Table of Contents
USAA Family of Funds............................. 1
Message from the President....................... 2
Investment Review:
New York Bond Fund.......................... 4
New York Money Market Fund..................10
Financial Information:
Independent Auditors' Report................13
Statements of Assets and Liabilities........14
Portfolios of Investments in Securities:
New York Bond Fund.....................17
New York Money Market Fund.............19
Notes to Portfolios of Investments..........22
Statements of Operations....................23
Statements of Changes in Net Assets.........24
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
New York Funds, managed by USAA Investment Management Company (IMCO).
It may be used as sales literature only when preceded or accompanied
by a current prospectus which gives further details about the funds.
USAA with the eagle is registered in the U.S. Patent & Trademark
Office. (copyright)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* 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
New York Bond Fund
OBJECTIVE: Provide New York investors with a high level of current
interest income that is exempt from federal income taxes and New York
state and New York City personal income taxes.
Types of Investments: Invests primarily in long-term investment grade
New York tax-exempt securities.
3/31/95 3/31/96
Net Assets $50.5 Million $54.0 Million
Net Asset Value Per Share $10.77 $10.95
Average Annual Total Return as of 3/31/96
1 Year 7.67%
5 Years 7.61%
Since inception on October 15, 1990 8.42%
30-Day SEC Yield* on March 31, 1996 5.49%
*Calculated as prescribed by the Securities and Exchange Commission.
[A graph is shown here which is a comparison of the change in value
of a $10,000 investment for the period of 10/15/90 to 3/31/96, with
dividends and capital gains reinvested. The ending values for the
items graphed are:
Lehman Brothers Muni. Bond Index $15,668
USAA New York Bond Fund 15,613 ]
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, Kenneth Willmann, appears here)
Financial Markets
The bull market in bonds which began in November 1994, lasted for most
of the fiscal year ended March 31, 1996. Bonds generally, and the New
York Bond Fund in particular, experienced declining interest rates and
rising prices from March 31, 1995, until January or February, 1996. Then
interest rates turned up, and bond prices fell. This can be seen in the
graph below. Join me in studying this graph, and I will attempt to
point out and explain several interesting observations.
[A graph is shown here which is a comparison of Municipal and U.S. Treasury
Bond Yields from 3/31/95 to 3/29/96. The vertical axis shows the yield
and the horizontal axis shows the time period. The ending yields are
6.67% for the 30 year U.S. Treasury and 5.96% for the Bond Buyer 40-Bond
Index (BBI40).]
Note: Past performance is no guarantee of future results. The results
of the comparison reflect current conditions as regards to tax laws,
inflationary trends, and general corporate policies and practices.
Investors are encouraged to closely monitor changes in any factor which
may affect their investments.
Before we begin, let me explain the structure of the graph itself. The
vertical axis is interest rates or yields, and the horizontal axis is
dates. The dates used are the Fridays of every week in the 12-month period
ended Friday, March 29, 1996. The top line is the yield of the active
30-year U.S. Treasury bond. This is generally considered the benchmark for
long-term interest rates in the U.S. and is often referred to as the
"Long Bond." The bottom line is the yield on the Bond Buyer 40-bond Index
(BBI40). This is the industry standard for the yield of long-term,
investment-grade municipal bonds.
The most obvious information which appears in this graph is what
happened to interest rates during the period. The yield on the Long Bond
fell from a high of 7.43% on March 31, 1995, to a low of 5.95% on December
29, 1995. This occurred because the Federal Reserve Board cut interest rates
several times in calendar year 1995. The economy was slowing also, which
led to a decline in inflation. Inflation is a major determinant of the level
of interest rates. Yields began to rise again in January and ended the period
at 6.67% on March 29, 1996. Several factors came together to cause this rise.
First, the market became concerned that inflation might rise since the economy
was no longer weakening. Second, the inability of Congress and the President
to agree on a budget raised the general apprehension level in financial
markets. Third, the Presidential primary season began. The original
discord in the Republican party and the uncertainty surrounding potential third
party candidates fed this apprehension.
