USAA FLORIDA FUNDS
USAA FLORIDA TAX-FREE INCOME FUND
USAA FLORIDA TAX-FREE MONEY MARKET FUND
PROSPECTUS
AUGUST 1, 1999
Shares of the Florida Funds are offered only to residents of the state of
Florida. The delivery of this Prospectus is not an offer in any state where
shares of the Florida Funds may not lawfully be made.
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of either of these Fund's shares or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Are Each Fund's Investment Objectives and Main Strategies?............. 2
Main Risks of Investing in These Funds...................................... 2
Are These Funds for You?.................................................... 3
Could the Value of Your Investment in These Funds Fluctuate?................ 4
Fees and Expenses........................................................... 7
Fund Investments............................................................ 9
Fund Management............................................................. 18
Using Mutual Funds in an Investment Program................................ 19
How to Invest.............................................................. 20
Important Information About Purchases and Redemptions...................... 24
Exchanges.................................................................. 25
Shareholder Information.................................................... 25
Financial Highlights....................................................... 29
Appendix A................................................................. 31
Appendix B................................................................. 33
Appendix C................................................................. 35
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USAA Investment Management Company manages these Funds. For easier reading,
USAA Investment Management Company will be referred to as "we" or "us"
throughout the Prospectus.
WHAT ARE EACH FUND'S INVESTMENT OBJECTIVES AND MAIN STRATEGIES?
Each Fund 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. Each Fund has separate investment
policies to achieve its objective.
The FLORIDA TAX-FREE INCOME FUND invests primarily in long-term,
investment-grade Florida tax-exempt securities. The Fund's average
dollar-weighted portfolio maturity is not restricted, but is expected to be
greater than 10 years.
The FLORIDA TAX-FREE MONEY MARKET FUND invests in high-quality Florida
tax-exempt securities with maturities of 397 days or less.
In view of the risks inherent in all investments in securities, there is no
assurance that the Funds' objectives will be achieved. See FUND INVESTMENTS on
page 9 for more information.
MAIN RISKS OF INVESTING IN THESE FUNDS
The two primary risks of investing in these Funds are credit risk and market
risk. As with other mutual funds, losing money is also a risk of investing in
these Funds.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
* MARKET RISK involves the possibility that the value of each Fund's
investments will decline because of an increase in interest rates, or to
adverse changes in supply and demand for municipal securities, or other
market factors.
These credit and market risks may be magnified because each Fund concentrates
in Florida tax-exempt securities.
IF INTEREST RATES INCREASE: the yield of each Fund may increase and the market
value of the Florida Tax-Free Income Fund's securities will likely decline,
adversely affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of each Fund may decrease and the market
value of the Florida Tax-Free Income Fund's securities may increase, which
would likely increase the Fund's net asset value and total return. The Florida
Tax-Free Money Market Fund's total return may decrease.
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Other risks of investing in either Fund include call risk and structural risk.
As you consider an investment in either Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in either Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Florida
Tax-Free Money Market Fund seeks to preserve the value of your investment at $1
per share, it is possible to lose money by investing in the Fund.
[CAUTION LIGHT GRAPHIC]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
ARE THESE FUNDS FOR YOU?
Florida Tax-Free Income Fund
This Fund might be appropriate as part of your investment portfolio if . . .
* You need steady income.
* You are willing to accept moderate risk.
* You are looking for a long-term investment.
* You need an investment that provides tax-free income.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* Your primary goal is to maximize long-term growth.
* Your current tax situation does not allow you to benefit from tax-exempt
income.
* You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
Florida Tax-Free Money Market Fund
This Fund might be appropriate as part of your investment portfolio if . . .
* You need to preserve principal.
* You want a low risk investment.
* You need your money back within a short period.
* You need an investment that provides tax-free income.
* You would like checkwriting privileges on the account.
* You are looking for an investment in a money market fund to balance your
stock or long-term bond portfolio.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* Your primary goal is long-term growth.
* Your current tax situation does not allow you to benefit from tax-exempt
income.
* You need a high total return to achieve your goals.
3
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Either Fund by itself does not constitute a balanced investment program.
Diversifying your investments may improve your long-run investment return and
lower the volatility of your overall investment portfolio.
COULD THE VALUE OF YOUR INVESTMENT IN THESE FUNDS FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Florida Tax-Free
Income Fund will fluctuate with the changing market values of the investments
in the Fund. We manage the Florida Tax-Free Money Market Fund in accordance
with strict Securities and Exchange Commission (SEC) guidelines designed to
preserve the Fund's value at $1 per share, although, of course, we cannot
guarantee that the value will remain at $1 per share.
The value of the securities in which the Florida Tax-Free Income Fund invests
typically fluctuates inversely with changes in the general level of 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. The bar charts shown below illustrate the Funds'
volatility and performance from year to year over the life of the Funds.
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
Florida Tax-Free Income Fund
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1994* -10.04%
1995 18.90%
1996 4.38%
1997 11.16%
1998 6.36%
*FUND BEGAN OPERATIONS ON OCTOBER 1, 1993.
THE FLORIDA TAX-FREE INCOME FUND'S TOTAL RETURN FOR THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999, WAS -1.77%.
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During the periods shown in the bar chart, the highest total return for a
quarter was 8.34% (quarter ending March 31, 1995) and the lowest total return
for a quarter was -8.93% (quarter ending March 31, 1994).
The table below shows how the Fund's average annual returns for the one- and
five-year periods as well as the life of the Fund compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
===============================================================================
AVERAGE ANNUAL TOTAL RETURNS SINCE FUND'S
(FOR THE PERIODS ENDING PAST PAST INCEPTION ON
DECEMBER 31, 1998) 1 YEAR 5 YEARS OCTOBER 1, 1993
- -------------------------------------------------------------------------------
Florida Tax-Free Income Fund 6.36% 5.71% 5.59%
- -------------------------------------------------------------------------------
Lehman Brothers
Municipal Bond Index* 6.48% 6.22% 6.20%
===============================================================================
* THE LEHMAN BROS. MUNICIPAL BOND INDEX IS AN UNMANAGED BENCHMARK OF TOTAL
RETURN PERFORMANCE FOR THE LONG-TERM, INVESTMENT-GRADE, TAX-EXEMPT BOND
MARKET
Florida Tax-Free Money Market Fund
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1994* 2.49%
1995 3.57%
1996 3.24%
1997 3.33%
1998 3.17%
*FUND BEGAN OPERATIONS ON OCTOBER 1, 1993.
THE FLORIDA TAX-FREE MONEY MARKET FUND'S TOTAL RETURN FOR THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999, WAS 1.38%.
During the periods shown in the bar chart, the highest total return for a
quarter was .93% (quarter ending June 30, 1995) and the lowest total return for
a quarter was .47% (quarter ending March 31, 1994).
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The table below shows the Fund's average annual returns for the one- and
five-year periods as well as the life of the Fund. Remember, historical
performance does not necessarily indicate what will happen in the future.
===============================================================================
AVERAGE ANNUAL TOTAL RETURNS SINCE FUND'S
(FOR THE PERIODS ENDING PAST PAST INCEPTION ON
DECEMBER 31, 1998) 1 YEAR 5 YEARS OCTOBER 1, 1993
- -------------------------------------------------------------------------------
Florida Tax-Free
Money Market Fund 3.17% 3.16% 3.10%
===============================================================================
YIELD
All mutual funds must use the same formulas to calculate yield and effective
yield.
[SIDE BAR]
YIELD IS THE ANNUALIZED NET INCOME OF THE FUND DURING A SPECIFIED PERIOD
AS A PERCENTAGE OF THE FUND'S SHARE PRICE.
[SIDE BAR]
EFFECTIVE YIELD IS CALCULATED SIMILAR TO THE YIELD, HOWEVER, WHEN
ANNUALIZED, THE INCOME EARNED IS ASSUMED TO BE REINVESTED.
Florida Tax-Free Income Fund
The Florida Tax-Free Income Fund may advertise performance in terms of a 30-day
yield quotation or a tax-equivalent yield. The Fund's 30-day yield for the
period ended December 31, 1998, was 4.52%.
Florida Tax-Free Money Market Fund
The Florida Tax-Free Money Market Fund typically advertises performance in
terms of a 7-day yield and effective yield or tax-equivalent yield and may
advertise total return. The 7-day yield quotation more closely reflects current
earnings of the Fund than the total return quotation. The effective yield will
be slightly higher than the yield because of the compounding effect of the
assumed reinvestment. Current yields 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. The Fund's 7-day yield
for the period ended December 31, 1998, was 3.22%.
You may obtain the most current yield information for either of the Funds by
calling 1-800-531-8777.
TAX-EQUIVALENT YIELD
Investors use tax-equivalent yields to compare taxable and tax-exempt fixed
income investments using a common yield measure. The tax-equivalent yield is
the yield that a fully taxable investment must generate to earn the same
"take-home" yield as a tax-exempt investment. The calculation depends upon your
federal marginal and Florida intangible tax rates and assumes that an investor
can fully itemize deductions on his or her federal tax return. The higher your
marginal tax bracket, the higher will be the tax-equivalent yield and the more
valuable is the Fund's tax exemption.
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For example, if you assume a federal marginal tax rate of 36% and a Florida
Intangible Tax Effect of .12%, the Effective Marginal Tax Rate would be 36.08%.
Using this tax rate, the Funds' tax-equivalent yields for the period ending
December 31, 1998, would be as follows:
===============================================================================
TAX-EQUIVALENT
YIELD YIELD
- -------------------------------------------------------------------------------
Florida Tax-Free Income Fund (30 day) 4.52% 7.07%
Florida Tax-Free Money Market Fund (7 day) 3.22% 5.04%
===============================================================================
Using the example, to exceed the 30-day yield of the Florida Tax-Free Income
Fund on an after-tax basis, you must find a fully taxable investment that
yields more than 7.07%. Likewise, to exceed the 7-day yield of the Florida
Tax-Free Money Market Fund, you must find a fully taxable investment that
yields more than 5.04%.
For more information on calculating tax-equivalent yields, see APPENDIX B on
page 33.
Please consider performance information in light of the Funds' investment
objectives and policies and market conditions during the reported time periods.
The value of your shares may go up or down. For the most current price, yield,
and return information for these Funds, you may call USAA TouchLine(R) at
1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1 again for prices,
yields, and returns. Then, press 66# for the Florida Tax-Free Income Fund or
press 67# for the Florida Tax-Free Money Market Fund when asked for a Fund
Code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TouchLine(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
6 7 #
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "TxFln" for the Florida Tax-Free Income Fund. If you prefer to
obtain this information from an on-line computer service, you can do so by
using the ticker symbol "UFLTX" for the Florida Tax-Free Income Fund or the
ticker symbol "UFLXX" for the Florida Tax-Free Money Market Fund.
[SIDE BAR]
FLORIDA
TAX-FREE
INCOME FUND
NEWSPAPER
SYMBOL
TxFln
TICKER
SYMBOLS
UFLTX
UFLXX
FEES AND EXPENSES
This summary shows what it will cost you, directly or indirectly, to invest in
these Funds.
Shareholder Transaction Expenses -- (Direct Costs)
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
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Annual Fund Operating Expenses -- (Indirect Costs)
Fund expenses come out of the Funds' assets and are reflected in the Funds'
share prices and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses before waivers,
if any, during the past fiscal year ended March 31, 1999, and are calculated as
a percentage of average net assets (ANA).
[SIDE BAR]
12B-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR
ADVERTISING AND OTHER COSTS OF SELLING FUND SHARES.
===============================================================================
FLORIDA TAX-FREE FLORIDA TAX-FREE
INCOME FUND MONEY MARKET FUND
- -------------------------------------------------------------------------------
Management Fees .36% .36%
Distribution (12b-1) Fees None None
Other Expenses .11% .15%
---- ----
Total Annual Fund Operating Expenses .47% .51%*
==== ====
===============================================================================
_____________
* During the year, we voluntarily limited each Fund's Total Annual Fund
Operating Expenses to .50% of its ANA. However, the Total Fund Operating
Expenses for the Florida Tax-Free Income Fund did not exceed the limitation,
therefore, no reimbursements were required. With respect to the Florida
Tax-Free Money Market Fund, these reimbursements were as follows:
===============================================================================
FLORIDA TAX-FREE
MONEY MARKET FUND
- -------------------------------------------------------------------------------
Total Annual Fund Operating Expenses .51%
Reimbursement from USAA Investment
Management Company (.01%)
Actual Fund Operating Expenses
After Reimbursement .50%
===============================================================================
We have again voluntarily agreed to limit each Fund's annual expenses to
.50% of its ANA and will reimburse the Funds for all expenses in excess of
that amount until August 1, 2000.
Example of Effect of the Funds' Operating Expenses
This example provides you a comparison of investing in one of these Funds with
the cost of investing in other mutual funds. Although your actual costs may be
higher or lower, you would pay the following expenses on a $10,000 investment,
assuming (1) 5% annual return, (2) the Fund's operating expenses (before any
applicable reimbursements) remain the same, and (3) you redeem all of your
shares at the end of those periods.
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===============================================================================
FLORIDA TAX-FREE FLORIDA TAX-FREE
INCOME FUND MONEY MARKET FUND
- -------------------------------------------------------------------------------
1 year $ 48 $ 52
3 years 151 164
5 years 263 285
10 years 591 640
===============================================================================
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is each Funds' principal investment strategy?
A Each Fund's principal investment strategy is to invest the Fund's assets
primarily in securities 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.
These securities include municipal debt obligations that have been issued
by Florida and its political subdivisions, and duly constituted state and
local authorities and corporations. We refer to these securities as
Florida tax-exempt securities. Florida tax-exempt securities are issued to
fund public infrastructure projects such as streets and highways, schools,
water and sewer systems, hospitals, and airports. They 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.
Because the projects benefit the public, Congress has granted exemption
from federal income taxes for the interest income arising from these
securities. Likewise, the Florida Legislature has granted an exemption
from state intangible personal property taxes for most Florida municipal
securities.
Q What types of tax-exempt securities will be included in each Fund's
portfolio?
A Each Fund's assets may be invested in any of the following tax-exempt
securities:
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* 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;
* synthetic instruments, which combine a municipality's long-term
obligation to pay interest and principal with another person's
obligation to repurchase the instrument on short notice; and
* industrial development bonds issued by or on behalf of public
authorities to obtain funds for privately-operated facilities.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of each Fund's assets in
short-term securities whether or not they are exempt from federal income
tax and Florida intangible personal property taxes. To the extent that
these temporary investments produce taxable income, that income may result
in that Fund not fully achieving its investment objective during the time
it is in this temporary defensive posture.
Q What are the principal risks associated with investments in tax-exempt
securities?
A The two principal risks of investing in tax-exempt securities are credit
risk and market risk.
[CAUTION LIGHT GRAPHIC]
CREDIT RISK. Credit risk is the possibility that an issuer of a fixed
income security will fail to make timely payments of interest or
principal. We attempt to minimize the Funds' credit risks by investing in
securities considered at least investment grade at the time of purchase.
Nevertheless, even investment-grade securities are subject to some credit
risk. In addition, the ratings of securities are estimates by the rating
agencies of the credit quality of the securities. The ratings may not take
into account every risk related to whether interest or principal will be
repaid on a timely basis.
When evaluating potential investments for the Funds, our analysts also
independently assess credit risk and its impact on the Funds' portfolios.
Securities in the lowest investment grade ratings category
10
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(BBB) have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to a weakened capability to
make principal and interest payments on these securities than is the case
for higher-rated securities.
[CAUTION LIGHT GRAPHIC]
MARKET RISK. As a mutual fund investing in bonds, the Funds are subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest
rates. In general, when interest rates rise, bond prices fall and when
interest rates fall, bond prices rise. The price volatility of a bond also
depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for
this higher market risk, bonds with longer maturities generally offer
higher yields than bonds with shorter maturities.
Q What other risks are associated with investments in tax-exempt securities?
A Two other risks that are applicable to certain tax-exempt securities are
call risk and structural risk.
[CAUTION LIGHT GRAPHIC]
CALL RISK.Many municipal bonds may be "called," or redeemed, by the issuer
before the stated maturity. During a period of declining interest rates,
an issuer would call, or refinance, a higher yielding bond for the same
reason that a homeowner would refinance a home mortgage. Interest rates
must drop sufficiently so that the savings more than offset the cost of
refinancing.
Intermediate- and long-term municipal bonds have the greatest call risk,
because most municipal bonds may not be called until after ten years from
the date of issue. The period of "call protection" may be longer or
shorter than ten years, but regardless, bonds purchased closest to the
date of issue will have the most call protection. Typically, bonds with
original maturities of ten years or less are not callable.
Although investors certainly appreciate the rise in bond prices when
interest rates drop, falling interest rates create the environment
necessary to "call" the higher-yielding bonds from your Fund. When bonds
are called, the Fund is impacted in several ways. Most likely, we must
reinvest the bond-call proceeds at lower interest rates. The Fund's income
may drop as a result. The Fund may also realize a taxable capital gain.
[CAUTION LIGHT GRAPHIC]
STRUCTURAL RISKS. Some tax-exempt securities, referred to as "synthetic
instruments," are created by combining a long-term municipal bond with a
right to sell the instrument back to the
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remarketer or liquidity provider for repurchase on short notice, referred
to as a "tender option." Usually, the tender option is backed by a letter
of credit or similar guarantee from a bank. The guarantee, however, is
conditional, which means that the bank is not required to pay under the
guarantee if there is a default by the municipality or if certain other
events occur. These types of instruments involve special risks, referred
to as "structural risk." For example, because of the structure of a
synthetic instrument, there is a risk that the instrument will lose its
tax-exempt treatment or that we will not be able to exercise our tender
option. We will not purchase a synthetic instrument unless counsel has
issued an opinion that the instrument is entitled to tax-exempt treatment.
