TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review:
California Bond Fund 4
California Money Market Fund 9
Financial Information:
Statements of Assets and Liabilities 13
Portfolios of Investments in Securities:
California Bond Fund 15
California Money Market Fund 18
Notes to Portfolios of Investments in Securities 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 "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 California
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the funds.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(COPYRIGHT)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 AND VICE CHAIRMAN OF THE BOARD, 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
CALIFORNIA BOND FUND
OBJECTIVE: Provide California investors with a high level of current interest
income that is exempt from federal and California state income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade California
tax-exempt securities.
_______________________________________________________________________________
3/31/97 9/30/97
Net Assets.............................. $440.2 MILLION $488.4 Million
Net Asset Value Per Share............... $10.50 $10.98
_______________________________________________________________________________
AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/97
March 31, 1997 to September 30,1997...................................7.51% (+)
1 Year................................................................9.85%
5 Years...............................................................7.43%
Since Inception on August 1, 1989................................... 7.81%
+ 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............................ 4.87%
_______________________________________________________________________________
*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 California Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper California Municipal Debt Funds
Average. Data since inception on 8/1/89 through 9/30/97. The data points from
the graph are as follows:
USAA California Bond Fund
Year Amount
- -------- ------
08/01/89 $10,000
08/31/89 $ 9,822
08/31/90 $10,390
08/31/91 $11,685
08/31/92 $12,841
08/31/93 $14,575
08/31/94 $14,232
08/31/95 $15,370
08/31/96 $16,557
08/31/97 $18,231
09/30/97 $18,487
Lehman Brothers Municipal Bond Index
Year Amount
- ---- ------
08/01/89 $10,000
08/31/89 $ 9,902
08/31/90 $10,537
08/31/91 $11,780
08/31/92 $13,095
08/31/93 $14,693
08/31/94 $14,713
08/31/95 $16,018
08/31/96 $16,857
08/31/97 $18,415
09/30/97 $18,634
Lipper California Municipal Debt Funds Average
Year Amount
- ---- ------
08/01/89 $10,000
08/31/89 $ 9,882
08/31/90 $10,382
08/31/91 $11,548
08/31/92 $12,750
08/31/93 $14,353
08/31/94 $14,182
08/31/95 $15,200
08/31/96 $16,075
08/31/97 $17,543
09/30/97 $17,793
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 California Municipal Debt Funds Average is the
average performance level of all California 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
(A photograph of Robert R. Pariseau, CFA, Portfolio Manager appears 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
8/1/89 7.81% = 6.31% + 1.50%
_________________________________________________________________
5 Years 7.43% = 5.98% + 1.45%
_________________________________________________________________
1 Year 9.85% = 5.97% + 3.88%
_________________________________________________________________
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA California Bond Fund for
the 8-year period ended September 30, 1997.
Total Return for years **Compounded Dividend
ended: Yield for years ended:
- ----------------------- ------------------------------
9/30/89 -1.73%* 9/30/89 1.07%*
9/30/90 6.19% 9/30/90 6.91
9/30/91 13.17% 9/30/91 7.26%
9/30/92 9.38% 9/30/92 6.54%
9/30/93 13.96% 9/30/93 6.35%
9/30/94 -5.14% 9/30/94 5.06%
9/30/95 11.24% 9/30/95 6.47%
9/30/96 8.34% 9/30/96 6.02%
9/30/97 9.85% 9/30/97 5.97%
Change in Share Price
- -------------------------
9/30/89 -2.80%
9/30/90 -0.72%
9/30/91 5.91%
9/30/92 2.84%
9/30/93 7.61%
9/30/94 -10.20%
9/30/95 4.77%
9/30/96 2.32%
9/30/97 3.88%
* 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 is 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 $.48 to $10.98, or 4.6%, 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 5.45%, as compared to the Lipper California
Municipal Debt Funds average of 4.66% for the 113 funds in the category.(2) For
the same period, the Fund's total return(3) was 7.51%, compared to the
Lipper average of 6.92%.
_______________________________________
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 California Bond Fund and the Lipper
California Municipal Debt Funds Average from 9/30/90 to 9/30/97.
