As filed with the Securities and Exchange Commission on July 24, 1995.
1933 Act File No. 2-75093
1940 Act File No. 811-3333
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 23 X
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 25 X
USAA TAX EXEMPT FUND, INC.
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Rd., San Antonio, TX 78288
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-0600
Michael D. Wagner, Secretary
USAA TAX EXEMPT FUND, INC.
9800 Fredericksburg Rd.
San Antonio, TX 78288-0227
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
immediately upon filing pursuant to paragraph (b)
X on August 1, 1995 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
The Registrant has heretofore registered an indefinite number of
shares of the 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, and Virginia Money Market Fund
pursuant to Rule 24f-2 under the Investment Company Act of 1940.
The Registrant filed its Rule 24f-2 notice for the fiscal year
ended March 31, 1995 on May 18, 1995.
Exhibit Index on Page 240
Page 1 of 497
USAA TAX EXEMPT FUND, INC.
CALCULATION OF REGISTRATION FEE UNDER
THE SECURITIES ACT OF 1933 (1)
- ----------------------------------------------------------------------------
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Per Offering Registration
Registered Registered Unit (2) Price (3) Fee
- ----------------------------------------------------------------------------
Shares of
Beneficial
Interest
Name of Series:
- ---------------
Long-Term 7,854,588 $ 13.16 103,366,378
Intermediate-Term 7,339,811 $ 12.77 93,729,386
Short-Term 19,692,084 $ 10.56 207,948,407
Tax Exempt Money Market 141,255,253 $ 1.00 141,255,253 $ 100
California Bond 2,585,095 $ 10.32 26,678,180
California Money Market -0- -0- -0-
New York Bond 717,024 $ 10.95 7,851,413
New York Money Market -0- -0- -0-
Virginia Bond 745,662 $ 10.93 8,150,086
Virginia Money Market -0- -0- -0-
- ----------------------------------------------------------------------------
(1) The shares being registered as set forth in this table are in
addition to the indefinite number of shares of beneficial
interest which Registrant has registered under the Securities Act
of 1933, as amended (the "1933 Act"), pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended (the "1940
Act"). The Registrant's Rule 24f-2 Notice for its fiscal year
ended March 31, 1995, was filed on May 18, 1995.
(2) Based on each Funds' respective net asset value on July 17,
1995 pursuant to Rule 457(d) under the 1933 Act and Rule 24e-2(a)
under the 1940 Act.
(3) In response to Rule 24e-2(b) under the 1940 Act: (1) the
calculation of the maximum aggregate offering price is made
pursuant to Rule 24e-2; (2) 2,705,156,292 shares of beneficial
interest were redeemed by the Registrant during the fiscal year
ended March 31, 1995; (3) 2,525,256,775 shares are being used for
reductions pursuant to Rule 24f-2 during the current fiscal year;
and (4) 179,899,517 shares are being used for reduction in this
amendment pursuant to Rule 24e-2(a). While no fee is required
for the 179,899,517 shares, the Registrant has elected to
register, for $100, an additional $290,000 of shares of the Tax
Exempt Money Market Fund.
USAA TAX EXEMPT FUND, INC.
CROSS REFERENCE SHEET
Part A
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
1. Cover Page Same
2. Synopsis Fees and Expenses
3. Condensed Financial Information Financial Highlights
Performance Information
4. General Description of Registrant Investment Objectives and Policies
Other Investment Information
Description of Shares
5. Management of the Fund Management of the Company
Service Providers
6. Capital Stock and Other Securities Dividends, Distributions and Taxes
Description of Shares
7. Purchase of Securities Being Offered Purchase of Shares
Conditions of Purchase and
Redemption
Exchanges
Other Services
Share Price Calculation
8. Redemption or Repurchase Redemption of Shares
Conditions of Purchase and
Redemption
Exchanges
Other Services
9. Legal Proceedings Not Applicable
USAA TAX EXEMPT FUND, INC.
CROSS REFERENCE SHEET
Part B
FORM N-1A ITEM NO. SECTION IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Same
11. Table of Contents Same
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Policies
Investment Restrictions
Special Risk Considerations
(California, New York,
and Virginia Funds SAIs only)
Portfolio Transactions
14. Management of the Registrant Directors and Officers of the
Company
15. Control Persons and Principal
Holders of Securities Directors and Officers of the
Company
16. Investment Advisory and Other
Services Directors and Officers of the
Company
The Company's Manager
General Information
17. Brokerage Allocation and Other
Practices Portfolio Transactions
18. Capital Stock and Other Securities Further Description of Shares
19. Purchase, Redemption and Pricing
of Securities Being Offered Valuation of Securities
Additional Information Regarding
Redemption of Shares
Investment Plans
20. Tax Status Tax Considerations (Long-Term,
Intermediate-Term, Short-Term
and Tax Exempt Money Market
Funds SAI only)
Certain Federal Income Tax
Considerations (California,
New York, and Virginia Funds
SAIs only)
California Taxation (California
Funds SAI only)
Virginia Taxation (Virginia Funds
SAI only)
21. Underwriters The Company's Manager
22. Calculation of Performance Data Calculation of Performance Data
23. Financial Statements General Information
PART A
Prospectuses for the
Long-Term, Intermediate-Term, Short-Term
and Tax Exempt Money Market Funds,
California Bond and California Money Market Funds,
New York Bond and New York Money Market Funds, and
Virginia Bond and Virginia Money Market Funds
are included herein
Part A
Prospectus for the
Long-Term, Intermediate-Term, Short-Term
and Tax Exempt Money Market Funds
USAA TAX EXEMPT FUND, INC.
August 1, 1995 PROSPECTUS
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 5% 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 from banks for
temporary emergency purposesand then only in an
amount not to exceed 5% of the value of the Fund's
total assets.
b. No Fund may pledge or mortgage more than 10% of its
total assets.
c. No Fund may invest more than 10% of its total assets
in illiquid securities (including repurchase
agreements maturing in more than seven days).
d. 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
connec-tion with the financing of projects with
similar characteristics, such as toll road revenue
bonds, housing revenue bonds or electric power
project revenue bonds.
e. No Fund will 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 its total assets would be
invested in the securities of a single 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 reinvested dividends.
In the Tax Exempt Money Market Fund, you will only
receive a confirmation for purchases or redemptions by
check and exchanges. If your Money Market Fund account
had activity other than reinvested dividends, 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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Part A
Prospectus for the
California Bond and
California Money Market Funds
USAA CALIFORNIA FUNDS
August 1, 1995 PROSPECTUS
USAA California Bond Fund and USAA California Money
Market Fund (collectively, the Funds or the California
Funds) are two of ten no-load mutual funds offered by
USAA Tax Exempt Fund, Inc. (the Company). The Funds are
managed by USAA Investment Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVES AND POLICIES?
The Funds have a common objective of providing
California investors with a high level of current
interest income that is exempt from federal and
California state income taxes. The California Money
Market Fund has a further objective of preserving capital
and maintaining liquidity. Each Fund has separate
investment policies to achieve its objective.
The California Bond Fund invests primarily in long-
term investment grade California tax-exempt securities.
The Fund's average portfolio maturity is not restricted,
but is expected to be greater than 10 years. Page 9.
The California Money Market Fund invests in high
quality California tax- exempt securities with maturities
of 397 days or less. The Manager will maintain a dollar-
weighted average portfolio maturity of 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 5% of
the Fund's total assets, and (ii) to invest up to 5% of
the Fund's total assets in repurchase agreements.
The California Bond Fund may enter into financial
futures contracts (and options thereon) for hedging
purposes or to attempt to reduce principal fluctuations
in the value of its portfolio. The Fund will not invest
in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money except from banks for
temporary emergency purposes and then only in an
amount not to exceed 10% of the value of the Fund's
total assets.
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. Neither Fund may invest more than 10% of its total
assets in illiquid securities (including repurchase
agreements maturing in more than seven days).
d. Neither Fund may invest more than 25% of its total
assets in securities issued in connection with the
financing of projects with similar characteristics,
such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in
industrial revenue bonds which are based, directly
or indirectly, on the credit of private entities of
any one industry. However, each Fund reserves the
right to invest more than 25% of its total assets in
tax-exempt industrial revenue bonds.
e. Neither Fund will invest more than 25% of its total
assets in the securities of a single issuer, and
neither Fund will, with respect to 75% of its total
assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund is subject to credit and market risks, which
will be intensified by concentration in California
issues. Because the Funds' portfolios concentrate their
investments in California tax-exempt securities, the
Funds are affected by political, 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 account
transaction in your California Bond Fund, except
reinvested dividends. In the California Money Market
Fund, you will only receive a confirmation for purchases
or redemptions by check and exchanges. If your Money
Market Fund account had activity other than reinvested
dividends, 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
Part A
Prospectus for the
New York Bond and
New York Money Market Funds
USAA NEW YORK FUNDS
August 1, 1995 PROSPECTUS
USAA New York Bond Fund and USAA New York Money Market
Fund (collectively, the Funds or the New York Funds) are
two of ten no-load mutual funds offered by USAA Tax
Exempt Fund, Inc. (the Company). The Funds are managed
by USAA Investment Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVES AND POLICIES?
The Funds have a common objective of providing New
York investors with a high level of current interest
income that is exempt from federal income taxes and New
York State and New York City personal income taxes. The
New York Money Market Fund has a further objective of
preserving capital and maintaining liquidity. Each Fund
has separate investment policies to achieve its
objective.
The New York Bond Fund invests primarily in long-
term investment grade New York tax-exempt securities.
The Fund's average portfolio maturity is not restricted,
but is expected to be greater than 10 years. Page 9.
The New York Money Market Fund invests in high
quality New York tax- exempt securities with maturities
of 397 days or less. The Manager will maintain a dollar-
weighted average portfolio maturity of 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 5% of
the Fund's total assets, and (ii) to invest up to 5% of
the Fund's total assets in repurchase agreements.
The New York Bond Fund may enter into financial
futures contracts (and options thereon) for hedging
purposes or to attempt to reduce principal fluctuations
in the value of its portfolio. The Fund will not invest
in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money except from banks for
temporary purposes and then only in an amount not to
exceed 10% of the value of the Fund's total assets.
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. Neither Fund may invest more than 10% of its net
assets in illiquid securities (including repurchase
agreements maturing in more than seven days).
d. Neither Fund may invest 25% or more of its total
assets in securities issued in connection with the
financing of projects with similar characteristics,
such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in
industrial revenue bonds which are based, directly
or indirectly, on the credit of private entities of
any one industry. However, each Fund reserves the
right to invest more than 25% of its total assets in
tax-exempt industrial revenue bonds.
e. Neither Fund will invest 25% or more of its total
assets in the securities of a single issuer, and
neither Fund will, with respect to 75% of its total
assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund's ability to achieve its investment objective
is dependent upon the ability of the issuers of New York
Municipal Obligations to meet their continuing
obligations for the payment of principal and interest.
New York State and New York City face long-term economic
problems that could seriously affect their ability and
that of other issuers of New York Municipal Obligations
to meet their financial obligations.
Certain substantial issuers of New York Municipal
Obligations (including issuers whose obligations may be
acquired by the Funds) have experienced serious financial
difficulties in recent years. These difficulties have at
times jeopardized the credit standing and impaired the
borrowing abilities of all New York issuers and have
generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt
obligations. In recent years, several different issues
of municipal securities of New York State and its
agencies and instrumentalities and of New York City
have been downgraded by S&P and Moody's. On the other
hand, strong demand for New York Municipal Obligations
has 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 account
transaction in your New York Bond Fund, except reinvested
dividends. In the New York Money Market Fund, you will
only receive a confirmation for purchases or redemptions
by check and exchanges. If your Money Market Fund
account had activity other than reinvested dividends,
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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Part A
Prospectus for the
Virginia Bond and
Virginia Money Market Funds
USAA VIRGINIA FUNDS
August 1, 1995 PROSPECTUS
USAA Virginia Bond Fund and USAA Virginia Money Market
Fund (collectively, the Funds or the Virginia Funds) are
two of ten no-load mutual funds offered by USAA Tax
Exempt Fund, Inc. (the Company). The Funds are managed
by USAA Investment Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVES AND POLICIES?
The Funds have a common objective of providing
Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state
income taxes. The Virginia Money Market Fund has a
further objective of preserving capital and maintaining
liquidity. Each Fund has separate investment policies to
achieve its objective.
The Virginia Bond Fund invests primarily in long-
term investment grade Virginia tax-exempt securities.
The Fund's average portfolio maturity is not restricted,
but is expected to be greater than 10 years. Page 9.
The Virginia Money Market Fund invests in high
quality Virginia tax-exempt securities with maturities of
397 days or less. The Manager will maintain a dollar-
weighted average portfolio maturity of 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 5% of
the Fund's total assets, and (ii) to invest up to 5% of
the Fund's total assets in repurchase agreements.
The Virginia Bond Fund may enter into financial
futures contracts (and options thereon) for hedging
purposes or to attempt to reduce principal fluctuations
in the value of its portfolio. The Fund will not invest
in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money except from banks for
temporary purposes and then only in an amount not to
exceed 10% of the value of the Fund's total assets.
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. Neither Fund may invest more than 10% of its net
assets in illiquid securities (including repurchase
agreements maturing in more than seven days).
d. Neither Fund may invest 25% or more of its total
assets in securities issued in connection with the
financing of projects with similar characteristics,
such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in
industrial revenue bonds which are based, directly
or indirectly, on the credit of private entities of
any one industry. However, each Fund reserves the right
to invest more than 25% of its total assets in tax-exempt
industrial revenue bonds.
e. Neither Fund will invest 25% or more of its total
assets in the securities of a single issuer, and
neither Fund will, with respect to 75% of its total
assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund is subject to credit and market risks, which
will be intensified by concentration in obligations
issued by or on behalf of Virginia public authorities.
For this reason, the Funds are affected by political,
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 account
transaction in your Virginia Bond Fund, except reinvested
dividends. In the Virginia Money Market Fund, you will
only receive a confirmation for purchases or redemptions
by check and exchanges. If your Money Market Fund
account had activity other than reinvested dividends,
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
PART B
Statements of Additional Information for the
Long-Term, Intermediate-Term, Short-Term
and Tax Exempt Money Market Funds,
California Bond and California Money Market Funds,
New York Bond and New York Money Market Funds, and
Virginia Bond and Virginia Money Market Funds
are included herein
Part B
Statement of Additional Information for the
Long-Term, Intermediate-Term, Short-Term
and Tax Exempt Money Market Funds
(Logo
of the USAA STATEMENT OF
USAA TAX EXEMPT ADDITIONAL INFORMATION
Eagle FUND, INC. August 1, 1995
is here)
- -------------------------------------------------------------------------
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 5% 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) Invest in securities other than tax-exempt securities,
except that a Fund may make temporary investments for
defensive purposes in notes issued by or on behalf of
municipal or corporate issuers, obligations of the United
States Government and its agencies or instrumentalities,
commercial paper, bank certificates of deposit and any such
items or tax-exempt securities subject to short-term
repurchase agreements;
(2) 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;
(3) Purchase more than 10% of the outstanding voting securities
of any issuer;
(4) Borrow money except for temporary emergency purposes and
then only from banks in an amount not to exceed 5% of the
value of the total assets of that Fund; the Company will
repay all borrowings before making additional investments
and the interest paid on such borrowings will reduce income;
(5) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
(6) 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;
Investment Restrictions, cont.
(7) 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;
(8) Invest more than 10% of the total assets of any Fund in
illiquid securities (including repurchase agreements
maturing in more than seven days);
(9) Invest in issuers for the purpose of exercising control of management;
(10) 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);
(11) Underwrite any issue of securities;
(12) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interests therein;
(13) Make loans to other persons, except by the purchase of
bonds, debentures or similar obligations which are publicly
distributed and as provided under Investment Policies herein;
(14) Purchase on margin or sell short;
(15) Purchase or sell commodities or commodities contracts;
(16) 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;
(17) Invest in put, call, straddle or spread options or interests in oil,
gas or other mineral exploration or development programs; or
(18) Purchase "restricted" securities.
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:
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.
06052-0895
Part B
Statement of Additional Information for the
California Bond and
California Money Market Funds
(Logo
of the USAA STATEMENT OF
USAA TAX EXEMPT ADDITIONAL INFORMATION
Eagle FUND, INC. August 1, 1995
is here)
- -------------------------------------------------------------------
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 5% 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 emergency purposes and
then only from banks in an amount not to exceed 10% of the
value of the total assets of that Fund; the Company will
repay all borrowings before making additional investments
and the interest paid on such borrowings will reduce income;
(4) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
Investment Restrictions, cont.
(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 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 more than 10% of the total assets of any Fund in
illiquid securities (including repurchase agreements
maturing in more than seven days);
(8) Invest in issuers for the purpose of exercising control or management;
(9) 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);
(10) Underwrite any issue of securities;
(11) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interests therein;
(12) Make loans to other persons, except by the purchase of
bonds, debentures or similar obligations which are publicly
distributed and except that a Fund may lend securities, as
provided under Investment Policies herein;
(13) 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;
(14) Purchase or sell commodities or commodities contracts,
except that the Fund may invest in financial futures
contracts and options thereon;
(15) 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
(16) 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.
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:
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.
14356-0895
Part B
Statement of Additional Information for the
New York Bond and
New York Money Market Funds
(Logo
of the
USAA USAA STATEMENT OF
Eagle TAX EXEMPT ADDITIONAL INFORMATION
is here) FUND, INC. August 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 5% 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 purposes and then only
from banks in an amount not to exceed 10% of the value of
the total assets of that Fund; the Company will repay all
borrowings before making investments and the interest paid
on such borrowings will reduce income;
(4) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
Investment Restrictions, cont.
(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 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 more than 10% of the net assets of any Fund in
illiquid securities (including repurchase agreements
maturing in more than seven days);
(8) Invest in issuers for the purpose of exercising control or
management;
(9) 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);
(10) Underwrite any issue of securities;
(11) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interests therein;
(12) Make loans to other persons, except by the purchase of
bonds, debentures or similar obligations which are publicly
distributed and except that a Fund may lend securities, as
provided under Investment Policies herein;
(13) 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;
(14) Purchase or sell commodities or commodities contracts,
except that the Fund may invest in financial futures and
contracts and options thereon;
(15) 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
(16) 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.
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:
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.
17005-0895
Part B
Statement of Additional Information for the
Virginia Bond and
Virginia Money Market Funds
(Logo
of the
USAA USAA STATEMENT OF
Eagle TAX EXEMPT ADDITIONAL INFORMATION
is here) FUND, INC. August 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 5% 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 purposes and then only
from banks in an amount not to exceed 10% of the value of
the total assets of that Fund; the Company will repay all
borrowings before making investments and the interest paid
on such borrowings will reduce income;
(4) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
Investment Restrictions, cont.
(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 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 more than 10% of the net assets of any Fund in
illiquid securities (including repurchase agreements
maturing in more than seven days);
(8) Invest in issuers for the purpose of exercising control or management;
(9) 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);
(10) Underwrite any issue of securities;
(11) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interest therein;
(12) Make loans to other persons, except by the purchase of
bonds, debentures or similar obligations which are publicly
distributed and except that a Fund may lend securities, as
provided under Investment Policies herein;
(13) 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;
(14) Purchase or sell commodities or commodities contracts,
except that the Fund may invest in financial futures
contracts and options thereon;
(15) 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
(16) 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.
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:
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.
17004-0895
USAA TAX EXEMPT FUND, INC.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
----------------------------------
(a) Financial Statements:
Financial Statements included in Parts A and B
(Prospectuses and Statements of Additional Information)
of this Registration Statement.
Financial Statements and Independent Auditors'
Reports are incorporated by reference to the USAA
Tax Exempt Fund, Inc. (incuding the Long-Term,
Intermediate-Term, Short-Term, and Tax Exempt Money
Market Funds') and the USAA California, New York,
and Virginia Funds' Annual Reports to Shareholders
for fiscal year ended March 31, 1995.
(b) Exhibits:
Exhibit No. Description of Exhibits
- ----------- ----------------------------------
1 (a) Articles of Incorporation (filed herewith)
(b) Articles of Amendment to Articles of Incorporation
dated December 18, 1981 (filed herewith)
(c) Articles Supplementary dated December 21, 1983 (filed herewith)
(d) Articles of Amendment to Articles of Incorporation
dated July 17, 1984 (filed herewith)
(e) Articles Supplementary dated July 27, 1984 (filed herewith)
(f) Articles Supplementary dated August 1, 1985 (filed herewith)
(g) Articles Supplementary dated January 17, 1986 (filed herewith)
(h) Articles Supplementary dated September 15, 1988 (filed herewith)
(i) Articles Supplementary dated May 18, 1989 (filed herewith)
(j) Articles Supplementary dated August 24, 1989 (filed herewith)
(k) Articles Supplementary dated January 29, 1990 (filed herewith)
(l) Articles Supplementary dated July 25, 1990 (filed herewith)
(m) Articles Supplementary dated May 2, 1991 (filed herewith)
(n) Articles Supplementary dated September 9, 1991 (filed herewith)
(o) Articles Supplementary dated May 12, 1992 (filed herewith)
(p) Articles of Amendment to Articles of Incorporation
dated July 22, 1992 (filed herewith)
(q) Articles Supplementary dated October 28, 1992 (filed herewith)
(r) Articles Supplementary dated January 28, 1993 (filed herewith)
(s) Articles Supplementary dated March 23, 1993 (filed herewith)
(t) Articles Supplementary dated May 5, 1993 (filed herewith)
(u) Articles Supplementary dated November 8, 1993 (filed herewith)
(v) Articles Supplementary dated January 18, 1994 (filed herewith)
(w) Articles Supplementary dated April 11, 1994 (filed herewith)
2 Bylaws as amended January 10, 1994 (filed herewith)
3 Voting trust agreement - Not Applicable
4 Specimen Certificates for Shares of
(a) Short-Term Fund (filed herewith)
(b) Intermediate-Term Fund (filed herewith)
(c) Long-Term Fund (filed herewith)
(d) Tax Exempt Money Market Fund (filed herewith)
(e) California Bond Fund (filed herewith)
(f) California Money Market Fund (filed herewith)
(g) New York Bond Fund (filed herewith)
(h) New York Money Market Fund (filed herewith)
(i) Virginia Bond Fund (filed herewith)
(j) Virginia Money Market Fund (filed herewith)
5 (a) Advisory Agreement (filed herewith)
(b) Letter Agreement adding New York Bond Fund, New
York Money Market Fund, Virginia Bond Fund, and
Virginia Money Market Fund (filed herewith)
6 (a) Underwriting Agreement (filed herewith)
(b) Letter Agreement adding New York Bond Fund, New
York Money Market Fund, Virginia Bond Fund, and
Virginia Money Market Fund (filed herewith)
7 Not Applicable
8 (a) Custodian Agreement (filed herewith)
(b) Letter Agreement adding New York Bond Fund, New
York Money Market Fund, Virginia Bond Fund, and
Virginia Money Market Fund (filed herewith)
9 (a) Transfer Agency Agreement (filed herewith)
(b) Amendments to Transfer Agency Agreement Fee Schedules for Tax
Exempt Money Market Fund, California Money Market Fund, New
York Money Market Fund, and Virginia Money Market Fund (filed
herewith)
10 Opinion and Consent of Counsel (filed herewith)
11 Independent Auditors' Consent (filed herewith)
12 Financial statements omitted from prospectuses - Not
Applicable
13 Subscriptions and Investment Letters
(a) Short-Term Fund, Intermediate-Term Fund, and High-
Yield Fund (filed herewith)
(b) California Bond Fund and California Money Market
Fund (filed herewith)
(c) New York Bond Fund, New York Money Market Fund, Virginia Bond
Fund, and Virginia Money Market Fund (filed herewith)
14 Prototype Plans - Not Applicable
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation
(filed herewith)
17 Financial Data Schedules
(a) Long-Term Fund (filed herewith)
(b) Intermediate-Term Fund (filed herewith)
(c) Short-Term Fund (filed herewith)
(d) Tax Exempt Money Market Fund (filed herewith)
(e) California Bond Fund (filed herewith)
(f) California Money Market Fund (filed herewith)
(g) New York Bond Fund (filed herewith)
(h) New York Money Market Fund (filed herewith)
(i) Virginia Bond Fund (filed herewith)
(j) Virginia Money Market Fund (filed herewith)
18 Plan Adopting Multiple Class of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk,
John W. Saunders, Jr., C. Dale Briscoe, George E. Brown,
Howard L. Freeman, Jr., and Richard A. Zucker dated
June 25, 1993 (filed herewith)
(b) Powers of Attorney for Hansford T. Johnson and
Barbara B. Dreeben (filed herewith)
Item 25. Persons Controlled by or Under Common Control with Registrant
Information pertaining to persons controlled by or
under common control with Registrant is hereby
incorporated by reference to the section captioned
"Management of the Company" in the Prospectus and the
section captioned "Directors and Officers of the
Company" in the Statement of Additional Information.
Item 26. Number of Holders of Securities
Set forth below are the number of record holders, as of
March 31, 1995 of each class of securities of the Registrant.
Title of Class Number of Record Holders
-------------- ------------------------
Long-Term Fund 39,745
Intermediate-Term Fund 38,457
Short-Term Fund 24,123
Tax Exempt Money Market Fund 36,974
California Bond Fund 8,504
California Money Market Fund 7,214
New York Bond Fund 1,621
New York Money Market Fund 1,115
Virginia Bond Fund 7,088
Virginia Money Market Fund 3,862
Item 27. Indemnification
Protection for the liability of the adviser and
underwriter and for the officers and directors of the
Registrant is provided by two methods:
(a) The Director and Officer Liability Policy. This policy
covers all losses incurred by the Registrant, its
adviser and its underwriter from any claim made against
those entities or persons during the policy period by
any shareholder or former shareholder of the Fund by
reason of any alleged negligent act, error or omission
committed in connection with the administration of the
investments of said Registrant.
(b) Statutory Indemnification Provisions. Under Section 2-
418 of the Maryland General Corporation Law, the
Registrant is authorized to indemnify any past or
present director, officer, agent or employee against
judgments, penalties, fines, settlements and reasonable
expenses actually incurred by him in connection with
any proceeding in which he is a party by reason of
having served as a director, officer, agent or
employee, if he acted in good faith and reasonably
believed (i) in the case of conduct in his official
capacity with the Registrant, that his conduct was in
the best interests of the Registrant, or (ii) in all
other cases, that his conduct was at least not opposed
to the best interests of the Registrant. In the case
of any criminal proceeding, said director, officer,
agent or employee must in addition have had no
reasonable cause to believe that his conduct was
unlawful. In the case of a proceeding by or in the
right of the Registrant, indemnification may only be
made against reasonable expenses and may not be made in
respect of any proceeding in which the director,
officer, agent or employee shall have been adjudged to
be liable to the Registrant. The termination of any
proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent
creates a rebuttable presumption that the director,
officer, agent or employee did not meet the requisite
standard of conduct for indemnification. No
indemnification may be made in respect of any
proceeding charging improper personal benefit to the
director, officer, agent or employee whether or not
involving action in such person's official capacity, if
such person was adjudged to be liable on the basis that
improper personal benefit was received. If such
director, officer, agent or employee is successful, on
the merits or otherwise, in defense of any such
proceeding against him, he shall be indemnified against
the reasonable expenses incurred by him (unless such
indemnification is limited by the Registrant's charter,
which it is not). Additionally, a court of appropriate
jurisdiction may order indemnification in certain
circumstances, even if the appropriate standard of
conduct set forth above was not met. Indemnification
may not be made unless authorized in the specific case
after determination that the applicable standard of
conduct has been met. Such determination shall be made
by either: (i) the board of directors by either (x) a
majority vote of a quorum consisting of directors not
parties to the proceeding or (y) if such quorum cannot
be obtained, then by a majority vote of a committee of
the board consisting solely of two or more directors
not at the time parties to such proceeding who were
duly designated to act in the matter by a majority vote
of the full board in which the designated directors who
are parties may participate; (ii) special legal counsel
selected by the board of directors or a committee of the
board by vote as set forth in (i) above, or, if the requisite
quorum of the board cannot be obtained therefor and the
committee cannot be established, by a majority vote of
the full board in which directors who are parties may
participate; or (iii) the stockholders.
