Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
Virginia Bond Fund 4
Virginia Money Market Fund 8
Financial Information:
Distributions to Shareholders 11
Independent Auditors' Report 12
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
Virginia Bond Fund 15
Virginia Money Market Fund 18
Notes to Portfolios of Investments 21
Statements of Operations 22
Statements of Changes in Net Assets 23
Notes to Financial Statements 25
Important Information:
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are now "streamlined."
One copy of each report will be sent to each address, instead of our previous
practice of sending one report to every registered owner. For many shareholders
and their families, this eliminates duplicate copies, saving paper and postage
costs to the Funds.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report
per registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business
hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Virginia
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
[Photo of Michael J.C. Roth, President
and Vice Chairman of the Board appears here]
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.
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.
*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.
"The bond market can fluctuate, but over the years it has been a good place to
invest. Risks have been rewarded."
Investment Review
VIRGINIA BOND FUND
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade Virginia
tax-exempt securities.
3/31/94 3/31/95
Net Assets $235.9 Million $238.9 Million
Net Asset Value Per Share $10.71 $10.76
Average Annual Total Return as of 3/31/95
1 Year 6.61%
Since inception on October 15, 1990 8.30%
30-Day SEC Yield* on March 31, 1995 5.83%
*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 Virginia Bond Fund 14,326
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 Portfolio Manager,
David G. Miller appears here]
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.
By the end of 1994, the Fund had suffered a total return loss of 6.32%.
However, as of this writing, the Fund has recovered all of the 1994 decline
with a calendar year-to-date total return of 7.72% at March 31, 1995.
Investment Philosophy
The Virginia 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 levels and higher total return levels. 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.
A pie chart is shown here depicting the Portfolio Ratings/Mix as of
March 31, 1995 for the Virginia Bond to be: AAA - 8%, AA - 50%, A - 24%,
BBB - 14%, BB - 3% and Cash Equivalent - 1%.
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.
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 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.
Previously we had concentrated our buying in the 15- to 20-year maturities.
Recently we 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.
A graph is shown here comparing the 12-month dividend yield of the USAA
Virginia Bond Fund and the Lipper Virginia Municipal Debt Funds Average from
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 Virginia
Bond Fund 6.37 5.74 5.73 5.80
Lipper, Virginia
Muni. Debt
Funds Avg. 6.17 5.54 5.40 5.17
The Lipper Virginia Municipal Debt Funds Average is computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. Lipper calculations do not include the effects of sales
charges. The graph represents data from 3/31/92 to 3/31/95.
Outlook
Investor interest in the Virginia Bond Fund has significantly improved since
year-end, as has the general demand for Virginia bonds. For whatever reasons -
the state tax relief or the financial comfort of buying close to home - this
strong demand, coupled with the sharply reduced supply of Virginia bonds,
should benefit our Fund. The supply of new Virginia bonds decreased nearly 35%
last year, with this year's first quarter new issuance off nearly another 45%
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 12-month
with ranking with ranking dividend
Data as of 3/31/95: Year-to-date 1 Year yield
USAA Virginia Bond Fund 7.72% 12/29 6.61% 9/24 5.8%
Lipper Virginia Municipal 7.49% 6.27% 5.2%
Debt Funds Average
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
VIRGINIA MONEY MARKET FUND
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes, while
preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality Virginia tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will endeavor to maintain
a constant net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund can maintain a stable
net asset value of $1.00 per share.
3/31/94 3/31/95
Net Assets $92.6 Million $98.0 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Return as of 3/31/95
1 Year 2.91%
Since inception on October 15, 1990 3.15%
7-Day Simple Yield on March 31, 1995 3.60%
A graph is shown here comparing the 7-day yield of the USAA Virginia
Money Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free):
Virginia from 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 Virginia Money Market Fund is 3.54% and the ending value for the
IBC Donoghue's State Specific SB & GP (Tax-Free) is 3.38%.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. Past performance is no guarantee of future
results and the value of your investment may vary according to the Fund's
performance. The graph tracks the Fund's 7-day simple yield against IBC/
Donoghue's State Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free)
Money Funds, an average of all major money market fund yields.