In addition, we will not purchase a synthetic instrument for the
Tax-Exempt Money Market Fund unless we believe there is only minimal risk
that we will not be able to exercise our tender option at all times.
Q What percentage of each Fund's assets will be invested in Florida
tax-exempt securities?
A During normal market conditions, at least 80% of each Fund's net assets
will consist of Florida tax-exempt securities. This policy may only be
changed by a shareholder vote.
In addition to Florida tax-exempt securities, securities issued by certain
U.S. territories and possessions such as Puerto Rico, the Virgin Islands,
and Guam are exempt from federal income tax and the state intangible
personal property tax; and as such, we may consider investing up to 20% of
each Fund's assets in these securities.
Q Are each Fund's investments diversified in many different issuers?
A Each Fund is considered diversified under the federal securities laws.
This means that we will not invest more than 5% in any one issuer with
respect to 75% of each Fund's assets. With respect to the remaining 25% of
each Fund's assets, we could invest more than 5% in any one, or more,
issuers. Purchases of securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities are not counted toward the
5% limitation. Each Fund, of course, is concentrated geographically
through the purchase of Florida tax-exempt securities.
With respect to the Florida Tax-Free Money Market Fund, strict SEC
guidelines do not permit us to invest, with respect to 75% of the
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Fund's assets, greater than 10% of the Fund's assets in securities issued
by or subject to guarantees by the same institution.
We also may not invest more than 25% of the Funds' 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
that are based, directly or indirectly, on the credit of private entities
of any one industry. However, we reserve the right to invest more than 25%
of the Funds' assets in tax-exempt industrial revenue bonds. The 25%
industry limitation does not apply to general obligation bonds or bonds
that are escrowed in U.S. Government securities.
Q What are the potential risks associated with concentrating such a large
portion of each Fund's assets in one state?
[CAUTION LIGHT GRAPHIC]
A The Funds are subject to credit and market risks, as described above,
which could be magnified by the Funds' concentration in Florida issues.
Florida tax-exempt securities may be affected by political, economic,
regulatory, or other developments that limit the ability of Florida
issuers to pay interest or repay principal in a timely manner. Therefore,
the Funds are affected by events within Florida to a much greater degree
than a more diversified national fund.
A particular development may not directly relate to the Funds' investments
but nevertheless might depress the entire market for the state's
tax-exempt securities and therefore adversely impact the Funds' valuation.
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.
The following are examples of just some of the events that may depress
valuations for Florida tax-exempt securities for an extended period of
time:
* Changes in state laws, including voter referendums, that restrict
revenues or raise costs for issuers.
* Court decisions that affect a category of municipal bonds, such as
municipal lease obligations or electric utilities.
* Natural disasters such as floods, storms, hurricanes, droughts, fires,
or earthquakes.
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* Bankruptcy or financial distress of a prominent municipal issuer
within the state.
* Economic issues that impact critical industries or large employers or
that weaken real estate prices.
* Reductions in federal or state financial aid.
* Imbalance in the supply and demand for the state's municipal
securities.
* Developments that may change the tax treatment of Florida tax-exempt
securities.
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
tax-exempt securities are summarized in the Statement of Additional
Information under SPECIAL RISK CONSIDERATIONS.
Q Will any portion of the distributions from the Funds be subject to federal
income taxes?
A During normal market conditions, at least 80% of each Fund's annual income
will be excluded from gross income for federal income tax purposes and the
shares will be exempt from the Florida intangible personal property tax.
This policy may only be changed by a shareholder vote. We expect that any
taxable interest income distributed will be minimal.
However, gains and losses from trading securities that occur during the
normal course of managing a fund may create net capital gain
distributions. The Internal Revenue Code presently treats these
distributions differently than tax-exempt interest income in the following
ways:
* Distributions of net short-term capital gains are taxable as ordinary
income.
* Distributions of net long-term capital gains are taxable as long-term
capital gains, regardless of the length of time you have held the Fund
shares.
* Both short-term and long-term capital gains are taxable whether
received in cash or reinvested in additional shares.
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<PAGE>
Q Do the Funds purchase municipal bonds secured by bond insurance?
A Yes. We may purchase municipal bonds whose principal and interest
payments are guaranteed by an insurance company. In addition, we may
purchase municipal bond insurance with Fund assets when we believe it will
provide a net economic benefit to the shareholders.
Q Will income from the Funds be subject to the federal alternative minimum
tax (AMT) for individuals?
A During normal market conditions, at least 80% of each Fund's annual income
will be excluded from the calculation of the federal alternative minimum
tax (AMT) for individuals. This policy may only be changed by a
shareholder vote. Since inception, the Funds have not distributed any
income that is subject to the federal AMT for individuals, and we do not
intend to invest in securities subject to the federal AMT. However, of
course, changes in federal tax laws or other unforeseen circumstances
could result in income subject to the federal AMT for individuals.
Florida Tax-Free Income Fund
Q What is the credit quality of the Fund's investments?
A Under normal market conditions, we will invest the Fund's assets 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 (A or higher)
by Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings
Group (S&P), or Fitch IBCA, Inc. (Fitch) or in the highest short-term
rating category by Moody's, S&P, or Fitch. If a security is not rated by
these rating agencies, we must determine that the security is of
equivalent investment quality.
In no event will we purchase a security for the Fund unless it is rated at
least investment grade at the time of purchase. Investment-grade
securities are those securities rated within the four highest long-term
rating categories by Moody's (Baa or higher), S&P, or Fitch (BBB or
higher), or in the two highest short-term rating categories by these
rating agencies. If unrated by these agencies, we must determine that the
securities are of equivalent investment quality.
On occasion, we may purchase a credit rating on a particular security when
we believe it will provide a net economic benefit to the shareholders.
15
<PAGE>
You will find a complete description of the above tax-exempt ratings in
the Fund's Statement of Additional Information.
Q What happens if the rating of a security is downgraded to below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio. If
downgrades result in more than 5% of the Fund's net assets being invested
in securities that are less than investment-grade quality, we will take
immediate action to reduce the Fund's holdings in such securities to 5% or
less of the Fund's net assets, unless otherwise directed by the Board of
Trustees.
Q How are the decisions to buy and sell securities made?
A We manage tax-exempt funds based on the common sense premise that our
investors value tax-exempt income over taxable capital gain distributions.
When weighing the decision to buy or sell a security, we strive to balance
the value of the tax-exempt income, the credit risk of the issuer, and the
price volatility of the bond.
Q What is the Fund's average portfolio maturity and how is it calculated?
A While the Fund's average portfolio maturity is not restricted, we expect
it to be greater than 10 years. To determine a security's maturity for
purposes of calculating the Fund's average portfolio maturity, we may
estimate the expected time in which the security's principal is to be
paid. This can be substantially shorter than its stated final maturity.
For more information on the method of calculating the Fund's average
weighted portfolio maturity, see INVESTMENT POLICIES in the Fund's
Statement of Additional Information.
Florida Tax-Free Money Market Fund
Q What is the credit quality of the Fund's investments?
A The Fund's investments consist of securities meeting the requirements to
qualify as "eligible securities" under the SEC rules applicable to money
market funds. In general, an eligible security is defined as a security
that is:
* issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof including "prerefunded" and "escrowed to
maturity" tax-exempt securities;
16
<PAGE>
* rated or subject to a guarantee that is 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;
* unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or
* unrated but determined by us to be of comparable quality.
In addition, we must consider whether a particular investment presents
minimal credit risk.
Q Who are the Nationally Recognized Statistical Rating Organizations?
A Current NRSROs include:
* Moody's Investors Service, Inc.;
* Standard & Poor's Ratings Group;
* Fitch IBCA, Inc.;
* Duff & Phelps, LLC; and
* Thompson BankWatch, Inc.
Q What happens if the rating of a security is downgraded?
A If the rating of a security is downgraded after purchase, we will
determine whether it is in the best interest of the Fund's shareholders to
continue to hold the security in the Fund's portfolio.
Q Will the Fund always maintain a net asset value of $1 per share?
[SIDE BAR]
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY IS OBTAINED BY MULTIPLYING THE
DOLLAR VALUE OF EACH INVESTMENT BY THE NUMBER OF DAYS LEFT TO ITS
MATURITY, THEN ADDING THOSE FIGURES TOGETHER AND DIVIDING THE TOTAL BY THE
DOLLAR VALUE OF THE FUND'S PORTFOLIO.
A While we will endeavor to maintain a constant Fund net asset value of $1
per share, there is no assurance that we will be able to do so. Remember,
the shares are neither insured nor guaranteed by the U.S. Government. As
such, the Fund carries some risk.
For example, there is always a risk that the issuer of a security held by
the Fund will fail to pay interest or principal when due. We attempt to
minimize this credit risk by investing only in securities rated in one of
the two highest categories for short-term securities, or, if not rated, of
comparable quality, at the time of purchase. Additionally, we will not
purchase a security unless our analysts determine that the security
presents minimal credit risk.
There is also a risk that rising interest rates will cause the value of
the Fund's securities to decline. We attempt to minimize this interest
risk by limiting the maturity of each security to 397 days or less and
17
<PAGE>
maintaining a dollar-weighted average portfolio maturity for the Fund of
90 days or less.
Finally, there is the possibility that one or more investments in the Fund
cease to be "eligible securities" resulting in the net asset value ceasing
to be $1 per share. For example, a guarantor on a security may fail to
meet a contractual obligation.
Q How are the decisions to buy and sell securities made?
A We balance factors such as credit quality and maturity to purchase the
best relative value available in the market at any given time. While rare,
sell decisions are usually based on a change in our credit analysis or to
take advantage of an opportunity to reinvest at a higher yield.
For additional information about other securities in which we may invest each
Fund's assets, see APPENDIX A on page 31.
FUND MANAGEMENT
USAA Investment Management Company serves as the manager and distributor of
these Funds. We are an affiliate of United Services Automobile Association
(USAA), a large, diversified financial services institution. As of the date of
this Prospectus, we had approximately $40 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Funds pursuant to an Advisory Agreement.
We are responsible for managing the Funds' portfolios (including placement of
brokerage orders) and their business affairs, subject to the authority and
supervision by the Board of Trustees. For our services, the Funds pay us an
annual fee. This fee, which is accrued daily and paid monthly, is computed as a
percentage of the aggregate average net assets of both Funds combined. This fee
is allocated between the Funds based on the relative net assets of each. The
fee is computed at one-half of one percent (.50%) of the first $50 million of
average net assets, two-fifths of one percent (.40%) of that portion of average
net assets over $50 million but not over $100 million, and three-tenths of one
percent (.30%) of that portion of average net assets in excess of $100 million.
The fees we received for the fiscal year ended March 31, 1999, were equal to
.36% of average net assets for the Florida Tax-Free Income Fund and, net of
reimbursements, .35% of average net assets for the Florida Tax-Free Money
Market Fund. We also provide services related to selling the Funds' shares and
receive no compensation for those services.
18
<PAGE>
Although our officers and employees, as well as those of the Funds, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Funds and us.
Portfolio Managers
FLORIDA TAX-FREE INCOME FUND
[PHOTOGRAPH OF PORTFOLIO MANAGER]
Robert R. Pariseau
Robert R. Pariseau, Assistant Vice President of Fixed Income Investments, has
managed the Fund since May 1995. He has 15 years investment management
experience working for us. Mr. Pariseau earned the Chartered Financial Analyst
(CFA) designation in 1987 and is a member of the Association for Investment
Management and Research (AIMR), the 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
[PHOTOGRAPH OF PORTFOLIO MANAGER]
Regina G. Shafer
Regina G. Shafer, Assistant Vice President of Money Market Funds, has managed
the Fund since April 1999. She has four years investment management experience
and has worked for us for eight years. Ms. Shafer is a Certified Public
Accountant and earned the CFA designation in 1998. She is a member of AIMR and
SAFAS. She holds an MBA from the University of Texas at San Antonio and a BBA
from Southwest Texas State University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
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,
you own an investment that in earlier times would have been available only to
very wealthy people.
19
<PAGE>
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to pursue the higher yields usually available in
the long-term bond market, but you are also concerned about the possible price
swings of the long-term bonds. You could divide your 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 way you
could combine funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
Appendix C under asset allocation on page 35. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our member service
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX C on page 35 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required to open your initial account. However, after you
open your initial account with us, you will not need to
20
<PAGE>
fill out another application to open another Fund unless the registration is
different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. Each
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day.
If you plan to purchase Fund shares with a foreign check, we suggest you
convert your foreign check to U.S. dollars prior to investment in a Fund. This
will avoid a potential four- to six-week delay in the effective date of your
purchase. Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
* $3,000. Employees of USAA and its affiliated companies may open an account
through payroll deduction for as little as $25 per pay period with no
initial investment.
ADDITIONAL PURCHASES
* $50 (Except transfers from brokerage accounts into the Florida Tax-Free
Money Market Fund, which are exempt from the minimum).
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
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 Road
San Antonio, TX 78288
21
<PAGE>
IN PERSON
[HANDSHAKE GRAPHIC]
* 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, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* To open or add to your 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 Florida Fund Name
USAA Account Number: 69384998
Shareholder(s) Name(s)____________________________________
Shareholder(s) Mutual Fund Account Number_________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank account,
paycheck, income-producing investment, or USAA money market fund account.
Sign up for these services when opening an account or call 1-800-531-8448 to
add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To open
an account by phone, the new account must have the same registration as your
existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check 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. For federal
income tax purposes, a redemption is a taxable event; and as such, you may
realize a capital gain or loss. Such capital
22
<PAGE>
gains or losses are based on the difference between your cost basis in the
shares and the price received upon redemption.
In addition, the Funds may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAM, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
* Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are 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. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number and/or account number, (2) the name(s) on the account
registration, and (3) social security/tax identification number
or date of birth of the registered account owner(s) for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
CHECKWRITING
[CHECKBOOK GRAPHIC]
* Checks can be issued for your Florida Tax-Free Money Market Fund account.
Return a signed signature card, which accompanies your application, or
request a signature card separately and return to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
You will not be charged for the use of checks or any subsequent reorders. Your
checkwriting privilege is subject to State Street Bank and Trust Company's
rules and regulations governing checking accounts. You may write checks in the
amount of $250 or more. Checks written for less than $250 will be returned
unpaid. Because the value of your account changes daily as dividends accrue,
you may not write a check to close your account.
23
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to assist you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Funds' transfer agent, may assess
annually 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 reduce
total transfer agency fees paid by the Fund to SAS. 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/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).
Fund Rights
Each Fund reserves the right to:
* reject purchase or exchange orders when in the best interest of the Fund;
* limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
* 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); 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;
* require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
* redeem an account with a total value of less than $500 of either Fund, with
certain limitations.
24
<PAGE>
EXCHANGES
Exchange Privilege
The exchange privilege is automatic 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 the shares to be acquired are
offered in your state of residence. Only Florida residents may exchange into a
Florida Fund. After we receive the exchange orders, the Funds' transfer agent
will simultaneously process exchange redemptions and purchases at the share
prices next determined. The investment minimums applicable to share purchases
also apply to exchanges. For federal income tax purposes, an exchange between
Funds is a taxable event; and as such, you may realize a capital gain or loss.
Such capital gains or losses are based on the difference between your cost
basis in the shares and the price received upon exchange.
The Funds have undertaken certain procedures regarding telephone transactions
as described on page 23.
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. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except 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).
SHAREHOLDER INFORMATION
Share Price Calculation
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. Each Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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
Trust's Board of Trustees. Securities that cannot be valued by the pricing
service, and all other assets, are valued in good faith at fair value using
methods we have determined under the general supervision of the Board of
Trustees. In addition, securities with maturities of 60 days or less and all
securities of the Florida Tax-Free Money Market Fund are stated at amortized
cost, which approximates market value.
25
<PAGE>
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Funds' Statement of Additional Information.
Dividends and Distributions
Net investment income of each Fund is accrued daily and paid on the last
business day of the month. Dividends shall begin accruing on shares purchased
the day following the effective date and shall continue to accrue to the
effective date of redemption. Any net capital gain distribution usually occurs
within 60 days of the March 31 fiscal year end, which would be somewhere around
the end of May. The Funds will make additional payments to shareholders, if
necessary, to avoid the imposition of any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any
capital gain distributions paid by the Florida Tax-Free Income Fund will reduce
the NAV per share by the amount of the dividend or distribution. You should
consider carefully the effects of purchasing shares of the Florida Tax-Free
Income Fund shortly before any capital gain distribution. Although, in effect
this would be a return of capital, these distributions are subject to taxes. If
you become a resident of a state other than Florida, we will mail a check for
proceeds of income dividends to you monthly.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. While we manage the
Funds so that at least 80% of each Fund's annual income will be exempt from
federal income taxes, we may invest up to 20% of the Funds' assets in
securities that generate income not exempt from federal income taxes. Because
interest income may be exempt for federal income tax purposes, it does not
necessarily mean that the interest income may be exempt under the income or
other tax laws of any state or local taxing authority. As discussed earlier on
page 14, capital gain distributions by a Fund may be taxable. Note that the
Taxpayer Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax adviser about your investment.
