Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
California Bond Fund 4
California Money Market Fund 8
Shareholder Voting Results 11
Financial Information:
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
California Bond Fund 15
California 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 24
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
California Funds, 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>
Average Annual Total Return*
<CAPTION>
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> <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 -
(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.
</TABLE>
Message from the President
[Photograph of Michael J.C. Roth, CFA, 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
California Bond Fund
OBJECTIVE: Provide California investors with a high level of current
interest income that is exempt from federal and California state income
taxes.
Types of Investments: Invests primarily in long-term investment grade
California tax-exempt securities.
3/31/95 9/30/95
Net Assets $372.9 Million $395.2 Million
Net Asset Value Per Share $10.10 $10.33
Average Annual Total Returns as of 9/30/95
March 31, 1995 to September 30, 1995 5.31%**
1 Year 11.24%
5 Years 8.28%
Since inception on August 1, 1989 7.39%
**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 5.75%*
* 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 peirod of 8/1/89 to 9/30/95, with dividends and
capital gains reinvested. The ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $16,119
USAA California Bond Fund 15,534]
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 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.
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 $.23 to $10.33, or 2.28%, 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 the Lipper's
California Municipal Debt Funds average of 5.23%.(2) For the same period,
the Fund's total return(3) was 5.31%, compared to the California Debt Funds
average of 4.20%.
[A graph is shown here comparing the 12-month dividend yield of the USAA
California Bond Fund and the Lipper California Municipal Debt Funds Average
from 9/30/91 to 9/30/95. The vertical axis shows the yield and the horizontal
axis shows the time period. The values are:
USAA Calif.
Bond Fund 6.53 6.10 5.41 5.84 5.80
Lipper. Calif.
Muni. Debt
Funds Avg. 6.39 6.04 5.35 5.70 5.29]
The Lipper California 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 9/30/91 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
California Bond Fund with a taxable equivalent investment.(4)
To match the California Bond Fund's closing 30-Day SEC yield of 5.75% and:
Assuming a Marginal Federal Tax Rate of:
28% 31% 36% 39.6%
Assuming a California State Tax Rate of:
9.30% 9.30% 10.00% 10.00%
A Fully Taxable Investment Must Pay: 8.80% 9.19% 9.98% 10.58%
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
fundsreceive 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 higher-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. In the past
this disciplined approach has kept us clear of situations like the Orange
County bankruptcy.
The California Economy
The Golden State is on the rebound. Employment, personal income and
nonresidential construction all showed continued improvement. Even
manufacturing employment is now slowly growing as the high-technology
industry is expanding and defense-related jobs are stabilizing. Residential
housing is quite soft but low mortgage rates and recovering employment
should eventually trigger a recovery in this sector.
For three years the legislature has generated a balanced state budget based
on conservative economic assumptions. The state budget appears on track for
this fiscal year. Although structural imbalances remain, I am now more
confident in the credit standing of direct state obligations. I am still very
cautious concerning most counties and municipal lease obligations that rely
on annual appropriations or are subject to abatement.
(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.
[A pie chart is shown here depicting the Portfolio Ratings/Mix as of
September 30, 1995 for the California Bond Fund to be: AAA - 30%,
AA - 22%, A - 24%, BBB - 22% 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 BBB account for .7% of
the Fund's investments.
Investment Review
California Money Market Fund
OBJECTIVE: Provide California investors with a high level of current interest
income that is exempt from federal and California state income taxes, while
preserving capital and maintaining liquidity.
Types of Investments: High quality California 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 $266.8 Million $274.7 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 1.82%**
1 Year 3.53%
5 Years 3.27%
Since inception on August 1, 1989 3.70%
**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 3.79%
[A graph is shown here comparing the 7-day yield of the USAA California
Money Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free):
California 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 California Money Market Fund is 3.72% and the ending value for
the IBC Donoghue's State Specific SB & GP (Tax-Free): California 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):
California 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
California continues its slow recovery from its longest recession since the
Great Depression. The state's economy remains fragile as the ongoing
effects of cutbacks in defense spending, softness in housing construction,
and excess commercial real estate impedes California's participation in a
growing national economy. Deficits which accumulated during California's
1989-1992 recession continued to go unpaid. The state legislature took
dramatic steps to eliminate the deficits by the end of the 1995-96 fiscal
year. If successful, the legislature's efforts will greatly improve the
state's credit quality, leading to increased financial flexibility.
