As filed with the Securities and Exchange Commission on July 25, 1996.
1933 Act File No. 33-65572
1940 Act File No. 811-7852
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 5
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 6
USAA STATE TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Rd., San Antonio, TX 78288
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-0600
Michael D. Wagner, Secretary
USAA STATE TAX-FREE TRUST
9800 Fredericksburg Rd.
San Antonio, TX 78288-0227
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
___ immediately upon filing pursuant to paragraph (b)
_X_ on August 1, 1996 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
The Registrant has heretofore registered an indefinite number of shares of the
Florida Tax-Free Income Fund, Florida Tax-Free Money Market Fund, Texas Tax
- -Free Income Fund, and Texas Tax-Free Money Market Fund pursuant to Rule 24f-2
under the Investment Company Act of 1940. The Registrant filed its Rule 24f-2
notice for the Florida Tax-Free Income Fund, Florida Tax-Free Money Market
Fund, Texas Tax-Free Income Fund and Texas Tax-Free Money Market Fund for the
fiscal year ended March 31, 1996 on May 20, 1996.
Exhibit Index on Page 120-121
Page 1 of 203
USAA STATE TAX-FREE TRUST
CROSS REFERENCE SHEET
Part A
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
1. Cover Page . . . . . . . . . . . . . Same
2. Synopsis . . . . . . . . . . . . . . Fees and Expenses
3. Condensed Financial
Information . . . . . . . . . . . Financial Highlights
Performance Information
4. General Description
of Registrant . . . . . . . . . . Investment Objectives and Policies
Other Investment Information
Description of Shares
5. Management of the Fund . . . . . . . Management of the Trust
Service Providers
6. Capital Stock and Other
Securities. . . . . . . . . . . . Dividends, Distributions and Taxes
Description of Shares
7. Purchase of Securities
Being Offered . . . . . . . . . . Purchase of Shares
Conditions of Purchase and Redemption
Exchanges
Other Services
Share Price Calculation
8. Redemption or Repurchase . . . . . . Redemption of Shares
Conditions of Purchase and Redemption
Exchanges
Other Services
9. Legal Proceedings. . . . . . . . . . Not Applicable
USAA STATE TAX-FREE TRUST
CROSS REFERENCE SHEET
Part B
FORM N-1A ITEM NO. SECTION IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page. . . . . . . . . . . . . Same
11. Table of Contents . . . . . . . . . Same
12. General Information and
History. . . . . . . . . . . . . Not Applicable
13. Investment Objectives
and Policies . . . . . . . . . . Investment Policies
Investment Restrictions
Special Risk Considerations
Portfolio Transactions
14. Management of the
Registrant . . . . . . . . . . . Trustees and Officers of the Trust
15. Control Persons and
Principal Holders
of Securities. . . . . . . . . . Trustees and Officers of the Trust
16. Investment Advisory and
Other Services . . . . . . . . . Trustees and Officers of the Trust
The Trust's Manager
General Information
17. Brokerage Allocation and
Other Practices. . . . . . . . . Portfolio Transactions
18. Capital Stock and Other
Securities . . . . . . . . . . . Further Description of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Offered. . . . . . . . . . Valuation of Securities
Additional Information Regarding
Redemption of Shares
Investment Plans
20. Tax Status. . . . . . . . . . . . . Certain Federal Income Tax
Considerations
Florida Taxation (Florida Funds
Statement of Additional
Information only)
21. Underwriters. . . . . . . . . . . . The Trust's Manager
22. Calculation of Performance
Data . . . . . . . . . . . . . . Calculation of Performance Data
23. Financial Statements. . . . . . . . General Information
PART A
Prospectuses for the
Florida Tax-Free Income, Florida Tax-Free Money Market,
Texas Tax-Free Income and Texas Tax-Free Money Market Funds
are included herein
Part A
Prospectus for the
Florida Tax-Free Income Fund and
Florida Tax-Free Money Market Fund
USAA FLORIDA FUNDS
August 1, 1996 PROSPECTUS
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, in person, or in certain instances, by telephone.
Page 13.
HOW DO YOU SELL? You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is calculated. Page 15.
Shares of the 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.
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 INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Florida Funds that you should
know before investing.
If you would like more information about the Funds, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Funds' Statement of Additional Information (SAI), dated August 1,
1996. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is incorporated by reference into this Prospectus (meaning it is
legally a part of the Prospectus).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE 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. THIS
FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
THEREFORE AN INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER
TYPES OF MONEY MARKET FUNDS.
TABLE OF CONTENTS
PAGE
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 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, which is based on actual expenses and average net
assets of each Fund for the year ended March 31, 1996, is provided to assist
you in understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses (APPLICABLE TO EACH FUND)
- ----------------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (AS A PERCENTAGE OF AVERAGE NET ASSETS (ANA))
- ----------------------------------------------------------------------------
Florida Florida
Tax-Free Tax-Free
Income Money Market
Fund Fund
---- ----
Management Fees, net of reimbursements. .26% .29%
12b-1 Fees None None
Other Expenses, net of reimbursements
Transfer Agent Fees** .07% .06%
Custodian Fees .08% .07%
All Other Expenses .09% .08%
---- ----
Total Other Expenses .24% .21%
---- ----
Total Fund Operating Expenses, net of reimbursements .50% .50%
==== ====
- -------------
* A shareholder who requests delivery of redemption proceeds by wire
transfer will be subject to a $10 fee. See REDEMPTION OF SHARES
BANK WIRE.
** The Funds pay USAA Shareholder Account Services an annual fixed
fee per account for its services. See TRANSFER AGENT in the SAI,
page 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, .43%, .24%, and
.67%; and Florida Tax-Free Money Market Fund, .43%, .21%, and .64%. The
Manager has voluntarily agreed to continue to limit each Fund's annual
expenses until August 1, 1997, to .50% of its ANA and will reimburse the Funds
for all expenses in excess of the limitation.
Example of Effect of Fund Expenses
- ----------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in one of the
Funds below, assuming (1) 5% annual return and (2) redemption at the end of
the periods shown:
1 year 3 years 5 years 10 years
------ ------- ------- --------
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 three-year period ended March 31, 1996, has been
derived from financial statements audited by KPMG Peat Marwick LLP. This
table should be read in conjunction with the financial statements and related
notes that appear in the Funds' Annual Report. Further performance
information is contained in the Annual Report and is available upon request
without charge.
FLORIDA TAX-FREE INCOME FUND:
YEAR ENDED MARCH 31,
1996 1995 1994*
---- ---- -----
Net asset value at
beginning of period $ 9.09 $ 8.98 $ 10.00
Net investment income .52 .49 .21
Net realized and
unrealized gain (loss) .17 .11 (1.02)
Distributions from net
investment income (.52) (.49) (.21)
------ ------ ------
Net asset value at
end of period $ 9.26 $ 9.09 $ 8.98
====== ====== ======
Total return (%) 7.66 7.01 (8.22)
Net assets at end of
period (000) $69,079 $42,891 $24,948
Ratio of expenses to
average net assets (%) .50(a) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 5.52(a) 5.59(a) 4.63(a)(b)
Portfolio turnover (%) 88.20(c) 71.76(c) 284.11
- --------------
* Fund commenced operations October 1, 1993.
(a) The information contained in this table is based on actual
expenses for the period, after giving effect to reimbursements of
expenses by the Manager. Absent such reimbursements, the Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1996 1995 1994*
---- ---- -----
Ratio of expenses to
average net assets (%) .67 .81 1.33(b)
Ratio of net investment income
to average net assets (%) 5.35 5.28 3.80(b)
(b) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(c) Portfolio turnover rates have been calculated excluding short-term
variable rate securities, which are those with put date intervals of
less than one year.
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS CONT.
FLORIDA TAX-FREE MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1996 1995 1994*
---- ---- -----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .01
Distributions from net
investment income (.03) (.03) (.01)
------ ------ ------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00
====== ====== ======
Total return (%) 3.51 2.86 .96
Net assets at end of
period (000) $71,224 $52,225 $29,877
Ratio of expenses to
average net assets (%) .50(a) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 3.45(a) 2.97(a) 1.98(a)(b)
- --------------
* Fund commenced operations October 1, 1993.
(a) The information contained in this table is based on actual
expenses for the period, after giving effect to reimbursements of
expenses by the Manager. Absent such reimbursements, the Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1996 1995 1994*
---- ---- -----
Ratio of expenses to
average net assets (%) .64 .72 1.11(b)
Ratio of net investment income
to average net assets (%) 3.31 2.75 1.37(b)
(b) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
Total return assumes reinvestment of all dividend income and capital gains
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 INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
* Available for sale only to residents of these specific states.
** S&P is a trademark of The McGraw-Hill Companies, Inc., and has
been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the
product.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give small investors some
of the advantages enjoyed by wealthy investors. A relatively small investment
buys part of a widely diversified portfolio. That portfolio is managed by
investment professionals, relieving the shareholder of the need to make
individual stock or bond selections. The investor also enjoys conveniences,
such as daily pricing, liquidity, and in the case of the USAA Family of Funds,
no sales charge. The portfolio, because of its size, has lower transaction
costs on its trades than most individuals would have. As a result each
shareholder owns an investment that in earlier times would have been available
only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is
foregoing some investment decisions, but must still make others. The
decisions foregone are those involved with choosing individual securities.
The Fund Manager will perform that function. In addition, the Manager will
arrange for the safekeeping of securities, auditing the annual financial
statements, and daily valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility
for an equally important decision. This decision includes determining a
portfolio of mutual funds that balances the investor's investment goals with
his or her tolerance for risk. It is likely that this decision may involve
the use of more than one fund of the USAA Family of Funds.
For example, assume a shareholder wishes to pursue the higher yields
usually available in the long-term bond market, but is also concerned about
the possible price swings of the long-term bonds. He or she could divide
investments between the 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 asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to
achieve diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an
asset strategy fund, the USAA Family of Funds provides a broad range of
choices covering just about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices and to help you
craft a portfolio which meets your needs.
INVESTMENT OBJECTIVES AND POLICIES
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 50% of the total market
value of the tax-exempt securities is rated within the three highest long-term
rating categories (at least A) by Moody's Investors Service, Inc. (Moody's),
Standard & Poor's Ratings Group (S&P), or Fitch Investors Service, Inc.
(Fitch), in the highest short-term rating category by Moody's, S&P, or Fitch,
or, if a security is not rated by those rating agencies, it must be of
equivalent investment quality as determined by the Manager. In no event will
a security be purchased for the Fund unless it is rated at least investment
grade; i.e., rated by Moody's, S&P, or Fitch at least in the fourth highest
rating category for long-term securities, in the second highest rating
category for short-term securities, or, if not rated by those rating agencies,
determined by the Manager to be of equivalent investment quality. Securities
rated in the lowest level of investment grade have some speculative
characteristics since adverse economic conditions and changing circumstances
are more likely to have an adverse impact on such securities.
If the rating of a security is downgraded, the Manager will determine
whether it is in the best interest of the Fund's shareholders to continue to
hold such security in the Fund's portfolio. Unless otherwise directed by the
Board of 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 net asset value (NAV) per share 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 SEC rules
applicable to money market mutual funds. These securities must also be
determined by the Manager to present minimal credit risk. In general, the
category of eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof including "prerefunded" and "escrowed to
maturity" tax-exempt securities;
(2) rated in one of the two highest categories for short-term securities by
at least two Nationally Recognized Statistical Rating Organizations
(NRSROs), or by one NRSRO if the security is rated by only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or
(4) unrated but determined to be of comparable quality by the Manager.
If a security is downgraded after purchase, the Manager will follow
written procedures adopted by the Fund's Board of 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 a Fund will invest generally
fluctuates inversely with changes in prevailing interest rates. Changes in the
creditworthiness of issuers and changes in other market factors such as the
relative supply of and demand for tax-exempt bonds also create value
fluctuations.
Each Fund may on a temporary basis due to market or other conditions
invest up to 100% of its assets in short-term securities whether or not exempt
from federal 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 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.
Zero Coupon Bonds - Each Fund may invest in zero coupon bonds. A zero coupon
bond is a security that is sold at a deep discount from its face value, makes
no periodic interest payments, and is redeemed at face value when it matures.
The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment. In calculating its dividend, each
Fund records as income the daily amortization of the purchase discount.
When-Issued Securities - Each Fund may invest in new issues of tax-exempt
securities offered on a when-issued basis; that is, delivery and payment take
place after the date of the commitment to purchase, normally within 45 days.
Both price and interest rate are fixed at the time of commitment. The Funds
do not earn interest on the securities until settlement, and the market value
of the securities may fluctuate between purchase and settlement. Such
securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
Municipal Lease Obligations - Each Fund may invest in municipal lease
obligations and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute a
general obligation of the municipality for which the municipality's taxing
power is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by
the leased property, disposition of the property in the event of foreclosure
might prove difficult. In evaluating a potential investment in such a lease
obligation, the Manager will consider: (1) the credit quality of the obligor,
(2) whether the underlying property is essential to a governmental function,
and (3) whether the lease obligation contains covenants prohibiting the
obligor from substituting similar property if the obligor fails to make
appropriations for the lease obligation.
Liquidity - The 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.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease obligation,
(2) the number of dealers willing to purchase or sell the lease obligation and
the number of other potential purchasers, (3) dealer undertakings to make a
market in the lease obligation, (4) the nature of the marketplace trades,
including the time needed to dispose of the lease obligation, the method of
soliciting offers, and the mechanics of transfer, (5) whether the lease
obligation is of a size that will be attractive to institutional investors,
(6) whether the lease obligation contains a non-appropriation clause
and the likelihood that the obligor will fail to make an appropriation
therefor, and (7) such other factors as the Manager may determine to be
relevant to such determination.
In determining the liquidity of put bonds with restrictions on transfer,
the Manager will evaluate the credit quality of the party (the Put Provider)
issuing (or unconditionally guaranteeing performance on) the unconditional put
or demand feature of the put bond.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) Neither Fund may borrow money, except 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.
(2) Neither Fund may invest 25% or more of its total assets in securities
issued in connection with the financing of projects with similar
characteristics, such as toll road revenue bonds, housing revenue bonds
or electric power project revenue bonds or in industrial revenue bonds
which are based, directly or indirectly, on the credit of private
entities of any one industry. However, each Fund reserves the right to
invest more than 25% of its total assets in tax-exempt industrial revenue
bonds.
(3) Neither Fund will, with respect to 75% of its total assets, purchase the
securities of any issuer (except Government Securities, as such term
is defined in the Investment Company Act of 1940, as amended (1940 Act))
if, as a result, the Fund would 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.
An investment in the Florida Tax-Free Money Market Fund may be riskier than
an investment in other types of money market funds because of this
concentration.
In addition, because each Fund invests in securities backed by banks and
other financial institutions, changes in the credit quality of these
institutions could cause losses to a Fund and affect its share price.
Other considerations affecting the Funds' investments in Florida
obligations are summarized in the SAI under SPECIAL RISK CONSIDERATIONS.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following
methods. A complete, signed application is required together with a check for
each new account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the NAV per share next
determined after the Fund receives your request in proper form. The NAV of
each Fund is determined at the close of the regular trading session of the New
York Stock Exchange (NYSE) each day on which the Exchange is open. If a Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If a Fund receives your request after the
time at which the NAV per share is calculated, the purchase will be effective
on the next business day. Because of the more lengthy clearing process and
the need to convert foreign currency, a check drawn on a foreign bank will not
be deemed received for the purchase of shares until such time as the check has
cleared and the Manager has received good funds, which may take up to 4 to 6
weeks. Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase. To avoid a delay in
the effectiveness of your purchase, the Manager suggests that you convert your
foreign check to U.S. dollars prior to investment in the Funds.
Purchase of Shares
Minimum Investments
- -------------------
Initial Purchase: $3,000
Additional Purchases: $50 - (Except transfers from brokerage accounts)
How to Purchase:
- ---------------
MAIL * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
IN PERSON * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY * Additional purchases on a regular basis can be
VIA deducted from a bank account, paycheck, income-producing
ELECTRONIC investment or from a USAA money market account. Sign up
FUNDS for these services when opening an account or call
TRANSFER 1-800-531-8448 to add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
BANK WIRE * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)-----------------
Shareholder(s) Account Number-------------------
PHONE * If you have an existing USAA account and would like to open
1-800-531-8448 a new account or if you would like to exchange to another
USAA fund, call for instructions. The new account must
have the same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our
Buy/Sell Service. Call for instructions.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day on
which instructions are received in accordance with the requirements set forth
below. However, if instructions are received after the NAV per share
calculation, redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or
electronic funds transfer will not be disbursed until the purchase check or
electronic funds transfer has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase,
you should purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during
any period that redemption is otherwise permitted to be suspended by the
SEC.
How to Redeem:
- -------------
WRITTEN, * Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-292-8177, or send a telegraph
to USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations,
and pension and profit-sharing plans; and (4) method of payment.
PHONE * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the name(s) on the account
registration, and (3) social security number or tax identification number for
the account registration. In addition, all telephone communications with a
shareholder are recorded and confirmations of all account transactions are
sent to the address of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
Methods of Payment:
- ------------------
BANK WIRE * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. If your account is at a savings bank, savings and loan association,
or credit union, please obtain precise wiring instructions from your
institution. Specifically, include the name of the correspondent bank and
your institution's account number at that bank. USAA Shareholder Account
Services (Transfer Agent) deducts a wire fee from the account for the
redemption by wire. The fee as of the date of this Prospectus is $10 ($25 for
wires to a foreign bank) and is subject to change at any time. The fee is
paid to State Street Bank and Trust Company (SSB) and the Transfer Agent for
their services in connection with the wire redemption. Your bank may also
charge a fee for receiving funds by wire.
AUTOMATICALLY * Systematic (regular) or intermittent (as-needed)
VIA EFT 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 * A check payable to the registered shareholder(s) will be
REDEMPTION mailed to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period
before a check redemption can be processed following a telephone address
change. Should you wish to redeem shares within the 15 days following a
telephone address change, you may do so by providing written instructions by
mail or facsimile.
CHECKWRITING * Checks can be issued for your 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 Company, the Transfer Agent and SSB
each reserve the right to change or suspend the checkwriting privilege upon 30
days' written notice to participating shareholders. See the SAI for further
information.
You may request that the Transfer Agent stop payment on a check. The
Transfer Agent will use its best efforts to execute stop payment instructions,
but does not guarantee that such efforts will be effective. A $10 charge will
be made for each stop payment requested by a shareholder.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the 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
signed by all registered owners and supporting documents to change an account
registration due to events such as divorce, marriage, or death. If a new
account needs to be established, an application must be completed and returned
to the Transfer Agent.
ACCOUNT BALANCE
The Board of 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by each
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers
to Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts;
(4) any account whose registered owner has an aggregate balance of $50,000 or
more invested in USAA mutual funds; and (5)all IRA accounts (for the first year
the account is open).
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 the required notice has
been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL
INFORMATION REGARDING REDEMPTION OF SHARES in the SAI contains
information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when you complete your
application. You may exchange shares among Funds in the USAA Family of Funds,
provided you do not hold these shares in stock certificate form and that the
shares to be acquired are offered in your state of residence. Only 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 Funds is a taxable event. Accordingly, a capital gain or
loss may be realized.
The Funds have undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
EXCHANGE LIMITATIONS, EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. Exchanges out
of any Fund in the USAA Family of Funds are limited for each account to six
per calendar year except that there is no limitation on exchanges out of the
Tax Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
Automatic Investment Plans - you may establish an automatic investment plan by
completing the appropriate forms. At the time you sign up for any of the
following investment plans that utilize the electronic funds transfer service,
you will choose the day of the month (the effective date) on which you would
like to regularly purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the last business day
before the effective date. Call the Manager to obtain instructions. More
information about these preauthorized plans is contained in the SAI.
* InvesTronic (registered trademark) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The investor
selects the day(s) each month that money is transferred from a checking or
savings account.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer, an income-producing investment, or an account
with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
* Directed Dividends - If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends and/or capital gain
distributions earned in one fund be used to purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your Florida
Tax-Free Income Fund account except:
(1) a reinvested dividend;
(2) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.
If you own shares in the Florida Tax-Free Money Market Fund, you will
receive a confirmation for purchases or redemptions by check and exchanges.
If that money market fund account had activity other than reinvested
dividends, such as wire purchases or redemptions or purchases under the
InvesTronic (registered trademark), Direct Purchase Service, Automatic
Purchase Plan or Directed Dividends investment plans, you will receive a
monthly statement that will reflect quarter-to-date account activity.
At the end of each quarter you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive a
Fund's financial statements with a summary of its investments and performance
at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the 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.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI,
the most recent Annual Report and/or Semiannual Report, or if you have any
questions concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Funds are purchased and redeemed by
shareholders is equal to the NAV per share determined on the effective date of
the purchase or redemption.
WHEN
The NAV per share for each Fund is calculated at the close of the regular
trading session of the NYSE, which is usually 4:00 p.m. Eastern time. You may
buy and sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and
other assets in a Fund, deducting liabilities, and dividing by the number of
shares outstanding. Securities of the 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. Net capital gain, if
any, generally will be distributed at least annually. The Funds intend to
make such additional distributions as may be necessary to avoid the imposition
of any federal excise tax.
All shares purchased will begin accruing dividends on the day following
the effective date of the purchase and will receive dividends through the
effective date of redemption.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will
be the net asset value of the Fund shares computed on the ex-dividend date.
Any capital gain distribution paid by the Florida Tax-Free Income Fund will
reduce the NAV per share by the amount of the distribution. An investor
should consider carefully the effects of purchasing shares of the 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 NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the
shareholder's account at the then-current NAV per share.
FEDERAL TAXES
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. The following discussion relates only to
generally applicable federal income tax provisions in effect as of the date of
this Prospectus. Therefore, shareholders are urged to consult their own tax
advisers about the status of distributions from a Fund in their own states and
localities.
Fund - Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, neither Fund will be
subject to federal income tax on its net investment income and net capital
gains (capital gains in excess of capital losses) distributed to shareholders.
Shareholder - Dividends of net tax-exempt interest income paid by a Fund are
excluded from a shareholder's gross income for federal income tax purposes.
Dividends from taxable net investment income and distributions of net
short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. However, it is
expected that any taxable net investment income will be insubstantial in
relation to the tax-exempt interest generated by a Fund.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of a Fund.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
Tax-exempt interest from private activity bonds (for example, industrial
development revenue bonds) issued after August 7, 1986, although otherwise
exempt from federal tax, is treated as a tax preference item for purposes of
the alternative minimum tax. For corporations, all tax-exempt interest will
be considered in calculating the alternative minimum tax as part of the
adjusted current earnings.
Withholding - Each Fund is required by federal law to withhold and remit to
the U.S. Treasury a portion of the income dividends and capital gain
distributions and proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct tax identification
number, who underreports dividend or interest income, or who fails to certify
that he is not subject to withholding. To avoid this withholding requirement,
you must certify on your application, or on a separate Form W-9 supplied by
the Transfer Agent, that your tax identification number is correct and that
you are not currently subject to backup withholding.
Reporting - Each Fund will report annually to its shareholders the federal tax
status of dividends and distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the dividends constituting
interest on private activity bonds, and the percentage and source, on a
state-by-state basis, of interest income earned on tax-exempt securities held
by the Fund during the preceding year.
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 $30 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 SEC
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,
1996, the fees paid to the Manager, net of reimbursements, were .26% of ANA
for the Florida Tax-Free Income Fund and .29% of ANA for Florida Tax-Free
Money Market Fund.
OPERATING EXPENSES
For the fiscal year ended March 31, 1996, the Manager limited each Fund's
total operating expenses to .50% of its ANA. The Manager reimbursed the
Florida Tax-Free Income Fund $96,718 and the Florida Tax-Free Money Market
Fund $85,352 for expenses in excess of the limitation. The Manager has
voluntarily agreed to continue to limit each Fund's annual expenses until
August 1, 1997, to .50% of its ANA and will reimburse the Funds for all
expenses in excess of the limitation.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Funds.
Florida Tax-Free Income Fund
Robert R. Pariseau, Assistant Vice President of Fixed Income Investments since
June 1995, has managed the Fund since May 1995. He has twelve years
investment management experience working for IMCO, where he has held various
positions in Fixed Income and Equity Investments. Mr. Pariseau earned the
Chartered Financial Analyst (CFA) designation in 1987 and is a member of the
Association for Investment Management and Research (AIMR), San Antonio
Financial Analysts Society, Inc. (SAFAS), and the National Federation of
Municipal Analysts (NFMA). He holds an MBA from Lindenwood College and a BS
from the U.S. Naval Academy.
Florida Tax-Free Money Market Fund
John C. Bonnell, Executive Director of Money Market Funds since May 1996, has
managed the Fund since May 1996. He has seven years investment management
experience working for IMCO, where he has held various positions in Fixed
Income Investments. Mr. Bonnell earned the CFA designation in 1994 and is
a member of the AIMR, the SAFAS, the NFMA and the Southern Municipal Finance
Society. He holds an MBA from St. Mary's University and a BBA from the
University of Texas at San Antonio.
DESCRIPTION OF SHARES
The 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 portfolios at
$.001 par value. Four such portfolios 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 portfolios 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 1940 Act. 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 portfolio, a separate vote of the shareholders of that portfolio
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 LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE (registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
Part A
Prospectus for the
Texas Tax-Free Income Fund and
Texas Tax-Free Money Market Fund
USAA TEXAS FUNDS
August 1, 1996 PROSPECTUS
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 9.
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 9.
HOW DO YOU BUY? Fund shares are sold on a continuous basis at the net asset
value per share without a sales charge. Make your initial investment directly
with the Manager by mail, in person, or in certain instances, by telephone.
Page 13.
HOW DO YOU SELL? You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is calculated. Page 15.
Shares of the 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.
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 INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Texas Funds that you should
know before investing.
If you would like more information about the Funds, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Funds' Statement of Additional Information (SAI), dated August 1,
1996. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is incorporated by reference into this Prospectus (meaning it is
legally a part of the Prospectus).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE 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. THIS
FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
THEREFORE AN INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER
TYPES OF MONEY MARKET FUNDS.
TABLE OF CONTENTS
PAGE
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 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
Texas Tax-Free Income Fund 9
Texas 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, which is based on actual expenses and average net
assets of each Fund for the year ended March 31, 1996, is provided to assist
you in understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses (APPLICABLE TO EACH FUND)
- ----------------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (AS A PERCENTAGE OF AVERAGE NET ASSETS (ANA))
- ----------------------------------------------------------------------------
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** .00% .00%
Custodian Fees .48% .48%
All Other Expenses .02% .02%
---- ----
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.
** 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: Texas Tax-Free Income Fund, .50%, 1.16%, and
1.66%; and Texas Tax-Free Money Market Fund, .50%, 1.52%, and 2.02%. The
Manager has voluntarily agreed to continue to limit each Fund's annual
expenses until August 1, 1997, to .50% of its ANA and will reimburse the Funds
for all expenses in excess of the limitation.
Example of Effect of Fund Expenses
- ----------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in one of the
Funds below, assuming (1) 5% annual return and (2) redemption at the end of
the periods shown:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Texas Tax-Free Income Fund $ 5 $ 16 $ 28 $ 63
Texas 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, 1996, 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.
TEXAS TAX-FREE INCOME FUND:
YEAR ENDED MARCH 31,
1996 1995*
---- -----
Net asset value at
beginning of period $10.21 $10.00
Net investment income .58 .34
Net realized and
unrealized gain .36 .21
Distributions from net
investment income (.58) (.34)
Distributions of realized
capital gains (.12) -
----- -----
Net asset value at
end of period $10.45 $10.21
====== ======
Total return (%) 9.42 5.75
Net assets at end of
period (000) $8,053 $6,446
Ratio of expenses to
average net assets (%) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 5.51(a) 5.56(a)(b)
Portfolio turnover (%) 71.14(c) 49.63(c)
- --------------
* Fund commenced operations August 1, 1994.
(a) The information contained in this table is based on actual
expenses for the period, after giving effect to reimbursements of
expenses by the Manager. Absent such reimbursements, the Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1996 1995*
---- -----
Ratio of expenses to
average net assets (%) 1.66 2.40(b)
Ratio of net investment income
to average net assets (%) 4.35 3.66(b)
(b) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(c) Portfolio turnover rates have been calculated excluding short-term
variable rate securities, which are those with put date intervals of
less than one year.
Total return assumes reinvestment of all dividend income and capital gains
distributions during the period.
FINANCIAL HIGHLIGHTS CONT.
TEXAS TAX-FREE MONEY MARKET FUND:
YEAR ENDED MARCH 31,
1996 1995*
---- -----
Net asset value at
beginning of period $ 1.00 $ 1.00
Net investment income .03 .02
Distributions from net
investment income (.03) (.02)
------ ------
Net asset value at
end of period $ 1.00 $ 1.00
====== ======
Total return (%) 3.49 2.09
Net assets at end of
period (000) $4,695 $3,881
Ratio of expenses to
average net assets (%) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 3.42(a) 3.18(a)(b)
- --------------
* Fund commenced operations August 1, 1994.
(a) The information contained in this table is based on actual
expenses for the period, after giving effect to reimbursements of
expenses by the Manager. Absent such reimbursements, the Fund's
ratios would have been:
YEAR ENDED MARCH 31,
1996 1995*
---- -----
Ratio of expenses to
average net assets (%) 2.02 2.63(b)
Ratio of net investment income
to average net assets (%) 1.90 1.05(b)
(b) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
Total return assumes reinvestment of all dividend income and capital gains
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 INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
* Available for sale only to residents of these specific states.
** S&P is a trademark of The McGraw-Hill Companies, Inc., and has
been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's and Standard & Poor's makes no
representation regarding the advisability of investing in the
product.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give small investors some
of the advantages enjoyed by wealthy investors. A relatively small investment
buys part of a widely diversified portfolio. That portfolio is managed by
investment professionals, relieving the shareholder of the need to make
individual stock or bond selections. The investor also enjoys conveniences,
such as daily pricing, liquidity, and in the case of the USAA Family of Funds,
no sales charge. The portfolio, because of its size, has lower transaction
costs on its trades than most individuals would have. As a result each
shareholder owns an investment that in earlier times would have been available
only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is
foregoing some investment decisions, but must still make others. The
decisions foregone are those involved with choosing individual securities.
The Fund Manager will perform that function. In addition, the Manager will
arrange for the safekeeping of securities, auditing the annual financial
statements, and daily valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility
for an equally important decision. This decision includes determining a
portfolio of mutual funds that balances the investor's investment goals with
his or her tolerance for risk. It is likely that this decision may involve
the use of more than one fund of the USAA Family of Funds.
For example, assume a shareholder wishes to pursue the higher yields
usually available in the long-term bond market, but is also concerned about
the possible price swings of the long-term bonds. He or she could divide
investments between the 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 asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to
achieve diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an
asset strategy fund, the USAA Family of Funds provides a broad range of
choices covering just about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices and to help you
craft a portfolio which meets your needs.
INVESTMENT OBJECTIVES AND POLICIES
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 50% of the total market value
of the tax-exempt securities is rated within the three highest long-term
rating categories (at least A) by Moody's Investors Service, Inc. (Moody's),
Standard & Poor's Ratings Group (S&P), or Fitch Investors Service, Inc.
(Fitch), in the highest short-term rating category by Moody's, S&P, or Fitch,
or, if a security is not rated by those rating agencies, it must be of
equivalent investment quality as determined by the Manager. In no event will
a security be purchased for the Fund unless it is rated at least investment
grade; i.e., rated by Moody's, S&P, or Fitch at least in the fourth highest
rating category for long-term securities, in the second highest rating
category for short-term securities, or, if not rated by those rating agencies,
determined by the Manager to be of equivalent investment quality. Securities
rated in the lowest level of investment grade have some speculative
characteristics since adverse economic conditions and changing circumstances
are more likely to have an adverse impact on such securities.
If the rating of a security is downgraded, the Manager will determine
whether it is in the best interest of the Fund's shareholders to continue to
hold such security in the Fund's portfolio. Unless otherwise directed by the
Board of 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 net asset value (NAV) per share of the
Texas Tax-Free Income Fund will fluctuate with portfolio maturity, the quality
of securi-ties 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 SEC rules
applicable to money market mutual funds. These securities must also be
determined by the Manager to present minimal credit risk. In general, the
category of eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof, including "prerefunded" and "escrowed to
maturity" tax-exempt securities;
(2) rated in one of the two highest categories for short-term securities by
at least two Nationally Recognized Statistical Rating Organizations
(NRSROs), or by one NRSRO if the security is rated by only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or
(4) unrated but determined to be of comparable quality by the Manager.
If a security is downgraded after purchase, the Manager will follow
written procedures adopted by the Fund's Board of 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 a Fund will invest generally
fluctuates inversely with changes in prevailing interest rates. Changes in
the creditworthiness of issuers and changes in other market factors such as
the relative supply of and demand for tax-exempt bonds also create value
fluctuations.
Each Fund may on a temporary basis due to market or other conditions
invest up to 100% of its assets in short-term securities whether or not exempt
from federal 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 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.
Zero Coupon Bonds - Each Fund may invest in zero coupon bonds. A zero coupon
bond is a security that is sold at a deep discount from its face value, makes
no periodic interest payments, and is redeemed at face value when it matures.
The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment. In calculating its dividend, each
Fund records as income the daily amortization of the purchase discount.
When-Issued Securities - Each Fund may invest in new issues of tax-exempt
securities offered on a when-issued basis; that is, delivery and payment take
place after the date of the commitment to purchase, normally within 45 days.
Both price and interest rate are fixed at the time of commitment. The Funds
do not earn interest on the securities until settlement, and the market value
of the securities may fluctuate between 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.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease obligation,
(2) the number of dealers willing to purchase or sell the lease obligation and
the number of other potential purchasers, (3) dealer undertakings to make a
market in the lease obligation, (4) the nature of the marketplace trades,
including the time needed to dispose of the lease obligation, the method of
soliciting offers, and the mechanics of transfer, (5) whether the lease
obligation is of a size that will be attractive to institutional investors,
(6) whether the lease obligation contains a non-appropriation clause
and the likelihood that the obligor will fail to make an appropriation
therefor, and (7) such other factors as the Manager may determine to be
relevant to such determination.
In determining the liquidity of put bonds with restrictions on transfer,
the Manager will evaluate the credit quality of the party (the Put Provider)
issuing (or unconditionally guaranteeing performance on) the unconditional
put or demand feature of the put bond.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) Neither Fund may borrow money, except 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.
(2) Neither Fund may invest 25% or more of its total assets in securities
issued in connection with the financing of projects with similar
characteristics, such as toll road revenue bonds, housing revenue bonds
or electric power project revenue bonds or in industrial revenue bonds
which are based, directly or indirectly, on the credit of private
entities of any one industry. However, each Fund reserves the right to
invest more than 25% of its total assets in tax-exempt industrial revenue
bonds.
(3) Neither Fund will, with respect to 75% of its total assets, purchase the
securities of any issuer (except Government Securities, as such term is
defined in the Investment Company Act of 1940, as amended (1940 Act))
if, as a result, the Fund would 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. An investment
in the Texas Tax-Free Money Market Fund may be riskier than an investment in
other types of money market funds because of this concentration.
In addition, because each Fund invests in securities backed by banks and
other financial institutions, changes in the credit quality of these
institutions could cause losses to a Fund and affect its share price.
