Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
New York Bond Fund 4
New York Money Market Fund 8
Financial Information:
Distribution to Shareholders 11
Independent Auditors' Report 12
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
New York Bond Fund 15
New York Money Market Fund 17
Notes to Portfolios of Investments 19
Statements of Operations 20
Statements of Changes in Net Assets 21
Notes to Financial Statements 23
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
New York 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 29 funds by investment objective as of March 31,
1995. If you're interested in more information, please call us at
1-800-531-1087 for a prospectus. Please read the prospectus carefully
before investing.
<TABLE>
Average Annual Total Return**
<CAPTION>
Investment Inception Since 7-Day 30-Day***
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 12.44 9.92 9.01 - - -
Emerging Markets 11/7/94 - - - (12.80) - -
Gold 8/15/84 (4.24) .87 1.51 - - -
Growth 4/5/71 20.03 12.05 11.71 - - -
Growth & Income 6/1/93 12.40 - - 6.96 - -
International 7/11/88 (1.37) 7.67 - 8.47 - -
World Growth 10/1/92 (.78 ) - - 9.20 - -
DIVERSIFIED/BALANCED
Balanced Portfolio 1/11/89 7.99 8.08 - 8.64 - 4.16
Cornerstone 8/15/84 2.18 7.66 11.59 - - -
INCOME - TAXABLE
GNMA 2/1/91 5.45 - - 7.29 - 7.10
Income 3/4/74 5.42 9.18 10.14 - - 7.34
Income Stock 5/4/87 11.41 11.17 - 10.84 - -
Short-Term Bond 6/1/93 3.27 - - 2.88 - 7.68
INCOME - TAX EXEMPT
Long-Term 3/19/82 5.07 7.68 9.13 - - 5.96
Intermediate-Term 3/19/82 6.16 7.58 8.22 - - 5.45
Short-Term 3/19/82 4.51 5.41 5.96 - - 4.58
California Bond* 8/1/89 6.89 7.66 - 7.09 - 5.94
Florida Tax-Free Income* 10/1/93 7.01 - - (1.19) - 5.80
New York Bond* 10/15/90 5.42 - - 8.59 - 5.73
Texas Tax-Free Income* 8/1/94 - - - 5.75 - 5.72
Virginia Bond* 10/15/90 6.61 - - 8.30 - 5.83
MONEY MARKET
Money Market 2/2/81 4.78 4.87 6.11 - 5.80 -
Tax Exempt Money Market 2/6/84 2.98 3.68 4.48 - 3.70 -
Treasury Money Market Trust 2/1/91 4.45 - - 3.91 5.63 -
California Money Market* 8/1/89 2.94 3.45 - 3.70 3.69 -
Florida Tax-Free Money Market* 10/1/93 2.86 - - 2.54 3.61 -
New York Money Market* 10/15/90 2.76 - - 2.94 3.48 -
Texas Tax-Free Money Market* 8/1/94 - - - 2.09 3.63 -
Virginia Money Market* 10/15/90 2.91 - - 3.15 3.60 -
* Shares of the state funds are authorized for sale only to residents of
the states listed above.
** 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.
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 maintain a stable net asset value of $1 per share.
Some tax-exempt income may be subject to state or local taxes or the
federal alternative minimum tax.
Foreign investing is subject to certain risks, which are discussed in
the funds' prospectuses.
***Calculated as prescribed by the Securities and Exchange Commission.
</TABLE>
Message from the President
(Photo of the President and Vice Chairman of the Board , Michael J.C. Roth,
appears here)
*Income Fund
-----------
Average Annual
Total Return
as of 3/31/95
1 Year 5.42%
5 Years 9.18%
10 Years 10.14%
Total return equals income
yield plus share price
change and assumes
reinvestment of all
dividends and capital
gains 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
the original cost.
Recently in Houston, I had a fascinating conversation with a USAA member
and shareholder of our funds. This gentleman is an owner
of the USAA Income Fund, but our conversation is applicable, with some
modification for returns, to any of our longer-term fixed-income funds.
Around 1990, after diligent research, he had invested the bulk of his
retirement funds into the Income Fund. When I met him in Houston, he
said to me, "The Income Fund had a 10-year record of 12% compound returns*,
so I chose it for my retirement fund." (From 1980 to 1990, the Income Fund's
annual compound return was actually 13.03%.)(1)
This gentleman then pulled out a large graph which he had constructed on
several pieces of graph paper carefully taped together. He had drawn a
line which began at the value of his account in 1990, which then
curved upward for 20 years. The upward curve was simply an extrapolation
of 12% returns for the next 20 years. This mathematical exercise, created
by the investor, will show the original value to grow over 9 1/2 times.
