Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA Virginia Bond Fund 4
USAA Virginia Money Market Fund 10
Financial Information:
Portfolios of Investments:
USAA Virginia Bond Fund 15
USAA Virginia Money Market Fund 19
Notes to Portfolios of Investments 22
Statements of Assets and Liabilities 23
Statements of Operations 24
Statements of Changes in Net Assets 25
Notes to Financial Statements 26
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 Fund.
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 Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1998, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 (Registered
Trademark) Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
===============================================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) 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.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is not insured or guaranteed by the
FDIC or any other government agency. Although the fund seeks to preserve
the value of your investment at $1 per share, it is possible to lose
money by investing in the fund.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. 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.
Non-deposit investment products 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, and may lose value.
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.
Message from the President
Over the past couple of years when Ken Willmann, who heads up our tax-exempt
bond area, has gone with us to speak to shareholders, he's said, "Bonds are like
Rodney Dangerfield. They get no respect." That was because the great performance
of stocks since 1995 made any bond look pale by comparison. But what a
difference a few months make!
After 1995, I told stock fund shareholders, "It was a great year, but it would
be a stretch to expect a repeat." After 1996, I said, "That's two great years in
a row. Any more would be unusual." After 1997, I said, "You should not
extrapolate 30% a year returns." Finally, by August of this year, my caution
proved correct. (The market is often reluctant to recognize genius.) Herein lies
the case for owning bonds.
[PHOTOGRAPH OF MICHAEL J. C. ROTH, CFA, PRESIDENT AND VICE CHAIRMAN OF THE BOARD
APPEARS HERE]
You have probably heard me say, that in my career I've known only two people who
could really stand a portfolio that is 100% stocks. That is being proven again.
The actual fear that accompanies a severe market drop is something difficult to
imagine. That fear is now impelling people toward fixed-income investments. The
behavior of stocks and bonds this past summer reinforces such a move, because as
stocks went into turmoil, a shift of money into bonds drove their prices up. If
you owned both in your portfolio, this difference in performance of the two
classes would have, I believe, left you much calmer than if you owned stocks
alone.
The ability to keep emotion out of investing and to look instead for opportunity
is very important. To be able to do that in a time like August 1998, for most
people, requires a portfolio that is a mix of stocks and bonds. And that's
because the markets will always surprise us.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
P.S. We have some news for those USAA funds that paid capital gain distributions
during 1998! President Clinton signed the appropriations bill October 23, 1998,
that modifies the long-term (12 months) capital gains holding period rules so
that essentially all registered investment company capital gain dividends paid
to shareholders during 1998 will be taxed at a maximum of 20%.
Past performance is no guarantee of future results.
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.
Although none of the investment instruments mentioned are guaranteed or insured,
government bonds are backed by the full faith and credit of the U.S. Government.
Common stocks are considered to have the most risk, followed by corporate bonds
and government bonds. All of these vehicles are subject to tax. If held to
maturity, bonds offer a fixed rate of return and fixed principal value. Return
and principal value of an investment in stocks will fluctuate.
Investment Review
USAA 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.
- --------------------------------------------------------------------------------
3/31/98 9/30/98
- --------------------------------------------------------------------------------
Net Assets $346.2 Million $376.8 Million
Net Asset Value Per Share $11.49 $11.70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6-MONTH TOTAL RETURN AND 30-DAY SEC YIELD* AS OF 9/30/98
- --------------------------------------------------------------------------------
3/31/98 to 9/30/98 30-Day SEC Yield
4.55% + 4.34%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending September 30, 1998
---------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
---------------------------------------------------------------------------
Since 10/15/90 8.31% = 6.10% + 2.21%
---------------------------------------------------------------------------
5 Years 6.27% = 5.83% + .44%
---------------------------------------------------------------------------
1 Year 8.73% = 5.65% + 3.08%
---------------------------------------------------------------------------
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR THE 7-YEAR PERIOD
ENDED SEPTEMBER 30, 1998
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA Virginia Bond Fund for the
7-year period ended September 30, 1998.
Total Return for Years Ended:
- ----------------------------
9/30/91 12.29%*
9/30/92 10.04%
9/30/93 13.12%
9/30/94 -3.19%
9/30/95 10.51%
9/30/96 6.98%
9/30/97 8.92%
9/30/98 8.73%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
9/30/91 6.89%*
9/30/92 6.53%
9/30/93 6.23%
9/30/94 5.22%
9/30/95 6.41%
9/30/96 5.97%
9/30/97 5.93%
9/30/98 5.65%
Change in Share Price:
- ---------------------
9/30/91 5.40%*
9/30/92 3.51%
9/30/93 6.89%
9/30/94 -8.41%
9/30/95 4.10%
9/30/96 1.01%
9/30/97 2.99%
9/30/98 3.08%
* This does not cover a 12 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.
COMPARISON - 12 MONTH DIVIDEND YIELD
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Virginia Bond Fund to the 12 Month
Dividend Yield of the Lipper Virginia Municipal Debt Funds Average from 9/30/92
to 9/30/98.
