Table of Contents
USAA Family of Funds............................. 1
Message from the President....................... 2
Investment Review:
California Bond Fund........................ 4
California Money Market Fund................ 9
Financial Information:
Independent Auditors' Report................12
Statements of Assets and Liabilities........13
Portfolios of Investments in Securities:
California Bond Fund...................15
California Money Market Fund...........18
Notes to Portfolios of Investments..........21
Statements of Operations....................22
Statements of Changes in Net Assets.........23
Notes to Financial Statements...............25
_____________________________________________________________________________
Important Information:
_____________________________________________________________________________
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are now "streamlined."
One copy of each report will be sent to each address, instead
of our previous practice of sending one report to every registered
owner. For many shareholders and their families, this eliminates
duplicate copies, saving paper and postage costs to the Funds.
If you are the primary shareholder on at least one account, prefer not
to participate in streamlining, and would like to continue receiving
one report per registered account owner, you may request this in
writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during
business hours.
This report is for the information of the shareholders and others who
have received a copy of the currently effective prospectus of the USAA
California Funds, managed by USAA Investment Management Company
(IMCO). It may be used as sales literature only when preceded or
accompanied by a current prospectus which gives further details about
the funds.
USAA with the eagle is registered in the U.S. Patent & Trademark
Office. (copyright)1996, USAA. All rights reserved.
<TABLE>
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the performance of our other funds. This summary is
a snapshot of the performance of all 32 funds by investment objective as of March 31, 1996. 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.
Average Annual Total Return*
<CAPTION>
Yield
Investment Inception Since 7-Day 30-Day(1)
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC
________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 53.09 16.33 11.30 - - -
Emerging Markets(2) 11/7/94 22.89 - - 4.97 - -
Gold(2) 8/15/84 22.74 11.44 6.69 - - -
Growth 4/5/71 28.37 14.63 11.60 - - -
Growth & Income 6/1/93 31.71 - - 15.08 - -
International(2) 7/11/88 22.25 12.71 - 10.15 - -
World Growth(2) 10/1/92 24.29 - - 13.28 - -
Asset Allocation
Balanced Strategy 9/1/95 - - - 5.16
Cornerstone Strategy(2) 8/15/84 22.70 12.02 11.45 - - -
Growth and Tax Strategy(3)** 1/11/89 17.89 9.91 - 9.87 - 3.59
Growth Strategy(2) 9/1/95 - - - 14.32 - -
Income Strategy 9/1/95 - - - 4.46 - 5.04
Income - Taxable
GNMA 2/1/91 9.42 7.90 - 7.69 - 6.81
Income 3/4/74 12.98 9.15 9.37 - - 6.68
Income Stock 5/4/87 24.73 13.01 - 12.32 - -
Short-Term Bond 6/1/93 9.03 - - 5.01 - 6.30
Income - Tax Exempt
Long-Term(3)** 3/19/82 7.88 7.57 7.60 - - 5.72
Intermediate-Term(3)** 3/19/82 7.97 7.51 7.17 - - 5.23
Short-Term(3)** 3/19/82 5.83 5.32 5.54 - - 4.33
California Bond(3)** 8/1/89 9.35 7.64 - 7.42 - 5.54
Florida Tax-Free Income(3)** 10/1/93 7.66 - - 2.26 - 5.61
New York Bond(3)** 10/15/90 7.67 7.61 - 8.42 - 5.49
Texas Tax-Free Income(3)** 8/1/94 9.42 - - 9.08 - 5.41
Virginia Bond(3)** 10/15/90 7.57 7.77 - 8.16 - 5.37
Money Market
Money Market(4) 2/2/81 5.64 4.46 5.92 - 5.00 -
Tax Exempt Money Market(3),(4)** 2/6/84 3.65 3.22 4.30 - 3.17 -
Treasury Money Market Trust(4) 2/1/91 5.48 4.20 - 4.21 4.96 -
California Money Market(3),(4)** 8/1/89 3.58 3.08 - 3.68 3.14 -
Florida Tax-Free Money
Market(3),(4)** 10/1/93 3.51 - - 2.93 3.06 -
New York Money Market(3),(4)** 10/15/90 3.56 2.91 - 3.05 3.07 -
Texas Tax-Free Money Market(3),(4)** 8/1/94 3.49 - - 3.34 3.06 -
Virginia Money Market(3),(4)** 10/15/90 3.42 3.04 - 3.20 2.99 -
(1) Calculated as prescribed by the Securities and Exchange Commission.
(2) Foreign investing is subject to additional risks, which are discussed in the funds' prospectuses.
(3) Some income may be subject to state or local taxes or the federal alternative minimum tax.
(4) An investment in a money market fund is neither insured nor guaranteed by the U.S. government and
there is no assurance that any of the funds will be able to maintain a stable net asset value of
$1 per share.
* Total return equals income yield plus share price change and assumes reinvestment of all dividends
and capital gain distributions. No adjustment has been made for taxes payable by shareholders on
their reinvested dividends and capital gain distributions. The performance data quoted 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.
</TABLE>
MESSAGE FROM THE PRESIDENT
(Photo of Michael J.C. Roth, President and Vice Chairman of the Board
appears here)
One of the most striking reactions of an audience to a speaker that I have
ever witnessed came during a shareholders' meeting that we had last year.
The speaker was Ken Willmann, who guides our efforts in the tax-exempt bond
area. He was talking about bond investors in general, and the statement that
evoked such a memorable reaction was, "If you are going to take the income,
you should not invest in bonds." There was dead silence in the room.