USAA California Bond Lipper California Municipal
Fund Debt Funds Average
9/30/90 6.82% 6.78%
9/30/91 6.53% 6.4%
9/30/92 6.1% 6.05%
9/30/93 5.41% 5.36%
9/30/94 5.84% 5.77%
9/30/95 5.8% 5.31%
9/30/96 5.7% 5.08%
9/30/97 5.48% 4.8%
The Lipper California Municipal Debt Funds Average is computed by Lipper
Analytical Services, an independent organization that monitors the
performance of mutual funds. 12-month dividend yield is computed by dividing
income dividends paid during the previous 12 months by the latest month-end net
asset value adjusted for capital gains distributions. The graph represents data
from 9/30/90 to 9/30/97.
The table below compares the yield of the USAA California Bond Fund with a
taxable equivalent investment.
TO MATCH THE CALIFORNIA BOND FUND'S CLOSING 30-DAY SEC YIELD OF 4.87% AND:
Assuming a California State Tax Rate of:
8.00% 9.30% 9.30% 9.30%
and a Marginal Federal Tax Rate of:
28% 31% 36% 39.6%
_______________________________________________________________________________
A fully Taxable Investment Must Pay: 7.35% 7.78% 8.39% 8.89%
_______________________________________________________________________________
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 California
Economic expansion continues at a brisk pace. Growth in high-tech, retail trade,
manufacturing, and exports has generated strong gains in the state's personal
income and employment levels. The unemployment rate fell to 6.2% in August 1997,
nearly 1% below the previous year's level. Since the state's personal income and
sales taxes produce nearly 80% of the state's General Fund revenues, the
dramatic recovery is very timely. Fitch Investors Service recently upgraded the
state's credit rating to "AA-" while Moody's and Standard & Poor's maintained
their A1/A+ ratings, respectively.
The state has reduced its accumulated General Fund deficit to $2.1 billion.
Ballot initiatives and spending pressures, particularly for education and public
safety, continue to delay the elimination of the deficit as well as prevent the
creation of a meaningful cash reserve. Looking forward, we will closely monitor
financial and legislative issues that could potentially impact your Fund's
holdings. One such legal issue is the Rider vs. San Diego case before the
California Supreme Court. This case challenges a city's right to issue a lease
revenue bond without a taxpayer vote. Such legal controversies are why I avoid
municipal leases that rely upon annual appropriations to service debt from a
local general fund, unless extenuating circumstances exist.
Portfolio Ratings/Mix
September 30, 1997
A pie chart is shown here depicting the Portfolio Mix as of September 30, 1997
of the USAA California Bond Fund to be:
AA - 20%, A - 23%, Cash Equivalents - 1%, AAA - 30%, BBB - 26%
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 1.8% and .5%, 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
CALIFORNIA MONEY MARKET FUND
OBJECTIVE: Provide California investors with a high level of current interest
income that is exempt from federal and California state income taxes, while
preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality California tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will endeavor to maintain
a constant net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund will maintain a stable
net asset value of $1.00 per share.
_______________________________________________________________________________
3/31/97 9/30/97
Net Assets.................................$341.1 MILLION $388.5 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............................. 1.70%(+)
1 Year........................................................... 3.30%
5 Years.......................................................... 2.98%
10 Years......................................................... 3.61%
(+) 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......................... 3.60%
______________________________________________________________________________
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 will
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 California Money Market Fund and the IBC/Donoghue's
State Specific SB (Stock Broker) and GP (General Purpose) (Tax - Free):
California Money Funds.
USAA CALIFORNIA IBC/Donoghue
MONEY MARKET FUND ------------
-----------------
9/24/96 3.41% 3.09%
10/29/96 3.23% 2.92%
11/26/96 3.24% 2.88%
12/31/96 3.61% 3.24%
1/28/97 3.1% 2.81%
2/25/97 3.19% 2.72%
3/25/97 3.01% 2.63%
4/29/97 3.76% 3.49%
5/27/97 3.54% 3.2%
6/24/97 3.59% 3.24%
7/29/97 3.28% 2.94%
8/26/97 3.03% 2.7%
9/29/97 3.58%* 3.21%*
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): California
Money Funds, an average of all major money market fund yields.
