TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review:
Virginia Bond Fund 4
Virginia Money Market Fund 9
Financial Information:
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
Virginia Bond Fund 15
Virginia Money Market Fund 18
Notes to Portfolios of Investments in Securities 20
Statements of Operations 21
Statements of Changes in Net Assets 22
Notes to Financial Statements 23
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than 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)1997, 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 35
funds by investment objective as of September 30, 1997.
<TABLE>
<CAPTION>
Investment Inception Average Annual Total Return(%)*
Objective Date 1 year 5 years 10 years Since Inception
<S> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION
Aggressive Growth 10/19/81 12.97 22.01 12.58 -
Emerging Markets(1) 11/7/94 17.80 - - 9.18
First Start Growth 8/1/97 - - - -0.70
Gold(1) 8/15/84 -15.16 3.76 -6.42 -
Growth 4/5/71 34.93 18.50 12.42 -
Growth & Income 6/1/93 37.04 - - 19.40
International(1) 7/11/88 26.99 17.03 - 11.90
S&P 500 Index(4)+ 5/1/96 40.33 - - 32.89
Science & Technology(5) 8/1/97 - - - -2.00
World Growth(1) 10/1/92 28.41 15.94 - 15.94
ASSET ALLOCATION
Balanced Strategy(1) 9/1/95 26.23 - - 16.92
Cornerstone Strategy(1) 8/15/84 26.15 15.31 9.33 -
Growth and Tax Strategy(2)** 1/11/89 18.12 11.73 - 10.69
Growth Strategy(1) 9/1/95 26.54 - - 24.91
Income Strategy 9/1/95 18.42 - - 11.85
INCOME--TAXABLE
GNMA 2/1/91 10.02 6.70 - 7.81
Income 3/4/74 11.55 7.35 10.31 -
Income Stock 5/4/87 31.46 16.04 13.55 -
Short-Term Bond 6/1/93 8.07 - - 5.92
INCOME--TAX EXEMPT
Long-Term(2)** 3/19/82 10.02 6.87 8.85 -
Intermediate-Term(2)** 3/19/82 9.07 6.89 8.05 -
Short-Term(2)** 3/19/82 5.95 4.89 5.81 -
California Bond(2)** 8/1/89 9.85 7.43 - 7.81
Florida Tax-Free Income(2)** 10/1/93 10.18 - - 4.88
New York Bond(2)** 10/15/90 9.69 6.58 - 8.49
Texas Tax-Free Income(2)** 8/1/94 10.30 - - 9.56
Virginia Bond(2)** 10/15/90 8.92 7.12 - 8.26
MONEY MARKET
Money Market(3) 2/2/81 5.32 4.58 5.77 -
Tax Exempt Money Market(2),(3)** 2/6/84 3.39 3.06 4.13 -
Treasury Money Market Trust(3) 2/1/91 5.16 4.38 - 4.41
California Money Market(2),(3)** 8/1/89 3.30 2.98 - 3.61
Florida Tax-Free Money Market(2),(3)** 10/1/93 3.28 - - 3.06
New York Money Market(2),(3)** 10/15/90 3.22 2.85 - 3.09
Texas Tax-Free Money Market(2),(3)** 8/1/94 3.36 - - 3.33
Virginia Money Market(2),(3)** 10/15/90 3.26 2.90 - 3.21
</TABLE>
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
including possible loss of the principal amount invested.
For more complete information about the mutual funds managed and distributed
by USAA IMCO, including charges and expenses, please call 1-800-531-8181 for
a prospectus. Read it carefully before you invest.
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(3) An investment in a money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
(4) S&P 500(Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* Total return equals income return 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.
+ Includes the $10 annual account maintenance fee through December 31, 1996.
MESSAGE FROM THE PRESIDENT
We recently received a bit of good news.
It is that all eight of the tax-exempt bond funds which we offer, the Long-Term,
Intermediate-Term and Short-Term Funds, plus our five state-specific bond funds,
have been awarded five-star ratings by Morningstar for the one-year period ended
September 30, 1997.* We are pleased with this achievement, mainly because of
what it confirms. To understand that, let's talk about what these ratings mean.
<TABLE>
EIGHT IS GREAT!
USAA's eight Tax-Exempt Bond Funds
all receive Morningstar's 5 star rating
in the municipal bond funds category for the year ended 9-30-97.*
<CAPTION>
FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
USAA Tax Exempt Intermediate-Term Fund ***** 5* 5* 5*
USAA Tax Exempt Short-Term Fund ***** 5* 5* 5*
USAA Virginia Bond Fund** ***** 5* 5*
USAA Tax Exempt Long-Term Fund ***** 5* 4* 4*
USAA California Bond Fund** ***** 5* 4*
USAA New York Bond Fund** ***** 5* 3*
USAA Texas Tax-Free Income Fund** ***** 5*
USAA Florida Tax-Free Income Fund** ***** 4*
Total Funds rated: 1,760 1,374 668 326
</TABLE>
Past performance is no guarantee of future results.
* Morningstar proprietary ratings reflect historical risk-adjusted performance
through 9/30/97. The ratings are subject to change monthly. Morningstar ratings
are calculated from the Fund's 3-, 5-, and 10-year average annual total returns
(with fee adjustments) in excess of 90-day Treasury bill returns, and a risk
factor that reflects fund performance below 90-day Treasury bill returns. There
is a three-year minimum performance requirement before a fund is rated. The
one-year rating is calculated using the same methodology, but is not a component
of the overall rating. Overall rating is a weighted average of a fund's 3-, 5-,
and 10-year ratings, when applicable. Among 1,374 municipal bond funds, the USAA
Tax Exempt Intermediate-Term, Short-Term, Texas Tax-Free Income, and Virginia
Bond Funds received overall ratings of 5 stars. The USAA Tax Exempt Long-Term,
California Bond, New York Bond, and Florida Tax-Free Income Funds received
overall ratings of 4 stars. The top ten percent of the funds in a rating
category receive five stars and the next 22.5% receive four stars.