26
<PAGE>
WITHHOLDING - Federal law requires each Fund 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,
* underreports dividend or interest income, or
* fails to certify that he or she 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 Funds' transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - Each Fund will report information to you annually concerning the
tax status of dividends and distributions for federal income tax purposes,
including the portion of the dividends constituting interest on private
activity bonds and the percentage and source 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 who 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. Prior to July 1, 1999, shares similar to shares in the Funds were
exempt from Florida intangible personal property tax if the fund's portfolio
consisted solely of assets exempt from the Florida intangible personal property
tax. Under this provision, the Funds previously 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. Effective July 1, 1999, the Florida Legislature revised
this requirement so that the Funds' shares will be exempt if at least ninety
percent of the net asset value of the portfolio of assets corresponding to the
shares in the Funds is
27
<PAGE>
invested in assets that are exempt from the Florida intangible personal
property tax. The Funds have applied for a ruling from the Florida Department
of Revenue that if, on the last business day of any calendar year, at least
ninety percent of the net asset value of the portfolio of assets corresponding
to shares in the Funds is invested in assets that are exempt from the 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 U.S. Government, its agencies and certain
territories and possessions such as Puerto Rico, the Virgin Islands, and Guam;
and cash. If shares of the Funds are subject to Florida intangible personal
property tax, because less than ninety percent of the net asset value 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 U.S. Government will be exempt from taxation.
Year 2000
Like other organizations around the world, the Funds could be adversely
affected if the computer systems used by them, their service providers, or
companies in which they invest do not properly process and calculate
information that relates to dates beginning January 1, 2000, and beyond. This
situation may occur because for many years computer programmers used only two
digits to describe years, such as 98 for 1998. A program written in this manner
may not work when it encounters the year 00. To confront this situation, USAA
companies have spent much effort and money; and we are confident that our
critical systems are essentially prepared for the Year 2000. In addition, we
are actively assessing the Year 2000 readiness of our service providers,
partners, and companies in whose securities we invest. It is not possible for
us to say that you will experience no effect from this situation, but we can
say that we are making a large effort to avoid ill effects upon our
shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
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<PAGE>
FINANCIAL HIGHLIGHTS
These financial highlights tables are intended to help you understand the
Funds' financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Funds' financial statements, are included in the Annual Report,
which is available upon request.
Florida Tax-Free Income Fund:
Year Ended March 31,
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
Net asset value at
beginning of period $ 9.94 $ 9.33 $ 9.26 $ 9.09 $ 8.98
Net investment income .50 .51 .52 .52 .49
Net realized and
unrealized gain .08 .61 .07 .17 .11
Distributions from net
investment income (.50) (.51) (.52) (.52) (.49)
--------------------------------------------------
Net asset value at
end of period $ 10.02 $ 9.94 $ 9.33 $ 9.26 $ 9.09
==================================================
Total return (%)* 5.91 12.22 6.51 7.66 7.01
Net assets at end of
period (000) $181,964 $ 145,921 $ 95,483 $ 69,079 $ 42,891
Ratio of expenses to
average net assets (%) .47 .50 .50 .50 .50
Ratio of expenses to average
net assets excluding
reimbursements (%) - .51 .57 .67 .81
Ratio of net investment
income to average net
assets (%) 4.96 5.21 5.57 5.52 5.59
Portfolio turnover (%) 25.28 27.48 44.75 88.20 71.76
______________________
* Assumes reinvestment of all dividend income distributions during the period.
29
<PAGE>
Financial Highlights (cont.)
Florida Tax-Free Money Market Fund:
Year Ended March 31,
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .03 .03
Distributions from net
investment income (.03) (.03) (.03) (.03) (.03)
--------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==================================================
Total return (%)* 3.05 3.34 3.20 3.51 2.86
Net assets at end of
period (000) $ 98,616 $ 89,799 $ 87,053 $ 71,224 $ 52,225
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50
Ratio of expenses to average
net assets excluding
reimbursements (%) .51 .52 .57 .64 .72
Ratio of net investment
income to average net
assets (%) 3.00 3.28 3.15 3.45 2.97
_________________________
* Assumes reinvestment of all dividend income distributions during the period.
30
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST EACH FUND'S ASSETS:
VARIABLE RATE SECURITIES
We may invest a Fund's assets 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 the Fund depending on the proportion of such securities
held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security 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
We may invest a Fund's assets in tax-exempt securities (including securities
with variable interest rates) that 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
We may invest a Fund's assets 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.
SYNTHETIC INSTRUMENTS
We may invest a Fund's assets in tender option bonds, bond receipts, and
similar synthetic municipal instruments. A synthetic instrument is a security
created by combining an intermediate or long-term municipal bond with a right
to sell the instrument back to the remarketer or liquidity provider for
repurchase on short notice. This right to sell is commonly referred to as a
tender option. Usually, the tender option is backed by a conditional guarantee
or letter of credit from a bank or other financial institution. Under its
terms, the guarantee may expire if the municipality defaults on payments of
interest or
31
<PAGE>
principal on the underlying bond, if the credit rating of the municipality is
downgraded, or if the instrument (or the underlying bond) loses its tax-exempt
treatment. Synthetic instruments involve structural risks that could adversely
affect the value of the instrument or could result in a Fund holding an
instrument for a longer period of time than originally anticipated.
WHEN-ISSUED SECURITIES
We may invest a Fund's assets in new securities offered on a when-issued basis.
* 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.
MUNICIPAL LEASE OBLIGATIONS
We may invest a Fund's assets in a variety of instruments commonly referred to
as municipal lease obligations, including:
* Leases,
* Installment purchase contracts, and
* Certificates of participation in such leases and contracts.
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.
ILLIQUID SECURITIES
We may invest up to 15% of the Florida Tax-Free Income Fund's net assets and up
to 10% of the Florida Tax-Free Money Market Fund's net assets in securities
that are illiquid. Illiquid securities are those securities which cannot be
disposed of in the ordinary course of business, seven days or less, at
approximately the same value at which the Fund has valued the securities.
Lease obligations and certain put bonds subject to restrictions on transfer may
be determined to be liquid in accordance with the guidelines established by the
Funds' Board of Trustees.
In determining the liquidity of a lease obligation, we 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, we
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.
32
<PAGE>
APPENDIX B
Taxable-Equivalent Yield Table
COMBINED FEDERAL AND
THE EFFECT OF FLORIDA INTANGIBLES TAX
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
and Assuming a Florida
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% 3.32%
- -------------------------------------------------------------------------------
2.50% 3.48% 3.63% 3.91% 4.14%
- -------------------------------------------------------------------------------
3.00% 4.17% 4.35% 4.69% 4.97%
- -------------------------------------------------------------------------------
3.50% 4.87% 5.08% 5.48% 5.80%
- -------------------------------------------------------------------------------
4.00% 5.56% 5.80% 6.26% 6.63%
- -------------------------------------------------------------------------------
4.50% 6.26% 6.53% 7.04% 7.46%
- -------------------------------------------------------------------------------
5.00% 6.95% 7.25% 7.82% 8.29%
- -------------------------------------------------------------------------------
5.50% 7.65% 7.98% 8.60% 9.12%
- -------------------------------------------------------------------------------
6.00% 8.34% 8.71% 9.39% 9.95%
- -------------------------------------------------------------------------------
6.50% 9.04% 9.43% 10.17% 10.77%
- -------------------------------------------------------------------------------
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 EXAMPLES 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.
33
<PAGE>
The following table calculates the estimated Intangible Tax Liability as a
percentage of intangible assets.
===================================================================
Florida 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 1998 INTANGIBLE TAX
RETURN'S "TAX CALCULATION WORKSHEET" TO CALCULATE THE INTANGIBLE TAX LIABILITY
AS A PERCENTAGE OF INTANGIBLE ASSETS.
FOR A FURTHER EXPLANATION ON CALCULATING TAX-EQUIVALENT YIELDS, SEE THE FUNDS'
STATEMENT OF ADDITIONAL INFORMATION.
34
<PAGE>
APPENDIX C
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 you with the opportunity to formulate your 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 mutual funds managed and
distributed by USAA Investment Management Company, including charges and
operating expenses, call us for a Prospectus. Read it carefully before you
invest. Mutual fund operating expenses apply and continue throughout the life
of the Fund.
FUND TYPE/NAME VOLATILITY
============================================================
CAPITAL APPRECIATION
- ------------------------------------------------------------
Aggressive Growth Very high
Emerging Markets Very high
First Start Growth Moderate to high
Gold Very high
Growth Moderate to high
Growth & Income Moderate
International Moderate to high
S&P 500 Index Moderate
Science & Technology Very high
Small Cap Stock Very high
World Growth Moderate to high
- ------------------------------------------------------------
ASSET ALLOCATION
- ------------------------------------------------------------
Balanced Strategy Moderate
Cornerstone Strategy Moderate
Growth and Tax Strategy Moderate
Growth Strategy Moderate to high
Income Strategy Low to moderate
- ------------------------------------------------------------
INCOME - TAXABLE
- ------------------------------------------------------------
GNMA Low to moderate
High-Yield Opportunities High
Income Moderate
Income Stock Moderate
Intermediate-Term Bond Low to moderate
Short-Term Bond Low
- ------------------------------------------------------------
INCOME - TAX EXEMPT
- ------------------------------------------------------------
Long-Term Moderate
Intermediate-Term Low to moderate
Short-Term Low
State Bond/Income Moderate
- ------------------------------------------------------------
MONEY MARKET
- ------------------------------------------------------------
Money Market Very low
Tax Exempt Money Market Very low
Treasury Money Market Trust Very low
State Money Market Very low
============================================================
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
S&P(R) 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.
SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE
FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE
VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
THE SCIENCE & TECHNOLOGY FUND MAY BE MORE VOLATILE THAN A FUND THAT
DIVERSIFIES ACROSS MANY INDUSTRIES
35
<PAGE>
If you would like more information about the Funds, you may call
1-800-531-8181 to request a free copy of the Funds' Statement of Additional
Information (SAI), Annual or Semiannual Reports, or to ask other questions
about the Funds. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In each Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the
public reference room can be obtained by calling 1-800-SEC-0330.
Additionally, copies of this information can be obtained, for a duplicating
fee, by writing the Public Reference Section of the Commission, Washington,
D.C. 20549-6009.
===============================================================================
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
----------------------------------------------------------
Transfer Agent Custodian
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
---------------------------------------------------------
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges, or redemptions
1-800-531-8448, (in San Antonio) 456-7202
---------------------------------------------------------
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
---------------------------------------------------------
Mutual Fund TouchLine(R)
(from Touchtone phones only)
For account balance, last transaction, or fund prices
1-800-531-8777, (in San Antonio) 498-8777
===============================================================================
Investment Company Act File No. 811-7852
<PAGE>
USAA TEXAS TAX-FREE INCOME FUND
USAA TEXAS TAX-FREE MONEY MARKET FUND
PROSPECTUS
AUGUST 1, 1999
Shares of the Texas Funds are offered only to residents of the state of Texas.
The delivery of this Prospectus is not an offer in any state where shares of
the Texas Funds may not lawfully be made.
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of either of these Fund's shares or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Are Each Fund's Investment Objectives and Main Strategies? ........... 2
Main Risks of Investing in These Funds .................................... 2
Are These Funds for You? .................................................. 3
Could the Value of Your Investment in These Funds Fluctuate? .............. 4
Fees and Expenses ......................................................... 7
Fund Investments .......................................................... 9
Fund Management ........................................................... 18
Using Mutual Funds in an Investment Program ............................... 19
How to Invest ............................................................. 20
Important Information About Purchases and Redemptions ..................... 23
Exchanges ................................................................. 24
Shareholder Information ................................................... 25
Financial Highlights ...................................................... 28
Appendix A ................................................................ 30
Appendix B ................................................................ 32
Appendix C ................................................................ 33
<PAGE>
USAA Investment Management Company manages these Funds. For easier reading,
USAA Investment Management Company will be referred to as "we" or "us"
throughout the Prospectus.
WHAT ARE EACH FUND'S INVESTMENT
OBJECTIVES AND MAIN STRATEGIES?
Each Fund 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. Each Fund has separate investment policies
to achieve its objective.
The TEXAS TAX-FREE INCOME FUND invests primarily in long-term, investment-grade
Texas tax-exempt securities. The Fund's average dollar-weighted portfolio
maturity is not restricted, but is expected to be greater than 10 years.
The TEXAS TAX-FREE MONEY MARKET FUND invests in high-quality Texas tax-exempt
securities with maturities of 397 days or less.
In view of the risks inherent in all investments in securities, there is no
assurance that the Funds' objectives will be achieved. See FUND INVESTMENTS on
page 9 for more information.
MAIN RISKS OF INVESTING IN THESE FUNDS
The two primary risks of investing in these Funds are credit risk and market
risk. As with other mutual funds, losing money is also a risk of investing in
these Funds.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
* MARKET RISK involves the possibility that the value of each Fund's
investments will decline because of an increase in interest rates, or to
adverse changes in supply and demand for municipal securities, or other
market factors.
These credit and market risks may be magnified because each Fund concentrates
in Texas tax-exempt securities.
IF INTEREST RATES INCREASE: the yield of each Fund may increase and the market
value of the Texas Tax-Free Income Fund's securities will likely decline,
adversely affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of each Fund may decrease and the market
value of the Texas Tax-Free Income Fund's securities may increase, which would
likely increase the Fund's net asset value and total return. The Texas Tax-Free
Money Market Fund's total return may decrease.
Other risks of investing in either Fund include call risk and structural risk.
2
<PAGE>
As you consider an investment in either Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in either Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Texas
Tax-Free Money Market Fund seeks to preserve the value of your investment at $1
per share, it is possible to lose money by investing in the Fund.
[CAUTION LIGHT GRAPHIC]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
ARE THESE FUNDS FOR YOU?
Texas Tax-Free Income Fund
This Fund might be appropriate as part of your investment portfolio if . . .
* You need steady income.
* You are willing to accept moderate risk.
* You are looking for a long-term investment.
* You need an investment that provides tax-free income.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* Your primary goal is to maximize long-term growth.
* Your current tax situation does not allow you to benefit from tax-exempt
income.
* You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
Texas Tax-Free Money Market Fund
This Fund might be appropriate as part of your investment portfolio if . . .
* You need to preserve principal.
* You want a low risk investment.
* You need your money back within a short period.
* You need an investment that provides tax-free income.
* You would like checkwriting privileges on the account.
* You are looking for an investment in a money market fund to balance your
stock or long-term bond portfolio.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* Your primary goal is long-term growth.
* Your current tax situation does not allow you to benefit from tax-exempt
income.
* You need a high total return to achieve your goals.
3
<PAGE>
Either Fund by itself does not constitute a balanced investment program.
Diversifying your investments may improve your long-run investment return and
lower the volatility of your overall investment portfolio.
COULD THE VALUE OF YOUR INVESTMENT IN THESE FUNDS FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Texas Tax-Free
Income Fund will fluctuate with the changing market values of the investments
in the Fund. We manage the Texas Tax-Free Money Market Fund in accordance with
strict Securities and Exchange Commission (SEC) guidelines designed to preserve
the Fund's value at $1 per share, although, of course, we cannot guarantee that
the value will remain at $1 per share.
The value of the securities in which the Texas Tax-Free Income Fund invests
typically fluctuates inversely with changes in the general level of 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. The bar charts shown below illustrate the Funds'
volatility and performance from year to year over the life of the Funds.
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
Texas Tax-Free Income Fund
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1995* 22.22%
1996 5.25%
1997 11.71%
1998 6.06%
*FUND BEGAN OPERATIONS ON AUGUST 1, 1994
THE TEXAS TAX-FREE INCOME FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD
ENDED JUNE 30, 1999, WAS -1.65%.
4
<PAGE>
During the periods shown in the bar chart, the highest total return for a
quarter was 9.25% (quarter ending March 31, 1995) and the lowest total return
for a quarter was -2.19% (quarter ending March 31, 1996).
The table below shows how the Fund's average annual returns for the one-year
period as well as the life of the Fund compared to those of a broad-based
securities market index. Remember, historical performance does not necessarily
indicate what will happen in the future.
===============================================================================
AVERAGE ANNUAL TOTAL RETURNS SINCE FUND'S
(FOR THE PERIODS ENDING PAST INCEPTION ON
DECEMBER 31, 1998) 1 YEAR AUGUST 1, 1994
- -------------------------------------------------------------------------------
Texas Tax-Free Income Fund 6.06% 9.20%
- -------------------------------------------------------------------------------
Lehman Brothers
Municipal Bond Index* 6.48% 7.74%
===============================================================================
* THE LEHMAN BROS. MUNICIPAL BOND INDEX IS AN UNMANAGED BENCHMARK OF TOTAL
RETURN PERFORMANCE FOR THE LONG-TERM, INVESTMENT-GRADE, TAX-EXEMPT BOND
MARKET.
Texas Tax-Free Money Market Fund
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1995* 3.56%
1996 3.25%
1997 3.43%
1998 3.24%
*FUND BEGAN OPERATIONS ON AUGUST 1, 1994.
THE TEXAS TAX-FREE MONEY MARKET FUND'S TOTAL RETURN FOR THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999, WAS 1.46%.
During the periods shown in the bar chart, the highest total return for a
quarter was .95% (quarter ending June 30, 1995) and the lowest total return
for a quarter was .76% (quarter ending March 31, 1997).
5
<PAGE>
The table below shows the Fund's average annual returns for the one-year period
as well as the life of the Fund. Remember, historical performance does not
necessarily indicate what will happen in the future.