As reported before, no USAA IMCO mutual fund held any security involved in
the Orange County bankruptcy. However, we'll continue to monitor the
county's recovery plan because of the credit implications it has on
municipal debt obligations. Our credit analysts provide continuing research
to avoid situations like Orange County, while still finding value in the
marketplace.
While Orange County and California are taking positive steps to improve
their financial positions, we believe their recoveries will proceed at a
slow pace. As a result, our longer-term holdings in the Fund will be
focused primarily at the local level including cities, schools, and
community college districts.
(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.
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 8/1/89 to 9/30/95,
invested in the USAA California Money Market Fund. The vertical axis
shows the dollar amount and the horizontal axis shows the time period.
The ending value is $12,512.]
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 California Bond
Fund's net assets 22,084,223 1,891,123 1,317,955
10% of the value of the California Money Market
Fund's net assets 115,779,068 27,666,403 8,666,948
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.
California Bond Fund 22,143,162 1,769,899 1,380,240
California Money Market Fund 115,215,942 27,705,349 9,191,128
Proposal to amend the restriction relating to borrowing to allow a Fund to
borrow an amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings) for temporary or
emergency purposes.
California Bond Fund 21,418,997 2,505,324 1,368,980
California Money Market Fund 111,820,706 32,139,277 8,152,437
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.
California Bond Fund 21,509,116 2,425,958 1,358,227
California Money Market Fund 112,625,681 30,443,767 9,042,971
(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)
<TABLE>
<CAPTION>
California
California Money Market
Bond Fund Fund
---------- ------------
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $373,040 and $271,953, respectively) $389,381 $271,953
Cash 301 1,116
Receivables:
Capital shares sold 42 289
Interest 6,210 2,077
------- -------
Total assets 395,934 275,435
------- -------
Liabilities
Capital shares redeemed 40 578
USAA Investment Management Company 104 73
USAA Transfer Agency Company 20 17
Accounts payable and accrued expenses 52 52
Dividends on capital shares 537 57
------- -------
Total liabilities 753 777
------- -------
Net assets applicable to capital shares outstanding $395,181 $274,658
======= =======
Represented by:
Paid-in capital $388,486 $274,658
Accumulated net realized loss on investments (9,646) -
Net unrealized appreciation of investments 16,341 -
------- -------
Net assets applicable to capital shares outstanding $395,181 $274,658
======= =======
Capital shares outstanding 38,272 274,658
======= =======
Net asset value, redemption price, and offering price per $ 10.33 $ 1.00
share ======= =======
See accompanying notes to financial statements.
</TABLE>
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.
California Bond Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------- -------- ------ -------- ------
Fixed Rate Instruments (96.3%)
<C> <S> <C> <C> <C>
California (93.8%)
$ 5,270 Alameda Housing Auth. MFH RB, Series 7.50% 2/20/31 $ 5,442
1989A
10,000 Big Bear Lake Water RB (CRE) 6.38 4/01/22 10,287
10,000 Castaic Union School District GO,
Series 1993B (CRE) 6.25(b) 11/01/19 2,305
7,100 Central Valley Financing Auth. RB 6.10 7/01/13 6,956
7,175 Contra Costa Water District RB,
Series D (CRE) 6.38 10/01/22 7,365
Department of Water Resources RB,
3,000 Series J-2 6.00 12/01/20 2,980
11,000 Series K 6.00 12/01/21 10,913
Educational Facilities Auth. RB,
9,500 Series 1991 (CRE) 7.15 5/01/21(a) 10,877
5,000 Series 1992 6.00 2/15/17 5,022
1,775 Series 1992 6.88 9/01/22 1,866
8,990 Series 1992 6.50 10/01/22 9,255
9,000 Series 1994 (CRE) 6.20 5/01/21 9,055
8,015 Series 1995 6.00 10/01/25 7,798
2,480 Fresno COP 8.50 5/01/16 2,555
Health Facilities Financing Auth. RB,
8,000 Series 1990 7.50 10/01/10 8,845
6,500 Series 1990A (CRE) 7.70 9/01/10 7,183
35,000 Series 1990A 6.50 12/01/20 35,758
11,500 Series 1991 (CRE) 6.75 6/01/21 11,746
3,175 Series 1992A (CRE) 6.38 10/01/22 3,237
2,000 Series 1994 6.50 9/01/14 2,036
5,000 Series 1994A 6.63 7/01/18 5,100
Housing Finance Agency Home Mortgage RB,
1,155 Series 1988F 7.88 8/01/19 1,186
10,645 Series 1991F 6.85 8/01/17 11,134
6,000 Series 1994A 6.55 8/01/26 6,187
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/25 5,550
12,500 Imperial Irrigation District COP (CRE) 6.00 11/01/15 12,441
17,000 Modesto Irrigation District RB,
Series 1992A (CRE) 6.13 9/01/19 17,155
7,575 Mojave Water Agency Improvement District
GO 6.60 9/01/22 7,716
13,315 Pleasanton Joint Powers Financing Auth.
