Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
Virginia Bond Fund 4
Virginia Money Market Fund 9
Financial Information:
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
Virginia Bond Fund 15
Virginia Money Market Fund 18
Notes to Portfolios of Investments in Securities 21
Statements of Operations 22
Statements of Changes in Net Assets 23
Notes to Financial Statements 24
Important Information:
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are now "streamlined."
One copy of each report will be sent to each address, instead of our previous
practice of sending one report to every registered owner. For many
shareholders and their families, this eliminates duplicate copies, saving
paper and postage costs to the Funds.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report
per registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA 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)1996, 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 33
funds by investment objective as of September 30, 1996.
<TABLE>
______________________________________________________________________________________________
Average Annual Total Return*
______________________________________________________________________________________________
<CAPTION>
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
______________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 33.19 16.98 14.08 -
Emerging Markets(1) 11/7/94 10.41 - - 4.96
Gold(1) 8/15/84 1.19 7.93 2.40 -
Growth 4/5/71 14.86 13.79 12.67 -
Growth & Income 6/1/93 18.80 - - 14.61
International(1) 7/11/88 15.03 12.73 - 10.21
S&P 500 Index(4) 5/1/96 - - - 7.76 ++
World Growth(1) 10/1/92 14.79 - - 13.01
______________________________________________________________________________________________
Asset Allocation
Balanced Strategy 9/1/95 9.32 - - 8.97
Cornerstone Strategy(1) 8/15/84 14.28 12.30 10.57 -
Growth and Tax Strategy(2)** 1/11/89 12.63 9.89 - 9.77
Growth Strategy(1) 9/1/95 25.37 - - 23.43
Income Strategy 9/1/95 5.08 - - 6.13
______________________________________________________________________________________________
Income - Taxable
GNMA 2/1/91 3.98 6.92 - 7.43
Income 3/4/74 3.26 7.76 9.17 -
Income Stock 5/4/87 12.73 12.41 - 12.03
Short-Term Bond 6/1/93 5.60 - - 5.29
_______________________________________________________________________________________________
Income - Tax Exempt
Long-Term(2)** 3/19/82 6.91 7.06 7.52 -
Intermediate-Term(2)** 3/19/82 5.43 7.02 7.12 -
Short-Term(2)** 3/19/82 4.51 5.04 5.49 -
California Bond(2)** 8/1/89 8.34 7.34 - 7.52
Florida Tax-Free Income(2)** 10/1/93 7.30 - - 3.17
New York Bond(2)** 10/15/90 6.34 6.80 - 8.29
Texas Tax-Free Income(2)** 8/1/94 8.56 - - 9.23
Virginia Bond(2)** 10/15/90 6.98 7.34 - 8.15
_______________________________________________________________________________________________
Money Market
Money Market(3) 2/2/81 5.33 4.38 5.85 -
Tax Exempt Money Market(2),(3)** 2/6/84 3.45 3.09 4.23 -
Treasury Money Market Trust(3) 2/1/91 5.18 4.16 - 4.28
California Money Market(2),(3)** 8/1/89 3.37 2.98 - 3.65
Florida Tax-Free Money Market(2),(3)** 10/1/93 3.34 - - 2.99
New York Money Market(2),(3)** 10/15/90 3.35 2.82 - 3.06
Texas Tax-Free Money Market(2),(3)** 8/1/94 3.31 - - 3.32
Virginia Money Market(2),(3)** 10/15/90 3.24 2.91 - 3.20
_________________________________________________________________________________________
</TABLE>
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
including possible loss of the principal amount invested.
For more complete information about the mutual funds managed and distributed
by USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(3) An investment in a money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will
be able to maintain a stable net asset value of $1 per share.
(4) S&P 500(registered trademark) is a trademark of The McGraw-Hill Companies,
Inc., and has been licensed for use. The product is not sponsored, sold
or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the product.
* 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 represent past performance and are not an indication of future
results. Investment return and principal value of an investment will
fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax
Strategy Fund is not available as an investment for your IRA because the
majority of its income is tax-exempt. California, Florida, New York,
Texas, and Virginia funds available to residents only.
++ Cumulative total return since inception.
(A photo of Michael J.C. Roth, President and Vice Chairman of the Board,
appears here)
I am writing this message in late October and every day it seems someone
asks what effect the election will have on the financial markets. My frank
answer is that I don't know. What I prefer to talk about are things that
concern me about the markets and things that give me hope.
My greatest concern is the promises we as a nation have made to our citizens
coupled with our unwillingness to face the cost of those promises. Some of
these promises are highly noble. We have tried to provide decent housing
for those in our midst who cannot afford it. With a decent and safe home
most people would have the opportunity to seek the education and work that
could lift families out of poverty. But effective solutions are very difficult
to achieve, and too often we succeed only in creating generations mired in
hopeless dependency. We have promised medical care to the poor and the
elderly, but the cost of that care runs away from the tax revenues we have
dedicated to it. We have promised a safety net, social security, to our
elderly, and we did take decisive steps to raise the tax revenue to fund that.
