USAA FLORIDA FUNDS
August 1, 1995 PROSPECTUS
As Supplemented December 1, 1995
USAA Florida Tax-Free Income Fund and USAA Florida Tax-
Free Money Market Fund (collectively, the Funds or the
Florida Funds) are two of four no-load mutual funds offered
by USAA State Tax-Free Trust (the Trust). 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
Florida investors with a high level of current interest
income that is exempt from federal income taxes and
shares that are exempt from the Florida intangible
personal property tax. The Florida Tax-Free Money Market
Fund has a further objective of preserving capital and
maintaining liquidity. Each Fund has separate investment
policies to achieve its objective.
The Florida Tax-Free Income Fund invests primarily
in long-term high grade Florida tax-exempt securities.
The Fund's average portfolio maturity is not restricted,
but is expected to be greater than 10 years. Page 9.
The Florida Tax-Free Money Market Fund invests in
high quality Florida tax-exempt securities with
maturities of 397 days or less. The Manager will
maintain a dollar-weighted average portfolio maturity of
no more than 90 days. The Fund will endeavor to maintain
a constant net asset value per share of $1.00. Page 9.
HOW DO YOU BUY? Fund shares are sold on a continuous
basis at the net asset value per share without a sales
charge. Make your initial investment directly with the
Manager by mail or in person. Page 13.
HOW DO YOU SELL? You may redeem shares of a Fund by
mail, telephone, fax, or telegraph on any day that the
net asset value is calculated. Page 15.
Shares of the Florida Funds are authorized for sale
only to residents of the State of Florida. The delivery
of this Prospectus shall not constitute an offer in any
state in which shares of the Florida Funds may not
lawfully be made.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Trust and the Florida Funds that you should know before
investing.
Shares of the USAA Florida Funds are not deposits or
other obligations of, or guaranteed by the USAA Federal
Savings Bank, are not insured by the FDIC or any other
Government Agency, and are subject to market risks.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) dated August 1, 1995, is
available upon request and without charge by writing to USAA
STATE TAX-FREE TRUST, Florida Funds, 9800 Fredericksburg Rd.,
San Antonio, TX 78288, or by calling 1-800-531-8181. The SAI
has been filed with the Securities and Exchange Commission
and is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FLORIDA TAX-FREE MONEY MARKET FUND
IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT
AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies 9
Florida Tax-Free Income Fund 9
Florida Tax-Free Money Market Fund 9
Other Investment Information 10
SHAREHOLDER INFORMATION
Purchase of Shares 13
Redemption of Shares 15
Conditions of Purchase and Redemption 17
Exchanges 18
Other Services 18
Share Price Calculation 19
Dividends, Distributions and Taxes 20
Management of the Trust 22
Description of Shares 23
Service Providers 24
Telephone Assistance Numbers 24
FEES AND EXPENSES
The following summary is provided to assist you in understanding
the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses (applicable to each Fund)
- ---------------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
- ----------------------------------------------------------------------------
Florida Florida
Tax-Free Tax-Free
Income Money Market
Fund Fund
---- ----
Management Fees, net of reimbursements .16% .24%
12b-1 Fees None None
Other Expenses, net of reimbursements
Transfer Agent Fees** .10% .06%
Custodian Fees .12% .10%
All Other Expenses .12% .10%
---- ----
Total Other Expenses .34% .26%
---- ----
Total Fund Operating Expenses, net of
reimbursements .50% .50%
==== ====
- ----------------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by wire
transfer will be subject to a $10 fee. See Redemption of
Shares - Bank Wire Redemption.
** The Funds pay USAA Shareholder Account Services an annual fixed fee
per account for its services. See Transfer Agent in the SAI,
page 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 Management Fees,
Other Expenses, and Total Fund Operating Expenses as a percentage of ANA
for each of the Funds would have been as follows: Florida Tax-Free Income
Fund, .46%, .35%, and .81%; and Florida Tax-Free Money Market Fund, .46%,
.26%, and .72%. The Manager has voluntarily agreed to continue to limit
each Fund's annual expenses until August 1, 1996, to .50% of its ANA and
will reimburse the Funds for all expenses in excess of the limitation.
Example of Effect of Fund Expenses
- ---------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Florida Tax-Free Income Fund $ 5 $ 16 $ 28 $ 63
Florida Tax-Free 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 two-year period ended March 31, 1995, has
been derived from financial statements audited by KPMG Peat Marwick LLP.
This table should be read in conjunction with the financial statements
and related notes that appear in the Funds' Annual Report. Further
performance information is contained in the Annual Report and is available
upon request without charge.
NET ASSET NET REALIZED DISTRIBUTIONS
FISCAL VALUE AT NET AND FROM NET DISTRIBUTIONS
YEAR BEGINNING INVESTMENT UNREALIZED INVESTMENT OF REALIZED
ENDED OF PERIOD INCOME GAIN(LOSS) INCOME CAPITAL GAINS
($) ($) ($) ($) ($)
FLORIDA TAX-FREE INCOME FUND:
March 31,
1994* 10.00 .21 (1.02) (.21) -
1995 8.98 .49 .11 (.49) -
FLORIDA TAX-FREE MONEY MARKET FUND:
March 31,
1994* 1.00 .01 - (.01) -
1995 1.00 .03 - (.03) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
FLORIDA TAX-FREE INCOME FUND:
8.98 (8.22) 24,948 .50(a)(b) 4.63(a)(b) 284.11
9.09 7.01 42,891 .50(b) 5.59(b) 183.44
FLORIDA TAX-FREE MONEY MARKET FUND:
1.00 .96 29,877 .50(a)(b) 1.98(a)(b) -
1.00 2.86 52,225 .50(b) 2.97(b) -
- --------------
(a) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(b) The information contained in this table is based on actual expenses
for the period, after giving effect to reimbursements of expenses by
the Manager. Absent such reimbursements, the Funds' ratios would
have been:
RATIO OF RATIO OF NET
EXPENSES INVESTMENT INCOME
TO AVERAGE TO AVERAGE
NET ASSETS NET ASSETS
(%) (%)
FLORIDA TAX-FREE INCOME FUND:
March 31,
1994* 1.33(a) 3.80(a)
1995 .81 5.28
FLORIDA TAX-FREE MONEY MARKET FUND:
March 31,
1994* 1.11(a) 1.37(a)
1995 .72 2.75
- --------------
* Funds commenced operations October 1, 1993.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
PERFORMANCE INFORMATION
Performance information should be considered in light of
each Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be considered
as representative of the future performance of either Fund.
The Trust 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 Trust's SAI.