Other considerations affecting the Funds' investments in Texas
obligations are summarized in the SAI under SPECIAL RISK CONSIDERATIONS.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following
methods. A complete, signed application is required together with a check for
each new account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the NAV per share next
determined after the Fund receives your request in proper form. The NAV of
each Fund is determined at the close of the regular trading session of the New
York Stock Exchange (NYSE) each day on which the Exchange is open. If a Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If a Fund receives your request after the
time at which the NAV per share is calculated, the purchase will be effective
on the next business day. Because of the more lengthy clearing process and
the need to convert foreign currency, a check drawn on a foreign bank will not
be deemed received for the purchase of shares until such time as the check has
cleared and the Manager has received good funds, which may take up to 4 to 6
weeks. Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase. To avoid a delay in
the effectiveness of your purchase, the Manager suggests that you convert your
foreign check to U.S. dollars prior to investment in the Funds.
Purchase of Shares
Minimum Investments
- -------------------
Initial Purchase: $3,000
Additional Purchases: $50 - (Except transfers from brokerage accounts)
How to Purchase:
- ---------------
MAIL * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
IN PERSON * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY * Additional purchases on a regular basis can be deducted
VIA from a bank account, paycheck, income-producing investment
ELECTRONIC or from a USAA money market account. Sign up for these
FUNDS services when opening an account or call 1-800-531-8448 to
TRANSFER add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
BANK WIRE * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)-----------------
Shareholder(s) Account Number-------------------
PHONE * If you have an existing USAA account and would like to open
1-800-531-8448 a new account or if you would like to exchange to another
USAA fund, call for instructions. The new account must
have the same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our
Buy/Sell Service. Call for instructions.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day on
which instructions are received in accordance with the requirements set forth
below. However, if instructions are received after the NAV per share
calculation, redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or
electronic funds transfer will not be disbursed until the purchase check or
electronic funds transfer has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase,
you should purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during
any period that redemption is otherwise permitted to be suspended by the SEC.
How to Redeem:
- -------------
WRITTEN, * Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations,
and pension and profit-sharing plans; and (4) method of payment.
PHONE * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the name(s) on the account
registration, and (3) social security number or tax identification number for
the account registration. In addition, all telephone communications with a
shareholder are recorded and confirmations of all account transactions are
sent to the address of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
Methods of Payment:
- ------------------
BANK WIRE * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. If your account is at a savings bank, savings and loan association,
or credit union, please obtain precise wiring instructions from your
institution. Specifically, include the name of the correspondent bank and
your institution's account number at that bank. USAA Shareholder Account
Services (Transfer Agent) deducts a wire fee from the account for the
redemption by wire. The fee as of the date of this Prospectus is $10 ($25 for
wires to a foreign bank) and is subject to change at any time. The fee is
paid to State Street Bank and Trust Company (SSB) and the Transfer Agent for
their services in connection with the wire redemption. Your bank may also
charge a fee for receiving funds by wire.
AUTOMATICALLY * Systematic (regular) or intermittent (as-needed)
VIA EFT 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 * A check payable to the registered shareholder(s) will be
REDEMPTION mailed to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period
before a check redemption can be processed following a telephone address
change. Should you wish to redeem shares within the 15 days following a
telephone address change, you may do so by providing written instructions by
mail or facsimile.
CHECKWRITING * Checks can be issued for your 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 Company, the Transfer Agent and SSB
each reserve the right to change or suspend the checkwriting privilege upon 30
days' written notice to participating shareholders. See the SAI for further
information.
You may request that the Transfer Agent stop payment on a check. The
Transfer Agent will use its best efforts to execute stop payment instructions,
but does not guarantee that such efforts will be effective. A $10 charge will
be made for each stop payment requested by a shareholder.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the 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
signed by all registered owners and supporting documents to change an account
registration due to events such as divorce, marriage, or death. If a new
account needs to be established, an application must be completed and returned
to the Transfer Agent.
ACCOUNT BALANCE
The Board of 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by
each Fund to the Transfer Agent. Accounts exempt from the fee include: (1)
any account regularly purchasing additional shares each month through an
automatic investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA or UTMA); (3) all (non IRA) money market
fund accounts; (4) any account whose registered owner has an aggregate balance
of $50,000 or more invested in USAA mutual funds; and (5) all IRA accounts
(for the first year the account is open).
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 the required notice has
been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL
INFORMATION REGARDING REDEMPTION OF SHARES in the SAI contains
information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when you complete your
application. You may exchange shares among Funds in the USAA Family of Funds,
provided you do not hold these shares in stock certificate form and that the
shares to be acquired are offered in your state of residence. Only 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 Funds is a taxable event. Accordingly, a capital gain or loss may be
realized.
The Funds have undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. Exchanges out
of any Fund in the USAA Family of Funds are limited for each account to six
per calendar year except that there is no limitation on exchanges out of the
Tax Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
Automatic Investment Plans - you may establish an automatic investment plan by
completing the appropriate forms. At the time you sign up for any of the
following investment plans that utilize the electronic funds transfer service,
you will choose the day of the month (the effective date) on which you would
like to regularly purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the last business day
before the effective date. Call the Manager to obtain instructions. More
information about these preauthorized plans is contained in the SAI.
* InvesTronic (registered trademark) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The investor
selects the day(s) each month that money is transferred from a checking or
savings account.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer, an income-producing investment, or an account
with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
* Directed Dividends - If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends and/or capital gain
distributions earned in one fund be used to purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your Texas Tax-Free
Income Fund account except:
(1) a reinvested dividend;
(2) a payment you make under the InvesTronic (registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or Directed Dividends
investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.
If you own shares in the Texas Tax-Free Money Market Fund, you will
receive a confirmation for purchases or redemptions by check and exchanges.
If that money market fund account had activity other than reinvested
dividends, such as wire purchases or redemptions or purchases under the
InvesTronic (registered trademark), Direct Purchase Service, Automatic
Purchase Plan or Directed Dividends investment plans, you will receive a
monthly statement that will reflect quarter-to-date account activity.
At the end of each quarter you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive a
Fund's financial statements with a summary of its investments and performance
at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the 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.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI,
the most recent Annual Report and/or Semiannual Report, or if you have any
questions concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Funds are purchased and redeemed by
shareholders is equal to the NAV per share determined on the effective date of
the purchase or redemption.
WHEN
The NAV per share for each Fund is calculated at the close of the regular
trading session of the NYSE, which is usually 4:00 p.m. Eastern time. You may
buy and sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and
other assets in a Fund, deducting liabilities, and dividing by the number of
shares outstanding. Securities of the 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. Net capital gain, if
any, generally will be distributed at least annually. The Funds intend to
make such additional distributions as may be necessary to avoid the imposition
of any federal excise tax.
All shares purchased will begin accruing dividends on the day following
the effective date of the purchase and will receive dividends through the
effective date of redemption.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will
be the net asset value of the Fund shares computed on the ex-dividend date.
Any capital gain distribution paid by the Texas Tax-Free Income Fund will
reduce the NAV per share by the amount of the distribution. An investor
should consider carefully the effects of purchasing shares of the 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 NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the
shareholder's account at the then-current NAV per share.
FEDERAL TAXES
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. The following discussion relates only to
generally applicable federal income tax provisions in effect as of the date of
this Prospectus. Therefore, shareholders are urged to consult their own tax
advisers about the status of distributions from a Fund in their own states and
localities.
Fund - Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, neither Fund will be
subject to federal income tax on its net investment income and net capital
gains (capital gains in excess of capital losses) distributed to shareholders.
Shareholder - Dividends of net tax-exempt interest income paid by a Fund are
excluded from a shareholder's gross income for federal income tax purposes.
Dividends from taxable net investment income and distributions of net
short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. However, it is
expected that any taxable net investment income will be insubstantial in
relation to the tax-exempt interest generated by a Fund.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of a Fund.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
Tax-exempt interest from private activity bonds (for example, industrial
development revenue bonds) issued after August 7, 1986, although otherwise
exempt from federal tax, is treated as a tax preference item for purposes of
the alternative minimum tax. For corporations, all tax-exempt interest will
be considered in calculating the alternative minimum tax as part of the
adjusted current earnings.
Withholding - Each Fund is required by federal law to withhold and remit to
the U.S. Treasury a portion of the income dividends and capital gain
distributions and proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct tax identification
number, who underreports dividend or interest income, or who fails to certify
that he is not subject to withholding. To avoid this withholding requirement,
you must certify on your application, or on a separate Form W-9 supplied by
the Transfer Agent, that your tax identification number is correct and that
you are not currently subject to backup withholding.
Reporting - Each Fund will report annually to its shareholders the federal tax
status of dividends and distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the dividends constituting
interest on private activity bonds, and the percentage and source, on a
state-by-state basis, of interest income earned on tax-exempt securities held
by the Fund during the preceding year.
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 $30 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in
personal securities transactions subject to restrictions and procedures set
forth in the Joint Code of Ethics adopted by the 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 SEC
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,
1996, the Manager waived the advisory fee for both Funds.
OPERATING EXPENSES
For the fiscal year ended March 31, 1996, the Manager limited each Fund's
total operating expenses to .50% of its ANA. The Manager reimbursed the Texas
Tax-Free Income Fund $83,234 and the Texas Tax-Free Money Market Fund $69,032
for expenses in excess of the limitation. The Manager has voluntarily agreed
to continue to limit each Fund's annual expenses until August 1, 1997, to .50%
of its ANA and will reimburse the Funds for all expenses in excess of the
limitation.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Funds.
Texas Tax-Free Income Fund
Robert R. Pariseau, Assistant Vice President of Fixed Income Investments since
June 1995, has managed the Fund since May 1995. He has twelve years
investment management experience working for IMCO, where he has held various
positions in Fixed Income and Equity Investments. Mr. Pariseau earned the
Chartered Financial Analyst (CFA) designation in 1987 and is a member of the
Association for Investment Management and Research (AIMR), San Antonio
Financial Analysts Society, Inc. (SAFAS), and the National Federation of
Municipal Analysts (NFMA). He holds an MBA from Lindenwood College and a BS
from the U.S. Naval Academy.
Texas Tax-Free Money Market Fund
John C. Bonnell, Executive Director of Money Market Funds since May 1996, has
managed the Fund since May 1996. He has seven years investment management
experience working for IMCO, where he has held various positions in Fixed
Income Investments. Mr. Bonnell earned the CFA designation in 1994 and is a
member of the AIMR, the SAFAS, the NFMA and the Southern Municipal Finance
Society. He holds an MBA from St. Mary's University and a BBA from the
University of Texas at San Antonio.
DESCRIPTION OF SHARES
The 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 portfolios at
$.001 par value. Four such portfolios 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 portfolios 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 1940 Act. 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 portfolio, a separate vote of the shareholders of that
portfolio 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 LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE (registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
PART B
Statements of Additional Information for the
Florida Tax-Free Income, Florida Tax-Free Money Market,
Texas Tax-Free Income and Texas Tax-Free Money Market Funds
are included herein
Part B
Statement of Additional Information for the
Florida Tax-Free Income Fund and
Florida Tax-Free Money Market Fund
USAA USAA STATE STATEMENT OF
Eagle Logo TAX-FREE ADDITIONAL INFORMATION
Appears Here TRUST August 1, 1996
- ------------------------------------------------------------------------------
USAA STATE TAX-FREE TRUST
FLORIDA FUNDS
USAA STATE TAX-FREE TRUST (the Trust) is a registered investment company
offering shares of four no-load mutual funds, two of which are described in
this Statement of Additional Information (SAI): the Florida Tax-Free Income
Fund and Florida Tax-Free Money Market Fund (collectively, the Funds or the
Florida Funds). Each Fund is classified as a diversified investment company
and has 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.
You may obtain a free copy of a Prospectus for the Florida Funds dated August
1, 1996, by writing to USAA State Tax-Free Trust, 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
This SAI is not a Prospectus and contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide you
with additional information regarding the activities and operations of the
Trust and the Funds, and should be read in conjunction with the Prospectus.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
5 Investment Restrictions
7 Special Risk Considerations
10 Portfolio Transactions
11 Further Description of Shares
11 Certain Federal Income Tax Considerations
13 Florida Taxation
14 Trustees and Officers of the Trust
17 The Trust's Manager
18 General Information
18 Calculation of Performance Data
20 Appendix A - Tax-Exempt Securities and Their Ratings
23 Appendix B - Comparison of Portfolio Performance
26 Appendix C - Taxable Equivalent Yield Tables
27 Appendix D - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts basis through
USAA Investment Management Company (IMCO or the Manager). The offering price
for shares of each Fund is equal to the current net asset value (NAV) per
share. The NAV per share of each Fund is calculated by adding the value of
all its portfolio securities and other assets, deducting its liabilities, and
dividing by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively.
The investments of the Florida Tax-Free Income Fund are valued each
business day by a pricing service (the Service) approved by the Board of
Trustees. The Service uses the mean between quoted bid and asked prices or
the last sale price to price securities when, in the Service's judgment, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The
Service generally prices these securities based on methods which include
consideration of yields or prices of tax-exempt securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities purchased with
maturities of 60 days or less are stated at amortized cost which approximates
market value. Repurchase agreements are valued at cost. Securities which
cannot be valued by the Service, and all other assets, are valued in good
faith at fair value using methods determined by the Manager under the general
supervision of the Board of Trustees.
The value of the Florida Tax-Free Money Market Fund's securities is
stated at amortized cost which approximates market value. This involves
valuing a security at its cost and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates. While this method provides certainty in valuation,
it may result in periods during which the value of an instrument, as
determined by amortized cost, is higher or lower than the price the Fund would
receive upon the sale of the instrument.
The valuation of the Florida Tax-Free Money Market Fund's portfolio
instruments based upon their amortized cost is subject to the Fund's adherence
to certain procedures and conditions. Consistent with regulatory
requirements, the Manager will only purchase securities with remaining
maturities of 397 days or less and will maintain a dollar-weighted average
portfolio maturity of no more than 90 days. The Manager will invest only in
securities that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of applicable rules and
regulations of the Securities and Exchange Commission (SEC).
The Board of Trustees has established procedures designed to stabilize
the Florida Tax-Free Money Market Fund's price per share, as computed for
the purpose of sales and redemptions, at $1.00. There can be no assurance,
however, that the Fund will at all times be able to maintain a constant
$1.00 NAV per share. Such procedures include review of the Fund's holdings
at such intervals as is deemed appropriate to determine whether the Fund's
NAV calculated by using available market quotations deviates from $1.00 per
share and, if so, whether such deviation may result in material dilution
or is otherwise unfair to existing shareholders. In the event that it is
determined that such a deviation exists, the Board of Trustees will take such
corrective action as it regards necessary and appropriate. Such action may
include selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity, withholding
dividends, or establishing a NAV per share by using available market
quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption may be more
or less than the cost at purchase, depending on the value of the securities
held in each Fund's portfolio. Requests for redemption which are subject to
any special conditions, or which specify an effective date other than as
provided herein, cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Trustees may cause the redemption of an account with a total
value of less than $500 provided (1) the value of the account has been
reduced, for reasons other than market action, below the minimum initial
investment in such Fund at the time of the establishment of the account, (2)
the account has remained below the minimum level for six months, and (3) 60
days' prior written notice of the proposed redemption has been sent to the
shareholder. Shares will be redeemed at the NAV on the date fixed for
redemption by the Board of Trustees. Prompt payment will be made by mail to
the last known address of the shareholder.
The Trust reserves the right to suspend the right of redemption or
postpone the date of payment (1) for any periods during which the NYSE is
closed, (2) when trading in the markets the Trust normally utilizes is
restricted, or an emergency exists as determined by the SEC so that disposal
of the Trust's investments or determination of its NAV is not reasonably
practicable, or (3) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.
For the mutual protection of the investor and the Funds, a guarantee of
signature may be required by the Trust. If required, each signature on the
account registration must be guaranteed. Signature guarantees are acceptable
from FDIC member banks, brokers, dealers, municipal securities dealers,
municipal securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. A
signature guarantee for active duty military personnel stationed abroad may be
provided by an officer of the United States Embassy or Consulate, a staff
officer of the Judge Advocate General, or an individual's commanding officer.
Redemption by Check
Shareholders in the Florida Tax-Free Money Market Fund may request that checks
be issued for their account. A one-time $5 checkwriting fee is charged to
each account by USAA Shareholder Account Services (Transfer Agent) for the use
of the privilege. Checks must be written in the amount of at least $250.
Checks issued to shareholders of the Fund will be sent only to the person
in whose name the account is registered and only to the address of record.
The checks must be manually signed by the registered owner(s) exactly as the
account is registered. For joint accounts the signature of either or both
joint owners will be required on the check, according to the election made on
the signature card. Dividends will continue to be earned by the shareholder
until the shares are redeemed by the presentation of a check.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares in the investor's account will be
redeemed to cover the amount of the check. If an investor's account is not
adequate to cover the amount of a check, the check will be returned unpaid.
Because the value of each account changes as dividends are accrued on a daily
basis, checks may not be used to close an account.
After clearance, checks paid during the month will be returned to the
shareholder by separate mail. The checkwriting privilege will be subject to
the customary rules and regulations of State Street Bank and Trust Company
(State Street Bank or the Custodian) governing checking accounts. Other than
the initial one-time fee, there is no charge to the shareholder for the use of
the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against a
shareholder's account for any redemption check not honored by a clearing or
paying agent. Currently, this fee is $15 and is subject to change at any
time. Some examples of such dishonor are improper endorsement, checks written
for an amount less than the minimum check amount, and insufficient or
uncollectible funds.
The Trust, the Transfer Agent and State Street Bank each reserve the right
to change or suspend the checkwriting privilege upon 30 days' written notice
to participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Trust to shareholders
of the Funds. At the time you sign up for any of the following investment
plans that utilize the electronic funds transfer service, you will choose the
day of the month (the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or holiday, the electronic
transfer will take place on the last business day before the effective date.
You may terminate your participation in a plan at any time. Please call the
Manager for details and necessary forms or applications.
Automatic Purchase of Shares
InvesTronic (registered trademark) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The investor
selects the day(s) each month that money is transferred from a checking or
savings account. By completing an application, which may be obtained from the
Manager, you invest a specific amount each month ($50 minimum) in any of your
accounts.
Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
Buy/Sell Service - the intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
Participation in these systematic purchase plans will permit a
shareholder to engage in dollar-cost averaging. For additional information
concerning the benefits of dollar-cost averaging, see APPENDIX D.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in different Funds
cannot be aggregated for this purpose) owns shares having a NAV of $5,000 or
more, the shareholder may request that enough shares to produce a fixed amount
of money be liquidated from the account monthly or quarterly. The amount of
each withdrawal must be at least $50. Using the electronic funds transfer
service, shareholders may choose to have withdrawals electronically deposited
at their bank or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing a Systematic Withdrawal Plan
application, which may be requested from the Manager. The shareholder may
terminate participation in the plan at any time. There is no charge to the
shareholder for withdrawals under the Systematic Withdrawal Plan. The Trust
will not bear any expenses in administering the plan beyond the regular
transfer agent and custodian costs of issuing and redeeming shares. Any
additional expenses of administering the plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional shares on the
date selected by the shareholder at the time the plan is established.
Withdrawal payments made under this plan may exceed dividends and
distributions and, to this extent, will involve the use of principal and could
reduce the dollar value of a shareholder's investment and eventually exhaust
the account. Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can fluctuate,
shareholders should not expect withdrawals to be offset by rising income or
share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on the shareholder's income tax return. Therefore, a shareholder
should keep an accurate record of any gain or loss on each withdrawal.
INVESTMENT POLICIES
The section captioned INVESTMENT OBJECTIVES AND POLICIES in the Prospectus
describes the fundamental investment objectives and the investment policies
applicable to each Fund and the following is provided as additional
information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of each
investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's
portfolio. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.
With respect to obligations held by the Florida Tax-Free Income Fund, if
it is probable that the issuer of an instrument will take advantage of a
maturity-shortening device, such as a call, refunding, or redemption
provision, the date on which the instrument will probably be called, refunded,
or redeemed may be considered to be its maturity date. Also, the maturities
of securities subject to sinking fund arrangements are determined on a weighted
average life basis, which is the average time for principal to be repaid.
The weighted average life of these securities is likely to be substantially
shorter than their stated final maturity. In addition, for purposes of the
Fund's investment policies, an instrument will be treated as having a maturity
earlier than its stated maturity date if the instrument has technical features
such as puts or demand features which, in the judgment of the Manager, will
result in the instrument being valued in the market as though it has the
earlier maturity.
The Florida Tax-Free Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under the Investment
Company Act of 1940, as amended (1940 Act).
Repurchase Agreements
Each Fund may invest up to 5% of its net assets in repurchase agreements. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the seller (a commercial
bank or recognized securities dealer) at an agreed upon price on an agreed
upon date, usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value of
the underlying security. In these transactions, the securities purchased by a
Fund will have a total value equal to or in excess of the amount of the
repurchase obligation and will be held by the Funds' custodian until
repurchased. If the seller defaults and the value of the underlying security
declines, a Fund may incur a loss and may incur expenses in selling the
collateral. If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. Any investments in
repurchase agreements will give rise to income which will not qualify as
tax-exempt income when distributed by a Fund.
Other Policies
Each Fund may lend its securities and engage in short sells against the box.
The Florida Tax-Free Income Fund may also invest in options, financial futures
contracts and options on financial futures contracts. However, the Funds do
not intend to engage in any of these practices during the coming year without
first supplying further information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust for and
are applicable to each Fund. These restrictions may not be changed for any
given Fund without approval by the lesser of (1) 67% or more of the voting
securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy
or (2) more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without affecting those of
the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase the securities of
any issuer (except Government Securities, as such term is defined in
the 1940 Act) 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; for purposes of this limitation,
identification of the "issuer" will be based on a determination of
the source of assets and revenues committed to meeting interest and
principal payments of each security; for purposes of this limitation
the State of Florida or other jurisdictions and each of its separate
political subdivisions, agencies, authorities and instrumentalities
shall be treated as a separate issuer;
(2) 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), nor will either Fund purchase securities when its
borrowings exceed 5% of its total assets;
(3) Purchase any securities which would cause 25% or more of the value
of that Fund's total assets at the time of such purchase to be
invested in securities the interest upon which is derived from
revenues or projects with similar characteristics, such as toll road
revenue bonds, housing revenue bonds, electric power project revenue
bonds, or in industrial revenue bonds which are based, directly or
indirectly, on the credit of private entities of any one industry;
provided that the foregoing limitation does not apply with respect
to investments in United States Treasury Bills, other obligations
issued or guaranteed by the United States Government, its agencies
and instrumentalities, and, in the case of the Florida Tax-Free
Money Market Fund, certificates of deposit and banker's acceptances
of domestic banks;
(4) Issue senior securities, except as permitted under the 1940 Act;
(5) Underwrite securities of other issuers, except to the extent that it
may be deemed to act as a statutory underwriter in the distribution
of any restricted securities or not readily marketable securities;
(6) Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent investments in securities secured by real estate or
interests therein);
(7) Lend any securities or make any loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, except that
this limitation does not apply to purchases of debt securities or to
repurchase agreements; or
(8) Purchase or sell commodities or commodities contracts except that
the Florida Tax-Free Income Fund may invest in financial futures
contracts, options thereon and similar instruments.
Additional Restrictions
The following restrictions are not considered to be fundamental policies of
the Funds. These additional restrictions may be changed by the Board of
Trustees of the Trust without notice to or approval by the shareholders.
Neither Fund will:
(1) Pledge, mortgage or hypothecate its assets to any extent greater
than 33 1/3% of the value of its total assets;
(2) Purchase or retain securities of any issuer if any officer or
Trustee of the Trust or its Manager owns individually more than
one-half of one percent (1/2%) of the securities of that issuer,
and collectively the officers and Trustees of the Trust and Manager
together own more than 5% of the securities of that issuer;
(3) The Florida Tax-Free Income Fund may not invest more than 15% of the
value of its net assets and the Florida Tax-Free Money Market Fund
may not invest more than 10% of the value of its net assets in
illiquid securities (including repurchase agreements maturing in
more than seven days);
(4) Purchase securities on margin or sell securities short except that a
Fund may obtain short-term credits necessary for the clearance of
securities transactions and make short sales against the box; for
purposes of the restriction the deposit or repayment of initial or
variation margin in connection with financial futures contracts or
related options will not be deemed to be a purchase of securities on
margin by a Fund;
(5) Purchase securities of other investment companies except to the
extent permitted by applicable law;
(6) Purchase or sell puts, calls, straddles or spreads or any
combination thereof, except to the extent permitted by applicable
law; or
(7) Purchase interests in oil, gas, or other mineral exploration or
development programs, except that it may purchase securities of
issuers whose principal business activities fall within such areas.
SPECIAL RISK CONSIDERATIONS
The information set forth below is derived from official statements prepared
in connection with the issuance of bonds of the State of Florida (the "State")
and other sources that are generally available to investors. The information
is provided as general information intended to give a brief and historical
description and is not intended to indicate future or continuing trends in the
financial or other positions of the State or of local governmental units
located in the State. The Trust has not independently verified this
information.
The Florida Economy. Throughout the 1980s, the State's unemployment rate
has, generally, tracked below that of the nation. In recent years, however,
as the State's economic growth has slowed from its previous highs, the State's
unemployment rate has tracked above the national average. The State's
unemployment rate for 1995 was 5.4%, while the national average was 5.6%.
The State's unemployment rate for 1996 is projected to be 5.9%, while the
national average is projected to be 5.8%.
Personal income in the State has been growing strongly the last several
years and has generally outperformed both the nation as a whole and the
Southeast in particular. The reasons for this are twofold: first, as
mentioned above, the State's population has expanded at a very strong pace;
and second, the State's economy since the early seventies has diversified in
such a way as to provide a broader economic base. From 1985 through 1994, the
State's per capita income rose an average of 5.1% per year, while the national
per capita income increased an average of 5.0%. For 1994, the State's per
capita personal income rose an average of 3.9% while the national per capita
personal income rose 4.8%. In 1994, per capita personal income in Florida was
$21,677, while the national per capita personal income was $21,809. The
structure of the State's income differs from that of the nation and the
southeast. Because the State has a proportionately greater retirement age
population, property income (dividends, interest and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more important source of income. For example, Florida's
employment income in 1994, represented 61.5% of total personal income, while
the nation's share of total personal income in the form of wages and salaries
and other labor benefits was 72.6%. Transfer payments, such as social
security, are occasionally subject to legislative change.
The State's strong population growth is one main reason why its economy
has typically performed better than the nation as a whole. In 1980, the State
was ranked seventh among the 50 states with a population of 9.7 million people.
The State has continued to grow since then and as of April 1, 1995 ranks
fourth with an estimated population of 14.1 million. Since 1985, the State's
average annual rate of population increase has been approximately 2.3% as
compared to an approximately 1.0% average annual increase for the nation as a
whole. While annual growth in the State's population is expected to decline
somewhat, it is still expected to grow approximately 200,000 per year
throughout the 1990s, however, no assurance can be given that such growth
will continue.
Tourism is one of the State's most important industries. Approximately
40.7 million people visited the State in 1995, as reported by the Florida
Department of Commerce. By the end of this fiscal year, 39.4 million domestic
and international tourists are expected to have visited this State. The State
expects 41.2 million visitors in 1996-1997. The State's tourism still appears
to be suffering from the effects of negative publicity regarding crime against
tourists in the State. Also, factors such as "product maturity" of the
State's vacation package, higher prices, and more aggressive marketing by
competing vacation destinations, could be contributory causes of the tourism
slowdown. Notably, in fiscal year 1993-94, the State experienced a 4.0% drop
in the number of tourists.
Until recently, the State has had a dynamic construction industry, with
single and multi-family housing starts accounting for approximately 8.5% of
total U.S. housing starts in 1995, while the State's population was only 5.4%
of the nation's total population. The reason for such a dynamic construction
industry was the rapid growth of the State's population. Since 1985, total
housing starts have averaged approximately 148,000 per year. Total housing
starts were 115,500 in 1995, however, it is expected to drop to 108,900 in
1996.
The Florida economy is expected to decelerate along with the nation. An
important element of Florida's economic outlook is the construction sector.
Multifamily starts have been slow to recover in the State after the increase
in interest rates in 1994 by the Federal Reserve. Further, the State
experienced one of its worst hurricane seasons in 1995 which resulted in
significant property damage.
Florida Revenues and Expenditures. Financial operations of the State
covering all receipts and expenditures are maintained through the use of four
funds--General Revenue Fund, Trust Funds, Working Capital Fund and the Budget
Stabilization Fund. In fiscal year 1994-1995, the State derived approximately
66% of its total direct revenues to these funds from State taxes and fees.
Federal funds and other special revenues accounted for the remaining revenues.
Major sources of tax revenues to the General Revenue Fund are the sales and
use tax, corporate income tax, intangible personal property tax, and beverage
tax, which amounted to 67%, 7%, 4%, and 4%, respectively, of total General
Revenue Fund receipts. State expenditures are categorized for budget and
appropriation purposes by type of fund and spending unit, which are further
subdivided by line item. In fiscal year 1994-1995, appropriations from the
General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 49%, 32% and 11%, respectively, of total General
Revenues.
The estimated General Revenue plus Working Capital and Budget
Stabilization funds available to the State for fiscal year 1995-1996 total
$15,311.3 million, a 3.3% increase over 1994-95. Compared to effective
appropriations from General Revenues plus Working Capital and Budget
Stabilization funds for fiscal year 1995-1996 of $14,808.2 million, this
results in unencumbered reserves estimated at $503.1 million at the end of
fiscal year 1995-1996. Estimated fiscal year 1996-1997 General Revenue plus
Working Capital and Budget Stabilization funds available total $15,997.6
million, a 4.5% increase over fiscal year 1995-1996.
The Sales and Use tax is the greatest single source of tax receipts in
the State. For the State fiscal year ended June 30, 1995, receipts from
this source were $10,672 million, an increase of 6.0% from fiscal year
1993-1994. The second largest source of State tax receipts is the Motor Fuel
Tax. Preliminary data show collections from this source in State fiscal year
ending June 30, 1994, were $1,733.4 million. However, these revenues are
almost entirely dedicated trust funds for specific purposes and are not
included in the State General Revenue Fund. Alcoholic beverage tax revenues
totalled $437.3 million for the State fiscal year ending June 30, 1995, down
.5% from the previous year. The receipts of corporate income tax for the
fiscal year ended June 30, 1995 were $1,063.5 million, an increase of 1.5%
from the previous fiscal year. Gross Receipt tax collections for fiscal year
1994-1995 totalled $508.4 million, an increase of 10.4% over the previous
fiscal year. Documentary stamp tax collections totalled $695.3 million during
fiscal year 1994-1995, decreasing 11.4% from the previous fiscal year. The
intangible personal property tax is a tax on stocks, bonds, notes,
governmental leaseholds, certain limited partnership interests, mortgages and
other obligations secured by liens on Florida realty, and other intangible
personal property. Total collections from intangible personal property taxes
were $818 million during fiscal year ending June 30, 1995, down 2.1% from the
previous fiscal year. Severance taxes totalled $61.2 million during fiscal
year 1994-1995, up 1.1% from the previous fiscal year. In November, 1986, the
voters of the State approved a constitutional amendment to allow the State to
operate a lottery. Fiscal year 1994-1995 produced ticket sales of $2.19
billion of which education received approximately $853.2 million.
The State Constitution does not permit a state or local personal income
tax. An amendment to the State Constitution by the electors of the State
is required to impose a personal income tax in the State.
Since January 1, 1994, property valuations for homestead property have
been subject to a growth cap. Growth in the just (market) value of property
qualifying for the homestead exemption is limited to 3% or the change in the
Consumer Price Index, whichever is less. If the property changes ownership
or homestead status, it is to be re-valued at full just value on the next tax
roll. Although the impact of the growth cap cannot be determined, it may
have the effect of causing local government units in the State to rely more
on non-ad valorem revenues to meet operating and other requirements normally
funded with ad valorem tax revenues.
An amendment to the State Constitution was approved by statewide ballot
in the November 8, 1994, general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are
required to be transferred to the budget stabilization fund until the fund
reaches the maximum balance specified in Section 19(g) of Article III of the
State Constitution, and thereafter is required to be refunded to taxpayers as
provided by general law. The limitation on State revenues imposed by the
amendment may be increased by the Legislature, by a two-thirds vote of each
house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (1) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (2) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception
of State matching funds used to fund elective expansions made after July 1,
1994; (3) proceeds from the State lottery returned as prizes; (4) receipts
of the Florida Hurricane Catastrophe Fund; (5) balances carried forward from
prior fiscal years; (6) taxes, licenses, fees and charges for services imposed
by local, regional, or school district governing bodies; or (7) revenue from
taxes, licenses, fees and charges for services required to be imposed by any
amendment or revision to the State Constitution after July 1, 1994. The
amendment took effect on January 1, 1995 and was first applicable to State
fiscal year 1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation itself
will be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on State finances.
To the extent local governments traditionally receive revenues from the State
which are subject to, and limited by, the amendment, the future distribution
of such State revenues may be adversely affected by the amendment.
The Florida Supreme Court recently determined in Kuhnlein v. Florida
Department of Revenue, 19 Fla.I., Weekly 467, 1994 WL 525900 (1994) that the
$295 vehicle impact fee imposed by the State on certificates of title issued
for vehicles previously titled outside the State violated the U.S.
Constitution. In making this determination, the Court approved the trial
court's order that the State refund the taxes collected. The State's refund
exposure may be in excess of $188 million. The Fund cannot predict the impact
of this ruling on State finances. Further, Hurricane Opal passed through the
northern part of the State on October 4, 1995. Damage resulting from this
hurricane occurred in 18 counties. Costs excluding damages from beach
erosion, are estimated at $185 to $195 million and include damages to public
facilities/infrastructure and costs to state and local governments for
emergency services. Cost estimates for beach erosion is estimated to exceed
$100 million.
According to the Office of the Comptroller, Department of Banking and
Finance of the State, as of February 21, 1996, the State maintains a high bond
rating from Moody's Investors Service (Aa), Standard & Poor's Ratings Group
(AA), and Fitch Investors Service, Inc. (AA) on all of its general obligation
bonds. Such ratings may be revised and downgraded at any time by such rating
agencies. Outstanding general obligation bonds at June 30, 1995 totalled
almost $6.8 billion and were issued to finance capital outlay for educational
projects of both local school districts and state universities, environmental
protection and highway construction. The State has issued over $896 million
of general obligation bonds since July 1, 1995.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated June 25, 1993, and
subject to the general control of the Trust's Board of Trustees, places all
orders for the purchase and sale of Fund securities. Purchases of Fund
securities are made either directly from the issuer or from dealers who deal
in tax-exempt securities. The Manager may sell Fund securities prior to
maturity if circumstances warrant and if it believes such disposition is
advisable. In connection with portfolio transactions for the Trust, the
Manager seeks to obtain the best available net price and most favorable
execution for its orders. The Manager has no agreement or commitment to place
transactions with any broker-dealer and no regular formula is used to allocate
orders to any broker-dealer. However, the Manager may place security orders
with brokers or dealers who furnish research or other services to the Manager
as long as there is no sacrifice in obtaining the best overall terms
available. Payment for such services would be generated only through purchase
of new issue fixed income securities.
Such research and other services may include, for example: advice
concerning the value of securities, the advisability of investing in,
purchasing, or selling securities, and the availability of securities or the
purchasers or sellers of securities; analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to effecting
securities transactions, such as clearance and settlement. The Manager
continuously reviews the performance of the broker-dealers with whom it places
orders for transactions. The receipt of research from broker-dealers that
execute transactions on behalf of the Trust may be useful to the Manager in
rendering investment management services to other clients (including
affiliates of the Manager), and conversely, such research provided by
broker-dealers who have executed transaction orders on behalf of other clients
may be useful to the Manager in carrying out its obligations to the Trust.