MESSAGE FROM THE MANAGER
(A PHOTOGRAPH OF JOHN C. BONNELL, CFA, PORTFOLIO MANAGER, APPEARS 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:
o The scarcity in supply of one-year notes.
o Borrowings made for periods longer than twelve months.
o 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 2 out of 41 California Money Market
Funds according to IBC Financial Data, Inc. with a yield of 3.30%. The average
for the category over the same time period was 2.96%.
California
Economic expansion continues in California. Growth in high-technology
industries, retail trade, business services, export trade, and manufacturing
resulted in strong gains in personal income and employment levels. Reflecting
this growth, the seasonally adjusted unemployment rate, while still higher than
the 4.9% national average, fell to 6.2% in August 1997, down from 7.1% in August
1996. The importance of a sound business environment to the State's financial
well-being is evidenced by the fact that the personal income tax and sales tax
comprised nearly 80% of General Fund (the state's main operating account)
revenues in fiscal 1996. The state has achieved operating surpluses for each of
the last five years. While a deficit is expected for fiscal 1997-98, this is
attributable to an extraordinary pension payment of $1.235 billion to the Public
Employment Retirement Fund.
Favorable operating results have permitted the state to reduce its accumulated
General Fund deficit from a peak of $4.6 billion at June 30, 1992, to $2.1
billion at June 30, 1996. However, ballot initiatives and spending pressures,
particularly for education and public safety, continue to hinder the state's
ability to build significant fiscal reserves. We will continue to closely
monitor financial and legislative issues that may ultimately have an impact on
the relative attractiveness of California municipal securities. As always, we
analyze each issue on a case-by-case basis and remain very selective when
investing Fund assets.
- ------------------------------------
Cumulative Performance of $10,000
- ------------------------------------
A chart in the form of a line graph appears here comparing the cumulative
performance of a $10,000 Investment in the USAA California Money Market Fund.
Data since inception on 08/01/89 through 9/30/97. The data points from the
graph are as follows:
California Money Market Fund
- ----------------------------
08/01/89 $10,000
08/31/89 $10,043
08/31/90 $10,609
08/31/91 $11,127
08/31/92 $11,511
08/31/93 $11,789
08/31/94 $12,057
08/31/95 $12,476
08/31/96 $12,898
08/31/97 $13,322
09/30/97 $13,362
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>
CALIFORNIA
CALIFORNIA MONEY MARKET
BOND FUND FUND
------------ -------------
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $464,121 and $391,802, respectively) $ 498,322 $ 391,802
Cash 152 862
Receivables:
Capital shares sold 135 244
Interest 7,295 3,027
-------- --------
Total assets 505,904 395,935
-------- --------
Liabilities
Securities purchased 16,461 6,400
Capital shares redeemed 142 750
USAA Investment Management Company 126 102
USAA Transfer Agency Company 20 17
Accounts payable and accrued expenses 70 75
Dividends on capital shares 702 65
--------- --------
Total liabilities 17,521 7,409
--------- --------
Net assets applicable to capital shares outstanding $ 488,383 $ 388,526
========= ========
Represented by:
Paid-in capital $ 454,676 $ 388,526
Accumulated net realized loss on investments (494) -
Net unrealized appreciation of investments 34,201 -
--------- --------
Net assets applicable to capital shares outstanding $ 488,383 $ 388,526
========= ========
Capital shares outstanding 44,479 388,526
========= ========
Net asset value, redemption price,