Reasonable expenses may be reimbursed or paid by the
Registrant in advance of final disposition of a
proceeding after a determination, made in accordance
with the procedures set forth in the preceding
paragraph, that the facts then known to those making
the determination would not preclude indemnification
under the applicable standards provided the Registrant
receives (i) a written affirmation of the good faith
belief of the person seeking indemnification that the
applicable standard of conduct necessary for
indemnification has been met, and (ii) a written
undertaking to repay the advanced sums if it is
ultimately determined that the applicable standard of
conduct has not been met.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the
Registrant pursuant to the Registrant's Articles of
Incorporation or otherwise, the Registrant has been
advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against
public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director,
officer or controlling person in connection with the
securities being registered, then the Registrant will,
unless in the opinion of its counsel the matter has
been settled by a controlling precedent, submit to a
court of appropriate jurisdiction the question of
whether indemnification by it is against public policy
as expressed in the Act and will be governed by the
final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Information pertaining to business and other
connections of the Registrant's investment adviser is
hereby incorporated by reference to the section of the
Prospectus captioned "Management of the Company" and to
the section of the Statement of Additional Information
captioned "Directors and Officers of the Company."
Item 29. Principal Underwriters
(a) USAA Investment Management Company (the "Adviser") acts
as principal underwriter and distributor of the
Registrant's shares on a best-efforts basis and
receives no fee or commission for its underwriting
services. The Adviser, wholly owned by United Services
Automobile Association, also serves as principal
underwriter for USAA Mutual Fund, Inc., USAA Investment
Trust, and USAA State Tax-Free Trust.
(b) Following is information concerning directors and
executive officers of USAA Investment Management
Company.
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
- ---------------------- --------------------- --------------------
Hansford T. Johnson Director and Chairman Director and
9800 Fredericksburg Rd. of the Board of Chairman of the
San Antonio, TX 78288 Directors Board of Trustees
Michael J.C. Roth Chief Executive President, Trustee
9800 Fredericksburg Rd. Officer, President, and Vice Chairman
San Antonio, TX 78288 Director, and Vice of the Board of
Chairman of the Trustees
Board of Directors
John W. Saunders, Jr. Senior Vice President, Vice President
9800 Fredericksburg Rd. Fixed Income and Trustee
San Antonio, TX 78288 Investments, and Director
Harry W. Miller Senior Vice President, None
9800 Fredericksburg Rd. Equity Investments,
San Antonio, TX 78288 and Director
William McCrae Director None
9800 Fredericksburg Rd.
San Antonio, TX 78288
Josue Robles, Jr. Director None
9800 Fredericksburg Rd.
San Antonio, TX 78288
John J. Dallahan Senior Vice President, None
9800 Fredericksburg Rd. Investment Services
San Antonio, TX 78288
Michael D. Wagner Vice President, Secretary
9800 Fredericksburg Rd. Secretary and Counsel
San Antonio, TX 78288
Sherron A. Kirk Vice President and Treasurer
9800 Fredericksburg Rd. Controller
San Antonio, TX 78288
Alex M. Ciccone Vice President, Assistant
9800 Fredericksburg Rd. Compliance Secretary
San Antonio, TX 78288
(c) Not Applicable.
Item 30. Location of Accounts and Records
The following entities prepare, maintain and preserve
the records required by Section 31(a) of the Investment
Company Act of 1940 (the "1940 Act") for the
Registrant. These services are provided to the
Registrant through written agreements between the
parties to the effect that such services will be
provided to the Registrant for such periods prescribed
by the Rules and Regulations of the Securities and
Exchange Commission under the 1940 Act and such records
are the property of the entity required to maintain and
preserve such records and will be surrendered promptly on request:
USAA Investment Management Company
9800 Fredericksburg Rd.
San Antonio, Texas 78288
USAA Shareholder Account Services
10750 Robert F. McDermott Freeway
San Antonio, Texas 78288
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
Item 31. Management Services
Not Applicable.
Item 32. Undertaking
The Registrant hereby undertakes to provide each person
to whom a prospectus is delivered a copy of the
Registrant's latest annual report(s) to shareholders
upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of the
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this amendment to its
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in this City of San
Antonio and State of Texas on the 12th day of July, 1995.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
------------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act of 1933,
this amendment to its Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
(Signature) (Title) (Date)
/s/ Hansford T. Johnson Chairman of the Board July 12, 1995
Hansford T. Johnson of Directors
/s/ Michael J.C. Roth Vice Chairman of the Board July 12, 1995
Michael J.C. Roth of Directors and President
(Principal Executive Officer)
/s/ Sherron A. Kirk Treasurer (Principal Financial July 12, 1995
Sherron A. Kirk and Accounting Officer)
/s/ John W. Saunders Director July 12, 1995
John W. Saunders, Jr.
/s/ C. Dale Briscoe Director July 12, 1995
C. Dale Briscoe
/s/ George E. Brown Director July 12, 1995
George E. Brown
/s/ Howard L. Freeman, Jr. Director July 12, 1995
Howard L. Freeman, Jr.
/s/ Richard A. Zucker Director July 12, 1995
Richard A. Zucker
/s/ Barbara B. Dreeben Director July 12, 1995
Barbara B. Dreeben
C-7
1933 Act File No. 2-75093
1940 Act File No. 811-3333
USAA TAX EXEMPT FUND, INC.
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 23
EXHIBIT INDEX
and
EXHIBITS
C-8
Exhibit Index
Exhibit Item Page No. *
- -------- ---- -----------
1 (a) Articles of Incorporation (filed herewith) 242
(b) Articles of Amendment to Articles of Incorporation
dated December 18, 1981 (filed herewith) 252
(c) Articles Supplementary dated December 21, 1983
(filed herewith) 256
(d) Articles of Amendment to Articles of Incorporation
dated July 17, 1984 (filed herewith) 259
(e) Articles Supplementary dated July 27, 1984 (filed
herewith) 264
(f) Articles Supplementary dated August 1, 1985 (filed
herewith) 268
(g) Articles Supplementary dated January 17, 1986 (filed
herewith) 272
(h) Articles Supplementary dated September 15, 1988 (filed
herewith) 276
(i) Articles Supplementary dated May 18, 1989 (filed
herewith) 279
(j) Articles Supplementary dated August 24, 1989 (filed
herewith) 282
(k) Articles Supplementary dated January 29, 1990 (filed
herewith) 285
(l) Articles Supplementary dated July 25, 1990 (filed
herewith) 288
(m) Articles Supplementary dated May 2, 1991 (filed
herewith) 292
(n) Articles Supplementary dated September 9, 1991 (filed
herewith) 296
(o) Articles Supplementary dated May 12, 1992 (filed
herewith) 300
(p) Articles of Amendment to Articles of Incorporation
dated July 22, 1992 (filed herewith) 304
(q) Articles Supplementary dated October 28, 1992 (filed
herewith) 307
(r) Articles Supplementary dated January 28, 1993 (filed
herewith) 311
(s) Articles Supplementary dated March 23, 1993 (filed
herewith) 315
(t) Articles Supplementary dated May 5, 1993 (filed
herewith) 319
(u) Articles Supplementary dated November 8, 1993 (filed
herewith) 323
(v) Articles Supplementary dated January 18, 1994 (filed
herewith) 327
(w) Articles Supplementary dated April 11, 1994 (filed
herewith) 331
2 Bylaws as amended January 10, 1994 (filed herewith) 335
3 Voting trust agreement - Not Applicable
4 Specimen Certificates for Shares of
(a) Short-Term Fund (filed herewith) 346
(b) Intermediate-Term Fund (filed herewith) 349
(c) Long-Term Fund (filed herewith) 352
(d) Tax Exempt Money Market Fund (filed herewith) 355
(e) California Bond Fund (filed herewith) 358
(f) California Money Market Fund (filed herewith) 361
(g) New York Bond Fund (filed herewith) 364
(h) New York Money Market Fund (filed herewith) 367
(i) Virginia Bond Fund (filed herewith) 370
(j) Virginia Money Market Fund (filed herewith) 373
5 (a) Advisory Agreement (filed herewith) 376
(b) Letter Agreement adding New York Bond Fund, New York
Money Market Fund, Virginia Bond Fund, and Virginia
Money Market Fund (filed herewith) 383
6 (a) Underwriting Agreement (filed herewith) 385
(b) Letter Agreement adding New York Bond Fund, New York
Money Market Fund, Virginia Bond Fund, and Virginia
Money Market Fund (filed herewith) 390
7 Not Applicable
C-9
Exhibit Index, cont.
Exhibit Item Page No. *
- ------- ---- -----------
8 (a) Custodian Agreement (filed herewith) 392
(b) Letter Agreement adding New York Bond Fund, New York
Money Market Fund, Virginia Bond Fund, and Virginia
Money Market Fund (filed herewith) 417
9 (a) Transfer Agency Agreement (filed herewith) 423
(b) Amendments to Transfer Agency Agreement Fee Schedules
for Tax Exempt Money Market Fund, California Money
Market Fund, New York Money Market Fund, and Virginia
Money Market Fund (filed herewith) 441
10 Opinion and Consent of Counsel (filed herewith) 446
11 Independent Auditors' Consent (filed herewith) 449
12 Financial statements omitted from prospectuses - Not
Applicable
13 Subscriptions and Investment Letters
(a) Short-Term Fund, Intermediate-Term Fund, and High-Yield
Fund (filed herewith) 451
(b) California Bond Fund and California Money Market Fund
(filed herewith) 454
(c) New York Bond Fund, New York Money Market Fund,
Virginia Bond Fund, and Virginia Money Market Fund
(filed herewith) 457
14 Prototype Plans - Not Applicable
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation
(filed herewith) 460
17 Financial Data Schedules
(a) Long-Term Fund (filed herewith) 463
(b) Intermediate-Term Fund (filed herewith) 466
(c) Short-Term Fund (filed herewith) 469
(d) Tax Exempt Money Market Fund (filed herewith) 472
(e) California Bond Fund (filed herewith) 475
(f) California Money Market Fund (filed herewith) 478
(g) New York Bond Fund (filed herewith) 481
(h) New York Money Market Fund (filed herewith) 484
(i) Virginia Bond Fund (filed herewith) 487
(j) Virginia Money Market Fund (filed herewith) 490
18 Plan Adopting Multiple Class of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A.
Kirk, John W. Saunders, Jr., C. Dale Briscoe, George
E. Brown, Howard L. Freeman, Jr., and Richard A.
Zucker dated June 25, 1993 (filed herewith) 493
(b) Powers of Attorney for Hansford T. Johnson and Barbara
B. Dreeben (filed herewith) 495
________________________________________________________
* Refers to sequentially numbered pages
EXHIBIT 1(a)
ARTICLES OF INCORPORATION
OF
USAA TAX EXEMPT FUND, INC.
The undersigned David F. Dietz, whose post office address is
28 State Street, Boston, Massachusetts, being eighteen years of
age, does hereby form a corporation under the General Laws of the
State of Maryland.
ARTICLE 1
Name
The name of the corporation (hereinafter referred to as the
"Corporation") shall be USAA TAX EXEMPT FUND, INC.
ARTICLE II
Duration
The period of its duration is perpetual.
ARTICLE III
Purpose
The purposes for which the Corporation is formed are:
(a) To engage generally in the business of investing,
reinvesting, owning, holding and trading in securities (as
defined in the Investment Company Act of 1940, as from time
to time amended (referred to herein as the "1940 Act")) or
repurchase agreements, to issue redeemable securities, and to
generally engage in the business of an open-end investment
company of the management type; and
(b) To exercise all rights, powers and privileges of
ownership or interest in all securities or repurchase
agreements held by the Corporation, including the right to
vote thereon and otherwise act with respect thereto and to do
all acts for the preservation, protection, improvement and
enhancement in the value of all such securities and
repurchase agreements.
(c) To aid by further investment any corporation,
company, trust, association, firm or other business
organization, any obligation of or interest in which is held
by the Corporation or in the affairs of which the Corporation
has any direct or indirect interest, and to do anything
designed to protect, preserve, improve or enhance the value
of such obligation or interest.
(d) To promote or aid the incorporation of any
organization or enterprise under the laws of any country,
state, municipality or other political subdivision, and to
cause the same to be dissolved, wound up, liquidated, merged
or consolidated.
(e) To do everything necessary, suitable or proper for
the accomplishment of any purpose or the attainment of any
object or the furtherance of any power herein set forth,
either alone or in association with others, and to take any
action incidental or appurtenant to or growing out of or
connected with the aforesaid business or purposes, objects or powers.
(f) In general, to carry on any other lawful business and
to have and exercise all the rights, powers and privileges
conferred upon corporations by the laws of the State of
Maryland as in force from time to time.
The Corporation shall have the power to conduct and carry on
its business, or any part thereof, and to have one or more
offices, and to exercise any or all of its corporate powers and
rights, in the State of Maryland, in any other states,
territories, districts, colonies and dependencies of the United
States, and in any or all foreign countries.
The foregoing clauses shall be construed both as objects and
powers, and the foregoing enumeration of specific powers shall
not be held to limit or restrict in any manner the general powers
of the Corporation.
ARTICLE IV
Principal Office and Resident Agent
The post office address of the principal office of the
Corporation in this State is c/o The Corporation Trust
Incorporated, First Maryland Building, 25 South Charles Street,
Baltimore, Maryland 21201. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated,
a corporation of this State, and the post office address of the
resident agent is First Maryland Building, 25 South Charles
Street, Baltimore, Maryland 21201.
ARTICLE V
Authorized Capital
The total number of shares of capital stock of all classes
which the Corporation shall have authority to issue is one
hundred million shares, $.01 par value (the "Shares"), and of the
aggregate par value of $1,000,000. Seventy-five million of such
Shares may be issued in the following classes, each class
comprising the number of shares and having the designations
indicated; subject, however to the authority herein granted to
the Board of Directors to increase or decrease any such number of
Shares:
Short-Term Portfolio. . . . . . . . . . . . .25,000,000 Shares
Intermediate-Term Portfolio . . . . . . . . .25,000,000 Shares
High-Yield Portfolio. . . . . . . . . . . . .25,000,000 Shares
The balance of 25,000,000 Shares may be issued by the Board
of Directors in such initial classes, or in any new class or
classes, each comprising such number of Shares and having such
preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications, and terms and conditions of
redemption as shall be fixed and determined from time to time by
resolution or resolutions providing for the issuance of such
Shares adopted by the Board of Directors, to whom authority so to
fix and determine the same is hereby expressly granted. In
addition, the Board of Directors is hereby expressly granted
authority to increase or decrease the number of Shares of any
class, but the number of Shares of any class shall not be
decreased by the Board of Directors below the number of Shares
thereof then outstanding.
The Board of Directors may classify or reclassify any
unissued Shares into one or more classes that may be established
and designated from time to time. The Corporation may hold as
treasury Shares, reissue for such consideration and on such terms
as the Board of Directors may determine, or cancel, at their
discretion from time to time, any Shares of any class reacquired
by the Corporation.
ARTICLE VI
Rights and Preferences of Classes
Section 6.1. Procedure for Designation. The establishment
and designation of any class of Shares in addition to those
established and designated in Section 6.2 shall be effective upon
(i) the authorization of such class by vote of a majority of the
Board of Directors, including the establishment and designation
of the preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of redemption of such class, and (ii) the filing for
record of the articles supplementary required by Section 2-208 of
the Maryland General Corporation Law with the State Department of
Assessments and Taxation of Maryland. At any time when there are
no Shares outstanding or subscribed for a particular class
previously established and designated by the Board of Directors,
the class may be liquidated by similar means.
Section 6.2. Establishment and Designation of Classes.
Without limiting the authority of the Board of Directors set
forth herein to establish and designate any further classes,
there are hereby established and designated three classes of
stock to be known as: the Short-Term Portfolio, Intermediate-Term
Portfolio and High-Yield Portfolio. The Shares of said classes
and any Shares of any further class that may from time to time be
established and designated by the Board of Directors (unless
provided otherwise by the Board of Directors with respect to such
further class at the time of establishing and designating such
further class) shall have the following relative preferences,
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption:
(a) Assets Belonging to Classes. All consideration
received by the Corporation for the issue or sale of Shares
of a particular class, together with all assets in which such
consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any
proceeds derived from any reinvestment of such proceeds in
whatever form the same may be, shall irrevocably belong to
that class for all purposes, subject only to the rights of
creditors, and shall be so recorded upon the books of account
of the Corporation. Such consideration, assets, income,
earnings, profits, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any
reinvestment of such proceeds, in whatever form the same may
be, together with any General Items allocated to that class
as provided in the following sentence, are herein referred to
as "assets belonging to" that class. In the event that there
are any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily
identifiable as belonging to any particular class
(collectively "General Items"), such General Items shall be
allocated by or under the supervision of the Board of
Directors to and among any one or more of the classes
established and designated from time to time in such manner
and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable; and any General Items
so allocated to a particular class shall belong to that
class. Each such allocation by the Board of Directors shall
be conclusive and binding for all purposes.
(b) Liabilities Belonging to Class. The assets belonging
to each particular class shall be charged with the
liabilities of the Corporation in respect of that class and
all expenses, costs, charges and reserves attributable to
that class, and any general liabilities, expenses, costs,
charges or reserves of the Corporation which are not readily
identifiable as belonging to any particular class shall be
allocated and charged by or under the supervision of the
Board of Directors to and among any one or more of the
classes established and designated from time to time in such
manner and on such basis as the Board of Directors, in its
sole discretion, deems fair and equitable. The liabilities,
expenses, costs, charges and reserves allocated and so
charged to a class are herein referred to as "liabilities
belonging to" that class. Each allocation of liabilities,
expenses, costs, charges and reserves by the Board of
Directors shall be conclusive and binding for all purposes.
(c) Income Belonging to Class. The Board of Directors
shall have full discretion, to the extent not inconsistent
with the Maryland General Corporation Law and the 1940 Act,
to determine which items shall be treated as income and which
items as capital; and each such determination and allocation
shall be conclusive and binding.
Income belonging to a class includes all income, earnings
and profits derived from assets belonging to that class, less
any expenses, costs, charges or reserves belonging to that
class, for the relevant time period, all determined in
accordance with generally accepted accounting principles.
(d) Dividends. Dividend and distributions on shares of a
particular class may be paid with such frequency, in such
form and in such amount as the Board of Directors may from
time to time determine. Dividends may be daily or otherwise
pursuant to a standing resolution or resolutions adopted only
once or with such frequency as the Board of Directors may
determine, after providing for actual and accrued liabilities
belonging to that class.
All dividends on Shares of a particular class shall be
paid only out of the income belonging to that class and
capital gains distributions on Shares of a particular class
shall be paid only out of the capital gains belonging to that
class. All dividends and distributions on Shares of a
particular class shall be distributed pro rata to the holders
of that class in proportion to the number of Shares of that
class held by such holders at the date and time of record
established for the payment of such dividends or
distributions, except that in connection with any dividend or
distribution program or procedure the Board of Directors may
determine that no dividend or distribution shall be payable
on Shares as to which the Shareholder's purchase order and/or
payment have not been received by the time or times
established by the Board of Directors under such program or
procedure.
The Corporation intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1954,
as amended, or any successor or comparable statute thereto,
and regulations promulgated thereunder. Inasmuch as the
computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books
of the Corporation, the Board of Directors shall have the
power, in its sole discretion, to distribute in any fiscal
year as dividends, including dividends designated in whole or
in part as capital gains distributions, amounts sufficient,
in the opinion of the Board of Directors, to enable the
Corporation to qualify as a regulated investment company and
to avoid liability of the Corporation for Federal income tax
in respect of that year. However, nothing in the foregoing
shall limit the authority of the Board of Directors to make
distributions greater than or less than the amount necessary
to qualify as a regulated investment company and to avoid
liability of the Corporation for such tax.
Dividends and distributions may be made in cash, property
or Shares, or a combination thereof, as determined by the
Board of Directors or pursuant to any program that the Board
of Directors may have in effect at the time for the election
by each Shareholder of the mode of the making of such
dividend or distribution to that Shareholder. Any such
dividend or distribution paid in Shares will be paid at the
net asset value thereof as defined in subsection 6.2(i).
(e) Liquidation. In the event of the liquidation or
dissolution of the Corporation or of a particular class, the
Shareholders of each class that has been established and
designated and is being liquidated shall be entitled to
receive, as a class, when and as declared by the Board of
Directors, the excess of the assets belonging to that class
over the liabilities belonging to that class. The holders of
Shares of any class shall not be entitled thereby to any
distribution upon liquidation of any other class. The assets
so distributable to the Shareholders of any particular class
shall be distributed among such Shareholders in proportion to
the number of Shares of that class held by them and recorded
on the books of the Corporation. The liquidation of any
particular class in which there are Shares then outstanding
may be authorized by vote of a majority of the Board of
Directors then in office, subject to the approval of a
majority of the outstanding securities of that class, as
defined in the 1940 Act.
(f) Voting. On each matter submitted to a vote of the
Shareholders, each holder of a Share shall be entitled to one
vote for each Share standing in his name on the books of the
Corporation, irrespective of the class thereof, and all
Shares of all classes shall vote as a single class ("Single
Class Voting"); provided, however, that (a) as to any matter
with respect to which a separate vote of any class is
required by the 1940 Act or by the Maryland General
Corporation Law, such requirement as to a separate vote by
that class shall apply in lieu of Single Class Voting as
described above; (b) in the event that the separate vote
requirements referred to in (a) above apply with respect to
one or more classes, then, subject to (c) below, the Shares
of all other classes shall vote as a single class; and (c) as
to any matter which does not affect the interest of a
particular class, only the holders of Shares of the one or
more affected classes shall be entitled to vote.
(g) Redemption by Shareholder. Each holder of Shares of a
particular class shall have the right at such times as may be
permitted by the Corporation, but no less frequently than
once each week, to require the Corporation to redeem all or
any part of his Shares of that class at a redemption price
per share equal to the net asset value per Share of that
class next determined (in accordance with subsection (i) of
this Section 6.2) after the Shares are properly tendered for
redemption, less such redemption charge as is determined by
the Board of Directors, which redemption charge shall not
exceed one percent (1%) of said net asset value per share.
Payment of the redemption price shall be in cash; provided,
however, that if the Board of Directors determines, which
determination shall be conclusive, that conditions exist
which make payment wholly in cash unwise or undesirable, the
Corporation may make payment wholly or partly in securities
or other assets belonging to the class of which the Shares
being redeemed are part at the value of such securities or
assets used in such determination of net asset value.
Notwithstanding the foregoing, the Corporation may
postpone payment of the redemption price and may suspend the
right of the holders of Shares of any class to require the
Corporation to redeem Shares of that class during any period
or at any time when and to the extent permissible under the
1940 Act.
(h) Redemption by Corporation. The Board of Directors may
cause the Corporation to redeem at net asset value the Shares
of any class from a holder who has, for a period of more than
six months, had less than 50 full Shares of that class in his
account, provided that the value of such Shares is less than
the minimum initial investment in such class at the time the
account was established and that at least sixty (60) days
prior written notice of the proposed redemption has been
given to such holder by postage prepaid mail to his last
known address. Upon redemption of Shares pursuant to this
subsection, the Corporation shall promptly cause payment of
the full redemption price to be made to the holder of Shares
so redeemed.
(i) Net Asset Value Per Share. The net asset value per
Share of any class shall be the quotient obtained by dividing
the value of the net assets of that class (being the value of
the assets belonging to that class less the liabilities
belonging to that class) by the total number of Shares of
that class outstanding, all determined in accordance with
generally accepted accounting principles and not inconsistent
with the 1940 Act.
The Board of Directors may determine to maintain the net
asset value per Share of any class at a designated constant
dollar amount and in connection therewith may adopt
procedures not inconsistent with the 1940 Act for the
continuing declarations of income attributable to that class
as dividends payable in additional Shares of that class at
the designated constant dollar amount and for the handling of
any losses attributable to that class. Such procedures may
provide that in the event of any loss each Shareholder shall
be deemed to have contributed to the capital of the
Corporation attributable to that class his pro rata portion
of the total number of Shares required to be cancelled in
order to permit the net asset value per Share of that class
to be maintained, after reflecting such loss, at the
designated constant dollar amount. Each Shareholder of the
Corporation shall be deemed to have agreed, by his investment
in any class with respect to which the Directors shall have
adopted any such procedure, to make the contribution referred
to in the preceding sentence in the event of any such loss.
(j) Equality. All Shares of each particular class shall
represent an equal proportionate interest in the assets
belonging to that class (subject to the liabilities belonging
to that class), and each Share of any particular class shall
be equal to each other Share of that class. The Board of
Directors may from time to time divide or combine the Shares
of any particular class into a greater or lesser number of
Shares of that class without thereby changing the
proportionate beneficial interest in the assets belonging to
that class or in any way affecting the rights of Shares of
any other class.
(k) Conversion or Exchange Rights. Subject to compliance
with the requirements of the 1940 Act, the Board of Directors
shall have the authority to provide that holders of Shares of
any class shall have the right to convert or exchange said
Shares into Shares of one or more other classes of Shares in
accordance with such requirements and procedures as may be
established by the Board of Directors.
ARTICLE VII
Issue of New Stock
Section 7.1. Issuance. The Board of Directors is authorized
to issue and sell or cause to be issued and sold from time to
time (without the necessity of offering the same or any part
thereof to existing shareholders) all or any portion or portions
of the entire authorized but unissued Shares of the Corporation,
and all or any portion or portions of the Shares of the
Corporation from time to time in its treasury, for cash or for
any other lawful consideration or considerations and on or for
any terms, conditions, or prices consistent with the provisions
of law and of the Articles of Incorporation at the time in force;
provided, however, that in no event shall Shares of the
Corporation having a par value be issued or sold for a
consideration or considerations less in amount or value than the
par value of the Shares so issued or sold, and provided further
that in no event shall any Shares of the Corporation be issued or
sold, and provided further that in no event shall any Shares of
the Corporation be issued or sold for a consideration (which
shall be net to the Corporation after underwriting discounts or
commissions) less in amount or value than the net asset value of
the Shares so issued or sold determined next after an order to
purchase such Shares is accepted, except that Shares may be sold
to an underwriter at (a) the net asset value determined next
after such orders are received by a dealer with whom such
underwriter has a sales agreement or (b) the net asset value
determined at a later time.
Section 7.2. Fractional Shares. The Corporation may issue
and sell fractions of Shares having pro rata all the rights of
full Shares, including, without limitation, the right to vote and
to receive dividends, and wherever the words "share" or "shares"
are used in these Articles or the Bylaws they shall be deemed to
include fractions of Shares, where the context does not clearly
indicate that only full Shares are intended.
ARTICLE VIII
Directors
The number of directors constituting the Board of Directors
shall be seven, which number may be changed in accordance with
the Bylaws of the Corporation but shall never be less than three.
The names of the persons who shall act as directors until the
first annual meeting of the Corporation and until their
successors have been duly chosen and qualified are:
Robert F. McDermott
George H. Ensley
George K. Sykes
Austin W. Betts
Robert I. Ferguson
Howard L. Freeman, Jr.
George E. Brown
ARTICLE IX
Voting Requirements
Section 9.1. Required Vote. Notwithstanding any provision
of law requiring a greater proportion than a majority of the
votes of all classes (or of any class entitled to vote thereon as
a separate class) to take or authorize any action, in accordance
with the authority granted by Section 2-104 of the Maryland
General Corporation Law, the Corporation is hereby authorized to
take such action upon the concurrence of a majority of the
aggregate number of Shares (or a majority of the aggregate number
of Shares of a class entitled to vote thereon as a separate
class) entitled to vote thereon.
Section 9.2. Cumulative Voting. The right to cumulative
votes in the election of directors is expressly prohibited.
ARTICLE X
Transactions With Related Parties
Section 10.1. Transactions with Related Parties. Subject
only to the provisions of the 1940 Act and to the provisions of
this Article X, any director, officer or employee, individually,
or any partnership of which any director, officer or employee may
be a member, or any corporation or association of which any
director, officer or employee may be an officer, director,
trustee, employee or shareholder, may be a party to, or may be
pecunniarily or otherwise interested in, any contract or
transaction of the Corporation, and in the absence of fraud no
contract or other transaction shall be thereby affected or
invalidated; provided that in case a director, or a partnership,
corporation or association of which a director is a member,
officer, director, trustee, employee or shareholder, is so
interested, such fact shall be disclosed or shall have been known
to the Board of Directors or a majority thereof; and any director
of the Corporation who is so interested or who is also a
director, officer, trustee, employee or shareholder of such other
corporation or association, or a member of such partnership which
is so interested, may be counted in determining the existence of
a quorum at any meeting of the Board of Directors of the
Corporation which shall authorize any such contract or
transaction with like force and effect as if he were not such
director, officer, trustee, employee, or shareholder of such
corporation or association, or not so interested or a member of a
partnership so interested, or so interested individually.
