As filed with the Securities and Exchange Commission on May 22, 1996.
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. 24
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 26
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)
____ on (date) pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(1)
_X__ on August 1, 1996 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,
1996 on May 20, 1996.
Exhibit Index on Pages 230-231
Page 1 of 274
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, 1996 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, in person, or in certain instances, by telephone. Page 15.
HOW DO YOU SELL?
You may redeem Fund shares 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, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information, a STATEMENT OF ADDITIONAL
INFORMATION (SAI) dated August 1, 1996, 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 (SEC) 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
Description of Shares 23
Management of the Company 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)
- -----------------------------------------------------------------------------
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.
** 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)
- ------------------
* Certain book-to-tax timing differences resulted in $.01 of excess
distributions that does not constitute a return of capital.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
FISCAL END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
YEAR OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
ENDED ($) (%)** ($000) (%) (%) (%)
- ------ --------- ------- --------- ---------- ---------- ---------
Long-Term Fund
March 31,
1986 13.52 24.28 648,076 .50 8.94 122.18
1987 13.96 12.13 1,039,057 .49 7.64 82.51
1988 12.44 (2.01) 823,375 .51 7.75 169.38
1989 12.66 9.72 975,285 .45 7.58 124.07
1990 13.01 10.44 1,172,842 .43 7.23 91.52
1991 13.13 8.46 1,355,321 .40 7.22 91.41
1992 13.54 10.39 1,638,848 .40 6.83 76.28
1993 14.21 12.46 1,882,882 .39 6.35 88.27
1994 13.20 2.36 1,831,693 .38 5.69 109.28
1995 12.96 5.07 1,774,643 .38 6.23 163.38
Intermediate-Term Fund
March 31,
1986 12.27 19.08 201,302 .57 8.36 79.61
1987 12.38 8.32 402,842 .60 7.07 90.86
1988 11.78 2.34 345,997 .56 7.16 138.82
1989 11.64 6.04 401,026 .49 7.10 112.69
1990 11.87 9.29 471,381 .46 6.95 62.28
1991 12.00 8.30 575,770 .43 6.91 66.26
1992 12.29 9.24 893,874 .44 6.45 66.57
1993 12.90 11.29 1,374,159 .42 5.85 74.02
1994 12.48 3.06 1,559,183 .40 5.30 69.45
1995 12.50 6.16 1,529,750 .40 5.63 72.00
FINANCIAL HIGHLIGHTS cont.
NET ASSET NET REALIZED DISTRIBUTIONS
VALUE AT NET AND FROM NET DISTRIBUTIONS
FISCAL BEGINNING INVESTMENT UNREALIZED INVESTMENT OF REALIZED
YEAR OF PERIOD INCOME GAIN (LOSS) INCOME CAPITAL GAINS
ENDED ($) ($) ($) ($) ($)
- ----- --------- ---------- ----------- ------------- -------------
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
FISCAL END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
YEAR OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
ENDED ($) (%)** ($000) (%) (%) (%)
- ------ --------- ------- --------- ---------- ---------- ---------
Short-Term Fund
March 31,
1986 10.66 10.10 139,345 .65 6.85 100.61
1987 10.70 6.33 287,271 .57 5.78 142.11
1988 10.42 3.57 244,703 .56 5.81 147.69
1989 10.27 4.78 254,453 .51 6.14 146.28
1990 10.39 7.91 279,028 .52 6.47 87.23
1991 10.35 6.27 423,914 .50 6.48 96.10
1992 10.48 7.09 680,075 .48 5.59 107.35
1993 10.63 6.37 862,182 .43 4.75 138.20
1994 10.48 2.87 995,624 .43 4.25 101.67
1995 10.47 4.51 801,157 .42 4.50 102.93
Tax-Exempt Money Market Fund
March 31,
1986 1.00 5.43 160,506 .59 5.44 -
1987 1.00 4.49 327,092 .47 4.34 -
1988 1.00 4.69 619,085 .43 4.63 -
1989 1.00 5.57 802,233 .43 5.48 -
1990 1.00 6.24 990,050 .42 6.06 -
1991 1.00 5.94 1,508,862 .40 5.76 -
1992 1.00 4.30 1,483,554 .39 4.21 -
1993 1.00 2.89 1,501,098 .40 2.85 -
1994 1.00 2.31 1,569,760 .40 2.29 -
1995 1.00 2.98 1,456,747 .39 2.93 -
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
S&P 500 Index Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy 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 asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. 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 an
asset strategy 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. Unless otherwise directed by the
Board of Directors, if downgrades result in more than 5% of a Fund's net
assets being invested in securities that are less than investment grade
quality, the Manager will take immediate action to reduce the Fund's holdings
in such securities to 5% or less of the Fund's net assets. 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 SEC 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.
The Fund will also comply with the diversification requirements which
are generally applicable to money market funds under regulations of the SEC.
Generally, these requirements limit a money market fund's investments in the
securities of any issuer to no more than 5% of the fund's assets, excluding
securities issued or guaranteed by the U.S. Government or its agencies and
instrumentalities.
OTHER INVESTMENT INFORMATION
The investment objectives of the Funds may not be changed without shareholder
approval. In view of the risks inherent in all investments in securities,
there is no assurance that these objectives will be achieved. The investment
policies and techniques used to pursue the Funds' objectives may be changed
without shareholder approval, except as otherwise noted. Further information
regarding the Funds' investment policies and restrictions is provided in the
SAI.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest; revenue bonds, which are payable from the revenue
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source,
but not from the general taxing power; lease obligations backed by the
municipality's covenant to budget for the payments due under the lease
obligation; and certain types of industrial development bonds issued by or on
behalf of public authorities to obtain funds for privately-operated
facilities, provided that the interest paid on such securities qualifies as
exempt from federal income taxes. The value of the securities in which the
Company will invest generally fluctuates inversely with changes in prevailing
interest rates. Changes in the creditworthiness of issuers and changes in
other market factors such as the relative supply of and demand for tax-exempt
bonds also create value fluctuations.
Each Fund may on a temporary basis due to market or other conditions
invest up to 100% of its assets in short-term securities whether or not
exempt from federal income tax. Such taxable securities may consist of
obligations of the United States Government, its agencies or instrumentalities,
and repurchase agreements secured by such instruments; certificates of
deposit of domestic banks having capital, surplus and undivided profits in
excess of $100 million; banker's acceptances of similar banks; commercial
paper; and other corporate debt obligations.
INVESTMENT TECHNIQUES
Variable Rate Securities - Each Fund may invest in tax-exempt securities that
bear interest at rates which are adjusted periodically to market rates.
These interest rate adjustments can both raise and lower the income generated
by such securities. These changes will have the same effect on the income
earned by a Fund depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline
and decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest
rate fluctuations on the value of these securities. The market value of tax
- -exempt variable rate securities usually tends toward par (100% of face value)
at interest rate adjustment time.
In the case of the Tax Exempt Money Market Fund only, any variable rate
instrument with a demand feature will be deemed to have a maturity equal to
either the date on which the underlying principal amount may be recovered
through demand or the next rate adjustment date consistent with applicable
regulatory requirements.
Put Bonds - Each Fund may invest in tax- exempt securities (including
securities with variable interest rates) which may be redeemed or sold back
(put) to the issuer of the security or a third party at face value prior to
stated maturity (Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated maturity is longer. For
the Long-Term, Intermediate-Term, and Short-Term Funds, maturity for put
bonds is deemed to be the date on which the put becomes exercisable.
Generally, maturity for put bonds for the Tax Exempt Money Market Fund is
determined as stated under Variable Rate Securities.
When-Issued Securities - Each Fund may invest in new issues of tax-exempt
securities offered on a when-issued basis; that is, delivery and payment take
place after the date of the commitment to purchase, normally within 45 days.
Both price and interest rate are fixed at the time of commitment. The Funds
do not earn interest on the securities until settlement, and the market value
of the securities may fluctuate between purchase and settlement. Such
securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund
will meet its obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the when-issued securities
themselves.
Municipal Lease Obligations - Each Fund may invest in municipal lease
obligations and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute
a general obligation of the municipality for which the municipality's taxing
power is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by
the leased property, disposition of the property in the event of foreclosure
might prove difficult. In evaluating a potential investment in such a lease
obligation, the Manager will consider: (1) the credit quality of the
obligor, (2) whether the underlying property is essential to a governmental
function, and (3) whether the lease obligation contains covenants prohibiting
the obligor from substituting similar property if the obligor fails to make
appropriations for the lease obligation.
Liquidity - Lease obligations may be determined to be liquid in accordance
with the guidelines established by the Board of Directors for purposes of
complying with the Funds' investment restrictions applicable to investments
in illiquid securities.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease obligation,
(2) the number of dealers willing to purchase or sell the lease obligation
and the number of other potential purchasers, (3) dealer undertakings to make
a market in the lease obligation, (4) the nature of the marketplace trades,
including the time needed to dispose of the lease obligation, the method of
soliciting offers, and the mechanics of transfer, (5) whether the lease
obligation is of a size that will be attractive to institutional investors,
(6) whether the lease obligation contains a non-appropriation clause and the
likelihood that the obligor will fail to make an appropriation therefor, and
(7) such other factors as the Manager may determine to be relevant to such
determination.
OTHER POLICIES
Each Fund is permitted (i) to lend portfolio securities so long as collateral
is obtained for the securities and the aggregate value of all loans does not
exceed 33 1/3% of the Fund's total assets, and (ii) to invest up to 5% of the
Fund's total assets in repurchase agreements.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
a. No Fund may borrow money, except for temporary or emergency purposes in
an amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings).
b. No Fund may pledge or mortgage more than 10% of its total assets.
c. No Fund may invest more than 25% of its total assets in securities of
issuers conducting their principal activities in the same state or
securities issued in connection with the financing of projects with
similar characteristics, such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds.
d. No Fund may, with respect to 75% of its total assets, purchase the
securities of any issuer (except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund would have more than
5% of the value of its total assets invested in the securities of such
issuer.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following
methods. A complete, signed application is required together with a check 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
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 (NYSE) 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. Because of the more
lengthy clearing process and the need to convert foreign currency, 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
MINIMUM INVESTMENTS
- -------------------
Initial Purchase: $3,000 or minimum $100 with a minimum $50 monthly
electronic investment
Additional Purchases: $50 - (Except transfers from brokerage accounts)
HOW TO PURCHASE:
- ----------------
MAIL * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
IN PERSON * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY * Additional purchases on a regular basis can be deducted from
VIA a bank account, paycheck, income-producing investment or from
ELECTRONIC a USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
BANK WIRE * To add to an account, instruct your bank (which may charge a
fee for the service) to wire the specified amount to the Fund
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(s) Account Number___________________
PHONE * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
THROUGH A * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the following methods 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 NYSE 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 SEC.
HOW TO REDEEM:
- --------------
WRITTEN, * Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-292-8177, 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.
PHONE * 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.
THROUGH A * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
METHODS OF PAYMENT:
- ------------------
BANK WIRE * 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. The Transfer Agent 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 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.
AUTOMATICALLY * Systematic (regular) or intermittent (as-needed) redemptions
VIA EFT 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 * A check payable to the registered shareholder(s) will be
REDEMPTION 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. Should you wish to redeem shares within the 15 days following a
telephone address change, you may do so by providing written instructions by
mail or facsimile.
CHECKWRITING * Checks can 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 signed by all registered owners 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 for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. 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 Funds 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 Funds 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 - PHONE.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. Exchanges
out of any Fund 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
Systematic 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) - an automatic investment program for
the purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred from a
checking or savings account.
* Direct Purchase Service - the periodic purchase of shares through
electronic funds transfer from an 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.
* 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.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each account transaction in your
Long-Term Fund, Intermediate-Term Fund and Short-Term Fund except:
i) a reinvested dividend;
ii) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
iii) a redemption you make under the Systematic Withdrawal Plan.
In the Tax Exempt Money Market Fund, you will receive a confirmation for
purchases or redemptions by check and exchanges. If your Money Market Fund
account had activity other than reinvested dividends, such as wire purchases
or redemptions or purchases under the InvesTronic (registered trademark),
Direct Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will reflect
quarter-to-date account activity.
At the end of each quarter you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive a
Fund's financial statements with a summary of its investments and performance
at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests
to reduce mail, the Company intends to consolidate mailings of Annual and
Semiannual Reports to households having multiple accounts with the same
address of record. One copy of each report will be furnished to that
address. You may request additional reports by notifying the Company.
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 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 NYSE, 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. Net capital gain, if
any, 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 NAV per share 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 NAV per share. 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 NAV per share.
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.
Redemptions, including exchanges, are subject to capital gains tax,
based on the difference between the cost of shares held and the price
received upon sale.
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.
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.
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 $______ 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 SEC 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 22 years investment management experience and has worked for IMCO 19
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 nine years investment management experience and has
worked for IMCO six 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 18
years investment management experience and has worked for IMCO 14 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.
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, LLP
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
California Bond and
California Money Market Funds
USAA CALIFORNIA FUNDS
August 1, 1996 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, in person, or in certain instances, by
telephone. Page 13.
HOW DO YOU SELL? You may redeem Fund shares 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.
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, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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.
If you would like more information, a STATEMENT OF ADDITIONAL
INFORMATION (SAI) dated August 1, 1996, 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
(SEC) 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.
** 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 ($) ($) ($) ($) ($)
----- --------- ---------- ------------ ------------- -------------
CALIFORNIA BOND FUND:
March 31,
1990* 10.00 .44 (.25) (.44) -
1991 9.75 .66 .23 (.66) -
1992 9.98 .66 .27 (.66) -
1993 10.25 .62 .62 (.62) (.12)
1994 10.75 .59 (.52) (.59) (.20)
1995 10.03 .59 .07 (.59) -
CALIFORNIA MONEY MARKET FUND:
March 31,
1990* 1.00 .04 - (.04) -
1991 1.00 .05 - (.05) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
FISCAL END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
YEAR OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
ENDED ($) (%)** ($000) (%) (%) (%)
----- --------- ------- ---------- ---------- ---------- ---------
California Bond Fund
March 31,
1990* 9.75 1.97 107,539 .50(a)(b) 6.81(a)(b) 135.61
1991 9.98 9.46 192,344 .50(b) 6.73(b) 72.67
1992 10.25 9.52 305,834 .48 6.44 50.61
1993 10.75 12.56 386,933 .46 5.94 86.53
1994 10.03 .31 382,766 .44 5.40 102.85
1995 10.10 6.89 372,877 .44 5.98 68.57
California Money Market Fund
March 31,
1990* 1.00 3.70 97,782 .50(a)(b) 5.51(a)(b) -
1991 1.00 5.44 197,254 .50(b) 5.26(b) -
1992 1.00 4.03 229,328 .50 3.94 -
1993 1.00 2.66 219,097 .50 2.63 -
1994 1.00 2.22 247,303 .49 2.19 -
1995 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
S&P 500 Index Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy 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 asset strategy
funds, the Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy and Growth Strategy Funds. 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 an
asset strategy 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. Unless otherwise directed
by the Board of Directors, if downgrades result in more than 5% of a Fund's
net assets being invested in securities that are less than investment grade
quality, the Manager will take immediate action to reduce the Fund's
holdings in such securities to 5% or less of the Fund's net assets. 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 NAV per share 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 SEC rules
applicable to money market mutual funds. These securities must also be
determined by the Manager to present minimal credit risk. In general, the
category of eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof, including "prerefunded" and "escrowed to
maturity" tax-exempt securities;
(2) rated in one of the two highest categories for short-term securities
by at least two Nationally Recognized Statistical Rating
Organizations (NRSROs), or by one NRSRO if the security is rated by
only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or
(4) unrated but determined to be of comparable quality by the Manager.
If a security is downgraded after purchase, the Manager will follow
written procedures adopted by the Fund's Board of Directors and a
determination will be made as to whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold the security.