and offering price per share $ 10.98 $ 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
COP Certificate of Participation
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TRAN Tax Revenue Anticipation Note
<TABLE>
California Bond Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1997
(Unaudited)
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
--------- --------- ------ ---------- -------
Fixed Rate Instruments (101.5%)
<C> <S> <C> <C> <C>
California (96.7%)
Adelanto School District GO
$ 4,715 Series 1997A (CRE) 5.67%(c) 9/01/21 $ 1,274
5,530 Series 1997A (CRE) 5.67(c) 9/01/22 1,414
5,210 Alameda Housing Auth. MFH RB, Series 1989A 7.50 2/20/31 5,402
4,500 Central Coast Water Auth. RB, Series 1996A (CRE) 5.00 10/01/22 4,278
30,000 Central Valley Finance Auth. RB, Series 1993 6.20 7/01/20 31,307
Contra Costa Water District RB
7,175 Series D (CRE) 6.38 10/01/22 7,715
2,650 Series G (CRE) 5.50 10/01/19 2,667
Department of Water Resources RB
11,000 Series K 6.00 12/01/21(a) 11,956
5,400 Series L 5.75 12/01/19 5,540
2,000 Series S 5.00 12/01/29 1,896
5,000 Desert Hospital District COP (CRE) 6.39 7/28/20(a) 5,537
Educational Facilities Auth. RB
9,500 Series 1991 (CRE) 7.15 5/01/21(a) 10,629
5,000 Series 1992 6.00 2/15/17 5,244
1,775 Series 1992 6.88 9/01/22 1,953
8,990 Series 1992 6.50 10/01/22 9,568
9,000 Series 1994 (CRE) 6.20 5/01/21 9,507
8,015 Series 1995 6.00 10/01/25 8,339
8,050 Series 1995A 5.60 12/01/20 8,068
Fontana Unified School District Zero Coupon
Convertible GO
2,500 Series 1990D (CRE) 5.80(c) 5/01/17 2,227
2,000 Series 1990D (CRE) 5.85(c) 5/01/22 1,765
8,270 Foothill/Eastern Transportation Corridor Agency RB,
Series 1995A 5.00 1/01/35 7,520
2,385 Fresno COP 8.50 5/01/16 2,581
Health Facilities Financing Auth. RB
8,000 Series 1990 7.50 10/01/10(a) 8,920
6,500 Series 1990A (CRE) 7.70 9/01/10 7,145
35,000 Series 1990A 6.50 12/01/20 37,315(e)
11,500 Series 1991 (CRE) 6.75 6/01/21 12,257
3,175 Series 1992A (CRE) 6.38 10/01/22 3,414
3,500 Series 1993C 5.60 5/01/33 3,521
2,000 Series 1994 (CRE) 6.50 9/01/14 2,153
5,000 Series 1994A 6.63 7/01/18 5,444
1,000 Series 1997A (CRE) 5.50 1/01/19 1,000
4,000 Series 1997A (CRE) 5.25 8/15/27 3,877
3,200 Series 1997C (CRE) 5.13 8/15/22 3,076(d)
4,180 Hollister Joint Powers Financing Auth. RB 5.90 12/01/23 4,255
Housing Finance Agency Home Mortgage RB
865 Series 1988F 7.88 8/01/19 892
10,310 Series 1991F 6.85 8/01/17 10,958(e)
5,990 Series 1994A 6.55 8/01/26 6,412
3,000 Housing Finance Agency MFH RB,
Series 1996A (CRE) 6.05 8/01/27 3,140
1,500 Housing Finance Agency RB, Series 1997D 5.85 8/01/17 1,561
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/25 5,868
Metropolitan Water District RB
5,000 Series 1992 5.50 7/01/19 5,030
2,515 Series 1992 5.00 7/01/20 2,394
6,000 Series 1996C 5.00 7/01/27 5,671
12,000 Modesto Irrigation District RB, Series 1992A (CRE) 6.13 9/01/19 12,630
3,000 Mojave Water Agency Improvement District GO 6.60 9/01/22(a) 3,370
10,975 New Haven Unified School District GO,
Series 1997A (CRE) 6.10(c) 8/01/21 2,820
10,990 Pleasanton Joint Powers Financing Auth. RB,
Series 1993A 6.15 9/02/12 11,660
8,500 Riverside County Public Financing Auth. Tax
Allocation RB, Series A 5.63 10/01/33 8,390
Sacramento Cogeneration Auth. RB
3,700 Series 1995 5.88 7/01/15 3,811
6,500 Series 1995 6.50 7/01/21 6,979
6,000 Series 1995 6.00 7/01/22 6,216
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/25 7,560
90,650 San Joaquin Hills Transportation Corridor Agency RB,
Series 1997A (CRE) 5.67(c) 1/15/32 13,601(d)
13,500 San Joaquin Hills Transportation Corridor
Agency Senior Lien RB 6.75 1/01/32 15,239
10,035 San Joaquin Hills Transportation Corridor
Agency Senior Lien RB 5.00 1/01/33 9,213
11,320 San Mateo Sewer RB, Series 1992 (CRE) 6.30 8/01/17 12,167
12,455 Southern California Public Power Auth. RB,
