Table of Contents
-----------------
USAA Family of Funds 1
Message from the President 2
Investment Review:
California Bond Fund 4
California Money Market Fund 8
Financial Information:
Independent Auditors' Report 12
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 25
Important Information:
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are now "streamlined."
One copy of each report will be sent to each address, instead of our previous
practice of sending one report to every registered owner. For many
shareholders and their families, this eliminates duplicate copies, saving
paper and postage costs to the Funds.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report
per registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who
have received a copy of the currently effective prospectus of the USAA
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 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>
<CAPTION>
Average Annual Total Return**
Investment Inception Since 7-Day 30-Day
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC***
Capital Appreciation % % % % % %
<S> <C> <C> <C> <C> <C> <C> <C>
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 -
</TABLE>
* 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.
MESSAGE FROM THE PRESIDENT
[Shown is a picture of the President, Michael J.C. Roth]
*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
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.
3/31/94 3/31/95
Net Assets $382.8 Million $372.9 Million
Net Asset Value Per Share $10.03 $10.10
Average Annual Total Return as of 3/31/95
1 Year 6.89%
5 Years 7.66%
Since inception on August 1, 1989 7.09%
30-Day SEC Yield* on March 31, 1995 5.94%
* 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 8/1/89 to 3/31/95, with dividends
and capital gains reinvested. The ending values for the items graphed are:
Lehman Brothers Municipal Bond Index $15,301
USAA California Bond Fund 14,751]
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
[Shown is a picture of the Portfolio Manager, David G. Miller]
No Auld Lang Synes
There were certainly no teary good-byes to the bond market in 1994. This
past year was brutal, as investors saw their Fund suffer through market
shocks including interest rate hikes by the Federal Reserve Board,
derivative-induced bankruptcies, and the peso devaluation.
For the most part, rates increased and prices declined
on bonds throughout the year, with a slight price recovery in December.
However, with the new year, the bond market seems less worried about
another series of rate increases. Despite the weaker dollar, the market
has staged a remarkable recovery.
The Orange County bankruptcy had a pervasive impact, causing all
California bonds to suffer price declines, simply by association. We
were fortunate to have been spared the full price impact, due to an
insightful investment decision to avoid all direct obligations from
Orange County. We were particularly pleased with this investment
analysis, as discussed in a letter sent out in December 1994 by the
president of IMCO.
By December 31, 1994, the Fund had suffered a total return loss of
9.32%. However, as of this writing, the Fund has recovered all of the
1994 decline with a calendar year-to-date total return of 9.55% at
March 31, 1995.
Investment Philosophy
The California Bond Fund is managed as a long-term bond fund. Although
longer-term bonds tend to have greater price volatility than shorter
bonds, they have historically provided higher income and higher total
return. In addition, because of the nature of bonds - you buy it, it
pays interest for the term of the bond, then you get your money back -
we see the primary value of a bond being the level of interest income it
provides.
These two observations form the basis for our income-oriented investment
philosophy in this Fund. Our focus on maintaining a high level of income
improves the prospects for dependable and solid long-term total returns.
Managing for stable income does not mean we ignore price movement. However,
this income philosophy does avoid the distractions of chasing an ever-
changing market price, which adds inappropriate risk.
[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 3/31/90 to 3/31/95. The vertical axis shows the yield and the
horizontal axis shows the time period. The values are:
03/31/91 03/31/92 03/31/93 03/31/94 03/31/95
USAA California
Bond Fund 6.63 6.40 5.77 5.80 5.83
Lipper California
Municipal Debt
Funds Average 6.58 6.35 5.74 5.72 5.48]
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 3/31/91 to 3/31/95.
Although the Fund's track record is somewhat brief, this philosophy has
allowed us to consistently provide above-average income levels while
still maintaining total returns that, thus far in 1995, place us solidly
in the upper half of our peer class.(1)
Adjustment in Strategy
As we have explained in previous reports, we do not try to predict the
level or direction of interest rates. It is a risky strategy, with debatable
benefit in the tax-free markets, that invites unstable income levels while
exposing the portfolio to undue volatility. Instead, we prefer to seek out
the best relative values in the current market environment consistent with
our long-term income orientation.