RB, Series 1993A 6.15 9/02/12 13,135
4,500 Sacramento Cogeneration Auth. RB,
Series 1995 6.50 7/01/21 4,536
6,130 Sacramento Municipal Utility District
Electric RB, Series 1987R 6.00 2/01/15 5,986
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/25 7,143
3,330 San Joaquin Hills Transportation RB 7.20(b) 1/01/14 966
10,435 San Joaquin Hills Transportation RB 7.19(b) 1/01/16 2,607
20,000 San Joaquin Hills Transportation RB 7.50(b) 1/01/22 3,296
13,500 San Joaquin Hills Transportation RB 6.75 1/01/32 13,637
40,900 San Joaquin Hills Transportation RB 5.00 1/01/33 32,329
11,320 San Mateo Sewer RB, Series 1992 (CRE) 6.30 8/01/17 11,595
12,455 Southern California Public Power Auth.
RB, Series 1989 (CRE) 6.00 7/01/18 12,122
5,000 Tahoe Truckee Unified School District
GO, Series 1993A (CRE) 6.00 9/01/17 5,022
11,005 Turlock Irrigation District RB,
Series 1992A (CRE) 6.25 1/01/12 11,592
12,000 Univ. of California RB, Series 1991A 6.88 9/01/16(a) 13,775
5,000 Watsonville Insured Hospital RB,
Series 1995A (CRE) 6.35 7/01/24 4,909
Puerto Rico (2.5%)
10,000 Electric Power Auth. RB, Series X 6.13 7/01/21 10,028
-------
Total fixed rate instruments (cost: $364,292) 380,628
-------
Put Bonds (0.5%)
California
1,940 Housing Finance Agency MFH RB,
Series 1985A (CRE) 9.25 2/01/11 1,953
-------
Total put bonds (cost: $1,948) 1,953
-------
Variable Rate Demand Notes (1.7%)
California
100 Fontana COP, Series 1991 (CRE) 4.70 7/01/21 100
3,200 Foothill/Eastern Transportation Corridor
Agency RB, Series 1995D (CRE) 4.25 1/02/35 3,200
400 Richmond Joint Powers Financing Auth. Lease
RB, Series 1994 (CRE) 4.75 9/01/04 400
Statewide Communities Development Auth. COP,
2,700 Series 1992 (CRE) 4.40 12/01/22 2,700
300 Series 1993A (CRE) 4.75 12/01/18 300
100 Victor Elementary School District COP
(CRE) 4.40 5/01/18 100
-------
Total variable rate demand notes (cost: $6,800) 6,800
-------
Total investments (cost: $373,040) $389,381
=======
</TABLE>
Portfolio Summary By Industry
-----------------------------
Electric Power 16.1%
Hospitals 15.2
Toll Roads 14.2
Water Utilities 12.3
Education 8.4
Escrowed Securities 6.2
Multi-Family Housing 5.1
Single-Family Housing 4.7
Nursing Care 4.2
General Obligations 3.8
Special Assessment/Tax/Fee 3.4
Sewer 2.9
Healthcare -- Miscellaneous 1.3
Other .7
----
Total 98.5%
====
California Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------- -------- ------ -------- ------