Series 1989 (CRE) 6.00 7/01/18 12,610
Statewide Communities Development Auth. COP
13,500 Huntington Memorial Hospital (CRE) 5.80 7/01/26 13,879
5,420 Lutheran Homes (CRE) 5.75 11/15/21 5,509
4,000 Series 1996A (CRE) 5.50 9/01/14 4,039
1,055 The Arc of San Diego (CRE) 5.63 5/01/21 1,057
1,000 Stockton Health Facilities RB, Series A 5.70 12/01/14 1,008
Univ. of California RB
12,000 Series 1991A 6.88 9/01/16(a) 13,595(e)
4,000 Series 1996 (CRE) 5.75 7/01/24 4,126
Washington Township Hospital RB
9,500 Series 1993 5.50 7/01/18 9,464
6,070 Series 1993 5.25 7/01/23 5,798
Watsonville Insured Hospital RB
5,000 Series 1995A (CRE) 6.35 7/01/24 5,376
1,515 Series 1996A (CRE) 6.20 7/01/12 1,661
Puerto Rico (4.8%)
Electric Power Auth. RB
10,500 Series 1995Z 5.25 7/01/21 10,153
10,000 Series X 6.13 7/01/21 10,605
2,700 Series X 5.50 7/01/25 2,696
- -----------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $461,721) 495,922
- -----------------------------------------------------------------------------------------------------
Variable Rate Demand Notes (0.5%)
California
100 Irvine Ranch Water District RB, Series 1985 (CRE) 3.65 10/01/05 100
100 Loma Linda Water RB, Series 1995 (CRE) 4.05 6/01/25 100
2,200 Statewide Communities Development Auth. COP,
Series 1996 (CRE) 3.65 6/01/26 2,200
- ------------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $2,400) 2,400
- ------------------------------------------------------------------------------------------------------
Total investments (cost: $464,121) $498,322
======================================================================================================
</TABLE>
Portfolio Summary By Industry
-------------------------------
Hospitals 21.2%
Electric Power 19.9
Escrowed Securities 11.1
Toll Roads 9.3
Education 8.7
Water Utilities 7.2
Housing - Multi-Family 4.5
Housing - Single-Family 4.1
Special Assessment/Tax/Fee 4.1
Sewer 3.4
Nursing Care 2.5
Retirement Homes 2.2
General Obligations 1.9
Healthcare - Miscellaneous 1.3
Other .6
---------
Total 102.0%
=========
<TABLE>
California Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1997
(Unaudited)
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
------ --------- ------- -------- ------
Variable Rate Demand Notes (69.0%)
<C> <S> <C> <C> <C>
California (68.6%)
$ 2,850 Agoura Hills MFH RB, Series 1995 (CRE) 4.00 % 6/01/15 $ 2,850
6,270 Alameda Contra Costa Schools Financing Auth. COP,
Series 1996A (CRE) 3.90 7/01/16 6,270
3,800 Central Unified School District COP, Series 1995 (CRE) 4.05 6/01/15 3,800
9,700 Corona MFH RB, Series 1985B (CRE) 4.10 2/01/05 9,700(b)
3,580 Covina Redevelopment Agency MFH RB,
Series 1994A (CRE) 4.15 12/01/15 3,580
5,100 Economic Development Financing Auth. RB,
Series 1996 (CRE) 3.85 11/15/26 5,100
Educational Facilities Auth. RB
4,290 Series 1997 (CRE) 4.00 3/01/27 4,290
5,000 Series 1997 3.90 6/01/27 5,000
4,800 Fillmore COP, Series 1997 (CRE) 4.10 5/01/29 4,800
Foothill/Eastern Transportation Corridor Agency RB
11,500 Series 1995D (CRE) 4.00 1/02/35 11,500
10,900 Series 1995E (CRE) 4.00 1/02/35 10,900
4,230 Gardena Financing Agency RB, Series 1991 (CRE) 4.10 9/01/11 4,230
7,945 Grand Terrace MFH RB, Series 1985A (CRE) 4.20 12/01/11 7,945
1,210 Healdsburg Community Redevelopment Agency RB,
Series 1993A (CRE) 4.10 1/01/98 1,210
4,900 Huntington Beach MFH RB, Series 1985A (CRE) 4.00 2/01/10 4,900
Irvine Ranch Water District RB
700 Series 1985 (CRE) 3.65 10/01/05 700
3,300 Series 1993 (CRE) 3.65 4/01/33 3,300
15,495 Kern Community College District COP,
Series 1995 (CRE) 4.60 1/01/25 15,495
9,000 Lancaster MFH RB, Series 1984A (CRE) 4.15 11/01/04 9,000(b)
6,900 Loma Linda Water RB, Series 1995 (CRE) 4.05 6/01/25 6,900
Los Angeles Community Redevelopment Agency MFH RB
3,000 Series 1985 (CRE) 4.05 12/01/05 3,000