Municipal bonds followed a similar pattern. Interestingly, the BBI40
line in the graph shows that in the first three quarters of the time
period, yields did not decline as much as that of the Long Bond. This led to
a narrowing of the spread between the yields of the BBI40 and the Long Bond.
Discussions of tax reform and uncertainty as to what effect it might have on
the tax-exempt status of municipal bond interest caused this to occur. As the
Presidential primary season got underway in January 1996, the lack of
unanimity among Republican candidates on this issue and the early
identification of Senator Bob Dole as the Republican nominee led the financial
markets to lose some fear of tax reform. As of this writing, Senator Dole has
not made any definite policy statements on tax reform. He merely observes that
the issue deserves study. Notice that as interest rates started back up,
municipal yields did not bottom out until early February. This lag widened the
spread between the BBI40 and the Long Bond.
All of the foregoing may seem pretty technical, but it does illustrate a
valuable point. Interest rates in different sectors of the U. S. financial
markets do not move in lock step. Over short periods, such as the month of
January, the yields of the BBI40 and the Long Bond actually moved in opposite
directions. Over longer periods, however, the trends are the same.
The New York Bond Fund
How did all of this affect the New York Bond Fund? Since bond prices
move opposite to yields, the first 10 months showed a strong rise in the net
asset value per share (NAV). The NAV was $10.77 on March 31, 1995, and it
rose to $11.41 on February 13, 1996. For those same dates, the 30-day SEC
Yield fell from 5.73% to a still attractive 5.21%. By March 31, 1996, the
NAV fell back to $10.95 and the SEC Yield rose to 5.49%. As one would expect,
the performance of the New York Bond Fund mirrored that of the municipal bond
market.
Current Economy
The U.S. economy is currently experiencing slow growth and relatively
low inflation. Since it is an election year, political policy statements
could cause rapid shifts in market sentiment and interest rates. One area
to which we will pay particular attention is tax reform. If this becomes a
major campaign issue, municipal interest rates could be affected
separately from the general interest rate markets. We will respond as
necessary when we know the nature of the tax reforms, if indeed any
are proposed.
New York Economy
The state's budget for the 1995-96 fiscal year, the first to be
enacted in the administration of Governor George Pataki, was notable
in the fact that it included the first phase of a personal income tax
reduction designed to spur economic growth, as well as an absolute
year-over-year decline in General Fund disbursements. Preliminary
financial reports for the 1996 fiscal year indicate satisfactory results.
However, the Governor's proposed 1996-97 budget and subsequent budget
contingency plan is dependent, in part, on yet-to-be enacted federal actions
to achieve balance. Underlying the current budget negotiations is an economy
that, while broad and diverse, has been relatively weak when compared to the
nation as a whole. This is evidenced by January 1996 unemployment
rates (seasonally adjusted) of 6.2% for New York state and 8.2% for
New York City, versus 5.8% for the country as a whole.
The ability of the Pataki administration to pass and implement a
timely and structurally sound budget, combined with ongoing economic
performance, will be key components of future financial performance. We will
be closely monitoring these and other issues and their potential impact on
credit quality. Overall debt levels, while high, remain manageable.
[A graph is shown here comparing the 12-month dividend yield of the USAA
New York Bond Fund and the Lipper New York Municipal Debt Funds Average
from 3/31/92 to 3/31/96. The vertical axis shows the yield and the
horizontal axis shows the time period. The values are:
USAA New York Bond Fund 6.28 5.61 5.62 5.74 5.79
Lipper. New York Muni Debt
Funds Average 6.40 5.69 5.62 5.39 5.08 ]
The Lipper New York 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 3/31/92 to
3/31/96.
Strategy
I will continue to follow a strategy of favoring tax-exempt income
over capital gains while maintaining a high quality portfolio. For the 12
months ended March 31, 1996, the dividend yield (1) on the Fund was 5.79%,
well ahead of Lipper's General Municipal Debt Funds average of 5.08% for the
94 funds in the category.(2) Compounding of the tax-exempt income is the
primary reason to own the Fund.
(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.
