Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
Virginia Bond Fund 4
Virginia Money Market Fund 8
Shareholder Voting Results 11
Financial Information:
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
Virginia Bond Fund 15
Virginia Money Market Fund 18
Notes to Portfolios of Investments 21
Statements of Operations 22
Statements of Changes in Net Assets 23
Notes to Financial Statements 25
Important Information:
Through our ongoing efforts to reduce expenses and respond to
shareholder requests, your annual and semiannual report mailings are now
"streamlined." One copy of each report will be sent to each address,
instead of our previous practice of sending one report to every registered
owner. For many shareholders and their families, this eliminates
duplicate copies, saving paper and postage costs to the Funds.
If you are the primary shareholder on at least one account, prefer not
to participate in streamlining, and would like to continue receiving one
report per registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business
hours.
This report is for the information of the shareholders and others who
have received a copy of the currently effective prospectus of the USAA
Tax Exempt Fund, Inc., managed by USAA Investment Management Company
(IMCO). It may be used as sales literature only when preceded or
accompanied by a current prospectus which gives further details about
the funds.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(copyright)1995, USAA. All rights reserved.
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the
performance of our other funds. This summary is a snapshot of the
performance of all 32 funds by investment objective as of September 30,
1995. For more complete information about the mutual funds managed and
distributed by USAA IMCO, including charges and expenses, please call
1-800-531-8181 for a prospectus. Read it carefully before you invest.
<TABLE>
<CAPTION>
Average Annual Total Return*
Investment Inception Since 7-Day 30-Day(1)
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC
<S> <C> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 46.21 22.58 12.68 - - -
Emerging Markets(2) 11/7/94 - - - (.60) - -
Gold(2) 8/15/84 (9.21) 2.95 4.46 - - -
Growth 4/5/71 18.48 16.12 13.22 - - -
Growth & Income 6/1/93 23.46 - - 12.88 - -
International(2) 7/11/88 1.58 13.34 - 9.56 - -
World Growth(2) 10/1/92 6.47 - - 12.43 - -
Asset Allocation
Balanced Strategy 9/1/95 - - - .40 - -
Cornerstone Strategy(2)# 8/15/84 10.89 11.97 12.98 - - -
Growth and Tax Strategy**# 1/11/89 13.86 10.20 - 9.35 - 3.75
Growth Strategy(2) 9/1/95 - - - .30 - -
Income Strategy 9/1/95 - - - 1.50 - -
Income - Taxable
GNMA 2/1/91 12.56 - - 8.18 - 6.82
Income 3/4/74 18.64 10.98 10.47 - - 6.61
Income Stock 5/4/87 20.54 15.74 - 11.95 - -
Short-Term Bond 6/1/93 9.37 - - 5.15 - 6.58
Income - Tax Exempt
Long-Term(3)** 3/19/82 9.83 8.25 8.92 - - 5.73
Intermediate-Term(3)** 3/19/82 9.76 8.14 8.23 - - 5.15
Short-Term(3)** 3/19/82 6.41 5.65 5.94 - - 4.33
California Bond(3)** 8/1/89 11.24 8.28 - 7.39 - 5.75
Florida Tax-Free Income(3)** 10/1/93 9.67 - - 1.17 - 5.71
New York Bond(3)** 10/15/90 9.71 - - 8.68 - 5.65
Texas Tax-Free Income(3)** 8/1/94 13.26 - - 9.80 - 5.61
Virginia Bond(3)** 10/15/90 10.51 - - 8.38 - 5.72
Money Market
Money Market(4) 2/2/81 5.67 4.65 6.01 - 5.56 -
Tax Exempt Money Market(3),(4)** 2/6/84 3.57 3.45 4.40 - 3.89 -
Treasury Money Market Trust(4) 2/1/91 5.42 - - 4.09 5.35 -
California Money Market(3),(4)** 8/1/89 3.53 3.27 - 3.70 3.79 -
Florida Tax-Free Money
Market(3),(4)** 10/1/93 3.45 - - 2.81 3.67 -
New York Money Market(3),(4)** 10/15/90 3.42 - - 3.01 3.89 -
Texas Tax-Free Money
Market(3),(4)** 8/1/94 3.46 - - 3.33 3.57 -
Virginia Money Market(3),(4)** 10/15/90 3.44 - - 3.19 3.62 -
</TABLE>
(1) Calculated as prescribed by the Securities and Exchange Commission.
(2) Foreign investing is subject to additional risks, which are discussed
in the funds' prospectuses.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is neither insured nor guaranteed
by the U.S. government and there is no assurance that any of the funds
will be able to maintain a stable net asset value of $1 per share.
* Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested dividends and capital gain distributions. The performance
data quoted represents past performance and is not an indication of
future results. Investment return and principal value of an investment
will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax
Strategy Fund is not available as an investment for your IRA because the
majority of its income is tax exempt. California, New York, Virginia,
Florida, and Texas funds available to residents only.
# Formerly known as Cornerstone Fund and Balanced Portfolio Fund,
respectively.
Message from the President
[Photograph of Michael J. C. Roth, President and Vice Chairman
of the Board appears here]
In September I attended an Investment Company Institute conference for
mutual fund directors. It was in Washington D.C., and the speakers included
a current member of the House and a former senator. Both delivered similar
messages: Expect a reform of the tax system.