Message from the Manager
[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 Virginia 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 am extending the Fund's average maturity from its March 31,
1995 level of 33 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's yield was
2.91% for the 12-month period ending March 31, 1995, as compared to the 2.67%
average yield for the same period according to IBC/Donoghue's Money Vision.(1)
The Orange County Experience
Although it didn't involve a Virginia 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 Virginia Economy
Virginia continues to be one of the few states rated "AAA" by all three major
rating agencies.(2) The combination of responsible financial management and a
diverse economy justifies the highest rating. Military cutbacks, while
negatively impacting the economy, remain manageable as demonstrated by the
state's low unemployment rate.
(1)Source: IBC/Donoghue's Money Vision, a monthly market industry analysis
prepared by IBC USA, Inc. The 12-month yield investment results for each fund
are effective yields assuming reinvestment of dividends for up to one year.
Total returns include any realized capital gains or losses, while yields
exclude capital gains and losses.
(2)The three major rating agencies are Moody's, Standard & Poor's, and Fitch.
See page 18 for a complete listing of the Portfolio of Investments in
Securities.
A graph is here showing the growth of $10,000, from 10/15/90 to 3/31/95,
invested in the USAA Virginia Money Market Fund. The vertical axis shows
the dollar amount and the horizontal axis shows the time period. The
ending value is $11,499.
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.
Distributions 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 and Virginia State 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 Virginia Bond and Virginia
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 Virginia Bond and Virginia 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
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
(In Thousands)
March 31, 1995
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $230,882 and $97,279, respectively) $235,178 $ 97,279
Cash 108 327
Receivables:
Capital shares sold 91 199
Interest 4,092 771
-------- --------
Total assets 239,469 98,576
-------- --------
Liabilities
Capital shares redeemed 82 417
USAA Investment Management Company (note 5) 136 52
USAA Transfer Agency Company (note 5) 16 7
Accounts payable and accrued expenses 40 34
Dividends on capital shares 275 17
-------- --------
Total liabilities 549 527
-------- --------
Net assets applicable to capital shares outstanding $238,920 $ 98,049
======== ========
Represented by:
Paid-in capital $237,538 $ 98,049
Accumulated net realized loss on investments (2,914) -
Net unrealized appreciation of investments 4,296 -
-------- --------
Net assets applicable to capital shares outstanding $238,920 $ 98,049
======== ========
Capital shares outstanding 22,204 98,049
======== ========
Net asset value, redemption price, and offering price per share $ 10.76 $ 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.
<TABLE>
<CAPTION>
VIRGINIA BOND FUND
Portfolio of Investments in Securities
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Fixed Rate Instruments (97.9%)
<C> <S> <C> <C> <C>
Virginia (95.2%)
$ 7,500 Augusta County IDA Hospital RB, Series 1991 7.00% 9/01/21(a) $ 8,356
11,000 Chesapeake Bay Bridge and Tunnel District
RB, Series 1991, (CRE) 6.38 7/01/22 11,164
11,000 Chesapeake IDA RB, Series 1993 5.88 3/01/13 10,802
College Building Auth. Educational
Facilities RB,
3,525 Series 1992 6.40 1/01/12 3,631
2,885 Series 1992 6.63 5/01/13 2,975
2,505 Series 1992 6.60 9/01/16 2,580
2,350 Series 1994 5.80 1/01/24 2,286
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 4,652
5,200 Fairfax County Economic Development Auth.