[A pie chart is shown here depicting the Portfolio Ratings/Mix as of March
31, 1996 for the New York Bond Fund to be: AAA -16%, AA-44%, A -21%,
BBB -17% 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.
See page 17 for a complete listing of the Portfolio of Investments in
Securities.
Note: Income may be subject to federal, state or local taxes, or the
alternative minimum tax.
Investment Review
NEW YORK MONEY MARKET FUND
OBJECTIVE: Provide New York investors with a high level of current
interest income that is exempt from federal income taxes and New York
state and New York City personal income taxes, while preserving
capital and maintaining liquidity.
Types of Investments: High quality New York tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will endeavor to maintain
a constant net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the
U.S. government, and there can be no assurance that the fund will maintain
a stable net asset value of $1.00 per share.
3/31/95 3/31/96
Net Assets $27.5 Million $45.6 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Return as of 3/31/96
1 Year........................................................ 3.56%
5 Years....................................................... 2.91%
Since inception on October 15, 1990........................... 3.05%
7-Day Simple Yield on March 31, 1996.......................... 3.07%
[A graph is shown here comparing the 7-day yield of the USAA New York Money
Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free): New
York from 3/95 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 New York Money Market Fund is 3.04% and the ending value for the
IBC Donoghue's State Specific SB & GP (Tax-Free): New York is 2.65%.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. Past performance is no guarantee of future
results and the value of your investment may vary according to the Fund's
performance. The graph tracks the Fund's 7-day simple yield against
IBC/Donoghue's State Specific SB (Stock Broker) & GP (General Purpose)
(Tax-Free): New York Money Funds, an average of all major money market
fund yields.
Message from the Manager
(A photo of the portfolio manager, Pamela K. 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.
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.
NEW YORK
New York continues to struggle to implement a timely and structurally
sound budget. Economic growth has been weak compared to the national
economy further aggravating the budget efforts. We are monitoring very
closely the State's financial condition and the impact this has on credit
quality. We remain selective in our purchases of new issues, focusing
primarily on issues with guarantees by strong financial institutions.
(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.
[A graph appears here showing the growth of $10,000 from 10/15/90
to 3/31/96, invested in the USAA New York Money Market Fund. The
vertical axis shows the dollar amount and the horizontal axis
shows the time period. The ending value is $11,798.]
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 19 for a complete listing of the Portfolio of Investments in
Securities.
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.
Independent Auditors' Report
The Shareholders and Board of Directors
USAA TAX EXEMPT FUND, INC.:
We have audited the accompanying statements of assets and liabilities
and portfolios of investments in securities of the New York Bond and New
York Money Market Funds, separate Funds of USAA Tax Exempt Fund, Inc.,
as of March 31, 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 New York Bond and New York 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>
New York
New York Money Market
Bond Fund Fund
----------- ------------
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $53,880 and $45,480, respectively) $ 55,464 $ 45,480
Cash 96 407
Receivables:
Capital shares sold 3 16
Interest 845 303
------- ---------
Total assets 56,408 46,206
------- ---------
Liabilities
Securities purchased 2,275 501
Capital shares redeemed 31 70
USAA Investment Management Company 37 57
USAA Transfer Agency Company 4 1
Accounts payable and accrued expenses 21 20
Dividends on capital shares 53 3
------ ---------
Total liabilities 2,421 652
------ ---------
Net assets applicable to capital shares outstanding $53,987 $45,554
======== =========
Represented by:
Paid-in capital $55,144 $45,554
Accumulated net realized loss on investments ( 2,741) -
Net unrealized appreciation of investments 1,584 -
------- --------
Net assets applicable to capital shares outstanding $53,987 $45,554
======= ========
Capital shares outstanding 4,929 45,554
======= ========
Net asset value, redemption price, and offering price per
share $ 10.95 $ 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.
