Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
Virginia Bond Fund 4
Virginia Money Market Fund 9
Financial Information:
Independent Auditors' Report 12
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
Virginia Bond Fund 15
Virginia Money Market Fund 18
Notes to Portfolios of Investments 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 Virginia
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus
which gives further details about the funds.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(copyright) 1996, USAA. All rights reserved.
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the
performance of our other funds. This summary is a snapshot of the
performance of all 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.
<TABLE>
<CAPTION>
Average Annual Total Return* Yield
Investment Inception Since 7-Day 30-Day1
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 Markets2 11/7/94 22.89 - - 4.97 - -
Gold2 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 - -
International2 7/11/88 22.25 12.71 - 10.15 - -
World Growth2 10/1/92 24.29 - - 13.28 - -
Asset Allocation
Balanced Strategy 9/1/95 - - - 5.16 - -
Cornerstone Strategy2 8/15/84 22.70 12.02 11.45 - - -
Growth and Tax Strategy3** 1/11/89 17.89 9.91 - 9.87 - 3.59
Growth Strategy2 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-Term3** 3/19/82 7.88 7.57 7.60 - - 5.72
Intermediate-Term3** 3/19/82 7.97 7.51 7.17 - - 5.23
Short-Term3** 3/19/82 5.83 5.32 5.54 - - 4.33
California Bond3** 8/1/89 9.35 7.64 - 7.42 - 5.54
Florida Tax-Free Income3** 10/1/93 7.66 - - 2.26 - 5.61
New York Bond3** 10/15/90 7.67 7.61 - 8.42 - 5.49
Texas Tax-Free Income3** 8/1/94 9.42 - - 9.08 - 5.41
Virginia Bond3** 10/15/90 7.57 7.77 - 8.16 - 5.37
Money Market
Money Market4 2/2/81 5.64 4.46 5.92 - 5.00 -
Tax Exempt Money Market3,4** 2/6/84 3.65 3.22 4.30 - 3.17 -
Treasury Money Market Trust4 2/1/91 5.48 4.20 - 4.21 4.96 -
California Money Market3,4** 8/1/89 3.58 3.08 - 3.68 3.14 -
Florida Tax-Free Money Market3,4** 10/1/93 3.51 - - 2.93 3.06 -
New York Money Market3,4** 10/15/90 3.56 2.91 - 3.05 3.07 -
Texas Tax-Free Money Market3,4** 8/1/94 3.49 - - 3.34 3.06 -
Virginia Money Market3,4** 10/15/90 3.42 3.04 - 3.20 2.99 -
</TABLE>
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.
Message from the President
[A 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
Virginia Bond Fund
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes.
Types of Investments: Invests primarily in long-term investment grade Virginia
tax-exempt securities.
3/31/95 3/31/96
Net Assets $238.9 Million $267.1 Million
Net Asset Value Per Share $10.76 $10.93
Average Annual Total Return as of 3/31/96
1 Year 7.57%
5 Years 7.77%
Since inception on October 15, 1990 8.16%
30-Day SEC Yield* on March 31, 1996 5.37%
*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 Virginia Bond Fund 15,410]
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 Robert R. Pariseau, Portfolio Manager 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 about 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.
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.
[A graph is shown here comparing the 12-month dividend yield of the USAA
Virginia Bond Fund and the Lipper Virginia Municipal Debt Funds Average
from 3/31/92 to 3/31/96. The vertical axis shows the yield and the
horizontal axis shows the time period. The values are:
USAA Virginia
Bond Fund 6.37 5.74 5.73 5.80 5.77
Lipper Virginia
Muni Debt
Funds Avg. 6.17 5.54 5.40 5.17 4.97]
The Lipper Virginia Municipal Debt Funds Average is computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. 12-month dividend yield is computed by dividing income
dividends paid during the previous 12 months by the latest month-end net asset
value adjusted for capital gains distributions. The graph represents data
from 3/31/92 to 3/31/96.