But, remember, this is a hypothetical exercise, and as we always tell you,
past performance is not a guarantee of future results.(2) A second line
on the graph plotted the actual value of his account. Through 1993 this
actual value stayed close to the extrapolation, but in 1994 fell below it.
He asked me, "How are you experts going to get me back to the 12% line?"
The first thing I told him was that if he updated his graph at the end
of the first quarter of 1995, he would find that the loss of 1994 had
been recouped.(3) But after that, we had a bit of a problem.
"The bond market can fluctuate, but over the years it has
been a good place to invest. Risks have been rewarded."
I pointed out to him that the period from the early 1980s until 1993
was an unusual one in the bond market. Interest rates declined, with a few
jiggles, from all-time highs to notable lows. That meant, in addition to
all the income bonds produced, their market prices kept rising, and
investors saw total returns that rivaled those of stocks.(4, 5)
We had a great conversation. He smiled and said, "I know all that,
I just want to know how you're going to get me back to my line." I told
him he could not dismiss the market so easily. Over time, bonds may return
their interest rate, with perhaps a bit more for premiums received if they
get called. Investors may enjoy a market run like we had in the 1980s
and early 1990s, but they must not deceive themselves. (5)
1994 was a signal that a unique period in the bond market was over. We
probably won't keep on going at 12% a year. But so far, 1995 has sent
another signal. That is - remember! The bond market can fluctuate, but
over the years it has been a good place to invest.(5)
Risks have been rewarded.
Sincerely,
Michael J.C. Roth
President and
Vice Chairman of the Board
1 Average annual 10-year return at December 31, 1990.
2 This hypothetical exercise does not imply that gain or income
realized in the past will be repeated in the future.
3 Income Fund: One-year total return as of December 31, 1994: -5.21%
Quarter ending March 31, 1995 total return: 5.56%
4 Based on price return data provided by Lehman Brothers, 1993 Bond
Market Annual Book.
5 Source: (copyright)Stocks, Bonds, Bills and Inflation 1995 Yearbook (TM),
Ibbotson Associates, Chicago (Annually updates work by Roger G. Ibbotson
and Rex A. Sinquefield). Used with permission. All rights reserved.
For more complete information about any of the USAA Family of Funds
including charges and expenses, call for a prospectus. Please read it
carefully before investing or sending money.
Investment Review
New York Bond Fund
OBJECTIVE: Provide New York investors with a high level of current
interest income that is exempt from federal income taxes and New York
State and New York City personal income taxes.
Types of Investments: Invests primarily in long-term investment grade
New York tax-exempt securities.
3/31/94 3/31/95
Net Assets $56.9 Million $50.5 Million
Net Asset Value Per Share $10.83 $10.77
Average Annual Total Return as of 3/31/95
1 Year 5.42%
Since inception on October 15, 1990 8.59%
30-Day SEC Yield* on March 31, 1995 5.73%
*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 3/31/95, with dividends
and capital gains reinvested. The ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $14,457
USAA New York Bond Fund 14,501
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.
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
(Photo of the Portfolio Manager, Kenneth E. Willmann, appears here)
Grizzly Bear
The fiscal year which began April 1, 1994, started off with one of the
worst bear markets ever. The standard for bond interest rates, the
active 30-year U.S. Treasury Bond (the Long Bond), rose from 7.09% on
March 31, 1994, to 8.23% on November 7, 1994. The resultant bond price
decline was 12.7%, a very substantial bear market in the Long Bond.
Tax-exempt municipal bonds followed suit. The Bond Buyer 40-Bond Index,
an industry benchmark for long-term municipal bonds, experienced an
interest rate rise from 6.36% on March 31, 1994, to 7.37% on
November 22, 1994. The resultant price decline was 11.7%. The New York
Bond Fund's performance mirrored the index. The net asset value (NAV)
per share declined 9.8% from March 31, 1994, to November 22, 1994.
This was a real grizzly bear market. On the bright side, the 30-day
SEC yield rose from 5.32% to a high of 6.41% during the same time period.