While such research is available to and may be used by the Manager in
providing investment advice to all its clients (including affiliates of the
Manager), not all of such research may be used by the Manager for the benefit
of the Trust. Such research and services will be in addition to and not in
lieu of research and services provided by the Manager, and the expenses of the
Manager will not necessarily be reduced by the receipt of such supplemental
research. See THE TRUST'S MANAGER.
On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Trust, as well as the Manager's other
clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Trust with those to be sold or purchased for other customers in order to
obtain best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations
to all such customers, including the Trust. In some instances, this procedure
may impact the price and size of the position obtainable for the Trust.
The tax-exempt security market is typically a "dealer" market in which
investment dealers buy and sell bonds for their own accounts, rather than for
customers, and although the price may reflect a dealer's mark-up or mark-down,
the Trust pays no brokerage commissions as such. In addition, some securities
may be purchased directly from issuers.
Portfolio Turnover Rate
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year.
The rate of portfolio turnover will not be a limiting factor when the
Manager deems changes in the Florida Tax-Free Income Fund's portfolio
appropriate in view of its investment objective. For example, securities may
be sold in anticipation of a rise in interest rates (market decline) or
purchased in anticipation of a decline in interest rates (market rise) and
later sold. In addition, a security may be sold and another security of
comparable quality may be purchased at approximately the same time in order to
take advantage of what the Fund believes to be a temporary disparity in the
normal yield relationship between the two securities. These yield disparities
may occur for reasons not directly related to the investment quality of
particular issues or the general movement of interest rates, such as changes
in the overall demand for or supply of various types of tax-exempt securities.
For the last two fiscal years the Florida Tax-Free Income Fund's portfolio
turnover rates were as follows:
1995. . . . . 71.76% 1996. . . . . 88.20%
Portfolio turnover rates have been calculated excluding short-term variable
rate securities, which are those with put date intervals of less than one year.
FURTHER DESCRIPTION OF SHARES
The Trust is authorized to issue shares of beneficial interest in separate
portfolios. Four such portfolios have been established, two of which are
described in this SAI. Under the Master Trust Agreement, the Board of
Trustees is authorized to create new portfolios in addition to those already
existing without shareholder approval.
The assets of each Fund and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated
to such Fund. They constitute the underlying assets of each Fund, are required
to be segregated on the books of account, and are to be charged with the
expenses of such Fund. Any general expenses of the Trust not readily
identifiable as belonging to a particular Fund are allocated on the basis of
the Funds' relative net assets during the fiscal year or in such other manner
as the Board determines to be fair and equitable. Each share of each Fund
represents an equal proportionate interest in that Fund with every other share
and is entitled to dividends and distributions out of the net income and
capital gains belonging to that Fund when declared by the Board.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meeting unless otherwise required by the 1940 Act. Under certain
circumstances, however, shareholders may apply to the Trustees for shareholder
information in order to obtain signatures to request a shareholder meeting.
Moreover, pursuant to the Master Trust Agreement, any Trustee may be removed
by the vote of two-thirds of the outstanding Trust shares and holders of 10%
or more of the outstanding shares of the Trust can require Trustees to call a
meeting of shareholders for the purpose of voting on the removal of one or more
Trustees. On any matter submitted to the shareholders, the holder of each Fund
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset values of the Funds'
shares. However, on matters affecting an individual Fund, a separate vote of
the shareholders of that Fund is required. Shareholders of a Fund are not
entitled to vote on any matter which does not affect that Fund but which
requires a separate vote of another Fund. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect 100% of the Trust's Board of Trustees,
and the holders of less than 50% of the shares voting for the election of
Trustees will not be able to elect any person as a Trustee.
Shareholders of a particular Fund might have the power to elect all of
the Trustees of the Trust because that Fund has a majority of the total
outstanding shares of the Trust. When issued, each Fund's shares are fully
paid and nonassessable, have no pre-emptive or subscription rights, and are
fully transferable. There are no conversion rights.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Taxation of the Funds
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
Accordingly, each Fund will not be liable for federal income taxes on its
taxable net investment income and net capital gains (capital gains in excess
of capital losses) that are distributed to shareholders, provided that each
Fund distributes at least 90% of its net investment income and net short-term
capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies (the 90% test); (2) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of stock or
securities held less than three months (the 30% test), and (3) satisfy certain
diversification requirements at the close of each quarter of the Fund's
taxable year. Furthermore, to pay tax-exempt interest income dividends, at
least 50% of the value of each Fund's total assets at the close of each
quarter of its taxable year must consist of obligations the interest of which
is exempt from federal income tax. Each Fund intends to satisfy this
requirement.
The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve month
period ending on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid imposition
of this excise tax.
For federal income tax purposes, debt securities purchased by the Fund
may be treated as having original issue discount. Original issue discount
represents interest income for federal income tax purposes and can generally
be defined as the excess of the stated redemption price at maturity of a debt
obligation over the issue price. Original issue discount is treated for
federal income tax purposes as earned by the Funds, whether or not any income
is actually received, and therefore is subject to the distribution requirements
of the Code. However, original issue discount with respect to tax-exempt
obligations generally will be excluded from the Funds' taxable income,
although such discount will be included in gross income for purposes of the
90% test and the 30% test described previously. Original issue discount with
respect to tax-exempt securities is accrued and added to the adjusted tax
basis of such securities for purposes of determining gain or loss upon sale or
at maturity. Generally, the amount of original issue discount is determined
on the basis of a constant yield to maturity which takes into account the
compounding of accrued interest. An investment in a stripped bond or stripped
coupon will result in original issue discount.
Debt securities may be purchased by the Funds at a market discount.
Market discount occurs when a security is purchased at a price less than the
original issue price adjusted for accrued original issue discount, if any.
The Funds intend to defer recognition of accrued market discount until
maturity or other disposition of the bond. For securities purchased at a
market discount, the gain realized on disposition will be treated as taxable
ordinary income to the extent it does not exceed accrued market discount on
the bond.
The Funds may also purchase debt securities at a premium, i.e., at a
purchase price in excess of face amount. With respect to tax-exempt
securities, the premium must be amortized to the maturity date but no
deduction is allowed for the premium amortization. The amortized bond premium
will reduce the Funds' adjusted tax basis in the securities. For taxable
securities, the premium may be amortized if the Funds so elect. The amortized
premium on taxable securities is first offset against interest received on the
securities and then allowed as a deduction, and, for securities issued after
September 27, 1985, must be amortized under an economic accrual method.
Taxation of the Shareholders
Taxable distributions are generally included in a shareholder's gross income
for the taxable year in which they are received. Dividends declared in
October, November, or December and made payable to shareholders of record in
such a month will be deemed to have been received on December 31, if a Fund
pays the dividend during the following January. It is expected that none of
the Funds' distributions will qualify for the corporate dividends-received
deduction.
To the extent that a Fund's dividends distributed to shareholders are
derived from interest income exempt from federal income tax and are
designated as "exempt-interest dividends" by a Fund, they will be excludable
from a shareholder's gross income for federal income tax purposes.
Shareholders who are recipients of Social Security benefits should be aware
that exempt-interest dividends received from a Fund are includible in their
"modified adjusted gross income" for purposes of determining the amount of
such Social Security benefits, if any, that are required to be included in
their gross income.
All distributions of investment income during the year will have the
same percentage designated as tax-exempt. This method is called the "average
annual method." Since the Funds invest primarily in tax-exempt securities,
the percentage will be substantially the same as the amount actually earned
during any particular distribution period.
A shareholder of the Florida Tax-Free Income Fund should be aware that a
redemption of shares (including any exchange into another USAA Fund) is a
taxable event and, accordingly, a capital gain or loss may be recognized. If
a shareholder receives an exempt-interest dividend with respect to any share
and such share has been held for six months or less, any loss on the redemption
or exchange will be disallowed to the extent of such exempt-interest dividend.
Similarly, if a shareholder of the Fund receives a distribution taxable as
long-term capital gain with respect to shares of the Fund and redeems or
exchanges shares before he has held them for more than six months, any loss
on the redemption or exchange (not otherwise disallowed as attributable to an
exempt-interest dividend) will be treated as long-term capital loss.
The Funds may invest in private activity bonds. Interest on certain
private activity bonds issued after August 7, 1986, is an item of tax
preference for purposes of the Federal Alternative Minimum Tax (AMT), although
the interest continues to be excludable from gross income for other purposes.
AMT is a supplemental tax designed to ensure that taxpayers pay at least a
minimum amount of tax on their income, even if they make substantial use of
certain tax deductions and exclusions (referred to as tax preference items).
Interest from private activity bonds is one of the tax preference items that
is added to income from other sources for the purposes of determining whether
a taxpayer is subject to the AMT and the amount of any tax to be paid. For
corporate investors, alternative minimum taxable income is increased by 75% of
the amount by which adjusted current earnings (ACE) exceeds alternative
minimum taxable income before the ACE adjustment. For corporate taxpayers,
all tax-exempt interest is considered in calculating the AMT as part of the
ACE. Prospective investors should consult their own tax advisers with respect
to the possible application of the AMT to their tax situation.
Opinions relating to the validity of tax-exempt securities and the
exemption of interest thereon from federal income tax are rendered by
recognized bond counsel to the issuers. Neither the Manager's nor the Funds'
counsel makes any review of the basis of such opinions.
FLORIDA TAXATION
Taxation of the Funds
If the Funds have tax nexus with Florida, such as through the location within
Florida of the Trust or Funds' activities or those of their advisors, then the
Florida Funds will be subject to Florida corporate income tax. In addition,
if the Funds' intangible assets have a taxable situs in Florida, then the
Funds will be subject to Florida's intangible personal property tax. The
Funds intend to operate so as not to be subject to Florida taxation.
Taxation of the Shareholders
Florida does not impose an income tax on individuals. Thus, dividends and
distributions paid by the Funds to individuals who are residents of Florida
are not taxable by Florida. Florida imposes an income tax on corporations and
similar entities at a rate of 5.5%. Dividends and distributions of investment
income and capital gains by the Funds will be subject to the Florida corporate
income tax. Accordingly, investors in the Funds, including, in particular,
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. Shares in the Funds constitute intangible personal property for
purposes of the Florida intangible personal property tax. Thus, unless an
exemption applies, shares in the Funds will be subject to the Florida
intangible personal property tax. Florida provides an exemption for shares in
an investment fund if the Fund's portfolio of assets consists solely of assets
exempt from the Florida intangible personal property tax. 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.
The Funds received a ruling from the Florida Department of Revenue that
if, on the last business day of any calendar year, the Funds' assets 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. If shares of the
Funds are subject to the 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 NAV of a share of the Funds that is attributable to
obligations of the United States Government will be exempt from taxation.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust consists of seven Trustees. Set forth
below are the Trustees and officers of the Trust, and their respective offices
and principal occupations during the last five years. Unless otherwise
indicated, the business address of each is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
M. Staser Holcomb 1, 2
Trustee and Chairman of the Board of Trustees
Age: 64
President, Chief Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/96-present); Executive Vice President, Chief Information
Officer, United Services Automobile Association (USAA) (2/94-12/95); Executive
Vice President, Chief Financial Officer, USAA and President, Director and Vice
Chairman of the Board of Directors, USAA Capital Corporation (9/91-1/94). Mr.
Holcomb also will serve as a Trustee and Chairman of the Board of Trustees of
USAA Investment Trust and as a Director and Chairman of the Boards of
Directors of USAA Investment Management Company (IMCO), USAA Mutual Fund,
Inc., USAA Tax Exempt Fund, Inc., USAA Shareholder Account Services, USAA
Federal Savings Bank and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Trustee, President and Vice Chairman of the Board of Trustees
Age: 54
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth currently
serves as President, Trustee and Vice Chairman of the Board of Trustees of
USAA Investment Trust, as President, Director and Vice Chairman of the Boards
of Directors of USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance Company and
as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 61
Senior Vice President, Investments, IMCO (10/85-present); Director, BHC
Financial, Inc. and BHC Securities, Inc. (1/87-present). Mr. Saunders
currently serves as a Trustee and Vice President of USAA Investment Trust, as
a Director of IMCO, Director and Vice President of USAA Mutual Fund, Inc. and
USAA Tax Exempt Fund, Inc., as Senior Vice President of USAA Shareholder
Account Services, and as Vice President of USAA Life Investment Trust.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Trustee
Age: 78
Retired. Mr. Brown currently serves as a Trustee of USAA Investment Trust and
as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). Mr. Freeman currently serves as a Trustee of USAA
Investment Trust and as a Director of USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc. >
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 53
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker
currently serves as a Trustee of USAA Investment Trust and as a Director of
USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer, (8/91-12/95). Mrs. Dreeben currently serves as a Trustee of USAA
Investment Trust and as a Director of USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 48
Vice President, Corporate Counsel, USAA (1982-present). Mr. Wagner has held
various positions in the legal department of USAA since 1970 and currently
serves as Vice President, Secretary and Counsel, IMCO and USAA Shareholder
Account Services; Secretary, USAA Investment Trust, USAA Mutual Fund, Inc. and
USAA Tax Exempt Fund, Inc., and as Vice President, Corporate Counsel, for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 46
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); Vice
President, Compliance, IMCO (12/91-5/94); Vice President, Compliance, Fund
Management Co. (10/89-11/91); and Vice President, Compliance, AIM
Distributors, Inc. (4/82-11/91). Mr. Ciccone currently serves as Assistant
Secretary of USAA Investment Trust, USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 51
Vice President, Controller, IMCO (10/92-present); Vice President, Corporate
Financial Analysis, USAA (9/92-10/92); Assistant Vice President, Financial
Plans and Support, USAA (8/91-9/92). Mrs. Kirk currently serves as Treasurer
of USAA Investment Trust, USAA Mutual Fund, Inc., and USAA Tax Exempt Fund,
Inc. and as Vice President, Controller of USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 37
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); Senior Manager, KPMG Peat Marwick
LLP (7/88-12/94). Mr. Pantzar currently serves as Assistant Treasurer of USAA
Mutual Fund, Inc., USAA Investment Trust, and USAA Tax Exempt Fund, Inc.
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1 Indicates those Trustees and officers who are employees of the
Manager or affiliated companies and are considered "interested
persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Trustees and while the Board is
not in session, the Executive Committee of the Board of Trustees has all the
powers and may exercise all the duties of the Board of Trustees in the
management of the business of the Trust which may be delegated to it by the
Board. The Pricing and Investment Committee of the Board of Trustees acts
upon various investment-related issues and other matters which have been
delegated to it by the Board. The Audit Committee of the Board of Trustees
reviews the financial statements and the auditor's reports and undertakes
certain studies and analyses as directed by the Board. The Corporate
Governance Committee of the Board of Trustees maintains oversight of the
organization, performance, and effectiveness of the Board and independent
Trustees.
In addition to the previously listed Trustees and/or officers of the Trust
who also serve as Directors and/or officers of the Manager, the following
individuals are Directors and/or executive officers of the Manager: Mark H.
Wright, President, Chief Executive Officer, Director and Vice Chairman, USAA
Federal Savings Bank; Josue Robles, Jr., Senior Vice President, Chief Financial
Officer/Controller, USAA; Bradford W. Rich, Senior Vice President, General
Counsel and Secretary, USAA; Harry W. Miller, Senior Vice President,
Investments (Equity); and John J. Dallahan, Senior Vice President,
Investment Services. There are no family relationships among the Trustees,
officers and managerial level employees of the Trust or its Manager.
The following table sets forth information describing the compensation
of the current Trustees of the Trust for their services as Trustees for the
fiscal year ended March 31, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Trustee from the Trust Family of Funds (c)
- ------- -------------- -------------------
C. Dale Briscoe* $3,982 $17,100
George E. Brown (a) 5,357 23,100
Barbara B. Dreeben 5,357 23,100
Howard L. Freeman, Jr. 5,357 23,100
M. Staser Holcomb* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 5,357 23,100
- ----------------
* Effective January 1, 1996, M. Staser Holcomb replaced Hansford T.
Johnson as Director and Chairman of the Board of Trustees and C.
Dale Briscoe retired from the Board of Trustees.
(a) The USAA Family of Funds has accrued deferred compensation for Mr.
Brown in an amount (plus earnings thereon) of $21,166. The
compensation was deferred by Mr. Brown pursuant to a non-qualified
Deferred Compensation Plan, under which deferred amounts accumulate
interest quarterly based on the annualized U.S. Treasury Bill rate
in effect on the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The Deferred
Compensation Plan was terminated in 1988 and no compensation has
been deferred by any Trustee/Director of the USAA Family of Funds
since the Plan was terminated.
(b) M. Staser Holcomb, Michael J.C. Roth, and John W. Saunders, Jr. are
affiliated with the Trust's investment adviser, IMCO, and,
accordingly, receive no remuneration from the Trust or any other
Fund of the USAA Family of Funds.
(c) At March 31, 1996, the USAA Family of Funds consisted of 4
registered investment companies offering 32 individual funds. Each
Trustee presently serves as a Trustee or Director of each investment
company in the USAA Family of Funds. In addition, Michael J.C. Roth
presently serves as a Trustee of USAA Life Investment Trust, a
registered investment company advised by IMCO, consisting of five
funds offered to investors in a fixed and variable annuity contract
with USAA Life Insurance Company. Mr. Roth receives no compensation
as Trustee of USAA Life Investment Trust.
All of the above Trustees are also Trustees/Directors of the other funds
for which IMCO serves as investment adviser. No compensation is paid by any
fund to any Trustee/Director who is a director, officer, or employee of IMCO
or its affiliates. No pension or retirement benefits are accrued as part of
fund expenses. The Trust reimburses certain expenses of the Trustees who are
not affiliated with the investment adviser. As of July 17, 1996, the officers
and Trustees of the Trust and their families as a group owned beneficially or
of record less than 1% of the outstanding shares of the Trust.
The Trust knows of no one person who, as of July 17, 1996, held of record
or owned beneficially 5% or more of either Fund's shares.
THE TRUST'S MANAGER
As described in the Prospectus, USAA Investment Management Company is the
Manager and investment adviser, providing services under the Advisory
Agreement. The Manager, organized in May 1970, has served as investment
adviser and underwriter for USAA State Tax-Free Trust from its inception.
In addition to managing the Trust's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Investment Trust, USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc.
and USAA Life Investment Trust. As of the date of this SAI, total assets
under management by the Manager were approximately $30 billion, of which
approximately $17 billion were in mutual fund portfolios.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of
Trustees of the Trust, to determine the selection, amount and time to buy or
sell securities for each Fund. In addition to providing investment services,
the Manager pays for office space, facilities, business equipment and
accounting services (in addition to those provided by the Custodian) for the
Trust. The Manager compensates all personnel, officers and Trustees of the
Trust if such persons are also employees of the Manager or its affiliates.
For these services under the Advisory Agreement, the Trust has agreed to pay
the Manager a fee computed as described under MANAGEMENT OF THE TRUST in the
Prospectus. Management fees are computed and accrued daily and payable
monthly.
Except for the services and facilities provided by the Manager, the Fund
pay all other expenses incurred in their operations. Expenses for which the
Funds are responsible include taxes (if any), brokerage commissions on
portfolio transactions (if any), expenses of issuance and redemption of
shares, charges of transfer agents, custodians and dividend disbursing agents,
cost of preparing and distributing proxy material, costs of printing and
engraving stock certificates, auditing and legal expenses, certain expenses of
registering and qualifying shares for sale, fees of Trustees who are not
interested persons (not affiliated) of the Manager, costs of typesetting,
printing and mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically enumerated. The
Manager pays the cost of printing and mailing copies of the Prospectus, the
SAI, and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 25, 1997 for each
Fund and will continue in effect from year to year thereafter for each Fund as
long as it is approved at least annually by a vote of the outstanding voting
securities of such Fund (as defined by the 1940 Act) or by the Board of
Trustees (on behalf of such Fund) including a majority of the Trustees who are
not interested persons of the Manager or (otherwise than as Trustees) of the
Trust, at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated at any time by either the Trust or the
Manager on 60 days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
Under the terms of the Advisory Agreement, the Manager is required to
reimburse each Fund in the event that the total annual expenses, inclusive of
the management fee, but exclusive of the interest, taxes and brokerage fees
and extraordinary items, incurred by that Fund exceeds any applicable state
expense limitation. At the current time, the most restrictive expense
limitation is 2.5% of the first $30,000,000 of average net assets (ANA), 2% of
the next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by
a Fund. Any such waiver or reimbursement may be terminated by the Manager
at any time without prior notice to shareholders. The Manager has voluntarily
agreed to limit each Fund's expenses to .50% of its ANA until August 1, 1997,
and will reimburse the Funds for all expenses in excess of the limitations.
For the last three fiscal years, management fees were as follows:
Six-month period
ended 3/31/94 1995 1996
---------------- ---- ----
Florida Tax-Free Income Fund $38,985 $158,406 $239,649
Florida Tax-Free Money Market Fund $51,944 $187,847 $256,697
Because the Funds' expenses exceeded the Manager's voluntary expense
limitation of .50% of average net assets, in 1994 the Manager did not receive
any management fees. In addition for 1994, the Manager did not receive fees
for other operating expenses to which it would have been entitled in the
amounts of $27,018 and $12,503, respectively, from the Florida Tax-Free Income
and Florida Tax-Free Money Market Funds. For 1995, the Manager did not
receive management fees of $104,638 and $90,717, respectively, from the
Florida Tax-Free Income and the Florida Tax-Free Money Market Fund. For 1996,
the Manager did not receive management fees of $96,718 and $85,352,
respectively, from the Florida Tax-Free Income and the Florida Tax-Free Money
Market Fund.
Underwriter
The Trust has an agreement with the Manager for exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
Transfer Agent
The Transfer Agent performs transfer agent services for the Trust under a
Transfer Agency Agreement. Services include maintenance of shareholder
account records, handling of communications with shareholders, distribution of
Fund dividends and production of reports with respect to account activity for
shareholders and the Trust. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee of $26.00 per
account. The fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all transactions
and correspondence. Fees are billed on a monthly basis at the rate of
one-twelfth of the annual fee. In addition, the Funds pay all out-of-pocket
expenses of the Transfer Agent and other expenses which are incurred at the
specific direction of the Trust.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Trust's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Trust's cash and securities, handling the
receipt and delivery of securities and collecting interest on the Trust's
investments.
Counsel
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Trust in connection with the shares offered by
the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is
the Trust's independent auditor. In this capacity, the firm is responsible
for auditing the annual financial statements of the Funds and reporting
thereon.
Financial Statements
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1996, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
The Manager will deliver a copy of the Annual Report free of charge with each
SAI requested.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in the Prospectus. See VALUATION OF SECURITIES herein
for a discussion of the manner in which each Fund's price per share is
calculated.
Total Return
The Florida Tax-Free Income Fund may advertise performance in terms of average
annual total return for 1, 5 and 10 year periods, or for such lesser period as
the Fund has been in existence. Average annual total return is computed by
finding the average annual compounded rates of return over the periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods at the end of the year or period
The calculation assumes all charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by such Fund are reinvested
at the price stated in the Prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts.
The date of commencement of operations for the Florida Tax-Free Income
Fund was October 1, 1993. The Fund's average annual total returns for the
following periods ended March 31, 1996 were:
1 year . . . . 7.66% Since inception . . . . 2.26%
Yield
The Florida Tax-Free Income Fund may advertise performance in terms of a
30-day yield quotation. The 30-day yield quotation is computed by dividing
the net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:
YIELD = 2((((a - b) / (cd) + 1) ^6) - 1
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
For purposes of the yield calculation, interest income is computed
based on the yield to maturity of each debt obligation in the Fund's portfolio
and all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1996 was 5.61%.
Yield - Florida Tax-Free Money Market Fund
When the Florida Tax-Free Money Market Fund quotes a current annualized yield,
it is based on a specified recent seven-calendar-day period. It is computed
by (1) determining the net change, exclusive of capital changes, in the value
of a hypothetical preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
return, then (3) multiplying the base period by 52.14 (365divided by7). The
resulting yield figure is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased
with dividends on the original share, and dividends declared on both the
original share and any such additional shares, and (2) any fees charged to
all shareholder accounts, in proportion to the length of the base period and
the Fund's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to
the quotient, raising the sum to the 365th power, and subtracting 1 from the
result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield for 7-day Period ended 03/31/96 was 3.06%
Effective Yield for 7-day Period ended 03/31/96 was 3.11%
Tax Equivalent Yield
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent
yield" means converting a tax-exempt yield to a pretax equivalent so that a
meaningful comparison can be made between a tax-exempt municipal fund and a
fully taxable fund. The Florida Money Market Fund may advertise performance
in terms of a tax equivalent yield based on the 7-day yield or effective yield
and the Florida Income Fund may advertise performance in terms of a 30-day tax
equivalent yield.
To calculate a tax equivalent yield, the Florida investor must know his
Effective Marginal Tax Rate or EMTR. Assuming an investor can fully itemize
deductions on his or her federal tax return, the EMTR is the sum of the Federal
marginal tax rate and the Florida Intangibles Personal Property Tax effect
adjusted to reflect the deductibility of the Intangibles Tax from Federal
income tax.
The computation of the state intangible tax effect is a multi-step
process. Since the intangible tax is a tax upon assets, and not income, an
investor may reduce his intangibles tax liability by choosing investments that
are exempt from the Florida Intangibles Tax. In APPENDIX C, we have provided
a table to estimate the effect the intangibles tax may have upon an investor's
EMTR. The Florida Intangibles Property Tax effect is determined by the
investor's filing status, individual or joint, and the fair market value of
intangible assets subject to the intangibles tax. The formula is:
State Intangible Tax Effect = Intangible Tax Liability / Intangible Assets
The formula for computing the EMTR to compare with fully taxable
securities subject to both federal income and state intangible taxes is:
EMTR = Federal Marginal Tax Rate + [State Intangible Tax Effect x (1-Federal
Marginal Tax Rate)]
The tax equivalent yield is then computed by dividing the tax-exempt yield
of a fund by the complement of the EMTR. The complement, for example, of an
EMTR of 36.08% is 63.92%, that is (1.00-0.3608= 0.6392).
Tax Equivalent Yield = Tax Exempt Yield / (1-Effective Marginal Tax Rate)
Based on a Federal marginal tax rate of 36% and intangible assets of
$300,000 filing jointly, the tax equivalent yields for the Florida Tax-Free
Income and Florida Tax-Free Money Market Funds for the period ended March 31,
1996 were 8.78% and 4.79%, respectively. See APPENDIX C for tax equivalent
yield table.
APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS
Tax-Exempt Securities
Tax-exempt securities generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and
corporations, to obtain funds to construct, repair or improve various public
facilities such as airports, bridges, highways, hospitals, housing, schools,
streets, and water and sewer works. Tax-exempt securities may also be issued
to refinance outstanding obligations as well as to obtain funds for general
operating expenses and for loans to other public institutions and facilities.
The two principal classifications of tax-exempt securities are "general
obligations" and "revenue" or "special tax" bonds. General obligation bonds
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue or special tax bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
tax, but not from general tax revenues. The Funds may also invest in
tax-exempt private activity bonds, which in most cases are revenue bonds and
generally do not have the pledge of the credit of the issuer. The payment of
the principal and interest on such industrial revenue bonds is dependent solely
on the ability of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. There are, of course, many variations
in the terms of, and the security underlying tax-exempt securities. Short-term
obligations issued by states, cities, municipalities or municipal agencies,
include Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation
Notes, Construction Loan Notes and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other things, general
money market conditions, conditions of the tax-exempt bond market, the size of
a particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc. (Fitch), Duff &
Phelps Inc., Thompson BankWatch, Inc., and IBCA Inc. represent their opinions
of the quality of the securities rated by them. It should be emphasized that
such ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, coupon and rating may have
different yeilds, while securities of the same maturity and coupon but with
ratings may have the same yield. It will be the responsibility of the Manager
to appraise independently the fundamental quality of the tax-exempt securities
included in a Fund's portfolio.
Ratings
Excerpts from Moody's Bond (Tax-Exempt Securities) Ratings:
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Note: Those bonds in the Aa, A, and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols Aa1, A1, and
Baa1.
Excerpts of Moody's Ratings of Short-Term Loans (State and Tax-Exempt Notes):
Moody's ratings for state and tax-exempt notes and other short-term
obligations are designated Moody's Investment Grade (MIG). Symbols used will
be as follows:
MIG-1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG-2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
Excerpts of Moody's Rating of Commercial Paper:
Prime-1 Issuers have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior short-term
debt obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.
Excerpts from S&P's Bond Ratings:
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts of S&P's Ratings of Tax-Exempt Notes:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
Excerpts of S&P's Rating of Commercial Paper:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated A-1.
Excerpts of Fitch's Ratings of Bonds:
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore, impair timely payment.
Plus (+) and Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the AAA category.
Excerpts of Fitch's Ratings to Commercial Paper, Certificates of Deposit and
Tax-Exempt Notes:
F-1+ Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but the margin
of safety is not as great as the F-1+ and F-1 ratings.
Excerpts from Duff & Phelps Long-Term Rating Scale:
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic
conditions.
A Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
Excerpts from Duff & Phelps Commercial Paper Rating Scale:
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or ready access to
alternative sources of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Thompson BankWatch, Inc.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while the
obligation is more susceptible to adverse developments (both
internal and external) than obligations with higher ratings, the
capacity to service principal and interest in a timely fashion is
considered adequate.
IBCA Inc.
A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Funds contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward,
investment objectives, investment strategies, and performance.
Fund performance also may be compared to the performance of broad groups
of mutual funds with similar investment goals or unmanaged indexes of
comparable securities. Evaluations of Fund performance made by independent
sources may be used in advertisements concerning the Fund, including reprints
of, or selections from, editorials or articles about the Fund. The Fund or
its performance may also be compared to products and services not constituting
securities subject to registration under the Securities Act of 1933 such as,
but not limited to, certificates of deposit and money market accounts.
Sources for performance information and articles about the Fund may include
the following:
AAII Journal, a monthly association magazine for members of the American
Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
The Bond Buyer, a daily newspaper which covers bond market news.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time reports on
companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine that periodically features companies in
the mutual fund industry.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine which may periodically review mutual fund
companies.
Forbes, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers financial news
and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry analysis prepared
by IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
Investment Company Institute, a national association of the American
Investment Company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance Analysis, a
monthly publication of industry-wide mutual fund performance averages by type
of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
and quarterly publication of industry-wide mutual fund performance averages by
type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to the medical
profession.
Money, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue Organization, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically: (1) Taxable Money Fund Averages: "100% U.S.
Treasury" and "First Tier" and (2) Tax-Free Money Fund Averages: "Stockbroker
and General Purpose" and "State Specific Stockbroker and General Purpose".
Morningstar 5 Star Investor, a monthly newsletter which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end mutual funds).
Muni Bond Fund Report, a monthly newsletter which covers news on the municipal
bond market and features performance data for municipal bond mutual funds.
MuniWeek, a weekly newspaper which covers news on the municipal bond market.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of industry-wide mutual
fund averages produced by Morningstar, Inc.
Mutual Fund Magazine, a monthly publication reporting on mutual fund
investing.
Mutual Fund Source Book, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the mutual fund
industry.
Personal Investor, a monthly magazine which from time to time features mutual
fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that periodically covers
mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on investing and
mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which covers
financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a
whole.
Worth, a magazine which covers financial and investment subjects including
mutual funds.
Your Money, a monthly magazine directed towards the novice investor.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. Each Fund will be compared to
Lipper's appropriate fund category according to objective and portfolio
holdings. The Florida Tax-Free Income Fund will be compared to funds in
Lipper's Florida tax-exempt bond funds category, and the Florida Tax-Free
Money Market Fund to funds in Lipper's Florida short-term tax-exempt bond
funds category. Footnotes in advertisements and other sales literature will
include the time period as applicable for any rankings used.
For comparative purposes, unmanaged indices of comparable securities or
economic data may be cited. Examples include the following:
- Shearson Lehman Hutton Bond Indices, indices of fixed-rate debt
issues rated investment grade or higher which can be found in the
Bond Market Report.
- Bond Buyer Indices, indices of debt of varying maturities including
revenue bonds, general obligation bonds, and U.S. Treasury bonds
which can be found in MuniWeek and The Bond Buyer.
Other sources for total return and other performance data which may be
used by the Fund or by those publications listed previously are Morningstar,
Inc., Schabaker Investment Management, and Investment Company Data, Inc.
These are services that collect and compile data on mutual fund companies.
APPENDIX C - TAXABLE EQUIVALENT YIELD TABLES
FEDERAL INCOME TAX RATES
(INCLUDES EFFECT OF FLORIDA INTANGIBLES TAX)
Assuming a Federal
arginal Tax Rate of: 28% 31% 36% 39.6%
and Assuming a State
Intangibles Tax Effect of: * 0.12% 0.12% 0.12% 0.12%
The Effective Marginal
Tax Rate would be: 28.09% (a) 31.08% (b) 36.08% (c) 39.67% (d)
To Match a Double
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:
2.00% 2.78% 2.90% 3.13% 3.31%
3.00% 4.17% 4.35% 4.69% 4.97%
4.00% 5.56% 5.80% 6.26% 6.63%
5.00% 6.95% 7.25% 7.82% 8.29%
6.00% 8.34% 8.70% 9.38% 9.94%
7.00% 9.73% 10.16% 10.95% 11.60%
- -----------
* Assumes an investor, filing jointly, with $300,000 in intangible assets.
See the following table.
(a) FEDERAL RATE OF 28% + (FLORIDA INTANGIBLES TAX EFFECT OF
.12% x (1 - 28%))
(b) FEDERAL RATE OF 31% + (FLORIDA INTANGIBLES TAX EFFECT OF
.12% x (1 - 31%))
(c) FEDERAL RATE OF 36% + (FLORIDA INTANGIBLES TAX EFFECT OF
.12% x (1 - 36%))
(d) FEDERAL RATE OF 39.6% + (FLORIDA INTANGIBLES TAX EFFECT OF
.12% x (1 - 39.6%))
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THESE RATES WERE SELECTED AS EXEMPLARY RATES THAT WOULD BE RELEVANT TO MOST
TAXPAYERS.
THE ABOVE TABLE ALSO INCLUDES THE EFFECT OF THE INTANGIBLES TAX. YOUR ACTUAL
RATE WILL VARY DEPENDING ON YOUR FILING STATUS AND THE TOTAL AMOUNT OF YOUR
INTANGIBLES SUBJECT TO THE FLORIDA TAX. SHAREHOLDERS OF EITHER FLORIDA FUND
WILL HAVE THE POTENTIAL BENEFIT OF OWNING SHARES IN A FUND THE VALUE OF WHICH
IS EXEMPT FROM THE FLORIDA INTANGIBLES TAX.
THE FOLLOWING TABLE CALCULATES THE ESTIMATED INTANGIBLE TAX LIABILITY AS A
PERCENTAGE OF INTANGIBLE ASSETS.
State Intangible Tax Rate Effect
Intangible Assets Individual Joint
- ----------------- ---------- -----
$100,000 0.08% 0.06%
$200,000 0.14% 0.08%
$300,000 0.16% 0.12%
$400,000 0.17% 0.14%
$500,000 0.18% 0.15%
$600,000 0.18% 0.16%
$700,000 0.18% 0.17%
$800,000 0.19% 0.17%
$900,000 0.19% 0.17%
$1,000,000 0.19% 0.18%
$2,000,000 0.19% 0.19%
$5,000,000 0.20% 0.20%
The table uses the methodology from the State of Florida's 1996 Intangible Tax
Return's "Tax Calculation Worksheet" to calculate the intangible tax
liability as a percentage of intangible assets.
