As filed with the Securities and Exchange Commission on July 25, 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. 25
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 27
USAA TAX EXEMPT FUND, INC.
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Rd., San Antonio, TX 78288
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-0600
Michael D. Wagner, Secretary
USAA TAX EXEMPT FUND, INC.
9800 Fredericksburg Rd.
San Antonio, TX 78288-0227
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
_____ immediately upon filing pursuant to paragraph (b)
__X__ on August 1, 1996 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
_____ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
The Registrant has heretofore registered an indefinite number of shares of the
Long-Term Fund, Intermediate-Term Fund, Short-Term Fund, Tax Exempt Money
Market Fund, California Bond Fund, California Money Market Fund, New York Bond
Fund, New York Money Market Fund, Virginia Bond Fund, and Virginia Money
Market Fund pursuant to Rule 24f-2 under the Investment Company Act of 1940.
The Registrant filed its Rule 24f-2 notice for the fiscal year ended March 31,
1996 on May 20, 1996.
Exhibit Index on Pages 245-246
Page 1 of 335
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 15.
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
16.
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 19.
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 21.
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 INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Funds, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Funds' Statement of Additional Information (SAI), dated August
1, 1996. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is incorporated by reference into this Prospectus (meaning it is
legally a part of the 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 12
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 13
Using Mutual Funds in an Investment Program 14
INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies 15
Long-Term Fund 15
Intermediate-Term Fund 15
Short-Term Fund 15
Tax Exempt Money Market Fund 16
Other Investment Information 16
SHAREHOLDER INFORMATION
Purchase of Shares 19
Redemption of Shares 21
Conditions of Purchase and Redemption 23
Exchanges 24
Other Services 24
Share Price Calculation 25
Dividends, Distributions and Taxes 26
Description of Shares 27
Management of the Company 28
Service Providers 29
Telephone Assistance Numbers 29
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets of each Fund for the year ended March 31, 1996, 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** .06% .07% .09% .07%
Custodian Fees .01% .01% .02% .02%
All Other Expenses .02% .02% .03% .03%
---- ---- ---- ----
Total Other Expenses .09% .10% .14% .12%
---- ---- ---- ----
Total Fund Operating Expenses .37% .38% .42% .40%
==== ==== ==== ====
- --------------
* 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
- ----------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in one of the
Funds below, 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 $ 47
Intermediate-Term Fund $ 4 $ 12 $ 21 $ 48
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, 1996, 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.
LONG-TERM FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 12.96 $ 13.20 $ 14.21 $ 13.54 $ 13.13
Net investment income .79 .79 .81 .88 .92
Net realized and
unrealized gain (loss) .21 (.16) (.44) .75 .41
Distributions from net
investment income (.79) (.78) (.82) (.88) (.92)
Distributions of realized
capital gains - (.09) (.56) (.08) -
------- ------- ------- ------- -------
Net asset value at
end of period $ 13.17 $ 12.96 $ 13.20 $ 14.21 $ 13.54
======= ======= ======= ======= =======
Total return (%) 7.88 5.07 2.36 12.46 10.39
Net assets at end of
period (000) $1,804,116 $1,774,643 $1,831,693 $1,882,882 $1,638,848
Ratio of expenses to
average net assets (%) .37 .38 .38 .39 .40
Ratio of net investment
income to average net
assets (%) 5.99 6.23 5.69 6.35 6.83
Portfolio turnover (%) 53.25(a) 64.72(a) 109.28 88.27 76.28
- -------------------
Total return assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Effective for 1995 and 1996, portfolio turnover rates have been
calculated excluding short-term variable rate securities, which
are those with put date intervals of less than one year.
FINANCIAL HIGHLIGHTS cont.
LONG-TERM FUND:
YEAR ENDED MARCH 31,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 13.01 $ 12.66 $ 12.44 $ 13.96 $ 13.52
Net investment income .94 .95 .96 .97 1.04
Net realized and
unrealized gain (loss) .12 .35 .22 (1.30) .52
Distributions from net
investment income (.94) (.95) (.96) (.97) (1.04)
Distributions of realized
capital gains - - - (.22) (.08)
------- ------- ------- ------- -------
Net asset value at
end of period $ 13.13 $ 13.01 $ 12.66 $ 12.44 $ 13.96
======= ======= ======= ======= =======
Total return (%) 8.46 10.44 9.72 (2.01) 12.13
Net assets at end of
period (000) $1,355,321 $1,172,842 $ 975,285 $ 823,375 $1,039,057
Ratio of expenses to
average net assets (%) .40 .43 .45 .51 .49
Ratio of net investment
income to average net
assets (%) 7.22 7.23 7.58 7.75 7.64
Portfolio turnover (%) 91.41 91.52 124.07 169.38 82.51
FINANCIAL HIGHLIGHTS cont.
INTERMEDIATE-TERM FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 12.50 $ 12.48 $ 12.90 $ 12.29 $ 12.00
Net investment income .71 .69 .69 .74 .79
Net realized and
unrealized gain (loss) .27 .05 (.29) .61 .29
Distributions from net
investment income (.71) (.69) (.69) (.74) (.79)
Distributions of realized
capital gains - (.03) (.13) - -
------- -------- ------- ------- -------
Net asset value at
end of period $ 12.77 $ 12.50 $ 12.48 $ 12.90 $ 12.29
======= ======= ======= ======= =======
Total return (%) 7.97 6.16 3.06 11.29 9.24
Net assets at end of
period (000) $1,660,039 $1,529,750 $1,559,183 $1,374,159 $ 893,874
Ratio of expenses to
average net assets (%) .38 .40 .40 .42 .44
Ratio of net investment
income to average net
assets (%) 5.54 5.63 5.30 5.85 6.45
Portfolio turnover (%) 27.51(a) 27.26(a) 69.45 74.02 66.57
- --------------
Total return assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Effective for 1995 and 1996, portfolio turnover rates have been
calculated excluding short-term variable rate securities, which
are those with put date intervals of less than one year.
FINANCIAL HIGHLIGHTS cont.
INTERMEDIATE-TERM FUND:
YEAR ENDED MARCH 31,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 11.87 $ 11.64 $ 11.78 $ 12.38 $ 12.27
Net investment income .82 .83 .83 .84 .88
Net realized and
unrealized gain (loss) .13 .23 (.14) (.58) .11
Distributions from net
investment income (.82) (.83) (.83) (.84) (.88)
Distributions of realized
capital gains - - - (.02) -
------- ------- ------- ------- -------
Net asset value at
end of period $ 12.00 $ 11.87 $ 11.64 $ 11.78 $ 12.38
======= ======= ======= ======= =======
Total return (%) 8.30 9.29 6.04 2.34 8.32
Net assets at end of
period (000) $ 575,770 $ 471,381 $ 401,026 $ 345,997 $ 402,842
Ratio of expenses to
average net assets (%) .43 .46 .49 .56 .60
Ratio of net investment
income to average net
assets (%) 6.91 6.95 7.10 7.16 7.07
Portfolio turnover (%) 66.26 62.28 112.69 138.82 90.86
FINANCIAL HIGHLIGHTS cont.
SHORT-TERM FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 10.47 $ 10.48 $ 10.63 $ 10.48 $ 10.35
Net investment income .50 .47 .45 .50 .59
Net realized and
unrealized gain (loss) .10 (.01) (.15) .15 .13
Distributions from net
investment income (.50) (.47) (.45) (.50) (.59)
Distributions of realized
capital gains - - - - -
------- ------- ------- ------- -------
Net asset value at
end of period $ 10.57 $ 10.47 $ 10.48 $ 10.63 $ 10.48
======= ======= ======= ======= =======
Total return (%) 5.83 4.51 2.87 6.37 7.09
Net assets at end of
period (000) $ 774,020 $ 801,157 $ 995,624 $ 862,182 $ 680,075
Ratio of expenses to
average net assets (%) .42 .42 .43 .43 .48
Ratio of net investment
income to average net
assets (%) 4.73 4.50 4.25 4.75 5.59
Portfolio turnover (%) 35.99(a) 32.61(a) 101.67 138.20 107.35
- --------------
Total return assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Effective for 1995 and 1996, portfolio turnover rates have been
calculated excluding short-term variable rate securities, which
are those with put date intervals of less than one year.
FINANCIAL HIGHLIGHTS cont.
SHORT-TERM FUND:
YEAR ENDED MARCH 31,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 10.39 $ 10.27 $ 10.42 $ 10.70 $ 10.66
Net investment income .67 .67 .64 .61 .62
Net realized and
unrealized gain (loss) (.04) .12 (.15) (.24) .04
Distributions from net
investment income (.67) (.67) (.64) (.61) (.62)
Distributions of realized
capital gains - - - (.04) -
------- ------- ------- ------- -------
Net asset value at
end of period $ 10.35 $ 10.39 $ 10.27 $ 10.42 $ 10.70
======= ======= ======= ======= =======
Total return (%) 6.27 7.91 4.78 3.57 6.33
Net assets at end of
period (000) $ 423,914 $ 279,028 $ 254,453 $ 244,703 $ 287,271
Ratio of expenses to
average net assets (%) .50 .52 .51 .56 .57
Ratio of net investment
income to average net
assets (%) 6.48 6.47 6.14 5.81 5.78
Portfolio turnover (%) 96.10 87.23 146.28 147.69 142.11
FINANCIAL HIGHLIGHTS cont.
TAX EXEMPT MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .04 .03 .02 .03 .04
Distributions from net
investment income (.04) (.03) (.02) (.03) (.04)
------- ------- ------- ------- -------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return (%) 3.65 2.98 2.31 2.89 4.30
Net assets at end of
period (000) $1,529,176 $1,456,747 $1,569,760 $1,501,098 $1,483,554
Ratio of expenses to
average net assets (%) .40 .39 .40 .40 .39
Ratio of net investment
income to average net
assets (%) 3.59 2.93 2.29 2.85 4.21
- --------------
Total return assumes reinvestment of all dividend income and capital gain
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
TAX EXEMPT MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .06 .06 .05 .05 .04
Distributions from net
investment income (.06) (.06) (.05) (.05) (.04)
------- ------- ------- ------- -------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return (%) 5.94 6.24 5.57 4.69 4.49
Net assets at end of
period (000) $1,508,862 $ 990,050 $ 802,233 $ 619,085 $ 327,092
Ratio of expenses to
average net assets (%) .40 .42 .43 .43 .47
Ratio of net investment
income to average net
assets (%) 5.76 6.06 5.48 4.63 4.34
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.
** S&P is a trademark of The McGraw-Hill Companies, Inc., and has
been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the product.
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 at least 50% 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. 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
applicable to money market funds under regulations of the SEC. Generally,
these requirements limit the 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 a Fund 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. Moreover, because each Fund invests in securities backed by
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to a Fund and affect its share price.
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 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.
Zero Coupon Bonds - Each Fund may invest in zero coupon bonds. A zero coupon
bond is a security that is sold at a deep discount from its face value, makes
no periodic interest payments, and is redeemed at face value when it matures.
The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment. In calculating its dividend, each
Fund records as income the daily amortization of the purchase discount.
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 - Each of the Long-Term, Intermediate-Term and Short-Term Funds may
invest up to 15% (10% with respect to the Tax Exempt Money Market Fund) of
their net assets in illiquid securities.
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.
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.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) 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).
(2) 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.
(3) 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 Investment Company Act of 1940, as amended (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. The NAV of each Fund is determined at the close of the regular trading
session of the New York Stock Exchange (NYSE) each day on which the Exchange
is open. If a Fund receives your request prior to that time, 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
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
VIA from a bank account, paycheck, income-producing investment
ELECTRONIC or from a USAA money market account. Sign up for these
FUNDS services when opening an account or call 1-800-531-8448 to
TRANSFER add these 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
1-800-531-8448 a 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.
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.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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 (SSB) and the Transfer Agent for
their services in connection with the wire redemption. Your bank may also
charge a fee for receiving funds by wire.
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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by
each Fund to the Transfer Agent. Accounts exempt from the fee include:
(1) any account regularly purchasing additional shares each month through an
automatic investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA or UTMA); (3) all (non IRA) money market
fund accounts; (4) any account whose registered owner has an aggregate balance
of $50,000 or more invested in USAA mutual funds; and (5) all IRA accounts
(for the first year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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 purchase shares automatically 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:
(1) a reinvested dividend;
(2) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.
If you own shares in the Tax Exempt Money Market Fund, you will receive
a confirmation for purchases or redemptions by check and exchanges. If that
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 income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 portfolios. Ten such portfolios 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
portfolios in addition to those already existing without the approval of the
shareholders of the Company.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held
unless required by the 1940 Act. 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 portfolio, a separate vote of
the shareholders of that portfolio 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 $30 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, 1996.
OPERATING EXPENSES
For the fiscal year ended March 31, 1996, the total operating expenses for
each Fund as a percentage of that Fund's ANA equaled .37% for the Long-Term
Fund, .38% for the Intermediate-Term Fund, .42% for the Short-Term Fund, and
.40% 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
1986, has managed the Fund since its inception in March 1982. He has 22 years
investment management experience and has worked for IMCO for 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 1994, has managed the Funds since April 1993 and April 1994,
respectively. He has nine years investment management experience and has
worked for IMCO for 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.
Tax Exempt Money Market Fund
Thomas G. Ramos, Assistant Vice President of Money Market Funds since August
1994, has managed the Fund since August 1994. Mr. Ramos has 18 years
investment management experience and has worked for IMCO for 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 and a BA from Yale University.
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 11.
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 11.
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.
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
INVESTMENT 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 about the Funds, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Funds' Statement of Additional Information (SAI), dated August
1, 1996. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is incorporated by reference into this Prospectus (meaning it is
legally a part of the 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. THIS
FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
THEREFORE AN INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER
TYPES OF MONEY MARKET FUNDS.
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
California Bond Fund 11
California Money Market Fund 11
Other Investment Information 12
SHAREHOLDER INFORMATION
Purchase of Shares 15
Redemption of Shares 17
Conditions of Purchase and Redemption 19
Exchanges 20
Other Services 20
Share Price Calculation 21
Dividends, Distributions and Taxes 22
Management of the Company 24
Description of Shares 25
Service Providers 25
Telephone Assistance Numbers 25
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets of each Fund for the year ended March 31, 1996, 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** .06% .07%
Custodian Fees .02% .04%
All Other Expenses .02% .04%
---- ----
Total Other Expenses .10% .15%
---- ----
Total Fund Operating Expenses .42% .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
- ----------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in one of the
Funds below, 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 $ 4 $ 13 $ 24 $ 53
California Money Market Fund $ 5 $ 15 $ 26 $ 59
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 seven-year period ended March 31, 1996, 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.
CALIFORNIA BOND FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 10.10 $ 10.03 $ 10.75 $ 10.25 $ 9.98
Net investment income .60 .59 .59 .62 .66
Net realized and
unrealized gain (loss) .33 .07 (.52) .62 .27
Distributions from net
investment income (.60) (.59) (.59) (.62) (.66)
Distributions of realized
capital gains - - (.20) (.12) -
------- ------- ------- ------- -------
Net asset value at
end of period $ 10.43 $ 10.10 $ 10.03 $ 10.75 $ 10.25
======= ======= ======= ======= =======
Total return (%) 9.35 6.89 .31 12.56 9.52
Net assets at end of
period (000) $409,180 $372,877 $382,766 $386,933 $305,834
Ratio of expenses to
average net assets (%) .42 .44 .44 .46 .48
Ratio of net investment
income to average net
assets (%) 5.74 5.98 5.40 5.94 6.44
Portfolio turnover (%) 23.09(a) 28.86(a) 102.85 86.53 50.61
- --------------
* Fund commenced operations August 1, 1989.
(a) Effective for 1995 and 1996, portfolio turnover rates have been
calculated excluding short-term variable rate securities, which
are those with put date intervals of less than one year.
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
CALIFORNIA BOND FUND:
YEAR ENDED MARCH 31,
1991 1990*
---- ----
Net asset value at
beginning of period $ 9.75 $ 10.00
Net investment income .66 .44
Net realized and
unrealized gain (loss) .23 (.25)
Distributions from net
investment income (.66) (.44)
Distributions of realized
capital gains - -
------- -------
Net asset value at
end of period $ 9.98 $ 9.75
======= =======
Total return (%) 9.46 1.97
Net assets at end of
period (000) $192,344 $107,539
Ratio of expenses to
average net assets (%) .50(c) .50(b)(c)
Ratio of net investment
income to average net
assets (%) 6.73(c) 6.81(b)(c)
Portfolio turnover (%) 72.67 135.61
- --------------
(b) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(c) 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 Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1991 1990*
---- ----
Ratio of expenses to
average net assets (%) .54 .74(b)
Ratio of net investment
income to average net
assets (%) 6.69 6.57(b)
FINANCIAL HIGHLIGHTS cont.
CALIFORNIA MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .04 .03 .02 .03 .04
Distributions from net
investment income (.04) (.03) (.02) (.03) (.04)
------- ------- ------- ------- -------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return (%) 3.58 2.94 2.22 2.66 4.03
Net assets at end of
period (000) $296,349 $266,764 $247,303 $219,097 $229,328
Ratio of expenses to
average net assets (%) .47 .47 .49 .50 .50
Ratio of net investment
income to average net
assets (%) 3.52 2.91 2.19 2.63 3.94
- --------------
* Fund commenced operations August 1, 1989.
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
CALIFORNIA MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1991 1990*
---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00
Net investment income .05 .04
Distributions from net
investment income (.05) (.04)
------- -------
Net asset value at
end of period $ 1.00 $ 1.00
======= =======
Total return (%) 5.44 3.70
Net assets at end of
period (000) $197,254 $ 97,782
Ratio of expenses to
average net assets (%) .50(b) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 5.26(b) 5.51(a)(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 Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1991 1990*
---- ----
Ratio of expenses to
average net assets (%) .55 .76(a)
Ratio of net investment
income to average net
assets (%) 5.21 5.25(a)
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.
** S&P is a trademark of The McGraw-Hill Companies, Inc., and has
been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the product.
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 50% 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. 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 net asset value (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 a Fund 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 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.
Zero Coupon Bonds - Each Fund may invest in zero coupon bonds. A zero coupon
bond is a security that is sold at a deep discount from its face value, makes
no periodic interest payments, and is redeemed at face value when it matures.
The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment. In calculating its dividend, each
Fund records as income the daily amortization of the purchase discount.
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 - The California Bond Fund and California Money Market Fund may
invest up to 15% and 10%, respectively, of their net assets in illiquid
securities.
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.
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.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) 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).
(2) 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.
(3) 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. An
investment in the California Money Market Fund may be riskier than an
investment in other types of money market funds because of this concentration.
In addition, because each Fund invests in securities backed by banks and
other financial institutions, changes in the credit quality of these
institutions could cause losses to a Fund and affect its share price.
Other considerations affecting the Funds' investments in California
obligations are summarized in the SAI under SPECIAL RISK CONSIDERATIONS.
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 NAV per share next
determined after the Fund receives your request in proper form. The NAV of
each Fund is determined at the close of the regular trading session of the New
York Stock Exchange (NYSE) each day on which the Exchange is open. If a Fund
receives your request prior to that time, 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
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
VIA from a bank account, paycheck, income-producing investment
ELECTRONIC or from a USAA money market account. Sign up for these
FUNDS services when opening an account or call 1-800-531-8448 to
TRANSFER add these 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
1-800-531-8448 a 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.
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:
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.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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 (SSB) and the Transfer Agent for
their services in connection with the wire redemption. Your bank may also
charge a fee for receiving funds by wire.
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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by
each Fund to the Transfer Agent. Accounts exempt from the fee include:
(1) any account regularly purchasing additional shares each month through
an automatic investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA or UTMA); (3) all (non IRA) money market
fund accounts; (4) any account whose registered owner has an aggregate balance
of $50,000 or more invested in USAA mutual funds; and (5) all IRA accounts
(for the first year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your California Bond
Fund account except:
(1) a reinvested dividend;
(2) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.
If you own shares in the California Money Market Fund, you will receive
a confirmation for purchases or redemptions by check and exchanges. If that
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 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 income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 $30 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, 1996, 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, 1996, the total operating expenses for
each Fund as a percentage of that Fund's ANA equaled .42% 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 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 and a BS
from the U.S. Naval Academy.
California Money Market Fund
John C. Bonnell, Executive Director of Money Market Funds since May 1996, has
managed the Fund since May 1996. He has seven years investment management
experience working for IMCO, where he has held various positions in Fixed
Income Investments. Mr. Bonnell earned the CFA designation in 1994 and is a
member of the AIMR, the SAFAS, the NFMA and the Southern Municipal Finance
Society. He holds an MBA from St. Mary's University and a BBA from the
University of Texas at San Antonio.
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 portfolios. Ten such portfolios
have been established, two of which are described in this Prospectus. Each
of the two Funds is classified as a diversified investment company. Under
the Company's charter, the Board of Directors is authorized to create new
portfolios in addition to those already existing without the approval of
the shareholders of the Company.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held
unless required by the 1940 Act. 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 portfolio, a separate vote of
the shareholders of that portfolio 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 11.
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 11.
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 16.
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 18.
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 INVESTMENT 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 about the Funds, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Funds' Statement of Additional Information (SAI), dated August
1, 1996. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is incorporated by reference into this Prospectus (meaning it is
legally a part of the 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. THIS
FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
THEREFORE AN INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER
TYPES OF MONEY MARKET FUNDS.
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
New York Bond Fund 11
New York Money Market Fund 11
Other Investment Information 12
SHAREHOLDER INFORMATION
Purchase of Shares 16
Redemption of Shares 18
Conditions of Purchase and Redemption 20
Exchanges 21
Other Services 21
Share Price Calculation 22
Dividends, Distributions and Taxes 23
Management of the Company 25
Description of Shares 26
Service Providers 27
Telephone Assistance Numbers 27
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assts
of each Fund for the year ended March 31, 1996, 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 .26% .17%
12b-1 Fees None None
Other Expenses, net of reimbursements
Transfer Agent Fees** .08% .09%
Custodian Fees .08% .12%
All Other Expenses .08% .12%
---- ----
Total Other Expenses .24% .33%
---- ----
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 22.
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, .45%, .24%, and .69%; and New
York Money Market Fund, .45%, .33%, and .78%. The Manager has voluntarily
agreed to continue to limit each Fund's annual expenses until August 1, 1997,
to .50% of its ANA and will reimburse the Funds for all expenses in excess of
the limitation.
Example of Effect of Fund Expenses
- -----------------------------------------------------------
You would pay the following expenses on a $1,000 investment in one of the
Funds below, 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 six-year period ended March 31, 1996, 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.