Current NRSROs include Moody's, S&P, Fitch, Duff & Phelps Inc.,
Thompson BankWatch, Inc., and IBCA Inc. For a description of tax-exempt
securities and their ratings, see APPENDIX A to the SAI.
Consistent with regulatory requirements, the Manager will purchase
securities with remaining maturities of 397 days or less and will maintain
a dollar-weighted average portfolio maturity of no more than 90 days. The
Fund will endeavor to maintain a constant net asset value of $1.00 per
share, although there is no assurance that it will be able to do so.
OTHER INVESTMENT INFORMATION
The investment objectives of the Funds may not be changed without
shareholder approval. In view of the risks inherent in all investments in
securities, there is no assurance that these objectives will be achieved.
The investment policies and techniques used to pursue the Funds' objectives
may be changed without shareholder approval, except as otherwise noted.
Further information regarding the Funds' investment policies and
restrictions is provided in the SAI.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest; revenue bonds, which are payable from the
revenue derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific
revenue source, but not from the general taxing power; lease obligations
backed by the municipality's covenant to budget for the payments due under
the lease obligation; and certain types of industrial development bonds
issued by or on behalf of public authorities to obtain funds for
privately-operated facilities, provided that the interest paid on such
securities qualifies as exempt from federal and California state income taxes.
The value of the securities in which the Company will invest generally
fluctuates inversely with changes in prevailing interest rates. Changes in
the creditworthiness of issuers and changes in other market factors such as
the relative supply of and demand for tax-exempt bonds also create value
fluctuations.
Each Fund may on a temporary basis due to market or other conditions
invest up to 100% of its assets in short-term securities whether or not
exempt from federal and California state income taxes. Such taxable
securities may consist of obligations of the United States Government, its
agencies or instrumentalities, and repurchase agreements secured by such
instruments; certificates of deposit of domestic banks having capital,
surplus and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper; and other corporate debt
obligations.
INVESTMENT TECHNIQUES
Variable Rate Securities - Each Fund may invest in tax-exempt securities
that bear interest at rates which are adjusted periodically to market rates.
These interest rate adjustments can both raise and lower the income generated
by such securities. These changes will have the same effect on the income
earned by a Fund depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes
in prevailing interest rates, increasing in value when interest rates
decline and decreasing in value when interest rates rise. The value of
variable rate securities, however, is less affected by changes in
prevailing interest rates because of the periodic adjustment of their coupons
to a market rate. The shorter the period between adjustments, the smaller the
impact of interest rate fluctuations on the value of these securities. The
market value of tax-exempt variable rate securities usually tends toward par
(100% of face value) at interest rate adjustment time.
In the case of the California Money Market Fund only, any variable
rate instrument with a demand feature will be deemed to have a maturity
equal to either the date on which the underlying principal amount may be
recovered through demand or the next rate adjustment date consistent with
applicable regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities (including
securities with variable interest rates) which may be redeemed or sold back
(put) to the issuer of the security or a third party at face value prior to
stated maturity (Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated maturity is longer.
For the California Bond Fund, maturity for put bonds is deemed to be the
date on which the put becomes exercisable. Generally, maturity for put
bonds for the California Money Market Fund is determined as stated under
Variable Rate Securities.
When-Issued Securities - Each Fund may invest in new issues of tax-exempt
securities offered on a when-issued basis; that is, delivery and payment
take place after the date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time of commitment.
The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement. Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to the amount of
the when-issued commitments are segregated at the Fund's custodian bank.
The segregated securities are valued at market, and daily adjustments are
made to keep the value of the cash and segregated securities at least equal
to the amount of such commitments by the Fund. On the settlement date, the
Fund will meet its obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the when-issued securities
themselves.
Municipal Lease Obligations - Each Fund may invest in municipal lease
obligations and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute
a general obligation of the municipality for which the municipality's
taxing power is pledged, although the lease obligation is ordinarily backed
by the municipality's covenant to budget for the payments due under the
lease obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured
by the leased property, disposition of the property in the event of
foreclosure might prove difficult. In evaluating a potential investment in
such a lease obligation, the Manager will consider: (1) the credit quality
of the obligor, (2) whether the underlying property is essential to a
governmental function, and (3) whether the lease obligation contains
covenants prohibiting the obligor from substituting similar property if the
obligor fails to make appropriations for the lease obligation.
Liquidity - Lease obligations and certain Put Bonds that are subject to
restrictions on transfer may be determined to be liquid in accordance with
the guidelines established by the Board of Directors for purposes of
complying with the Funds' investment restrictions applicable to investments
in illiquid securities.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease
obligation, (2) the number of dealers willing to purchase or sell the lease
obligation and the number of other potential purchasers, (3) dealer
undertakings to make a market in the lease obligation, (4) the nature of
the marketplace trades, including the time needed to dispose of the lease
obligation, the method of soliciting offers, and the mechanics of transfer,
(5) whether the lease obligation is of a size that will be attractive to
institutional investors, (6) whether the lease obligation contains
a non-appropriation clause and the likelihood that the obligor will fail to
make an appropriation therefor, and (7) such other factors as the Manager
may determine to be relevant to such determination.
In determining the liquidity of Put Bonds with restrictions on
transfer, the Manager will evaluate the credit quality of the party (the
Put Provider) issuing (or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
OTHER POLICIES
Each Fund is permitted (i) to lend portfolio securities so long as
collateral is obtained for the securities and the aggregate value of all
loans does not exceed 33 1/3% of the Fund's total assets, and (ii) to invest
up to 5% of the Fund's total assets in repurchase agreements.
The California Bond Fund may enter into financial futures contracts
(and options thereon) for hedging purposes or to attempt to reduce
principal fluctuations in the value of its portfolio. The Fund will not
invest in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
a. Neither Fund may borrow money, except for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than
borrowings).
b. Neither Fund may pledge or mortgage more than 10% of its total
assets.
c. Neither Fund may invest more than 25% of its total assets in
securities issued in connection with the financing of projects with
similar characteristics, such as toll road revenue bonds, housing
revenue bonds or electric power project revenue bonds or in
industrial revenue bonds which are based, directly or indirectly, on
the credit of private entities of any one industry. However, each
Fund reserves the right to invest more than 25% of its total assets
in tax-exempt industrial revenue bonds.
d. Neither Fund will invest more than 25% of its total assets in the
securities of a single issuer, and neither Fund will, with respect to
75% of its total assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund is subject to credit and market risks, which will be intensified
by concentration in California issues. Because the Funds' portfolios
concentrate their investments in California tax-exempt securities, the
Funds are affected by political, economic, regulatory or other
developments which constrain the taxing and spending authority of
California issuers or otherwise affect the ability of California issuers to
pay interest or repay principal. See SPECIAL RISK CONSIDERATIONS in the
SAI.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following
methods. A complete, signed application is required together with a check
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
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 (NYSE) 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.
Because of the more lengthy clearing process and the need to convert
foreign currency, 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
MINIMUM INVESTMENTS
- -------------------
Initial Purchase: $3,000 or minimum $100 with a minimum $50 monthly
electronic investment
Additional Purchases: $50 - (Except transfers from brokerage accounts)
HOW TO PURCHASE:
- ----------------
MAIL * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
IN PERSON * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY * Additional purchases on a regular basis can be deducted from
VIA a bank account, paycheck, income-producing investment or from
ELECTRONIC a USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
BANK WIRE * To add to an account, instruct your bank (which may charge a
fee for the service) to wire the specified amount to the Fund
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(s) Account Number___________________
PHONE * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
THROUGH A * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the following methods 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 NYSE 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 SEC.
HOW TO REDEEM:
- --------------
WRITTEN, * Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-292-8177, 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.
PHONE * 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.
THROUGH A * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
METHODS OF PAYMENT:
- ------------------
BANK WIRE * 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. The Transfer Agent 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 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.
AUTOMATICALLY * Systematic (regular) or intermittent (as-needed) redemptions
VIA EFT 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 * A check payable to the registered shareholder(s) will be
REDEMPTION 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. Should you wish to redeem shares within the 15 days following a
telephone address change, you may do so by providing written instructions by
mail or facsimile.
CHECKWRITING * Checks can 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 signed by all registered owners 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 for purchases, redemptions, or changes
in account information in those instances where the appropriateness
of a signature authorization is in question. 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 Funds 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 Funds 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 - PHONE.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. Exchanges
out of any Fund 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
Systematic 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) - an automatic investment program for
the purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred from a
checking or savings account.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an 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.
* 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.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your California
Bond Fund account except:
i) a reinvested dividend;
ii) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
iii) a redemption you make under the Systematic Withdrawal Plan.
In the California Money Market Fund, you will receive a confirmation
for purchases or redemptions by check and exchanges. If your Money Market
Fund account had activity other than reinvested dividends, such as wire
purchases or redemptions or purchases under the InvesTronic (registered
trademark), Direct Purchase Service, Automatic Purchase Plan or Directed
Dividends investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a consolidated statement
for all of your mutual fund accounts, regardless of account activity. The
fourth quarter consolidated statement will reflect all account activity for
the prior tax year. There will be a $10 fee charged for copies of historical
statements for other than the prior tax year for any one account. You will
receive a Fund's financial statements with a summary of its investments and
performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests
to reduce mail, the Company intends to consolidate mailings of Annual and
Semiannual Reports to households having multiple accounts with the same
address of record. One copy of each report will be furnished to that
address. You may request additional reports by notifying the Company.
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 NYSE, 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. Net capital gain, if
any, 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 NAV per share 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 NAV per share. 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 NAV per share.
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.
Redemptions, including exchanges, are subject to capital gains tax,
based on the difference between the cost of shares held and the price
received upon sale.
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 $ 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 SEC 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 twelve
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 eight
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, LLP
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, 1996 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, in person, or in certain instances, by
telephone. Page 14.
HOW DO YOU SELL? You may redeem Fund shares 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.
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, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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.
If you would like more information, a STATEMENT OF ADDITIONAL
INFORMATION (SAI) dated August 1, 1996, 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
(SEC) 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.
** 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
FISCAL BEGINNING INVESTMENT UNREALIZED INVESTMENT OF REALIZED
YEAR OF PERIOD INCOME GAIN (LOSS) INCOME CAPITAL GAINS
ENDED ($) ($) ($) ($) ($)
- ------ --------- ---------- ----------- ------------- -------------
NEW YORK BOND FUND:
March 31,
1991* 10.00 .32 .50 (.32) -
1992 10.50 .69 .44 (.69) -
1993 10.94 .65 .80 (.65) (.12)
1994 11.62 .62 (.50) (.62) (.29)
1995 10.83 .62 (.06) (.62) -
NEW YORK MONEY MARKET FUND:
March 31,
1991* 1.00 .02 - (.02) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
FISCAL END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
YEAR OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
ENDED ($) (%)** ($000) (%) (%) (%)
- ------ --------- ------- ---------- ---------- ----------- ---------
New York Bond Fund
March 31,
1991* 10.50 8.22 11,635 .50(a)(b) 6.73(a)(b) 128.04
1992 10.94 1.00 28,022 .50(b) 6.32(b) 110.77
1993 11.62 13.74 48,925 .50(b) 5.79(b) 107.12
1994 10.83 .68 56,912 .50(b) 5.24(b) 124.40
1995 10.77 5.42 50,507 .50(b) 5.83(b) 142.19
New York Money Market Fund
March 31,
1991* 1.00 2.23 12,684 .50(a)(b) 4.75(a)(b) -
1992 1.00 3.72 16,788 .50(b) 3.61(b) -
1993 1.00 2.51 19,428 .50(b) 2.46(b) -
1994 1.00 2.00 24,513 .50(b) 1.98(b) -
1995 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
S&P 500 Index Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy 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 asset strategy
funds, the Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy and Growth Strategy Funds. 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 an
asset strategy 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. Unless otherwise directed
by the Board of Directors, if downgrades result in more than 5% of a Fund's
net assets being invested in securities that are less than investment grade
quality, the Manager will take immediate action to reduce the Fund's
holdings in such securities to 5% or less of the Fund's net assets. 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 NAV per share 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 SEC rules
applicable to money market mutual funds. These securities must also be
determined by the Manager to present minimal credit risk. In general, the
category of eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof, including "prerefunded" and "escrowed to
maturity" tax-exempt securities;
(2) rated in one of the two highest categories for short-term securities
by at least two Nationally Recognized Statistical Rating
Organizations (NRSROs), or by one NRSRO if the security is rated by
only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or
(4) unrated but determined to be of comparable quality by the Manager.
If a security is downgraded after purchase, the Manager will follow
written procedures adopted by the Fund's Board of Directors and a
determination will be made as to whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold the security.
Current NRSROs include Moody's, S&P, Fitch, Duff & Phelps Inc.,
Thompson BankWatch, Inc., and IBCA Inc. For a description of tax-exempt
securities and their ratings, see APPENDIX A to the SAI.
Consistent with regulatory requirements, the Manager will purchase
securities with remaining maturities of 397 days or less and will maintain
a dollar-weighted average portfolio maturity of no more than 90 days. The
Fund will endeavor to maintain a constant net asset value of $1.00 per
share, although there is no assurance that it will be able to do so.
OTHER INVESTMENT INFORMATION
The investment objectives of the Funds may not be changed without
shareholder approval. In view of the risks inherent in all investments in
securities, there is no assurance that these objectives will be achieved.
The investment policies and techniques used to pursue the Funds' objectives
may be changed without shareholder approval, except as otherwise noted.
Further information regarding the Funds' investment policies and
restrictions is provided in the SAI.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest; revenue bonds, which are payable from the
revenue derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific
revenue source, but not from the general taxing power; lease obligations
backed by the municipality's covenant to budget for the payments due under
the lease obligation; and certain types of industrial development bonds
issued by or on behalf of public authorities to obtain funds for privately
- -operated facilities, provided that the interest paid on such securities is
excluded from gross income for federal income tax purposes and is exempt
from New York State and New York City personal income taxes. The value of
the securities in which the Company will invest generally fluctuates
inversely with changes in prevailing interest rates. Changes in the
creditworthiness of issuers and changes in other market factors such as the
relative supply of and demand for tax-exempt bonds also create value
fluctuations.
Each Fund may on a temporary basis due to market or other conditions
invest up to 100% of its assets in short-term securities whether or not
exempt from federal and New York State and New York City income taxes.
Such taxable securities may consist of obligations of the United States
Government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks
having capital, surplus and undivided profits in excess of $100 million;
banker's acceptances of similar banks; commercial paper; and other corporate
debt obligations.
INVESTMENT TECHNIQUES
Variable Rate Securities - Each Fund may invest in tax-exempt securities
that bear interest at rates which are adjusted periodically to market
rates. These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by a Fund depending on the proportion of such securities
held.
The market value of fixed coupon securities fluctuates with changes
in prevailing interest rates, increasing in value when interest rates
decline and decreasing in value when interest rates rise. The value of
variable rate securities, however, is less affected by changes in
prevailing interest rates because of the periodic adjustment of their
coupons to a market rate. The shorter the period between adjustments, the
smaller the impact of interest rate fluctuations on the value of these
securities. The market value of tax-exempt variable rate securities
usually tends toward par (100% of face value) at interest rate adjustment
time.
In the case of the New York Money Market Fund only, any variable rate
instrument with a demand feature will be deemed to have a maturity equal to
either the date on which the underlying principal amount may be recovered
through demand or the next rate adjustment date consistent with applicable
regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities (including
securities with variable interest rates) which may be redeemed or sold back
(put) to the issuer of the security or a third party at face value prior to
stated maturity (Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated maturity is longer.
For the New York Bond Fund, maturity for put bonds is deemed to be the date
on which the put becomes exercisable. Generally, maturity for put bonds
for the New York Money Market Fund is determined as stated under Variable
Rate Securities.