Ken's statement is magnificently perceptive. There has been a tradition of
opposite thinking. For as long as I can remember people talking about
investments, the phrase, "I only spend the income - I never touch the
principal," has elicited nods of admiration. Here was a disciplined person.
This thinking even found its way into our legal process. During my six years
as a trust investment officer, I frequently saw trust instruments which
allowed beneficiaries to spend income but forbade them to "invade corpus."
In 1990, we first published information showing the experience of an
investor who made one of two theoretical choices in 1975. One was to purchase
a 9% bond, and the other was to buy the S&P 40 Utilities Index (an unmanaged
index representing the market value weighted performance of a group of
approximately 40 publicly traded utilities stocks). Although this is
theoretical, it provides us easy measurement. In this report we have updated
the bond data through 1995. The black bars on the chart show the value of the
bond portfolio assuming all the interest is spent, and we applied the actual
rates of inflation to the portfolio. The income from the bond, by 1995, is of
course unchanging, and its purchasing power has also fallen, to about 1/3 of
its 1975 level.
The gray bars on the chart reflect the real value of the portfolio if
interest is reinvested. This chart illustrates just what Ken Willmann said.
The only way to maintain the purchasing power of a bond portfolio is to
reinvest the income. The primary purpose of investing in bonds is the
excellent synergy they add to a portfolio. Their combination with stocks can
result in a portfolio that has better return and risk characteristics than
either stocks or bonds alone.
But when it comes time to take some of your investment return, you do not want
to only take your bond portfolio's income. That is the time to look at total
return.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
[A graph is shown here entitled "Real Value of a Bond Portfolio - $100,000
invested on January 1, 1975". The graph shows the impact of inflation on a
$100,000 investment with interest reinvested vs. interest distributed. The
vertical axis shows the dollar amount and the horizontal axis shows the year.
The data is as follows:
Interest Interest
Reinvested Distributed
------------ ------------
1975 101,860 93,449
1976 105,932 89,161
1977 108,144 83,507
1978 108,114 76,591
1979 104,002 67,594
1980 100,856 60,137
1981 100,912 55,202
1982 105,896 53,145
1983 111,200 51,200
1984 116,603 49,254
1985 122,480 47,465
1986 132,011 46,934
1987 137,814 44,952
1988 143,859 43,049
1989 149,839 41,136
1990 153,920 38,768
1991 162,791 37,617
1992 172,442 36,557
1993 182,931 35,578
1994 194,209 34,653
1995 206,042 33,729]
NOTE: Real value is the purchasing power of the dollars accumulated
when the actual rate of inflation is applied. The return used in this example
of a fixed-rate investment is hypothetical and for illustrative purposes only.
Investors are encouraged to closely monitor changes in any factor which may
affect their investments.
Investment Review
California Bond Fund
OBJECTIVE: Provide California investors with a high level of current
interest income that is exempt from federal and California state
income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade
California tax-exempt securities.
3/31/95 3/31/96
Net Assets $372.9 Million $409.2 Million
Net Asset Value Per Share $10.10 $10.43
Average Annual Total Return as of 3/31/96
1 Year 9.35%
5 Years 7.64%
Since inception on August 1, 1989 7.42%
30-Day SEC Yield* on March 31, 1996 5.54%
*Calculated as prescribed by the Securities and Exchange Commission.
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment for the period of 8/1/89 to 3/31/96, with dividends
and capital gains reinvested. The ending values for the items graphed are:
Lehman Brothers Municipal Bond Index $16,583
USAA California Bond Fund 16,130 ]
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 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
(A photo of the portfolio manager, Robert R. Pariseau, appears here)
When Good News is Bad
Interest rates had been falling for 15 months, but on February 20, 1996, news
screens flashed, "Greenspan says U.S. Economy 'On Track for Sustained Growth'."
Two weeks later, on March 8th, the screens read, "Non-Farm Jobs Up 705,000;
Biggest Gain since 1983." The bond and stock markets, seemingly unable to cope
with so much good news, promptly suffered their worst single day's decline in
years. What caused interest rates to increase on the 30-year U.S. Treasury
bond (the "Long Bond") from 5.95% last December to 6.67% on March 31, 1996?
Investors perceived that if the economy were strengthening too fast, then
inflation would eventually follow.
A Change in Sentiment
Since last spring, bond market sentiment has been very positive,
meaning investors were expecting the continuation of weak economic
conditions and falling interest rates. At one point, the market was
also counting on Congress to develop a bi-partisan deficit reduction
plan and for fiscal conservatives to capture the White House and
dominate Congress. Confounding the situation was the delayed release
of critical economic statistics caused by last fall's federal government
shutdown and then the distortion of the statistics by the January blizzard
and major strikes at Boeing and General Motors. Financial markets rely upon
this information to gauge the strength of the economy, the resulting demand
for credit, and the relative risk of inflation. I believe that bond market
sentiment has swung from overly optimistic to a more realistic and cautious
outlook.
The Municipal Market
As interest rates rose during the recent correction, the municipal
bond market fell less in value and has out-performed the government market.
This process started when the pro-flat tax presidential candidates did
poorly in the Republican primary elections. The improvement continued when
several influential financial publications printed articles projecting that
the middle class would end up paying higher taxes under a flat tax system or
that massive changes to the tax code would create unwise economic risks. Does
this mean that worries over major tax reform have vanished? No, but for now,
markets are less concerned that significant tax reform is likely. I promise
to monitor the situation very closely.