TOTAL RETURN - Florida Tax-Free Income 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 - Florida Tax-Free Income 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 - Florida Tax-Free 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 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*
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Balanced Portfolio Fund
Cornerstone Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT
PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of
the responsibility for an equally important decision.
This decision includes determining a portfolio of mutual
funds that balances the investor's investment goals with
his or her tolerance for risk. It is likely that this
decision may involve the use of more than one fund of the
USAA Family of Funds.
For example, assume a shareholder wishes to pursue
the higher yields usually available in the long-term bond
market, but is also concerned about the possible price
swings of the long-term bonds. He or she could divide
investments between the Florida Tax-Free Income Fund and
the Florida Tax-Free Money Market Fund. This would
create a portfolio with a higher yield than that of the
money market and less volatility than that of the long-
term market. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
portfolio funds, the Balanced Portfolio and Cornerstone
Funds. Both of these unique mutual funds provide a
professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use a portfolio fund, the USAA Family of Funds
provides a broad range of choices covering just about any
investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVES AND POLICIES
FLORIDA TAX-FREE INCOME FUND
FLORIDA TAX-FREE MONEY MARKET FUND
INVESTMENT OBJECTIVES
The Florida Tax-Free Income Fund and Florida Tax-Free
Money Market Fund have a common investment objective of
providing Florida investors with a high level of current
interest income that is exempt from federal income taxes
and shares that are exempt from the Florida intangible
personal property tax. The Florida Tax-Free 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 primarily in debt
obligations issued by the State of Florida, 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 the
obligations are exempt from the Florida intangible
personal property tax. 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 Florida tax-
exempt securities and at least 80% of the Fund's annual
income will be exempt from federal income taxes and
excluded from the calculation of federal alternative
minimum taxes for individual taxpayers.
Florida Tax-Free Income Fund. Under normal market
conditions, the Manager will invest the assets of the
Fund so that at least 75% of the total market value of
the tax-exempt securities is rated within the three
highest long-term rating categories (at least A) by
Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), or Fitch Investors Service,
Inc. (Fitch), in the highest short-term rating category
by Moody's, S&P, or Fitch, or, if a security is not
rated by those rating agencies, it must be of equivalent
investment quality as determined by the Manager. The
Manager will not purchase a security if, as a result of
such purchase, more than 25% of the total market value
of the tax-exempt securities of the Fund would be invested
in securities which do not meet these quality standards.
In no event will a security be purchased for the Fund
unless it is rated at least investment grade; i.e., rated
by Moody's, S&P, or Fitch at least in the fourth highest
rating category for long-term securities, in the second
highest rating category for short-term securities, or, if
not rated by those rating agencies, determined by the Manager
to be of equivalent investment quality. Securities rated
in the lowest level of investment grade have some
speculative characteristics since adverse economic
conditions and changing circumstances are more likely to
have an adverse impact on such securities.
If the rating of a security is downgraded, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. Unless otherwise
directed by the Board of Trustees, if downgrades result
in more than 5% of the 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 per share net
asset value of the Florida Tax-Free Income Fund will
fluctuate with portfolio maturity, the quality of
securities held, and inversely to interest rate levels.
Florida Tax-Free Money Market Fund. The Fund will
purchase only high quality securities that qualify as
"eligible securities" under the Securities and Exchange
Commission rules applicable to money market mutual funds.
These securities must also be determined by the Manager
to present minimal credit risk. In general, the category
of eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof including
"prerefunded" and "escrowed to maturity" tax-exempt
securities;
(2) rated in one of the two highest categories for
short-term securities by at least two Nationally
Recognized Statistical Rating Organizations (NRSROs),
or by one NRSRO if the security is rated by only one
NRSRO;
(3) unrated but issued by an issuer or guaranteed by a
guarantor that has other comparable short-term debt
obligations so rated; or
(4) unrated but determined to be of comparable quality
by the Manager.
If a security is downgraded after purchase, the
Manager will follow written procedures adopted by the
Fund's Board of Trustees 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 income taxes.
The value of the securities in which the Trust will
invest generally fluctuates inversely with changes in
prevailing interest rates. Changes in the
creditworthiness of issuers and changes in other market
factors such as the relative supply of and demand for
tax-exempt bonds also create value fluctuations.
Each Fund may on a temporary basis due to market or
other conditions invest up to 100% of its assets in
short-term securities whether or not exempt from federal
income 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 Florida Tax-Free Money Market
Fund only, any variable rate instrument with a demand
feature will be deemed to have a maturity equal to either
the date on which the underlying principal amount may be
recovered through demand or the next rate adjustment date
consistent with applicable regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities
(including securities with variable interest rates) which
may be redeemed or sold back (put) to the issuer of the
security or a third party at face value prior to stated
maturity (Put Bonds). Such securities will normally
trade as if maturity is the earlier put date, even though
stated maturity is longer. For the Florida Tax-Free
Income Fund, maturity for put bonds is deemed to be the
date on which the put becomes exercisable. Generally,
maturity for put bonds for the Florida Tax-Free Money
Market Fund is determined as stated under Variable Rate
Securities.
When-Issued Securities - Each Fund may invest in new
issues of tax-exempt securities offered on a when-issued
basis; that is, delivery and payment take place after the
date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time
of commitment. The Funds do not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Municipal Lease Obligations - Each Fund may invest in
municipal lease obligations and certificates of
participation in such obligations (collectively, lease
obligations). A lease obligation does not constitute a
general obligation of the municipality for which the
municipality's taxing power is pledged, although the
lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due
under the lease obligation.
Certain lease obligations contain "non-
appropriation" clauses which provide that the
municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the
leased property, disposition of the property in the event
of foreclosure might prove difficult. In evaluating a
potential investment in such a lease obligation, the
Manager will consider: (1) the credit quality of the
obligor, (2) whether the underlying property is essential
to a governmental function, and (3) whether the lease
obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails
to make appropriations for the lease obligation.
Liquidity - The Florida Tax-Free Income Fund and Florida
Tax-Free 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 Trustees for purposes of complying with
the Funds' investment restrictions applicable to
investments in illiquid securities.
In determining the liquidity of a lease obligation,
the Manager will consider: (1) the frequency of
trades and quotes for the lease obligation, (2) the
number of dealers willing to purchase or sell the lease
obligation and the number of other potential purchasers,
(3) dealer undertakings to make a market in the lease
obligation, (4) the nature of the marketplace trades,
including the time needed to dispose of the lease
obligation, the method of soliciting offers, and the
mechanics of transfer, (5) whether the lease obligation
is of a size that will be attractive to institutional
investors, (6) whether the lease obligation contains a
non-appropriation clause and the likelihood that the
obligor will fail to make an appropriation therefor, and
(7) such other factors as the Manager may determine to be
relevant to such determination.