When-Issued Securities - Each Fund may invest in new issues of tax-exempt
securities offered on a when-issued basis; that is, delivery and payment
take place after the date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time of commitment.
The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement. Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to the amount of
the when-issued commitments are segregated at the Fund's custodian bank.
The segregated securities are valued at market, and daily adjustments are
made to keep the value of the cash and segregated securities at least equal
to the amount of such commitments by the Fund. On the settlement date, the
Fund will meet its obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the when-issued securities
themselves.
Municipal Lease Obligations - Each Fund may invest in municipal lease
obligations and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute
a general obligation of the municipality for which the municipality's taxing
power is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured
by the leased property, disposition of the property in the event of
foreclosure might prove difficult. In evaluating a potential investment in
such a lease obligation, the Manager will consider: (1) the credit quality
of the obligor, (2) whether the underlying property is essential to a
governmental function, and (3) whether the lease obligation contains
covenants prohibiting the obligor from substituting similar property if the
obligor fails to make appropriations for the lease obligation.
Liquidity - Lease obligations and certain Put Bonds that are subject to
restrictions on transfer may be determined to be liquid in accordance with
the guidelines established by the Board of Directors for purposes of
complying with the Funds' investment restrictions applicable to investments
in illiquid securities.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease
obligation, (2) the number of dealers willing to purchase or sell the lease
obligation and the number of other potential purchasers, (3) dealer
undertakings to make a market in the lease obligation, (4) the nature of
the marketplace trades, including the time needed to dispose of the lease
obligation, the method of soliciting offers, and the mechanics of transfer,
(5) whether the lease obligation is of a size that will be attractive to
institutional investors, (6) whether the lease obligation contains a non
- -appropriation clause and the likelihood that the obligor will fail to make
an appropriation therefor, and (7) such other factors as the Manager may
determine to be relevant to such determination.
In determining the liquidity of Put Bonds with restrictions on
transfer, the Manager will evaluate the credit quality of the party (the
Put Provider) issuing (or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
OTHER POLICIES
Each Fund is permitted (i) to lend portfolio securities so long as
collateral is obtained for the securities and the aggregate value of all
loans does not exceed 33 1/3% of the Fund's total assets, and (ii) to invest
up to 5% of the Fund's total assets in repurchase agreements.
The New York Bond Fund may enter into financial futures contracts
(and options thereon) for hedging purposes or to attempt to reduce
principal fluctuations in the value of its portfolio. The Fund will not
invest in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
a. Neither Fund may borrow money, except for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than
borrowings).
b. Neither Fund may pledge or mortgage more than 10% of its total
assets.
c. Neither Fund may invest 25% or more of its total assets in securities
issued in connection with the financing of projectswith similar
characteristics, such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in industrial
revenue bonds which are based, directly or indirectly, on the credit
of private entities of any one industry. However, each Fund reserves
the right to invest more than 25% of its total assets in tax-exempt
industrial revenue bonds.
d. Neither Fund will invest 25% or more of its total assets in the
securities of a single issuer, and neither Fund will, with respect to
75% of its total assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund's ability to achieve its investment objective is dependent upon
the ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. New York
State and New York City face long-term economic problems that could
seriously affect their ability and that of other issuers of New York
Municipal Obligations to meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations
(including issuers whose obligations may be acquired by the Funds) have
experienced serious financial difficulties in recent years. These
difficulties have at times jeopardized the credit standing and impaired the
borrowing abilities of all New York issuers and have generally contributed
to higher interest costs for their borrowings and fewer markets for their
outstanding debt obligations. In recent years, several different issues of
municipal securities of New York State and its agencies and instrumentalities
and of New York City have been downgraded by S&P and Moody's. On the other
hand, strong demand for New York Municipal Obligations has at times had the
effect of permitting New York Municipal Obligations to be issued with yields
relatively lower, and after issuance, to trade in the market at prices
relatively higher, than comparably rated municipal obligations issued by
other jurisdictions. A recurrence of the financial difficulties previously
experienced by certain issuers of New York Municipal Obligations could
result in defaults or declines in the market values of those issuers'
existing obligations and, possibly, in the obligations of other issuers of
New York Municipal Obligations. Although no issuers of New York Municipal
Obligations are in default with respect to the payment of their municipal
obligations as of the date of this Prospectus, the occurrence of any such
default could adversely affect the market values and marketability of all
New York Municipal Obligations and, consequently, the net asset value of the
Fund's portfolio.
Other considerations affecting the Fund's investments in New York
Municipal Obligations are summarized in the SAI.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following
methods. A complete, signed application is required together with a check
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
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 (NYSE) 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.
Because of the more lengthy clearing process and the need to convert
foreign currency, 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
MINIMUM INVESTMENTS
- -------------------
Initial Purchase: $3,000 or minimum $100 with a minimum $50 monthly
electronic investment
Additional Purchases: $50 - (Except transfers from brokerage accounts)
HOW TO PURCHASE:
- ----------------
MAIL * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
IN PERSON * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY * Additional purchases on a regular basis can be deducted from
VIA a bank account, paycheck, income-producing investment or from
ELECTRONIC a USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
BANK WIRE * To add to an account, instruct your bank (which may charge a
fee for the service) to wire the specified amount to the Fund
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(s) Account Number___________________
PHONE * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
THROUGH A * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the following methods 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 NYSE 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 SEC.
HOW TO REDEEM:
- --------------
WRITTEN, * Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-292-8177, 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.
PHONE * 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.
THROUGH A * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
METHODS OF PAYMENT:
- ------------------
BANK WIRE * 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. The Transfer Agent 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 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.
AUTOMATICALLY * Systematic (regular) or intermittent (as-needed) redemptions
VIA EFT 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 * A check payable to the registered shareholder(s) will be
REDEMPTION 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. Should you wish to redeem shares within the 15 days following a
telephone address change, you may do so by providing written instructions by
mail or facsimile.
CHECKWRITING * Checks can 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 signed by all registered owners 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 for purchases, redemptions, or changes
in account information in those instances where the appropriateness
of a signature authorization is in question. 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 Funds 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 Funds 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 - PHONE.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. Exchanges
out of any Fund 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
Systematic 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) - an automatic investment program for
the purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred from a
checking or savings account.
* Direct Purchase Service - the periodic purchase of shares through
electronic funds transfer from an 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.
* 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.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your New York
Bond Fund account except:
i) a reinvested dividend;
ii) a payment you make under the InvesTronic registered trademark, Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
iii) a redemption you make under the Systematic Withdrawal Plan.
In the New York Money Market Fund, you will receive a confirmation
for purchases or redemptions by check and exchanges. If your Money Market
Fund account had activity other than reinvested dividends, such as wire
purchases or redemptions or purchases under the InvesTronic (registered
trademark), Direct Purchase Service, Automatic Purchase Plan or Directed
Dividends investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the
prior tax year. There will be a $10 fee charged for copies of historical
statements for other than the prior tax year for any one account. You will
receive a Fund's financial statements with a summary of its investments and
performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests
to reduce mail, the Company intends to consolidate mailings of Annual and
Semiannual Reports to households having multiple accounts with the same
address of record. One copy of each report will be furnished to that
address. You may request additional reports by notifying the Company.
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 NYSE, 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. Net capital gain, if
any, 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 NAV per share 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 NAV per share. 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 NAV per share.
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.
Redemptions, including exchanges, are subject to capital gains tax,
based on the difference between the cost of shares held and the price
received upon sale.
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 $______ 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 SEC 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 22 years investment management experience and has worked for IMCO 19
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 eight
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, LLP
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
Virginia Bond and
Virginia Money Market Funds
USAA VIRGINIA FUNDS
August 1, 1996 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, in person, or in certain instances, by
telephone. Page 13.
HOW DO YOU SELL? You may redeem Fund shares 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.
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, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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.
If you would like more information, a STATEMENT OF ADDITIONAL
INFORMATION (SAI) dated August 1, 1996, 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
(SEC) 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.
** 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 ($) ($) ($) ($) ($)
- ------ --------- ---------- ----------- ------------ -------------
VIRGINIA BOND FUND:
March 31,
1991* 10.00 .32 .28 (.32) -
1992 10.28 .67 .29 (.67) -
1993 10.57 .64 .65 (.64) (.06)
1994 11.16 .62 (.30) (.62) (.15)
1995 10.71 .62 .05 (.62) -
VIRGINIA MONEY MARKET FUND:
March 31,
1991* 1.00 .02 - (.02) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
FISCAL END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
YEAR OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
ENDED ($) (%)** ($000) (%) (%) (%)
- ------ --------- ------- --------- ---------- ------------ ---------
Virginia Bond Fund
March 31,
1991* 10.28 6.01 58,045 .50(a)(b) 6.83(a)(b) 142.56
1992 10.57 9.61 131,475 .50(b) 6.40(b) 86.77
1993 11.16 12.61 207,302 .50(b) 5.90(b) 91.31
1994 10.71 2.69 235,901 .49 5.44 92.17
1995 10.76 6.61 238,920 .50 5.95 68.53
Virginia Money Market Fund
March 31,
1991* 1.00 2.38 42,513 .50(a)(b) 5.03(a)(b) -
1992 1.00 4.09 73,220 .50(b) 3.96(b) -
1993 1.00 2.65 77,263 .50(b) 2.62(b) -
1994 1.00 2.14 92,570 .50(b) 2.12(b) -
1995 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
S&P 500 Index Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy 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 asset strategy
funds, the Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy and Growth Strategy Funds. 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 an
asset strategy 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. Unless otherwise directed
by the Board of Directors, if downgrades result in more than 5% of a Fund's
net assets being invested in securities that are less than investment grade
quality, the Manager will take immediate action to reduce the Fund's
holdings in such securities to 5% or less of the Fund's net assets. 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 NAV per share 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 SEC rules
applicable to money market mutual funds. These securities must also be
determined by the Manager to present minimal credit risk. In general, the
category of eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof, including "prerefunded" and "escrowed to
maturity" tax-exempt securities;
(2) rated in one of the two highest categories for short-term securities
by at least two Nationally Recognized Statistical Rating Organizations
(NRSROs), or by one NRSRO if the security is rated by only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or
(4) unrated but determined to be of comparable quality by the Manager.
If a security is downgraded after purchase, the Manager will follow
written procedures adopted by the Fund's Board of Directors and a
determination will be made as to whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold the security.
Current NRSROs include Moody's, S&P, Fitch, Duff & Phelps Inc.,
Thompson BankWatch, Inc., and IBCA Inc. For a description of tax-exempt
securities and their ratings, see APPENDIX A to the SAI.
Consistent with regulatory requirements, the Manager will purchase
securities with remaining maturities of 397 days or less and will maintain
a dollar-weighted average portfolio maturity of no more than 90 days. The
Fund will endeavor to maintain a constant net asset value of $1.00 per
share, although there is no assurance that it will be able to do so.
OTHER INVESTMENT INFORMATION
The investment objectives of the Funds may not be changed without
shareholder approval. In view of the risks inherent in all investments in
securities, there is no assurance that these objectives will be achieved.
The investment policies and techniques used to pursue the Funds' objectives
may be changed without shareholder approval, except as otherwise noted.
Further information regarding the Funds' investment policies and
restrictions is provided in the SAI.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest; revenue bonds, which are payable from the
revenue derived from a particular facility or class of facilities or, in
some cases, from annual appropriations made by the state legislature for
the repayment of interest and principal or other specific revenue source,
but not from the general taxing power; lease obligations backed by the
municipality's covenant to budget for the payments due under the lease
obligation; and certain types of industrial development bonds issued by or
on behalf of public authorities to obtain funds for privately-operated
facilities, provided that the interest paid on such securities qualifies as
exempt from federal and Virginia state income taxes. The value of the
securities in which the Company will invest generally fluctuates inversely
with changes in prevailing interest rates. Changes in the creditworthiness
of issuers and changes in other market factors such as the relative supply of
and demand for tax-exempt bonds also create value fluctuations.
Each Fund may on a temporary basis due to market or other conditions
invest up to 100% of its assets in short-term securities whether or not
exempt from federal and Virginia state income taxes. Such taxable
securities may consist of obligations of the United States Government, its
agencies or instrumentalities, and repurchase agreements secured by such
instruments.
INVESTMENT TECHNIQUES
Variable Rate Securities - Each Fund may invest in tax-exempt securities
that bear interest at rates which are adjusted periodically to market
rates. These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by a Fund depending on the proportion of such securities
held.
The market value of fixed coupon securities fluctuates with changes
in prevailing interest rates, increasing in value when interest rates
decline and decreasing in value when interest rates rise. The value of
variable rate securities, however, is less affected by changes in
prevailing interest rates because of the periodic adjustment of
their coupons to a market rate. The shorter the period between
adjustments, the smaller the impact of interest rate fluctuations on the
value of these securities. The market value of tax-exempt variable rate
securities usually tends toward par (100% of face value) at interest rate
adjustment time.
In the case of the Virginia Money Market Fund only, any variable rate
instrument with a demand feature will be deemed to have a maturity equal to
either the date on which the underlying principal amount may be recovered
through demand or the next rate adjustment date consistent with applicable
regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities (including
securities with variable interest rates) which may be redeemed or sold back
(put) to the issuer of the security or a third party at face value prior to
stated maturity (Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated maturity is longer.
For the Virginia Bond Fund, maturity for put bonds is deemed to be the date
on which the put becomes exercisable. Generally, maturity for put bonds
for the Virginia Money Market Fund is determined as stated under Variable
Rate Securities.
When-Issued Securities - Each Fund may invest in new issues of tax-exempt
securities offered on a when-issued basis; that is, delivery and payment
take place after the date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time of commitment.
The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement. Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to the amount of
the when-issued commitments are segregated at the Fund's custodian bank.
The segregated securities are valued at market, and daily adjustments are
made to keep the value of the cash and segregated securities at least equal
to the amount of such commitments by the Fund. On the settlement date, the
Fund will meet its obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the when-issued securities
themselves.
Municipal Lease Obligations - Each Fund may invest in municipal lease
obligations and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute
a general obligation of the municipality for which the municipality's
taxing power is pledged, although the lease obligation is ordinarily backed
by the municipality's covenant to budget for the payments due under the
lease obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured
by the leased property, disposition of the property in the event of
foreclosure might prove difficult. In evaluating a potential investment in
such a lease obligation, the Manager will consider: (1) the credit quality
of the obligor, (2) whether the underlying property is essential to a
governmental function, and (3) whether the lease obligation contains
covenants prohibiting the obligor from substituting similar property if the
obligor fails to make appropriations for the lease obligation.
Liquidity - Lease obligations and certain Put Bonds that are subject to
restrictions on transfer may be determined to be liquid in accordance with the
guidelines established by the Board of Directors for purposes of complying
with the Funds' investment restrictions applicable to investments in illiquid
securities.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease
obligation, (2) the number of dealers willing to purchase or sell the lease
obligation and the number of other potential purchasers, (3) dealer
undertakings to make a market in the lease obligation, (4) the nature of
the marketplace trades, including the time needed to dispose of the lease
obligation, the method of soliciting offers, and the mechanics of transfer,
(5) whether the lease obligation is of a size that will be attractive to
institutional investors, (6) whether the lease obligation contains a
non-appropriation clause and the likelihood that the obligor will fail to
make an appropriation therefor, and (7) such other factors as the Manager
may determine to be relevant to such determination.
In determining the liquidity of Put Bonds with restrictions on
transfer, the Manager will evaluate the credit quality of the party (the
Put Provider) issuing (or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
OTHER POLICIES
Each Fund is permitted (i) to lend portfolio securities so long as
collateral is obtained for the securities and the aggregate value of all
loans does not exceed 33 1/3% of the Fund's total assets, and (ii) to invest
up to 5% of the Fund's total assets in repurchase agreements.