While previously we had concentrated our buying in the 15- to 20-year
maturities, recently we have decided to extend our average maturity and
take advantage of the longer-term higher yields. We view the market as
more receptive to the Federal Reserve's actions to manage a "soft
landing" and keep inflation in check. This extension of the average
maturity has been a major factor in the strong performance of the Fund
so far this year.
As of this writing, we are maintaining this approach.
Outlook
Investor interest in the California Bond Fund has significantly improved
since December 31, 1994, as has the general demand for California bonds.
For whatever reasons - the state tax benefits or a renewed financial
comfort of buying close to home - strengthening investor confidence and
the reduced supply of California bonds should benefit our Fund. The supply
of new California bonds decreased nearly 32% last year, with this year's
first quarter new issuance off another 60% from last year.
(1) Source: Lipper Analytical Services, an independent organization that
monitors the performance of mutual funds. Total return equals income
yield plus share price change and assumes reinvestment of all dividends
and capital gains distributions. 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.
Total return Total return Total return 12-month
with ranking with ranking with ranking dividend
Data as of 3/31/95: Year-to-date 1 year 5 year (cumulative) yield
USAA California
Bond Fund 9.55% 9/97 6.89% 15/83 44.63% 26/44 5.8%
Lipper California
Municipal Debt
Funds Average 7.73% 5.94% 44.09% 5.5%
See page 15 for a complete listing of the Portfolio of Investments in
Securities.
Note: Income may be subject to federal, state or local taxes, or the
alternative minimum tax.
Portfolio Ratings/Mix
March 31, 1995
[A pie chart is shown here depicting the Portfolio Ratings/Mix as of
March 31, 1995 for the California Bond Fund to be:
AAA - 36%, AA - 24%, A - 18%, BBB - 21% and Cash Equivalents - 1%.]
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 can maintain
a stable net asset value of $1.00 per share.
3/31/94 3/31/95
Net Assets $247.3 Million $266.8 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Return as of 3/31/95
1 Year 2.94%
5 Years 3.45%
Since inception on August 1, 1989 3.70%
7-Day Simple Yield on March 31, 1995 3.69%
[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 3/94 to 3/95. The vertical axis shows the yield and the
horizonal axis shows the time period. The ending value, on 3/27/95, for
the USAA California Money Market Fund is 3.78% and the ending value for the
IBC/Donoghue's State Specific SB & GP (Tax-Free): California is 3.35%.]
Data represents the last Monday of each month.
* Ending Date 3/27/95
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
[Shown is a picture of the Portfolio Manager, Robert R. Pariseau]
The Orange County Experience
Orange County, rated AA at the time of its bankruptcy, is a vivid reminder
of the critical need for independent credit analysis. Although about 25
major mutual fund companies chose to bail out their money market funds, the
USAA California Money Market Fund held no securities jeopardized by the
bankruptcy, thanks to our investment process and our analyst, John Bonnell,
CFA.
In the spring of 1994, John visited the Orange County office to discover
why the returns on their investment pool were so high. John knew that all
school districts and many cities invested in the pool and that eventually a
USAA mutual fund might consider buying a bond issued by a county
municipality. Although he couldn't determine the exact magnitude of risk in
his judgment, the extensive use of speculative derivatives and financial
leverage created a very risky investment. John disapproved the purchase of
any municipality that participated in the Orange County investment pool.
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 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 and a higher
degree of safety for our investors.
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 USAA California 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 51 days.
The second factor, credit risk, 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.
[A graph is here showing the growth of $10,000, from 8/1/89 to 3/31/95,
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 $12,288.]
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.
While past performance is no guarantee of future results, the Fund ranked
6th among 43 California 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 California Economy
After several very rough years, there is finally some good news concerning
one of the world's largest economies. Unemployment has declined to a five-year
low and manufacturing employment has begun to grow modestly. Personal income
and property values have bottomed out and are slowly improving. Despite all
of this good economic news, the government has made only limited strides to
rectify structural budget problems. We will continue to closely monitor the
state's financial policies.
(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 California Money Market Fund
Period Ending Ranking Average Annual
3/31/95 in category Total Return
1 Year 6/43 2.94%
3 Years 5/39 2.61%
5 Years 6/28 3.45%
See page 18 for a complete listing of the Portfolio of Investments in
Securities.