[A graph is shown here comparing the 12-month dividend yield of the USAA
California Bond Fund and the Lipper California Municipal Debt Funds
Average from 3/31/91 to 3/31/96. The vertical axis shows the yield and
the horizontal axis shows the time period. The values are:
USAA Calif.
Bond Fund 6.63 6.40 5.77 5.80 5.83 5.74
Lipper Calif. 6.59 6.35 5.74 5.73 5.53 5.19
Muni. Debt
Funds Avg.
The Lipper California 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
gain distributions. The graph represents data from
3/31/91 to 3/31/96.
Strategy & Outlook
Although inflation has remained very tame since 1990, the bond market
is uneasy because of the recent rise in commodity prices - especially
gasoline. Key indicators of prevailing economic conditions are very
anemic now compared to 1994 when inflation last spooked the financial
markets. How will this uncertainty impact my strategy for managing the
fund?
You may be surprised, but under most market conditions, the near-term
economic outlook will have little influence on my long-term strategy. I plan
to do what has worked successfully over the years - primarily concentrate on
generating a high level of tax exempt income and invest in quality securities.
Secondarily, I will focus on total return. This strategy means that I
typically will buy maturities 20 years or longer with higher yields, although
the market values of these bonds are more sensitive to changes in interest
rates. I rely on our seasoned research staff to find value in lesser-known
issuers and to help me avoid credit problems. In short, I position the fund
for long-term investors that want to enhance tax-exempt income and reduce
taxable capital gain distributions. I do not buy derivatives, hedge the
portfolio with futures, or try to time the market because no one has
demonstrated that they can consistently predict the future course of
interest rates.
Your Fund's Performance
Looking over the past 12 months, the bond market had a very good year
as the Long Bond rates fell from 7.43% last March 1995 to 6.67% on March 31,
1996. Your Fund's net asset value (NAV) per share rose $.33 to $10.43, or
3.3%, since March 31, 1995. The Fund's performance compared very favorably
to its peer group. For the past fiscal year, the Fund's dividend yield(1) was
5.74% compared to the Lipper California Municipal Debt Funds average
of 5.19% for the 94 funds in the category.(2) For the same period, the
Fund's total return(3) was 9.35% compared to the California Debt Funds
average of 7.27%.
The State of California
The economic recovery continues to gain momentum. Growth in the
housing and retail sales sectors is accelerating as high technology
relinquishes its leadership role. In 1995, California's employment
growth rate was twice the national average, 3.1% versus 1.5%, and the
state has now replaced all of the jobs lost in the recession. As long
as the state maintains its trend of balanced budgets, the rating
agencies should upgrade the "A" credit rating of the state within a
year or so. I remain very cautious regarding municipal lease
obligations that rely on annual appropriations, despite their somewhat
higher yields.
(1) 12-month dividend yield is computed by dividing income dividends
paid during the previous 12 months by the latest month-end net asset
value adjusted for capital gains distributions.
(2) Lipper Analytical Services is an independent organization that
monitors the performance of mutual funds.
(3) Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gains distributions.
[A pie chart appears here depicting the Portfolio Ratings/Mix as of
March 31, 1996 for the California Bond Fund to be:
AAA - 26%, AA - 20%, A - 28%, BBB - 24% and Cash Equivalents - 2%.]
This chart reflects the highest rating of either Moody's Investors
Service, Standard & Poor's Rating Group or Fitch Investors Service. Unrated
securities that have been determined by USAA IMCO to be of equivalent
investment quality to category BBB account for 0.6% of the Fund's investments.
A tax-exempt mutual fund may provide more income after taxes than a
fully taxable mutual fund. The table below compares the yield of the
USAA California Bond Fund with a taxable equivalent investment.
To match the California Bond Fund's closing 30-Day SEC yield of 5.54%
and:
Assuming a Marginal Federal Tax Rate of:
28% 31% 36% 39.6%
and
Assuming a California State Tax Rate of:
9.30% 9.30% 10.00% 10.00%
_____________________________________________________________________________
A Fully Taxable Investment Must Pay: 8.48% 8.85% 9.62% 10.19%
_____________________________________________________________________________
This table is based on a hypothetical investment calculated for
illustrative purposes only. It is not an indication of performance for
any of the USAA Family of Funds.
See page 15 for a complete listing of the Portfolio of Investments in
Securities.
Note: Income may be subject to federal, state or local taxes, or the
alternative minimum tax.
Investment Review
CALIFORNIA MONEY MARKET FUND
OBJECTIVE: Provide California investors with a high level of current
interest income that is exempt from federal and California state
income taxes, while preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality California tax-exempt securities
with maturities of 397 days or less. The Fund will maintain a
dollar-weighted average portfolio maturity of 90 days or less and will
endeavor to maintain a constant net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the
U.S. government, and there can be no assurance that the Fund will maintain
a stable net asset value of $1.00 per share.
3/31/95 3/31/96
_______________________________________________________________________
Net Assets $266.8 Million $296.3 Million
Net Asset Value Per Share $1.00 $1.00
_______________________________________________________________________
Average Annual Total Return as of 3/31/96
1 Year....................................................... 3.58%
5 Years...................................................... 3.08%
Since inception on August 1, 1989............................ 3.68%
7-Day Simple Yield on March 31, 1996......................... 3.14%
[A graph is shown here comparing the 7-day yield of the USAA California
Money Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free):
California from 3/95 to 3/96. The vertical axis shows the yield and the
horizontal axis shows the time period. The ending value, on 3/25/96, for
the USAA California Money Market Fund is 3.11% and the ending value for
the IBC Donoghue's State Specific SB & GP (Tax-Free): California is 2.70%.]