In determining the liquidity of Put Bonds with
restrictions on transfer, the Manager will evaluate the
credit quality of the party (the Put Provider) issuing
(or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money, except that a Fund
may borrow money 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). Neither Fund
will purchase securities when its borrowings exceed
5% of its total assets.
b. Neither Fund may invest 25% or more of its total
assets in securities issued in connection with the
financing of projectswith similar characteristics,
such as toll road revenue bonds, housing revenue bonds or
electric power project revenue bonds or in
industrial revenue bonds which are based, directly
or indirectly, on the credit of private entities of
any one industry. However, each Fund reserves the
right to invest more than 25% of its total assets in
tax-exempt industrial revenue bonds.
c. Neither Fund will, 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) if,
as a result, the Fund would own more than 10% of the
outstanding voting securities of such issuer or the
Fund would have more than 5% of the value of its
total assets invested in the securities of such
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 Florida 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 Florida issuers or otherwise affect the
ability of Florida issuers to pay interest, repay
principal or any premium. See Special Risk
Considerations in the SAI.
Because each Fund will ordinarily invest at least
80% of its net assets in Florida tax-exempt securities,
it is more susceptible to factors adversely affecting
issuers of Florida tax-exempt securities than is a fund
that is not concentrated in issuers of Florida tax-exempt
securities to this degree.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the methods described in the following table. A
complete, signed application is required together with a
check (payable to USAA [Fund Name]) for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Trust with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next
determined after the Fund receives your request in proper
form. If a Fund receives your request prior to the close of
the New York Stock Exchange on a day on which the Exchange is
open, your purchase price will be the NAV per share
determined for that day. If a Fund receives your request
after the time at which the NAV per share is calculated,
the purchase will be effective on the next business day.
A check drawn on a foreign bank will not be deemed
received for the purchase of shares until such time as
the check has cleared and the Manager has received good
funds, which may take up to 4 to 6 weeks. Furthermore, a
bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase.
To avoid a delay in the effectiveness of your purchase,
the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Funds.
PURCHASE OF SHARES
INITIAL PURCHASES: Minimum $3,000 - (Except USAA employee payroll deduction).
Mail
Send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
In Person
Bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX
USAA Employee
Payroll Deduction
The periodic purchase of shares through payroll deduction ($25 minimum)
by any employee of USAA, its subsidiaries or affiliated companies.
Exchange
Call our telephone assistance numbers. The new account must have the
same registration as the account from which you are exchanging.
ADDITIONAL PURCHASES: Minimum $50 - (Except transfers from brokerage
accounts and USAA employee payroll deduction).
Mail
Send your check and the "Invest By Mail" stub, which accompanies your
Fund's transaction confirmation, to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Bank Wire
Purchase
Instruct your bank (which may charge a fee for the service) to wire
the specified amount to the Company as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA# 011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)
Shareholder Account Number
Electronic
Funds
Transfer (EFT)
You can pay for purchases electronically via electronic funds transfer.
Systematic (regular) purchases can be deducted from your bank account,
payroll, income-producing investment, or from a USAA money market account.
Intermittent (as-needed) purchases can be deducted from your bank account
through our Buy/Sell Service.
Establish any of our electronic investing services when you apply
for your account, or later upon request.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the methods
described in the following table on any day the NAV per
share is calculated. Redemptions will be effective on
the day on which instructions are received in accordance
with the requirements set forth below. However, if
instructions are received after the NAV per share
calculation, redemption will be effective on the next
business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase
check or electronic funds transfer has cleared, which
could take up to 15 days from the purchase date. If you
are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid
delay.
In addition, the Trust may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Trust normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
Redemption
of Shares
Any of the following methods may be used to authorize the
Transfer Agent to redeem shares from your account based
on instructions received.
Written,
Fax, or
Telegraph
Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and stock
certificate (if issued), specifying the Fund and the number
of shares or dollar amount to be redeemed; (2) signatures of
all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required,
as in the case of estates, trusts, guardianships, custodianships,
partnerships, corporations, and pension and profit- sharing plans;
and (4) method of payment.
Telephone
Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
(continued)
Methods of
Payment
Any of the following methods of payment may be used with
your redemption request.
Bank Wire
Redemption
The wire redemption privilege allows redemptions to be
sent directly to your bank account. Establish this
service when you apply for your account, or later upon
request. If your account is at a savings bank, savings
and loan association, or credit union, please obtain
precise wiring instructions from your institution.
Specifically, include the name of the correspondent bank
and your institution's account number at that bank. USAA
Shareholder Account Services deducts a wire fee from the
account for the redemption by wire. The fee as of the
date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company (SSB)
and the Transfer Agent for their services in connection
with the wire redemption. Your bank may also charge a
fee for receiving funds by wire.
Electronic
Funds
Transfer (EFT)
You can request electronic redemptions via electronic
funds transfer. Systematic (regular) or intermittent
(as-needed) redemptions can be credited to your bank
account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check
Redemption
You may request a redemption to be paid by check to the
registered shareholder(s) and mailed to the address of
record. This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change.
Checkwriting
You may request that checks be issued for your Florida
Tax-Free 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 Trust, 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 Trust does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Trustees may cause the redemption of an
account with a total value of less than $500 of either
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Trust;
(2) limit or discontinue the offering of shares of any
portfolio of the Trust 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 (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 Trustees and adequate
notice has been given to shareholders;
(4) require a signature guarantee when deemed appropriate
by the Manager for purchases, redemptions, or changes
in account information. The section Additional
Information Regarding Redemption of Shares in the SAI
contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among portfolios in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Only Florida residents may exchange
into a Florida Fund. Exchange redemptions and purchases
will be processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between
portfolios is a taxable event. Accordingly, a capital
gain or loss may be realized.
The Funds have undertaken certain procedures
regarding telephone transactions. See Redemption of
Shares - Telephone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the portfolios and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
portfolio in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the SAI.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your
Florida Tax-Free Income Fund account except:
i) a reinvested dividend;
ii) a payment you make after January 31, 1996 under the
InvesTronic(registered trademark), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment
plans; or
iii) a redemption you make after January 31, 1996 under the
Systematic Withdrawal Plan.
In the Florida Tax-Free Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges.
