TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review:
Virginia Bond Fund 4
Virginia Money Market Fund 10
Financial Information:
Independent Auditors' Report 13
Statements of Assets and Liabilities 14
Portfolios of Investments in Securities:
Virginia Bond Fund 16
Virginia Money Market Fund 19
Notes to Portfolios of Investments 22
Statements of Operations 23
Statements of Changes in Net Assets 24
Notes to Financial Statements 25
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "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.
<TABLE>
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the performance
of our other funds. This summary is a snapshot of the performance of all 33
funds by investment objective as of March 31, 1997.
<CAPTION>
Average Annual Total Return(%)*
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
<S> <C> <C> <C> <C> <C>
Capital Appreciation
========================================================================================================
Aggressive Growth 10/19/81 -5.70 11.02 8.98 -
Emerging Markets(1) 11/7/94 12.86 - - 8.14
Gold(1) 8/15/84 -24.30 6.19 -4.11 -
Growth 4/5/71 10.96 14.37 10.98 -
Growth & Income 6/1/93 17.96 - - 15.82
International(1) 7/11/88 15.64 14.34 - 10.77
S&P 500 Index(4) 5/1/96 - - - 19.78+
World Growth(1) 10/1/92 14.38 - - 13.53
Asset Allocation
==================
Balanced Strategy(1) 9/1/95 12.87 - - 11.35
Cornerstone Strategy(1) 8/15/84 13.36 13.32 8.63 -
Growth and Tax Strategy(2)** 1/11/89 8.57 10.08 - 9.71
Growth Strategy(1) 9/1/95 11.02 - - 16.09
Income Strategy 9/1/95 7.17 - - 7.36
Income-Taxable
================
GNMA 2/1/91 5.59 6.94 - 7.35
Income 3/4/74 4.53 7.49 8.79 -
Income Stock 5/4/87 14.01 13.16 - 12.49
Short-Term Bond 6/1/93 6.73 - - 5.45
Income - Tax Exempt
=====================
Long-Term(2)** 3/19/82 6.51 6.80 7.04 -
Intermediate-Term(2)** 3/19/82 5.80 6.82 6.92 -
Short-Term(2)** 3/19/82 4.70 4.85 5.38 -
California Bond(2)** 8/1/89 6.60 7.06 - 7.32
Florida Tax-Free Income(2)** 10/1/93 6.51 - - 3.45
New York Bond(2)** 10/15/90 5.89 6.60 - 8.03
Texas Tax-Free Income(2)** 8/1/94 7.06 - - 8.32
Virginia Bond(2)a** 10/15/90 5.82 7.01 - 7.80
Money Market
==============
Money Market(3) 2/2/81 5.21 4.41 5.82 -
Tax Exempt Money Market(2,3)** 2/6/84 3.30 3.03 4.18 -
Treasury Money Market Trust(3) 2/1/91 5.07 4.20 - 4.35
California Money Market(2,3)** 8/1/89 3.23 2.93 - 3.62
Florida Tax-Free Money Market(2,3)** 10/1/93 3.20 - - 3.01
New York Money Market(2,3)** 10/15/90 3.16 2.80 - 3.07
Texas Tax-Free Money Market(2,3)** 8/1/94 3.22 - - 3.30
Virginia Money Market(2,3)** 10/15/90 3.14 2.85 - 3.19
</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 alterna-
tive 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.
* 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.
+ Cumulative total return since inception, including account maintenance fee.
Message from the President
[Photograph of Michael J. C. Roth, CFA, President and Vice Chairman of the
Board appears here]
At the most recent USAA Strategic Planning Conference, we spent much of our
time discussing USAA's Mission and how to accomplish it in today's world. Our
Mission has three main elements:
+We want to facilitate the financial
security of those whom we serve.
+We seek to do this with highly competitive
products and services.
+In so doing, we want to be the provider of
choice to the military community.
One evening I sat down and considered each of these separately. Perhaps the most
interesting outcome was my thoughts on financial security. What does that mean
to those who make up the USAA family?
I set down these elements:
+Housing and caring for a family
+Pursuing a rewarding career
+Providing for children's educations
+Providing proper medical care
+Protecting the family against accidents and emergencies
+Providing for a comfortable retirement
+Perhaps providing comfort to aging parents
+Creating an estate plan that will serve well those who survive you
+Enjoying life
The last point struck me especially.
Financial planning almost always focuses on the very serious reasons to save and
invest. But there needs to be a balance in people's lives. Here I have learned a
valuable lesson from my wife, Jutta. She has special china and silver. However,
she has always said, "Nothing is stored away in cabinets. I use it as often as I
can. These things are meant to be enjoyed."
This philosophy meshed very well with my ideas on saving. Here too I have urged
balance. You must save for the future, but you must not strangle on that saving.