But the excess of social security taxes over benefits, which should
have built a meaningful trust fund, has been systematically borrowed by the
treasury and spent on other current needs. That trust fund consists solely of
promises by the federal government which will have to be funded somehow in
the future. And then we have quite properly promised our citizens a strong
national defense. These are decent and noble promises but they translate to a
debt burden whose service requires a large and growing part of what we produce
as a nation.
But there is much we are prone to overlook. We forgot in the 80s that the
Japanese borrowed heavily from American knowledge and American methods
to work their economic miracle. We forget that the freedom of our society,
both political and intellectual, draws bright people from all over the world
and allows them and our own citizens the opportunity to take risks and reap
the rewards. We are a vibrant nation in the forefront of change that is
shaping the world. From IMCO's standpoint this means that there are great
opportunities for investors.
We tend, at times, to dwell on the problems. USAA, as a citizen of San Antonio
and the other great cities in which we have a presence, has confronted these.
Hundreds of our employees are mentors in schools. They and others in our
company devote their skills and their money to bettering the lives of people
in our communities. But while we in the Investment Management Company
participate in these endeavors, our attention is focused on the opportunities
that abound in the U.S. and other countries. We see, perhaps more clearly than
most people, that those opportunities offer great hope to very many people and
that great hope offers great opportunity to our investors.
This election is a small step on a long journey.
Sincerely,
Michael J.C. Roth
President and
Vice Chairman of the Board
Investment Review
Virginia Bond Fund
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes.
Types of Investments: Invests primarily in long-term investment grade Virginia
tax-exempt securities.
3/31/96 9/30/96
Net Assets $267.1 Million $278.3 Million
Net Asset Value Per Share $10.93 $11.02
Average Annual Total Returns as of 9/30/96
March 31, 1996 to September 30, 1996 3.82%**
1 Year 6.98%
5 Years 7.34%
Since Inception on October 15, 1990 8.15%
** Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
30-Day SEC Yield on September 30, 1996 5.51%*
* Calculated as prescribed by the Securities and Exchange Commission.
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment for the period of 10/15/90 to 9/30/96, with dividends and
capital gains reinvested. The ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $16,150
USAA Virginia Bond Fund 15,998]
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks total
return performance for the long-term investment grade tax-exempt bond market.
All tax-exempt bond funds will find it difficult to outperform such an index,
since funds have expenses.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's shares,
when redeemed, may be worth more or less than their original cost.
Message from the Manager
[Photograph of Robert R. Pariseau, CFA, Portfolio Manager, appears here.]
A Volatile Market
Since March, bond market investors have held passionate feelings towards the
future direction of the economy and interest rates. The problem was that
investors did not hold a particular feeling very long. Emotions ranged from
elation to depression, mixed with numbing confusion. Interest rate trends,
either up or down, lasted only weeks. The reason for such vacillation is
quite simple. The economy itself has behaved in fits and starts since late
last fall.
From March 31, 1996 to September 30, 1996, the 30-year U.S. Treasury bond
(the "Long Bond") started at 6.67%, peaked at 7.19% in June and again in
July, and then ended the quarter at 6.92%. Municipal bonds outperformed
the Long Bond, as the yield on the Bond Buyer 40 Index, which is the
industry standard for the yield of the long-term, investment-grade municipal
bonds, declined slightly during the same period. In volatile periods such
as these, how should a single state municipal fund fit into your investment
strategy?
Why a State Municipal Fund?
In a growth-oriented portfolio, municipal bonds provide essential
diversification and respectable after-tax total return. For investors who
focus on income and are in the 28% and higher federal tax brackets, single
state funds typically generate higher tax-equivalent yields than fully taxable
funds or tax-exempt national municipal funds of comparable credit quality.
The table below compares the yield of the USAA Virginia Bond Fund with a
taxable equivalent investment.
To match the Virginia Bond Fund's closing 30-day SEC yield of 5.51% and:
Assuming a Virginia State Tax Rate of 5.75%
and
Assuming a Marginal Federal Tax Rate of:
28% 31% 36% 39.6%
A fully taxable investment must Pay: 8.12% 8.48% 9.14% 9.68%
This table is based on a hypothetical investment calculated for illustrative
purposes only. It is not an indication of performance for any of the USAA
Family of Funds.
Single state funds allow investors to invest close to home where they may be
more comfortable with regional economic and fiscal issues. Your fund consists
of over 45 different securities all thoroughly researched by experienced
credit analysts. Geographic, industry and issuer diversification mitigates the
risk of investing in a single state. Proper diversification and credit
research are critical, yet daunting tasks for the average investor to achieve
on his own with individual bonds.
Although most municipal bonds pay their interest coupons at six-month
intervals, mutual funds provide the convenience and efficiency of monthly
dividends and automatic reinvestment of interest and other proceeds.