USAA Virginia Lipper Virginia Municipal
Bond Fund Yield Debt Funds Average Yield
------------------ ------------------------
9/30/92 6.04% 5.91%
9/30/93 5.44% 5.23%
9/30/94 5.81% 5.32%
9/30/95 5.82% 5.06%
9/30/96 5.75% 4.86%
9/30/97 5.50% 4.73%
9/30/98 5.25% 4.46%
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
gain distributions. The graph represents data for periods ending 9/30/92 to
9/30/98.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 investment for the USAA Virginia Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper Virginia Municipal Debt Funds
Average. The data is from 10/15/90 through 9/30/98. The data points from the
graph are as follows:
USAA Virginia Bond Fund
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 $10,601
09/30/91 $11,229
03/31/92 $11,620
09/30/92 $12,357
03/31/93 $13,085
09/30/93 $13,978
03/31/94 $13,437
09/30/94 $13,532
03/31/95 $14,326
09/30/95 $14.955
03/31/96 $15,410
09/30/96 $15,998
03/31/97 $16,307
09/30/97 $17,425
03/31/98 $18,121
09/30/98 $18,945
Lehman Brothers Municipal Bond Index
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 $10,574
09/30/91 $11,220
03/31/92 $11,632
09/30/92 $12,395
03/31/93 $13,089
09/30/93 $13,974
03/31/94 $13,392
09/30/94 $13,633
03/31/95 $14,387
09/30/95 $15,159
03/31/96 $15,593
09/30/96 $16,073
03/31/97 $16,444
09/30/97 $17,526
03/31/98 $18,208
09/30/98 $19,053
Lipper Virginia Municipal Debt Funds Average
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 $10,560
09/30/91 $11,161
03/31/92 $11,519
09/30/92 $12,260
03/31/93 $12,940
09/30/93 $13,853
03/31/94 $13,108
09/30/94 $13,172
03/31/95 $13,928
09/30/95 $14,550
03/31/96 $14,949
09/30/96 $15,405
03/31/97 $15,682
09/30/97 $16,695
03/31/98 $17,356
09/30/98 $18,084
Data since inception on 10/15/90 through 9/30/98
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, Inc., 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
MUNICIPALS ON SALE?
The yield on the 30-year U.S. Treasury bond (1) (the Long Bond) fell almost a
full 1%, closing at 4.98%, during the six-month period ending on September 30,
1998. The yield on the Bond Buyer 40-Bond Index (2) (BBI40) fell less. It began
the period at 5.27% and ended at 5.04%. The current relationship between U.S.
Treasury and municipal bonds implies that an investor can buy a municipal long
bond at nearly the same yield as the U.S. Treasury long bond and receive the tax
exemption feature to boot.
[PHOTOGRAPH OF PORTFOLIO MANAGER, ROBERT R. PARISEAU, CFA, APPEARS HERE]
1) The 30-year U.S. Treasury Bond is generally considered the benchmark for U.S.
long-term interest rates.
2) The Bond Buyer 40-Bond Index is the industry standard for the yield of
long-term, investment-grade municipal bonds.
ROUND UP THE USUAL SUSPECTS --
SUPPLY & DEMAND
Why have the municipal and U.S. Treasury markets reacted the way they have?
Although the different fixed income market sectors tend to move together over
time, relative performance often varies during shorter periods. Typically, the
greatest influence on market prices is supply and demand.
Supply of U.S. Treasury bonds has been stable thanks to the budget surplus,
while demand has been very strong - especially from skittish foreign and stock
market investors. Foreign investors, who cannot benefit from a U.S. tax-exempt
security, prefer the widely quoted and more liquid U.S. Treasury bonds.
Municipal bonds are in ample supply, thanks to a near record level of
refinancing. Demand has been positive but restrained. Municipal prices have
moved generally with the market, but not as much as the U.S. Treasury bonds
which are more "in demand." Why should investors consider the municipal market
today? For the same reasons as before. When compared to taxable bonds for those
investors in the 28% federal income tax bracket and higher, municipal bonds
typically generate the highest tax-equivalent yields for a very reasonable level
of risk.
MARKET OUTLOOK
In late September, the Federal Reserve Board reduced the interbank lending (Fed
Funds) rate by .25% to 5.25%, the first reduction since January 1996. Chairman
Greenspan is concerned that the financial crisis in emerging foreign markets may
infect the more developed nations including the United States. A growing number
of economists believe that recessions could envelop a number of important U.S.
trading partners. Mr. Greenspan appears less concerned about the outlook for the
American economy. Our economy is beginning to show the first signs of
cooling-off after years of brisk economic expansion. In this current economic
environment, inflationary expectations are very low which should be favorable
for the bond markets.
STRATEGY
I focus primarily on generating maximum tax-exempt income with the goal of
producing the best after-tax total return over a 3 to 5 year investment horizon.
I remain fully invested in long-term, investment-grade municipal bonds. There
are no exotic derivatives or futures contracts to leverage or hedge the
portfolio. I have no intention of purchasing municipal bonds that are subject to
the federal alternative minimum tax (AMT) for individuals. Of course, I would
certainly advise our shareholders if there is a change in the Federal Tax Code
that compels me to reconsider my position on the AMT.
THE PORTFOLIO IS A SUM OF ITS PARTS -- DISCOUNT & PREMIUM BONDS
I consider how each bond will fit and interact with the rest of the portfolio.