NEW YORK BOND FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 10.77 $ 10.83 $ 11.62 $ 10.94 $ 10.50
Net investment income .63 .62 .62 .65 .69
Net realized and
unrealized gain (loss) .18 (.06) (.50) .80 .44
Distributions from net
investment income (.63) (.62) (.62) (.65) (.69)
Distributions of realized
capital gains - - (.29) (.12) -
------- ------- ------- ------- -------
Net asset value at
end of period $ 10.95 $ 10.77 $ 10.83 $ 11.62 $ 10.94
======= ======= ======= ======= =======
Total return (%) 7.67 5.42 .68 13.74 11.00
Net assets at end of
period (000) $ 53,987 $ 50,507 $ 56,912 $ 48,925 $ 28,022
Ratio of expenses to
average net assets (%) .50(b) .50(b) .50(b) .50(b) .50(b)
Ratio of net investment
income to average net
assets (%) 5.75(b) 5.83(b) 5.24(b) 5.79(b) 6.32(b)
Portfolio turnover (%) 74.80(c) 74.74(c) 124.40 107.12 110.77
- --------------
* Fund commenced operations October 15, 1990.
(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 Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992 1991*
---- ---- ---- ---- ---- ----
Ratio of expenses to
average net assets (%) .69 .71 .69 .80 1.07 1.73(a)
Ratio of net investment
income to average net
assets (%) 5.56 5.62 5.05 5.49 5.75 5.50(a)
(c) Effective for 1995 and 1996, portfolio turnover rates have been
calculated excluding short-term variable rate securities, which
are those with put date intervals of less than one year.
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
NEW YORK BOND FUND:
YEAR ENDED MARCH 31,
1991*
----
Net asset value at
beginning of period $ 10.00
Net investment income .32
Net realized and
unrealized gain (loss) .50
Distributions from net
investment income (.32)
Distributions of realized
capital gains -
-------
Net asset value at
end of period $ 10.50
=======
Total return (%) 8.22
Net assets at end of
period (000) $ 11,635
Ratio of expenses to
average net assets (%) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 6.73(a)(b)
Portfolio turnover (%) 128.04
FINANCIAL HIGHLIGHTS cont.
NEW YORK MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .04 .03 .02 .03 .04
Distributions from net
investment income (.04) (.03) (.02) (.03) (.04)
------ ------ ------ ------ ------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return (%) 3.56 2.76 2.00 2.51 3.72
Net assets at end of
period (000) $ 45,554 $ 27,525 $ 24,513 $ 19,428 $ 16,788
Ratio of expenses to
average net assets (%) .50(b) .50(b) .50(b) .50(b) .50(b)
Ratio of net investment
income to average net
assets (%) 3.47(b) 2.74(b) 1.98(b) 2.46(b) 3.61(b)
- --------------
* Fund commenced operations October 15, 1990.
(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 Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992 1991*
---- ---- ---- ---- ---- ----
Ratio of expenses to
average net assets (%) .78 .85 .98 1.06 1.26 1.65(a)
Ratio of net investment
income to average net
assets (%) 3.19 2.39 1.50 1.90 2.85 3.60(a)
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
NEW YORK MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1991*
----
Net asset value at
beginning of period $ 1.00
Net investment income .02
Distributions from net
investment income (.02)
------
Net asset value at
end of period $ 1.00
======
Total return (%) 2.23
Net assets at end of
period (000) $ 12,684
Ratio of expenses to
average net assets (%) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 4.75(a)(b)
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.
** S&P is a trademark of The McGraw-Hill Companies, Inc., and has
been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the product.
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 50% 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. 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 net asset value (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 a Fund 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 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.
Zero Coupon Bonds - Each Fund may invest in zero coupon bonds. A zero coupon
bond is a security that is sold at a deep discount from its face value, makes
no periodic interest payments, and is redeemed at face value when it matures.
The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment. In calculating its dividend, each
Fund records as income the daily amortization of the purchase discount.
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 - The New York Bond Fund and New York Money Market Fund may invest
up to 15% and 10%, respectively, of their net assets in illiquid securities.
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.
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.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) 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).
(2) 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.
(3) 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 New York issues. 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.
An investment in the New York Money Market Fund may be riskier than an
investment in other types of money market funds because of the Fund's
concentration in New York issues.
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.
In addition to these considerations, because each Fund invests in
securities backed by banks and other financial institutions, changes in the
credit quality of these institutions could cause losses to a Fund and affect
its share price.
Other considerations affecting the Funds' investments in New York
Municipal Obligations are summarized in the SAI under SPECIAL RISK
CONSIDERATIONS.
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 NAV per share next
determined after the Fund receives your request in proper form. The NAV of
each Fund is determined at the close of the regular trading session of the New
York Stock Exchange (NYSE) each day on which the Exchange is open. If a Fund
receives your request prior to that time, 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
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
VIA from a bank account, paycheck, income-producing investment
ELECTRONIC or from a USAA money market account. Sign up for these
FUNDS services when opening an account or call 1-800-531-8448 to
TRANSFER add these 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
1-800-531-8448 a 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.
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.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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 (SSB) and the Transfer Agent for
their services in connection with the wire redemption. Your bank may also
charge a fee for receiving funds by wire.
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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by
each Fund to the Transfer Agent. Accounts exempt from the fee include:
(1) any account regularly purchasing additional shares each month through
an automatic investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA or UTMA); (3) all (non IRA) money market
fund accounts; (4) any account whose registered owner has an aggregate balance
of $50,000 or more invested in USAA mutual funds; and (5) all IRA accounts
(for the first year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your New York Bond
Fund account except:
(1) a reinvested dividend;
(2) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.
If you own shares in the New York Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges. If that
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 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 income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 $30 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, 1996, the fees paid to the Manager, net of the reimbursements, were .26%
of ANA for the New York Bond Fund and .17% of ANA for the New York Money
Market Fund.
OPERATING EXPENSES
For the fiscal year ended March 31, 1996, the Manager limited each Fund's
total operating expenses to .50% of its ANA. The Manager reimbursed the New
York Bond Fund $102,918 and the New York Money Market Fund $97,382 for
expenses in excess of the limitation. The Manager has voluntarily agreed to
continue to limit each Fund's annual expenses until August 1, 1997, 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
1986, has managed the Fund since its inception in October 1990. He has 22
years investment management experience and has worked for IMCO for 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
John C. Bonnell, Executive Director of Money Market Funds since May 1996, has
managed the Fund since May 1996. He has seven years investment management
experience working for IMCO, where he has held various positions in Fixed
Income Investments. Mr. Bonnell earned the CFA designation in 1994 and is a
member of the AIMR, the SAFAS, the NFMA and the Southern Municipal Finance
Society. He holds an MBA from St. Mary's University and a BBA from the
University of Texas at San Antonio.
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 portfolios. Ten such portfolios
have been established, two of which are described in this Prospectus. Each
of the two Funds is classified as a diversified investment company. Under
the Company's charter, the Board of Directors is authorized to create new
portfolios in addition to those already existing without the approval of
the shareholders of the Company.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held
unless required by the 1940 Act. 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 portfolio, a separate vote of
the shareholders of that portfolio 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
[THIS PAGE LEFT BLANK INTENTIONALLY]
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 11.
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 11.
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.
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 INVESTMENT 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 about the Funds, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Funds' Statement of Additional Information (SAI), dated August 1, 1996.
The SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part
of the 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. THIS
FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
THEREFORE AN INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER
TYPES OF MONEY MARKET FUNDS.
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
Virginia Bond Fund 11
Virginia Money Market Fund 11
Other Investment Information 12
SHAREHOLDER INFORMATION
Purchase of Shares 15
Redemption of Shares 17
Conditions of Purchase and Redemption 19
Exchanges 20
Other Services 20
Share Price Calculation 21
Dividends, Distributions and Taxes 22
Management of the Company 24
Description of Shares 25
Service Providers 26
Telephone Assistance Numbers 26
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets of each Fund for the year ended March 31, 1996, 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 .34% .29%
12b-1 Fees None None
Other Expenses, net of reimbursements
Transfer Agent Fees** .08% .10%
Custodian Fees .03% .05%
All Other Expenses .03% .06%
---- ----
Total Other Expenses .14% .21%
---- ----
Total Fund Operating Expenses, net of reimbursements .48% .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 18.
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 .34%, .21%, and .55%. 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, 1997, to .50%
of its ANA and will reimburse the Funds for all expenses in excess of the
limitation.
Example of Effect of Fund Expenses
- -----------------------------------------------------------
You would pay the following expenses on a $1,000 investment in one of the
Funds below, 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 $ 15 $ 27 $ 60
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 six-year period ended March 31, 1996, 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.
VIRGINIA BOND FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 10.76 $ 10.71 $ 11.16 $ 10.57 $ 10.28
Net investment income .63 .62 .62 .64 .67
Net realized and
unrealized gain (loss) .17 .05 (.30) .65 .29
Distributions from net
investment income (.63) (.62) (.62) (.64) (.67)
Distributions of realized
capital gains - - (.15) (.06) -
------- ------- ------- ------- -------
Net asset value at
end of period $ 10.93 $ 10.76 $ 10.71 $ 11.16 $ 10.57
======= ======= ======= ======= ========
Total return (%) 7.57 6.61 2.69 12.61 9.61
Net assets at end of
period (000) $267,111 $238,920 $235,901 $207,302 $131,475
Ratio of expenses to
average net assets (%) .48 .50 .49 .50(b) .50(b)
Ratio of net investment
income to average net
assets (%) 5.74 5.95 5.44 5.90(b) 6.40(b)
Portfolio turnover (%) 27.20(c) 27.77(c) 92.17 91.31 86.77
- --------------
* Fund commenced operations October 15, 1990.
(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 Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1993 1992 1991*
---- ---- ----
Ratio of expenses to
average net assets (%) .54 .65 .99(a)
Ratio of net investment income
to average net assets (%) 5.86 6.25 6.34(a)
(c) Effective for 1995 and 1996, portfolio turnover rates have been
calculated excluding short-term variable rate securities, which
are those with put date intervals of less than one year.
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
VIRGINIA BOND FUND:
YEAR ENDED MARCH 31,
1991*
----
Net asset value at
beginning of period $ 10.00
Net investment income .32
Net realized and
unrealized gain (loss) .28
Distributions from net
investment income (.32)
Distributions of realized
capital gains -
-------
Net asset value at
end of period $ 10.28
=======
Total return (%) 6.01
Net assets at end of
period (000) $ 58,045
Ratio of expenses to
average net assets (%) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 6.83(a)(b)
Portfolio turnover (%) 142.56
FINANCIAL HIGHLIGHTS cont.
VIRGINIA MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .02 .03 .04
Distributions from net
investment income (.03) (.03) (.02) (.03) (.04)
------ ------ ------ ------ ------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return (%) 3.42 2.91 2.14 2.65 4.09
Net assets at end of
period (000) $110,308 $ 98,049 $ 92,570 $ 77,263 $ 73,220
Ratio of expenses to
average net assets (%) .50(b) .50(b) .50(b) .50(b) .50(b)
Ratio of net investment
income to average net
assets (%) 3.36(b) 2.88(b) 2.12(b) 2.62(b) 3.96(b)
- --------------
* Fund commenced operations October 15, 1990.
(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 Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992 1991*
---- ---- ---- ---- ---- ----
Ratio of expenses to
average net assets (%) .55 .56 .61 .63 .74 1.08(a)
Ratio of net investment
income to average net
assets (%) 3.31 2.82 2.01 2.49 3.72 4.45(a)
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS cont.
VIRGINIA MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1991*
----
Net asset value at
beginning of period $ 1.00
Net investment income .02
Distributions from net
investment income (.02)
------
Net asset value at
end of period $ 1.00
======
Total return (%) 2.38
Net assets at end of
period (000) $ 42,513
Ratio of expenses to
average net assets (%) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 5.03(a)(b)
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.
** S&P is a trademark of The McGraw-Hill Companies, Inc., and has
been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the product.
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 50% 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. 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 net asset value (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 a Fund 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 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.
Zero Coupon Bonds - Each Fund may invest in zero coupon bonds. A zero coupon
bond is a security that is sold at a deep discount from its face value, makes
no periodic interest payments, and is redeemed at face value when it matures.
The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment. In calculating its dividend, each
Fund records as income the daily amortization of the purchase discount.
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 - The Virginia Bond Fund and Virginia Money Market Fund may invest
up to 15% and 10%, respectively, of their net assets in illiquid securities.
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.
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.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) 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).
(2) 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.
(3) 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. An investment in the Virginia Money Market Fund may be riskier than
an investment in other types of money market funds because of this
concentration.
In addition, because each Fund invests in securities backed
by banks and other financial institutions, changes in the credit quality of
these institutions could cause losses to a Fund and affect its share price.
Other considerations affecting the Funds' investments in Virginia
obligations are summarized in the SAI under SPECIAL RISK CONSIDERATIONS.
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 NAV per share next
determined after the Fund receives your request in proper form. The NAV of
each Fund is determined at the close of the regular trading session of the New
York Stock Exchange (NYSE) each day on which the Exchange is open. If a Fund
receives your request prior to that time, 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
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
VIA from a bank account, paycheck, income-producing investment
ELECTRONIC or from a USAA money market account. Sign up for these
FUNDS services when opening an account or call 1-800-531-8448 to
TRANSFER add these 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
1-800-531-8448 a 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.
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.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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 (SSB) and the Transfer Agent for
their services in connection with the wire redemption. Your bank may also
charge a fee for receiving funds by wire.
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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less
than $2,000. The fee will be used to reduce total transfer agency fees
paid by each Fund to the Transfer Agent. Accounts exempt from the fee include:
(1) any account regularly purchasing additional shares each month through an
automatic investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA or UTMA); (3) all (non IRA) money market
fund accounts; (4) any account whose registered owner has an aggregate balance
of $50,000 or more invested in USAA mutual funds; and (5) all IRA accounts
(for the first year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your Virginia Bond
Fund account except:
(1) a reinvested dividend;
(2) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.
If you own shares in the Virginia Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges. If that
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 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 income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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
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 obligations of 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
(1) paid by the Funds, (2) excluded from gross income for federal income tax
purposes, and (3) derived from interest on 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 is derived from interest on 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.
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 $30 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,
1996, the fees paid to the Manager, net of reimbursements, were .34% 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, 1996, the Manager limited each Fund's
total operating expenses to .50% of its ANA. The Manager reimbursed the
Virginia Money Market Fund $58,627 for expenses in excess of the limitation.
Total operating expenses for the Virginia Bond Fund were .48% 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, 1997, 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 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 and a BS
from the U.S. Naval Academy.
Virginia Money Market Fund
John C. Bonnell, Executive Director of Money Market Funds since May 1996, has
managed the Fund since May 1996. He has seven years investment management
experience working for IMCO, where he has held various positions in Fixed
Income Investments. Mr. Bonnell earned the CFA designation in 1994 and is
a member of the AIMR, the SAFAS, the NFMA and the Southern Municipal Finance
Society. He holds an MBA from St. Mary's University and a BBA from the
University of Texas at San Antonio.
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 portfolios. Ten such portfolios
have been established, two of which are described in this Prospectus. Each
of the two Funds is classified as a diversified investment company. Under
the Company's charter, the Board of Directors is authorized to create new
portfolios in addition to those already existing without the approval of
the shareholders of the Company.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held
unless required by the 1940 Act. 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 portfolio, a separate vote of
the shareholders of that portfolio 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
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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
[USAA Eagle USAA STATEMENT OF
logo appears TAX EXEMPT ADDITIONAL INFORMATION
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.
You may obtain a free copy of a Prospectus for the Funds dated August 1, 1996,
by writing to USAA Tax Exempt Fund, Inc., 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
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 judgment, these prices are readily available and are representative
of the securities' market values. For many securities, such prices are not
readily available. The Service generally prices these securities based on
methods 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 only 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 NAV 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 USAA Shareholder Account Services (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 NAV 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.
Automatic 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 in the money
market fund, with a monthly transaction minimum of $50.
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 NAV 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 seven 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
Investment Company Act of 1940, as amended (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 64.72% 53.25%
Intermediate-Term 27.26% 27.51%
Short-Term 32.61% 35.99%
Portfolio turnover rates have been calculated excluding short-term variable
rate securities, which are those with put date intervals of less than one
year.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate portfolios. Ten such
portfolios 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 portfolios 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 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, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). 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, 4, 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 June 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 June 30, 1996, USAA and its affiliates (including related employee
benefit plans) owned 4,251,262 shares (3.3%) of the Intermediate-Term Fund,
10,536,143 shares (.7%) of the Tax Exempt Money Market Fund and no shares of
the Long-Term and Short-Term Funds.
The Company knows of no one person who, as of June 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 $30 billion, of which
approximately $17 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 1994 1995 1996
---- ---- ---- ----
Long-Term $5,578,013 $4,931,411 $5,119,811
Intermediate-Term $4,403,791 $4,220,542 $4,532,471
Short-Term $2,619,690 $2,489,834 $2,188,350
Tax Exempt Money Market $4,068,637 $4,299,382 $4,067,473
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
The Transfer Agent 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 the Transfer Agent 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, 1996, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
The Manager will deliver a copy of the Annual Report free of charge with each
SAI requested.
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 3/31/96
1 5 10
Fund year years years
---- ---- ----- -----
Long-Term 7.88% 7.57% 7.60%
Intermediate-Term 7.97% 7.51% 7.17%
Short-Term 5.83% 5.32% 5.54%
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, 1996 were
as follows:
Long-Term Fund . . . . 5.72%
Intermediate-Term Fund . . . . 5.23%
Short-Term Fund . . . . 4.33%
Yield - Tax Exempt Money Market Fund
When the Tax Exempt Money Market Fund quotes a current annualized yield, it is
based on a specified recent seven-calendar-day period. It is computed by (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
return, then (3) multiplying the base period by 52.14 (365 divided by 7). The
resulting yield figure is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased
with dividends on the original share, and dividends declared on both the
original share and any such additional shares, and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Fund's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to
the quotient, raising the sum to the 365th power, and subtracting 1 from the
result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield For 7-day Period Ended 3/31/96 . . . . 3.17%
Effective Yield For 7-day Period Ended 3/31/96 . . . . 3.22%
Tax Equivalent Yield
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent
yield" means converting a tax exempt yield to a pretax equivalent so that a
meaningful comparison can be made between a tax-exempt municipal fund and a
fully taxable fund. 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.
To calculate a tax equivalent yield, an investor must know his Federal
marginal income tax rate. The tax equivalent yield is then computed by
dividing the tax-exempt yield of a fund by the complement of the Federal
marginal tax rate. The complement, for example, of a Federal marginal tax
rate of 36.0% is 64.0%, that is (1.00-0.36= 0.64).
Tax Equivalent Yield = Tax Exempt Yield / (1- Federal Marginal Tax Rate)
Based on a Federal marginal tax rate of 36.0%, the tax equivalent yields
for the Long-Term, Intermediate-Term, Short-Term, and Tax Exempt Money Market
Funds for the period ended March 31, 1996 were 8.94%, 8.17%, 6.77%, and 4.95%,
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 which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end 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.
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.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. Each 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
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
To Match a
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:
- ----------------------- -------------------------------------------------
2.00% 2.78% 2.90% 3.13% 3.31%
3.00% 4.17% 4.35% 4.69% 4.97%
4.00% 5.56% 5.80% 6.25% 6.62%
5.00% 6.94% 7.25% 7.81% 8.28%
6.00% 8.33% 8.70% 9.38% 9.93%
7.00% 9.72% 10.15% 10.94% 11.59%
- ----------------------- -------------------------------------------------
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THESE RATES WERE SELECTED AS EXEMPLARY RATES THAT WOULD BE RELEVANT TO MOST
TAXPAYERS.
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
California Money Market Funds
[USAA Eagle USAA STATEMENT OF
logo appears TAX EXEMPT ADDITIONAL INFORMATION
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.
You may obtain a free copy of a Prospectus for the California Funds dated
August 1, 1996, by writing to USAA Tax Exempt Fund, Inc., 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling toll free 1-800-531-8181. The
Prospectus provides the basic information you should know before investing in
the Funds. 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
7 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
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 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 judgment, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The
Service generally prices these securities based on methods 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 only 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 NAV 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 USAA Shareholder Account Services (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.
Automatic 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 in the
money market fund, with a monthly transaction minimum of $50.
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 NAV 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 seven 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 (1) any indebtedness approved by the
voters prior to July 1, 1978, or (2) 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 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.
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 (1) the California Legislature establish a prudent state reserve
fund in an amount as shall be reasonable and necessary and (2) 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: (1) 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 (2) 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 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 (1) 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, (2) 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, (3) restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was imposed, (4)
prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA, (5) prohibits the
imposition of transaction taxes and sales taxes on the sale of real property
by local governments, (6) 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, (7) 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 (8) permits these provisions to be amended
exclusively by the voters of the State of California. In September 1995, the
California Supreme Court upheld the constitutionality of Proposition 62,
creating uncertainty as to the legality of certain local taxes enacted by
non-charter cities in California without voter approval. It is not possible
to predict the impact of the decision.
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 1980s, the State was adversely affected
by both the national recession and the cutbacks in aerospace and defense
spending. Although the outlook for California's economy has improved
significantly, 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. Economic data indicates that the State's
economy grew at a modest rate in 1995, and continued growth is expected in
1996.
California's economic difficulties exacerbated a structural budget
imbalance which had been evident since fiscal year 1985-86. Many of the
State's budget problems were attributed to a great population increase which
increased demand for educational and social services at a pace far greater
than growth in revenues. To combat its budget problems, the State has cut
non-mandatory spending and aggressively sought assistance from the federal
government.
On August 3, 1995, the Governor signed into law a $57.5 billion budget
which, among other things, reduces welfare payments and increases education
spending from the previous fiscal year. The fiscal 1995-96 budget calls for
$44.1 billion in revenues and $43.4 billion in spending, an increase of over
3.5% and 4.0%, respectively, from the fiscal 1994-95 budget. Although the
State's budget projects an operating surplus of approximately $600 million, it
continues to rely on federal actions, both to fund programs relating to
MediCal and incarceration costs associated with illegal immigrants and to
relieve the State from federally mandated spending, which are not certain of
occurring. Accordingly, the surplus may not be realized unless the economy
outperforms expectations or spending falls below planned levels.
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 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 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. However, in February 1996, citing California's improving
economy and budget situation, Fitch raised its rating from A to A+.
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. In September 1995, the state legislature approved legislation
permitting Orange County to use for bankruptcy recovery $820 million over 20
years in sales taxes previously earmarked for highways, transit and
development. In June 1996 the County completed a $880 million bond offering
secured by real property owned by the County. On June 12, 1996, the County
emerged from bankruptcy protection.
Los Angeles County, the nation's largest county, is also experiencing
financial difficulty. In August 1995, the credit rating of the county's
long-term bonds was downgraded for the third time since 1992 as a result of,
among other things, severe operating deficits for the county's health care
system. In September 1995, federal and state aid to Los Angeles County
totalling $514 million was pledged, providing a short-term solution to the
County's budget problems. Despite such efforts, the County is facing a
potential budget gap of $1.0 billion in the 1996-97 fiscal year.