Running of the Bulls
Each year there is a festival in Pamplona, Spain, where bulls are
allowed to run through the main street of the city. The object is to
give to all who choose a chance to prove their bravery by running in
front of the bulls. When interest rates started downward sharply in
November 1994, we were all given the same opportunity. A "bull market"
is investment jargon for a period of rising prices. Bond prices rise
when interest rates decline, and that is what began a few days before
Thanksgiving 1994.
The yield on the Long Bond dropped to 7.51% and the yield on the Bond
Buyer 40-Bond Index dropped to 6.37% by March 31, 1995. The 30-day SEC
yield on the Fund fell to 5.73%.
In January 1995, I began buying bonds which were structurally a bit more
volatile and selling those that were less volatile. For example, we sold
several bonds that had relatively short periods to the next possible
call date and bought those with longer call dates. We also bought bonds
with slightly lower coupons and sold some with higher coupons.
The NAV per share had recovered 10.2% to $10.77 by March 31, 1995,
making up nearly all of its previous decline.
New York Outlook
New York State's broad and diverse economy remained sluggish as
evidenced by 1994 unemployment rates of 6.9% for the state and 8.7% for
New York City, which exceeded the nation's rate of 6.1%. Diverging
from prior administrations, Governor George Pataki is seeking to radically
confront this economic stagnation by simultaneously lowering taxes and, for
the first time in 50 years, shrinking the size of government. Largely
reflecting the controversy surrounding these proposed changes, at the time
of this writing, New York was late with its budget.
The ability of Governor Pataki to get his budget passed and implemented,
combined with an anticipated economic recovery, will be key factors in
determining whether the state can continue the trend of recently improved
financial operations. We will closely monitor these issues going forward.
Of note is the fact that debt levels, while high, remain manageable.
Crystal Ball
What is the general outlook for the near term? There are several
crosscurrents at work. Will the Federal Reserve Board continue to raise
short-term interest rates? What is the effect of the current turmoil in
the foreign exchange markets on the general level of interest rates?
Will the U.S. economy continue to grow or falter? Will inflation heat up
or cool down? Will the new issuance of municipal bonds continue at
relatively low levels? What effects will the shift in political power,
away from federally funded programs to state and local control, have on
all of the above plus state and local finance?
A pie chart is shown here depicting the Portfolio Ratings/Mix as of
March 31, 1995 for the New York Bond to be: AAA - 24%,
AA - 37%, A - 28%, BBB - 9% and Cash Equivalents - 2%.
Searching for answers to these questions is like looking into a crystal
ball, full of swirling images as all the answers and their
interrelationships appear. A picture emerges, though it is not
completely clear. I think the U.S. economy will slow gradually for the
rest of calendar 1995, which should keep inflation from rising. The
Federal Reserve will respond by holding short-term interest rates steady.
Therefore, long-term rates will likely fall in a choppy pattern, causing
bond prices to rise in a similar pattern.
A graph is shown here comparing the 12-month dividend yield of
the USAA New York Bond Fund and the Lipper New York Municipal
Debt Funds Average from 3/31/92 to 3/31/95. The vertical
axis shows the yield and the horizontal axis shows the time period.
The values are:
03/31/92 03/31/93 03/31/94 03/31/95
USAA New York
Bond Fund 6.28 5.61 5.62 5.74
Lipper New York
Muni. Debt
Funds Avg. 6.43 5.71 5.63 5.41
The Lipper New York 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
3/31/92 to 3/31/95.
I will continue to follow a strategy of favoring tax-exempt income over
capital gains while maintaining a high-quality portfolio. For the fiscal
year ended March 31, 1995, the dividend yield(1) on the New York Bond Fund
was 5.7%, well ahead of Lipper's New York State Municipal Debt Funds Average
of 5.4%.(2) I believe such a strategy is appropriate and desirable for
investors who are in upper income tax brackets. It should stand them in
good stead in the scenario outlined above.
( 1 )12-Month Dividend Yield is computed by dividing income dividends
paid during the previous 12 months by the latest month-end net asset
value adjusted for capital gains distributions.
(2 )Lipper Analytical Services is an independent organization that
monitors the performance of mutual 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.
Investment Review
New York Money Market Fund
OBJECTIVE: Provide New York investors with a high level of current
interest income that is exempt from federal income taxes and New York
State and New York City personal income taxes, while preserving capital
and maintaining liquidity.
Types of Investments: High quality New York 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 can maintain
a stable net asset value of $1.00 per share.