In a sense, different types of bonds play different roles, in particular,
discount and premium bonds. While a relatively small percentage of the Fund is
invested in zero coupon bonds (zero coupons), a much larger percentage is
invested in bonds originally purchased at their stated face value, or "par," but
when interest rates were higher. Some of these bonds are priced at significant
premiums above par. While these premium bonds contribute very nicely to your
monthly dividend, over time they expose the portfolio to significant coupon
reinvestment and call risk (early redemption risk). In addition, premium bonds
are less sensitive to the changes in interest rates.
WHAT IS A ZERO COUPON BOND?
A zero coupon bond is a security that makes no periodic coupon (3) payments, but
instead is sold at a deep discount from its face value. A zero coupon bond
gradually appreciates in value at the market rate of interest until the bond is
worth the stated face value at maturity. The current Federal Tax Code requires
that we account for this gradual increase by distributing it as tax-exempt
interest. As interest accrues on all of the bonds in the portfolio, including
the zero coupons, shareholders are paid monthly dividends.
Since the compounding interest rate never changes, zero coupons have no
reinvestment risk, unlike coupon bonds. In addition, because of the single lump
sum payment at maturity, the market value of a zero coupon bond is very
sensitive to changes in interest rates.
3) A bond's coupon is the fixed amount of interest that is paid annually stated
as a percentage of face value, normally $1000. For example, a 6.5% coupon pays
$65 (6.5% times $1000 = $65) normally in two semiannual payments of $32.50 for
the life of the bond.
HOW DO ZERO COUPON BONDS ADD UP?
In summary, zero coupon bonds are an excellent complement to my yield strategy
for two reasons:
- Zero coupons accrue and distribute interest typically at yields higher
than coupon bonds of equal maturity priced near par.
- Zero coupons offset the Fund's less interest-rate sensitive, premium bonds
by significantly contributing to total return performance in strong
markets.
YOUR FUND'S PERFORMANCE -- MORNINGSTAR 5-STAR FUND
I'm very pleased to say that your Fund's performance earned 5-star ratings from
Morningstar for the overall, 3-, and 5-year periods ended September 30, 1998,
overall and among 1,581 and 943 funds, respectively, in the municipal bond fund
category.(4) The Fund's performance compared very favorably to its peer group.
Your Fund's net asset value (NAV) per share increased by $.21, or 1.83%, since
March 31, 1998.
While past performance is no guarantee of future results, the Fund's annualized
dividend distribution yield (5) for the past 6 months was 5.19%, as compared to
the Lipper Virginia Municipal Debt Funds Average of 4.41% for the 35 funds in
the category.(6) For the same period and category, the Fund's total return (7)
was 4.55 % as compared to the Lipper Average of 4.19%.
Past performance is no guarantee of future results.
4) Morningstar proprietary ratings reflect historical risk-adjusted performance
through September 30, 1998. The ratings are subject to change monthly. The
ratings are calculated from the Fund's 3-, 5-, and 10-year average annual total
returns, as applicable, in excess of 90-day Treasury bill returns with
appropriate fee adjustments, and a risk factor that reflects fund performance
below 90-day Treasury bill returns. There is a 3-year minimum performance
requirement before a fund is rated. Overall rating is a weighted average of a
fund's 3-, 5-, and 10-year ratings, as applicable. The top ten percent of the
funds in a rating category receive five stars and the next 22.5% receive four
stars.
5) 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
gain distributions and annualizing the result.
6) Refer to page 5 for the Lipper Average definition.
7) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
THE STATE OF VIRGINIA
Virginia derives its financial strength from its dynamic and broad-based
economy. Employment has improved every month this past year. Importantly,
employment in the high technology industry remains substantial even though
Motorola has postponed construction of a manufacturing and research &
development complex located in Goochland County near Richmond. Wealth levels for
the state are solid with per capita income at 103% of the national average.
The state's long history of conservative financial management is a very positive
factor for bondholders. Virginia continues to enjoy the highest debt rating of
AAA from all three major credit rating agencies: Moody's Investors Service,
Fitch IBCA, and Standard & Poor's. During fiscal 1998, state revenues again
exceeded projections and budget reserves remained substantial.
The state will begin to eliminate, by incremental reductions, the personal
property tax on vehicles during the next five years. At completion, the tax
reduction may cost the state about $1 billion annually. This program will
increase local municipalities' financial dependence on the state. In November,
Virginians will consider whether to amend the state's constitution by
authorizing localities to issue bonds for economic development. If approved, the
debt issued under the proposal would not count against a municipality's
borrowing limit or be subject to local referendum.
To match the USAA Virginia Bond Fund's closing 30-Day SEC yield of 4.34% and:
- --------------------------------------------------------------------------------
Assuming a Virginia State Tax Rate of 5.75%
and a Marginal Federal Tax Rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investment must pay: 5.41% 6.39% 6.67% 7.19% 7.62%
- --------------------------------------------------------------------------------
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.
PORTFOLIO RATINGS/MIX
A pie chart is shown here depicting the Portfolio Mix as of September 30, 1998
of the USAA Virginia Bond Fund to be:
AA - 37%; AAA - 29%; A - 19%; BBB - 15%.
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 3.7% and 1.1%, 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.