Variable Rate Demand Notes (51.7%)
<C> <S> <C> <C> <C>
California
$ 5,300 Auburn Union School District COP,
Series 1993 (CRE) 4.50% 12/01/21 $ 5,300
3,100 Azusa MFH RB, Series 1994 (CRE) 4.85 7/15/15 3,100
5,900 Fontana COP, Series 1991 (CRE) 4.70 7/01/21 5,900
100 Foothill/Eastern Transportation
Corridor Agency RB, Series 1995D (CRE) 4.25 1/02/35 100
5,000 Huntington Beach MFH RB, Series 1985A
(CRE) 4.00 2/01/10 5,000
15,000 Kern Community College District COP,
Series 1995 (CRE) 4.50 1/01/25 15,000
7,470 Livermore MFH RB, Series 1992A (CRE) 4.40 12/01/22 7,470
5,000 Loma Linda Water RB, Series 1995 (CRE) 4.50 6/01/25 5,000
1,200 Merced IDA RB, Series 1989 (CRE) 4.45 12/01/97 1,200
4,500 Monrovia Redevelopment Agency COP,
Series 1984 (CRE) 4.00 12/01/14 4,500
Orange County Apartment Development RB,
11,500 Series 1984D (CRE) 4.78 8/01/19 11,500
3,100 Series 1985Z (CRE) 4.50 11/01/07 3,100
19,450 Series 1992B (CRE) 4.90 11/01/05 19,450
4,000 Series 1992D (CRE) 4.30 12/01/06 4,000
2,500 Pollution Control Financing Auth. PCRB,
Series 1985 (CRE) 4.78 12/01/00 2,500
2,645 Porterville Union High School District
COP (CRE) 4.45 5/01/19 2,645
2,600 Richmond Joint Powers Financing Auth.
Lease RB, Series 1994 (CRE) 4.75 9/01/04 2,600
3,190 Riverside County Housing Auth. MFH RB,
Series 1986F (CRE) 4.45 12/01/16 3,190
2,500 San Bernardino County Housing Auth.
MFH RB, Series 1985B (CRE) 5.03 6/01/05 2,500(c)
5,325 San Bernardino IDA RB, Series 1992 (CRE) 4.50 2/01/12 5,325
12,300 San Diego MFH RB, Series 1993A (CRE) 4.65 12/01/15 12,300
1,545 San Jose Financing Auth. Lease RB,
Series 1995B (CRE) 4.35 12/01/25 1,545
7,310 Statewide Communities Development Auth.
Apartment Development RB,
Series 1995D (CRE) 4.75 12/01/22 7,310
Statewide Communities Development Auth. COP,
4,225 Institute for Defense Analysis (CRE) 4.45 11/01/22 4,225
1,300 Series 1992 (CRE) 4.40 12/01/22 1,300
345 Series 1993A (CRE) 4.75 12/01/18 345
5,585 Victor Elementary School District COP
(CRE) 4.40 5/01/18 5,585
-------
Total variable rate demand notes (cost: $141,990) 141,990
-------
Put Bonds (17.0%)
California
13,000 Irvine Assessment District #85-7 CP (CRE) 3.90 9/02/11 13,000
Pollution Control Financing Auth. PCRB,
2,660 Series 1984 4.50 5/15/02 2,664
5,260 Series 1984B 4.25 6/15/05 5,265
4,000 Series 1988D (CRE) 3.60 11/01/08 4,000
9,000 Series 1988E (CRE) 4.15 12/01/08 9,000
12,700 Public Capital Improvement Finance Auth.