New York 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 (100.3%)
<C> <S> <C> <C> <C>
New York
$ 2,235 34th Street Partnership Capital Improvement
Bonds, Series 1993 5.50 % 1/01/14 $ 2,100
Dormitory Auth. RB,
1,750 Series 1990A (Devereux Foundation) (CRE) 7.40 7/01/15(a) 1,973
2,000 Series 1992 (Manhattan College) (CRE) 6.50 7/01/19 2,059
2,000 Series 1994 (Garwin Geriatric Center) 7.35 8/01/29 2,219
2,500 Series 1994B (State Univ. System) 6.25 5/15/20 2,507
2,545 Series 1995 (Our Lady of Consolation) 6.05 8/01/35 2,507
2,770 Series 1995A (City Univ. System) 5.63 7/01/16 2,639
2,950 Series 1996 (Department of Health) 5.50 7/01/25 2,665
2,380 Series 1996 (Mather Memorial Hospital)(CRE) 5.25 7/01/15 2,178(b)
2,500 Series 1996 (St. Johns Health Care) 6.25 2/01/36 2,527
1,650 Environmental Facilities Corp. PCRB,
Series 1990B 7.50 3/15/11 1,810
1,985 Groton Community Health Care Facilities RB,
Series 1994A 7.45 7/15/21 2,194
1,930 Housing Finance Agency MFH RB, Series 1992E 6.75 8/15/25 1,985
Medical Care Facilities Finance Agency RB,
2,500 Series 1994A (Community General Hospital of
Sullivan County) 6.25 2/15/24 2,386
2,000 Series 1994A (Hospital and Nursing Home
Facilities) 6.50 2/15/34 2,040
2,000 Series 1994A (New York Hospital) (CRE) 6.90 8/15/34 2,185
2,000 Series 1994E (Mental Health Services) 6.50 8/15/24 2,062
2,350 Series 1995A (Brookdale Hospital) 6.85 2/15/17 2,415
2,500 Series 1995A (Health Center Projects) 6.38 11/15/19 2,517
6,250 Mortgage Agency RB, Series EE-3 7.75 4/01/16 6,652
New York City GO,
3,000 Series 1995B 7.25 8/15/19 3,221
1,400 Series 1996D 6.00 2/15/25 1,323
-------
Total fixed rate instruments (cost: $52,580) 54,164
-------
Variable Rate Demand Note (2.4%)
New York
1,300 New York City Trust for Cultural Resources RB,
Series 1990B (CRE) (cost: $1,300) 3.60 12/01/15 1,300
Total investments (cost: $53,880) $ 55,464
=======
</TABLE>
Portfolio Summary By Industry
------------------------------
Hospitals 21.9%
Nursing Care 21.3
Education 13.3
Single-Family Housing 12.3
Healthcare - Miscellaneous 8.5
General Obligations 8.4
Special Assessment/Tax/Fee 3.9
Escrowed Securities 3.7
Multi-Family Housing 3.7
Water Utilities 3.3
Community Service 2.4
-------
Total 102.7%
New York 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 (64.4%)
<C> <S> <C> <C> <C>
New York (60.9%)
$ 1,800 Chautauqua County IDA IDRB,
Series 1984A (CRE) 4.30% 1/01/00 $ 1,800
Dormitory Auth. RB,
1,300 Series 1994A (CRE) 3.30 7/01/24 1,300
1,500 Series 1995 (CRE) 3.30 7/01/25 1,500
1,250 Glens Falls IDA RB, Series 1985 (CRE) 3.25 8/01/05 1,250
Job Development Auth. RB,
355 Series 1984 D1-D9 (CRE) 3.50 3/01/99 355
515 Series 1985 C1-C34 (CRE) 3.85 3/01/00 515
1,200 Local Government Assistance Corp. RB,
Series 1995D (CRE) 3.15 4/01/25 1,200
1,000 Medical Care Facilities Finance Agency RB,
1985 Issue One (CRE) 3.35 11/01/15 1,000
550 Monroe County IDA RB, Series 1985 (CRE) 3.40 12/01/00 550
1,600 Nassau County IDA Research Facility RB,