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 . . . 28.86% 1996 . . . 23.09%
Portfolio turnover rates have been calculated excluding short-term variable
rate securities, which are those with put date intervals of less than one
year.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate portfolios. Ten such
portfolios 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 portfolios 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
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 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 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, (1) the Fund will also
be exempt from the California corporate income and franchise taxes to the
extent it distributes its income and (2), provided 50% or more of the value
of the total assets of the Fund at the close of each quarter of its taxable
year consists of obligations, the interest on which (when held by an
individual) is exempt from personal income taxation under California law, the
Fund will be qualified under California law to distribute dividends
("California exempt-interest dividends") which will be exempt from the
California personal income tax. The Funds intend to qualify under the above
requirement so that they can distribute California exempt
- -interest dividends. If the Funds fail to so qualify, no part of their
dividends will be exempt from the California personal income tax.
The portion of dividends constituting California exempt-interest
dividends is that portion derived from interest on obligations issued by
California and its municipalities and localities, the interest on which (when
held by an individual) is excludable from California personal income under
California law. Distributions from the Funds that are attributable to sources
other than those described in the preceding sentence generally will be taxable
to such shareholders as ordinary income. In addition, distributions other
than exempt-interest dividends to such shareholders are includable in income
that may be subject to the California alternative minimum tax. The total
amount of California exempt-interest dividends paid by each Fund to all of its
shareholders with respect to any taxable year cannot exceed the amount of
interest received by each Fund during such year on California municipal
obligations less any expenses and expenditures. California exempt-interest
dividends are excludable from income for California personal income tax
purposes only. Any dividends paid to shareholders subject to the California
franchise tax will be taxed as ordinary dividends to such shareholders
notwithstanding that all or a portion of such dividends are exempt from the
California personal income tax.
To the extent any portion of the dividends distributed to the
shareholders by the Funds are derived from taxable interest for California
purposes or net short-term capital gains, such portion will be taxable to the
shareholders as ordinary income. The character of long-term capital gains
realized and distributed by the California 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, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). 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, 4, 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 June 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 June 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 $30 billion, of which
approximately $17 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:
1994 1995 1996
---- ---- ----
California Bond Fund $1,346,140 $1,192,329 $1,281,538
California Money Market Fund $ 727,498 $ 823,095 $ 890,228
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
The Transfer Agent 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 the Transfer Agent 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, 1996, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
The Manager will deliver a copy of the Annual Report free of charge with each
SAI requested.
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, 1996 were:
1 year . . . . 9.35%
5 years . . . . 7.64%
Since inception . . . . 7.42%
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 the Fund's portfolio and
all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1996 was 5.54%.
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 3/31/96 . . . 3.14%
Effective Yield for 7-day Period Ended 3/31/96 . . . 3.19%
Tax Equivalent Yield
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent
yield" means converting a tax-exempt yield to a pretax equivalent so that a
meaningful comparison can be made between a tax-exempt municipal fund and a
fully taxable fund. 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.
To calculate a tax equivalent yield, the California investor must know
his Effective Marginal Tax Rate or EMTR. Assuming an investor can fully
itemize deductions on his or her federal tax return, the EMTR is the sum of
the Federal marginal tax rate and the state marginal tax rate adjusted to
reflect the deductibility of state taxes from Federal taxable income. The
formula for computing the EMTR to compare with fully taxable securities
subject to both federal and state taxes is:
EMTR = Federal Marginal Tax Rate + [State Marginal Tax Rate x
(1-Federal Marginal Tax Rate)]
The tax equivalent yield is then computed by dividing the tax-exempt
yield of a fund by the complement of the EMTR. The complement, for example,
of a EMTR of 42.4% is 57.6%, that is (1.00-0.424= 0.576).
Tax Equivalent Yield = Tax Exempt Yield / (1-Effective Marginal Tax Rate)
Using a Federal marginal tax rate of 36% and state marginal tax rate of
10%, resulting in an EMTR of 42.40%, the tax equivalent yields for the
California Bond and California Money Market Funds for the period ended March
31, 1996 were 9.62% and 5.45%, 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 which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end 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.
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.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. Each 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
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
and a State Rate of: 9.3% 9.3% 10% 10%
The Effective Marginal
Tax Rate would be: 34.696% (a) 37.417% (b) 42.400% (c) 45.640% (d)
To Match a Double
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:
- ---------------------- -----------------------------------------------------
2.00% 3.06% 3.20% 3.47% 3.68%
3.00% 4.59% 4.79% 5.21% 5.52%
4.00% 6.13% 6.39% 6.94% 7.36%
5.00% 7.66% 7.99% 8.68% 9.20%
6.00% 9.19% 9.59% 10.42% 11.04%
7.00% 10.72% 11.19% 12.15% 12.88%
- ---------------------- ----------------------------------------------------
(a) FEDERAL RATE OF 28% + (CALIFORNIA STATE RATE OF
9.3% x (1 - 28%))
(b) FEDERAL RATE OF 31% + (CALIFORNIA STATE RATE OF
9.3% x (1 - 31%))
(c) FEDERAL RATE OF 36% + (CALIFORNIA STATE RATE OF
10% x (1 - 36%))
(d) FEDERAL RATE OF 39.6% + (CALIFORNIA STATE RATE OF
10% x (1 - 39.6%))
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THESE RATES WERE SELECTED AS EXEMPLARY RATES THAT WOULD BE RELEVANT TO MOST
TAXPAYERS.
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
[USAA Eagle USAA STATEMENT OF
logo appears TAX EXEMPT ADDITIONAL INFORMATION
here} FUND, INC. August 1, 1996
- ------------------------------------------------------------------------
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.
You may obtain a free copy of a Prospectus for the New York Funds dated August
1, 1996, by writing to USAA Tax Exempt Fund, Inc., 9800 Fredericksburg Rd.,
San Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
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
7 Special Risk Considerations
14 Portfolio Transactions
15 Further Description of Shares
16 Certain Federal Income Tax Considerations
18 Directors and Officers of the Company
21 The Company's Manager
22 General Information
23 Calculation of Performance Data
24 Appendix A - Tax-Exempt Securities and Their Ratings
27 Appendix B - Comparison of Portfolio Performance
30 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 judgment, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The
Service generally prices these securities based on methods 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 only 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 NAV 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 USAA Shareholder Account Services (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.
Automatic 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 in the
money market fund, with a monthly transaction minimum of $50.
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 NAV 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 seven 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.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 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 was 19.2% above the
1994 estimated national average of $21,809. During the recent past, 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 (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 was 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 was the first to be enacted in the
administration of the Governor. It was the first budget in over half a
century which proposed and, as enacted, projected an absolute year-over-year
decline in disbursements in the General Fund, the State's principal operating
fund. Spending for State operations was projected to drop even more sharply,
by 4.6%. Nominal spending from all State spending sources (i.e., excluding
Federal aid) was 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.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, and subsequently amended it. There can be no assurance
that the Legislature will enact the Executive Budget into law or that the
projections set forth in the Executive Budget will not differ materially and
adversely from actual results.
The Governor's Executive Budget projected balance on a cash basis in the
General Fund. It reflected a continuing strategy of substantially reduced
State spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. The 1996-1997
Executive Budget proposed $3.9 billion in actions to balance the 1996-97 State
Financial Plan. The Executive Budget proposed to close this gap primarily
through a series of spending reductions and cost containment measures. The
Executive Budget projected (1) over $1.8 billion in savings from cost
containment and other actions in social welfare programs, including Medicaid,
welfare and various health and mental health programs; (2) $1.3 billion in
savings from a reduced State General Fund share of Medicaid made available
from anticipated changes in the Medicaid program, including an increase in the
Federal share of Medicaid; (3) over $450 million in savings from reforms and
cost avoidance in educational services (including school aid and higher
education), while providing fiscal relief from certain State mandates that
increase local spending; and (4) $350 million in savings from efficiencies and
reductions in other State programs. The State has noted that there is
considerable uncertainty as to the ultimate composition of the Federal budget,
including uncertainties regarding major Federal entitlement reforms.
The State Division of the Budget has noted that the economic and
financial condition of the State may be affected by various financial, social,
economic and political factors. Those factors can be very complex, can vary
from fiscal year to fiscal year, and are frequently the result of actions
taken not only by the State but also by entities, such as the Federal
government, that are outside the State's control. Because of the uncertainty
and unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be
no assurance that the State economy will not experience results that are worse
than predicted, with corresponding material and adverse effects on the State's
financial projections.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposed significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be
no assurance that the Legislature will enact the Governor's proposals or that
the State's actions will be sufficient to preserve budgetary balance or to
align recurring receipts and disbursements in future fiscal years. The
1996-97 Executive Budget included actions that will have an impact on receipts
and disbursements in future fiscal years. The net impact of these actions is
expected to produce a potential imbalance in the 1997-98 fiscal year of $1.4
billion and in the 1998-99 fiscal year of $2.5 billion, assuming
implementation of the 1996-97 Executive Budget recommendations. It is
expected that the Governor will propose to close these budget gaps with future
spending reductions.
Uncertainties with regard to both the economy and potential decisions at
the Federal level add further pressure on future budget balance in New York
State. For example, various proposals relating to Federal tax and spending
policies could, if enacted, have a significant impact on the State's financial
condition in the current and future fiscal years. Specifically, the
assumption of $1.3 billion in savings in the State fiscal year 1996-97 from a
reduced State General Fund share of Medicaid is contingent upon anticipated
changes to Federal provisions, including an increase in the Federal share of
Medicaid from 50 to 60 percent. Other budget and tax proposals under
consideration at the Federal level but not included in the State's 1996-97
Executive Budget forecast could also have a disproportionately negative impact
on the longer-term outlook for the State's economy as compared to other
states. A significant risk to the State's projections arises from tax
legislation under consideration by Congress and the President.
Congressionally adopted retroactive changes to Federal tax treatment of
capital gains would flow through automatically to the State personal income
tax. Such changes, if ultimately enacted, could produce revenue losses in the
1996-1997 fiscal year. In addition, changes in Federal aid programs,
currently pending in Congress, could result in prolonged interruptions in the
receipt of Federal grants.
On March 15, 1996, the Governor announced that additional projected
resources had been identified for the State fiscal year 1996-97, which could
be used for additional program needs if the Federal government enacts welfare
and Medicaid reform in the near future, or which could be used as part of a
contingency plan, if such reform is not enacted in the State fiscal year
1996-97, to offset the loss of welfare and Medicaid reform benefits to the
State assumed in the 1996-97 Executive Budget.
In the State's 1996 fiscal year and in certain recent fiscal years, the
State has failed to enact a budget prior to the beginning of the State's
fiscal year. The State budget for the 1997 fiscal year was not adopted by the
statutory deadline of April 1, 1996.
The projections and assumptions contained in the 1996-97 Executive
Budget are subject to revision which may involve substantial change, and no
assurance can be given that these estimates and projections will be realized.
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 State reported a General Fund operating deficit of $1.426 billion
for the 1994-95 fiscal year, as compared to an operating surplus of $914
million for the prior fiscal year. The 1994-95 fiscal year deficit was caused
by several factors, including the use of $1.026 billion of the 1993-94
cash-based surplus to fund operating expenses in 1994-95 and the adoption of
changes in accounting methodologies by the State Comptroller. These factors
were offset by net proceeds of $315 million in bonds issued by the Local
Government Assistance Corporation.
On April 3, 1996, the State announced that the General Fund for the
State's 1996 fiscal year is expected to be balanced on a cash basis, with an
operating surplus of $445 million.
Total revenues for 1994-95 were $31.455 billion. Revenues decreased by
$173 million over the prior fiscal year, a decrease of less than one percent.
Total expenditures for 1994-95 totaled $33.079 billion, an increase of $2.083
billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted accounting
principles) basis as of March 31, 1995 showed an accumulated deficit in its
combined governmental funds of $1.666 billion, reflecting liabilities of
$14.778 billion and assets of $13.112 billion.
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 (1)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (2) 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.
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 (1) permit multiple purpose general obligation bond proposals
to be proposed on the same ballot, (2) require that State debt be incurred
only for capital projects included in a multi-year capital financing plan, and
(3) prohibit, after its effective date, lease-purchase and
contractual-obligation financing mechanisms for State facilities.
Before the approved constitutional amendment could be presented to the
voters for their consideration, it had to be passed by a separately elected
legislature. The amendment was passed by the Senate and Assembly in June
1995. The Amendment was thereafter submitted to voters in November 1995,
where it was defeated.
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 anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1995-96. The State
expected 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 had 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.
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 were 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 were 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 were 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; (7) challenges to certain aspects of petroleum business taxes;
(8) action alleging damages resulting from the failure by the State's
Department of Environmental Conservation to timely provide certain data; (9) a
challenge to the constitutionality of the treatment of certain moneys held in
a Supplemental Reserve Fund; and (10) a challenge to the constitutionality of
a State lottery game.
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
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 was required
to make aggregate payments of $351.4 million. 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 1996-97 State
Financial Plan. An adverse decision in any of these proceedings could exceed
the amount of the 1996-97 State Financial Plan reserve for the payment of
judgments and, therefore, could affect the ability of the State to maintain a
balanced 1996-97 State Financial Plan. In its audited financial statements
for the fiscal year ended March 31, 1995, the State reported its estimated
liability for awarded and anticipated unfavorable judgments to be $676
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 the 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, Standard & Poor's 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 the City's $23 billion
of outstanding general obligation bonds to "BBB+" from "A-", citing to 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. Moody's currently has the City's rating under review for a possible
downgrade.
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. Since its creation, MAC has provided, among other things,
financing assistance to the City by refunding maturing City short-term debt
and transferring to the City funds received from sales of MAC bonds and notes.
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, subject to certain prior claims, 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. As of
December 31, 1995, MAC had outstanding an aggregate of approximately $4.684
billion of its bonds. MAC is authorized to issue bonds and notes to refunds
its outstanding bonds and notes and to fund certain reserves, without
limitation as to principal amount, and to finance certain capital commitments
to the Transit Authority and the New York City School Construction Authority
for the 1992 through 1997 fiscal years in the event the City fails to provide
such financing.
The City and MAC have reached an agreement in principle under which MAC
will develop and implement a debt restructuring program which will provide the
City with $125 million in budget relief in fiscal year 1996, in addition to
the $20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in each of the four fiscal years starting in
fiscal year 1997. The proposed refinancing, which must satisfy MAC
refinancing criteria, is subject to market conditions.
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.
From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to
eliminate projected operating deficits. Some of these reports and statements
have warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the City's future economic and social conditions and have questioned
whether the City has the capacity to generate sufficient revenues in the
future to meet the costs of its expenditure increases and to provide necessary
services.
On January 31, 1996, the City published the financial plan for the
1996-1999 fiscal years (the City Financial Plan), which is a modification to a
financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the City
Financial Plan reflected a strategy to substantially reduce spending for
entitlements for the 1996 and subsequent fiscal years, and to decrease the
City's costs for Medicaid in the 1997 fiscal year and thereafter by increasing
the Federal share of Medicaid costs otherwise paid by the City. This strategy
has been the subject of substantial debate, and implementation of this
strategy will be significantly affected by State and Federal budget proposals
currently being considered. It is likely that the City Financial Plan will be
changed significantly in connection with the preparation of the Executive
Budget for the 1997 fiscal year as a result of the status of State and Federal
budget proposals and other factors.
The City Financial Plan also set forth projections for the 1997 through
1999 fiscal years and outlined a proposed gap-closing program to eliminate a
projected gap of $2.0 billion for the 1997 fiscal year, and to reduce
projected gaps of $3.3 billion and $4.1 billion for the 1998 and 1999 fiscal
years, respectively, assuming successful implementation of the gap-closing
program for the 1996 fiscal year.
The proposed gap-closing actions for the 1997 through 1999 fiscal years
included: (1) additional agency actions, totaling between $643 million and
$691 million in each of the 1997 through 1999 fiscal years; (2) additional
savings resulting from State and Federal aid and cost containment in
entitlement programs to reduce City expenditures and increase revenues by $650
million in the 1997 fiscal year and by $727 million in each of the 1998 and
1999 fiscal years; (3) additional proposed Federal aid of $50 million in the
1997 fiscal year and State aid of $100 million in each of the 1997 through
1999 fiscal years; (4) the receipt of $300 million in the 1997 fiscal year
from privatization or other initiatives, certain of which actions is expected
to require legislative action by the City Council; and (5) the assumed receipt
of revenues relating to rent payments for the City's airports, totaling $244
million, $226 million and $70 million in the 1997 through 1999 fiscal years,
respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion
of negotiations with the Port Authority or the enforcement of the City's
remedies under the leases through pending legal actions. The City was also
preparing an additional contingency gap-closing program for the 1997 fiscal
year to be comprised of $200 million in additional agency actions.
The Federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The nature and extent of the impact on the City of the Federal and
State budgets, when adopted, is uncertain, and no assurance can be given that
Federal or State actions included in the Federal and State adopted budgets may
not have a significant adverse impact on the City's budget and the City
Financial Plan.
The projections for the 1996 through 1999 fiscal years reflected the
costs of the proposed settlement with the teachers union and the recent
settlement with a coalition of municipal unions, and assumed that the City
will reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements.
The City's financial plans have been the subject of extensive public
comment and criticism. The City comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the general
reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the City Financial Plan assumed
the implementation of highly uncertain State and Federal actions, most of
which are unlikely to be implemented, that would provide between $1.2 billion
and $1.4 billion in relief to the City, and identified additional risks. The
report concluded that the magnitude of the budget risk for the 1997 fiscal
year, after two years of large agency cutbacks and workforce reductions,
indicated the seriousness of the City's continuing budget difficulties, and
that the City Financial Plan would require substantial revision in order to
provide a credible program for dealing with the large projected budget gap for
the 1997 fiscal year.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
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 State's projections of its receipts and disbursements.
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 . . . 74.74% 1996 . . . 74.80%
Portfolio turnover rates have been calculated excluding short-term variable
rate securities, which are those with put date intervals of less than one
year.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate portfolios. Ten such
portfolios 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 portfolios 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
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 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 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, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). 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, 4, 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 also reimburses certain expenses of the
Directors who are not affiliated with the investment adviser. As of June 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 June 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 $30 billion, of which
approximately $17 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,
1997 and will reimburse the Funds for all expenses in excess of the
limitations.
For the last three fiscal years, management fees were as follows:
1994 1995 1996
---- ---- ----
New York Bond Fund $ 268,218 $ 239,018 $ 242,866
New York Money Market Fund $ 90,987 $ 124,264 $ 154,397
For 1994, the Manager did not receive $108,778 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 1994, 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 amount of $2,591. For 1995 and 1996, the
Manager did not receive management fees to which it would have been entitled
in the amounts of $110,439 and $102,918, respectively, from the New York Bond
Fund and $94,923 and $97,382, respectively, from the New York 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
The Transfer Agent 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 the Transfer Agent 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, 1996, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
The Manager will deliver a copy of the Annual Report free of charge with each
SAI requested.
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, 1996 were:
1 year . . 7.67% 5 years . . 7.61% Since inception . . 8.42%
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 the Fund's portfolio and
all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1996 was 5.49%.
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 3/31/96 . . . . . 3.07%
Effective Yield For 7-day Period Ended 3/31/96 . . . . . 3.12%
Tax Equivalent Yield
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent
yield" means converting a tax-exempt yield to a pretax equivalent so that a
meaningful comparison can be made between a tax-exempt municipal fund and a
fully taxable fund. 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.
To calculate a tax equivalent yield, the New York investor must know his
Effective Marginal Tax Rate or EMTR. Assuming an investor can fully itemize
deductions on his or her federal tax return, the EMTR is the sum of the
Federal marginal tax rate and the state (and city if applicable) marginal tax
rate adjusted to reflect the deductibility of state (and city if applicable)
taxes from Federal taxable income. The formula for computing the EMTR to
compare with fully taxable securities subject to federal, state and city taxes
is:
EMTR = Federal Marginal Tax Rate + [(State Marginal Tax Rate + City
Marginal Tax Rate) x (1-Federal Marginal Tax Rate)]
The tax equivalent yield is then computed by dividing the tax-exempt
yield of a fund by the complement of the EMTR. The complement, for example,
of a EMTR of 43.67% is 56.33%, that is (1.00-0.4367= 0.5633).
Tax Equivalent Yield = Tax Exempt Yield / (1-Effective Marginal Tax Rate)
Using a Federal marginal tax rate of 36% and state and city marginal tax
rate of 11.99%, resulting in an EMTR of 43.67%, the tax equivalent yields for
the New York Bond and New York Money Market Funds for the period ended March
31, 1996 were 9.75% and 5.45%, 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 which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end 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.
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.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. Each 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
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
and a State Rate of: 7.59% 7.59% 7.59% 7.59%
The Effective Marginal
Tax Rate would be: 33.4648% (a) 36.2371% (b) 40.8576% (c) 44.1844% (d)
To Match a Double
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:
- ---------------------- ------------------------------------------------------
2.00% 3.01% 3.14% 3.38% 3.58%
3.00% 4.51% 4.70% 5.07% 5.37%
4.00% 6.01% 6.27% 6.76% 7.17%
5.00% 7.51% 7.84% 8.45% 8.96%
6.00% 9.02% 9.41% 10.15% 10.75%
7.00% 10.52% 10.98% 11.84% 12.54%
- ---------------------- ------------------------------------------------------
(a) FEDERAL RATE OF 28% + (NEW YORK STATE RATE OF
7.59% x (1 - 28%))
(b) FEDERAL RATE OF 31% + (NEW YORK STATE RATE OF
7.59% x (1 - 31%))
(c) FEDERAL RATE OF 36% + (NEW YORK STATE RATE OF
7.59% x (1 - 36%))
(d) FEDERAL RATE OF 39.6% + (NEW YORK STATE RATE
OF 7.59% x (1 - 39.6%))
II. COMBINED FEDERAL, NEW YORK STATE, AND NEW YORK CITY INCOME TAX RATES
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
and a State and
City Rate of: 11.99% 11.99% 11.99% 11.99%
The Effective Marginal
Tax Rate would be: 36.6328% (e) 39.2731% (f) 43.6736% (g) 46.8420% (h)
To Match a Triple
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:
- ---------------------- ------------------------------------------------------
2.00% 3.16% 3.29% 3.55% 3.76%
3.00% 4.73% 4.94% 5.33% 5.64%
4.00% 6.31% 6.59% 7.10% 7.52%
5.00% 7.89% 8.23% 8.88% 9.41%
6.00% 9.47% 9.88% 10.65% 11.29%
7.00% 11.05% 11.53% 12.43% 13.17%
- ---------------------- ------------------------------------------------------
(e) FEDERAL RATE OF 28% + ((NEW YORK STATE RATE OF
7.59% + CITY RATE OF 4.4%) x (1 - 28%))
(f) FEDERAL RATE OF 31% + ((NEW YORK STATE RATE OF
7.59% + CITY RATE OF 4.4%) x (1 - 31%))
(g) FEDERAL RATE OF 36% + ((NEW YORK STATE RATE OF
7.59% + CITY RATE OF 4.4%) x (1 - 36%))
(h) FEDERAL RATE OF 39.6% + ((NEW YORK STATE RATE
OF 7.59% + CITY RATE OF 4.4%) x (1 - 39.6%))
THESE TABLES ARE HYPOTHETICAL ILLUSTRATIONS AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THESE RATES WERE SELECTED AS EXEMPLARY RATES THAT WOULD BE RELEVANT TO MOST
TAXPAYERS.