Investment Review
USAA 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 a money market fund is not insured or guaranteed by the FDIC
or any government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
- --------------------------------------------------------------------------------
3/31/98 9/30/98
- --------------------------------------------------------------------------------
Net Assets $122.5 Million $126.9 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY YIELD AS OF 9/30/98
- --------------------------------------------------------------------------------
3/31/98 Since Inception 7-Day
to 9/30/98 1 Year 5 Years on 10/15/90 Yield
1.62% + 3.27% 3.10% 3.22% 3.44%
- --------------------------------------------------------------------------------
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income return and assumes reinvestment of all dividends and
any capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. Past
performance is no guarantee of future results. Yields and returns fluctuate. The
7-day yield quotation more closely reflects current earnings of the Fund than
the total return quotation.
7-DAY YIELD COMPARISON
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day Yield of the USAA Virginia Money Market Fund and the IBC Financial
Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose) (Tax-Free):
Money Funds.
USAA Virginia
Money Market Fund IBC Financial Data, Inc.
09/30/97 3.51% 3.25%
10/28/97 3.30% 3.03%
11/25/97 3.50% 3.20%
12/30/97 3.58% 3.27%
01/27/98 3.12% 2.82%
02/24/98 3.09% 2.66%
03/31/98 3.33% 2.93%
04/28/98 3.69% 3.37%
05/26/98 3.36% 3.10%
06/30/98 3.33% 2.93%
07/28/98 3.22% 2.88%
08/25/98 2.99% 2.60%
09/29/98 3.44%* 3.10%*
Data represent the last Monday of each month.
* Ending date 9/28/98
The graph tracks the Fund's 7-day yield against IBC Financial Data, Inc. State
Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free): Money Funds, an
average of money market fund yields.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER, JOHN C. BONNELL, CFA, APPEARS HERE]
THE MARKET
The six-month period ending September 30, 1998, was certainly eventful. The
focus at the beginning of the period was on the ideal economic environment -
strong growth with low inflation. Focus quickly shifted course to concerns over
negative economic events unfolding globally and the potential impact on the
domestic economy. These concerns induced a massive "flight to quality" into U.S.
Treasury securities, seen as a safe haven from market uncertainty. In response,
the Federal Reserve (Fed) lowered the federal funds rate (the rate banks charge
one another for overnight loans) .25% to 5.25% on September 29, 1998. The
perception in the market is for further decreases before year end.
This action reversed the Fed's prior stance from a bias toward raising rates to
a more accommodative easing mode. One-year Treasury bills that stood at 5.39%
March 31, 1998, ended September 30, 1998, at 4.40%.
This year's municipal "note season" (1) was anything but typical. For one, the
new supply of notes was substantially reduced since most issuers' cash positions
improved last year. In addition, some underwriters purchased large quantities of
notes at inflated prices only to convert the notes into variable rate securities
(2) with even shorter effective maturities. This caused prices on fixed-rate
notes to soar (yields fall) and prices on variable rate securities to be
relatively attractive (higher yields). One-year municipal note yields, as
measured by the Bond Buyer One-Year Note Index, (3) dropped from 3.64% to 3.24%
over the six months ending September 30, 1998. Yields on variable rate
securities, as measured by the BMA Swap Index (a weekly high-grade market index
composed of 7-day tax-exempt demand notes), fluctuated from 2.79% to 4.37% over
the same period but averaged 3.58%.
1) Note season is typically June through August when many issuers sell one-year
notes in order to smooth the uneven timing of taxes and other revenues.
2) Variable rate demand notes represent borrowings that are payable on demand
and that bear interest reflective of a money market rate.
3) The Bond Buyer One-Year Note Index is representative of yields on 10 large
one-year tax-exempt notes.
STRATEGY
As always, we focus on buying the best relative value in the market at any time.
Given the relative abundance of variable rate securities compared to longer
maturity fixed-rate securities, variable rate securities currently offer a
better risk/reward value. For this reason, the average maturity of the Fund may
drift lower in the near term. In addition, the variable rate securities provide
the liquidity necessary to extend the Fund's average maturity as opportunities
arise. The fixed-rate securities already in the Fund will help stabilize the
seasonally fluctuating yields on variable rate securities. We continue to
utilize our internal credit research staff to analyze each security on a
case-by-case basis and remain very selective when investing fund assets.
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending September 30, 1998, your Fund ranked 11 out of 161 State Specific
Tax-Exempt Money Market Funds according to IBC Financial Data, Inc.(4) with a
compounded dividend yield of 3.27%. The average for the category over the same
period was 2.94%.
4) IBC Financial Data, Inc. provides independent analysis of trends in the
financial services and investing industries, with particular concentration on
money market funds.
VIRGINIA
Virginia derives strength from its diverse and growing economy. Even though
Motorola postponed construction of a manufacturing and research & development
complex in Goochland County, high technology employment remains substantial, and
overall employment gains continue to be strong. As of August 1998, seasonally
adjusted unemployment was a low 3.1% in Virginia versus 4.5% for the U.S. Wealth
levels for the state are solid with per capita income at 103% of the national
average. Virginia, with a population of 6.7 million, is the twelfth largest
state. However, population growth has slowed relative to the nation's over the
last three years.