Series 1989 (CRE) 3.75 7/01/19 1,600
New York City Housing Development Corp. RB,
5,300 Series 1984A (CRE) 4.50 12/01/16 5,300
2,000 Series 1985A (CRE) 4.50 12/01/09 2,000
New York City IDA RB,
1,000 Series 1990 (CRE) 3.25 5/01/20 1,000
1,300 Series 1993 (CRE) 3.25 6/30/23 1,300
1,200 Niagara County IDA RB, Series 1994A 3.30 11/15/24 1,200
800 North Hempstead Solid Waste Management
Auth. RB, Series 1993A (CRE) 3.10 2/01/12 800
2,100 Oswego County IDA PCRB, Series 1992 3.35 12/01/08 2,100
1,000 Rotterdam IDA RB, Series 1993A (CRE) 3.25 11/01/09 1,000
2,000 Suffolk County IDA RB, Series 1992 (CRE) 3.35 12/01/12 2,000
Puerto Rico (3.5%)
1,600 Industrial, Tourist, Educational, Medical
and Environmental Control Facilities
Financing Auth. RB, Series 1995A (CRE) 3.65 1/01/15 1,600
------
Total variable rate demand notes (cost: $29,370) 29,370
------
Put Bonds (11.2%)
New York
300 City of Hudson IDA RB, Series 1985 (CRE) 4.25 12/15/00 300
1,200 Dormitory Auth. Memorial Sloan-Kettering
Cancer Center RB, Series 1989A (CRE) 3.35 7/01/19 1,200
Energy Research and Development Auth. PCRB
800 Series 1985A (CRE) 3.30 3/15/15 800
1,800 Series 1985A (CRE) 3.25 3/01/16 1,800
1,000 Series 1985B (CRE) 3.85 10/15/15 1,000
--------
Total put bonds (cost: $5,100) 5,100
--------
Fixed Rate Instruments (24.2%)
New York
500 Copiague Union Free School District TAN,
1995-96 4.50 6/28/96 501
1,220 Dormitory Auth. Memorial Hospital RB,
Series 1995 (CRE) 4.50 7/01/96 1,222
500 Dormitory Auth. RB, Vassar College,
Series 1995 3.50 7/01/96 500
697 Dormitory Auth. Revenue Notes CP,
Series 1989A (CRE) 3.40 4/04/96 697
1,200 Half Hollow Hills Central School District
TAN, 1995-96 4.25 6/28/96 1,201
500 Monroe County BAN, Series 1995A 4.50 6/07/96 500
2,000 New York City Municipal Water Finance Auth.
CP Notes, (CRE) 3.30 4/25/96 2,000
500 Patchogue Medford Union Free School District
TAN, 1995 4.38 6/27/96 501
1,360 Rockland County GO, Series 1994B (CRE) 5.90 11/15/96 1,383
1,000 Sayville Union Free School District
TAN, 1995 4.25 6/27/96 1,001
1,500 Suffolk County TAN, Series 1996-I (CRE) 4.00 8/15/96 1,504
--------
Total fixed rate instruments (cost: $11,010) 11,010
--------
Total investments (cost: $45,480) $ 45,480
========
</TABLE>
Portfolio Summary By Industry
Education 16.7%
Multi-Family Housing 16.0
General Obligations 9.4
Electric Power 9.1
Nursing Care 8.3
Hospitals 5.3
Buildings 4.9
Tobacco 4.6
Community Service 4.4
Water/Sewer 4.4
Publishing/Newspapers 4.0
Specialized Services 3.5
Pollution Control 2.6
Sales Tax Obligations 2.6
Resource Recovery 1.8
Finance - Municipal 1.5
Manufacturing - Diversified Industries .7
-----
Total 99.8%
=====
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 Notes
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
IDRB Industrial Development Revenue Bond
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TAN Tax Anticipation Note
Specific Notes
(a) Prerefunded to various dates prior to maturity at the call price.