RB, Series 1991B 7.50 6/01/01 5,539
1,500 Fairfax County Redevelopment and Housing
Auth. RB, Series 1989A, (CRE) 7.50 11/01/19 1,569
12,000 Fairfax County Water Auth. RB, Series 1992 5.75 4/01/29 11,450
6,480 Hopewell Hospital Auth. RB, Series 1986 8.85 1/01/13 6,659
Housing Development Auth. Commonwealth
Mortgage RB,
7,550 Series 1989B, Subseries B-2 7.63 7/01/17 7,868
5,440 Series 1992A 7.10 1/01/22 5,687
10,000 Series 1992A 7.10 1/01/25 10,455
1,455 Series 1992C 6.40 1/01/15 1,464
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,046
Housing Development Auth. MFH RB,
55,000 Series 1982A 7.00(b) 11/01/17 7,899
7,700 Series 1991F 7.10 5/01/13 8,104
4,220 Isle of Wight County IDA RB, Series 1990 7.38 1/01/10 4,510
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A 6.25 7/01/21 9,089
11,000 Peninsula Ports Auth. RB, Series 1992, (CRE) 7.38 6/01/20 11,424
3,690 Pittsylvania County GO 6.00 7/01/14 3,677
2,500 Prince William County IDA Hospital RB,
Series 1995 6.85 10/01/25 2,598
$ 4,100 Prince William County Water and Sewer System
RB, (CRE) 6.00% 7/01/29 $ 4,024
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/15 5,038
3,400 Resources Auth. Sewer System RB,
Series 1992A 6.00 5/01/22 3,394
Richmond GO,
10,000 Series 1991A 6.25 1/15/21 10,048
1,000 Series B 6.25 1/15/18 1,008
5,000 Roanoke IDA Hospital RB, Series A, (CRE) 5.00 7/01/24 4,236
10,270 Roanoke Valley Resource Auth. RB, Series 1992 5.75 9/01/12 10,025
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,642
1,250 Spotsylvania County GO, Series 1994 6.88 12/01/14 1,333
12,000 Virginia Beach Development Auth. Hospital RB,
Series 1991 6.30 11/01/21 12,023
11,000 West Point IDA Solid Waste Disposal RB,
Series B 6.25 3/01/19 10,578
6,000 Williamsburg IDA RB, Series 1993 5.75 10/01/22 5,221
3,500 Winchester IDA RB, Series 1994, (CRE) 6.75 10/01/19 3,689
5,010 York County IDA RB, Series 1993 5.75 12/01/09 4,462
Guam (1.2%)
1,000 Government Limited Obligation Infrastructure
Improvement RB, Series 1989A, (CRE) 7.10 11/15/09 1,053
2,000 Power Auth. RB, Series A 6.30 10/01/22 1,912
Puerto Rico (1.5%)
3,750 Electric Power Auth. RB, Series U 6.00 7/01/14 3,658
-------
Total fixed rate instruments (cost: $229,532) 233,828
-------
Variable Rate Demand Notes (0.5%)
Virginia
400 Chesterfield County IDA PCRB,
Series 1992, (CRE) 4.20 4/01/09 400
700 Loudoun County IDA RB, Series 1985, (CRE) 4.60 9/01/15 700
$ 250 Loudoun County IDA Residential Care Facility
RB, Series 1994B, (CRE) 4.50% 11/01/24 $ 250
--------
Total variable rate demand notes (cost: $1,350) 1,350
--------
Total investments (cost: $230,882) $235,178
========
</TABLE>
Portfolio Summary By Industry
-----------------------------
Hospitals 16.7%
Housing - Single/Family 11.9
Paper & Forest Products 8.3
General Obligations 6.7
Housing - Multi/Family 6.7
Education 6.3
Ports/Wharfs 4.8
Water Utilities 4.8
Toll Roads 4.7
Conglomerate 4.5
Electric Power 4.3
Pollution Control 4.2
Escrowed Securities 3.5
Broadcasters 2.3
Railroads 2.1
Retail Stores - General Merchandising 1.9
Water/Sewer 1.7
Sewer 1.4
Nursing Care .6
Special Assessment/Tax/Fee .4
Hotel - Motel .3
Tobacco .2
Retirement Homes .1
----
Total 98.4%
====
<TABLE>
<CAPTION>
VIRGINIA 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 (66.5%)
<C> <S> <C> <C> <C>
Virginia
$4,453 Alexandria IDA RB, Series 1989, (CRE) 4.30% 1/01/09 $4,453
Chesterfield County IDA PCRB,
2,800 Series 1992, (CRE) 4.20 4/01/09 2,800
4,700 Series 1993, (CRE) 4.35 8/01/09 4,700
7,000 Chesterfield County IDA RB,
Series 1989, (CRE) 4.32 2/01/03 7,000
3,691 Fairfax County American College of Radiology
RB, (CRE) 4.30 2/01/11 3,691
2,400 Fauquier County IDA RB, Series 1994, (CRE) 4.30 12/01/14 2,400
3,800 Fluvanna County IDA RB, Series 1984, (CRE) 4.25 12/01/09 3,800
1,700 Hampton Redevelopment and Housing Auth.