As for liquidity, your money is available sooner than the normal 3 day
settlement with individual bonds. Convenient periodic statements and
worry-free custodial services are additional benefits.
Each business day the mutual fund is "marked to market" by an independent
pricing service to reflect fairly the market value of the fund's assets. USAA
has three full-time fixed income traders who monitor the pulse of the bond
market. Municipals are not traded in an organized exchange with posted quotes.
Instead, each trade is the result of a unique negotiation. When we enter the
market to buy or sell, our traders are in contact with dozens of market makers,
primary dealers and brokers to obtain the best price. The spread, or markup,
is the difference between the bid and the asking price. Effectively, it is
the broker's compensation for the trade. Because of its greater buying power,
the spread for an institution's $1 million block is much smaller than the
individual's order for $25,000 of bonds.
Strategy & Outlook
With no real consensus over the future direction of interest rates, the bond
market is prone to volatility as investors react to the latest economic data.
I continue to pursue tax-exempt income and invest in investment-grade quality
securities. Secondarily, I will focus on total return. When pursuing
tax-exempt income, I will typically buy bonds with 20-year or longer maturities,
although their market values are more sensitive to changes in interest rates.
I do not buy exotic derivatives, hedge the portfolio with futures, or try
to time the market because no one has demonstrated that they can consistently
predict the future direction of interest rates.
Your Fund's Performance
Since municipal rates declined slightly during the same period, your Fund's
net asset value (NAV) per share increased $.09 to $11.02, or .8%, since March
31, 1996. The Fund's performance compared favorably to its peer group. While
past performance is no guarantee of future results, the Fund's annualized
dividend yield(1) for the past six months was 5.79%, as compared to Lipper's
Virginia Municipal Debt Funds average of 4.88% for the 34 funds in the
category.(2) For the same period, the Fund's total return(3) was 3.82%,
compared to the Lipper average of 3.13%.
(1) Dividend yield is computed by dividing income dividends paid during the
previous 6 months by the latest month-end net asset value adjusted for capital
gains distributions and annualizing the result.
(2) Lipper Analytical Services is an independent organization that monitors the
performance of mutual funds.
(3) Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
[A graph is shown here comparing the 12-month dividend yield of the
USAA Virginia Bond Fund and the Lipper Virginia Municipal Debt Funds Average
from 9/30/91 to 9/30/96. The vertical axis shows the yield and the horizontal
axis shows the time period. The values are:
USAA Virginia
Bond Fund 6.20 6.04 5.44 5.81 5.82 5.75
Lipper Virginia
Muni. Debt
Funds Avg. 6.08 5.91 5.20 5.33 5.04 4.87]
The Lipper Virginia Municipal Debt Funds average is computed by Lipper
Analytical Services, an independent organization that monitors the
performance of mutual funds. 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.
The graph represents data from 9/30/91 to 9/30/96.
The State of Virginia
Since the spring of 1995, five leading high-technology companies have
announced plans to invest $10 billion and add 12,000 jobs spread between
Richmond, Manassas and Hampton. Hi-tech's attraction for Virginia is
strong enough that the industry is now 5% of total employment allowing
the state to lower its incentive packages. Most importantly, growth in the
state's per capita personal income should improve, having lagged national
levels for three of the last six years. Residential and especially
commercial real estate have shown strength in most regions of the state.
Virginia remains one of only five states to have their debt rated "AAA"
by all three major credit rating agencies - Moody's Investors Services, Inc.,
Standard & Poor's Ratings Group and Fitch Investors Services, Inc. Our
analysts remain cautious in regard to county and local municipal lease
obligations that rely on annual appropriations. I will monitor closely the
impact of welfare reform upon state and local finances.
[A pie chart is shown here depicting the Portfolio Ratings/Mix as of
September 30, 1996 for the USAA Virginia Bond to be: AAA - 19%, AA - 39%,
A - 21%, and BBB - 21%.]
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality
to categories AAA and BBB account for 5.4% and 2%, respectively, of the Fund's
investments.
Note: Income may be subject to federal, state or local taxes, or the
alternative minimum tax.
See page 15 for a complete listing of the Portfolio of Investments in
Securities.
Investment Review
Virginia Money Market Fund
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes, while
preserving capital and maintaining liquidity.
Types of Investments: High quality Virginia tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will endeavor to maintain
a constant net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share.
3/31/96 9/30/96
Net Assets $110.3 Million $109.5 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Returns as of 9/30/96
March 31, 1996 to September 30, 1996 1.57%**
1 Year 3.24%
5 Years 2.91%
Since inception on October 15, 1990 3.20%
** Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
7-Day Simple Yield on September 30, 1996 3.37%
[A graph is shown here comparing the 7 - day yield of the USAA
Virginia Money Market Fund and the IBC/Donoghue's State Specific SB & GP
(Tax-Free): Virginia from 9/95 to 9/96. The vertical axis shows the
yield and the horizontal axis shows the time period. The ending value,
on 9/30/96, for the USAA Virginia Money Market Fund is 3.37% and the
ending value for the IBC Donoghue's State Specific Sb & GP (Tax-Free) is
3.09%.]