This news is not a surprise to tax-exempt fund investors. As
I pointed out in a letter earlier this year, the tax-exempt bond market
has spent much of 1995 adjusting to the expectation of lower tax rates.
It has done this by narrowing the difference in yields between taxable
and tax-exempt bonds. This adjustment has been well masked by the very
handsome total returns in tax-exempt bonds this year. The portfolio
managers will give you details in their reports.
"We will always remember that you are
the reason we are in business."
I wish I could give you simple guidance on where to go from here, but I
cannot. In fact, one of the most difficult questions in reforming the
tax system will be how to approach the tax-exempt bond market. It is not
only important to you, the investor, but also to the state and local
entities that borrow your money through these bonds.
Do we suddenly, in one fell swoop, dramatically raise their cost of
borrowing? If we do, current owners of bonds will be hurt, but so will
everyone who pays taxes in states and cities. Those borrowers will
need more revenue to pay interest on their bonds. Therefore, a radical
reform might lower federal taxes, but raise state and local taxes.
I do not think this is a desirable or desired outcome. It certainly is
not a simple problem to solve.
I do not believe that any major change will take place until after the
next national election. At this uncertain time I will make this pledge
to you:
We will watch the tax reform situation very closely.
Our guidance to you will keep your interests uppermost.
We will always remember that you are the reason we are in business.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Investment Review
Virginia Bond Fund
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes.
Types of Investments: Invests primarily in long-term investment grade
Virginia tax-exempt securities.
3/31/95 9/30/95
Net Assets $238.9 Million $252.8 Million
Net Asset Value Per Share $10.76 $10.91
Average Annual Total Returns as of 9/30/95
March 31, 1995 to September 30, 1995 4.39%*
1 Year 10.51%
Since Inception on October 15, 1990 8.38%
*Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
30-Day SEC Yield on September 30, 1995 5.72%**
**Calculated as prescribed by the Securities and Exchange Commission.
[A graph is shown here which is a comparison of the change in
value of a $10,000 investment for the period of 10/15/90 to
9/30/95, with dividends and capital gains reinvested. The
ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $15,230
USAA Virginia Bond Fund $14,955]
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks
total return performance for the long-term investment grade tax-exempt bond
market. All tax-exempt bond funds will find it difficult to outperform such
an index, since funds have expenses.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payableby shareholders on their
reinvested dividends and capital gain distributions. The performance
data quoted represents past performance and is not an indication of
future results. Investment return and principal value of an investment
will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
Message from the Manager
[Photograph of Robert R. Pariseau, CFA, Portfolio Manager appears here]
The Municipal Market
Compared to the roller-coaster ride last fall, the last six months have
been pretty tame. The yield on the Bond Buyer 40 Bond Index traded in a
narrow range from 6.00% to 6.35%. Last October it was quite different when
the Bond Buyer Index increased .80% to 7.40% within a month, then fell a
full 1.0% by March 1995, as the economy peaked, then decelerated. Confident
that inflation was in check, Chairman Greenspan lowered the federal funds
rate by .25% on July 6, 1995 - the first cut in nearly three years - as the
Federal Reserve Board successfully engineered the economy's "soft landing."
In this favorable environment, your fund's net asset value (NAV) per share
rose $.15 to $10.91, or 1.39%, since March 31, 1995. The Fund's performance
compared very favorably to its peer group. For the past six months, the
Fund's annualized dividend yield(1) was 5.81%, compared to Lipper's Virginia
Municipal Debt average of 4.93%.(2) For the same period, the Fund's total
return(3) was 4.39%, compared to the Virginia Municipal Debt average of
4.40%.
[A graph is shown here comparing the 12-month dividend yield of
the USAA Virginia Bond Fund and the Lipper Virginia Municipal Debt
Funds Average from 9/30/92 to 9/30/95. The vertical axis shows the
yield and the horizontal axis shows the time period. The values are:
USAA Virginia
Bond Fund 6.04 5.44 5.81 5.82
Lipper Virginia
Muni. Debt
Funds Avg. 5.91 5.20 5.33 5.04]
The Lipper Virginia Municipal Debt Funds average is computed
by Lipper Analytical Services, an independent organization that monitors
the performance of mutual funds. Lipper calculations do not include the
effects of sales charges. The graph represents data from
9/30/92 to 9/30/95.
A tax-exempt mutual fund may provide more income after taxes than a fully
taxable mutual fund. The table below compares the yield of the USAA
Virginia Bond Fund with a taxable equivalent investment.(4)
To match the Virginia Bond Fund's closing 30-Day SEC yield of 5.72% and:
Assuming a virginia State Tax rate of 5.75%
and
Assuming a marginal federal tax rate of:
28% 31% 36% 39.6%
A fully taxable investment must pay: 8.43% 8.80% 9.48% 10.05%
Strategy & Outlook
As the yield curve steepened, the best market values were 25-year
maturities and longer, as evidenced by the particularly wide spread between
interest rates for the 15- and 25-year maturities. I pursue a strategy to
maximize tax-exempt interest because, over the long run, shareholders of
tax-exempt bonds receive the greatest portion of their total return from
interest. Over time, the increased yield from longer maturities offsets the
increased sensitivity of market value to changes in interest rates, so this
policy rewards long-term investors.