** These funds are only available for residents in these states.
(PHOTO OF THE PRESIDENT, MICHAEL J. C. ROTH, APPEARS HERE)
There are some standard words which you will see commonly published along with
any reference to Morningstar ratings. They are what we call a legend and they
include this; "Morningstar proprietary ratings reflect historical risk-adjusted
performance through [date]. The ratings are subject to change monthly..." At
many conferences I have attended, I have heard Morningstar executives emphasize
the point that their ratings are historically based and that they are not
predictive. In other words they tell you who did well, but they do not purport
to tell you who will do well.
Having said all that, we are pleased with these ratings because they are an
affirmation of one of our basic beliefs. We believe investors in tax-exempt bond
funds want, and will benefit most from tax-exempt income. That seems obvious
when you put it on paper, but it is something which is easily obscured. The
performance and the relative ratings of these funds are based upon their total
returns, which means both interest income and price change. We have chosen very
deliberately to manage our funds for consistently high yields, and we believe
that over time this will be beneficial to our investors both in terms of income
and total return. The Morningstar ratings indicate that in the recent past we
have been correct in these beliefs.
And besides, it's nice to have someone say you're "five-star."
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
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.
3/31/97 9/30/97
Net Assets........................... $292.9 MILLION $318.4 MILLION
Net Asset Value Per Share............ $10.92 $11.35
AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/97
March 31, 1997 to September 30, 1997.................... 6.86%+
1 Year.................................................. 8.92%
5 Years................................................. 7.12%
Since inception on October 15, 1990..................... 8.26%
+ Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
30-Day SEC Yield* on September 30, 1997................. 5.09%
*Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income return 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.
- ----------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- ----------------------------------
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 Investment for the USAA Virginia Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper Virginia Municipal Debt Funds
Average. Data since inception on 10/15/90 through 09/30/97. The data points
from the graph are as follows:
USAA Virginia Bond Fund
Year Amount
- -------- ------
10/15/90 $10,000
10/31/90 $10,135
10/31/91 $11,342
10/31/92 $12,098
10/31/93 $14,048
10/31/94 $13,252
10/31/95 $15,208
10/31/96 $16,161
09/30/97 $17,425
Lehman Brothers Municipal Bond Index
Year Amount
- ---- ------
10/15/90 $10,000
10/31/90 $10,143
10/31/91 $11,376
10/31/92 $12,333
10/31/93 $14,068
10/31/94 $13,455
10/31/95 $15,453
10/31/96 $16,334
09/30/97 $17,611
Lipper Virginia Municipal Debt Funds Average
Year Amount
- ---- ------
10/15/90 $10,000
10/31/90 $10,086
10/31/91 $11,259
10/31/92 $12,027
10/31/93 $13,888
10/31/94 $12,915
10/31/95 $14,801
10/31/96 $15,572
09/30/97 $17,019
The broad-based Lehman Brothers Municipal Bond Index is an unmanaged index that
tracks total return performance for the long-term investment grade tax-exempt
bond market. The Lipper Virginia Municipal Debt Funds Average is the average
performance level of all Virginia Municipal Debt Funds, as computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. All tax-exempt bond funds will find it difficult to outperform
the Lehman Index, since funds have expenses.
MESSAGE FROM THE MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER: ROBERT R. PARISEAU, CFA IS HERE]
A Remarkable Economy
The Federal Reserve Board (the Fed) has made it quite evident that they will
tolerate a robust economy and low unemployment. After all, Fed Chairman Alan
Greenspan himself described the economy's performance as remarkable. Such
tolerance is unusual for the Fed since in the past prolonged economic growth and
tight labor markets raised serious concerns of inflation. However, Chairman
Greenspan has made it crystal clear that, if inflation should re-ignite, he
would act forcefully. Very likely the Fed would initiate one or more increases
in short-term interest rates triggering a negative reaction by the financial
markets. Obviously, new economic conditions and relationships have lowered the
inflationary threshold compared to the 1980s. But, a limit still exists. It will
be most interesting to see how long and how far this economy can go without
generating inflationary pressures.
Interest Rates
The yield on the Bond Buyer 40-Bond Index (BBI40), the industry standard for the
yield of long-term, investment-grade municipal bonds, fell nearly 1/2 percent
from March 31, 1997, until July. During August and September the BBI40 traded in
the range of 5.40% to 5.60%.
Portfolio Strategy
I focus primarily on generating maximum tax-exempt income that potentially
should produce the best after-tax total return over a 3-5 year investment
horizon. I do not buy exotic derivatives or bonds subject to the alternative
minimum tax (AMT), nor do I hedge the portfolio with futures contracts.
Absolute concentration on pretax total return implies that the manager believes
he or she can forecast interest rates. I don't believe anyone has ever
demonstrated that they can consistently predict the future of interest rates.
Although I pay close attention to total return, my primary concern remains on
generating tax-free income. There are other reasons. Typically income is the
largest component of total return, and over longer time horizons price
volatility tends to even out.
AVERAGE ANNUAL COMPOUNDED RETURNS WITH
REINVESTMENT OF DIVIDENDS - PERIODS ENDING SEPTEMBER 30, 1997
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
- ---------------------------------------------------------------------
SINCE
10/15/90 8.26% = 6.17% + 2.09%
5 YEAR 7.12% = 5.95% + 1.17%
1 YEAR 8.92% = 5.93% + 2.99%
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA Virginia Bond Fund for
the 7-year period ended September 30, 1997.