You should use plans like 401(k)s and IRAs, but you should also set something
aside for now. That means saving in accounts that are not tax-sheltered, and
that means looking at vehicles like tax-exempt bond and money market funds. They
can perform the job of controlling overall portfolio risk, just as they would in
an IRA by combining equity and taxable bond funds. In this case, they are
valuable tools in helping your after-tax return while you enjoy life, the most
pleasant outcome of financial planning.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
USAA Funds Rated 5 Stars
on Overall Performance
Five-star ratings for overall risk-adjusted performance have been awarded by
Morningstar for USAA Funds as of March 31, 1997.*
USAA Tax Exempt Intermediate-Term Fund & USAA Tax Exempt Short-Term Fund
were rated 5 Stars overall among 1,751, 1,237, 601, and 267 municipal bond
funds for the 1-,3-,5-, and 10-year periods, respectively.
USAA Growth & Income Fund was rated 5 Stars for the 3-year period and 4 Stars
for the 1-year period among 1,919 and 3,048 domestic equity funds, respectively.
USAA International Fund was rated 5 Stars for the 5-year period and 4 Stars for
the 1- and 3-year periods overall and among 219, 939, and 478 international
equity funds, respectively.
*Morningstar proprietary ratings reflect historical risk-adjusted performance
through March, 31 1997. The ratings are subject to change monthly. Past
performance is no guarantee of future results. 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 T-bill returns. The one-year
rating is calculated using the same methodology, but is not a component of the
overall rating. Ten percent of the funds in a rating category receive five
stars and the next 22.5% receive four stars.
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.
3/31/96 3/31/97
Net Assets................................ $267.1 Million $292.9 Million
Net Asset Value Per Share................. $10.93 $10.92
Average Annual Total Returns as of 3/31/97
1 Year......................................................... 5.82%
5 Years........................................................ 7.01%
Since inception on October 15, 1990............................ 7.80%
30-Day SEC Yield* on March 31, 1997............................ 5.57%
*Calculated as prescribed by the securities and exchange commission.
A graph is shown here which is a comparison of the change in value of a $10,000
investment for the period of 10/15/90 to 3/31/97, with dividends and capital
gains reinvested. The ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $16,524
USAA Virginia Bond Fund 16,307
Lipper Virginia Municipal Debt Funds Average 15,701
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.
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.
Message from the Manager
[Photograph of Robert R. Pariseau, CFA appears here]
The Envy of the World
Since 1983, the United States economy has enjoyed impressive, but not
spectacular, growth with steadily rising employment, relatively low inflation
and only one short recession in these 14 years. Using conventional wisdom from
the 1970's and early 1980's, an economist would expect such sustained growth to
strain production capacity and trigger higher prices. However, since 1991,
inflation has been consistently below 3.5%, as measured by the Consumer Price
Index.
Has inflation been tamed? My first boss at USAA, Harry Miller, Senior Vice
President for Equity Investments, taught me that the four most dangerous words
in investing are - "it's different this time." Fixed income investors demand
higher interest rates when the inflation rate accelerates, because their future
interest payments will have less purchasing power. Since bond prices fall when
interest rates rise, the bond market reacts negatively to the threat of higher
inflation.
What Is Different This Time?
Compared to earlier decades, quite different factors now influence the many
pieces of the economic puzzle. For example: Have computer technology and
just-in-time manufacturing increased productivity and smoothed economic cycles?
Are workers and managers too concerned about job security and benefits to demand
a raise? Have manufacturers lost pricing power to global competitors? Has the
threat of reform tamed the excessive growth in healthcare costs? Will the new
fiscal conservatism prevail in Congress? Finally, will these factors continue to
dampen inflationary pressures; or, are they temporary in nature?
A Preemptive Move
Chairman Greenspan and the Federal Reserve Board (the "Fed") grappled with these
issues over the last year. Their dilemma - although economic statistics still
indicated benign inflation, economic growth has been vibrant. After concluding
it was too risky to wait for inflation to accelerate, the Fed raised the federal
funds rate on March 25 by .25% to 5.50%. This was the first increase since
February 1995. Inflation won't have a free ride on their watch! As the adage
goes, the Fed's job is to remove the punch bowl just before the party really
gets going. I believe the Fed hopes that a preemptive rate increase now would
slow the economy, restrain inflation, and eliminate the need for a more forceful
response later.
Portfolio Strategy
What should investors do? For many investors, a diversified portfolio of stocks,
bonds, and cash equivalents (money market or short-term bond funds) gives them
the confidence to endure the bumps in the road. As I have said in the past, no
one has yet proven that they can consistently predict the future of interest
rates. Rather than chasing the market, I follow a strategy of generating maximum
tax-exempt income that potentially should produce the best after-tax total
return over a 3-5 year investment horizon. Since I tend to focus on maturities
20 years or longer, this Fund will generally be more volatile than a fund with a
shorter average maturity. Potentially, investors should be rewarded over time
with higher tax-free income and the volatility, both up and down, typically
evens out.
The following table demonstrates that the tax-free dividend return is the
largest component of total return which we believe is the primary rationale for
owning a tax-exempt fund. In the graphs below, notice again the significance of
dividend return to total return and that annual price changes sometime offset
one another - but only over multi-year investment horizons!