3/31/94 3/31/95
Net Assets $24.5 Million $27.5 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Return as of 3/31/95
1 Year 2.76%
Since inception on October 15, 1990 2.94%
7-Day Simple Yield on March 31, 1995 3.48%
A graph is shown here comparing the 7-day yield of the USAA New York
Money Market Fund and the IBC/Donoghue's State Specific SB &
GP (Tax-Free): New York from 3/94 to 3/95. The vertical axis shows
the yield and the horizontal axis shows the time period. The ending
value, on 3/27/95, for the USAA New York Money Market Fund is 3.42% and
the ending value for the IBC Donoghue's State Specific SB & GP (Tax-Free):
California is 3.32%
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): New York Money Funds, an average of all major money market
fund yields.
Message from the Manager
(Photo of Portfolio Manager, Robert R. Pariseau, appears here)
Factors That Affect Performance
Last month, an investor asked me what were the most critical
determinants of money market fund performance. The answer provides
insight into how I manage the New York Money Market Fund. Two factors
typically have the greatest impact on a fund's yield: maturity and
credit risk.
A portfolio manager adjusts the fund's average maturity to benefit from
the current interest rate environment. If rates are falling, I lengthen
the Fund's maturity to lock in high rates. But as rates increased last year,
I kept the portfolio moderately short to reinvest at ever-higher rates.
Since portfolio managers may buy only a limited number of fixed-rate
instruments to comply with the SEC's 90-day limit, they must buy at the
most opportune time to maximize a fund's yield. I expect rates to stabilize
or decline over the coming year, so I plan on extending the Fund's average
maturity from its March 31, 1995 level of 55 days.
Credit risk, the second factor, typically affects the fund's yield in a
more subtle manner. The trick is to buy bonds that have "value"- a
beneficial relationship between credit risk and market return. Our
analysts and I work as a team in an analytical process - independent of
the rating agencies and "the street" - to judge whether the bond is
appropriate for a money market fund. Only after understanding all of the
pertinent credit issues can I accurately make this determination. I
completely avoid low-quality bonds or derivatives. The benefits of
stretching for yield are illusionary, since you cannot be paid enough to
take speculative risks in a money market fund. This cautious process
hasn't hampered our performance.
While past performance is no guarantee of future results, the Fund
ranked 6th among 36 New York money market funds in total return in its
category for the one-year period ending March 31, 1995, according to
IBC/Donoghue's Money Vision.(1)
The Orange County Experience
Although it didn't involve a New York municipality, the Orange County,
California bankruptcy presents vivid examples of our research process
and investment strategy. In the spring of 1994 one of our analysts,
John Bonnell, CFA, visited the Orange County office to discover why the
returns on their investment pool were excessively high. Although he couldn't
determine the exact magnitude of risk, he disapproved the purchase of any
municipality that participated in the Orange County investment pool. His
astute analysis months before the event meant that none of USAA's mutual
funds held any security jeopardized by the bankruptcy.
But the story doesn't end there. After further analysis, we decided that
the market turmoil also presented an opportunity to buy safe, secure
bonds in Orange County. The county and its agencies often function
solely as "conduits" to issue bonds, for example, to finance low-income,
multi-family housing projects. The bond cash flows are entirely
independent of the Orange County office and investment pool. In
addition, an unconditional, irrevocable letter of credit issued by a
top-quality bank absolutely supports the bond's principal, interest, and
the put option. The same penetrating analysis which kept the USAA funds
clear of the tragic Orange County bankruptcy, has been used to buy these
and other types of securities that represent value for our investors.
The New York Economy
New York's economy remained sluggish despite the robust recovery
occurring throughout most of the nation. Governor Pataki is confronting
the status quo by simultaneously cutting taxes and shrinking the size of
government. Because of this radical proposal, New York's budget was
implemented late. We believe that the state's finances will slowly
improve only if the legislature enacts the governor's budget and the
national economy remains healthy. Because of the uncertain political
climate, we favor the purchase of credit-enhanced New York securities,
but may purchase a few select issues based on their own credit.
(1) Source: IBC/Donoghue's Money Vision, a monthly market industry
analysis prepared by IBC USA, Inc. Total return equals income yield plus
share price change and assumes reinvestment of all dividends and capital
gain distributions.
USAA New York Money Market Fund
Avg.
Period Ranking Annual
ending in Total
3/31/95 Category Return
1 Year 6/36 2.76%
3 Years 3/31 2.42%
Since
inception 4/26 2.94%
See page 17 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
3/31/95, invested in the USAA New York Money Market Fund. The
vertical axis shows the dollar amount and the horizontal axis
shows the time period. The ending value is $11,392.