If your Money Market Fund account had activity other than
reinvested dividends, such as wire purchases or redemptions or
purchases under the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive a Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Trust 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 Trust.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Funds are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for each Fund is calculated at the
close of the regular trading session of the New York
Stock Exchange, which is usually 4:00 p.m. Eastern time.
You may buy and sell Fund shares at the NAV per share
without a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in a Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Securities of the Florida Tax-Free Income
Fund are valued each business day at their current
market value as determined by a pricing service approved
by the Board of Trustees. 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
Trustees. In addition, securities purchased with maturities
of 60 days or less and all securities of the Florida Tax-Free
Money Market Fund are stated at amortized cost.
For additional information, see Valuation of
Securities in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income of each Fund is accrued daily and
distributed to shareholders on the last business day of
each month. Any net capital gain generally will be
distributed at least annually. The Funds intend to make
such additional distributions as may be necessary to
avoid the imposition of any federal excise tax.
All shares purchased will begin accruing dividends
on the day following the effective date of the purchase
and will receive dividends through the effective date of
redemption.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any capital gain distribution paid by the
Florida Tax-Free Income Fund will reduce the per share
net asset value by the amount of the distribution. An
investor should consider carefully the effects of
purchasing shares of the Florida Tax-Free Income 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 Florida, a check for proceeds of
income dividends will be mailed to such shareholder
monthly, and a check for any capital gain distribution
will be mailed after the distribution is paid.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The exemption of interest income for federal income tax
purposes does not necessarily result in exemption under
the income or other tax laws of any state or local taxing
authority. The following discussion relates only to
generally applicable federal income tax provisions in
effect as of the date of this Prospectus. Therefore,
shareholders are urged to consult their own tax advisers
about the status of distributions from a Fund in their
own states and localities.
Fund - Each Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code,
neither Fund will be subject to federal income tax on its
net investment income and net capital gains (capital
gains in excess of capital losses) distributed to
shareholders.
Shareholder - Dividends of net tax-exempt interest income
paid by a Fund are excluded from a shareholder's gross
income for federal income tax purposes. Dividends from
taxable net investment income and distributions of net
short-term capital gains are taxable to shareholders as
ordinary income, whether received in cash or reinvested
in additional shares. However, it is expected that any
taxable net investment income will be insubstantial in
relation to the tax-exempt interest generated by a Fund.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
a Fund.
Tax-exempt interest from private activity bonds (for
example, industrial development revenue bonds) issued after
August 7, 1986, although otherwise exempt from federal tax,
is treated as a tax preference item for purposes of the
alternative minimum tax. For corporations, all tax-exempt
interest will be considered in calculating the alternative
minimum tax as part of the adjusted current earnings.
Withholding - Each Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Each Fund will report annually to its
shareholders the federal tax status of dividends and
distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the
dividends constituting interest on private activity
bonds, and the percentage and source, on a state-by-state
basis, of interest income earned on tax-exempt securities
held by the Fund during the preceding year.
FLORIDA TAXATION
The following is only a summary of some of the important
Florida 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.
Dividends and distributions paid by the Funds to
individuals who are residents of Florida are not taxable
by Florida, because Florida does not impose a personal
income tax. Dividends and distributions by the Funds will
be subject to Florida corporate income taxes. Accordingly,
investors in the Funds, including in particular corporate
investors that may be subject to the Florida corporate
income tax, should consult their tax advisers with respect
to the application of the Florida corporate income tax to
the receipt of Fund dividends and distributions and to the
investor's Florida tax situation in general.
Florida imposes a tax on intangible personal
property owned by Florida residents. The Funds received
a ruling from the Florida Department of Revenue that if,
on the last business day of any calendar year, the Funds'
investments consist solely of assets exempt from the
Florida intangible personal property tax, shares of the
Funds owned by Florida residents will be exempt from the
Florida intangible personal property tax in the following
year. Assets exempt from the Florida intangible personal
property tax include obligations issued by the State of
Florida and its political subdivisions, municipalities,
and public authorities; obligations of the United States
Government or its agencies; and cash. If shares of the
Funds are subject to Florida intangible personal property
tax, because less than 100% of the Funds' assets on the
last business day of the calendar year consist of assets
exempt from the Florida intangible personal property tax,
only the portion of the net asset value of shares of the
Funds that is attributable to obligations of the United
States Government will be exempt from taxation.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the
supervision of the Board of Trustees.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately
$27 billion in total assets under management. The
Manager's mailing address is at 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 Trust and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Trust, 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 Trustees.
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 management fee is
computed at .50% of the first $50,000,000 ANA, .40% of
that portion over $50,000,000 and not over $100,000,000
ANA, and .30% of that portion over $100,000,000 ANA. For
the fiscal year ended March 31, 1995, the fees paid to
the Manager, net of reimbursements, were .16% of ANA for
the Florida Tax-Free Income Fund and .24% of ANA for
Florida Tax-Free Money Market Fund.
OPERATING EXPENSES
For the fiscal year ended March 31, 1995, the Manager
limited each Fund's total annualized operating expenses
to .50% of its ANA. The Manager reimbursed the Florida
Tax-Free Income Fund $104,638 and the Florida Tax-Free
Money Market Fund $90,717 for expenses in excess of the
limitation. The Manager has voluntarily agreed to
continue to limit each Fund's annual expenses until
August 1, 1996, to .50% of its ANA and will reimburse the
Funds for all expenses in excess of the limitation.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Funds.
Florida Tax-Free Income Fund
Robert R. Pariseau, Assistant Vice President of Fixed
Income Investments since June of 1995, has managed the
Fund since May 1995. He has eleven years investment
management experience working for IMCO, where he has held
various positions in Fixed Income and Equity Investments.
Mr. Pariseau earned the Chartered Financial Analyst (CFA)
designation in 1987 and is a member of the Association
for Investment Management and Research (AIMR), San
Antonio Financial Analysts Society, Inc. (SAFAS), and the
National Federation of Municipal Analysts (NFMA). He
holds an MBA from Lindenwood College, Missouri and a BS
from the U.S. Naval Academy, Annapolis, Maryland.
Florida Tax-Free Money Market Fund
Pamela K. Bledsoe, Executive Director of Fixed Income
Investments since June of 1995, has managed the Fund
since May 1995. Ms. Bledsoe has seven years investment
management experience and has worked for IMCO since
July 1991 in Fixed Income Research. From October 1986
to August 1989 she was a Financial Analyst at Schenley
Industries, Inc., Dallas, Texas. Ms. Bledsoe earned the
CFA designation in 1992 and is a member of the AIMR and
SAFAS. Ms. Bledsoe holds an MBA from Texas Christian
University and a BS from Louisiana Tech University.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company
established as a business trust under the laws of the
State of Delaware pursuant to a Master Trust Agreement
dated June 21, 1993. The Trust is authorized to issue an
unlimited number of shares of beneficial interest of
separate series or Funds at $.001 par value. Four such
Funds have been established, two of which are described
in this Prospectus. Each Fund is classified as a
diversified investment company. Under the Master Trust
Agreement, the Board of Trustees is authorized to create
new Funds in addition to those already existing without
shareholder approval.