A manager who concentrates exclusively on total return must correctly and
consistently time the market. At USAA IMCO, we strongly believe that no one
can accurately predict the future course of interest rates. More often than
not, managing by a total-return strategy results in higher taxable capital
gains and trading costs and lower tax-exempt income. Although my primary
focus is on tax-exempt distributions, I do pay attention to total return.
For example, if interest rates should increase dramatically, I would
position the Fund more defensively by buying shorter-maturity
and high-coupon bonds.
Purchase Criteria
Before buying a new security, our experienced municipal analysts conduct an
independent, bottom-up, credit analysis. In their critical judgement, the
bond must be investment grade, standing on its own fundamental merits
without relying on good fortune or municipal bond insurance.
The Virginia Economy
Virginians can take pride in their state's credit standing as one of the
few rated "AAA" by all three national rating agencies (Moody's, Standard
and Poor's, and Fitch). However, job growth is slowing due to government
cutbacks and some "back office" operations of major companies leaving
northern Virginia. With a national Congress that talks about further
reducing the size of government, the state and local municipalities must
attract higher value-added employers to Virginia. The transition appears on
track as the region's educated work force and appealing lifestyle have
lured three leading high-technology companies to locate major facilities in
Manassas and Richmond. We will closely monitor how the state responds to
the challenge.
(1) Dividend yield is computed by dividing income dividends paid during the
previous 6 months by the latest month-end net asset value adjusted for
capital gains distributions and annualizing the result.
(2) Source: Lipper Analytical Services, an independent organization that
monitors the performance of mutual funds.
(3) Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gains distributions.
(4) This table is based on a hypothetical investment calculated for
illustrative purposes only. It is not an indication of performance for any
of the USAA Family of Funds.
See page 15 for a complete listing of the Portfolio of Investments in
Securities.
Note: Income may be subject to federal, state or local taxes, or the
alternative minimum tax.
Portfolio Ratings/Mix
September 30, 1995
[A pie chart is shown here depicting the Portfolio Ratings/Mix
as of September 30, 1995 for the USAA Virginia Bond Fund to be:
AAA - 6%, AA - 49%, A - 27%, BBB - 16% and Cash Equivalents -
2%.]
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group or Fitch Investors Service. Unrated
securities that have been determined by USAA Investment Management Company
to be of equivalent investment quality to category A account for 2.6% of
the Fund's investments.
Investment Review
Virginia Money Market Fund
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes, while
preserving capital and maintaining liquidity.
Types of Investments: High quality Virginia tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will endeavor to
maintain a constant net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share.
3/31/95 9/30/95
Net Assets $98.0 Million $102.3 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Returns as of 9/30/95
March 31, 1995 to September 30, 1995 1.75%*
1 Year 3.44%
Since inception on October 15, 1990 3.19%
* Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
7-Day Simple Yield on September 30, 1995 3.62%
[A graph is shown here comparing the 7-day yield of the USAA
Virginia Money Market Fund and the IBC/Donoghue's State Specific
SB & GP (Tax-Free): Virginia from 9/94 to 9/95. The vertical
axis shows the yield and the horizontal axis shows the time period.
The ending value, on 9/25/95, for the USAA Virginia Money Market
Fund is 3.52% and the ending value for the IBC Donoghue's State
Specific SB & GP (Tax-Free) is 3.33%.]
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested dividends and capital gain distributions. Past performance
is no guarantee of future results and the value of your investment
may vary according to the Fund's performance. The graph tracks the
Fund's 7-day simple yield against IBC/Donoghue's State Specific
SB (Stock Broker) & GP (General Purpose) (Tax-Free) Money Funds, an
average of all major money market fund yields.
Message from the Manager
[Photograph of Pamela K. Bledsoe, CFA, Portfolio Manager appears here]
Economic Volatility in the Market
Contrary to the long-term bond market, the money market continues to
experience a roller-coaster ride. Since March, the yield on the Tax Exempt
Note Rate (TENR)(1) has traded from a high of 4.75% in May to a low of 2.65%
in early June. These ups and downs have been driven by mixed economic data,
supply and demand factors and credit risk. The Federal Reserve (Fed) uses
economic data such as unemployment levels, retail sales and new housing
starts to make interest rate decisions. On July 6, 1995, the Fed reduced
interest rates .25% after raising interest rates seven times during 1994
and 1995. This reduction was spurred by easing inflationary pressures and
the Fed's desire to keep the economy strong enough to avoid a recession. In
anticipation of this activity, I extended the Fund's maturity to lock in
the higher rates and will try to continue to do so as I expect rates to be
in a generally downward trend.
Economic volatility is intensified by the short-term market's sensitivity
to supply and demand factors, especially during the months of January,
April, May, June, July, and December. Yields on variable-rate money market
instruments typically rise in April and May as the need to cover tax payments
creates an excess of bonds in the market. This situation reverses itself in
the first weeks of June, July, December, and January since excess cash that
needs to be invested creates a shortage of bonds leading to a sharp decline
in yields. To minimize the impact of this phenomenon, I aggressively manage
our variable rate demand notes (VRDNs)(2) to pursue top performance in this
segment of the portfolio.
Credit risk, the relationship between market value and the likelihood of
receiving payment at maturity, has also added to the volatility in the
municipal note market. Our own research staff has proven invaluable in
making credit-quality determinations. We'll continue to carefully evaluate
credit risk to determine if a security is appropriate for this fund.