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested dividends and capital gain distributions. Past performance
is no guarantee of future results and the value of your investment
may vary according to the Fund's performance. The graph tracks the
Fund's 7-day simple yield against IBC/Donoghue's State Specific SB
(Stock Broker) & GP (General Purpose) (Tax-Free) Money Funds, an
average of all major money market fund yields.
Message from the Manager
[Photograph of John C. Bonnell, CFA, Portfolio Manager, appears here.]
Interest Rates
When 1996 began, interest rates were falling. The Federal Reserve (Fed)
lowered the Federal Funds rate (the rate banks charge other banks for
overnight loans) by .25% at the end of January. This move proved to be the
only action taken so far this year by the Fed. Not long after the Fed's
action, however, economic indicators and statistics came out reflecting much
stronger growth than expected, sending short-term interest rates higher. With
investors trying to anticipate interest rate actions by the Fed and reacting
to each economic indicator released, short-term interest rates remained very
volatile throughout 1996. Many investors were caught off guard after expecting
the Fed to raise the rate .25% to .50% following their September 24th meeting.
When the Fed left the Federal Funds rate unchanged, market interest rates
fell significantly. Clearly, the true magnitude of economic growth taking
place remains elusive. This illustrates why we do not forecast interest rates.
It is difficult, if not impossible, for anyone to consistently predict future
interest rate movements. Your money market fund strives to meet its objective
in any prevailing interest rate environment.
Strategy
Your Fund's success stems from two major advantages. First is the expense
ratio. Your Fund's expense ratio was .50%, net of reimbursements, versus an
industry average of .63%.* The lower a fund's expense ratio (everything else
being equal), the higher the potential return is to you. The second major
advantage your fund has is the quality of research provided by our internal
research department. Our credit research team, which includes four full-time
money market analysts, not only pores over financial statements, but also
interrogates the appropriate individuals (often including on-site tours/
visits) responsible for repayment of the debt we are considering purchasing
for the portfolio. This type of analysis helps avoid problems such as the
Orange County, California, bankruptcy and helps us identify opportunities
to enhance performance without taking risks inappropriate for a money market
fund. Credit quality and preservation of capital remain top priorities of the
Fund.
Our conservative approach to managing the Fund includes strict limits we place
on the portfolio regarding diversification. These limits go beyond the rules
governing money market funds set forth by the Securities and Exchange
Commission (SEC) which are intended to protect the safety and quality of money
market funds.
* Source: IBC/Donoghue's State Specific SB & GP (Tax-Free)
[A graph is here showing the growth of $10,000, from 10/15/90 to 9/30/96,
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 $12,080.]
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 the alternative minimum tax.
Performance
While past performance is no guarantee of future results, for the 12 months
ending 9/30/96 your fund ranked 20 out of 144 state specific Tax-Exempt Money
Market Funds according to IBC/Donoghue, Inc. with a yield of 3.22%. The average
for the category over the same time period was 2.98%.
Virginia
Virginia remains one of the few states to carry the highest debt rating of
"AAA" by all three major rating agencies, a result of prudent, conservative
fiscal management. This creditworthiness also characterizes most of Virginia's
local governments. Given the large government sector of the economy, it is not
surprising the state lost approximately 10,000 jobs since the early 1980s due
to defense cutbacks/restructurings. The state not only weathered this, but
according to Standard & Poor's now has the 10th strongest employment growth
in the nation, averaging 2.2% annually. Unemployment rates are below national
averages and since 1995, many high-technology companies have announced plans
to invest billions of dollars and to add approximately 12,000 jobs in
Virginia. We continue to analyze each issue on a case by case basis and remain
very selective when investing fund assets.
An investment in any money market fund is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share.
See page 18 for a complete listing of the Portfolio of Investments of
Securities.
Statements of Assets and Liabilities
(In Thousands)
September 30, 1996
(Unaudited)
Virginia
Virginia Money Market
Bond Fund Fund
Assets
Investments in securities, at market
value (identified cost of $264,996
and $108,738, respectively) $ 274,072 $ 108,738
Cash 288 688
Receivables:
Capital shares sold 29 79
Interest 4,426 552
------------ ------------
Total assets 278,815 110,057
------------ ------------
Liabilities
Securities purchased - 252
Capital shares redeemed 90 232
USAA Investment Management Company 76 70
USAA Transfer Agency Company 17 9
Accounts payable and accrued expenses 41 27
Dividends on capital shares 336 17
------------ ------------
Total liabilities 560 607
------------ ------------
Net assets applicable
to capital shares
outstanding $ 278,255 $ 109,450
============ ============
Represented by:
Paid-in capital $ 271,044 $ 109,450
Accumulated net realized loss on
investments (1,865) -
Net unrealized appreciation of
investments 9,076 -
------------ ------------
Net assets applicable
to capital shares
outstanding $ 278,255 $ 109,450
============ ============
Capital shares outstanding 25,253 109,450
============ ============
Net asset value, redemption price,
and offering price per share $ 11.02 $ 1.00
============ ============
See accompanying notes to financial statements.