Under the Master Trust Agreement, no annual meeting
of shareholders is required. Ordinarily, no shareholder
meeting will be held unless required by the Investment
Company Act of 1940. The Trustees may fill vacancies on
the Board or appoint new Trustees provided that
immediately after such action at least two-thirds of the
Trustees have been elected by shareholders. Shareholders
are entitled to one vote per share (with proportionate
voting for fractional shares) irrespective of the relative
net asset value of the shares. For matters affecting an
individual Fund, a separate vote of the shareholders of
that Fund is required. Shareholders holding an aggregate
of at least 10% of the outstanding shares of the Trust
may request a meeting of shareholders at any time for the
purpose of voting to remove one or more of the Trustees,
and the Trust will assist shareholders in communicating
with other shareholders in connection with such a meeting.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
USAA TEXAS FUNDS
August 1, 1995 PROSPECTUS
As Supplemented December 1, 1995
USAA Texas Tax-Free Income Fund and USAA Texas Tax-Free
Money Market Fund (collectively, the Funds or the Texas
Funds) are two of four no-load mutual funds offered by USAA
State Tax-Free Trust (the Trust). 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 Texas
investors with a high level of current interest income
that is exempt from federal income taxes. The Texas Tax-
Free Money Market Fund has a further objective of
preserving capital and maintaining liquidity. Each Fund
has separate investment policies to achieve its objective.
The Texas Tax-Free Income Fund invests primarily in
long-term high grade Texas tax-exempt securities. The
Fund's average portfolio maturity is not restricted, but
is expected to be greater than 10 years. Page 8.
The Texas Tax-Free Money Market Fund invests in high
quality Texas 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 8.
HOW DO YOU BUY? Fund shares are sold on a continuous
basis at the net asset value per share without a sales
charge. Make your initial investment directly with the
Manager by mail or in person. Page 12.
HOW DO YOU SELL? You may redeem shares of a Fund by
mail, telephone, fax, or telegraph on any day that the
net asset value is calculated. Page 14.
Shares of the Texas Funds are authorized for sale
only to residents of the State of Texas. The delivery of
this Prospectus shall not constitute an offer in any
state in which shares of the Texas Funds may not lawfully
be made.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Trust and the Texas Funds that you should know before
investing.
Shares of the USAA Texas Funds are not deposits or
other obligations of, or guaranteed by the USAA Federal
Savings Bank, are not insured by the FDIC or any other
Government Agency, and are subject to market risks.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) dated August 1, 1995, is
available upon request and without charge by writing to USAA
STATE TAX-FREE TRUST, Texas Funds, 9800 Fredericksburg Rd.,
San Antonio, TX 78288, or by calling 1-800-531-8181. The SAI
has been filed with the Securities and Exchange Commission
and is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE TEXAS TAX-FREE 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 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 6
Using Mutual Funds in an Investment Program 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies 8
Texas Tax-Free Income Fund 8
Texas Tax-Free Money Market Fund 8
Other Investment Information 9
SHAREHOLDER INFORMATION
Purchase of Shares 12
Redemption of Shares 14
Conditions of Purchase and Redemption 16
Exchanges 17
Other Services 17
Share Price Calculation 18
Dividends, Distributions and Taxes 19
Management of the Trust 21
Description of Shares 22
Service Providers 23
Telephone Assistance Numbers 23
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or
indirectly.
Shareholder Transaction Expenses (applicable to each Fund)
- ----------------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
- ----------------------------------------------------------------------------
Texas Texas
Tax-Free Tax-Free
Income Money Market
Fund Fund
---- ----
Management Fees, net of reimbursements .00% .00%
12b-1 Fees None None
Other Expenses, net of reimbursements
Transfer Agent Fees** .02% .00%
Custodian Fees .46% .50%
All Other Expenses .02% .00%
---- ----
Total Other Expenses .50% .50%
---- ----
Total Fund Operating Expenses, net of reimbursements .50% .50%
==== ====
- ----------------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by wire
transfer will be subject to a $10 fee. See Redemption of
Shares - Bank Wire Redemption.
** The Funds pay USAA Shareholder Account Services an annual fixed
fee per account for its services. See Transfer Agent in the SAI,
page 18.
During the eight-month period ended March 31, 1995, 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: Texas Tax-Free Income Fund, .50%,
1.90%, and 2.40%; and Texas Tax-Free Money Market Fund, .50%, 2.13%, and
2.63%. The Manager has voluntarily agreed to continue to limit each
Fund's annual expenses until August 1, 1996, to .50% of its ANA and will
reimburse the Funds for all expenses in excess of the limitation.
Example of Effect of Fund Expenses
- ----------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of the
periods shown:
1 year 3 years
------ -------
Texas Tax-Free Income Fund $ 5 $ 16
Texas Tax-Free Money Market Fund $ 5 $ 16
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 the eight-month period ended March 31, 1995, has been derived
from the 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.
Eight-Month Period
Ended March 31, 1995*
---------------------
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
----------- -----------
Net asset value at beginning of period $10.00 $ 1.00
Net investment income .34 .02
Net realized and unrealized gain .21 -
Distributions from net investment income (.34) (.02)
------ ------
Net asset value at end of period $10.21 $ 1.00
------ ------
------ ------
Total return (%)** 5.75 2.09
Net assets at end of period ($000) $6,446 $3,881
Ratio of expenses to average net assets (%) .50(a)(b) .50(a)(b)
Ratio of net investment income to
average net assets (%) 5.56(a)(b) 3.18(a)(b)
Portfolio turnover (%) 196.62 -
- ----------
(a) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(b) The information contained in this table is based on actual expenses
for the period, after giving effect to reimbursements of expenses
by the Manager. Absent such reimbursements the Funds' ratios would
have been:
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
----------- -----------
Ratio of expenses to average net assets (%) 2.40(a) 2.63(a)
Ratio of net investment income to
average net assets (%) 3.66(a) 1.05(a)
* Funds commenced operations August 1, 1994.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
PERFORMANCE INFORMATION
Performance information should be considered in light of
each Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
either Fund.
The Trust 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 - Texas Tax-Free Income 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 - Texas Tax-Free Income 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 the Fund's portfolio and all recurring
charges are recognized.