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 about 7.43% last March 1995 to 6.67% on March 31,
1996. Your Fund's net asset value (NAV) per share rose $.17 to $10.93, or
1.6%, since March 31, 1995. The Fund's performance compared very favorably
to its peer group. For the past year, the Fund's dividend yield1 was 5.77%
compared to the Lipper Virginia Municipal Debt Funds average of 4.97% for the
30 funds in the category.2 For the same period, the Fund's total return3 was
7.57% compared to the Virginia Debt Funds average of 7.43%.
The State of Virginia
Job creation in Virginia's last fiscal year just matched the nation's growth
of 2.3%, a deceleration from the prior year. I mentioned in the semiannual
report that the state is working to replace the jobs in Northern Virginia lost
to federal cutbacks and corporate re-locations. Governor Allen has suggested
new ideas in school funding and has withdrawn an earlier proposal for tax cuts.
During this transition period, the state's strong and diversified economy
should allow it to maintain its AAA rating by all three rating agencies
(Moody's, Standard & Poor's and Fitch's). I remain very cautious
regarding city and county 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 is shown here depicting the Portfolio Ratings/Mix as of
March 31, 1996 for the USAA Virginia Bond Fund to be: AAA - 13%, AA - 42%,
A - 29%, BBB - 14% 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 categories AAA and BBB account for 2.5% and 2.1%, respectively, 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 Virginia
Bond Fund with a taxable equivalent investment.
To match the Virginia Bond Fund's closing 30-Day SEC yield of 5.37% and:
Assuming a Virginia State Tax rate of 5.75%
and
Assuming a marginal federal tax rate of:
28% 31% 36% 39.6%
A fully taxable investment must pay: 7.91% 8.26% 8.90% 9.43%
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
Virginia Money Market Fund
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes, while
preserving capital and maintaining liquidity.
Types Of Investments: High quality Virginia tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will endeavor to maintain a
constant net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund will maintain a stable
net asset value of $1.00 per share.
3/31/95 3/31/96
Net Assets $98.0 Million $110.3 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Return as of 3/31/96
1 Year 3.42%
5 Years 3.04%
Since inception on October 15, 1990 3.20%
7-Day Simple Yield on March 31, 1996 2.99%
[A graph is shown here comparing the 7-day yield of the USAA Virginia
Money Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free)
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
Virginia Money Market Fund is 2.96% and the ending value for the IBC
Donoghue's State Specific SB & GP (Tax-Free) is 2.72%]
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested dividends and capital gain distributions. Past performance is
no guarantee of future results and the value of your investment may vary
according to the Fund's performance. The graph tracks the Fund's 7-day
simple yield against IBC/Donoghue's State Specific SB (Stock Broker) &
GP (General Purpose) (Tax-Free) Money Funds, an average of all major money
market fund yields.
Message from the Manager
[A photo of Pamela K. Bledsoe, Portfolio Manager, appears here]
The Market
A year ago the Federal Reserve Board ( the "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 6 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.
Virginia
Individual income and sales tax revenue increases drove the state's revenues
up 5.8% last year. Unemployment levels remain below national averages while
per capita income levels remain above national averages. Virginia's finances
will be pressured until 1998-99 as a result of mandatory transfers to the
budget stabilization reserve and initial refund payments to federal retirees.
Despite this pressure, Virginia continues to deserve the highest credit quality
rating from the three major rating agencies.
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 is here showing the growth of $10,000, from 10/15/90 to 3/31/96,
invested in the USAA Virginia Money Market Fund. The vertical axis shows
the dollar amount and the horizontal axis shows the time period. The
ending value is $11,893.]