Section 10.2. Liability for Acts. Nothing herein contained
shall protect or purport to protect any director or officer of
the Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason
of his willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office.
ARTICLE XI
Bylaws
Except as may otherwise be provided in the Bylaws, the Board
of Directors of the Corporation is expressly authorized to make,
alter, amend and repeal Bylaws or to adopt new Bylaws of the
Corporation, without any action on the part of the shareholders;
but the Bylaws made by the Board of Directors and the power so
conferred may be altered or repealed by the shareholders.
ARTICLE XII
Amendment
The Corporation reserves the right from time to time to make
any amendment of these Articles of Incorporation, now or
hereafter authorized by law, including any amendment which alters
contract rights, as expressly set forth in these Articles of
Incorporation, of any outstanding stock. Any amendment to these
Articles of Incorporation may be adopted at either an annual or
special meeting of the shareholders upon receiving an affirmative
majority vote of all outstanding Shares and an affirmative
majority of the outstanding Shares of each class entitled to vote
thereon separately as a class in accordance with subsection
6.2(f) hereof.
In Witness Whereof, the undersigned incorporator of USAA TAX
EXEMPT FUND, INC. who executed the foregoing Articles of
Incorporation hereby acknowledges the same to be his act and
further acknowledges that, to the best of his knowledge, the
matters and facts set forth therein are true in all material
respects under the penalties of perjury.
Dated the 13th day of November, 1981.
/s/ David F. Dietz
---------------------------
David F. Dietz
EXHIBIT 1(b)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
(CHARTER)
OF
USAA TAX EXEMPT FUND, INC.
Article One
The name of the corporation (hereinafter referred to as the
"Corporation") is USAA TAX EXEMPT FUND, INC. The Corporation
does hereby certify that the Charter of the Corporation was
amended as hereinafter described.
Article Two
Article V is amended by deleting the second sentence thereof
in its entirety and substituting therefor the following:
Seventy-five million of such Shares may be issued in the
following classes, each class comprising the number of shares
and having the designations indicated; subject, however, to
the authority herein granted to the Board of Directors to
increase or decrease any such number of Shares:
Short-Term Fund . . . . . . . .25,000,000 shares
Intermediate-Term Fund. . . . .25,000,000 shares
High-Yield Fund . . . . . . . .25,000,000 shares
Article Three
Section 6.2 of Article VI is amended by deleting the first
sentence thereof in its entirety and substituting therefor the
following:
Without limiting the authority of the Board of Directors set
forth herein to establish and designate any further classes,
there are hereby established and designated three classes of
stock to be known as: the Short-Term Fund, Intermediate-Term
Fund and High-Yield Fund.
Article Four
The Board of Directors of the Corporation, at a meeting duly
called and held on December 18, 1981, at which a quorum was
present, adopted a resolution in which was set forth the foregoing
amendments of the Charter, declaring that said amendments are
advisable and directing that they be submitted for consideration by
the stockholders of the Corporation.
Article Five
The amendments of the Charter of the Corporation as hereinabove
set forth were duly approved by the stockholders of the Corporation
acting by unanimous consent without a formal meeting as of December
18, 1981.
IN WITNESS WHEREOF, these Articles of Amendment have been
executed by the President and Secretary of USAA Tax Exempt Fund,
Inc., thereunto duly authorized, as of the 18th day of December, 1981.
By:/s/ Robert F. McDermott
------------------------------
Robert F. McDermott, President
ATTEST:
/s/ Lloyd W. Sielbeck
- ------------------------
Lloyd W. Sielbeck, Secretary
CERTIFICATE
The undersigned, Robert F. McDermott, President of USAA Tax
Exempt Fund, Inc., who executed on behalf of said Corporation the
foregoing Articles of Amendment of which this certificate is made a
part, hereby acknowledges in the name of said Corporation the
foregoing Articles of Amendment to be the corporate act of said
Corporation and certifies that, to the best of his knowledge,
information and belief, the matters set forth therein with respect
to the approval thereof are true in all material respects, under
the penalties of perjury.
/s/ Robert F. McDermott
---------------------------
Robert F. McDermott, President
EXHIBIT 1(c)
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION, AS AMENDED
OF
USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated December 21, 1983, supplementing
the Articles of Incorporation of USAA TAX EXEMPT FUND, INC., a
Maryland corporation, as heretofore amended (the "Articles").
1. USAA TAX EXEMPT FUND, INC., pursuant to the provisions of
its Articles and Section 2-208 of the Maryland General Corporation
Law, hereby files Articles Supplementary for record evidencing the
classification of 25,000,000 shares of unissued capital stock, par
value $.01 per share, into a new class of capital stock, par value
$.01 per share, designated as the "TAX EXEMPT MONEY MARKET FUND."
2. Without limiting the authority of the Board of Directors to
establish and designate any further classes of capital stock, there
is hereby established and designated a fourth class in as the HIGH-
YIELD FUND, the INTERMEDIATE-TERM FUND and the SHORT-TERM FUND.
Such fourth class shall be designated the "TAX EXEMPT MONEY MARKET
FUND," shall be issuable as capital stock, par value $.01 per
share, and shall have the relative preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption as are described in Article
VI of the Articles.
3. The shares comprising the "TAX EXEMPT MONEY MARKET FUND"
have been classified by the Board of Directors of USAA TAX EXEMPT
FUND, INC. under the authority contained in Article V of the
Articles by votes duly adopted at a meeting of such Board of
Directors on October 26, 1983.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its President and attested
by its Secretary thereunto duly authorized as of the day and year
first above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner By:/s/ George K. Sykes
- ------------------------- ----------------------------
Secretary President
CERTIFICATE
The undersigned GEORGE K. SYKES, President of USAA TAX EXEMPT
FUND, INC., who executed on behalf of said corporation the
foregoing Articles Supplementary, of which this Certificate is made
a part, hereby acknowledges in the name of said corporation the
foregoing Articles Supplementary to be the corporate act of said
corporation and certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein
with respect to the approval thereof are true in all material
respects, under penalties of perjury.
/s/ George K. Sykes
------------------------
PRESIDENT
EXHIBIT 1(d)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
(CHARTER)
OF
USAA TAX EXEMPT FUND, INC.
ARTICLE ONE
The name of the Corporation (hereinafter referred to as the
"Corporation") is USAA TAX EXEMPT FUND, INC. The Corporation does
hereby certify that the Charter of the Corporation was amended as
hereinafter described.
ARTICLE TWO
Article V is hereby amended to read as follows:
ARTICLE V
The total number of shares of capital stock of all classes
which the Corporation shall have authority to issue is five billion
shares, $.01 par value (the "Shares"), and of the aggregate par value
of $50,000,000. One hundred million of such shares may be issued in
the following classes, each class comprising the number of shares and
having the designations indicated, subject, however, to the authority
herein granted to the Board of Directors to increase or decrease any
such number of shares:
High Yield Fund . . . . . . . .25,000,000 shares
Intermediate-Term Fund. . . . .25,000,000 shares
Short-Term Fund . . . . . . . .25,000,000 shares
Tax Exempt Money Market Fund. .25,000,000 shares
The balance of 4,900,000,000 shares may be issued by the Board
of Directors in such initial classes, or in any new class or classes,
each comprising such number of shares and having such preferences,
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption as shall be
fixed and determined from time to time by resolution or resolutions,
providing for the issuance of such shares adopted by the Board of
Directors, to whom authority so to fix and determine the same is
hereby expressly granted. In addition, the Board of Directors is
hereby expressly granted authority to increase or decrease the number
of shares of any class, but the number of shares of any class shall
not be decreased by the Board of Directors below the number of shares
thereof then outstanding.
ARTICLE THREE
Immediately before the Amendment, the total number of shares of
stock of all classes which the Corporation had authority to issue was
one hundred million shares. As Amended, the total number of shares of
stock of all classes which the Corporation has authority to issue is
five billion shares.
ARTICLE FOUR
Immediately before the Amendment, the number of shares of stock
of each class was:
High Yield Fund . . . . . . . .25,000,000 shares
Intermediate-Term Fund. . . . .25,000,000 shares
Short-Term Fund . . . . . . . .25,000,000 shares
Tax Exempt Money Market Fund. .25,000,000 shares
The Amendment did not change the number of shares of stock of
each class here and above.
ARTICLE FIVE
The par value of the shares of stock of each class is
unaffected by the Amendment.
ARTICLE SIX
Immediately before the Amendment, the aggregate par value of
all the shares of all classes was $1,000,000. Subsequent to the
Amendment, the aggregate par value of all the shares of all classes
was $50,000,000.
ARTICLE SEVEN
The information required by subsection (b)(2)(i) of section 2-607
of the Maryland General Corporation Law was not changed by the Amendment.
ARTICLE EIGHT
The Board of Directors of the Corporation at a meeting duly
called and held on April 25, 1984, at which a quorum was present,
unanimously adopted a resolution in which was set forth the foregoing
Amendment of the Charter, declaring that said Amendment is advisable
and directing that it be submitted for consideration at the annual
meeting of the stockholders of the Corporation.
ARTICLE NINE
The Amendment of the Charter of the Corporation as here and
above set forth was duly adopted by the stockholders of the
Corporation during the annual meeting held on June 15, 1984.
IN WITNESS WHEREOF, these Articles of Amendment have been
executed by the President and Secretary of USAA TAX EXEMPT FUND, INC.,
thereunto duly authorized, as of the 17th day of July, 1984.
By:/s/ George K. Sykes
----------------------------
GEORGE K. SYKES
President
ATTEST:
/s/ Michael D. Wagner
- ---------------------------
MICHAEL D. WAGNER
Secretary
CERTIFICATE
The undersigned, George K. Sykes, President of USAA Tax Exempt Fund,
Inc., who executed on behalf of said Corporation the foregoing
Articles of Amendment of which this certificate is made a part, hereby
acknowledges in the name of said Corporation the foregoing Articles of
Amendment to be the corporate act of said Corporation and certifies
that, to the best of his knowledge, information and belief, the
matters set forth therein with respect to the approval hereof are true
in all material respects, under the penalties of perjury.
/s/ Goerge K. Sykes
----------------------------
GEORGE K. SYKES
President
EXHIBIT 1(e)
ARTICLES SUPPLEMENTARY
TO
CHARTER
OF
USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated July 27, 1984 supplementing the
Charter of USAA TAX EXEMPT FUND, INC., a Maryland Corporation, as
heretofore amended.
ARTICLE 1
USAA TAX EXEMPT FUND, INC., pursuant to the provisions of its
Charter and Section 2-208 of the Maryland General Corporation Law,
hereby files Articles Supplementary for record evidencing the
classification of an additional 50,000,000 shares of unissued stock
into an existing class of shares of stock designated as the HIGH YIELD
FUND to increase the number of shares of that class, and the
classification of an additional 100,000,000 shares of unissued stock
into an existing class of shares of stock designated as the TAX EXEMPT
MONEY MARKET FUND, to increase the number of shares of that class.
ARTICLE II
Section 2.1 Increase in Number of Shares of a Class. Without
limiting the authority of the Board of Directors, as set forth in the
Charter to which these Supplementary Articles apply to increase or
decrease the number of shares of any class; subject, however, to the
provision that the number of shares of any class shall not be
decreased by the Board of Directors below the number of shares thereof
then outstanding, the number of shares of the class designated the
HIGH YIELD FUND is hereby increased by an additional 50,000,000 shares
of unissued stock, to equal a total of 75,000,000 shares of stock in
the class of shares designated the HIGH YIELD FUND. The number of
shares of the class designated the TAX EXEMPT MONEY MARKET FUND is
hereby increased by an additional 100,000,000 shares of unissued stock
to equal a total of 125,000,000 shares of stock in the class of shares
designated the TAX EXEMPT MONEY MARKET FUND. Such additional shares
shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption as are described in Article VI of the
Articles of Incorporation of the USAA TAX EXEMPT FUND, INC.
Section 2.2. Statement of Authority. The increase in the
number of shares of the class of shares designated the HIGH YIELD FUND
and the increase in the number of shares of the class of shares
designated the TAX EXEMPT MONEY MARKET FUND has been performed by the
Board of Directors of USAA TAX EXEMPT FUND, INC., under the authority
contained in Article V of the Articles of Incorporation of the USAA
TAX EXEMPT FUND, INC., by vote duly adopted at a meeting of the Board
of Directors on July 27, 1984.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its President and attested by
its Secretary thereunto duly authorized as of the day and year first
above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
By:/s/ Michael D. Wagner By:/s/ George K. Sykes
- ----------------------------- -----------------------------
Michael D. Wagner George K. Sykes
Secretary President
CERTIFICATE
The undersigned GEORGE K. SYKES, President of USAA TAX EXEMPT
FUND, INC., who executed this on behalf of said corporation the
foregoing Articles Supplementary of which this Certificate is made a
part, hereby acknowledges, in the name of said corporation, that the
foregoing Articles Supplementary are the corporate act of said
corporation and certifies that, to the best of his knowledge,
information and belief, that matters and facts set below therein with
respect to the approval thereof are true in all material respects,
under penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ George K. Sykes
---------------------
PRESIDENT
EXHIBIT 1(f)
ARTICLES SUPPLEMENTARY
TO
CHARTER
OF
USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated August 1, 1985 supplementing the
Charter of USAA TAX EXEMPT FUND, INC., a Maryland corporation, as
heretofore amended.
ARTICLE I
USAA TAX EXEMPT FUND, INC., pursuant to the provisions of its
Charter and Section 2-208 of the Maryland General Corporation Law,
hereby files Articles Supplementary for record evidencing the
classification of an additional 25,000,000 shares of unissued stock
into an existing class of shares of stock designated as the SHORT-TERM
FUND to increase the number of shares of that class, and the
classification of an additional 125,000,000 shares of unissued stock
into an existing class of shares of stock designated as the TAX EXEMPT
MONEY MARKET FUND, to increase the number of shares of that class.
ARTICLE II
Section 2.1 Increase in Number of Shares of a Class. Without
limiting the authority of the Board of Directors, as set forth in the
Charter to which these Supplementary Articles apply to increase or
decrease the number of shares of any class; subject, however, to the
provision that the number of shares of any class shall not be
decreased by the Board of Directors below the number of shares thereof
then outstanding, the number of shares of the class designated the
SHORT-TERM FUND is hereby increased by an additional 25,000,000 shares
of unissued stock, to equal a total of 50,000,000 shares of stock in
the class of shares designated the SHORT-TERM FUND. The number of
shares of the class designated the TAX EXEMPT MONEY MARKET FUND is
hereby increased by an additional 125,000,000 shares of unissued stock
to equal a total of 250,000,000 shares of stock in the class of shares
designated the TAX EXEMPT MONEY MARKET FUND. Such additional shares
shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption as are described in Article VI of the
Articles of Incorporation of the USAA TAX EXEMPT FUND, INC.
Section 2.2 Statement of Authority. The increase in the
number of shares of the class of shares designated the SHORT-TERM FUND
and the increase in the number of shares of the class of shares
designated the TAX EXEMPT MONEY MARKET FUND, INC., has been performed
by the Board of Directors of USAA TAX EXEMPT FUND, INC., under the
authority contained in Article V of the Articles of Incorporation of
the USAA TAX EXEMPT FUND, INC., by vote duly adopted at a meeting of
the Board of Directors on July 24, 1985.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its President and attested by
its Secretary thereunto duly authorized as of the day and year first
above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
By:/s/ Michael D. Wagner By:/s/ George K. Sykes
- ----------------------------- --------------------------
MICHAEL D. WAGNER GEORGE K. SYKES
Secretary President
CERTIFICATE
The undersigned GEORGE K. SYKES, President of USAA TAX EXEMPT
FUND, INC., who executed this on behalf of said corporation the
foregoing Articles Supplementary of which this Certificate is made a
part, hereby acknowledges, in the name of said corporation, that the
foregoing Articles Supplementary are the corporate act of said
corporation and certifies that, to the best of his knowledge,
information and belief, that matters and facts set below therein with
respect to the approval thereof are true in all material respects,
under penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ George K. Sykes
---------------------------
President
EXHIBIT 1(g)
ARTICLES SUPPLEMENTARY
TO
CHARTER
OF
USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated January 17, 1986 supplementing the
Charter of USAA TAX EXEMPT FUND, INC., a Maryland Corporation, as
heretofore amended.
ARTICLE I
USAA TAX EXEMPT FUND, INC., pursuant to the provisions of its
Charter and Section 2-208 of the Maryland General Corporation Law,
hereby files Articles Supplementary for record evidencing the
classification of an additional 75,000,000 shares of unissued stock
into an existing class of shares of stock designated as the HIGH YIELD
FUND, to increase the number of shares of that class; the
classification of an additional 25,000,000 shares of unissued stock
into an existing class of shares of stock designated as the
INTERMEDIATE-TERM FUND, to increase the number of shares of that
class; and the classification of an additional 500,000,000 shares of
unissued stock into an existing class of shares of stock designated as
the TAX EXEMPT MONEY MARKET FUND, to increase the number of shares of
that class.
ARTICLE II
Section 2.1 Increase in Number of Shares of a Class. Without
limiting the authority of the Board of Directors, as set forth in the
Charter to which these Supplementary Articles apply to increase or
decrease the number of shares of any class, subject however to the
provision that the number of shares of any class shall not be
decreased by the Board of Directors below the number of shares thereof
then outstanding, the number of shares of the class designated the
HIGH YIELD FUND is hereby increased by an additional 75,000,000 shares
of unissued stock, to equal a total of 150,000,000 shares of stock in
the class of shares designated the HIGH YIELD FUND. The number of
shares of the class designated the INTERMEDIATE-TERM FUND is hereby
increased by an additional 25,000,000 shares of unissued stock, to
equal a total of 50,000,000 shares of stock in the class of shares
designated the INTERMEDIATE-TERM FUND. The number of shares of the
class designated the TAX EXEMPT MONEY MARKET FUND is hereby increased
by an additional 500,000,000 shares of unissued stock, to equal a
total of 750,000,000 shares of stock in the class of shares designated
the TAX EXEMPT MONEY MARKET FUND. Such additional shares shall have
the relative preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions
of redemption as are described in Article VI of the Articles of
Incorporation of the USAA TAX EXEMPT FUND, INC.
Section 2.2 Statement of Authority. The increase in the
number of shares of the class of shares designated the HIGH YIELD
FUND, the increase in the number of shares of the class of shares
designated the INTERMEDIATE-TERM FUND, and the increase in the number
of shares of the class of shares designated the TAX EXEMPT MONEY
MARKET FUND has been performed by the Board of Directors of USAA TAX
EXEMPT FUND, INC., under the authority contained in Article V of the
Articles of Incorporation of the USAA TAX EXEMPT FUND, INC., by vote
duly adopted at a meeting of the Board of Directors on January 17, 1986.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its President and attested by
its Assistant Secretary thereunto duly authorized as of the day and
year first above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
By:/s/ Nora P. McDaniel By:/s/ George K. Sykes
- --------------------------- ------------------------
Nora P. McDaniel George K. Sykes
Assistant Secretary President
CERTIFICATE
The undersigned GEORGE K. SYKES, President of USAA TAX EXEMPT
FUND, INC., who executed this on behalf of said corporation the
foregoing Articles Supplementary of which this Certificate is made a
part, hereby acknowledges, in the name of said corporation, that the
foregoing Articles Supplementary are the corporate act of said
corporation and certifies that, to the best of his knowledge,
information and belief, that matters and facts set below therein with
respect to the approval thereof are true in all material respects,
under penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ George K. Sykes
----------------------------
PRESIDENT
EXHIBIT 1(h)
ARTICLES SUPPLEMENTARY
TO CHARTER OF
USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated September 15, 1988 supplementing
the Charter of USAA TAX EXEMPT FUND, INC., a Maryland corporation, as
heretofore amended.
ARTICLE I
USAA TAX EXEMPT FUND, INC., pursuant to the provisions of its
Charter and Section 2-208 of the Maryland General Corporation Law,
hereby files Articles Supplementary for record evidencing the
classification of an additional 500,000,000 shares of unissued stock
into an existing class of shares of stock designated as the TAX EXEMPT
MONEY MARKET FUND, to increase the number of shares of that class.
ARTICLE II
Section 2.1. Increase in Number of Shares of a Class. Without
limiting the authority of the Board of Directors, as set forth in the
Charter to which these Supplementary Articles apply to increase or
decrease the number of shares of any class; subject, however, to the
provision that the number of shares of any class shall not be
decreased by the Board of Directors below the number of shares thereof
then outstanding, the number of shares of the class designated the TAX
EXEMPT MONEY MARKET FUND is hereby increased by an additional
500,000,000 shares of unissued stock, to equal a total of
1,250,000,000 shares of stock in the class of shares designated the
TAX EXEMPT MONEY MARKET FUND. Such additional shares shall have the
relative preferences, rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemption
as are described in Article VI of the Articles of Incorporation of the
USAA TAX EXEMPT FUND, INC.
Section 2.2 Statement of Authority. The increase in the
number of shares of the class of shares designated the TAX EXEMPT
MONEY MARKET FUND has been performed by the Board of Directors of USAA
TAX EXEMPT FUND, INC., under the authority contained in Article V of
the Articles of Incorporation of the USAA TAX EXEMPT FUND, INC., by
vote duly adopted by unanimous consent of the Board of Directors on
September 15, 1988.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its Executive Vice President
and attested by its Assistant Secretary thereunto duly authorized as
of the day and year first above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
By:/s/ Nora P. McDaniel By:/s/ Michael J.C. Roth
- --------------------------- ------------------------------
Nora P. McDaniel Michael J. C. Roth
Assistant Secretary Executive Vice President
CERTIFICATE
The undersigned MICHAEL J. C. ROTH, Executive Vice President of
USAA TAX EXEMPT FUND, INC., who executed this on behalf of said
corporation the foregoing Articles Supplementary of which this
Certificate is made a part, hereby acknowledges, in the name of said
corporation, that the foregoing Articles Supplementary are the
corporate act of said corporation and certifies that, to the best of
his knowledge, information and belief, that matters and facts set
below therein with respect to the approval thereof are true in all
material respects, under penalties of perjuey.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J.C. Roth
-------------------------
EXECUTIVE VICE PRESIDENT
EXHIBIT 1(i)
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION, AS AMENDED
OF
USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated May 18, 1989, supplementing the
Articles of Incorporation of USAA TAX EXEMPT, INC., a Maryland
corporation, as heretofore amended (the "Articles").
1. USAA TAX EXEMPT FUND, INC., Pursuant to the provisions of
its Articles and Section 2-208 of the Maryland General Corporation
Law, hereby files Articles Supplementary for record evidencing the
classification of 25,000,000 and 50,000,000 shares respectively, of
unissued capital stock, par value $.01 per share, into two new classes
of capital stock, par value $.01 per share, designated as the
"CALIFORNIA BOND FUND" and "CALIFORNIA MONEY MARKET FUND."
2. Without limiting the authority of the Board of Directors to
establish and designate any further classes of capital stock, there is
hereby established and designated the fifth and sixth classes in
addition to the four classes already established and designated as the
HIGH YIELD FUND, the INTERMEDIATE-TERM FUND, the SHORT-TERM FUND and
the TAX EXEMPT MONEY MARKET FUND. Such fifth and sixth classes shall
be designated the "CALIFORNIA BOND FUND" and "CALIFORNIA MONEY MARKET
FUND," shall be issuable as capital stock, par value $.01 per share,
and shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption as are described in Article VI of the
Articles.
3. The shares comprising the "CALIFORNIA BOND FUND" and
CALIFORNIA MONEY MARKET FUND," have been classified by the Board of
Directors of USAA TAX EXEMPT FUND, INC. under the authority contained
in Article V of the Articles by votes duly adopted at a meeting of
such Board of Directors on May 17, 1989.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its Executive Vice President
and attested by its Secretary thereunto duly authorized as of the day
and year first above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner By /s/ Michael J.C. Roth
- ------------------------ -------------------------
Secretary Executive Vice President
CERTIFICATE
The undersigned, Michael J. C. Roth, Executive Vice President
of USAA TAX EXEMPT FUND, INC., who executed on behalf of said
corporation the foregoing Articles Supplementary, of which this
Certificate is made a part, hereby acknowledges in the name of said
corporation the foregoing Articles Supplementary to be the corporate
act of said corporation and certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material
respects, under penalties of perjury.
/s/ Micheal J.C. Roth
------------------------
Executive Vice President
EXHIBIT 1(j)
ARTICLES SUPPLEMENTARY TO
ARTICLES OF INCORPORATION AS AMENDED
OF USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated August 24, 1989 supplementing the
Charter of USAA TAX EXEMPT FUND, INC., a Maryland Corporation, as
heretofore amended.
ARTICLE I
USAA TAX EXEMPT FUND, INC., pursuant to the provisions of its
Charter and Section 2-208 of the Maryland General Corporation Law,
hereby files Articles Supplementary for record evidencing the
classification of an additional 50,000,000 shares of unissued capital
stock, par value $.01 per share, into an existing class of shares of
capital stock, par value $.01 per share, designated as the CALIFORNIA
MONEY MARKET FUND, to increase the number of shares of that class.
ARTICLE II
Section 2.1 Increase in Number of Shares of a Class.
Without limiting the authority of the Board of Directors, as set forth
in the Charter to which these Supplementary Articles apply to increase
or decrease the number of shares of any class; subject, however, to
the provision that the number of shares of any class shall not be
decreased by the Board of Directors below the number of shares thereof
then outstanding, the number of shares of the class of capital stock,
par value $.01 per share, designated the CALIFORNIA MONEY MARKET FUND
is hereby increased by an additional 50,000,000 shares of unissued
stock, to equal a total of 100,000,000 shares of stock in the class of
shares designated the CALIFORNIA MONEY MARKET FUND. Such additional
shares shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption as are described in Article VI of the
Articles of Incorporation of the USAA TAX EXEMPT FUND, INC.
Section 2.2 Statement of Authority. The increase in the
number of shares of the class of capital stock, par value $.01 per
share, designated the CALIFORNIA MONEY MARKET FUND has been performed
by the Board of Directors of USAA TAX EXEMPT FUND, INC., under the
authority contained in Article V of the Articles of Incorporation of
the USAA TAX EXEMPT FUND, INC., by vote duly adopted at a meeting of
the Board of Directors on August 23, 1989.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC., has caused
these Articles Supplementary to be executed by its executive Vice
President and attested by its Secretary thereunto duly authorized as
of the day and year first above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
BY: /s/ Michael D. Wagner BY: /s/ Michael J.C. Roth
- -------------------------- ---------------------------
MICHAEL D. WAGNER MICHAEL J. C. ROTH
Secretary Executive Vice President
CERTIFICATE
The undersigned, Michael J. C. Roth, Executive Vice President
of USAA TAX EXEMPT FUND, INC., who executed on behalf of said
corporation the foregoing Articles Supplementary of which this
Certificate is made a part, hereby acknowledges in the name of said
corporation the foregoing Articles Supplementary to be the corporate
act of said corporation and certifies that, to the best of his
knowledge, information and belief, the matters and facts set below
therein with respect to the approval thereof are true in all material
respects, under penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
--------------------------
Michael J. C. Roth
Executive Vice President
EXHIBIT 1(k)
ARTICLES SUPPLEMENTARY TO
ARTICLES OF INCORPORATION, AS AMENDED
OF USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated January 29, 1990 supplementing the
Charter of USAA TAX EXEMPT FUND, INC., a Maryland Corporation, as
heretofore amended.
ARTICLE I
USAA TAX EXEMPT FUND, INC., pursuant to the provisions of its
Charter and Section 2-208 of the Maryland General Corporation Law,
hereby files Articles Supplementary for record evidencing the
classification of an additional 200,000,000 shares of unissued capital
stock, par value $.01 per share, into an existing class of shares of
capital stock, par value $.01 per share, designated as the CALIFORNIA
MONEY MARKET FUND, to increase the number of shares of that class.