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.
DISTRIBUTION TO SHAREHOLDERS
USAA TAX EXEMPT FUND, INC. completed its fiscal year on March 31, 1995.
Federal law (Internal Revenue Code of 1986, as amended, and the regulations
thereunder) requires each Fund to notify its shareholders after the close of
its taxable year as to what portion of its earnings was exempt from federal
taxation and the dividend distributions which represent long-term capital
gains. The net investment income earned and distributed by each of the Funds
was 100% tax exempt for federal, New York State, and New York City income
tax purposes. There were no long-term capital gain distributions for the
year ended March 31, 1995.
Independent Auditors' Report
The Shareholders and Board of Directors
USAA Tax Exempt Fund, Inc.:
We have audited the accompanying statements of assets and liabilities
and portfolios of investments in securities of the New York Bond and
New York Money Market Funds, separate Funds of USAA Tax Exempt Fund,
Inc., as of March 31, 1995, the related statements of operations for
the year then ended, the statements of changes in net assets for each
of the years in the two-year period then ended, and the financial
highlights information presented in note 6 to the financial statements
for each of the periods in the five-year period then ended. These
financial statements and the financial highlights information are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial
highlights information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights information are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of March 31, 1995, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
information referred to above present fairly, in all material respects,
the financial position of the New York Bond and New York Money Market
Funds, separate Funds of USAA Tax Exempt Fund, Inc., as of March 31,
1995, the results of their operations for the year then ended, the
changes in their net assets for each of the years in the two-year period
then ended, and the financial highlights information for each of the
periods in the five-year period then ended, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 3, 1995
Statements of Assets and Liabilities
(In Thousands)
March 31, 1995
<TABLE>
<CAPTION>
New York
New York Money Market
Bond Fund Fund
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $48,249 and $27,128, respectively) $ 49,643 $ 27,128
Cash 27 183
Receivables:
Capital shares sold 15 170
Interest 991 175
------ -------
Total assets 50,676 27,656
------ -------
Liabilities
Capital shares redeemed 34 72
USAA Investment Management Company (note 5) 57 29
USAA Transfer Agency Company (note 5) 1 2
Accounts payable and accrued expenses 24 23
Dividends on capital shares 53 5
----- -----
Total liabilities 169 131
----- -----
Net assets applicable to capital shares outstanding $ 50,507 $ 27,525
======== =========
Represented by:
Paid-in capital $ 52,512 $ 27,525
Accumulated net realized loss on investments (3,399) -
Net unrealized appreciation of investments 1,394 -
--------- --------
Net assets applicable to capital shares outstanding $ 50,507 $ 27,525
========= =========
Capital shares outstanding 4,690 27,525
========= =========
Net asset value, redemption price, and offering price per share $ 10.77 $ 1.00
========= =========
See accompanying notes to financial statements.
</TABLE>
Categories & Definitions
Portfolios of Investments in Securities
March 31, 1995
This year's Portfolios of Investments in Securities have a new format.
The securities are now divided into three categories - fixed rate
instruments, put bonds, and variable rate demand notes. We hope this
presentation enhances your understanding of the securities held in each
fund.
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.