Average Annual Compounded Returns
With Reinvestment of Dividends - Periods Ending March 31, 1997
Total Dividend Price
Return Equals Return Plus Change
Since
10/15/90 7.80% = 6.13% + 1.67%
5 Year 7.01% = 5.97% + 1.04%
1 Year 5.82% = 5.91% + -.09%
A graph is located here showing the annual total returns of the USAA Virginia
Bond Fund for the 6-year period ended march 31, 1997. The values are:
1992 1993 1994 1995 1996 1997
9.61 12.61 2.69 6.61 7.57 5.82
A graph is located here showing the compounded dividend returns of the USAA
Virginia Bond Fund for the 6-year period ended March 31, 1997.
The values are:
1992 1993 1994 1995 1996 1997
6.79 6.46 5.38 6.14 5.99 5.91
A graph is located here showing the change in share price of the USAA
Virginia Bond Fund for the 6-year period ended March 31, 1997.
The values are:
1992 1993 1994 1995 1996 1997
2.82 6.15 -2.69 0.47 1.58 -0.09
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.
Focus on Healthcare
You may notice that healthcare-related bonds are the largest "industry" segment
for this Fund. I actively seek healthcare providers with certain credit
characteristics. Typically, they yield more because of the uncertainty of
healthcare reform and excess capacity in some markets. I believe we have picked
the winners. Healthcare has been and will continue to be an essential service.
Those providers with dominant market share, solidly profitable operations, and
talented management will not just survive, but thrive in a more competitive
environment.
Bond Selection
You may be interested to know what isn't in the Fund. The Fund currently owns no
lease revenue bonds that rely upon a local municipality, such as a city or
county, to appropriate annually the debt service from their General Fund. Unless
extenuating circumstances exist, an analyst cannot confidently predict debt
service payments that depend upon the actions of an elected governmental body
five or ten years into the future.
Since considerable public controversy typically embroils sports stadium
financing, I tend to avoid these bonds also. As I have said before, I do not buy
exotic derivatives, futures contracts, or bonds subject to the alternative
minimum tax (AMT).
Interest Rates
Interest rates on the 30-year U.S. Treasury Bond(1) (the "Long Bond") began the
reporting period at 6.67% on March 29, 1996. Over the next seven months, rates
traded nervously in a choppy range from 6.60% to 7.19%, falling to a fiscal year
low of 6.35% in November 1996. In December, Long Bond rates began an upward
trend closing the year at 7.10% on March 31, 1997. The yield on the Bond Buyer
40-Bond Index (BBI40), the industry standard for long-term, investment-grade
municipal bonds, behaved similarly. The BBI40 began the one-year period at 5.96%
on March 29, 1996, but closed slightly lower at 5.95% on March 31, 1997.
Your Fund's Performance
Your Fund's net asset value per share declined by $.01, or -.09%, since March
31, 1996. The Fund's performance compared very favorably to its peer group.
While past performance is no guarantee of future results, the Fund's dividend
distribution yield(2) for the past 12 months was 5.80%, as compared to
Lipper's Virginia Municipal Debt Funds average of 4.94% for the 31
funds in the category.(3) For the same period, the Fund's total return(4) was
5.82%, compared to the Lipper average of 4.92%.
(1) The 30-year Treasury Bond is generally considered the benchmark for long-
term interest rates in the U.S.
(2) 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.
(3) Lipper Analytical Services is an independent organization that monitors
the performance of mutual funds.
(4) Total return equals income return plus share price change and
assumes reinvestment of all dividends and capital gain distributions.
A graph is shown here comparing the 12-month dividend yield of the USAA
Virginia Bond Fund and the Lipper Virginia Municipal Debt Funds Average from
9/30/92 to 3/31/97. The vertical axis shows the yield and the horizontal axis
shows the time period.
The values are:
USAA Virginia
Bond Fund 6.40 5.70 5.70 5.80 5.80 5.80
Lipper. Virginia
Muni. Debt
Funds Avg. 6.20 5.50 5.40 5.20 5.00 4.90
The Lipper Virginia Municipal Debt Funds Average is computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. 12-month dividend yield is computed by dividing income
dividends paid during the previous 12 months by the latest month-end net asset
value adjusted for capital gains distributions. The graph represents data
from 3/31/92 to 3/31/97.
The State of Virginia
Despite its diverse economic base, Virginia is striving to replace higher paying
jobs lost to government and military cutbacks. Unemployment at 4.1%, as of
December 1996, was still well below the nation's 5.3% rate, but per capita
income has lagged. In December 1987, the state's per capita income was 107% of
the nation's average, but had fallen to 104% by year end 1995. Personal income
growth still trailed the nation as of September 1996. Service-related job growth
has helped, but the real potential lies with the high technology industry.