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 California Bond and
California 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 years 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 California Bond and California 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
years 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
California
California Money Market
Bond Fund Fund
---------- ------------
Assets
Investments in securities, at market value
(identified cost of $360,472 and $257,819,
respectively) $369,702 $257,819
Cash 96 914
Receivables:
Capital shares sold 37 1,680
Interest 6,296 2,217
Securities sold - 5,375
------- -------
Total assets 376,131 268,005
------- -------
Liabilities
Securities purchased 2,506 -
Capital shares redeemed 66 1,027
USAA Investment Management Company (note 5) 102 72
USAA Transfer Agency Company (note 5) 10 14
Accounts payable and accrued expenses 53 53
Dividends on capital shares 517 75
------- -------
Total liabilities 3,254 1,241
------- -------
Net assets applicable to
capital shares outstanding $372,877 $266,764
======== ========
Represented by:
Paid-in capital $374,649 $266,764
Accumulated net realized loss on investments (11,002) -
Net unrealized appreciation of investments 9,230 -
-------- --------
Net assets applicable to
capital shares outstanding $372,877 $266,764
======== ========
Capital shares outstanding 36,919 266,764
======== ========
Net asset value, redemption price, and
offering price per share $ 10.10 $ 1.00
======== ========
See accompanying notes to financial statements.
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.
California Bond Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
Fixed Rate Instruments (97.8%)
California
$ 5,285 Alameda Housing Auth. MFH RB, Series A 7.50% 2/20/31 $ 5,472
4,200 Benicia Unified School District GO,
Series 1994C, (CRE) 6.45 6/01/19 4,339
14,000 Big Bear Lake Water RB, (CRE) 6.38 4/01/22 14,253
10,000 Castaic Union School District GO,
Series 1993B, (CRE) 6.25(b) 11/01/19 2,210
7,175 Contra Costa Water District RB,
Series D, (CRE) 6.38 10/01/22 7,310
Department of Water Resources RB,
3,000 Series J-2 6.00 12/01/20 2,912
11,000 Series K 6.00 12/01/21 10,672
Educational Facilities Auth. RB,
9,500 Series 1991, (CRE) 7.15 5/01/21(a) 10,645
1,775 Series 1992 6.88 9/01/22 1,839
8,990 Series 1992 6.50 10/01/22 9,110
9,000 Series 1994, (CRE) 6.20 5/01/21 8,851
2,525 Fresno COP 8.50 5/01/16 2,563
Health Facilities Financing Auth. RB,
8,000 Series 1990 7.50 10/01/10 8,693
6,500 Series 1990A, (CRE) 7.70 9/01/10 7,010
35,000 Series 1990A 6.50 12/01/20 35,268
11,500 Series 1991, (CRE) 6.75 6/01/21 11,620
3,175 Series 1992A, (CRE) 6.38 10/01/22 3,212
2,000 Series 1994 6.50 9/01/14 1,919
5,000 Series 1994A 6.63 7/01/18 4,965
Housing Finance Agency Home Mortgage RB,
1,215 Series 1988F 7.88 8/01/19 1,261
10,645 Series 1991F 6.85 8/01/17 10,921
6,000 Series 1994A 6.55 8/01/26 6,028
17,000 Imperial Irrigation District COP, (CRE) 6.00 11/01/15 16,880
Kings River Conservation District RB,
6,830 Series D 6.38 1/01/12 7,024
4,495 Series D 6.00 1/01/17 4,489
17,000 Modesto Irrigation Disrict RB,
Series 1992A, (CRE) 6.13 9/01/19 17,017
California Bond Fund
Portfolio of Investments in Securities (continued)
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
$ 6,575 Mojave Water Agency Improvement
District GO 6.60% 9/01/22 $ 6,541