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested dividends and capital gain distributions. Past performance
is no guarantee of future results and the value of your investment may
vary according to the Fund's performance. The graph tracks the Fund's
7-day simple yield against IBC/Donoghue's State Specific SB (Stock Broker)
& GP (General Purpose) (Tax-Free): California Money Funds, an average
of all major money market fund yields.
Message from the Manager
(A photo of the portfolio manager, Pamela Bledsoe, appears here)
The Market
A year ago the Federal Reserve (Fed) instituted a directional shift
from increasing short-term interest rates to lowering them. Short-term
interest rates have been decreased by the Fed three times since July 1995
in an effort to stimulate growth in the national economy. If the economy
grows too slowly it could result in a recession; if it grows too
rapidly, it could cause inflation. Reports used to measure the
country's level of economic growth show mixed signals for the rate of
growth. The impact of these mixed signals results in fluctuating
yields for money market funds.
As we make new purchases, we consider the trends in interest rates
although we do not attempt to forecast rates. In general, if rates are
trending higher, purchasing securities with very short maturities
allows the Fund to reinvest at higher rates. If rates are trending
lower, securities with longer maturities allow the Fund to hold on to
higher rates as long as possible. Over the last six months, I have
tried to maintain a longer average maturity as the Fed has continued
to lower short-term rates. However, the need for liquidity requires
that the Fund hold a large percentage of variable rate demand notes
(VRDNs).(1) These notes have yields that change weekly and will
fluctuate with changing market conditions.
(1) Variable rate demand note (VRDN): A note representing borrowings that
is payable on demand and that bears interest tied to a money market
rate.
Regardless of the trend in interest rates, we strive to maintain a
portfolio of high quality, competitive yielding securities. All of our
holdings must meet our standards for liquidity, credit quality, yield,
and maturity.
California
Continued economic growth in California signals the end of a prolonged
recession. Positive financial results anticipated for the current
fiscal year, combined with positive financial results for the previous
three fiscal years, have improved the State's cash positions, and
elimination of the State's accumulated deficit is anticipated by the
end of Fiscal 1996. However, recent improvements must be tempered with
caution due to the fragility of the State's economic recovery. Our
outlook for the California recovery remains positive, but we continue
to prefer investing at the local level (schools and community college
districts) because of state funding priorities.
[A graph appears here showing the growth of $10,000 from 8/1/89 to 3/31/96
invested in the USAA California Money Market Fund. The vertical axis shows
the dollar amount and the horizontal axis shows the time period. The ending
value is $12,729.]
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.
An investment in any money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
See page 18 for a complete listing of the Portfolio of Investments in
Securities.
Independent Auditors' Report
The Shareholders and Board of Directors
USAA Tax Exempt Fund, Inc.:
We have audited the accompanying statements of assets and liabilities
and portfolios of investments in securities of the California Bond and
California Money Market Funds, separate Funds of USAA Tax Exempt Fund, Inc.,
as of March 31, 1996, the related statements of operations for the year
then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights information
presented in note 6 to the financial statements for each of the years in the
five-year period then ended. These financial statements and the financial
highlights information are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and the financial highlights information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights information are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of March 31, 1996, by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
information referred to above present fairly, in all material
respects, the financial position of the California Bond and California
Money Market Funds, separate Funds of USAA Tax Exempt Fund, Inc.,
as of March 31, 1996, the results of their operations for the year
then ended, the changes in their net assets for each of the years in
the two-year period then ended, and the financial highlights
information for each of the years in the five-year period then ended,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 10, 1996
STATEMENTS OF ASSETS AND LIABILITIES
(In Thousands)
March 31, 1996
<TABLE>
<CAPTION>
California
California Money Market
Bond Fund Fund
---------- ---------
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $393,515 and $293,203, respectively) $ 411,426 $ 293,203
Cash 162 1,191
Receivables:
Capital shares sold 43 226
Interest 6,695 2,376
------- ---------
Total assets 418,326 296,996
------- ---------
Liabilities
Securities purchased 8,380 -
Capital shares redeemed 41 450
USAA Investment Management Company 111 79
USAA Transfer Agency Company 16 16
Accounts payable and accrued expenses 49 54
Dividends on capital shares 549 48
------ --------
Total liabilities 9,146 647
------ --------
Net assets applicable to capital shares outstanding $409,180 $296,349
========= ==========
Represented by:
Paid-in capital $398,915 $296,349
Accumulated net realized loss on investments (7,646) -
Net unrealized appreciation of investments 17,911 -
--------- ---------
Net assets applicable to capital shares outstanding $409,180 $296,349
======== ========
Capital shares outstanding 39,244 296,349
======== ========
Net asset value, redemption price, and offering price per share $ 10.43 $ 1.00
======== ========
See accompanying notes to financial statements.
</TABLE>
Categories & Definitions
Portfolios of Investments in Securities
March 31, 1996
Fixed Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The coupon rate is constant to maturity. Prior to maturity, the
price of a fixed rate instrument generally varies inversely to the movement
of interest rates. At maturity, the security pays face value.
Put Bonds - provide the right to tender, or put, the bond for
redemption at face value at specific tender dates prior to final
maturity. The put feature shortens the effective maturity to the next
tender date. Between tender dates, the price of a put bond generally
varies inversely to the movement of interest rates.