New York Bond Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1995
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
Fixed Rate Instruments (96.7%)
<C> <S> <C> <C> <C>
New York
Dormitory Auth. RB,
$ 1,750 Series 1990A, (CRE) 7.40% 7/01/15 $ 1,881
2,000 Series 1992, (CRE) 6.50 7/01/19 2,025
2,000 Series 1994 5.90 7/01/17 1,896
2,000 Series 1994 7.35 8/01/29 2,174
2,500 Series 1994B 6.25 5/15/20 2,456
1,650 Environmental Facilities Corp. PCRB,
Series 1990B 7.50 3/15/11 1,786
2,000 Groton Community Health Care Facilities RB,
Series 1994A 7.45 7/15/21 2,178
1,950 Housing Finance Agency MFH RB, Series 1992E 6.75 8/15/25 1,986
2,000 Local Government Assistance Corp. RB,
Series 1992B 6.00 4/01/18 1,942
Medical Care Facilities Finance Agency RB,
1,000 Series 1989B, (CRE) 7.45 2/15/29(a) 1,122
2,000 Series 1992B, (CRE) 6.45 11/01/14 2,052
2,000 Series 1994A 6.50 2/15/34 2,028
2,000 Series 1994A, (CRE) 6.90 8/15/34 2,118
2,350 Series 1995A 6.85 2/15/17 2,354
2,000 Series 1994E 6.50 8/15/24 2,001
6,250 Mortgage Agency RB, Series EE-3 7.75 4/01/16 6,694
3,380 New York City GO, Series 1995B 7.25 8/15/19 3,515
2,500 New York City Housing Development Corp. RB,
Series 1993B 5.85 5/01/26 2,303
1,975 New York City Municipal Water Finance RB,
Series 1992B 6.38 6/15/22 1,997
2,000 Niagara Falls Public Improvement GO,
Series 1994, (CRE) 6.90 3/01/22 2,129
2,275 Thruway Auth. RB, Series 1992A 5.75 1/01/19 2,206
-------
Total fixed rate instruments (cost: $47,449) 48,843
-------
</TABLE>
NEW YORK BOND FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
(IN THOUSANDS)
March 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL SECURITY COUPON FINAL MARKET
AMOUNT RATE MATURITY VALUE
Variable Rate Demand Notes (1.6%)
<C> <S> <C> <C> <C>
New York
$ 200 New York City Housing Development Corp. RB,
Series 1984A, (CRE) 4.60% 12/01/16 $ 200
500 New York City Trust for Cultural Resources RB,
Series 1990B, (CRE) 4.45 12/01/15 500
100 North Hempstead Solid Waste Management Auth.
RB, Series 1991, (CRE) 3.80 2/01/12 100
------
Total variable rate demand notes (cost: $800) 800
------
Total investments (cost: $48,249) $49,643
=======
</TABLE>
Portfolio Summary By Industry
Education 16.3%
Housing - Single/Family 13.3
Nursing Care 12.6
General Obligations 11.2
Hospitals 8.9
Housing - Multi/Family 8.9
Healthcare - Miscellaneous 8.0
Toll Roads 4.4
Water/Sewer 4.0
Sales Tax Obligations 3.8
Water Utilities 3.5
Escrowed Securities 2.2
Community Service 1.0
Resource Recovery .2
------
Total 98.3%
======
New York Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1995
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
Variable Rate Demand Notes (65.5%)
<C> <S> <C> <C> <C>
New York
$ 1,300 Dormitory Auth. RB, Series 1994A, (CRE) 4.00% 7/01/24 $ 1,300
100 Energy Research and Development Auth. PCRB,
Series 1987A, (CRE) 4.45 3/01/27 100
1,355 Geneva IDA RB, Series 1993A, (CRE) 4.00 3/01/08 1,355
800 Glens Falls IDA RB, Series 1985, (CRE) 3.85 8/01/05 800
Job Development Auth. RB,
400 Series 1984D1-D9, (CRE) 3.85 3/01/99 400
565 Series 1985C1-C34,(CRE) 3.80 3/01/00 565
700 Monroe County IDA RB, (CRE) 3.85 12/01/00 700
New York City GO,
515 Series 1994A-5, (CRE) 4.60 8/01/15 515
600 Series 1995B-8, (CRE) 4.05 8/15/24 600
New York City Housing Development Corp. RB,
3,400 Series 1984A, (CRE) 4.60 12/01/16 3,400
1,800 Series 1985A, (CRE) 4.60 12/01/09 1,800
1,300 Series 1995A, (CRE) 4.25 3/15/25 1,300
New York City IDA RB,
1,000 Series 1990, (CRE) 3.90 5/01/20 1,000
1,300 Series 1993, (CRE) 3.90 6/30/23 1,300
700 North Hempstead Solid Waste Management Auth.
RB, Series 1991, (CRE) 3.80 2/01/12 700
1,300 Oswego County IDA PCRB, Series 1992,(CRE) 4.10 12/01/08 1,300
500 Rotterdam IDA RB, Series 1993A, (CRE) 3.95 11/01/09 500
400 Triborough Bridge and Tunnel Auth. RB,
Series 1994, (CRE) 3.80 1/01/24 400
-------
Total variable rate demand notes (cost: $18,035) 18,035
-------
Put Bonds (14.8%)
New York
360 City of Hudson IDA RB, Series 1985,(CRE) 5.20 12/15/00 360
1,200 Dormitory Auth. RB, Series 1989A, (CRE) 3.75 7/01/19 1,200
</TABLE>
NEW YORK MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
(IN THOUSANDS)
March 31, 1995
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
<C> <S> <C> <C> <C>
Energy Research and Development Auth. PCRB,
$ 300 Series 1985A, (CRE) 4.65% 3/15/15 $ 300
1,200 Series 1985A, (CRE) 4.70 3/01/16 1,200
1,000 Series 1985B, (CRE) 4.10 10/15/15 1,000
------
Total put bonds (cost: $4,060) 4,060
------
Fixed Rate Instruments (18.3%)
New York
678 Dormitory Auth. RB, Series 1989A, (CRE) 4.10 4/07/95 678
700 Erie County RAN, Series 1994, (CRE) 4.75 8/15/95 702
1,200 New York City Municipal Water Finance Auth.