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
[USAA Eagle USAA STATEMENT OF
logo appears TAX EXEMPT ADDITIONAL INFORMATION
here] FUND, INC. August 1, 1996
- ---------------------------------------------------------------------------
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.
You may obtain a free copy of a Prospectus for the Virginia Funds dated August
1, 1996, by writing to USAA Tax Exempt Fund, Inc., 9800 Fredericksburg Rd.,
San Antonio, TX 78288, or by calling toll free 1-800-531-8181. The
Prospectus provides the basic information you should know before investing in
the Funds. 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
7 Special Risk Considerations
10 Portfolio Transactions
11 Further Description of Shares
11 Certain Federal Income Tax Considerations
13 Virginia Taxation
14 Directors and Officers of the Company
17 The Company's Manager
18 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 judgment, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The
Service generally prices these securities based on methods 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 only 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 NAV 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 USAA Shareholder Account Services (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.
Automatic 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 in the
money market fund, with a monthly transaction minimum of $50.
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 NAV 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 seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value of
the underlying security. In these transactions, the securities purchased by a
Fund will have a total value equal to or in excess of the amount of the
repurchase obligation and will be held by the Funds' custodian until
repurchased. If the seller defaults and the value of the underlying security
declines, a Fund may incur a loss and may incur expenses in selling the
collateral. If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. Any investments in
repurchase agreements will give rise to income which will not qualify as
tax-exempt income when distributed by a Fund.
Other Policies
Although the Virginia Bond Fund is permitted to invest in options, financial
futures contracts and options on financial futures contracts, the Fund has no
current intention of doing so and will not invest in such securities without
first notifying shareholders and supplying further information in the
Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for and
are applicable to each Fund. These restrictions may not be changed for any
given Fund without approval by the lesser of (1) 67% or more of the voting
securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy
or (2) more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without affecting those of
the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase securities of any
issuer (other than a security issued or guaranteed as to principal
or interest by the United States, or by a person controlled or
supervised by and acting as an instrumentality of the Government of
the United States; or any certificate of deposit for any of the
foregoing) if as a result more than 5% of the total assets of that
Fund would be invested in securities of such issuer; for purposes of
this limitation, identification of the "issuer" will be based on a
determination of the source of assets and revenues committed to
meeting interest and principal payments of each security; for
purposes of this limitation the Commonwealth of Virginia or other
jurisdictions and each of its separate political subdivisions,
agencies, authorities and instrumentalities shall be treated as a
separate issuer;
(2) Purchase more than 10% of the outstanding voting securities of any
issuer;
(3) Borrow money, except for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent greater
than 10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer or
Director of the Company or its Manager owns individually more than
one-half of one percent (1/2%) of the securities of that issuer,
and collectively the officers and Directors of the Company and
Manager together own more than 5% of the securities of that issuer;
(6) Purchase any securities which would cause 25% or more of the value
of that Fund's total assets at the time of such purchase to be
invested in securities the interest upon which is derived from
revenues or projects with similar characteristics, such as toll road
revenue bonds, housing revenue bonds, electric 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 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 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.
Investors should be aware of certain factors that might affect the
financial condition of issuers of Virginia municipal securities.
Virginia Issues may include primarily debt obligations of the
subdivisions of the Commonwealth of Virginia issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, schools, streets and water and
sewer works. Other purposes for which bonds may be issued include the
obtaining of funds to lend to public or private institutions for the
construction of facilities such as educational, hospital, housing, and solid
waste disposal facilities. The latter are generally payable from private
sources which, in varying degrees, may depend on local economic conditions,
but are not necessarily affected by the ability of the Commonwealth of
Virginia and its political subdivisions to pay their debts. Therefore, the
general risk factors as to the credit of the State or its political
subdivision discussed herein may not be relevant to the Virginia Issues.
(a) The Commonwealth as an Issuer. To the extent bonds of the
Commonwealth of Virginia are included in the Virginia Issues, information on
the financial condition of the Commonwealth is noted. The Constitution of
Virginia limits the ability of the Commonwealth to create debt. The
Constitution requires a balanced budget. The Commonwealth has maintained a
high level of fiscal stability for many years due in large part to
conservative financial operations and diverse sources of revenue. The economy
of the Commonwealth of Virginia is based primarily on manufacturing, the
government sector (including defense), agriculture, mining and tourism. The
Federal Base Closing Commission has ordered that a number of military
facilities in Virginia be closed or reduced. As a result of recessionary
conditions, the Commonwealth experienced for the past several years severe
revenue shortfalls. In 1995 Motorola and IBM each announced the location of
major manufacturing facilities in Virginia. The Commonwealth ended the fiscal
year on June 30, 1995, with general fund revenues exceeding budget projections
by $64.9 million. The preliminary unaudited results for the fiscal year 1995
show a general fund balance of $350.7 million.
In DAVIS V. MICHIGAN (decided March 28, 1989), the United States
Supreme Court ruled unconstitutional Michigan's statute exempting from state
income tax the retirement benefits paid by the state and local governments and
not exempting retirement benefits paid by the federal government. In HARPER
V. VIRGINIA DEPARTMENT OF TAXATION (decided June 18, 1993), the United States
Supreme Court held, in a suit involving claims for refunds by Federal retirees
living in Virginia that Virginia State income tax Statutes violated the
principles of DAVIS V. MICHIGAN, but remanded for further relief so long as
the relief was consistent with Federal due process. If the courts ultimately
rule that the Commonwealth must make full refunds of taxes imposed prior to
DAVIS V. MICHIGAN, the State had estimated that the potential financial impact
on the Commonwealth based on its review of claims for refunds by federal
pensioners (including interest payable calculated as of December 31, 1993)
would be approximately $700 million. The Governor and General Assembly of
Virginia authorized a settlement of $340 million, plus interest, payable into
a special trust fund in amounts of $60 million in 1994 and $70 million in each
of the years 1995 through 1998. Approximately 91% of the retirees accepted
the settlement. During the 1995 session of the General Assembly, legislation
was passed authorizing participation in the settlement for certain retirees
who failed to meet the original deadline. The original principal amount of
the claims of the retirees opting out of the settlement has been estimated by
the Commonwealth to be in excess of $47,000,000. On September 15, 1995, the
Supreme Court of Virginia entered its final judgment in the Harper case and
ordered full refunds with statutory interest. The Commonwealth has estimated
that the potential cost of refunding all Virginia income taxes paid on federal
government pensions for taxable years 1985, 1986, 1987 and 1988 to federal
government pensioners who opted out of the settlement is approximately $78.4
million, including interest earnings, as of September 18, 1995.
The Governor proposed a plan to the General Assembly to eliminate or
reduce parole for persons convicted of violent crime. In that connection he
proposed the issuance of bonds to finance part of the cost of additional
prisons that would result from the program. The General Assembly approved
part of the plan, with bonds to be issued by the Virginia Public Building
Authority or other entities and leased to the Commonwealth.
The Commonwealth currently has a Standard & Poor's rating of AAA and
a Moody's rating of Aaa on its general obligation bonds. There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions. Further, the credit of the
Commonwealth is not material to the ability of political subdivisions and
private entities to make payments on the obligations described below.
(b) Bonds of Other Entities. General obligations of cities, towns
and counties in Virginia are payable from the general revenues of the entity,
including ad valorem tax revenues on property within the jurisdiction. The
obligation to levy taxes could be enforced by mandamus, but such a remedy may
be impracticable and difficult to enforce. Under section 15.1-227.61 of the
Code of Virginia of 1950, as amended, a holder of any general obligation bond
in default may file an affidavit setting forth such default with the Governor.
If, after investigating, the Governor determines that such default exists, he
is directed to order the State Comptroller to withhold State funds
appropriated and payable to the entity and apply the amount so withheld to
unpaid principal and interest. The Commonwealth, however, has no obligation
to provide any additional funds necessary to pay such principal and interest.
Revenue bonds issued by Virginia political subdivisions include (1)
revenue bonds payable exclusively from revenue producing governmental
enterprises and (2) industrial revenue bonds, college and hospital revenue
bonds and other "private activity bonds" which are essentially
non-governmental debt issues and which are payable exclusively by private
entities such as non-profit organizations and business concerns of all sizes.
State and local governments have no obligation to provide for payment of such
private activity bonds and in many cases would be legally prohibited from
doing so. The value of such private activity bonds may be affected by a wide
variety of factors relevant to particular localities or industries, including
economic developments outside of Virginia.
Virginia municipal securities that are lease obligations are
customarily subject to "non-appropriation" clauses which allow the
municipality, or other public entity, to terminate its lease obligations if
moneys to make the lease payments are not appropriated for that purpose.
Legal principles may restrict the enforcement of provisions in lease financing
limiting the municipal issuer's ability to utilize property similar to that
leased in the event that debt service is not appropriated.
Recent amendments to Chapter 9 of the United States Bankruptcy Code,
which applies to bankruptcies by political subdivisions, limit the filing
under that chapter to political subdivisions that have been specifically
authorized to do so under applicable state law. The Company is not aware of
any statute in Virginia that gives any such authorization to political
subdivisions in Virginia. Bonds payable exclusively by private entities may
be subject to the provisions of the United States Bankruptcy Code other than
Chapter 9.
(c) Other Factors. Virginia municipal issuers have generally not
been required to provide ongoing information about their finances and
operations to holders of their debt obligations, although a number of cities,
counties and other issuers prepare annual reports. Virginia political
subdivisions that sell bonds after July 3, 1995, will be subject to Rule
15c2-12 of the SEC that requires continuing disclosure, including annual
audited financial statements, with respect to those obligations, unless
exempted by the Rule.
Although revenue obligations of the Commonwealth or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on Commonwealth and local government finances will not
adversely affect the market value of the portfolio of the Fund or the ability
of the respective obligors to make timely payments of principal and interest
on such obligations.
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.
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.
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 . . . 27.77% 1996 . . . 27.20%
Portfolio turnover rates have been calculated excluding short-term variable
rate securities, which are those with put date intervals of less than one
year.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate portfolios. Ten such
portfolios 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 portfolios 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
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.
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 the basis of such opinions.
VIRGINIA TAXATION
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 (1) 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 excluded from gross income for federal income tax
purposes and (2) the Fund satisfies certain Virginia reporting requirements.
The Funds intend to qualify and report under the above requirement so that
they can distribute Virginia exempt-interest dividends. If a Fund fails to so
qualify or report, 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 taxable income under the laws of Virginia or derived from obligations
of the United States which pay interest excludable from Virginia taxable
income under the laws of the United States. Dividends (1) paid by the Funds,
(2) excluded from gross income for federal income tax purposes, and (3)
derived from interest on 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 any portion of the dividends distributed to the
shareholders by the Funds is 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 Funds will flow through to their
shareholders regardless of how long the shareholders have held their shares.
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, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). 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, 4, 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 June 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 June 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 $30 billion, of
which approximately $17 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, 1997, and will reimburse the Funds for all expenses in excess
of the limitations.
For the last three fiscal years, management fees were as follows:
1994 1995 1996
---- ---- ----
Virginia Bond Fund $831,660 $794,044 $869,725
Virginia Money Market Fund $271,935 $330,961 $354,537
Because the Fund's expenses exceeded the Manager's voluntary expense
limitation of .50% of average net assets, in 1994, 1995, and 1996, the Manager
did not receive management fees of $83,779, $58,402, and $58,627,
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
The Transfer Agent 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 the Transfer Agent 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, 1996, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
The Manager will deliver a copy of the Annual Report free of charge with each
SAI requested.
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, 1996 were:
1 year . . 7.57% 5 years . . 7.77% Since inception . . 8.16%
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 the Fund's portfolio
and all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1996 was 5.37%.
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 3/31/96 . . . . 2.99%
Effective Yield For 7-day Period Ended 3/31/96 . . . . 3.04%
Tax Equivalent Yield
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent
yield" means converting a tax-exempt yield to a pretax equivalent so that a
meaningful comparison can be made between a tax-exempt municipal fund and a
fully taxable fund. 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.
To calculate a tax equivalent yield, the Virginia investor must know
his Effective Marginal Tax Rate or EMTR. Assuming an investor can fully
itemize deductions on his or her federal tax return, the EMTR is the sum of
the Federal marginal tax rate and the state marginal tax rate adjusted to
reflect the deductibility of state taxes from Federal taxable income. The
formula for computing the EMTR to compare with fully taxable securities
subject to both federal and state taxes is:
EMTR = Federal Marginal Tax Rate + [State Marginal Tax Rate
x (1 - Federal Marginal Tax Rate)]
The tax equivalent yield is then computed by dividing the tax-exempt
yield of a fund by the complement of the EMTR. The complement, for example,
of a EMTR of 39.68% is 60.32%, that is (1.00-0.3968= 0.6032).
Tax Equivalent Yield = Tax Exempt Yield / (1-Effective Marginal Tax Rate)
Using a Federal marginal tax rate of 36% and state marginal tax rate
of 5.75%, resulting in an EMTR of 39.68%, the tax equivalent yields for the
Virginia Bond and Virginia Money Market Funds for the period ended March 31,
1996 were 8.90% and 4.96%, 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 which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end 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.
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.
In addition to the sources above, performance of our Funds may also
be tracked by Lipper Analytical Services, Inc. Each 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
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
and a State Rate of: 5.75% 5.75% 5.75% 5.75%
The Effective Marginal
Tax Rate would be: 32.140% (a) 34.968% (b) 39.680% (c) 43.073% (d)
To Match a Double
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:
- ---------------------- -----------------------------------------------------
2.00% 2.95% 3.08% 3.32% 3.51%
3.00% 4.42% 4.61% 4.97% 5.27%
4.00% 5.89% 6.15% 6.63% 7.03%
5.00% 7.37% 7.69% 8.29% 8.78%
6.00% 8.84% 9.23% 9.95% 10.54%
7.00% 10.32% 10.76% 11.60% 12.30%
- ---------------------- -----------------------------------------------------
(a) FEDERAL RATE OF 28% + (VIRGINIA STATE RATE OF
5.75% x (1 - 28%))
(b) FEDERAL RATE OF 31% + (VIRGINIA STATE RATE OF
5.75% x (1 - 31%))
(c) FEDERAL RATE OF 36% + (VIRGINIA STATE RATE OF
5.75% x (1 - 36%))
(d) FEDERAL RATE OF 39.6% + (VIRGINIA STATE RATE
OF 5.75% x (1 - 39.6%))
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THESE RATES WERE SELECTED AS EXEMPLARY RATES THAT WOULD BE RELEVANT TO MOST
TAXPAYERS.
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 are incorporated by
reference to the USAA Tax Exempt Fund, Inc. (incuding the Long-Term,
Intermediate-Term, Short-Term, and Tax Exempt Money Market Funds') and the
USAA California, New York, and Virginia Funds' Annual Reports to Shareholders
for fiscal year ended March 31, 1996.
(b) Exhibits:
Exhibit No. Description of Exhibits
1 (a) Articles of Incorporation dated November 13, 1981 (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 (2)
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 dated July 20, 1990 (1)
(b) Letter Agreement dated July 26, 1990 adding New York Bond
Fund, New York Money Market Fund, Virginia Bond Fund, and
Virginia Money Market Fund (1)
6 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement dated July 26, 1990 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 dated June 23, 1989 (1)
(b) Letter Agreement dated July 26, 1990 adding New York Bond
Fund, New York Money Market Fund, Virginia Bond Fund, and
Virginia Money Market Fund (1)
(c) Subcustodian Agreement dated March 24, 1994 (filed herewith)
9 (a) Transfer Agency Agreement dated January 23, 1992 (1)
(b) Amendments dated May 3, 1995 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)
(c) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 15, 1996 (filed herewith)
(d) Master Revolving Credit Facility Agreement with NationsBank of
Texas dated January 16, 1996 (filed herewith)
10 (a) Opinion of Counsel (1)
(b) Consent of Counsel (filed herewith)
11 Independent Auditors' Consent (filed herewith)
12 Financial statements omitted from prospectuses - Not Applicable
13 Subscriptions and Investment Letters
(a) Short-Term Fund, Intermediate-Term Fund, and High-Yield Fund
dated December 7, 1981 (1)
(b) California Bond Fund and California Money Market Fund dated
June 23, 1989 and June 26, 1989 (1)
(c) New York Bond Fund, New York Money Market Fund, Virginia
Bond Fund, and Virginia Money Market Fund dated September 5,
1990 (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.
(2) Previously filed with Post-Effective Amendment No. 24 of the Registrant
(No. 2-75093) filed with the Securities and Exchange Commission on May
22, 1996.
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 June 30,
1996 of each class of securities of the Registrant.
Title of Class Number of Record Holders
-------------- ------------------------
Long-Term Fund 37,630
Intermediate-Term Fund 37,464
Short-Term Fund 22,041
Tax Exempt Money Market Fund 35,275
California Bond Fund 8,434
California Money Market Fund 7,275
New York Bond Fund 1,623
New York Money Market Fund 1,250
Virginia Bond Fund 7,097
Virginia Money Market Fund 3,811
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 meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the securities Act of 1933 and has duly caused this
amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Antonio and State
of Texas on the 10th day of July, 1996.
USAA TAX EXEMPT FUND, INC.
/s/Michael J.C. Roth
---------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
(Signature) (Title) (Date)
----------- ------- ------
/s/ M. Staser Holcomb Chairman of the July 10, 1996
- ------------------------- Board of Directors
M. Staser Holcomb
/s/ Michael J.C. Roth Vice Chairman of the Board July 10, 1996
- ------------------------- of Directors and President
Michael J.C. Roth (Principal Executive Officer)
/s/ Sherron A. Kirk Treasurer (Principal July 10, 1996
- ------------------------- Financial and
Sherron A. Kirk Accounting Officer)
/s/ John W. Saunders, Jr. Director July 10, 1996
- -------------------------
John W. Saunders, Jr.
/s/ George E. Brown Director July 10, 1996
- -------------------------
George E. Brown
/s/ Howard L. Freeman, Jr. Director July 10, 1996
- -------------------------
Howard L. Freeman, Jr.
/s/ Richard A. Zucker Director July 10, 1996
- -------------------------
Richard A. Zucker
/s/ Barbara B. Dreeben Director July 10, 1996
- -------------------------
Barbara B. Dreeben
Exhibit Index
Exhibit Item Page No. *
- ---------- ---- ----------
1 (a) Articles of Incorporation dated November 13, 1981 (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 (2)
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 dated July 20, 1990 (1)
(b) Letter Agreement dated July 26, 1990 adding New York Bond
Fund, New York Money Market Fund, Virginia Bond Fund,
and Virginia Money Market Fund (1)
6 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement dated July 26, 1990 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 dated June 23, 1989 (1)
(b) Letter Agreement dated July 26, 1990 adding New York Bond
Fund, New York Money Market Fund, Virginia Bond Fund,
and Virginia Money Market Fund (1)
(c) Subcustodian Agreement dated March 24, 1994 (filed herewith) 247
9 (a) Transfer Agency Agreement dated January 23, 1992 (1)
(b) Amendments dated May 3, 1995 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)
(c) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 15, 1996 (filed herewith) 260
(d) Master Revolving Credit Facility Agreement with NationsBank
of Texas dated January 16, 1996 (filed herewith) 284
Exhibit Index, cont.
Exhibit Item Page No. *
- -------- ---- ----------
10 (a) Opinion of Counsel (1)
(b) Consent of Counsel (filed herewith) 312
11 Independent Auditors' Consent (filed herewith) 314
12 Financial statements omitted from prospectuses - Not Applicable
13 Subscriptions and Investment Letters
(a) Short-Term Fund, Intermediate-Term Fund, and High-Yield
Fund dated December 7, 1981 (1)
(b) California Bond Fund and California Money Market Fund dated
June 23, 1989 and June 26, 1989 (1)
(c) New York Bond Fund, New York Money Market Fund, Virginia
Bond Fund, and Virginia Money Market Fund dated September
5, 1990 (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) 316
(b) Intermediate-Term Fund (filed herewith) 318
(c) Short-Term Fund (filed herewith) 320
(d) Tax Exempt Money Market Fund (filed herewith) 322
(e) California Bond Fund (filed herewith) 324
(f) California Money Market Fund (filed herewith) 326
(g) New York Bond Fund (filed herewith) 328
(h) New York Money Market Fund (filed herewith) 330
(i) Virginia Bond Fund (filed herewith) 332
(j) Virginia Money Market Fund (filed herewith) 334
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.
(2) Previously filed with Post-Effective Amendment No. 24 of the Registrant
(No. 2-75093) filed with the Securities and Exchange Commission on May
22, 1996.
- --------------------------------------------------------
* Refers to sequentially numbered pages
EXHIBIT 8(c)
USAA TAX EXEMPT FUND, INC.
SUBCUSTODIAN AGREEMENT
WITH
TEXAS COMMERCE BANK
The undersigned custodian (the "Custodian") for USAA Tax Exempt Fund,
Inc. (the "Company"), an open-end investment company registered under the
Investment Company Act of 1940 (the "1940 Act"), hereby appoints Texas
Commerce Bank as subcustodian (the "Subcustodian") for each of the respective
series of the Fund (the "Funds") and the Subcustodian hereby accepts such
appointment on the following terms and conditions as of the date set forth
below.
1. Qualification. The Custodian and the Subcustodian each represents
to the other and to the Company that it is qualified to act as a custodian for
a registered investment company under the 1940 Act, and the Custodian
represents to the Subcustodian that it is the duly appointed, qualified and
acting Custodian of the Funds, with all necessary power and authority to enter
into this Agreement.
2. Subcustody. The Subcustodian agrees to maintain one or more
custodial accounts ("Subscription Accounts") for the Funds in which checks
("Subscription Checks") issued in payment for purchases of Fund shares shall
be deposited by USAA Shareholder Account Services ("USAA SAS"), transfer agent
of the Funds (the "Transfer Agent"). The Subcustodian further agrees to debit
USAA IMCO account no. 06407080765 (the "Return Item Account") for the
aggregate amount of all Subscription Checks returned to the Subcustodian for
non-payment ("Return Items"), informing USAA SAS daily of any returned
Subscription Checks. In the event that the available funds in the Return Item
Account are insufficient to cover the amount of the Return Items, Subcustodian
will promptly notify Transfer Agent by telephone of the amount of such
insufficiency. Upon receipt of such telephone notice, Transfer Agent agrees
to remit to Subcustodian the full amount of any such insufficiency.