Variable Rate Demand Notes (VRDN) - provide the right, on any business
day, to demand, or put, the security for redemption at face value on
either that day or in seven days. The interest rate is adjusted at the
stipulated daily, weekly, or monthly interval to a rate that reflects
current market conditions. In money market funds, the VRDN's effective
maturity is the longer of the next put date or the interest reset date
rather than the final maturity. In bond funds, the effective maturity
is the next put date. Most VRDNs possess a credit enhancement.
Credit Enhancement (CRE) - adds the financial strength of the provider
to support the underlying obligor's debt service obligations and/or the
put option. The enhancement may be provided by either a high quality bank,
insurance company or other corporation, or a collateral trust. Typically,
the rating agencies evaluate the security based upon the credit standing
of the credit enhancement.
California Bond Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1996
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
--------- ---------- ------- ---------- ------
Fixed Rate Instruments (97.9%)
<C> <S> <C> <C> <C>
California (93.4%)
$ 5,255 Alameda Housing Auth. MFH RB, Series 1989A 7.50 % 2/20/31 $ 5,398
10,000 Big Bear Lake Water RB (CRE) 6.38 4/01/22 10,409
20,000 Central Valley Cogeneration Financing
Auth. RB 6.20 7/01/20 19,460
7,175 Contra Costa Water District RB,
Series D (CRE) 6.38 10/01/22 7,434
11,000 Department of Water Resources RB, Series K 6.00 12/01/21 11,018
Educational Facilities Auth. RB,
9,500 Series 1991 (CRE) 7.15 5/01/21(a) 10,736
5,000 Series 1992 6.00 2/15/17 5,084
1,775 Series 1992 6.88 9/01/22 1,886
8,990 Series 1992 6.50 10/01/22 9,340
9,000 Series 1994 (CRE) 6.20 5/01/21 9,127
8,015 Series 1995 6.00 10/01/25 8,015
7,100 Series 1995A 5.60 12/01/14 6,776
2,250 Series 1995A 5.60 12/01/20 2,107
2,480 Fresno COP 8.50 5/01/16 2,542
Health Facilities Financing Auth. RB,
8,000 Series 1990 7.50 10/01/10(a) 8,762
6,500 Series 1990A (CRE) 7.70 9/01/10 7,161
35,000 Series 1990A 6.50 12/01/20 37,026
11,500 Series 1991 (CRE) 6.75 6/01/21 11,840
3,175 Series 1992A (CRE) 6.38 10/01/22 3,300
2,000 Series 1994 (CRE) 6.50 9/01/14 2,029
5,000 Series 1994A 6.63 7/01/18 5,081
Housing Finance Agency Home Mortgage RB,
1,100 Series 1988F 7.88 8/01/19 1,141
10,645 Series 1991F 6.85 8/01/17 11,078
5,990 Series 1994A 6.55 8/01/26 6,147
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/25 5,552
8,500 Imperial Irrigation District COP (CRE) 6.00 11/01/15 8,612
17,000 Modesto Irrigation District RB,
Series 1992A (CRE) 6.13 9/01/19 17,272
7,575 Mojave Water Agency Improvement District GO 6.60 9/01/22 7,816
11,450 Pleasanton Joint Powers Financing Auth. RB,
Series 1993A 6.15 9/02/12 11,457
Sacramento Cogeneration Auth. RB,
4,500 Series 1995 6.50 7/01/21 4,546
6,000 Series 1995 6.00 7/01/22 5,718
6,130 Sacramento Municipal Utility District
Electric RB, Series 1987R 6.00 2/01/15 5,994
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/25 7,145
13,500 San Joaquin Hills Transportation RB 6.75 1/01/32 13,847
40,900 San Joaquin Hills Transportation RB 5.00 1/01/33 33,271
11,320 San Mateo Sewer RB, Series 1992 (CRE) 6.30 8/01/17 11,704
12,455 Southern California Public Power Auth. RB,
Series 1989 (CRE) 6.00 7/01/18 12,170
4,000 Statewide Communities Development Auth. COP,
Series 1996A (CRE) 5.50 9/01/14 3,724
11,005 Turlock Irrigation District RB,
Series 1992A (CRE) 6.25 1/01/12 11,710
12,000 Univ. of California RB, Series 1991A 6.88 9/01/16(a) 13,608
5,000 Watsonville Insured Hospital RB,
Series 1995A (CRE) 6.35 7/01/24 5,007
Puerto Rico (4.5%)
10,000 Electric Power Auth. RB, Series X 6.13 7/01/21 10,084
9,000 Puerto Rico Highway and Transportation
Auth. RB, Series 1996Y 5.50 7/01/26 8,328(c)
---------
Total fixed rate instruments (cost: $382,552) 400,462
------------
Put Bond (0.4%)
California
1,890 Housing Finance Agency MFH RB, Series 1985A
(CRE) (cost: $1,893) 9.25 2/01/11 1,894
------
Variable Rate Demand Notes (2.2%)
California
800 Health Facilities Financing Auth. RB,
Series 1985B 3.50 7/01/13 800
7,325 Richmond Joint Powers Financing Auth.