Categories & Definitions
Portfolios of Investments in Securities
September 30, 1996
(Unaudited)
Fixed Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The coupon rate is constant to maturity. Prior to maturity, the price
of a fixed-rate instrument generally varies inversely to the movement of
interest rates. At maturity, the security pays face value.
Put Bonds - provide the right to tender, or put, the bond for redemption at
face value at specific tender dates prior to final maturity. The put feature
shortens the effective maturity to the next tender date. Between tender dates,
the price of a put bond generally varies inversely to the movement of interest
rates.
Variable Rate Demand Notes (VRDN) - provide the right, on any business day, to
demand, or put, the security for redemption at face value on either that day
or in seven days. The interest rate is adjusted at a stipulated daily, weekly,
or monthly interval to a rate that reflects current market conditions. In
money market funds, the effective maturity is equal to either the date on
which the underlying principal amount may be recovered through demand or the
next rate adjustment date consistent with applicable regulatory requirements.
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>
Virginia Bond Fund
Portfolio of Investments in Securities
(In Thousands)
<CAPTION>
September 30, 1996
(Unaudited)
Principal Coupon Final Market
Amount Security Rate Maturity Value
Fixed Rate Instruments (98.4%)
Virginia (84.9%)
<S> <C> <C> <C> <C>
$ 7,500 Augusta County IDA Hospital RB,
Series 1991 7.00% 9/01/21(a) $ 8,385
College Building Auth. Educational
Facilities RB,
3,525 Series 1992 6.40 1/01/12 3,699
2,885 Series 1992 6.63 5/01/13 3,042
2,505 Series 1992 6.60 9/01/16 2,635
2,350 Series 1994 5.80 1/01/24 2,331
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/15 3,031
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 4,838
2,250 Emporia GO, Series 1995 5.75 7/15/15 2,268
5,200 Fairfax County Economic Development
Auth. RB,
Series 1991B 7.50 6/01/01 5,513
15,180 Fairfax County IDA RB, Series 1996 6.00 8/15/26 15,320
1,500 Fairfax County Redevelopment and Housing
Auth. RB, Series 1989A (CRE) 7.50 11/01/19(a) 1,656
13,000 Fairfax County Sewer RB, Series 1996
(CRE) 5.88 7/15/28 13,158
8,750 Galax IDA Hospital RB, Series
1995 (CRE) 5.75 9/01/20 8,649
Hampton Redevelopment and Housing Auth. RB,
2,000 Series 1996A 5.88 7/20/16 1,992
1,300 Series 1996A 6.00 1/20/26 1,303
5,000 Hanover County IDA Hospital RB (CRE) 5.50 8/15/25 4,824
6,320 Hopewell Hospital Auth. RB,
Series 1986 8.85 1/01/13(a) 6,513
Housing Development Auth. Commonwealth
Mortgage RB,
5,440 Series 1992A 7.10 1/01/22 5,532
10,000 Series 1992A 7.10 1/01/25 10,541
1,455 Series 1992C 6.40 1/01/15 1,483
1,680 Series 1994D 6.40 7/01/17 1,721
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,113
Housing Development Auth. MFH RB,
55,000 Series 1982A 7.00(b) 11/01/17 9,254
7,700 Series 1991F 7.10 5/01/13 8,148
4,220 Isle of Wight County IDA RB,
Series 1990 7.38 1/01/10 4,519
8,000 Loudoun County IDA Hospital RB,
Series 1995 (CRE) 5.80 6/01/26 8,012
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A 6.25 7/01/21 9,269
11,000 Peninsula Ports Auth. RB, Series 1992 7.38 6/01/20 11,674
3,690 Pittsylvania County GO 6.00 7/01/14 3,827
2,500 Prince William County IDA Hospital RB,
Series 1995 6.85 10/01/25 2,665
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/15 4,974
3,985 Resources Auth. Sewer System RB,
Series 1992A 6.00 5/01/22 4,045
10,000 Roanoke Valley Resource Auth. RB,
Series 1992 5.75 9/01/12 9,876
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,670
1,250 Spotsylvania County GO, Series 1994 6.88 12/01/14 1,379
10,000 Upper Occoquan Sewage Auth. RB,
Series 1995A (CRE) 4.75 7/01/29 8,506
11,820 Virginia Beach Development Auth. Hospital RB,
Series 1991 6.30 11/01/21 12,103
12,000 West Point IDA Solid Waste Disposal RB,
Series 1994B 6.25 3/01/19 12,221
6,000 Williamsburg IDA RB, Series 1993 5.75 10/01/22 5,624