Although the tobacco industry presents risk, the overall employment outlook is
nonetheless improving. Reflecting its strengths, Virginia remains one of only
five states to have their debt rated "AAA" by all three major rating agencies -
Moody's, Standard & Poor's, and Fitch.
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 5.57% 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: 8.21% 8.56% 9.23% 9.78%
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.
A pie chart is shown here depicting the Portfolio Ratings/Mix as of
March 31, 1997 for the USAA Virginia Bond to be: AAA - 19%, AA - 40%,
A - 21%, BBB - 21% and Cash Equivalents - 1%.
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 2.9% and 1.9% respectively, of the Fund's
investments.
Note: Income may be subject to federal, state or local taxes, or
the alternative minimum tax.
See page 16 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.
3/31/96 3/31/97
Net Assets............................. $110.3 Million $113.3 Million
Net Asset Value Per Share.............. $1.00 $1.00
Average Annual Total Returns as of 3/31/97
1 Year............................................................. 3.14%
5 Years............................................................ 2.85%
Since inception on October 15, 1990................................ 3.19%
7-Day Simple Yield on March 31, 1997............................... 3.09%
A graph is shown here comparing the 7-day yield of the USAA Virginia Money
Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free): Virginia
from 3/96 to 3/97. The vertical axis shows the yield and the horizontal axis
shows the time period. The ending value, on 3/25/97, for the USAA Virginia
Money Market Fund is 2.96% and the ending vlaue for the IBC Donoghue's State
Specific SB & GP (Tax-Free) is 2.70%.
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 and the value of your investment
may vary according to the Fund's performance. The graph tracks the Fund's 7-day
simple yield against IBC/Donoghue's State Specific SB (Stock Broker) & GP
(General Purpose) (Tax-Free) Money Funds, an average of all major money market
fund yields.
Message fromt the Manager
[Photograph of John C. Bonnell, CFA appears here]
Interest Rates
The short-term debt markets are heavily influenced by actions taken, or not
taken by the Federal Reserve (the Fed). After lowering the federal funds rate
(the rate banks charge each other for overnight loans) .25% on January 31, 1996,
the Fed maintained a stable policy for the remainder of 1996. However, an
exceptionally strong jobs report in February 1996 was the first of many signs
that the economy was growing much faster than originally anticipated. These
strong economic indicators and statistics were perceived by many to have the
potential of producing inflation. On March 25, 1997, the Fed announced it was
increasing the federal funds rate .25% in an attempt to prevent inflation before
it became a problem. It is still unclear (as it always is) whether this will be
a single move, or one of a series of rate hikes. The volatility in short-term
rates is illustrated by the one-year Treasury bill rate which increased more
than 1.0% between February and July 1996, before falling approximately .5% by
the end of 1996. The first quarter of 1997 brought higher rates once again with
the one-year Treasury bill increasing .5% to end the quarter at 6.0%, the
highest since May 22, 1995.
Strategy
We strive to meet the Fund's objective in any prevailing interest rate
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
for a given period of time, and help stabilize the Fund's yield during the
periods when there is a large amount of cash in the market relative to supply.
Variable rate securities pay interest that adjusts periodically to prevailing
market conditions, and also provide liquidity necessary to take advantage of
higher yielding securities when opportunities arise. Maintaining an appropriate
mix of different types of securities and conducting internal credit research
combine to provide a highly competitive return. As part of our stringent
selection criteria, we strive to ensure 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 March 31, 1997, your Fund ranked 19 out of 149 State Specific Tax-Exempt
Money Market Funds according to IBC Financial Data, Inc.(1) The Fund's
compounded dividend yield was 3.14%, while the average for the category over
the same time period was 2.89%.
(1) IBC Financial Data, Inc. provides independent analyses of trends in the
financial services and investing industries, with particular concentration on
money market funds.
Virginia
Virginia continues to enjoy the highest debt rating of "AAA" from all three
major credit rating agencies as a result of continued prudent, conservative
fiscal management. The overall economy of the state is diverse although military
and defense-related employment continues to be a large component. In the future,
high technology firms are expected to continue to invest and add jobs in the
state. Unemployment rates in the state are consistently lower than national
averages, while income levels remain higher. In general, securities issued by
Virginia governments continue to represent very high quality securities,
however, we continue to analyze each issue on a case by case basis and remain
very selective when investing fund assets.
A graph is here showing the growth of $10,000, from 10/15/90 to 3/31/97,
invested in the USAA Virginia Money Market Fund. The vertical axis shows the
dollar amount and the horizontal axis shows the time period. The ending
value is $12,267.
Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance. Income may be subject
to federal, state or local taxes, or to the alternative minimum tax.
An investment in 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 19 for a complete listing of the Portfolio of Investments in
Securities.