YIELD - Texas Tax-Free 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 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*
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Balanced Portfolio Fund
Cornerstone Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of
the responsibility for an equally important decision.
This decision includes determining a portfolio of mutual
funds that balances the investor's investment goals with
his or her tolerance for risk. It is likely that this
decision may involve the use of more than one fund of the
USAA Family of Funds.
For example, assume a shareholder wishes to pursue
the higher yields usually available in the long-term bond
market, but is also concerned about the possible price
swings of the long-term bonds. He or she could divide
investments between the Texas Tax-Free Income Fund and
the Texas Tax-Free Money Market Fund. This would create
a portfolio with a higher yield than that of the money
market and less volatility than that of the long-term
market. This is just one example of how an individual
could combine funds to create a portfolio tailored to his
or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
portfolio funds, the Balanced Portfolio and Cornerstone
Funds. Both of these unique mutual funds provide a
professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use a portfolio fund, the USAA Family of Funds
provides a broad range of choices covering just about any
investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVES AND POLICIES
TEXAS TAX-FREE INCOME FUND
TEXAS TAX-FREE MONEY MARKET FUND
INVESTMENT OBJECTIVES
The Funds have a common investment objective of providing
Texas investors with a high level of current interest
income that is exempt from federal income taxes. The
Texas Tax-Free 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 primarily in debt
obligations issued by the State of Texas, 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. 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 Texas tax-exempt securities and at least 80%
of the Fund's annual income will be exempt from federal
income taxes and excluded from the calculation of federal
alternative minimum taxes for individual taxpayers.
Texas currently imposes no personal state income
tax. In the event Texas enacts a personal state income
or similar tax, the Texas Funds will thereafter attempt
to seek a high level of current interest income also
exempt from such tax. The ability of the Funds to pursue
this further policy, of course, will be affected by the
actual form of such a tax.
Texas Tax-Free Income Fund. Under normal market
conditions, the Manager will invest the assets of the
Fund so that at least 75% of the total market value of
the tax-exempt securities is rated within the three
highest long-term rating categories (at least A) by
Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), or Fitch Investors Service,
Inc. (Fitch), in the highest short-term rating category
by Moody's, S&P, or Fitch, or, if a security is not rated
by those rating agencies, it must be of equivalent
investment quality as determined by the Manager. The
Manager will not purchase a security if, as a result of
such purchase, more than 25% of the total market value
of the tax-exempt securities of the Fund would be invested
in securities which do not meet these quality standards.
In no event will a security be purchased for the Fund
unless it is rated at least investment grade; i.e., rated
by Moody's, S&P, or Fitch at least in the fourth highest
rating category for long-term securities, in the second
highest rating category for short-term securities, or, if
not rated by those rating agencies, determined by the
Manager to be of equivalent investment quality. Securities
rated in the lowest level of investment grade have some
speculative characteristics since adverse economic conditions
and changing circumstances are more likely to have an
adverse impact on such securities.
If the rating of a security is downgraded, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. Unless otherwise
directed by the Board of Trustees, if downgrades result
in more than 5% of the 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 per share net
asset value of the Texas Tax-Free Income Fund will
fluctuate with portfolio maturity, the quality of
securities held, and inversely to interest rate levels.
Texas Tax-Free Money Market Fund. The Fund will purchase
only high quality securities that qualify as "eligible
securities" under the Securities and Exchange Commission
rules applicable to money market mutual funds. These
securities must also be determined by the Manager to present
minimal credit risk. In general, the category of eligible
securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof, including
"prerefunded" and "escrowed to maturity" tax-exempt
securities;
(2) rated in one of the two highest categories for
short-term securities by at least two Nationally
Recognized Statistical Rating Organizations (NRSROs),
or by one NRSRO if the security is rated by only
one NRSRO;
(3) unrated but issued by an issuer orguaranteed 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 Trustees 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 income taxes.
The value of the securities in which the Trust will
invest generally fluctuates inversely with changes in
prevailing interest rates. Changes in the creditworthiness
of issuers and changes in other market factors such as the
relative supply of and demand for tax-exempt bonds also
create value fluctuations.
Each Fund may on a temporary basis due to market or
other conditions invest up to 100% of its assets in short-
term securities whether or not exempt from federal income
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 Texas Tax-Free Money Market Fund
only, any variable rate instrument with a demand feature
will be deemed to have a maturity equal to either the
date on which the underlying principal amount may be
recovered through demand or the next rate adjustment date
consistent with applicable regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities
(including securities with variable interest rates) which
may be redeemed or sold back (put) to the issuer of the
security or a third party at face value prior to stated
maturity (Put Bonds). Such securities will normally
trade as if maturity is the earlier put date, even though
stated maturity is longer. For the Texas Tax-Free Income
Fund, maturity for put bonds is deemed to be the date on
which the put becomes exercisable. Generally, maturity
for put bonds for the Texas Tax-Free Money Market Fund is
determined as stated under Variable Rate Securities.
When-Issued Securities - Each Fund may invest in new
issues of tax-exempt securities offered on a when-issued
basis; that is, delivery and payment take place after the
date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time
of commitment. The Funds do not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between the 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 Texas Tax-Free Income Fund and Texas Tax-
Free 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 Trustees for purposes of complying with the
Funds' investment restrictions applicable to investments in
illiquid securities.
In determining the liquidity of a lease obligation,
the Manager will consider: (1) the frequency of trades
and quotes for the lease obligation, (2) the number of
dealers willing to purchase or sell the lease obligation
and the number of other potential purchasers, (3) dealer
undertakings to make a market in the lease obligation,
(4) the nature of the marketplace trades, including the
time needed to dispose of the lease obligation, the
method of soliciting offers, and the mechanics of
transfer, (5) whether the lease obligation is of a size
that will be attractive to institutional investors, (6)
whether the lease obligation contains a non-appropriation
clause and the likelihood that the obligor will fail to
make an appropriation therefor, and (7) such other
factors as the Manager may determine to be relevant to
such determination.
In determining the liquidity of Put Bonds with
restrictions on transfer, the Manager will evaluate the
credit quality of the party (the Put Provider) issuing
(or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money, except that a Fund
may borrow money 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). Neither Fund
will purchase securities when its borrowing exceeds
5% of its total assets.
b. 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.
c. Neither Fund will, 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) if, as a result, the
Fund would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have more
than 5% of the value of its total assets invested in the
securities of such issuer.