1,775 Series 1989 (CRE) 3.65 4/01/09 1,775
Los Angeles County Housing Auth. MFH RB
4,700 Series 1991B (CRE) 4.20 12/01/15 4,700
3,300 Series 1994B (CRE) 4.15 9/01/18 3,300
400 Merced IDA RB, Series 1989 (CRE) 4.10 12/01/97 400
4,400 Monrovia Redevelopment Agency COP,
Series 1984 (CRE) 3.70 12/01/14 4,400
8,955 Moreno Valley COP (CRE) 4.10 6/01/27 8,955
1,000 Ontario Redevelopment Agency Housing
Financings RB, Series 1997A (CRE) 4.15 10/01/27 1,000
Orange County Apartment Development RB
8,100 Series 1984D (CRE) 4.18 8/01/19 8,100
2,300 Series 1985T (CRE) 4.05 10/01/07 2,300(b)
14,450 Series 1992B (CRE) 4.20 11/01/05 14,450
3,235 Riverside County Housing Auth. MFH RB,
Series 1986F (CRE) 3.80 12/01/16 3,235
4,055 Sacramento County MFH RB, Series 1985E (CRE) 4.10 9/15/07 4,055
5,000 San Bernardino County COP, Series 1996 (CRE) 4.15 11/01/25 5,000
San Bernardino County MFH RB
550 Series 1985A (CRE) 4.05 6/01/05 550(b)
1,500 Series 1985B (CRE) 4.10 6/01/05 1,500(b)
3,000 Series 1992A (CRE) 4.00 8/01/05 3,000
5,075 San Bernardino IDA RB, Series 1992 (CRE) 4.15 2/01/12 5,075
8,300 San Diego MFH RB, Series 1993A (CRE) 4.25 12/01/15 8,300
8,000 Statewide Communities Development Auth. RB,
Series 1995D (CRE) 4.00 12/01/22 8,000
Statewide Communities Development Auth. COP
2,200 Covenant Retirement Communities, Series 1992 (CRE) 4.00 12/01/22 2,200
3,925 Institute for Defense Analysis, Series 1992 (CRE) 4.10 11/01/22 3,925
31,700 Series 1996 (CRE) 3.65 6/01/26 31,700
16,000 Torrance Hospital RB, Series 1992 (CRE) 4.05 2/01/22 16,000
Puerto Rico (0.4%)
1,600 Industrial, Tourist, Educational, Medical
and Environmental Control Facilities
Financing Auth. RB, Series 1995A (CRE) 3.85 1/01/15 1,600
- ------------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $267,990) 267,990
- ------------------------------------------------------------------------------------------------------
Put Bonds (5.3%)
California
Pollution Control Financing Auth. PCRB
2,660 Series 1984 4.00 5/15/02 2,660
5,260 Series 1984B 3.90 6/15/05 5,260
12,700 Public Capital Improvement Finance Auth. RB,
Series 1988C (CRE) 3.80 6/01/28 12,700
- ------------------------------------------------------------------------------------------------------
Total put bonds (cost: $20,620) 20,620
- ------------------------------------------------------------------------------------------------------
Fixed Rate Instruments (26.5%)
California
2,050 Lafayette Elementary School District TRAN,
Series 1996 4.25 10/09/97 2,050
8,500 Long Beach GO TRAN, Series 1996-97 4.75 10/09/97 8,501
10,000 Los Angeles Department of Water and Power CP (CRE) 3.90 10/14/97 10,000
4,050 New Haven Unified School District TRAN, Series 1997 4.25 6/30/98 4,061
4,600 Orange County Fire Auth. TRAN, Series 1997 4.25 9/17/98 4,615
2,500 Placer Union High School District GO TRAN,
Series 1997 4.45 9/10/98 2,512
8,700 Pomona GO TRAN, Series 1997 4.50 7/16/98 8,736
7,000 San Bernardino County GO TRAN, Series 1997-98A 4.50 6/30/98 7,033
1,620 San Leandro Unified School District GO TRAN,
Series 1997 4.25 6/30/98 1,625
14,775 San Ramon Valley Unified School District TRAN,
Series 1996-97 4.30 10/30/97 14,780
16,000 Santa Barbara County GO TRAN, Series 1996A 4.75 10/01/97 16,000
7,210 Santa Rosa High School District TRAN, Series 1997-98 4.50 7/02/98 7,242
9,000 Whittier Union High School District GO TRAN,
Series 1997 4.25 6/30/98 9,027
4,500 Yuba Community College District TRAN,
Series 1996-97 4.50 10/31/97 4,503
2,500 Yucaipa-Calimesa Joint Unified School
District GO TRAN, Series 1997 4.25 6/30/98 2,507
- -----------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $103,192) 103,192
- -----------------------------------------------------------------------------------------------------
Total investments (cost: $391,802) $391,802