Total Return for years **Compounded Dividend
ended: Yield for years ended:
- ----------------------- ------------------------------
9/30/91 12.29%* 9/30/91 6.89%*
9/30/92 10.04% 9/30/92 6.53%
9/30/93 13.12% 9/30/93 6.23%
9/30/94 -3.19% 9/30/94 5.22%
9/30/95 10.51% 9/30/95 6.41%
9/30/96 6.98% 9/30/96 5.97%
9/30/97 8.92% 9/30/97 5.93%
Change in Share Price
- -------------------------
9/30/91 5.40%*
9/30/92 3.51%
9/30/93 6.89%
9/30/94 -8.41%
9/30/95 4.10%
9/30/96 1.01%
9/30/97 2.99%
* This does not cover a twelve month period.
** Compounded Dividend yield calculation includes only income distributions.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. Dividend return
is the income dividends received over the period assuming reinvestment of all
dividends. Share price change in the change in net asset value over the period
adjusted for 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.
Current Market Conditions
With interest rates nearing four-year lows, finding a value in the marketplace
is more of a challenge. Currently, investment grade bonds, regardless of their
credit rating (AAA or BBB), are selling at yields within a very narrow range. I
will invest only in those bonds that I believe offer the best value for
shareholders.
Your Fund's Performance
Since long-term interest rates dropped during the period, your Fund's net asset
value (NAV) per share increased by $.43 to $11.35, or 3.9%, since March 31,
1997. The Fund's performance compared favorably to its peer group. While past
performance is no guarantee of future results, the Fund's annualized dividend
yield(1) for the past six months was 5.47%, as compared to the Lipper Virginia
Municipal Debt Funds average of 4.73% for the 34 funds in the category.(2) For
the same period, the Fund's total return(3) was 6.86%, compared to the Lipper
average of 6.47%.
------------------------------------
COMPARISON - 12 MONTH DIVIDEND YIELD
------------------------------------
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Virginia Bond Fund and the Lipper
Virginia Municipal Debt Funds Average from 9/30/92 to 9/30/97.
USAA VIRGINIA LIPPER VIRGINIA MUNICIPAL
Year BOND FUND DEBT FUNDS AVERAGE
- ---- ------------- --------------------------
09/92 6.04% 5.91%
09/93 5.44% 5.2%
09/94 5.81% 5.33%
09/95 5.82% 5.04%
09/96 5.75% 4.87%
09/97 5.5% 4.73%
The Lipper Virginia Municipal Debt Funds Average is computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. 12-month dividend yield is computed by dividing income
dividends paid during the previous 12 months by the latest month-end net asset
value adjusted for capital gains distributions. The graph represents
data from 9/30/92 to 9/30/97.
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 5.09% AND:
ASSUMING A VIRGINIA STATE TAX RATE OF 5.75%
AND A MARGINAL FEDERAL TAX RATE OF:
28% 31% 36% 39.6%
A FULLY TAXABLE INVESTMENT MUST PAY: 7.50% 7.83% 8.44% 8.94%
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.
(1) Dividend yield is computed by dividing income dividends paid during the
previous 6 months by the latest month-end net asset value adjusted for
capital gains distributions and annualizing the result.
(2) Lipper Analytical Services is an independent organization that monitors the
performance of mutual funds.
(3) Total return equals income return plus share price change and assumes
reinvestment of dividends and capital gains distributions.
The State of Virginia
Given the state's successful crusade to attract high-tech industry and higher
paying jobs, I believe Virginia is about to end ten years of lagging personal
income growth. Employment has improved every month this year to record levels.
Governor Allen has actively courted out-of-state employers by reducing the cost
of doing business in Virginia. Real estate values, especially in Northern
Virginia for example, have turned the corner after falling 2% over five years in
Arlington County. Conversely, Virginia Beach continues its steady growth of 5.4%
over the last ten years.
A controversy in Loudoun County certainly justifies my reasons for avoiding
municipal lease bonds issued by local municipalities. After voters defeated a
proposed general obligation bond, the county instead issued a lease revenue bond
that didn't require an election. Some local voters are quite agitated about the
turn of events. Unless extenuating circumstances exist, I avoid bonds that rely
upon annual appropriations from a local general fund. Looking forward, we will
closely monitor financial and legislative issues that could potentially impact
your Fund's holdings.
---------------------
PORTFOLIO RATINGS/MIX
SEPTEMBER 30, 1997
---------------------
A pie chart is shown here depicting the Portfolio Mix as of September 30, 1997
of the USAA Virginia Bond Fund to be:
AA - 40%, A - 19%, Cash Equivalents - 1%, AAA - 21%, BBB - 19%
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 2.6% and 3.0%, respectively, of the Fund's
investments.
Note: Income may be subject to federal, state or local taxes, or the alternative
minimum tax.
See page 15 for a complete listing of the Portfolio of Investments in
Securities.
INVESTMENT REVIEW
VIRGINIA MONEY MARKET FUND
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes, while
preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality Virginia tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will endeavor to maintain a constant
net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund will maintain a
stable net asset value of $1.00 per share.
3/31/97 9/30/97
Net Assets........................... $113.3 MILLION $113.6 MILLION
Net Asset Value Per Share............ $1.00 $1.00
AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/97
March 31, 1997 to September 30, 1997..................... 1.69%+
1 Year................................................... 3.26%
5 Years.................................................. 2.90%
Since inception on October 15, 1990...................... 3.21%
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
7-Day Simple Yield on September 30, 1997................. 3.52%
Total return equals income return and assumes reinvestment of all dividends and
any 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. Yields and returns fluctuate.
-----------------------
7-DAY YIELD COMPARISON
-----------------------
A chart in the form of a line graph appears here illustrating the comparison of
the 7 day Yield of the USAA Virginia Money Market Fund and the IBC/Donoghue's
State Specific SB (Stock Broker) and GP (General Purpose) (Tax - Free):
Money Funds.