MFH RB, Series 1984A, (CRE) 4.25 12/01/06 1,700
4,250 Henrico County IDA RB, Series 1986C, (CRE) 4.30 7/15/16 4,250
2,400 Loudoun County IDA RB, Series 1985, (CRE) 4.60 9/01/15 2,400
4,000 Louisa County IDA RB, Series 1995, (CRE) 4.30 1/01/20 4,000
Newport News Redevelopment and Housing Auth.
MFH RB,
4,700 Series 1984, (CRE) 4.45 9/01/06 4,700
2,465 Series 1990, (CRE) 4.25 3/01/07 2,465
3,700 Peninsula Ports Auth. RB, Series 1984, (CRE) 4.25 11/01/01 3,700
2,650 Polytechnic Institute and State Univ. Dorm
and Dining Hall RB, Series 1984B, (CRE) 4.10 6/01/04 2,650
6,300 Prince William County IDA RB,
Series 1988, (CRE) 4.32 6/30/04 6,300
1,940 Rockingham County IDA RB,
Series 1983A, (CRE) 4.38 10/01/20 1,940
2,300 Saltville IDA RB, Series 1985, (CRE) 4.38 12/01/96 2,300
------
Total variable rate demand notes (cost: $65,249) 65,249
------
Put Bonds (21.7%)
Virginia
Chesterfield County IDA PCRB,
$2,700 Series 1985, (CRE) 4.25% 10/01/09 $ 2,700
2,000 Series 1987B, (CRE) 4.10 6/01/17 2,000
1,340 Fairfax County Economic Development RN,
Series 1986, (CRE) 4.63 9/01/16 1,340
3,575 Falls Church IDA RB, Series 1985, (CRE) 3.90 5/01/15 3,575
Housing Development Auth. Commonwealth
Mortgage RB,
3,000 Series 1993A A-Stem 4.25 7/01/17 3,000
3,000 Series 1993F F-Stem 3.90 7/01/22 3,000
3,500 Peninsula Ports Auth. RB, Series 1987A, (CRE) 4.20 7/01/16 3,500
2,165 Prince William County IDA RB,
Series 1992, (CRE) 4.50 9/01/07 2,165
------
Total put bonds (cost: $21,280) 21,280
------
Fixed Rate Instruments (11.0%)
Virginia
3,000 Education Loan Auth. RB, Series 1994E, (CRE) 4.10 9/01/01(a) 3,000
1,100 Fairfax County GO, Series 1989B 6.30 11/01/95 1,113
2,490 GO, Series 1993B 3.50 6/01/95 2,490
4,000 Southeastern Public Service Auth. RB,
Series A, (CRE) 10.50 7/01/15(a) 4,147
-------
Total fixed rate instruments (cost: $10,750) 10,750
-------
Total investments (cost: $97,279) $97,279
=======
</TABLE>
Portfolio Summary By Industry
Aerospace/Defense 11.2%
Electric Power 9.1
Housing - Multi/Family 9.0
Escrowed Securities 7.3
Manufacturing - Diversified Industries 7.1
Education 6.5
Hotel - Motel 6.2
Housing - Single/Family 6.1
Community Service 4.5
Finance - Municipal 4.1
Metals - Miscellaneous 3.9
General Obligations 3.7
Hospitals 3.6
Ports/Wharfs 3.6
Tobacco 2.9
Retail Stores - General Merchandising 2.5
Chemicals 2.3
Retail Stores - Food Chains 2.2
Drugs 2.0
Buildings 1.4
----
Total 99.2%
====
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
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
RN Revenue Note
Specific Notes
(a) Prerefunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Year ended March 31, 1995
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
Net investment income:
Interest income $14,785 $3,233
------- ------
Expenses (note 5):
Management fees 794 331
Transfer agent's fees 208 94
Custodian's fees 67 51
Postage 18 15
Shareholder reporting fees 11 9
Directors' fees 2 2
Audit fees 22 22
Legal fees 5 5
Other 10 7
------- ------
Total expenses before reimbursement 1,137 536
Expenses reimbursed - (58)
------- ------
Total expenses after reimbursement 1,137 478
------- ------
Net investment income 13,648 2,755
------- ------
Net realized and unrealized gain (loss)
on investments (note 4):
Net realized loss (2,553) -