===============================================================================
AVERAGE ANNUAL TOTAL RETURNS SINCE FUND'S
(FOR THE PERIODS ENDING PAST INCEPTION ON
DECEMBER 31, 1998) 1 YEAR AUGUST 1, 1994
- -------------------------------------------------------------------------------
Texas Tax-Free Money Market Fund 3.24% 3.33%
===============================================================================
YIELD
All mutual funds must use the same formulas to calculate yield and effective
yield.
[SIDE BAR]
YIELD IS THE ANNUALIZED NET INCOME OF THE FUND DURING A SPECIFIED PERIOD
AS A PERCENTAGE OF THE FUND'S SHARE PRICE.
[SIDE BAR]
EFFECTIVE YIELD IS CALCULATED SIMILAR TO THE YIELD, HOWEVER, WHEN
ANNUALIZED, THE INCOME EARNED IS ASSUMED TO BE REINVESTED.
Texas Tax-Free Income Fund
The Texas Tax-Free Income Fund may advertise performance in terms of a 30-day
yield quotation or a tax-equivalent yield. The Fund's 30-day yield for the
period ended December 31, 1998, was 4.64%.
Texas Tax-Free Money Market Fund
The Texas Tax-Free Money Market Fund typically advertises performance in terms
of a 7-day yield and effective yield or tax-equivalent yield and may advertise
total return. The 7-day yield quotation more closely reflects current earnings
of the Fund than the total return quotation. The effective yield will be
slightly higher than the yield because of the compounding effect of the assumed
reinvestment. Current yields 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. The Fund's 7-day yield for the period
ended December 31, 1998, was 3.51%.
You may obtain the most current yield information for either of the Funds by
calling 1-800-531-8777.
TAX-EQUIVALENT YIELD
Investors use tax-equivalent yields to compare taxable and tax-exempt fixed
income investments using a common yield measure. The tax-equivalent yield is
the yield that a fully taxable investment must generate to earn the same
"take-home" yield as a tax-exempt investment. The calculation depends upon your
federal marginal tax rate and assumes that an investor can fully itemize
deductions on his or her federal tax return. The higher your marginal tax
bracket, the higher will be the tax-equivalent yield and the more valuable is
the Fund's tax exemption.
6
<PAGE>
For example, if you assume a federal marginal tax rate of 36%, the Funds'
tax-equivalent yields for the period ending December 31, 1998, would be as
follows:
===============================================================================
TAX-EQUIVALENT
YIELD YIELD
- -------------------------------------------------------------------------------
Texas Tax-Free Income Fund (30 day) 4.64% 7.25%
Texas Tax-Free Money Market Fund (7 day) 3.51% 5.48%
===============================================================================
Using the example, to exceed the 30-day yield of the Texas Tax-Free Income Fund
on an after-tax basis, you must find a fully taxable investment that yields
more than 7.25%. Likewise, to exceed the 7-day yield of the Texas Tax-Free
Money Market Fund, you must find a fully taxable investment that yields more
than 5.48%.
For more information on calculating tax-equivalent yields, see APPENDIX B on
page 32.
Please consider performance information in light of the Funds' investment
objectives and policies and market conditions during the reported time periods.
The value of your shares may go up or down. For the most current price, yield,
and return information for these Funds, you may call USAA TouchLine(R) at
1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1 again for prices,
yields, and returns. Then, press 70# for the Texas Tax-Free Income Fund or
press 71# for the Texas Tax-Free Money Market Fund when asked for a Fund Code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TouchLine(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
7 1 #
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "TxTln" for the Texas Tax-Free Income Fund. If you prefer to obtain
this information from an on-line computer service, you can do so by using the
ticker symbol "UTXTX" for the Texas Tax-Free Income Fund.
[SIDE BAR]
TEXAS
TAX-FREE
INCOME FUND
NEWSPAPER
SYMBOL
TXTIN
TICKER
SYMBOL
UTXTX
FEES AND EXPENSES
This summary shows what it will cost you, directly or indirectly, to invest in
these Funds.
Shareholder Transaction Expenses -- (Direct Costs)
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
7
<PAGE>
Annual Fund Operating Expenses -- (Indirect Costs)
Fund expenses come out of the Funds' assets and are reflected in the Funds'
share prices and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses before waivers,
during the past fiscal year ended March 31, 1999, and are calculated as a
percentage of average net assets (ANA).
[SIDE BAR]
12B-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR
ADVERTISING AND OTHER COSTS OF SELLING FUND SHARES.
===============================================================================
TEXAS TAX-FREE TEXAS TAX-FREE
INCOME FUND MONEY MARKET FUND
- -------------------------------------------------------------------------------
Management Fees .50% .50%
Distribution (12b-1) Fees None None
Other Expenses .37% .83%
---- -----
Total Annual Fund Operating Expenses .87% 1.33%
==== =====
===============================================================================
_________________
* During the year, we voluntarily limited each Fund's Total Annual Fund
Operating Expenses to .50% as follows:
===============================================================================
TEXAS TEXAS TAX-
TAX-FREE FREE MONEY
INCOME FUND MARKET FUND
- -------------------------------------------------------------------------------
Total Annual Fund Operating Expenses .87% 1.33%
Reimbursement from USAA Investment
Management Company (.37%) (.83%)
------ ------
Actual Fund Operating Expenses
After Reimbursement .50% .50%
====== ======
===============================================================================
We have again voluntarily agreed to limit each Fund's annual expenses to
.50% of its ANA and will reimburse the Funds for all expenses in excess of
that amount until August 1, 2000.
Example of Effect of the Funds' Operating Expenses
This example provides you a comparison of investing in one of the Funds with
the cost of investing in other mutual funds. Although your actual costs may be
higher or lower, you would pay the following expenses on a $10,000 investment,
assuming (1) 5% annual return, (2) the Fund's operating expenses (before any
applicable reimbursements) remain the same, and (3) you redeem all of your
shares at the end of those periods.
===============================================================================
TEXAS TAX-FREE TEXAS TAX-FREE
INCOME FUND MONEY MARKET FUND
- -------------------------------------------------------------------------------
1 year $ 89 $ 135
3 years 278 421
5 years 482 729
10 years 1,073 1,601
===============================================================================
8
<PAGE>
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is each Fund's principal investment strategy?
A Each Fund's principal investment strategy is to invest the Fund's assets
primarily in securities 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.
Currently, Texas does not have a personal state income tax. In the event
Texas does enact a personal state income or similar tax, we will 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.
These securities include municipal debt obligations that have been issued
by Texas and its political subdivisions, and duly constituted state and
local authorities and corporations. We refer to these securities as Texas
tax-exempt securities. Texas tax-exempt securities are issued to fund
public infrastructure projects such as streets and highways, schools,
water and sewer systems, hospitals, and airports. They 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.
Because the projects benefit the public, Congress has granted exemption
from federal income taxes for the interest income arising from these
securities.
Q What types of tax-exempt securities will be included in each Fund's
portfolio?
A Each Fund's assets may be invested in any of the following tax-exempt
securities:
* 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;
9
<PAGE>
* lease obligations backed by the municipality's covenant to budget for
the payments due under the lease obligation;
* synthetic instruments, which combine a municipality's long-term
obligation to pay interest and principal with another person's
obligation to repurchase the instrument on short notice; and
* industrial development bonds issued by or on behalf of public
authorities to obtain funds for privately-operated facilities.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of each Fund's assets in
short-term securities whether or not they are exempt from federal income
tax. To the extent that these temporary investments produce taxable
income, that income may result in that Fund not fully achieving its
investment objective during the time it is in this temporary defensive
posture.
Q What are the principal risks associated with investments in tax-exempt
securities?
A The two principal risks of investing in tax-exempt securities are credit
risk and market risk.
[CAUTION LIGHT GRAPHIC]
CREDIT RISK. Credit risk is the possibility that an issuer of a fixed
income security will fail to make timely payments of interest or
principal. We attempt to minimize the Funds' credit risks by investing in
securities considered at least investment grade at the time of purchase.
Nevertheless, even investment-grade securities are subject to some credit
risk. In addition, the ratings of securities are estimates by the rating
agencies of the credit quality of the securities. The ratings may not take
into account every risk related to whether interest or principal will be
repaid on a timely basis.
When evaluating potential investments for the Funds, our analysts also
independently assess credit risk and its impact on the Funds' portfolios.
Securities in the lowest investment grade ratings category (BBB) have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capability to make
principal and interest payments on these securities than is the case for
higher-rated securities.
[CAUTION LIGHT GRAPHIC]
MARKET RISK. As a mutual fund investing in bonds, the Funds are subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest
rates. In general, when interest rates rise, bond prices fall and when
interest rates fall, bond prices rise.
10
<PAGE>
The price volatility of a bond also depends on its maturity. Generally,
the longer the maturity of a bond, the greater its sensitivity to interest
rates. To compensate investors for this higher market risk, bonds with
longer maturities generally offer higher yields than bonds with shorter
maturities.
Q What other risks are associated with investments in tax-exempt securities?
A Two other risks that are applicable to certain tax-exempt securities are
call risk and structural risk.
[CAUTION LIGHT GRAPHIC]
CALL RISK. Many municipal bonds may be "called," or redeemed, by the
issuer before the stated maturity. During a period of declining interest
rates, an issuer would call, or refinance, a higher yielding bond for the
same reason that a homeowner would refinance a home mortgage. Interest
rates must drop sufficiently so that the savings more than offset the cost
of refinancing.
Intermediate- and long-term municipal bonds have the greatest call risk,
because most municipal bonds may not be called until after ten years from
the date of issue. The period of "call protection" may be longer or
shorter than ten years, but regardless, bonds purchased closest to the
date of issue will have the most call protection. Typically, bonds with
original maturities of ten years or less are not callable.
Although investors certainly appreciate the rise in bond prices when
interest rates drop, falling interest rates create the environment
necessary to "call" the higher-yielding bonds from your Fund. When bonds
are called, the Fund is impacted in several ways. Most likely, we must
reinvest the bond-call proceeds at lower interest rates. The Fund's income
may drop as a result. The Fund may also realize a taxable capital gain.
[CAUTION LIGHT GRAPHIC]
STRUCTURAL RISK. Some tax-exempt securities, referred to as "synthetic
instruments," are created by combining a long-term municipal bond with a
right to sell the instrument back to the remarketer or liquidity provider
for repurchase on short notice, referred to as a "tender option." Usually,
the tender option is backed by a letter of credit or similar guarantee
from a bank. The guarantee, however, is conditional, which means that the
bank is not required to pay under the guarantee if there is a default by
the municipality or if certain other events occur. These types of
instruments involve special risks, referred to as "structural risk." For
example, because of the structure of a synthetic instrument, there is a
risk that the instrument will lose its tax-exempt treatment
11
<PAGE>
or that we will not be able to exercise our tender option. We will not
purchase a synthetic instrument unless counsel has issued an opinion that
the instrument is entitled to tax-exempt treatment. In addition, we will
not purchase a synthetic instrument for the Tax-Exempt Money Market Fund
unless we believe there is only minimal risk that we will not be able to
exercise our tender option at all times.
Q What percentage of each Fund's assets will be invested in Texas tax-exempt
securities?
A During normal market conditions, at least 80% of each Fund's net assets
will consist of Texas tax-exempt securities. This policy may only be
changed by a shareholder vote.
In addition to Texas tax-exempt securities, securities issued by certain
U.S. territories and possessions such as Puerto Rico, the Virgin Islands,
and Guam are exempt from federal personal income taxes; and as such, we
may consider investing up to 20% of each Fund's assets in these
securities.
Q Are each Fund's investments diversified in many different issuers?
A Each Fund is considered diversified under the federal securities laws.
This means that we will not invest more than 5% in any one issuer with
respect to 75% of each Fund's assets. With respect to the remaining 25% of
each Fund's assets, we could invest more than 5% in any one, or more,
issuers. Purchases of securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities are not counted toward the
5% limitation. Each Fund, of course, is concentrated geographically
through the purchase of Texas tax-exempt securities.
With respect to the Texas Tax-Free Money Market Fund, strict SEC
guidelines do not permit us to invest, with respect to 75% of the Fund's
assets, greater than 10% of the Fund's assets in securities issued by or
subject to guarantees by the same institution.
We also may not invest more than 25% of the Funds' 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
that are based, directly or indirectly, on the credit of private entities
of any one industry. However, we reserve the right to invest more than 25%
of the Funds' assets in tax-exempt industrial revenue bonds. The 25%
industry limitation
12
<PAGE>
does not apply to general obligation bonds or bonds that are escrowed in
U.S. Government securities.
Q What are the potential risks associated with concentrating such a large
portion of each Fund's assets in one state?
[CAUTION LIGHT GRAPHIC]
A The Funds are subject to credit and market risks, as described above,
which could be magnified by the Funds' concentration in Texas issues.
Texas tax-exempt securities may be affected by political, economic,
regulatory, or other developments that limit the ability of Texas issuers
to pay interest or repay principal in a timely manner. Therefore, the
Funds are affected by events within Texas to a much greater degree than a
more diversified national fund.
A particular development may not directly relate to the Funds' investments
but nevertheless might depress the entire market for the state's
tax-exempt securities and therefore adversely impact the Funds' valuation.
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.
The following are examples of just some of the events that may depress
valuations for Texas tax-exempt securities for an extended period of time:
* Changes in state laws, including voter referendums, that restrict
revenues or raise costs for issuers.
* Court decisions that affect a category of municipal bonds, such as
municipal lease obligations or electric utilities.
* Natural disasters such as floods, storms, hurricanes, droughts, fires,
or earthquakes.
* Bankruptcy or financial distress of a prominent municipal issuer within
the state.
* Economic issues that impact critical industries or large employers or
that weaken real estate prices.
* Reductions in federal or state financial aid.
* Imbalance in the supply and demand for the state's municipal securities.
* Developments that may change the tax treatment of Texas tax-exempt
securities.
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.
13
<PAGE>
Other considerations affecting the Funds' investments in Texas tax-exempt
securities are summarized in the Statement of Additional Information under
SPECIAL RISK CONSIDERATIONS.
Q Will any portion of the distributions from the Funds be subject to federal
income taxes?
A During normal market conditions, at least 80% of each Fund's annual income
will be excluded from gross income for federal income tax purposes. This
policy may only be changed by a shareholder vote. We expect that any
taxable interest income distributed will be minimal.
However, gains and losses from trading securities that occur during the
normal course of managing a fund may create net capital gain
distributions. The Internal Revenue Code presently treats these
distributions differently than tax-exempt interest income in the following
ways:
* Distributions of net short-term capital gains are taxable as ordinary
income.
* Distributions of net long-term capital gains are taxable as long-term
capital gains, regardless of the length of time you have held the Fund
shares.
* Both short-term and long-term capital gains are taxable whether received
in cash or reinvested in additional shares.
Q Do the Funds purchase municipal bonds secured by bond insurance?
A Yes. We may purchase municipal bonds whose principal and interest
payments are guaranteed by an insurance company. In addition, we may
purchase municipal bond insurance with Fund assets when we believe it will
provide a net economic benefit to the shareholders.
Q Will income from the Funds be subject to the federal alternative minimum
tax (AMT) for individuals?
A During normal market conditions, at least 80% of each Fund's annual income
will be excluded from the calculation of the federal alternative minimum
tax (AMT) for individuals. This policy may only be changed by a
shareholder vote. Since inception, the Funds have not distributed any
income that is subject to the federal AMT for individuals, and we do not
intend to invest in securities subject to the federal AMT. However, of
course, changes in federal tax laws or other unforeseen circumstances
could result in income subject to the federal AMT for individuals.
14
<PAGE>
Texas Tax-Free Income Fund
Q What is the credit quality of the Fund's investments?
A Under normal market conditions, we will invest the Fund's assets 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 (A or higher)
by Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings
Group (S&P), or Fitch IBCA, Inc. (Fitch) or in the highest short-term
rating category by Moody's, S&P, or Fitch. If a security is not rated by
these rating agencies, we must determine that the security is of
equivalent investment quality.
In no event will we purchase a security for the Fund unless it is rated at
least investment grade at the time of purchase. Investment-grade
securities are those securities rated within the four highest long-term
rating categories by Moody's (Baa or higher), S&P, or Fitch (BBB or
higher), or in the two highest short-term rating categories by these
rating agencies. If unrated by these agencies, we must determine that the
securities are of equivalent investment quality.
On occasion, we may purchase a credit rating with Fund assets when we
believe it will provide a net economic benefit to the shareholders.
You will find a complete description of the above tax-exempt ratings in
the Fund's Statement of Additional Information.
Q What happens if the rating of a security is downgraded to below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio. If
downgrades result in more than 5% of the Fund's net assets being invested
in securities that are less than investment-grade quality, we will take
immediate action to reduce the Fund's holdings in such securities to 5% or
less of the Fund's net assets, unless otherwise directed by the Board of
Trustees.
Q How are the decisions to buy and sell securities made?
A We manage tax-exempt funds based on the common sense premise that our
investors value tax-exempt income over taxable capital gain distributions.
When weighing the decision to buy or sell a security, we strive to balance
the value of the tax-exempt income, the credit risk of the issuer, and the
price volatility of the bond.
15
<PAGE>
Q What is the Fund's average portfolio maturity and how is it calculated?