USAA VIRGINIA IBC/Donoghue
MONEY MARKET FUND ------------
-----------------
9/24/96 3.37% 3.09%
10/29/96 3.18% 2.92%
11/26/96 3.15% 2.88%
12/31/96 3.51% 3.24%
1/28/97 3.05% 2.81%
2/25/97 3.06% 2.72%
3/25/97 2.96% 2.63%
4/29/97 3.71% 3.49%
5/27/97 3.5% 3.2%
6/24/97 3.56% 3.24%
7/29/97 3.25% 2.94%
8/26/97 3.09% 2.7%
9/29/97 3.51%* 3.25%*
Data represent the last Monday of each month.
*Ending date 9/29/97
The graph tracks the Fund's 7-day simple yield against IBC/Donoghue's State
Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free) Money Funds, an
average of all major money market fund yields.
MESSAGE FROM THE MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER: JOHN C. BONNELL, CFA IS HERE]
The Market
All financial markets are driven by supply and demand relationships. This was
especially highlighted in the summer months by the tax-exempt money market.
During the six months ending September 30, 1997, the one-year Treasury bill
yield ranged from 6.07% to 5.42% and has generally trended down since the end of
April. The same cannot be said for one-year municipal notes. As measured by the
Bond Buyer One-Year Note Index,(1) yields ranged from 3.97% to 3.76% during the
same time span, and ended the period at 3.82%, only slightly lower than the
3.85% at the end of March. Why didn't short-term municipals follow the
short-term treasury market closer? The municipal market is influenced more by
the amount of securities available in the market, and the amount of cash to be
invested. Several possible factors that combined this year to influence both the
supply of and demand for short-term tax-exempt securities included the
following:
- The scarcity in supply of one-year notes.
- Borrowings made for periods longer than twelve months.
- An increase in the alternative to fixed rate notes.
With improved economic conditions issuers did not need to borrow as much as in
prior years. In fact, more issuers chose to borrow for fifteen months,
temporarily making their securities too long for money market investments.
Alternatively, underwriters created money market eligible variable rate products
out of long-term securities, thus increasing the supply of variable rate
securities.(2)
(1) Bond Buyer Index is the industry standard for yields of investment-grade
municipal bonds.
(2) Variable rate demand note: A note representing borrowings that is payable
on demand and that bears interest tied to money market rate.
The equity and long-term bond markets both experienced tremendous price gains
over the last six months. This was accompanied by extreme volatility which many
expect caused large cash flows into and out of money market funds. In addition,
during the Federal government budget negotiations one proposal contained a
provision that would reduce the amount of tax-exempt interest corporations could
claim. This provision was not included in the final budget bill, but many feel
corporations reduced their municipal holdings (a large amount being short-term
securities) temporarily, only to buy into the market after the budget was
passed. These events combined to influence the demand for short-term municipal
securities. Situations such as these, which are unique to the municipal market,
explain why the municipal market does not always closely track the much larger
and highly efficient treasury market.
Strategy
Your Fund strives to meet its objective in any prevailing market environment.
This is done in part by maintaining a mix of fixed rate securities and variable
rate securities in the fund. Fixed rate securities lock in rates and help
stabilize the Fund's yield during the periods when there is a large amount of
money in the market relative to supply. Variable rate securities provide
liquidity necessary to take advantage of higher yielding securities as
opportunities arise. Our longstanding commitment to credit research is a major
factor that ensures all purchases are the best relative value in the market at
any given time.
Performance
While past performance is no guarantee of future results, for the 12 months
ending September 30, 1997, your Fund ranked 16 out of 149 State Specific
Tax-Exempt Money Market Funds according to IBC Financial Data, Inc. with a yield
of 3.26%. The average for the category over the same time period was 3.00%.
Virginia
Virginia continues to demonstrate very conservative fiscal management and this
is reflected in the highest debt ratings of "AAA" from all three major credit
rating agencies. Fiscal 1997 ended with an estimated operating surplus of $197
million. Most of the surplus will be placed in the state's revenue stabilization
fund (a reserve fund for contingencies). Employment continues to expand and the
unemployment rate, at 4.2% in August 1997, is well below the 4.9% national rate.
Tobacco is a major product of the state. Possible financial/economic
implications ensuing from the litigation of tobacco is an issue we are closely
following. However, because of the overall diversity of the state's economic
base, any negative impact should be manageable. As always, we continue to
analyze each issue on a case-by-case basis and remain very selective when
investing Fund assets.
- ------------------------------------
Cumulative Performance Comparison
- ------------------------------------
A chart in the form of a line graph appears here comparing the cumulative
performance of a $10,000 Investment of the USAA Virginia Money Market Fund. The
data is from 10/15/90 through 9/30/97. The data points from the graph are as
follows:
Virginia Money Market Fund
- ----------------------------
10/15/90 $10,000
10/90 $10,020
04/90 $10,609
04/91 $10,278
10/91 $10,500
04/92 $10,687
10/92 $10,833
4/93 $10,960
10/93 $11,079
4/94 $11,193
10/94 $11,339
4/95 $11,532
10/95 $11,736
4/96 $11,925
10/96 $12,112
4/97 $12,300
9/30/97 $12,474
Past performance is no guarantee of future results and the value of your
investment will vary according to the fund's performance. Income may be subject
to federal, state or local taxes, or to the alternative minimum tax.
An investment in this Fund is neither insured nor guaranteed by the U.S.
government and there is no assurance that the Fund will maintain a stable net
asset value of $1 per share.
See page 18 for a complete listing of the Portfolio of Investments in
Securities.