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 Virginia Bond and Virginia 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 Virginia Bond and Virginia 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
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
(In Thousands)
<S> <C> <C>
March 31, 1996
Virginia
Virginia Money Market
Bond Fund Fund
Assets
Investments in securities, at market value
(identified cost of $266,908 and $109,604, respectively) $ 276,005 $ 109,604
Cash 137 205
Receivables:
Capital shares sold 28 176
Interest 4,413 747
------------- -------------
Total assets 280,583 110,732
------------- ------------
Liabilities
Securities purchased 12,870 -
Capital shares redeemed 185 315
USAA Investment Management Company 76 58
USAA Transfer Agency Company 15 9
Accounts payable and accrued expenses 38 30
Dividends on capital shares 288 12
-------------- -------------
Total liabilities 13,472 424
-------------- --------------
Net assets applicable to capital shares outstanding $ 267,111 $ 110,308
=============== ==============
Represented by:
Paid-in capital $ 262,181 $ 110,308
Accumulated net realized loss on investments (4,167) -
Net unrealized appreciation of investments 9,097 -
--------------- -------------
Net assets applicable to capital shares outstanding $ 267,111 $ 110,308
=============== ==============
Capital shares outstanding 24,440 110,308
================ ==============
Net asset value, redemption price, and offering price per share $ 10.93 $ 1.00
================ ==============
</TABLE>
See accompanying notes to financial statements.
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.
Virginia Bond Fund
Portfolio of Investments in Securities
(In Thousands)
<TABLE>
<CAPTION>
March 31, 1996
Principal Coupon Final Market
Amount Security Rate Maturity Value
<C> <S> <C> <C> <C>
Fixed Rate Instruments (100.8%)
Virginia (87.3%)
$ 7,500 Augusta County IDA Hospital RB, Series 1991 7.00% 9/01/21(a) $ 8,451
12,000 Chesapeake Bay Bridge and Tunnel District RB,
Series 1991 (CRE) 6.38 7/01/22(a) 13,200
College Building Auth. Educational
Facilities RB,
3,525 Series 1992 6.40 1/01/12 3,716
2,885 Series 1992 6.63 5/01/13 3,006
2,505 Series 1992 6.60 9/01/16 2,639
2,350 Series 1994 5.80 1/01/24 2,318
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/15 3,027
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 4,799
2,250 Emporia GO, Series 1995 5.75 7/15/15 2,250
5,200 Fairfax County Economic Development Auth. RB,
Series 1991B 7.50 6/01/01 5,542
13,000 Fairfax County IDA RB, Series 1996 6.00 8/15/26 12,927(c)
1,500 Fairfax County Redevelopment and Housing
Auth. RB, Series 1989A (CRE) 7.50 11/01/19 1,556
8,750 Galax IDA Hospital RB, Series 1995 (CRE) 5.75 9/01/20 8,536
1,300 Hampton Redevelopment and Housing Auth. RB,
Series 1996A 6.00 1/20/26 1,289
6,320 Hopewell Hospital Auth. RB, Series 1986 8.85 1/01/13(a) 6,663
Housing Development Auth. Commonwealth
Mortgage RB,