Outlook
Although the underlying Virginia economy continues to be strong, it has
been negatively impacted by reductions in defense spending, slow population
growth and overbuilding in commercial real estate. These factors have led
to a decline in state and local tax receipts which has placed considerable
stress on the state's balanced budget. However, responsible financial
management has allowed the state to maintain its "AAA" status by three
major rating agencies.(3)
(1) Tax Exempt Note Rate (TENR): A general market "AAA" weekly index as
determined by Bankers Trust.
(2) Variable rate demand note (VRDN): A note representing borrowings that is
payable on demand and that bears interest tied to a money market rate.
(3) Rating services include Fitch Investors Service, Inc., Moody's Investors
Service, and Standard & Poor's Corporation.
An investment in any money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
See page 18 for a complete listing of the Portfolio of Investments in
Securities.
[A graph is here showing the growth of $10,000, from 10/15/90 to 9/30/95,
invested in the USAA Virginia Money Market Fund. The vertical axis shows
the dollar amount and the horizontal axis shows the time period. The
ending value is $11,701.]
Past performance is no guarantee of future results and the value of your
investment may vary according to the fund's performance. Income may be
subject to federal, state or local taxes, or to the alternative
minimum tax.
Shareholder Voting Results
On October 13, 1995, a special meeting of shareholders was held to vote on
the following proposals. All proposals were approved by the shareholders.
All shareholders of record on August 17, 1995 were entitled to vote on
each proposal. The number of votes shown below are shown by Fund for
proposal (2) and by aggregate for the entire USAA Tax Exempt Fund, Inc.
(the Company) for proposals (1) and (3).
(1) Proposal to elect a Board of Directors as follows:
Votes Votes
Director For Withheld
------- --- --------
Hansford T. Johnson 1,263,957,222 40,330,706
Michael J.C. Roth 1,262,975,844 41,312,084
John W. Saunders, Jr. 1,263,409,381 40,878,547
George E. Brown 1,250,233,665 54,054,263
Howard L. Freeman, Jr. 1,259,213,299 45,074,629
Richard A. Zucker 1,252,694,421 51,593,507
Barbara B. Dreeben 1,242,417,451 61,870,477
Mr. C. Dale Briscoe did not stand for re-election to the Board. His term of
office will terminate on December 31, 1995.
(2) Proposals to reclassify, amend or eliminate certain investment
restrictions as follows:
Proposal to reclassify the investment restriction on illiquid securities
from fundamental to non-fundamental and amend the restriction to permit
investments in illiquid securities, including repurchase agreements
maturing in more than seven days, to no more than the following:
Number of Shares Voting
For Against Abstain
--- ------- -------
15% of the value of the Virginia Bond
Fund's net assets 12,999,874 1,358,582 700,218
10% of the value of the Virginia Money
Market Fund's net assets 52,543,032 9,221,470 4,222,794
Proposal to amend the restriction that a Fund may not underwrite any issue
of securities to state that a Fund may be deemed to act as a statutory
underwriter in the distribution of any restricted securities or not readily
marketable securities.
Virginia Bond Fund 13,087,819 1,245,358 725,497
Virginia Money Market Fund 53,814,407 8,159,358 4,013,530
Proposal to amend the restriction relating to borrowing to allow a Fund to
borrow an amount not exceeding 331/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings) for temporary or
emergency purposes.
Virginia Bond Fund 12,581,275 1,580,201 897,198
Virginia Money Market Fund 50,521,249 9,907,163 5,558,883
Proposal to amend the restriction relating to lending portfolio securities
to permit a Fund to lend up to 1/3 of its total assets to other parties.
Virginia Bond Fund 12,767,264 1,497,016 794,393
Virginia Money Market Fund 51,401,939 10,164,750 4,420,607
(3) Proposal to ratify or reject the selection by the Board of Directors of
KPMG Peat Marwick LLP as auditors for the Company for the fiscal year
ending March 31, 1996.
1,220,377,387 32,420,032 51,490,499
Statements of Assets and Liabilities
(In Thousands)
September 30, 1995
(Unaudited)
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
Assets
Investments in securities, at market value
(identified cost of $249,670 and
$101,739, respectively) $ 257,286 $ 101,739
Cash 157 265
Receivables:
Capital shares sold 49 80
Interest 4,317 663
--------- ---------
Total assets 261,809 102,747
--------- ---------
Liabilities
Securities purchased 8,600 -
Capital shares redeemed 14 261
USAA Investment Management Company 71 83
USAA Transfer Agency Company 17 9
Accounts payable and accrued expenses 41 32
Dividends on capital shares 283 15
--------- ---------
Total liabilities 9,026 400
--------- ---------
Net assets applicable to capital
shares outstanding $ 252,783 $ 102,347
========= =========
Represented by:
Paid-in capital $ 247,957 $ 102,347
Accumulated net realized loss on investments (2,790) -
Net unrealized appreciation of investments 7,616 -
--------- ---------
Net assets applicable to capital
shares outstanding $ 252,783 $ 102,347
========= =========
Capital shares outstanding 23,163 102,347
========= =========
Net asset value, redemption price, and
offering price per share $ 10.91 $ 1.00
========= =========
See accompanying notes to financial statements.