<TABLE>
Statements of Assets and Liabilities
(In Thousands)
September 30, 1997
(Unaudited)
<CAPTION>
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $298,939 and $114,068, respectively) $ 316,858 $ 114,068
Cash 123 324
Receivables:
Capital shares sold 6 110
Interest 5,146 653
--------- ----------
Total assets 322,133 115,155
--------- ----------
Liabilities
Securities purchased 3,099 1,083
Capital shares redeemed 48 401
USAA Investment Management Company 87 52
USAA Transfer Agency Company 17 9
Accounts payable and accrued expenses 53 30
Dividends on capital shares 391 19
--------- ----------
Total liabilities 3,695 1,594
--------- ----------
Net assets applicable to capital shares outstanding $318,438 $ 113,561
========= ==========
Represented by:
Paid-in capital $302,255 $ 113,561
Accumulated net realized loss on investments (1,736) -
Net unrealized appreciation of investments 17,919 -
--------- ----------
Net assets applicable to capital shares outstanding $ 318,438 $ 113,561
========= ==========
Capital shares outstanding 28,051 113,561
========= ==========
Net asset value, redemption price, and offering price per share $ 11.35 $ 1.00
========= ==========
See accompanying notes to financial statements.
</TABLE>
Categories & Definitions
Portfolios of Investments in Securities
September 30, 1997
(Unaudited)
Fixed-Rate Instruments -- consist of municipal bonds, notes, and commercial
paper. The interest rate is constant to maturity. Prior to maturity, the price
of a fixed-rate instrument generally varies inversely to the movement of
interest rates.
Put Bonds -- provide the right to sell the bond at face value at specific tender
dates prior to final maturity. The put feature shortens the effective maturity
to the next tender date.
Variable Rate Demand Notes (VRDN) -- provide the right, on any business day, to
sell the security at face value on either that day or in seven days. The
interest rate is adjusted at a stipulated daily, weekly, or monthly interval to
a rate that reflects current market conditions. In money market funds, the
effective maturity is the date on which the underlying principal amount may be
recovered or the next rate adjustment date consistent with regulatory
requirements. In bond funds, the effective maturity is the next put date. Most
VRDNs possess a credit enhancement.
Credit Enhancement (CRE) -- adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. 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 provider of the
credit enhancement, rather than the credit standing of the issuer.
Portfolio Description Abbreviations
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
<TABLE>
Virginia Bond Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1997
(Unaudited)
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
<C> <S>
Fixed Rate Instruments (98.9%) <C> <C> <C>
Virginia (83.9%)
$ 7,500 Augusta County IDA Hospital RB, Series 1991 7.00% 9/01/21(a) $ 8,372
1,895 Capital Region Airport Commission RB, Series A (CRE) 5.63 7/01/25 1,925
Chesterfield County Health Center Commission
Mortgage RB
1,500 Series 1996 5.95 12/01/26 1,550
12,195 Series 1996 6.00 6/01/39 12,574
College Building Auth. Educational Facilities RB
3,525 Series 1992 6.40 1/01/12 3,756
2,885 Series 1992 6.63 5/01/13 3,081
2,505 Series 1992 6.60 9/01/16 2,660
3,350 Series 1994 5.80 1/01/24 3,429
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/15 3,105
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 4,985
2,250 Emporia GO, Series 1995 5.75 7/15/15 2,335
5,200 Fairfax County Economic Development Auth. RB,
Series 1991B 7.50 6/01/01 5,438
15,180 Fairfax County IDA RB, Series 1996 6.00 8/15/26 15,933
2,000 Fairfax County Redevelopment and Housing
Auth. MFH RB, Series 1996A 6.00 12/15/28 2,086
1,500 Fairfax County Redevelopment and Housing Auth. RB,
Series 1989A (CRE) 7.50 11/01/19(a) 1,630
12,000 Fairfax County Sewer RB, Series 1996 (CRE) 5.88 7/15/28 12,520
8,750 Galax IDA Hospital RB, Series 1995 (CRE) 5.75 9/01/20 8,948
Hampton Redevelopment and Housing Auth. RB
2,000 Series 1996A 5.88 7/20/16 2,079
1,300 Series 1996A 6.00 1/20/26 1,361
6,000 Hanover County IDA Hospital RB (CRE) 5.50 8/15/25 6,018
Henrico County IDA Residential and
Healthcare Facility RB
1,025 Series 1997 6.10 7/01/20 1,025(c)
2,070 Series 1997 6.15 7/01/26 2,070(c)