ARTICLE II
Section 2.1. Increase in Number of Shares of a Class. Without
limiting the authority of the Board of Directors, as set forth in the
Charter to which these Supplementary Articles apply to increase or
decrease the number of shares of any class; subject, however, to the
provision that the number of shares of any class shall not be
decreased by the Board of Directors below the number of shares thereof
then outstanding, the number of shares of the class of capital stock,
par value $.01 per share, designated the CALIFORNIA MONEY MARKET FUND
is hereby increased by an additional 200,000,000 shares of unissued
stock, to equal a total of 300,000,000 shares of stock in the class of
shares designated the CALIFORNIA MONEY MARKET FUND. Such additional
shares shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption as are described in Article VI of the
Articles of Incorporation of the USAA TAX EXEMPT FUND, INC.
Section 2.2. Statement of Authority. The increase in the
number of shares of the class of capital stock, par value $.01 per
share, designated the CALIFORNIA MONEY MARKET FUND has been performed
by the Board of Directors of USAA TAX EXEMPT FUND, INC., under the
authority contained in Article V of the Articles of Incorporation of
the USAA TAX EXEMPT FUND, INC., by vote duly adopted at a meeting of
the Board of Directors on January 26, 1990.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its President and attested by
its Secretary thereunto duly authorized as of the day and year first
above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J.C. Roth
- ------------------------- -------------------------
MICHAEL D. WAGNER MICHAEL J.C. ROTH
Secretary President
CERTIFICATE
The undersigned, Michael J.C. Roth, President of USAA TAX
EXEMPT FUND, INC., who executed on behalf of said corporation the
foregoing Articles Supplementary of which this Certificate is made a
part, hereby acknowledges in the name of said corporation the
foregoing Articles Supplementary to be the corporate act of said
corporation and certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects,
under penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J.C. Roth
---------------------------
Michael J.C. Roth
President
EXHIBIT 1(l)
ARTICLES SUPPLEMENTARY TO
ARTICLES OF INCORPORATION, AS AMENDED
OF USAA TAX EXEMPT FUND, INC.
Articles Supplementary dated July 25, 1990, supplementing the
Articles of Incorporation of USAA TAX EXEMPT FUND, INC., a Maryland
Corporation, as heretofore amended (the "Articles").
ARTICLE I
USAA TAX EXEMPT FUND, INC., pursuant to the provisions of its
Articles and Section 2-208 of the Maryland General Corporation Law,
hereby files Articles Supplementary for record evidencing the
classification of an additional 10,000,000 shares and 750,000,000
shares, respectively, of unissued capital stock, par value $.01 per
share, into existing classes of shares of capital stock, par value
$.01 per share, designated as the INTERMEDIATE-TERM FUND and the TAX
EXEMPT MONEY MARKET FUND, to increase the number of shares of those
classes; and evidencing the classification of 25,000,000 shares,
100,000,000 shares, 25,000,000 shares, and 100,000,000 shares,
respectively, of unissued capital stock, par value $.01 per share,
into four new classes of capital stock, par value $.01 per share,
designated as the NEW YORK BOND FUND, the NEW YORK MONEY MARKET FUND,
the VIRGINIA BOND FUND, and the VIRGINIA MONEY MARKET FUND.
ARTICLE II
Section 2.1. Increase in Number of Shares of a Class. Without
limiting the authority of the Board of Directors, as set forth in the
Articles to which these Supplementary Articles apply, to increase or
decrease the number of shares of any class, subject, however, to the
provision that the number of shares of any class shall not be
decreased by the Board of Directors below the number of shares thereof
then outstanding, the number of shares of the class of capital stock,
par value $.01 per share, designated the INTERMEDIATE-TERM FUND is
hereby increased by an additional 10,000,000 shares of unissued stock,
to equal a total of 60,000,000 shares of stock in the class of shares
designated the INTERMEDIATE-TERM FUND and the number of shares of the
class of capital stock, par value $.01 per share, designated the TAX
EXEMPT MONEY MARKET FUND is hereby increased by an additional
750,000,000 shares of unissued stock, to equal a total of
2,000,000,000 shares of stock in the class of shares designated the
TAX EXEMPT MONEY MARKET FUND. Such additional shares shall have the
relative preferences, rights, voting powers, restrictions, limitations
as to dividends, qualifications, and terms and conditions of
redemption as are described in Article VI of the Articles.
Section 2.2. Statement of Authority. The increase in the
number of shares of the class of capital stock, par value $.01 per
share, designated the INTERMEDIATE-TERM FUND and the TAX EXEMPT MONEY
MARKET FUND has been performed by the Board of Directors of USAA TAX
EXEMPT FUND, INC., under the authority contained in Article V of the
Articles of Incorporation of the USAA TAX EXEMPT FUND, INC., by vote
duly adopted at a meeting of the Board of Directors on July 25, 1990.
ARTICLE III
Section 3.1. Establishing Additional Classes of Capital Stock.
Without limiting the authority of the Board of Directors to establish
and designate any further classes of capital stock, there is hereby
established and designated the seventh, eighth, ninth and tenth
classes in addition to the six classes already established and
designated as the HIGH YIELD FUND, the INTERMEDIATE-TERM FUND, the
SHORT-TERM FUND, the TAX EXEMPT MONEY MARKET FUND, the CALIFORNIA BOND
FUND and the CALIFORNIA MONEY MARKET FUND. Such seventh, eighth, ninth
and tenth classes shall be designated the NEW YORK BOND FUND, the NEW
YORK MONEY MARKET FUND, the VIRGINIA BOND FUND, and the VIRGINIA MONEY
MARKET FUND, shall be issuable as capital stock, par value $.01 per
share, and shall have the relative preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms
and conditions of redemption as are described in Article VI of the
Articles.
Section 3.2. Statement of Authority. The shares comprising
the NEW YORK BOND FUND, the NEW YORK MONEY MARKET FUND, the VIRGINIA
BOND FUND, and the VIRGINIA MONEY MARKET FUND have been classified by
the Board of Directors of USAA TAX EXEMPT FUND, INC. under the
authority contained in Article V of the Articles by votes duly adopted
at a meeting of such Board of Directors on July 25, 1990.
IN WITNESS WHEREOF, USAA TAX EXEMPT FUND, INC. has caused these
Articles Supplementary to be executed by its President and attested to
by its Secretary thereunto duly authorized as of the day and year
first above written.
ATTEST: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J.C. Roth
- ------------------------- ----------------------------
Secretary President
CERTIFICATE
The undersigned, MICHAEL J.C. ROTH, President of USAA TAX
EXEMPT FUND, INC., who executed on behalf of said Corporation the
foregoing Articles Supplementary of which this Certificate is made a
part, hereby acknowledges in the name of said Corporation, the
foregoing Articles Supplementary to be the corporate act of said
Corporation and certifies that, to the best of his knowledge,
information, and belief, that the matters and facts set below therein
with respect to the approval thereof are true in all material
respects, under penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J.C. Roth
---------------------
Michael J.C. Roth
President
EXHIBIT 1(m)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In a accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Company ($.01
par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the Short-Term Fund by classifying an
additional 10,000,000 shares of the authorized and unissued stock of the
Corporation into the Short-Term Fund, and hereby increases the aggregate
number of shares of stock of the class of shares designated as the California
Bond Fund by classifying an additional 5,000,000 shares of the authorized
and unissued stock of the Corporation into the California Bond Fund.
THIRD: The additional shares of the Short-Term Fund and the
California Bond Fund shall have the preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions as are described in Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in
the total number of shares classified as shares of the Short-Term Fund and
California Bond Fund, the total number of shares of stock of all classes
that the Corporation had and has authority to issue was and is 5,000,000,000
shares ($.01 par value per share).
(b) Before the increase in the total number of shares
classified as shares of the Short-Term Fund and California Bond Fund, there
were classified 150,000,000 shares of the High Yield Fund, 60,000,000 shares
of the Intermediate-Term Fund, 50,000,000 shares of the Short-Term Fund,
2,000,000,000 shares of the Tax Exempt Money Market Fund, 25,000,000 shares
of the California Bond Fund, 300,000,000 shares of the California Money
Market Fund, 25,000,000 shares of the New York Bond Fund, 100,000,000 shares
of the New York Money Market Fund, 25,000,000 shares of the Virginia Bond
Fund and 100,000,000 shares of the Virginia Money Market Fund.
(c) After the increase in the total number of shares
classified as shares of the Short-Term Fund and California Bond Fund, there
are classified 150,000,000 shares of the High Yield Fund, 60,000,000 shares
of the Intermediate-Term Fund, 60,000,000 shares of the Short-Term Fund,
2,000,000,000 shares of the Tax Exempt Money Market Fund, 30,000,000 shares
of the California Bond Fund, 300,000,000 shares of the California Money
Market Fund, 25,000,000 shares of the New York Bond Fund, 100,000,000 shares
of the New York Money Market Fund, 25,000,000 shares of the Virginia Bond
Fund and 100,000,000 shares of the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the
total number of shares classified as shares of the Short-Term Fund and
California Bond Fund, the aggregate par value of all shares of all classes
of stock authorized to be issued by the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on May 2, 1991.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner By: /s/ Michael J.C. Roth
- ------------------------ ----------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
The UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
----------------------
Michael J. C. Roth
President
EXHIBIT 1(n)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the Intermediate-Term Fund by classifying an
additional 20,000,000 shares of the authorized and unissued stock of the
Corporation into the Intermediate-Term Fund, hereby increases the aggregate
number of shares of stock of the class of shares designated as the Short-
Term Fund by classifying an additional 20,000,000 shares of the authorized
and unissued stock of the Corporation into the Short-Term Fund, and hereby
increases the aggregate number of shares of stock of the class of shares
designated as the California Bond Fund by classifying an additional
10,000,000 shares of the authorized and unissued stock of the Corporation
into the California Bond Fund.
THIRD: The additional shares of the Intermediate-Term Fund, the
Short-Term Fund, and the California Bond Fund shall have the preferences,
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions as are described in Article VI of
the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Intermediate-Term Fund,
Short-Term Fund, and California Bond Fund, the total number of shares of
stock of all classes that the Corporation had and has authority to issue was
and is 5,000,000,000 shares ($.01 par value per share).
(b) Before the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, Short-Term Fund, and California
Bond Fund, there were classified 150,000,000 shares of the High Yield Fund,
60,000,000 shares of the Intermediate-Term Fund, 60,000,000 shares of the
Short-Term Fund, 2,000,000,000 shares of the Tax Exempt Money Market Fund,
30,000,000 shares of the California Bond Fund, 300,000,000 shares of the
California Money Market Fund, 25,000,000 shares of the New York Bond Fund,
100,000,000 shares of the New York Money Market Fund, 25,000,000 shares of
the Virginia Bond Fund and 100,000,000 shares of the Virginia Money Market
Fund.
(c) After the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, Short-Term Fund, and California
Bond Fund, there are classified 150,000,000 shares of the High Yield Fund,
80,000,000 shares of the Intermediate-Term Fund, 80,000,000 shares of the
Short-Term Fund, 2,000,000,000 shares of the Tax Exempt Money Market Fund,
40,000,000 shares of the California Bond Fund, 300,000,000 shares of the
California Money Market Fund, 25,000,000 shares of the New York Bond Fund,
100,000,000 shares of the New York Money Market Fund, 25,000,000 shares of
the Virginia Bond Fund and 100,000,000 shares of the Virginia Money Market
Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Intermediate-Term Fund, Short-
Term Fund, and California Bond Fund, the aggregate par value of all shares
of all classes of stock authorized to be issued by the Corporation was and
is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on September 9, 1991.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- ------------------------- --------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
----------------------------
Michael J. C. Roth
President
EXHIBIT 1(o)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the Intermediate-Term Fund by classifying an
additional 25,000,000 shares of the authorized and unissued stock of the
Corporation into the Intermediate-Term Fund.
THIRD: The additional shares of the Intermediate-Term Fund shall
have the preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions as are described in
Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Intermediate-Term Fund,
the total number of shares of stock of all classes that the Corporation had
and has authority to issue was and is 5,000,000,000 shares ($.01 par value
per share).
(b) Before the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, there were classified 150,000,000
shares of the High Yield Fund, 80,000,000 shares of the Intermediate-Term
Fund, 80,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the
Tax Exempt Money Market Fund, 40,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 25,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, there are classified 150,000,000
shares of the High Yield Fund, 105,000,000 shares of the Intermediate-Term
Fund, 80,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the
Tax Exempt Money Market Fund, 40,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 25,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Intermediate-Term Fund, the
aggregate par value of all shares of all classes of stock authorized to be
issued by the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on May 12, 1992.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- -------------------------- ----------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
---------------------------
Michael J. C. Roth
President
EXHIBIT 1(p)
USAA TAX EXEMPT FUND, INC.
ARTICLES OF AMENDMENT
USAA Tax Exempt Fund, Inc., a Maryland corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended as follows:
The name of the class of stock designated as the
"High Yield Fund" is changed to "Long-Term Fund"
and in connection therewith all references in the
Charter to "High Yield Fund" are hereby deleted and
the words "Long-Term Fund" shall be substituted
therefor wherever such words appear.
SECOND: The amendment does not increase the authorized stock of
the Corporation.
THIRD: The foregoing amendment to the Charter of the Corporation
has been advised by the Board of Directors and approved by the stockholders
of the Corporation.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these
presents to be signed in its name and on its behalf by its President and
witnessed by its Assistant Secretary on July 22, 1992.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Nora P. McDaniel By /s/ Michael J. C. Roth
- ------------------------- --------------------------------
Nora P. McDaniel Michael J. C. Roth
Assistant Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles of Amendment of
which this certificate is made a part, hereby acknowledges in the name and
on behalf of said Corporation the foregoing Articles of Amendment to be the
corporate act of said Corporation and hereby certifies that to the best of
his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
/s/ Michael J. c. Roth
--------------------------
Michael J. C. Roth
President
EXHIBIT 1(q)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the Short-Term Fund by classifying an
additional 25,000,000 shares of the authorized and unissued stock of the
Corporation into the Short-Term Fund.
THIRD: The additional shares of the Short-Term Fund shall have the
preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions as are described in
Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Short-Term Fund, the
total number of shares of stock of all classes that the Corporation had and
has authority to issue was and is 5,000,000,000 shares ($.01 par value per
share).
(b) Before the increase in the total number of shares classified
as shares of the Short-Term Fund, there were classified 150,000,000 shares
of the Long-Term Fund (formerly High Yield Fund), 105,000,000 shares of the
Intermediate-Term Fund, 80,000,000 shares of the Short-Term Fund,
2,000,000,000 shares of the Tax Exempt Money Market Fund, 40,000,000 shares
of the California Bond Fund, 300,000,000 shares of the California Money
Market Fund, 25,000,000 shares of the New York Bond Fund, 100,000,000 shares
of the New York Money Market Fund, 25,000,000 shares of the Virginia Bond
Fund and 100,000,000 shares of the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the Short-Term Fund, there are classified 150,000,000 shares of
the High Yield Fund, 105,000,000 shares of the Intermediate-Term Fund,
105,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the Tax
Exempt Money Market Fund, 40,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 25,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Short-Term Fund, the aggregate
par value of all shares of all classes of stock authorized to be issued by
the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on October 28, 1992.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- ----------------------- ------------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
-----------------------------
Michael J. C. Roth
President
EXHIBIT 1(r)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the Intermediate-Term Fund by classifying an
additional 30,000,000 shares of the authorized and unissued stock of the
Corporation into the Intermediate-Term Fund.
THIRD: The additional shares of the Intermediate-Term Fund shall
have the preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions as are described in
Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Intermediate-Term Fund,
the total number of shares of stock of all classes that the Corporation had
and has authority to issue was and is 5,000,000,000 shares ($.01 par value
per share).
(b) Before the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, there were classified 150,000,000
shares of the Long-Term Fund (formerly High Yield Fund), 105,000,000 shares
of the Intermediate-Term Fund, 105,000,000 shares of the Short-Term Fund,
2,000,000,000 shares of the Tax Exempt Money Market Fund, 40,000,000 shares
of the California Bond Fund, 300,000,000 shares of the California Money
Market Fund, 25,000,000 shares of the New York Bond Fund, 100,000,000 shares
of the New York Money Market Fund, 25,000,000 shares of the Virginia Bond
Fund and 100,000,000 shares of the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, there are classified 150,000,000
shares of the Long-Term Fund, 135,000,000 shares of the Intermediate-Term
Fund, 105,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the
Tax Exempt Money Market Fund, 40,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 25,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Intermediate-Term Fund, the
aggregate par value of all shares of all classes of stock authorized to be
issued by the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on January 28, 1993.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- ----------------------- -----------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
-------------------------
Michael J. C. Roth
President
EXHIBIT 1(s)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the California Bond Fund by classifying an
additional 10,000,000 shares of the authorized and unissued stock of the
Corporation into the California Bond Fund.
THIRD: The additional shares of the California Bond Fund shall have
the preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions as are described in
Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the California Bond Fund, the
total number of shares of stock of all classes that the Corporation had and
has authority to issue was and is 5,000,000,000 shares ($.01 par value per
share).
(b) Before the increase in the total number of shares classified
as shares of the California Bond Fund, there were classified 150,000,000
shares of the Long-Term Fund (formerly High Yield Fund), 135,000,000 shares
of the Intermediate-Term Fund, 105,000,000 shares of the Short-Term Fund,
2,000,000,000 shares of the Tax Exempt Money Market Fund, 40,000,000 shares
of the California Bond Fund, 300,000,000 shares of the California Money
Market Fund, 25,000,000 shares of the New York Bond Fund, 100,000,000 shares
of the New York Money Market Fund, 25,000,000 shares of the Virginia Bond
Fund and 100,000,000 shares of the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the California Bond Fund, there are classified 150,000,000
shares of the Long-Term Fund, 135,000,000 shares of the Intermediate-Term
Fund, 105,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the
Tax Exempt Money Market Fund, 50,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 25,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the California Bond Fund, the
aggregate par value of all shares of all classes of stock authorized to be
issued by the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on March 23, 1993.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Wagner
- ------------------------ ----------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
------------------------
Michael J. C. Roth
President
EXHIBIT 1(t)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
classes of shares designated as the Long-Term Fund and the Virginia Bond
Fund by classifying an additional 25,000,000 shares and 10,000,000 shares,
respectively, of the authorized and unissued stock of the Corporation into
the Long-Term Fund and the Virginia Bond Fund.
THIRD: The additional shares of the Long-Term Fund and the Virginia
Bond Fund shall have the preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions as are
described in Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Long-Term Fund and the
Virginia Bond Fund, the total number of shares of stock of all classes that
the Corporation had and has authority to issue was and is 5,000,000,000
shares ($.01 par value per share).
(b) Before the increase in the total number of shares classified
as shares of the Long-Term Fund and the Virginia Bond Fund, there were
classified 150,000,000 shares of the Long-Term Fund, 135,000,000 shares of
the Intermediate-Term Fund, 105,000,000 shares of the Short-Term Fund,
2,000,000,000 shares of the Tax Exempt Money Market Fund, 50,000,000 shares
of the California Bond Fund, 300,000,000 shares of the California Money
Market Fund, 25,000,000 shares of the New York Bond Fund, 100,000,000 shares
of the New York Money Market Fund, 25,000,000 shares of the Virginia Bond
Fund and 100,000,000 shares of the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the Long-Term Fund and the Virginia Bond Fund, there are
classified 175,000,000 shares of the Long-Term Fund, 135,000,000 shares of
the Intermediate-Term Fund, 105,000,000 shares of the Short-Term Fund,
2,000,000,000 shares of the Tax Exempt Money Market Fund, 50,000,000 shares
of the California Bond Fund, 300,000,000 shares of the California Money
Market Fund, 25,000,000 shares of the New York Bond Fund, 100,000,000 shares
of the New York Money Market Fund, 35,000,000 shares of the Virginia Bond
Fund and 100,000,000 shares of the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Long-Term Fund and the Virginia
Bond Fund, the aggregate par value of all shares of all classes of stock
authorized to be issued by the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on May 5, 1993.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- ------------------------ --------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
-------------------------
Michael J. C. Roth
President
EXHIBIT 1(u)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the Intermediate-Term Fund by classifying an
additional 35,000,000 shares of the authorized and unissued stock of the
Corporation into the Intermediate-Term Fund.
THIRD: The additional shares of the Intermediate-Term Fund shall
have the preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions as are described in
Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Intermediate-Term Fund,
the total number of shares of stock of all classes that the Corporation had
and has authority to issue was and is 5,000,000,000 shares ($.01 par value
per share).
(b) Before the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, there were classified 175,000,000
shares of the Long-Term Fund, 135,000,000 shares of the Intermediate-Term
Fund, 105,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the
Tax Exempt Money Market Fund, 50,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 35,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the Intermediate-Term Fund, there are classified 175,000,000
shares of the Long-Term Fund, 170,000,000 shares of the Intermediate-Term
Fund, 105,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the
Tax Exempt Money Market Fund, 50,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 35,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Intermediate-Term Fund, the
aggregate par value of all shares of all classes of stock authorized to be
issued by the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on November 8, 1993.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- ----------------------- -------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
-------------------------
Michael J. C. Roth
President
EXHIBIT 1(v)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
class of shares designated as the Short-Term Fund by classifying an
additional 30,000,000 shares of the authorized and unissued stock of the
Corporation into the Short-Term Fund.
THIRD: The additional shares of the Short-Term Fund shall have the
preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions as are described in
Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Short-Term Fund, the
total number of shares of stock of all classes that the Corporation had and
has authority to issue was and is 5,000,000,000 shares ($.01 par value per
share).
(b) Before the increase in the total number of shares classified
as shares of the Short-Term Fund, there were classified 175,000,000 shares
of the Long-Term Fund, 170,000,000 shares of the Intermediate-Term Fund,
105,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the Tax
Exempt Money Market Fund, 50,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 35,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the Short-Term Fund, there are classified 175,000,000 shares of
the Long-Term Fund, 170,000,000 shares of the Intermediate-Term Fund,
135,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the Tax
Exempt Money Market Fund, 50,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 35,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Short-Term Fund, the aggregate
par value of all shares of all classes of stock authorized to be issued by
the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on January 18, 1994.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- ------------------------- -----------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said Corporation the foregoing Articles Supplementary to be
the corporate act of said Corporation and hereby certifies that to the best
of his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
------------------------------
Michael J. C. Roth
President
EXHIBIT 1(w)
USAA TAX EXEMPT FUND, INC.
Articles Supplementary
USAA Tax Exempt Fund, Inc., a Maryland Corporation, having its
principal office in San Antonio, Texas (the "Corporation"), hereby certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940.
SECOND: (a) In accordance with Section 2-105(c) of the Maryland
General Corporation Law, the Board of Directors has heretofore authorized
the issuance of 5,000,000,000 shares of capital stock of the Corporation
($.01 par value per share).
(b) In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to authority expressly vested in the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors hereby increases the aggregate number of shares of stock of the
classes of shares designated as the Tax-Exempt Money Market Fund, California
Money Market Fund and the Virginia Money Market Fund by classifying an
additional 600,000,000 shares, 125,000,000 shares and 75,000,000 shares,
respectively, of the authorized and unissued stock of the Corporation into
the Tax-Exempt Money Market Fund, California Money Market Fund and the
Virginia Money Market Fund.
THIRD: The additional shares of the Tax-Exempt Money Market Fund,
California Money Market Fund and the Virginia Money Market Fund shall have
the preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions as are described in
Article VI of the Articles of Incorporation.
FOURTH: (a) As of immediately before and after the increase in the
total number of shares classified as shares of the Tax-Exempt Money Market
Fund, California Money Market Fund and the Virginia Money Market Fund, the
total number of shares of stock of all classes that the Corporation had and
has authority to issue was and is 5,000,000,000 shares ($.01 par value per
share).
(b) Before the increase in the total number of shares classified
as shares of the Tax-Exempt Money Market Fund, California Money Market Fund
and the Virginia Money Market Fund, there were classified 175,000,000 shares
of the Long-Term Fund, 170,000,000 shares of the Intermediate-Term Fund,
135,000,000 shares of the Short-Term Fund, 2,000,000,000 shares of the Tax
Exempt Money Market Fund, 50,000,000 shares of the California Bond Fund,
300,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 35,000,000 shares of the Virginia Bond Fund and 100,000,000 shares of
the Virginia Money Market Fund.
(c) After the increase in the total number of shares classified
as shares of the Tax-Exempt Money Market Fund, California Money Market Fund
and the Virginia Money Market Fund, there are classified 175,000,000 shares
of the Long-Term Fund, 170,000,000 shares of the Intermediate-Term Fund,
135,000,000 shares of the Short-Term Fund, 2,600,000,000 shares of the Tax
Exempt Money Market Fund, 50,000,000 shares of the California Bond Fund,
425,000,000 shares of the California Money Market Fund, 25,000,000 shares of
the New York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 35,000,000 shares of the Virginia Bond Fund and 175,000,000 shares of
the Virginia Money Market Fund.
(d) As of immediately before and after the increase in the total
number of shares classified as shares of the Tax-Exempt Money Market Fund,
California Money Market Fund and the Virginia Money Market Fund, the
aggregate par value of all shares of all classes of stock authorized to be
issued by the Corporation was and is $50,000,000.
IN WITNESS WHEREOF, USAA Tax Exempt Fund, Inc. has caused these presents to
be signed in its name and on its behalf by its President and witnessed by
its Secretary on April 11, 1994.
WITNESS: USAA TAX EXEMPT FUND, INC.
/s/ Michael D. Wagner /s/ Michael J. C. Roth
- ---------------------------- ------------------------
Michael D. Wagner Michael J. C. Roth
Secretary President
THE UNDERSIGNED, President of USAA Tax Exempt Fund, Inc., who executed
on behalf of the Corporation the foregoing Articles Supplementary of which
this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles Supplementary to be the
corporate act of said Corporation and hereby certifies that to the best of
his knowledge, information, and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J. C. Roth
---------------------------
Michael J. C. Roth
President
EXHIBIT 2
USAA TAX EXEMPT FUND, INC.
BYLAWS
AS AMENDED January 10, 1994
ARTICLE I
OFFICES
SECTION 1.1. Principal Office. The principal office of the Company in
the State of Maryland shall be in the City of Baltimore, State of Maryland.
SECTION 1.2. Other Offices. The Company may also have
offices at such other places both within and without the State of
Maryland as the Board of Directors may from time to time
determine or the business of the Company may require, including
without limitation, offices at San Antonio, Texas.
ARTICLE II
SHAREHOLDERS
SECTION 2.1. Place of Meetings. Meetings of shareholders
shall be held at the offices of the Company in the State of
Maryland, at the offices of the Company in the City of San
Antonio, Texas, or at any other place within the United States as
shall be designated from time to time by the Board of Directors
and stated in the notice of meeting or in a duly executed waiver
of notice thereof.
SECTION 2.2. Annual Meeting. The Company is not required to
hold an annual meeting of its stockholders in any year in which
the election of directors is not required to be acted upon under
the Investment Company Act of 1940 (the "1940 Act"). If the
Company is required by the 1940 Act to hold a meeting of
stockholders to elect directors, such meeting shall be held at a
date and time set by the Board of Directors in accordance with
the 1940 Act and no later than 120 days after the occurrence of
the event requiring the meeting. Any stockholders' meeting held
in accordance with the preceding sentence shall for all purposes
constitute the annual meeting of stockholders for the fiscal year
of the Company in which the meeting is held. Except as the
Charter or statute provides otherwise, any business may be
considered at an annual meeting without the purpose of the
meeting having been specified in the notice. Failure to hold an
annual meeting does not invalidate the Company's existence or
affect any otherwise valid corporate acts.
SECTION 2.3. Special Meetings. Special meetings of the
shareholders may be called by the Board of Directors or by the
President. Special meetings of shareholders shall be called by
the Secretary upon the written request of holders of shares
entitled to cast not less than twenty-five per cent of all the
votes entitled to be cast at such meeting. Such request shall
state the purpose or purposes of such meeting and the matters
proposed to be acted on thereat. The Secretary shall inform such
requesting shareholders of the reasonably estimated cost of
preparing and mailing such notice of the meeting and, upon
payment to the Company of such costs, the Secretary shall give
notice stating the purpose or purposes of the meeting to all
shareholders entitled to notice of such meeting. No special
meeting need be called to consider any matter which is
substantially the same as a matter voted upon at any special
meeting of the shareholders held during the preceding twelve
months unless requested by the holders of shares entitled to cast
a majority of all votes entitled to be cast at such meeting.