Independent Auditor's Report
The shareholders and Board of Directors
USAA TAX EXEMPT FUND, INC.:
We have audited the accompanying statements of assets and liabilities and
portfolios of investments in securities of the Virginia Bond and Virginia Money
Market Funds, separate funds of USAA Tax Exempt Fund, Inc., as of March 31,
1997, the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights information presented in note
7 to the financial statements for each of the years in the five-year period
then ended. These financial statements and the financial highlights
information are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
the financial highlights information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights information are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of March 31, 1997, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights information
referred to above present fairly, in all material respects, the financial
position of the Virginia Bond and Virginia Money Market Funds, separate Funds
of USAA Tax Exempt Fund, Inc., as of March 31, 1997, the results of their
operations for the year then ended, the changes in their net assets for
each of the years in the two-year period then ended, and the financial
highlights information for each of the years in the five-year period then
ended, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 9, 1997
<TABLE>
Statements of Assets and Liabilities
(In Thousands)
March 31, 1997
<CAPTION>
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $282,132 and $108,949, respectively) $ 288,139 $ 108,949
Cash 664 3,826
Receivables:
Capital shares sold 25 390
Interest 4,789 551
Securities sold 2,319 -
---------- ----------
Total assets 295,936 113,716
---------- ----------
Liabilities
Securities purchased 2,277 -
Capital shares redeemed 246 275
USAA Investment Management Company 84 57
USAA Transfer Agency Company 16 8
Accounts payable and accrued expenses 44 31
Dividends on capital shares 355 15
---------- ----------
Total liabilities 3,022 386
---------- ----------
Net assets applicable to capital shares outstanding $ 292,914 $ 113,330
========== ==========
Represented by:
Paid-in capital $ 288,509 $ 113,330
Accumulated net realized loss on investments (1,602) -
Net unrealized appreciation of investments 6,007 -
---------- ----------
Net assets applicable to capital shares outstanding $ 292,914 $ 113,330
========== ==========
Capital shares outstanding 26,827 113,330
========== ==========
Net asset value, redemption price, and offering price per share $ 10.92 $ 1.00
========== ==========
</TABLE>
See accompanying notes to financial statements.
Categories & Definitions
Portfolios of Investments in Securities
March 31, 1997
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.
<TABLE>
Virginia Bond Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1997
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
<C> <S> <C> <C> <C>
Fixed Rate Instruments (97.6%)
Virginia (80.7%)
$ 7,500 Augusta County IDA Hospital RB, Series 1991 7.00 % 9/01/21 (a) $ 8,276
Chesterfield County Health Center Commission
Mortgage RB,
1,500 Series 1996 5.95 12/01/26 1,465
12,195 Series 1996 6.00 6/01/39 11,884
College Building Auth. Educational Facilities RB,
3,525 Series 1992 6.40 1/01/12 3,677
2,885 Series 1992 6.63 5/01/13 3,015
2,505 Series 1992 6.60 9/01/16 2,609
3,350 Series 1994 5.80 1/01/24 3,252
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/15 2,967
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 4,818
2,250 Emporia GO, Series 1995 5.75 7/15/15 2,253
5,200 Fairfax County Economic Development Auth. RB,
Series 1991B 7.50 6/01/01 5,466
15,180 Fairfax County IDA RB, Series 1996 6.00 8/15/26 15,191
1,250 Fairfax County Redevelopment and Housing
Auth. MFH RB, Series 1996A (CRE) 6.00 12/15/28 1,245
1,500 Fairfax County Redevelopment and Housing
Auth. RB, Series 1989A (CRE) 7.50 11/01/19 (a) 1,634
13,000 Fairfax County Sewer RB, Series 1996 (CRE) 5.88 7/15/28 13,057