Each business day the Subcustodian agrees to, based upon
instructions by USAA SAS, remit to the Custodian by wire transfer amounts of
Subscription Checks deposited in the Subscription Account on the preceding
business day notwithstanding whether the Subcustodian has collected good funds
in respect of such checks. The Funds will compensate the Subcustodian for (i)
estimated earnings lost on amounts wired to the custodian in payment of
Subscription Checks during the period from the date wire payment is made
through the date good funds on such checks are received by the Subcustodian,
(ii) for service fees charged by the Subcustodian for processing Subscription
Checks as set forth in Schedule 1 to this Agreement (These amounts will be
paid monthly and computed based on an overall account relationship.), (iii)
other miscellaneous fees as described in Schedule 1, and (iv) Return Items not
paid by the Transfer Agent or the USAA Investment Management Company (USAA
IMCO) within five (5) business days following a request for payment by
Subcustodian pursuant to Paragraph 2 hereof.
3. Instructions: Other Communications. Any one officer or other
authorized representative of the Transfer Agent designated as hereinafter
provided as an officer or other authorized representative of the Transfer
Agent authorized to give instructions to the Subcustodian with respect to Fund
assets held in Subscription Accounts (an "Authorized Officer"), shall be
authorized to instruct the Subcustodian as to the deposit, withdrawal or any
other action with respect to Fund assets from time to time by telephone, or in
writing signed by such Authorized Officer and delivered by telecopy, tested
telex, tested computer printout or such other reasonable method as the
Transfer Agent and Subcustodian shall agree; provided, however, the
Subcustodian is authorized to accept and act upon instructions from the
Transfer Agent, whether orally, by telephone or otherwise, which the
Subcustodian reasonably believes to be given by an authorized person. The
Subcustodian may require that any instructions given orally or by
telecommunications be promptly confirmed in writing.
The Authorized Officers shall be as set forth on Schedule 2
attached hereto or as otherwise from time to time certified in writing by the
Transfer Agent to the Subcustodian signed by the President or any Vice
President and any Assistant Vice President, Assistant Secretary or Assistant
Treasurer of the Funds. In addition to a written list of authorized officers,
the Transfer Agent will provide Subcustodian with additional information and
signature cards as reasonably requested by Subcustodian relating to the
authorized officers. The Subcustodian shall furnish the Transfer Agent, with
a copy to the Funds, by first class mail, or other mutually agreed-upon means
of transmission, (i) prompt telephonic and written notice of Return Items,
(ii) a monthly report on activity in each of the Subscription Accounts within
five (5) days after the end of each calendar month, and (iii) a daily
statement of activity in each of the Subscription Accounts. The Subcustodian
shall also furnish the Custodian with a copy of item (ii) above.
4. Fees. The service fees charged by the Subcustodian under the
Agreement are set forth in Schedule 1 attached hereto. Schedule 1 may be
amended by the parties in writing provided written notice is furnished to the
Funds thirty (30) days in advance of any increase in fees.
5. Liabilities.
(i) The Subcustodian shall be held harmless by the Custodian and
Transfer Agent and shall not be liable for any action taken or omitted to be
taken in good faith, or for any mistake of law or fact, or for anything
Subcustodian may do or refrain from doing in connection with or as required by
this Agreement, except for failure to exercise ordinary care or act in good
faith. Except as otherwise set forth herein, the Subcustodian shall have no
responsibility with respect to Fund assets. The Subcustodian shall, for the
benefit of the Custodian and the Funds, use the same care with respect to
handling of Fund assets in depository accounts as it uses in respect of its
own assets similarly held. The Subcustodian shall have no responsibility with
respect to any monies or any wire transfer, checks or other instruments for
the payment of money unless and until actually received or secured by wire
transfer by the Subcustodian. IN NO EVENT WILL THE SUBCUSTODIAN BE LIABLE TO
CUSTODIAN, TRANSFER AGENT OR THE FUNDS FOR ANY INDIRECT DAMAGES, LOST PROFITS,
SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES WHICH ARISE OUT OF OR IN CONNECTION
WITH THE SERVICES CONTEMPLATED HEREIN.
(ii) The Subcustodian shall indemnify, defend and save harmless the
Custodian and each Fund from and against all loss, liability, claims and
demands incurred by the Custodian or the Fund arising out of or in connection
with the Subcustodian's willful malfeasance or bad faith in connection with
its obligations and duties under this Agreement.
(iii) The Custodian agrees to indemnify, defend and save harmless the
Subcustodian from and against all loss, liability, claims and demands incurred
by the Subcustodian in connection with the performance by the Subcustodian in
good faith of any activity under this Agreement pursuant to instructions of
the Custodian.
(iv) It is understood and expressly stipulated that neither the
shareholders of any Fund or the members of the Board of such Fund shall be
personally liable hereunder. The obligations of each Fund hereunder are not
personally binding upon, nor shall resort to the private property of, any of
the members of the Board of the Fund, nor of its shareholders, officers,
employees or agents, but only the Fund's property shall be bound.
6. Termination. Each party may terminate this Agreement at any time
by not less than thirty (30) days' prior written notice which shall specify
the date of such termination; and further, provided, however, that the
Custodian may immediately terminate this Agreement in the event of the
appointment of a conservator or receiver for the Subcustodian by the Federal
Deposit Insurance Corporation or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction. Upon termination, the Subcustodian shall make immediate
delivery of all Fund assets held in the Subscription Accounts to the Custodian
or to any third party specified by the Custodian in writing. If any
Subscription Checks are subsequently returned unpaid the Funds shall direct
the Transfer Agent to pay the Subcustodian the amount thereof on behalf of the
Funds promptly upon demand.
7. Communications. All notices to be delivered pursuant to the terms
of this Agreement shall be given in writing, and shall be deemed given (a)
upon delivery in person to the persons indicated below, or (b) three days
after deposit in the United States Postal Service, postage prepaid,
registered, or certified mail, return receipt requested, or (c) upon receipt
by facsimile (provided that such receipt of such facsimile is confirmed
telephonically by the addressee), or (d) by overnight delivery service (with
receipt of delivery), sent to the addresses shown below, or to such different
address(es) as such party shall be designated by written notice to the other
parties hereto at least ten (10) days in advance of the date upon which such
change of address shall be effective. All communications required or
permitted to be given under this Agreement, unless otherwise agreed by the
parties, shall be addressed as follows:
(i) to the Subcustodian:
Texas Commerce Bank
1020 N.E. Loop 410
San Antonio, Texas 78209
Attn: Jessica Jones
(ii) to the Custodian:
State Street Bank and Trust Company
One Heritage Drive
Palmer Building P.1-N
Quincy, Massachusetts 02171
Attn: Paul Kaminsky
(iii) to the Transfer Agent: USAA Shareholder Account Services
USAA Building, D-3-E
(As instructed by the Custodian) San Antonio, Texas 78288
Attn: Pat Bauer
8. Access to Records. The Subcustodian will not refuse any
reasonable request for inspection and audit of its books and records
concerning transactions and balances of the Subscription Accounts by an agent
of any Fund or the Custodian.
9. Cooperation. The Subcustodian shall cooperate with each Fund and
the Custodian and their respective independent public accountants in
connection with annual and other audits of the books and records of the
Custodian or the Fund.
10. Miscellaneous. This Agreement (i) shall be governed by and
construed in accordance with the laws of the State of Texas without regard to
conflicts of law rules, (ii) may be executed in counterparts each of which
shall be deemed an original but all of which shall constitute the same
instrument, and (iii) may only be amended by the parties hereto in writing.
11. Terms and Conditions of Deposit Accounts. The handling of the
Subscription Accounts and the Return Item Account and all other accounts
maintained with Subcustodian in connection with or relating to this Agreement
will be subject to the Subcustodian's Terms and Conditions of Deposit
Accounts, and any and all rules or regulations now or hereafter promulgated by
the Subcustodian which relate to such accounts and the Uniform Commercial
Code, as adopted by the State of Texas (except in the event any of the same
are contrary to the specific provisions hereof). In the event of any specific
conflict between the provisions hereof and the provisions of any of the
agreements, rules and regulations referenced in this paragraph, the provisions
of this Agreement shall control.
12. Signature Authority. Each of the undersigned represents and
warrants that he/she has the requisite authority to execute this Agreement on
behalf of the party for whom the undersigned signs; that all necessary action
has been taken to authorize this Agreement; that this Agreement, upon
execution and delivery, shall be a binding obligation of such party.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date set forth below.
Dated: March 24, 1994
----------------
STATE STREET BANK & TRUST COMPANY
As Custodian
By: /s/ Ronald E. Logue
----------------------------
Title: Executive Vice President
TEXAS COMMERCE BANK
As Subcustodian
By: /s/ Jessica Jones
-------------------------
Title: Vice President
USAA SHAREHOLDER ACCOUNT SERVICES
As Transfer Agent
By: /s/ A. Ray Otte
--------------------------
A. Ray Otte
Title: Sr. Vice President-
Chief Financial Officer/Controller
By: /s/ Sherron A. Kirk
---------------------------
Sherron A. Kirk
Title: Vice President-Controller
The Funds each hereby consent and agree to the terms of the foregoing
Subcustodian Agreement; provided, however, that the same shall not relieve the
Custodian of any of its responsibilities to the Funds as set forth in the
Custodian Agreements between the Funds and the Custodian.
USAA TAX EXEMPT FUND, INC.
By: /s/ John W. Saunders, Jr.
--------------------------------
John W. Saunders, Jr.
Title: Vice President
SCHEDULE 1
FEES
Item Processing Pricing
High Volume Corporate Accounts
Effective January 1994
SERVICE PRICE
------- -----
Pre-encoded Deposit
On-Us $ .019/item
Tier I/Local City $ .019/item
Tier II/Local RCPC $ .029/item
Tier III/Texas Fed Cities $ .040/item
Tier IV/Other Texas $ .050/item
Tier V/Other Transit $ .059/item
Rejects $ .03/item
Account Maintenance $ 10.00/account
Debits Posted $ .12/item
Credits Posted $ .45/deposit
FDIC Assessment $ .16/$1,000 ledger bal./mo.
MicroLink Pricing
Effective January 1994
SERVICE PRICE
------- -----
Cash Manager
- ------------
Software Pricing *
Cash Manager Setup Fee $ 325.00
Maintenance *
Cash Manager $ 35.00/customer/month
Bank Account Reporting
TCB
(First 5 Accounts) $ 25.00/account/month
Current Day Reporting **
Transaction Reporting
Previous Day Items $ .15/item
Current Day Items $ .20/item
Automated Payments & Collections (APC)***
- --------------------------------------
Software Pricing *
APC Setup Fee $ 225.00
Maintenance *
Automated Payments & Collections $ 25.00/customer/month
APC Transactions
First 1-500 Transactions $ .30/transaction
* Fees are for single micro-computer software. Additional micro-computer
software and maintenance charges are available at 50% off listed fees.
** The charge for Current Day Reporting is in addition to the account
charges.
*** Refer to ACH Price Sheet for additional APC and DTS charges.
TexStar Funds Transfer Pricing
Effective January 1994
SERVICE PRICE
------- -----
TexStar Account Maintenance $ 0.00/account/month
Incoming Transfer
Autopost Domestic $ 4.50/transfer
Notifications
TexStar Direct Access $ No charge
TexStar Direct Access, TexStar EXPRESS,
Automatic Standing Transfer, BatchWire*
Internal $ 1.00/transfer
Outgoing
Repetitive $ 6.00/transfer
* BatchWire supports domestic internal and outgoing repetitive funds
transfers.
Automated Clearing House (ACH)
Origination
(Statewide)
Effective January 1994
SERVICE PRICE
------- -----
MicroLink (APC Module)
Software Setup Fee $ 225.00
Maintenance $ 25.00/customer/month
Initiation
First 1-500 transactions $ .30/transaction
Monthly Maintenance * $ 50.00/customer Tax ID/
month
* One charge for all accounts
International Collection Services Pricing
Effective January 1994
SERVICE PRICE
------- -----
International Collections*
$ 25.00-$ 4,000.00 $ 16.00
$ 4,000.01-$10,000.00 $ 26.00
$10,000.01+ $ 51.00 maximum (1/4 of 1%)
* Charge deducted from the face amount of the check. $8.50 processing fee
charged to analysis.
SCHEDULE 2
AUTHORIZED OFFICERS
Michael J.C. Roth
Joseph H.L. Jimenez
Sherron Kirk
Pat Bauer
Jim Sanchez
Lori Polhamus
Delia Flores
EXHIBIT 9(c)
January 15, 1996
USAA Mutual Fund, Inc.,
USAA Investment Trust,
USAA Tax Exempt Fund, Inc., and
USAA State Tax-Free Trust, on behalf of and for the
benefit of the series
of funds comprising each such Borrower
as set forth on Schedule A hereto
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Michael J.C. Roth, President
Gentlemen:
This Facility Agreement Letter (this "Agreement") sets forth the terms and
conditions for loans (each a "Loan" and collectively the "Loans") which
USAA Capital Corporation ( 'CAPCO' ) may from time to time make during the
period commencing January 15, 1996 and ending January 14, 1997 (the "Facility
Period") to USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt
Fund, Inc., and USAA State Tax-Free Trust, and each investment company which
may become a party hereto pursuant to the terms of this Agreement (each a
"Borrower" and collectively the "Borrowers"), each of which is executing
this Agreement on behalf of and for the benefit of the series of funds
comprising each such Borrower as set forth on Schedule A hereto (as hereafter
modified or amended in accordance with the terms hereof) (each a "Fund" and
collectively the "Funds"), under a master revolving credit facility (the
"Facility"). USAA Investment Management Company is the Manager and
Investment Advisor of each Fund. CAPCO and the Borrowers hereby agree as
follows:
1. Amount. The aggregate principal amount of the Loans which may
be advanced under this Facility shall not exceed, at any one time outstanding,
Seven Hundred Fifty Million Dollars ($750,000,000). The aggregate principal
amount of the Loans which may be borrowed by a Borrower for the benefit of a
particular Fund under this Facility shall not exceed the borrowing limit (the
"Borrowing Limit") on borrowings applicable to such Fund, as set forth on
Schedule A hereto.
2. Purpose and Limitations on Borrowings. Each Borrower will use
the proceeds of each Loan made to it solely for temporary or emergency
purposes of the Fund for whose benefit it is borrowing in accordance with such
Fund's Borrowing Limit (Schedule A) and prospectus in effect at the time of
such Loan. Portfolio securities may not be purchased by a Fund while there is
a Loan outstanding under the Facility or any other facility, if the aggregate
amount of such Loan and any other such loan exceeds 5% of the total assets of
such Fund.
3. Borrowing Rate and Maturity of Loans. CAPCO may make Loans to
a Borrower and the principal amount of the Loans outstanding from time to time
shall bear interest at a rate per annum equal to the rate at which CAPCO
obtains funding in the Capital Markets plus a standard mark-up to cover
CAPCO's operating costs (not to exceed 8 basis points). Interest on the Loans
shall be calculated on the basis of a year of 360 days and the actual days
elapsed but shall not exceed the highest lawful rate. Each loan will be for
an established number of days agreed upon by the applicable Borrower and
CAPCO. Notwithstanding the above, all Loans to a Borrower shall be made
available at a rate per annum equal to the rate at which CAPCO would make
loans to affiliates and subsidiaries. Further, if the CAPCO rate exceeds the
rate at which a Borrower could obtain funds pursuant to the NationsBank of
Texas, N.A. ("NationsBank") 364-day committed $100,000,000 Master Revolving
Credit Facility, the Borrower will in the absence of predominating
circumstances, borrow from NationsBank. Any past due principal and/or accrued
interest shall bear interest at a rate per annum equal to the aggregate of the
Federal Funds Rate plus 1 percent (100 basis points) and shall be payable on
demand.
4. Advances, Payments, Prepayments and Readvances. Upon each
Borrower's request, and subject to the terms and conditions contained herein,
CAPCO may make Loans to each Borrower on behalf of and for the benefit of its
respective Fund(s) during the Facility Period, and each Borrower may at
CAPCO's sole and absolute discretion, borrow, repay and reborrow funds
hereunder. The Loans shall be evidenced by duly executed and delivered Master
Grid Promissory Note in the form of Exhibit A. Each Loan shall be in an
aggregate amount not less than One Hundred Thousand United States Dollars
(U.S. $100,000) and increments of One Thousand United States Dollars (U.S.
$1,000) in excess thereof. Payment of principal and interest due with respect
to each Loan shall be payable at the maturity of such Loan and shall be made
in funds immediately available to CAPCO prior to 2 p.m. San Antonio time on
the day such payment is due, or as CAPCO shall otherwise direct from time to
time and, subject to the terms and conditions hereof, may be repaid with the
proceeds of a new borrowing hereunder. Notwithstanding any provision of this
Agreement to the contrary, all Loans, accrued but unpaid interest and other
amounts payable hereunder shall be due and payable upon termination of the
Facility (whether by acceleration or otherwise).
5. Facility Fee. As this Facility is uncommitted, no facility fee
shall be charged by CAPCO.
6. Optional Termination. The Borrowers shall have the right upon at
least three (3) business days prior written notice to CAPCO, to terminate the
Facility.
7. Mandatory Termination of the Facility. The Facility, unless
extended by written amendment, shall automatically terminate on the last day
of the Facility Period and any Loans then outstanding (together with accrued
interest thereon and any other amounts owing hereunder) shall be due and
payable on such date.
8. Uncommitted Facility. The Borrowers acknowledge that the
Facility is an uncommitted facility and that CAPCO shall have no obligation to
make any Loan requested during the Facility Period under this Agreement.
Further, CAPCO shall not make any Loan if this Facility has been terminated by
the Borrowers, or if at the time of a request for a Loan by a Borrower [on
behalf of the applicable Fund(s)] there exists any Event of Default or
condition which, with the passage of time or giving of notice, or both, would
constitute or become an Event of Default with respect to such Borrower [or
such applicable Fund(s)].
9. Loan Requests. Each request for a Loan (each a "Borrowing
Notice") shall be in writing by the applicable Borrower(s), except that such
Borrower(s) may make an oral request (each an "Oral Request") provided that
each Oral Request shall be followed by a written Borrowing Notice within one
business day. Each Borrowing Notice shall specify the following terms
("Terms") of the requested Loan: (i) the date on which such Loan is to be
disbursed, (ii) the principal amount of such Loan, (iii) the Borrower(s) which
are borrowing such Loan and the amount of such Loan to be borrowed by each
Borrower, (iv) the Funds for whose benefit the loan is being borrowed and the
amount of the Loan which is for the benefit of each such Fund and (v) the
requested maturity date of the Loan. Each Borrowing Notice shall also set
forth the total assets of each Fund for whose benefit a portion of the Loan is
being borrowed as of the close of business on the day immediately preceding
the date of such Borrowing Notice. Borrowing notices shall be delivered to
CAPCO by 9:00 a.m. San Antonio time on the day the Loan is requested to be
made.
Each Borrowing Notice shall constitute a representation to CAPCO by the
applicable Borrower(s) that all of the representations and warranties in
Section 12 hereof are true and correct as of such date and that no Event of
Default or other condition which with the passage of time or giving of notice,
or both, would result in an Event of Default, has occurred or is occurring.
10. Confirmations; Crediting of Funds; Reliance by CAPCO. Upon
receipt by CAPCO of a Borrowing Notice:
(a) CAPCO shall provide each applicable Borrower written
confirmation of the Terms of such Loan via facsimile or telecopy, as soon as
reasonably practicable; provided, however, that the failure to do so shall not
affect the obligation of any such Borrower;
(b) CAPCO shall make such Loan in accordance with the Terms by
transfer of the Loan amount in immediately available funds, to the account of
the applicable Borrower(s) as specified in Exhibit B to this Agreement or as
such Borrower(s) shall otherwise specify to CAPCO in a writing signed by an
Authorized Individual (as defined in Section 11) of such Borrower(s); and
(c) CAPCO shall make appropriate entries on the Note or the
records of CAPCO to reflect the Terms of the Loan; provided, however, that the
failure to do so shall not affect the obligation of any Borrower.
CAPCO shall be entitled to rely upon and act hereunder pursuant to any Oral
Request which it reasonably believes to have been made by the applicable
Borrower through an Authorized Individual. If any Borrower believes that the
confirmation relating to any Loan contains any error or discrepancy from the
applicable Oral Request, such Borrower will promptly notify CAPCO thereof.
11. Borrowing Resolutions and Officers' Certificates. Prior to the
making of any Loan pursuant to this Agreement, the Borrowers shall have
delivered to CAPCO the duly executed Note, Resolutions of each Borrower's
Trustees or Board of Directors authorizing such Borrower to execute, deliver
and perform this Agreement and the Note on behalf of the applicable Funds and
an Officer's Certificate in substantially the form set forth in Exhibit D to
this Agreement, authorizing certain individuals ("Authorized Individuals"),
to take on behalf of each Borrower (on behalf of the applicable Funds) action
contemplated by this Agreement and the Note.
12. Representations and Warranties. In order to induce CAPCO to
enter into this Agreement and to make the Loans provided for hereunder, each
Borrower hereby makes with respect to itself, and as may be relevant, the
series of Funds comprising such Borrower, the following representations and
warranties, which shall survive the execution and delivery hereof and of the
Note:
(a) Organization, Standing, etc. The Borrower is a corporation
or trust duly organized, validly existing, and in good standing under
applicable state laws and has all requisite corporate or trust power and
authority to carry on its respective businesses as now conducted and proposed
to be conducted, to enter into this Agreement and all other documents to be
executed by it in connection with the transactions contemplated hereby, to
issue and borrow under the Note and to carry out the terms hereof and thereof;
(b) Financial Information; Disclosure, etc. The Borrower has
furnished CAPCO with certain financial statements of such Borrower with
respect to itself and the applicable Funds, all of which such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis and fairly present the financial
position and results of operations of such Borrower and the applicable Funds
on the dates and for the periods indicated. Neither this Agreement nor any
financial statements, reports or other documents or certificates furnished to
CAPCO by such Borrower or the applicable Funds in connection with the
transactions contemplated hereby contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
contained herein or therein in light of the circumstances when made not
misleading;
(c) Authorization; Compliance with Other Instruments. The
execution, delivery and performance of this Agreement and the Note, and
borrowings hereunder, have been duly authorized by all necessary corporate or
trust action of the Borrower and will not result in any violation of or be in
conflict with or constitute a default under any term of the charter, by-laws
or trust agreement of such Borrower or the applicable Funds, or of any
borrowing restrictions or prospectus or statement of additional information of
such Borrower or the applicable Funds, or of any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to such Borrower, or result in the creation of any mortgage, lien, charge or
encumbrance upon any of the properties or assets of such Borrower or the
applicable Funds pursuant to any such term. The Borrower and the applicable
Funds are not in violation of any term of their respective charter, by-laws or
trust agreement, and such Borrower and the applicable Funds are not in
violation of any material term of any agreement or instrument to which they
are a party, or to the best of such Borrower's knowledge, of any judgment,
decree, order, statute, rule or governmental regulation applicable to them;
(d) SEC Compliance. The Borrower and the applicable Funds are
in compliance in all material respects with all federal and state securities
or similar laws and regulations, including all material rules, regulations and
administrative orders of the Securities and Exchange Commission (the "SEC")
and applicable Blue Sky authorities. The Borrower and the applicable Funds
are in compliance in all material respects with all of the provisions of the
Investment Company Act of 1940, and such Borrower has filed all reports with
the SEC that are required of it or the applicable Funds;
(e) Litigation. There is no action, suit or proceeding pending
or, to the best of the Borrower's knowledge, threatened against such Borrower
or the applicable Funds in any court or before any arbitrator or governmental
body which seeks to restrain any of the transactions contemplated by this
Agreement or which, if adversely determined, could have a material adverse
effect on the assets or business operations of such Borrower or the applicable
Funds or the ability of such Borrower and the applicable Funds to pay and
perform their obligations hereunder and under the Notes; and
(f) Borrowers' Relationship to Funds. The assets of each Fund
for whose benefit Loans are borrowed by the applicable Borrower are subject to
and liable for such Loans and are available (except as subordinated to
borrowings under the NationsBank committed facility) to the applicable
Borrower for the repayment of such Loans.