10,170 Pleasanton Joint Powers Financing Auth. RB,
Series A 6.15 9/02/12 9,874
6,130 Sacramento Municipal Utility District
Electric RB, Series 1987R 6.00 2/01/15 5,817
2,500 San Diego MFH RB, Series 1995A 6.45 5/01/25 2,480(c)
5,000 San Diego Mortgage RB, Series 1993B 5.80 9/01/15 4,698
3,330 San Joaquin Hills Transportation RB 7.20(b) 1/01/14 882
20,000 San Joaquin Hills Transportation RB 7.50(b) 1/01/22 2,926
10,000 San Joaquin Hills Transportation RB 7.60(b) 1/01/26 1,098
13,500 San Joaquin Hills Transportation RB 6.75 1/01/32 12,934
40,900 San Joaquin Hills Transportation RB 5.00 1/01/33 29,998
11,320 San Mateo Sewer RB, Series 1992, (CRE) 6.30 8/01/17 11,510
Southern California Public Power Auth. RB,
8,570 Series 1989 6.00 7/01/18(a) 8,960
12,455 Series 1989, (CRE) 6.00 7/01/18 12,045
5,000 Tahoe Truckee Unified School District GO,
Series 1993A, (CRE) 6.00 9/01/17 4,975
11,005 Turlock Irrigation District RB,
Series 1992A, (CRE) 6.25 1/01/12 11,398
12,000 Univ. of California RB, Series 1991A 6.88 9/01/16(a) 13,424
9,300 Valley Health Systems COP 6.88 5/15/23 8,663
-------
Total fixed rate instruments (cost: $355,484) 364,706
-------
Put Bonds (0.5%)
California
1,975 Housing Finance Agency MFH RB,
Series 1985A, (CRE) 9.25 2/01/11 1,996
-------
Total put bonds (cost: $1,988) 1,996
-------
California Bond Fund
Portfolio of Investments in Securities (continued)
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
Variable Rate Demand Notes (0.8%)
California
$ 500 Livermore MFH RB, Series 1992A, (CRE) 4.35% 12/01/22 $ 500
1,600 Richmond Joint Powers Financing Auth. RB,
Series 1994, (CRE) 4.60 9/01/04 1,600
900 Statewide Communities Development Auth. COP,
Series 1992, (CRE) 4.20 12/01/22 900
-------
Total variable rate demand notes (cost: $3,000) 3,000
-------
Total investments (cost: $360,472) $369,702
=======
Portfolio Summary By Industry
-----------------------------
Hospitals 16.8%
Electric Power 15.5
Water Utilities 14.0
Toll Roads 12.8
Escrowed Securities 8.9
Education 5.3
Housing - Single/Family 4.9
General Obligations 4.8
Housing - Multi/Family 4.1
Nursing Care 3.9
Sewer 3.1
Special Assessment/Tax/Fee 2.6
Healthcare - Miscellaneous 1.3
Community Service .7
Ports/Wharfs .4
-----
Total 99.1%
=====
California Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
Variable Rate Demand Notes (57.3%)
California
$ 3,500 Auburn Union School District COP,
Series 1993, (CRE) 4.15% 12/01/21 $ 3,500
12,505 Fontana COP, Series 1991, (CRE) 4.20 7/01/21 12,505
15,000 Kern Community College District COP,
Series 1995, (CRE) 4.45 1/01/25 15,000
1,800 Livermore MFH RB, Series 1992A, (CRE) 4.35 12/01/22 1,800
1,200 Merced IDA RB, Series 1989, (CRE) 4.30 12/01/97 1,200
4,500 Monrovia Redevelopment Agency COP,
Series 1984, (CRE) 4.10 12/01/14 4,500
Orange County Apartment Development RB,
11,500 Series 1984, Issue D, (CRE) 4.75 8/01/19 11,500
12,100 Series 1985Z, (CRE) 4.35 11/01/07 12,100
7,000 Series 1992, Issue D, (CRE) 4.55 12/01/06 7,000
19,450 Series 1992B, (CRE) 4.70 11/01/05 19,450
Palm Springs Community Redevelopment
Agency COP,
1,000 Project IX, (CRE) 4.10 12/01/14 1,000
1,700 Project V, (CRE) 4.10 12/01/14 1,700
3,700 Project VIII, (CRE) 4.10 12/01/14 3,700
800 Project X, (CRE) 4.10 12/01/14 800
2,500 Pollution Control Financing Auth. RB,
Series 1985, (CRE) 4.50 12/01/00 2,500
2,645 Porterville Union High School