A While the Fund's average portfolio maturity is not restricted, we expect
it to be greater than 10 years. To determine a security's maturity for
purposes of calculating the Fund's average portfolio maturity, we may
estimate the expected time in which the security's principal is to be
paid. This can be substantially shorter than its stated final maturity.
For more information on the method of calculating the Fund's average
weighted portfolio maturity, see INVESTMENT POLICIES in the Fund's
Statement of Additional Information.
Texas Tax-Free Money Market Fund
Q What is the credit quality of the Fund's investments?
A The Fund's investments consist of securities meeting the requirements to
qualify as "eligible securities" under the SEC rules applicable to money
market funds. In general, an eligible security is defined as a security
that is:
* issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof including "prerefunded" and "escrowed to
maturity" tax-exempt securities;
* rated or subject to a guarantee that is 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;
* unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or
* unrated but determined by us to be of comparable quality.
In addition, we must consider whether a particular investment presents
minimal credit risk.
Q Who are the Nationally Recognized Statistical Rating Organizations?
A Current NRSROs include:
* Moody's Investors Service, Inc.;
* Standard & Poor's Ratings Group;
* Fitch IBCA, Inc.;
16
<PAGE>
* Duff & Phelps, LLC; and
* Thompson BankWatch, Inc.
Q What happens if the rating of a security is downgraded?
A If the rating of a security is downgraded after purchase, we will
determine whether it is in the best interest of the Fund's shareholders to
continue to hold the security in the Fund's portfolio.
Q Will the Fund always maintain a net asset value of $1 per share?
[SIDE BAR]
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY IS OBTAINED BY MULTIPLYING
THE DOLLAR VALUE OF EACH INVESTMENT BY THE NUMBER OF DAYS LEFT TO ITS
MATURITY, THEN ADDING THOSE FIGURES TOGETHER AND DIVIDING THE TOTAL
BY THE DOLLAR VALUE OF THE FUND'S PORTFOLIO.
A While we will endeavor to maintain a constant Fund net asset value of $1
per share, there is no assurance that we will be able to do so. Remember,
the shares are neither insured nor guaranteed by the U.S. Government. As
such, the Fund carries some risk.
For example, there is always a risk that the issuer of a security held by
the Fund will fail to pay interest or principal when due. We attempt to
minimize this credit risk by investing only in securities rated in one of
the two highest categories for short-term securities, or, if not rated, of
comparable quality, at the time of purchase. Additionally, we will not
purchase a security unless our analysts determine that the security
presents minimal credit risk.
There is also a risk that rising interest rates will cause the value of
the Fund's securities to decline. We attempt to minimize this interest
risk by limiting the maturity of each security to 397 days or less and
maintaining a dollar-weighted average portfolio maturity for the Fund of
90 days or less.
Finally, there is the possibility that one or more investments in the Fund
cease to be "eligible securities" resulting in the net asset value ceasing
to be $1 per share. For example, a guarantor on a security may fail to
meet a contractual obligation.
Q How are the decisions to buy and sell securities made?
A We balance factors such as credit quality and maturity to purchase the
best relative value available in the market at any given time. While rare,
sell decisions are usually based on a change in our credit analysis or to
take advantage of an opportunity to reinvest at a higher yield.
For additional information about other securities in which we may invest each
Fund's assets, see APPENDIX A on page 30.
17
<PAGE>
FUND MANAGEMENT
USAA Investment Management Company serves as the manager and distributor of
these Funds. We are an affiliate of United Services Automobile Association
(USAA), a large, diversified financial services institution. As of the date of
this Prospectus, we had approximately $40 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Funds pursuant to an Advisory Agreement.
We are responsible for managing the Funds' portfolios (including placement of
brokerage orders) and their business affairs, subject to the authority and
supervision by the Board of Trustees. For our services, the Funds pay us an
annual fee. This fee, which is accrued daily and paid monthly, is computed as a
percentage of the aggregate average net assets of both Funds combined. This fee
is allocated between the Funds based on the relative net assets of each. The
fee is computed at one-half of one percent (.50%) of the first $50 million of
average net assets, two-fifths of one percent (.40%) of that portion of average
net assets over $50 million but not over $100 million, and three-tenths of one
percent (.30%) of that portion of average net assets in excess of $100 million.
The fee we received for the fiscal year ended March 31, 1999, net of
reimbursements, was equal to .13% of average net assets for the Texas Tax-Free
Income Fund. We waived the advisory fee for the Texas Tax-Free Money Market
Fund. We also provide services related to selling the Funds' shares and receive
no compensation for those services.
Although our officers and employees, as well as those of the Funds, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Funds and us.
Portfolio Managers
TEXAS TAX-FREE INCOME FUND
[PHOTOGRAPH OF PORTFOLIO MANAGER
Robert R. Pariseau
Robert R. Pariseau, Assistant Vice President of Fixed Income Investments, has
managed the Fund since May 1995. He has 15 years investment management
experience working for us. Mr. Pariseau earned the Chartered Financial Analyst
(CFA) designation in 1987 and is a member of the Association for Investment
Management and Research (AIMR), the 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.
18
<PAGE>
TEXAS TAX-FREE MONEY MARKET FUND
[PHOTOGRAPH OF PORTFOLIO MANAGER]
Regina G. Shafer
Regina G. Shafer, Assistant Vice President of Money Market Funds, has managed
the Fund since April 1999. She has four years investment management experience
and has worked for us for eight years. Ms. Shafer is a Certified Public
Accountant and earned the CFA designation in 1998. She is a member of AIMR and
SAFAS. She holds an MBA from the University of Texas at San Antonio and a BBA
from Southwest Texas State University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
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,
you own 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, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to pursue the higher yields usually available in
the long-term bond market, but you are also concerned about the possible price
swings of the long-term bonds. You could divide your 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 way you could
combine funds to fit your own risk and reward goals.
19
<PAGE>
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX C under asset allocation on page 33. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our member service
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX C on page 33 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required to open your initial account. However, after you
open your initial account with us, you will not need to fill out another
application to open another Fund unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. Each
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day.
If you plan to purchase Fund shares with a foreign check, we suggest you
convert your foreign check to U.S. dollars prior to investment in a Fund. This
will avoid a potential four- to six-week delay in the effective date of your
purchase. Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase.
20
<PAGE>
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
* $3,000. Employees of USAA and its affiliated companies may open an account
through payroll deduction for as little as $25 per pay period with no
initial investment.
ADDITIONAL PURCHASES
* $50 (Except transfers from brokerage accounts into the Texas Tax-Free Money
Market Fund, which are exempt from the minimum).
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
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 Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* 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, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* To open or add to your 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 Texas Fund Name
USAA Account Number: 69384998
Shareholder(s) Name(s) ____________________________________
Shareholder(s) Mutual Fund Account Number _________________
21
<PAGE>
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank account,
paycheck, income-producing investment, or USAA money market fund account.
Sign up for these services when opening an account or call 1-800-531-8448 to
add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To open
an account by phone, the new account must have the same registration as your
existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check 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. For federal
income tax purposes, a redemption is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between your cost basis in the shares and the price received upon
redemption.
In addition, the Funds may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAM, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
* Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are 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
22
<PAGE>
instructions. Before any discussion regarding your account, the following
information is obtained: (1) USAA number and/or account number, (2) the name(s)
on the account registration, and (3) social security/tax identification number
or date of birth of the registered account owner(s) for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
CHECKWRITING
[CHECKS GRAPHIC]
* Checks can be issued for your Texas Tax-Free Money Market Fund account.
Return a signed signature card, which accompanies your application, or
request a signature card separately and return to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
You will not be charged for the use of checks or any subsequent reorders. Your
checkwriting privilege is subject to State Street Bank and Trust Company's
rules and regulations governing checking accounts. You may write checks in the
amount of $250 or more. Checks written for less than $250 will be returned
unpaid. Because the value of your account changes daily as dividends accrue,
you may not write a check to close your account.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to assist you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Funds' transfer agent, may assess
annually 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 reduce
total transfer agency fees paid by the Fund to SAS. 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/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any
23
<PAGE>
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).
Fund Rights
Each Fund reserves the right to:
* reject purchase or exchange orders when in the best interest of the Fund;
* limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
* 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); 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;
* require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
* redeem an account with a total value of less than $500 of either Fund, with
certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic 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 the shares to be acquired are
offered in your state of residence. Only Texas residents may exchange into a
Texas Fund. After we receive the exchange orders, the Funds' transfer agent
will simultaneously process exchange redemptions and purchases at the share
prices next determined. The investment minimums applicable to share purchases
also apply to exchanges. For federal income tax purposes, an exchange between
Funds is a taxable event; and as such, you may realize a capital gain or loss.
Such capital gains or losses are based on the difference between your cost
basis in the shares and the price received upon exchange.
The Funds have undertaken certain procedures regarding telephone transactions
as described on page 22.
24
<PAGE>
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. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except 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).
SHAREHOLDER INFORMATION
Share Price Calculation
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. Each Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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
Trust's Board of Trustees. Securities that cannot be valued by the pricing
service, and all other assets, are valued in good faith at fair value using
methods we have determined under the general supervision of the Board of
Trustees. In addition, securities with maturities of 60 days or less and all
securities of the Texas Tax-Free Money Market Fund are stated at amortized
cost, which approximates market value.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Funds' Statement of Additional Information.
Dividends and Distributions
Net investment income of each Fund is accrued daily and paid on the last
business day of the month. Dividends shall begin accruing on shares purchased
the day following the effective date and shall continue to accrue to the
effective date of redemption. Any net capital gain distribution usually occurs
within 60 days of the March 31 fiscal year end, which would be somewhere around
the end of May. The Funds will make additional payments to shareholders, if
necessary, to avoid the imposition of any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any
capital gain distributions paid by the Texas Tax-Free Income Fund will reduce
the NAV per share by the amount of the dividend or distribution. You should
25
<PAGE>
consider carefully the effects of purchasing shares of the Texas Tax-Free
Income Fund shortly before any capital gain distribution. Although, in effect
this would be a return of capital, these distributions are subject to taxes. If
you become a resident of a state other than Texas, we will mail a check for
proceeds of income dividends to you monthly.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. While we manage the
Funds so that at least 80% of each Fund's annual income will be exempt from
federal income taxes, we may invest up to 20% of the Funds' assets in
securities that generate income not exempt from federal income taxes. Because
interest income may be exempt for federal income tax purposes, it does not
necessarily mean that the interest income may be exempt under the income or
other tax laws of any state or local taxing authority. As discussed earlier on
page 14, capital gain distributions by a Fund may be taxable. Note that the
Taxpayer Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax adviser about your investment.
WITHHOLDING - Federal law requires each Fund 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,
* underreports dividend or interest income, or
* fails to certify that he or she 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 Funds' transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - Each Fund will report information to you annually concerning the
tax status of dividends and distributions for federal income tax purposes,
including the portion of the dividends constituting interest on private
activity bonds and the percentage and source of interest income earned on
tax-exempt securities held by the Fund during the preceding year.
26
<PAGE>
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
advisers with respect to the possible taxation of dividends and distributions.
Texas imposes a franchise tax on corporations, limited liability companies,
certain banks, limited banking associations, and savings and loan associations
that do business in the State or that are chartered or authorized to do
business in the State. It is a tax on the privilege of doing business within
the State, measured by such an entity'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. An 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.
Year 2000
Like other organizations around the world, the Funds could be adversely
affected if the computer systems used by them, their service providers, or
companies in which they invest do not properly process and calculate
information that relates to dates beginning January 1, 2000, and beyond. This
situation may occur because for many years computer programmers used only two
digits to describe years, such as 98 for 1998. A program written in this manner
may not work when it encounters the year 00. To confront this situation, USAA
companies have spent much effort and money; and we are confident that our
critical systems are essentially prepared for the Year 2000. In addition, we
are actively assessing the Year 2000 readiness of our service providers,
partners, and companies in whose securities we invest. It is not possible for
us to say that you will experience no effect from this situation, but we can
say that we are making a large effort to avoid ill effects upon our
shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
27
<PAGE>
FINANCIAL HIGHLIGHTS
These financial highlights tables are intended to help you understand the
Funds' financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Funds' financial statements, are included in the Annual Report,
which is available upon request. Texas Tax-Free Income Fund:
Year Ended March 31,
------------------------------------------------------
1999 1998 1997 1996 1995**
------------------------------------------------------
Net asset value at
beginning of period $ 11.10 $ 10.38 $ 10.45 $ 10.21 $ 10.00
Net investment income .56 .57 .59 .58 .34
Net realized and
unrealized gain (loss) (.01) .82 .13 .36 .21
Distributions from net
investment income (.56) (.57) (.59) (.58) (.34)
Distributions of realized
capital gains (.02) (.10) (.20) (.12) -
------------------------------------------------------
Net asset value at
end of period $ 11.07 $ 11.10 $ 10.38 $ 10.45 $ 10.21
======================================================
Total return (%)* 5.00 13.71 7.06 9.42 5.75
Net assets at end of
period (000) $34,766 $21,116 $11,206 $ 8,053 $ 6,446
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50(a)
Ratio of expenses to average
net assets excluding
reimbursements (%) .87 .98 1.35 1.66 2.40(a)
Ratio of net investment
income to average net
assets (%) 5.00 5.27 5.63 5.51 5.56(a)
Portfolio turnover (%) 55.83 56.29 86.17 71.14 49.63
________________
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
** Fund commenced operations August 1, 1994.
28
<PAGE>
Financial Highlights (cont.)
Texas Tax-Free Money Market Fund:
Year Ended March 31,
------------------------------------------------------
1999 1998 1997 1996 1995**
------------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .03 .02
Distributions from net
investment income (.03) (.03) (.03) (.03) (.02)
------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======================================================
Total return (%)* 3.16 3.43 3.22 3.49 2.09
Net assets at end of
period (000) $7,504 $5,888 $5,280 $4,695 $3,881
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50(a)
Ratio of expenses to average
net assets excluding
reimbursements (%) 1.33 1.37 1.77 2.02 2.63(a)
Ratio of net investment
income to average net
assets (%) 3.10 3.38 3.17 3.42 3.18(a)
________________
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the
period.
** Fund commenced operations August 1, 1994.
29
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST EACH FUND'S ASSETS:
VARIABLE RATE SECURITIES
We may invest a Fund's assets 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 the Fund depending on the proportion of such securities
held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security 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
We may invest a Fund's assets in tax-exempt securities (including securities
with variable interest rates) that 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
We may invest a Fund's assets 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.
SYNTHETIC INSTRUMENTS
We may invest a Fund's assets in tender option bonds, bond receipts, and
similar synthetic municipal instruments. A synthetic instrument is a security
created by combining an intermediate or long-term municipal bond with a right
to sell the instrument back to the remarketer or liquidity provider for
repurchase on short notice. This right to sell is commonly referred to as a
tender option. Usually, the tender option is backed by a conditional guarantee
or letter of credit from a bank or other financial institution. Under its
terms, the guarantee may expire if the municipality defaults on payments of
interest or
30
<PAGE>
principal on the underlying bond, if the credit rating of the municipality is
downgraded, or if the instrument (or the underlying bond) loses its tax-exempt
treatment. Synthetic instruments involve structural risks that could adversely
affect the value of the instrument or could result in a Fund holding an
instrument for a longer period of time than originally anticipated.
WHEN-ISSUED SECURITIES
We may invest a Fund's assets in new securities offered on a when-issued basis.
* 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.
MUNICIPAL LEASE OBLIGATIONS
We may invest a Fund's assets in a variety of instruments commonly referred to
as municipal lease obligations, including:
* Leases,
* Installment purchase contracts, and
* Certificates of participation in such leases and contracts.
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.
ILLIQUID SECURITIES
We may invest up to 15% of the Texas Tax-Free Income Fund's net assets and up
to 10% of the Texas Tax-Free Money Market Fund's net assets in securities that
are illiquid. Illiquid securities are those securities which cannot be disposed
of in the ordinary course of business, seven days or less, at approximately the
same value at which the Fund has valued the securities.
Lease obligations and certain put bonds subject to restrictions on transfer may
be determined to be liquid in accordance with the guidelines established by the
Funds' Board of Trustees.
In determining the liquidity of a lease obligation, we 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, we
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.
31
<PAGE>
APPENDIX B
Taxable-Equivalent Yield Table
Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
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%
---------------------------------------------------------------------
2.50% 3.47% 3.62% 3.91% 4.14%
---------------------------------------------------------------------
3.00% 4.17% 4.35% 4.69% 4.97%
---------------------------------------------------------------------
3.50% 4.86% 5.07% 5.47% 5.79%
---------------------------------------------------------------------
4.00% 5.56% 5.80% 6.25% 6.62%
---------------------------------------------------------------------
4.50% 6.25% 6.52% 7.03% 7.45%
---------------------------------------------------------------------
5.00% 6.94% 7.25% 7.81% 8.28%
---------------------------------------------------------------------
5.50% 7.64% 7.97% 8.59% 9.11%
---------------------------------------------------------------------
6.00% 8.33% 8.70% 9.38% 9.93%
---------------------------------------------------------------------
6.50% 9.03% 9.42% 10.16% 10.76%
---------------------------------------------------------------------
7.00% 9.72% 10.14% 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 EXAMPLES THAT WOULD BE RELEVANT TO MOST TAXPAYERS.
FOR A FURTHER EXPLANATION ON CALCULATING TAX-EQUIVALENT YIELDS, SEE THE FUNDS'
STATEMENT OF ADDITIONAL INFORMATION.