APPENDIX D - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money
is invested in a security (such as a stock or mutual fund) on a regular basis
over a period of time, regardless of whether securities markets are moving up
or down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in
periods of higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to
help calm the effect of fluctuations in the financial markets. Systematic
investing involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should consider their
financial ability to continue purchases through periods of low and high price
levels.
As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------
Down Up Mixed
----------------- ----------------- -----------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
----------------- ----------------- -----------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- ----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg.Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg.Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by
shares purchased.
** Average Price is the sum of the prices paid divided by
number of purchases.
*** Cumulative total of share prices used to compute average
prices.
22735-0896
Part B
Statement of Additional Information for the
Texas Tax-Free Income Fund and
Texas Tax-Free Money Market Fund
USAA STATE TAX-FREE TRUST
USAA USAA STATE STATEMENT OF
Eagle Logo TAX-FREE ADDITIONAL INFORMATION
Appears Here TRUST August 1, 1996
- ------------------------------------------------------------------------------
USAA STATE TAX-FREE TRUST
TEXAS FUNDS
USAA STATE TAX-FREE TRUST (the Trust) is a registered investment company
offering shares of four no-load mutual funds, two of which are described in
this Statement of Additional Information (SAI): the Texas Tax-Free Income
Fund and Texas Tax-Free Money Market Fund (collectively, the Funds or the
Texas Funds). Each Fund is classified as a diversified investment company and
has 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.
You may obtain a free copy of a Prospectus for the Texas Funds dated August 1,
1996, by writing to USAA State Tax-Free Trust, 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
This SAI is not a Prospectus and contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide you
with additional information regarding the activities and operations of the
Trust and the Funds, and should be read in conjunction with the Prospectus.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
5 Investment Restrictions
6 Special Risk Considerations
11 Portfolio Transactions
12 Further Description of Shares
12 Certain Federal Income Tax Considerations
14 Trustees and Officers of the Trust
17 The Trust's Manager
18 General Information
18 Calculation of Performance Data
20 Appendix A - Tax-Exempt Securities and Their Ratings
24 Appendix B - Comparison of Portfolio Performance
27 Appendix C - Taxable Equivalent Yield Table
28 Appendix D - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts basis through
USAA Investment Management Company (IMCO or the Manager). The offering price
for shares of each Fund is equal to the current net asset value (NAV) per
share. The NAV per share of each Fund is calculated by adding the value of
all its portfolio securities and other assets, deducting its liabilities, and
dividing by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE
is currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively.
The investments of the Texas Tax-Free Income Fund are valued each
business day by a pricing service (the Service) approved by the Board of
Trustees. The Service uses the mean between quoted bid and asked prices or
the last sale price to price securities when, in the Service's judgment, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The
Service generally prices these securities based on methods which include
consideration of yields or prices of tax-exempt securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities purchased with
maturities of 60 days or less are stated at amortized cost which approximates
market value. Repurchase agreements are valued at cost. Securities which
cannot be valued by the Service, and all other assets, are valued in good
faith at fair value using methods determined by the Manager under the general
supervision of the Board of Trustees.
The value of the Texas Tax-Free Money Market Fund's securities is stated
at amortized cost which approximates market value. This involves valuing a
security at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates. While this method provides certainty in valuation, it may
result in periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Fund would receive upon
the sale of the instrument.
The valuation of the Texas Tax-Free Money Market Fund's portfolio
instruments based upon their amortized cost is subject to the Fund's adherence
to certain procedures and conditions. Consistent with regulatory
requirements, the Manager will only purchase securities with remaining
maturities of 397 days or less and will maintain a dollar-weighted average
portfolio maturity of no more than 90 days. The Manager will invest only in
securities that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of applicable rules and
regulations of the Securities and Exchange Commission (SEC).
The Board of Trustees has established procedures designed to stabilize
the Texas Tax-Free Money Market Fund's price per share, as computed for the
purpose of sales and redemptions, at $1.00. There can be no assurance,
however, that the Fund will at all times be able to maintain a constant $1.00
NAV per share. Such procedures include review of the Fund's holdings at such
intervals as is deemed appropriate to determine whether the Fund's NAV
calculated by using available market quotations deviates from $1.00 per share
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders. In the event that it is determined
that such a deviation exists, the Board of Trustees will take such
corrective action as it regards necessary and appropriate. Such action may
include selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity, withholding
dividends, or establishing a NAV per share by using available market
quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption may be more
or less than the cost at purchase, depending on the value of the securities
held in each Fund's portfolio. Requests for redemption which are subject to
any special conditions, or which specify an effective date other than as
provided herein, cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Trustees may cause the redemption of an account with a total
value of less than $500 provided (1) the value of the account has been reduced,
for reasons other than market action, below the minimum initial investment in
such Fund at the time of the establishment of the account, (2) the account has
remained below the minimum level for six months, and (3) 60 days' prior
written notice of the proposed redemption has been sent to the shareholder.
Shares will be redeemed at the NAV on the date fixed for redemption by the
Board of Trustees. Prompt payment will be made by mail to the last known
address of the shareholder.
The Trust reserves the right to suspend the right of redemption or
postpone the date of payment (1) for any periods during which the NYSE is
closed, (2) when trading in the markets the Trust normally utilizes is
restricted, or an emergency exists as determined by the SEC so that disposal
of the Trust's investments or determination of its NAV is not reasonably
practicable, or (3) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.
For the mutual protection of the investor and the Funds, a guarantee of
signature may be required by the Trust. If required, each signature on the
account registration must be guaranteed. Signature guarantees are acceptable
from FDIC member banks, brokers, dealers, municipal securities dealers,
municipal securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. A
signature guarantee for active duty military personnel stationed abroad may be
provided by an officer of the United States Embassy or Consulate, a staff
officer of the Judge Advocate General, or an individual's commanding officer.
Redemption by Check
Shareholders in the Texas Tax-Free Money Market Fund may request that checks
be issued for their account. A one-time $5 checkwriting fee is charged to
each account by USAA Shareholder Account Services (Transfer Agent) for the use
of the privilege. Checks must be written in the amount of at least $250.
Checks issued to shareholders of the Fund will be sent only to the person
in whose name the account is registered and only to the address of record. The
checks must be manually signed by the registered owner(s) exactly as the
account is registered. For joint accounts the signature of either or both
joint owners will be required on the check, according to the election made on
the signature card. Dividends will continue to be earned by the shareholder
until the shares are redeemed by the presentation of a check.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares in the investor's account will be redeemed
to cover the amount of the check. If an investor's account is not adequate to
cover the amount of a check, the check will be returned unpaid. Because the
value of each account changes as dividends are accrued on a daily basis, checks
may not be used to close an account.
After clearance, checks paid during the month will be returned to the
shareholder by separate mail. The checkwriting privilege will be subject to
the customary rules and regulations of State Street Bank and Trust Company
(State Street Bank or the Custodian) governing checking accounts. Other than
the initial one-time fee, there is no charge to the shareholder for the use of
the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against a
shareholder's account for any redemption check not honored by a clearing or
paying agent. Currently, this fee is $15 and is subject to change at any
time. Some examples of such dishonor are improper endorsement, checks written
for an amount less than the minimum check amount, and insufficient or
uncollectible funds.
The Trust, the Transfer Agent and State Street Bank each reserve the right
to change or suspend the checkwriting privilege upon 30 days' written notice to
participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Trust to shareholders
of the Funds. At the time you sign up for any of the following investment
plans that utilize the electronic funds transfer service, you will choose the
day of the month (the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or holiday, the electronic
transfer will take place on the last business day before the effective date.
You may terminate your participation in a plan at any time. Please call the
Manager for details and necessary forms or applications.
Automatic Purchase of Shares
InvesTronic (registered trademark) - an automatic investment program for the
purchase of additional shares through electronic funds transfer. The investor
selects the day(s) each month that money is transferred from a checking or
savings account. By completing an application, which may be obtained from the
Manager, you invest a specific amount each month ($50 minimum) in any of your
accounts.
Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
Buy/Sell Service - the intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
Participation in these systematic purchase plans will permit a shareholder
to engage in dollar-cost averaging. For additional information concerning the
benefits of dollar-cost averaging, see APPENDIX D.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in different Funds
cannot be aggregated for this purpose) owns shares having a NAV of $5,000 or
more, the shareholder may request that enough shares to produce a fixed amount
of money be liquidated from the account monthly or quarterly. The amount of
each withdrawal must be at least $50. Using the electronic funds transfer
service, shareholders may choose to have withdrawals electronically deposited
at their bank or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing the Systematic Withdrawal Plan
application, which may be requested from the Manager. The shareholder
may terminate participation in the plan at any time. There is no charge to
the shareholder for withdrawals under the Systematic Withdrawal Plan. The
Trust will not bear any expenses in administering the plan beyond the regular
transfer agent and custodian costs of issuing and redeeming shares. Any
additional expenses of administering the plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional shares on the
date selected by the shareholder at the time the plan is established.
Withdrawal payments made under this plan may exceed dividends and
distributions and, to this extent, will involve the use of principal and could
reduce the dollar value of a shareholder's investment and eventually exhaust
the account. Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can fluctuate,
shareholders should not expect withdrawals to be offset by rising income or
share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on the shareholder's income tax return. Therefore, a shareholder
should keep an accurate record of any gain or loss on each withdrawal.
INVESTMENT POLICIES
The section captioned INVESTMENT OBJECTIVES AND POLICIES in the Prospectus
describes the fundamental investment objectives and the investment policies
applicable to each Fund and the following is provided as additional
information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of each
investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's
portfolio. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.
With respect to obligations held by the Texas Tax-Free Income Fund, if it
is probable that the issuer of an instrument will take advantage of a
maturity-shortening device, such as a call, refunding, or redemption provision,
the date on which the instrument will probably be called, refunded, or redeemed
may be considered to be its maturity date. Also, the maturities of securities
subject to sinking fund arrangements are determined on a weighted average life
basis, which is the average time for principal to be repaid. The weighted
average life of these securities is likely to be substantially shorter than
their stated final maturity. In addition, for purposes of the Fund's
investment policies, an instrument will be treated as having a maturity
earlier than its stated maturity date if the instrument has technical features
such as puts or demand features which, in the judgment of the Manager, will
result in the instrument being valued in the market as though it has the
earlier maturity.
The Texas Tax-Free Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under the Investment
Company Act of 1940, as amended (1940 Act).
Repurchase Agreements
Each Fund may invest up to 5% of its net assets in repurchase agreements. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the seller (a commercial
bank or recognized securities dealer) at an agreed upon price on an agreed
upon date, usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value of
the underlying security. In these transactions, the securities purchased by a
Fund will have a total value equal to or in excess of the amount of the
repurchase obligation and will be held by the Funds' custodian until
repurchased. If the seller defaults and the value of the underlying security
declines, a Fund may incur a loss and may incur expenses in selling the
collateral. If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. Any investments in
repurchase agreements will give rise to income which will not qualify as
tax-exempt income when distributed by a Fund.
Other Policies
Each Fund may lend its securities and engage in short sells against the box.
The Texas Tax-Free Income Fund may also invest in options, financial futures
contracts and options on financial futures contracts. However, the Funds do
not intend to engage in any of these practices during the coming year without
first supplying further information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust for and
are applicable to each Fund. These restrictions may not be changed for any
given Fund without approval by the lesser of (1) 67% or more of the voting
securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy
or (2) more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without affecting those of
the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase the securities of
any issuer (except Government Securities, as such term is defined in
the (1940 Act) 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; for purposes of this limitation,
identification of the "issuer" will be based on a determination of
the source of assets and revenues committed to meeting interest and
principal payments of each security; for purposes of this limitation
the State of Texas or other jurisdictions and each of its separate
political subdivisions, agencies, authorities and instrumentalities
shall be treated as a separate issuer;
(2) 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), nor will either Fund purchase securities when its
borrowings exceed 5% of its total assets;
(3) Purchase any securities which would cause 25% or more of the value
of that Fund's total assets at the time of such purchase to be
invested in securities the interest upon which is derived from
revenues or projects with similar characteristics, such as toll road
revenue bonds, housing revenue bonds, electric power project revenue
bonds, or in industrial revenue bonds which are based, directly or
indirectly, on the credit of private entities of any one industry;
provided that the foregoing limitation does not apply with respect
to investments in United States Treasury Bills, other obligations
issued or guaranteed by the United States Government, its agencies
and instrumentalities, and, in the case of the Texas Tax-Free Money
Market Fund, certificates of deposit and banker's acceptances of
domestic banks;
(4) Issue senior securities, except as permitted under the 1940 Act;
(5) Underwrite securities of other issuers, except to the extent that it
may be deemed to act as a statutory underwriter in the distribution
of any restricted securities or not readily marketable securities;
(6) Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent investments in securities secured by real estate or
interests therein);
(7) Lend any securities or make any loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, except that
this limitation does not apply to purchases of debt securities or to
repurchase agreements; or
(8) Purchase or sell commodities or commodities contracts except that
the Texas Tax-Free Income Fund may invest in financial futures
contracts, options thereon and similar instruments.
Additional Restrictions
The following restrictions are not considered to be fundamental policies of
the Funds. These additional restrictions may be changed by the Board of
Trustees of the Trust without notice to or approval by the shareholders.
Neither Fund will:
(1) Pledge, mortgage or hypothecate its assets to any extent greater
than 33 1/3% of the value of its total assets;
(2) Purchase or retain securities of any issuer if any officer or
Trustee of the Trust or its Manager owns individually more than
one-half of one percent ( 1/2%) of the securities of that issuer,
and collectively the officers and Trustees of the Trust and Manager
together own more than 5% of the securities of that issuer;
(3) The Texas Tax-Free Income Fund may not invest more than 15% of the
value of its net assets and the Texas Tax-Free Money Market Fund may
not invest more than 10% of the value of its net assets in illiquid
securities (including repurchase agreements maturing in more than
seven days);
(4) Purchase securities on margin or sell securities short except that a
Fund may obtain short-term credits necessary for the clearance of
securities transactions and make short sales against the box; for
purposes of the restriction the deposit or repayment of initial or
variation margin in connection with financial futures contracts or
related options will not be deemed to be a purchase of securities on
margin by a Fund;
(5) Purchase securities of other investment companies except to the
extent permitted by applicable law;
(6) Purchase or sell puts, calls, straddles or spreads or any
combination thereof, except to the extent permitted by applicable
law; or
(7) Purchase interests in oil, gas, or other mineral exploration or
development programs, except that it may purchase securities of
issuers whose principal business activities fall within such areas.
SPECIAL RISK CONSIDERATIONS
The following only highlights some of the more significant financial trends
and budget information affecting the State of Texas, and is based on
information drawn from official statements and prospectuses relating to
various securities offerings by the State of Texas, its agencies and
instrumentalities, as available on the date of this SAI. The Trust has not
independently verified this information. The historical data and trends
discussed in this section are not intended to be exhaustive or to predict
future events or trends. There can be no assurance that past trends will
continue or that there will be an absence of material adverse changes
subsequent to the date of this SAI.
Because the Texas Funds concentrate their investments in a specific state,
there are risks associated with investment in the Funds which would not exist
if the Funds' investments were more widely diversified. These risks include
the possible enactment of new legislation in the State which could affect
State and/or municipal obligations, economic factors which could affect
these obligations, and varying levels of supply and demand for state and
municipal obligations.
State Debt. Except as specifically authorized, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the State,
with two exceptions: (1) debt created to supply deficiencies in revenues
which do not total more than $200,000 at any time, and (2) debt to repel
invasion, suppress insurrection, defend the State in war, or pay existing debt.
In addition, the Texas Constitution prohibits the Legislature from lending the
credit of the State to any person, including municipalities, or pledging the
credit of the State in any manner for the payment of the liabilities of any
individual, association of individuals, corporation or municipality. The
limitations of the Constitution do not prohibit the issuance of revenue bonds,
however, since Texas courts (like the courts of most states) have held that
certain obligations do not create a "debt" within the meaning of the
Constitution. The State of Texas and various State agencies have issued
revenue bonds payable from the revenues produced by various facilities or
from lease payments appropriated by the Legislature. Furthermore, obligations
which are payable from funds expected to be available during the current budget
period do not constitute "debt" within the meaning of the Constitution.
Certain short term obligations, like the Tax and Revenue Anticipation Notes
issued by the Treasurer of the State of Texas, which mature within the biennial
budget period in which they are issued (discussed below in more detail), are
not deemed to be "debt" within the meaning of the Texas Constitution.
Voters in the State have from time to time by constitutional amendment
authorized the issuance of general obligation indebtedness for which the full
full faith, credit and taxing power of the State are pledged. In some cases,
the authorized indebtedness may not be issued without the approval of the
Legislature, but in other cases, the constitutional amendments are
self-operating and the debt may be issued without specific legislative action.
Texas voters have also adopted a constitutional amendment which authorizes the
Water Development Board to incur unlimited contractual obligations to the
United States for the acquisition and development of water storage facilities
in reservoirs constructed by the United States. These contractual obligations
are declared by the Constitution to constitute general obligations of the
State. Texas voters have also authorized the governing bodies of certain
public colleges and universities to issue bonds payable from certain
appropriations required by the Constitution, without limitation as to
principal amount, except that the debt service on such bonds may not exceed
fifty percent of the amount appropriated each year.
Credit ratings on State debt are dependent upon several economic and
political factors, including the ability to continue to fund a substantial
portion of the debt service on general obligation debt from general fund
revenue in the annual State budget and the ability to maintain the amount of
authorized debt within the range of affordability.
Outstanding Debt Summary. Texas had a total of approximately $10.4
billion in State bonds outstanding on August 31, 1995, up from $9.97 billion
on August 31, 1994. This figure includes commercial paper and variable rate
notes; however, it does not include short-term debt issued by the State
Treasurer for cash management purposes (described below). Approximately
$4.97 billion of Texas' total state debt outstanding on August 31, 1995,
carries the general obligation pledge of the State. These bonds carry a
constitutional pledge of the full faith and credit of the State to pay off the
bonds if pledged revenues are insufficient. The remaining debt, non-general
obligation debt, is dependent only on the revenue stream of a particular
program or an appropriation from the Legislature for lease payments. General
obligation and non-general obligation bonds that depend on general revenue for
debt service are classified as "not self-supporting" for purposes of this
disclosure. "Not self-supporting" debt outstanding totaled approximately
$3.1 billion of total State bonds outstanding as of the end of August 1995.
Debt service on "self-supporting" bonds (both general obligation and
non-general obligation bonds) is paid from sources outside the State's
general revenue fund or outside State government entirely. Self-supporting
bonds, therefore, do not put direct pressure on State finances.
During fiscal 1995, State agencies and institutions of higher education
issued $1.3 billion in bonds, including $770 million in new money bonds and
$507 million in refunding bonds. New money bond issues raise additional
funds and add to the State's outstanding debt, while refunding bonds,
generally, replace bonds issued previously. Texas State agencies and
institutions of higher education plan to issue approximately $2.4 billion in
bonds and commercial paper during fiscal year 1996. Of this amount, $213
million is anticipated to be not self-supporting. Approximately $1.64 billion
will be issued to finance projects or programs and approximately $732 million
will be issued to refund existing debt.
As of August 31, 1995, Texas had approximately $5.8 billion in
authorized but unissued bonds. Approximately $3.4 billion or 58 percent of
these authorized but unissued bonds would be State general obligation debt.
About $1.7 billion or 22 percent of the total authorized but unissued bonds
would require the payment of debt service from general revenue. The remainder
are designed to be self-supporting through program revenues.
General Obligation Debt. Much of the outstanding bond indebtedness of
the State is designed to be self-supporting, even though the full faith and
credit of the State is pledged for its payment. Revenues from land and
housing programs are expected to be sufficient to pay principal and interest
on all outstanding Veterans Land Board bonds. The majority of the bonded
indebtedness of the Texas Water Development Board is self-supporting to the
extent that all funds provided from payments on obligations of political
subdivisions for water projects are applied to such bonded indebtedness in an
effort to avoid resorting to appropriated funds. The remaining portion of the
Water Development Board's debt is for the Economically Distressed Areas
Program. These bonds do not depend totally on the State's general revenue for
debt service; however, approximately 90 percent of the bonds issued may be
used for grants. Revenues from student loans are pledged to pay the principal
and interest on the outstanding bonds of the Texas Higher Education
Coordinating Board. Revenues from park entrance fees and other income have
been sufficient to pay principal and interest on the outstanding bonds of the
Texas Parks and Wildlife Department.
The general obligation bonds that have been issued by the Texas Public
Finance Authority and the Texas National Research Laboratory Commission are
not self-supporting. All debt service on these bonds is paid from the State's
general revenue fund. The higher education constitutional bonds are not
explicitly a general obligation or full faith and credit bond, but the
revenue pledge has the same effect. Debt service is paid from an annual
constitutional appropriation to qualified institutions of higher education
from the first monies coming into the state treasury that are not otherwise
dedicated by the Constitution.
State Revenue Bonds. The Texas Public Finance Authority (the "TPFA"),
the Texas National Research Laboratory Commission (the "Laboratory Commission")
and the National Guard Armory Board (the "Armory Board") have authority to
issue state-backed lease revenue bonds. Such obligations do not constitute
"debt" within the meaning of the Constitution, even though they are payable
from rental payments appropriated and made by the State under leases covering
the facilities financed with the proceeds of the obligations.
The Armory Board is authorized to issue bonds, payable solely from rents
received with respect to buildings constructed by it and leased to the
National Guard without limitation as to amount. Effective January 1, 1992,
the TPFA issues bonds on behalf of the Armory Board.
The Laboratory Commission was authorized to issue up to $500 million in
lease-revenue bonds to pay for activities related to a superconducting super
space collider research facility; $250 million of this authorization had been
used and $238 million of these bonds were outstanding on November 30, 1994.
On June 1, 1995, all of the outstanding Laboratory Commission lease revenue
bonds issued to provide funding for the super collider project were defeased.
As of September 1, 1995, the Texas Legislature rescinded the Laboratory
Commission's remaining revenue bond authority. Effective January 1, 1992,
the TPFA issued bonds on behalf of the Laboratory Commission.
The TPFA is authorized to issue lease-revenue bonds to finance the
construction, acquisition or renovation of state office buildings and
equipment revenue bonds to finance the acquisition of equipment. For the
lease-revenue bonds, the authorized amount of debt is equal to 1.5 times the
estimated cost of projects that have been approved by the Legislature.
In addition to the foregoing revenue obligations issued by state entities,
additional state programs may be financed with revenue bonds or similar
obligations payable from revenues generated by the specific authorized
programs, and not from the general revenues of the State or its taxing power.
Among the state entities authorized to issue such revenue bonds are the Texas
Water Development Board, the Texas Water Resources Finance Authority, the
Texas Agricultural Finance Authority, the State Treasurer on behalf of the
Texas School Facilities Finance Program, the Texas Department of Housing and
Community Affairs, the Texas Department of Commerce, the Texas Turnpike
Authority, the Texas Public Finance Authority, the Texas Low-Level Radioactive
Waste Disposal Authority and Texas colleges and universities.
Short Term Borrowing. By statute, the Texas Comptroller of Public
Accounts is authorized, with the consent of the Treasurer, to make interfund
transfers of surplus cash, excluding constitutionally dedicated revenues,
between funds in the Treasury in order to avoid temporary cash deficiencies in
the General Revenue Fund. This procedure effectively allows the Comptroller
of Public Accounts to borrow against cash balances held in special funds to
finance deficiencies in the General Revenue Fund caused by timing differences
between cash receipts and cash expenditures. During fiscal 1995 approximately
$2.2 billion in Tax and Revenue Anticipation Notes were issued by the
Treasurer. The Treasurer is authorized to issue Tax and Revenue Anticipation
Notes ("Notes") on behalf of the State under legislation which became
effective in October 1986. Under the terms of the legislation, Notes may be
issued solely to coordinate the State's cash flow within a fiscal year and
must mature and be paid in full during the biennium in which the Notes are
issued. Interfund borrowing was not used in fiscal years 1994 and 1995 due to
the consolidation of numerous funds into the General Revenue Fund on August
31, 1993. The total amount of Notes issued and interfund borrowing may not
exceed 25 percent of the taxes and revenues to be credited to the State's
General Revenue Fund for the fiscal year as forecasted by the Treasurer. On
September 1, 1995, the Treasurer (on behalf of the State) issued $2.4 billion
of Notes.
Sources of Revenue. As a result of the State's expansion in Medicaid
spending and other Health and Human Services programs requiring federal
matching revenues, federal receipts were the State's leading source of income
in fiscal 1995, accounting for approximately 29 percent of total revenues.
Sales tax, which had been the main source of revenue for the previous twelve
years prior to fiscal 1993, was second. Sales tax accounted for approximately
27 percent of the total revenues in fiscal 1995. Licenses, fees, fines and
penalties were the third largest revenue source to the State in fiscal 1995.
Motor fuels taxes and motor vehicle sales/rental taxes, the State's fourth and
fifth largest sources accounted for approximately 10% of total collections in
fiscal 1995. The remainder of the State's revenues are derived primarily from
interest and investment income, lottery proceeds, cigarette and tobacco,
franchise, oil and gas severance and other taxes. The State has no personal
or corporate income tax, although the State does impose a corporate franchise
tax based on the amount of a corporation's capital and "earned surplus,"
which includes corporate net income and officers' and directors' compensation.
There can be no assurance that the State will not face budget gaps,
decreases in revenues or deficits in future years resulting from a disparity
between tax or other revenues projected and the spending required to maintain
State programs and debt service at current levels. Furthermore, the State is
a party to numerous lawsuits in which an adverse decision could require
extraordinary and unbudgeted expenditures. Notwithstanding the foregoing, the
State of Texas finished fiscal year 1995 with a $2.1 billion positive cash
balance in the General Revenue Fund. This was the eighth consecutive year
that Texas has ended a fiscal year with a positive balance in the General
Revenue Fund.
Limitations on Taxing Power. The Constitution prohibits the State of
Texas from levying ad valorem taxes on property for general revenue purposes.
The Constitution also limits the rate of growth of appropriations from tax
revenues not regulated by the Constitution during any biennium to the
estimated rate of growth for the State's economy. The Legislature may avoid
the constitutional limitations if it finds, by a majority vote of both houses,
that an emergency exists. The Constitution authorizes the Legislature to
provide by law for the implementation of this restriction, and the
Legislature, pursuant to such authorization, has defined the estimated rate of
growth in the State's economy to mean the estimated increase in personal
income.
Appropriations and Budgeting. The Constitution requires an appropriation
for any funds to be drawn out of the Treasury. Certain appropriations are
made by the Constitution and do not require further legislative action,
although the Legislature frequently makes a parallel appropriation. All other
appropriations must be made through a bill passed by the Legislature and
approved by the Governor or passed by the Legislature over the Governor's
veto. Legislative appropriations are limited by the Constitution to a period
of two years. Article III, Section 49a of the Texas Constitution, the
so-called "pay-as-you-go" provision, provides that an appropriation from any
fund other than the General Revenue Fund is not valid if it exceeds the amount
of cash and estimated revenues of the fund from which such appropriation is to
be paid. No appropriations that are passed by the Legislature may be sent to
the Governor for consideration until the Comptroller of Public Accounts has
certified that the amounts appropriated are within the amounts estimated to be
available in the affected funds.
The Governor is authorized by statute to make findings of any facts
specified by the Legislature in any appropriations bill as a contingency to
the expenditure of funds. Accordingly, the Governor has some minimal
discretion to prevent the expenditure of funds, exercisable in situations in
which an appropriation made by the Legislature is conditioned upon the
occurrence of a given event or the existence of a given fact.
The Legislature has provided a means of dealing with fiscal emergencies
under which the Governor is empowered to authorize expenditures from a general
appropriation made by the Legislature specifically for emergencies. The
Legislature is not obligated to appropriate any amount for such purpose, but
customarily does so. The Governor may not authorize the expenditure of the
emergency funds unless a certification is made to the Comptroller of Public
Accounts that an emergency and imperative public necessity requiring the use
of such funds exists and the Comptroller of Public Accounts determines that
no other funds are available for such purpose.
The Legislature, in the second called session held during the Summer of
1987, enacted a budget execution law which gave the Governor, subject to
the review of the Legislative Budget Board, the ability to make changes in
legislative appropriations during periods when the Legislature is not in
session. The statute was amended in 1991, giving both the Governor and the
Legislative Budget Board the authority to make proposals that require a state
agency be prohibited from spending an appropriation, or that an agency be
obligated to expend an appropriation, or which affect the manner in which part
or all of an appropriation made by the Legislature to an agency may be
distributed or redistributed. In addition, the Governor or the Legislative
Budget Board, upon making a determination that an emergency exists, may
propose that an appropriation made to a state agency be transferred to another
agency, that an appropriation be retained by the agency but used for a
different purpose or that the time when an appropriation is made available to
a state agency be changed. Funds which are dedicated by the Constitution may
be withheld upon the Governor's or the Legislative Budget Board's proposal,
but may not be transferred to other state agencies, except to an agency which
is entitled to receive appropriations from those funds under the terms of the
Constitution. Federal funds appropriated by the Texas Legislature may be
transferred only as permitted by federal law. The Governor's or the
Legislative Budget Board's use of the budget execution law is subject to
publication and, in certain instances, public hearing requirements. In
addition, before the Governor's proposal may be executed, it must be ratified
by action of the Legislative Budget Board, or if proposed by the Board, the
proposal must be ratified by the Governor.
Except under the circumstances set forth above, appropriations or
adjustments of appropriations may currently be authorized only by the
Legislature.
Public School Finance. In recent years, special sessions of the
Legislature have been called to deal with various fiscal matters. After four
successive special sessions called to deal with the public school finance
system, the Legislature passed a school finance bill and accompanying revenue
bill on June 7, 1990. However, on January 22, 1991, the Texas Supreme Court
ruled that the Legislature's school finance plan was unconstitutional, and
issued an April 1, 1991, deadline for a new plan. A new school bill (SB 351)
was passed by the 72nd Legislature in April 1991. In August 1991, Judge Scott
McCown affirmed the constitutionality of the school finance system developed
in this bill; however, the Texas Supreme Court ruled on January 30, 1992, that
the County Education District ("CED") system was unconstitutional and gave the
Texas Legislature until June 1, 1993, to develop a new system. In February
1993, the 73rd Texas Legislature passed SB 7 and SJR 7 in an attempt to
legalize the CED system. On May 1, however, Texas voters overwhelmingly
defeated SJR 7. Working under the pressure of the June 1 court deadline, the
Legislature passed a new version of SB 7 which directed 98 of the State's
wealthiest school districts to choose among five alternatives for
redistributing their wealth to poorer districts. Although a number of both
poor and wealthy school districts have challenged the new funding law, Judge
McCown has stated SB 7 shall be implemented for at least the 1993-94 school
year before any constitutional challenges are considered. On May 25, 1994,
representatives from the property-rich and property-poor districts appealed
the case to the Texas Supreme Court. The Texas Supreme Court issued its
opinion on January 30, 1995. The court upheld all provisions of SB 7 and
overturned the lower court's mandate to provide additional funding for school
facilities in property-poor districts. The court ruled that convincing
evidence of an inability to provide facilities had not yet been presented, but
that the absence of a separate funding source for facilities could cause the
court to declare the entire finance system unconstitutional. The court also
cautioned of the appearance of a constitutionally-prohibited state ad valorem
tax if all districts were forced to tax at the capped value to maintain
standards.
The Texas Legislature has recently created a new $170 million school
facilities construction funding program targeted at property-poor school
districts. The Legislature also modified the $1.50 total tax rate cap of SB
7, replacing it with a $1.50 Maintenance and Operations tax rate cap. A
school district must demonstrate a projected ability to pay for all debt
issued after September 1, 1992 from a tax rate not to exceed $0.50. Old debt
continues to be unlimited for tax rate cap purposes.
Retirement Systems. The State of Texas operates three defined-benefit
retirement systems: the Teacher Retirement System of Texas ("TRST"), the
Employee's Retirement System of Texas ("ERST") and the Judicial Retirement
System of Texas ("JRST"). In addition, state employees, except those
compensated on a fee basis, are covered under the federal Social Security
system. Political subdivisions of the State may voluntarily provide for
coverage of their employees under the State's agreement with the federal
Social Security Administration.
TRST and ERST are maintained on an actuarial basis. As of August 31,
1995, the unfunded actuarial liability of TRST was approximately $1,956
million and the overfunded actuarial liability of ERST was approximately $433
million. The period required to amortize the unfunded actuarial liability,
given then-current contribution rates, benefits and investment assumptions, was
estimated to be 14 years in the case of TRST. The TRST market value of
investments, as of August 31, 1995, was $44.2 billion. The ERST market value
of pooled investments as of August 31, 1995, was $11.6 billion. Until
recently, JRST was maintained on a pay-as-you-go basis. However, legislation
enacted in June 1985, divided JRST into two plans by changing the name of the
existing plan and establishing a second, separate plan. The new plan, known
as Judicial Retirement System of Texas Plan Two, is to be maintained on an
actuarially sound basis and covers individuals who became judicial officers
after August 31, 1985. The unfunded actuarial liability of JRST Plan Two as
of August 31, 1994 was $4 million. The old plan, now known as the Judicial
Retirement System of Texas Plan One, will continue to be maintained on a
pay-as-you-go basis and will cover judicial officers who are active on August
31, 1985, or had retired on or before that date.
Contributions to the retirement systems are made by both the State and
covered employees. The Texas Constitution mandates a state contribution rate
of not less than 6 percent or more than 10 percent of payroll; member
contributions may not be less than 6 percent of payroll. The Legislature,
however, may appropriate additional funds as are actuarially determined to be
needed to fund benefits authorized by law.
For the 1996-97 biennium, the Texas Legislature set the State's
contribution rates to the retirement systems at the following rates: ERST and
TRST at 6 percent of payroll, and JRST Plan Two at 16.54 percent of payroll.
Member contribution rates are 6 percent for ERST and JRST Plan Two and 6.4
percent for TRST.
As part of the 1985 changes in the State's retirement systems, the
Legislature prohibited the implementation of changes in the ERST and TRST
systems that would cause the period required to amortize the unfunded
actuarial liability of either plan to exceed thirty-one years. Prior to the
adoption of these measures, the State had no official limit on the
amortization period for unfunded actuarial liability, although the management
of both ERST and TRST had adopted an informal policy of limiting the period to
thirty years.
The State's retirement systems were created and are operated pursuant to
statutes enacted by the Legislature. The Legislature has the authority to
modify these statutes and, accordingly, contribution rates, benefits, benefit
levels and such other aspects of each system as it deems appropriate,
including the provisions limiting changes that increase the amortization period
for unfunded actuarial liability of any plan. The State's retirement systems
are not subject to the funding and vesting requirements of the Employee
Retirement Income Security Act of 1974, as amended, although Congress has from
time to time considered legislation that would regulate pension funds of
public bodies.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated June 25, 1993, and
subject to the general control of the Trust's Board of Trustees, places all
orders for the purchase and sale of Fund securities. Purchases of Fund
securities are made either directly from the issuer or from dealers who deal
in tax-exempt securities. The Manager may sell Fund securities prior to
maturity if circumstances warrant and if it believes such disposition is
advisable. In connection with portfolio transactions for the Trust, the
Manager seeks to obtain the best available net price and most favorable
execution for its orders. The Manager has no agreement or commitment to place
transactions with any broker-dealer and no regular formula is used to allocate
orders to any broker-dealer. However, the Manager may place security orders
with brokers or dealers who furnish research or other services to the Manager
as long as there is no sacrifice in obtaining the best overall terms
available. Payment for such services would be generated only through purchase
of new issue fixed income securities.