13. Affirmative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to CAPCO by a Borrower pursuant to any
Loan made to such Borrower is irrevocably paid in full, and until the Facility
is terminated, such Borrower (for itself and on behalf of its respective
Funds) agrees:
(a) To deliver to CAPCO as soon as possible and in any event
within ninety (90) days after the end of each fiscal year of such Borrower and
the applicable Funds, Statements of Assets and Liabilities, Statements of
Operations and Statements of Changes in Net Assets of each applicable Fund for
such fiscal year, as set forth in each applicable Fund's Annual Report to
shareholders together with a calculation of the maximum amount which each
applicable Fund could borrow under its Borrowing Limit as of the end of such
fiscal year;
(b) To deliver to CAPCO as soon as available and in any event
within seventy-five (75) days after the end of each semiannual period of such
Borrower and the applicable Funds, Statements of Assets and Liabilities,
Statement of Operations and Statements of Changes in Net Assets of each
applicable Fund as of the end of such semiannual period, as set forth in each
applicable Fund's Semiannual Report to shareholders, together with a
calculation of the maximum amount which each applicable Fund could borrow
under its Borrowing Limit at the end of such semiannual period;
(c) To deliver to CAPCO prompt notice of the occurrence of any
event or condition which constitutes, or is likely to result in, a change in
such Borrower or any applicable Fund which could reasonably be expected to
materially adversely affect the ability of any applicable Fund to promptly
repay outstanding Loans made for its benefit or the ability of such Borrower
to perform its obligations under this Agreement or the Note;
(d) To do, or cause to be done, all things necessary to preserve
and keep in full force and effect the corporate or trust existence of such
Borrower and all permits, rights and privileges necessary for the conduct of
its businesses and to comply in all material respects with all applicable
laws, regulations and orders, including without limitation, all rules and
regulations promulgated by the SEC;
(e) To promptly notify CAPCO of any litigation, threatened legal
proceeding or investigation by a governmental authority which could materially
affect the ability of such Borrower or the applicable Funds to promptly repay
the outstanding Loans or otherwise perform their obligations hereunder; and
(f) In the event a Loan for the benefit of a particular Fund is
not repaid in full within 10 days after the date it is borrowed , and until
such Loan is repaid in full, to deliver to CAPCO, within two business days
after each Friday occurring after such 10th day, a statement setting forth the
total assets of such Fund as of the close of business on each such Friday.
14. Negative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to CAPCO by a Borrower pursuant to any
Loan made to such Borrower is irrevocably paid in full, and until the Facility
is terminated, such Borrower (for itself and on behalf of its respective
Funds) agrees:
(a) Not to incur any indebtedness for borrowed money (other than
pursuant to the One Hundred Million Dollar ($100,000,000) committed Master
Revolving Credit Facility with NationsBank and for overdrafts incurred at the
custodian of the Funds from time to time in the normal course of business)
except the Loans, without the prior written consent of CAPCO, which consent
will not be unreasonably withheld; and
(b) Not to dissolve or terminate its existence, or merge or
consolidate with any other person or entity, or sell all or substantially all
of its assets in a single transaction or series of related transactions (other
than assets consisting of margin stock), each without the prior written
consent of CAPCO, which consent will not be unreasonably withheld; provided
that a Borrower may without such consent merge, consolidate with, or purchase
substantially all of the assets of, or sell substantially all of its assets
to, an affiliated investment company or series thereof, as provided for in
Rule 17a-8 of the Investment Company Act of 1940.
15. Events of Default. If any of the following events (each an
"Event of Default") shall occur (it being understood that an Event of
Default with respect to one Fund or Borrower shall not constitute an Event of
Default with respect to any other Fund or Borrower):
(a) Any Borrower or Fund shall default in the payment of
principal or interest on any Loan or any other fee due hereunder for a period
of five (5) days after the same becomes due and payable, whether at maturity
or with respect to any Facility Fee at a date fixed for the payment thereof;
(b) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 13 hereof and such default shall
not have been remedied within thirty (30) days after written notice thereof
shall have been given such Borrower or Fund by CAPCO;
(c) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 14 hereof;
(d) Any Borrower or Fund shall default in the performance or
compliance with any other term contained herein and such default shall not
have been remedied within thirty (30) days after written notice thereof shall
have been given such Borrower or Fund by CAPCO;
(e) Any representation or warranty made by a Borrower or Fund
herein or pursuant hereto shall prove to have been false or incorrect in any
material respect when made;
(f) USAA Investment Management Company or any successor manager
or investment adviser, provided that such successor in a wholly-owned
subsidiary of CAPCO, shall cease to be the Manager and Investment Advisor of
each Fund; or
(g) An event of default shall occur and be continuing under any
other facility;
then, in any event, and at any time thereafter, if any Event of Default shall
be continuing, CAPCO may by written notice to the applicable Borrower or Fund
(i) terminate the Facility with respect to such Borrower or Fund and (ii)
declare the principal and interest in respect of any outstanding Loans with
respect to such Borrower or Fund, and all other amounts due hereunder with
respect to such Borrower or Fund, to be immediately due and payable whereupon
the principal and interest in respect thereof and all other amounts due
hereunder shall become forthwith due and payable without presentment, demand,
protest or other notice of any kind, all of which are expressly waived by the
Borrowers.
16. New Borrowers; New Funds. So long as no Event of Default or
condition which, with the passage of time or the giving of notice, or both,
would constitute or become an Event of Default has occurred and is continuing,
and with the prior consent of CAPCO, which consent will not be unreasonably
withheld:
(a) Any investment company that becomes part of the same "group
of investment companies" (as that term is defined in Rule 11a-3 under the
Investment Company Act of 1940) as the original Borrowers to this Agreement,
may, by submitting an amended Schedule A and Exhibit B to this Agreement to
CAPCO (which amended Schedule A and Exhibit B shall replace the corresponding
Schedule and Exhibit which are, then a part of this Agreement) and such other
documents as CAPCO may reasonably request, become a party to this Agreement
and may become a "Borrower" hereunder; and
(b) A Borrower may, by submitting an amended Schedule A and
Exhibit B to this Agreement to CAPCO (which amended Schedule A and Exhibit B
shall replace the corresponding Schedule and Exhibit which are then a part of
this Agreement), add additional Funds for whose benefit such Borrower may
borrow Loans. No such amendment of Schedule A to this Agreement shall amend
the Borrowing Limit applicable to any Fund without the prior approval of
CAPCO.
17. Limited Recourse. CAPCO agrees (i) that any claim, liability, or
obligation arising hereunder or under the Note whether on account of the
principal of any Loan, interest thereon, or any other amount due hereunder or
thereunder shall be satisfied only from the assets of the specific Fund for
whose benefit a Loan is borrowed and in any event in an amount not to exceed
the outstanding principal amount of any Loan borrowed for such Fund's benefit,
together with accrued and unpaid interest due and owing thereon, and such
Fund's share of any other amount due hereunder and under the Note (as
determined in accordance with the provisions hereof) and (ii) that no assets
of any fund shall be used to satisfy any claim, liability, or obligation
arising hereunder or under the Note with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Note (as determined in accordance
with the provisions hereof).
18. Remedies on Default. In case any one or more Events of Default
shall occur and be continuing, CAPCO may proceed to protect and enforce its
rights by an action at law, suit in equity or other appropriate proceedings,
against the applicable Borrower(s) and/or Fund(s), as the case may be. In the
case of a default in the payment of any principal or interest on any Loan or
in the payment of any fee due hereunder, the relevant Funds (to be allocated
among such Funds as the Borrowers deem appropriate) shall pay to CAPCO such
further amount as shall be sufficient to cover the cost and expense of
collection, including, without limitation, reasonable attorney's fees and
expenses.
19. No Waiver of Remedies. No course of dealing or failure or delay
on the part of CAPCO in exercising any right or remedy hereunder or under the
Note shall constitute a waiver of any right or remedy hereunder or under the
Note, nor shall any partial exercise of any right or remedy hereunder or under
the Note preclude any further exercise thereof or the exercise of any other
right or remedy hereunder or under the Note. Such rights and remedies
expressly provided are cumulative and not exclusive of any rights or remedies
which CAPCO would otherwise have.
20. Expenses. The Funds (to be allocated among the Funds as the
Borrowers deem appropriate) shall pay on demand all reasonable out-of-pocket
costs and expenses (including reasonable attorney's fees and expenses)
incurred by CAPCO in connection with the collection and any other enforcement
proceedings of or regarding this Agreement, any Loan or the Note.
21. Benefit of Agreement. This Agreement and the Note shall be
binding upon and inure for the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided that no party to this
Agreement or the Note may assign any of its rights hereunder or thereunder
without the prior written consent of the other parties.
22. Notices. All notices hereunder and all written, facsimile or
telecopied confirmations of Oral Requests made hereunder shall be sent to the
Borrowers as indicated on Exhibit B and to CAPCO as indicated on Exhibit C.
23. Modifications. No provision of this Agreement or the Note may
be waived, modified or discharged except by mutual written agreement of all
parties. THIS WRITTEN LOAN AGREEMENT AND THE NOTE REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
24. Governing Law and Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the state of Texas
without regard to the choice of law provisions thereof.
25. Trust Disclaimer. Neither the shareholders, trustees, officers,
employees and other agents of any Borrower or Fund shall be personally bound
by or liable for any indebtedness, liability or obligation hereunder or under
the Note nor shall resort be had to their private property for the
satisfaction of any obligation or claim hereunder.
If this letter correctly reflects your agreement with us, please execute both
copies hereof and return one to us, whereupon this Agreement shall be binding
upon the Borrowers, the Funds and CAPCO.
Sincerely,
USAA CAPITAL CORPORATION
By: /s/ Laurie B. Blank
- ------------------------
Laurie B. Blank
Assistant Vice President-Treasurer
AGREED AND ACCEPTED this 15th
Day of January, 1996.
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
- --------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J. C. Roth
- ---------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
- --------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
- ------------------------------
Michael J.C. Roth
President
SCHEDULE A
FUNDS FOR WHOSE BENEFIT LOANS CAN
BE BORROWED UNDER FACILITY AGREEMENT
Borrower Funds Borrowing Limit
- -------- ----- ---------------
USAA Mutual Fund, Inc. USAA Aggressive Growth 5% of Total Assets
USAA Growth & Income '
USAA Income Stock '
USAA Short-Term Bond '
USAA Money Market '
USAA Growth '
USAA Income '
USAA Investment Trust USAA Cornerstone Strategy '
USAA Gold '
USAA International '
USAA World Growth '
USAA GNMA Trust '
USAA Treasury Money Market Trust '
USAA Emerging Markets '
USAA Growth and Tax Strategy '
USAA Balanced Strategy '
USAA Growth Strategy '
USAA Income Strategy '
USAA Tax Exempt Fund, Inc. USAA Long-Term '
USAA Intermediate-Term '
USAA Short-Term '
USAA Tax Exempt Money Market '
USAA California Bond '
USAA California Money Market '
USAA New York Bond '
USAA New York Money Market '
USAA Virginia Bond '
USAA Virginia Money Market '
USAA State Tax-Free Trust USAA Florida Tax-Free Income '
USAA Florida Tax-Free Money Market '
USAA Texas Tax-Free Income '
USAA Texas Tax-Free Money Market '
EXHIBIT A
MASTER GRID PROMISSORY NOTE
U.S. $750,000,000 Dated: January 15, 1996
FOR VALUE RECEIVED, each of the undersigned (each a "Borrower" and
collectively the "Borrowers"), severally and not jointly, on behalf of and
for the benefit of the series of funds comprising each such Borrower as listed
on Schedule A to the Agreement as defined below (each a "Fund" and
collectively the "Funds") promises to pay to the order of USAA Capital
Corporation ("CAPCO") at CAPCO's office located at 9800 Fredericksburg Road,
San Antonio, Texas 78288, in lawful money of the United States of America, in
immediately available funds, the principal amount of all Loans made by CAPCO
to such Borrower for the benefit of the applicable Funds under the Facility
Agreement Letter dated January 15, 1996 (as amended or modified, the
"Agreement"), among the Borrowers and CAPCO, together with interest thereon
at the rate or rates set forth in the Agreement. All payments of interest and
principal outstanding shall be made in accordance with the terms of the
Agreement.
This Note evidences Loans made pursuant to, and is entitled to the
benefits of, the Agreement. Terms not defined in this Note shall be as set
forth in the Agreement.
CAPCO is authorized to endorse the particulars of each Loan evidenced
hereby on the attached Schedule and to attach additional Schedules as
necessary, provided that the failure of CAPCO to do so or to do so accurately
shall not affect the obligations of any Borrower (or the Fund for whose
benefit it is borrowing) hereunder.
Each Borrower waives all claims to presentment, demand, protest, and
notice of dishonor. Each Borrower agrees to pay all reasonable costs of
collection, including reasonable attorney's fees in connection with the
enforcement of this Note.
CAPCO hereby agrees (i) that any claim, liability, or obligation arising
hereunder or under the Agreement whether on account of the principal of any
Loan, interest thereon, or any other amount due hereunder or thereunder shall
be satisfied only from the assets of the specific Fund for whose benefit a
Loan is borrowed and in any event in an amount not to exceed the outstanding
principal amount of any Loan borrowed for such Fund's benefit, together with
accrued and unpaid interest due and owing thereon, and such Fund's share of
any other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement) and (ii) that no assets of
any Fund shall be used to satisfy any claim, liability, or obligation arising
hereunder or under the Agreement with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement).
Neither the shareholders, trustees, officers, employees and other agents
of any Borrower or Fund shall be personally bound by or liable for any
indebtedness, liability or obligation hereunder or under the Note nor shall
resort be had to their private property for the satisfaction of any obligation
or claim hereunder.
Loans under the Agreement and this Note are subordinated to loans made
under the $100,000,000 364-day Committed Mater Revolving Credit Facility
Agreement between the Borrowers and NationsBank of Texas, N.A. (NationsBank),
dated January 16, 1996, in the manner and to the extent set forth in the
Agreement among the Borrowers, CAPCO and NationsBank, dated January 16, 1996.
This Note shall be governed by the laws of the state of Texas.
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
---------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
---------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
---------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
----------------------------
Michael J.C. Roth
President
LOANS AND PAYMENT OF PRINCIPAL
This schedule (grid) is attached to and made a part of the Promissory Note
dated January 15, 1996, executed by USAA MUTUAL FUND, INC., USAA INVESTMENT
TRUST, USAA TAX EXEMPT FUND, INC. AND USAA STATE TAX-FREE TRUST on behalf of
and for the benefit of the series of funds comprising each such Borrower
payable to the order of USAA CAPITAL CORPORATION.
[Information listed in grid]
Date of Loan
Borrower and Fund
Amount of Loan
Type of Rate and Interest Rate on Date of Borrowing
Amount of Principal Repaid
Date of Repayment
Other Expenses
Notation made by
EXHIBIT B
USAA CAPITAL CORPORATION
MASTER REVOLVING
CREDIT FACILITY AGREEMENT
BORROWER INFORMATION SHEET
BORROWER: USAA MUTUAL FUND, INC., USAA INVESTMENT TRUST, USAA TAX EXEMPT
FUND, INC. AND USAA STATE TAX-FREE TRUST
ADDRESS FOR NOTICES AND OTHER COMMUNICATIONS TO THE BORROWER:
9800 Fredericksburg Road
San Antonio, Texas 78288 (For Federal Express, 78240)
Attention: John W. Saunders, Jr.
Senior Vice President,
Fixed Income Investments
Telephone: (210) 498-7320
Telecopy: (210) 498-5689
Harry W. Miller
Senior Vice President,
Equity Investments
Telephone: (210) 498-7344
Telecopy: (210) 498-7332
ADDRESS FOR BORROWING AND PAYMENTS:
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Dean R. Pantzar
Telephone: (210) 498-7472
Telecopy: (210) 498-0382 or 498-7819
Telex: 767424
INSTRUCTIONS FOR PAYMENTS TO BORROWER:
WE PAY VIA: X FED FUNDS CHIPS
TO: (PLEASE PLACE BANK NAME, CORRESPONDENT NAME (IF APPLICABLE), CHIPS
AND/OR FED FUNDS ACCOUNT NUMBER BELOW)
State Street Bank and Trust Company, Boston, Massachusetts
ABA #011-00-0028
USAA MUTUAL FUND, INC.
- ----------------------
USAA Aggressive Growth Fund Acct.# 6938-502-9
USAA Growth & Income Fund Acct.# 6938-519-3
USAA Income Stock Fund Acct.# 6938-495-6
USAA Short-Term Bond Fund Acct.# 6938-517-7
USAA Money Market Fund Acct.# 6938-498-0
USAA Growth Fund Acct.# 6938-490-7
USAA Income Fund Acct.# 6938-494-9
USAA INVESTMENT TRUST
- ---------------------
USAA Cornerstone Strategy Fund Acct.# 6938-487-3
USAA Gold Fund Acct.# 6938-488-1
USAA International Fund Acct.# 6938-497-2
USAA World Growth Fund Acct.# 6938-504-5
USAA GNMA Trust Acct.# 6938-486-5
USAA Treasury Money Market Trust Acct.# 6938-493-1
USAA Emerging Markets Fund Acct.# 6938-501-1
USAA Growth and Tax Strategy Fund Acct.# 6938-509-4
USAA Balanced Strategy Fund Acct.# 6938-507-8
USAA Growth Strategy Fund Acct.# 6938-510-2
USAA Income Strategy Fund Acct.# 6938-508-6
USAA TAX EXEMPT FUND, INC.
- --------------------------
USAA Long-Term Fund Acct.# 6938-492-3
USAA Intermediate-Term Fund Acct.# 6938-496-4
USAA Short-Term Fund Acct.# 6938-500-3
USAA Tax Exempt Money Market Fund Acct.# 6938-514-4
USAA California Bond Fund Acct.# 6938-489-9
USAA California Money Market Fund Acct.# 6938-491-5
USAA New York Bond Fund Acct.# 6938-503-7
USAA New York Money Market Fund Acct.# 6938-511-0
USAA Virginia Bond Fund Acct.# 6938-512-8
USAA Virginia Money Market Fund Acct.# 6938-513-6
USAA STATE TAX-FREE TRUST
- -------------------------
USAA Florida Tax-Free Income Fund Acct.# 6938-473-3
USAA Florida Tax-Free Money Market Fund Acct.# 6938-467-5
USAA Texas Tax-Free Income Fund Acct.# 6938-602-7
USAA Texas Tax-Free Money Market Fund Acct.# 6938-601-9
EXHIBIT C
ADDRESS FOR USAA CAPITAL CORPORATION
USAA Capital Corporation
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Laurie B. Blank
Telephone No.: (210) 498-0825
Telecopy No.: (210) 498-6566
EXHIBIT D
OFFICER'S CERTIFICATE
The undersigned hereby certifies that he is the duly elected Secretary of USAA
Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA
State Tax-Free Trust and that he is authorized to execute this Certificate on
behalf of USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund,
Inc. and USAA State Tax-Free Trust. The undersigned hereby further certifies
to the following:
The following individuals are duly authorized to act on behalf of USAA Mutual
Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA State
Tax-Free Trust, by transmitting telephonic, telex, or telecopy instructions
and other communications with regard to borrowing and payments pursuant to the
uncommitted Master Revolving Credit Agreement with USAA Capital Corporation.
The signature set opposite the name of each individual below is that
individual's genuine signature.
NAME OFFICE SIGNATURE
- ---- ------ ---------
Michael J.C. Roth President /s/ Michael J.C. Roth
-------------------------
John W. Saunders, Jr. Senior Vice President,
Fixed Income Investments /s/ John W. Saunders, Jr.
-------------------------
Harry W. Miller Senior Vice President,
Equity Investments /s/ Harry W. Miller
-------------------------
Kenneth E. Willmann Vice President,
Fixed Income /s/ Kenneth W. Willmann
-------------------------
David G. Peebles Vice President,
Equity Investments /s/ David G. Peebles
-------------------------
Sherron A. Kirk Vice President,
Controller /s/ Sherron A. Kirk
-------------------------
Dean R. Pantzar Executive Director,
Mutual Fund Accounting /s/ Dean R. Pantzar
-------------------------
IN WITNESS WHEREOF, I have executed this Certificate as of this 15th day of
January, 1996.
/s/ Michael D. Wagner
---------------------
MICHAEL D. WAGNER
Secretary
I, Michael J.C. Roth, President of USAA Mutual Fund, Inc., USAA Investment
Trust, USAA Tax Exempt Fund, Inc. And USAA State Tax-Free Trust hereby
certify that Michael D. Wagner is, and has been at all times since a date
prior to the date of this Certificate, the duly elected, qualified, and acting
Secretary of USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt
Fund, Inc. And USAA State Tax-Free Trust and that the signature set forth
above is his true and correct signature.
DATE: January 15, 1996 /s/ Michael J. C. Roth
----------------------
MICHAEL J. C. ROTH
President
EXHIBIT 9(d)
January 16, 1996
USAA Mutual Fund, Inc.,
USAA Investment Trust,
USAA Tax Exempt Fund, Inc., and
USAA State Tax-Free Trust, on behalf of and for the
benefit of the series
of funds comprising each such Borrower
as set forth on Schedule A hereto
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Michael J.C. Roth, President
Gentlemen:
This Facility Agreement Letter (this "Agreement") sets forth the terms and
conditions for loans (each a "Loan" and collectively the "Loans") which
NationsBank of Texas, N.A. (the "Bank") agrees to make during the period
commencing January 16, 1996 and ending January 15, 1997 (the "Facility
Period") to USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt
Fund, Inc., and USAA State Tax-Free Trust, and each investment company which
may become a party hereto pursuant to the terms of this Agreement (each a
"Borrower" and collectively the "Borrowers"), each of which is executing this
Agreement on behalf of and for the benefit of the series of funds comprising
each such Borrower as set forth on Schedule A hereto (as hereafter modified or
amended in accordance with the terms hereof) (each a "Fund" and collectively
the "Funds"), under a master revolving credit facility (the "Facility"). This
Agreement amends, restates and replaces in its entirety that certain Facility
Agreement Letter dated June 1, 1994, as heretofore amended or modified,
between the Borrowers and the Bank. The Bank and the Borrowers hereby agree
as follows:
1. Amount. The aggregate principal amount of the Loans to be
advanced under this Facility shall not exceed, at any one time outstanding,
One Hundred Million United States Dollars (U.S. $100,000,000) (the
"Commitment"). The aggregate principal amount of the Loans which may be
borrowed by a Borrower for the benefit of a particular Fund under the Facility
and the Other Facility (hereinafter defined) shall not exceed the percentage
(the "Borrowing Limit") of the total assets of such Fund as set forth on
Schedule A hereto.