32
<PAGE>
APPENDIX C
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 you with the opportunity to formulate your 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 mutual funds managed and
distributed by USAA Investment Management Company, including charges and
expenses, call us for a Prospectus. Read it carefully before you invest. Mutual
fund operating expenses apply and continue throughout the life of the Fund.
FUND TYPE/NAME VOLATILITY
============================================================
CAPITAL APPRECIATION
- ------------------------------------------------------------
Aggressive Growth Very high
Emerging Markets Very high
First Start Growth Moderate to high
Gold Very high
Growth Moderate to high
Growth & Income Moderate
International Moderate to high
S&P 500 Index Moderate
Science & Technology Very high
Small Cap Stock Very high
World Growth Moderate to high
- ------------------------------------------------------------
ASSET ALLOCATION
- ------------------------------------------------------------
Balanced Strategy Moderate
Cornerstone Strategy Moderate
Growth and Tax Strategy Moderate
Growth Strategy Moderate to high
Income Strategy Low to moderate
- ------------------------------------------------------------
INCOME - TAXABLE
- ------------------------------------------------------------
GNMA Low to moderate
High-Yield Opportunities High
Income Moderate
Income Stock Moderate
Intermediate-Term Bond Low to moderate
Short-Term Bond Low
- ------------------------------------------------------------
INCOME - TAX EXEMPT
- ------------------------------------------------------------
Long-Term Moderate
Intermediate-Term Low to moderate
Short-Term Low
State Bond/Income Moderate
- ------------------------------------------------------------
MONEY MARKET
- ------------------------------------------------------------
Money Market Very low
Tax Exempt Money Market Very low
Treasury Money Market Trust Very low
State Money Market Very low
============================================================
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
S&P(R) 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.
SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE
FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE
VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
THE SCIENCE & TECHNOLOGY FUND MAY BE MORE VOLATILE THAN A FUND THAT
DIVERSIFIES ACROSS MANY INDUSTRIES.
33
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Funds, you may call
1-800-531-8181 to request a free copy of the Funds' Statement of Additional
Information (SAI), Annual or Semiannual Reports, or to ask other questions
about the Funds. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In each Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the
public reference room can be obtained by calling 1-800-SEC-0330.
Additionally, copies of this information can be obtained, for a duplicating
fee, by writing the Public Reference Section of the Commission, Washington,
D.C. 20549-6009.
==============================================================================
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
----------------------------------------------------------
Transfer Agent Custodian
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
---------------------------------------------------------
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges, or redemptions
1-800-531-8448, (in San Antonio) 456-7202
---------------------------------------------------------
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
---------------------------------------------------------
Mutual Fund TouchLine(R)
(from Touchtone phones only)
For account balance, last transaction, or fund prices
1-800-531-8777, (in San Antonio) 498-8777
===============================================================================
Investment Company Act File No. 811-7852
<PAGE>
USAA USAA STATE STATEMENT OF
EAGLE TAX-FREE ADDITIONAL INFORMATION
LOGO TRUST August 1, 1999
- -------------------------------------------------------------------------------
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 diversified 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 dated August 1, 1999, for the
Florida Funds by writing to USAA State Tax-Free Trust, 9800 Fredericksburg
Road, 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.
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1999, are included in the
accompanying Annual Report to Shareholders of that date and are incorporated
herein by reference.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
2 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
6 Investment Restrictions
7 Special Risk Considerations
9 Portfolio Transactions
10 Description of Shares
11 Certain Federal Income Tax Considerations
13 Florida Taxation
13 Trustees and Officers of the Trust
16 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 - Dollar-Cost Averaging
<PAGE>
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, Martin Luther King, Jr.
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 that 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. There can be no assurance, however,
that the Fund will at all times be able to maintain a constant $1 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 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.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is canceled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, USAA
Shareholder Account Services (Transfer Agent) will treat the cancellation 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, the
Transfer Agent can redeem shares from 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.
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TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you 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,
you must complete and return an application to the Transfer Agent.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of your 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 that 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 you. 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 your last known address.
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, the Trust may
require a signature guarantee. 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. Checks must be written in amounts 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. You will continue to earn dividends 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 from your account will be redeemed to
cover the amount of the check. If the account balance 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.
The checkwriting privilege is subject to the customary rules and
regulations of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. There is no charge to you for the use
of the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against your
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.
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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.
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. The Transfer Agent
will charge you $10 for each stop payment you request.
INVESTMENT PLANS
The Trust makes available the following investment plans 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(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from a non-governmental employer, an income-producing
investment, or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
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. You may
initiate a "buy" or "sell" whenever you choose.
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.
Participation in these systematic purchase plans allows you to engage in
dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a NAV of $5,000 or more in a single investment account
(accounts in different Funds cannot be aggregated for this purpose), you 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, you may choose to have
withdrawals electronically deposited at your bank or other financial
institution. You may also elect to have checks mailed to a designated address.
This 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. You may terminate participation in the
plan at any time. You are not charged 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. The Manager will bear any additional expenses of administering the
plan.
Withdrawals will be made by redeeming full and fractional shares on the
date you select 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 your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you should not expect withdrawals to be offset
by rising income or share value gains.
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Each redemption of shares may result in a gain or loss, which must be
reported on your income tax return. Therefore, you should keep an accurate
record of any gain or loss on each withdrawal.
INVESTMENT POLICIES
The sections captioned WHAT ARE EACH FUND'S INVESTMENT OBJECTIVES AND MAIN
STRATEGIES? and FUND INVESTMENTS in the Prospectus describe the fundamental
investment objective(s) and the investment policies applicable to each Fund.
Each Fund's objective(s) cannot be changed without shareholder approval. 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 the results
of 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 that, 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.
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
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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.
TEMPORARY DEFENSIVE POLICY
Each Fund may on a temporary basis because of market, economic, political, or
other conditions, invest up to 100% of its assets in short-term securities
whether or not they are exempt from federal income taxes. Such taxable
securities may consist of obligations of the U.S. 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.
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 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 U.S. Treasury
Bills, other obligations issued or guaranteed by the U.S. 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;
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(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 RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Board of Trustees may change this additional restriction without
notice to or approval by the shareholders.
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).
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 1980's, the State's unemployment rate,
generally, tracked below that of the nation. In the nineties the trend was
reversed. Since 1995 the State's unemployment rate has again tracked below the
U.S. The State's unemployment rate for 1998 was 4.5%, while the national
average was also 4.5%. The State's unemployment rate for 1999 is projected to
be 4.2%, while the national average is projected to be 4.6%.
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, 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 1992 through 1997, the State's per capita income rose an
average of 5.0% per year, while the national per capita income increased an
average of 4.8%. For 1997, the State's per capita personal income rose an
average of 4.0% while the national per capita personal income rose 4.7%. In
1997, per capita personal income in Florida was $24,795, while the national per
capita personal income was $25,298. 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 1997, represented 60.9% 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 71.2%. 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, 1997 ranks fourth
with an estimated population of 14.7 million. Since 1990, the State's average
annual rate of population increase has been approximately 1.8% 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 257,000 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 47
million people visited the State in 1997, as reported by the Florida Department
of Commerce. By the end of fiscal year 1998-99, 49.7 million domestic and
international tourists are expected to have visited this State. The State
expects 50.6 million visitors in 1999-2000. The State's tourism appears to be
recovering from the effects of negative publicity regarding crime against
tourists in the State.
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The State has it dynamic construction industry, with single and
multi-family housing starts accounting for approximately 9.2% of total U.S.
housing starts in 1997, while the State's population was only 5.5% 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
132,813 in 1997, and are projected to be 97,600 in 1998-99.
The Florida economy is expected to grow at a moderate pace, but will
continue to outperform the U.S. as a whole. An important element of Florida's
economic outlook is the construction sector. Multi-family starts have been slow
to recover in the State from the early 90's recession, but are now showing
stronger growth. Overall, the Florida economy appears to be in line with the
U.S. economy and is expected to experience steady growth over the next couple
of years.
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 1996-97, the State derived approximately 67%
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, beverage tax, and
estate tax, which amounted to 68%, 8%, 4%, 3%, and 3%, 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 1996-97, appropriations from the
General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 53%, 26% and 14%, respectively, of total General
Revenues.
The estimated General Revenue plus Working Capital and Budget
Stabilization funds available to the State for fiscal year 1998-99 total
$19,481.8 million, an 5.2% increase over 1997-98. Compared to effective
appropriations from General Revenues plus Working Capital and Budget
Stabilization funds for fiscal year 1998-99 of $18,222.0 million, this results
in unencumbered reserves estimated at $1,360.7 million at the end of fiscal
year 1998-99. Estimated fiscal year 1999-00 General Revenue plus Working
Capital and Budget Stabilization funds available total $20,133.9 million, a
3.3% increase over fiscal year 1998-99.
The sales and use tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1997, receipts from this source
were $12,089 million, an increase of 5.5% from fiscal year 1996-97. 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, 1997,
were $2,012 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 $447.2 million for the
State fiscal year ending June 30, 1997. The receipts of corporate income tax
for the fiscal year ended June 30, 1997 were $1,362.3 million, an increase of
17.2% from the previous fiscal year. Gross Receipt tax collections for fiscal
year 1996-97 totalled 575.7 million, an increase of 6% over the previous fiscal
year. Documentary stamp tax collections totalled $844.2 million during fiscal
year 1996-97, increasing 8.9% 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 $952.4
million during fiscal year ending June 30, 1997, a 6.3% increase from the
previous fiscal year. Severance taxes totalled $35.4 million during fiscal year
1997-98, a decline of approximately 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 1996-97 produced ticket sales
of $2.09 billion of which education received approximately $792.3 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
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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 expenses 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) the proceeds from the sale of goods (e.g. land, buildings);
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.
According to the Office of the Comptroller, Department of Banking and
Finance of the State, as of April, 1999, the State maintains a high bond rating
from Moody's Investors Service (Aa2), Standard & Poor's Corporation (AA+), and
Fitch IBCA, 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, 1998 totalled almost
$8.7 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 $555 million of general
obligation bonds since July 1, 1998.
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. These research
services may also include access to research on third party data bases, such as
historical data on companies, financial statements, earnings history and
estimates and corporate releases; real-time quotes and financial news; research
on specific fixed income securities; research on international market news and
securities; and
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rating services on companies and industries. 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:
1998 . . . . . 27.48% 1999. . . . . 25.28%
Portfolio turnover rates have been calculated excluding short-term
variable rate securities, which are those with put date intervals of less than
one year.
DESCRIPTION OF SHARES
The Funds are series of the Trust and are diversified. 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 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.
Each Fund's assets 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.
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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. The Trust may fill
vacancies on the Board or appoint new Trustees if the result is that at least
two-thirds of the Trustees have still been elected by shareholders. 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.
The Trust will assist in communicating to other shareholders about the meeting.
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 that 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) and (2) 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
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.
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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 or she 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.
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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 advisers, 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 who 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. Prior to July 1, 1999, Florida provided an
exemption for shares in an investment fund if the fund's portfolio consisted
solely of assets exempt from the Florida intangible personal property tax.
Effective July 1, 1999, the Florida Legislature revised this requirement so
that the shares in a fund will be exempt if at least ninety percent of the net
asset value of the portfolio of assets corresponding to the shares in the fund
is invested in assets that are 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 U.S.
Government, its agencies, and certain territories and possessions such as
Puerto Rico, the Virgin Islands, and Guam; and cash.
The Funds previously 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.
The Funds have applied for a ruling from the Florida Department of Revenue that
if, on the last business day of any calendar year, at least ninety percent of
the net asset value of the portfolio of assets corresponding to shares in the
Funds is invested in assets that are exempt from the tax, shares of the Funds
owned by Florida residents will be exempt from the Florida intangible personal
property tax in the following year. Although there is no assurance that the
Florida Department of Revenue will issue a favorable ruling on this issue, the
Florida Department of Revenue previously issued similar rulings under the prior
law. If shares of the Funds are subject to the Florida intangible personal
property tax, because less than ninety percent of the net asset value 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 U.S.
Government will be exempt from taxation.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Directors of the Company consists of seven Directors who supervise
the business affairs of the Company. Set forth below are the Directors and
officers of the Company, and their respective offices and principal occupations
during the last five years. Unless otherwise indicated, the business address of
each is 9800 Fredericksburg Road, San Antonio, TX 78288.
Robert G. Davis 1, 2
Director and Chairman of the Board of Directors
Age: 52
President and Chief Operating Officer of United Services Automobile Association
(USAA) (6/99-present); Deputy Chief Executive Officer for Capital Management of
USAA (6/98-5/99); President, Chief Executive Officer, Director, and Vice
Chairman of the Board of Directors of USAA Capital Corporation and several of
its subsidiaries and affiliates (1/97-present); President, Chief Executive
Officer, Director, and Chairman of
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the Board of Directors of USAA Financial Planning Network, Inc. (1/97-present);
Executive Vice President, Chief Operating Officer, Director, and Vice Chairman
of the Board of Directors of USAA Financial Planning Network, Inc.
(6/96-12/96); Special Assistant to Chairman, USAA (6/96-12/96); President and
Chief Executive Officer, Banc One Credit Corporation (12/95-6/96); and
President and Chief Executive Officer, Banc One Columbus, (8/91-12/95). Mr.
Davis serves as a Director/Trustee and Chairman of the Boards of
Directors/Trustees of each of the remaining funds within the USAA Family of
Funds; Director and Chairman of the Boards of Directors of USAA Investment
Management Company (IMCO), USAA Shareholder Account Services, USAA Federal
Savings Bank, and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Director, President, and Vice Chairman of the Board of Directors
Age: 57
Chief Executive Officer, IMCO (10/93-present); President, Director, and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Director/Trustee, and Vice Chairman of the Boards of
Directors/Trustees of each of the remaining funds within the USAA Family of
Funds and USAA Shareholder Account Services; Director of USAA Life Insurance
Company; and Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 64
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as a Director/Trustee of each of the remaining funds within the
USAA Family of Funds; Director of IMCO; Senior Vice President of USAA
Shareholder Account Services, and Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 54
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). Mrs. Dreeben serves as a Director/Trustee of each of
the remaining funds within the USAA Family of Funds.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 64
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Director/Trustee of each of the
remaining funds within the USAA Family of Funds.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 53
Staff Analyst, Southwest Research Institute (9/98-present); Manager,
Statistical Analysis Section, Southwest Research Institute (2/79-9/98). Dr.
Mason serves as a Director/Trustee of the remaining funds within each of the
USAA Family of Funds.
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<PAGE>
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 56
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Director/Trustee of each of the remaining funds within the USAA Family of
Funds.
Michael D. Wagner 1
Secretary
Age: 51
Senior Vice President, CAPCO General Counsel (01/99-present); Vice President,
Corporate Counsel, USAA (1982-01/99). Mr. Wagner has held various positions in
the legal department of USAA since 1970 and serves as Vice President,
Secretary, and Counsel, IMCO and USAA Shareholder Account Services; Secretary,
of each of the remaining funds within the USAA Family of Funds; Vice President,
Corporate Counsel for various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 49
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94). Mr. Ciccone
serves as Assistant Secretary of each of the remaining funds within the USAA
Family of Funds.
Mark S. Howard 1
Assistant Secretary
Age: 35
Assistant Vice President, Securities Counsel, USAA (2/98-present); Executive
Director, Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel,
Securities Counsel, USAA (5/95-8/96); Attorney, Kirkpatrick & Lockhart LLP
(9/90-4/95). Mr. Howard serves as Assistant Vice President and Assistant
Secretary, IMCO and USAA Shareholder Account Services; Assistant Secretary of
each of the remaining funds within the USAA Family of Funds; and Assistant Vice
President, Securities Counsel for various other USAA subsidiaries and
affiliates.
Sherron A. Kirk 1
Treasurer
Age: 54
Vice President, Senior Financial Officer, IMCO (8/98-present); Vice President,
Controller, IMCO (10/92-8/98). Mrs. Kirk serves as Treasurer of each of the
remaining funds within the USAA Family of Funds; Vice President, Senior
Financial Officer of USAA Shareholder Account Services.
Caryl Swann 1
Assistant Treasurer
Age: 51
Executive Director, Mutual Fund Analysis & Support, IMCO (10/98-present);
Director, Mutual Fund Portfolio Analysis & Support, IMCO (2/98-10/98); Manager,
Mutual Fund Accounting, IMCO (7/92-2/98). Ms. Swann serves as Assistant
Treasurer for each of the remaining funds within the USAA Family of Funds.
- -------------------
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
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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: Carl W.
Shirley, Senior Vice President, Insurance Company Portfolios; John J. Dallahan,
Senior Vice President, Investment Services; and David G. Peebles, Senior Vice
President, Equity Investments. 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, 1999.
NAME AGGREGATE TOTAL COMPENSATION
OF COMPENSATION FROM THE USAA
DIRECTOR FROM THE COMPANY FAMILY OF FUNDS (b)
-------- ----------------- -------------------
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $7,022 $36,500
Howard L. Freeman, Jr. $7,022 $36,500
Robert L. Mason $7,022 $36,500
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $7,022 $36,500
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(a) Robert G. Davis, 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.
(b) At March 31, 1999, the USAA Family of Funds consisted of four registered
investment companies offering 35 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 seven funds available to the public only
through the purchase of certain variable annuity contracts and variable
life insurance policies offered by 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
within the USAA Family of Funds. 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 May 14, 1999, 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 May 14, 1999, 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, a wholly owned indirect subsidiary of United Services
Automobile Association (USAA), a large, diversified financial services
institution, was organized in May 1970 and has served as investment adviser and
underwriter for USAA State Tax-Free Trust from its inception.