SECTION 2.4. Notice and Purpose. Not less than ten (10) nor
more then ninety (90) days before the date of every shareholders'
meeting, the Secretary shall give to each shareholder entitled to
vote at such meeting, and to each shareholder not entitled to
vote who is entitled by statute to notice, written or printed
notice stating the time and place of the meeting and the purpose
or purposes for which the meeting is called, either by mail or by
presenting it to him personally or by leaving it at his residence
or usual place of business. If mailed, such notice shall be
deemed to be given when deposited in the United States mail
addressed to the shareholder at his post-office address as it
appears on the records of the Company, with postage thereon
prepaid. Business transacted at any special meeting of
shareholders shall be limited to the purposes stated in the notice.
SECTION 2.5. Record Date. The Board of Directors may fix,
in advance, a date as the record date for the purpose of
determining shareholders entitled to notice of, or to vote at,
any meeting of shareholders or any adjournment thereof, or
entitled to receive payment of any dividend or the allotment of
any rights, or in order to make a determination of shareholders
for any other proper purpose. Such date in any case shall be not
more than ninety (90) days, and in case of a meeting of
shareholders, not less than ten (10) days, prior to the date on
which the particular action requiring such determination of
shareholders is to be taken.
SECTION 2.6. Quorum. The holders of a majority of the
shares entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of the shareholders, but, if a
quorum is not represented, a majority in interest of those
represented may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting, at which a quorum
shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
SECTION 2.7. Voting. Any holder of shares of the Company
shall be entitled to vote to the extent provided in subsection
6.2(f) of the Articles of Incorporation, either in person or by
proxy executed in writing by him or by his duly authorized
attorney-in-fact. Any holder of fractional shares of the Company
shall have proportionally the same voting rights as are provided
for a full share. No proxy shall be valid after eleven months
from the date of execution, unless otherwise provided in the
proxy. Each proxy shall be revocable unless expressly provided
therein to be irrevocable or unless otherwise made irrevocable by
law. Proxies shall be delivered to the Secretary of the Company
before or at the time of such meeting. The vote of the holders
of a majority of the shares entitled to vote and represented at a
meeting at which a quorum is present shall be the act of the
shareholders meeting, unless the vote of a greater number is
required by law, the Articles of Incorporation or these Bylaws.
SECTION 2.8. Officers. The President shall preside at and
the Secretary shall keep the records of each meeting of
shareholders, and in the absence of either such officer, his
duties shall be performed by some person appointed by the meeting.
SECTION 2.9. Order of Business. The business shall be
transacted in such order as the presiding officer shall determine.
ARTICLE III
DIRECTORS
SECTION 3.1. General Powers. The business and property of
the Company shall be managed by its Board of Directors, and
subject to the restrictions imposed by law, by the Articles of
Incorporation, or by these Bylaws, they shall exercise all the
powers of the Company.
SECTION 3.2. Delegation. To the extent permitted by law,
the Board of Directors may delegate the duty of management of the
Company's assets and may delegate such other of its powers and
duties as are permitted by the Articles of Incorporation or these
Bylaws, (a) to the Executive Committee or other committees, or
(b) to another party to act as manager, investment adviser or
underwriter pursuant to a written contract or contracts to be
approved in the manner required by the Investment Company Act of 1940.
SECTION 3.3. Number. The Board of Directors shall consist
of eight (8) directors, but the number of directors may be
increased or decreased (provided such decrease does not shorten
the term of any incumbent director) from time to time by the
Board of Directors by amendment of the Bylaws, provided that the
number of directors shall not be more than twenty-one (21) nor
less than three (3).
SECTION 3.4. Election, Resignations, Term of Office and
Vacancies. Until the first meeting of shareholders or until
their successors are duly elected and qualified, the Board of
Directors shall consist of the persons named as such in the
Articles of Incorporation. Cumulative voting is not permitted.
Directors need not be residents of the State of Maryland or
shareholders of the Company. Each director, unless he sooner
resigns or is removed, shall hold office until his successor is
elected and shall have qualified. Any director may resign his
office at any time by delivering his resignation in writing to
the Company. The acceptance of such resignation, unless required
by the terms thereof, shall not be necessary to make such
resignation effective. Subject to compliance with Section 16(a)
of the Investment Company Act of 1940, as amended, any vacancies
occurring in the Board of Directors other than by reason of an
increase in the number of directors may be filled by the
affirmative vote of a majority of the remaining directors, even
though such majority is less than a quorum. A director elected
by the Board of Directors to fill a vacancy shall be elected for
the unexpired term of his predecessor in office. If a special
meeting of shareholders is required to fill a vacancy, the
meeting shall be held within sixty (60) days or such longer
period as may be permitted by the Securities and Exchange Commission.
SECTION 3.5. Place of Meeting. Meetings of the Board of Directors may
be held either within or without the State of Maryland, at whatever place
is specified by the officer calling the meeting. In the absence of a
specific place designation, the meeting shall be held at the office of the
Company in the City of San Antonio, Texas.
SECTION 3.6. Organizational and Regular Meetings. Any newly
elected Board of Directors may hold its first meeting for the
purpose of organization and the transaction of business, if a
quorum is present, immediately following its election at a
meeting of the shareholders, at the place of such meeting. No
notice of such first meeting need be given to either old or new
members of the Board of Directors. Regular meetings may be held
at such other times as shall be designated by the Board of
Directors and notice of such regular meetings shall not be required.
SECTION 3.7. Special Meetings. Special meetings of the
Board of Directors may be held at any time upon the call of the
President or any two (2) directors of the Company. The Secretary
shall give notice of such special meeting by mailing the same at
least three (3) days or by telegraphing or telephoning the same
at least one (1) day before the meeting to each director. Notice
of the time, place and purpose of such meeting may be waived in
accordance with Article VI of these Bylaws. Attendance of a
director at such meeting shall also constitute a waiver of notice
thereof, except where he attends for the announced purpose of objecting
to the transaction of any business on the ground that the meeting is not
lawfully called or convened. Except as otherwise herein provided, neither
the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors need be specified in the notice
or waiver of notice of such meeting.
SECTION 3.8. Quorum and Manner of Acting. A majority of the
number of directors fixed by these Bylaws as from time to time
amended shall constitute a quorum for the transaction of
business, but a smaller number may adjourn from time to time
until they can secure the attendance of a quorum. The act of a
majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors,
except as otherwise expressly required under the provisions of
the Investment Company Act of 1940, as amended, or where a larger
vote is required by law, the Articles of Incorporation or these
Bylaws. Any regular or special meeting of the Board of Directors
may be adjourned from time to time by those present, whether a
quorum is present or not.
SECTION 3.9. Removal of Directors. Any director may be
removed from office, either for or without cause, at any special
meeting of shareholders by the affirmative vote of a majority of
the outstanding shares entitled to vote for the election of
directors. The notice calling such meeting shall give notice of
the intention to act upon such matter, and if the notice so
provides, the vacancy caused by such removal may be filled at
such meeting by vote of a majority of the shares represented at
such meeting and entitled to vote for the election of directors.
SECTION 3.10. Action Without Meeting. Subject to the
provisions of the Investment Company Act of 1940, as amended, any
action permitted or required by law, these Bylaws or by the
Articles of Incorporation to be taken at a meeting of the Board
of Directors or any committee may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed
by all the members of the Board of Directors of such committee,
as the case may be. Such consent shall have the same force and
effect as a unanimous vote at a meeting, and may be stated as
such in any document or instrument filed with the Secretary of
State or State Department of Assessments and Taxation of Maryland.
ARTICLE IV
COMMITTEES
SECTION 4.1. Executive Committee. The Board of Directors
may, by resolution adopted by a majority of the entire Board of
Directors, designate an Executive Committee consisting of the
President and one or more of the directors of the Company, and
may delegate to such Executive Committee any of the powers of the
Board of Directors except:
a. the power to declare dividends or distributions on stock;
b. the power to recommend to the shareholders any action
which requires shareholder approval;
c. the power to amend the Bylaws;
d. the power to approve any merger or share exchange
which does not require shareholder approval; or
e. the power to issue stock, except as hereafter provided.
If the Board of Directors has given general authorization for the
issuance of stock of any class, the Executive Committee, in
accordance with a general formula or method specified by the
Board of Directors by resolution, may fix the terms of such class
and the terms on which any stock may be issued, to the extent
permitted by law and the Articles of Incorporation.
The Executive Committee shall keep written minutes of its
proceedings and shall report such minutes to the Board of
Directors. All such proceedings shall be subject to revision or
alteration by the Board of Directors; provided, however, that
third parties shall not be prejudiced by such revision or alteration.
SECTION 4.2. Other Committees. The Board of Directors may,
by resolution or resolutions adopted by a majority of the entire
Board, designate one or more committees, each committee to
consist of two or more of the directors of the Company, which
committee shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the
Company to the extent provided in said resolution or resolutions,
except where action of the Board of Directors is specified by
law. Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by
the Board of Directors. The Board of Directors shall have the
power at any time to fill vacancies in, to change the size or
membership of, and to discharge any such committees.
SECTION 4.3. General. A committee shall fix its own rules of
procedure not inconsistent with these Bylaws and with any
directions of the Board of Directors. It shall meet at such
times and places and upon such notice as shall be provided by
such rules or by resolution of the Board of Directors. The
presence of a majority shall constitute a quorum for the
transaction of business, and in every case an affirmative vote of
a majority of the members of the committee present shall be
necessary for the taking of any action. A committee shall keep
regular minutes of its proceedings and report the same to the
Board of Directors when required.
ARTICLE V
OFFICERS
SECTION 5.1. Number. The officers of the Company shall be
chosen by the Board of Directors and shall be a Chairman of the
Board, a President, a Vice President, a Secretary and a Treasurer.
The Board of Directors may also choose additional Vice Presidents,
and one or more Assistant Secretaries and Assistant Treasurers.
SECTION 5.2. Selection. The Board of Directors annually
shall choose a Chairman of the Board, a President, and one or
more Vice Presidents, a Secretary and a Treasurer, none of whom,
other than the Chairman of the Board, need be a member of the
Board. Any two or more offices, except the offices of President
and Vice President, may be held by the same person, but no
officer shall execute, acknowledge or verify any instrument in
more than one capacity if such instrument is required by law, the
Articles of Incorporation or these Bylaws to be executed,
acknowledged or verified by two or more officers.
SECTION 5.3. Term of Office. The officers of the Company
shall hold office until their successors are chosen and
qualified. Any vacancy occurring in any office of the Company
shall be filled by the Board of Directors.
SECTION 5.4. Selection of Other Officers and Agents. The
Board of Directors may appoint such other officers and agents as
it shall deem necessary, who shall hold their offices for such
terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
SECTION 5.5. Salaries. The salaries of all officers and
agents of the Company shall be fixed by the Board of Directors.
No officer shall be disqualified from receiving a salary by
reason of his also being a director of the Company.
SECTION 5.6. Suspension. Except for the Chairman of the
Board and the President of the Company, all officers shall be
subject to peremptory suspension by written order of the
President, subject to subsequent action of the Board of
Directors. The Chairman of the Board and the President of the
Company shall be subject to peremptory suspension by written
order of the Board of Directors.
SECTION 5.7. Removal. Any officer or agent of the Company
may be removed during his term by a majority vote of the Board of
Directors whenever, in its judgment, removal of such person would
serve the best interests of the Company. Such removal shall
terminate all of such person's authority as an officer of agent,
but his right to salary and any contract rights shall depend on
the terms of his employment and the circumstances of his removal.
Election or appointment of an officer or agent shall not of
itself create contract rights.
SECTION 5.8. Chairman of the Board. The Chairman of the
Board shall preside at meetings of the Board of Directors. He
shall have such other powers as are usually incident to the
office of Chairman of the Board and shall exercise such other specific
powers as the Board of Directors may from time to time assign him.
SECTION 5.9. President. Subject to the control of the Board
of Directors, the President shall be the chief operating officer
of the Company and shall preside at all meetings of the
shareholders. He shall assume general and active management of
the business of the Company and general and active supervision
and direction over the other officers, agents, and employees of
the Company and shall see that their duties are properly
performed. The foregoing shall not apply to any responsibilities
delegated by the Board of Directors to a manager, investment
adviser, underwriter, custodian, or transfer agent pursuant to
any written contract, as provided for in the Articles of
Incorporation or these Bylaws.
The President, either alone or (if so required by law, these
Bylaws or the Board of Directors) with the Secretary or any other
officer of the Company so authorized by the Board of Directors,
may sign certificates of shares of the Company or any deeds,
mortgages, bonds, contracts or other instruments that the Board
of Directors has authorized for execution, except when the
signing and execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or
agent of the Company or shall be required by law to be otherwise
signed or executed.
The President, in conjunction with the Secretary, may duly
authenticate the Company records or copies thereof for use as
evidence in any action or proceeding to which the Company may be a party.
In general, the President shall perform all duties incident
to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 5.10. The Vice Presidents. The Vice President, or
if there shall be more than one, the Vice Presidents in the order
determined by the Board of Directors, shall be vested with all
the powers and required to perform all the duties of the
President in his absence or disability or refusal to act, and
when so acting shall have all the powers of and be subject to all
the restrictions upon the President. Each Vice President shall
perform such other duties and have such other powers as the
President or the Board of Directors may from time to time
prescribe.
SECTION 5.11. The Secretary and Assistant Secretaries. The
Secretary of the Company shall have the following powers and duties:
a. to keep the minutes of the meetings of shareholders,
of the Board of Directors, and of any committee
thereof in one or more books provided for that purpose;
b. to see that all notices are duly given, in accordance
with these Bylaws or as required by law;
c. to be custodian of the corporate records and the seal
of the Company;
d. to see that the seal of the Company is affixed to all
documents duly authorized for execution under seal on
behalf of the Company;
e. to keep or cause to be kept for the Company the stock
ledger described in Section 7.2 of these Bylaws;
f. to countersign certificates for Company shares, the
issuance of which have been authorized by resolution
of the Board of Directors;
g. to have general charge of the stock transfer books of
the Company;
h. to duly authenticate, in conjunction with the
President, the Company records or copies thereof to be
used as evidence in any action or proceedings to which
the Company may be a party and
i. to perform all duties incidental to the Office of
Secretary and such other duties as, from time to time,
may be assigned to the Secretary by the President or
Board of Directors.
The Assistant Secretary, or if there by more than one, the
Assistant Secretaries in the order determined by the Board of
Directors, shall, in the absence or refusal to act or disability
of the Secretary, perform the duties and exercise the powers of
the Secretary and shall perform such other duties as, from time
to time, may be assigned by the President, the Secretary or the
Board of Directors.
SECTION 5.12. The Treasurer and Assistant Treasurers. The
Treasurer shall:
a. have charge and custody of, and be responsible for,
all the funds and securities of the Company, except
those which the Company has placed in the custody of a
bank or trust company pursuant to a written agreement
designating such bank or trust company as custodian of
the property of the Company;
b. keep full and accurate accounts of the receipts and
disbursements in books belonging to the Company;
c. cause all monies and other valuables to be deposited
to the credit of the Company;
d. receive, and give receipts for, monies due and payable
to the Company from any source whatsoever;
e. disburse the funds of the Company and supervise the
investment of its funds as ordered or authorized by
the Board of Directors, taking proper vouchers therefore; and
f. in general, perform all the duties incident to the
office of Treasurer and such other duties as from time
to time may be assigned to him by the President, or
the Board of Directors.
The Assistant Treasurer, or if there be more than one, the
Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or refusal to act or disability
of the Treasurer, perform such other duties as, from time to
time, may be assigned by the President, the Treasurer or the
Board of Directors.
SECTION 5.13. Other Subordinate Officers. Other subordinate
officers and agents appointed by the Board of Directors shall
exercise such powers and perform such duties as may be assigned
by the President or may be delegated to them by the resolution
appointing them, or by subsequent resolutions adopted from time
to time by the Board of Directors.
SECTION 5.14. Bonding. The Board of Directors may require
any officer, agent or employee to give bond for the faithful
discharge of his duty and for the protection of the Company in
such sum and with such surety or sureties as the Board of
Directors may deem advisable.
ARTICLE VI
WAIVERS OF NOTICE
Whenever, under the provisions of any law, the Articles of
Incorporation of amendments thereto, or these Bylaws, any notice
is required to be given to any shareholder, director or committee
member, a waiver thereof in writing signed by the person or
persons entitled to such notice, whether before or after the time
stated therein, shall be equivalent to the giving of such notice.
Waivers given by telegram, radiogram, or cablegram shall be
deemed waivers in writing within the meaning of these Bylaws.
ARTICLE VII
CAPITAL STOCK
SECTION 7.1. Share Certificates. The Company will issue
upon written request certificates representing all full shares to
which shareholders are entitled. No certificate may be issued
until payment for the shares represented thereby has been made in
full. Such certificates shall be numbered and registered in the
order in which they are issued, shall be signed by the Chairman
of the Board, President or Vice President and countersigned by
the Secretary, any Assistant Secretary, the Treasurer or any
Assistant Treasurer, and may bear the seal of the Company or a
facsimile thereof. The signatures of such officers upon a
certificate may be facsimiles, if the certificate is
countersigned by a transfer agent. In case any officer who has
signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Company with the
same effect as if he were such officer at the date of its
issuance. Each share certificate shall include on its face the
name of the Company, the name of the shareholder and the class of
stock and number of shares represented by the certificate. In
addition it shall contain on its face or its back a statement
that the Company will furnish to any of the shareholders upon
request and without charge a full statement of the designations
and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the shares of each class
which the Company is authorized to issue and the authority of the
Board of Directors to designate new classes and determine such
matters with respect thereto.
SECTION 7.2. Stock Ledger and Record of Shareholders. The
Company shall maintain at its offices in the City of San Antonio,
State of Texas, or at the offices of a transfer agent, if one is
appointed, an original or duplicate stock ledger containing the
names and addresses of all shareholders and the number of shares
of each class held by each shareholder, and, if a certificate has
been issued, the certificate number, date of issue and whether it
was original issue or by transfer. The Board of Directors of the
Company may appoint one or more transfer agents of the stock of
the Company. Unless and until such appointment is made, the
Secretary of the Company shall maintain the stock ledger. The
names of shareholders as they appear on the stock ledger shall be
the official list of shareholders of record of the Company for
all purposes. The Company shall be entitled to treat the holder
of record of any shares of the Company as the owner thereof for
all purposes, and shall not be bound to recognize any equitable
or other claim to, or interest in, such shares or any rights
deriving from such shares, on the part of any other person,
including (but without limitation) a purchaser, assignee or
transferee, unless and until such other person becomes the holder
of record of such shares, whether or not the Company shall have
either actual or constructive notice of the interest of such
other person, except as otherwise provided by the laws of Maryland.
SECTION 7.3. Transfers of Shares. The shares of the Company
shall be transferable on the stock certificate books of the
company upon appropriate authorization in person by the holder of
record thereof, or his duly authorized attorney or legal
representative, and, if a certificate was issued, upon
endorsement and surrender for cancellation of the certificate for
such shares. All certificates surrendered for transfer shall be
cancelled, and no new certificates shall be issued to the
transferee until a former certificate or certificates for a like
number of shares shall have been surrendered and cancelled,
except that in the case of a lost, destroyed or mutilated
certificate, a new certificate may be issued therefor upon such
conditions for the protection of the Company and any transfer
agent of the Company as the Board of Directors may prescribe.
SECTION 7.4. Account Maintenance Charges. The Board of
Directors may, in accordance with such terms and conditions as it
may from time to time prescribe, establish an account maintenance
charge to be paid by shareholders of the Company for maintenance
of their accounts. Any account maintenance charge established by
the Board of Directors of the Company may be charged against
income credited to a shareholder account and, to the extent there
is not sufficient income credited to a shareholder account in any
period to cover such charge, the Company may redeem sufficient
shares owned by a shareholder to cover such charges. A
shareholder charged with any maintenance charge pursuant to this
Section 7.4 as a result of having an account with a value less
than a specified amount shall be given prompt written notice at
the time of imposition of such charge.
ARTICLE VIII
CUSTODIAN
SECTION 8.1. Employment of Custodian. All assets of the
Company shall be held by one or more custodian banks or trust
companies meeting the requirements of the Investment Company Act
of 1940, as amended, and having capital, surplus and undivided
profits of at least $2,000,000 and may be registered in the name
of the Company, including a designation of the particular class
to which such assets belong, or any such custodian, or a nominee
of either of them. The terms of any custodian agreement shall be
determined by the Board of Directors, which terms shall be in
accordance with the provisions of the Investment Company Act of
1940, as amended. If so directed by vote of the holders of a
majority of the outstanding shares of a particular class or by
vote of the Board of Directors, the custodian of the assets
belonging to such class shall deliver and pay over such assets as
specified in such vote.
Subject to such rules, regulations and orders as the
Securities and Exchange Commission may adopt, the Company may
direct a custodian to deposit all or any part of the securities
owned by the Company in a system for the central handling of
securities established by a national securities exchange or a
national securities association registered with the Securities
and Exchange Commission, or otherwise in accordance with the
Investment Company Act of 1940, as amended, pursuant to which
system all securities of any particular class of any issuer
deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical
delivery of such securities, provided that all such deposits
shall be subject to withdrawal only upon the order of the Company
or a custodian.
ARTICLE IX
INSPECTION OF BOOKS AND SHAREHOLDER LIST
SECTION 9.1. Inspection of Books. The Board of Directors
shall have the power from time to time to determine whether and
to what extent, and at what times and places, and under what
conditions and regulations the accounts and books of the Company
(other than the stock ledger) or any of them shall be open to the
inspection of the shareholders. No shareholder shall have any
right to inspect any account or book or document of the Company
except as conferred by law or authorized by the Board of
Directors or the shareholders.
SECTION 9.2. Inspection of Shareholder List. Any one or
more persons, who together are and for at lease six months have
been shareholders of record of at least 5% of the outstanding
shares of the Company, may submit (unless the Company at the
time of the request maintains a duplicate stock ledger at its
principal office in Maryland) a written request to any officer of
the Company or its resident agent in Maryland for a list of the
shareholders of the Company.
Within 20 days after such a request, there shall be prepared and
filed at the Company's principal office in Maryland a list,
verified under oath by an officer of the Company or by its stock
transfer agent or registrar, which sets forth the name and
address of each shareholder and the number of shares of each
class which the shareholder holds.
ARTICLE X
MISCELLANEOUS
SECTION 10.1. Fiscal Year. The fiscal year of the Company
shall begin on the first day of April and end on the thirty-first
day of March in each year.
SECTION 10.2. Seal. The corporate seal shall have inscribed
thereon the name of the Company, the year of its organization and
the words "Corporate Seal, Maryland." The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
SECTION 10.3. Annual Statement of Affairs. The President or
any Vice President or the Treasurer shall prepare annually a full
and correct statement of the affairs of the Company, to include a
balance sheet and a financial statement of operations for the
preceding fiscal year. The statement of affairs shall be placed
on file at the Company's principal office within 120 days after
the end of the fiscal year.
ARTICLE XI
AMENDMENT
SECTION 11.1. By Shareholders. These Bylaws may be amended,
altered, repealed or added to at any special meeting called for
that purpose by the affirmative vote of a majority of the shares
entitled to vote and represented at such meeting.
SECTION 11.2. By Directors. The Board of Directors may
alter and amend these Bylaws at any regular meeting of the Board,
or at any special meeting of the Board called for that purpose,
by the affirmative vote of a majority of such Board, except where
a vote of shareholders is required by law, the Articles of
Incorporation, or these Bylaws.
EXHIBIT 4(a)
Number USAA TAX EXEMPT FUND, INC. Shares
SHORT-TERM FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 30 4
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
---------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(b)
Number USAA TAX EXEMPT FUND, INC. Shares
INTERMEDIATE-TERM FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 20 5
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
-------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(c)
Number USAA TAX EXEMPT FUND, INC. Shares
LONG-TERM FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 10 6
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
--------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(d)
Number USAA TAX EXEMPT FUND, INC. Shares
TAX EXEMPT MONEY MARKET FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 40 3
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
-------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(e)
Number USAA TAX EXEMPT FUND, INC. Shares
CALIFORNIA BOND FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 50 2
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
---------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(f)
Number USAA TAX EXEMPT FUND, INC. Shares
CALIFORNIA MONEY MARKET FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 60 1
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
-------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(g)
Number USAA TAX EXEMPT FUND, INC. Shares
NEW YORK BOND FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 70 0
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
----------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(h)
Number USAA TAX EXEMPT FUND, INC. Shares
NEW YORK MONEY MARKET FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 80 9
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
--------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(i)
Number USAA TAX EXEMPT FUND, INC. Shares
VIRGINIA BOND FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 87 4
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
----------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 4(j)
Number USAA TAX EXEMPT FUND, INC. Shares
VIRGINIA MONEY MARKET FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903289 88 2
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the
par value of one cent per share of USAA TAX EXEMPT FUND, INC.,
transferable on the books of the Corporation by the holder
thereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed. This certificate is not
valid unless countersigned by the Transfer Agent. Witness the
facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Dyek R. Boles PICTURE of /s/ Michael J.C. Roth
TREASURER USAA TAX EXEMPT FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA TRANSFER AGENCY COMPANY
(San Antonio) TRANSFER AGENT
By
---------------------------
AUTHORIZED SIGNATURE
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other Taxpayer
Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must correspond with
the name as written upon the face of this certificate, in
every particular, without alteration or enlargement, or any
change whatsoever.)
This certificate is transferable or redeemable at the
offices of the Transfer Agent, USAA Transfer Agency Company,
USAA Building, San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a
commercial bank or trust company which is a member of the FDIC, a
savings bank or savings and loan association which is a member of
the FSLIC, a credit union which is a member of the NCUA, or by a
member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
EXHIBIT 5(a)
ADVISORY AGREEMENT
AGREEMENT made as of the 20th day of July, 1990 between USAA
INVESTMENT MANAGEMENT COMPANY, a corporation organized under the
laws of the State of Delaware and having a place of business in
San Antonio, Texas (the "Manager"), and USAA TAX EXEMPT FUND,
INC., a corporation organized under the laws of the State of
Maryland and having a place of business in San Antonio, Texas
(the "Company").
WHEREAS, the Company is engaged in business as an open-end
management investment company and is so registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Manager is engaged principally in the business
of rendering investment management services and is registered
under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Company is authorized to issue shares of capital
stock (the "Shares") in separate classes with each such class
representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Company presently offers Shares in six classes
designated as the High Yield Fund, Intermediate-Term Fund, Short-
Term Fund, Tax Exempt Money Market Fund, California Bond Fund and
California Money Market Fund (the "Existing Funds") (such
classes, together with all other classes subsequently established
by the Company with respect to which the Company desires to
retain the Manager to render investment advisory services
hereunder and with respect to which the Manager is willing so to
do, being herein collectively referred to as the "Funds");
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between
the parties hereto as follows:
1. APPOINTMENT OF MANAGER.
(a) Existing Funds. The Company hereby appoints the Manager
to act as manager and investment adviser to each of the
Existing Funds for the period and on the terms herein set
forth. The Manager accepts such appointment and agrees to
render the services herein set forth, for the compensation
herein provided.
(b) Additional Funds. In the event that the Company
establishes one or more classes of Shares other than the
Existing Funds with respect to which it desires to retain the
Manager to render management and investment advisory services
hereunder, it shall so notify the Manager in writing. If the
Manager is willing to render such services it shall notify
the Company in writing, whereupon the Company shall appoint
the Manager to act as manager and investment adviser to each
of such classes of shares for the period and on the terms
herein set forth, the Manager shall accept such appointment
and agree to render the services herein set forth for the
compensation herein provided, and each of such classes of
Shares shall become a Fund hereunder.
2. DUTIES OF MANAGER.
The Manager, at its own expense, shall furnish the following
services and facilities to the Company:
(a) Investment Program. The Manager will (i) furnish
continuously an investment program for each Fund, (ii)
determine (subject to the overall supervision and review of
the Board of Directors of the Company) what investments shall
be purchased, held, sold or exchanged by each Fund and what
portion, if any, of the assets of each Fund shall be held
uninvested, and (iii) make changes on behalf of the Company
in the investments of each Fund. The Manager will also
manage, supervise and conduct the other affairs and business
of the Company and of each Fund thereof and matters
incidental thereto, subject always to the control of the
Board of Directors of the Company and to the provisions of
the Company's Articles of Incorporation and Bylaws and the 1940 Act.
(b) Regulatory Reports. The Manager shall furnish to the
Company necessary assistance in:
(i) The preparation of all reports now or hereafter required
by Federal or other laws.
(ii) The preparation of Prospectuses, Registration Statements,
and amendments thereto that may be required by Federal or
other laws or by the rules or regulations of any duly
authorized commission or administrative body.