3,530 Series 1989B, Subseries B-2 7.63 7/01/17 3,649
5,440 Series 1992A 7.10 1/01/22 5,720
10,000 Series 1992A 7.10 1/01/25 10,514
1,455 Series 1992C 6.40 1/01/15 1,477
1,680 Series 1994D 6.40 7/01/17 1,711
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,081
Housing Development Auth. MFH RB,
55,000 Series 1982A 7.00(b) 11/01/17 8,596
7,700 Series 1991F 7.10 5/01/13 8,137
4,200 Isle of Wight County IDA RB, Series 1990 7.38 1/01/10 4,528
5,000 Loudoun County IDA Hospital RB,
Series 1995 (CRE) 5.80 6/01/26 4,888
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A 6.25 7/01/21 9,220
11,000 Peninsula Ports Auth. RB, Series 1992 (CRE) 7.38 6/01/20 11,701
3,690 Pittsylvania County GO 6.00 7/01/14 3,789
2,500 Prince William County IDA Hospital RB,
Series 1995 6.85 10/01/25 2,613
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/15 5,005
12,000 Richmond GO, Series 1991A 6.25 1/15/21(a) 13,006
8,000 Roanoke Valley Resource Auth. RB, Series 1992 5.75 9/01/12 7,899
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,683
1,250 Spotsylvania County GO, Series 1994 6.88 12/01/14 1,370
10,000 Upper Occoquan Sewage Auth. RB,
Series 1995A (CRE) 4.75 7/01/29 8,307
11,820 Virginia Beach Development Auth. Hospital RB,
Series 1991 6.30 11/01/21 12,033
12,000 West Point IDA Solid Waste Disposal RB,
Series 1994B 6.25 3/01/19 12,105
6,000 Williamsburg IDA RB, Series 1993 5.75 10/01/22 5,421
3,500 Winchester IDA RB, Series 1994 (CRE) 6.75 10/01/19 3,825
Guam (3.4%)
1,000 Government Limited Obligation Infrastructure
Improvement RB, Series 1989A (CRE) 7.10 11/15/09 1,059
8,050 Power Auth. RB, Series 1992A 6.30 10/01/22 7,968
Puerto Rico (10.1%)
2,600 Aqueduct and Sewer Auth. RB, Series 1995 5.00 7/01/19 2,297
Electric Power Auth. RB,
8,500 Series 1995Z 5.25 7/01/21 7,655
5,025 Series X 5.50 7/01/25 4,667
Highway and Transportation Auth. RB,
10,000 Series 1993X 5.50 7/01/13 9,760
3,000 Series 1993X 5.25 7/01/21 2,702
----------
Total fixed rate instruments (cost: $260,208) 269,305
----------
Variable Rate Demand Notes (2.5%)
Virginia
Chesterfield County IDA PCRB,
1,300 Series 1992 3.45 4/01/09 1,300
400 Series 1993 3.55 8/01/09 400
800 Loudoun County IDA RB, Series 1985 (CRE) 3.80 9/01/15 800
3,700 Loudoun County IDA Residential Care
Facility RB, Series 1994B (CRE) 3.95 11/01/24 3,700
500 Prince William County IDA RB,
Series 1988 (CRE) 3.47 6/30/04 500
----------
Total variable rate demand notes (cost: $6,700) 6,700
----------
Total investments (cost: $266,908) $276,005
==========
</TABLE>
Portfolio Summary By Industry
Hospitals 20.8%
Escrowed Securities 15.5
Single-Family Housing 9.8
Electric Power 9.3
Paper & Forest Products 8.0
Education 6.9
Multi-Family Housing 6.3
Special Assessment/Tax/Fee 5.1
Ports/Wharfs 4.4
General Obligations 3.6
Sewer 3.1
Pollution Control 2.9
Broadcasters 2.1
Railroads 1.9
Retirement Homes 1.9
Other 1.7
--------
Total 103.3%
========
Virginia 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 (57.7%)