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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 $40 billion, of which
approximately $26 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 FUND MANAGEMENT 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 printing and
mailing the Prospectus, SAI, and periodic reports to existing shareholders; and
any other charges or fees not specifically enumerated. The Manager pays the
cost of printing and mailing copies of the Prospectus, the SAI, and reports to
prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 2000, 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).
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, 2000, and will
reimburse the Funds for all expenses in excess of the limitations.
For the last three fiscal years, management fees were as follows:
1997 1998 1999
-------- -------- --------
Florida Tax-Free Income Fund $233,603 $437,613 $586,064
Florida Tax-Free Money Market Fund $301,693 $323,098 $345,419
Because the Florida Tax-Free Money Market Funds expenses exceeded the
Manager's voluntary expense limitation, the Manager did not receive management
fees to which it would have been entitled as follows:
1997 1998 1999
------- ------- -------
Florida Tax-Free Income Fund $54,750 $10,032 $ --
Florida Tax-Free Money Market Fund $56,434 $20,954 $11,257
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.
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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 $28.50 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, each Fund pays 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 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.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
COULD THE VALUE OF YOUR INVESTMENT IN THESE FUNDS FLUCTUATE? 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, 1999, were:
1 year..... 5.91% 5 year .....7.84% Since inception ...5.45%
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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, 1999, was 4.57%.
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 and income other
than investment income, 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
return by 52.14 (365/7). The resulting yield figure is carried to the nearest
hundredth of one percent.
The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Fund's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to
the quotient, raising the sum to the 365th power, and subtracting 1 from the
result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield for 7-day Period ended March 31, 1999, was 2.71%.
Effective Yield for 7-day Period ended March 31, 1999, was 2.75%.
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 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
Florida Tax-Free 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 Florida 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. We have provided a table in the
Prospectus 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:
Florida Intangible Tax Effect = Intangible Tax Liability / Intangible Assets
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The formula for computing the EMTR to compare with fully taxable
securities subject to both federal income and Florida intangible taxes is:
EMTR = Federal Marginal Tax Rate + [Florida 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,
1999 were 7.15% and 4.24%, 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 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 IBCA, Inc. (Fitch), Duff & Phelps LLC, and
Thompson BankWatch, 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.
I. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICES, INC.
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 edged." 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 risk appear
somewhat larger than in Aaa securities.
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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: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION. THE MODIFIER 1 INDICATES THAT THE OBLIGATION RANKS IN THE
HIGHER END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES A MID-RANGE
RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF THAT
GENERIC RATING CATEGORY.
STANDARD & POOR'S RATINGS GROUP
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB An obligation rated BBB exhibits adequate capacity to pay interest and
repay principal. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
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.
FITCH IBCA, INC.
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
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.
DUFF & PHELPS, LLC
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.
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2. SHORT-TERM DEBT RATINGS:
MOODY'S STATE AND TAX-EXEMPT NOTES
MIG-1/VMIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MOODY'S COMMERCIAL PAPER
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
* Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
* Broad margins in earning 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 rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory 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, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P 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.
S&P 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.
FITCH'S COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND TAX-EXEMPT NOTES
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit features.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
DUFF & PHELPS COMMERCIAL PAPER
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
D-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.
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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 those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
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 but are not
restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper that may cover financial and investment news.
AUSTIN AMERICAN-STATESMAN, a newspaper that 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 that 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 that may cover financial news.
CONSUMER REPORTS, a monthly magazine that from time to time reports on
companies in the mutual fund industry.
DALLAS MORNING NEWS, a newspaper that may cover financial news.
DENVER POST, a newspaper that may quote financial news.
FINANCIAL PLANNING, a monthly magazine that periodically features companies in
the mutual fund industry.
FINANCIAL SERVICES WEEK, a weekly newspaper that covers financial news.
FINANCIAL WORLD, a monthly magazine that periodically features companies in the
mutual fund industry.
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 that may cover financial news.
HOUSTON POST, a newspaper that may cover financial news.
IBC'S MONEY FUND REPORT, a weekly publication of IBC Financial Data, 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."
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared
by IBC Financial Data, Inc.
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IBC'S MONEYLETTER, a biweekly newsletter that covers financial news and from
time to time rates specific mutual funds.
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, the national association of the American
Investment Company industry.
INVESTOR'S BUSINESS DAILY, a newspaper that 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 EQUITY FUND PERFORMANCE ANALYSIS, a weekly
and monthly publication of industry-wide mutual fund performance averages by
type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type
of fund.
LOS ANGELES TIMES, a newspaper that 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.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter that covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service that
tracks open-end mutual funds).
MUNI BOND FUND REPORT, a monthly newsletter that covers news on the municipal
bond market and features performance data for municipal bond mutual funds.
MUNIWEEK, a weekly newspaper that 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 mutual fund
performance and rankings, produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund
investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
that 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 that may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper that may cover financial news.
PERSONAL INVESTOR, a monthly magazine that 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 that may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper that may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper that 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 that covers
financial news.
WASHINGTON POST, a newspaper that may cover financial news.
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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 that 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. and Morningstar, Inc. Each Fund
will be compared to Lipper's or Morningstar's appropriate fund category
according to its objective(s) and portfolio holdings. 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 Funds or by those publications listed previously are Schabaker
Investment Management and Investment Company Data, Inc. These are services that
collect and compile data on mutual fund companies.
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APPENDIX C - 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 number of
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.
===============================================================================
26
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27
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22735-0899
<PAGE>
USAA USAA STATE STATEMENT OF
EAGLE TAX-FREE ADDITIONAL INFORMATION
LOGO TRUST August 1, 1999
- -------------------------------------------------------------------------------
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 diversified 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 dated August 1, 1999, for the Texas
Funds by writing to USAA State Tax-Free Trust, 9800 Fredericksburg Road, 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.
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1999, are included in the
accompanying Annual Report to Shareholders of that date and are incorporated
herein by reference.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
2 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
6 Investment Restrictions
7 Special Risk Considerations
13 Portfolio Transactions
14 Description of Shares
15 Certain Federal Income Tax Considerations
16 Trustees and Officers of the Trust
20 The Trust's Manager
21 General Information
21 Calculation of Performance Data
23 Appendix A - Tax-Exempt Securities and Their Ratings
26 Appendix B - Comparison of Portfolio Performance
28 Appendix C - Dollar-Cost Averaging
<PAGE>
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, Martin Luther King, Jr.
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 that 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. There can be no assurance, however, that the
Fund will at all times be able to maintain a constant $1 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 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.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is canceled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, USAA
Shareholder Account Services (Transfer Agent) will treat the cancellation 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, the
Transfer Agent can redeem shares from 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.
2
<PAGE>
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you 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,
you must complete and return an application to the Transfer Agent.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of your 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 that 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 you. 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 your last known address.
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, the Trust may
require a signature guarantee. 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. Checks must be written in amounts 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. You will continue to earn dividends 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 from your account will be redeemed to
cover the amount of the check. If the account balance 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.
The checkwriting privilege is subject to the customary rules and
regulations of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. There is no charge to you for the use
of the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against your
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.
3
<PAGE>
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. The Transfer Agent
will charge you $10 for each stop payment you request.
INVESTMENT PLANS
The Trust makes available the following investment plans 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(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from a non-governmental employer, an income-producing
investment, or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
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. You may
initiate a "buy" or "sell" whenever you choose.
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.
Participation in these systematic purchase plans allows you to engage in
dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a NAV of $5,000 or more in a single investment account
(accounts in different Funds cannot be aggregated for this purpose), you 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, you may choose to have
withdrawals electronically deposited at your bank or other financial
institution. You may also elect to have checks mailed to a designated address.
This 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. You may terminate
participation in the plan at any time. You are not charged 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. The Manager will bear any additional expenses of
administering the plan.
Withdrawals will be made by redeeming full and fractional shares on the
date you select 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 your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you 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 your income tax return. Therefore, you should keep an accurate
record of any gain or loss on each withdrawal.
4
<PAGE>
INVESTMENT POLICIES
The sections captioned WHAT ARE EACH FUND'S INVESTMENT OBJECTIVES AND MAIN
STRATEGIES? and FUND INVESTMENTS in the Prospectus describe the fundamental
investment objective(s) and the investment policies applicable to each Fund.
Each Fund's objective(s) cannot be changed without shareholder approval. 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 the results
of 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 that, 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.
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
5
<PAGE>
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.
TEMPORARY DEFENSIVE POLICY
Each Fund may on a temporary basis because of market, economic, political, or
other conditions, invest up to 100% of its assets in short-term securities
whether or not they are exempt from federal income taxes. Such taxable
securities may consist of obligations of the U.S. 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.
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 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 U.S. Treasury
Bills, other obligations issued or guaranteed by the U.S. 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
6
<PAGE>
(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 RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Board of Trustees may change this additional restriction without
notice to or approval by the shareholders.
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).
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 solely upon
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 Funds have made no attempt to verify
the accuracy or completeness of this information or the absence of material
adverse changes occurring subsequent to the date of such 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.
LACK OF DIVERSIFICATION. 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: (i) debt created to supply deficiencies in revenues which do not
total more than $200,000 at any time, and (ii) 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 Texas
Comptroller of Public Accounts, 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 state constitutional prohibition.
Voters in Texas have from time to time by constitutional amendment
authorized the issuance of general obligation indebtedness for which the 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.
Various state agencies have the authority to issue general obligation
bonds. The Veterans' Land Board is authorized to issue general obligation bonds
to finance the purchase of land and housing by veterans. The Texas Water
Development Board (the "TWDB") is authorized to issue general obligation bonds
to make funds available to municipalities and certain other governmental units
for the conservation and development of water resources; the acquisition and
development of water storage facilities for the filtration, treatment and
transportation of water; water quality enhancement purposes; flood control
purposes; and water-efficient irrigation systems. Additionally, the TWDB is
authorized 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 obligations are declared by the Texas
Constitution to be general obligations of the State. On November 4, 1997, Texas
voters decided to allow the TWDB to
7
<PAGE>
consolidate existing, specific general obligation authority for separate
purposes in order to more effectively meet demand experienced for such
purposes.
The Texas Agricultural Finance Authority (the "TAFA") is authorized to
issue general obligation bonds to provide financial assistance for the
expansion, development and diversification of production, processing and
marketing of Texas agricultural products. Additionally, the TAFA is authorized
to issue general obligation bonds for a farm and ranch land acquisition
program. The Texas Parks and Wildlife Department (the "TPWD") is authorized to
issue general obligation bonds to finance the acquisition and development of
state parks. The Texas Higher Education Coordinating Board is authorized to
issue general obligation bonds to finance student loans. The Texas National
Research Laboratory Commission (the "TNRLC") was authorized to issue general
obligation bonds to aid in the construction of the "superconducting super
collider" project. Given the decision by the U.S. Congress to terminate federal
funding for the super collider, the Legislature made provisions for the removal
of the remaining bond authority. Elimination of the remaining super collider
general obligation authority required voter approval, which was received in
November 1995. Additionally, the General Appropriations Act for the 1998-99
biennium includes provisions for the defeasance of all or a portion of the
outstanding general obligation bonds associated with the super collider
project.
The Texas Public Finance Authority (the "TPFA") is authorized to issue
general obligation bonds to finance the acquisition, construction and equipping
of new facilities, and major repair or renovation of existing facilities for
correction institutions and mental health and mental retardation institutions.
Effective January 1, 1992, TPFA is authorized to issue general obligation bonds
on behalf of the TNRLC and the TPWD. The Texas Department of Economic
Development, formerly the Texas Department of Commerce, is authorized to issue
general obligation bonds to provide loans to finance the commercialization of
new or improved products or processes developed in Texas and to stimulate the
development of small businesses in Texas. Certain public colleges and
universities are authorized 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 50 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 $11.79
billion in state bonds and notes outstanding on August 31, 1998, down slightly
from $11.8 billion on August 31, 1997. This figure includes commercial paper
and variable rate notes; however, it does not include short-term debt issued
for cash management purposes (described below). Approximately $5.19 billion of
Texas' total state debt outstanding on August 31, 1998, 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 program revenues
are insufficient. General obligation debt is the only legally binding debt of
the State. The issuance of general obligation bonds requires passage of a
proposition by two-thirds of both houses of the Texas Legislature and by a
majority of Texas voters. The remaining debt, non-general obligation debt, is
dependent only on the revenue stream of a particular program or an
appropriation from the Legislature. 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. Bonds which are not
self-supporting depend solely on the State's general revenue fund for debt
service, drawing funds from the same source used by the Legislature to finance
the operation of state government. "Not self-supporting" bonds outstanding
totaled approximately $3.24 billion of total state bonds outstanding as of the
end of August 1998. 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 year 1998, Texas state agencies and universities issued
approximately $2.43 billion in bonds, including $1.2 billion in new money bonds
(not including commercial paper) and $1.22 billion 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 universities plan to issue approximately $2.8 billion in
bonds and commercial paper during fiscal year 1999. Approximately $1.8 billion
will be issued to finance projects, programs and facilities, and approximately
$961 million will be issued to refund existing debt.
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As of August 31, 1998, Texas had approximately $5.3 billion in authorized
but unissued bonds. Authorized bonds are those which may be issued without
further action by the Legislature. Approximately $3 billion of 57 percent of
these authorized but unissued bonds would be state general obligation debt. At
the end of fiscal 1997, $852.5 million or 16 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 bonded 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. Almost all of the bonded indebtedness of
the TWDB 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; such revenues have been sufficient to pay the principal
and interest on such bonds since fiscal year 1980 without resort to
appropriated funds. The remaining portion of the TWDB'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, up to 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.
The general obligation bonds that have been issued by the TPFA 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 TPFA and the Military Facilities Commission (the
"MFC"), formerly known as the National Guard Armory Board, have authority to
issue state-backed lease revenue bonds. Such obligations do not constitute
"debt" within the meaning of the Texas 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 MFC
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 MFC.
The TNRLC had the authority to issue state-backed lease revenue bonds,
however, on June 1, 1995, all of these outstanding bonds issued to provide
funding for the super collider project were defeased or redeemed. As of
September 1, 1995, the Texas Legislature rescinded the TNRLC's remaining
revenue bond authority.
The TPFA is authorized to issue both 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. Effective September 1,
1997, the TPFA is also authorized to issue park improvement revenue bonds on
behalf of the TPWD. These bonds are payable from general revenue appropriations
to TPWD.
In addition to the foregoing revenue obligations issued by state agencies,
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 Comptroller on behalf of the Texas
School Facilities Finance Program, the Texas Department of Housing and
Community Affairs, the Texas Department of Economic Development, the Texas
Public Finance Authority, the Texas Low-Level Radioactive Waste Disposal
Authority, the Texas Veterans' Land Board and Texas colleges and universities.
Effective September 1, 1997, the Texas Department of Transportation received
authority to issue revenue bonds, and the TPFA was authorized to issue bonds on
behalf of the Texas Low-Level Radioactive Waste Disposal Authority.
Additionally, as of September 1, 1997, the name of the Texas Department of
Commerce was changed to the Texas Department of Economic Development, and the
outstanding debt and assets of the Texas Turnpike Authority were transferred to
a newly created regional tollway authority, the North Texas Tollway Authority.
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RECENT DEVELOPMENTS AFFECTING STATE DEBT. Texas Revised Civil Statutes
Article 717k-7(8) prohibits the Legislature from authorizing additional state
debt payable from general revenues, including authorized but unissued bonds and
lease purchase contracts in excess of $250,000 or for a term of greater than
five years, if the resulting annual debt service exceeds five percent of an
amount equal to the average amount of general revenue for the three immediately
preceding years, excluding revenues constitutionally dedicated for purposes
other than payment of debt service. Self-supporting general obligation bonds,
although backed by the full faith and credit of the State, are reasonably
expected to be paid from other revenue sources and are not expected to create a
general revenue draw. Pursuant to HJR 59, passed by the 75th Legislature,
Proposition 11 proposed a constitutional amendment to add the provisions of
Article 717k-7(8) to the Constitution. On November 4, 1997 Proposition 11 was
passed. The provision is now Article III, Section 49-j of the Texas
Constitution.
Although not specifically a debt issue, pursuant to HJR 8, passed by the
75th Legislature, Proposition 13 was submitted to Texas voters and passed on
November 4, 1997. Proposition 13 proposed a constitutional amendment to extend
the State's full faith and credit to the Texas Tomorrow Fund and established
the Fund as a constitutionally protected fund. The Texas Tomorrow Fund is
dedicated to the prepayment of higher education tuition and fees.
SHORT TERM BORROWING. By statute, the Texas Comptroller of Public Accounts
is authorized 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.
Any surplus cash transferred to the General Revenue fund must be returned to
the fund from which it was taken as soon as practicable. Depository interest on
funds so transferred is allocated as if the funds had not been transferred.
During fiscal 1998 approximately $2.9 billion in Tax and Revenue Anticipation
Notes were issued by the Comptroller. The Comptroller 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 year
1998 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
Comptroller.
Several state agencies and universities use commercial paper and variable
rate notes to provide financing for equipment, interim construction, and loans.
As of August 31, 1998, a total of $1.7 billion was authorized for state
commercial paper or variable-rate note programs. Of this amount $593.4 million
was outstanding as of the end of fiscal 1998.