2,500 Henry County IDA Hospital RB, Series 1997 6.00 1/01/27 2,593
Housing Development Auth. Commonwealth Mortgage RB
5,440 Series 1992A 7.10 1/01/22 5,813
10,000 Series 1992A 7.10 1/01/25 10,685
1,455 Series 1992C 6.40 1/01/15 1,528
1,650 Series 1994D 6.40 7/01/17 1,754
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,226
Housing Development Auth. MFH RB
55,000 Series 1982A 7.00(b) 11/01/17 10,109
7,700 Series 1991F 7.10 5/01/13 8,227
4,220 Isle of Wight County IDA RB, Series 1990 7.38 1/01/10 4,504
3,000 Loudoun County IDA Hospital RB, Series 1995 (CRE) 5.80 6/01/20 3,085
8,000 Loudoun County IDA Hospital RB, Series 1995 (CRE) 5.80 6/01/26 8,195
6,000 Metropolitan District of Columbia Airports Auth. RB 5.38 10/01/23 5,954
4,000 Norfolk Water RB, Series 1995 (CRE) 5.88 11/01/20 4,155
9,090 Peninsula Ports Auth. Health Systems RB, Series 1992A 6.25 7/01/21 9,478
11,000 Peninsula Ports Auth. RB, Series 1992 (CRE) 7.38 6/01/20 12,070(d)
3,690 Pittsylvania County GO 6.00 7/01/14 3,935
2,710 Polytechnic Institute and State Univ. RB, Series 1996A 5.50 6/01/16 2,751
1,000 Portsmouth Redevelopment and Housing Auth. RB,
Series 1997A 5.85 12/20/30 1,012
2,500 Prince William County IDA Hospital RB, Series 1995 6.85 10/01/25 2,765
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/15 4,908
3,985 Resources Auth. Sewer System RB, Series 1992A 6.00 5/01/22 4,093
7,210 Resources Auth. Water and Sewer RB, Series 1996A 5.63 4/01/27 7,317
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,660
1,250 Spotsylvania County GO, Series 1994 6.88 12/01/14 1,408
11,820 Virginia Beach Development Auth. Hospital RB,
Series 1991 6.30 11/01/21 12,497
1,000 Virginia Beach Development Auth. Residential
and Health Care Facility RB, Series 1997 6.15 7/01/27 1,004
12,000 West Point IDA Solid Waste Disposal RB, Series 1994B 6.25 3/01/19 12,757(d)
6,000 Williamsburg IDA RB, Series 1993 5.75 10/01/22 6,080(d)
3,500 Winchester IDA RB, Series 1994 (CRE) 6.75 10/01/19 3,874
Guam (3.0%)
1,000 Government Limited Obligation Infrastructure
Improvement RB, Series 1989A (CRE) 7.10 11/15/09 1,051
8,050 Power Auth. RB, Series 1992A 6.30 10/01/22 8,415
Puerto Rico (12.0%)
10,000 Commonwealth GO, Series 1996 5.40 7/01/25 9,899
Electric Power Auth. RB
7,700 Series 1995Z 5.25 7/01/21 7,446
6,525 Series X 5.50 7/01/25 6,515
Highway and Transportation Auth. RB
6,235 Series 1993X 5.00 7/01/22 5,816
8,600 Series 1996Y 5.50 7/01/26 8,599
- -----------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $297,139) 315,058
- -----------------------------------------------------------------------------------------------------
Variable Rate Demand Note (0.6%)
Virginia
1,800 Henrico County IDA RB, Series 1994 (CRE) (cost: $1,800) 3.95 5/01/24 1,800
- -----------------------------------------------------------------------------------------------------
Total investments (cost: $298,939) $316,858
=====================================================================================================
</TABLE>
Portfolio Summary By Industry
-----------------------------
Hospitals 23.7%
Electric Power 8.5
Sewer 7.5
Housing - Single-Family 7.2
Education 7.1
Paper & Forest Products 7.0
Housing - Multi-Family 6.7
Nursing Care 5.7
General Obligations 5.5
Special Assessment/Tax/Fee 4.9
Ports/Wharfs 3.8
Escrowed Securities 3.1
Airports 2.5
Broadcasters 1.7
Retirement Homes 1.7
Railroads 1.6
Water Utilities 1.3
----
Total 99.5%
====
<TABLE>
Virginia Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1997
(Unaudited)
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
<C> <S> <C> <C> <C>
Variable Rate Demand Notes (59.9%)
Virginia
$ 6,768 Alexandria IDA RB, Series 1989 (CRE) 4.35% 1/01/09 $ 6,768
5,000 Bedford County IDA RB, Series 1993 (CRE) 4.15 10/01/04 5,000
8,750 Chesterfield County IDA PCRB, Series 1993 4.20 8/01/09 8,750
5,600 Chesterfield County IDA RB, Series 1989 (CRE) 4.13 2/01/03 5,600
2,495 Fauquier County IDA RB, Series 1994 (CRE) 4.10 12/01/14 2,495
Henrico County IDA RB
1,700 Series 1986C 4.10 7/15/16 1,700
1,200 Series 1994 (CRE) 3.95 5/01/24 1,200
5,180 Housing Development Auth. RB, Series 1987A (CRE) 4.15 9/01/17 5,180
12,600 Loudoun County IDA Residential Care Facility RB,
Series 1994B (CRE) 4.35 11/01/24 12,600
4,600 Newport News Redevelopment and Housing Auth.