Such research and other services may include, for example: advice
concerning the value of securities, the advisability of investing in,
purchasing, or selling securities, and the availability of securities or the
purchasers or sellers of securities; analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to effecting
securities transactions, such as clearance and settlement. The Manager
continuously reviews the performance of the broker-dealers with whom it places
orders for transactions. The receipt of research from broker-dealers that
execute transactions on behalf of the Trust may be useful to the Manager in
rendering investment management services to other clients (including
affiliates of the Manager), and conversely, such research provided by
broker-dealers who have executed transaction orders on behalf of other clients
may be useful to the Manager in carrying out its obligations to the Trust.
While such research is available to and may be used by the Manager in
providing investment advice to all its clients (including affiliates of the
Manager), not all of such research may be used by the Manager for the benefit
of the Trust. Such research and services will be in addition to and not in
lieu of research and services provided by the Manager, and the expenses of the
Manager will not necessarily be reduced by the receipt of such supplemental
research. See THE TRUST'S MANAGER.
On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Trust, as well as the Manager's other
clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Trust with those to be sold or purchased for other customers in order to
obtain best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations
to all such customers, including the Trust. In some instances, this procedure
may impact the price and size of the position obtainable for the Trust.
The tax-exempt security market is typically a "dealer" market in which
investment dealers buy and sell bonds for their own accounts, rather than for
customers, and although the price may reflect a dealer's mark-up or mark-down,
the Trust pays no brokerage commissions as such. In addition, some securities
may be purchased directly from issuers.
Portfolio Turnover Rate
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year.
The rate of portfolio turnover will not be a limiting factor when the
Manager deems changes in the Texas Tax-Free Income Fund's portfolio appropriate
in view of its investment objective. For example, securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold.
In addition, a security may be sold and another security of comparable quality
may be purchased at approximately the same time in order to take advantage of
what the Fund believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for or supply of various types of tax-exempt securities.
The portfolio turnover rates for the Texas Tax-Free Income Fund for the
eight-month period ended March 31, 1995 and the fiscal year ended March 31,
1996 were 49.63% and 71.14%, respectively. Portfolio turnover rates have
been calculated excluding short-term variable rate securities, which are those
with put date intervals of less than one year.
FURTHER DESCRIPTION OF SHARES
The Trust is authorized to issue shares of beneficial interest in separate
portfolios. Four such portfolios have been established, two of which are
described in this SAI. Under the Master Trust Agreement, the Board of
Trustees is authorized to create new portfolios in addition to those already
existing without shareholder approval.
The assets of each Fund and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated
to such Fund. They constitute the underlying assets of each Fund, are required
to be segregated on the books of account, and are to be charged with the
expenses of such Fund. Any general expenses of the Trust not readily
identifiable as belonging to a particular Fund are allocated on the basis of
the Funds' relative net assets during the fiscal year or in such other manner
as the Board determines to be fair and equitable. Each share of each Fund
represents an equal proportionate interest in that Fund with every other share
and is entitled to dividends and distributions out of the net income and
capital gains belonging to that Fund when declared by the Board.
Under the Trust's Master Trust Agreement, no annual or regular meeting
of shareholders is required. Thus, there will ordinarily be no shareholder
meeting unless otherwise required by the 1940 Act. Under certain
circumstances, however, shareholders may apply to the Trustees for shareholder
information in order to obtain signatures to request a shareholder meeting.
Moreover, pursuant to the Master Trust Agreement, any Trustee may be removed
by the vote of two-thirds of the outstanding Trust shares and holders of 10%
or more of the outstanding shares of the Trust can require Trustees to call
a meeting of shareholders for the purpose of voting on the removal of one or
more Trustees. On any matter submitted to the shareholders, the holder of
each Fund share is entitled to one vote per share (with proportionate voting
for fractional shares) regardless of the relative net asset values of the
Funds' shares. However, on matters affecting an individual Fund, a separate
vote of the shareholders of that Fund is required. Shareholders of a Fund are
not entitled to vote on any matter which does not affect that Fund but which
requires a separate vote of another Fund. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect 100% of the Trust's Board of Trustees,
and the holders of less than 50% of the shares voting for the election of
Trustees will not be able to elect any person as a Trustee.
Shareholders of a particular Fund might have the power to elect all of
Trustees of the Trust because that Fund has a majority of the total
outstanding shares of the Trust. When issued, each Fund's shares are fully
paid and nonassessable, have no pre-emptive or subscription rights, and are
fully transferable. There are no conversion rights.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Taxation of the Funds
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
Accordingly, each Fund will not be liable for federal income taxes on its
taxable net investment income and net capital gains (capital gains in excess
of capital losses) that are distributed to shareholders, provided that each
Fund distributes at least 90% of its net investment income and net short-term
capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in such stock,
securities or currencies (the 90% test); (2) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of stock or
securities held less than three months (the 30% test), and (3) satisfy certain
diversification requirements at the close of each quarter of the Fund's taxable
year. Furthermore, to pay tax-exempt interest income dividends, at least 50%
of the value of each Fund's total assets at the close of each quarter of its
taxable year must consist of obligations the interest of which is exempt from
federal income tax. Each Fund intends to satisfy this requirement.
The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve month
period ending on October 31, and (3) any prior amounts not distributed.
Each Fund intends to make such distributions as are necessary to avoid
imposition of this excise tax.
For federal income tax purposes, debt securities purchased by the Funds
may be treated as having original issue discount. Original issue discount
represents interest income for federal income tax purposes and can generally
be defined as the excess of the stated redemption price at maturity of a debt
obligation over the issue price. Original issue discount is treated for
federal income tax purposes as earned by the Funds, whether or not any income
is actually received, and therefore is subject to the distribution requirements
of the Code. However, original issue discount with respect to tax-exempt
obligations generally will be excluded from the Funds' taxable income, although
such discount will be included in gross income for purposes of the 90% test and
the 30% test described previously. Original issue discount with respect to
tax-exempt securities is accrued and added to the adjusted tax basis of such
securities for purposes of determining gain or loss upon sale or at maturity.
Generally, the amount of original issue discount is determined on the basis
of a constant yield to maturity which takes into account the compounding of
accrued interest. An investment in a stripped bond or stripped coupon will
result in original issue discount.
Debt securities may be purchased by the Funds at a market discount.
Market discount occurs when a security is purchased at a price less than the
original issue price adjusted for accrued original issue discount, if any.
The Funds intend to defer recognition of accrued market discount until
maturity or other disposition of the bond. For securities purchased at a
market discount, the gain realized on disposition will be treated as taxable
ordinary income to the extent it does not exceed accrued market discount on
the bond.
The Funds may also purchase debt securities at a premium, i.e., at a
purchase price in excess of face amount. With respect to tax-exempt
securities, the premium must be amortized to the maturity date but no
deduction is allowed for the premium amortization. The amortized bond premium
will reduce the Funds' adjusted tax basis in the securities. For taxable
securities, the premium may be amortized if the Funds so elect. The amortized
premium on taxable securities is first offset against interest received on the
securities and then allowed as a deduction, and, for securities issued after
September 27, 1985, must be amortized under an economic accrual method.
Taxation of the Shareholders
Taxable distributions are generally included in a shareholder's gross income
for the taxable year in which they are received. Dividends declared in
October, November, or December and made payable to shareholders of record in
such a month will be deemed to have been received on December 31, if a Fund
pays the dividend during the following January. It is expected that none of
the Funds' distributions will qualify for the corporate dividends-received
deduction.
To the extent that a Fund's dividends distributed to shareholders are
derived from interest income exempt from federal income tax and are designated
as "exempt-interest dividends" by a Fund, they will be excludable from a
shareholder's gross income for federal income tax purposes. Shareholders who
are recipients of Social Security benefits should be aware that exempt-interest
dividends received from a Fund are includible in their "modified adjusted gross
income" for purposes of determining the amount of such Social Security
benefits, if any, that are required to be included in their gross income.
A shareholder of the Texas Tax-Free Income Fund should be aware that a
redemption of shares (including any exchange into another USAA Fund) is a
taxable event and, accordingly, a capital gain or loss may be recognized. If
a shareholder receives an exempt-interest dividend with respect to any share
and such share has been held for six months or less, any loss on the
redemption or exchange will be disallowed to the extent of such
exempt-interest dividend. Similarly, if a shareholder of the Fund receives a
distribution taxable as long-term capital gain with respect to shares of the
Fund and redeems or exchanges shares before he has held them for more than
six months, any loss on the redemption or exchange (not otherwise disallowed
as attributable to an exempt-interest dividend) will be treated as long-term
capital loss.
The Funds may invest in private activity bonds. Interest on certain
private activity bonds issued after August 7, 1986, is an item of tax
preference for purposes of the Federal Alternative Minimum Tax (AMT), although
the interest continues to be excludable from gross income for other purposes.
AMT is a supplemental tax designed to ensure that taxpayers pay at least a
minimum amount of tax on their income, even if they make substantial use of
certain tax deductions and exclusions (referred to as tax preference items).
Interest from private activity bonds is one of the tax preference items that
is added to income from other sources for the purposes of determining whether
a taxpayer is subject to the AMT and the amount of any tax to be paid. For
corporate investors, alternative minimum taxable income is increased by 75% of
the amount by which adjusted current earnings (ACE) exceeds alternative
minimum taxable income before the ACE adjustment. For corporate taxpayers,
all tax-exempt interest is considered in calculating the AMT as part of the
ACE. Prospective investors should consult their own tax advisers with respect
to the possible application of the AMT to their tax situation.
Opinions relating to the validity of tax-exempt securities and the
exemption of interest thereon from federal income tax are rendered by
recognized bond counsel to the issuers. Neither the Manager's nor the Funds'
counsel makes any review of the basis of such opinions.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust consists of seven Trustees. Set forth
below are the Trustees and officers of the Trust, and their respective offices
and principal occupations during the last five years. Unless otherwise
indicated, the business address of each is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
M. Staser Holcomb 1, 2
Trustee and Chairman of the Board of Trustees
Age: 64
President, Chief Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/96-present); Executive Vice President, Chief Information
Officer, United Services Automobile Association (USAA) (2/94-12/95); Executive
Vice President, Chief Financial Officer, USAA and President, Director and Vice
Chairman of the Board of Directors, USAA Capital Corporation (9/91-1/94). Mr.
Holcomb also will serve as a Trustee and Chairman of the Board of Trustees of
USAA Investment Trust and as a Director and Chairman of the Boards of
Directors of USAA Investment Management Company (IMCO), USAA Mutual Fund,
Inc., USAA Tax Exempt Fund, Inc., USAA Shareholder Account Services, USAA
Federal Savings Bank and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Trustee, President and Vice Chairman of the Board of Trustees
Age: 54
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth currently
serves as President, Trustee and Vice Chairman of the Board of Trustees of
USAA Investment Trust, as President, Director and Vice Chairman of the Boards
of Directors of USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance Company and
as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 61
Senior Vice President, Investments, IMCO (10/85-present); Director, BHC
Financial, Inc. and BHC Securities, Inc. (1/87-present). Mr. Saunders
currently serves as a Trustee and Vice President of USAA Investment Trust, as
a Director of IMCO, Director and Vice President of USAA Mutual Fund, Inc. and
USAA Tax Exempt Fund, Inc., as Senior Vice President of USAA Shareholder
Account Services, and as Vice President of USAA Life Investment Trust.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Trustee
Age: 78
Retired. Mr. Brown currently serves as a Trustee of USAA Investment Trust and
as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). Mr. Freeman currently serves as a Trustee of USAA
Investment Trust and as a Director of USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 53
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker
currently serves as a Trustee of USAA Investment Trust and as a Director of
USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). Mrs. Dreeben currently serves as a Trustee of USAA
Investment Trust and as a Director of USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 48
Vice President, Corporate Counsel, USAA (1982-present). Mr. Wagner has held
various positions in the legal department of USAA since 1970 and currently
serves as Vice President, Secretary and Counsel, IMCO and USAA Shareholder
Account Services; Secretary, USAA Investment Trust, USAA Mutual Fund, Inc. and
USAA Tax Exempt Fund, Inc., and as Vice President, Corporate Counsel, for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 46
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); Vice
President, Compliance, IMCO (12/91-5/94); Vice President, Compliance, Fund
Management Co. (10/89-11/91); and Vice President, Compliance, AIM
Distributors, Inc. (4/82-11/91). Mr. Ciccone currently serves as Assistant
Secretary of USAA Investment Trust, USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 51
Vice President, Controller, IMCO (10/92-present); Vice President, Corporate
Financial Analysis, USAA (9/92-10/92); Assistant Vice President, Financial
Plans and Support, USAA (8/91-9/92). Mrs. Kirk currently serves as Treasurer
of USAA Investment Trust, USAA Mutual Fund, Inc., and USAA Tax Exempt Fund,
Inc. and as Vice President, Controller of USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 37
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); Senior Manager, KPMG Peat Marwick
LLP (7/88-12/94). Mr. Pantzar currently serves as Assistant Treasurer of USAA
Mutual Fund, Inc., USAA Investment Trust, and USAA Tax Exempt Fund, Inc.
- -------
1 Indicates those Trustees and officers who are employees of the
Manager or affiliated companies and are considered "interested
persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Trustees and while the Board is
not in session, the Executive Committee of the Board of Trustees has all the
powers and may exercise all the duties of the Board of Trustees in the
management of the business of the Trust which may be delegated to it by the
Board. The Pricing and Investment Committee of the Board of Trustees acts
upon various investment-related issues and other matters which have been
delegated to it by the Board. The Audit Committee of the Board of Trustees
reviews the financial statements and the auditor's reports and undertakes
certain studies and analyses as directed by the Board. The Corporate
Governance Committee of the Board of Trustees maintains oversight of the
organization, performance, and effectiveness of the Board and independent
Trustees.
In addition to the previously listed Trustees and/or officers of the
Trust who also serve as Directors and/or officers of the Manager, the
following individuals are Directors and/or executive officers of the Manager:
Mark H. Wright, President, Chief Executive Officer, Director and Vice
Chairman, USAA Federal Savings Bank; Josue Robles, Jr., Senior Vice President,
Chief Financial Officer/Controller, USAA; Bradford W. Rich, Senior Vice
President, General Counsel and Secretary, USAA; Harry W. Miller, Senior Vice
President, Investments (Equity); and John J. Dallahan, Senior Vice President,
Investment Services. There are no family relationships among the Trustees,
officers and managerial level employees of the Trust or its Manager.
The following table sets forth information describing the compensation
of the current Trustees of the Trust for their services as Trustees for the
fiscal year ended March 31, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Trustee from the Trust Family of Funds (c)
- ------- -------------- -------------------
C. Dale Briscoe* $3,982 $17,100
George E. Brown (a) 5,357 23,100
Barbara B. Dreeben 5,357 23,100
Howard L. Freeman, Jr. 5,357 23,100
M. Staser Holcomb* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 5,357 23,100
- ----------------
* Effective January 1, 1996, M. Staser Holcomb replaced Hansford T.
Johnson as Director and Chairman of the Board of Trustees and C.
Dale Briscoe retired from the Board of Trustees.
(a) The USAA Family of Funds has accrued deferred compensation for Mr.
Brown in an amount (plus earnings thereon) of $21,166. The
compensation was deferred by Mr. Brown pursuant to a non-qualified
Deferred Compensation Plan, under which deferred amounts accumulate
interest quarterly based on the annualized U.S. Treasury Bill rate
in effect on the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The Deferred
Compensation Plan was terminated in 1988 and no compensation has
been deferred by any Trustee/Director of the USAA Family of Funds
since the Plan was terminated.
(b) M. Staser Holcomb, Michael J.C. Roth, and John W. Saunders, Jr. are
affiliated with the Trust's investment adviser, IMCO, and,
accordingly, receive no remuneration from the Trust or any other
Fund of the USAA Family of Funds.
(c) At March 31, 1996, the USAA Family of Funds consisted of 4
registered investment companies offering 32 individual funds. Each
Trustee presently serves as a Trustee or Director of each investment
company in the USAA Family of Funds. In addition, Michael J.C. Roth
presently serves as a Trustee of USAA Life Investment Trust, a
registered investment company advised by IMCO, consisting of five
funds offered to investors in a fixed and variable annuity contract
with USAA Life Insurance Company. Mr. Roth receives no compensation
as Trustee of USAA Life Investment Trust.
All of the above Trustees are also Trustees/Directors of the other funds
for which IMCO serves as investment adviser. No compensation is paid by
any fund to any Trustee/Director who is a director, officer, or employee of
IMCO or its affiliates. No pension or retirement benefits are accrued as part
of fund expenses. The Trust reimburses certain expenses of the Trustees who
are not affiliated with the investment adviser. As of June 30, 1996, the
officers and Trustees of the Trust and their families as a group owned
beneficially or of record less than 1% of the outstanding shares of the Trust.
As of June 30, 1996, USAA and its affiliates (including related employee
benefit plans) owned 2,194,890 shares (45.4%) of the Texas Tax-Free Money
Market Fund and no shares of the Texas Tax-Free Income Fund.
The following table identifies all other persons, who as of June 30, 1996,
held of record or owned beneficially 5% or more of either Fund's shares.
Name and address
Title of Class of beneficial owner Percent of class
-------------------- ------------------- ----------------
Texas Tax-Free Money Carl A. Schweers 7.4%
Market Fund Miriam F. Schweers
1240 E. Sunshine Dr.
San Antonio, TX 78228-2944
THE TRUST'S MANAGER
As described in the Prospectus, USAA Investment Management Company is the
Manager and investment adviser, providing services under the Advisory
Agreement. The Manager, organized in May 1970, has served as investment
adviser and underwriter for USAA State Tax-Free Trust from its inception.
In addition to managing the Trust's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Investment Trust, USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc.
and USAA Life Investment Trust. As of the date of this SAI, total assets
under management by the Manager were approximately $30 billion, of which
approximately $17 billion were in mutual fund portfolios.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of
Trustees of the Trust, to determine the selection, amount and time to buy or
sell securities for each Fund. In addition to providing investment services,
the Manager pays for office space, facilities, business equipment and
accounting services (in addition to those provided by the Custodian) for the
Trust. The Manager compensates all personnel, officers and Trustees of the
Trust if such persons are also employees of the Manager or its affiliates.
For these services under the Advisory Agreement, the Trust has agreed to pay
the Manager a fee computed as described under MANAGEMENT OF THE TRUST in the
Prospectus. Management fees are computed and accrued daily and payable
monthly.
Except for the services and facilities provided by the Manager, the Funds
pay all other expenses incurred in their operations. Expenses for which the
Funds are responsible include taxes (if any), brokerage commissions on
portfolio transactions (if any), expenses of issuance and redemption of
shares, charges of transfer agents, custodians and dividend disbursing agents,
cost of preparing and distributing proxy material, costs of printing and
engraving stock certificates, auditing and legal expenses, certain expenses of
registering and qualifying shares for sale, fees of Trustees who are not
interested persons (not affiliated) of the Manager, costs of typesetting,
printing and mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically enumerated. The
Manager pays the cost of printing and mailing copies of the Prospectus, the
SAI, and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 25, 1997 for each
Fund and will continue in effect from year to year thereafter for each Fund as
long as it is approved at least annually by a vote of the outstanding voting
securities of such Fund (as defined by the 1940 Act) or by the Board of
Trustees (on behalf of such Fund) including a majority of the Trustees who are
not interested persons of the Manager or (otherwise than as Trustees) of the
Trust, at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated at any time by either the Trust or the
Manager on 60 days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
Under the terms of the Advisory Agreement, the Manager is required to
reimburse each Fund in the event that the total annual expenses, inclusive of
the management fee, but exclusive of the interest, taxes and brokerage fees
and extraordinary items, incurred by that Fund exceeds any applicable state
expense limitation. At the current time, the most restrictive expense
limitation is 2.5% of the first $30,000,000 of average net assets (ANA), 2% of
the next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by a
Fund. Any such waiver or reimbursement may be terminated by the Manager at
any time without prior notice to shareholders. The Manager has voluntarily
agreed to limit each Fund's annual expenses to .50% of its ANA until August 1,
1997, and will reimburse the Funds for all expenses in excess of the
limitations.
For the eight-month period ended March 31, 1995 and the fiscal year ended
March 31, 1996, management fees were as follows:
1995 1996
---- ----
Texas Tax-Free Income Fund $13,843 $35,729
Texas Tax-Free Money Market Fund $11,156 $22,664
Because the Funds' expenses exceeded the Manager's voluntary expense
limitation of .50% of average net assets, the Manager did not receive any
management fees. In addition for 1995 and 1996, the Manager did not receive
fees for other operating expenses to which it would have been entitled in the
amounts of $38,724 and $47,505, respectively, from the Texas Tax-Free Income
Fund and $36,396 and $46,368, respectively, from the Texas Tax-Free Money
Market Fund.
Underwriter
The Trust has an agreement with the Manager for exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
Transfer Agent
The Transfer Agent performs transfer agent services for the Trust under a
Transfer Agency Agreement. Services include maintenance of shareholder
account records, handling of communications with shareholders, distribution of
Fund dividends and production of reports with respect to account activity for
shareholders and the Trust. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee of $26.00 per
account. The fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth
of the annual fee. In addition, the Funds pay all out-of-pocket expenses of
the Transfer Agent and other expenses which are incurred at the specific
direction of the Trust.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Trust's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Trust's cash and securities, handling the
receipt and delivery of securities and collecting interest on the Trust's
investments.
Counsel
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Trust in connection with the shares offered by
the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is
the Trust's independent auditor. In this capacity, the firm is responsible
for auditing the annual financial statements of the Funds and reporting
thereon.
Financial Statements
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1996, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
The Manager will deliver a copy of the Annual Report free of charge with each
SAI requested.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in the Prospectus. See VALUATION OF SECURITIES herein
for a discussion of the manner in which each Fund's price per share is
calculated.
Total Return
The Texas Tax-Free Income Fund may advertise performance in terms of average
annual total return for 1, 5 and 10 year periods, or for such lesser period as
the Fund has been in existence. Average annual total return is computed by
finding the average annual compounded rates of return over the periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at
the end of the year or period
The calculation assumes all charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by such Fund are
reinvested at the price stated in the Prospectus on the reinvestment dates
during the period, and includes all recurring fees that are charged to all
shareholder accounts.
The date of commencement of operations for the Texas Tax-Free Income Fund
was August 1, 1994. The Fund's average total returns for the following periods
ended March 31, 1996 were:
1 year . . . . . 9.42% Since inception . . . . .9.08%
Yield
The Texas Tax-Free Income Fund may advertise performance in terms of a 30-day
yield quotation. The 30-day yield quotation is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2((((a - b) / (cd) + 1) ^6) - 1
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
For purposes of the yield calculation, interest income is computed based
on the yield to maturity of each debt obligation in the Fund's portfolio and
all recurring charges are recognized.
The Fund's 30-day yield for the period ended March 31, 1996 was 5.41%.
Yield - Texas Tax-Free Money Market Fund
When the Texas Tax-Free Money Market Fund quotes a current annualized yield,
it is based on a specified recent seven-calendar-day period. It is computed
by (1) determining the net change, exclusive of capital changes, in the value
of a hypothetical preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
return, then (3) multiplying the base period by 52.14 (365divided by7). The
resulting yield figure is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased
with dividends on the original share, and dividends declared on both the
original share and any such additional shares, and (2) any fees charged to
all shareholder accounts, in proportion to the length of the base period and
the Fund's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to
the quotient, raising the sum to the 365th power, and subtracting 1 from the
result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield for 7-day Period ended 3/31/96 was 3.06%
Effective Yield for 7-day Period ended 3/31/96 was 3.11%
Tax Equivalent Yield
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent
yield" means converting a tax-exempt yield to a pretax equivalent so that a
meaningful comparison can be made between a tax-exempt municipal fund and a
fully taxable fund. The Texas Tax-Free Money Market Fund may advertise
performance in terms of a tax equivalent yield based on the 7-day yield or
effective yield and the Texas Tax-Free Income Fund may advertise performance
in terms of a 30-day tax equivalent yield.
To calculate a tax equivalent yield, the Texas investor must know his
Federal marginal income tax rate. The tax equivalent yield is then computed
by dividing the tax-exempt yield of a fund by the complement of the Federal
marginal tax rate. The complement, for example, of a Federal marginal tax
rate of 36.0% is 64.0%, that is (1.00-0.36= 0.64).
Tax Equivalent Yield = Tax Exempt Yield / (1- Federal Marginal Tax Rate)
Based on a Federal marginal tax rate of 36.0%, the tax equivalent yields
for the Texas Tax-Free Income and Texas Tax-Free Money Market Funds for the
period ended March 31, 1996 were 8.45% and 4.78%, respectively.
APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS
Tax-Exempt Securities
Tax-exempt securities generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and
corporations, to obtain funds to construct, repair or improve various public
facilities such as airports, bridges, highways, hospitals, housing, schools,
streets, and water and sewer works. Tax-exempt securities may also be issued
to refinance outstanding obligations as well as to obtain funds for general
operating expenses and for loans to other public institutions and facilities.
The two principal classifications of tax-exempt securities are "general
obligations" and "revenue" or "special tax" bonds. General obligation bonds
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue or special tax bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
tax, but not from general tax revenues. The Funds may also invest in
tax-exempt private activity bonds, which in most cases are revenue bonds and
generally do not have the pledge of the credit of the issuer. The payment of
the principal and interest on such industrial revenue bonds is dependent
solely on the ability of the user of the facilities financed by the bonds to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. There are, of course,
many variations in the terms of, and the security underlying tax-exempt
securities. Short-term obligations issued by states, cities, municipalities
or municipal agencies, include Tax Anticipation Notes, Revenue Anticipation
Notes, Bond Anticipation Notes, Construction Loan Notes and Short-Term Discount
Notes.
The yields of tax-exempt securities depend on, among other things, general
money market conditions, conditions of the tax-exempt bond market, the size of
a particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc. (Fitch), Duff &
Phelps Inc., Thompson BankWatch, Inc., and IBCA Inc. represent their
opinions of the quality of the securities rated by them. It should be
emphasized that such ratings are general and are not absolute standards of
quality. Consequently, securities with the same maturity, coupon and rating
may have different yields, while securities of the same maturity and coupon
but with different ratings may have the same yield. It will be the
responsibility of the Manager to appraise independently the fundamental
quality of the tax-exempt securities included in a Fund's portfolio.
Ratings
Excerpts from Moody's Bond (Tax-Exempt Securities) Ratings:
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Note: Those bonds in the Aa, A, and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols Aa1, A1, and
Baa1.
Excerpts of Moody's Ratings of Short-Term Loans (State and Tax-Exempt Notes):
Moody's ratings for state and tax-exempt notes and other short-term
obligations are designated Moody's Investment Grade (MIG). Symbols used will
be as follows:
MIG-1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG-2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
Excerpts of Moody's Rating of Commercial Paper:
Prime-1 Issuers have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior short-term
debt obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.
Excerpts from S&P's Bond Ratings:
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts of S&P's Ratings of Tax-Exempt Notes:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
Excerpts of S&P's Rating of Commercial Paper:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated A-1.
Excerpts of Fitch's Ratings of Bonds:
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore, impair timely payment.
Plus (+) and Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the AAA category.
Excerpts of Fitch's Ratings to Commercial Paper, Certificates of Deposit and
Tax-Exempt Notes:
F-1+ Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but the margin
of safety is not as great as the F-1+ and F-1 ratings.
Excerpts from Duff & Phelps Long-Term Rating Scale:
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic
conditions.
A Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during
economic cycles.
Excerpts from Duff & Phelps Commercial Paper Rating Scale:
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or ready access to
alternative sources of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Thompson BankWatch, Inc.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while the
obligation is more susceptible to adverse developments (both
internal and external) than obligations with higher ratings, the
capacity to service principal and interest in a timely fashion is
considered adequate.
IBCA Inc.
A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Funds contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward,
investment objectives, investment strategies, and performance.
Fund performance also may be compared to the performance of broad groups
of mutual funds with similar investment goals or unmanaged indexes of
comparable securities. Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund. The
Fund or its performance may also be compared to products and services not
constituting securities subject to registration under the Securities Act of
1933 such as, but not limited to, certificates of deposit and money market
accounts. Sources for performance information and articles about the Fund may
include the following:
AAII Journal, a monthly association magazine for members of the American
Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
The Bond Buyer, a daily newspaper which covers bond market news.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time reports on
companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine that periodically features companies in
the mutual fund industry.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine which may periodically review mutual fund
companies.
Forbes, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers financial news
and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry analysis prepared
by IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
Investment Company Institute, a national association of the American
Investment Company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance Analysis, a
monthly publication of industry-wide mutual fund performance averages by type
of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
and quarterly publication of industry-wide mutual fund performance averages by
type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to the medical
profession.
Money, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue Organization, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically: (1) Taxable Money Fund Averages: "100% U.S.
Treasury" and "First Tier" and (2) Tax-Free Money Fund Averages: "Stockbroker
and General Purpose" and "State Specific Stockbroker and General Purpose".
Morningstar 5 Star Investor, a monthly newsletter which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end mutual funds).
</5>
Muni Bond Fund Report, a monthly newsletter which covers news on the municipal
bond market and features performance data for municipal bond mutual funds.
MuniWeek, a weekly newspaper which covers news on the municipal bond market.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of industry-wide mutual
fund averages produced by Morningstar, Inc.
Mutual Fund Magazine, a monthly publication reporting on mutual fund
investing.
Mutual Fund Source Book, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the mutual fund
industry.
Personal Investor, a monthly magazine which from time to time features mutual
fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that periodically covers
mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on investing and
mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which covers
financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a
whole.
Worth, a magazine which covers financial and investment subjects including
mutual funds.
Your Money, a monthly magazine directed towards the novice investor.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. Each Fund will be compared to
Lipper's appropriate fund category according to objective and portfolio
holdings. The Texas Tax-Free Income Fund will be compared to funds in
Lipper's Texas tax-exempt bond funds category, and the Texas Tax-Free Money
Market Fund to funds in Lipper's Texas short-term tax-exempt bond funds
category. Footnotes in advertisements and other sales literature will
include the time period applicable for any rankings used.
For comparative purposes, unmanaged indices of comparable securities or
economic data may be cited. Examples include the following:
- Shearson Lehman Hutton Bond Indices, indices of fixed-rate debt
issues rated investment grade or higher which can be found in the
Bond Market Report.
- Bond Buyer Indices, indices of debt of varying maturities including
revenue bonds, general obligation bonds, and U.S. Treasury bonds
which can be found in MuniWeek and The Bond Buyer.
Other sources for total return and other performance data which may be
used by the Fund or by those publications listed previously are Morningstar,
Inc., Schabaker Investment Management, and Investment Company Data, Inc.
These are services that collect and compile data on mutual fund companies.
APPENDIX C - TAXABLE EQUIVALENT YIELD TABLE
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
To Match a
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:
2.00% 2.78% 2.90% 3.13% 3.31%
3.00% 4.17% 4.35% 4.69% 4.97%
4.00% 5.56% 5.80% 6.25% 6.62%
5.00% 6.94% 7.25% 7.81% 8.28%
6.00% 8.33% 8.70% 9.38% 9.93%
7.00% 9.72% 10.15% 10.94% 11.59%
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THESE RATES WERE SELECTED AS EXEMPLARY RATES THAT WOULD BE RELEVANT TO MOST
TAXPAYERS.
APPENDIX D - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money
is invested in a security (such as a stock or mutual fund) on a regular basis
over a period of time, regardless of whether securities markets are moving up
or down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods
of higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to
help calm the effect of fluctuations in the financial markets. Systematic
investing involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should consider their
financial ability to continue purchases through periods of low and high
price levels.
As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------
Down Up Mixed
----------------- ----------------- -----------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
----------------- ----------------- -----------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- ----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg.Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg.Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by
shares purchased.
** Average Price is the sum of the prices paid divided by
number of purchases.
*** Cumulative total of share prices used to compute average
prices.
23702-0896
PART C. OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Statements included in Parts A and B (Prospectuses and
Statements of Additional Information) of this Registration Statement:
Financial Statements and Independent Auditors' Report are incorporated
by reference to the USAA STATE TAX-FREE TRUST, USAA Florida Funds and
USAA Texas Funds Annual Reports to Shareholders for fiscal year ended
March 31, 1996.
(b) Exhibits:
Exhibit No. Description of Exhibits
- ---------- -----------------------
1(a) Master Trust Agreement dated June 21, 1993 (1)
(b) Amendment No. 1 to Master Trust Agreement dated September 8, 1993
(1)
(c) Amendment No. 2 to Master Trust Agreement dated May 3, 1994 (1)
2 By-Laws, as amended November 8, 1993 (1)
3 Voting trust agreement - Not Applicable
4 Specimen Certificates for Shares of
(a) Florida Tax-Free Income Fund (1)
(b) Florida Tax-Free Money Market Fund (1)
(c) Texas Tax-Free Income Fund (1)
(d) Texas Tax-Free Money Market Fund (1)
5(a) Advisory Agreement dated June 25, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas Tax-Free Income
Fund and Texas Tax-Free Money Market Fund (1)
6(a) Underwriting Agreement dated June 25, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas Tax-Free Income
Fund and Texas Tax-Free Money Market Fund (1)
7 Not Applicable
8(a) Custodian Agreement dated June 29, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas Tax-Free Income
Fund and Texas Tax-Free Money Market Fund (1)
(c) Subcustodian Agreement dated March 24, 1994 (filed herewith)
9(a) Transfer Agency Agreement dated June 25, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas Tax-Free Income
Fund and Texas Tax-Free Money Market Fund (1)
(c) Amendment to Transfer Agency Agreement Fee Schedule dated May 3,
1995 for Florida Tax-Free Money Market Fund (1)
(d) Amendment to Transfer Agency Agreement Fee Schedule dated May 3,
1995 for Texas Tax-Free Money Market Fund (1)
(e) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 15, 1996 (filed herwith)
(f) Master Revolving Credit Facility Agreement with NationsBank of
Texas dated January 16, 1996 (filed herewith)
10(a) Opinion of Counsel (1)
(b) Consent of Counsel (filed herewith)
11 Independent Auditors' Consent (filed herewith)
12 Financial statements omitted from prospectuses - Not Applicable
Exhibit No. Description of Exhibits
- ---------- -----------------------
13 Subscriptions and Investment Letters
(a) Florida Bond Fund and Florida Money Market Fund dated June 25,
1993 (1)
(b) Texas Tax-Free Income Fund and Texas Tax-Free Money Market Fund
dated May 3, 1994 (1)
14 Prototype Plans - Not Applicable
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
17 Financial Data Schedules
(a) Florida Tax-Free Income Fund (filed herewith)
(b) Florida Tax-Free Money Market Fund (filed herewith)
(c) Texas Tax-Free Income Fund (filed herewith)
(d) Texas Tax-Free Money Market Fund (filed herewith)
18 Plan Adopting Multiple Classes of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk, John W.
Saunders, Jr., George E. Brown, Howard L. Freeman, Jr., and
Richard A. Zucker dated June 25, 1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated July 12, 1995 (1)
- ----------------
(1) Previously filed with Post-Effective Amendment No. 4 of the Registrant
(No. 33-65572 with the Securities and Exchange Commission on July 25
1995.