<C> <S> <C> <C> <C>
Virginia
$ 6,768 Alexandria IDA RB, Series 1989 (CRE) 3.75% 1/01/09 $ 6,768
5,000 Bedford County IDA RB, Series 1993 (CRE) 3.60 10/01/04 5,000
Chesterfield County IDA PCRB,
1,100 Series 1992 3.45 4/01/09 1,100
2,800 Series 1993 3.55 8/01/09 2,800
7,000 Chesterfield County IDA RB, Series 1989 (CRE) 3.47 2/01/03 7,000
1,291 Fairfax County American College of
Radiology RB, Series 1990 (CRE) 3.50 2/01/11 1,291
2,395 Fauquier County IDA RB, Series 1994 (CRE) 3.50 12/01/14 2,395
11,680 Housing Development Auth. RB,
Series 1987A (CRE) 3.70 9/01/17 11,680
600 Loudoun County IDA Residential Care Facility RB,
Series 1994B (CRE) 3.95 11/01/24 600
265 Newport News Redevelopment and Housing Auth.
MFH RB, Series 1990 (CRE) 3.43 3/01/07 265
3,400 Peninsula Ports Auth. RB, Series 1984 (CRE) 3.45 11/01/01 3,400
2,450 Polytechnic Institute and State Univ. Dorm
and Dining Hall RB, Series 1984B (CRE) 3.50 6/01/04 2,450
Prince William County IDA RB,
4,600 Series 1988 (CRE) 3.47 6/30/04 4,600
1,031 Series 1989D (CRE) 3.65 10/01/00 1,031
522 Richmond IDA RB, Series 1989A (CRE) 3.65 6/01/02 522
Richmond Redevelopment and Housing Auth. RB,
3,155 Series 1995 (CRE) 3.50 4/01/29 3,155
1,400 Series 1995A (CRE) 3.55 12/01/25 1,400
1,940 Rockingham County IDA RB, Series 1983A 3.55 10/01/20 1,940
2,300 Saltville IDA RB, Series 1985 (CRE) 3.43 12/01/96 2,300
3,937 Spotsylvania County IDA RB, Series 1990 (CRE) 3.50 10/01/20 3,937
----------
Total variable rate demand notes (cost: $63,634) 63,634
----------
Put Bonds (23.2%)
Virginia
Chesterfield County IDA PCRB,
$ 2,700 Series 1985 3.30% 10/01/09 $ 2,700
2,000 Series 1987B 3.15 6/01/17 2,000
3,000 Fairfax County Economic Development
Auth. RN, Series 1986 (CRE) 3.45 9/01/16 3,000
4,000 Fairfax County Hospital IDA RB, Series 1993B 3.30 8/15/25 4,000
3,575 Falls Church IDA RB, Series 1985 3.70 5/01/15 3,575
1,200 Housing Development Auth. Commonwealth
Mortgage RB, Series 1995D 3.35 1/01/19 1,200
3,500 Peninsula Ports Auth. RB, Series 1987A (CRE) 3.20 7/01/16 3,500
2,055 Prince William County IDA RB,
Series 1992 (CRE) 3.35 9/01/07 2,055
3,590 Richmond IDA RB, Series 1987A (CRE) 3.50 8/15/15 3,590
-----------
Total put bonds (cost: $25,620) 25,620
-----------
Fixed Rate Instruments (18.5%)
Virginia
$ 1,995 Arlington County GO Public Improvement RB,
Series 1994 5.25% 8/01/96 $ 2,009
1,000 Fairfax County IDA RB, Series 1985A 7.88 10/01/17(a) 1,050
Fairfax County Public Improvement RB,
1,000 Series 1991A 5.70 4/01/96 1,000
1,450 Series 1992B 4.70 5/01/96 1,452
Fairfax County Public Improvement
Refunding Bonds,
2,000 Series 1989B 6.75 11/01/03(a) 2,072
1,000 Series 1989B 6.75 11/01/05(a) 1,038
2,190 Higher Education Institute RB, Series 1991A 7.60 6/01/96 2,202
2,500 Norfolk GO, Series 1995 5.25 6/01/96 2,504
2,000 Public Facilities RB, Series 1993A 4.50 6/01/96 2,002
3,000 Richmond GO RAN, Series 1996A 4.00 6/28/96 3,005
2,000 Virginia Beach GO Public Improvement Bonds,
Series 1991C 6.10 8/01/96 2,016
-----------
Total fixed rate instruments (cost: $20,350) 20,350
-----------
Total investments (cost: $109,604) $109,604
===========
</TABLE>
Portfolio Summary By Industry
General Obligations 14.7%
Single-Family Housing 11.7
Manufacturing - Diversified Industries 9.6
Community Service 7.4
Hospitals 6.9
Aerospace/Defense 6.7
Education 4.8
Paper & Forest Products 4.5
Electric Power 4.2
Retirement Homes 4.1
Escrowed Securities 3.8
Ports/Wharfs 3.2
Hotel/Motel 3.1
Multi-Family Housing 3.1
Buildings 2.7
Retail - General Merchandising 2.2
Chemicals 2.1