3,000 Fredericksburg IDA RB, Series 1996 (CRE) 5.25 6/15/23 2,730
8,750 Galax IDA Hospital RB, Series 1995 (CRE) 5.75 9/01/20 8,551
Hampton Redevelopment and Housing Auth. RB,
2,000 Series 1996A 5.88 7/20/16 1,985
1,300 Series 1996A 6.00 1/20/26 1,304
6,000 Hanover County IDA Hospital RB (CRE) 5.50 8/15/25 5,632
Housing Development Auth. Commonwealth
Mortgage RB,
5,440 Series 1992A 7.10 1/01/22 5,645
10,000 Series 1992A 7.10 1/01/25 10,377
1,455 Series 1992C 6.40 1/01/15 1,483
1,680 Series 1994D 6.40 7/01/17 1,721
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,111
Housing Development Auth. MFH RB,
55,000 Series 1982A 7.00 (b) 11/01/17 9,653
7,700 Series 1991F 7.10 5/01/13 8,123
4,220 Isle of Wight County IDA RB, Series 1990 7.38 1/01/10 4,486
8,000 Loudoun County IDA Hospital RB,
Series 1995 (CRE) 5.80 6/01/26 7,834
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A 6.25 7/01/21 9,243
11,000 Peninsula Ports Auth. RB, Series 1992 (CRE) 7.38 6/01/20 11,626
3,690 Pittsylvania County GO 6.00 7/01/14 3,800
2,500 Prince William County IDA Hospital RB,
Series 1995 6.85 10/01/25 2,654
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/15 4,927
3,985 Resources Auth. Sewer System RB, Series 1992A 6.00 5/01/22 4,011
7,210 Resources Auth. Water and Sewer RB,
Series 1996A 5.63 4/01/27 6,845
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,630
1,250 Spotsylvania County GO, Series 1994 6.88 12/01/14 1,371
11,820 Virginia Beach Development Auth. Hospital RB,
Series 1991 6.30 11/01/21 12,126
12,000 West Point IDA Solid Waste Disposal RB,
Series 1994B 6.25 3/01/19 12,196
6,000 Williamsburg IDA RB, Series 1993 5.75 10/01/22 5,605
3,500 Winchester IDA RB, Series 1994 (CRE) 6.75 10/01/19 3,783
Guam (3.1%)
1,000 Government Limited Obligation Infrastructure
Improvement RB, Series 1989A (CRE) 7.10 11/15/09 1,045
8,050 Power Auth. RB, Series 1992A 6.30 10/01/22 8,069
Puerto Rico (13.8%)
11,000 Commonwealth GO, Series 1996 5.40 7/01/25 10,148
1,920 Commonwealth Public Improvement GO,
Series 1997 5.38 7/01/25 1,767 (c)
Electric Power Auth. RB,
9,100 Series 1995Z 5.25 7/01/21 8,212
6,525 Series X 5.50 7/01/25 6,066
Highway and Transportation Auth. RB,
6,235 Series 1993X 5.00 7/01/22 5,422
8,600 Series 1996Y 5.50 7/01/26 8,009
500 Series 1996Y 5.50 7/01/36 466 (c)
475 Highway Auth. RB, Series Q 6.00 7/01/20 474
- ---------------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $279,932) 285,939
- ---------------------------------------------------------------------------------------------------------
Variable Rate Demand Note (0.8%)
Virginia
2,200 Henrico County IDA RB,
Series 1994 (CRE) (cost: $2,200) 3.90 5/01/24 2,200
- ---------------------------------------------------------------------------------------------------------
Total investments (cost: $282,132) $ 288,139
=========================================================================================================
</TABLE>
Portfolio Summary By Industry
-----------------------------
Hospitals 23.7%
Electric Power 9.2
Sewer 8.2
Single-Family Housing 7.6
Paper & Forest Products 7.3
Education 6.6
General Obligations 6.6
Multi-Family Housing 6.5
Special Assessment/Tax/Fee 5.3
Nursing Care 4.5
Ports/Wharfs 4.0
Escrowed Securities 3.4
Broadcasters 1.9
Retirement Homes 1.9
Railroads 1.7
----
Total 98.4%
====
<TABLE>
Virginia Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1997
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
<C> <S> <C> <C> <C>
Variable Rate Demand Notes (58.7%)
Virginia
$ 6,768 Alexandria IDA RB, Series 1989 (CRE) 3.75 % 1/01/09 $ 6,768
5,000 Bedford County IDA RB, Series 1993 (CRE) 3.65 10/01/04 5,000
8,400 Chesterfield County IDA PCRB, Series 1993 3.65 8/01/09 8,400
3,400 Chesterfield County IDA RB, Series 1989 (CRE) 3.53 2/01/03 3,400
700 Henrico County IDA RB, Series 1986C 3.45 7/15/16 700
5,380 Housing Development Auth. RB,
Series 1987A (CRE) 3.55 9/01/17 5,380
12,400 Loudoun County IDA Residential Care Facility RB,
Series 1994B (CRE) 4.10 11/01/24 12,400
Newport News Redevelopment and Housing Auth.