3,500 Winchester IDA RB, Series 1994 (CRE) 6.75 10/01/19 3,832
Guam (3.3%)
1,000 Government Limited Obligation Infrastructure
Improvement RB,
Series 1989A (CRE) 7.10 11/15/09 1,051
8,050 Power Auth. RB, Series 1992A 6.30 10/01/22 8,110
Puerto Rico (10.2%)
2,600 Aqueduct and Sewer Auth. RB,
Series 1995 5.00 7/01/19 2,348
Electric Power Auth. RB,
8,500 Series 1995Z 5.25 7/01/21 7,785
6,025 Series X 5.50 7/01/25 5,708
Highway and Transportation Auth. RB,
10,000 Series 1993X 5.50 7/01/13 9,859
3,000 Series 1993X 5.25 7/01/21 2,766
--------
Total fixed rate instruments (cost: $264,696) 273,772
--------
Variable Rate Demand Note (0.1%)
Virginia
300 Henrico County IDA RB,
Series 1994 (CRE) (cost: $300) 4.10% 5/01/24 300
--------
Total investments (cost: $264,996) $274,072
========
</TABLE>
Portfolio Summary By Industry
Hospitals 23.9%
Electric Power 9.4
Sewer 9.2
Single-Family Housing 8.0
Paper & Forest Products 7.8
Education 6.7
Multi-Family Housing 6.3
Escrowed Securities 6.0
Special Assessment/Tax/Fee 4.9
Ports/Wharfs 4.2
General Obligations 3.5
Pollution Control 3.5
Broadcasters 2.0
Railroads 1.8
Retirement Homes 1.3
----
Total 98.5%
====
<TABLE>
Virginia Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
<CAPTION>
September 30, 1996
(Unaudited)
Principal Coupon Final
Amount Security Rate Maturity Value
Variable Rate Demand Notes (76.4%)
<S> <C> <C> <C> <C>
Virginia
$ 6,768 Alexandria IDA RB, Series
1989 (CRE) 4.10% 1/01/09 $ 6,768
5,000 Bedford County IDA RB, Series
1993 (CRE) 4.05 10/01/04 5,000
Chesterfield County IDA PCRB,
4,700 Series 1992 3.90 4/01/09 4,700
7,900 Series 1993 4.00 8/01/09 7,900
4,500 Chesterfield County IDA RB,
Series 1989 (CRE) 3.88 2/01/03 4,500
2,100 Henrico County IDA RB,
Series 1986C 3.95 7/15/16 2,100
5,380 Housing Development Auth. RB,
Series 1987A (CRE) 3.90 9/01/17 5,380
12,400 Loudoun County IDA Residential
Care Facility RB,
Series 1994B (CRE) 4.35 11/01/24 12,400
3,000 Louisa County IDA RB,
Series 1995 (CRE) 3.85 1/01/20 3,000
3,265 Newport News Redevelopment
and Housing Auth.
MFH RB, Series 1990 (CRE) 3.93 3/01/07 3,265
3,400 Peninsula Ports Auth. RB,
Series 1984 (CRE) 3.55 11/01/01 3,400
2,250 Polytechnic Institute and State
Univ. Dorm and Dining Hall
RB, Series 1984B (CRE) 3.85 6/01/04 2,250
Prince William County IDA RB,
5,400 Series 1988 (CRE) 3.92 6/30/04 5,400
1,031 Series 1989D (CRE) 4.05 10/01/00 1,031
Richmond IDA RB,
522 Series 1989A (CRE) 4.05 6/01/02 522
3,100 Series 1996 (CRE) 3.95 5/01/16 3,100
Richmond Redevelopment and
Housing Auth. RB,
3,400 Series 1995 (CRE) 3.85 4/01/29 3,400
1,400 Series 1995A (CRE) 3.85 12/01/25 1,400
1,940 Rockingham County IDA RB,
Series 1983A 4.05 10/01/20 1,940
2,300 Saltville IDA RB, Series
1985 (CRE) 3.93 12/01/96 2,300
3,937 Spotsylvania County IDA RB,
Series 1990 (CRE) 3.85 10/01/20 3,937
--------
Total variable rate demand notes (cost: $83,693) 83,693
--------
Put Bonds (17.7%)
Virginia
Chesterfield County IDA PCRB,
2,700 Series 1985 3.75 10/01/09 2,700
1,000 Series 1987B 3.60 6/01/17 1,000
3,000 Fairfax County Hospital IDA RB,
Series 1993B 3.50 8/15/25 3,000
3,575 Falls Church IDA RB, Series 1985 3.70 5/01/15 3,575
3,500 Peninsula Ports Auth. RB,
Series 1987A (CRE) 3.50 7/01/16 3,500
2,055 Prince William County IDA RB,
Series 1992 (CRE) 3.75 9/01/07 2,055
3,555 Richmond IDA RB, Series 1987A
(CRE) 3.75 8/15/15 3,555
--------
Total put bonds (cost: $19,385) 19,385
--------
Fixed Rate Instruments (5.2%)
Virginia
1,265 City of Suffolk GO, Series 1988 7.00 8/01/00(a) 1,315
1,000 Fairfax County IDA RB, Series
1985A 7.88 10/01/17(a) 1,030
Fairfax County GO Public Improvement
Refunding Bonds,
250 Series 1992C 4.70 10/01/97 252
2,000 Series 1989B 6.75 11/01/03(a) 2,040
1,000 Series 1989B 6.75 11/01/05(a) 1,023
--------
Total fixed rate instruments (cost: $5,660) 5,660
--------
Total investments (cost: $108,738) $108,738
========
</TABLE>
Portfolio Summary By Industry
Retirement Homes 14.9%
Aerospace/Defense 12.2
Multi-Family Housing 11.0
Community Service 10.3
Hospitals 6.0
Electric Power 5.3