RISK FACTORS
The Texas Funds' investment concentration in debt
obligations issued by the State, its political
subdivisions and instrumentalities, and by other
governmental entities involves greater risks than if they
invested in the securities of a broader range of issuers.
The Texas Funds' yield and the value of their portfolios
can be affected by political and economic developments
within the State, and by the financial condition of the
State, its public authorities and political subdivisions.
In the past, Texas voters have passed amendments to the
Texas Constitution and other measures that limit the
taxing and spending authority of Texas governmental
entities, and future voter initiatives could result in
adverse consequences affecting the financial condition of
the State and/or its obligations. A more detailed
discussion of the risks of investing in the Texas Funds
is included in Special Risk Considerations in the SAI.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the methods described in the following table. A
complete, signed application is required together with a
check (payable to USAA [Fund Name]) for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Trust with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next determined
after the Fund receives your request in proper form. If a
Fund receives your request prior to the close of the New York
Stock Exchange on a day on which the Exchange is open, your
purchase price will be the NAV per share determined for that
day. If a Fund receives your request after the time at which
the NAV per share is calculated, the purchase will be effective
on the next business day. A check drawn on a foreign bank will
not be deemed received for the purchase of shares until such
time as the check has cleared and the Manager has received good
funds, which may take up to 4 to 6 weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be
deducted from the amount of the purchase. To avoid a delay in
the effectiveness of your purchase, the Manager suggests that
you convert your foreign check to U.S. dollars prior to
investment in the Funds.
PURCHASE OF SHARES
INITIAL PURCHASES: Minimum $3,000 - (Except USAA employee
payroll deduction).
Mail
Send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
In Person
Bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX
USAA Employee
Payroll Deduction
The periodic purchase of shares through payroll deduction
($25 minimum) by any employee of USAA, its subsidiaries
or affiliated companies.
Exchange
Call our telephone assistance numbers. The new account
must have the same registration as the account from which
you are exchanging.
ADDITIONAL PURCHASES: Minimum $50 - (Except transfers
from brokerage accounts and USAA employee payroll deduction).
Mail
Send your check and the "Invest By Mail" stub, which
accompanies your Fund's transaction confirmation, to the
Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Bank Wire
Purchase
Instruct your bank (which may charge a fee for the service)
to wire the specified amount to the Company as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA# 011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)
Shareholder Account Number
Electronic
Funds
Transfer (EFT)
You can pay for purchases electronically via electronic
funds transfer. Systematic (regular) purchases can be
deducted from your bank account, payroll, income-
producing investment, or from a USAA money market account.
Intermittent (as-needed) purchases can be deducted from
your bank account through our Buy/Sell Service.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the methods
described in the following table on any day the NAV per
share is calculated. Redemptions will be effective on
the day on which instructions are received in accordance
with the requirements set forth below. However, if
instructions are received after the NAV per share
calculation, redemption will be effective on the next
business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic funds
transfer will not be disbursed until the purchase check or
electronic funds transfer has cleared, which could take up
to 15 days from the purchase date. If you are considering
redeeming shares soon after purchase, you should purchase
by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Trust normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by
the Securities and Exchange Commission.
Redemption
of Shares
Any of the following methods may be used to authorize the
Transfer Agent to redeem shares from your account based
on instructions received.
Written,
Fax, or
Telegraph
Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the
following: (1) a letter of instruction or stock
assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be
redeemed; (2) signatures of all owners of the shares
exactly as their names appear on the account; (3) other
supporting legal documents, if required, as in the case
of estates, trusts, guardianships, custodianships,
partnerships, corporations, and pension and profit-
sharing plans; and (4) method of payment.
Telephone
Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
(continued)
Methods of
Payment
Any of the following methods of payment may be used with
your redemption request.
Bank Wire
Redemption
The wire redemption privilege allows redemptions to be
sent directly to your bank account. Establish this
service when you apply for your account, or later upon
request. If your account is at a savings bank, savings
and loan association, or credit union, please obtain
precise wiring instructions from your institution.
Specifically, include the name of the correspondent bank
and your institution's account number at that bank. USAA
Shareholder Account Services deducts a wire fee from the
account for the redemption by wire. The fee as of the
date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company (SSB)
and the Transfer Agent for their services in connection
with the wire redemption. Your bank may also charge a
fee for receiving funds by wire.
Electronic
Funds
Transfer (EFT)
You can request electronic redemptions via electronic
funds transfer. Systematic (regular) or intermittent
(as-needed) redemptions can be credited to your bank
account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check
Redemption
You may request a redemption to be paid by check to the
registered shareholder(s) and mailed to the address of
record. This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change.
Checkwriting
You may request that checks be issued for your Texas Tax-
Free 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 Trust, 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 Trust does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Trustees may cause the redemption of an account
with a total value of less than $500 of either Fund, subject
to certain limitations described in Additional Information
Regarding Redemption of Shares in the SAI.
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Trust;
(2) limit or discontinue the offering of shares of any
portfolio of the Trust 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 (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 Trustees and adequate
notice has been given to shareholders;
(4) require a signature guarantee when deemed appropriate
by the Manager for purchases, redemptions, or changes
in account information. The section Additional
Information Regarding Redemption of Shares in the SAI
contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among portfolios in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Only Texas residents may exchange
into a Texas Fund. Exchange redemptions and purchases
will be processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between
portfolios is a taxable event. Accordingly, a capital
gain or loss may be realized.
The Funds have undertaken certain procedures
regarding telephone transactions. See Redemption of
Shares - Telephone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the portfolios and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
portfolio in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the SAI.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your
Texas Tax-Free Income Fund account except:
i) a reinvested dividend;
ii) a payment you make after January 31, 1996 under the
InvesTronic(registered trademark), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment
plans; or
iii) a redemption you make after January 31, 1996 under the
Systematic Withdrawal Plan.
In the Texas Tax-Free Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges.
If your Money Market Fund account had activity other than
reinvested dividends, such as wire purchases or redemptions or
purchases under the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive a Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Trust 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 Trust.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Funds are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for each Fund is calculated at the
close of the regular trading session of the New York
Stock Exchange, which is usually 4:00 p.m. Eastern time.
You may buy and sell Fund shares at the NAV per share
without a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in a Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Securities of the Texas Tax-Free Income
Fund are valued each business day at their current market
value as determined by a pricing service approved by the
Board of Trustees. 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
Trustees. In addition, securities purchased with
maturities of 60 days or less and all securities of the
Texas Tax-Free Money Market Fund are stated at amortized
cost.
For additional information, see Valuation of
Securities in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income of each Fund is accrued daily and
distributed to shareholders on the last business day of
each month. Any net capital gain generally will be
distributed at least annually. The Funds intend to make
such additional distributions as may be necessary to
avoid the imposition of any federal excise tax.