The Virginia Bond Fund may enter into financial futures contracts
(and options thereon) for hedging purposes or to attempt to reduce
principal fluctuations in the value of its portfolio. The Fund will not
invest in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
a. Neither Fund may borrow money, except for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than
borrowings).
b. Neither Fund may pledge or mortgage more than 10% of its total
assets.
c. Neither Fund may invest 25% or more of its total assets in securities
issued in connection with the financing of projects with similar
characteristics, such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in industrial
revenue bonds which are based, directly or indirectly, on the credit
of private entities of any one industry. However, each Fund reserves
the right to invest more than 25% of its total assets in tax-exempt
industrial revenue bonds.
d. Neither Fund will invest 25% or more of its total assets in the
securities of a single issuer, and neither Fund will, with respect to
75% of its total assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund is subject to credit and market risks, which will be intensified
by concentration in obligations issued by or on behalf of Virginia public
authorities. For this reason, the Funds are affected by political,
economic, legal, regulatory or other developments which constrain the
taxing, spending and revenue collection authority of Virginia issuers or
otherwise affect the ability of Virginia issuers to pay interest, repay
principal or any premium. See SPECIAL RISK CONSIDERATIONS in the SAI.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following
methods. A complete, signed application is required together with a check
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
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 (NYSE) 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.
Because of the more lengthy clearing process and the need to convert
foreign currency, 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
MINIMUM INVESTMENTS
- -------------------
Initial Purchase: $3,000 or minimum $100 with a minimum $50 monthly
electronic investment
Additional Purchases: $50 - (Except transfers from brokerage accounts)
HOW TO PURCHASE:
- ----------------
MAIL * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
IN PERSON * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY * Additional purchases on a regular basis can be deducted from
VIA a bank account, paycheck, income-producing investment or from
ELECTRONIC a USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
BANK WIRE * To add to an account, instruct your bank (which may charge a
fee for the service) to wire the specified amount to the Fund
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(s) Account Number___________________
PHONE * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
THROUGH A * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the following methods 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 NYSE 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 SEC.
HOW TO REDEEM:
- --------------
WRITTEN, * Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-292-8177, 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.
PHONE * 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.
THROUGH A * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
METHODS OF PAYMENT:
- ------------------
BANK WIRE * 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. The Transfer Agent 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 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.
AUTOMATICALLY * Systematic (regular) or intermittent (as-needed) redemptions
VIA EFT 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 * A check payable to the registered shareholder(s) will be
REDEMPTION 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. Should you wish to redeem shares within the 15 days following a
telephone address change, you may do so by providing written instructions by
mail or facsimile.
CHECKWRITING * Checks can 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 signed by all registered owners 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 for purchases, redemptions, or changes
in account information in those instances where the appropriateness
of a signature authorization is in question. 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 Funds 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 Funds 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 - PHONE.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. Exchanges
out of any Fund 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
Systematic 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) - an automatic investment program for
the purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred from a
checking or savings account.
* Direct Purchase Service - the periodic purchase of shares through
electronic funds transfer from an 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.
* 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.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your Virginia
Bond Fund account except:
i) a reinvested dividend;
ii) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
iii) a redemption you make under the Systematic Withdrawal Plan.
In the Virginia Money Market Fund, you will receive a confirmation
for purchases or redemptions by check and exchanges. If your Money Market
Fund account had activity other than reinvested dividends, such as wire
purchases or redemptions or purchases under the InvesTronic registered
trademark, Direct Purchase Service, Automatic Purchase Plan or Directed
Dividends investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the
prior tax year. There will be a $10 fee charged for copies of historical
statements for other than the prior tax year for any one account. You will
receive a Fund's financial statements with a summary of its investments and
performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests
to reduce mail, the Company intends to consolidate mailings of Annual and
Semiannual Reports to households having multiple accounts with the same
address of record. One copy of each report will be furnished to that
address. You may request additional reports by notifying the Company.
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 NYSE, 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. Net capital gain, if
any, 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 NAV per share 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 NAV per share. 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 NAV per share.
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.
Redemptions, including exchanges, are subject to capital gains tax,
based on the difference between the cost of shares held and the price
received upon sale.
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 $_____ 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 SEC 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 twelve
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 eight
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, LLP
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,
[Picture of USAA STATEMENT OF
the USAA Eagle TAX EXEMPT ADDITIONAL INFORMATION
appears here] FUND, INC. August 1, 1996
- -------------------------------------------------------------------------
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, 1996, 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 (NAV)
per share. The NAV 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 NAV 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 (SEC).
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 NAV per share. Such procedures include review of the Fund's
holdings at such intervals as is deemed appropriate to determine whether
the Fund's NAV 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 NAV 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 NAV 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 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) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred 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 an employer, an income-producing investment,
or an account with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual
fund. There is a minimum investment required for this program of $5,000,
with a monthly transaction minimum of $50. The minimum initial investment
requirement for the other USAA mutual fund must be satisfied before the
first transfer.
Buy/Sell Service - the intermittent purchase or redemption of shares
through electronic funds transfer to or from a checking or savings account.
Participation in these systematic purchase plans will permit a
shareholder to engage in dollar-cost averaging. For additional information
concerning the benefits of dollar-cost averaging, see APPENDIX D.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in different
Funds cannot be aggregated for this purpose) owns shares having a net asset
value of $5,000 or more, the shareholder may request that enough shares to
produce a fixed amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50. Using the
electronic funds transfer service, shareholders may choose to have
withdrawals electronically deposited at their bank or other financial
institution. They may also elect to have checks mailed to a designated
address.
Such a plan may be initiated by depositing shares worth at least
$5,000 with the Transfer Agent and by completing a Systematic Withdrawal
Plan application, which may be requested from the Manager. The shareholder
may terminate participation in the plan at any time. There is no charge to
the shareholder for withdrawals under the Systematic Withdrawal Plan. The
Company will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and redeeming shares.
Any additional expenses of administering the plan will be borne by the
Manager.
Withdrawals will be made by redeeming full and fractional shares on
the date selected by the shareholder at the time the plan is established.
Withdrawal payments made under this plan may exceed dividends and
distributions and, to this extent, will involve the use of principal and
could reduce the dollar value of a shareholder's investment and eventually
exhaust the account. Reinvesting dividends and distributions helps
replenish the account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be offset by
rising income or share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on the shareholder's income tax return. Therefore, a shareholder
should keep an accurate record of any gain or loss on each withdrawal.
INVESTMENT POLICIES
The section captioned INVESTMENT OBJECTIVES AND POLICIES in the Prospectus
describes the fundamental investment objectives and the investment policies
applicable to each Fund and the following is provided as additional
information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of each
investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of a Fund's
portfolio. An obligation's maturity is typically determined on a stated
final maturity basis, although there are some exceptions to this rule.
With respect to obligations held by the Long-Term Fund, the
Intermediate-Term Fund, and the Short-Term Fund, if it is probable that the
issuer of an instrument will take advantage of a maturity-shortening
device, such as a call, refunding, or redemption provision, the date on
which the instrument will probably be called, refunded, or redeemed may be
considered to be its maturity date. Also, the maturities of securities
subject to sinking fund arrangements are determined on a weighted average
life basis, which is the average time for principal to be repaid. The
weighted average life of these securities is likely to be substantially
shorter than their stated final maturity. In addition, for purposes of
these Funds' investment policies, an instrument will be treated as having a
maturity earlier than its stated maturity date if the instrument has
technical features such as puts or demand features which, in the judgment
of the Manager, will result in the instrument being valued in the market as
though it has the earlier maturity.
The Tax Exempt Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended (1940 Act).
Lending of Securities
Each Fund may lend its securities. A lending policy may be authorized by
the Company's Directors and implemented by the Manager, but securities may
be loaned only to qualified broker-dealers or institutional investors that
agree to maintain cash collateral with the Company equal at all times to at
least 100% of the value of the loaned securities. The Directors will
establish procedures and monitor the creditworthiness of any institution or
broker-dealer during such time as any loan is outstanding. The Company
will continue to receive interest on the loaned securities and will invest
the cash collateral in readily marketable short-term obligations of high
quality, thereby earning additional interest. Interest on loaned tax
- -exempt securities received by the borrower and paid to the Company will
not be exempt from federal income taxes in the hands of the Company.
No loan of securities will be made if, as a result, the aggregate of
such loans would exceed 33 1/3% of the value of a Fund's total assets. The
Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase agreements.
A repurchase agreement is a transaction in which a security is purchased
with a simultaneous commitment to sell the security back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on
an agreed upon date, usually not more than 7 days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity
of the purchased security. A repurchase agreement involves the obligation
of the seller to pay the agreed upon price, which obligation is in effect
secured by the value of the underlying security. In these transactions,
the securities purchased by a Fund will have a total value equal to or in
excess of the amount of the repurchase obligation and will be held by the
Funds' custodian until repurchased. If the seller defaults and the value
of the underlying security declines, a Fund may incur a loss and may incur
expenses in selling the collateral. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or
limited. Any investments in repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by a Fund.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for
and are applicable to each Fund. These restrictions may not be changed for
any given Fund without approval by the lesser of (1) 67% or more of the
voting securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by
proxy or (2) more than 50% of the Fund's outstanding voting securities.
The investment restrictions of one Fund may be changed without affecting
those of any other Fund.
Under the restrictions, each Fund may not:
(1) With respect to 75% of its total assets, purchase the securities of
any issuer (except Government Securities, as such term is defined in
the 1940 Act) if, as a result, the Fund would have more than 5% of
the value of its total assets invested in the securities of such
issuer;
(2) Purchase more than 10% of the outstanding voting securities of any
issuer;
(3) Borrow money, except for temporary or emergency purposes in an amount
not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent greater than
10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer or
Director of the Company or its Manager owns individually more than
one-half of one percent (1/2%) of the securities of that issuer, and
collectively the officers and Directors of the Company and Manager
together own more than 5% of the securities of that issuer;
(6) Purchase any securities which would cause more than 25% of the value
of that Fund's total assets at the time of such purchase to be
invested in either (i) the securities of issuers conducting their
principal activities in the same state, or (ii) the securities the
interest upon which is derived from revenues or projects with similar
characteristics, such as toll road revenue bonds, housing revenue
bonds, electric power project revenue bonds, etc.; provided that the
foregoing limitation does not apply with respect to investments in
United States Treasury Bills, other obligations issued or guaranteed
by the United States Government, its agencies and instrumentalities,
and, in the case of the Tax Exempt Money Market Fund, certificates of
deposit and banker's acceptances of domestic banks;
(7) Invest in issuers for the purpose of exercising control of
management;
(8) Issue senior securities as defined in the 1940 Act, except that it
may purchase tax-exempt securities on a "when-issued" basis as
permitted by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that it
may be deemed to act as a statutory underwriter in the distribution
of any restricted securities or not readily marketable securities;
(10) Purchase or sell real estate, but this shall not prevent investments
in tax-exempt securities secured by real estate or interests therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, except
that this limitation does not apply to purchases of debt securities
or to repurchase agreements;
(12) Purchase on margin or sell short;
(13) Purchase or sell commodities or commodities contracts;
(14) Invest its assets in securities of other investment companies except
by purchases in the open market involving only customary brokers'
commissions or as part of a merger, consolidation, reorganization or
purchase of assets approved by the shareholders; or
(15) Invest in put, call, straddle or spread options or interests in oil,
gas or other mineral exploration or development programs.
Additional Restrictions
The following restrictions are not considered to be fundamental policies of
the Funds. These additional restrictions may be changed by the Board of
Directors of the Company without notice to or approval by the shareholders.
Each Fund may not:
(1) Invest more than 15% (10% with respect to the Tax Exempt Money Market
Fund) of the value of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days.
(2) Purchase any security while borrowings representing more than 5% of
the Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated July 20, 1990 and
subject to the general control of the Company's Board of Directors, places
all orders for the purchase and sale of Fund securities. Purchases of Fund
securities are made either directly from the issuer or from dealers who
deal in tax-exempt securities. The Manager may sell Fund securities prior
to maturity if circumstances warrant and if it believes such disposition is
advisable. In connection with portfolio transactions for the Company, the
Manager seeks to obtain the best available net price and most favorable
execution for its orders. The Manager has no agreement or commitment to
place transactions with any broker-dealer and no regular formula is used to
allocate orders to any broker-dealer. However, the Manager may place
security orders with brokers or dealers who furnish research or other
services to the Manager as long as there is no sacrifice in obtaining the
best overall terms available. Payment for such services would be generated
only through purchase of new issue fixed income securities.
Such research and other services may include, for example: advice
concerning the value of securities, the advisability of investing in,
purchasing, or selling securities, and the availability of securities or
the purchasers or sellers of securities; analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio
strategy, and performance of accounts; and various functions incidental to
effecting securities transactions, such as clearance and settlement. The
Manager continuously reviews the performance of the broker-dealers with
whom it places orders for transactions. The receipt of research from
broker-dealers that execute transactions on behalf of the Company may be
useful to the Manager in rendering investment management services to other
clients (including affiliates of the Manager), and conversely, such
research provided by broker-dealers who have executed transaction orders on
behalf of other clients may be useful to the Manager in carrying out its
obligations to the Company. While such research is available to and may be
used by the Manager in providing investment advice to all its clients
(including affiliates of the Manager), not all of such research may be used
by the Manager for the benefit of the Company. Such research and services
will be in addition to and not in lieu of research and services provided by
the Manager, and the expenses of the Manager will not necessarily be
reduced by the receipt of such supplemental research. See THE COMPANY'S
MANAGER.
On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Company, as well as the
Manager's other clients, the Manager, to the extent permitted by applicable
laws and regulations, may aggregate such securities to be sold or purchased
for the Company with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In
such event, allocation of the securities so purchased or sold, as well as
the expenses incurred in the transaction, will be made by the Manager in
the manner it considers to be most equitable and consistent with its
fiduciary obligations to all such customers, including the Company. In
some instances, this procedure may impact the price and size of the
position obtainable for the Company.
The tax-exempt security market is typically a "dealer" market in
which investment dealers buy and sell bonds for their own accounts, rather
than for customers, and although the price may reflect a dealer's mark-up
or mark-down, the Company pays no brokerage commissions as such. In
addition, some securities may be purchased directly from issuers.
Portfolio Turnover Rates
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year.
The rate of portfolio turnover will not be a limiting factor when the
Manager deems changes in the Long-Term, Intermediate-Term, and Short-Term
Funds' portfolios appropriate in view of each Fund's investment objective.
For example, securities may be sold in anticipation of a rise in interest
rates (market decline) or purchased in anticipation of a decline in
interest rates (market rise) and later sold. In addition, a security may
be sold and another security of comparable quality may be purchased at
approximately the same time in order to take advantage of what the Fund
believes to be a temporary disparity in the normal yield relationship
between the two securities. These yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand
for or supply of various types of tax-exempt securities.
For the last two fiscal years the Funds' portfolio turnover rates
were as follows:
FUND 1995 1996
------ ------ ------
Long-Term 163.38% %
Intermediate-Term 72.00% %
Short-Term 102.93% %
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 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 seven 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.
M. Staser Holcomb (1, 2)
Director and Chairman of the Board of Directors
Age: 64
President, Chief Executive Officer, Director and Vice Chairman of the Board
of Directors of USAA Capital Corporation and several of its subsidiaries
and affiliates (1/96-present); Executive Vice President, Chief Information
Officer, United Services Automobile Association (USAA) (2/94-12/95);
Executive Vice President, Chief Financial Officer, USAA and President,
Director and Vice Chairman of the Board of Directors, USAA Capital
Corporation (9/91-1/94). Mr. Holcomb also will serve as a Trustee and
Chairman of the Board of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust and as a 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: 54
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). 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: 61
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.