RB, Series 1988C (CRE) 3.80 6/01/28 12,700
-------
Total put bonds (cost: $46,629) 46,629
-------
Fixed Rate Instruments (30.3%)
California
3,230 Community College Financing Auth. TRAN,
Series 1995B 5.00 8/30/96 3,244
8,500 Del Mar Race Track Auth. BAN,
Series 1993 (CRE) 3.70 10/19/95 8,500
Department of Water Resources CP Notes,
4,400 Series 1 3.95 10/04/95 4,400
4,818 Series 1 3.95 10/06/95 4,818
2,137 Series 1 3.70 11/07/95 2,137
8,500 Los Angeles County Metropolitian
Transportation Auth. Bonds,
Series 1995A (CRE) 3.75 10/31/95 8,500
5,000 Millbrae Elementary School District TRAN 4.75 7/05/96 5,023
4,000 Pasadena TRAN, Series 1994 4.75 10/27/95 4,002
12,000 Revenue Anticipation Warrants,
Series 1994C (CRE) 5.75 4/25/96 12,069
10,000 San Bernardino County TRAN,
Series 1995-96 (CRE) 4.50 7/05/96 10,040
5,000 San Mateo Union High School District TRAN,
Series 1995 4.75 7/05/96 5,024
10,000 San Ramon Valley Unified School District
TRAN, Series 1994-1995 5.25 3/13/96 10,015
2,500 Santa Margarita Water District RB,
Series 1985 9.50 11/01/11(a) 2,561
3,000 Sonoma County TRAN, Series 1994-1995 4.75 10/10/95 3,001
-------
Total fixed rate instruments (cost: $83,334) 83,334
-------
Total investments (cost: $271,953) $271,953
=======
</TABLE>
Portfolio Summary By Industry
-----------------------------
Multi-Family Housing 24.5%
General Obligations 16.1
Special Assessment/Tax/Fee 8.7
Education 8.5
Water Utilities 6.0
Finance - Municipal 5.6
Electric Power 4.7
Retirement Homes 4.2
Hotel/Motel 3.6
Leisure Time 3.1
Sales Tax Obligations 3.1
Oil - International 2.9
Buildings 2.2
Specialized Services 1.5
Other 4.3
----
Total 99.0%
====
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
BAN Bond Anticipation Note
COP Certificate of Participation
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TRAN Tax Revenue Anticipation Note
Specific Notes
(a) Pre-refunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(c) This security was purchased within the terms of a private placement
memorandum and is subject to a seven day demand feature. Under procedures
adopted by the Board of Directors, the adviser has determined that this
security is liquid. At September 30, 1995, this security represented .9%
of the California Money Market Fund's net assets.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Six-month period ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
California
California Money Market
Bond Fund Fund
---------- ------------
<S> <C> <C>
Net investment income:
Interest income $12,111 $ 5,544
------ ------
Expenses:
Management fees 623 438
Transfer agent's fees 117 99
Custodian's fees 41 47
Postage 11 15
Shareholder reporting fees 5 9
Directors' fees 1 1
Registration fees - 1
Audit fees 14 14
Legal fees 5 5
Other 7 5
------ ------
Total expenses 824 634
------ ------
Net investment income 11,287 4,910
------ ------
Net realized and unrealized gain on investments:
Net realized gain 1,356 -
Change in net unrealized appreciation/depreciation 7,111 -
------ ------
Net realized and unrealized gain 8,467 -
------ ------
Increase in net assets resulting from operations $19,754 $ 4,910
====== ======
See accompanying notes to financial statements.
</TABLE>
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended September 30, 1995 and Year ended March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
California
California Money
Bond Fund Market Fund
---------- -----------
9/30/95 3/31/95 9/30/95 3/31/95
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 11,287 $ 21,989 $ 4,910 $ 7,398
Net realized gain (loss) on investments 1,356 (7,665) - -
Change in net unrealized appreciation/
depreciation of investments 7,111 8,457 - -
------- ------- ------- -------
Increase in net assets resulting from
operations 19,754 22,781 4,910 7,398
------- ------ ------- -------
Distributions to shareholders from:
Net investment income (11,287) (21,989) (4,910) (7,398)
------- ------- ------ -------
From capital share transactions:
Shares sold 33,824 68,957 120,144 274,440
Shares issued for dividends reinvested 8,007 15,794 4,518 6,718
Shares redeemed (27,994) (95,432) (116,768) (261,697)
------- ------- ------- -------
Increase (decrease) in net assets from
capital share transactions 13,837 (10,681) 7,894 19,461
------- ------- ------- -------
Net increase (decrease) in net assets 22,304 (9,889) 7,894 19,461
Net assets:
Beginning of period 372,877 382,766 266,764 247,303
------- ------- ------- -------
End of period $395,181 $372,877 $274,658 $266,764
======= ======= ======= =======
Change in shares outstanding:
Shares sold 3,302 6,982 120,144 274,440
Shares issued for dividends reinvested 781 1,604 4,518 6,718
Shares redeemed (2,730) (9,826) (116,768) (261,697)
------- ------- ------- -------
Increase (decrease) in shares outstanding 1,353 (1,240) 7,894 19,461
======= ======= ======= =======
Authorized shares of $.01 par value 50,000 50,000 425,000 425,000
======= ======= ======= =======
See accompanying notes to financial statements.