Item 25. Persons Controlled by or Under Common Control with Registrant
Information pertaining to persons controlled by or under common
control with Registrant is hereby incorporated by reference to the
section captioned "Management of the Trust" in the Prospectus and
the section captioned "Trustees and Officers of the Trust" in the
Statement of Additional Information.
Item 26. Number of Holders of Securities
Set forth below are the number of record holders, as of June 30,
1996, of each class of securities of the Registrant.
Title of Class Number of Record Holders
-------------- ------------------------
Florida Tax-Free Income Fund 1,766
Florida Tax-Free Money Market Fund 1,419
Texas Tax-Free Income Fund 379
Texas Tax-Free Money Market Fund 173
Item 27. Indemnification
Protection for the liability of the adviser and underwriter and for
the officers and trustees of the Registrant is provided by two
methods:
(a) The Trustee and Officer Liability Policy. This policy covers all
losses incurred by the Registrant, its adviser and its underwriter
from any claim made against those entities or persons during the
policy period by any shareholder or former shareholder of any Fund
by reason of any alleged negligent act, error or omission
committed in connection with the administration of the investments
of said Registrant or in connection with the sale or redemption of
shares issued by said Registrant. The Trust will not pay for such
insurance to the extent that payment therefor is in violation of
the Investment Company Act of 1940 or the Securities Act of 1933.
(b) Indemnification Provisions under Agreement and Declaration of
Trust. Under Article VI of the Registrant's Agreement and
Declaration of Trust, each of its Trustees and officers or any
person serving at the Registrant's request as directors, officers or
trustees of another organization in which the Registrant has any
interest as a shareholder, creditor or otherwise ("Covered Person")
shall be indemnified against all liabilities, including but not
limited to amounts paid in satisfaction of judgments, in compromise
or as fines and penalties, and expenses, including reasonable
accountants' and counsel fees, incurred by any Covered Person in
connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such Covered Person may
be or may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in office or
thereafter, by reason of being or having been such an officer,
director or trustee, except with respect to any matter as to which
it has been determined that such Covered Person had acted with
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered
Person's office (such conduct referred to hereafter as "Disabling
Conduct"). A determination that the Covered Person is entitled to
indemnification may be made by (i) a final decision on the merits by
a court or other body before whom the proceeding was brought that the
person to be indemnified was not liable by reason of Disabling
Conduct, (ii) dismissal of a court action or an administrative
proceeding against a Covered Person for insufficiency of evidence of
Disabling Conduct, or (iii) a reasonable determination, based upon a
review of the facts, that the Covered Person was not liable by reason
of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Registrant as
defined in section 2(a)(19) of the 1940 Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion.
Expenses, including accountants and counsel fees so incurred by
any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or
penalties), may be paid from time to time from funds attributable
to the Fund of the Registrant in question in advance of the final
disposition of any such action, suit or proceeding, provided that
the Covered Person shall have undertaken to repay the amounts so
paid to the Fund of the Registrant in question if it is ultimately
determined that indemnification of such expenses is not authorized
under this Article VI and (i) the Covered Person shall have
provided security for such undertaking, (ii) the Registrant shall
be insured against losses arising by reason of any lawful
advances, or (iii) a majority of a quorum of the disinterested
Trustees who are not a party to the proceeding, or an independent
legal counsel in a written opinion, shall have determined, based
on a review of readily available facts (as opposed to full trial
-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
As to any matter disposed of by a compromise payment by any such
Covered Person pursuant to a consent decree or otherwise, no such
indemnification either for said payment or for any other expenses
shall be provided unless such indemnification shall be approved
(a) by a majority of the disinterested Trustees who are not parties
to the proceeding or (b) by an independent legal counsel in a
written opinion. Approval by the Trustees pursuant to clause (a)
or by independent legal counsel pursuant to clause (b) shall not
prevent the recovery from any Covered Person of any amount paid to
such Covered Person in accordance with any of such clauses as
indemnification if such Covered Person is subsequently adjudicated
by a court of competent jurisdiction to have been liable to the
Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the Registrant's
Agreement and Declaration of the Trust or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the
securities being registered, then the Registrant will, unless in the
opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Information pertaining to business and other connections of the
Registrant's investment adviser is hereby incorporated by reference
to the section of the Prospectus captioned "Management of the Trust"
and to the section of the Statement of Additional Information
captioned "Trustees and Officers of the Trust."
Item 29. Principal Underwriters
(a) USAA Investment Management Company (the "Adviser") acts as
principal underwriter and distributor of the Registrant's shares
on a best-efforts basis and receives no fee or commission for its
underwriting services. The Adviser, wholly owned by United
Services Automobile Association, also serves as principal
underwriter for USAA Investment Trust, USAA Mutual Fund, Inc., and
USAA Tax Exempt Fund, Inc.
(b) Following is information concerning directors and executive
officers of USAA Investment Management Company.
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
- ------------------ -------------------- --------------------
M. Staser Holcomb Director and Chairman Trustee and
9800 Fredericksburg Rd. of the Board of Chairman of the
San Antonio, TX 78288 Directors Board of Trustees
Michael J.C. Roth Chief Executive President, Trustee
9800 Fredericksburg Rd. Officer, President, and Vice Chairman
San Antonio, TX 78288 Director, and Vice of the Board of
Chairman of the Trustees
Board of Directors
Mark H. Wright Director None
9800 Fredericksburg Rd.
San antonio, TX 78288
John W. Saunders, Jr. Senior Vice President, Vice President
9800 Fredericksburg Rd. Fixed Income Investments, and Trustee
San Antonio, TX 78288 and Director
Harry W. Miller Senior Vice President, None
9800 Fredericksburg Rd. Equity Investments,
San Antonio, TX 78288 and Director
Bradford W. Rich Director None
9800 Fredericksburg Rd.
San Antonio, TX 78288
Josue Robles, Jr. Director None
9800 Fredericksburg Rd.
San Antonio, TX 78288
John J. Dallahan Senior Vice President, None
9800 Fredericksburg Rd. Investment Services
San Antonio, TX 78288
Michael D. Wagner Vice President, Secretary
9800 Fredericksburg Rd. Secretary and Counsel
San Antonio, TX 78288
Sherron A. Kirk Vice President and Treasurer
9800 Fredericksburg Rd. Controller
San Antonio, TX 78288
Alex M. Ciccone Vice President, Assistant
9800 Fredericksburg Rd. Compliance Secretary
San Antonio, TX 78288
(c) Not Applicable
Item 30. Location of Accounts and Records
The following entities prepare, maintain and preserve the records
required by Section 31(a) of the Investment Company Act of 1940
(the "1940 Act") for the Registrant. These services are provided
to the Registrant through written agreements between the parties to
the effect that such services will be provided to the Registrant for
such periods prescribed by the Rules and Regulations of the
Securities and Exchange Commission under the 1940 Act and such
records are the property of the entity required to maintain and
preserve such records and will be surrendered promptly on request.
USAA Investment Management Company
9800 Fredericksburg Rd.
San Antonio, Texas 78288
USAA Shareholder Account Services
10750 Robert F. McDermott Freeway
San Antonio, Texas 78288
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
Item 31. Management Services
Not Applicable.
Item 32. Undertaking
The Registrant hereby undertakes, if requested to do so by the
holders of at least 10% of the Registrant's outstanding shares,
to call a meeting of shareholders for the purpose of voting upon
the question of removal of a Trustee or Trustees and to assist in
communications with other shareholders as required by Section 16(c)
of the Investment Company Act of 1940.
The Registrant hereby undertakes to provide each person to whom a
prospectus is delivered a copy of the Registrant's latest annual
report(s) to shareholders upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the securities Act of 1933 and has duly caused this
amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Antonio and State
of Texas on the 10th day of July, 1996.
USAA STATE TAX-FREE TRUST
/s/Michael J.C. Roth
---------------------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
(Signature) (Title) (Date)
/s/M. Staser Holcomb Chairman of the July 10, 1996
- ------------------------ Board of Trustees
M. Staser Holcomb
/s/Michael J.C. Roth Vice Chairman of the July 10, 1996
- ------------------------ Board of Trustees and
Michael J.C. Roth President (Principal
Executive Officer)
/s/Sherron A. Kirk Treasurer (Principal July 10, 1996
- ------------------------ Financial and
Sherron A. Kirk Accounting Officer)
/s/John W. Saunders, Jr. Trustee July 10, 1996
- ------------------------
John W. Saunders, Jr.
/s/George E. Brown Trustee July 10, 1996
- ------------------------
George E. Brown
/s/Howard L. Freeman, Jr. Trustee July 10, 1996
- ------------------------
Howard L. Freeman, Jr.
/s/Richard A. Zucker Trustee July 10, 1996
- ------------------------
Richard A. Zucker
/s/Barbara B. Dreeben Trustee July 10, 1996
- ------------------------
Barbara B. Dreeben
EXHIBIT INDEX
Exhibit Item Page No. *
- ------- ---- ----------
1(a) Master Trust Agreement dated June 21, 1993 (1)
(b) Amendment No. 1 to Master Trust Agreement dated
September 8, 1993 (1)
(c) Amendment No. 2 to Master Trust Agreement dated
May 3, 1994 (1)
2 By-Laws, as amended November 8, 1993 (1)
3 Voting trust agreement - Not Applicable
4 Specimen Certificates for Shares of
(a) Florida Tax-Free Income Fund (1)
(b) Florida Tax-Free Money Market Fund (1)
(c) Texas Tax-Free Income Fund (1)
(d) Texas Tax-Free Money Market Fund (1)
5(a) Advisory Agreement dated June 25, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas
Tax-Free Income Fund and Texas Tax-Free Money Market Fund (1)
6(a) Underwriting Agreement dated June 25, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas Tax-Free
Income Fund and Texas Tax-Free Money Market Fund (1)
7 Not Applicable
8(a) Custodian Agreement dated June 29, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas Tax-Free
Income Fund and Texas Tax-Free Money Market Fund (1)
(c) Subcustodian Agreement dated March 24, 1994
(filed herewith) 122
9(a) Transfer Agency Agreement dated June 25, 1993 (1)
(b) Letter Agreement dated May 10, 1994 adding Texas Tax-Free
Income Fund and Texas Tax-Free Money Market Fund (1)
(c) Amendment to Transfer Agency Agreement Fee Schedule dated
May 3, 1995 for Florida Tax-Free Money Market Fund (1)
(d) Amendment to Transfer Agency Agreement Fee Schedule dated
May 3, 1995 for Texas Tax-Free Money Market Fund (1)
(e) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 15, 1996 (filed herwith) 135
(f) Master Revolving Credit Facility Agreement with NationsBank
of Texas dated January 16, 1996 (filed herewith) 164
10(a) Opinion of Counsel (1)
(b) Consent of Counsel (filed herewith) 192
11 Independent Auditors' Consent (filed herewith) 194
12 Financial statements omitted from prospectuses - Not Applicable
13 Subscriptions and Investment Letters
(a) Florida Bond Fund and Florida Money Market Fund dated
June 25, 1993 (1)
(b) Texas Tax-Free Income Fund and Texas Tax-Free Money Market Fund
dated May 3, 1994 (1)
14 Prototype Plans - Not Applicable
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
EXHIBIT INDEX, cont.
Exhibit Item Page No. *
- ------- ---- ----------
17 Financial Data Schedules
(a) Florida Tax-Free Income Fund (filed herewith) 196
(b) Florida Tax-Free Money Market Fund (filed herewith) 198
(c) Texas Tax-Free Income Fund (filed herewith) 200
(d) Texas Tax-Free Money Market Fund (filed herewith) 202
18 Plan Adopting Multiple Classes of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk,
John W. Saunders, Jr., George E. Brown, Howard L. Freeman,
Jr., and Richard A. Zucker dated June 25, 1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated July 12,
1995 (1)
- ----------------
(1) Previously filed with Post-Effective Amendment No. 4 of the Registrant
(No. 33-65572 with the Securities and Exchange Commission on July 25
1995.
- -----------------------
* Refers to sequentially numbered pages
EXHIBIT 8(c)
USAA STATE TAX FREE FUND
SUBCUSTODIAN AGREEMENT
WITH
TEXAS COMMERCE BANK
The undersigned custodian (the "Custodian") for USAA State Tax Free Fund
(the "Company"), an open-end investment company registered under the
Investment Company Act of 1940 (the "1940 Act"), hereby appoints Texas
Commerce Bank as subcustodian (the "Subcustodian") for each of the respective
series of the Fund (the "Funds") and the Subcustodian hereby accepts such
appointment on the following terms and conditions as of the date set forth
below.
1. Qualification. The Custodian and the Subcustodian each represents
to the other and to the Company that it is qualified to act as a custodian for
a registered investment company under the 1940 Act, and the Custodian
represents to the Subcustodian that it is the duly appointed, qualified and
acting Custodian of the Funds, with all necessary power and authority to enter
into this Agreement.
2. Subcustody. The Subcustodian agrees to maintain one or more
custodial accounts ("Subscription Accounts") for the Funds in which checks
("Subscription Checks") issued in payment for purchases of Fund shares shall
be deposited by USAA Shareholder Account Services ("USAA SAS"), transfer agent
of the Funds (the "Transfer Agent"). The Subcustodian further agrees to debit
USAA IMCO account no. 06407080765 (the "Return Item Account") for the
aggregate amount of all Subscription Checks returned to the Subcustodian for
non-payment ("Return Items"), informing USAA SAS daily of any returned
Subscription Checks. In the event that the available funds in the Return Item
Account are insufficient to cover the amount of the Return Items, Subcustodian
will promptly notify Transfer Agent by telephone of the amount of such
insufficiency. Upon receipt of such telephone notice, Transfer Agent agrees
to remit to Subcustodian the full amount of any such insufficiency.
Each business day the Subcustodian agrees to, based upon
instructions by USAA SAS, remit to the Custodian by wire transfer amounts of
Subscription Checks deposited in the Subscription Account on the preceding
business day notwithstanding whether the Subcustodian has collected good funds
in respect of such checks. The Funds will compensate the Subcustodian for (i)
estimated earnings lost on amounts wired to the custodian in payment of
Subscription Checks during the period from the date wire payment is made
through the date good funds on such checks are received by the Subcustodian,
(ii) for service fees charged by the Subcustodian for processing Subscription
Checks as set forth in Schedule 1 to this Agreement (These amounts will be
paid monthly and computed based on an overall account relationship.), (iii)
other miscellaneous fees as described in Schedule 1, and (iv) Return Items not
paid by the Transfer Agent or the USAA Investment Management Company (USAA
IMCO) within five (5) business days following a request for payment by
Subcustodian pursuant to Paragraph 2 hereof.
3. Instructions: Other Communications. Any one officer or other
authorized representative of the Transfer Agent designated as hereinafter
provided as an officer or other authorized representative of the Transfer
Agent authorized to give instructions to the Subcustodian with respect to Fund
assets held in Subscription Accounts (an "Authorized Officer"), shall be
authorized to instruct the Subcustodian as to the deposit, withdrawal or any
other action with respect to Fund assets from time to time by telephone, or in
writing signed by such Authorized Officer and delivered by telecopy, tested
telex, tested computer printout or such other reasonable method as the
Transfer Agent and Subcustodian shall agree; provided, however, the
Subcustodian is authorized to accept and act upon instructions from the
Transfer Agent, whether orally, by telephone or otherwise, which the
Subcustodian reasonably believes to be given by an authorized person. The
Subcustodian may require that any instructions given orally or by
telecommunications be promptly confirmed in writing.
The Authorized Officers shall be as set forth on Schedule 2
attached hereto or as otherwise from time to time certified in writing by the
Transfer Agent to the Subcustodian signed by the President or any Vice
President and any Assistant Vice President, Assistant Secretary or Assistant
Treasurer of the Funds. In addition to a written list of authorized officers,
the Transfer Agent will provide Subcustodian with additional information and
signature cards as reasonably requested by Subcustodian relating to the
authorized officers. The Subcustodian shall furnish the Transfer Agent, with
a copy to the Funds, by first class mail, or other mutually agreed-upon means
of transmission, (i) prompt telephonic and written notice of Return Items,
(ii) a monthly report on activity in each of the Subscription Accounts within
five (5) days after the end of each calendar month, and (iii) a daily
statement of activity in each of the Subscription Accounts. The Subcustodian
shall also furnish the Custodian with a copy of item (ii) above.
4. Fees. The service fees charged by the Subcustodian under the
Agreement are set forth in Schedule 1 attached hereto. Schedule 1 may be
amended by the parties in writing provided written notice is furnished to the
Funds thirty (30) days in advance of any increase in fees.
5. Liabilities.
(i) The Subcustodian shall be held harmless by the Custodian and
Transfer Agent and shall not be liable for any action taken or omitted to be
taken in good faith, or for any mistake of law or fact, or for anything
Subcustodian may do or refrain from doing in connection with or as required by
this Agreement, except for failure to exercise ordinary care or act in good
faith. Except as otherwise set forth herein, the Subcustodian shall have no
responsibility with respect to Fund assets. The Subcustodian shall, for the
benefit of the Custodian and the Funds, use the same care with respect to
handling of Fund assets in depository accounts as it uses in respect of its
own assets similarly held. The Subcustodian shall have no responsibility with
respect to any monies or any wire transfer, checks or other instruments for
the payment of money unless and until actually received or secured by wire
transfer by the Subcustodian. IN NO EVENT WILL THE SUBCUSTODIAN BE LIABLE TO
CUSTODIAN, TRANSFER AGENT OR THE FUNDS FOR ANY INDIRECT DAMAGES, LOST PROFITS,
SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES WHICH ARISE OUT OF OR IN CONNECTION
WITH THE SERVICES CONTEMPLATED HEREIN.
(ii) The Subcustodian shall indemnify, defend and save harmless the
Custodian and each Fund from and against all loss, liability, claims and
demands incurred by the Custodian or the Fund arising out of or in connection
with the Subcustodian's willful malfeasance or bad faith in connection with
its obligations and duties under this Agreement.
(iii) The Custodian agrees to indemnify, defend and save harmless the
Subcustodian from and against all loss, liability, claims and demands incurred
by the Subcustodian in connection with the performance by the Subcustodian in
good faith of any activity under this Agreement, pursuant to instructions of
the Custodian
(iv) It is understood and expressly stipulated that neither the
shareholders of any Fund or the members of the Board of such Fund shall be
personally liable hereunder. The obligations of each Fund hereunder are not
personally binding upon, nor shall resort to the private property of, any of
the members of the Board of the Fund, nor of its shareholders, officers,
employees or agents, but only the Fund's property shall be bound.
6. Termination. Each party may terminate this Agreement at any time
by not less than thirty (30) days' prior written notice which shall specify
the date of such termination; and further, provided, however, that the
Custodian may immediately terminate this Agreement in the event of the
appointment of a conservator or receiver for the Subcustodian by the Federal
Deposit Insurance Corporation or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction. Upon termination, the Subcustodian shall make immediate
delivery of all Fund assets held in the Subscription Accounts to the Custodian
or to any third party specified by the Custodian in writing. If any
Subscription Checks are subsequently returned unpaid the Funds shall direct
the Transfer Agent to pay the Subcustodian the amount thereof on behalf of the
Funds promptly upon demand.
7. Communications. All notices to be delivered pursuant to the terms
of this Agreement shall be given in writing, and shall be deemed given (a)
upon delivery in person to the persons indicated below, or (b) three days
after deposit in the United States Postal Service, postage prepaid,
registered, or certified mail, return receipt requested, or (c) upon receipt
by facsimile (provided that such receipt of such facsimile is confirmed
telephonically by the addressee), or (d) by overnight delivery service (with
receipt of delivery), sent to the addresses shown below, or to such different
address(es) as such party shall be designated by written notice to the other
parties hereto at least ten (10) days in advance of the date upon which such
change of address shall be effective. All communications required or
permitted to be given under this Agreement, unless otherwise agreed by the
parties, shall be addressed as follows:
(i) to the Subcustodian:
Texas Commerce Bank
1020 N.E. Loop 410
San Antonio, Texas 78209
Attn: Jessica Jones
(ii) to the Custodian:
State Street Bank and Trust Company
One Heritage Drive
Palmer Building P.1-N
Quincy, Massachusetts 02171
Attn: Paul Kaminsky
(iii) to the Transfer Agent: USAA Shareholder Account Services
USAA Building, D-3-E
(As instructed by the Custodian) San Antonio, Texas 78288
Attn: Pat Bauer
8. Access to Records. The Subcustodian will not refuse any
reasonable request for inspection and audit of its books and records
concerning transactions and balances of the Subscription Accounts by an agent
of any Fund or the Custodian.
9. Cooperation. The Subcustodian shall cooperate with each Fund and
the Custodian and their respective independent public accountants in
connection with annual and other audits of the books and records of the
Custodian or the Fund.
10. Miscellaneous. This Agreement (i) shall be governed by and
construed in accordance with the laws of the State of Texas without regard to
conflicts of law rules, (ii) may be executed in counterparts each of which
shall be deemed an original but all of which shall constitute the same
instrument, and (iii) may only be amended by the parties hereto in writing.
11. Terms and Conditions of Deposit Accounts. The handling of the
Subscription Accounts and the Return Item Account and all other accounts
maintained with Subcustodian in connection with or relating to this Agreement
will be subject to the Subcustodian's Terms and Conditions of Deposit
Accounts, and any and all rules or regulations now or hereafter promulgated by
the Subcustodian which relate to such accounts and the Uniform Commercial
Code, as adopted by the State of Texas (except in the event any of the same
are contrary to the specific provisions hereof). In the event of any specific
conflict betweenthe provisions hereof and the provisions of any of the
agreements, rules andregulations referenced in this paragraph, the provisions
of this Agreement shall control.
12. Signature Authority. Each of the undersigned represents and
warrants that he/she has the requisite authority to execute this Agreement on
behalf of the party for whom the undersigned signs; that all necessary action
has been taken to authorize this Agreement; that this Agreement, upon
execution and delivery, shall be a binding obligation of such party.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date set forth below.
Dated: March 24, 1994
STATE STREET BANK & TRUST COMPANY
As Custodian
By: /s/ Ronald E. Logue
------------------------------
Title: Executive Vice President
TEXAS COMMERCE BANK
As Subcustodian
By: /s/ Jessica Jones
------------------------------
Title: Vice President
USAA SHAREHOLDER ACCOUNT SERVICES
As Transfer Agent
By: /s/ A. Ray Otte
------------------------------
A. Ray Otte
Title: Sr. Vice President
Chief Financial Officer/Controller
By: /s/ Sherron A. Kirk
-------------------------------
Sherron A. Kirk
Title: Vice President-Controller
The Funds each hereby consent and agree to the terms of the foregoing
Subcustodian Agreement; provided, however, that the same shall not relieve the
Custodian of any of its responsibilities to the Funds as set forth in the
Custodian Agreements between the Funds and the Custodian.
USAA STATE TAX FREE FUND
By: /s/ John W. Saunders, Jr.
-------------------------------
John W. Saunders, Jr.
Title: Vice President
SCHEDULE 1
FEES
Item Processing Pricing
High Volume Corporate Accounts
Effective January 1994
SERVICE PRICE
Pre-encoded Deposit
On-Us $ .019/item
Tier I/Local City $ .019/item
Tier II/Local RCPC $ .029/item
Tier III/Texas Fed Cities $ .040/item
Tier IV/Other Texas $ .050/item
Tier V/Other Transit $ .059/item
Rejects $ .03/item
Account Maintenance $ 10.00/account
Debits Posted $ .12/item
Credits Posted $ .45/deposit
FDIC Assessment $ .16/$1,000 ledger bal./mo.
MicroLink Pricing
Effective January 1994
SERVICE PRICE
Cash Manager
Software Pricing *
Cash Manager Setup Fee $ 325.00
Maintenance *
Cash Manager $ 35.00/customer/month
Bank Account Reporting
TCB
(First 5 Accounts) $ 25.00/account/month
Current Day Reporting **
Transaction Reporting
Previous Day Items $ .15/item
Current Day Items $ .20/item
Automated Payments & Collections (APC)***
Software Pricing *
APC Setup Fee $ 225.00
Maintenance *
Automated Payments & Collections $ 25.00/customer/month
APC Transactions
First 1-500 Transactions $ .30/transaction
* Fees are for single micro-computer software. Additional micro-computer
software and maintenance charges are available at 50% off listed fees.
** The charge for Current Day Reporting is in addition to the account
charges.
*** Refer to ACH Price Sheet for additional APC and DTS charges.
TexStar Funds Transfer Pricing
Effective January 1994
SERVICE PRICE
TexStar Account Maintenance $ 0.00/account/month
Incoming Transfer
Autopost Domestic $ 4.50/transfer
Notifications
TexStar Direct Access $ No charge
TexStar Direct Access, TexStar EXPRESS,
Automatic Standing Transfer, BatchWire*
Internal $ 1.00/transfer
Outgoing
Repetitive $ 6.00/transfer
* BatchWire supports domestic internal and outgoing repetitive funds
transfers.
Automated Clearing House (ACH)
Origination
(Statewide)
Effective January 1994
SERVICE PRICE
MicroLink (APC Module)
Software Setup Fee $ 225.00
Maintenance $ 25.00/customer/month
Initiation
First 1-500 transactions $ .30/transaction
Monthly Maintenance * $ 50.00/customer Tax ID/
month
* One charge for all accounts
International Collection Services Pricing
Effective January 1994
SERVICE PRICE
International Collections*
$ 25.00-$ 4,000.00 $ 16.00
$ 4,000.01-$10,000.00 $ 26.00
$10,000.01+ $ 51.00 maximum (1/4 of 1%)
* Charge deducted from the face amount of the check. $8.50 processing fee
charged to analysis.
SCHEDULE 2
AUTHORIZED OFFICERS
Michael J.C. Roth
Joseph H.L. Jimenez
Sherron Kirk
Pat Bauer
Jim Sanchez
Lori Polhamus
Delia Flores
EXHIBIT 9(e)
January 15, 1996
USAA Mutual Fund, Inc.,
USAA Investment Trust,
USAA Tax Exempt Fund, Inc., and
USAA State Tax-Free Trust, on behalf of and for the
benefit of the series
of funds comprising each such Borrower
as set forth on Schedule A hereto
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Michael J.C. Roth, President
Gentlemen:
This Facility Agreement Letter (this "Agreement") sets forth the terms and
conditions for loans (each a "Loan" and collectively the "Loans") which USAA
Capital Corporation ("CAPCO") may from time to time make during the period
commencing January 15, 1996 and ending January 14, 1997 (the "Facility
Period") to USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt
Fund, Inc., and USAA State Tax-Free Trust, and each investment company which
may become a party hereto pursuant to the terms of this Agreement (each a
"Borrower" and collectively the "Borrowers"), each of which is executing this
Agreement on behalf of and for the benefit of the series of funds comprising
each such Borrower as set forth on Schedule A hereto (as hereafter modified or
amended in accordance with the terms hereof) (each a "Fund" and collectively
the "Funds"), under a master revolving credit facility (the "Facility"). USAA
Investment Management Company is the Manager and Investment Advisor of each
Fund. CAPCO and the Borrowers hereby agree as follows:
1. Amount. The aggregate principal amount of the Loans which may
be advanced under this Facility shall not exceed, at any one time outstanding,
Seven Hundred Fifty Million Dollars ($750,000,000). The aggregate principal
amount of the Loans which may be borrowed by a Borrower for the benefit of a
particular Fund under this Facility shall not exceed the borrowing limit (the
"Borrowing Limit") on borrowings applicable to such Fund, as set forth on
Schedule A hereto.
2. Purpose and Limitations on Borrowings. Each Borrower will use
the proceeds of each Loan made to it solely for temporary or emergency
purposes of the Fund for whose benefit it is borrowing in accordance with such
Fund's Borrowing Limit (Schedule A) and prospectus in effect at the time of
such Loan. Portfolio securities may not be purchased by a Fund while there is
a Loan outstanding under the Facility or any other facility, if the aggregate
amount of such Loan and any other such loan exceeds 5% of the total assets of
such Fund.
3. Borrowing Rate and Maturity of Loans. CAPCO may make Loans to
a Borrower and the principal amount of the Loans outstanding from time to time
shall bear interest at a rate per annum equal to the rate at which CAPCO
obtains funding in the Capital Markets plus a standard mark-up to cover
CAPCO's operating costs (not to exceed 8 basis points). Interest on the Loans
shall be calculated on the basis of a year of 360 days and the actual days
elapsed but shall not exceed the highest lawful rate. Each loan will be for
an established number of days agreed upon by the applicable Borrower and
CAPCO. Notwithstanding the above, all Loans to a Borrower shall be made
available at a rate per annum equal to the rate at which CAPCO would make
loans to affiliates and subsidiaries. Further, if the CAPCO rate exceeds the
rate at which a Borrower could obtain funds pursuant to the NationsBank of
Texas, N.A. ("NationsBank") 364-day committed $100,000,000 Master Revolving
Credit Facility, the Borrower will in the absence of predominating
circumstances, borrow from NationsBank. Any past due principal and/or accrued
interest shall bear interest at a rate per annum equal to the aggregate of the
Federal Funds Rate plus 1 percent (100 basis points) and shall be payable on
demand.
4. Advances, Payments, Prepayments and Readvances. Upon each
Borrower's request, and subject to the terms and conditions contained herein,
CAPCO may make Loans to each Borrower on behalf of and for the benefit of its
respective Fund(s) during the Facility Period, and each Borrower may at
CAPCO's sole and absolute discretion, borrow, repay and reborrow funds
hereunder. The Loans shall be evidenced by duly executed and delivered Master
Grid Promissory Note in the form of Exhibit A. Each Loan shall be in an
aggregate amount not less than One Hundred Thousand United States Dollars
(U.S. $100,000) and increments of One Thousand United States Dollars (U.S.
$1,000) in excess thereof. Payment of principal and interest due with respect
to each Loan shall be payable at the maturity of such Loan and shall be made
in funds immediately available to CAPCO prior to 2 p.m. San Antonio time on
the day such payment is due, or as CAPCO shall otherwise direct from time to
time and, subject to the terms and conditions hereof, may be repaid with the
proceeds of a new borrowing hereunder. Notwithstanding any provision of this
Agreement to the contrary, all Loans, accrued but unpaid interest and other
amounts payable hereunder shall be due and payable upon termination of the
Facility (whether by acceleration or otherwise).
5. Facility Fee. As this Facility is uncommitted, no facility fee
shall be charged by CAPCO.
6. Optional Termination. The Borrowers shall have the right upon at
least three (3) business days prior written notice to CAPCO, to terminate the
Facility.
7. Mandatory Termination of the Facility. The Facility, unless
extended by written amendment, shall automatically terminate on the last day
of the Facility Period and any Loans then outstanding (together with accrued
interest thereon and any other amounts owing hereunder) shall be due and
payable on such date.
8. Uncommitted Facility. The Borrowers acknowledge that the
Facility is an uncommitted facility and that CAPCO shall have no obligation to
make any Loan requested during the Facility Period under this Agreement.
Further, CAPCO shall not make any Loan if this Facility has been terminated by
the Borrowers, or if at the time of a request for a Loan by a Borrower [on
behalf of the applicable Fund(s)] there exists any Event of Default or
condition which, with the passage of time or giving of notice, or both, would
constitute or become an Event of Default with respect to such Borrower [or
such applicable Fund(s)].
9. Loan Requests. Each request for a Loan (each a "Borrowing
Notice") shall be in writing by the applicable Borrower(s), except that such
Borrower(s) may make an oral request (each an "Oral Request") provided that
each Oral Request shall be followed by a written Borrowing Notice within one
business day. Each Borrowing Notice shall specify the following terms
("Terms") of the requested Loan: (i) the date on which such Loan is to be
disbursed, (ii) the principal amount of such Loan, (iii) the Borrower(s) which
are borrowing such Loan and the amount of such Loan to be borrowed by each
Borrower, (iv) the Funds for whose benefit the loan is being borrowed and the
amount of the Loan which is for the benefit of each such Fund and (v) the
requested maturity date of the Loan. Each Borrowing Notice shall also set
forth the total assets of each Fund for whose benefit a portion of the Loan is
being borrowed as of the close of business on the day immediately preceding
the date of such Borrowing Notice. Borrowing notices shall be delivered to
CAPCO by 9:00 a.m. San Antonio time on the day the Loan is requested to be
made.
Each Borrowing Notice shall constitute a representation to CAPCO by the
applicable Borrower(s) that all of the representations and warranties in
Section 12 hereof are true and correct as of such date and that no Event of
Default or other condition which with the passage of time or giving of notice,
or both, would result in an Event of Default, has occurred or is occurring.
10. Confirmations; Crediting of Funds; Reliance by CAPCO. Upon
receipt by CAPCO of a Borrowing Notice:
(a) CAPCO shall provide each applicable Borrower written
confirmation of the Terms of such Loan via facsimile or telecopy, as soon as
reasonably practicable; provided, however, that the failure to do so shall not
affect the obligation of any such Borrower;
(b) CAPCO shall make such Loan in accordance with the Terms by
transfer of the Loan amount in immediately available funds, to the account of
the applicable Borrower(s) as specified in Exhibit B to this Agreement or as
such Borrower(s) shall otherwise specify to CAPCO in a writing signed by an
Authorized Individual (as defined in Section 11) of such Borrower(s); and
(c) CAPCO shall make appropriate entries on the Note or the
records of CAPCO to reflect the Terms of the Loan; provided, however, that the
failure to do so shall not affect the obligation of any Borrower.
CAPCO shall be entitled to rely upon and act hereunder pursuant to any Oral
Request which it reasonably believes to have been made by the applicable
Borrower through an Authorized Individual. If any Borrower believes that the
confirmation relating to any Loan contains any error or discrepancy from the
applicable Oral Request, such Borrower will promptly notify CAPCO thereof.
11. Borrowing Resolutions and Officers' Certificates. Prior to the
making of any Loan pursuant to this Agreement, the Borrowers shall have
delivered to CAPCO the duly executed Note, Resolutions of each Borrower's
Trustees or Board of Directors authorizing such Borrower to execute, deliver
and perform this Agreement and the Note on behalf of the applicable Funds and
an Officer's Certificate in substantially the form set forth in Exhibit D to
this Agreement, authorizing certain individuals ("Authorized Individuals"), to
take on behalf of each Borrower (on behalf of the applicable Funds) action
contemplated by this Agreement and the Note.