Retail - Food Chains 1.9
Drugs 1.7
Tobacco 1.0
----------
Total 99.4%
==========
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
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RAN Revenue Anticipation Notes
RB Revenue Bond
RN Revenue Note
Specific Notes
(a) Prerefunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(c) At March 31, 1996, the cost of securities purchased on a delayed delivery
basis for the Virginia Bond Fund was $12,799.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Year ended March 31, 1996
Virginia
Virginia Money Market
Bond Fund Fund
Net investment income:
Interest income $15,809 $4,001
--------- --------
Expenses:
Management fees 870 355
Transfer agent's fees 196 107
Custodian's fees 72 52
Postage 20 14
Shareholder reporting fees 13 10
Directors' fees 3 3
Audit fees 20 20
Legal fees 7 7
Other 8 6
----------- ----------
Total expenses before reimbursement 1,209 574
Expenses reimbursed - (59)
------------ -----------
Total expenses after reimbursement 1,209 515
------------ -----------
Net investment income 14,600 3,486
------------ -----------
Net realized and unrealized gain (loss)
on investments:
Net realized loss (1,253) -
Change in net unrealized appreciation/depreciation 4,801 -
------------ ----------
Net realized and unrealized gain 3,548 -
------------ ----------
Increase in net assets resulting from operations $18,148 $3,486
============ ===========
See accompanying notes to financial statements.
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
<TABLE>
<CAPTION>
Virginia
Virginia Money Market
Bond Fund Fund
1996 1995 1996 1995
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 14,600 $ 13,648 $ 3,486 $ 2,755
Net realized loss on investments (1,253) (2,553) - -
Change in net unrealized appreciation/
depreciation of investments 4,801 3,152 - -
--------- --------- ---------- ---------
Increase in net assets resulting from
operations 18,148 14,247 3,486 2,755
---------- --------- ---------- ----------
Distributions to shareholders from:
Net investment income (14,600) (13,648) (3,486) (2,755)
---------- --------- ---------- ----------
From capital share transactions:
Shares sold 42,550 42,301 92,210 93,826
Shares issued for dividends reinvested 11,045 10,435 3,286 2,563
Shares redeemed (28,952) (50,316) (83,237) (90,910)
--------- ---------- ---------- ----------
Increase in net assets from
capital share transactions 24,643 2,420 12,259 5,479
--------- ---------- ---------- ----------
Net increase in net assets 28,191 3,019 12,259 5,479
Net assets:
Beginning of period 238,920 235,901 98,049 92,570
---------- --------- ---------- -----------
End of period $267,111 $238,920 $110,308 $ 98,049
========== ======== ========== ===========
Change in shares outstanding:
Shares sold 3,868 4,029 92,210 93,826
Shares issued for dividends reinvested 1,005 994 3,286 2,563
Shares redeemed (2,637) (4,849) (83,237) (90,910)
---------- ---------- ---------- -----------
Increase in shares outstanding 2,236 174 12,259 5,479
========== ========== ========== ===========
Authorized shares of $.01 par value 35,000 35,000 175,000 175,000
========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
Notes to Financial Statements
(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 Virginia
Bond Fund and Virginia Money Market Fund (the Funds). The Funds have a common
objective of providing Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes. The Virginia
Money Market Fund has a further objective of preserving capital and maintaining
liquidity.