George E. Brown (3, 4, 5)
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 78
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: 61
Retired. 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: 53
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: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). 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: 48
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: 46
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: 51
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). 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: 37
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); 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: Mark H. Wright, President, Chief Executive Officer, Director and
Vice Chairman, USAA Federal Savings Bank; Josue Robles, Jr., Senior Vice
President, Chief Financial Officer/Controller, USAA; Bradford W. Rich,
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, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ---------------- -------------------
C. Dale Briscoe* $4,480 $17,100
George E. Brown (a) 6,042 23,100
Barbara B. Dreeben 6,042 23,100
Howard L. Freeman, Jr. 6,042 23,100
M. Staser Holcomb* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 6,042 23,100
- ----------------
* Effective January 1, 1996, M. Staser Holcomb replaced Hansford T.
Johnson as Director and Chairman of the Board of Directors and C.
Dale Briscoe retired from the Board of Directors.
(a) The USAA Family of Funds has accrued deferred compensation for Mr.
Brown in an amount (plus earnings thereon) of $21,166. 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) M. Staser Holcomb, 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, 1996, the USAA Family of Funds consisted of 4 registered
investment companies offering 32 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 April
30, 1996, 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 April 30, 1996, USAA and its affiliates (including related
employee benefit plans) owned 4,210,885 shares (3.2%) of the Intermediate
- -Term Fund and 9,582,528 shares (.6%) of the Tax Exempt Money Market Fund,
for an aggregate total of 13,793,412 shares (.6%) of the Company.
The Company knows of no one person who, as of April 30, 1996, 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, USAA State Tax-Free
Trust and USAA Life Investment Trust. As of the date of this SAI, total
assets under management by the Manager were approximately $____ billion, of
which approximately $_____ billion were in mutual fund portfolios.
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, 1997 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.
Transfer Agent
USAA Shareholder Account Services (SAS) 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, each Fund pays SAS an annual
fixed fee of $26.00 per account. 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, LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered
by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205,
is the Company's independent auditor. In this capacity, the firm is
responsible for auditing the annual financial statements of the Funds and
reporting thereon.
Financial Statements
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1995, are included in the
Annual Report to Shareholders of that date and are incorporated herein by
reference. A copy of the Annual Report will be delivered free of charge
with each SAI requested from the Manager at the address set forth on page 1
of this statement.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in the Prospectus. See VALUATION OF SECURITIES
herein for a discussion of the manner in which each Fund's price per share
is calculated.
Total Return
The Funds, other than the Tax Exempt Money Market Fund, may each advertise
performance in terms of average annual total return for 1, 5 and 10 year
periods. Average annual total return is computed by finding the average
annual compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods at the end of the year or period
The calculation assumes all charges are deducted from the initial
$1,000 payment and assumes all dividends and distributions by such Fund are
reinvested at the price stated in the Prospectus on the reinvestment dates
during the period, and includes all recurring fees that are charged to all
shareholder accounts.
Average Annual Total Returns
For Periods Ended 3/31/95
1 5 10
Fund year years years
---- ---- ----- -----
Long-Term 5.07% 7.68% 9.13%
Intermediate-Term 6.16% 7.58% 8.22%
Short-Term 4.51% 5.41% 5.96%
Yield
The Funds, other than the Tax Exempt Money Market Fund, each may advertise
performance in terms of a 30-day yield quotation. The 30-day yield
quotation is computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2((((a - b) / (cd) + 1) ^6) - 1
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
For purposes of the yield calculation, interest income is computed
based on the yield to maturity of each debt obligation in a Fund's
portfolio and all recurring charges are recognized.
The 30-day yields for the Funds for the period ended March 31, 1995
were as follows:
Long-Term Fund . . . . 5.96%
Intermediate-Term Fund . . . . 5.45%
Short-Term Fund . . . . 4.58%
Yield - Tax Exempt Money Market Fund
When the Tax Exempt Money Market Fund quotes a current annualized yield, it
is based on a specified recent seven-calendar-day period. It is computed
by (1) determining the net change, exclusive of capital changes, in the
value of a hypothetical preexisting account having a balance of one share
at the beginning of the period, (2) dividing the net change in account
value by the value of the account at the beginning of the base period to
obtain the base return, then (3) multiplying the base period by 52.14
(365divided by7). 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].
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.
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.
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
- ---------- ----------------------------------------------------------------
A FULLY TAXABLE INVESTMENT
TO MATCH A WOULD HAVE TO PAY YOU:
TAX-FREE ----------------------------------------------------------------
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.
06052-0896
Part B
Statement of Additional Information for the
California Bond and Money Market Funds
[Picture
of the USAA STATEMENT OF
USAAEagle TAX EXEMPT ADDITIONAL INFORMATION
is here] FUND, INC. August 1, 1996
- -------------------------------------------------------------------
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, 1996, 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
(NAV) per share. The NAV 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 NAV 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 (SEC).
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
NAV per share. Such procedures include review of the Fund's holdings at such
intervals as is deemed appropriate to determine whether the Fund's NAV
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 NAV 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 NAV 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 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 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) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred 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 an 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 the Fund's
portfolio. An obligation's maturity is typically determined on a stated
final maturity basis, although there are some exceptions to this rule.
With respect to obligations held by the California Bond Fund, if it is
probable that the issuer of an instrument will take advantage of a maturity
- -shortening device, such as a call, refunding, or redemption provision, the
date on which the instrument will probably be called, refunded, or redeemed
may be considered to be its maturity date. Also, the maturities of securities
subject to sinking fund arrangements are determined on a weighted average life
basis, which is the average time for principal to be repaid. The weighted
average life of these securities is likely to be substantially shorter than
their stated final maturity. In addition, for purposes of the Fund's
investment policies, an instrument will be treated as having a maturity
earlier than its stated maturity date if the instrument has technical features
such as puts or demand features which, in the judgment of the Manager, will
result in the instrument being valued in the market as though it has the
earlier maturity.
The California Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under the Investment
Company Act of 1940, as amended (1940 Act).
Lending of Securities
Each Fund may lend its securities. A lending policy may be authorized
by the Company's Directors and implemented by the Manager, but
securities may be loaned only to qualified broker-dealers or institutional
investors that agree to maintain cash collateral with the Company equal
at all times to at least 100% of the value of the loaned securities. The
Directors will establish procedures and monitor the creditworthiness of
any institution or broker-dealer during such time as any loan is
outstanding. The Company will continue to receive interest on the loaned
securities and will invest the cash collateral in readily marketable short
- -term obligations of high quality, thereby earning additional
interest. Interest on loaned tax-exempt securities received by
the borrower and paid to the Company will not be exempt
from federal income taxes in the hands of the Company.
No loan of securities will be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of a Fund's
total assets. The Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase
agreements. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell the security back to
the seller (a commercial bank or recognized securities dealer) at an
agreed upon price on an agreed upon date, usually not more than 7 days
from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value of the underlying
security. In these transactions, the securities purchased by a Fund will
have a total value equal to or in excess of the amount of the repurchase
obligation and will be held by the Funds' custodian until repurchased. If
the seller defaults and the value of the underlying security declines, a
Fund may incur a loss and may incur expenses in selling the collateral. If
the seller seeks relief under the bankruptcy laws, the disposition of the
collateral may be delayed or limited. Any investments in repurchase
agreements will give rise to income which will not qualify as tax-exempt
income when distributed by a Fund.
Other Policies
Although the California Bond Fund is permitted to invest in
options, financial futures contracts and options on financial
futures contracts, the Fund has no current intention of doing
so and will not invest in such securities without first notifying
shareholders and supplying further information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for and
are applicable to each Fund. These restrictions may not be changed for any
given Fund without approval by the lesser of (1) 67% or more of the voting
securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy
or (2) more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without affecting those of
the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase securities of any
issuer (except the United States Government, its agencies and
instrumentalities and any tax-exempt security guaranteed by the
United States Government) if as a result more than 5% of the total assets
of that Fund would be invested in securities of such issuer; for purposes
of this limitation, identification of the "issuer" will be based on a
determination of the source of assets and revenues committed to meeting
interest and principal payments of each security; for purposes of this
limitation the State of California or other jurisdictions and each of its
separate political subdivisions, agencies, authorities and
instrumentalities shall be treated as a separate issuer;
(2) Purchase more than 10% of the outstanding voting securities of any
issuer;
(3) Borrow money, except for temporary or emergency purposes in an amount
not exceeding 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent greater than 10%
of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer or Director
of the Company or its Manager owns individually more than one-half of
one percent (1/2%) of the securities of that issuer, and collectively the
officers and Directors of the Company and Manager together own more than
5% of the securities of that issuer;
(6) Purchase any securities which would cause more than 25% of the value of
that Fund's total assets at the time of such purchase to be invested in
securities the interest upon which is derived from revenues or projects
with similar characteristics, such as toll road revenue bonds, housing
revenue bonds, electric power project revenue bonds, or in industrial
revenue bonds which are based, directly or indirectly, on the credit of
private entities of any one industry; provided that the foregoing
limitation does not apply with respect to investments in United States
Treasury Bills, other obligations issued or guaranteed by the United
States Government, its agencies and instrumentalities, and, in the case
of the California Money Market Fund, certificates of deposit and banker's
acceptances of domestic banks;
(7) Invest in issuers for the purpose of exercising control or management;
(8) Issue senior securities as defined in the 1940 Act, except that it may
purchase tax-exempt securities on a "when-issued" basis or in financial
futures contracts as permitted by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that it
may be deemed to act as a statutory underwriter in the distribution
of any restricted securities or not readily marketable securities;
(10) Purchase or sell real estate, but this shall not prevent investments
in tax-exempt securities secured by real estate or interests therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, except that
this limitation does not apply to purchases of debt securities or to
repurchase agreements;
(12) Purchase on margin or sell short; for purposes of this restriction the
deposit or payment of initial or variation margin in connection with
financial futures contracts or related options will not be deemed to be
a purchase of securities on margin by a Fund;
(13) Purchase or sell commodities or commodities contracts, except that the
Fund may invest in financial futures contracts and options thereon;
(14) Invest its assets in securities of other investment companies except by
purchases in the open market involving only customary brokers'
commissions or as part of a merger, consolidation, reorganization or
purchase of assets approved by the shareholders; or
(15) Invest in put, call, straddle or spread options or interests in oil, gas
or other mineral exploration or development programs, except that a Fund
may write covered call options and purchase put options.
Additional Restrictions
The following restrictions are not considered to be fundamental policies of
the Funds. These additional restrictions may be changed by the Board of
Directors of the Company without notice to or approval by the shareholders.
Neither Fund will:
(1) Invest more than 15% (10% with respect to the California Money
Market Fund) of the value of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days.
(2) Purchase any security while borrowings representing more than 5%
of the Fund's total assets are outstanding.
SPECIAL RISK CONSIDERATIONS
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could result in the
adverse effects described below. The following information constitutes only a
brief summary, does not purport to be a complete description, and is based on
information drawn from official statements and prospectuses relating to
securities offerings of the State of California (the "State") and various
local agencies in California and from other relevant sources. While the
Funds have not independently verified such information, they have no reason to
believe that such information is not correct in all material respects.
Certain of the tax-exempt securities in which the Funds may invest may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a
portion of the State's General Fund surplus are distributed to counties,
cities and their various taxing entities, and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent a
portion of the State's General Fund will be distributed in the future to
counties, cities and their various entities, is unclear.
Certain of the tax-exempt securities may be obligations of issuers who
rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA is to limit ad
valorem taxes on real property, and to restrict the ability of taxing entities
to increase real property tax revenues. On November 7, 1978, California
voters approved Proposition 8, and on June 3, 1986 California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem property tax on
real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the
1% limitation does not apply to ad valorem taxes or special assessments to pay
the interest and redemption charges or (i) any indebtedness approved by the
voters prior to July 1, 1978, or (ii) any bonded indebtedness for the
acquisition or improvement of real property approved on or after July 1, 1978
by two-thirds of the votes cast by the voters voting on the proposition.
Section 2 of Article XIIIA defines "full cash value" to mean "the County
Assessor's valuation of real property as shown on the 1975-76 tax bill under
full cash value or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The "full cash value" may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or a reduction in the Consumer
Price Index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on county
assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (statutes of 1978, Chapter 292, as amended) provides, that
notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the
voters prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIIIA of $4.00 per $100 assessed valuation (based on the
former practice of using 25%, instead of 100%, of full cash value as the
assessed value for tax purposes). The legislation further provided that,
for the 1978-79 fiscal year only, the tax levied by each county was to be
apportioned among all taxing agencies within the county in proportion to
their average share of taxes levied in certain pervious years. The
apportionment of property taxes for fiscal years after 1978-79 has been
revised pursuant to Statutes of 1979, Chapter 282, which provides relief funds
from state attorneys beginning in fiscal year 1979-80 and is designed to
provide a permanent system for sharing state taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the
remaining property tax revenues collected under Proposition 13 instead of
direct State aid. School districts receive a correspondingly reduced amount
of property taxes, but receive compensation directly from the State and are
given additional relief. Chapter 282 does not affect the derivation of the
base levy ($4.00 per $100 of assessed valuation) and the bonded debt tax rate.
However, there can be no assurance that any particular level of State aid to
local governments will be maintained in future years.
On November 6, 1979, another initiative known as "Proposition 4" or the
"Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, state and local
governmental entities have an annual "appropriations limit" and are not able
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is to be based on certain 1978-79 expenditures, and is to be adjusted
annually to reflect changes in consumer prices, population and certain
services provided by these entities. Article XIIIB also provides that if
these entities' revenues in any year exceed the amount permitted to be spent,
the excess would have to be returned by revising tax rates or fee schedules
over the subsequent two years. The "appropriations limit" was $35.010 billion
for the 1992-93 fiscal year, and is estimated to be $36.599 billion for the
1993-94 fiscal year and $36.606 billion for the 1994-95 fiscal year.
In June 1982, the voters of California passed two initiative measures to
repeal the California gift and inheritance tax laws and to enact, in lieu
thereof, a California death tax. California voters also passed an initiative
measure to increase, for taxable years commencing on or after January 1, 1982,
the amount by which personal income tax brackets will be adjusted annually in
an effort to index such tax brackets to account for the effects of inflation.
Decreases in State and local revenues in future fiscal years as a consequence
of these initiatives may result in reductions in allocations of state revenues
to California issuers or in the ability of California issuers to pay their
obligations.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount as shall be reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fees schedules, be
transferred and allocated (up to a maximum of 40%) to the State School Fund
and be expended solely for purposes of instructional improvement and
accountability. No such transfer or allocation of funds will be required if
certain designated state officials determine that annual student expenditures
and class size meet certain criteria as set forth in Proposition 98. Any
funds allocated to the State School Fund shall cause the appropriation limits
established in Article XIIIB to be annually increased for any such allocation
made in the prior year.
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 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.
For the last two fiscal years the California Bond Fund's portfolio
turnover rates were as follows:
1995.....68.57% 1996......______%
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 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 seven 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.
M. Staser Holcomb (1, 2)
Director and Chairman of the Board of Directors
Age: 64
President, Chief Executive Officer, Director and Vice Chairman of the Board
of Directors of USAA Capital Corporation and several of its subsidiaries
and affiliates (1/96-present); Executive Vice President, Chief Information
Officer, United Services Automobile Association (USAA) (2/94-12/95);
Executive Vice President, Chief Financial Officer, USAA and President,
Director and Vice Chairman of the Board of Directors, USAA Capital
Corporation (9/91-1/94). Mr. Holcomb also will serve as a Trustee and
Chairman of the Board of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust and as a 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: 54
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). 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: 61
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.
George E. Brown (3, 4, 5)
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 78
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: 61
Retired. 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: 53
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: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). 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: 48
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: 46
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: 51
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). 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: 37
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); 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: Mark H. Wright, President, Chief Executive Officer, Director and
Vice Chairman, USAA Federal Savings Bank; Josue Robles, Jr., Senior Vice
President, Chief Financial Officer/Controller, USAA; Bradford W. Rich,
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, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ---------------- -------------------
C. Dale Briscoe* $4,480 $17,100
George E. Brown (a) 6,042 23,100
Barbara B. Dreeben 6,042 23,100
Howard L. Freeman, Jr. 6,042 23,100
M. Staser Holcomb* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 6,042 23,100
- ----------------
* Effective January 1, 1996, M. Staser Holcomb replaced Hansford T.