A long history of conservative financial management by the state is a positive
factor for bondholders. During fiscal 1998 (unaudited-budgetary basis), state
revenues again exceeded projections, and the General Fund balance remained
substantial. The state will phase-in the elimination of the personal property
tax on vehicles over the next five years. Since the state plans to offset any
lost revenue to underlying localities as a result of eliminating the personal
property tax on vehicles, financial dependence of localities on the state will
effectively be increased. Although this may eventually reduce financial
flexibility, it is not a major concern at this time. Virginia continues to carry
the highest possible bond ratings of Aaa, AAA, and AAA from Moody's Investors
Service, Standard & Poor's, and Fitch IBCA, respectively.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 investment of the USAA Virginia Money Market Fund. The
data is from 10/15/90 through 9/30/98. The data points from the graph are as
follows:
USAA Virginia Money Market Fund
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 $10,238
09/30/91 $10,464
03/31/92 $10,657
09/30/92 $10,811
03/31/93 $10,940
09/30/93 $11,060
03/31/94 $11,174
09/30/94 $11,312
03/31/95 $11,499
09/30/95 $11,701
03/31/96 $11,893
09/30/96 $12,080
03/31/97 $12,267
09/30/97 $12,474
03/31/98 $12,676
09/30/98 $12,881
Data since inception on 10/15/90 through 9/30/98
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. For the
7-day yield information, please refer to the Fund's Investment Review page.
An investment in a money market fund is not insured or guaranteed by the FDIC or
any government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
See page 19 for a complete listing of the Portfolio of Investments.
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS
September 30, 1998
(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. If the
securities are enhanced by a bond insurer, scheduled principal and interest
payments are insured by:
(1) Municipal Bond Insurance Association.
(2) Asset Guaranty Reinsurance Co.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance, Inc.
(5) AMBAC Indemnity Corp.
The insurance does not guarantee the market value of the municipal bonds.
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
USAA VIRGINIA BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED RATE INSTRUMENTS (98.9%)
Virginia (85.3%)
Abingdon Town IDA Hospital RB,
$ 3,305 Series 1998 5.25% 7/01/16 $ 3,382
2,610 Series 1998 5.38 7/01/28 2,681
7,500 Augusta County IDA Hospital RB, Series 1991 (a) 7.00 9/01/21 8,311
Chesterfield County Health Center Commission
Mortgage RB,
1,500 Series 1996 5.95 12/01/26 1,632
12,195 Series 1996 6.00 6/01/39 13,283
College Building Auth. Educational Facilities RB,
3,525 Series 1992 (a) 6.40 1/01/12 3,874
2,885 Series 1992 (a) 6.63 5/01/13 3,211
2,505 Series 1992 (a) 6.60 9/01/16 2,751
3,350 Series 1994 (a) 5.80 1/01/24 3,708
3,950 Commonwealth GO, Series 1998 4.75 6/01/17 3,963
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/15 3,234
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 5,038
1,000 Danville IDA Hospital RB (CRE) (5) 5.20 10/01/18 1,062
2,250 Emporia GO, Series 1995 5.75 7/15/15 2,441
15,180 Fairfax County IDA RB, Series 1996 6.00 8/15/26 16,787
2,000 Fairfax County Redevelopment and Housing Auth.
MFH RB, Series 1996A 6.00 12/15/28 2,139
1,500 Fairfax County Redevelopment and Housing Auth. RB,
Series 1989A (CRE) (a) 7.50 11/01/19 1,593
12,000 Fairfax County Sewer RB, Series 1996 (CRE) (1) 5.88 7/15/28 13,274
11,125 Fairfax County Water Auth RB 5.00 4/01/29 11,147
8,750 Galax IDA Hospital RB, Series 1995 (CRE) (2) 5.75 9/01/20 9,350
1,000 Halifax County IDA Hospital RB, Series 1998 5.25 9/01/17 1,010
Hampton Redevelopment and Housing Auth. RB,
1,885 Series 1996A 5.88 7/20/16 1,998
1,255 Series 1996A 6.00 1/20/26 1,330
1,000 Hanover County IDA Hospital RB (CRE) (1) 5.50 8/15/25 1,050
Henrico County IDA Residential and Healthcare
Facility RB,
1,025 Series 1997 6.10 7/01/20 1,054
2,070 Series 1997 6.15 7/01/26 2,126
2,500 Henry County IDA Hospital RB, Series 1997 6.00 1/01/27 2,736
Housing Development Auth. Commonwealth Mortgage RB,
5,440 Series 1992A 7.10 1/01/22 5,662
10,000 Series 1992A 7.10 1/01/25 10,409
1,455 Series 1992C 6.40 1/01/15 1,535
1,595 Series 1994D 6.40 7/01/17 1,695
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,234
Housing Development Auth. MFH RB,
55,000 Series 1982A (b) 7.00 11/01/17 10,313
2,630 Series 1991F 7.10 5/01/13 2,792
4,220 Isle of Wight County IDA RB, Series 1990 7.38 1/01/10 4,413
Loudoun County IDA Hospital RB,
3,000 Series 1995 (CRE) (4) 5.80 6/01/20 3,235
8,000 Series 1995 (CRE) (4) 5.80 6/01/26 8,633
Metropolitan Washington Airports Auth. RB,
6,000 Series 1997A 5.38 10/01/23 6,258
5,400 Series 1998 5.00 10/01/28 5,427
4,000 Norfolk Water RB, Series 1995 (CRE) (1) 5.88 11/01/20 4,409
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A 6.25 7/01/21 9,742
11,000 Peninsula Ports Auth. RB, Series 1992 (CRE) (d) 7.38 6/01/20 12,162
3,690 Pittsylvania County GO, Series 1994 6.00 7/01/14 4,055