Categories & Definitions
Portfolios of Investments in Securities
September 30, 1995
(Unaudited)
Fixed Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The coupon rate is constant to maturity. Prior to maturity, the
price of a fixed rate instrument generally varies inversely to the movement
of interest rates. At maturity, the security pays face value.
Put Bonds - provide the right to tender, or put, the bond for redemption at
face value at specific tender dates prior to final maturity. The put feature
shortens the effective maturity to the next tender date. Between tender
dates, the price of a put bond generally varies inversely to the movement
of interest rates.
Variable Rate Demand Notes (VRDN) - provide the right, on any business
day, to demand, or put, the security for redemption at face value on either
that day or in seven days. The interest rate is adjusted at the stipulated
daily, weekly, or monthly interval to a rate that reflects current market
conditions. In money market funds, the VRDN's effective maturity is the
longer of the next put date or the interest reset date rather than the final
maturity. In bond funds, the effective maturity is the next put date. Most
VRDNs possess a credit enhancement.
Credit Enhancement (CRE) - adds the financial strength of the provider to
support the underlying obligor's debt service obligations and/or the put
option. The enhancement may be provided by either a high quality bank,
insurance company or other corporation, or a collateral trust. Typically,
the rating agencies evaluate the security based upon the credit standing
of the credit enhancement.
Virginia Bond Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1995
(Unaudited)
Principal Coupon Final Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Fixed Rate Instruments (100.1%)
Virginia (92.9%)
$ 7,500 Augusta County IDA Hospital RB, Series
1991 7.00% 9/01/21(a)$ 8,536
11,000 Chesapeake Bay Bridge and Tunnel
District RB, Series 1991 (CRE) 6.38 7/01/22 11,244
9,000 Chesapeake IDA RB, Series 1993 5.88 3/01/13 8,956
College Building Auth. Educational
Facilities RB,
3,525 Series 1992 6.40 1/01/12 3,683
2,885 Series 1992 6.63 5/01/13 3,018
2,505 Series 1992 6.60 9/01/16 2,614
2,350 Series 1994 5.80 1/01/24 2,357
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/15 2,969
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 4,791
2,250 Emporia GO, Series 1995 5.75 7/15/15 2,254
5,200 Fairfax County Economic Development Auth.
RB, Series 1991B 7.50 6/01/01 5,574
1,500 Fairfax County Redevelopment and Housing
Auth. RB, Series 1989A (CRE) 7.50 11/01/19 1,565
12,000 Fairfax County Water Auth. RB,
Series 1992 5.75 4/01/29 11,619
7,500 Galax IDA Hospital RB, Series 1995 5.75 9/01/20 7,259(c)
6,480 Hopewell Hospital Auth. RB,
Series 1986 8.85 1/01/13 6,660
Housing Development Auth. Commonwealth
Mortgage RB,
3,925 Series 1989B, Subseries B-2 7.63 7/01/17 4,081
5,440 Series 1992A 7.10 1/01/22 5,712
10,000 Series 1992A 7.10 1/01/25 10,501
1,455 Series 1992C 6.40 1/01/15 1,477
1,680 Series 1994D 6.40 7/01/17 1,711
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,081
Housing Development Auth. MFH RB,
55,000 Series 1982A 7.00(b)11/01/17 8,244
7,700 Series 1991F 7.10 5/01/13 8,132
4,220 Isle of Wight County IDA RB, Series 1990 7.38 1/01/10 4,544
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A 6.25 7/01/21 9,249
11,000 Peninsula Ports Auth. RB, Series
1992 (CRE) 7.38 6/01/20 11,695
3,690 Pittsylvania County GO 6.00 7/01/14 3,739
2,500 Prince William County IDA Hospital RB,
Series 1995 6.85 10/01/25 2,662
3,000 Prince William County Water and Sewer
System RB (CRE) 6.00 7/01/29 2,995
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/15 5,031
3,400 Resources Auth. Sewer System RB, Series
1992A 6.00 5/01/22 3,418
12,000 Richmond GO, Series 1991A 6.25 1/15/21 12,138
2,000 Roanoke IDA Hospital RB, Series
1993A (CRE) 5.00 7/01/24 1,725
8,000 Roanoke Valley Resource Auth. RB, Series
1992 5.75 9/01/12 7,764
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,703
1,250 Spotsylvania County GO, Series 1994 6.88 12/01/14 1,352
11,820 Virginia Beach Development Auth.