(c) Office Space, Facilities, and Personnel. The Manager
shall furnish to the Company office space in the offices of
the Manager or in such other place or places as may be agreed
upon from time to time, and all necessary office facilities,
simple business equipment, supplies, utilities, telephone
service and accounting services (in addition to those
provided by the custodian and transfer agent) for managing
the affairs and investments of the Company. These services
are exclusive of the necessary records of any dividend
disbursing agent, transfer agent, registrar or custodian.
The Manager shall compensate all personnel, officers, and
Directors of the Company if such persons are also officers or
employees of the Manager or its affiliates.
(d) Fidelity Bond. The Manager shall provide and maintain a
bond issued by a reputable insurance company authorized to do
business in the place where the bond is issued, against
larceny and embezzlement covering each officer and employee
of the Company who may singly or jointly with others have
access to funds or securities of the Company, with direct or
indirect authority to draw upon such funds or to direct
generally the disposition of such funds. The bond shall be
in such reasonable amount as a majority of the Board of
Directors of the Company who are not officers or employees of
the Company shall determine, with due consideration to the
aggregate assets of the Company to which any such officer or
employee may have access.
3. ALLOCATION OF EXPENSES.
Except for the services and facilities to be provided by the
Manager set forth in Paragraph 2 above, the Company assumes and
shall pay all expenses for all other Company operations and
activities and shall reimburse the Manager for any such expenses
incurred by the Manager. The expenses to be borne by the Company
shall include, without limitation:
(a) the charges and expenses of any registrar, share transfer
or dividend disbursing agent, custodian, or depository
appointed by the Company for the safekeeping of its cash,
portfolio securities and other property;
(b) the charges and expenses of auditors;
(c) brokerage commissions for transactions in the portfolio
securities of the Company;
(d) all taxes, including issuance and transfer taxes, and fees
payable by the Company to Federal, state or other
governmental agencies;
(e) the cost of share certificates representing Shares of the Company;
(f) fees involved in registering and maintaining registrations
of the Company and of its Shares with the Securities and
Exchange Commission and various states and other jurisdictions;
(g) all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing proxy statements,
quarterly reports, semiannual reports, annual reports and
other communications (including Prospectuses) to existing shareholders;
(h) compensation and travel expenses of Directors who are not
"interested persons" within the meaning of the 1940 Act;
(i) the expense of furnishing or causing to be furnished, to each
shareholder a statement of his account, including the expense of mailing;
(j) charges and expenses of legal counsel in connection with
matters relating to the Company, including, without limitation, legal
services rendered in connection with the Company's legal and financial
structure and relations with its shareholders, issuance of Company
Shares, and registration and qualification of securities under Federal,
state and other laws;
(k) membership or association dues for the Investment Company
Institute or similar organizations;
(l) interest payable on Company borrowings; and
(m) postage.
4. ADVISORY FEE.
(a) For the services and facilities to be provided by the
Manager as provided in Paragraph 2 hereof, the Company shall
pay to the Manager a monthly fee with respect to the High
Yield Fund, Intermediate-Term Fund, Short-Term Fund and Tax
Exempt Money Market Fund computed as a percentage of
aggregate average net assets of each Fund, which on an annual
basis is equal to twenty-eight one-hundredths of one percent
(.28%) of all Monthly Average Net Assets (defined below) of
each Fund for such calendar month.
(b) For the services and facilities to be provided by the
Manager as provided in Paragraph 2 hereof, the Company shall
pay to the Manager a monthly fee with respect to the
California Bond Fund and California Money Market Fund,
computed as a percentage of aggregate average net assets of
both Funds combined and allocated between both Funds based on
the relative net asset values of each Fund, which on an
annual basis is equal to:
(1) one-half of one percent (.50%) of the first $50,000,000
of the Monthly Average Net Assets (defined below) of both Funds
for such calendar month;
(2) two-fifths of one percent (.40%) for that portion of
Monthly Average Net Assets in excess of $50,000,000 and not
over $100,000,000 of both Funds for such calendar month; and
(3) three-tenths of one percent (.30%) of that portion of such
Monthly Average Net Assets of both Funds in excess of $100,000,000.
(c) The "Monthly Average Net Assets" of any Fund of the
Company for any calendar month shall be equal to the quotient
produced by dividing (i) the sum of the net assets of such
Fund, determined in accordance with procedures established
from time to time by or under the direction of the Board of
Directors of the Company in accordance with the Articles of
Incorporation of the Company, as of the close of business on
each day during such month that such Fund was open for
business, by (ii) the number of such days.
(d) The Manager may from time to time and for such periods as
it deems appropriate voluntarily waive fees or otherwise
reduce its compensation hereunder.
5. EXPENSE LIMITATION.
In the event that expenses of any Fund of the Company for any
fiscal year should exceed the expense limitation on investment
company expenses imposed by any statute or regulatory authority
of any jurisdiction in which shares of the Company are qualified
for offer and sale, the compensation due the Manager for such
fiscal year with respect to such Fund shall be reduced by the
amount of such excess by a reduction or refund thereof. In the
event that the expenses of any Fund exceed any expense limitation
which the Manager may, by written notice to such Fund,
voluntarily declare to be effective subject to such terms and
conditions as the Manager may prescribe in such notice, the
compensation due the Manager shall be reduced, and, if necessary,
the Manager shall assume expenses of such Fund, to the extent
required by such expense limitation.
In the event this Agreement is terminated with respect to any
one or more Funds as of a date other than the last day of the
fiscal year of the Company, the Manager shall pay the Company a
pro rata portion of the amount that the Manager would have been
required to pay, if any, had this Agreement remained in effect
for the full fiscal year.
6. COMPANY TRANSACTIONS.
In connection with the management of the investment and
reinvestment of the assets of the Company, the Manager, acting by
its own officers, directors or employees or by a duly authorized
subcontractor, is authorized to select the brokers or dealers
that will execute purchase and sale transactions for the Company
and is directed to use its best efforts to obtain the best
available price and most favorable execution with respect to all
such purchases and sales of portfolio securities for the Company.
Subject to this primary requirement, and maintaining as its first
consideration the benefits to the Company and its shareholders,
the Manager shall have the right, subject to the control of the
Board of Directors, to follow a policy of selecting brokers and
dealers who furnish statistical, research and other services to
the Company or to the Manager.
The Manager agrees that neither it nor any of its officers or
Directors will take any long or short position in the capital
stock of the Company; provided, however, that such prohibition:
(a) shall not prevent the Manager from purchasing shares of
the capital stock of the Company if orders to purchase such
shares are placed upon the receipt by the Manager of purchase
orders for such shares and are not in excess of such purchase
orders received by the Manager; and
(b) shall not prevent the purchase of shares of capital stock
of the Company by any of the persons above described for
their account and for investment at the price at which such
shares are available to the public at the time of purchase or
as part of the initial capital of the Company.
7. RELATIONS WITH COMPANY.
Subject to and in accordance with the Articles of
Incorporation and Bylaws of the Company and of the Manager,
respectively, it is understood that Directors, officers, agents
and shareholders of the Company are or may be interested in the
Manager (or any successor thereof) as Directors, officers, or
otherwise, that Directors, officers, agents and shareholders of
the Manager are or may be interested in the Company as Directors,
officers, shareholders or otherwise, that the Manager (or any
such successor) is or may be interested in the Company as a
shareholder or otherwise and that the effect of any such
interests shall be governed by said Articles of Incorporation and
Bylaws.
8. LIABILITY OF MANAGER.
No provision of this Agreement shall be deemed to protect the
Manager against any liability to the Company or its shareholders
to which it might otherwise be subject by reason of any willful
misfeasance, bad faith or gross negligence in the performance of
its duties or the reckless disregard of its obligations and
duties under this Agreement. Nor shall any provision hereof be
deemed to protect any Director or officer of the Company against
any such liability to which he might otherwise be subject by
reason of any willful misfeasance, bad faith or gross negligence
in the performance of his duties or the reckless disregard of his
obligations and duties. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected
thereby.
9. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall be executed on the first
date upon which the Agreement shall have been approved by a
majority of the outstanding voting securities (as that term
is defined in the 1940 Act) of any Existing Fund. This
Agreement shall become effective with respect to any Existing
Fund on the date upon which the Agreement shall have been
approved by a majority of the outstanding voting securities
(as that term is defined in the 1940 Act) of such Existing
Fund, and with respect to any additional Fund on the date of
receipt by the Company of notice from the Manager in
accordance with Paragraph 1(b) hereof that the Manager is
willing to serve as Manager with respect to such Fund.
Unless terminated as herein provided, this Agreement shall
remain in full force and effect with respect to each Existing
Fund through June 30, 1991 and, with respect to each additional Fund,
through the first June 30 occurring more than twelve months
after the date on which such Fund becomes a Fund hereunder,
and shall continue in full force and effect for periods of
one year thereafter with respect to each Fund so long as such
continuance with respect to any such Fund is approved at
least annually (a) by either the Directors of the Company or
by vote of a majority of the outstanding voting shares (as
defined in the 1940 Act) of such Fund, and (b) in either
event by the vote of a majority of the Directors of the
Company who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast
in person at a meeting called for the purpose of voting on
such approval.
Any approval of this Agreement by the holders of a majority
of the outstanding shares (as defined in the 1940 Act) of any
Fund shall be effective to continue this Agreement with
respect to any such Fund notwithstanding (A) that this
Agreement has not been approved by the holders of a majority
of the outstanding shares of any other Fund affected thereby,
and (B) that this Agreement has not been approved by the vote
of a majority of the outstanding shares of the Company,
unless such approval shall be required by any other
applicable law or otherwise.
(b) Termination. This Agreement may be terminated at any
time, without payment of any penalty, by vote of the
Directors of the Company or by vote of a majority of the
outstanding shares (as defined in the 1940 Act), or by the
Manager on sixty (60) days' written notice to the other party.
(c) Automatic Termination. This Agreement shall automatically
and immediately terminate in the event of its assignment.
10. NAME OF COMPANY.
It is understood that the name "USAA," and any logo
associated with that name, is the valuable property of the United
Services Automobile Association, and that the Company has the
right to include "USAA" as a part of its name only so long as
this Agreement shall continue and the Manager is a wholly owned
subsidiary of the United Services Automobile Association. Upon
termination of this Agreement the Company shall forthwith cease
to use the "USAA" name and logo and shall submit to its
shareholders an amendment to its Articles of Incorporation to
change the Company's name.
11. PRIOR AGREEMENT SUPERSEDED.
This Agreement supersedes any prior agreement relating to the
subject matter hereof between the parties.
12. SERVICES NOT EXCLUSIVE.
The services of the Manager to the Company hereunder are not
to be deemed exclusive, and the Manager shall be free to render
similar services to others so long as its services hereunder are
not impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first set forth above.
USAA TAX EXEMPT FUND, INC. USAA INVESTMENT MANAGEMENT COMPANY
By: /s/ Michael J. C. Roth By: /s/ Michael J. C. Roth
---------------------- ------------------------
President President
ATTEST: ATTEST:
/s/ Michael D. Wagner /s/ Michael D. Wagner
------------------------ -----------------------
Secretary Secretary
EXHIBIT 5(b)
USAA Investment Management Company
USAA Building
San Antonio, TX 78288
Gentlemen:
Pursuant to Section 1(b) of the Advisory Agreement dated as
of July 20, 1990 between USAA Tax Exempt Fund, Inc. (the
"Company") and USAA Investment Management Company (the
"Manager"), please be advised that the Company has established
four new series of its shares, namely, the New York Bond Fund,
the New York Money Market Fund, the Virginia Bond Fund and the
Virginia Money Market Fund (the "Funds"), and please be further
advised that the Company desires to retain the Manager to render
management and investment advisory services under the Advisory
Agreement to the Funds at the fees stated below:
Advisory Fee Schedule
On an annual basis the Manager's fee is equal to .50%
of the first $50,000,000 aggregate average net assets
("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. The fee is computed as a percentage
of the ANA of both New York Funds combined, and as a
percentage of the ANA of both Virginia Funds combined,
and is allocated among the Funds based on the relative
net asset values of each Fund.
Please state below whether you are willing to render such
services at the fees stated above.
USAA TAX EXEMPT FUND, INC.
Attest: /s/ Michael D. Wagner By: /s/ Michael J. C. Roth
-------------------- -----------------------
Secretary President
Dated: July 26, 1990
We are willing to render management and investment advisory
services to the New York Bond Fund, the New York Money Market
Fund, the Virginia Bond Fund and the Virginia Money Market Fund
at the fees stated above.
USAA INVESTMENT MANAGEMENT COMPANY
Attest: /s/ Nora P. McDaniel By: /s/ John W. Saunders, Jr.
--------------------- ------------------------
Assistant Secretary Senior Vice President
Dated: July 26, 1990
EXHIBIT 6(a)
UNDERWRITING AGREEMENT
Underwriting Agreement dated as of the 25th day of July, 1990
between USAA INVESTMENT MANAGEMENT COMPANY, a corporation
organized under the laws of the State of Delaware and having a
place of business in San Antonio, Texas (sometimes herein
referred to as the "Underwriter"), and USAA TAX EXEMPT FUND,
INC., a corporation organized under the laws of the State of
Maryland and having a place of business in San Antonio, Texas
(sometimes herein referred to as the "Company") which offers
shares of capital stock (the "Shares") in different classes
representing interests in different portfolios of assets (each
class of stock being referred to herein as a "Fund"). The
Underwriter presently sells and distributes Shares in six classes
designated as the High Yield Fund, Intermediate-Term Fund, Short-
Term Fund, Tax Exempt Money Market Fund, California Money Market
Fund and California Bond Fund (the "Existing Funds").
WITNESSETH: In consideration of the agreements herein
contained and for other good and valuable consideration, receipt
of which is hereby acknowledged, it is agreed:
1. APPOINTMENT OF UNDERWRITER.
The Company hereby appoints the Underwriter as its exclusive
agent to sell and distribute Shares of each Fund of the Company
at the offering price thereof as from time to time determined in
the manner herein provided. The Underwriter hereby accepts such
appointment and agrees during the term of this Agreement to
provide the services and to assume the obligations herein set
forth without compensation.
2. BASIS OF SALE OF SHARES.
The Underwriter does not agree to sell any specific number of
Shares. Shares will be sold to the Underwriter as agent for the
Company only against orders therefor. Underwriter will not
purchase Shares from anyone other than the Company except as
agent for the Company.
3. OFFERING PRICE.
The offering price for Shares of any Fund of the Company
shall be determined according to the terms of the then current
Prospectus of the Fund. The net asset value per share for each
Fund shall be determined at such time each day as is established
by the Board of Directors of the Company from time to time.
4. MANNER OF OFFERING.
The Underwriter will conform to the securities laws of any
jurisdiction in which it sells, directly or indirectly, any
Shares. The Underwriter also agrees to furnish to the Company
sufficient copies of any agreements, plans or sales literature it
intends to use in connection with any sales of Shares in adequate
time for the Company to file and clear them with the proper
authorities before they are put in use, and not to use them until
so filed and cleared.
5. RESERVATION OF RIGHTS BY THE COMPANY.
The Company reserves the right to issue Shares at any time
directly to existing shareholders and to sell Shares to such
shareholders or to other persons approved by the Underwriter at
not less than net asset value. The Company reserves the right to
suspend the sale of Shares of any or all Funds without prior
notice for any reason deemed adequate by it.
6. ALLOCATION OF EXPENSES.
(a) The Company, either directly or through its manager and
investment adviser, will be responsible for, and shall pay
the expenses of:
(i) providing all necessary services, including fees and
disbursements of counsel, related to the preparation,
setting in type, printing and filing of any Registration
Statement and/or Prospectus required under the Securities
Act of 1933, as amended, or under state securities laws,
covering its Shares, and all amendments and supplements
thereto, and preparing, setting in type, printing and
mailing periodic reports to existing shareholders;
(ii) the cost of all registration or qualification fees;
(iii) the cost of preparing temporary and permanent share
certificates for Shares of the Company;
(iv) all the federal and state (if any) issue and/or
transfer taxes payable upon the issue by or (in the case
of treasury shares) transfer from the Company to the
Underwriter of any and all Shares distributed hereunder.
(b) The Underwriter agrees that, after the Prospectus and
periodic reports have been set in type, it will bear the
expense of printing and distributing any copies thereof which
are to be used in connection with the offering of Shares to
dealers or prospective investors. The Underwriter further
agrees that it will bear the expenses of preparing, printing
and distributing any other literature used by the Underwriter
or furnished by it for use by dealers in connection with the
offering of the Shares for sale to the public, and any
expense of advertising in connection with such offering. The
Underwriter will also pay fees for services rendered by the
transfer agent on behalf of the Underwriter.
7. INDEPENDENT CONTRACTOR.
The Underwriter shall be an independent contractor and
neither the Underwriter nor any of its officers or employees, as
such, is or shall be an employee of the Company. The Underwriter
is responsible for its own conduct, for the employment, control
and conduct of its agents and employees and for injury to such
agents or employees or to others through its agents or employees.
The Underwriter assumes full responsibility for its agents and
employees under applicable statutes and agrees to pay all
employer taxes thereunder.
8. INDEMNIFICATION BY UNDERWRITER.
The Underwriter agrees to indemnify and hold harmless the
Company or any such person who has been, is, or may hereafter be,
an officer, director or employee of the Company against any loss,
damage or expense reasonably incurred by any of them in
connection with any claim or in connection with any action, suit
or proceeding to which any of them may be a party, which arises
out of or is alleged to arise out of or is based upon any untrue
statement or alleged untrue statement of a material fact, or the
omission or alleged omission to state a material fact necessary
to make the statements made not misleading, on the part of the
Underwriter or any agent or employee of the Underwriter or any
other person for whose acts the Underwriter is responsible or is
alleged to be responsible, unless such statement or omission was
made in reliance upon written information furnished by the
Company. The Underwriter likewise agrees to indemnify and hold
harmless the Company and each such person in connection with any
claim or in connection with any action, suit or proceeding which
arises out of or is alleged to arise out of the Underwriter's
failure to exercise reasonable care and diligence with respect to
its services, if any, rendered in connection with investment,
reinvestment, automatic withdrawal and other plans for Shares.
The term "expenses" for purposes of this and the next paragraph
includes amounts paid in satisfaction of judgments or in
settlements which are made with the Underwriter's consent. The
foregoing rights of indemnification shall be in addition to any
other rights to which the Company or a director may be entitled
as a matter of law.
9. INDEMNIFICATION BY COMPANY.
The Company agrees to indemnify and hold harmless the
Underwriter and each person who has been, is, or may hereafter be
an officer, director, employee or agent of the Underwriter
against any loss, damage or expense reasonably incurred by any of
them in connection with any claim or in connection with any
action, suit or proceeding to which any of them may be a party,
which arises out of or is alleged to arise out of or is based
upon any untrue or alleged untrue statement of material fact, or
the omission or alleged omission to state a material fact
necessary to make the statements therein not misleading,
contained in a Registration Statement or Prospectus, or any
amendment or supplement thereto, unless such statement or
omission was made in reliance upon written information furnished
by the Underwriter. The foregoing rights of indemnification
shall be in addition to any other rights to which the Underwriter
may be entitled as a matter of law.
10. TERM OF AGREEMENT.
This Agreement shall be executed and become effective with
respect to all Existing Funds on July 25, 1990, and, with respect
to any additional Fund, on the date of receipt by the Company of
notice from the Underwriter in accordance with Paragraph 12
hereof that the Underwriter is willing to serve as Underwriter
with respect to such Fund. Unless terminated as herein provided,
this Agreement shall remain in full force and effect through June
30, 1991, and, with respect to each additional Fund, through the
first June 30 occurring more than twelve months after the date on
which such Fund becomes a Fund hereunder, and shall continue in
full force and effect for periods of one year thereafter with
respect to each Fund so long as such continuance with respect to
any such Fund is approved at least annually (a) by either the
Directors of the Company or by vote of a majority of the
outstanding voting Shares (as defined in the Investment Company
Act of 1940, as amended) of such Fund, and (b) in either event by
the vote of a majority of the Directors of the Company who are
not parties to this Agreement or "interested persons" (as defined
in the Investment Company Act of 1940, as amended) of any such
party, cast in person at a meeting called for the purpose of
voting on such approval. Written notice of discontinuance of
this Underwriting Agreement may be given by one party hereto to
the other not less than sixty (60) days before expiration of its
initial term or before the expiration of any succeeding annual
period. This Agreement supersedes any prior agreement relating
to the subject matter hereof between the parties.
11. ASSIGNMENT.
This Agreement may not be assigned by the Underwriter and
shall automatically terminate in the event of an attempted
assignment by the Underwriter; provided, however, that the
Underwriter may employ such other person, persons, corporation,
or corporations, as it shall determine, in order to assist it in
carrying out this Agreement.
12. AMENDMENT.
This Agreement may be amended at any time by mutual agreement
in writing of the parties hereto, provided that any such
amendment is approved by a majority of the directors of the
Company who are not "interested persons" of the Underwriter or by
the holders of a majority of the Shares of the Company.
IN WITNESS WHEREOF, this Agreement has been executed for the
Underwriter and the Company by their duly authorized officers as
of the date first set forth above.
USAA TAX EXEMPT FUND, INC. USAA INVESTMENT MANAGEMENT COMPANY
By:/s/ Michael J.C. Roth By:/s/ Michael J.C. Roth
----------------------- ------------------------
President President
ATTEST: ATTEST:
/s/ Michael D. Wagner /s/ Michael D. Wagner
------------------------- ------------------------
Secretary Secretary
EXHIBIT 6(b)
USAA Investment Management Company
USAA Building
San Antonio, TX 78288
Gentlemen:
Pursuant to paragraph 12 of the Underwriting Contract dated
as of July 25, 1990 between USAA Tax Exempt Fund, Inc. (the
"Company") and USAA Investment Management Company (the
"Underwriter"), please be advised that the Company has
established four new series of its shares, namely, the New York
Bond Fund, the New York Money Market Fund, the Virginia Bond Fund
and the Virginia Money Market Fund (the "Funds"), and please be
further advised that the Company desires to retain the
Underwriter to sell and distribute shares of the Funds and to
render other services to the Funds as provided in the
Underwriting Agreement.
Please state below whether you are willing to render such
services as provided in the Underwriting Agreement.
USAA TAX EXEMPT FUND, INC.
Attest:/s/ Michael D. Wagner By:/s/ Michael J. C. Roth
-------------------- -----------------------
Secretary President
Dated: July 26, 1990
We are willing to render services to the New York Bond Fund,
the New York Money Market Fund, the Virginia Bond Fund and the
Virginia Money Market Fund as set forth in the Underwriting
Contract.
USAA INVESTMENT MANAGEMENT COMPANY
Attest:/s/ Nora P. McDaniel By:/s/ John W. Saunders, Jr.
--------------------- -----------------------
Assistant Secretary Senior Vice President
Dated: July 26, 1990
EXHIBIT 8(a)
CUSTODIAN CONTRACT
Between
USAA TAX EXEMPT FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held By It . . . .1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian . . . . . . . . . . . . . .2
2.1 Holding Securities . . . . . . . . . . . . . . . . . .2
2.2 Delivery of Securities . . . . . . . . . . . . . . . .3
2.3 Registration of Securities . . . . . . . . . . . . . .8
2.4 Bank Accounts. . . . . . . . . . . . . . . . . . . . .8
2.5 Payments for Shares. . . . . . . . . . . . . . . . . .9
2.6 Availability of Federal Funds . . . . . . . . . . . 10
2.7 Collection of Income . . . . . . . . . . . . . . . . 10
2.8 Payment of Fund Monies . . . . . . . . . . . . . . . 11
2.9 Liability for Payment in Advance of Receipt of
Securities Purchased . . . . . . . . . . . . . . . . 14
2.10 Payments for Repurchases or Redemptions
of Shares of the Fund .. . . . . . . . . . . . . . . 14
2.11 Appointment of Agents. . . . . . . . . . . . . . . . 15
2.12 Deposit of Fund Assets in Securities System. . . . .15
2.13 Segregated Account . . . . . . . . . . . . . . . . . 18
2.14 Ownership Certificates for Tax Purposes. . . . . . . 20
2.15 Proxies. . . . . . . . . . . . . . . . . . . . . . . 20
2.16 Communications Relating to Portfolio Securities. . . 20
2.17 Proper Instructions. . . . . . . . . . . . . . . . . 21
2.18 Actions Permitted Without Express Authority. . . . . 22
2.19 Evidence of Authority. . . . . . . . . . . . . . . . 23
3. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income . . . . . 23
4. Records . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5. Opinion of Fund's Independent Accountants . . . . . . . . . 25
6. Reports to Fund by Independent Public Accountants . . . . . 25
7. Compensation of Custodian . . . . . . . . . . . . . . . . . 26
8. Responsibility of Custodian . . . . . . . . . . . . . . . . 26
9. Effective Period, Termination and Amendment . . . . . . . . 28
10. Successor Custodian.. . . . . . . . . . . . . . . . . . . 29
11. Interpretive and Additional Provisions. . . . . . . . . . 31
12. Additional Funds. . . . . . . . . . . . . . . . . . . . . 31
13. Massachusetts Law to Apply. . . . . . . . . . . . . . . . 31
14. Prior Contracts.. . . . . . . . . . . . . . . . . . . . . 32
CUSTODIAN CONTRACT
This Contract between USAA TAX EXEMPT FUND, INC., a
corporation organized and existing under the laws of Maryland,
having its principal place of business at San Antonio, Texas
hereinafter called the "Fund", and State Street Bank and Trust
Company, a Massachusetts trust company, having its principal
place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate
series, with each such series representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Fund offers shares in six series, the California
Bond Fund, California Money Market Fund, High Yield Fund,
Intermediate-Term Fund, Short-Term Fund, and Tax Exempt Money
Market Fund, (such series together with all other series
subsequently established by the Fund and made subject to this
Contract in accordance with paragraph 12, being herein referred
to as the "Portfolio(s)");
NOW THEREFOR, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of
the assets of the Portfolios of the Fund pursuant to the
provisions of the Articles of Incorporation. The Fund on behalf
of the Portfolio(s) agrees to deliver to the Custodian all
securities and cash of the Portfolios, and all payments of
income, payments of principal or capital distributions received
by it with respect to all securities owned by the Portfolio(s)
from time to time, and the cash consideration received by it for
such new or treasury shares of beneficial interest of the Fund
representing interests in the Portfolios, ("Shares") as may be
issued or sold from time to time. The Custodian shall not be
responsible for any property of a Portfolio held or received by
the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning
of Section 2.17), the Custodian shall on behalf of the applicable
Portfolio(s) from time to time employ one or more sub-custodians,
but only in accordance with an applicable vote by the Board of
Directors of the Fund on behalf of the applicable Portfolio(s),
and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-
custodian has to the Custodian.
2. Duties of the Custodian with Respect to Property of the Fund
Held By the Custodian
2.1 Holding Securities. The Custodian shall hold and
physically segregate for the account of each Portfolio
all non-cash property, including all securities owned by
such Portfolio, other than securities which are
maintained pursuant to Section 2.12 in a clearing agency
which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System".
2.2 Delivery of Securities. The Custodian shall release and
deliver securities owned by a Portfolio held by the
Custodian or in a Securities System account of the
Custodian or in the Custodian's Direct Paper book entry
system account ("Direct Paper System Account") only upon
receipt of Proper Instructions from the Fund on behalf of
the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, and
only in the following cases:
1) Upon sale of such securities for the account of the
Portfolio and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or
other similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or otherwise
become payable; provided that, in any such case, the
cash or other consideration is to be delivered to the Custodian;
6) To the Issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.11 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such case,
the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of
the Portfolio, to the broker or its clearing agent,
against a receipt, for examination in accordance with
"street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of
such securities prior to receiving payment for such
securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be
delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any,
are to be delivered to the Custodian;
10) For delivery in connection with any loans of
securities made by the Portfolio, but only against
receipt of adequate collateral as agreed upon from
time to time by the Custodian and the Fund on behalf
of the Portfolio, which may be in the form of cash or
obligations issued by the United States government,
its agencies or instrumental- ities, except that in
connection with any loans for which collateral is to
be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any
borrowings by the Fund on behalf of the Portfolio
requiring a pledge of assets by the Fund on behalf of
the Portfolio, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio,
the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act")
and a member of The National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any
similar organization or organizations, regarding
escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio,
the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating
to compliance with the rules of the Commodity Futures
Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding
account deposits in connection with transactions by
the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the currently effective
prospectus and statement of additional information of
the Fund, related to the Portfolio ("Prospectus"), in
satisfaction of requests by holders of Shares for
repurchase or redemption; and
15) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions from
the Fund on behalf of the applicable Portfolio, a
certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or
an Assistant Secretary, specifying the securities of the
Portfolio to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose
to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Securities held by the
Custodian (other than bearer securities) shall be
registered in the name of the Portfolio or in the name of
any nominee of the Fund on behalf of the Portfolio or of
any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund
has authorized in writing the appointment of a nominee to
be used in common with other registered investment
companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent
appointed pursuant to Section 2.11 or in the name or
nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on
behalf of the Portfolio under the terms of this Contract
shall be in "street name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the name of each
Portfolio of the Fund, subject only to draft or order by
the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it
from or for the account of the Portfolio, other than cash
maintained by the Portfolio in a bank account established
and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the
Custodian for a Portfolio may be deposited by it to its
credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company
shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or
trust company and the funds to be deposited with each
such bank or trust company shall on behalf of each
applicable Portfolio, be approved by vote of a majority
of the Board of Directors of the Fund. Such funds shall
be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only
in that capacity.