=====================================================================================================
</TABLE>
Portfolio Summary By Industry
------------------------------
Housing - Multi-Family 25.0%
General Obligations 18.5
Education 13.3
Retirement Homes 10.2
Toll Roads 5.8
Buildings 5.0
Finance - Municipal 4.9
Hospitals 4.1
Electric Power 2.6
Hotel/Motel 2.4
Water/Sewer 2.3
Oil - International 2.0
Water Utilities 1.8
Specialized Services 1.0
Other 1.9
----------
Total 100.8%
==========
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) These securities were purchased within the terms of a private placement
memorandum and are subject to a seven day demand feature. Under procedures
adopted by the Board of Directors, the adviser has determined that these
securities are liquid. At September 30, 1997, these securities represented
5.9% of the California Money Market Fund's net assets.
(c) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(d) At September 30, 1997, the cost of securities purchased on a delayed
delivery basis for the California Bond Fund was $16,446,550.
(e) 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>
California
California Money Market
Bond Fund Fund
----------- -----------
<S> <C> <C>
Net investment income:
Interest income $ 13,924 $ 6,870
--------- ---------
Expenses:
Management fees 742 578
Transfer agent's fees 116 99
Custodian's fees 46 52
Postage 10 11
Shareholder reporting fees 6 7
Directors' fees 2 2
Registration fees 7 1
Professional fees 12 12
Other 8 7
-------- --------
Total expenses 949 769
-------- --------
Net investment income 12,975 6,101
-------- --------
Net realized and unrealized gain on investments:
Net realized gain 3,517 -
Change in net unrealized appreciation/depreciation 17,180 -
------- --------
Net realized and unrealized gain 20,697 -
------- --------
Increase in net assets resulting from operations $ 33,672 $ 6,101
======== ========
</TABLE>
See accompanying notes to financial statements.
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended September 30, 1997 and Year ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
California California
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 $ 12,975 $ 24,521 $ 6,101 $ 9,994
Net realized gain on investments 3,517 3,635 - -
Change in net unrealized appreciation/
depreciation of investments 17,180 (890) - -
------- ------- ------ ------
Increase in net assets resulting
from operations 33,672 27,266 6,101 9,994
------- ------- ------ -------
Distributions to shareholders from:
Net investment income (12,975) (24,521) (6,101) (9,994)
-------- -------- -------- --------
From capital share transactions:
Proceeds from shares sold 43,562 66,664 221,577 371,516
Shares issued for dividends reinvested 9,042 16,992 5,721 9,315
Cost of shares redeemed (25,149) (55,350) (179,900) (336,052)
-------- -------- -------- ---------
Increase in net assets from
capital share transactions 27,455 28,306 47,398 44,779
-------- -------- -------- --------
Net increase in net assets 48,152 31,051 47,398 44,779
Net assets:
Beginning of period 440,231 409,180 341,128 296,349
-------- -------- -------- --------
End of period $ 488,383 $ 440,231 $ 388,526 $ 341,128
======== ======== ======== ========
Change in shares outstanding:
Shares sold 4,056 6,327 221,577 371,516
Shares issued for dividends reinvested 837 1,610 5,721 9,315
Shares redeemed (2,340) (5,255) (179,900) (336,052)
------- -------- -------- ---------
Increase in shares outstanding 2,553 2,682 47,398 44,779
======== ======== ======== =======
Authorized shares of $.01 par value 60,000 50,000 425,000 425,000
======== ======== ======== ========
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 California Bond Fund and California Money Market Fund (the Funds).