12. Representations and Warranties. In order to induce CAPCO to
enter into this Agreement and to make the Loans provided for hereunder, each
Borrower hereby makes with respect to itself, and as may be relevant, the
series of Funds comprising such Borrower, the following representations and
warranties, which shall survive the execution and delivery hereof and of the
Note:
(a) Organization, Standing, etc. The Borrower is a corporation
or trust duly organized, validly existing, and in good standing under
applicable state laws and has all requisite corporate or trust power and
authority to carry on its respective businesses as now conducted and proposed
to be conducted, to enter into this Agreement and all other documents to be
executed by it in connection with the transactions contemplated hereby, to
issue and borrow under the Note and to carry out the terms hereof and thereof;
(b) Financial Information; Disclosure, etc. The Borrower has
furnished CAPCO with certain financial statements of such Borrower with
respect to itself and the applicable Funds, all of which such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis and fairly present the financial
position and results of operations of such Borrower and the applicable Funds
on the dates and for the periods indicated. Neither this Agreement nor any
financial statements, reports or other documents or certificates furnished to
CAPCO by such Borrower or the applicable Funds in connection with the
transactions contemplated hereby contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
contained herein or therein in light of the circumstances when made not
misleading;
(c) Authorization; Compliance with Other Instruments. The
execution, delivery and performance of this Agreement and the Note, and
borrowings hereunder, have been duly authorized by all necessary corporate or
trust action of the Borrower and will not result in any violation of or be in
conflict with or constitute a default under any term of the charter, by-laws
or trust agreement of such Borrower or the applicable Funds, or of any
borrowing restrictions or prospectus or statement of additional information of
such Borrower or the applicable Funds, or of any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to such Borrower, or result in the creation of any mortgage, lien, charge or
encumbrance upon any of the properties or assets of such Borrower or the
applicable Funds pursuant to any such term. The Borrower and the applicable
Funds are not in violation of any term of their respective charter, by-laws or
trust agreement, and such Borrower and the applicable Funds are not in
violation of any material term of any agreement or instrument to which they
are a party, or to the best of such Borrower's knowledge, of any judgment,
decree, order, statute, rule or governmental regulation applicable to them;
(d) SEC Compliance. The Borrower and the applicable Funds are
in compliance in all material respects with all federal and state securities
or similar laws and regulations, including all material rules, regulations and
administrative orders of the Securities and Exchange Commission (the "SEC")
and applicable Blue Sky authorities. The Borrower and the applicable Funds
are in compliance in all material respects with all of the provisions of the
Investment Company Act of 1940, and such Borrower has filed all reports with
the SEC that are required of it or the applicable Funds;
(e) Litigation. There is no action, suit or proceeding pending
or, to the best of the Borrower's knowledge, threatened against such Borrower
or the applicable Funds in any court or before any arbitrator or governmental
body which seeks to restrain any of the transactions contemplated by this
Agreement or which, if adversely determined, could have a material adverse
effect on the assets or business operations of such Borrower or the applicable
Funds or the ability of such Borrower and the applicable Funds to pay and
perform their obligations hereunder and under the Notes; and
(f) Borrowers' Relationship to Funds. The assets of each Fund
for whose benefit Loans are borrowed by the applicable Borrower are subject to
and liable for such Loans and are available (except as subordinated to
borrowings under the NationsBank committed facility) to the applicable
Borrower for the repayment of such Loans.
13. Affirmative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to CAPCO by a Borrower pursuant to any
Loan made to such Borrower is irrevocably paid in full, and until the Facility
is terminated, such Borrower (for itself and on behalf of its respective
Funds) agrees:
(a) To deliver to CAPCO as soon as possible and in any event
within ninety (90) days after the end of each fiscal year of such Borrower and
the applicable Funds, Statements of Assets and Liabilities, Statements of
Operations and Statements of Changes in Net Assets of each applicable Fund for
such fiscal year, as set forth in each applicable Fund's Annual Report to
shareholders together with a calculation of the maximum amount which each
applicable Fund could borrow under its Borrowing Limit as of the end of such
fiscal year;
(b) To deliver to CAPCO as soon as available and in any event
within seventy-five (75) days after the end of each semiannual period of such
Borrower and the applicable Funds, Statements of Assets and Liabilities,
Statement of Operations and Statements of Changes in Net Assets of each
applicable Fund as of the end of such semiannual period, as set forth in each
applicable Fund's Semiannual Report to shareholders, together with a
calculation of the maximum amount which each applicable Fund could borrow
under its Borrowing Limit at the end of such semiannual period;
(c) To deliver to CAPCO prompt notice of the occurrence of any
event or condition which constitutes, or is likely to result in, a change in
such Borrower or any applicable Fund which could reasonably be expected to
materially adversely affect the ability of any applicable Fund to promptly
repay outstanding Loans made for its benefit or the ability of such Borrower
to perform its obligations under this Agreement or the Note;
(d) To do, or cause to be done, all things necessary to preserve
and keep in full force and effect the corporate or trust existence of such
Borrower and all permits, rights and privileges necessary for the conduct of
its businesses and to comply in all material respects with all applicable
laws, regulations and orders, including without limitation, all rules and
regulations promulgated by the SEC;
(e) To promptly notify CAPCO of any litigation, threatened legal
proceeding or investigation by a governmental authority which could materially
affect the ability of such Borrower or the applicable Funds to promptly repay
the outstanding Loans or otherwise perform their obligations hereunder; and
(f) In the event a Loan for the benefit of a particular Fund is
not repaid in full within 10 days after the date it is borrowed , and until
such Loan is repaid in full, to deliver to CAPCO, within two business days
after each Friday occurring after such 10th day, a statement setting forth the
total assets of such Fund as of the close of business on each such Friday.
14. Negative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to CAPCO by a Borrower pursuant to any
Loan made to such Borrower is irrevocably paid in full, and until the Facility
is terminated, such Borrower (for itself and on behalf of its respective
Funds) agrees:
(a) Not to incur any indebtedness for borrowed money (other than
pursuant to the One Hundred Million Dollar ($100,000,000) committed Master
Revolving Credit Facility with NationsBank and for overdrafts incurred at the
custodian of the Funds from time to time in the normal course of business)
except the Loans, without the prior written consent of CAPCO, which consent
will not be unreasonably withheld; and
(b) Not to dissolve or terminate its existence, or merge or
consolidate with any other person or entity, or sell all or substantially all
of its assets in a single transaction or series of related transactions (other
than assets consisting of margin stock), each without the prior written
consent of CAPCO, which consent will not be unreasonably withheld; provided
that a Borrower may without such consent merge, consolidate with, or purchase
substantially all of the assets of, or sell substantially all of its assets
to, an affiliated investment company or series thereof, as provided for in
Rule 17a-8 of the Investment Company Act of 1940.
15. Events of Default. If any of the following events (each an
"Event of Default") shall occur (it being understood that an Event of Default
with respect to one Fund or Borrower shall not constitute an Event of Default
with respect to any other Fund or Borrower):
(a) Any Borrower or Fund shall default in the payment of
principal or interest on any Loan or any other fee due hereunder for a period
of five (5) days after the same becomes due and payable, whether at maturity
or with respect to any Facility Fee at a date fixed for the payment thereof;
(b) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 13 hereof and such default shall
not have been remedied within thirty (30) days after written notice thereof
shall have been given such Borrower or Fund by CAPCO;
(c) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 14 hereof;
(d) Any Borrower or Fund shall default in the performance or
compliance with any other term contained herein and such default shall not
have been remedied within thirty (30) days after written notice thereof shall
have been given such Borrower or Fund by CAPCO;
(e) Any representation or warranty made by a Borrower or Fund
herein or pursuant hereto shall prove to have been false or incorrect in any
material respect when made;
(f) USAA Investment Management Company or any successor manager
or investment adviser, provided that such successor in a wholly-owned
subsidiary of CAPCO, shall cease to be the Manager and Investment Advisor of
each Fund; or
(g) An event of default shall occur and be continuing under any
other facility;
then, in any event, and at any time thereafter, if any Event of Default shall
be continuing, CAPCO may by written notice to the applicable Borrower or Fund
(i) terminate the Facility with respect to such Borrower or Fund and (ii)
declare the principal and interest in respect of any outstanding Loans with
respect to such Borrower or Fund, and all other amounts due hereunder with
respect to such Borrower or Fund, to be immediately due and payable whereupon
the principal and interest in respect thereof and all other amounts due
hereunder shall become forthwith due and payable without presentment, demand,
protest or other notice of any kind, all of which are expressly waived by the
Borrowers.
16. New Borrowers; New Funds. So long as no Event of Default or
condition which, with the passage of time or the giving of notice, or both,
would constitute or become an Event of Default has occurred and is continuing,
and with the prior consent of CAPCO, which consent will not be unreasonably
withheld:
(a) Any investment company that becomes part of the same "group of
investment companies" (as that term is defined in Rule 11a-3 under the
Investment Company Act of 1940) as the original Borrowers to this Agreement,
may, by submitting an amended Schedule A and Exhibit B to this Agreement to
CAPCO (which amended Schedule A and Exhibit B shall replace the corresponding
Schedule and Exhibit which are, then a part of this Agreement) and such other
documents as CAPCO may reasonably request, become a party to this Agreement
and may become a "Borrower" hereunder; and
(b) A Borrower may, by submitting an amended Schedule A and
Exhibit B to this Agreement to CAPCO (which amended Schedule A and Exhibit B
shall replace the corresponding Schedule and Exhibit which are then a part of
this Agreement), add additional Funds for whose benefit such Borrower may
borrow Loans. No such amendment of Schedule A to this Agreement shall amend
the Borrowing Limit applicable to any Fund without the prior approval of
CAPCO.
17. Limited Recourse. CAPCO agrees (i) that any claim, liability, or
obligation arising hereunder or under the Note whether on account of the
principal of any Loan, interest thereon, or any other amount due hereunder or
thereunder shall be satisfied only from the assets of the specific Fund for
whose benefit a Loan is borrowed and in any event in an amount not to exceed
the outstanding principal amount of any Loan borrowed for such Fund's benefit,
together with accrued and unpaid interest due and owing thereon, and such
Fund's share of any other amount due hereunder and under the Note (as
determined in accordance with the provisions hereof) and (ii) that no assets
of any fund shall be used to satisfy any claim, liability, or obligation
arising hereunder or under the Note with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Note (as determined in accordance
with the provisions hereof).
18. Remedies on Default. In case any one or more Events of Default
shall occur and be continuing, CAPCO may proceed to protect and enforce its
rights by an action at law, suit in equity or other appropriate proceedings,
against the applicable Borrower(s) and/or Fund(s), as the case may be. In the
case of a default in the payment of any principal or interest on any Loan or
in the payment of any fee due hereunder, the relevant Funds (to be allocated
among such Funds as the Borrowers deem appropriate) shall pay to CAPCO such
further amount as shall be sufficient to cover the cost and expense of
collection, including, without limitation, reasonable attorney's fees and
expenses.
19. No Waiver of Remedies. No course of dealing or failure or delay
on the part of CAPCO in exercising any right or remedy hereunder or under the
Note shall constitute a waiver of any right or remedy hereunder or under the
Note, nor shall any partial exercise of any right or remedy hereunder or under
the Note preclude any further exercise thereof or the exercise of any other
right or remedy hereunder or under the Note. Such rights and remedies
expressly provided are cumulative and not exclusive of any rights or remedies
which CAPCO would otherwise have.
20. Expenses. The Funds (to be allocated among the Funds as the
Borrowers deem appropriate) shall pay on demand all reasonable out-of-pocket
costs and expenses (including reasonable attorney's fees and expenses)
incurred by CAPCO in connection with the collection and any other enforcement
proceedings of or regarding this Agreement, any Loan or the Note.
21. Benefit of Agreement. This Agreement and the Note shall be
binding upon and inure for the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided that no party to this
Agreement or the Note may assign any of its rights hereunder or thereunder
without the prior written consent of the other parties.
22. Notices. All notices hereunder and all written, facsimile or
telecopied confirmations of Oral Requests made hereunder shall be sent to the
Borrowers as indicated on Exhibit B and to CAPCO as indicated on Exhibit C.
23. Modifications. No provision of this Agreement or the Note may
be waived, modified or discharged except by mutual written agreement of all
parties. THIS WRITTEN LOAN AGREEMENT AND THE NOTE REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
24. Governing Law and Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the state of Texas
without regard to the choice of law provisions thereof.
25. Trust Disclaimer. Neither the shareholders, trustees, officers,
employees and other agents of any Borrower or Fund shall be personally bound
by or liable for any indebtedness, liability or obligation hereunder or under
the Note nor shall resort be had to their private property for the
satisfaction of any obligation or claim hereunder.
If this letter correctly reflects your agreement with us, please execute both
copies hereof and return one to us, whereupon this Agreement shall be binding
upon the Borrowers, the Funds and CAPCO.
Sincerely,
USAA CAPITAL CORPORATION
By: /s/ Laurie B. Blank
-------------------------------
Laurie B. Blank
Assistant Vice President-Treasurer
AGREED AND ACCEPTED this 15th
Day of January, 1996.
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
------------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J. C. Roth
------------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
------------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
-------------------------------
Michael J.C. Roth
President
SCHEDULE A
FUNDS FOR WHOSE BENEFIT LOANS CAN
BE BORROWED UNDER FACILITY AGREEMENT
Borrower Funds Borrowing Limit
- -------- ----- ---------------
USAA Mutual Fund, Inc. USAA Aggressive Growth 5% of Total Assets
USAA Growth & Income '
USAA Income Stock '
USAA Short-Term Bond '
USAA Money Market '
USAA Growth '
USAA Income '
USAA Investment Trust USAA Cornerstone Strategy '
USAA Gold '
USAA International '
USAA World Growth '
USAA GNMA Trust '
USAA Treasury Money Market Trust '
USAA Emerging Markets '
USAA Growth and Tax Strategy '
USAA Balanced Strategy '
USAA Growth Strategy '
USAA Income Strategy '
USAA Tax Exempt Fund, Inc. USAA Long-Term '
USAA Intermediate-Term '
USAA Short-Term '
USAA Tax Exempt Money Market '
USAA California Bond '
USAA California Money Market '
USAA New York Bond '
USAA New York Money Market '
USAA Virginia Bond '
USAA Virginia Money Market '
USAA State Tax-Free Trust USAA Florida Tax-Free Income '
USAA Florida Tax-Free Money Market'
USAA Texas Tax-Free Income '
USAA Texas Tax-Free Money Market '
EXHIBIT A
MASTER GRID PROMISSORY NOTE
U.S. $750,000,000 Dated: January 15, 1996
FOR VALUE RECEIVED, each of the undersigned (each a "Borrower" and
collectively the "Borrowers"), severally and not jointly, on behalf of and
for the benefit of the series of funds comprising each such Borrower as listed
on Schedule A to the Agreement as defined below (each a "Fund" and
collectively the "Funds") promises to pay to the order of USAA Capital
Corporation ("CAPCO") at CAPCO's office located at 9800 Fredericksburg Road,
San Antonio, Texas 78288, in lawful money of the United States of America, in
immediately available funds, the principal amount of all Loans made by CAPCO
to such Borrower for the benefit of the applicable Funds under the Facility
Agreement Letter dated January 15, 1996 (as amended or modified, the
"Agreement"), among the Borrowers and CAPCO, together with interest thereon
at the rate or rates set forth in the Agreement. All payments of interest and
principal outstanding shall be made in accordance with the terms of the
Agreement.
This Note evidences Loans made pursuant to, and is entitled to the
benefits of, the Agreement. Terms not defined in this Note shall be as set
forth in the Agreement.
CAPCO is authorized to endorse the particulars of each Loan evidenced
hereby on the attached Schedule and to attach additional Schedules as
necessary, provided that the failure of CAPCO to do so or to do so accurately
shall not affect the obligations of any Borrower (or the Fund for whose
benefit it is borrowing) hereunder.
Each Borrower waives all claims to presentment, demand, protest, and
notice of dishonor. Each Borrower agrees to pay all reasonable costs of
collection, including reasonable attorney's fees in connection with the
enforcement of this Note.
CAPCO hereby agrees (i) that any claim, liability, or obligation arising
hereunder or under the Agreement whether on account of the principal of any
Loan, interest thereon, or any other amount due hereunder or thereunder shall
be satisfied only from the assets of the specific Fund for whose benefit a
Loan is borrowed and in any event in an amount not to exceed the outstanding
principal amount of any Loan borrowed for such Fund's benefit, together with
accrued and unpaid interest due and owing thereon, and such Fund's share of
any other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement) and (ii) that no assets of
any Fund shall be used to satisfy any claim, liability, or obligation arising
hereunder or under the Agreement with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement).
Neither the shareholders, trustees, officers, employees and other agents
of any Borrower or Fund shall be personally bound by or liable for any
indebtedness, liability or obligation hereunder or under the Note nor shall
resort be had to their private property for the satisfaction of any obligation
or claim hereunder.
Loans under the Agreement and this Note are subordinated to loans made
under the $100,000,000 364-day Committed Mater Revolving Credit Facility
Agreement between the Borrowers and NationsBank of Texas, N.A. (NationsBank),
dated January 16, 1996, in the manner and to the extent set forth in the
Agreement among the Borrowers, CAPCO and NationsBank, dated January 16, 1996.
This Note shall be governed by the laws of the state of Texas.
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
----------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
----------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
-----------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
-----------------------------
Michael J.C. Roth
President
LOANS AND PAYMENT OF PRINCIPAL
This schedule (grid) is attached to and made a part of the Promissory Note
dated January 15, 1996, executed by USAA MUTUAL FUND, INC., USAA INVESTMENT
TRUST, USAA TAX EXEMPT FUND, INC. AND USAA STATE TAX-FREE TRUST on behalf of
and for the benefit of the series of funds comprising each such Borrower
payable to the order of USAA CAPITAL CORPORATION.
[Information listed in grid]
Date of Loan
Borrower and Fund
Amount of Loan
Type of Rate and Interest Rate on Date of Borrowing
Amount of Principal Repaid
Date of Repayment
Other Expenses
Notation made by
EXHIBIT B
USAA CAPITAL CORPORATION
MASTER REVOLVING
CREDIT FACILITY AGREEMENT
BORROWER INFORMATION SHEET
BORROWER: USAA MUTUAL FUND, INC., USAA INVESTMENT TRUST, USAA TAX EXEMPT
FUND, INC. AND USAA STATE TAX-FREE TRUST
ADDRESS FOR NOTICES AND OTHER COMMUNICATIONS TO THE BORROWER:
9800 Fredericksburg Road
San Antonio, Texas 78288 (For Federal Express, 78240)
Attention: John W. Saunders, Jr.
Senior Vice President,
Fixed Income Investments
Telephone: (210) 498-7320
Telecopy: (210) 498-5689
Harry W. Miller
Senior Vice President,
Equity Investments
Telephone: (210) 498-7344
Telecopy: (210) 498-7332
ADDRESS FOR BORROWING AND PAYMENTS:
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Dean R. Pantzar
Telephone: (210) 498-7472
Telecopy: (210) 498-0382 or 498-7819
Telex: 767424
INSTRUCTIONS FOR PAYMENTS TO BORROWER:
WE PAY VIA: X FED FUNDS CHIPS
TO: (PLEASE PLACE BANK NAME, CORRESPONDENT NAME (IF APPLICABLE), CHIPS
AND/OR FED FUNDS ACCOUNT NUMBER BELOW)
State Street Bank and Trust Company, Boston, Massachusetts
ABA #011-00-0028
USAA MUTUAL FUND, INC.
- ----------------------
USAA Aggressive Growth Fund Acct.# 6938-502-9
USAA Growth & Income Fund Acct.# 6938-519-3
USAA Income Stock Fund Acct.# 6938-495-6
USAA Short-Term Bond Fund Acct.# 6938-517-7
USAA Money Market Fund Acct.# 6938-498-0
USAA Growth Fund Acct.# 6938-490-7
USAA Income Fund Acct.# 6938-494-9
USAA INVESTMENT TRUST
- ---------------------
USAA Cornerstone Strategy Fund Acct.# 6938-487-3
USAA Gold Fund Acct.# 6938-488-1
USAA International Fund Acct.# 6938-497-2
USAA World Growth Fund Acct.# 6938-504-5
USAA GNMA Trust Acct.# 6938-486-5
USAA Treasury Money Market Trust Acct.# 6938-493-1
USAA Emerging Markets Fund Acct.# 6938-501-1
USAA Growth and Tax Strategy Fund Acct.# 6938-509-4
USAA Balanced Strategy Fund Acct.# 6938-507-8
USAA Growth Strategy Fund Acct.# 6938-510-2
USAA Income Strategy Fund Acct.# 6938-508-6
USAA TAX EXEMPT FUND, INC.
- --------------------------
USAA Long-Term Fund Acct.# 6938-492-3
USAA Intermediate-Term Fund Acct.# 6938-496-4
USAA Short-Term Fund Acct.# 6938-500-3
USAA Tax Exempt Money Market Fund Acct.# 6938-514-4
USAA California Bond Fund Acct.# 6938-489-9
USAA California Money Market Fund Acct.# 6938-491-5
USAA New York Bond Fund Acct.# 6938-503-7
USAA New York Money Market Fund Acct.# 6938-511-0
USAA Virginia Bond Fund Acct.# 6938-512-8
USAA Virginia Money Market Fund Acct.# 6938-513-6
USAA STATE TAX-FREE TRUST
- -------------------------
USAA Florida Tax-Free Income Fund Acct.# 6938-473-3
USAA Florida Tax-Free Money Market Fund Acct.# 6938-467-5
USAA Texas Tax-Free Income Fund Acct.# 6938-602-7
USAA Texas Tax-Free Money Market Fund Acct.# 6938-601-9
EXHIBIT C
ADDRESS FOR USAA CAPITAL CORPORATION
USAA Capital Corporation
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Laurie B. Blank
Telephone No.: (210) 498-0825
Telecopy No.: (210) 498-6566
EXHIBIT D
OFFICER'S CERTIFICATE
The undersigned hereby certifies that he is the duly elected Secretary of USAA
Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA
State Tax-Free Trust and that he is authorized to execute this Certificate on
behalf of USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund,
Inc. and USAA State Tax-Free Trust. The undersigned hereby further certifies
to the following:
The following individuals are duly authorized to act on behalf of USAA Mutual
Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA State
Tax-Free Trust, by transmitting telephonic, telex, or telecopy instructions
and other communications with regard to borrowing and payments pursuant to the
uncommitted Master Revolving Credit Agreement with USAA Capital Corporation.
The signature set opposite the name of each individual below is that
individual's genuine signature.
NAME OFFICE SIGNATURE
- ---- ------ ---------
Michael J.C. Roth President /s/ Michael J.C. Roth
----------------------------
John W. Saunders, Jr. Senior Vice President,
Fixed Income Investments /s/ John W. Saunders,Jr.
----------------------------
Harry W. Miller Senior Vice President,
Equity Investments /s/ Harry W. Miller
-----------------------------
Kenneth E. Willmann Vice President,
Fixed Income /s/ Kenneth W. Willmann
-----------------------------
David G. Peebles Vice President,
Equity Investments /s/ David G. Peebles
-----------------------------
Sherron A. Kirk Vice President,
Controller /s/ Sherron A. Kirk
-----------------------------
Dean R. Pantzar Executive Director,
Mutual Fund Accounting /s/ Dean R. Pantzar
-----------------------------
IN WITNESS WHEREOF, I have executed this Certificate as of this 15th day of
January, 1996.
/s/ Michael D. Wagner
----------------------------------
MICHAEL D. WAGNER
Secretary
I, Michael J.C. Roth, President of USAA Mutual Fund, Inc., USAA Investment
Trust, USAA Tax Exempt Fund, Inc. And USAA State Tax-Free Trust hereby
certify that Michael D. Wagner is, and has been at all times since a date
prior to the date of this Certificate, the duly elected, qualified, and acting
Secretary of USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt
Fund, Inc. And USAA State Tax-Free Trust and that the signature set forth
above is his true and correct signature.
DATE: January 15, 1996 /s/ Michael J. C. Roth
-----------------------------------
MICHAEL J. C. ROTH
President
EXHIBIT 9(f)
January 16, 1996
USAA Mutual Fund, Inc.,
USAA Investment Trust,
USAA Tax Exempt Fund, Inc., and
USAA State Tax-Free Trust, on behalf of and for the
benefit of the series
of funds comprising each such Borrower
as set forth on Schedule A hereto
9800 Fredericksburg Road
San Antonio, Texas 78288
Attention: Michael J.C. Roth, President
Gentlemen:
This Facility Agreement Letter (this "Agreement") sets forth the terms and
conditions for loans (each a "Loan" and collectively the "Loans") which
NationsBank of Texas, N.A. (the "Bank") agrees to make during the period
commencing January 16, 1996 and ending January 15, 1997 (the "Facility
Period") to USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt
Fund, Inc., and USAA State Tax-Free Trust, and each investment company which
may become a party hereto pursuant to the terms of this Agreement (each a
"Borrower" and collectively the "Borrowers"), each of which is executing this
Agreement on behalf of and for the benefit of the series of funds comprising
each such Borrower as set forth on Schedule A hereto (as hereafter modified or
amended in accordance with the terms hereof) (each a "Fund" and collectively
the "Funds"), under a master revolving credit facility (the "Facility"). This
Agreement amends, restates and replaces in its entirety that certain Facility
Agreement Letter dated June 1, 1994, as heretofore amended or modified,
between the Borrowers and the Bank. The Bank and the Borrowers hereby agree
as follows:
1. Amount. The aggregate principal amount of the Loans to be
advanced under this Facility shall not exceed, at any one time outstanding,
One Hundred Million United States Dollars (U.S. $100,000,000) (the
"Commitment"). The aggregate principal amount of the Loans which may be
borrowed by a Borrower for the benefit of a particular Fund under the Facility
and the Other Facility (hereinafter defined) shall not exceed the percentage
(the "Borrowing Limit") of the total assets of such Fund as set forth on
Schedule A hereto.
2. Purpose and Limitations on Borrowings. Each Borrower will use the
proceeds of each Loan made to it solely for temporary or emergency purposes of
the Fund for whose benefit it is borrowing in accordance with such Fund's
Borrowing Limit and prospectus in effect at the time of such Loan. Portfolio
securities may not be purchased by a Fund while there is a Loan outstanding
under the Facility and/or a loan outstanding under the Other Facility for the
benefit of such Fund, if the aggregate amount of such Loan and such other loan
exceeds 5% of the total assets of such Fund. The Borrowers will not, and will
not permit any Fund to, directly or indirectly, use any proceeds of any Loan
for any purpose which would violate any provision of any applicable statute,
regulation, order or restriction, including, without limitation, Regulation U,
Regulation T, Regulation X or any other regulation of the Board of Governors
of the Federal Reserve System or the Securities Exchange Act of 1934, as
amended. If requested by the Bank, the Borrowers will promptly furnish the
Bank with a statement in conformity with the requirements of Federal Reserve
Form U-1 as referred to in Regulation U.
3. Borrowing Rate and Maturity of Loans. The principal amount of the
Loans outstanding from time to time shall bear interest at a rate per annum
equal to, at the option of the applicable Borrower(s), (i) the aggregate of
the Federal Funds Rate (as defined below) plus .125 of one percent (1%) (12.5
basis points) or (ii) the aggregate of the London Interbank Offered Rate (as
defined below) plus 12.5 basis points. The rate of interest payable on such
outstanding amounts shall change on each date that the Federal Funds Rate
shall change. Interest on the Loans shall be calculated on the basis of a
year of 360 days and the actual days elapsed but shall not exceed the highest
lawful rate. Each Loan will be for an established number of days to be agreed
upon by the applicable Borrower(s) and the Bank and, in the absence of such
agreement, will mature on the earlier of three months after the date of such
Loan or the last day of the Facility Period. The term "Federal Funds Rate,"
as used herein, shall mean the overnight rate for Federal funds transactions
between member banks of the Federal Reserve System, as published by the
Federal Reserve Bank of New York or, if not so published, as determined in
good faith by the Bank in accordance with its customary practices; and the
term "London Interbank Offered Rate," as used herein, shall mean the rate per
annum at which United States dollar deposits are offered by the Bank in the
London interbank market at approximately 11:00 a.m. London time two business
days prior to the first day of the interest period (of 7 or 14 days or one,
two or three months as selected by the Borrower(s)) for which the London
Interbank Offered Rate is to be in effect, as adjusted by the Bank in good
faith and in accordance with its customary practices for any reserve costs
imposed on the Bank under Federal Reserve Board Regulation D with respect to
"Euro-currency Liabilities". The London Interbank Offered Rate shall not be
available hereunder if it would be unlawful for the Bank to make or maintain
Loans based on such rate or if such rate does not, in the good faith judgment
of the Bank, fairly reflect the cost to the Bank of making or maintaining
Loans. The London Interbank Offered Rate shall not be available for any
interest period which, if such rate were available, would begin after the
occurrence and during the continuation of an Event of Default (as defined
below). Any past due principal and/or accrued interest shall bear interest at
a rate per annum equal to the aggregate of the Federal Funds Rate plus 1.125
percent (112.5 basis points) and shall be payable on demand. If the
applicable Borrowers do not affirmatively elect to have a Loan or Loans bear
interest based on the London Interbank Offered Rate at least two business days
prior to the first day of a possible interest period applicable thereto, such
Loan or Loans shall bear interest based on the Federal Funds Rate until such
election is affirmatively made.
4. Advances, Payments, Prepayments and Readvances. Upon each
Borrower's request, and subject to the terms and conditions contained herein,
the Bank shall make Loans to each Borrower on behalf of and for the benefit of
its respective Fund(s) during the Facility Period, and each Borrower may
borrow, repay and reborrow funds hereunder. The Loans shall be evidenced by
duly executed and delivered Master Grid Promissory Note in the form of Exhibit
A. Each Loan shall be in an aggregate amount not less than One Hundred
Thousand United States Dollars (U.S. $100,000) and increments of One Thousand
United States Dollars (U.S. $1,000) in excess thereof. Payment of principal
and interest due with respect to each Loan shall be payable at the maturity of
such Loan and shall be made in funds immediately available to the Bank prior
to 2 p.m. Dallas time on the day such payment is due, or as the Bank shall
otherwise direct from time to time and, subject to the terms and conditions
hereof, may be repaid with the proceeds of a new borrowing hereunder.
Notwithstanding any provision of this Agreement to the contrary, all Loans,
accrued but unpaid interest and other amounts payable hereunder shall be due
and payable upon termination of the Facility (whether by acceleration or
otherwise). If any Loan bearing interest based on the London Interbank
Offered Rate is repaid or prepaid other than on the last day of an interest
period applicable thereto, the Fund which is the beneficiary of such Loan
shall pay to the Bank promptly upon demand such amount as the Bank determines
in good faith is necessary to compensate the Bank for any reasonable cost or
expense incurred by the Bank as a result of such repayment or prepayment in
connection with the reemployment of funds in an amount equal to such repayment
or prepayment. Whenever the Bank seeks to assess for any such cost or expense
it will provide a certificate as the Borrower(s) shall reasonably request.
5. Facility Fee. Beginning with the date of this Agreement and until
such time as all Loans have been irrevocably repaid to the Bank in full, and
the Bank is no longer obligated to make Loans, the Funds (to be allocated
among the Funds as the Borrowers deem appropriate) shall pay to the Bank a
facility fee (the "Facility Fee") in the amount of .05 of one percent (5 basis
points) of the amount of the Commitment, as it may be reduced pursuant to
section 6. The Facility Fee shall be payable quarterly in arrears beginning
March 31, 1996, and upon termination of the Facility (whether by acceleration
or otherwise).
6. Optional Termination or Reduction of Commitment. The Borrowers
shall have the right upon at least three (3) business days prior written
notice to the Bank, to terminate or reduce the unused portion of the
Commitment. Any such reduction of the Commitment shall be in the amount of
Five Million United States Dollars (U.S. $5,000,000) or any larger integral
multiple of One Million United States Dollars (U.S. $1,000,000) (except that
any reduction may be in the aggregate amount of the unused Commitment).
Accrued fees with respect to the terminated Commitment shall be payable to the
Bank on the effective date of such termination.
7. Mandatory Termination of Commitment. The Commitment shall
automatically terminate on the last day of the Facility Period and any Loans
then outstanding (together with accrued interest thereon and any other amounts
owing hereunder) shall be due and payable on such date.
8. Committed Facility. The Bank acknowledges that the Facility is a
committed facility and that the Bank shall be obligated to make any Loan
requested during the Facility Period under this Agreement, subject to the
terms and conditions hereof; provided, however, that the Bank shall not be
obligated to make any Loan if this Facility has been terminated by the
Borrowers, or if at the time of a request for a Loan by a Borrower (on behalf
of the applicable Fund(s)) there exists any Event of Default or condition
which, with the passage of time or giving of notice, or both, would constitute
or become an Event of Default with respect to such Borrower (or such
applicable Fund(s)).
9. Loan Requests. Each request for a Loan (each a "Borrowing
Notice") shall be in writing by the applicable Borrower(s), except that such
Borrower(s) may make an oral request (each an "Oral Request") provided that
each Oral Request shall be followed by a written Borrowing Notice within one
business day. Each Borrowing Notice shall specify the following terms
("Terms") of the requested Loan: (i) the date on which such Loan is to be
disbursed, (ii) the principal amount of such Loan, (iii) the Borrower(s) which
are borrowing such Loan and the amount of such Loan to be borrowed by each
Borrower, (iv) the Funds for whose benefit the Loan is being borrowed and the
amount of the Loan which is for the benefit of each such Fund, (v) whether
such Loan shall bear interest at the Federal Funds Rate or the London
Interbank Offered Rate, and (vi) the requested maturity date of the Loan.
Each Borrowing Notice shall also set forth the total assets of each Fund for
whose benefit a portion of the Loan is being borrowed as of the close of
business on the day immediately preceding the date of such Borrowing Notice.
Borrowing Notices shall be delivered to the Bank by 1:00 p.m. Dallas time on
the day the Loan is requested to be made if such Loan is to bear interest
based on the Federal Funds Rate or by 10:00 a.m. Dallas time on the second
business day before the Loan is requested to be made if such Loan is to bear
interest based on the London Interbank Offered Rate.
Each Borrowing Notice shall constitute a representation to the Bank by the
applicable Borrower(s) that all of the representations and warranties in
Section 12 hereof are true and correct as of such date and that no Event of
Default or other condition which with the passage of time or giving of notice,
or both, would result in an Event of Default, has occurred or is occurring.
10. Confirmations; Crediting of Funds; Reliance by the Bank. Upon
receipt by the Bank of a Borrowing Notice:
(a) The Bank shall send each applicable Borrower written
confirmation of the Terms of such Loan via facsimile or telecopy, as
soon as reasonably practicable; provided, however, that the failure to
do so shall not affect the obligation of any such Borrower;
(b) The Bank shall make such Loan in accordance with the Terms
by transfer of the Loan amount in immediately available funds, to the
account of the applicable Borrower(s) as specified in Exhibit B to this
Agreement or as such Borrower(s) shall otherwise specify to the Bank in
a writing signed by an Authorized Individual (as defined in Section 11)
of such Borrower(s) and sent to the Bank via facsimile or telecopy; and
(c) The Bank shall make appropriate entries on the Note or the
records of the Bank to reflect the Terms of the Loan; provided, however,
that the failure to do so shall not affect the obligation of any
Borrower.
The Bank shall be entitled to rely upon and act hereunder pursuant to any Oral
Request which it reasonably believes to have been made by the applicable
Borrower through an Authorized Individual. If any Borrower believes that the
confirmation relating to any Loan contains any error or discrepancy from the
applicable Oral Request, such Borrower will promptly notify the Bank thereof.
11. Borrowing Resolutions and Officers' Certificates; Subordination
Agreement. Prior to the making of any Loan pursuant to this Agreement, the
Borrowers shall have delivered to the Bank (a) the duly executed Note, (b)
resolutions of each Borrower's Trustees or Board of Directors authorizing such
Borrower to execute, deliver and perform this Agreement and the Note on behalf
of the applicable Funds, (c) an Officer's Certificate in substantially the
form set forth in Exhibit D to this Agreement, authorizing certain individuals
("Authorized Individuals"), to take on behalf of each Borrower (on behalf of
the applicable Funds) actions contemplated by this Agreement and the Note, and
(d) a subordination agreement in substantially the form set forth in Exhibit E
to this Agreement.