Change in net unrealized appreciation/depreciation 3,152 -
------- ------
Net realized and unrealized gain 599 -
------- ------
Increase in net assets resulting from operations $14,247 $2,755
======= ======
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
From operations:
Net investment income $13,648 $13,042 $2,755 $1,659
Net realized gain (loss) on investments (2,553) 1,470 - -
Change in net unrealized appreciation/
depreciation of investments 3,152 (9,158) - -
-------- ------- ------ ------
Increase in net assets resulting from
operations 14,247 5,354 2,755 1,659
-------- ------- ------ ------
Distributions to shareholders from:
Net investment income (note 3) (13,648) (13,042) (2,755) (1,659)
-------- ------- ------
Net realized gains (note 3) - (3,080) - -
-------- ------- ------ ------
From capital share transactions:
Shares sold 42,301 80,102 93,826 90,480
Shares issued for dividends reinvested 10,435 12,746 2,563 1,528
Shares redeemed (50,316) (53,481) (90,910) (76,701)
-------- ------- ------- -------
Increase in net assets from
capital share transactions 2,420 39,367 5,479 15,307
-------- ------- ------- -------
Net increase in net assets 3,019 28,599 5,479 15,307
Net assets:
Beginning of period 235,901 207,302 92,570 77,263
-------- ------- ------- -------
End of period $238,920 $235,901 $98,049 $92,570
======== ======== ======= =======
Change in shares outstanding:
Shares sold 4,029 7,071 93,826 90,480
Shares issued for dividends reinvested 994 1,128 2,563 1,528
Shares redeemed (4,849) (4,750) (90,910) (76,701)
-------- -------- ------- -------
Increase in shares outstanding 174 3,449 5,479 15,307
======== ======== ======= =======
Authorized shares of $.01 par value 35,000 35,000 175,000 100,000
======== ======== ======= =======
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 Virginia
Bond Fund and Virginia Money Market Fund (the Funds).
A. Security valuation - Investments in the Virginia Bond Fund are valued
each business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods
which include consideration of yields or prices of municipal securities of
comparable quality, coupon, maturity and type, indications as to values from
dealers in securities, and general market conditions. Securities which are not
valued by the Service, and all other assets, are valued in good faith at fair
value using methods determined by the Manager under the general supervision
of the Board of Directors. Securities purchased with maturities of 60 days
or less and, pursuant to Rule 2a-7 of the Securities and Exchange Commission,
all securities in the Virginia Money Market Fund are stated at amortized cost
which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased or
sold (trade date). Gain or loss from sales of investment securities is
computed on the identified cost basis. Interest income is recorded daily on the
accrual basis. Premiums and original issue discounts are amortized over the
life of the respective securities. Market discounts are not amortized. Any
ordinary income related to market discounts is recognized upon disposition of
the bonds. The Funds concentrate their investments in Virginia municipal
securities, and therefore may be exposed to more credit risk than portfolios
with a broader geographical diversification.