The Funds have a common objective of providing California investors with a high
level of current interest income that is exempt from federal and California
state income taxes. The California Money Market Fund has a further objective of
preserving capital and maintaining liquidity.
A. Security valuation -- Investments in the California Bond Fund are valued each
business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued
by the Service, and all other assets, are valued in good faith at fair value
using methods determined by the Manager under the general supervision of the
Board of Directors. Securities purchased with maturities of 60 days or less
and, pursuant to Rule 2a-7 of the Investment Company Act of 1940, as amended,
all securities in the California Money Market Fund, are stated at amortized
cost which approximates market value.
B. Federal taxes -- Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities -- 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 California municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Funds participate with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, 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 California Bond Fund
had capital loss carryovers for federal income tax purposes of approximately
$494,000 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 California Bond Fund
were $103,943,357 and $63,405,255, respectively. Purchases and sales/maturities
of securities for the six-month period ended September 30, 1997 for the
California Money Market Fund were $401,187,250 and $346,620,840, respectively.
Gross unrealized appreciation and depreciation of investments at September 30,
1997 for the California Bond Fund was $34,261,476 and $59,939, 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.
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.
Notes to Financial Statements (continued)
California Bond Fund
September 30, 1997
(Unaudited)
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
----------------------------------------------------
1997 1997 1996 1995 1994 1993
---- ---- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period $ 10.50 $ 10.43 $ 10.10 $ 10.03 $ 10.75 $ 10.25
Net investment
income .30 .61 .60 .59 .59 .62
Net realized and
unrealized
gain (loss) .48 .07 .33 .07 (.52) .62
Distributions from
net investment
income (.30) (.61) (.60) (.59) (.59) (.62)
Distributions
of realized
capital gains - - - - (.20) (.12)
---------- ------- ------- -------- ------- --------
Net asset value at
end of period $ 10.98 $ 10.50 $ 10.43 $ 10.10 $ 10.03 $ 10.75
========== ======== ======= ======== ======== =========
Total return (%) * 7.51 6.60 9.35 6.89 .31 12.56
Net assets at end
of period (000) $ 488,383 $ 440,231 $ 409,180 $ 372,877 $ 382,766 $ 386,933
Ratio of expenses
to average
net assets (%) .41(a) .41 .42 .44 .44 .46
Ratio of net
investment
income to
average net
assets (%) 5.56(a) 5.74 5.74 5.98 5.40 5.94
Portfolio
turnover (%) 13.76 23.72 23.09 28.86 102.85 86.53
(a) Annualized. The ratio is not necessarily indicative of 12 months of operations.
* Assumes reinvestment of all dividend income and capital gains distributions during the period.
</TABLE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CALIFORNIA MONEY MARKET FUND
September 30, 1997
(Unaudited)
(7) Financial Highlights (continued)
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
-----------------------------------------------------
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 .04 .03 .02 .03
Distributions from
net investment
income (.02) (.03) (.04) ( .03) (.02) (.03)
-------- ------ ------ ------- ------- --------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ====== ======= ======= ========
Total return (%) * 1.70 3.23 3.58 2.94 2.22 2.66
Net assets at end
of period (000) $ 388,526 $ 341,128 $ 296,349 $ 266,764 $ 247,303 $ 219,097
Ratio of expenses
to average net
assets (%) .42(a) .45 .47 .47 .49 .50
Ratio of net
investment
income to
average net
assets (%) 3.36(a) 3.19 3.52 2.91 2.19 2.63
(a) Annualized. The ratio is not necessarily indicative of 12 months of operations.
* Assumes reinvestment of all dividend income distributions during the period.
</TABLE>