(b) At March 31, 1996, the cost of securities purchased on a delayed
delivery basis for the New York Bond Fund was $2,256.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Year ended March 31, 1996
<TABLE>
<CAPTION>
New York
New York Money Market
Bond Fund Fund
----------- ------------
<S> <C> <C>
Net investment income:
Interest income $ 3,313 $ 1,337
--------- ----------
Expenses:
Management fees 243 154
Transfer agent's fees 45 32
Custodian's fees 40 39
Postage 4 4
Shareholder reporting fees 4 4
Directors' fees 3 3
Audit fees 15 15
Legal fees 9 9
Other 4 4
-------- -------
Total expenses before reimbursement 367 264
Expenses reimbursed (103) (97)
-------- -------
Total expenses after reimbursement 264 167
-------- -------
Net investment income 3,049 1,170
-------- -------
Net realized and unrealized gain on investments:
Net realized gain 658 -
Change in net unrealized appreciation/depreciation 190 -
--------- --------
Net realized and unrealized gain 848 -
----- ------
Increase in net assets resulting from operations $3,897 $ 1,170
======= =======
See accompanying notes to financial statements.
</TABLE>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
<TABLE>
<CAPTION>
New York
New York Money Market
Bond Fund Fund
---------- ------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 3,049 $ 3,007 $ 1,170 $ 733
Net realized gain (loss) on investments 658 (3,353) - -
Change in net unrealized appreciation/
depreciation of investments 190 2,716 - -
Increase in net assets resulting from
operations 3,897 2,370 1,170 733
------ ----- ------- -----
Distributions to shareholders from:
Net investment income (3,049) (3,007) (1,170) (733)
From capital share transactions:
Shares sold 14,008 16,488 51,173 31,532
Shares issued for dividends reinvested 2,362 2,357 1,120 691
Shares redeemed (13,738) 24,613) (34,264) (29,211)
-------- ------- -------- --------
Increase (decrease) in net assets from
capital share transactions 2,632 (5,768) 18,029 3,012
-------- ------- -------- -------
Net increase (decrease) in net assets 3,480 (6,405) 18,029 3,012
Net assets:
Beginning of period 50,507 56,912 27,525 24,513
------- ------- -------- --------
End of period $ 53,987 $ 50,507 $ 45,554 $ 27,525
======== ======== ========= =======
Change in shares outstanding:
Shares sold 1,269 1,569 51,173 31,532
Shares issued for dividends reinvested 214 223 1,120 691
Shares redeemed (1,244) (2,358) (34,264) (29,211)
-------- ------- -------- -------
Increase (decrease) in shares outstanding 239 (566) 18,029 3,012
======== ======= ======== ========
Authorized shares of $.01 par value 25,000 25,000 100,000 100,000
======== ======= ======== ========
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 New York Bond Fund and New York Money Market Fund (the Funds). The
Funds have a common objective of providing New York investors with a high
level of current interest income that is exempt from federal, New York
state, and New York City income taxes. The New York Money Market Fund
has a further objective of preserving capital and maintaining
liquidity.
A. Security valuation - Investments in the New York Bond Fund are
valued each business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between quoted bid
and asked prices or the last sale price to price securities when, in the
Service's judgement, these prices are readily available and are representative
of the securities' market values. For many securities, such prices are not
readily available. The Service generally prices these securities based on
methods which include consideration of yields or prices of municipal
securities of comparable quality, coupon, maturity and type, indications
as to values from dealers in securities, and general market conditions.
Securities which are not valued by the Service, and all other assets,
are valued in good faith at fair value using methods determined by the
Manager under the general supervision of the Board of Directors.
Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 of the Securities and Exchange Commission, all securities
in the New York Money Market Fund are stated at amortized cost which
approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its income
to its shareholders. Therefore, no federal income or excise tax
provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased
or sold (trade date). Gain or loss from sales of investment securities
is computed on the identified cost basis. Interest income is recorded
daily on the accrual basis. Premiums and original issue discounts are
amortized over the life of the respective securities. Market discounts
are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the bonds. The Funds concentrate their
investments in New York municipal securities and therefore may be
exposed to more credit risk than portfolios with a broader
geographical diversification.
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 New York Bond Fund had a capital loss carryover of
approximately $2,741 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 that portion of its earnings was exempt from federal taxation and
the dividend distributions which represent long-term capital gains.