Hospital RB, Series 1991 6.30 11/01/21 12,059
12,000 West Point IDA Solid Waste Disposal RB,
Series 1994B 6.25 3/01/19 12,063
6,000 Williamsburg IDA RB, Series 1993 5.75 10/01/22 5,445
3,500 Winchester IDA RB, Series 1994 (CRE) 6.75 10/01/19 3,782
5,010 York County IDA RB, Series 1993 5.75 12/01/09 4,591
Guam (3.6%)
1,000 Government Limited Obligation
Infrastructure Improvement RB,
Series 1989A (CRE) 7.10 11/15/09 1,060
8,050 Power Auth. RB, Series 1992A 6.30 10/01/22 7,988
Puerto Rico (3.6%)
Electric Power Auth. RB,
5,025 Series X 5.50 7/01/25 4,588
5,000 Series Z 5.25 7/01/21 4,457(c)
-------
Total fixed rate instruments (cost: $245,470) 253,086
-------
Variable Rate Demand Notes (1.7%)
Virginia
3,100 Henrico County IDA RB, Series 1994 (CRE) 4.80 5/01/24 3,100
1,100 Loudoun County IDA RB, Series 1985 (CRE) 4.60 9/01/15 1,100
-------
Total variable rate demand notes (cost: $4,200) 4,200
-------
Total investments (cost: $249,670) $257,286
========
Portfolio Summary By Industry
Hospitals 17.8%
Single-Family Housing 10.5
Electric Power 8.6
Paper & Forest Products 8.5
General Obligations 7.7
Education 7.3
Multi-Family Housing 6.5
Ports/Wharfs 4.6
Water Utilities 4.6
Toll Roads 4.5
Conglomerate 3.5
Escrowed Securities 3.4
Pollution Control 3.1
Broadcasters 2.2
Railroads 2.0
Retail Stores - General Merchandising 1.8
Sewer 1.4
Retirement Homes 1.2
Water/Sewer 1.2
Other 1.4
-----
Total 101.8%
=====
Virginia Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1995
(Unaudited)
Principal Coupon Final
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Variable Rate Demand Notes (62.3%)
Virginia
$ 4,453 Alexandria IDA RB, Series 1989 (CRE) 4.45% 1/01/09 $ 4,453
2,300 Bedford County IDA RB, Series 1993 (CRE) 4.50 10/01/04 2,300
4,800 Chesterfield County IDA PCRB, Series 1993 4.40 8/01/09 4,800
7,000 Chesterfield County IDA RB, Series
1989(CRE) 4.55 2/01/03 7,000
700 Culpepper IDA RB, Series 1992 (CRE) 4.45 11/01/17 700
1,291 Fairfax County American College of
Radiology RB (CRE) 4.45 2/01/11 1,291
2,800 Fauquier County IDA RB, Series 1994 (CRE) 4.45 12/01/14 2,800
3,400 Hampton Redevelopment and Housing Auth.
MFH RB, Series 1984A (CRE) 4.53 12/01/06 3,400
1,100 Henrico County IDA RB, Series 1986C 4.35 7/15/16 1,100
4,300 Loudoun County IDA RB, Series 1985 (CRE) 4.60 9/01/15 4,300
Newport News Redevelopment and Housing Auth.
MFH RB,
4,700 Series 1984 (CRE) 4.10 9/01/06 4,700
3,265 Series 1990 (CRE) 4.53 3/01/07 3,265
3,700 Peninsula Ports Auth. RB, Series
1984 (CRE) 3.90 11/01/01 3,700
Prince William County IDA RB,
6,300 Series 1988 (CRE) 4.55 6/30/04 6,300
1,031 Series 1989D (CRE) 4.80 10/01/00 1,031
2,500 Richmond Housing and Redevelopment
Auth. RB, Series 1995 (CRE) 4.40 4/01/29 2,500
Richmond IDA RB,
1,460 Series 1987 (CRE) 4.45 12/01/99 1,460
522 Series 1989A (CRE) 4.80 6/01/02 522
1,940 Rockingham County IDA RB, Series 1983A 4.65 10/01/20 1,940
2,300 Saltville IDA RB, Series 1985 (CRE) 4.65 12/01/96 2,300
3,937 Spotsylvania County IDA RB, Series 1990
(CRE) 4.45 10/01/20 3,937
-------
Total variable rate demand notes (cost: $63,799) 63,799
-------
Put Bonds (23.5%)
Virginia
Chesterfield County IDA PCRB,
2,700 Series 1985 3.70 10/01/09 2,700
2,000 Series 1987B 3.65 6/01/17 2,000
2,140 Fairfax County Economic Development
Auth. RN, Series 1986 (CRE) 4.13 9/01/16 2,140
4,000 Fairfax County IDA RB, Series 1993B 3.75 8/15/25 4,000
3,575 Falls Church IDA RB, Series 1985 4.10 5/01/15 3,575
4,000 Housing Development Auth. Commonwealth
Mortgage RB, Series 1995D 3.65 1/01/19 4,000
3,500 Peninsula Ports Auth. RB, Series
1987A (CRE) 3.75 7/01/16 3,500
2,165 Prince William County IDA RB,
Series 1992 (CRE) 3.85 9/01/07 2,165
------
Total put bonds (cost: $24,080) 24,080
------
Fixed Rate Instruments (13.6%)
Virginia
1,100 Fairfax County GO, Series 1989B 6.30 11/01/95 1,102
1,000 Fairfax County Public Improvement RB,
Series 1991A 5.70 4/01/96 1,007
2,190 Higher Education Institute RB,
Series 1991A 7.60 6/01/96 2,237
2,500 Norfolk GO, Series 1995 5.25 6/01/96 2,516
2,000 Public Facilities RB, Series 1993A 4.50 6/01/96 2,010
Public School Auth. Finance RB,
1,000 Series 1991A 7.70 1/01/96 1,008
1,930 Series 1992A 6.00 1/01/96 1,941
2,000 Virginia Beach GO Public Improvement
Bonds, Series 1991C 6.10 8/01/96 2,039
--------
Total fixed rate instruments (cost: $13,860) 13,860
--------
Total investments (cost: $101,739) $101,739
========
Portfolio Summary By Industry
Multi-Family Housing 13.5%
Aerospace/Defense 10.8
General Obligations 10.7
Hotel/Motel 7.8
Hospitals 7.4
Manufacturing - Diversified Industries 6.8
Electric Power 5.7
Community Service 4.4
Single-Family Housing 3.9
Retirement Homes 3.8
Ports/Wharfs 3.4
Finance - Municipal 2.9
Education 2.8
Retail Stores - General Merchandising 2.7
Chemicals 2.3
Paper & Forest Products 2.3
Buildings 2.1
Retail Stores - Food Chains 2.1
Drugs 1.9
Other 2.1
----
Total 99.4%
====
Notes to Portfolios of Investments
(In Thousands)
September 30, 1995
(Unaudited)
General Notes
Market values of securities are determined by procedures and practices
discussed in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the
same as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net
assets.