</TABLE>
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 California
Bond Fund and California Money Market Fund (the Funds).
A. Security valuation - Investments in the California Bond Fund are
valued each business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between quoted bid
and asked prices or the last sale price to price securities when, in the
Service's 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 California 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
California 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 California Bond Fund had
a capital loss carryover of approximately $9,646 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
California Bond Fund were $60,418 and $53,336, respectively. Purchases and
sales/maturities of securities for the six-month period ended September 30,
1995 for the California Money Market Fund were $413,076 and $398,711,
respectively.
Gross unrealized appreciation and depreciation of investments at September
30, 1995 for the California Bond Fund was $16,432 and $91, 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 $100,000. These fees are allocated on a proportional basis to each
Fund monthly based upon ANA.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Company. Shareholder accounting service fees
are based on an annual charge per shareholder account plus out-of-pocket
expenses.
C. Underwriting agreement - The Company has an agreement with the Manager
for exclusive underwriting and distribution of the Funds' shares on a
continuing best efforts basis. The agreement provides that the Manager will
receive no fee or other remuneration for such services.
(6) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
Net Asset Net Realized Distributions
Fiscal Value at Net and From Net Distributions
Year Beginning Investment Unrealized Investment of Realized
Ended Of Period Income Gain (Loss) Income Capital Gains
($) ($) ($) ($) ($)
California Bond Fund:
March 31, 1991 9.75 .66 .23 (.66) -
1992 9.98 .66 .27 (.66) -
1993 10.25 .62 .62 (.62) (.12)
1994 10.75 .59 (.52) (.59) (.20)
1995 10.03 .59 .07 (.59) -
1996** 10.10 .30 .23 (.30) -
California Money Market Fund:
March 31, 1991 1.00 .05 - (.05) -
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
Net Asset Ratio of Investment
Fiscal Value At Net Assets Expenses Income
Year End Total At End To Average To Average Portfolio
End of Period Return of Period Net Assets Net Assets Turnover
($) (%)* ($000) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
California Bond Fund:
March 31, 1991 9.98 9.46 192,344 .50(a) 6.73(a) 72.67
1992 10.25 9.52 305,834 .48 6.44 50.61
1993 10.75 12.56 386,933 .46 5.94 86.53
1994 10.03 .31 382,766 .44 5.40 102.85
1995 10.10 6.89 372,877 .44 5.98 68.57
1996** 10.33 5.31 395,181 .43(b) 5.85(b) 14.16(c)
California Money Market Fund:
March 31, 1991 1.00 5.44 197,254 .50(a) 5.26(a) -
1992 1.00 4.03 229,328 .50 3.94 -
1993 1.00 2.66 219,097 .50 2.63 -
1994 1.00 2.22 247,303 .49 2.19 -
1995 1.00 2.94 266,764 .47 2.91 -
1996** 1.00 1.82 274,658 .47(b) 3.62(b) -
</TABLE>
(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:
Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
California Bond Fund:
March 31, 1991 .54 6.69
California Money Market Fund:
March 31, 1991 .55 5.21
(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 California
Bond Fund would have been 28.86%.
*Assumes reinvestment of all dividend income and capital gains
distributions during the period.
**For the six-month period ended September 30, 1995.