Lease RB, Series 1994 (CRE) 3.65 9/01/04 7,325
245 Statewide Communities Development Auth. COP,
Series 1993A (CRE) 3.50 12/01/18 245
700 Torrance Hospital RB, Series 1992 (CRE) 4.00 2/01/22 700
-------
Total variable rate demand notes (cost: $9,070) 9,070
-------
Total investments (cost: $393,515) $411,426
==========
</TABLE>
Portfolio Summary By Industry
______________________________
Electric Power 19.1 %
Hospitals 14.2
Toll Roads 11.5
Water Utilities 11.3
Education 10.3
Escrowed Securities 8.1
Multi-Family Housing 4.9
Special Assessment/Tax/Fee 4.8
Single-Family Housing 4.5
Nursing Care 2.9
Sewer 2.9
General Obligations 1.9
Ports/Wharfs 1.8
Healthcare - Miscellaneous 1.2
Other 1.1
-----
Total 100.5 %
======
California Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1996
<TABLE>
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
--------- --------- ------ -------- -----
Variable Rate Demand Notes (53.8%)
<C> <S> <C> <C> <C>
California
$ 5,200 Auburn Union School District COP,
Series 1993 (CRE) 3.60 % 12/01/21 $ 5,200
3,100 Azusa MFH RB, Series 1994 (CRE) 3.65 7/15/15 3,100
4,000 Central Unified School District COP,
Series 1995 (CRE) 3.75 6/01/15 4,000
1,200 Covina Redevelopment Agency MFH RB,
Series 1994A (CRE) 3.65 12/01/15 1,200
9,600 Fontana COP, Series 1991 (CRE) 3.90 7/01/21 9,600
1,200 Health Facilities Financing Auth. RB,
Series 1985B 3.50 7/01/13 1,200
4,900 Huntington Beach MFH RB, Series 1985A (CRE) 4.00 2/01/10 4,900
15,000 Kern Community College District COP,
Series 1995 (CRE) 3.65 1/01/25 15,000
5,170 Livermore MFH RB, Series 1992A (CRE) 3.40 12/01/22 5,170
7,000 Loma Linda Water RB, Series 1995 (CRE) 3.75 6/01/25 7,000
800 Merced IDA RB, Series 1989 (CRE) 3.50 12/01/97 800
4,400 Monrovia Redevelopment Agency COP,
Series 1984 (CRE) 4.00 12/01/14 4,400
Orange County Apartment Development RB,
8,100 Series 1984D (CRE) 3.43 8/01/19 8,100
19,450 Series 1992B (CRE) 3.75 11/01/05 19,450
4,000 Series 1992D (CRE) 3.40 12/01/06 4,000
2,500 Pollution Control Financing Auth. PCRB,
Series 1985 (CRE) 3.68 12/01/00 2,500
2,645 Porterville Union High School District COP,
Series 1994 (CRE) 3.60 5/01/19 2,645
3,040 Riverside County Housing Auth. MFH RB,
Series 1986F (CRE) 3.75 12/01/16 3,040
2,500 San Bernardino County Housing Auth. MFH RB,
Series 1985B (CRE) 3.68 6/01/05 2,500(b)
5,200 San Bernardino IDA RB, Series 1992 (CRE) 3.55 2/01/12 5,200
16,500 San Diego MFH RB, Series 1993A (CRE) 3.65 12/01/15 16,500
8,010 Statewide Communities Development Auth.
Apartment Development RB,
Series 1995D (CRE) 3.75 12/01/22 8,010
Statewide Communities Development Auth. COP,
2,200 Covenant Retirement Communities,
Series 1992 (CRE) 3.35 12/01/22 2,200
4,075 Institute for Defense Analysis (CRE) 3.50 11/01/22 4,075
12,700 Torrance Hospital RB, Series 1992 (CRE) 4.00 2/01/22 12,700
5,685 Victor Elementary School District COP (CRE) 3.45 5/01/18 5,685
1,200 Western Riverside County Regional Wastewater
Treatment Auth. RB, Series 1996 (CRE) 3.50 4/01/28 1,200
-------
Total variable rate demand notes (cost: $159,375) 159,375
-------
Put Bonds (15.2%)
California
13,000 Irvine Assessment District #85-7 CP (CRE) 3.45 9/02/11 13,000
2,600 Modesto MFH RB, Issue 1992A (CRE) 3.25 3/01/06 2,600
Pollution Control Financing Auth. PCRB,
2,660 Series 1984 4.50 5/15/02 2,661
5,260 Series 1984B 4.25 6/15/05 5,261
9,000 Series 1988E (CRE) 3.25 12/01/08 9,000
12,700 Public Capital Improvement Finance Auth. RB,
Series 1988C (CRE) 3.40 6/01/28 12,700
------
Total put bonds (cost: $45,222) 45,222
------
Fixed Rate Instruments (29.9%)
California (26.2%)
3,230 Community College Financing Auth. TRAN,
Series 1995B 5.00 8/30/96 3,237
5,500 Del Mar Race Track Auth. BAN, Series 1993 (CRE) 3.50 8/15/96 5,500
Department of Water Resources CP Notes,
6,243 Series 1 2.90 4/04/96 6,243
3,200 Series 1 3.10 4/30/96 3,200
3,200 Series 1 3.10 5/13/96 3,200
1,500 Series 1 3.25 5/23/96 1,500
8,500 Los Angeles County Metropolitan Transportation
Auth. CP Notes, Series 1996A (CRE) 3.05 4/08/96 8,500
5,000 Millbrae Elementary School District TRAN,
Series 1995 4.75 7/05/96 5,008
12,000 Revenue Anticipation Warrants,
Series 1994C (CRE) 5.75 4/25/96 12,009
8,905 San Bernardino County Refunding and Capital
Improvement COP 7.80 7/01/16(a) 9,171
10,000 San Bernardino County TRAN,
Series 1995-96 (CRE) 4.50 7/05/96 10,014
5,000 San Mateo Union High School District TRAN,
Series 1995 4.75 7/05/96 5,008
5,000 Yuba Community College TRAN, Series 1995-96 4.25 11/21/96 5,016
Puerto Rico (3.7%)
6,000 Government Development Bank CP 3.30 4/04/96 6,000
5,000 Government Development Bank CP 3.20 5/16/96 5,000
-------
Total fixed rate instruments (cost: $88,606) 88,606
-------
Total investments (cost: $293,203) $ 293,203
=========
</TABLE>
Portfolio Summary By Industry
Multi-Family Housing 23.8 %
Education 10.9
General Obligations 9.1
Special Assessment/Tax/Fee 8.1
Water Utilities 7.1
Finance - Municipal 5.2
Hospitals 4.7
Bank Holding Companies - Other Major 3.7
Buildings 3.2
Hotel/Motel 3.2
Escrowed Securities 3.1
Electric Power 3.0
Sales Tax Obligations 2.9
Oil - International 2.7
Retirement Homes 2.7
Leisure Time 1.9
Specialized Services 1.4
Other 2.2
-----
Total 98.9 %
======
Notes to Portfolios of Investments
(In Thousands)
March 31, 1996
General Notes
Market values of securities are determined by procedures and practices
discussed in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the
same as that reported in the financial statements.