MFH RB,
4,600 Series 1984 (CRE) 3.60 11/01/06 4,600
3,265 Series 1990 (CRE) 3.53 3/01/07 3,265
3,100 Peninsula Ports Auth. RB, Series 1984 (CRE) 3.55 11/01/01 3,100
Prince William County IDA RB,
5,500 Series 1988 (CRE) 3.57 6/30/04 5,500
1,031 Series 1989D (CRE) 3.70 10/01/00 1,031
Richmond IDA RB,
522 Series 1989A (CRE) 3.70 6/01/02 522
3,100 Series 1996 (CRE) 3.55 5/01/16 3,100
1,400 Richmond Redevelopment and Housing Auth. RB,
Series 1995A (CRE) 3.50 12/01/25 1,400
1,940 Rockingham County IDA RB, Series 1983A 3.65 10/01/20 1,940
- -------------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $66,506) 66,506
- -------------------------------------------------------------------------------------------------------
Put Bonds (23.7%)
Virginia
2,700 Chesterfield County IDA PCRB, Series 1985 3.50 10/01/09 2,700
4,500 Fairfax County Hospital IDA RB, Series 1993B 3.45 8/15/25 4,500
3,575 Falls Church IDA RB, Series 1985 3.65 5/01/15 3,575
4,800 Hampton IDA Hospital Facilities RB,
Series 1997B 3.45 11/01/11 4,800
3,500 Peninsula Ports Auth. RB, Series 1987A (CRE) 3.55 7/01/16 3,500
Prince William County IDA RB,
1,000 Series 1986 3.60 8/01/16 1,000
1,935 Series 1992 (CRE) 3.60 9/01/07 1,935
3,520 Richmond IDA RB, Series 1987A (CRE) 3.70 8/15/15 3,520
1,400 York County IDA PCRB, Series 1985 3.60 7/01/09 1,400
- -------------------------------------------------------------------------------------------------------
Total put bonds (cost: $26,930) 26,930
- -------------------------------------------------------------------------------------------------------
Fixed Rate Instruments (13.7%)
Virginia (9.3%)
1,265 City of Suffolk GO, Series 1988 7.00 8/01/00 (a) 1,296
250 Fairfax County GO, Series 1992C 4.70 10/01/97 251
Norfolk GO,
1,000 Series 1989 6.60 6/01/01 (a) 1,025
1,000 Series 1989 6.70 6/01/05 (a) 1,025
3,750 Series 1993 4.50 2/01/98 3,777
2,000 Public School Auth. GO, Series 1990A 7.00 1/01/04 (a) 2,089
1,000 Richmond Public Utility RB, Series 1988A 7.60 1/15/04 (a) 1,050
Puerto Rico (4.4%)
5,000 Government Development Bank CP 3.40 5/01/97 5,000
- -------------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $15,513) 15,513
- -------------------------------------------------------------------------------------------------------
Total investments (cost: $108,949) $ 108,949
=======================================================================================================
</TABLE>
Portfolio Summary By Industry
-----------------------------
Aerospace/Defense 12.3%
Multi-Family Housing 11.7
Hospitals 11.4
Retirement Homes 10.9
Community Service 9.9
Escrowed Securities 5.7
Electric Power 5.1
Bank Holding Companies - Other Major 4.4
Paper & Forest Products 4.4
General Obligations 3.6
Buildings 3.1
Ports/Wharfs 3.1
Manufacturing - Diversified Industries 3.0
Hotel/Motel 2.7
Drugs 1.7
Retail - Food Chains 1.7
Education 1.4
----
Total 96.1%
====
Notes to Portfolios of Investments in Securities
March 31, 1997
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.
Portfolio Description Abbreviations
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
Specific Notes
(a) Prerefunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(c) At March 31, 1997, the cost of securities purchased on a delayed
delivery basis for the Virginia Bond Fund was $2,007,696.
See accompanying notes to financial statements.
<TABLE>
Statements of Operations
(In Thousands)
Year ended March 31, 1997
<CAPTION>
Virginia
Virginia Money Market
Bond Fund Fund
--------- ----
<S> <C> <C>
Net investment income:
Interest income $ 17,282 $ 3,948
--------- -------
Expenses:
Management fees 940 371
Transfer agent's fees 198 106
Custodian's fees 76 55
Postage 13 12
Shareholder reporting fees 7 9
Directors' fees 4 4
Registration fees 7 1
Audit fees 16 16
Legal fees 6 6
Other 12 7
--------- -------
Total expenses before reimbursement 1,279 587
Expenses reimbursed - (36)
--------- -------
Total expenses after reimbursement 1,279 551
--------- -------
Net investment income 16,003 3,397
--------- -------
Net realized and unrealized gain (loss) on investments:
Net realized gain 2,565 -
Change in net unrealized appreciation/depreciation (3,090) -
--------- -------
Net realized and unrealized loss (525) -
--------- -------
Increase in net assets resulting from operations $ 15,478 $ 3,397
========= =======
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
<CAPTION>
Virginia Virginia
Bond Fund Money Market Fund
--------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 16,003 $ 14,600 $ 3,397 $ 3,486
Net realized gain (loss) on investments 2,565 (1,253) - -
Change in net unrealized appreciation/
depreciation of investments (3,090) 4,801 - -
--------- --------- ---------- ---------
Increase in net assets resulting from
operations 15,478 18,148 3,397 3,486
--------- --------- ---------- ---------
Distributions to shareholders from:
Net investment income (16,003) (14,600) (3,397) (3,486)
--------- --------- ---------- ---------
From capital share transactions:
Proceeds from shares sold 46,723 42,550 84,841 92,210
Shares issued for dividends reinvested 11,994 11,045 3,195 3,286
Cost of shares redeemed (32,389) (28,952) (85,014) (83,237)
--------- --------- ---------- ---------
Increase in net assets from
capital share transactions 26,328 24,643 3,022 12,259
--------- --------- ---------- ---------
Net increase in net assets 25,803 28,191 3,022 12,259
Net assets:
Beginning of period 267,111 238,920 110,308 98,049
--------- --------- ---------- ---------
End of period $ 292,914 $ 267,111 $ 113,330 $ 110,308
========= ========= ========== =========
Change in shares outstanding:
Shares sold 4,251 3,868 84,841 92,210
Shares issued for dividends reinvested 1,091 1,005 3,195 3,286
Shares redeemed (2,955) (2,637) (85,014) (83,237)
--------- --------- ---------- ---------
Increase in shares outstanding 2,387 2,236 3,022 12,259