The net investment income earned and distributed by each of the Funds
was 100% tax exempt for federal, New York state, and New
York City income tax purposes. There were no long-term capital gain
distributions for the year ended March 31, 1996.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term
securities, for the year ended March 31, 1996 for the New York Bond Fund
were $43,284 and $38,799, respectively. Purchases and sales/maturities of
securities for the year ended March 31, 1996 for the New York Money Market
Fund were $92,471 and $74,090, respectively.
Gross unrealized appreciation and depreciation of investments at March
31, 1996 for the New York Bond Fund was $1,991 and $407, respectively.
(5) Transactions with Manager
A. Management fees - The investment policy of the Funds and the
management of the Funds' portfolios is carried out by USAA Investment
Management Company (the Manager). Management fees are computed as a
percentage of aggregate average net assets (ANA) of both Funds combined,
which on an annual basis is equal to .50% of the first $50,000, .40% of
that portion over $50,000 but not over $100,000, and .30% of that portion
over $100,000. These fees are allocated on a proportional basis to
each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of
each Fund to .50% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Company. Shareholder accounting service
fees are based on an annual charge per shareholder account plus
out-of-pocket expenses.
C. Underwriting agreement - The Company has an agreement with the
Manager for exclusive underwriting and distribution of the Funds'
shares on a continuing best efforts basis. The agreement provides that
the Manager will receive no fee or other remuneration for such
services.
(6) Financial Highlights
Per share operating performance for a share outstanding throughout
each period is as follows:
<TABLE>
<CAPTION>
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net
Year Beginning Investment Unrealized Investment
Ended of Period Income Gain (Loss) Income
($) ($) ($) ($)
<S> <C> <C> <C> <C>
New York Bond Fund:
March 31,
1992 10.50 .69 .44 (.69)
1993 10.94 .65 .80 (.65)
1994 11.62 .62 (.50) (.62)
1995 10.83 .62 (.06) (.62)
1996 10.77 .63 .18 (.63)
New York Money Market Fund:
March 31,
1992 1.00 .04 - (.04)
1993 1.00 .03 - (.03)
1994 1.00 .02 - (.02)
1995 1.00 .03 - (.03)
1996 1.00 .04 - (.04)
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Net Asset Ratio of Investment
Distributions Value at Net Assets Expenses Income
of Realized End Total at end to Average to Average Portfolio
Capital Gains of period Return of Period Net Assets Net Assets Turnover
($) ($) (%)* ($000) (%) (%) (%)
Fiscal
Year
Ended
<S> <C> <C> <C> <C> <C> <C> <C>
New York Bond Fund:
March 31,
1992 - 10.94 11.00 28,022 .50(a) 6.32(a) 110.77
1993 (.12) 11.62 13.74 48,925 .50(a) 5.79(a) 107.12
1994 (.29) 10.83 .68 56,912 .50(a) 5.24(a) 124.40
1995 - 10.77 5.42 50,507 .50(a) 5.83(a) 74.74(b)
1996 - 10.95 7.67 53,987 .50(a) 5.75(a) 74.80(b)
New York Money Market Fund:
March 31,
1992 - 1.00 3.72 16,788 .50(a) 3.61(a) -
1993 - 1.00 2.51 19,428 .50(a) 2.46(a) -
1994 - 1.00 2.00 24,513 .50(a) 1.98(a) -
1995 - 1.00 2.76 27,525 .50(a) 2.74(a) -
1996 - 1.00 3.56 45,554 .50(a) 3.47(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 Funds' ratios
would have been:
(b) Effective for 1995 and 1996, portfolio turnover rates have been
calculated excluding short-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>
<CAPTION>
Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
<S>
New York Bond Fund: <C> <C>
March 31,
1992 1.07 5.75
1993 .80 5.49
1994 .69 5.05
1995 .71 5.62
1996 .69 5.56
New York Money Market Fund:
March 31,
1992 1.26 2.85
1993 1.06 1.90
1994 .98 1.50
1995 .85 2.39
1996 .78 3.19
</TABLE>