Escrowed Securities 4.9
Paper & Forest Products 4.6
Tobacco 4.3
Manufacturing - Diversified Industries 4.1
Education 3.5
Buildings 3.2
Ports/Wharfs 3.2
Hotel/Motel 3.1
Finance - Municipal 2.7
Chemicals 2.1
Retail - Food Chains 1.9
Drugs 1.8
General Obligations .2
----
Total 99.3%
=====
Notes to Portfolios of Investments in Securities
September 30, 1996
(Unaudited)
General Notes
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
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)
Six-month period ended September 30, 1996
(Unaudited)
Virginia
Virginia Money Market
Bond Fund Fund
Net investment income:
Interest income $ 8,547 $ 1,966
------------ -------------
Expenses:
Management fees 459 184
Transfer agent's fees 98 53
Custodian's fees 38 28
Postage 8 7
Shareholder reporting fees 4 5
Directors' fees 2 2
Registration fees 3 -
Audit fees 11 11
Legal fees 3 3
Other 4 3
--------- ----------
Total expenses before
reimbursement 630 296
Expenses reimbursed - (22)
--------- ----------
Total expenses after
reimbursement 630 274
--------- ----------
Net investment income 7,917 1,692
--------- ----------
Net realized and unrealized gain (loss)
on investments:
Net realized gain 2,302 -
Change in net unrealized
appreciation/depreciation (21) -
--------- ----------
Net realized and
\unrealized gain 2,281 -
--------- ----------
Increase in net assets resulting
from operations $ 10,198 $ 1,692
=========== ===========
See accompanying notes to financial statements.
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended September 30, 1996 and Year ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Virginia Virginia
Bond Fund Money Market Fund
9/30/96 3/31/96 9/30/96 3/31/96
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 7,917 $ 14,600 $ 1,692 $ 3,486
Net realized gain (loss) on investments 2,302 (1,253) - -
Change in net unrealized appreciation/
depreciation of investments (21) 4,801 - -
----------- ----------- ---------- -----------
Increase in net assets resulting from
operations 10,198 18,148 1,692 3,486
----------- ----------- ---------- -----------
Distributions to shareholders from:
Net investment income (7,917) (14,600) (1,692) (3,486)
----------- ----------- ---------- -----------
From capital share transactions:
Proceeds from shares sold 19,640 42,550 38,909 92,210
Shares issued for dividends reinvested 5,949 11,045 1,599 3,286
Cost of shares redeemed (16,726) (28,952) (41,366) (83,237)
----------- ----------- ------------ ------------
Increase (decrease) in net assets from
capital share transactions 8,863 24,643 (858) 12,259
----------- ----------- ------------ -------------
Net increase (decrease) in net assets 11,144 28,191 (858) 12,259
Net assets:
Beginning of period 267,111 238,920 110,308 98,049
---------- ---------- ----------- -------------
End of period $278,255 $267,111 $109,450 $110,308
========== ========== ============ =============
Change in shares outstanding:
Shares sold 1,807 3,868 38,909 92,210
Shares issued for dividends reinvested 546 1,005 1,599 3,286
Shares redeemed (1,540) (2,637) (41,366) (83,237)
---------- ---------- ----------- -------------
Increase (decrease) in shares outstanding 813 2,236 (858) 12,259
========== ========== =========== =============
Authorized shares of $.01 par value 35,000 35,000 175,000 175,000
========== ========== ============ =============
</TABLE>
See accompanying notes to financial statements.
Notes to Financial Statements
September 30, 1996
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company incorporated under the laws of Maryland consisting of ten
separate funds. The information presented in this semiannual report pertains
only to the Virginia Bond Fund and Virginia Money Market Fund (the Funds). The
Funds have a common objective of providing Virginia investors with a high
level of current interest income that is exempt from federal and Virginia
state income taxes. The Virginia Money Market Fund has a further objective of
preserving capital and maintaining liquidity.