2. Purpose and Limitations on Borrowings. Each Borrower will use the
proceeds of each Loan made to it solely for temporary or emergency purposes of
the Fund for whose benefit it is borrowing in accordance with such Fund's
Borrowing Limit and prospectus in effect at the time of such Loan. Portfolio
securities may not be purchased by a Fund while there is a Loan outstanding
under the Facility and/or a loan outstanding under the Other Facility for the
benefit of such Fund, if the aggregate amount of such Loan and such other loan
exceeds 5% of the total assets of such Fund. The Borrowers will not, and will
not permit any Fund to, directly or indirectly, use any proceeds of any Loan
for any purpose which would violate any provision of any applicable statute,
regulation, order or restriction, including, without limitation, Regulation U,
Regulation T, Regulation X or any other regulation of the Board of Governors
of the Federal Reserve System or the Securities Exchange Act of 1934, as
amended. If requested by the Bank, the Borrowers will promptly furnish the
Bank with a statement in conformity with the requirements of Federal Reserve
Form U-1 as referred to in Regulation U.
3. Borrowing Rate and Maturity of Loans. The principal amount of the
Loans outstanding from time to time shall bear interest at a rate per annum
equal to, at the option of the applicable Borrower(s), (i) the aggregate of
the Federal Funds Rate (as defined below) plus .125 of one percent (1%) (12.5
basis points) or (ii) the aggregate of the London Interbank Offered Rate (as
defined below) plus 12.5 basis points. The rate of interest payable on such
outstanding amounts shall change on each date that the Federal Funds Rate
shall change. Interest on the Loans shall be calculated on the basis of a
year of 360 days and the actual days elapsed but shall not exceed the highest
lawful rate. Each Loan will be for an established number of days to be agreed
upon by the applicable Borrower(s) and the Bank and, in the absence of such
agreement, will mature on the earlier of three months after the date of such
Loan or the last day of the Facility Period. The term "Federal Funds Rate,"
as used herein, shall mean the overnight rate for Federal funds transactions
between member banks of the Federal Reserve System, as published by the
Federal Reserve Bank of New York or, if not so published, as determined in
good faith by the Bank in accordance with its customary practices; and the
term "London Interbank Offered Rate," as used herein, shall mean the rate per
annum at which United States dollar deposits are offered by the Bank in the
London interbank market at approximately 11:00 a.m. London time two business
days prior to the first day of the interest period (of 7 or 14 days or one,
two or three months as selected by the Borrower(s)) for which the London
Interbank Offered Rate is to be in effect, as adjusted by the Bank in good
faith and in accordance with its customary practices for any reserve costs
imposed on the Bank under Federal Reserve Board Regulation D with respect to
"Euro-currency Liabilities". The London Interbank Offered Rate shall not be
available hereunder if it would be unlawful for the Bank to make or maintain
Loans based on such rate or if such rate does not, in the good faith judgment
of the Bank, fairly reflect the cost to the Bank of making or maintaining
Loans. The London Interbank Offered Rate shall not be available for any
interest period which, if such rate were available, would begin after the
occurrence and during the continuation of an Event of Default (as defined
below). Any past due principal and/or accrued interest shall bear interest at
a rate per annum equal to the aggregate of the Federal Funds Rate plus 1.125
percent (112.5 basis points) and shall be payable on demand. If the
applicable Borrowers do not affirmatively elect to have a Loan or Loans bear
interest based on the London Interbank Offered Rate at least two business days
prior to the first day of a possible interest period applicable thereto, such
Loan or Loans shall bear interest based on the Federal Funds Rate until such
election is affirmatively made.
4. Advances, Payments, Prepayments and Readvances. Upon each
Borrower's request, and subject to the terms and conditions contained herein,
the Bank shall make Loans to each Borrower on behalf of and for the benefit of
its respective Fund(s) during the Facility Period, and each Borrower may
borrow, repay and reborrow funds hereunder. The Loans shall be evidenced by
duly executed and delivered Master Grid Promissory Note in the form of Exhibit
A. Each Loan shall be in an aggregate amount not less than One Hundred
Thousand United States Dollars (U.S. $100,000) and increments of One Thousand
United States Dollars (U.S. $1,000) in excess thereof. Payment of principal
and interest due with respect to each Loan shall be payable at the maturity of
such Loan and shall be made in funds immediately available to the Bank prior
to 2 p.m. Dallas time on the day such payment is due, or as the Bank shall
otherwise direct from time to time and, subject to the terms and conditions
hereof, may be repaid with the proceeds of a new borrowing hereunder.
Notwithstanding any provision of this Agreement to the contrary, all Loans,
accrued but unpaid interest and other amounts payable hereunder shall be due
and payable upon termination of the Facility (whether by acceleration or
otherwise). If any Loan bearing interest based on the London Interbank
Offered Rate is repaid or prepaid other than on the last day of an interest
period applicable thereto, the Fund which is the beneficiary of such Loan
shall pay to the Bank promptly upon demand such amount as the Bank determines
in good faith is necessary to compensate the Bank for any reasonable cost or
expense incurred by the Bank as a result of such repayment or prepayment in
connection with the reemployment of funds in an amount equal to such repayment
or prepayment. Whenever the Bank seeks to assess for any such cost or expense
it will provide a certificate as the Borrower(s) shall reasonably request.
5. Facility Fee. Beginning with the date of this Agreement and until
such time as all Loans have been irrevocably repaid to the Bank in full, and
the Bank is no longer obligated to make Loans, the Funds (to be allocated
among the Funds as the Borrowers deem appropriate) shall pay to the Bank a
facility fee (the "Facility Fee") in the amount of .05 of one percent (5 basis
points) of the amount of the Commitment, as it may be reduced pursuant to
section 6. The Facility Fee shall be payable quarterly in arrears beginning
March 31, 1996, and upon termination of the Facility (whether by acceleration
or otherwise).
6. Optional Termination or Reduction of Commitment. The Borrowers
shall have the right upon at least three (3) business days prior written
notice to the Bank, to terminate or reduce the unused portion of the
Commitment. Any such reduction of the Commitment shall be in the amount of
Five Million United States Dollars (U.S. $5,000,000) or any larger integral
multiple of One Million United States Dollars (U.S. $1,000,000) (except that
any reduction may be in the aggregate amount of the unused Commitment).
Accrued fees with respect to the terminated Commitment shall be payable to the
Bank on the effective date of such termination.
7. Mandatory Termination of Commitment. The Commitment shall
automatically terminate on the last day of the Facility Period and any Loans
then outstanding (together with accrued interest thereon and any other amounts
owing hereunder) shall be due and payable on such date.
8. Committed Facility. The Bank acknowledges that the Facility is a
committed facility and that the Bank shall be obligated to make any Loan
requested during the Facility Period under this Agreement, subject to the
terms and conditions hereof; provided, however, that the Bank shall not be
obligated to make any Loan if this Facility has been terminated by the
Borrowers, or if at the time of a request for a Loan by a Borrower (on behalf
of the applicable Fund(s)) there exists any Event of Default or condition
which, with the passage of time or giving of notice, or both, would constitute
or become an Event of Default with respect to such Borrower (or such
applicable Fund(s)).
9. Loan Requests. Each request for a Loan (each a "Borrowing
Notice") shall be in writing by the applicable Borrower(s), except that such
Borrower(s) may make an oral request (each an "Oral Request") provided that
each Oral Request shall be followed by a written Borrowing Notice within one
business day. Each Borrowing Notice shall specify the following terms
("Terms") of the requested Loan: (i) the date on which such Loan is to be
disbursed, (ii) the principal amount of such Loan, (iii) the Borrower(s) which
are borrowing such Loan and the amount of such Loan to be borrowed by each
Borrower, (iv) the Funds for whose benefit the Loan is being borrowed and the
amount of the Loan which is for the benefit of each such Fund, (v) whether
such Loan shall bear interest at the Federal Funds Rate or the London
Interbank Offered Rate, and (vi) the requested maturity date of the Loan.
Each Borrowing Notice shall also set forth the total assets of each Fund for
whose benefit a portion of the Loan is being borrowed as of the close of
business on the day immediately preceding the date of such Borrowing Notice.
Borrowing Notices shall be delivered to the Bank by 1:00 p.m. Dallas time on
the day the Loan is requested to be made if such Loan is to bear interest
based on the Federal Funds Rate or by 10:00 a.m. Dallas time on the second
business day before the Loan is requested to be made if such Loan is to bear
interest based on the London Interbank Offered Rate.
Each Borrowing Notice shall constitute a representation to the Bank by the
applicable Borrower(s) that all of the representations and warranties in
Section 12 hereof are true and correct as of such date and that no Event of
Default or other condition which with the passage of time or giving of notice,
or both, would result in an Event of Default, has occurred or is occurring.
10. Confirmations; Crediting of Funds; Reliance by the Bank. Upon
receipt by the Bank of a Borrowing Notice:
(a) The Bank shall send each applicable Borrower written
confirmation of the Terms of such Loan via facsimile or telecopy, as
soon as reasonably practicable; provided, however, that the failure
to do so shall not affect the obligation of any such Borrower;
(b) The Bank shall make such Loan in accordance with the Terms
by transfer of the Loan amount in immediately available funds, to the
account of the applicable Borrower(s) as specified in Exhibit B to this
Agreement or as such Borrower(s) shall otherwise specify to the Bank in
a writing signed by an Authorized Individual (as defined in Section 11)
of such Borrower(s) and sent to the Bank via facsimile or telecopy; and
(c) The Bank shall make appropriate entries on the Note or the
records of the Bank to reflect the Terms of the Loan; provided, however,
that the failure to do so shall not affect the obligation of any
Borrower.
The Bank shall be entitled to rely upon and act hereunder pursuant to any Oral
Request which it reasonably believes to have been made by the applicable
Borrower through an Authorized Individual. If any Borrower believes that the
confirmation relating to any Loan contains any error or discrepancy from the
applicable Oral Request, such Borrower will promptly notify the Bank thereof.
11. Borrowing Resolutions and Officers' Certificates; Subordination
Agreement. Prior to the making of any Loan pursuant to this Agreement, the
Borrowers shall have delivered to the Bank (a) the duly executed Note, (b)
resolutions of each Borrower's Trustees or Board of Directors authorizing such
Borrower to execute, deliver and perform this Agreement and the Note on behalf
of the applicable Funds, (c) an Officer's Certificate in substantially the
form set forth in Exhibit D to this Agreement, authorizing certain individuals
("Authorized Individuals"), to take on behalf of each Borrower (on behalf of
the applicable Funds) actions contemplated by this Agreement and the Note, and
(d) a subordination agreement in substantially the form set forth in Exhibit E
to this Agreement.
12. Representations and Warranties. In order to induce the Bank to
enter into this Agreement and to make the Loans provided for hereunder, each
Borrower hereby makes with respect to itself, and as may be relevant, the
series of Funds comprising such Borrower the following representations and
warranties, which shall survive the execution and delivery hereof and of the
Note:
(a) Organization, Standing, etc. The Borrower is a corporation
or trust duly organized, validly existing, and in good standing under
applicable state laws and has all requisite corporate or trust power and
authority to carry on its respective businesses as now conducted and
proposed to be conducted, to enter into this Agreement and all other
documents to be executed by it in connection with the transactions
contemplated hereby, to issue and borrow under the Note and to carry out
the terms hereof and thereof;
(b) Financial Information; Disclosure, etc. The Borrower has
furnished the Bank with certain financial statements of such Borrower
with respect to itself and the applicable Funds, all of which such
financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis and fairly
present the financial position and results of operations of such
Borrower and the applicable Funds on the dates and for the periods
indicated. Neither this Agreement nor any financial statements, reports
or other documents or certificates furnished to the Bank by such
Borrower or the applicable Funds in connection with the transactions
contemplated hereby contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
contained herein or therein in light of the circumstances when made not
misleading;
(c) Authorization; Compliance with Other Instruments. The
execution, delivery and performance of this Agreement and the Note, and
borrowings hereunder, have been duly authorized by all necessary
corporate or trust action of the Borrower and will not result in any
violation of or be in conflict with or constitute a default under any
term of the charter, by-laws or trust agreement of such Borrower or the
applicable Funds, or of any borrowing restrictions or prospectus or
statement of additional information of such Borrower or the applicable
Funds, or of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Borrower, or
result in the creation of any mortgage, lien, charge or encumbrance upon
any of the properties or assets of such Borrower or the applicable Funds
pursuant to any such term. The Borrower and the applicable Funds are
not in violation of any term of their respective charter, by-laws or
trust agreement, and such Borrower and the applicable Funds are not in
violation of any material term of any agreement or instrument to which
they are a party, or to the best of such Borrower's knowledge, of any
judgment, decree, order, statute, rule or governmental regulation
applicable to them;
(d) SEC Compliance. The Borrower and the applicable Funds are
in compliance in all material respects with all federal and state
securities or similar laws and regulations, including all material
rules, regulations and administrative orders of the Securities and
Exchange Commission (the "SEC") and applicable Blue Sky authorities.
The Borrower and the applicable Funds are in compliance in all material
respects with all of the provisions of the Investment Company Act of
1940, and such Borrower has filed all reports with the SEC that are
required of it or the applicable Funds;
(e) Litigation. There is no action, suit or proceeding pending
or, to the best of the Borrower's knowledge, threatened against such
Borrower or the applicable Funds in any court or before any arbitrator
or governmental body which seeks to restrain any of the transactions
contemplated by this Agreement or which, if adversely determined, could
have a material adverse effect on the assets or business operations of
such Borrower or the applicable Funds or the ability of such Borrower
and the applicable Funds to pay and perform their obligations hereunder
and under the Notes; and
(f) Borrowers' Relationship to Funds. The assets of each Fund
for whose benefit Loans are borrowed by the applicable Borrower are
subject to and liable for such Loans and are available to the applicable
Borrower for the repayment of such Loans.
13. Affirmative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to the Bank by a Borrower pursuant to
any Loan made to such Borrower is irrevocably paid in full, and until the Bank
is no longer obligated to make Loans to such Borrower, such Borrower (for
itself and on behalf of its respective Funds) agrees:
(a) To deliver to the Bank as soon as possible and in any event
within ninety (90) days after the end of each fiscal year of such
Borrower and the applicable Funds, Statements of Assets and Liabilities,
Statements of Operations and Statements of Changes in Net Assets of each
applicable Fund for such fiscal year, as set forth in each applicable
Fund's Annual Report to shareholders together with a calculation of the
maximum amount which each applicable Fund could borrow under its
Borrowing Limit as of the end of such fiscal year;
(b) To deliver to the Bank as soon as available and in any event
within seventy-five (75) days after the end of each semiannual period of
such Borrower and the applicable Funds, Statements of Assets and
Liabilities, Statements of Operations and Statements of Changes in Net
Assets of each applicable Fund as of the end of such semiannual period,
as set forth in each applicable Fund's Semiannual Report to
shareholders, together with a calculation of the maximum amount which
each applicable Fund could borrow under its Borrowing Limit at the end
of such semiannual period;
(c) To deliver to the Bank prompt notice of the occurrence of
any event or condition which constitutes, or is likely to result in, a
change in such Borrower or any applicable Fund which could reasonably be
expected to materially adversely affect the ability of any applicable
Fund to promptly repay outstanding Loans made for its benefit or the
ability of such Borrower to perform its obligations under this Agreement
or the Note;
(d) To do, or cause to be done, all things necessary to preserve
and keep in full force and effect the corporate or trust existence of
such Borrower and all permits, rights and privileges necessary for the
conduct of its businesses and to comply in all material respects with
all applicable laws, regulations and orders, including without
limitation, all rules and regulations promulgated by the SEC;
(e) To promptly notify the Bank of any litigation, threatened
legal proceeding or investigation by a governmental authority which
could materially affect the ability of such Borrower or the applicable
Funds to promptly repay the outstanding Loans or otherwise perform their
obligations hereunder; and
(f) In the event a Loan for the benefit of a particular Fund is
not repaid in full within 10 days after the date it is borrowed, and
until such Loan is repaid in full, to deliver to the Bank, within two
business days after each Friday occurring after such 10th day, a
statement setting forth the total assets of such Fund as of the close of
business on each such Friday.
14. Negative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to the Bank by a Borrower pursuant to
any Loan made to such Borrower is irrevocably paid in full, and until the Bank
is no longer obligated to make Loans to such Borrower, such Borrower (for
itself and on behalf of its respective Funds) agrees:
(a) Not to incur any indebtedness for borrowed money (other than
pursuant to a $750,000,000 uncommitted master revolving credit facility
with USAA Capital Corporation (the "Other Facility") and overdrafts
incurred at the custodian of the Funds from time to time in the ordinary
course of business) except the Loans, without the prior written consent
of the Bank, which consent will not be unreasonably withheld; and
(b) Not to dissolve or terminate its existence, or merge or
consolidate with any other person or entity, or sell all or
substantially all of its assets in a single transaction or series of
related transactions (other than assets consisting of margin stock),
each without the prior written consent of the Bank, which consent will
not be unreasonably withheld; provided that a Borrower may without such
consent merge, consolidate with, or purchase substantially all of the
assets of, or sell substantially all of its assets to, an affiliated
investment company or series thereof, as provided for in Rule 17a-8 of
the Investment Company Act of 1940.
15. Events of Default. If any of the following events (each an "Event
of Default") shall occur (it being understood that an Event of Default with
respect to one Fund or Borrower shall not constitute an Event of Default with
respect to any other Fund or Borrower):
(a) Any Borrower or Fund shall default in the payment of
principal or interest on any Loan or any other fee due hereunder for a
period of five (5) days after the same becomes due and payable, whether
at maturity or with respect to the Facility Fee at a date fixed for the
payment thereof; or
(b) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 13 hereof and such default
shall not have been remedied within thirty (30) days after written
notice thereof shall have been given such Borrower or Fund by the Bank;
(c) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 14 hereof;
(d) Any Borrower or Fund shall default in the performance or
compliance with any other term contained herein and such default shall
not have been remedied within thirty (30) days after written notice
thereof shall have been given such Borrower or Fund by the Bank;
(e) Any representation or warranty made by a Borrower or Fund
herein or pursuant hereto shall prove to have been false or incorrect in
any material respect when made;
(f) USAA Investment Management Company or any successor manager
or investment adviser, provided that such successor is a wholly-owned
subsidiary of USAA Capital Corporation, shall cease to be the Manager
and investment advisor of each Fund; or
(g) An event of default shall occur and be continuing under the
Other Facility;
then, in any event, and at any time thereafter, if any Event of Default shall
be continuing, the Bank may by written notice to the applicable Borrower or
Fund (i) terminate its commitment to make any Loan hereunder, whereupon said
commitment shall forthwith terminate without any other notice of any kind with
respect to such Borrower or Fund and (ii) declare the principal and interest
in respect of any outstanding Loans with respect to such Borrower or Fund, and
all other amounts due hereunder with respect to such Borrower or Fund, to be
immediately due and payable whereupon the principal and interest in respect
thereof and all other amounts due hereunder shall become forthwith due and
payable without presentment, demand, protest or other notice of any kind, all
of which are expressly waived by the Borrowers.
16. New Borrowers; New Funds. So long as no Event of Default or
condition which, with the passage of time or the giving of notice, or both,
would constitute or become an Event of Default has occurred and is continuing,
and with the prior consent of the Bank, which consent will not be unreasonably
withheld:
(a) Any investment company that becomes part of the same "group
of investment companies" (as that term is defined in Rule 11a-3 under
the Investment Company Act of 1940) as the original Borrowers to this
Agreement, may, by submitting an amended Schedule A and Exhibit B to
this Agreement to the Bank (which amended Schedule A and Exhibit B shall
replace the Schedule A and Exhibit B which are then a part of this
Agreement) and such other documents as the Bank may reasonably request,
become a party to this Agreement and may become a "Borrower" hereunder;
and
(b) A Borrower may, by submitting an amended Schedule A and
Exhibit B to this Agreement to the Bank (which amended Schedule A and
Exhibit B shall replace the Schedule A and Exhibit B which are then a
part of this Agreement), add additional Funds for whose benefit such
Borrower may borrow Loans. No such amendment of Schedule A to this
Agreement shall amend the Borrowing Limit applicable to any Fund without
the prior consent of the Bank.
17. Limited Recourse. The Bank agrees (i) that any claim, liability,
or obligation arising hereunder or under the Note whether on account of the
principal of any Loan, interest thereon, or any other amount due hereunder or
thereunder shall be satisfied only from the assets of the specific Fund for
whose benefit a Loan is borrowed and in any event in an amount not to exceed
the outstanding principal amount of any Loan borrowed for such Fund's benefit,
together with accrued and unpaid interest due and owing thereon, and such
Fund's share of any other amount due hereunder and under the Note (as
determined in accordance with the provisions hereof) and (ii) that no assets
of any Fund shall be used to satisfy any claim, liability, or obligation
arising hereunder or under the Note with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Note (as determined in accordance
with the provisions hereof).
18. Remedies on Default. In case any one or more Events of Default
shall occur and be continuing, the Bank may proceed to protect and enforce its
rights by an action at law, suit in equity or other appropriate proceedings,
against the applicable Borrower(s) and/or Fund(s), as the case may be. In the
case of a default in the payment of any principal or interest on any Loan or
in the payment of any fee due hereunder, the relevant Funds (to be allocated
among such Funds as the Borrowers deem appropriate) shall pay to the Bank such
further amount as shall be sufficient to cover the cost and expense of
collection, including, without limitation, reasonable attorney's fees and
expenses.
19. No Waiver of Remedies. No course of dealing or failure or delay
on the part of the Bank in exercising any right or remedy hereunder or under
the Note shall constitute a waiver of any right or remedy hereunder or under
the Note, nor shall any partial exercise of any right or remedy hereunder or
under the Note preclude any further exercise thereof or the exercise of any
other right or remedy hereunder or under the Note. Such rights and remedies
expressly provided are cumulative and not exclusive of any rights or remedies
which the Bank would otherwise have.