Johnson as Director and Chairman of the Board of Directors and C.
Dale Briscoe retired from the Board of Directors.
(a) The USAA Family of Funds has accrued deferred compensation for Mr.
Brown in an amount (plus earnings thereon) of $21,166. 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) M. Staser Holcomb, 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, 1996, the USAA Family of Funds consisted of 4 registered
investment companies offering 32 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 April
30, 1996, 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 April 30, 1996, 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, USAA State Tax-Free Trust
and USAA Life Investment Trust. As of the date of this SAI, total assets
under management by the Manager were approximately $____ billion, of which
approximately $____ billion were in mutual fund portfolios.
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, 1997 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:
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 (SAS) 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, each Fund pays SAS an annual fixed fee
of $26.00 per account. 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, LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered
by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205,
is the Company's independent auditor. In this capacity, the firm is
responsible for auditing the annual financial statements of the Funds and
reporting thereon.
Financial Statements
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1995, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
A copy of the Annual Report will be delivered free of charge with each SAI
requested from the Manager at the address set forth on page 1 of this
statement.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in the Prospectus. See VALUATION OF SECURITIES
herein for a discussion of the manner in which each Fund's price per share
is calculated.
Total Return
The California Bond Fund may advertise performance in terms of average
annual total return for 1, 5 and 10 year periods, or for such lesser
period as the Fund has been in existence. Average annual total return is
computed by finding the average annual compounded rates of return over the
periods that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods
at the end of the year or period
The calculation assumes all charges are deducted from the initial
$1,000 payment and assumes all dividends and distributions by such
Fund are reinvested at the price stated in the Prospectus on the
reinvestment dates during the period, and includes all recurring
fees that are charged to all shareholder accounts.
The date of commencement of operations for the California Bond Fund
was August 1, 1989. The Fund's average annual total returns for the
periods ended March 31, 1995 were:
1 year. . . . 6.89%
5 years. . . . 7.66%
Since inception. . . . 7.09%
Yield
The California Bond Fund may advertise performance in terms of a 30-day
yield quotation. The 30-day yield quotation is computed by dividing the
net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:
YIELD = 2((((a - b) /(cd) + 1) ^6) - 1
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
For purposes of the yield calculation, interest income is computed based
on the yield to maturity of each debt obligation in a Fund's portfolio and
all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1995 was 5.94%.
Yield - California Money Market Fund
When the California Money Market Fund quotes a current annualized yield,
it is based on a specified recent seven-calendar -day period. It is computed
by (1) determining the net change, exclusive of capital changes, in the value
of a hypothetical preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account value
by the value of the account at the beginning of the base period to obtain the
base return, then (3) multiplying the base period by 52.14 (365 divided by 7).
The resulting yield figure is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased
with dividends on the original share, and dividends declared on both the
original share and any such additional shares, and (2) any fees charged to
all shareholder accounts, in proportion to the length of the base period
and the Fund's average account size.
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.
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.
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
A FULLY TAXABLE INVESTMENT
TO MATCH WOULD HAVE TO PAY YOU:
A DOUBLE -------------------------------------------------------------------
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.
14356-0896
Part B
Statement of Additional Information for the
New York Bond and
New York Money Market Funds
[Picture USAA STATEMENT OF
of the TAX EXEMPT ADDITIONAL INFORMATION
USAA Eagle FUND, INC. August 1, 1996
is here]
- -------------------------------------------------------------------
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, 1996, 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 (NAV)
per share. The NAV 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 NAV 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 (SEC).
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 NAV per share. Such procedures include review of the Fund's holdings
at such intervals as is deemed appropriate to determine whether the Fund's
NAV 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 NAV 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 NAV 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 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) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred 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 an 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 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 creditworthiness of any institution or
broker-dealer during such time as any loan is outstanding. The Company
will continue to receive interest on the loaned securities and will invest
the cash collateral in readily marketable short-term obligations of high
quality, thereby earning additional interest. Interest on loaned tax
- -exempt securities received by the borrower and paid to the Company will
not be exempt from federal income taxes in the hands of the Company.
No loan of securities will be made if, as a result, the aggregate of
such loans would exceed 33 1/3% of the value of a Fund's total assets. The
Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase agreements.
A repurchase agreement is a transaction in which a security is purchased
with a simultaneous commitment to sell the security back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on
an agreed upon date, usually not more than 7 days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity
of the purchased security. A repurchase agreement involves the obligation
of the seller to pay the agreed upon price, which obligation is in effect
secured by the value of the underlying security. In these transactions,
the securities purchased by a Fund will have a total value equal to or in
excess of the amount of the repurchase obligation and will be held by the
Funds' custodian until repurchased. If the seller defaults and the value
of the underlying security declines, a Fund may incur a loss and may incur
expenses in selling the collateral. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or
limited. Any investments in repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by a Fund.
Other Policies
Although the New York Bond Fund is permitted to invest in options,
financial futures contracts and options on financial futures contracts, the
Fund has no current intention of doing so and will not invest in such
securities without first notifying shareholders and supplying further
information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for
and are applicable to each Fund. These restrictions may not be changed for
any given Fund without approval by the lesser of (1) 67% or more of the
voting securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by
proxy or (2) more than 50% of the Fund's outstanding voting securities.
The investment restrictions of one Fund may be changed without affecting
those of the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase securities of any
issuer (other than a security issued or guaranteed as to principal or
interest by the United States, or by a person controlled or
supervised by and acting as an instrumentality of the Government of
the United States; or any certificate of deposit for any of the
foregoing) if as a result more than 5% of the total assets of that
Fund would be invested in securities of such issuer; for purposes of
this limitation, identification of the "issuer" will be based on a
determination of the source of assets and revenues committed to
meeting interest and principal payments of each security; for
purposes of this limitation the State of New York or other
jurisdictions and each of its separate political subdivisions,
agencies, authorities and instrumentalities shall be treated as a
separate issuer;
(2) Purchase more than 10% of the outstanding voting securities of any
issuer;
(3) Borrow money, except for temporary or emergency purposes in an amount
not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent greater than
10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer or
Director of the Company or its Manager owns individually more than
one-half of one percent (1/2%) of the securities of that issuer, and
collectively the officers and Directors of the Company and Manager
together own more than 5% of the securities of that issuer;
(6) Purchase any securities which would cause 25% or more of the value of
that Fund's total assets at the time of such purchase to be invested
in securities the interest upon which is derived from revenues or
projects with similar characteristics, such as toll road revenue
bonds, housing revenue bonds, electric power project revenue bonds,
or in industrial revenue bonds which are based, directly or
indirectly, on the credit of private entities of any one industry;
provided that the foregoing limitation does not apply with respect to
investments in United States Treasury Bills, other obligations issued
or guaranteed by the United States Government, its agencies and
instrumentalities, and, in the case of the New York Money Market
Fund, certificates of deposit and banker's acceptances of domestic
banks;
(7) Invest in issuers for the purpose of exercising control or
management;
(8) Issue senior securities as defined in the 1940 Act, except that it
may purchase tax-exempt securities on a "when-issued" basis and may
purchase and sell financial futures contracts and options as
permitted by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that it
may be deemed to act as a statutory underwriter in the distribution
of any restricted securities or not readily marketable securities;
(10) Purchase or sell real estate, but this shall not prevent investments
in tax-exempt securities secured by real estate or interests therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, except
that this limitation does not apply to purchases of debt securities
or to repurchase agreements;
(12) Purchase on margin or sell short; for purposes of this restriction
the deposit or payment of initial or variation margin in connection
with financial futures contracts or related options will not be
deemed to be a purchase of securities on margin by a Fund;
(13) Purchase or sell commodities or commodities contracts, except that
the Fund may invest in financial futures and contracts and options
thereon;
(14) Invest its assets in securities of other investment companies except
by purchases in the open market involving only customary brokers'
commissions or as part of a merger, consolidation, reorganization or
purchase of assets approved by the shareholders; or
(15) Invest in put, call, straddle or spread options or interests in oil,
gas, or other mineral exploration or development programs, except
that a Fund may write covered call options and purchase put options.
Additional Restrictions
The following restrictions are not considered to be fundamental policies of
the Funds. These additional restrictions may be changed by the Board of
Directors of the Company without notice to or approval by the shareholders.
Neither Fund will:
(1) Invest more than 15% (10% with respect to the New York Money Market
Fund) of the value of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days.
(2) Purchase any security while borrowings representing more than 5% of
the Fund's total assets are outstanding.
SPECIAL RISK CONSIDERATIONS
Special Considerations Relating To New York Municipal Obligations
Some of the significant financial considerations relating to the Fund's
investment in New York Municipal Obligations are summarized below. This
summary information is not intended to be a complete description and is
principally derived from official statements relating to issues of New York
Municipal Obligations that were available prior to the date of this SAI.
The accuracy and completeness of the information contained in those
official statements have not been independently verified.
State Economy. New York is the third most populous state in the nation and
has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a
very small share of the nation's farming and mining activity. The State
has a declining proportion of its workforce engaged in manufacturing, and
an increasing proportion engaged in service industries. New York City (the
"City"), which is the most populous city in the State and nation and is the
center of the nation's largest metropolitan area, accounts for a large
portion of the State's population and personal income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the
nation as a whole, gradually eroding its relative economic position. The
recession has been more severe in the State, owing to a significant
retrenchment in the financial services industry, cutbacks in defense
spending, and an overbuilt real estate market. There can be no assurance
that the State economy will not experience worse-than-predicted results in
the 1995-96 fiscal year, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
The unemployment rate in the State dipped below the national rate in
the second half of 1981 and remained lower until 1991. It stood at 6.9% in
1994. The total employment growth rate in the State has been below the
national average since 1984 and is expected to slow to less than 0.5% in
1995. State per capita personal income remains above the national average.
State per capita income for 1994 was estimated at $25,999, which is 19.2%
above the 1994 estimated national average of $21,809. During the past ten
years, total personal income in the State rose slightly faster than the
national average only in 1986 through 1989.
State Budget. The State Constitution requires the Governor to submit to
the State legislature (the Legislature) a balanced executive budget which
contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by
bills containing all proposed appropriations or reappropriations and any
new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial
plan for that fiscal year. The Governor is required to submit to the
Legislature quarterly budget updates which include a revised cash-basis
state financial plan, and an explanation of any changes from the previous
state financial plan.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State
operations and other purposes, including all necessary appropriations for
debt service. The State financial plan for the 1995-96 fiscal year was
formulated on June 20, 1995 and is based upon the State's budget as enacted
by the Legislature and signed into law by the Governor (the "1995-96 State
Financial Plan").
The 1995-96 State Financial Plan is the first to be enacted in the
administration of the Governor, who assumed office on January 1. It is the
first budget in over half a century which proposed and, as enacted,
projects an absolute year-over-year decline in disbursements in the General
Fund, the State's principal operating fund. Spending for State operations
is projected to drop even more sharply, by 4.6%. Nominal spending from all
State spending sources (i.e., excluding Federal aid) is proposed to
increase by only 2.5% from the prior fiscal year, in contrast to the prior
decade when such spending growth averaged more than 6.0% annually.
In his executive budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing
disparity between sluggish growth in receipts, the effect of prior-year tax
changes, and the rapid acceleration of spending growth; the impact of
unfunded 1994-95 initiatives, primarily for local aid programs; and the use
of one-time solutions, primarily surplus funds from the prior year, to fund
recurring spending in the 1994-95 budget. The Governor proposed additional
tax cuts to spur economic growth and provide relief for low and
middle-income tax payers, which were larger than those ultimately adopted,
and which added $240 million to the then projected imbalance or budget gap,
bringing the total to approximately $5 billion.
This gap is projected to be closed in the 1995-96 State Financial
Plan through a series of actions, mainly spending reductions and cost
containment measures and certain reestimates that are expected to be
recurring, but also through the use of one-time solutions. The 1995-96
State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and
family care programs; (ii) $2.2 billion in savings from State agency
actions to reduce spending on the State workforce, SUNY and CUNY, mental
hygiene programs, capital projects, the prison system and fringe benefits;
(iii) $300 million in savings from local assistance reforms, including
actions affecting school aid and revenue sharing, while proposing program
legislation to provide relief from certain mandates that increase local
spending; (iv) over $400 million in revenue measures, primarily through a
new Quick Draw Lottery game, changes to tax payments schedules, and the
sale of assets; and (v) $300 million from reestimates in receipts.
The 1995-96 State Financial Plan includes actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The
Division of the Budget estimates that the 1995-96 State Financial Plan
contains actions that provide nonrecurring resources or savings totalling
approximately $900 million, while the State comptroller (the Comptroller)
believes that such amount exceeds $1 billion. In addition to this use of
nonrecurring resources, the 1995-96 State Financial Plan reflects actions
that will directly affect the State's 1996-97 fiscal year baseline receipts
and disbursements. The three-year plan to reduce State personal income
taxes will decrease State tax receipts by an estimated $1.7 billion in
State fiscal year 1996-97 in addition to the amount of reduction in State
fiscal year 1995-96. Further significant reductions in the personal income
tax are scheduled for the 1997-98 State fiscal year. Other tax reductions
enacted in 1994 and 1995 are estimated to cause an additional reduction in
receipts of over $500 million in 1996-97, as compared to the level of
receipts in 1995-96. Similarly, many actions taken to reduce disbursements
in 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 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 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 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.
For the last two fiscal years the New York Bond Fund's portfolio
turnover rates were as follows:
1995.....142.19% 1996....._______%
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.
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 seven 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.
M. Staser Holcomb (1, 2)
Director and Chairman of the Board of Directors
Age: 64
President, Chief Executive Officer, Director and Vice Chairman of the Board
of Directors of USAA Capital Corporation and several of its subsidiaries
and affiliates (1/96-present); Executive Vice President, Chief Information
Officer, United Services Automobile Association (USAA) (2/94-12/95);
Executive Vice President, Chief Financial Officer, USAA and President,
Director and Vice Chairman of the Board of Directors, USAA Capital
Corporation (9/91-1/94). Mr. Holcomb also will serve as a Trustee and
Chairman of the Board of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust and as a 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: 54
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). 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: 61
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.
George E. Brown (3, 4, 5)
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 78
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: 61
Retired. 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: 53
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: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). 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: 48
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: 46
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: 51
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). 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: 37
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); 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: Mark H. Wright, President, Chief Executive Officer, Director and
Vice Chairman, USAA Federal Savings Bank; Josue Robles, Jr., Senior Vice
President, Chief Financial Officer/Controller, USAA; Bradford W. Rich,
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, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ---------------- -------------------
C. Dale Briscoe* $4,480 $17,100
George E. Brown (a) 6,042 23,100
Barbara B. Dreeben 6,042 23,100
Howard L. Freeman, Jr. 6,042 23,100
M. Staser Holcomb* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 6,042 23,100
- ----------------
* Effective January 1, 1996, M. Staser Holcomb replaced Hansford T.
Johnson as Director and Chairman of the Board of Directors and C.
Dale Briscoe retired from the Board of Directors.
(a) The USAA Family of Funds has accrued deferred compensation for Mr.
Brown in an amount (plus earnings thereon) of $21,166. 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) M. Staser Holcomb, 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, 1996, the USAA Family of Funds consisted of 4 registered
investment companies offering 32 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 April
30, 1996, 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 April 30, 1996,
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
-------------- ------------------- ----------------
New York Money Robert H. Benmosche 5.1%
Market Fund Denise V. Benmosche
4 Wesley Chapel Rd
Wesley Hills, NY 10901-2604
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, USAA State Tax-Free
Trust and USAA Life Investment Trust. As of the date of this SAI, total
assets under management by the Manager were approximately $_____ billion, of
which approximately $_____ billion were in mutual fund portfolios.