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 Investment Company Act
of 1940, as amended, 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.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) Lines of Credit
The Funds participate with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million through January 14, 1997, one with USAA
Capital Corporation (CAPCO), an affiliate of the Manager ($750 million
uncommitted), and one with an unaffiliated bank ($100 million committed).
The purpose of the agreements is to meet temporary or emergency cash needs,
including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under these agreements,
each Fund may borrow up to a maximum of 15% of its total assets, of which
only 5% may be borrowed from CAPCO, at the lending institution's borrowing
rate plus a markup. The Funds had no borrowings under either of these
agreements during the six-month period ended September 30, 1996.
(3) Distributions
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. All net investment income available for distribution
was distributed at September 30, 1996.
Distributions of realized gains from security transactions not offset by
capital losses are made in the succeeding fiscal year or as otherwise
required to avoid the payment of federal taxes. At September 30, 1996, the
Virginia Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $1,865,000 which, if not offset by subsequent
capital gains will expire in 2003. 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 carryovers have been
utilized or expire.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the six-month period ended September 30, 1996 for the Virginia Bond Fund
were $31,336,361 and $29,537,320, respectively. Purchases and sales/maturities
of securities for the six-month period ended September 30, 1996 for the
Virginia Money Market Fund were $114,626,021 and $115,368,000, respectively.
Gross unrealized appreciation and depreciation of investments at September 30,
1996 for the Virginia Bond Fund was $9,454,873 and $379,034, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies 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 $50,000,000, .40% of that portion over $50,000,000
but not over $100,000,000, and .30% of that portion over $100,000,000. These
fees are allocated on a proportional basis to each Fund monthly based upon
ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund
to .50% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides transfer
agent services to the Company. Shareholder accounting service fees are based
on an annual charge per shareholder account plus out-of-pocket expenses.
C. Underwriting agreement - The Company has an agreement with the Manager for
exclusive underwriting and distribution of the Funds' shares on a continuing
best efforts basis. The agreement provides that the Manager will receive no
fee or other remuneration for such services.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
VIRGINIA BOND FUND
September 30, 1996
(Unaudited)
(6) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.93 $ 10.76 $ 10.71 $ 11.16 $ 10.57 $ 10.28
Net investment income .32 .63 .62 .62 .64 .67
Net realized and
unrealized gain (loss) .09 .17 .05 (.30) .65 .29
Distributions from net
investment income (.32) (.63) (.62) (.62) (.64) (.67)
Distributions of realized
capital gains - - - (.15) (.06) -
----------- --------- -------- ---------- --------- ------------
Net asset value at
end of period $ 11.02 $ 10.93 $ 10.76 $ 10.71 $ 11.16 $ 10.57
============ ========== ======== ========== ========== ============
Total return (%) * 3.82 7.57 6.61 2.69 12.61 9.61
Net assets at end
of period ($000) $278,255 $267,111 $238,920 $235,901 $207,302 $131,475
Ratio of expenses to
average net assets (%) .47(b) .48 .50 .49 .50(a) .50(a)
Ratio of net investment
income to average
net assets (%) 5.86(b) 5.74 5.95 5.44 5.90(a) 6.40(a)
Portfolio turnover (%) 11.09 27.20 27.77 92.17 91.31 86.77
</TABLE>
(a) The information contained in this table is based on actual expenses for
the period, after giving effect to reimbursements of expenses by the Manager.
Absent such reimbursements the Fund's ratios would have been:
Ratio of expenses to average net assets (%) .54 .65
Ratio of net investment income to average net assets (%) 5.86 6.25
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gains
distributions during the period.
(6) Financial Highlights (continued)
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .02 .03 .03 .02 .03 .04
Distributions from net
investment income (.02) (.03) (.03) (.02) (.03) (.04)
----------- ---------- ----------- ------------ ------------ -----------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== ========= =========== =========== ============= ===========
Total return (%) * 1.57 3.42 2.91 2.14 2.65 4.09
Net assets at end
of period ($000) $109,450 $110,308 $ 98,049 $ 92,570 $ 77,263 $ 73,220
Ratio of expenses to
average net assets (%) .50(a)(b) .50(a) .50(a) .50(a) .50(a) .50(a)
Ratio of net investment
income to average
net assets (%) 3.12(a)(b) 3.36(a) 2.88(a) 2.12(a) 2.62(a) 3.96(a)
</TABLE>
(a) The information contained in this table is based on actual expenses for
the period, after giving effect to reimbursements of expenses by the Manager.
Absent such reimbursements the Fund's ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to
average net assets (%) .54(b) .55 .56 .61 .63 .74
Ratio of net investment
income to average
net assets (%) 3.08(b) 3.31 2.82 2.01 2.49 3.72
</TABLE>
(b) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
* Assumes reinvestment of all dividend income distributions during
the period.