Portfolio Description Abbreviations
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
RN Revenue Note
Specific Notes
(a) Prerefunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(c) At September 30, 1995, the cost of securities purchased on a delayed
delivery basis for the Virginia Bond Fund was $8,600.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Six-month period ended September 30, 1995
(Unaudited)
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
Net investment income:
Interest income $ 7,761 $ 2,013
------- -------
Expenses:
Management fees 422 174
Transfer agent's fees 97 53
Custodian's fees 35 26
Postage 9 8
Shareholder reporting fees 5 5
Directors' fees 1 1
Audit fees 10 10
Legal fees 4 4
Other 5 3
------- -------
Total expenses before reimbursement 588 284
Expenses reimbursed - (32)
------- -------
Total expenses after reimbursement 588 252
------- -------
Net investment income 7,173 1,761
------- -------
Net realized and unrealized gain on investments:
Net realized gain 124 -
Change in net unrealized appreciation/
depreciation 3,320 -
------- -------
Net realized and unrealized gain 3,444 -
------- -------
Increase in net assets resulting from operations $ 10,617 $ 1,761
======== ========
See accompanying notes to financial statements.
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended September 30, 1995 and Year ended March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
<C> <C> <C> <C>
9/30/95 3/31/95 9/30/95 3/31/95
------- ------- ------ -------
From operations:
Net investment income $ 7,173 $ 13,648 $ 1,761 $ 2,755
Net realized gain (loss) on investments 124 (2,553) - -
Change in net unrealized appreciation/
depreciation of investments 3,320 3,152 - -
------- -------- ------ --------
Increase in net assets resulting from
operations 10,617 14,247 1,761 2,755
------- ------- ------ --------
Distributions to shareholders from:
Net investment income (7,173) (13,648) (1,761) (2,755)
------- ------- ------ -------
From capital share transactions:
Shares sold 19,620 42,301 45,077 93,826
Shares issued for dividends reinvested 5,434 10,435 1,659 2,563
Shares redeemed (14,635) (50,316) (42,438) (90,910)
------- ------- ------- -------
Increase in net assets from
capital share transactions 10,419 2,420 4,298 5,479
------- ------- ------- -------
Net increase in net assets 13,863 3,019 4,298 5,479
Net assets:
Beginning of period 238,920 235,901 98,049 92,570
-------- -------- ------- -------
End of period $252,783 $238,920 $102,347 $98,049
======== ======== ======== =======
Change in shares outstanding:
Shares sold 1,805 4,029 45,077 93,826
Shares issued for dividends reinvested 500 994 1,659 2,563
Shares redeemed (1,346) (4,849) (42,438) (90,910)
-------- ------- ------- -------
Increase in shares outstanding 959 174 4,298 5,479
======== ======= ======= =======
Authorized shares of $.01 par value 35,000 35,000 175,000 175,000
======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
Notes to Financial Statements
(In Thousands)
September 30, 1995
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, is a diversified, open-end management investment company
incorporated under the laws of Maryland consisting of ten separate funds.
The information presented in this semiannual report pertains only to the
Virginia Bond Fund and Virginia Money Market Fund (the Funds).
A. Security valuation - Investments in the Virginia Bond Fund are valued
each business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between quoted
bid and asked prices or the last sale price to price securities when,
in the Service's judgement, these prices are readily available and are
representative of the securities' market values. For many securities,
such prices are not readily available. The Service generally prices these
securities based on methods which include consideration of yields or prices
of municipal securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions. Securities which are not valued by the Service, and all
other assets, are valued in good faith at fair value using methods determined
by the Manager under the general supervision of the Board of Directors.
Securities purchased with maturities of 60 days or less and, pursuant to
Rule 2a-7 of the Securities and Exchange Commission, all securities in the
Virginia Money Market Fund are stated at amortized cost which approximates
market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
and to distribute substantially all of its income to its shareholders.
Therefore, no federal income or excise tax provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased
or sold (trade date). Gain or loss from sales of investment securities
is computed on the identified cost basis. Interest income is recorded
daily on the accrual basis. Premiums and original issue discounts are
amortized over the life of the respective
securities. Market discounts are not amortized. Any ordinary income related
to market discounts is recognized upon disposition of the bonds. The Funds
concentrate their investments in Virginia municipal securities and
therefore may be exposed to more credit risk than portfolios with a broader
geographical diversification.