MFH RB, Series 1984 (CRE) 4.00 11/01/06 4,600
3,100 Peninsula Ports Auth. RB, Series 1984 (CRE) 3.65 11/01/01 3,100
Prince William County IDA RB
5,600 Series 1988 (CRE) 4.17 6/30/04 5,600
1,031 Series 1989D (CRE) 4.20 10/01/00 1,031
Richmond IDA RB
522 Series 1989A (CRE) 4.20 6/01/02 522
520 Series 1996 (CRE) 4.10 5/01/16 520
1,400 Richmond Redevelopment and Housing Auth. RB,
Series 1995A (CRE) 4.00 12/01/25 1,400
1,940 Rockingham County IDA RB, Series 1983A 4.30 10/01/20 1,940
- -----------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $68,006) 68,006
- -----------------------------------------------------------------------------------------------------
Put Bonds (26.8%)
Virginia
3,100 Chesterfield County IDA PCRB, Series 1985 3.80 10/01/09 3,100
4,200 Fairfax County Hospital IDA RB, Series 1993B 3.65 8/15/25 4,200
3,575 Falls Church IDA RB, Series 1985 3.80 5/01/15 3,575
4,800 Hampton IDA Hospital Facilities RB, Series 1997B 3.80 11/01/11 4,800
5,000 Housing Development Auth. Commonwealth
Mortgage RB, Series 1997C 3.80 7/01/17 5,000
2,000 Peninsula Ports Auth. RB, Series 1987A (CRE) 3.70 7/01/16 2,000
Prince William County IDA RB
1,000 Series 1986 3.75 8/01/16 1,000
1,935 Series 1992 (CRE) 3.80 9/01/07 1,935
3,480 Richmond IDA RB, Series 1987A (CRE) 3.80 8/15/15 3,480
1,400 York County IDA PCRB, Series 1985 3.80 7/01/09 1,400
- -----------------------------------------------------------------------------------------------------
Total put bonds (cost: $30,490) 30,490
- -----------------------------------------------------------------------------------------------------
Fixed Rate Instruments (13.7%)
Virginia
4,375 Commonwealth GO, Series 1996 5.38 6/01/98 4,421
250 Fairfax County GO, Series 1992C 4.70 10/01/97 250
1,000 Newport News Improvement Refunding GO,
Series 1993B 7.15 10/15/05(a) 1,050
3,750 Norfolk GO, Series 1993 4.50 2/01/98 3,761
650 Norfolk IDA RB, Series 1997 (CRE) 3.85 8/15/98 650
265 Peninsula Ports Auth. RB, Series 1997 (CRE) 3.85 8/15/98 265
2,000 Public Building Auth. RB, Series 1988A 7.00 8/01/00(a) 2,088
2,000 Public School Auth. GO, Series 1990A 7.00 1/01/04(a) 2,056
1,000 Richmond Public Utility RB, Series 1988A 7.60 1/15/04(a) 1,031
- -----------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $15,572) 15,572
- -----------------------------------------------------------------------------------------------------
Total investments (cost: $114,068) $114,068
=====================================================================================================
</TABLE>
Portfolio Summary By Industry
-----------------------------
Aerospace/Defense 12.6%
Retirement Homes 12.2
Hospitals 11.9
Housing - Multi-Family 8.6
Community Service 7.6
General Obligations 7.4
Electric Power 6.3
Escrowed Securities 5.5
Manufacturing - Diversified Industries 4.9
Housing - Single-Family 4.4
Paper & Forest Products 4.4
Buildings 3.1
Hotel/Motel 2.7
Retail - General Merchandising 2.2
Ports/Wharfs 1.8
Drugs 1.7
Retail - Food Chains 1.7
Education 1.4
-----
Total 100.4%
=====
Notes to Portfolios of Investments in Securities
September 30, 1997
(Unaudited)
General Notes
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
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 September 30, 1997, the cost of securities purchased on a delayed
delivery basis for the Virginia Bond Fund were $3,095,000.
(d) At September 30, 1997, these securities were segregated to cover delayed
delivery purchases.
See accompanying notes to financial statements.
<TABLE>
Statements of Operations
(In Thousands)
Six-month period ended September 30, 1997
(Unaudited)
<CAPTION>
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
<S> <C> <C>
Net investment income:
Interest income $ 9,189 $ 2,207
--------- -------
Expenses:
Management fees 514 193
Transfer agent's fees 99 52
Custodian's fees 37 27
Postage 14 6
Shareholder reporting fees 5 4
Directors' fees 2 2
Professional fees 9 9
Other 6 4
--------- -------
Total expenses before reimbursement 686 297
Expenses reimbursed - (10)
--------- -------
Total expenses after reimbursement 686 287
--------- -------
Net investment income 8,503 1,920
--------- -------
Net realized and unrealized gain (loss) on investments:
Net realized loss (134) -
Change in net unrealized appreciation/depreciation 11,912 -
--------- -------
Net realized and unrealized gain 11,778 -
--------- -------
Increase in net assets resulting from operations $ 20,281 $ 1,920
========= =======
See accompanying notes to financial statements.
</TABLE>
<TABLE>
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended September 30, 1997 and Year ended March 31, 1997
(Unaudited)
<CAPTION>
Virginia Virginia
Bond Fund Money Market Fund
--------- -----------------
9/30/97 3/31/97 9/30/97 3/31/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 8,503 $ 16,003 $ 1,920 $ 3,397
Net realized gain (loss) on investments (134) 2,565 - -
Change in net unrealized appreciation/
depreciation of investments 11,912 (3,090) - -
---------- ---------- ---------- ---------
Increase in net assets resulting from
operations 20,281 15,478 1,920 3,397
---------- ---------- ---------- ---------
Distributions to shareholders from:
Net investment income (8,503) (16,003) (1,920) (3,397)
---------- ---------- ---------- ---------
From capital share transactions:
Proceeds from shares sold 23,560 46,723 49,482 84,841
Shares issued for dividends reinvested 6,314 11,994 1,805 3,195
Cost of shares redeemed (16,128) (32,389) (51,056) (85,014)
---------- ---------- ---------- ---------
Increase in net assets from
capital share transactions 13,746 26,328 231 3,022
---------- ---------- ---------- ---------
Net increase in net assets 25,524 25,803 231 3,022
Net assets:
Beginning of period 292,914 267,111 113,330 110,308
---------- ---------- ---------- ---------
End of period $ 318,438 $ 292,914 $ 113,561 $ 113,330
========== ========== ========== =========
Change in shares outstanding:
Shares sold 2,106 4,251 49,482 84,841
Shares issued for dividends reinvested 563 1,091 1,805 3,195
Shares redeemed (1,445) (2,955) (51,056) (85,014)
---------- ---------- ---------- ---------
Increase in shares outstanding 1,224 2,387 231 3,022
========== ========== ========== =========
Authorized shares of $.01 par value 45,000 35,000 175,000 175,000
========== ========== ========== =========
See accompanying notes to financial statements.