1,725 Portsmouth Golfcourse System RB,
Series 1998 (CRE) (2),(c) 5.00 5/01/23 1,707
1,000 Portsmouth Redevelopment and Housing Auth. RB,
Series 1997A 5.85 12/20/30 1,052
2,500 Prince William County IDA Hospital RB,
Series 1995 (a) 6.85 10/01/25 2,987
6,425 Prince William County Service Auth. Water and
Sewer RB, Series 1997 (CRE) (3) 4.75 7/01/29 6,252
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/15 4,818
Resources Auth. Sewer System RB,
3,985 Series 1992A (a) 6.00 5/01/22 4,334
2,000 Series 1998 5.00 5/01/22 2,004
Resources Auth. Water and Sewer RB,
7,210 Series 1996A 5.63 4/01/27 7,718
1,620 Series 1997 5.30 11/01/22 1,681
4,270 Series 1998 5.20 10/01/28 4,360
2,200 Richmond Metropolitan Auth. Expressway RB,
Series 1998 (CRE) (3) 5.25 7/15/22 2,367
1,250 Roanoke County Educational Facility IDA RB,
Series 1998 5.25 3/15/23 1,275
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,597
1,250 Spotsylvania County GO, Series 1994 (a) 6.88 12/01/14 1,471
Upper Occoquan Sewage Auth. RB,
7,000 Series 1995A (CRE) (1) 5.15 7/01/20 7,431
11,000 Series 1995A (CRE) (1) 4.75 7/01/29 10,713
11,820 Virginia Beach Development Auth. Hospital RB,
Series 1991 6.30 11/01/21 12,794
1,000 Virginia Beach Development Auth. Residential and
Health Care Facility RB, Series 1997 6.15 7/01/27 1,035
1,500 Virginia College Building Auth RB, Series 1998 (d) 5.00 9/01/16 1,514
12,000 West Point IDA Solid Waste Disposal RB,
Series 1994B (d) 6.25 3/01/19 12,911
6,000 Williamsburg IDA RB, Series 1993 (d) 5.75 10/01/22 6,294
3,500 Winchester IDA RB, Series 1994 (CRE) (2) 6.75 10/01/19 3,965
Guam (2.6%)
1,000 Limited Obligation Infrastructure Improvement RB,
Series 1989A (CRE) (a) 7.10 11/15/09 1,060
8,050 Power Auth. RB, Series 1992A 6.30 10/01/22 8,622
Puerto Rico (11.0%)
8,365 Commonwealth GO, Series 1998 5.00 7/01/27 8,368
Electric Power Auth. RB,
7,700 Series 1995Z 5.25 7/01/21 7,837
7,025 Series X 5.50 7/01/25 7,312
Highway and Transportation Auth. RB,
5,000 Series 1993X 5.00 7/01/22 4,982
8,600 Series 1996Y 5.50 7/01/26 9,074
4,000 Series 1998A 5.00 7/01/38 3,976
--------
Total fixed rate instruments (cost: $345,344) 372,650
--------
VARIABLE RATE DEMAND NOTE (0.1%)
Virginia
485 Henrico County IDA RB, Series 1994
(CRE)(cost: $485) 4.20 5/01/24 485
--------
Total investments (cost: $345,829) $373,135
========
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Hospitals 20.9%
Water/Sewer Utilities - Municipal 18.3
Escrowed Bonds 8.8
Airport/Port 6.3
Electric/Gas Utilities - Municipal 6.3
Nursing/Continuing Care Centers 6.1
Single-Family Housing 6.0
General Obligations 5.0
Special Assessment/Tax/Fee 4.8
Paper & Forest Products 4.8
Multi-Family Housing 4.3
Education 2.6
Miscellaneous 1.3
Electric Utilities 1.2
Containers - Paper 1.2
Toll Roads .6
Community Service .5
-----
Total 99.0%
=====
USAA VIRGINIA MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES (72.8%)
Virginia
$ 4,500 Alexandria IDA RB, Series 1989 (CRE) 3.60% 1/01/09 $ 4,500
5,350 Arlington Public Improvement RB (CRE) 3.75 8/01/17 5,350
6,250 Chesterfield County IDA PCRB, Series 1993 3.80 8/01/09 6,250
5,600 Chesterfield County IDA RB, Series 1989 (CRE) 4.06 2/01/03 5,600
5,450 Culpeper IDA RB, Series 1997 (CRE) 4.00 1/01/08 5,450
2,495 Fauquier County IDA RB, Series 1994 (CRE) 4.00 12/01/14 2,495
2,500 Hampton Redevelopment and Housing Auth. RB,
Series 1998 (CRE) 4.00 2/01/28 2,500
Henrico County IDA RB,
4,150 Series 1986C (CRE) 3.65 7/15/16 4,150
2,520 Series 1994 (CRE) 4.20 5/01/24 2,520
13,480 Housing Development Auth. RB, Series 1987A (CRE) 4.25 9/01/17 13,480
15,000 Loudoun County IDA RB, Series 1998 (CRE) 3.55 11/01/28 15,000
2,450 Newport News Redevelopment and Housing Auth. MFH
RB, Series 1984 (CRE) 4.05 11/01/06 2,450
3,225 Norfolk IDA RB, Series 1998 (CRE) 4.05 9/01/20 3,225
Prince William County IDA RB,
6,300 Series 1988 (CRE) 4.10 6/30/04 6,300
1,031 Series 1989D (CRE) 3.75 10/01/00 1,031
522 Richmond IDA RB, Series 1989A (CRE) 3.75 6/01/02 522
3,310 Richmond Redevelopment and Housing Auth. RB,
Series 1995 (CRE) 4.00 4/01/29 3,310
6,240 Roanoke IDA RB, Series 1994 3.80 12/01/13 6,240
1,940 Rockingham County IDA RB, Series 1983A 4.25 10/01/20 1,940
-------
Total variable rate demand notes (cost: $92,313) 92,313
-------
PUT BONDS (15.8%)
Virginia
3,100 Chesterfield County IDA PCRB, Series 1985 3.35 10/01/09 3,100
5,000 Hampton IDA Hospital Facilities RB, Series 1997B 3.40 11/01/11 5,000
Peninsula Ports Auth. RB,
2,500 Series 1987A (CRE) 3.38 7/01/16 2,500
1,800 Series 1987B (CRE) 3.30 7/01/16 1,800
Prince William County IDA RB,
1,000 Series 1986 3.35 8/01/16 1,000
1,810 Series 1992 (CRE) 3.65 9/01/07 1,810
3,415 Richmond IDA RB, Series 1987A (CRE) 3.70 8/15/15 3,415
1,400 York County IDA PCRB, Series 1985 3.35 7/01/09 1,400
-------
Total put bonds (cost: $20,025) 20,025
-------
FIXED RATE INSTRUMENTS (10.8%)
Virginia (6.3%)
4,600 Fairfax County GO, Series 1995A 7.00 6/01/99 4,710
1,000 Newport News Improvement Refunding GO,
Series 1988 (a) 7.15 10/15/05 1,019
1,300 Norfolk IDA Revenue Notes 3.30 10/02/98 1,300
1,000 Prince William County GO, Series 1998 4.50 8/01/99 1,007