20. Expenses. The Funds (to be allocated among the Funds as the
Borrowers deem appropriate) shall pay on demand all reasonable out-of-pocket
costs and expenses (including reasonable attorney's fees and expenses)
incurred by the Bank in connection with the collection and any other
enforcement proceedings of or regarding this Agreement, any Loan or the Note.
21. Benefit of Agreement. This Agreement and the Note shall be
binding upon and inure for the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided that no party to this
Agreement or the Note may assign any of its rights hereunder or thereunder
without the prior written consent of the other parties. The Bank may not sell
participations and subparticipations in all or any part of the Loans made
hereunder without the prior consent of the Borrowers, which consent shall not
be unreasonably withheld.
22. Notices. All notices hereunder and all written, facsimiled or
telecopied confirmations of Oral Requests made hereunder shall be sent to the
Borrowers as indicated on Exhibit B and to the Bank as indicated on Exhibit C.
Written communications shall be deemed to have been duly given and made as
follows: If sent by mail, seventy-two (72) hours after deposit in the mail
with first-class postage prepaid, addressed as provided in Exhibit B (the
Borrowers) and Exhibit C (the Bank); and in the case of facsimile or telecopy,
when the facsimile or telecopy is received if on a business day or otherwise
on the next business day.
23. Modifications. No provision of this Agreement or the Note may be
waived, modified or discharged except by mutual written agreement of all
parties. THIS WRITTEN LOAN AGREEMENT AND THE NOTE REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
24. Increased Cost and Reduced Return. If at any time after the date
hereof, the Bank (which shall include, for purposes of this Section, any
corporation controlling the Bank) determines that the adoption or modification
of any applicable law regarding the Bank's required levels of reserves, other
than the reserve requirement taken into account when computing the London
Interbank Offered Rate as provided in Section 3, or capital (including any
allocation of capital requirements or conditions), or similar requirements, or
any interpretation or administration thereof by a governmental body or
compliance by the Bank with any of such requirements, has or would have the
effect of (a) increasing the Bank's costs relating to the Loans, or (b)
reducing the yield or rate of return of the Bank on the Loans, to a level
below that which the Bank could have achieved but for the adoption or
modification of any such requirements, the Funds (to be allocated among the
Funds as the Borrowers deem appropriate) shall, within fifteen (15) days of
any request by the Bank, pay to the Bank such additional amounts as (in the
Bank's sole judgment, after good faith and reasonable computation) will
compensate the Bank for such increase in costs or reduction in yield or rate
of return of the Bank. Whenever the Bank shall seek compensation for any
increase in costs or reduction in yield or rate of return, the Bank shall
provide a certificate as the Borrower(s) shall reasonably request. Failure by
the Bank to demand payment within 90 days of any additional amounts payable
hereunder shall constitute a waiver of the Bank's right to demand payment of
such amounts at any subsequent time. Nothing herein contained shall be
construed or so operate as to require the Borrowers or the Funds to pay any
interest, fees, costs or charges greater than is permitted by applicable law.
25. Governing Law and Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the state of Texas without
regard to the choice of law provisions thereof.
26. Trust Disclaimer. Neither the shareholders, trustees, officers,
employees and other agents of any Borrower or Fund shall be personally bound
by or liable for any indebtedness, liability or obligation hereunder or under
the Note nor shall resort be had to their private property for the
satisfaction of any obligation or claim hereunder.
If this letter correctly reflects your agreement with us, please execute both
copies hereof and return one to us, whereupon this Agreement shall be binding
upon the Borrowers, the Funds and the Bank.
Sincerely,
NATIONSBANK OF TEXAS, N.A.
By: /s/ Greg Venker
- -----------------------------
Title: Senior Vice President
AGREED AND ACCEPTED:
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
- --------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
- --------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
- --------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J. C. Roth
- ---------------------------
Michael J.C. Roth
President
SCHEDULE A
FUNDS FOR WHOSE BENEFIT LOANS CAN
BE BORROWED UNDER FACILITY AGREEMENT
AND BORROWING LIMIT
Maximum Percent of the
Total Assets Which Can
Be Borrowed Under Facility
Borrower Funds Agreement and Other Facility
- -------- ----- -----------------------------
USAA Mutual Fund, Inc. USAA Aggressive Growth 25%
USAA Growth & Income 25
USAA Income Stock 25
USAA Short-Term Bond 25
USAA Money Market 25
USAA Growth 25
USAA Income 25
USAA Investment Trust USAA Cornerstone Strategy 25
USAA Gold 25
USAA International 25
USAA World Growth 25
USAA GNMA Trust 25
USAA Treasury Money Market Trust 25
USAA Emerging Markets 25
USAA Growth and Tax Strategy 25
USAA Growth Strategy 25
USAA Income Strategy 25
USAA Balanced Strategy 25
USAA Tax -Exempt Fund, Inc. USAA Long-Term 15
USAA Intermediate-Term 15
USAA Short-Term Bond 15
USAA Tax -Exempt Money Market 15
USAA California Bond 15
USAA California Money Market 15
USAA New York Bond 15
USAA New York Money Market 15
USAA Virginia Bond 15
USAA Virginia Money Market 15
USAA State Tax-Free Trust USAA Florida Tax-Free Income 15
USAA Florida Tax-Free Money Market 15
USAA Texas Tax-Free Income 15
USAA Texas Tax-Free Money Market 15
EXHIBIT A
MASTER GRID PROMISSORY NOTE
U.S. $100,000,000 Dated: January 16, 1996
FOR VALUE RECEIVED, each of the undersigned (each a "Borrower" and
collectively the "Borrowers"), severally and not jointly, on behalf of and for
the benefit of the series of funds comprising each such Borrower as listed on
Schedule A to the Agreement as defined below (each a "Fund" and collectively
the "Funds") promises to pay to the order of NATIONSBANK OF TEXAS, N.A. (the
"Bank") at the Bank's office located at 901 Main Street, Dallas, Dallas
County, Texas 75202, in lawful money of the United States of America, in
immediately available funds, the principal amount of all Loans made by the
Bank to such Borrower for the benefit of the applicable Funds under the
Facility Agreement Letter dated January 16, 1996 (as amended or modified, the
"Agreement"), among the Borrowers and the Bank, together with interest thereon
at the rate or rates set forth in the Agreement. All payments of interest and
principal outstanding shall be made in accordance with the terms of the
Agreement.
This Note evidences Loans made pursuant to, and is entitled to the
benefits of, the Agreement. Terms not defined in this Note shall be as set
forth in the Agreement.
The Bank is authorized to endorse the particulars of each Loan evidenced
hereby on the attached Schedule and to attach additional Schedules as
necessary, provided that the failure of the Bank to do so or to do so
accurately shall not affect the obligations of any Borrower (or the Fund for
whose benefit it is borrowing) hereunder.
Each Borrower waives all claims to presentment, demand, protest, and
notice of dishonor. Each Borrower agrees to pay all reasonable costs of
collection, including reasonable attorney's fees in connection with the
enforcement of this Note.
The Bank hereby agrees (i) that any claim, liability, or obligation
arising hereunder or under the Agreement whether on account of the principal
of any Loan, interest thereon, or any other amount due hereunder or thereunder
shall be satisfied only from the assets of the specific Fund for whose benefit
a Loan is borrowed and in any event in an amount not to exceed the outstanding
principal amount of any Loan borrowed for such Fund's benefit, together with
accrued and unpaid interest due and owing thereon, and such Fund's share of
any other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement) and (ii) that no assets of
any Fund shall be used to satisfy any claim, liability, or obligation arising
hereunder or under the Agreement with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement).
Neither the shareholders, trustees, officers, employees and other agents
of any Borrower or Fund shall be personally bound by or liable for any
indebtedness, liability or obligation hereunder or under the Note nor shall
resort be had to their private property for the satisfaction of any obligation
or claim hereunder.
This Note shall be governed by the laws of the state of Texas.
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
---------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J.C. Roth
--------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J.C. Roth
--------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
---------------------------
Michael J.C. Roth
President
LOANS AND PAYMENT OF PRINCIPAL
This schedule (grid) is attached to and made a part of the Promissory Note
dated January 16, 1996, executed by USAA MUTUAL FUND, INC., USAA INVESTMENT
TRUST, USAA TAX EXEMPT FUND, INC. AND USAA STATE TAX-FREE TRUST on behalf of
and for the benefit of the series of funds comprising each such Borrower
payable to the order of NATIONSBANK OF TEXAS, N.A.
[Information listed in grid]
Date of Loan
Borrower and Fund
Amount of Loan
Type of Rate and Interest Rate on Date of Borrowing
Amount of Principal Repaid
Date of Repayment
Other Expenses
Notation made by
EXHIBIT B
NATIONSBANK OF TEXAS, N.A.
MASTER REVOLVING
CREDIT FACILITY AGREEMENT
BORROWER INFORMATION SHEET
BORROWER: USAA MUTUAL FUND, INC., USAA INVESTMENT TRUST, USAA
TAX-EXEMPT FUND, INC. AND USAA STATE TAX-FREE TRUST
ADDRESS FOR NOTICES AND OTHER COMMUNICATIONS TO THE BORROWER:
9800 Fredericksburg Road
San Antonio, Texas 78288 (for Federal Express, 78240)
Attention: John W. Saunders, Jr.
Senior Vice President,
Fixed Income Investments
Telephone: (210) 498-7320
Telecopy: (210) 498-5689
Harry W. Miller
Senior Vice President,
Equity Investments
Telephone: (210) 498-7344
Telecopy: (210) 498-7332
ADDRESS FOR BORROWING AND PAYMENTS:
9800 Fredericksburg Road
San Antonio, Texas 78288 (for Federal Express, 78240)
Attention: Dean R. Pantzar
Telephone: (210) 498-7472
Telecopy: (210) 498-0382 or 498-7819
Telex: 767424
INSTRUCTIONS FOR PAYMENTS TO BORROWER:
WE PAY VIA: X FED FUNDS CHIPS
--------- ------------
TO: (PLEASE PLACE BANK NAME, CORESPONDENT NAME (IF APPLICABLE), CHIPS AND/OR
FED FUNDS ACCOUNT NUMBER BELOW)
State Street Bank and Trust Company, Boston, Massachusetts
ABA #011-00-0028
USAA MUTUAL FUND, INC.
- ------------------------
USAA Aggressive Growth Fund Acct.# 6938-502-9
USAA Growth & Income Fund Acct.# 6938-519-3
USAA Income Stock Fund Acct.# 6938-495-6
USAA Short-Term Bond Fund Acct.# 6938-517-7
USAA Money Market Fund Acct.# 6938-498-0
USAA Growth Fund Acct.# 6938-490-7
USAA Income Fund Acct.# 6938-494-9
USAA INVESTMENT TRUST
- ---------------------
USAA Cornerstone Strategy Fund Acct.# 6938-487-3
USAA Gold Fund Acct.# 6938-488-1
USAA International Fund Acct.# 6938-497-2
USAA World Growth Fund Acct.# 6938-504-5
USAA GNMA Trust Acct.# 6938-486-5
USAA Treasury Money Market Trust Acct.# 6938-493-1
USAA Emerging Markets Fund Acct.# 6938-501-1
USAA Growth and Tax Strategy Fund Acct.# 6938-509-4
USAA Growth Strategy Fund Acct.# 6938-510-2
USAA Income Strategy Fund Acct.# 6938-508-6
USAA Balanced Strategy Fund Acct.# 6938-507-8
USAA TAX EXEMPT FUND, INC.
- ---------------------------
USAA Long-Term Fund Acct.# 6938-492-3
USAA Intermediate-Term Fund Acct.# 6938-496-4
USAA Short-Term Bond Fund Acct.# 6938-500-3
USAA Tax Exempt Money Market Fund Acct.# 6938-514-4
USAA California Bond Fund Acct.# 6938-489-9
USAA California Money Market Fund Acct.# 6938-491-5
USAA New York Bond Fund Acct.# 6938-503-7
USAA New York Money Market Fund Acct.# 6938-511-0
USAA Virginia Bond Fund Acct.# 6938-512-8
USAA Virginia Money Market Fund Acct.# 6938-513-6
USAA STATE TAX-FREE TRUST
- -------------------------
USAA Florida Tax-Free Income Fund Acct.# 6938-473-3
USAA Florida Tax-Free Money Market Fund Acct.# 6938-467-5
USAA Texas Tax-Free Income Fund Acct.# 6938-602-7
USAA Texas Tax-Free Money Market Fund Acct.# 6938-601-9
EXHIBIT C
ADDRESS FOR THE BANK
NationsBank of Texas, N.A.
901 Main Street
66th Floor
Dallas, Texas 75202
Attention: Greg Venker
Telephone No.: (214) 508-0584
Telecopy No.: (214) 508-0604
EXHIBIT D
OFFICER'S CERTIFICATE
The undersigned hereby certifies that he is the duly elected Secretary of USAA
Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA
State Tax-Free Trust and that he is authorized to execute this Certificate on
behalf of USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund,
Inc. and USAA State Tax-Free Trust. The undersigned hereby further certifies
to the following:
The following individuals are duly authorized to act on behalf of USAA Mutual
Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA State
Tax-Free Trust, by transmitting telephonic, telex, or telecopy instructions
and other communications with regard to borrowings and payments pursuant to
the Master Revolving Credit Facility Agreement with NationsBank of Texas, N.A.
The signature set opposite the name of each individual below is that
individual's genuine signature.
NAME OFFICE SIGNATURE
- ---- ------ ---------
Michael J. C. Roth President /s/ Michael J.C. Roth
-------------------------
John W. Saunders, Jr. Senior Vice President
Fixed Income Investments /s/ John W. Saunders, Jr.
-------------------------
Harry W. Miller Senior Vice President
Equity Investments /s/ Harry W. Miller
-------------------------
Kenneth E. Willmann Vice President
Fixed Income /s/ Kenneth E. Willmann
-------------------------
David G. Peebles Vice President
Equity Investment /s/ David G. Peebles
-------------------------
Sherron A. Kirk Vice President
Controller /s/ Sherron A. Kirk
-------------------------
Dean R. Pantzar Executive Director
Mutual Fund Accounting /s/ Dean R. Pantzar
-------------------------
IN WITNESS WHEREOF, I have executed the Certificate as of this 16th day of
January, 1996.
/s/ Michael D. Wagner
-------------------------
MICHAEL D. WAGNER
Secretary
I, Michael J. C. Roth, President of USAA Mutual Fund, Inc., USAA Investment
Trust, USAA Tax Exempt Fund, Inc. and USAA State Tax-Free Trust hereby certify
that Michael D. Wagner is, and has been at all times since a date prior to the
date of this Certificate, the duly elected, qualified, and acting Secretary of
USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and
USAA State Tax-Free Trust and that the signature set forth above is his true
and correct signature.
DATE: January 16, 1996
/s/ Michael J.C. Roth
---------------------
MICHAEL J. C. ROTH
President
EXHIBIT E
Subordination
NationsBank of Texas, N.A. Agreement
This is an agreement among: Dated: January 16, 1996
- -----------------------------------------------------------------------------
Name and Address of Lender (Including County):
NationsBank of Texas, N.A.
901 Main Street
Dallas, Dallas County, Texas 75202
(Lender)
- ---------------------------------------------
Name and Address of Borrower:
USAA Mutual Fund, Inc.
USAA Investment Trust
USAA Tax Exempt Fund, Inc.
USAA State Tax-Free Trust
9800 Fredericksburg Road
San Antonio, Texas 78288
(Debtor)
- ---------------------------------------------
Name and Address of Creditor:
USAA Capital Corporation
9800 Fredericksburg Road
San Antonio, Texas 78288
(Creditor)
- ---------------------------------------------
1. Background. Debtor is or may be indebted to Lender pursuant to that
certain Facility Agreement Letter dated January 16, 1996 between Debtor
and Lender ("Senior Facility Agreement"). Debtor also is or may be
indebted to Creditor pursuant to that certain Facility Agreement Letter
dated January 15, 1996 between Debtor and Creditor ("Subordinated
Facility Agreement"). All debt (as hereinafter defined) under the
Senior Facility Agreement is hereinafter referred to as "senior debt"
and all debt (as hereinafter defined) under the Subordinated Facility
Agreement is hereinafter referred to as "subordinated debt".
2. Definition of Debt. The term "debt" as used in the terms "senior debt"
and "subordinated debt" means all debts, obligations and liabilities,
now or hereafter existing, direct or indirect, absolute or contingent,
joint or several, secured or unsecured, due or not due, contractual or
tortious, liquidated or unliquidated, arising by operation of law or
otherwise, irrespective of the person in whose favor such debt may
originally have been created and regardless of the manner in which such
debt has been or may hereafter be acquired by Lender or Creditor, as the
case may be, and includes all costs incurred to obtain, preserve,
perfect or enforce any security interest, lien or mortgage, or to
collect any debt or to maintain, preserve, collect and enforce any
collateral, and interest on such amounts.
3. Subordination of Debt. Until senior debt has been paid in full, Debtor
will not pay and Creditor will not accept any payment on subordinated
debt at any time that an Event of Default (as defined in the Senior
Facility Agreement) has occurred and is continuing in respect of senior
debt. Anything of value received by Creditor on account of subordinated
debt in violation of this agreement will be held by Creditor in trust
and immediately will be turned over to Lender in the form received to be
applied by Lender on senior debt.
4. Remedies of Creditor. Until all senior debt has been paid in full,
without Lender's permission, Creditor will not be a party to any action
or proceeding against any person to recover subordinated debt. Upon
written request of Lender, Creditor will file any claim or proof of
claim or take any other action to collect subordinated debt in any
bankruptcy, receivership, liquidation, reorganization or other
proceeding for relief of debtors or in connection with Debtor's
insolvency, or in liquidation or marshaling of Debtor's assets or
liabilities, or in any probate proceeding, and if any distribution shall
be made to Creditor, Creditor will hold the same in trust for Lender and
immediately pay to Lender, in the form received to be applied on senior
debt, all money or other assets received in any such proceedings on
account of subordinated debt until senior debt shall have been paid in
full. If Creditor shall fail to take an such action when requested by
Lender, Lender may enforce this agreement or as attorney in fact for
Creditor and Debtor may take any such action on Creditor's behalf.
Creditor hereby irrevocably appoints Lender Creditor's attorney in fact
to take any such action that Lender might request Creditor to take
hereunder, and to sue for, compromise, collect and receive all such
money and other assets and take any other action in Lender's own name or
in Creditor's name that Lender shall consider advisable for enforcement
and collection of subordinated debt, and to apply any amounts received
on senior debt.
5. Modifications. At any time and from time to time, without Creditor's
consent or notice to Creditor and without liability to Creditor and
without releasing or impairing any of Lender's rights against Creditor
or any of Creditor's obligations hereunder, Lender may take additional
or other security for senior debt; release, exchange, subordinated or
lose any security for senior debt; release any person obligated on
senior debt, modify, amend or waive compliance with any agreement
relating to senior debt; grant any adjustment, indulgence or forbearance
to, or compromise with, any person liable for senior debt; neglect,
delay, omit, fail or refuse to take or prosecute any action for
collection of any senior debt or to foreclose upon any collateral or
take or prosecute any action on any agreement securing any senior debt.
6. Subordination of Liens. Creditor subordinates and makes inferior to any
security interests, liens or mortgages now or hereafter securing senior
debt all security interests, liens, or mortgages now or hereafter
securing subordinated debt. Any foreclosure against any property
securing senior debt shall foreclose, extinguish and discharge all
security interests, liens and mortgages securing subordinated debt, and
any purchaser at any such foreclosure sale shall take title to the
property so sold free of all security interest, liens and mortgages
securing subordinated debt.
7. Statement of Subordination; Assignment by Creditor; Additional
Instruments. Debtor and Creditor will cause any instrument evidencing
or securing subordinated debt to bear upon its face a statement that
such instrument is subordinated to senior debt as set forth herein and
will take all actions and execute all documents appropriate to carry out
this agreement. Creditor will notify Lender not less than 10 days
before any assignment of any subordinated debt.
8. Assignment by Lender. Lender's rights under this agreement may be
assigned in connection with any assignment or transfer of any senior
debt.
9. Venue. Debtor and Creditor agree that this agreement is performable in
the county of Lender's address set out above.
10. Cumulative Rights; Waivers. This instrument is cumulative of all other
rights and securities of the Lender. No waiver by Lender of any right
hereunder, with respect to a particular payment, shall affect or impair
its rights in any matters thereafter occurring.
11. Successors and Assigns. This instrument is binding upon and shall inure
to the benefit of the heirs, executors, administrators, successors and
assigns of each of the parties hereto, but Creditor covenants that it
will not assign subordinated debt, or any part thereof, without making
the rights and interests of the assignee subject in all respects to the
terms of this instrument.
12. Termination. This agreement shall terminate upon the termination of the
Senior Facility Agreement and repayment in full of the senior debt.
(Lender) (Debtor) (Creditor)
NationsBank of Texas, N.A. USAA Mutual Fund, Inc. USAA Capital Corporation
USAA Investment Trust
USAA Tax Exempt Fund, Inc.
USAA State Tax-Free Trust
By /s/ Greg Venker By /s/ Michael J.C. Roth By /s/ Laurie B. Blank
- ------------------ ------------------------ ----------------------
Its Senior Vice President Its President Its Treasurer
EXHIBIT 10(b)
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
July 16, 1996
USAA Tax Exempt Fund, Inc.
USAA Building
9800 Fredericksburg Road
San Antonio, Texas 78288
Ladies and Gentlemen:
We hereby consent to the reference in Post-Effective Amendment No. 25
(the "Amendment") to the Registration Statement (No. 2-75093) on Form N-1A
of USAA Tax Exempt Fund, Inc. (the "Registrant"), a Maryland corporation, to
our opinion with respect to the legality of the 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 the reference to this firm in the Prospectuses
under the heading "Legal Counsel" and in the Statements of Additional
Information under the heading "General Information--Counsel" which form a part
of the Amendment and to the filing of this consent as an exhibit to the
Amendment.
Very truly yours,
GOODWIN, PROCTER & HOAR LLP
EXHIBIT 11
The Shareholders and Board of Directors
USAA Tax Exempt Fund, Inc.:
We consent to the use of our reports dated May 10, 1996 on the
financial statements of the California Bond, California Money
Market, New York Bond, New York Money Market, Virginia Bond,
Virginia Money Market, Long-Term, Intermediate-Term, Short-Term,
and Tax Exempt Money Market Funds, separate Funds of USAA Tax
Exempt Fund, Inc. (the Company), as of and for the period ended
March 31, 1996 included in the Company's Annual Reports to
Shareholders for the period ended March 31, 1996 incorporated
herein by reference and to the references to our firm under the
headings "Financial Highlights" and "Independent Auditors" as
part of Post-Effective Amendment No. 25 under the Securities Act
of 1933, as amended, and Amendement No. 27 under the Investment
Company Act of 1940, as amended, to the Company's Registration
Statement on Form N-1A.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
July 19, 1996
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<NUMBER-OF-SHARES-SOLD> 267,168,296
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
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