The percentages shown represent the percentage of the investments to
net assets.
Portfolio Description Abbreviations
BAN Bond Anticipation Note
COP Certificate of Participation
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TRAN Tax Revenue Anticipation Note
Specific Notes
(a) Pre-refunded to various dates prior to maturity at the call price.
(b) This security was purchased within the terms of a private
placement memorandum and is subject to a seven day demand feature.
Under procedures adopted by the Board of Directors, the adviser has
determined that this securitiy is liquid. At March 31, 1996, this
security represented .8% of the California Money Market Fund's net
assets.
(c) At March 31, 1996, the cost of securities purchased on a delayed
delivery basis for the California Bond Fund was $8,328.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Year ended March 31, 1996
<TABLE>
<CAPTION>
California
California Money Market
Bond Fund Fund
---------- --------
<S> <C> <C>
Net investment income:
Interest income $ 24,515 $ 10,999
--------- ---------
Expenses:
Management fees 1,281 890
Transfer agent's fees 235 201
Custodian's fees 86 93
Postage 25 32
Shareholder reporting fees 13 21
Directors' fees 3 3
Registration fees - 2
Audit fees 28 28
Legal fees 8 8
Other 11 10
------ ------
Total expenses 1,690 1,288
------ ------
Net investment income 22,825 9,711
------- ------
Net realized and unrealized gain on investments:
Net realized gain 3,356 -
Change in net unrealized appreciation/depreciation 8,681 -
------- ------
Net realized and unrealized gain 12,037 -
------- -------
Increase in net assets resulting from operations $34,862 $ 9,711
======= ========
See accompanying notes to financial statements.
</TABLE>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
<TABLE>
<CAPTION>
California
California Money
Bond Fund Market Fund
1996 1995 1996 1995
---- ---- ----- ----
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 22,825 $ 21,989 $ 9,711 $ 7,398
Net realized gain (loss) on investments 3,356 ( 7,665) - -
Change in net unrealized appreciation/
depreciation of investments 8,681 8,457 - -
--------- -------- ------- -------
Increase in net assets resulting from
operations 34,862 22,781 9,711 7,398
--------- --------- ------- -------
Distributions to shareholders from:
Net investment income (22,825) (21,989) (9,711) (7,398)
--------- --------- ------- -------
From capital share transactions:
Shares sold 64,140 68,957 262,179 274,440
Shares issued for dividends reinvested 16,097 15,794 8,964 6,718
Shares redeemed (55,971) (95,432) (241,558) (261,697)
-------- --------- --------- ---------
Increase (decrease) in net assets from
capital share transactions 24,266 (10,681) 29,585 19,461
-------- -------- --------- -------
Net increase (decrease) in net assets 36,303 (9,889) 29,585 19,461
Net assets:
Beginning of period 372,877 382,766 266,764 247,303
------- ------- --------- -------
End of period $ 409,180 $ 372,877 $ 296,349 $266,764
======== ======= ========= =======
Change in shares outstanding:
Shares sold 6,158 6,982 262,179 274,440
Shares issued for dividends reinvested 1,543 1,604 8,964 6,718
Shares redeemed (5,376) (9,826) (241,558) (261,697)
--------- -------- --------- ---------
Increase (decrease) in shares outstanding 2,325 (1,240) 29,585 19,461
========= ======== ========= ========
Authorized shares of $.01 par value 50,000 50,000 425,000 425,000
========= ======== ========= ========
See accompanying notes to financial statements.
</TABLE>
Notes to Financial Statements
(In Thousands)
March 31, 1996
(1) Summary of Significant Accounting Policies
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, is a diversified, open-end management investment company
incorporated under the laws of Maryland consisting of ten separate funds. The
information presented in this annual report pertains only to the California
Bond Fund and California Money Market Fund (the Funds). The Funds have a
common objective of providing California investors with a high level of
current interest income that is exempt from federal and California state
income taxes. The California Money Market Fund has a further objective of
preserving capital and maintaining liquidity.