District COP, (CRE) 4.15 5/01/19 2,645
1,700 Richmond Joint Powers Financing Auth. RB,
Series 1994, (CRE) 4.60 9/01/04 1,700
3,025 Riverside County Housing Auth. MFH RB,
Series 1986F, (CRE) 4.40 12/01/16 3,025
2,500 San Bernardino County Housing Auth. MFH RB,
Series 1985B, (CRE) 4.75 6/01/05 2,500(d)
5,325 San Bernardino IDA RB, Series 1992,
(CRE) 4.35 2/01/12 5,325
20,000 San Diego MFH RB, Series 1993A, (CRE) 4.50 12/01/15 20,000
Statewide Communities Development Auth. COP,
4,225 Institute for Defense Analysis, (CRE) 4.30 11/01/22 4,225
8,675 Series 1992, (CRE) 4.20 12/01/22 8,675
California Money Market Fund
Portfolio of Investments in Securities (continued)
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
$ 800 Torrance Hospital RB, Series 1992,
(CRE) 4.15% 2/01/22 $ 800
5,685 Victor Elementary School District
COP, (CRE) 4.10 5/01/18 5,685
-------
Total variable rate demand notes (cost: $152,835) 152,835
-------
Put Bonds (13.3%)
California
10,000 Irvine Assessment District #85-7 CP,
(CRE) 4.15 9/02/11 10,000
Pollution Control Financing Auth. RB,
3,900 Series 1984B, (CRE) 3.70 6/15/05 3,900
9,000 Series 1988E, (CRE) 4.10 12/01/08 9,000
12,700 Public Capital Improvement Finance Auth. RB,
Series 1988C, (CRE) 4.30 6/01/28 12,700
-------
Total put bonds (cost: $35,600) 35,600
-------
Fixed Rate Instruments (26.0%)
California
3,000 Berkeley TRAN, Series 1994 4.25 7/11/95 3,001
8,500 Del Mar Race Track Auth. BAN, (CRE) 4.00 5/09/95 8,500
6,000 Los Angeles County Educational Agencies
TRAN, Series 1994-1995A 4.50 7/06/95 6,011
8,500 Los Angeles County Mass Transit Auth. RB,
Series A, (CRE) 4.20 4/27/95 8,500
4,000 Pasadena TRAN, Series 1994 4.75 10/27/95 4,013
4,000 Revenue Anticipation Warrants,
Series 1994C, (CRE) 5.75 4/25/96 4,045
6,000 San Diego Unified School District TRAN,
Series 1994-1995A 4.25 6/30/95 6,009
4,635 San Luis Coastal Unified School District
TRAN, Series 1994 4.75 7/26/95 4,644
3,000 San Luis Obispo County TRAN,
Series 1994-1995 4.50 7/18/95 3,007
10,000 San Ramon Valley Unified School District
TRAN, Series 1994-1995 5.25 3/13/96 10,032
5,600 Simi Valley Unified School District TRAN,
Series 1994 4.75 9/21/95 5,609
California Money Market Fund
Portfolio of Investments in Securities (continued)
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
$ 3,000 Sonoma County Junior College District TRAN,
Series 1994 4.50% 6/30/95 $ 3,004
3,000 Sonoma County TRAN, Series 1994-1995 4.75 10/10/95 3,009
-------
Total fixed rate instruments (cost: $69,384) 69,384
-------
Total investments (cost: $257,819) $257,819
========
Portfolio Summary By Industry
-----------------------------
Housing - Multi/Family 24.7%
General Obligations 17.4
Finance - Municipal 8.0
Special Assessment/Tax/Fee 7.2
Hotel - Motel 6.4
Education 5.6
Buildings 4.7
Retirement Homes 4.3
Electric Power 3.4
Leisure Time 3.2
Nursing Care 3.2
Sales Tax Obligations 3.2
Specialized Services 1.6
Oil - International 1.5
Pollution Control .9
Ports/Wharfs .6
Retail Stores - General Merchandising .4
Hospitals .3
----
Total 96.6%
====
Notes to Portfolios of Investments
(In Thousands)
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
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
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) At March 31, 1995, the cost of securities purchased on a delayed
delivery basis for the California Bond Fund was $2,506.