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 1998. Sales tax, which had been the main source of revenue for the
previous twelve years prior to fiscal 1993, was second. Licenses, fees, fines
and penalties were the third largest revenue source to the State in fiscal
1998. Motor fuels taxes and motor vehicle sales/rental taxes were the State's
fourth and fifth largest revenue sources. 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.
POTENTIAL FOR REDUCTION OF STATE REVENUES AND DEBT SERVICE. 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. These or other events could result in the State's
inability to pay debt as it becomes due which could also affect negatively the
value of your investment in the Texas Funds. Notwithstanding the foregoing, the
state of Texas finished fiscal 1998 with a $3.3 billion positive cash balance
in the General Revenue Fund. This was the eleventh consecutive year that Texas
has ended a fiscal year with a positive balance in the General Revenue Fund.
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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 dedicated 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 state personal income.
APPROPRIATIONS AND BUDGETING. The Texas 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. Claims must be filed against an appropriation within
two years after the end of the fiscal year for which the appropriation is made,
except for construction appropriations, against which claims may be made for up
to four 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 bill 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.
Budgeting for the State is handled through the Governor's Budget Office
and the Legislative Budget Board. By statute, the Governor has been made the
chief budget officer of the State, which is a function carried out by staff
members who constitute the Governor's Budget Office. The Legislature has its
own budget agency in the Legislative Budget Board. The Governor's Budget Office
and the Legislative Budget Board generally cooperate with respect to matters
pertaining to the preparation of budgets and prepare uniform instructions and
forms for budget requests. The Governor and the Legislative Budget Board each
make separate submissions to the Legislature. The Governor's submission is
usually in the form of a budget proposal and the Legislative Budget Board's is
in the form of a draft appropriations bill to be submitted for consideration by
the Legislature. The Governor is authorized by statute to submit a draft
appropriations bill, or the bill may be introduced in the Legislature along
with the bill prepared by the Legislative Budget Board.
NON-LEGISLATIVE POWERS AFFECTING APPROPRIATIONS. The Governor is
authorized by statute to make findings of any fact 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. Any expenditure so authorized by
the Governor may only be used in those instances in which no other funds are
available for purposes specifically appropriated by the Legislature due to
exhaustion of appropriations.
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 which require that a
state agency be prohibited from spending an appropriation, which require 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
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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
provision 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. The affirmative vote
of a majority of the members of the Legislative Budget Board from each house of
the Legislature is necessary for the adoption of any budget execution order.
Except under the circumstances set forth above, appropriations or
adjustments of appropriations may currently be authorized only by the
Legislature.
PUBLIC SCHOOL FINANCE. In 1984, a group of property-poor school districts
and the Mexican-American Legal Defense and Education Fund filed EDGEWOOD V.
BYNUM (later Kirby) against the school finance system, challenging the state's
school finance system as unconstitutional. In April 1987 State District Judge
Harley Clark ruled in favor of the 67 property-poor districts finding the
State's public school funding system unconstitutional. Two subsequent school
finance plans were drafted by the Texas Legislature in June 1990 and April
1991, but each was declared unconstitutional. In late May 1993, Texas
legislators passed Senate Bill 7, which directed the State's 98 wealthiest
school districts to choose from among five alternatives for sharing their
overall property wealth with other, poorer districts. Judge McCown ordered that
the plan be implemented during the 1993-94 school year and, on December 10,
1993, upheld the constitutionality of SB 7. On May 25, 1994, representatives
from 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 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.
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, 1998,
the overfunded actuarial liability of TRST was approximately $2.4 billion and
the overfunded actuarial liability of ERST was approximately $1,013.9 million.
The TRST fair value of investments, as of August 31, 1998, was $65.7 billion.
The ERST fair value of pooled investments as of August 31, 1998, was $18.8
billion. Prior to 1985, JRST was maintained on a pay-as-you-go basis. However,
legislation enacted in 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 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, 1998, the most recent valuation date, was $3.16 million. The period
required to amortize the unfunded actuarial liability of JRST Plan Two, given
the current rates, benefits, and actuarial assumptions, was estimated to be 6.7
years. The old plan, known as the Judicial Retirement System of Texas Plan One,
is maintained on a pay-as-you-go basis and covers 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 for the ERST and
TRST; 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 1998-99 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 16.83 percent of payroll.
Member contribution rates are 6 percent for ERST and JRST Plan Two and 6.4
percent for TRST.
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The Legislature is prohibited by statute from implementing changes in the
ERST, JRST, and TRST systems that would cause the period required to amortize
the unfunded actuarial liability of the plans 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.
YEAR 2000 ISSUES. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the State's computers, computer programs or embedded systems that have
time-sensitive hardware or software may recognize a date using 00 as the year
1900 rather than the year 2000. The issue is compounded by the fact that the
year 2000 (unlike the year 1900) is a leap year, which may also lead to
incorrect calculations. All of this could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Most state agencies and universities in Texas have been aware of the Year
2000 Issue for several years. In September 1996, the Texas Department of
Information Resources ("TDIR") adopted a rule that all hardware and software
procurements by state agencies and universities had to be Year-2000 compliant
as of January 1, 1997. Through the Texas Association of State Systems for
Computing and Communications, a Year 2000 Working Group was established that
has been meeting on a monthly basis since September 1996. The TDIR is focusing
on mission-critical systems being operable in the Year 2000. These are systems
that impact public health, public safety and revenue collections/distribution.
Based upon reporting received from state agencies and universities through
February 1999, the Project Office of TDIR currently believes that most
mission-critical systems will be ready for the Year 2000. Additional
information concerning the State's Year 2000 efforts can be found on the TDIR
web-site at www.dir.state.tx.us/y2k.
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. These research
services may also include access to research on third party data bases, such as
historical data on companies, financial statements, earnings history and
estimates and corporate releases; real-time quotes and financial news; research
on specific fixed income securities; research on international market news and
securities; and rating services on companies and industries. 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
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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.
For the last two fiscal years the Texas Tax-Free Income Fund's portfolio
turnover rates were as follows:
1998 . . . . . 56.29% 1999 . . . . . 55.83%
Portfolio turnover rates have been calculated excluding short-term
variable rate securities, which are those with put date intervals of less than
one year.
DESCRIPTION OF SHARES
The Funds are series of the Trust and are diversified. 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 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.
Each Fund's assets 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. The Trust may fill
vacancies on the Board or appoint new Trustees if the result is that at least
two-thirds of the Trustees have still been elected by
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shareholders. 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. The Trust will assist in communicating to
other shareholders about the meeting. 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 that 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) and (2) 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
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.
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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 or she 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 who supervise the
business affairs of the Trust. 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 Road, San Antonio, TX 78288.
Robert G. Davis 1, 2
Director and Chairman of the Board of Directors
Age: 52
President and Chief Operating Officer of United Services Automobile Association
(USAA) (6/99-present); Deputy Chief Executive Officer for Capital Management of
USAA (6/98-5/99); President, Chief Executive
16
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Officer, Director, and Vice Chairman of the Board of Directors of USAA Capital
Corporation and several of its subsidiaries and affiliates (1/97-present);
President, Chief Executive Officer, Director, and Chairman of the Board of
Directors of USAA Financial Planning Network, Inc. (1/97-present); Executive
Vice President, Chief Operating Officer, Director, and Vice Chairman of the
Board of Directors of USAA Financial Planning Network, Inc. (6/96-12/96);
Special Assistant to Chairman, USAA (6/96-12/96); President and Chief Executive
Officer, Banc One Credit Corporation (12/95-6/96); and President and Chief
Executive Officer, Banc One Columbus, (8/91-12/95). Mr. Davis serves as a
Director/Trustee and Chairman of the Boards of Directors/Trustees of each of
the remaining funds within the USAA Family of Funds; Director and Chairman of
the Boards of Directors of USAA Investment Management Company (IMCO), USAA
Shareholder Account Services, USAA Federal Savings Bank, and USAA Real Estate
Company.
Michael J.C. Roth 1, 2
Director, President, and Vice Chairman of the Board of Directors
Age: 57
Chief Executive Officer, IMCO (10/93-present); President, Director, and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Director/Trustee, and Vice Chairman of the Boards of
Directors/Trustees of each of the remaining funds within the USAA Family of
Funds and USAA Shareholder Account Services; Director of USAA Life Insurance
Company; and Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 64
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as a Director/Trustee of each of the remaining funds within the
USAA Family of Funds; Director of IMCO; Senior Vice President of USAA
Shareholder Account Services, and Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 54
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). Mrs. Dreeben serves as a Director/Trustee of each of
the remaining funds within the USAA Family of Funds.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 64
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Director/Trustee of each of the
remaining funds within the USAA Family of Funds.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 53
Staff Analyst, Southwest Research Institute (9/98-present); Manager,
Statistical Analysis Section, Southwest Research Institute (2/79-9/98). Dr.
Mason serves as a Director/Trustee of the remaining funds within each of the
USAA Family of Funds.
17
<PAGE>
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 56
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Director/Trustee of each of the remaining funds within the USAA Family of
Funds.
Michael D. Wagner 1
Secretary
Age: 51
Senior Vice President, CAPCO General Counsel (01/99-present); Vice President,
Corporate Counsel, USAA (1982-01/99). Mr. Wagner has held various positions in
the legal department of USAA since 1970 and serves as Vice President,
Secretary, and Counsel, IMCO and USAA Shareholder Account Services; Secretary,
of each of the remaining funds within the USAA Family of Funds; Vice President,
Corporate Counsel for various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 49
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94). Mr. Ciccone
serves as Assistant Secretary of each of the remaining funds within the USAA
Family of Funds.
Mark S. Howard 1
Assistant Secretary
Age: 35
Assistant Vice President, Securities Counsel, USAA (2/98-present); Executive
Director, Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel,
Securities Counsel, USAA (5/95-8/96); Attorney, Kirkpatrick & Lockhart LLP
(9/90-4/95). Mr. Howard serves as Assistant Vice President and Assistant
Secretary, IMCO and USAA Shareholder Account Services; Assistant Secretary of
each of the remaining funds within the USAA Family of Funds; and Assistant Vice
President, Securities Counsel for various other USAA subsidiaries and
affiliates.
Sherron A. Kirk 1
Treasurer
Age: 54
Vice President, Senior Financial Officer, IMCO (8/98-present); Vice President,
Controller, IMCO (10/92-8/98). Mrs. Kirk serves as Treasurer of each of the
remaining funds within the USAA Family of Funds; Vice President, Senior
Financial Officer of USAA Shareholder Account Services.
Caryl Swann 1
Assistant Treasurer
Age: 51
Executive Director, Mutual Fund Analysis & Support, IMCO (10/98-present);
Director, Mutual Fund Portfolio Analysis & Support, IMCO (2/98-10/98); Manager,
Mutual Fund Accounting, IMCO (7/92-2/98). Ms. Swann serves as Assistant
Treasurer for each of the remaining funds within the USAA Family of Funds.
- ------------------
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
18
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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: Carl W.
Shirley, Senior Vice President, Insurance Company Portfolios; John J. Dallahan,
Senior Vice President, Investment Services; and David G. Peebles, Senior Vice
President, Equity Investments. 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, 1999.
NAME AGGREGATE TOTAL COMPENSATION
OF COMPENSATION FROM THE USAA
DIRECTOR FROM THE COMPANY FAMILY OF FUNDS(b)
---------- ---------------- ------------------
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $7,022 $36,500
Howard L. Freeman, Jr. $7,022 $36,500
Robert L. Mason $7,022 $36,500
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $7,022 $36,500
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(a) Robert G. Davis, 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.
(b) At March 31, 1999, the USAA Family of Funds consisted of four registered
investment companies offering 35 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 seven funds available to the public only
through the purchase of certain variable annuity contracts and variable
life insurance policies offered by 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
within the USAA Family of Funds. 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 May 14, 1999, 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 following table identifies all persons, who as of May 14, 1999, 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 Eden I Limited Partnership 8.0%
Market Fund 1903 Central Drive Suite 102
Bedford, TX 76021-5876
Texas Tax-Free Money Miriam F. Schweers 7.5%
Market Fund Carl A. Schweers
1240 E. Sunshine Dr.
San Antonio, TX 78228-2944
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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, a wholly owned indirect subsidiary of United Services
Automobile Association (USAA), a large, diversified financial services
institution, was organized in May 1970 and 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 $40 billion, of which
approximately $26 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 FUND MANAGEMENT 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 printing and
mailing the Prospectus, SAI, and periodic reports to existing shareholders; and
any other charges or fees not specifically enumerated. The Manager pays the
cost of printing and mailing copies of the Prospectus, the SAI, and reports to
prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 2000, 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).
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, 2000,
and will reimburse the Funds for all expenses in excess of the limitations.
For the last three fiscal years, management fees were as follows:
1997 1998 1999
---- ----- ----
Texas Tax-Free Income Fund $47,582 $76,602 $138,727
Texas Tax-Free Money Market Fund $25,483 $27,561 $ 32,937
Because the Funds' expenses exceeded the Manager's voluntary expense
limitation, the Manager did not receive any management fees for the last three
fiscal years with respect to the Texas Tax-Free Money Market Fund. With respect
to the Texas Tax-Free Income Fund, the Manager did not receive any management
fees for 1997. For 1998 and 1999 the Manager did not receive $73,972 and
$101,891 respectively, in management fees to which it would have been entitled.
In addition, the Manager did not receive reimbursement for other operating
expenses to which it would have been entitled as follows:
1997 1998 1999
---- ---- ----
Texas Tax-Free Income Fund $32,878 $ - $ -
Texas Tax-Free Money Market Fund $39,351 $20,096 $21,713
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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 $28.50 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, each Fund pays 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 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.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
COULD THE VALUE OF YOUR INVESTMENT IN THESE FUNDS FLUCTUATE? 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, 1999, were:
1 year . . 5.00% Since inception . .8.75%
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<PAGE>
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, 1999, was 4.79%.
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 and income other than
investment income, 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
return by 52.14 (365/7). The resulting yield figure is carried to the nearest
hundredth of one percent.
The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Fund's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to
the quotient, raising the sum to the 365th power, and subtracting 1 from the
result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield for 7-day Period ended March 31, 1999, was 2.89%.
Effective Yield for 7-day Period ended March 31, 1999, was 2.93%.
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 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, 1999, were 7.48% and 4.52%, respectively.
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<PAGE>
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 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 IBCA, Inc. (Fitch), Duff & Phelps LLC, and
Thompson BankWatch, 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.
I. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICES, INC.
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 edged." 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 risk 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: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION. THE MODIFIER 1 INDICATES THAT THE OBLIGATION RANKS IN THE
HIGHER END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES A MID-RANGE
RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF THAT
GENERIC RATING CATEGORY.
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STANDARD & POOR'S RATINGS GROUP
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB An obligation rated BBB exhibits adequate capacity to pay interest and
repay principal. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
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.
FITCH IBCA, INC.
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
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.
DUFF & PHELPS, LLC
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.
2. SHORT-TERM DEBT RATINGS:
MOODY'S STATE AND TAX-EXEMPT NOTES
MIG-1/VMIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MOODY'S COMMERCIAL PAPER
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
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* Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
* Broad margins in earning 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 rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory 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, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P 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.
S&P 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.
FITCH'S COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND TAX-EXEMPT NOTES
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit features.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
DUFF & PHELPS COMMERCIAL PAPER
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
D-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 those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
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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 but are not restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper that may cover financial and investment news.
AUSTIN AMERICAN-STATESMAN, a newspaper that 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 that 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 that may cover financial news.
CONSUMER REPORTS, a monthly magazine that from time to time reports on
companies in the mutual fund industry.
DALLAS MORNING NEWS, a newspaper that may cover financial news.
DENVER POST, a newspaper that may quote financial news.
FINANCIAL PLANNING, a monthly magazine that periodically features companies in
the mutual fund industry.
FINANCIAL SERVICES WEEK, a weekly newspaper that covers financial news.
FINANCIAL WORLD, a monthly magazine that periodically features companies in the
mutual fund industry.
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 that may cover financial news.
HOUSTON POST, a newspaper that may cover financial news.
IBC'S MONEY FUND REPORT, a weekly publication of IBC Financial Data, 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."
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared
by IBC Financial Data, Inc.
IBC'S MONEYLETTER, a biweekly newsletter that covers financial news and from
time to time rates specific mutual funds.
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, the national association of the American
Investment Company industry.
INVESTOR'S BUSINESS DAILY, a newspaper that covers financial news.
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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 EQUITY FUND PERFORMANCE ANALYSIS, a weekly
and monthly publication of industry-wide mutual fund performance averages by
type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type
of fund.
LOS ANGELES TIMES, a newspaper that 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.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter that covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service that
tracks open-end mutual funds).
MUNI BOND FUND REPORT, a monthly newsletter that covers news on the municipal
bond market and features performance data for municipal bond mutual funds.
MUNIWEEK, a weekly newspaper that 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 mutual fund
performance and rankings, produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund
investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
that 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 that may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper that may cover financial news.
PERSONAL INVESTOR, a monthly magazine that 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 that may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper that may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper that 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 that covers
financial news.
WASHINGTON POST, a newspaper that 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 that 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. and Morningstar, Inc. Each Fund
will be compared to Lipper's or Morningstar's appropriate fund category
according to its objective(s) and portfolio holdings. Footnotes in
advertisements and other sales literature will include the time period
applicable for any rankings used.
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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 Funds or by those publications listed previously are Schabaker
Investment Management and Investment Company Data, Inc. These are services that
collect and compile data on mutual fund companies.
APPENDIX C - 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 number of 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.
===============================================================================
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