(2) Line of Credit
The Funds participate with other USAA Funds in a joint $150 million
short-term revolving loan agreement (the Agreement) through January 15,
1996, for temporary or emergency purposes, including the meeting of
redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under this Agreement,
each Fund may borrow amounts not to exceed 10% of the value of its total
assets. All borrowings must be repaid before additional investments are
made, 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 Virginia Bond Fund had a capital loss carryover of approximately
$2,914 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 Virginia Bond Fund were $174,175
and $155,267, respectively. Purchases and sales/maturities of securities for
the year ended March 31, 1995, for the Virginia Money Market Fund were
$149,447 and $144,676, respectively.
Gross unrealized appreciation and depreciation of investments at March 31,
1995, for the Virginia Bond Fund was $5,955 and $1,659, 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 $100,000. These fees are
allocated on a proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund
to .50% of its annual average net assets. This limitation may be rescinded
at any time and in the event of rescission the terms of the advisory agreement
would govern.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides transfer
agent services to the Company. Shareholder accounting service fees are based
on an annual charge per shareholder account plus out-of-pocket expenses.
C. Underwriting agreement - The Company has an agreement with the Manager
for exclusive underwriting and distribution of the Funds' shares on a
continuing best efforts basis. The agreement provides that the Manager will
receive no fee or other remuneration for such services.
Notes to Financial Statements (continued)
March 31, 1995
(6) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net
Year Beginning Investment Unrealized Investment
Ended of Period Income Gain (Loss) Income
($) ($) ($) ($)
Virginia Bond Fund:
March 31,
1991* 10.00 .32 .28 (.32)
1992 10.28 .67 .29 (.67)
1993 10.57 .64 .65 (.64)
1994 11.16 .62 (.30) (.62)
1995 10.71 .62 .05 (.62)
Virginia Money Market Fund:
March 31,
1991* 1.00 .02 - (.02)
1992 1.00 .04 - (.04)
1993 1.00 .03 - (.03)
1994 1.00 .02 - (.02)
1995 1.00 .03 - (.03)
<TABLE>
<CAPTION>
Ratio of Net
Net Asset Ratio of Investment
Fiscal Distributions Value at Net Assets Expenses Income
year of Realized End Total at End to Average to Average Portfolio
ended Capital Gains of Period Return of Period Net Assets Net Assets Turnover
($) ($) (%) ($000) (%) (%) (%)
Virginia Bond Fund:
March 31,
<C> <C> <C> <C> <C> <C> <C>
1991* - 10.28 6.01 58,045 .50(a)(b) 6.83(a)(b) 142.56
1992 - 10.57 9.61 131,475 .50(b) 6.40(b) 86.77
1993 (.06) 11.16 12.61 207,302 .50(b) 5.90(b) 91.31
1994 (.15) 10.71 2.69 235,901 .49 5.44 92.17
1995 - 10.76 6.61 238,920 .50 5.95 68.53
Virginia Money Market Fund:
March 31,
1991* - 1.00 2.38 42,513 .50(a)(b) 5.03(a)(b) -
1992 - 1.00 4.09 73,220 .50(b) 3.96(b) -
1993 - 1.00 2.65 77,263 .50(b) 2.62(b) -
1994 - 1.00 2.14 92,570 .50(b) 2.12(b) -
1995 - 1.00 2.91 98,049 .50(b) 2.88(b) -
</TABLE>
(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:
Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
Virginia Bond Fund:
March 31,
1991* .99(a) 6.34(a)
1992 .65 6.25
1993 .54 5.86
Virginia Money Market Fund:
March 31,
1991* 1.08(a) 4.45(a)
1992 .74 3.72
1993 .63 2.49
1994 .61 2.01
1995 .56 2.82
* Funds commenced operations October 15, 1990.