Puerto Rico (4.5%)
2,500 Electric Power Auth. RB, Series 1968 (a) 5.00 1/01/00 2,523
3,200 Government Development Bank CP 2.75 10/15/98 3,200
--------
Total fixed rate instruments (cost: $13,759) 13,759
--------
Total investments (cost: $126,097) $126,097
========
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Nursing/Continuing Care Centers 13.8%
Single-Family Housing 10.6
Manufacturing - Diversified Industries 9.3
Community Service 7.9
Buildings 6.8
Multi-Family Housing 6.5
Aerospace/Defense 5.0
Hospitals 5.0
Machinery - Diversified 4.9
General Obligations 4.5
Electric Utilities 4.3
Airport/Port 3.4
Electric/Gas Utilities - Municipal 3.3
U.S. Government 2.8
Real Estate Investment Trusts 2.7
Banks - Major Regional 2.5
Retail - General Merchandising 2.0
Drugs 1.5
Retail - Food 1.4
Education 1.2
-----
Total 99.4%
=====
NOTES TO PORTFOLIO OF INVESTMENTS
September 30, 1998
(Unaudited)
GENERAL NOTES
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) Prerefunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(c) At September 30, 1998, the cost of securities purchased on a delayed
delivery basis for the USAA Virginia Bond Fund was $1.7 million.
(d) At September 30, 1998, these securities were segregated to cover delayed
delivery purchases.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
USAA
USAA Virginia
Virginia Money Market
Bond Fund Fund
------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $345,829 and $126,097, respectively) $ 373,135 $ 126,097
Cash 74 274
Receivables:
Capital shares sold 62 126
Interest 5,820 560
Securities sold -- 200
------------------------------------
Total assets 379,091 127,257
------------------------------------
LIABILITIES
Securities purchased 1,694 --
Capital shares redeemed 42 318
USAA Investment Management Company 101 36
USAA Transfer Agency Company 17 9
Accounts payable and accrued expenses 37 23
Dividends on capital shares 423 17
------------------------------------
Total liabilities 2,314 403
------------------------------------
Net assets applicable to capital shares outstanding $ 376,777 $ 126,854
====================================
REPRESENTED BY:
Paid-in capital $ 349,938 $ 126,854
Accumulated net realized loss on investments (467) --
Net unrealized appreciation of investments 27,306 --
------------------------------------
Net assets applicable to capital shares outstanding $ 376,777 $ 126,854
====================================
Capital shares outstanding 32,198 126,854
====================================
Authorized shares of $.01 par value 120,000 1,125,000
====================================
Net asset value, redemption price,
and offering price per share $ 11.70 $ 1.00
====================================
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1998
(Unaudited)
USAA
USAA Virginia
Virginia Money Market
Bond Fund Fund
---------------------------
Net investment income:
Interest income $ 10,243 $ 2,402
---------------------------
Expenses:
Management fees 594 214
Transfer agent's fees 102 52
Custodian's fees 38 28
Postage 8 8
Shareholder reporting fees 4 6
Directors' fees 2 2
Registration fees 8 3
Professional fees 9 9
Other 6 3
---------------------------
Total expenses 771 325
---------------------------
Net investment income 9,472 2,077
---------------------------
Net realized and unrealized gain (loss)
on investments:
Net realized loss (182) --
Change in net unrealized appreciation/
depreciation 7,024 --
---------------------------
Net realized and unrealized gain 6,842 --
Increase in net assets resulting from operations $ 16,314 $ 2,077
===========================
See accompanying notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended September 30, 1998 and Year ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
USAA USAA
Virginia Virginia
Bond Fund Money Market Fund
---------------------------------------------------------------
9/30/98 3/31/98 9/30/98 3/31/98
---------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 9,472 $ 17,440 $ 2,077 $ 3,814
Net realized gain (loss) on investments (182) 1,317 -- --
Change in net unrealized appreciation/
depreciation of investments 7,024 14,275 -- --
---------------------------------------------------------------
Increase in net assets resulting from
operations 16,314 33,032 2,077 3,814
---------------------------------------------------------------
Distributions to shareholders from:
Net investment income (9,472) (17,440) (2,077) (3,814)
---------------------------------------------------------------
From capital share transactions:
Proceeds from shares sold 32,913 54,125 92,202 101,022
Dividend reinvestments 6,940 12,932 1,964 3,591
Cost of shares redeemed (16,164) (29,317) (89,821) (95,434)
---------------------------------------------------------------
Increase in net assets from
capital share transactions 23,689 37,740 4,345 9,179
---------------------------------------------------------------
Net increase in net assets 30,531 53,332 4,345 9,179
Net assets:
Beginning of period 346,246 292,914 122,509 113,330
---------------------------------------------------------------