All shares purchased will begin accruing dividends
on the day following the effective date of the purchase
and will receive dividends through the effective date of
redemption.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-dividend
date. Any capital gain distribution paid by the Texas
Tax-Free Income Fund will reduce the per share net asset
value by the amount of the distribution. An investor
should consider carefully the effects of purchasing shares
of the Texas Tax-Free Income 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 Texas, a check for
proceeds of income dividends will be mailed to such
shareholder monthly, and a check for any capital gain
distribution will be mailed after the distribution is paid.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The exemption of interest income for federal income tax
purposes does not necessarily result in exemption under
the income or other tax laws of any state or local taxing
authority. The following discussion relates only to
generally applicable federal income tax provisions in
effect as of the date of this Prospectus. Therefore,
shareholders are urged to consult their own tax advisers
about the status of distributions from a Fund in their
own states and localities.
Fund - Each Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code,
neither Fund will be subject to federal income tax on its
net investment income and net capital gains (capital
gains in excess of capital losses) distributed to
shareholders.
Shareholder - Dividends of net tax-exempt interest income
paid by a Fund are excluded from a shareholder's gross
income for federal income tax purposes. Dividends from
taxable net investment income and distributions of net
short-term capital gains are taxable to shareholders as
ordinary income, whether received in cash or reinvested
in additional shares. However, it is expected that any
taxable net investment income will be insubstantial in
relation to the tax-exempt interest generated by a Fund.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
a Fund.
Tax-exempt interest from private activity bonds (for
example, industrial development revenue bonds) issued
after August 7, 1986, although otherwise exempt from
federal tax, is treated as a tax preference item for
purposes of the alternative minimum tax. For corporations,
all tax-exempt interest will be considered in calculating
the alternative minimum tax as part of the adjusted
current earnings.
Withholding - Each Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Each Fund will report annually to its
shareholders the federal tax status of dividends and
distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the
dividends constituting interest on private activity
bonds, and the percentage and source, on a state-by-state
basis, of interest income earned on tax-exempt securities
held by the Fund during the preceding year.
TEXAS TAXATION
Texas does not currently impose an income tax on
individuals. Therefore, dividends and distributions paid
by the Funds to individuals who are residents of Texas
are not subject to a Texas personal income tax. If Texas
eventually enacts a personal income tax, investors will
need to consult with their own tax advisors with respect
to the possible taxation of dividends and distributions.
Texas imposes a franchise tax on each corporation
that does business in the state or that is chartered or
authorized to do business in the state. It is a tax on
the privilege of doing business within the state,
measured by a corporation's net taxable capital and by
its net taxable earned surplus. Because the Funds are
series of a registered open-end investment company
organized as a Delaware business trust, they themselves
are not subject to the Texas franchise tax. A corporate
investor in the Funds subject to the Texas franchise tax,
however, must include distributions it receives from the
Funds in its calculation of net taxable capital. All
distributions from the Funds that are exempt from federal
income tax, though, are exempt from the portion of the
Texas franchise tax based on taxable earned surplus.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the
supervision of the Board of Trustees.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately
$27 billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd.,
San Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Trust and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Trust, 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 Trustees.
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 management fee is
computed at .50% of the first $50,000,000 ANA, .40% of
that portion over $50,000,000 and not over $100,000,000
ANA, and .30% of that portion over $100,000,000 ANA. For
the fiscal year ended March 31, 1995, the Manager waived
the advisory fee for both Funds.
OPERATING EXPENSES
For the fiscal year ended March 31, 1995, the Manager
limited each Fund's total annualized operating expenses
to .50% of its ANA. The Manager reimbursed the Texas
Tax-Free Income Fund $52,566 and the Texas Tax-Free Money
Market Fund $47,552 for expenses in excess of the
limitation. The Manager has voluntarily agreed to
continue to limit each Fund's annual expenses until
August 1, 1996, to .50% of its ANA and will reimburse the
Funds for all expenses in excess of the limitation.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Funds.
Texas Tax-Free Income Fund
Robert R. Pariseau, Assistant Vice President of Fixed
Income Investments since June of 1995, has managed the
Fund since May 1995. He has eleven years investment
management experience working for IMCO, where he has held
various positions in Fixed Income and Equity Investments.
Mr. Pariseau earned the Chartered Financial Analyst (CFA)
designation in 1987 and is a member of the Association
for Investment Management and Research (AIMR), San
Antonio Financial Analysts Society, Inc. (SAFAS), and the
National Federation of Municipal Analysts (NFMA). He
holds an MBA from Lindenwood College, Missouri and a BS
from the U.S. Naval Academy, Annapolis, Maryland.
Texas Tax-Free Money Market Fund
Pamela K. Bledsoe, Executive Director of Fixed Income
Investments since June of 1995, has managed the Fund
since May 1995. Ms. Bledsoe has seven years investment
management experience and has worked for IMCO since
July 1991 in Fixed Income Research. From October 1986
to August 1989 she was a Financial Analyst at Schenley
Industries, Inc., Dallas, Texas. Ms. Bledsoe earned the
CFA designation in 1992 and is a member of the AIMR and
SAFAS. Ms. Bledsoe holds an MBA from Texas Christian
University and a BS from Louisiana Tech University.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company
established as a business trust under the laws of the
State of Delaware pursuant to a Master Trust Agreement
dated June 21, 1993. The Trust is authorized to issue an
unlimited number of shares of beneficial interest of
separate series or Funds at $.001 par value. Four such
Funds have been established, two of which are described
in this Prospectus. Each Fund is classified as a
diversified investment company. Under the Master Trust
Agreement, the Board of Trustees is authorized to create
new Funds in addition to those already existing without
shareholder approval.
Under the Master Trust Agreement, no annual meeting
of shareholders is required. Ordinarily, no shareholder
meeting will be held unless required by the Investment
Company Act of 1940. The Trustees may fill vacancies on
the Board or appoint new Trustees provided that immediately
after such action at least two-thirds of the Trustees have
been elected by shareholders. Shareholders are entitled to
one vote per share (with proportionate voting for fractional
shares) irrespective of the relative net asset value of the
shares. For matters affecting an individual Fund, a separate
vote of the shareholders of that Fund is required. Shareholders
holding an aggregate of at least 10% of the outstanding shares
of the Trust may request a meeting of shareholders at any time
for the purpose of voting to remove one or more of the Trustees,
and the Trust will assist shareholders in communicating with
other shareholders in connection with such a meeting.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
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