CP Notes, Series 3, (CRE) 4.30 7/27/95 1,200
1,200 Suffolk County TAN, Series 1994 II, (CRE) 4.50 9/14/95 1,202
250 Tri-Valley Central School District GO,(CRE) 5.30 6/15/95 251
1,000 West Islip Union Free School District TAN 4.00 6/29/95 1,000
------
Total fixed rate instruments (cost: $5,033)
5,033
------
Total investments (cost: $27,128) $27,128
=======
</TABLE>
Portfolio Summary By Industry
Housing - Multi/Family 23.6%
General Obligations 19.0
Education 13.3
Electric Power 12.0
Buildings 4.7
Nursing Care 4.7
Tobacco 4.7
Hospitals 4.4
Water/Sewer 4.4
Finance - Municipal 2.5
Resource Recovery 2.5
Toll Roads 1.5
Manufacturing - Diversified Industries 1.3
-----
Total 98.6%
======
Notes to Portfolios of Investments
March 31, 1995
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
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RAN Revenue Anticipation Note
RB Revenue Bond
TAN Tax Anticipation Note
Specific Notes
(a) Prerefunded to various dates prior to maturity at the call price.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Year ended March 31, 1995
<TABLE>
<CAPTION>
New York
New York Money Market
Bond Fund Fund
<S> <C> <C>
Net investment income:
Interest income $3,265 $867
-------- ------
Expenses (note 5):
Management fees 239 124
Transfer agent's fees 51 27
Custodian's fees 39 38
Postage 4 5
Shareholder reporting fees 3 3
Directors' fees 2 2
Registration fees 1 1
Audit fees 18 18
Legal fees 6 6
Other 5 5
-------- -----
Total expenses before reimbursement 368 229
Expenses reimbursed (110) (95)
-------- ------
Total expenses after reimbursement 258 134
-------- ------
Net investment income 3,007 733
-------- ------
Net realized and unrealized gain (loss)
on investments (note 4):
Net realized loss (3,353) -
Change in net unrealized appreciation/depreciation 2,716 -
-------- -------
Net realized and unrealized loss (637) -
-------- -------
Increase in net assets resulting from operations $ 2,370 $ 733
========= ========
See accompanying notes to financial statements.
</TABLE>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
<TABLE>
<CAPTION>
New York
New York Money Market
Bond Fund Fund
--------- ------------
1995 1994 1995 1994
----- ----- ---- -----
<S> <C> <C> <C> <C>
From operations:
Net investment income $3,007 $3,026 $ 733 $ 388
Net realized gain (loss) on investments (3,353) 1,373 - -
Change in net unrealized appreciation/
depreciation of investments 2,716 (4,368) - -
------- ------- ------ -------
Increase in net assets resulting from
operations 2,370 31 733 388
------- ------- ------ -------
Distributions to shareholders from:
Net investment income (note 3) (3,007) (3,026) (733) (388)
------- -------- ------ ------
Net realized gains (note 3) - (1,434) - -
------- -------- ----- ------
From capital share transactions:
Shares sold 16,488 24,919 31,532 27,133
Shares issued for dividends reinvested 2,357 3,648 691 364
Shares redeemed (24,613) (16,151) (29,211) (22,412)
-------- -------- -------- --------
Increase (decrease) in net assets from
capital share transactions (5,768) 12,416 3,012 5,085
-------- -------- -------- -------
Net increase (decrease) in net assets (6,405) 7,987 3,012 5,085
Net assets:
Beginning of period 56,912 48,925 24,513 19,428
------- ------- -------- --------
End of period $50,507 $56,912 $27,525 $24,513
======= ======= ========= =========
Change in shares outstanding:
Shares sold 1,569 2,120 31,532 27,133
Shares issued for dividends reinvested 223 312 691 364
Shares redeemed (2,358) (1,387) (29,211) (22,412)
------- ------- -------- ---------
Increase (decrease) in shares outstanding (566) 1,045 3,012 5,085
======= ======= ======== =========
Authorized shares of $.01 par value 25,000 25,000 100,000 100,000
======= ======= ======== =========
See accompanying notes to financial statements.