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, 1997 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 (SAS) 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, each Fund pays SAS an annual
fixed fee of $26.00 per account. 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, LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered
by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan Suite 2400, San Antonio, TX 78205, is
the Company's independent auditor. In this capacity, the firm is
responsible for auditing the annual financial statements of the Funds and
reporting thereon.
Financial Statements
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1995, are included in the
Annual Report to Shareholders of that date and are incorporated herein by
reference. A copy of the Annual Report will be delivered free of charge
with each SAI requested from the Manager at the address set forth on page 1
of this statement.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in the Prospectus. See VALUATION OF SECURITIES
herein for a discussion of the manner in which each Fund's price per share
is calculated.
Total Return
The New York Bond Fund may advertise performance in terms of average annual
total return for 1, 5 and 10 year periods, or for such lesser period as the
Fund has been in existence. Average annual total return is computed by
finding the average annual compounded rates of return over the periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at
the end of the year or period
The calculation assumes all charges are deducted from the initial
$1,000 payment and assumes all dividends and distributions by such Fund are
reinvested at the price stated in the Prospectus on the reinvestment dates
during the period, and includes all recurring fees that are charged to all
shareholder accounts.
The date of commencement of operations for the New York Bond Fund was
October 15, 1990. The Fund's average annual total returns for the periods
ended March 31, 1995 were:
1 year. . . .5.42% Since inception . . . .8.59%
Yield
The New York Bond Fund may advertise performance in terms of a 30-day yield
quotation. The 30-day yield quotation is computed by dividing the net
investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:
YIELD = 2((((a - b) / (cd) + 1) ^6) - 1
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
For purposes of the yield calculation, interest income is computed
based on the yield to maturity of each debt obligation in a Fund's
portfolio and all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1995 was 5.73%.
Yield - New York Money Market Fund
When the New York Money Market Fund quotes a current annualized yield, it
is based on a specified recent seven-calendar-day period. It is computed
by (1) determining the net change, exclusive of capital changes, in the
value of a hypothetical preexisting account having a balance of one share
at the beginning of the period, (2) dividing the net change in account
value by the value of the account at the beginning of the base period to
obtain the base return, then (3) multiplying the base period by 52.14
(365divided by7). 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.
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.
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.
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
A FULLY TAXABLE INVESTMENT
TO MATCH WOULD HAVE TO PAY YOU:
A DOUBLE --------------------------------------------------------------------
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
A FULLY TAXABLE INVESTMENT
TO MATCH WOULD HAVE TO PAY YOU:
A TRIPLE --------------------------------------------------------------------
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.
17005-0896
Part B
Statement of Additional Information for the
Virginia Bond and
Virginia Money Market Funds
[Picture USAA STATEMENT OF
of the TAX EXEMPT ADDITIONAL INFORMATION
USAA Eagle FUND, INC. August 1, 1996
is here]
- ---------------------------------------------------------------------------
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, 1996, 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 (NAV)
per share. The NAV 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 NAV 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 (SEC).
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 NAV per share. Such procedures include review of the Fund's holdings
at such intervals as is deemed appropriate to determine whether the Fund's
NAV 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 NAV 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 NAV 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 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) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The
investor selects the day(s) each month that money is transferred 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 an 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 the Systematic Withdrawal
Plan application, which may be requested from the Manager. The shareholder
may terminate participation in the plan at any time. There is no charge to
the shareholder for withdrawals under the Systematic Withdrawal Plan. The
Company will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and redeeming shares.
Any additional expenses of administering the plan will be borne by the
Manager.
Withdrawals will be made by redeeming full and fractional shares
on the date selected by the shareholder at the time the plan is
established. Withdrawal payments made under this plan may exceed dividends
and distributions and, to this extent, will involve the use of principal
and could reduce the dollar value of a shareholder's investment and
eventually exhaust the account. Reinvesting dividends and distributions
helps replenish the account. Because share values and net investment
income can fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss, which
must be reported on the shareholder's income tax return. Therefore, a
shareholder should keep an accurate record of any gain or loss on each
withdrawal.
INVESTMENT POLICIES
The section captioned INVESTMENT OBJECTIVES AND POLICIES in the Prospectus
describes the fundamental investment objectives and the investment policies
applicable to each Fund and the following is provided as additional
information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of each
investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's
portfolio. An obligation's maturity is typically determined on a stated
final maturity basis, although there are some exceptions to this rule.
With respect to obligations held by the Virginia Bond Fund, if it
is probable that the issuer of an instrument will take advantage of a
maturity-shortening device, such as a call, refunding, or redemption
provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. Also, the
maturities of securities subject to sinking fund arrangements are
determined on a weighted average life basis, which is the average time for
principal to be repaid. The weighted average life of these securities is
likely to be substantially shorter than their stated final maturity. In
addition, for purposes of the Fund's investment policies, an instrument
will be treated as having a maturity earlier than its stated maturity date
if the instrument has technical features such as puts or demand features
which, in the judgment of the Manager, will result in the instrument being
valued in the market as though it has the earlier maturity.
The Virginia Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended (1940 Act).
Lending of Securities
Each Fund may lend its securities. A lending policy may be authorized by
the Company's Directors and implemented by the Manager, but securities may
be loaned only to qualified broker-dealers or institutional investors that
agree to maintain cash collateral with the Company equal at all time to at
least 100% of the value of the loaned securities. The Directors will
establish procedures and monitor the creditworthiness of any institution or
broker-dealer during such time as any loan is outstanding. The Company
will continue to receive interest on the loaned securities and will invest
the cash collateral in readily marketable short-term obligations of high
quality, thereby earning additional interest. Interest on loaned tax
- -exempt securities received by the borrower and paid to the Company will
not be exempt from federal income taxes in the hands of the Company.
No loan of securities will be made if, as a result, the aggregate
of such loans would exceed 33 1/3% of the value of a Fund's total assets.
The Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase agreements.
A repurchase agreement is a transaction in which a security is purchased
with a simultaneous commitment to sell the security back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on
an agreed upon date, usually not more than 7 days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity
of the purchased security. A repurchase agreement involves the obligation
of the seller to pay the agreed upon price, which obligation is in effect
secured by the value of the underlying security. In these transactions,
the securities purchased by a Fund will have a total value equal to or in
excess of the amount of the repurchase obligation and will be held by the
Funds' custodian until repurchased. If the seller defaults and the value
of the underlying security declines, a Fund may incur a loss and may incur
expenses in selling the collateral. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or
limited. Any investments in repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by a Fund.
Other Policies
Although the Virginia Bond Fund is permitted to invest in options,
financial futures contracts and options on financial futures contracts, the
Fund has no current intention of doing so and will not invest in such
securities without first notifying shareholders and supplying further
information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for
and are applicable to each Fund. These restrictions may not be changed for
any given Fund without approval by the lesser of (1) 67% or more of the
voting securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by
proxy or (2) more than 50% of the Fund's outstanding voting securities.
The investment restrictions of one Fund may be changed without affecting
those of the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase securities of
any issuer (other than a security issued or guaranteed as to
principal or interest by the United States, or by a person
controlled or supervised by and acting as an instrumentality of
the Government of the United States; or any certificate of
deposit for any of the foregoing) if as a result more than 5% of
the total assets of that Fund would be invested in securities of
such issuer; for purposes of this limitation, identification of
the "issuer" will be based on a determination of the source of
assets and revenues committed to meeting interest and principal
payments of each security; for purposes of this limitation the
Commonwealth of Virginia or other jurisdictions and each of its
separate political subdivisions, agencies, authorities and
instrumentalities shall be treated as a separate issuer;
(2) Purchase more than 10% of the outstanding voting securities of
any issuer;
(3) Borrow money, except for temporary or emergency purposes in an
amount not exceeding 331/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent greater
than 10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer or
Director of the Company or its Manager owns individually more
than one-half of one percent (1/2%) of the securities of that
issuer, and collectively the officers and Directors of the
Company and Manager together own more than 5% of the securities
of that issuer;
(6) Purchase any securities which would cause 25% or more of the
value of that Fund's total assets at the time of such purchase to
be invested in securities the interest upon which is derived from
revenues or projects with similar characteristics, such as toll
road revenue bonds, housing revenue bonds, electric power project
revenue bonds, or in industrial revenue bonds which are based,
directly or indirectly, on the credit of private entities of any
one industry; provided that the foregoing limitation does not
apply with respect to investments in United States Treasury
Bills, other obligations issued or guaranteed by the United
States Government, its agencies and instrumentalities, and, in
the case of the Virginia Money Market Fund, certificates of
deposit and banker's acceptances of domestic banks;
(7) Invest in issuers for the purpose of exercising control or
management;
(8) Issue senior securities as defined in the 1940 Act, except that
it may purchase tax-exempt securities on a "when-issued" basis
and may purchase and sell financial futures contracts and options
as permitted by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that
it may be deemed to act as a statutory underwriter in the
distribution of any restricted securities or not readily
marketable securities;
(10) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate or
interest therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, except
that this limitation does not apply to purchases of debt
securities or to repurchase agreements;
(12) Purchase on margin or sell short; for purposes of the restriction
the deposit or payment of initial or variation margin in
connection with financial futures contracts or related options
will not be deemed to be a purchase of securities on margin by a
Fund;
(13) Purchase or sell commodities or commodities contracts, except
that the Fund may invest in financial futures contracts and
options thereon;
(14) Invest its assets in securities of other investment companies
except by purchases in the open market involving only customary
brokers' commissions or as part of a merger, consolidation,
reorganization or purchase of assets approved by the
shareholders; or
(15) Invest in put, call, straddle or spread options or interests in
oil, gas, or other mineral exploration or development programs,
except that a Fund may write covered call options and purchase
put options.
Additional Restrictions
The following restrictions are not considered to be fundamental policies of
the Funds. These additional restrictions may be changed by the Board of
Directors of the Company without notice to or approval by the shareholders.
Neither Fund will:
(1) Invest more than 15% (10% with respect to the Virginia Money
Market Fund) of the value of its net assets in illiquid
securities, including repurchase agreements maturing in more than
seven days.
(2) Purchase any security while borrowings representing more than 5%
of the Fund's total assets are outstanding.
SPECIAL RISK CONSIDERATIONS
A substantial portion of the Funds' investments will consist of debt
obligations issued to obtain funds for bonds issued by or on behalf of
Virginia state and local governments and other public authorities (Virginia
Issues). For this reason, the Funds are affected by political, economic,
regulatory or other developments which constrain the taxing, revenue
collecting and spending authority of Virginia issuers or otherwise affect
the ability of Virginia issuers to pay interest, repay principal, or any
premium. The following information constitutes only a brief summary of
some of such developments and does not purport to be a complete description.
One such Virginia issuer having special considerations is the
Metropolitan Washington Airports Authority (the Authority). The Authority
is a regional airport authority created by legislation adopted by the
Commonwealth of Virginia and the District of Columbia. The acts empowered
the Authority to acquire Washington National and Washington Dulles
International airports by lease or otherwise, to issue bonds, to carry out
capital improvements plans and other acts necessary to administer the
airports. In 1987 the federal government enacted legislation (the Airports
Act) which authorized a long-term lease of each airport to the Authority.
The Airports Act required that the Authority establish a Board of Review
which is comprised of members of Congress. The Board of Review was granted
the power to disapprove, among other things, the authorization by the
Authority of the issuance of bonds. In 1991, the United States Supreme Court
ruled that the legislation establishing the Board of Review was
unconstitutional in that it authorized the carrying out of executive functions
by Congress, thus violating the doctrine of separation of powers. As part
of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA),
Congress substantially amended the Airports Act in an effort to comply with
the Supreme Court's decision concerning the Review Board. Under these
amendments, a new Board of Review was established in January 1992. The new
Board has nine members. The 1991 legislation does not require that members
of the Board be members of Congress and, unlike the prior Board, does not
have an independent "veto" power over decisions of the Authority's Board,
but can only recommend to the Congress that Board decisions be overturned.
On January 31, 1994, as modified on February 15, 1994, the United
States District Court for the District of Columbia, in an action styled
Hechinger, et al. v. Metropolitan Washington Airports Authority, et. al.,
found the 1991 amendments to be unconstitutional and invalidated the new
Board of Review, holding that the Authority was without authority
thereafter to carry out actions that the Board of Review was required to
oversee. In its decision, the District Court also validated all prior
actions of the Board of Review, including actions with respect to the
Authority's previously authorized bonds. On appeal, the United States
Court of Appeals for the District of Columbia Circuit affirmed the District
Court's decision in late 1994. A petition for further review by the United
States Supreme Court was denied.
In the opinion of the Authority, its litigation counsel, and the
Authority's co-bond counsel, delivered at the time of the issuance of the
Authority's Series 1994A Bonds, this litigation will not impair the ability
of the Authority to sell any securities or to service the resulting debt.
Legislation is presently pending in the Congress to revise the
Authority's powers in compliance with the Court of Appeals decision. Since
this legislation has not been enacted, its impact cannot be determined.
On June 18, 1993, in the case of Harper, et al. v. Virginia
Department of Taxation, the United States Supreme Court determined that the
State of Virginia must consider claims for refunds of certain income taxes
paid in prior years to the State by federal military and civil service
retirees. This decision was a sequel to an earlier (1989) decision of the
Court, Davis v. Michigan, wherein the Court has determined that the
practice of a number of states, including Virginia, of imposing income
taxes on the retirement income of federal employees, while exempting
similar payments to state employees, was invalid under federal law. At
issue in the Harper case was whether the rule announced in Davis would be
applied retroactively. In holding that the Davis rule was to be
retroactively applied, the Supreme Court did not order refunds for taxes or
otherwise mandate a specific remedy. Rather, it remanded the matter back
to the Virginia Courts for further proceedings to determine whether such
refunds are required. On remand, a lower court has held that no refunds
for taxes previously paid were owed. Certain federal retirees have appealed
this decision to the Virginia Supreme Court where it is now pending.
At the present time, it is estimated that some $720.0 million in
potential refund claims and accrued interest are outstanding with potential
interest accruing at the rate of around $3.0 million monthly. In an effort
to reduce the uncertainty of further litigation at a reasonable cost to the
State, the Virginia state legislature, on July 8, 1994, enacted legislation
appropriating $340.0 million to establish a settlement "pool" to provide
for the settlement of federal retiree's claims over a five-year period.
This legislation provides that, within the limits of the pool, a federal
retiree may seek a refund for the amount of previously paid taxes for the
tax years 1985-1988. No accrued interest was paid. This legislation
further provides that the Virginia State Department of Taxation must
provide to each eligible person a notice indicating that such person may be
entitled to a refund and the amount of such refund. Each person receiving
such notice must advise the Taxation Department by a stated time that he
wishes to participate in this settlement or, in the alternative, that he
wishes to opt out and recover refunds through litigation, in the Harper
case or other litigation. If requests for refunds exceed the $340.0
million available in the "pool", each refund request will be reduced
proportionally. The 1994 legislation further provided that if more than
$20.0 million in the aggregate opted out (choose to continue the
litigation), this settlement would be void unless re-authorized by the
legislature in 1995. Such re-authorization was enacted by the 1995 session
of the legislature.
Because of the several uncertainties, including the effect of the
"opt out" provision, it is difficult to measure the full impact of this law
on Virginia issuers or the ability of such issuers to meet their obligations.
Virginia issues may be obligations which rely in whole or in part
on state revenues or appropriations from the state legislature for the
payment of such obligations. For example, obligations of the Virginia
Public Building Authority may be repaid by an amortization and/or debt
service from an agency appropriation. There can be no assurance that such
appropriations will be forthcoming or maintained at any given level over
the life of the obligation. Similarly, certain local government
obligations may be supported by financial assistance provided by the State.