2.5 Payments for Shares. The Custodian shall receive from
the distributor for the Shares or from the Transfer Agent
of the Fund and deposit into the account of the
appropriate Portfolio such payments as are received for
Shares of that Portfolio issued or sold from time to time
by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio
and the Transfer Agent of any receipt by it of payments
for Shares of such Portfolio.
2.6 Availability of Federal Funds. Upon mutual agreement
between the Fund on behalf of each applicable Portfolio
and the Custodian, the Custodian shall, upon the receipt
of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio
as of specified times agreed upon from time to time by
the Fund and the Custodian in the amount of checks
received in payment for Shares of such Portfolio which
are deposited into the Portfolio's account.
2.7 Collection of Income. The Custodian shall collect on a
timely basis all income and other payments with respect
to registered securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a
timely basis all income and other payments with respect
to bearer securities if, on the date of payment by the
issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected,
to such Portfolio's custodian account. Without limiting
the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other
income items requiring presentation as and when they
become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on
securities loaned pursuant to the provisions of Section
2.2 (10) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with
such information or data as may be necessary to assist
the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is
properly entitled.
2.8 Payment of Fund Monies. Upon receipt of Proper
Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall
pay out monies of a Portfolio in the following cases
only:
1) Upon the purchase of securities, options, futures
contracts or options on futures contracts for the
account of the Portfolio but only (a) against the
delivery of such securities or evidence of title to
such options, futures contracts or options on futures
contracts to the Custodian (or any bank, banking firm
or trust company doing business in the United States
or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian
and has been designated by the Custodian as its agent
for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form
for transfer; (b) in the case of a purchase effected
through a Securities System, in accordance with the
conditions set forth in Section 2.12 hereof; (c) in
the case of repurchase agreements entered into between
the Fund on behalf of the Portfolio and the Custodian,
or another bank, or a broker-dealer which is a member
of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with
such securities or (ii) against delivery of the
receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with written
evidence of the agreement by the Custodian to
repurchase such securities from the Portfolio; or (d)
for transfer to a time deposit account of the Fund in
any bank, whether domestic or foreign; such transfer
may be effected prior to receipt of a confirmation
from a broker and/or the applicable bank pursuant to
Proper Instructions from the Fund as defined in Section 2.17;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by
the Portfolio, including but not limited to the following
payments for the account of the Portfolio: interest,
taxes, management, accounting, transfer agent and legal
fees, and operating expenses of the Fund whether or not
such expenses are to be in whole or part capitalized or
treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in
respect of securities sold short;
7) For any other proper purpose, but only upon receipt of,
in addition to Proper Instructions from the Fund on
behalf of the Portfolio, a certified copy of a resolution
of the Board of Directors or of the Executive Committee
of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring
such purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in
this Contract, in any and every case where payment for
purchase of securities for the account of a Portfolio is
made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written
instructions from the Fund on behalf of such Portfolio to
so pay in advance, the Custodian shall be absolutely
liable to the Fund for such securities to the same extent
as if the securities had been received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of the
Fund. From such funds as may be available for the
purpose but subject to the limitations of the Articles of
Incorporation and any applicable votes of the Board of
Directors of the Fund pursuant thereto, the Custodian
shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of
Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In
connection with the redemption or repurchase of Shares of
a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or
through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or
repurchase of Shares of the Fund, the Custodian shall
honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to
the holder of Shares, when presented to the Custodian in
accordance with such procedures and controls as are
mutually agreed upon from time to time between the Fund
and the Custodian.
2.11 Appointment of Agents. The Custodian may at any time or
times in its discretion appoint (and may at any time
remove) any other bank or trust company which is itself
qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out
such of the provisions of this Article 2 as the Custodian
may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian
of its responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain securities owned by
a Portfolio in a clearing agency registered with the
Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system
authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to herein
as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to
the following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets
of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to securities
of the Portfolio which are maintained in a Securities
System shall identify by book-entry those securities
belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from
the Securities System that such securities have been
transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
payment and transfer for the account of the Portfolio.
The Custodian shall transfer securities sold for the
account of the Portfolio upon (i) receipt of advice from
the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making
of an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Portfolio.
Copies of all advices from the Securities System of transfers
of securities for the account of the Portfolio shall identify
the Portfolio, be maintained for the Portfolio by the Custodian
and be provided to the Fund at its request. Upon request,
the Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio in the form of a written advice or notice and shall
furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transactions in the
Securities System for the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio
with any report obtained by the Custodian on the
Securities System's accounting system, internal
accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received from the Fund on behalf
of the Portfolio the initial or annual certificate, as
the case may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the
Fund for the benefit of the Portfolio for any loss or
damage to the Portfolio resulting from use of the
Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall
be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the
Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if
and to the extent that the Portfolio has not been made
whole for any such loss or damage.
2.13 Segregated Account. The Custodian shall upon receipt of
Proper Instructions from the Fund on behalf of each
applicable Portfolio establish and maintain a segregated
account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities
maintained in an account by the Custodian pursuant to
Section 2.12 hereof, (i) in accordance with the
provisions of any agreement among the Fund on behalf of
the Portfolio, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the
NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity
Futures Trading Commission or any registered contract
market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio, (ii) for purposes of
segregating cash or government securities in connection
with options purchased, sold or written by the Portfolio
or commodity futures contracts or options thereon
purchased or sold by the Portfolio, (iii) for the
purposes of compliance by the Portfolio with the
procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions from the
Fund on behalf of the applicable Portfolio, a certified
copy of a resolution of the Board of Directors or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian
shall execute ownership and other certificates and
affidavits for all federal and state tax purposes in
connection with receipt of income or other payments with
respect to securities of each Portfolio held by it and in
connection with transfers of securities.
2.15 Proxies. The Custodian shall, with respect to the
securities held hereunder, cause to be promptly executed
by the registered holder of such securities, if the
securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies
are to be voted, and shall promptly deliver to the
Portfolio such proxies, all proxy soliciting materials
and all notices relating to such securities.
2.16 Communications Relating to Portfolio Securities. The
Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without
limitation, pendency of calls and maturities of
securities and expirations of rights in connection
therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the
maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the
securities being held for the Portfolio. With respect to
tender or exchange offers, the Custodian shall transmit
promptly to the Portfolio all written information
received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the
Portfolio desires to take action with respect to any
tender offer, exchange offer or any other similar
transaction, the Portfolio shall notify the Custodian at
least three business days prior to the date on which the
Custodian is to take such action.
2.17 Proper Instructions. Proper Instructions as used
throughout this Article 2 means a writing signed or
initialled by one or more person or persons as the Board
of Directors shall have from time to time authorized.
Each such writing shall set forth the specific
transaction or type of transaction involved, including a
specific statement of the purpose for which such action
is requested. Oral instructions will be considered
Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give
such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to
be confirmed in writing. Upon receipt of a certificate
of the Secretary or an Assistant Secretary as to the
authorization by the Board of Directors of the Fund
accompanied by a detailed description of procedures
approved by the Board of Directors, Proper Instructions
may include communications effected directly between
electro-mechanical or electronic devices provided that
the Board of Directors and the Custodian are satisfied
that such procedures afford adequate safeguards for the
Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which
requires a segregated asset account in accordance with
Section 2.13.
2.18 Actions Permitted without Express Authority. The
Custodian may in its discretion, without express
authority from the Fund on behalf of each applicable
Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to
its duties under this Contract, provided that all such
payments shall be accounted for to the Fund on behalf of
the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities
and property of the Portfolio except as otherwise
directed by the Board of Directors of the Fund.
2.19 Evidence of Authority. The Custodian shall be protected
in acting upon any instructions, notice, request,
consent, certificate or other instrument or paper
believed by it to be genuine and to have been properly
executed by or on behalf of the Fund. The Custodian may
receive and accept a certified copy of a vote of the
Board of Directors of the Fund as conclusive evidence (a)
of the authority of any person to act in accordance with
such vote or (b) of any determination or of any action by
the Board of Directors pursuant to the Articles of
Incorporation as described in such vote, and such vote
may be considered as in full force and effect until
receipt by the Custodian of written notice to the
contrary.
3. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Board of
Directors of the Fund to keep the books of account of each
Portfolio and/or compute the net asset value per share of the
outstanding shares of each Portfolio or, if directed in writing
to do so by the Fund on behalf of the Portfolio, shall itself
keep such books of account and/or compute such net asset value
per share. If so directed, the Custodian shall also calculate
daily the net income of the Portfolio as described in the Fund's
currently effective prospectus related to such Portfolio and
shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an
officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various
components. The calculations of the net asset value per share
and the daily income of each Portfolio shall be made at the time
or times described from time to time in the Fund's currently
effective prospectus related to such Portfolio.
4. Records.
The Custodian shall with respect to each Portfolio create
and maintain all records relating to its activities and
obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940,
with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder, applicable federal and state tax laws and
any other law or administrative rules or procedures which may be
applicable to the Fund. All such records shall be the property
of the Fund and shall at all times during the regular business
hours of the Custodian be open for inspection by duly authorized
officers, employees or agents of the Fund and employees and
agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation
of securities owned by each Portfolio and held by the Custodian
and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
5. Opinion of Fund's Independent Accountant.
The Custodian shall take all reasonable action, as the
Fund on behalf of each applicable Portfolio may from time to time
request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities
hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the Securities
and Exchange Commission and with respect to any other
requirements of such Commission.
6. Reports to Fund by Independent Public Accountants.
The Custodian shall provide the Fund, on behalf of each
of the Portfolios at such times as the Fund may reasonably
require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a
Securities System, relating to the services provided by the
Custodian under this Contract; such reports, shall be of
sufficient scope and in sufficient detail, as may reasonably be
required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
7. Compensation of Custodian.
The Custodian shall be entitled to reasonable
compensation for its services and expenses as Custodian, as
agreed upon from time to time between the Fund on behalf of each
applicable Portfolio and the Custodian.
8. Responsibility of Custodian.
So long as and to the extent that it is in the exercise
of reasonable care, the Custodian shall not be responsible for
the title, validity or genuineness of any property or evidence of
title thereto received by it or delivered by it pursuant to this
Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party
or parties, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options
agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability
to the Fund for any action taken or omitted by it in good faith
without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all
matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. Notwithstanding the
foregoing, the responsibility of the Custodian with respect to
redemptions effected by check shall be in accordance with a
separate Agreement entered into between the Custodian and the Fund.
If the Fund on behalf of the Portfolio requires the
Custodian to take any action with respect to securities, which
action involves the payment of money or which action may, in the
opinion of the Custodian, result in the Custodian or its nominee
assigned to the Fund or the Portfolio being liable for the
payment of money or incurring liability of some other form, the
Fund on behalf of the Portfolio, as a prerequisite to requiring
the Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or
securities for any purpose for the benefit of a Portfolio or in
the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any
property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of such Portfolio's assets
to the extent necessary to obtain reimbursement, provided that
Custodian shall, with respect to Fund assets as to which
Custodian has perfected its lien and which Custodian proposes to
dispose of pursuant to the foregoing right, give the Fund notice
identifying such assets and the Fund shall have five business
days from receipt of such notice to notify the Custodian if the
Fund wishes the Custodian to dispose of Fund assets of equal
value other than those identified in such notice; in the absence
of any contrary notification from the Fund, Custodian shall be
free to dispose of the Fund assets initially identified to the
extent necessary to realize the amounts to which it is entitled
hereunder.
9. Effective Period, Termination and Amendment.
This Contract shall become effective as of its execution,
shall continue in full force and effect until terminated as
hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either
party by an instrument in writing delivered or mailed, postage
prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or
mailing; provided, however that the Custodian shall not with
respect to a Portfolio act under Section 2.12 hereof in the
absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors of the Fund
has approved the initial use of a particular Securities System by
such Portfolio and the receipt of an annual certificate of the
Secretary or an Assistant Secretary that the Board of Directors
has reviewed the use by such Portfolio of such Securities System,
as required in each case by Rule 17f-4 under the Investment
Company Act of 1940, as amended; provided further, however, that
the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or
any provision of the Articles of Incorporation, and further
provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Directors
(i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event
at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of
each applicable Portfolio shall pay to the Custodian such
compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses
and disbursements.
10. Successor Custodian.
If a successor custodian for the Fund, of one or more of
the Portfolios shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed
and in the form for transfer, all securities of each applicable
Portfolio then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of each
such Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy
of a vote of the Board of Directors of the Fund, deliver at the
office of the Custodian and transfer such securities, funds and
other properties in accordance with such vote.
In the event that no written order designating a
successor custodian or certified copy of a vote of the Board of
Directors shall have been delivered to the Custodian on or before
the date when such termination shall become effective, then the
Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company
Act of 1940, doing business in Boston, Massachusetts, of its own
selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by
the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other
property held by it under this Contract on behalf of each
applicable Portfolio and to transfer to an account of such
successor custodian all of the securities of each such Portfolio
held in any Securities System. Thereafter, such bank or trust
company shall be the successor of the Custodian under this
Contract.
In the event that securities, funds and other properties
remain in the possession of the Custodian after the date of
termination hereof owing to failure of the Fund to procure the
certified copy of vote referred to or of the Board of Directors
to appoint a successor custodian, the Custodian shall be entitled
to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the
duties and obligations of the Custodian shall remain in full
force and effect.
11. Interpretive and Additional Provisions.
In connection with the operation of this Contract, the
Custodian and the Fund on behalf of each of the Portfolios, may
from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint
opinion be consistent with the general tenor of this Contract.
Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto,
provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any
provision of the Articles of Incorporation of the Fund. No
interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this
Contract.
12. Additional Funds.
In the event that the Fund establishes one or more series
of Shares in addition to the California Bond Fund, California
Money Market Fund, High Yield Fund, Intermediate Term Fund,
Short-Term Fund, and Tax Exempt Money Market Fund, with respect
to which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the
Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a
Portfolio hereunder.
13. Massachusetts Law to Apply.
This Contract shall be construed and the provisions
thereof interpreted under and in accordance with laws of The
Commonwealth of Massachusetts.
14. Prior Contracts.
This Contract supersedes and terminates, as of the date
hereof, all prior contracts between the Fund on behalf of each of
the Portfolios and the Custodian relating to the custody of the
Fund's assets.
IN WITNESS WHEREOF, each of the parties has caused this
instrument to be executed in its name and behalf by its duly
authorized representative and its seal to be hereunder affixed as
of the 23rd day of June, 1989.
ATTEST USAA TAX EXEMPT FUND, INC.
/s/ Nora P. McDaniel By /s/ Michael J. C. Roth
- ------------------------ -----------------------
Assistant Secretary Executive Vice President
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ M. Fitzgerald By /s/ E. D. Hawkins Jr.
- ------------------------ ----------------------
Assistant Secretary Vice President
EXHIBIT 8(b)
State Street Bank and Trust
1776 Heritage Drive
North Quincy, MA 02171
Gentlemen:
Pursuant to Section 12 of the Custodian Contract dated as of
June 23, 1989 between USAA Tax Exempt Fund, Inc. (the "Company")
and State Street Bank and Trust Company, (the "Custodian") please
be advised that the Company has established four new series of
its shares, namely, the New York Bond Fund, the New York Money
Market Fund, the Virginia Bond Fund and the Virginia Money Market
Fund (the "Funds"), and please be further advised that the
Company desires to retain the Custodian to render custody
services under the Custodian Contract to the Funds in accordance
with the fee schedule attached hereto as Exhibit A.
Please state below whether you are willing to render such
services in accordance with the fee schedule attached hereto as
Exhibit A.
USAA TAX EXEMPT FUND, INC.
Attest: /s/ Michael D. Wagner By: /s/ Michael J. C. Roth
---------------------- -----------------------
Secretary President
Dated: July 26, 1990
We are willing to render custody services to the New York
Bond Fund, the New York Money Market Fund, the Virginia Bond Fund
and the Virginia Money Market Fund in accordance with the fee
schedule attached hereto as Exhibit A.
STATE STREET BANK AND TRUST COMPANY
Attest: /s/Robert Kaplan By: /s/ Sandra McCarthy
------------------------- ------------------------
Dated: July 26, 1990
STATE STREET
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA STATE TAX-FREE TRUST
- -------------------------------------------------------------------
I. Custody, Portfolio and Fund Accounting Services - Maintain
investment ledgers, provide selected portfolio transactions,
position and income reports. Maintain general ledger, and
capital stock accounts. Prepare daily trial balance.
Calculate net asset value daily. Provide selected general
ledger reports. Securities yield or market value quotations
will be provided to State Street by the fund or via State
Streets Automated Pricing service.
The administration fee shown below is an annual charge, in
basis points, billed and payable monthly, based on average
monthly net assets.
ANNUAL FEES PER PORTFOLIO
Annual Full Service Fees
------------------------
First 50 Million 3.50 Basis Points
Next 50 Million 2.50 Basis Points
Next 100 Million 1.50 Basis Points
Excess .85 Basis Points
Minimum Monthly Charge $2,000.00
II. Portfolio Trades - For Each Line Item Processed
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $12.00
Boston/New York Physical $25.00
PTC Buy/Sell $20.00
All Other Trades $16.00
Maturity Collections (NY Physical) $ 8.00
Option Charge for each option written or
closing contract, per issue, per broker $25.00
Option expiration/Option exercised $15.00
Interest Rate Futures -- no security movement $ 8.00
Monitoring for calls and processing coupons --
for each coupon issue held -- monthly charge $ 5.00
Principal Reduction Payments Per Paydown $10.00
Interest/Dividend Claim Charges
(For items held at the Request of Traders over record
date in street form) $50.00
III. Holdings Charge
Per Security per Month (Domestic Securities Only) $ 5.00
STATE STREET
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA STATE TAX-FREE TRUST
- -------------------------------------------------------------------
IV. Affirmation Charge
Per Affirmation per Month $ 1.00
V. Global Custody
U.S. Equivalent Market Value 13.75 Basis Points
Euroclear 5.00 Basis Points
VI. Automated Pricing Via NAVigator
Monthly Base Fee:
Funds with International Holdings $375.00
All other Funds $300.00
Monthly Quote Charge:
- Municipal Bonds via Muller Data $10.00
- Municipal Bonds via Kenny Information Systems $16.00
- Government, Corporate and Convertible Bonds
via Merrill Lynch $11.00
- Corporate and Government Bonds via Muller Data $11.00
- Options, Futures and Private Placements $ 6.00
- Foreign Equities and Bonds via Extel Ltd. $ 6.00
- Listed Equities, OTC Equities, and Bonds $ 6.00
- Corporate, Municipal, Convertible and
Government Bonds, Adjustable Rate Preferred
Stocks via IDSI $12.00
VII. Shareholder Check-Writing Service
Per check presented for payment
(excluding postage) $ .65
VIII. Advertised Yield Service
Annual Maintenance Fee:
For each portfolio maintained, monthly charge is based on the
number of holdings as followed:
STATE STREET
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA STATE TAX-FREE TRUST
- -------------------------------------------------------------------
Holding per Portfolio Monthly Charge
--------------------- --------------
0 to 50 $250.00
50 to 100 $300.00
over 100 $350.00
IX. Special Services
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security
shipments and the preparation of special reports will be
subject to negotiation. Fees for yield calculation,
securities lending, and other special items will be
negotiated separately.
X. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket
expenses will be made as of the end of each month. Out-of-
pocket expenses include, but are not limited to the following:
Telephone/Telex
Wire Charges ($5.25 per wire and $5.00 out)
Postage and Insurance (includes check writing postage)
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-Custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
(Bill directly to USAA Transfer Agency Company)
GNMA Transfer - $15 each
PTC Deposit/Withdrawal for same day turnarounds - $50.00
STATE STREET
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA STATE TAX-FREE TRUST
USAA TAX EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA TAX EXEMPT TRUST (name struckout)
USAA TAX FREE TRUSTSTATE STREET BANK & TRUST CO.
BY: /s/ Sherron Kirk BY: /s/ Marguerite Summers
----------------------- --------------------------
Sherron Kirk Marguerite Summers
TITLE: TREASURER TITLE: VICE PRESIDENT
-------------------- -----------------------
DATE: 10-4-94 DATE: 9/28/94
----------------- ------------------
EXHIBIT 9(a)
TRANSFER AGENCY AGREEMENT
AGREEMENT made as of this 23rd day of January, 1992, by and
between USAA TRANSFER AGENCY COMPANY, a corporation organized
under the laws of the State of Delaware and having a place of
business in San Antonio, Texas (the "USAA Transfer Agency"), and
USAA TAX EXEMPT FUND, INC., a corporation organized under the
laws of the State of Maryland, and having a place of business in
San Antonio, Texas (the "Company"). The Company presently
consists of ten separate classes designated as the High Yield
Fund, Intermediate-Term Fund, Short-Term Fund, Tax Exempt Money
Market Fund, California Bond Fund, California Money Market Fund,
New York Bond Fund, New Money Market Fund, Virginia Bond Fund and
Virginia Money Market Fund ("Existing Funds") (such classes
together with all other classes subsequently established by the
Company with respect to which the Company desires to retain the
USAA Transfer Agency to render transfer agency services hereunder
and with respect to which the USAA Transfer Agency is willing to
do, being herein collectively referred to as the "Funds").
WITNESS THAT: USAA Transfer Agency is hereby appointed
Transfer Agent for the shares of capital stock, $.01 par value
(the "Shares") of the Company and Dividend Disbursing Agent for
the Company and shall act as Plan Agent for shareholders of the
Company under the following terms and conditions:
1. DOCUMENTS.
In connection with the appointment of USAA Transfer Agency as
Transfer Agent, the Company shall file with USAA Transfer Agency
the following documents:
(a) Certified copies of the Articles of Incorporation of the
Company and all amendments thereto;
(b) A certified copy of the Bylaws of the Company as amended to date;
(c) A copy of the resolution of the Board of Directors of the
Company authorizing this Agreement;
(d) Specimens of all forms of outstanding and new share
certificates in the forms approved by the Board of Directors
of the Company with a certificate of the Secretary of the
Company as to such approval.
(e) All account application forms and other documents relating
to record holders' accounts;
(f) A certified list of record holders of the Company with the
name, address and tax identification number of each record
holder, the number of Shares held by each record holder,
certificate numbers and denominations (if any have been
issued), the plan account number of each record holder having
a plan, lists of any accounts against which stops have been
placed, together with the reasons for said stops, and the
number of Shares redeemed by the Company.
(g) An opinion of counsel for the Company with respect to the
validity of the Shares, the number of Shares authorized, the
status of redeemed Shares and the number of Shares with
respect to which a Registration Statement has been filed and
is in effect.
2. FURTHER DOCUMENTATION.
The Company shall also furnish from time to time the following documents:
(a) Each resolution of the Board of Directors of the Company
authorizing the original issue of its Shares;
(b) Each Registration Statement filed with the Securities and Exchange
Commission and amendments thereof and orders relating thereto in effect
with respect to the sale of the Shares of the Company;
(c) A certified copy of each amendment to the Articles of
Incorporation and the Bylaws of the Company;
(d) Certified copies of each vote of the Board of Directors
authorizing officers to give instructions to the Transfer Agent;
(e) Specimens of all new share certificates accompanied by
Board of Directors' resolutions approving such forms;
(f) Such other certificates, documents or opinions which USAA
Transfer Agency may, in its discretion, deem necessary or
appropriate in the proper performance of its duties.
3. AUTHORIZED SHARES.
The Company certifies to USAA Transfer Agency that as of the
close of business on the date of the Agreement, it has authorized
5,000,000,000 Shares of its capital stock, $.01 par value.
4. TRANSFER AGENT TO REGISTER SHARES.
USAA Transfer Agency shall record issues of Shares of the
Company. Except as specifically agreed in writing between USAA
Transfer Agency and the Company, USAA Transfer Agency shall have
no obligation, when crediting Shares or countersigning and
issuing certificates for Shares, to take cognizance of any other
laws relating to the issue and sale of such Shares.
5. TRANSFER AGENT TO RECORD TRANSFERS.
USAA Transfer Agency, upon receipt of proper request for
transfer and surrender to it of certificates, if any, in proper
form for transfer is authorized to transfer on the records of the
Company maintained by it from time to time, Shares of the
Company, and upon cancellation of surrendered certificates, if
any, to credit a like amount of Shares to the transferee and to
countersign, issue and deliver new certificates if requested.
6. SHARE CERTIFICATES.
The Company shall supply USAA Transfer Agency with a
sufficient supply of blank share certificates and from time to
time shall renew such supply upon request of USAA Transfer
Agency. Such blank share certificates shall be properly signed,
manually or by facsimile, if authorized by the Company, and shall
bear the Company seal or facsimile thereof; and notwithstanding
the death, resignation or removal of any officers of the Company
authorized to sign share certificates, USAA Transfer Agency may
continue to countersign certificates which bear the manual or facsimile
signature of such officer until otherwise directed by the Company.
7. RECEIPT OF FUNDS.
Upon receipt at the office designated by USAA Transfer Agency
of any check or other order drawn or endorsed to it as Transfer
Agent for the Company or as Plan Agent for any shareholder of the
Company or otherwise identified as being for the account of the
Company and in the case of a new account accompanied by a new
account application or sufficient information to establish an
account, USAA Transfer Agency shall stamp the check or other
order with the date of receipt, shall forthwith process the same
for collection, and compute the number of Shares to be purchased
according to the price of Shares in effect for such purchases as
set forth in the Company's then current Prospectus. USAA
Transfer Agency shall credit the Share account of the investor
with the number of Shares so purchased and shall promptly mail
the investor a notice of such credit and mail a copy to the Distributor.
All such actions are subject to any instructions which the
Company may give to USAA Transfer Agency with respect to
acceptance of orders for Shares so received by it. USAA Transfer
Agency shall deposit the net amount due the Company in the bank
account of the Company maintained by the Company's custodian bank
(the "Custodian") and shall, on a daily basis, notify the
Custodian of the total amount deposited.
8. ISSUE OF SHARE CERTIFICATES.
If an investor requests a share certificate, USAA Transfer
Agency as Transfer Agent, shall countersign and mail by first
class mail, a share certificate to the investor at his address as
set forth on the transfer books of the Company, subject to any
instructions for delivery of certificates which the Company may
give to USAA Transfer Agency with respect to certificates
representing newly purchased Shares, and subject to the
limitation that no certificates representing newly purchased
Shares shall be mailed until the cash purchase price of such
Shares has been deposited in the bank account of the Company
maintained by the Custodian.
9. RETURNED CHECKS.
In the event that any check or other order for the payment of
money is returned unpaid for any reason, USAA Transfer Agency shall:
(a) Give prompt notification to the Company of the non-payment
of said check.
(b) In the absence of other instructions from the Company take
such steps as may be necessary to cancel promptly any Shares
purchased on the basis of such returned check and shall
cancel accumulated dividends for such account, which are due
to that specific purchase.
10. NOTICE OF DISTRIBUTION.
The Company shall promptly inform USAA Transfer Agency of the
declaration of any dividend or distribution on account of its Shares.