End of period $376,777 $346,246 $126,854 $122,509
===============================================================
Change in shares outstanding:
Shares sold 2,859 4,772 92,202 101,022
Shares issued for dividends reinvested 602 1,140 1,964 3,591
Shares redeemed (1,405) (2,597) (89,821) (95,434)
---------------------------------------------------------------
Increase in shares outstanding 2,056 3,315 4,345 9,179
===============================================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(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 USAA Virginia Bond Fund and USAA 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 USAA Virginia Money Market Fund has a further objective
of preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA 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 under the Investment Company Act of 1940, as amended, all
securities in the USAA Virginia Money Market Fund, are stated at amortized cost
which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in Virginia municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, each Fund may borrow
from CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with
no markup. Subject to availability under its agreement with NationsBank, each
Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 15% of its total assets at
NationsBank's borrowing rate plus a markup. The Funds had no borrowings under
either of these agreements during the six-month period ended September 30, 1998.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. 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, 1998,
the USAA Virginia Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $467,000 which, if not offset by subsequent capital
gains will expire in 2003. It is unlikely that the Company's Board of Directors
will authorize a distribution of capital gains realized in the future until the
capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the
six-month period ended September 30, 1998 were as follows:
USAA Virginia USAA Virginia
Bond Fund Money Market Fund
($000) ($000)
-----------------------------------
Purchases $54,678 $224,915
Sales/maturities $29,681 $220,213
For the USAA Virginia Bond Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at September 30,
1998 was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-------------------------------------------------
USAA Virginia Bond Fund $27,306 $ -- $27,306
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company (the Manager) carries
out each Fund's investment policies and manages each Fund's portfolio.
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 million, .40% of that portion over $50 million but not over $100
million, and .30% of that portion over $100 million. These fees are allocated on
a proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund to
.50% of its annual average net assets through August 1, 1999.
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)
USAA VIRGINIA BOND FUND
September 30, 1998
(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,
-------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $ 11.49 $ 10.92 $ 10.93 $ 10.76 $ 10.71 $ 11.16
Net investment income .30 .62 .63 .63 .62 .62
Net realized and unrealized
gain (loss) .21 .57 (.01) .17 .05 (.30)
Distributions from net
investment income (.30) (.62) (.63) (.63) (.62) (.62)
Distributions of realized
capital gains -- -- -- -- -- (.15)
-----------------------------------------------------------------------------------
Net asset value at
end of period $ 11.70 $ 11.49 $ 10.92 $ 10.93 $ 10.76 $ 10.71
===================================================================================
Total return (%) * 4.55 11.13 5.82 7.57 6.61 2.69
Net assets at end
of period (000) $376,777 $346,246 $292,914 $267,111 $238,920 $235,901
Ratio of expenses to average
net assets (%) .43(a) .44 .46 .48 .50 .49
Ratio of net investment income
to average net assets (%) 5.28(a) 5.48 5.76 5.74 5.95 5.44
Portfolio turnover (%) 8.43 14.24 26.84 27.20 27.77 92.17
</TABLE>
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA VIRGINIA MONEY MARKET FUND
September 30, 1998
(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,
-------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .02 .03 .03 .03 .03 .02
Distributions from net
investment income (.02) (.03) (.03) (.03) (.03) (.02)
-----------------------------------------------------------------------------------
Net asset value at end
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===================================================================================
Total return (%) * 1.62 3.34 3.14 3.42 2.91 2.14
Net assets at end
of period (000) $126,854 $122,509 $113,330 $110,308 $ 98,049 $ 92,570
Ratio of expenses to average
net assets (%) .50(a) .50 .50 .50 .50 .50
Ratio of expenses to average
net assets excluding
reimbursements (%) -- .51 .53 .55 .56 .61
Ratio of net investment income
to average net assets (%) 3.20(a) 3.29 3.10 3.36 2.88 2.12
</TABLE>
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the period.
DIRECTORS
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