</TABLE>
(This page left blank intentionally)
Notes to Financial Statements
(In Thousands)
March 31, 1995
(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 annual report pertains only to the New
York Bond Fund and New York Money Market Fund (the Funds).
A. Security valuation - Investments in the New York 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 New York 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 New York 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, and the interest paid on such borrowings will reduce income.
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 year ended March 31, 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 March 31, 1995.
Distributions of realized gains from security transactions not offset by
capital losses are generally made in the succeeding fiscal year. At
March 31, 1995, the New York Bond Fund had a capital loss carryover of
approximately $3,399 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 year ended March 31, 1995, for the New York Bond
Fund were $72,948 and $81,104, respectively. Purchases and sales/maturities
of securities for the year ended March 31, 1995, for the New York Money
Market Fund were $69,005 and $65,563, respectively.
Gross unrealized appreciation and depreciation of investments at March
31, 1995, for the New York Bond Fund was $1,704 and $310, 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 $100,000. These fees are allocated on a proportional basis
to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each
Fund to .50% of its annual average net assets. This limitation may be
rescinded at any time and in the event of rescission the terms of the
advisory agreement would govern.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Company. Shareholder accounting service
fees are based on an annual charge per shareholder account plus out-of-
pocket expenes.
C. Underwriting agreement - The Company has an agreement with the
Manager for exclusive underwriting and distribution of the Funds' shares
on a continuing best efforts basis. The agreement provides that the
Manager will receive no fee or other remuneration for such services.
Notes to Financial Statements (continued)
March 31, 1995
<TABLE>
(6) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
<CAPTION>
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net
Year Beginning Investment Unrealized Investment
Ended of Period Income Gain (Loss) Income
($) ($) ($) ($)
<S> <C> <C> <C> <C>
New York Bond Fund:
March 31,
1991* 10.00 .32 .50 (.32)
1992 10.50 .69 .44 (.69)
1993 10.94 .65 .80 (.65)
1994 11.62 .62 (.50) (.62)
1995 10.83 .62 (.06) (.62)
New York Money Market Fund:
March 31,
1991* 1.00 .02 - (.02)
1992 1.00 .04 - (.04)
1993 1.00 .03 - (.03)
1994 1.00 .02 - (.02)
1995 1.00 .03 - (.03)
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Net Asset Ratio of Investment
Fiscal Distributions Value at Net Assets Expenses Income
Year of Realized End Total at End to Average to Average Portfolio
Ended Capital Gains of Period Return of Period Net Assets Net Assets Turnover
($) ($) (%) ($000) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
NEW YORK BOND FUND:
March 31,
1991* - 10.50 8.22 11,635 .50(a)(b) 6.73(a)(b) 128.04
1992 - 10.94 11.00 28,022 .50(b) 6.32(b) 110.77
1993 (.12) 11.62 13.74 48,925 .50(b) 5.79(b) 107.12
1994 (.29) 10.83 .68 56,912 .50(b) 5.24(b) 124.40
1995 - 10.77 5.42 50,507 .50(b) 5.83(b) 142.19
NEW YORK MONEY MARKET FUND:
March 31,
1991* - 1.00 2.23 12,684 .50(a)(b) 4.75(a)(b) -
1992 - 1.00 3.72 16,788 .50(b) 3.61(b) -
1993 - 1.00 2.51 19,428 .50(b) 2.46(b) -
1994 - 1.00 2.00 24,513 .50(b) 1.98(b) -
1995 - 1.00 2.76 27,525 .50(b) 2.74(b) -
(a) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(b) The information contained in this table is based on actual expenses
for the period, after giving effect to reimbursements of expenses by the
Manager. Absent such reimbursements the Funds' ratios would have been:
</TABLE>
Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
New York Bond Fund:
March 31,
1991* 1.73(a) 5.50(a)
1992 1.07 5.75
1993 .80 5.49
1994 .69 5.05
1995 .71 5.62
New York Money Market Fund:
March 31,
1991* 1.65(a) 3.60(a)
1992 1.26 2.86
1993 1.06 1.90
1994 .98 1.50
1995 .85 2.39
*Funds commenced operations October 15, 1990.
(This page left blank intentionally)