A. Security valuation - Investments in the California Bond Fund are
valued each business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between quoted bid and
asked prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods
which include consideration of yields or prices of municipal securities
of comparable quality, coupon, maturity and type, indications as to
values from dealers in securities, and general market conditions.
Securities which are not valued by the Service, and all other assets,
are valued in good faith at fair value using methods determined by the
Manager under the general supervision of the Board of Directors. Securities
purchased with maturities of 60 days or less and, pursuant to Rule 2a-7 of
the Securities and Exchange Commission, all securities in the California
Money Market Fund are stated at amortized cost which approximates market
value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its income to its shareholders. Therefore,
no federal income or excise tax provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased or
sold (trade date). Gain or loss from sales of investment securities is
computed on the identified cost basis. Interest income is recorded daily on
the accrual basis. Premiums and original issue discounts are amortized
over the life of the respective securities. Market discounts are not
amortized. Any ordinary income related to market discounts is recognized upon
disposition of the bonds. The Funds concentrate their investments in
California municipal securities and therefore may be exposed to more credit
risk than portfolios with a broader geographical diversification.
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, 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 at the lending institution's
borrowing rate plus a markup to cover costs. The Funds had no borrowings under
either of these agreements during the year ended March 31, 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 March 31, 1996.
Distributions of realized gains from security transactions not offset
by capital losses are generally made in the succeeding fiscal year. At
March 31, 1996, the California Bond Fund had a capital loss carryover
of approximately $7,646 which will expire in or before 2005. It is
unlikely that the Board of Directors of the Company will authorize a
distribution of capital gains realized in the future until the capital loss
carryover has been utilized or expires.
The Funds completed their fiscal year on March 31, 1996. Federal law
(Internal Revenue Code of 1986, as amended, and the regulations
thereunder) requires each Fund to notify its shareholders after the
close of its taxable year as to what portion of its earnings was
exempt from federal taxation and the dividend distributions which
represent long-term capital gains. The net investment income earned
and distributed by each of the Funds was 100% tax exempt for federal
and California state income tax purposes. There were no long-term
capital gain distributions for the year ended March 31, 1996.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term
securities, for the year ended March 31, 1996 for the California Bond
Fund were $112,732 and $89,639, respectively. Purchases and sales/maturities
of securities for the year ended March 31, 1996 for the California Money
Market Fund were $819,931 and $784,025, respectively.
Gross unrealized appreciation and depreciation of investments at March
31, 1996 for the California Bond Fund was $19,007 and $1,096,
respectively.
(5) Transactions with Manager
A. Management fees - The investment policy of the Funds and the
management of the Funds' portfolios is carried out by USAA Investment
Management Company (the Manager). Management fees are computed as a
percentage of aggregate average net assets (ANA) of both Funds
combined, which on an annual basis is equal to .50% of the first $50,000,
.40% of that portion over $50,000 but not over $100,000, and .30% of that
portion over $100,000. These fees are allocated on a proportional basis to
each Fund monthly based upon ANA.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Company. Shareholder accounting service
fees are based on an annual charge per shareholder account plus
out-of-pocket expenses.
C. Underwriting agreement - The Company has an agreement with the
Manager for exclusive underwriting and distribution of the Funds'
shares on a continuing best efforts basis. The agreement provides that
the Manager will receive no fee or other remuneration for such
services.
Notes to Financial Statements (continued)
March 31, 1996
(6) Financial Highlights
Per share operating performance for a share outstanding throughout
each period is as follows:
<TABLE>
<CAPTION>
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net
Year Beginning Investment Unrealized Investment
Ended of Period Income Gain (Loss) Income
($) ($) ($) ($)
<S> <C> <C> <C> <C>
California Bond Fund:
March 31,
1992 9.98 .66 .27 (.66)
1993 10.25 .62 .62 (.62)
1994 10.75 .59 (.52) (.59)
1995 10.03 .59 .07 (.59)
1996 10.10 .60 .33 (.60)
California Money Market Fund:
March 31,
1992 1.00 .04 - (.04)
1993 1.00 .03 - (.03)
1994 1.00 .02 - (.02)
1995 1.00 .03 - (.03)
1996 1.00 .04 - (.04)
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Net Asset Ratio of Investment
Distributions Value at Net Assets Expenses Income
of Realized End Total at end to Average to Average Portfolio
Capital Gains of Period Return of Period Net Assets Net Assets Turnover
($) ($) (%)* ($000) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
California Bond Fund:
March 31,
1992 - 10.25 9.52 305,834 .48 6.44 50.61
1993 (.12) 10.75 12.56 386,933 .46 5.94 86.53
1994 (.20) 10.03 .31 382,766 .44 5.40 102.85
1995 - 10.10 6.89 372,877 .44 5.98 28.86(a)
1996 - 10.43 9.35 409,180 .42 5.74 23.09(a)
California Money Market Fund:
March 31,
1992 - 1.00 4.03 229,328 .50 3.94 -
1993 - 1.00 2.66 219,097 .50 2.63 -
1994 - 1.00 2.22 247,303 .49 2.19 -
1995 - 1.00 2.94 266,764 .47 2.91 -
1996 - 1.00 3.58 296,349 .47 3.52 -
(a) Effective for 1995 and 1996, portfolio turnover rates have been calculated excluding short-term
term variable rate securities which are those with put date intervals of less than one year.
* Assumes reinvestment of all dividend income and capital gains distributions during the period.
</TABLE>