A. Security valuation - Investments in the Virginia Bond Fund are valued each
business day by a pricing service (the Service) approved by the Company's Board
of Directors. The Service uses the mean between quoted bid and asked prices or
the last sale price to price securities when, in the Service's judgement, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The Service
generally prices these securities based on methods which include consideration
of yields or prices of municipal securities of comparable quality, coupon,
maturity and type, indications as to values from dealers in securities, and
general market conditions. Securities which are not valued by the Service, and
all other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and,
pursuant to Rule 2a-7 of the Securities and Exchange Commission, all securities
in the Virginia Money Market Fund are stated at amortized cost which
approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased or sold
(trade date). Gain or loss from sales of investment securities is computed on
the identified cost basis. Interest income is recorded daily on the accrual
basis. Premiums and original issue discounts are amortized over the life of the
respective securities. Market discounts are not amortized. Any ordinary income
related to market discounts is recognized upon disposition of the bonds. The
Funds concentrate their investments in Virginia municipal securities and
therefore may be exposed to more credit risk than portfolios with a broader
geographical diversification.
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 Virginia Bond Fund had a capital loss carryover of approximately
$4,167 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 Virginia 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 Virginia Bond Fund were $99,711 and
$68,364, respectively. Purchases and sales/maturities of securities for the
year ended March 31, 1996 for the Virginia Money Market Fund were $223,602 and
$210,961, respectively.
Gross unrealized appreciation and depreciation of investments at March 31,
1996 for the Virginia Bond Fund was $10,159 and $1,062, 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 $100,000. These fees are
allocated on a proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund
to .50% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides transfer
agent services to the Company. Shareholder accounting service fees are based
on an annual charge per shareholder account plus out-of-pocket expenses.
C. Underwriting agreement - The Company has an agreement with the Manager for
exclusive underwriting and distribution of the Funds' shares on a continuing
best efforts basis. The agreement provides that the Manager will receive no
fee or other remuneration for such services.
Notes to Financial Statements (continued)
March 31, 1996
(6) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net
Year Beginning Investment Unrealized Investment
Ended of Period Income Gain (Loss) Income
($) ($) ($) ($)
Virginia Bond Fund:
March 31,
1992 10.28 .67 .29 (.67)
1993 10.57 .64 .65 (.64)
1994 11.16 .62 (.30) (.62)
1995 10.71 .62 .05 (.62)
1996 10.76 .63 .17 (.63)
Virginia Money Market Fund:
March 31,
1992 1.00 .04 - (.04)
1993 1.00 .03 - (.03)
1994 1.00 .02 - (.02)
1995 1.00 .03 - (.03)
1996 1.00 .03 - (.03)
(a) The information contained in this table is based on actual expenses for
the period, after giving effect to reimbursements of expenses by the Manager.
Absent such reimbursements the Funds' ratios would have been:
Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
Virginia Bond Fund:
March 31,
1992 .65 6.25
1993 .54 5.86
Virginia Money Market Fund:
March 31,
1992 .74 3.72
1993 .63 2.49
1994 .61 2.01
1995 .56 2.82
1996 .55 3.31
<TABLE>
<CAPTION>
Ratio of Net
Net Asset Ratio of Investment
Fiscal Distributions Value at Net Assets Expenses Income
Year of Realized End Total at End to Average to Average Portfolio
Ended Capital Gains of Period Return of Period Net Assets Net Assets Turnover
($) ($) (%)* ($000) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
VIRGINIA BOND FUND:
March 31,
1992 - 10.57 9.61 131,475 .50(a) 6.40(a) 86.77
1993 (.06) 11.16 12.61 207,302 .50(a) 5.90(a) 91.31
1994 (.15) 10.71 2.69 235,901 .49 5.44 92.17
1995 - 10.76 6.61 238,920 .50 5.95 27.77(b)
1996 - 10.93 7.57 267,111 .48 5.74 27.20(b)
VIRGINIA MONEY MARKET FUND:
March 31,
1992 - 1.00 4.09 73,220 .50(a) 3.96(a) -
1993 - 1.00 2.65 77,263 .50(a) 2.62(a) -
1994 - 1.00 2.14 92.570 .50(a) 2.12(a) -
1995 - 1.00 2.91 98,049 .50(a) 2.88(a) -
1996 - 1.00 3.42 110,308 .50(a) 3.36(a) -
(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>