11. DISTRIBUTIONS.
USAA Transfer Agency shall act as Dividend Disbursing Agent
for the Company, and, as such in accordance with the provisions
of the Company's Articles of Incorporation and then current
Prospectus, shall prepare and mail or credit income and capital
gain payments to investors. As the Dividend Disbursing Agent it
shall, on or before the payment date of any such dividend or
distribution, notify the Custodian of the estimated amount
required to pay any portion of said dividend or distribution
which is payable in cash, and the Company agrees that on or
before the payment date of such distribution, it shall instruct
the Custodian to make available to the Dividend Disbursing Agent
sufficient funds for the cash amount to be paid out. If an
investor is entitled to receive additional Shares by virtue of
any such distribution or dividend, appropriate credits will be
made to his account and/or certificates delivered where required.
12. REDEMPTIONS.
USAA Transfer Agency shall receive and shall stamp with the
date of receipt, all certificates delivered to it for redemption
or repurchase as well as all requests for redemptions or
repurchase of Shares and shall process said certificates and
redemption and repurchase requests as follows:
(a) If such certificates, redemption or repurchase requests
comply with the standards for redemption or repurchase as
approved by the Company, USAA Transfer Agency shall notify
the Company of the total number of Shares presented and covered
by such requests received by USAA Transfer Agency on said date;
(b) On or prior to the seventh calendar day succeeding any
such receipt of certificates or request for redemption or
repurchase, USAA Transfer Agency shall from cash available in
the bank account maintained by the Custodian, pay the
applicable redemption or repurchase price, as the case may
be, to the investor as set forth in the Articles of
Incorporation and then current Prospectus of the Company;
(c) If any such certificate or request for redemption or
repurchase does not comply with the standards for redemption
approved by the Company, USAA Transfer Agency shall promptly
notify the investor of such fact, together with the reason
therefor, and shall effect such redemption or repurchase at
the price applicable to the date and time of receipt of
documents complying with said standards, or in the case of a
repurchase, at such other time as the Distributor, as agent
for the Company, shall so direct.
13. WITHDRAWAL PLANS.
USAA Transfer Agency shall process withdrawal orders in
accordance with the terms of any withdrawal plans instituted by
the Company and duly executed by investors. Payments upon such
withdrawal orders and redemptions of Shares held in withdrawal
plan accounts for the payment of the amounts required shall be
made at such times as the Company may determine with the approval
of USAA Transfer Agency.
14. TAX RETURNS.
USAA Transfer Agency shall prepare, file with the Internal
Revenue Service and with the appropriate State Agencies, and, if
required, mail to investors such returns for reporting dividends
and distributions paid as are required to be so filed and mailed,
and shall withhold such sums as are required to be withheld under
applicable Federal and State income tax laws, rules and regulations.
15. BOOKS AND RECORDS.
USAA Transfer Agency shall maintain records showing for each
investor's account the following:
(a) Names, addresses and tax identifying numbers;
(b) Number of Shares held;
(c) Historical information regarding the account of each shareholder,
including dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholdings in the case of a
foreign account;
(f) Any dividend reinvestment order, plan application, dividend address
and correspondence relating to the current maintenance of the account;
(g) Certificate numbers and denominations for any shareholder
holding certificates;
(h) Any information required in order for USAA Transfer Agency to perform
the calculations contemplated or required by this Agreement.
Any such records required to be maintained by Rule 31a-1 of
the General Rules and Regulations under the Investment Company
Act of 1940, as amended (the "1940 Act") shall be preserved for
the periods prescribed in Rule 31a-2 of said rules as
specifically noted below. Such record retention shall be at the
expense of the Company and records may be inspected by the
Company at reasonable times. USAA Transfer Agency, may at its
option at any time, and shall forthwith upon the Company's
demand, turn over to the Company and cease to retain in USAA
Transfer Agency files, records and documents created and
maintained by USAA Transfer Agency pursuant to this Agreement,
which are no longer needed by USAA Transfer Agency in performance
of its services or for its protection. If not so turned over to
the Company, such records and documents will be retained by USAA
Transfer Agency for six years from the year of creation, during
the first two of which such documents will be in readily
accessible form. At the end of the six year period, such records
and documents will either be turned over to the Company, or
destroyed in accordance with the Company's authorization.
16. INFORMATION TO BE FURNISHED TO COMPANY.
USAA Transfer Agency shall furnish to the Company
periodically as agreed upon the following information:
(a) A copy of the daily transaction register;
(b) Dividend and reinvestment amounts;
(c) The total number of Shares distributed in each state for
"blue sky" purposes as determined according to instructions
delivered from time to time by the Company to USAA Transfer Agency.
17. OTHER INFORMATION TO THE COMPANY.
USAA Transfer Agency shall furnish to the Company such other
information, including shareholder lists, and statistical
information as may be agreed upon from time to time.
18. CORRESPONDENCE.
USAA Transfer Agency shall answer that correspondence from
shareholders relating to their Share accounts and such other
correspondence as may from time to time be mutually agreed upon.
19. PROXIES.
USAA Transfer Agency shall mail such proxy cards and other
material supplied to it by the Company in connection with
shareholder meetings of the Company and shall receive, examine
and tabulate returned proxies and certify the vote of the Company.
20. FEES AND CHARGES.
USAA Transfer Agency shall receive such compensation from the
Company for its services as the Company's Transfer and Dividend
Disbursing Agent, as Plan Agent for shareholders of the Company,
and for its other duties pursuant hereto as may be agreed from
time to time, and shall be reimbursed for the cost of any and all
forms, including blank checks and proxies, used by it in
communicating with shareholders of the Company, or especially
prepared for use in connection with its actions hereunder, as
well as the cost of postage, telephone (including facsimile
transmission) and telegraph used in communicating with
shareholders of the Company, it being agreed that USAA Transfer
Agency, prior to ordering any forms in such supply as it
estimates will be adequate for more than two years' use, shall
obtain the written consent of the Company. All forms for which
USAA Transfer Agency has received reimbursement from the Company
shall be and remain the property of the Company until used. The
cost of microfilm and microfiche for record retention shall be
reimbursed by the Company. USAA Transfer Agency shall also
receive from the Company reimbursement for all counsel fees
incurred by USAA Transfer Agency in connection with the
performance of its duties under this Agreement, unless such fees
are incurred on a matter involving USAA Transfer Agency's willful
misconduct or gross negligence.
21. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS.
The Company assumes full responsibility for the preparation
contents and distribution of each Prospectus of the Company for
complying with all applicable requirements of the Securities Act
of 1933, as amended, the Investment Company Act of 1940, as
amended, and any laws, rules and regulations of governmental
authorities having jurisdiction.
22. REFERENCES TO USAA TRANSFER AGENCY COMPANY.
The Company shall not circulate any printed matter which
contains any reference to USAA Transfer Agency without the prior
written approval of USAA Transfer Agency, excepting solely such
printed matter as merely identifies USAA Transfer Agency as
Transfer Agent and Dividend Disbursing Agent for the Company and
Plan Agent for the shareholders the Company. The Company shall
submit printed matter requiring approval to USAA Transfer Agency
in draft form, allowing sufficient time for review by USAA
Transfer Agency and its counsel prior to any deadline for printing.
23. FORCE MAJEURE.
USAA Transfer Agency shall not be liable for loss of data,
occurring by reason of circumstance beyond its control, including
but not limited to acts of civil or military authority, national
emergencies, fire, flood or catastrophe, acts of God,
insurrection, war, riots, or failure of transportation,
communication or power supply. USAA Transfer Agency shall use
its best efforts to minimize the likelihood of all damage, loss
of data, delays and errors resulting from uncontrollable events,
and if such damage, loss of data, delays or errors occur, USAA
Transfer Agency shall use its best efforts to mitigate the
effects of such occurrence.
24. STANDARD OF CARE.
USAA Transfer Agency shall at all times act in good faith and
agrees to use its best efforts within reasonable limits to insure
the accuracy of all services performed under this Agreement, but
assumes no responsibility and shall not be liable for loss or
damage due to errors unless said error is caused by its gross
negligence, bad faith or willful misconduct or that of its employees.
25. INDEMNIFICATION.
The Company shall indemnify and hold USAA Transfer Agency
harmless from all loss, cost, damage and expense, including
reasonable expenses for counsel, incurred by it resulting from
any claim, demand, action or suit in connection with its
acceptance of this Agreement, any action or omission by it in the
performance of its duties hereunder, the functions of Transfer
and Dividend Disbursing Agent and Plan Agent, or as a result of
acting upon any instruction believed by it to have been executed
by a duly authorized officer of the Company, or upon any
information, data, records or documents provided USAA Transfer
Agency or its agents by computer tape, telex, CRT data entry or
other similar means authorized by the Company, provided that this
indemnification shall not apply to actions or omissions of USAA
Transfer Agency in cases of its own willful misconduct or gross
negligence, and further provided, that prior to confessing any
claim against it which may be the subject of this
indemnification, USAA Transfer Agency shall give the Company
reasonable opportunity to defend against said claim in its own
name or in the name of USAA Transfer Agency.
26. FURTHER ACTIONS.
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
27. AMENDMENT AND TERMINATION.
This Agreement shall be executed and become effective with respect to
all Existing Funds on January 23, 1992, and, with respect to any
additional Fund, on the date of receipt by the Company of notice from
the USAA Transfer Agency in accordance with this paragraph that the
USAA Transfer Agency is willing to serve as Transfer Agent with
respect to such Fund. Unless terminated as herein provided, this
Agreement shall remain in full force and effect through June 30,
1992, and, with respect to each additional Fund, through the
first June 30 occurring more than twelve months after the date on
which such Fund becomes a Fund hereunder, and shall continue in
full force and effect for periods of one year thereafter with
respect to each Fund so long as such continuance with respect to
any such Fund is approved at least annually (a) by either the
Directors of the Company or by vote of a majority of the
outstanding voting Shares (as defined in the 1940 Act) of such
Fund, and (b) in either event by the vote of a majority of the
Directors of the Company who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of
voting on such approval. This Agreement may be modified or
amended from time to time by mutual agreement between the parties
hereto. The Agreement may be terminated at any time after the
expiration of such one year by sixty (60) days' written notice
given by one party to the other. Upon termination hereof, the
Company shall pay to USAA Transfer Agency such compensation as
may be due as of the date of such termination, and shall likewise
reimburse USAA Transfer Agency for its costs, expenses and
disbursements. This Agreement supersedes any prior agreement
relating to the subject matter hereof between the parties.
EXECUTED under seal as of the day and year first above written.
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
By: /s/ Michael J. C. Roth BY: /s/ Joseph H. L. Jimenez
------------------------- ---------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
ATTEST: ATTEST:
/s/ Michael D. Wagner /s/ Michael D. Wagner
------------------------ ---------------------------
Secretary Secretary
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
High Yield Fund
General - Fees are based on an annual per shareholder account charge for
account maintenance plus out-of pocket expenses. There is a minimum charge
of $2,000 per month applicable to the entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Funds - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
High Yield Fund
By: /s/ Michael J. C. Roth By: /s/ Joseph H. L. Jimenez
------------------------- -------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
Intermediate-Term Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Funds - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
Intermediate-Term Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
-------------------------- ----------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
Short-Term Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Funds - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
Short-Term Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
------------------------- ----------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
Tax Exempt Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Tax Exempt Money Market Fund - charge per account $22.64
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
Tax Exempt Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
------------------------- ----------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
California Bond Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
California Bond Fund - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
California Bond Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
------------------------ ------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
California Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
California Money Market Fund - charge per account $22.64
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
California Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
---------------------- ------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
New York Bond Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
New York Bond Fund - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
New York Bond Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
---------------------- -----------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
New York Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
New York Money Market Fund - charge per account $22.64
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
New York Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
--------------------- ------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
Virginia Bond Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Virginia Bond Fund - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
Virginia Bond Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
------------------------- ------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
Virginia Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Virginia Money Market Fund - charge per account $22.64
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
Virginia Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
----------------------- ----------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: January 23, 1992 Date: January 23, 1992
EXHIBIT 9(b)
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
Tax Exempt Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Tax Exempt Money Market Fund - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
Tax Exempt Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
----------------------- --------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: May 3, 1995 Date: May 3, 1995
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
California Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
California Money Market Fund - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
California Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
------------------------ -----------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: May 3, 1995 Date: May 3, 1995
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
New York Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
New York Money Market Fund - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
New York Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
------------------------ ------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: May 3, 1995 Date: May 3, 1995
USAA Transfer Agency Company
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA TAX EXEMPT FUND, INC.
Virginia Money Market Fund
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses.
There is a minimum charge of $2,000 per month applicable to the
entire fund complex.
Annual Maintenance Charges - The annual maintenance charge
includes the processing of all transactions and correspondence.
The fee is billable on a monthly basis at the rate of 1/12 of the
annual fee. USAA Transfer Agency Company will charge for each
open account from the month the account is opened through January
of the year following the year all funds are redeemed from the account.
Virginia Money Market Fund - charge per account $26.00
USAA TAX EXEMPT FUND, INC. USAA TRANSFER AGENCY COMPANY
Virginia Money Market Fund
By: /s/ Micheal J. C. Roth By: /s/ Joseph H. L. Jimenez
--------------------- ------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: May 3, 1995 Date: May 3, 1995
EXHIBIT 10
GOODWIN, PROCTER & HOAR
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
CABLE: GOODPROCT, BOSTON
July 17, 1995
USAA Tax Exempt Fund, Inc.
USAA Building
San Antonio, TX 78288-0227
Gentlemen:
As counsel to USAA Tax Exempt Fund, Inc. (the "Company"), a
Maryland corporation, we have been asked to render our opinion
with respect to the issuance of shares of capital stock, $.01 par
value per share, classified as shares of the 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
and Virginia Money Market Fund (the "Shares") of the Company
which have been established and designated in Articles of
Incorporation of the Company and Articles Supplementary to the
Articles of Incorporation, as amended (collectively, the
"Articles"), all as more fully described in the prospectuses and
statements of additional information contained in Post-Effective
Amendment No. 23 (the "Amendment") to Registration Statement No.
2-75093 (the "Registration Statement") filed by the Company.
We have examined the Articles of the Company, the By-Laws of
the Company, the minutes of certain meetings of the Board of
Directors of the Company, the prospectuses and statements of
additional information contained in the Amendment and such other
documents, records and certificates as we deemed necessary for
the purposes of this opinion.
Based upon the foregoing, and assuming that not more than
175,000,000 shares of the Long-Term Fund, 170,000,000 shares of
the Intermediate-Term Fund, 135,000,000 shares of the Short-Term
Fund, 2,600,000,000 shares of the Tax Exempt Money Market Fund,
50,000,000 shares of the California Bond Fund, 425,000,000 shares
of the California Money Market Fund, 25,000,000 shares of the New
York Bond Fund, 100,000,000 shares of the New York Money Market
Fund, 35,000,000 shares of the Virginia Bond Fund and 175,000,000
shares of the Virginia Money Market Fund will be issued and
outstanding at any time, we are of the opinion that the Shares
will, when sold in accordance with the terms of the prospectuses
and statements of additional information relating to the Shares in
effect at the time of the sale, be legally issued, fully paid and
non-assessable.
We consent to being named in the prospectuses and statements
of additional information and to a copy of this opinion being
filed as an exhibit to the Amendment.
Very truly yours,
/s/ Goodwin, Procter & Hoar
----------------------------
GOODWIN, PROCTER & HOAR
EXHIBIT 11
The Shareholders and Board of Directors
USAA Tax Exempt Fund, Inc.:
We consent to the use of our reports dated May 3, 1995 on the
financial statements of the California Bond, California Money
Market, New York Bond, New York Money Market, Virginia Bond,
Virginia Money Market, Long-Term, Intermediate-Term, Short-Term,
and Tax Exempt Money Market Funds, separate Funds of USAA Tax
Exempt Fund, Inc. (the Company), as of and for the period ended
March 31, 1995 included in the Company's Annual Reports to
Shareholders for the period ended March 31, 1995 incorporated
herein by reference and to the references to our firm under the
headings "Financial Highlights" and "Independent Auditors" as
part of Post-Effective Amendment No. 23 under the Securities Act
of 1933, as amended, and Amendement No. 25 under the Investment
Company Act of 1940, as amended, to the Company's Registration
Statement on Form N-1A.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
July 19, 1995
EXHIBIT 13(a)
SUBSCRIPTION AND
INVESTMENT LETTER
December 7, 1981
Board of Directors
USAA TAX EXEMPT FUND, INC.
9800 Fredericksburg Road
San Antonio, Texas 78288
Gentlemen:
The undersigned hereby subscribes to 50,000 shares of the
Short-Term Fund of USAA TAX EXEMPT FUND, INC., (the "Fund"), at a
purchase price of $10.00 per share, for an aggregate purchase
price of $500,000, payment of which is enclosed herewith.
The undersigned confirms that the shares of the Fund
purchased by it are being acquired for the account of the
undersigned and not with a view to sale or distribution thereof
except to the extent permitted by the Securities Act of 1933 and
the rules and regulations of the Securities and Exchange
Commission thereunder, as amended from time to time.
Very truly yours,
USAA GENERAL INDEMNITY COMPANY
By: /s/ George H. Ensley
-----------------------
74-1718283
------------------------------
Taxpayer Identification Number
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
Address
SUBSCRIPTION AND
INVESTMENT LETTER
December 7, 1981
Board of Directors
USAA TAX EXEMPT FUND, INC.
9800 Fredericksburg Road
San Antonio, Texas 78288
Gentlemen:
The undersigned hereby subscribes to 150,000 shares of the
Short-Term Fund of USAA TAX EXEMPT FUND, INC., (the "Fund"),
200,000 shares of the Intermediate-Term Fund of the Fund and
200,000 shares of the High-Yield Fund of the Fund, each at a
purchase price of $10.00 per share, for an aggregate purchase
price of $5,500,000, payment of which is enclosed herewith.
The undersigned confirms that the shares of the Fund
purchased by it are being acquired for the account of the
undersigned and not with a view to sale or distribution thereof
except to the extent permitted by the Securities Act of 1933 and
the rules and regulations of the Securities and Exchange
Commission thereunder, as amended from time to time.
Very truly yours,
USAA CASUALTY INSURANCE COMPANY
By: /s/George H. Ensley
----------------------
74-1613656
------------------------------
Taxpayer Identification Number
9800 Fredericksburg Road
San Antonio, Texas 78288
-------------------------------
Address
EXHIBIT 13(b)
SUBSCRIPTION
June 23, 1989
TO: Board of Directors of USAA
Tax Exempt Fund, Inc.
USAA Building
San Antonio, TX 78288
Dear Sir:
The undersigned hereby subscribes to 100 shares of the
California Money Market Fund series, one cent par value, of USAA
Tax Exempt Fund, Inc. at a price of $1.00 per share and agrees to
pay therefor upon demand, cash in the amount of $100.
The undersigned hereby further subscribes to 10 shares of
the California Bond Fund series one cent par value, of USAA Tax
Exempt Fund, Inc. at a price of $10.00 per share and agrees to
pay therefor upon demand, cash in the amount of $100.
Very truly yours,
USAA INVESTMENT MANAGEMENT COMPANY
By: /s/ Michael J. C. Roth
----------------------------
Executive Vice President
June 26, 1989
USAA Tax Exempt Fund, Inc.
USAA Building
San Antonio, TX 78288
Gentlemen:
In connection with your sale to us today of ten (10) shares
of capital stock representing interests in the California Bond
Fund, and one hundred (100) shares of capital stock representing
interests in the California Money Market Fund (collectively, the
"Shares"), we understand that: (i) the Shares have not been
registered under the Securities Act of 1933, as amended (the
"1933 Act"); (ii) your sale of the Shares to us is made in
reliance on such sale being exempt under Section 4(2) of the 1933
Act as not involving any public offering; and (iii) in part, your
reliance on such exemption is predicated on our representation,
which we hereby confirm, that we are acquiring the Shares for
investment for our own account as the sole beneficial owner
thereof, and not with a view to or in connection with any resale
or distribution of the shares or of any interest therein. We
hereby agree that we will not sell, assign or transfer the Shares
or any interest therein, except upon repurchase or redemption by
the Corporation, unless and until the Shares have been registered
under the 1933 Act or you have received an opinion of your
counsel indicating to your satisfaction that said sale,
assignment or transfer will not violate the provisions of the
1933 Act or any rules or regulations promulgated thereunder.
Very truly yours,
USAA INVESTMENT MANAGEMENT COMPANY
By: /s/ Michael J. C. Roth
---------------------------
Executive Vice President
EXHIBIT 13(c)
September 5, 1990
USAA Tax Exempt Fund, Inc.
USAA Building
San Antonio, TX 78288
Gentlemen:
In connection with your sale to us today of ten (10) shares
of capital stock representing interests in the Virginia Bond
Fund, ten (10) shares of capital stock representing interests in
the New York Bond Fund, one hundred (100) shares of capital stock
representing interests in the Virginia Money Market Fund and one
hundred (100) shares of capital stock representing interests in
the New York Money Market Fund (collectively, the "Shares"), we
understand that: (i) the Shares have not been registered under
the Securities Act of 1933, as amended (the "1933 Act"); (ii)
your sale of the Shares to us is made in reliance on such sale
being exempt under Section 4(2) of the 1933 Act as not involving
any public offering; and (iii) in part, your reliance on such
exemption is predicated on our representation, which we hereby
confirm, that we are acquiring the Shares for investment for our
own account as the sole beneficial owner thereof, and not with a
view to or in connection with any resale or distribution of the
shares or of any interest therein. We hereby agree that we will
not sell, assign or transfer the Shares or any interest therein,
except upon repurchase or redemption by the Corporation, unless
and until the Shares have been registered under the 1933 Act or
you have received an opinion of your counsel indicating to your
satisfaction that said sale, assignment or transfer will not
violate the provisions of the 1933 Act or any rules or
regulations promulgated thereunder.
Very truly yours,
USAA INVESTMENT MANAGEMENT COMPANY
By: /s/ Michael J. C. Roth
-----------------------------
President
SUBSCRIPTION
September 5, 1990
TO: Board of Directors of USAA
Tax Exempt Fund, Inc.
USAA Building
San Antonio, TX 78288
Dear Sir:
The undersigned hereby subscribes to 100 shares each of the
Virginia Money Market Fund series and the New York Money Market
Fund series, one cent par value, of USAA Tax Exempt Fund, Inc. at
a price of $1.00 per share and agrees to pay therefor upon
demand, cash in the amount of $100 to each of the named Funds.
The undersigned hereby further subscribes to 10 shares of
each of the Virginia Bond Fund series and the New York Bond Fund
series, one cent par value, of USAA Tax Exempt Fund, Inc. at a
price of $10.00 per share and agrees to pay therefor upon demand,
cash in the amount of $100 to each of these named Funds.
Very truly yours,
USAA INVESTMENT MANAGEMENT
COMPANY
By: /s/ Michael J. C. Roth
---------------------------
President
EXHIBIT 16
Exhibit 16 - Schedule for Computation of Performance Quotation
TOTAL RETURN CALCULATION
Formula used for the calculation of average annual total return:
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 redeeming value of a hypothetical $1,000 initial
investment. The ERV assumes reinvestment of all dividends
and distributions at the net asset value on reinvestment date.
High Yield Fund - For the Period Ended 3/31/88
1 Year total Return: 1000(1+T) to the 1st power = $979.89
T = (2.01%)
5 Year Total Return: 1000(1+T) to the 5th power = $1627.89
T = 10.24%
73 Months total Return: 1000(1+T) to the 6.08th power= $2138.86
T = 13.31%
Intermediate-Term Fund - For the Period Ended 3/31/88
1 Year Total Return: 1000(1+T) to the 1st power = $1023.41
T = 2.34%
5 Year Total Return: 1000(1+T) to the 5th power = $1546.69
T = 9.11%
73 Months Total Return: 1000(1+T) to the 6.08th power = $1936.23
T = 11.47%
Short-Term Fund - For the Period Ended 3/31/88
1 Year Total Return: 1000(1+T) to the 1st power = $1035.70
T = 3.57%
5 Year Total Return: 1000(1+T) to the 5th power = $1392.81
T = 6.85%
73 Months Total Return: 1000(1+T) to the 6.08th power = $1551.07
T = 7.48%
YIELD CALCULATION
Formula used for the calculation of 30-day yield quotation:
YIELD = 2[((((a-b) divided by (cd)) + 1) to the 6th power) - 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
30-Day Yield Calculation for Period Ended 3/31/88
High Yield Fund: Yield = 2 times [((((5,916,863 - 327,603) divided by
(66,140,696 x 12.44)) +1) to the 6th power) -1]
Yield = 8.291%
Intermediate-Term Fund: Yield = 2 times [((((2,149,103 - 160,016) divided by
(29,358,751 x 11.78)) +1) to the 6th power) -1]
Yield = 7.002%
Short-Term Fund: Yield = 2 times [((((1,011,740 - 109,212) divided by
(22,978,686 x 10.42)) +1) to the 6th power) -1]
Yield = 4.566%
EXHIBIT 19(a)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of the
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this amendment to its
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in this City of San
Antonio and State of Texas on the 25th day of June, 1993.
USAA TAX EXEMPT FUND, INC.
/s/ Michael J.C. Roth
-----------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act of 1933,
this amendment to its Registration Statement has been signed
below by the following persons in the capacities and on the date
indicated.
Know all men by these presents that each person whose
signature appears below constitutes and appoints Michael J.C.
Roth, John W. Saunders, Jr. and Michael D. Wagner, and each of
them, as his true and lawful attorney-in-fact and agent, with
full power of substitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments
to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his
substitute, may lawfully do or cause to be done by virtue hereof.
(Signature) (Title) (Date)
Chairman of the Board of
Robert T. Herres Directors
/s/ Michael J.C. Roth Vice Chairman of the Board of June 25, 1993
Michael J.C. Roth Directors and President
(Principal Executive Officer)
/s/ Sherron A. Kirk Treasurer (Principal Financial June 25, 1993
Sherron A. Kirk and Accounting Officer)
/s/ John W. Saunders, Jr. Director June 25, 1993
John W. Saunders, Jr.
/s/ C. Dale Briscoe Director June 25, 1993
C. Dale Briscoe
/s/ George E. Brown Director June 25, 1993
George E. Brown
/s/ Howard L. Freeman, Jr. Director June 25, 1993
Howard L. Freeman, Jr.
/s/ Richard A. Zucker Director June 25, 1993
Richard A. Zucker
EXHIBIT 19(b)
POWER OF ATTORNEY
Know all men by these presents that the undersigned
Director of USAA TAX EXEMPT FUND, INC., a Maryland Corporation
(the "Company"), constitutes and appoints Michael J.C. Roth, John
W. Saunders, Jr. and Michael D. Wagner, and each of them, as his
true and lawful attorney-in-fact and agent, with full power or
substitution, for him and in his name, place and stead, in any
and all capacities to sign registration statements on any form or
forms filed under the Securities Act of 1933 and the Investment
Company Act of 1940 and any and all amendments thereto, with all
exhibits, instruments, and other documents necessary or
appropriate in connection therewith and to file them with the
Securities and Exchange Commission or any other regulatory
authority as may be necessary or desirable, hereby ratifying and
confirming all that said attorney-in-fact and agent or his
substitute, may lawfully do or cause to be done by virtue hereof.
/s/ Hansford T. Johnson July 12, 1995
- -------------------------- ---------------------
Hansford T. Johnson, Director Date
POWER OF ATTORNEY
Know all men by these presents that the undersigned
Director of USAA TAX EXEMPT FUND, INC., a Maryland Corporation
(the "Company"), constitutes and appoints Michael J.C. Roth, John
W. Saunders, Jr. and Michael D. Wagner, and each of them, as her
true and lawful attorney-in-fact and agent, with full power or
substitution, for her and in her name, place and stead, in any
and all capacities to sign registration statements on any form or
forms filed under the Securities Act of 1933 and the Investment
Company Act of 1940 and any and all amendments thereto, with all
exhibits, instruments, and other documents necessary or
appropriate in connection therewith and to file them with the
Securities and Exchange Commission or any other regulatory
authority as may be necessary or desirable, hereby ratifying and
confirming all that said attorney-in-fact and agent or her
substitute, may lawfully do or cause to be done by virtue hereof.
/s/ Barbara B. Dreeben July 12, 1995
- -------------------------- ---------------------
Barbara B. Dreeben, Director Date
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000356555
<NAME> USAA TAX EXEMPT FUND, INC.
<SERIES>
<NUMBER> 1
<NAME> LONG-TERM FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 1,695,136,462
<INVESTMENTS-AT-VALUE> 1,757,194,624
<RECEIVABLES> 46,489,334
<ASSETS-OTHER> 316,728
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,804,000,686
<PAYABLE-FOR-SECURITIES> 25,013,723
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,344,084
<TOTAL-LIABILITIES> 29,357,807
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