(d) 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 March 31, 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)
Year ended March 31, 1995
California
California Money Market
Bond Fund Fund
---------- ------------
Net investment income:
Interest income $ 23,611 $ 8,589
Expenses (note 5):
Management fees 1,192 823
Transfer agent's fees 264 181
Custodian's fees 83 91
Postage 23 30
Shareholder reporting fees 10 19
Directors' fees 2 2
Registration fees 1 1
Audit fees 30 30
Legal fees 4 4
Other 13 10
-------- --------
Total expenses 1,622 1,191
-------- --------
Net investment income 21,989 7,398
-------- --------
Net realized and unrealized gain (loss)
on investments (note 4):
Net realized loss (7,665) -
Change in net unrealized appreciation/depreciation 8,457 -
-------- --------
Net realized and unrealized gain 792 -
-------- --------
Increase in net assets resulting from operations $ 22,781 $ 7,398
======== ========
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
California
California Money
Bond Fund Market Fund
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 21,989 $ 22,485 $ 7,398 $ 4,926
Net realized gain (loss) on investments (7,665) 128 - -
Change in net unrealized appreciation/
depreciation of investments 8,457 (20,929) - -
-------- -------- -------- --------
Increase in net assets resulting from
operations 22,781 1,684 7,398 4,926
-------- -------- -------- --------
Distributions to shareholders from:
Net investment income (note 3) (21,989) (22,485) (7,398) (4,926)
-------- -------- -------- --------
Net realized gains (note 3) - (7,450) - -
-------- -------- -------- --------
From capital share transactions:
Shares sold 68,957 105,503 274,440 234,064
Shares issued for dividends reinvested 15,794 22,714 6,718 4,565
Shares redeemed (95,432) (104,133) (261,697) (210,423)
-------- -------- -------- --------
Increase (decrease) in net assets from
capital share transactions (10,681) 24,084 19,461 28,206
-------- -------- -------- --------
Net increase (decrease) in net assets (9,889) (4,167) 19,461 28,206
Net assets:
Beginning of period 382,766 386,933 247,303 219,097
-------- -------- -------- --------
End of period $372,877 $382,766 $266,764 $247,303
======== ======== ======== ========
Change in shares outstanding:
Shares sold 6,982 9,716 274,440 234,064
Shares issued for dividends reinvested 1,604 2,100 6,718 4,565
Shares redeemed (9,826) (9,648) (261,697) (210,423)
-------- -------- -------- --------
Increase (decrease) in shares outstanding (1,240) 2,168 19,461 28,206
======== ======== ======== ========
Authorized shares of $.01 par value 50,000 50,000 425,000 300,000
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
(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 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.
Notes to Financial Statements (continued)
(In Thousands)
March 31, 1995
(2) Line of Credit
The Funds participate with certain 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 will 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 pulished 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 California Bond Fund had a capital loss carryover
of approximately $11,002 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.
The Funds completed their 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 and California State
income tax purposes. There were no long-term capital gain distributions for
the year ended March 31, 1995.
Notes to Financial Statements (continued)
(In Thousands)
March 31, 1995
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term
securities, for the year ended March 31, 1995, for the California Bond Fund
were $249,126 and $261,393, respectively. Purchases and sales/maturities
of securities for the year ended March 31, 1995, for the California Money
Market Fund were $683,545 and $667,463, respectively.
Gross unrealized appreciation and depreciation of investments at March
31, 1995, for the California Bond Fund was $10,018 and $788, 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 $100,000. These fees are
allocated on a proportional basis to each Fund monthly based upon ANA.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Company. Shareholder accounting service
fees are based on an annual charge per shareholder account plus
out-of-pocket expenses.
C. Underwriting agreement - The Company has an agreement with the
Manager for exclusive underwriting and distribution of the Funds' shares
on a continuing best efforts basis. The agreement provides that the
Manager will receive no fee or other remuneration for such services.
Notes to Financial Statements (continued)
March 31, 1995
(6) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net Distributions
Year Beginning Investment Unrealized Investment of Realized
Ended of Period Income Gain (Loss) Income Capital Gains
($) ($) ($) ($) ($)
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) -
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) -
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
Ended of Period Return of Period Net Assets Net Assets Turnover
($) (%) ($000) (%) (%) (%)
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
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 -
(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