</TABLE>
Notes to Financial Statements
September 30, 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company incorporated under the laws of Maryland consisting of ten
separate funds. The information presented in this semiannual report pertains
only to the Virginia Bond Fund and Virginia Money Market Fund (the Funds). The
Funds have a common objective of providing Virginia investors with a high level
of current interest income that is exempt from federal and Virginia state income
taxes. The Virginia Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation -- Investments in the Virginia Bond Fund are valued each
business day by a pricing service (the Service) approved by the Company's Board
of Directors. The Service uses the mean between quoted bid and asked prices or
the last sale price to price securities when, in the Service's judgement, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The Service
generally prices these securities based on methods which include consideration
of yields or prices of municipal securities of comparable quality, coupon,
maturity and type, indications as to values from dealers in securities, and
general market conditions. Securities which are not valued by the Service, and
all other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 of the Investment Company Act of 1940, as amended, all securities
in the Virginia Money Market Fund, are stated at amortized cost which
approximates market value.
B. Federal taxes -- Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities -- 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 securities. 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, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($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 its agreement with CAPCO, each Fund may borrow
from CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with
no markup. Subject to availability under its agreement with NationsBank, each
Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 15% of its total assets at
NationsBank's borrowing rate plus a markup. The Funds had no borrowings under
either of these agreements during the six-month period ended September 30, 1997.
(3) Distributions
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. All net investment income available for distribution was
distributed at September 30, 1997.
Distributions of realized gains from security transactions not offset by capital
losses are made in the succeeding fiscal year or as otherwise required to avoid
the payment of federal taxes. At September 30, 1997, the Virginia Bond Fund had
capital loss carryovers for federal income tax purposes of approximately
$1,736,000 which, if not offset by subsequent capital gains will expire in 2003.
It is unlikely that the Board of Directors of the Company will authorize a
distribution of capital gains realized in the future until the capital loss
carryovers have been utilized or expire.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the six-month period ended September 30, 1997 for the Virginia Bond Fund
were $28,297,881 and $11,329,911, respectively. Purchases and sales/maturities
of securities for the six-month period ended September 30, 1997 for the Virginia
Money Market Fund were $113,260,869 and $108,019,975, respectively.
Gross unrealized appreciation and depreciation of investments at September 30,
1997 for the Virginia Bond Fund was $17,919,895 and $371, respectively.
(5) Transactions with Manager
A. Management fees -- The investment policies of the Funds and the management of
the Funds' portfolios are carried out by USAA Investment Management Company (the
Manager). Management fees are computed as a percentage of aggregate average net
assets (ANA) of both Funds combined, which on an annual basis is equal to .50%
of the first $50,000,000, .40% of that portion over $50,000,000 but not over
$100,000,000, and .30% of that portion over $100,000,000. These fees are
allocated on a proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund to
.50% of its annual average net assets through August 1, 1998.
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 Funds based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services -- The Manager provides exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) Transactions with Affiliates
Certain directors and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated directors or Fund officers
received any compensation from the Funds.
<TABLE>
Notes to Financial Statements
Virginia Bond Fund
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-Month
Period Ended Year Ended March 31,
September 30, -----------------------------------------------------------
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period $ 10.92 $ 10.93 $ 10.76 $ 10.71 $ 11.16 $ 10.57
Net investment
income .31 .63 .63 .62 .62 .64
Net realized
and unrealized
gain (loss) .43 (.01 ) .17 .05 (.30) .65
Distributions from
net investment
income (.31) (.63 ) (.63 ) (.62) (.62) (.64)
Distributions of
realized capital
gains - - - - (.15) (.06)
---------- ---------- --------- ---------- ---------- ----------
Net asset value at
end of period $ 11.35 $ 10.92 $ 10.93 $ 10.76 $ 10.71 $ 11.16
========== ========== ========= ========== ========== ==========
Total return (%) * 6.86 5.82 7.57 6.61 2.69 12.61
Net assets at end
of period (000) $ 318,438 $ 292,914 $ 267,111 $ 238,920 $ 235,901 $ 207,302
Ratio of expenses
to average
net assets (%) .45(b) .46 .48 .50 .49 .50(a)
Ratio of net
investment
income to
average net
assets (%) 5.56(b) 5.76 5.74 5.95 5.44 5.90(a)
Portfolio
turnover (%) 3.76 26.84 27.20 27.77 92.17 91.31
</TABLE>
(a) The information contained in this table is based on actual expenses for
the period, after giving effect to reimbursements of expenses by the
Manager. Absent such reimbursements the Fund's ratios would have been:
1993
----
Ratio of expenses to average net assets (%) .54
Ratio of net investment income to average net assets (%) 5.86
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gains
distribution during the period.
<TABLE>
Notes to Financial Statements (continued)
Virginia Money Market Fund
September 30, 1997
(Unaudited)
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-Month
Period Ended Year Ended March 31,
September 30, ---------------------------------------------------------------
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment
income .02 .03 .03 .03 .02 .03
Distributions from
net investment
income (.02) (.03) (.03) (.03) (.02) (.03)
---------- ---------- ---------- --------- --------- ---------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========= ========= =========
Total return (%) * 1.69 3.14 3.42 2.91 2.14 2.65
Net assets at end
of period (000) $ 113,561 $ 113,330 $ 110,308 $ 98,049 $ 92,570 $ 77,263
Ratio of expenses
to average
net assets (%) .50(a)(b) .50(a) .50(a) .50(a) .50(a) .50(a)
Ratio of net
investment
income to
average net
assets (%) 3.34(a)(b) 3.10(a) 3.36(a) 2.88(a) 2.12(a) 2.62(a)
</TABLE>
(a) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursements of expenses by the Manager.
Absent such reimbursements the Fund's ratios would have been:
<TABLE>
<CAPTION>
Six-Month
Period Ended Year Ended March 31,
September 30, ------------------------------------------------------------
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses
to average
net assets (%) .52(b) .53 .55 .56 .61 .63
Ratio of net
investment
income to
average net
assets (%) 3.32(b) 3.07 3.31 2.82 2.01 2.49
</TABLE>
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during
the period.