(2) Line of Credit
The Funds participate with other USAA funds in a joint $150 million
short-term revolving loan agreement (the Agreement) through January 15,
1996 for temporary or emergency purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities. Subject to availability under this Agreement, each Fund may
borrow amounts not to exceed 10% of the value of its total assets. All
borrowings must be repaid before additional investments are made. Borrowings
under this Agreement will bear interest at .125% over the Federal Funds Rate
as published by the Federal Reserve Bank of New York or at .125% over the
London Interbank Offered Rate. The Funds had no borrowings under this
Agreement during the six-month period ended September 30, 1995.
(3) Distributions
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. All net investment income available for distribution
was distributed at September 30, 1995.
Distributions of realized gains from security transactions not offset by
capital losses are generally made in the succeeding fiscal year. At
September 30, 1995, the Virginia Bond Fund had a capital loss carryover of
approximately $2,790 which will expire in or before 2004. It is unlikely
that the Board of Directors of the Company will authorize a distribution of
capital gains realized in the future until the capital loss carryover has
been utilized or expires.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term
securities, for the six-month period ended September 30, 1995 for
the Virginia Bond Fund were $34,612 and $19,074, respectively.
Purchases and sales/maturities of securities for the six-month
period ended September 30, 1995 for the Virginia Money Market Fund
were $103,797 and $99,176, respectively.
Gross unrealized appreciation and depreciation of investments at September
30, 1995 for the Virginia Bond Fund was $8,546 and $930, respectively.
(5) Transactions with Manager
A. Management fees - The investment policy of the Funds and the
management of the Funds' portfolios is carried out by USAA Investment
Management Company (the Manager). Management fees are computed as a
percentage of aggregate average net assets (ANA) of both Funds combined,
which on an annual basis is equal to .50% of the first $50,000, .40% of
that portion over $50,000 but not over $100,000, and .30% of that portion
over $100,000. These fees are allocated on a proportional basis to each
Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each
Fund to .50% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Company. Shareholder accounting service fees
are based on an annual charge per shareholder account plus out-of-pocket
expenses.
C. Underwriting agreement - The Company has an agreement with the Manager
for exclusive underwriting and distribution of the Funds' shares on a
continuing best efforts basis. The agreement provides that the Manager will
receive no fee or other remuneration for such services.
(6) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net Distributions
Year Beginning Investment Unrealized Investment of Realized
Ended of Period Income Gain (Loss) Income Capital Gains
($) ($) ($) ($) ($)
Virginia Bond Fund:
March 31, 1991* 10.00 .32 .28 (.32) -
1992 10.28 .67 .29 (.67) -
1993 10.57 .64 .65 (.64) (.06)
1994 11.16 .62 (.30) (.62) (.15)
1995 10.71 .62 .05 (.62) -
1996** 10.76 .32 .15 (.32) -
Virginia Money Market Fund:
March 31, 1991* 1.00 .02 - (.02) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
1996** 1.00 .02 - (.02) -
<TABLE>
<CAPTION>
Ratio of Net
Ratio of Investment
Net Asset Net Assets Expenses Income
Value at Total at End to Average to Average Portfolio
End of Period Return of Period Net Assets Net Assets Turnover
($) (%) ($000) (%) (%) (%)
Virginia Bond Fund:
<S> <C> <C> <C> <C> <C> <C>
March 31, 1991* 10.28 6.01 58,045 .50(a)(b) 6.83(a)(b) 142.56
1992 10.57 9.61 131,475 .50(a) 6.40(a) 86.77
1993 11.16 12.61 207,302 .50(a) 5.90(a) 91.31
1994 10.71 2.69 235,901 .49 5.44 92.17
1995 10.76 6.61 238,920 .50 5.95 68.53
1996** 10.91 4.39 252,783 .48(b) 5.84(b) 7.86(c)
Virginia Money Market Fund:
March 31, 1991* 1.00 2.38 42,513 .50(a)(b) 5.03(a)(b) -
1992* 1.00 4.09 73,220 .50(a) 3.96(a) -
1993 1.00 2.65 77,263 .50(a) 2.62(a) -
1994 1.00 2.14 92,570 .50(a) 2.12(a) -
1995 1.00 2.91 98,049 .50(a) 2.88(a) -
1996** 1.00 1.75 102,347 .50(a)(b) 3.47(a)(b) -
</TABLE>
Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
Virginia Bond Fund:
March 31, 1991* .99(b) 6.34(b)
1992 .65 6.25
1993 .54 5.86
Virginia Money Market Fund:
March 31, 1991* 1.08(b) 4.45(b)
1992 .74 3.72
1993 .63 2.49
1994 .61 2.01
1995 .56 2.82
1996** .56(b) 3.41(b)
(a) The information contained in this table is based on actual expenses
for the period, after giving effect to reimbursements of expenses by the
Manager. Absent such reimbursements the Funds' ratios would have been:
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Effective September 30, 1995, the portfolio turnover rate has been
calculated excluding short-term variable rate securities, which are those
with put date intervals of less than one year. Had these securities been
excluded for March 31, 1995, the portfolio turnover rate for the Virginia
Bond Fund would have been 27.77%.
* Funds commenced operations October 15, 1990.
** For the six-month period ended September 30, 1995.
Total return assumes reinvestment of all dividend income and
capital gains distributions during the period.