12. Representations and Warranties. In order to induce the Bank to
enter into this Agreement and to make the Loans provided for hereunder, each
Borrower hereby makes with respect to itself, and as may be relevant, the
series of Funds comprising such Borrower the following representations and
warranties, which shall survive the execution and delivery hereof and of the
Note:
(a) Organization, Standing, etc. The Borrower is a corporation
or trust duly organized, validly existing, and in good standing under
applicable state laws and has all requisite corporate or trust power and
authority to carry on its respective businesses as now conducted and
proposed to be conducted, to enter into this Agreement and all other
documents to be executed by it in connection with the transactions
contemplated hereby, to issue and borrow under the Note and to carry out
the terms hereof and thereof;
(b) Financial Information; Disclosure, etc. The Borrower has
furnished the Bank with certain financial statements of such Borrower
with respect to itself and the applicable Funds, all of which such
financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis and fairly
present the financial position and results of operations of such
Borrower and the applicable Funds on the dates and for the periods
indicated. Neither this Agreement nor any financial statements, reports
or other documents or certificates furnished to the Bank by such
Borrower or the applicable Funds in connection with the transactions
contemplated hereby contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
contained herein or therein in light of the circumstances when made not
misleading;
(c) Authorization; Compliance with Other Instruments. The
execution, delivery and performance of this Agreement and the Note, and
borrowings hereunder, have been duly authorized by all necessary
corporate or trust action of the Borrower and will not result in any
violation of or be in conflict with or constitute a default under any
term of the charter, by-laws or trust agreement of such Borrower or the
applicable Funds, or of any borrowing restrictions or prospectus or
statement of additional information of such Borrower or the applicable
Funds, or of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Borrower, or
result in the creation of any mortgage, lien, charge or encumbrance upon
any of the properties or assets of such Borrower or the applicable Funds
pursuant to any such term. The Borrower and the applicable Funds are
not in violation of any term of their respective charter, by-laws or
trust agreement, and such Borrower and the applicable Funds are not in
violation of any material term of any agreement or instrument to which
they are a party, or to the best of such Borrower's knowledge, of any
judgment, decree, order, statute, rule or governmental regulation
applicable to them;
(d) SEC Compliance. The Borrower and the applicable Funds are
in compliance in all material respects with all federal and state
securities or similar laws and regulations, including all material
rules, regulations and administrative orders of the Securities and
Exchange Commission (the "SEC") and applicable Blue Sky authorities.
The Borrower and the applicable Funds are in compliance in all material
respects with all of the provisions of the Investment Company Act of
1940, and such Borrower has filed all reports with the SEC that are
required of it or the applicable Funds;
(e) Litigation. There is no action, suit or proceeding pending
or, to the best of the Borrower's knowledge, threatened against such
Borrower or the applicable Funds in any court or before any arbitrator
or governmental body which seeks to restrain any of the transactions
contemplated by this Agreement or which, if adversely determined, could
have a material adverse effect on the assets or business operations of
such Borrower or the applicable Funds or the ability of such Borrower
and the applicable Funds to pay and perform their obligations hereunder
and under the Notes; and
(f) Borrowers' Relationship to Funds. The assets of each Fund
for whose benefit Loans are borrowed by the applicable Borrower are
subject to and liable for such Loans and are available to the applicable
Borrower for the repayment of such Loans.
13. Affirmative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to the Bank by a Borrower pursuant to
any Loan made to such Borrower is irrevocably paid in full, and until the Bank
is no longer obligated to make Loans to such Borrower, such Borrower (for
itself and on behalf of its respective Funds) agrees:
(a) To deliver to the Bank as soon as possible and in any event
within ninety (90) days after the end of each fiscal year of such
Borrower and the applicable Funds, Statements of Assets and Liabilities,
Statements of Operations and Statements of Changes in Net Assets of each
applicable Fund for such fiscal year, as set forth in each applicable
Fund's Annual Report to shareholders together with a calculation of the
maximum amount which each applicable Fund could borrow under its
Borrowing Limit as of the end of such fiscal year;
(b) To deliver to the Bank as soon as available and in any event
within seventy-five (75) days after the end of each semiannual period of
such Borrower and the applicable Funds, Statements of Assets and
Liabilities, Statements of Operations and Statements of Changes in Net
Assets of each applicable Fund as of the end of such semiannual period,
as set forth in each applicable Fund's Semiannual Report to
shareholders, together with a calculation of the maximum amount which
each applicable Fund could borrow under its Borrowing Limit at the end
of such semiannual period;
(c) To deliver to the Bank prompt notice of the occurrence of
any event or condition which constitutes, or is likely to result in, a
change in such Borrower or any applicable Fund which could reasonably be
expected to materially adversely affect the ability of any applicable
Fund to promptly repay outstanding Loans made for its benefit or the
ability of such Borrower to perform its obligations under this Agreement
or the Note;
(d) To do, or cause to be done, all things necessary to preserve
and keep in full force and effect the corporate or trust existence of
such Borrower and all permits, rights and privileges necessary for the
conduct of its businesses and to comply in all material respects with
all applicable laws, regulations and orders, including without
limitation, all rules and regulations promulgated by the SEC;
(e) To promptly notify the Bank of any litigation, threatened
legal proceeding or investigation by a governmental authority which
could materially affect the ability of such Borrower or the applicable
Funds to promptly repay the outstanding Loans or otherwise perform their
obligations hereunder; and
(f) In the event a Loan for the benefit of a particular Fund is
not repaid in full within 10 days after the date it is borrowed, and
until such Loan is repaid in full, to deliver to the Bank, within two
business days after each Friday occurring after such 10th day, a
statement setting forth the total assets of such Fund as of the close of
business on each such Friday.
14. Negative Covenants of the Borrowers. Until such time as all
amounts of principal and interest due to the Bank by a Borrower pursuant to
any Loan made to such Borrower is irrevocably paid in full, and until the Bank
is no longer obligated to make Loans to such Borrower, such Borrower (for
itself and on behalf of its respective Funds) agrees:
(a) Not to incur any indebtedness for borrowed money (other than
pursuant to a $750,000,000 uncommitted master revolving credit facility
with USAA Capital Corporation (the "Other Facility") and overdrafts
incurred at the custodian of the Funds from time to time in the ordinary
course of business) except the Loans, without the prior written consent
of the Bank, which consent will not be unreasonably withheld; and
(b) Not to dissolve or terminate its existence, or merge or
consolidate with any other person or entity, or sell all or
substantially all of its assets in a single transaction or series of
related transactions (other than assets consisting of margin stock),
each without the prior written consent of the Bank, which consent will
not be unreasonably withheld; provided that a Borrower may without such
consent merge, consolidate with, or purchase substantially all of the
assets of, or sell substantially all of its assets to, an affiliated
investment company or series thereof, as provided for in Rule 17a-8 of
the Investment Company Act of 1940.
15. Events of Default. If any of the following events (each an "Event
of Default") shall occur (it being understood that an Event of Default with
respect to one Fund or Borrower shall not constitute an Event of Default with
respect to any other Fund or Borrower):
(a) Any Borrower or Fund shall default in the payment of
principal or interest on any Loan or any other fee due hereunder for a
period of five (5) days after the same becomes due and payable, whether
at maturity or with respect to the Facility Fee at a date fixed for the
payment thereof; or
(b) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 13 hereof and such default
shall not have been remedied within thirty (30) days after written
notice thereof shall have been given such Borrower or Fund by the Bank;
(c) Any Borrower or Fund shall default in the performance of or
compliance with any term contained in Section 14 hereof;
(d) Any Borrower or Fund shall default in the performance or
compliance with any other term contained herein and such default shall
not have been remedied within thirty (30) days after written notice
thereof shall have been given such Borrower or Fund by the Bank;
(e) Any representation or warranty made by a Borrower or Fund
herein or pursuant hereto shall prove to have been false or incorrect in
any material respect when made;
(f) USAA Investment Management Company or any successor manager
or investment adviser, provided that such successor is a wholly-owned
subsidiary of USAA Capital Corporation, shall cease to be the Manager
and investment advisor of each Fund; or
(g) An event of default shall occur and be continuing under the
Other Facility;
then, in any event, and at any time thereafter, if any Event of Default shall
be continuing, the Bank may by written notice to the applicable Borrower or
Fund (i) terminate its commitment to make any Loan hereunder, whereupon said
commitment shall forthwith terminate without any other notice of any kind with
respect to such Borrower or Fund and (ii) declare the principal and interest
in respect of any outstanding Loans with respect to such Borrower or Fund, and
all other amounts due hereunder with respect to such Borrower or Fund, to be
immediately due and payable whereupon the principal and interest in respect
thereof and all other amounts due hereunder shall become forthwith due and
payable without presentment, demand, protest or other notice of any kind, all
of which are expressly waived by the Borrowers.
16. New Borrowers; New Funds. So long as no Event of Default or
condition which, with the passage of time or the giving of notice, or both,
would constitute or become an Event of Default has occurred and is continuing,
and with the prior consent of the Bank, which consent will not be unreasonably
withheld:
(a) Any investment company that becomes part of the same "group
of investment companies" (as that term is defined in Rule 11a-3 under
the Investment Company Act of 1940) as the original Borrowers to this
Agreement, may, by submitting an amended Schedule A and Exhibit B to
this Agreement to the Bank (which amended Schedule A and Exhibit B shall
replace the Schedule A and Exhibit B which are then a part of this
Agreement) and such other documents as the Bank may reasonably request,
become a party to this Agreement and may become a "Borrower" hereunder;
and
(b) A Borrower may, by submitting an amended Schedule A and
Exhibit B to this Agreement to the Bank (which amended Schedule A and
Exhibit B shall replace the Schedule A and Exhibit B which are then a
part of this Agreement), add additional Funds for whose benefit such
Borrower may borrow Loans. No such amendment of Schedule A to this
Agreement shall amend the Borrowing Limit applicable to any Fund without
the prior consent of the Bank.
17. Limited Recourse. The Bank agrees (i) that any claim, liability,
or obligation arising hereunder or under the Note whether on account of the
principal of any Loan, interest thereon, or any other amount due hereunder or
thereunder shall be satisfied only from the assets of the specific Fund for
whose benefit a Loan is borrowed and in any event in an amount not to exceed
the outstanding principal amount of any Loan borrowed for such Fund's benefit,
together with accrued and unpaid interest due and owing thereon, and such
Fund's share of any other amount due hereunder and under the Note (as
determined in accordance with the provisions hereof) and (ii) that no assets
of any Fund shall be used to satisfy any claim, liability, or obligation
arising hereunder or under the Note with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Note (as determined in accordance
with the provisions hereof).
18. Remedies on Default. In case any one or more Events of Default
shall occur and be continuing, the Bank may proceed to protect and enforce its
rights by an action at law, suit in equity or other appropriate proceedings,
against the applicable Borrower(s) and/or Fund(s), as the case may be. In the
case of a default in the payment of any principal or interest on any Loan or
in the payment of any fee due hereunder, the relevant Funds (to be allocated
among such Funds as the Borrowers deem appropriate) shall pay to the Bank such
further amount as shall be sufficient to cover the cost and expense of
collection, including, without limitation, reasonable attorney's fees and
expenses.
19. No Waiver of Remedies. No course of dealing or failure or delay
on the part of the Bank in exercising any right or remedy hereunder or under
the Note shall constitute a waiver of any right or remedy hereunder or under
the Note, nor shall any partial exercise of any right or remedy hereunder or
under the Note preclude any further exercise thereof or the exercise of any
other right or remedy hereunder or under the Note. Such rights and remedies
expressly provided are cumulative and not exclusive of any rights or remedies
which the Bank would otherwise have.
20. Expenses. The Funds (to be allocated among the Funds as the
Borrowers deem appropriate) shall pay on demand all reasonable out-of-pocket
costs and expenses (including reasonable attorney's fees and expenses)
incurred by the Bank in connection with the collection and any other
enforcement proceedings of or regarding this Agreement, any Loan or the Note.
21. Benefit of Agreement. This Agreement and the Note shall be
binding upon and inure for the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided that no party to this
Agreement or the Note may assign any of its rights hereunder or thereunder
without the prior written consent of the other parties. The Bank may not sell
participations and subparticipations in all or any part of the Loans made
hereunder without the prior consent of the Borrowers, which consent shall not
be unreasonably withheld.
22. Notices. All notices hereunder and all written, facsimiled or
telecopied confirmations of Oral Requests made hereunder shall be sent to the
Borrowers as indicated on Exhibit B and to the Bank as indicated on Exhibit C.
Written communications shall be deemed to have been duly given and made as
follows: If sent by mail, seventy-two (72) hours after deposit in the mail
with first-class postage prepaid, addressed as provided in Exhibit B (the
Borrowers) and Exhibit C (the Bank); and in the case of facsimile or telecopy,
when the facsimile or telecopy is received if on a business day or otherwise
on the next business day.
23. Modifications. No provision of this Agreement or the Note may be
waived, modified or discharged except by mutual written agreement of all
parties. THIS WRITTEN LOAN AGREEMENT AND THE NOTE REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
24. Increased Cost and Reduced Return. If at any time after the date
hereof, the Bank (which shall include, for purposes of this Section, any
corporation controlling the Bank) determines that the adoption or modification
of any applicable law regarding the Bank's required levels of reserves, other
than the reserve requirement taken into account when computing the London
Interbank Offered Rate as provided in Section 3, or capital (including any
allocation of capital requirements or conditions), or similar requirements, or
any interpretation or administration thereof by a governmental body or
compliance by the Bank with any of such requirements, has or would have the
effect of (a) increasing the Bank's costs relating to the Loans, or (b)
reducing the yield or rate of return of the Bank on the Loans, to a level
below that which the Bank could have achieved but for the adoption or
modification of any such requirements, the Funds (to be allocated among the
Funds as the Borrowers deem appropriate) shall, within fifteen (15) days of
any request by the Bank, pay to the Bank such additional amounts as (in the
Bank's sole judgment, after good faith and reasonable computation) will
compensate the Bank for such increase in costs or reduction in yield or rate
of return of the Bank. Whenever the Bank shall seek compensation for any
increase in costs or reduction in yield or rate of return, the Bank shall
provide a certificate as the Borrower(s) shall reasonably request. Failure by
the Bank to demand payment within 90 days of any additional amounts payable
hereunder shall constitute a waiver of the Bank's right to demand payment of
such amounts at any subsequent time. Nothing herein contained shall be
construed or so operate as to require the Borrowers or the Funds to pay any
interest, fees, costs or charges greater than is permitted by applicable law.
25. Governing Law and Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the state of Texas without
regard to the choice of law provisions thereof.
26. Trust Disclaimer. Neither the shareholders, trustees, officers,
employees and other agents of any Borrower or Fund shall be personally bound
by or liable for any indebtedness, liability or obligation hereunder or under
the Note nor shall resort be had to their private property for the
satisfaction of any obligation or claim hereunder.
If this letter correctly reflects your agreement with us, please execute both
copies hereof and return one to us, whereupon this Agreement shall be binding
upon the Borrowers, the Funds and the Bank.
Sincerely,
NATIONSBANK OF TEXAS, N.A.
By: /s/ Greg Venker
-----------------------------
Title: Senior Vice President
AGREED AND ACCEPTED:
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
-------------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
---------------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J.C. Roth
---------------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to this Agreement
By: /s/ Michael J. C. Roth
---------------------------------
Michael J.C. Roth
President
SCHEDULE A
FUNDS FOR WHOSE BENEFIT LOANS CAN
BE BORROWED UNDER FACILITY AGREEMENT
AND BORROWING LIMIT
Maximum Percent of the
Total Assets Which Can
Be Borrowed Under Facility
Borrower Funds Agreement and Other Facility
USAA Mutual Fund, Inc. USAA Aggressive Growth 25%
USAA Growth & Income 25
USAA Income Stock 25
USAA Short-Term Bond 25
USAA Money Market 25
USAA Growth 25
USAA Income 25
USAA Investment Trust USAA Cornerstone Strategy 25
USAA Gold 25
USAA International 25
USAA World Growth 25
USAA GNMA Trust 25
USAA Treasury Money Market Trust 25
USAA Emerging Markets 25
USAA Growth and Tax Strategy 25
USAA Growth Strategy 25
USAA Income Strategy 25
USAA Balanced Strategy 25
USAA Tax Exempt Fund, Inc. USAA Long-Term 15
USAA Intermediate-Term 15
USAA Short-Term Bond 15
USAA Tax-Exempt Money Market 15
USAA California Bond 15
USAA California Money Market 15
USAA New York Bond 15
USAA New York Money Market 15
USAA Virginia Bond 15
USAA Virginia Money Market 15
USAA State Tax-Free Trust USAA Florida Tax-Free Income 15
USAA Florida Tax-Free Money Market 15
USAA Texas Tax-Free Income 15
USAA Texas Tax-Free Money Market 15
EXHIBIT A
MASTER GRID PROMISSORY NOTE
U.S. $100,000,000 Dated: January 16, 1996
FOR VALUE RECEIVED, each of the undersigned (each a "Borrower" and
collectively the "Borrowers"), severally and not jointly, on behalf of and for
the benefit of the series of funds comprising each such Borrower as listed on
Schedule A to the Agreement as defined below (each a "Fund" and collectively
the "Funds") promises to pay to the order of NATIONSBANK OF TEXAS, N.A. (the
"Bank") at the Bank's office located at 901 Main Street, Dallas, Dallas
County, Texas 75202, in lawful money of the United States of America, in
immediately available funds, the principal amount of all Loans made by the
Bank to such Borrower for the benefit of the applicable Funds under the
Facility Agreement Letter dated January 16, 1996 (as amended or modified, the
"Agreement"), among the Borrowers and the Bank, together with interest thereon
at the rate or rates set forth in the Agreement. All payments of interest and
principal outstanding shall be made in accordance with the terms of the
Agreement.
This Note evidences Loans made pursuant to, and is entitled to the
benefits of, the Agreement. Terms not defined in this Note shall be as set
forth in the Agreement.
The Bank is authorized to endorse the particulars of each Loan evidenced
hereby on the attached Schedule and to attach additional Schedules as
necessary, provided that the failure of the Bank to do so or to do so
accurately shall not affect the obligations of any Borrower (or the Fund for
whose benefit it is borrowing) hereunder.
Each Borrower waives all claims to presentment, demand, protest, and
notice of dishonor. Each Borrower agrees to pay all reasonable costs of
collection, including reasonable attorney's fees in connection with the
enforcement of this Note.
The Bank hereby agrees (i) that any claim, liability, or obligation
arising hereunder or under the Agreement whether on account of the principal
of any Loan, interest thereon, or any other amount due hereunder or thereunder
shall be satisfied only from the assets of the specific Fund for whose benefit
a Loan is borrowed and in any event in an amount not to exceed the outstanding
principal amount of any Loan borrowed for such Fund's benefit, together with
accrued and unpaid interest due and owing thereon, and such Fund's share of
any other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement) and (ii) that no assets of
any Fund shall be used to satisfy any claim, liability, or obligation arising
hereunder or under the Agreement with respect to the outstanding principal
amount of any Loan borrowed for the benefit of any other Fund or any accrued
and unpaid interest due and owing thereon or such other Fund's share of any
other amount due hereunder and under the Agreement (as determined in
accordance with the provisions of the Agreement).
Neither the shareholders, trustees, officers, employees and other agents
of any Borrower or Fund shall be personally bound by or liable for any
indebtedness, liability or obligation hereunder or under the Note nor shall
resort be had to their private property for the satisfaction of any obligation
or claim hereunder.
This Note shall be governed by the laws of the state of Texas.
USAA MUTUAL FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
-----------------------------------
Michael J.C. Roth
President
USAA INVESTMENT TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J.C. Roth
-----------------------------------
Michael J.C. Roth
President
USAA TAX EXEMPT FUND, INC.,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J.C. Roth
----------------------------------
Michael J.C. Roth
President
USAA STATE TAX-FREE TRUST,
on behalf of and for the benefit
of its series of Funds as set forth
on Schedule A to the Agreement
By: /s/ Michael J. C. Roth
---------------------------------
Michael J.C. Roth
President
LOANS AND PAYMENT OF PRINCIPAL
This schedule (grid) is attached to and made a part of the Promissory Note
dated January 16, 1996, executed by USAA MUTUAL FUND, INC., USAA INVESTMENT
TRUST, USAA TAX EXEMPT FUND, INC. AND USAA STATE TAX-FREE TRUST on behalf of
and for the benefit of the series of funds comprising each such Borrower
payable to the order of NATIONSBANK OF TEXAS, N.A.
[Information listed in grid]
Date of Loan
Borrower and Fund
Amount of Loan
Type of Rate and Interest Rate on Date of Borrowing
Amount of Principal Repaid
Date of Repayment
Other Expenses
Notation made by
EXHIBIT B
NATIONSBANK OF TEXAS, N.A.
MASTER REVOLVING
CREDIT FACILITY AGREEMENT
BORROWER INFORMATION SHEET
BORROWER: USAA MUTUAL FUND, INC., USAA INVESTMENT TRUST, USAA TAX-EXEMPT
FUND, INC. AND USAA STATE TAX-FREE TRUST
ADDRESS FOR NOTICES AND OTHER COMMUNICATIONS TO THE BORROWER:
9800 Fredericksburg Road
San Antonio, Texas 78288 (for Federal Express, 78240)
Attention: John W. Saunders, Jr.
Senior Vice President,
Fixed Income Investments
Telephone: (210) 498-7320
Telecopy: (210) 498-5689
Harry W. Miller
Senior Vice President,
Equity Investments
Telephone: (210) 498-7344
Telecopy: (210) 498-7332
ADDRESS FOR BORROWING AND PAYMENTS:
9800 Fredericksburg Road
San Antonio, Texas 78288 (for Federal Express, 78240)
Attention: Dean R. Pantzar
Telephone: (210) 498-7472
Telecopy: (210) 498-0382 or 498-7819
Telex: 767424
INSTRUCTIONS FOR PAYMENTS TO BORROWER:
WE PAY VIA: X FED FUNDS CHIPS
TO: (PLEASE PLACE BANK NAME, CORESPONDENT NAME (IF APPLICABLE), CHIPS AND/OR
FED FUNDS ACCOUNT NUMBER BELOW)
State Street Bank and Trust Company, Boston, Massachusetts
ABA #011-00-0028
USAA MUTUAL FUND, INC.
- ----------------------
USAA Aggressive Growth Fund Acct.# 6938-502-9
USAA Growth & Income Fund Acct.# 6938-519-3
USAA Income Stock Fund Acct.# 6938-495-6
USAA Short-Term Bond Fund Acct.# 6938-517-7
USAA Money Market Fund Acct.# 6938-498-0
USAA Growth Fund Acct.# 6938-490-7
USAA Income Fund Acct.# 6938-494-9
USAA INVESTMENT TRUST
- ---------------------
USAA Cornerstone Strategy Fund Acct.# 6938-487-3
USAA Gold Fund Acct.# 6938-488-1
USAA International Fund Acct.# 6938-497-2
USAA World Growth Fund Acct.# 6938-504-5
USAA GNMA Trust Acct.# 6938-486-5
USAA Treasury Money Market Trust Acct.# 6938-493-1
USAA Emerging Markets Fund Acct.# 6938-501-1
USAA Growth and Tax Strategy Fund Acct.# 6938-509-4
USAA Growth Strategy Fund Acct.# 6938-510-2
USAA Income Strategy Fund Acct.# 6938-508-6
USAA Balanced Strategy Fund Acct.# 6938-507-8
USAA TAX EXEMPT FUND, INC.
- --------------------------
USAA Long-Term Fund Acct.# 6938-492-3
USAA Intermediate-Term Fund Acct.# 6938-496-4
USAA Short-Term Bond Fund Acct.# 6938-500-3
USAA Tax Exempt Money Market Fund Acct.# 6938-514-4
USAA California Bond Fund Acct.# 6938-489-9
USAA California Money Market Fund Acct.# 6938-491-5
USAA New York Bond Fund Acct.# 6938-503-7
USAA New York Money Market Fund Acct.# 6938-511-0
USAA Virginia Bond Fund Acct.# 6938-512-8
USAA Virginia Money Market Fund Acct.# 6938-513-6
USAA STATE TAX-FREE TRUST
- -------------------------
USAA Florida Tax-Free Income Fund Acct.# 6938-473-3
USAA Florida Tax-Free Money Market Fund Acct.# 6938-467-5
USAA Texas Tax-Free Income Fund Acct.# 6938-602-7
USAA Texas Tax-Free Money Market Fund Acct.# 6938-601-9
EXHIBIT C
ADDRESS FOR THE BANK
NationsBank of Texas, N.A.
901 Main Street
66th Floor
Dallas, Texas 75202
Attention: Greg Venker
Telephone No.: (214) 508-0584
Telecopy No.: (214) 508-0604
EXHIBIT D
OFFICER'S CERTIFICATE
The undersigned hereby certifies that he is the duly elected Secretary of USAA
Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA
State Tax-Free Trust and that he is authorized to execute this Certificate on
behalf of USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund,
Inc. and USAA State Tax-Free Trust. The undersigned hereby further certifies
to the following:
The following individuals are duly authorized to act on behalf of USAA Mutual
Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and USAA State
Tax-Free Trust, by transmitting telephonic, telex, or telecopy instructions
and other communications with regard to borrowings and payments pursuant to
the Master Revolving Credit Facility Agreement with NationsBank of Texas, N.A.
The signature set opposite the name of each individual below is that
individual's genuine signature.
NAME OFFICE SIGNATURE
Michael J. C. Roth President /s/ Michael J.C. Roth
------------------------
John W. Saunders, Jr. Senior Vice President
Fixed Income Investments /s/ John W. Saunders, Jr.
-------------------------
Harry W. Miller Senior Vice President
Equity Investments /s/ Harry W. Miller
-------------------------
Kenneth E. Willmann Vice President
Fixed Income /s/ Kenneth E. Willmann
--------------------------
David G. Peebles Vice President
Equity Investment /s/ David G. Peebles
--------------------------
Sherron A. Kirk Vice President
Controller /s/ Sherron A. Kirk
--------------------------
Dean R. Pantzar Executive Director
Mutual Fund Accounting /s/ Dean R. Pantzar
---------------------------
IN WITNESS WHEREOF, I have executed the Certificate as of this 16th day of
January, 1996.
/s/ Michael D. Wagner
--------------------------
MICHAEL D. WAGNER
Secretary
I, Michael J. C. Roth, President of USAA Mutual Fund, Inc., USAA Investment
Trust, USAA Tax Exempt Fund, Inc. and USAA State Tax-Free Trust hereby certify
that Michael D. Wagner is, and has been at all times since a date prior to the
date of this Certificate, the duly elected, qualified, and acting Secretary of
USAA Mutual Fund, Inc., USAA Investment Trust, USAA Tax Exempt Fund, Inc. and
USAA State Tax-Free Trust and that the signature set forth above is his true
and correct signature.
DATE: January 16, 1996
/s/ Michael J.C. Roth
---------------------------
MICHAEL J. C. ROTH
President
EXHIBIT E
Subordination
NationsBank of Texas, N.A. Agreement
This is an agreement among: Dated: January 16, 1996
Name and Address of Lender (Including County):
NationsBank of Texas, N.A.
901 Main Street
Dallas, Dallas County, Texas 75202
(Lender)
- --------------------------------------
Name and Address of Borrower:
USAA Mutual Fund, Inc.
USAA Investment Trust
USAA Tax Exempt Fund, Inc.
USAA State Tax-Free Trust
9800 Fredericksburg Road
San Antonio, Texas 78288
(Debtor)
- --------------------------------------
Name and Address of Creditor:
USAA Capital Corporation
9800 Fredericksburg Road
San Antonio, Texas 78288
(Creditor)
- ----------------------------------------
1. Background. Debtor is or may be indebted to Lender pursuant to that
certain Facility Agreement Letter dated January 16, 1996 between Debtor
and Lender ("Senior Facility Agreement"). Debtor also is or may be
indebted to Creditor pursuant to that certain Facility Agreement Letter
dated January 15, 1996 between Debtor and Creditor ("Subordinated
Facility Agreement"). All debt (as hereinafter defined) under the
Senior Facility Agreement is hereinafter referred to as "senior debt"
and all debt (as hereinafter defined) under the Subordinated Facility
Agreement is hereinafter referred to as "subordinated debt".
2. Definition of Debt. The term "debt" as used in the terms "senior debt"
and "subordinated debt" means all debts, obligations and liabilities,
now or hereafter existing, direct or indirect, absolute or contingent,
joint or several, secured or unsecured, due or not due, contractual or
tortious, liquidated or unliquidated, arising by operation of law or
otherwise, irrespective of the person in whose favor such debt may
originally have been created and regardless of the manner in which such
debt has been or may hereafter be acquired by Lender or Creditor, as the
case may be, and includes all costs incurred to obtain, preserve,
perfect or enforce any security interest, lien or mortgage, or to
collect any debt or to maintain, preserve, collect and enforce any
collateral, and interest on such amounts.
3. Subordination of Debt. Until senior debt has been paid in full, Debtor
will not pay and Creditor will not accept any payment on subordinated
debt at any time that an Event of Default (as defined in the Senior
Facility Agreement) has occurred and is continuing in respect of senior
debt. Anything of value received by Creditor on account of subordinated
debt in violation of this agreement will be held by Creditor in trust
and immediately will be turned over to Lender in the form received to be
applied by Lender on senior debt.
4. Remedies of Creditor. Until all senior debt has been paid in full,
without Lender's permission, Creditor will not be a party to any action
or proceeding against any person to recover subordinated debt. Upon
written request of Lender, Creditor will file any claim or proof of
claim or take any other action to collect subordinated debt in any
bankruptcy, receivership, liquidation, reorganization or other
proceeding for relief of debtors or in connection with Debtor's
insolvency, or in liquidation or marshaling of Debtor's assets or
liabilities, or in any probate proceeding, and if any distribution shall
be made to Creditor, Creditor will hold the same in trust for Lender and
immediately pay to Lender, in the form received to be applied on senior
debt, all money or other assets received in any such proceedings on
account of subordinated debt until senior debt shall have been paid in
full. If Creditor shall fail to take an such action when requested by
Lender, Lender may enforce this agreement or as attorney in fact for
Creditor and Debtor may take any such action on Creditor's behalf.
Creditor hereby irrevocably appoints Lender Creditor's attorney in fact
to take any such action that Lender might request Creditor to take
hereunder, and to sue for, compromise, collect and receive all such
money and other assets and take any other action in Lender's own name or
in Creditor's name that Lender shall consider advisable for enforcement
and collection of subordinated debt, and to apply any amounts received
on senior debt.
5. Modifications. At any time and from time to time, without Creditor's
consent or notice to Creditor and without liability to Creditor and
without releasing or impairing any of Lender's rights against Creditor
or any of Creditor's obligations hereunder, Lender may take additional
or other security for senior debt; release, exchange, subordinated or
lose any security for senior debt; release any person obligated on
senior debt, modify, amend or waive compliance with any agreement
relating to senior debt; grant any adjustment, indulgence or forbearance
to, or compromise with, any person liable for senior debt; neglect,
delay, omit, fail or refuse to take or prosecute any action for
collection of any senior debt or to foreclose upon any collateral or
take or prosecute any action on any agreement securing any senior debt.
6. Subordination of Liens. Creditor subordinates and makes inferior to any
security interests, liens or mortgages now or hereafter securing senior
debt all security interests, liens, or mortgages now or hereafter
securing subordinated debt. Any foreclosure against any property
securing senior debt shall foreclose, extinguish and discharge all
security interests, liens and mortgages securing subordinated debt, and
any purchaser at any such foreclosure sale shall take title to the
property so sold free of all security interest, liens and mortgages
securing subordinated debt.
7. Statement of Subordination; Assignment by Creditor; Additional
Instruments. Debtor and Creditor will cause any instrument evidencing
or securing subordinated debt to bear upon its face a statement that
such instrument is subordinated to senior debt as set forth herein and
will take all actions and execute all documents appropriate to carry out
this agreement. Creditor will notify Lender not less than 10 days
before any assignment of any subordinated debt.
8. Assignment by Lender. Lender's rights under this agreement may be
assigned in connection with any assignment or transfer of any senior
debt.
9. Venue. Debtor and Creditor agree that this agreement is performable in
the county of Lender's address set out above.
10. Cumulative Rights; Waivers. This instrument is cumulative of all other
rights and securities of the Lender. No waiver by Lender of any right
hereunder, with respect to a particular payment, shall affect or impair
its rights in any matters thereafter occurring.
11. Successors and Assigns. This instrument is binding upon and shall inure
to the benefit of the heirs, executors, administrators, successors and
assigns of each of the parties hereto, but Creditor covenants that it
will not assign subordinated debt, or any part thereof, without making
the rights and interests of the assignee subject in all respects to the
terms of this instrument.
12. Termination. This agreement shall terminate upon the termination of the
Senior Facility Agreement and repayment in full of the senior debt.
(Lender) (Debtor) (Creditor)
NationsBank of Texas, N.A. USAA Mutual Fund, Inc. USAA Capital Corporation
USAA Investment Trust
USAA Tax Exempt Fund, Inc.
USAA State Tax-Free Trust
By /s/ Greg Venker By /s/ Michael J.C. Roth By /s/ Laurie B. Blank
-------------------- --------------------- --------------------
Its Senior Vice President Its President Its Treasurer
EXHIBIT 10(b)
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
July 16, 1996
USAA State Tax-Free Trust
USAA Building
9800 Fredericksburg Road
San Antonio, Texas 78288
Ladies and Gentlemen:
We hereby consent to the reference in Post-Effective Amendment No. 5
(the "Amendment") to the Registration Statement (No. 33-65572) on Form N-1A
of USAA State Tax-Free Trust (the "Registrant"), a Delaware business Trust,
to our opinion with respect to the legality of the shares of the Registrant
representing interests in the Florida Tax-Free Income Fund, Florida Tax-Free
Money Market Fund, Texas Tax-Free Income Fund and the Texas Tax-Free Money
Market Fund series of the Registrant, which opinion was filed with Post
- -Effective Amendment No. 4 to the Registration Statement.
We also hereby consent to the reference to this firm in the Prospectuses
under the heading "Legal Counsel" and in the Statements of Additional
Information under the heading "General Information--Counsel" which form a part
of the Amendment and to the filing of this consent as an exhibit to the
Amendment.
Very truly yours,
GOODWIN, PROCTER & HOAR LLP
EXHIBIT 11
The Shareholders and Board of Trustees
USAA State Tax-Free Trust:
We consent to the use of our reports dated May 10, 1996 on the financial
statements of the Florida Tax-Free Income, Florida Tax-Free Money Market,
Texas Tax-Free Income, and Texas Tax-Free Money Market Funds, separate Funds
of USAA State Tax-Free Trust (the Trust), as of and for the period ended March
31, 1996 included in the Trust's Annual Reports to Shareholders for the period
ended March 31, 1996 incorporated herein by reference and to the references to
our firm under the headings "Financial Highlights" and "Independent Auditors"
as part of Post-Effective Amendment No. 5 under the Securities Act of 1933, as
amended, and Amendement No. 6 under the Investment Company Act of 1940, as
amended, to the Trust's Registration Statement on Form N-1A.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
July 19, 1996
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<NAME> FLORIDA TAX-FREE INCOME FUND
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<TABLE> <S> <C>
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<NAME> FLORIDA TAX-FREE MONEY MARKET FUND
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<PERIOD-END> MAR-30-1996
<INVESTMENTS-AT-COST> 70814192
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<PAID-IN-CAPITAL-COMMON> 71223549
<SHARES-COMMON-STOCK> 71223549
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<EXPENSES-NET> (297268)
<NET-INVESTMENT-INCOME> 2064556
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<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2064556
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<DISTRIBUTIONS-OF-INCOME> (2064556)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 121575916
<NUMBER-OF-SHARES-REDEEMED> (104452263)
<SHARES-REINVESTED> 1875105
<NET-CHANGE-IN-ASSETS> 18998758
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 382621
<AVERAGE-NET-ASSETS> 59894244
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