Here again, there can be no assurance that any particular level of state
aid will be maintained in future years.
All appropriations made by the Virginia General Assembly are
conditional appropriations. In the event that Virginia's estimated general
fund revenues are exceeded by the total of general fund appropriations,
including the currently estimated expenditures, the Governor shall, subject
to certain qualifications, reduce the general fund expenditures and
withhold allotments of the appropriations to the extent necessary to
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 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.
For the last two fiscal years the Virginia Bond Fund's portfolio
turnover rates were as follows:
1995.....68.53% 1996....._______%
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 seven 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.
M. Staser Holcomb (1, 2)
Director and Chairman of the Board of Directors
Age: 64
President, Chief Executive Officer, Director and Vice Chairman of the Board
of Directors of USAA Capital Corporation and several of its subsidiaries
and affiliates (1/96-present); Executive Vice President, Chief Information
Officer, United Services Automobile Association (USAA) (2/94-12/95);
Executive Vice President, Chief Financial Officer, USAA and President,
Director and Vice Chairman of the Board of Directors, USAA Capital
Corporation (9/91-1/94). Mr. Holcomb also will serve as a Trustee and
Chairman of the Board of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust and as a 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: 54
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). 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: 61
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.
George E. Brown (3, 4, 5)
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 78
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: 61
Retired. 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: 53
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: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). 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: 48
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: 46
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: 51
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). 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: 37
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); 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: Mark H. Wright, President, Chief Executive Officer, Director and
Vice Chairman, USAA Federal Savings Bank; Josue Robles, Jr., Senior Vice
President, Chief Financial Officer/Controller, USAA; Bradford W. Rich,
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, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ---------------- -------------------
C. Dale Briscoe* $4,480 $17,100
George E. Brown (a) 6,042 23,100
Barbara B. Dreeben 6,042 23,100
Howard L. Freeman, Jr. 6,042 23,100
M. Staser Holcomb* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 6,042 23,100
- ----------------
* Effective January 1, 1996, M. Staser Holcomb replaced Hansford T.
Johnson as Director and Chairman of the Board of Directors and C.
Dale Briscoe retired from the Board of Directors.
(a) The USAA Family of Funds has accrued deferred compensation for Mr.
Brown in an amount (plus earnings thereon) of $21,166. 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) M. Staser Holcomb, 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, 1996, the USAA Family of Funds consisted of 4 registered
investment companies offering 32 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 April
30, 1996, 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 April 30, 1996, 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, USAA State Tax
- -Free Trust and USAA Life Investment Trust. As of the date of this SAI,
total assets under management by the Manager were approximately $_____
billion, of which approximately $_____ billion were in mutual fund
portfolios.
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, 1997
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 (SAS) 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, each Fund pays an annual
fixed fee of $26.00 per account. 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, LLP, 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
The calculation assumes all charges are deducted from the initial
$1,000 payment and assumes all dividends and distributions by such Fund are
reinvested at the price stated in the Prospectus on the reinvestment dates
during the period, and includes all recurring fees that are charged to all
shareholder accounts.
The date of commencement of operations for the Virginia Bond Fund
was October 15, 1990. The Fund's average annual total returns for the
periods ended March 31, 1995 were:
1 year. . . . 6.61% Since inception. . . . 8.30%
Yield
The Virginia Bond Fund may advertise performance in terms of a 30-day yield
quotation. The 30-day yield quotation is computed by dividing the net
investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:
YIELD = 2((((a - b) / (cd) + 1) ^6) - 1
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
For purposes of the yield calculation, interest income is
computed based on the yield to maturity of each debt obligation in a Fund's
portfolio and all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1995 was 5.83%.
Yield - Virginia Money Market Fund
When the Virginia Money Market Fund quotes a current annualized yield, it
is based on a specified recent seven-calendar-day period. It is computed
by (1) determining the net change, exclusive of capital changes, in the
value of a hypothetical preexisting account having a balance of one share
at the beginning of the period, (2) dividing the net change in account
value by the value of the account at the beginning of the base period to
obtain the base return, then (3) multiplying the base period by 52.14
(365divided by7). 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.
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.
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.
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
A FULLY TAXABLE INVESTMENT
TO MATCH WOULD HAVE TO PAY YOU:
A DOUBLE ---------------------- ---------------------- ----------------------
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.
17004-0896
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 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, 1996 are to be filed by amendment.
(b) Exhibits:
Exhibit No. Description of Exhibits
- ----------- -----------------------
1 (a) Articles of Incorporation (1)
(b) Articles of Amendment to Articles of Incorporation dated
December 18, 1981 (1)
(c) Articles Supplementary dated December 21, 1983 (1)
(d) Articles of Amendment to Articles of Incorporation dated
July 17, 1984 (1)
(e) Articles Supplementary dated July 27, 1984 (1)
(f) Articles Supplementary dated August 1, 1985 (1)
(g) Articles Supplementary dated January 17, 1986 (1)
(h) Articles Supplementary dated September 15, 1988 (1)
(i) Articles Supplementary dated May 18, 1989 (1)
(j) Articles Supplementary dated August 24, 1989 (1)
(k) Articles Supplementary dated January 29, 1990 (1)
(l) Articles Supplementary dated July 25, 1990 (1)
(m) Articles Supplementary dated May 2, 1991 (1)
(n) Articles Supplementary dated September 9, 1991 (1)
(o) Articles Supplementary dated May 12, 1992 (1)
(p) Articles of Amendment to Articles of Incorporation dated
July 22, 1992 (1)
(q) Articles Supplementary dated October 28, 1992 (1)
(r) Articles Supplementary dated January 28, 1993 (1)
(s) Articles Supplementary dated March 23, 1993 (1)
(t) Articles Supplementary dated May 5, 1993 (1)
(u) Articles Supplementary dated November 8, 1993 (1)
(v) Articles Supplementary dated January 18, 1994 (1)
(w) Articles Supplementary dated April 11, 1994 (1)
2 Bylaws as amended March 12, 1996 (filed herewith)
3 Voting trust agreement - Not Applicable
4 Specimen Certificates for Shares of
(a) Short-Term Fund (1)
(b) Intermediate-Term Fund (1)
(c) Long-Term Fund (1)
(d) Tax Exempt Money Market Fund (1)
(e) California Bond Fund (1)
(f) California Money Market Fund (1)
(g) New York Bond Fund (1)
(h) New York Money Market Fund (1)
(i) Virginia Bond Fund (1)
(j) Virginia Money Market Fund (1)
5 (a) Advisory Agreement (1)
(b) Letter Agreement adding New York Bond Fund, New York Money Market
Fund, Virginia Bond Fund, and Virginia Money Market Fund (1)
6 (a) Underwriting Agreement (1)
(b) Letter Agreement adding New York Bond Fund, New York Money Market
Fund, Virginia Bond Fund, and Virginia Money Market Fund (1)
7 Not Applicable
8 (a) Custodian Agreement (1)
(b) Letter Agreement adding New York Bond Fund, New York Money Market
Fund, Virginia Bond Fund, and Virginia Money Market Fund (1)
9 (a) Transfer Agency Agreement (1)
(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 (1)
10 (a) Opinion of Counsel (1)
(b) Consent of Counsel (filed herewith)
11 Independent Auditors' Consent (to be filed)
12 Financial statements omitted from prospectuses - Not Applicable
13 Subscriptions and Investment Letters
(a) Short-Term Fund, Intermediate-Term Fund, and High-Yield Fund (1)
(b) California Bond Fund and California Money Market Fund (1)
(c) New York Bond Fund, New York Money Market Fund, Virginia Bond
Fund, and Virginia Money Market Fund (1)
14 Prototype Plans - Not Applicable
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
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., George E. Brown, Howard L. Freeman, Jr.,
and Richard A. Zucker dated June 25, 1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated July 12, 1995 (1)
- ----------------
(1) Previously filed with Post-Effective Amendment No. 23 of the Registrant
(No. 2-75093) filed with the Securities and Exchange Commission on July
24, 1995.
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,
1996 of each class of securities of the Registrant.
Title of Class Number of Record Holders
-------------- ------------------------
Long-Term Fund 38,140
Intermediate-Term Fund 37,834
Short-Term Fund 22,403
Tax Exempt Money Market Fund 35,530
California Bond Fund 8,421
California Money Market Fund 7,169
New York Bond Fund 1,638
New York Money Market Fund 1,218
Virginia Bond Fund 7,113
Virginia Money Market Fund 3,814
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
- ---------------------- ---------------------- --------------------
M. Staser Holcomb Director and Chairman Director and
9800 Fredericksburg Rd. of the Board of Chairman of the
San Antonio, TX 78288 Directors Board of Directors
Michael J.C. Roth Chief Executive Officer, President, Director
9800 Fredericksburg Rd. President, Director, and and Vice Chairman
San Antonio, TX 78288 Vice Chairman of the of the Board of
Board of Directors Directors
Mark H. Wright Director None
9800 Fredericksburg Rd.
San Antonio, TX 78288
John W. Saunders, Jr. Senior Vice President, Vice President
9800 Fredericksburg Rd. Fixed Income Investments, and Director
San Antonio, TX 78288 and Director
Harry W. Miller Senior Vice President, None
9800 Fredericksburg Rd. Equity Investments,
San Antonio, TX 78288 and Director
Bradford W. Rich 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 Secretary
9800 Fredericksburg Rd. 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 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 22nd day of May, 1996.
USAA TAX EXEMPT FUND, INC.
*
--------------------------
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)
- ----------------------- Chairman of the
M. Staser Holcomb Board of Directors
* Vice Chairman of the Board May 22, 1996
- ----------------------- of Directors and President
Michael J.C. Roth (Principal Executive Officer)
* Treasurer (Principal May 22, 1996
- ----------------------- Financial and
Sherron A. Kirk Accounting Officer)
* Director May 22, 1996
- ----------------------
John W. Saunders, Jr.
* Director May 22, 1996
- ----------------------
George E. Brown
* Director May 22, 1996
- ----------------------
Howard L. Freeman, Jr.
* Director May 22, 1996
- ----------------------
Richard A. Zucker
* Director May 22, 1996
- ----------------------
Barbara B. Dreeben
* By: /s/Michael D. Wagner
- ---------------------------
Michael D. Wagner, Attorney-in-Fact, under Powers of Attorney dated
June 25, 1993 and July 12, 1995, incorporated by reference to Post-Effective
Amendment No. 23 filed with the Securities and Exchange Commission on
July 24, 1995.
Exhibit Index
Exhibit Item Page No. *
- ------- ---- ----------
1 (a) Articles of Incorporation (1)
(b) Articles of Amendment to Articles of Incorporation
dated December 18, 1981 (1)
(c) Articles Supplementary dated December 21, 1983 (1)
(d) Articles of Amendment to Articles of Incorporation
dated July 17, 1984 (1)
(e) Articles Supplementary dated July 27, 1984 (1)
(f) Articles Supplementary dated August 1, 1985 (1)
(g) Articles Supplementary dated January 17, 1986 (1)
(h) Articles Supplementary dated September 15, 1988 (1)
(i) Articles Supplementary dated May 18, 1989 (1)
(j) Articles Supplementary dated August 24, 1989 (1)
(k) Articles Supplementary dated January 29, 1990 (1)
(l) Articles Supplementary dated July 25, 1990 (1)
(m) Articles Supplementary dated May 2, 1991 (1)
(n) Articles Supplementary dated September 9, 1991 (1)
(o) Articles Supplementary dated May 12, 1992 (1)
(p) Articles of Amendment to Articles of Incorporation
dated July 22, 1992 (1)
(q) Articles Supplementary dated October 28, 1992 (1)
(r) Articles Supplementary dated January 28, 1993 (1)
(s) Articles Supplementary dated March 23, 1993 (1)
(t) Articles Supplementary dated May 5, 1993 (1)
(u) Articles Supplementary dated November 8, 1993 (1)
(v) Articles Supplementary dated January 18, 1994 (1)
(w) Articles Supplementary dated April 11, 1994 (1)
2 Bylaws as amended March 12, 1996 (filed herewith) 232
3 Voting trust agreement - Not Applicable
4 Specimen Certificates for Shares of
(a) Short-Term Fund (1)
(b) Intermediate-Term Fund (1)
(c) Long-Term Fund (1)
(d) Tax Exempt Money Market Fund (1)
(e) California Bond Fund (1)
(f) California Money Market Fund (1)
(g) New York Bond Fund (1)
(h) New York Money Market Fund (1)
(i) Virginia Bond Fund (1)
(j) Virginia Money Market Fund (1)
5 (a) Advisory Agreement (1)
(b) Letter Agreement adding New York Bond Fund, New York
Money Market Fund, Virginia Bond Fund, and Virginia
Money Market Fund (1)
6 (a) Underwriting Agreement (1)
(b) Letter Agreement adding New York Bond Fund, New York
Money Market Fund, Virginia Bond Fund, and Virginia
Money Market Fund (1)
7 Not Applicable
8 (a) Custodian Agreement (1)
(b) Letter Agreement adding New York Bond Fund, New York
Money Market Fund, Virginia Bond Fund, and Virginia
Money Market Fund (1)
9 (a) Transfer Agency Agreement (1)
(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 (1)
Exhibit Index, cont.
Exhibit Item Page No. *
- ------- ---- ----------
10 (a) Opinion of Counsel (1)
(b) Consent of Counsel (filed herewith) 243
11 Independent Auditors' Consent (to be filed)
12 Financial statements omitted from prospectuses - Not Applicable
13 Subscriptions and Investment Letters
(a) Short-Term Fund, Intermediate-Term Fund, and High-Yield Fund (1)
(b) California Bond Fund and California Money Market Fund (1)
(c) New York Bond Fund, New York Money Market Fund, Virginia
Bond Fund, and Virginia Money Market Fund (1)
14 Prototype Plans - Not Applicable
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
17 Financial Data Schedules
(a) Long-Term Fund (filed herewith) 245
(b) Intermediate-Term Fund (filed herewith) 248
(c) Short-Term Fund (filed herewith) 251
(d) Tax Exempt Money Market Fund (filed herewith) 254
(e) California Bond Fund (filed herewith) 257
(f) California Money Market Fund (filed herewith) 260
(g) New York Bond Fund (filed herewith) 263
(h) New York Money Market Fund (filed herewith) 266
(i) Virginia Bond Fund (filed herewith) 269
(j) Virginia Money Market Fund (filed herewith) 272
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., George E. Brown, Howard L. Freeman,
Jr., and Richard A. Zucker dated June 25, 1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated July 12,
1995 (1)
- --------------------
(1) Previously filed with Post-Effective Amendment No. 23 of the Registrant
(No. 2-75093) filed with the Securities and Exchange Commission on July
24, 1995.
- --------------------------------------------------------
* Refers to sequentially numbered pages
EXHIBIT 2
USAA TAX EXEMPT FUND, INC.
BYLAWS
AS AMENDED March 12, 1996
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 ten percent 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
seven (7) 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 10(b)
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
May 16, 1996
USAA Tax Exempt Fund, Inc.
USAA Building
9800 Fredericksburg Road
San Antonio, TX 78288-0227
Ladies and Gentlemen:
We hereby consent to the incorporation by reference in Post-
Effective Amendment No. 24 (the "Amendment") to the Registration
Statement (No. 2-75093) on Form N-1A (the "Registration
Statement") of USAA Tax Exempt Fund, Inc., a Maryland corporation
(the :Registrant"), of our opinion with respect to the legality
of shares of the Registrant representing interests in 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 series of the
Registrant, which opinion was filed with Post-Effective Amendment
No. 23 to the Registration Statement.
We also hereby consent to being named in the Prospectuses
and the Statements of Additional Information contained in the
Amendment and to a copy of this consent being filed as an exhibit
to the Amendment.
Very truly yours,
/s/Goodwin, Procter & Hoar LLP
------------------------------
GOODWIN, PROCTER & HOAR
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