========= ========= ========== =========
Authorized shares of $.01 par value 35,000 35,000 175,000 175,000
========= ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
Notes to Financial Statements
March 31, 1997
(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 annual report pertains only to
the Virginia Bond Fund and Virginia Money Market Fund (the Funds). The Funds
have a common objective of providing Virginia investors with a high level of
current interest income that is exempt from federal and Virginia state income
taxes. The Virginia Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation -- Investments in the Virginia Bond Fund are valued each
business day by a pricing service (the Service) approved by the Company's Board
of Directors. The Service uses the mean between quoted bid and asked prices or
the last sale price to price securities when, in the Service's judgement, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The Service
generally prices these securities based on methods which include consideration
of yields or prices of municipal securities of comparable quality, coupon,
maturity and type, indications as to values from dealers in securities, and
general market conditions. Securities which are not valued by the Service, and
all other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 of the 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 bonds. The Funds concentrate their
investments in Virginia municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Funds participate with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million through January 13, 1998, one with USAA
Capital Corporation (CAPCO), an affiliate of the Manager ($750 million
uncommitted), and one with an unaffiliated bank ($100 million committed). The
purpose of the agreements is to meet temporary or emergency cash needs,
including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under these agreements, each
Fund may borrow up to a maximum of 15% of its total assets, of which only 5% may
be borrowed from CAPCO, at the lending institution's borrowing rate plus a
markup. The Funds had no borrowings under either of these agreements during the
year ended March 31, 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 March 31, 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 March 31, 1997, the Virginia Bond Fund had
capital loss carryovers for federal income tax purposes of approximately
$1,602,000 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.
The Funds completed their fiscal year on March 31, 1997. Federal law (Internal
Revenue Code of 1986, as amended, and the regulations thereunder) requires each
Fund to notify its shareholders after the close of its taxable year as to what
portion of its earnings was exempt from federal taxation and dividend
distributions which represent long-term capital gains. The net investment income
earned and distributed by each of the Funds was 100% tax exempt for federal and
Virginia state income tax purposes. There were no long-term capital gain
distributions for the year ended March 31, 1997.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the year ended March 31, 1997 for the Virginia Bond Fund were $90,068,200
and $73,653,714, respectively. Purchases and sales/maturities of securities for
the year ended March 31, 1997 for the Virginia Money Market Fund were
$236,952,433 and $237,415,000, respectively.
Gross unrealized appreciation and depreciation of investments at March 31, 1997
for the Virginia Bond Fund was $7,480,223 and $1,473,163, 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.
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 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>
Virginia Bond Fund
March 31, 1997
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.93 $ 10.76 $ 10.71 $ 11.16 $ 10.57
Net investment income .63 .63 .62 .62 .64
Net realized and
unrealized gain (loss) (.01) .17 .05 (.30) .65
Distributions from net
investment income (.63) (.63) (.62) (.62) (.64)
Distributions of realized
capital gains - - - (.15) (.06)
--------- --------- --------- --------- ----------
Net asset value at
end of period $ 10.92 $ 10.93 $ 10.76 $ 10.71 $ 11.16
========= ========= ========= ========= ==========
Total return (%) * 5.82 7.57 6.61 2.69 12.61
Net assets at end
of period (000) $ 292,914 $ 267,111 $ 238,920 $ 235,901 $ 207,302
Ratio of expenses to
average net assets (%) .46 .48 .50 .49 .50(a)
Ratio of net investment
income to average
net assets (%) 5.76 5.74 5.95 5.44 5.90(a)
Portfolio turnover (%) 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:
Ratio of expenses to average net assets (%) .54
Ratio of net investment income to average net assets (%) 5.86
* Assumes reinvestment of all dividend income and capital gains distribution
during the period.
<TABLE>
Virginia Money Market Fund
March 31, 1997
(7) Financial Highlights (continued)
Per share operating performance for a share outstanding throughout each
period is as follows:
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .02 .03
Distributions from net
investment income (.03) (.03) (.03) (.02) (.03)
--------- --------- --------- --------- ----------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ==========
Total return (%) * 3.14 3.42 2.91 2.14 2.65
Net assets at end
of period (000) $ 113,330 $ 110,308 $ 98,049 $ 92,570 $ 77,263
Ratio of expenses to
average net assets (%) .50(a) .50(a) .50 (a) .50(a) .50(a)
Ratio of net investment
income to average
net assets (%) 3.10(a) 3.36(a) 2.88 (a) 2.12(a) 2.62(a)
(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:
Ratio of expenses to
average net assets (%) .53 .55 .56 .61 .63
Ratio of net investment
income to average
net assets (%) 3.07 3.31 2.82 2.01 2.49
</TABLE>
* Assumes reinvestment of all dividend income distributions during the period.
