Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA New York Bond Fund 4
USAA New York Money Market Fund 10
Financial Information:
Independent Auditors' Report 13
Statements of Assets and Liabilities 14
Portfolios of Investments in Securities:
USAA New York Bond Fund 16
USAA New York Money Market Fund 19
Notes to Portfolios of Investments in Securities 24
Statements of Operations 25
Statements of Changes in Net Assets 26
Notes to Financial Statements 27
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 New York
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*
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CAPITAL APPRECIATION
===================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
USAA 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 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 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.
(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
In the last few years I have turned my attention more and more to the
subject of tax-efficient investing. Though a few fund companies
are beginning to write about this subject, it remains off the beaten
track of mutual fund investing. But I believe it is of great importance.
[PHOTOGRAPH OF PRESIDENT: MICHAEL J.C. ROTH, CFA APPEARS HERE]
Just recently a close friend whom I have advised for years asked me, "Will my
tax bracket be lower when I retire?" I told him, "No. I will not permit that." I
believe that much financial planning makes an invalid assumption that a
retiree's tax bracket will fall substantially when retirement comes. But it is
quite possible for a person whose income is in a high tax bracket to build an
estate that will sustain that bracket upon retirement. If that occurs,
tax-efficient investing can be very important.
For a mutual fund investor that means maximizing potential tax-exempt income and
long-term capital gains. Unfortunately all of the distributions from IRAs,
401(k)s, and variable annuities will be taxed as ordinary income. But a
non-sheltered portfolio of index funds or efficiently run equity portfolios can
be harvested principally as long-term capital gains at a 20% tax rate. And an
accompanying investment in tax-exempt funds may provide the fixed-income buffer
to stock market risk along with the potential for significant tax-exempt
returns. Such a non-sheltered portfolio may be a valuable addition to an
individual's investment plan and may provide valuable assistance while you live
through your retirement.
Much of the attention of financial planners is concentrated on preparing for
retirement. You must not overlook the fact that you have a good possibility of
enjoying decades of reward for your good planning after you retire.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
Investment Review
USAA NEW YORK BOND FUND
OBJECTIVE: Provide New York investors with a high level of current interest
income that is exempt from federal income taxes and New York state and New York
City personal income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade New York
tax-exempt securities.
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3/31/97 3/31/98
===============================================================================
Net Assets $58.0 Million $70.6 Million
Net Asset Value Per Share $10.94 $11.62
===============================================================================
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AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 3/31/98
===============================================================================
1 Year 5 Years Since Inception on 10/15/90 30-Day SEC Yield
12.24% 6.31% 8.58% 4.54%
- -------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested dividends and
capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
- ------------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- ------------------------------------
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 Investment for the USAA New York Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper New York Municipal Debt Funds
Average. The data points from the graph are as follows:
USAA New York Bond Fund
Year Amount
- -------- ------
10/15/90 $10,000
10/31/90 $10,166
12/31/90 $10,543
06/30/91 $11,028
10/31/91 $11,731
04/30/92 $12,106
10/31/92 $12,590
04/30/93 $13,807
10/31/93 $14,630
04/30/94 $13,767
10/31/94 $13,497
04/30/95 $14,555
10/30/95 $15,434
04/30/96 $15,579
10/31/96 $16,305
04/30/97 $16,703
10/31/97 $17,863
03/31/98 $18,555
Lehman Brothers Municipal Bond Index
Year Amount
- -------- ------
10/15/90 $10,000
10/31/90 $10,143
12/31/90 $10,391
06/30/91 $10,853
10/31/91 $11,376
04/30/92 $11,792
10/31/92 $12,333
04/30/93 $13,285
10/31/93 $14,068
04/30/94 $13,572
10/31/94 $13,455
04/30/95 $14,475
10/30/95 $15,453
04/30/96 $15,625
10/31/96 $16,334
04/30/97 $16,663
10/31/97 $17,724
03/31/98 $18,297
Lipper New York Municipal Debt Funds Average
Year Amount
- -------- -------
10/15/90 $10,000
10/31/90 $10,056
12/31/90 $10,319
06/30/91 $10,809
10/31/91 $11,440
04/30/92 $11,834
10/31/92 $12,352
04/30/93 $13,502
10/31/93 $14,316
04/30/94 $13,616
10/31/94 $13,377
04/30/95 $14,299
10/30/95 $15,131
04/30/96 $15,205
10/31/96 $15,873
04/30/97 $16,140
10/31/97 $17,146
03/31/98 $17,679
Data since inception on 10/15/90 through 3/31/98
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 New York Municipal Debt Funds Average is the average
performance level of all New York Municipal Debt Funds, as computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. All tax-exempt bond funds will find it difficult to outperform
the Lehman Index, since funds have expenses.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: KENNETH E. WILLMANN, CFA IS HERE]
THE "PEACE DIVIDEND"?
With the fall of Communism and the end of the Cold War in the late 1980s, it was
widely expected that the Free World would enjoy a "peace dividend." This was to
be a period of general prosperity and economic well-being resulting from turning
our attention from negative to positive pursuits. It didn't materialize within
six months of the destruction of the Berlin Wall, so the media and markets seem
to have forgotten it. At any rate, I haven't heard much about it in the last few
years.
We are now in an unprecedented seventh year of economic expansion in the U.S.
Each year the stock market has been making new highs. Interest rates have fallen
to levels not seen since the 1970s. Inflation is lower than it's been in well
over ten years.
Explanations for this prosperity include increased productivity related to
technological innovation, excellent monetary policy as practiced by the Federal
Reserve Board in this country, and rapid internationalization of the business
world. All of these undoubtedly figure in the picture. But doesn't the current
economic environment sound like the "peace dividend" expected ten years ago?
Maybe all these sweeping political, economic, and social changes take time to
work through the fabric of society.
INTEREST RATE MARKETS
As I have said several times in previous Annual and Semiannual Reports, a
primary (and probably the most important) determinant of the general level of
interest rates is inflation. The current inflation rate largely determines
short-term interest rates, but long-term rates are mostly dependent on the
outlook for future inflation. The general level of interest rates peaked in
1980, and so did inflation as measured by the Consumer Price Index (CPI).
Inflation has generally declined ever since, and so have interest rates. Neither
the decline in inflation nor interest rates has been in a straight line, but the
long- term trend in both has been down.
This pattern continued in the twelve months ended March 31, 1997. Interest rates
declined sharply until mid January 1998, then stabilized through March 1998.
This pattern is quite apparent in the graph below.
MUNICIPAL & U.S. TREASURY BOND YIELDS
- -------------------------------------
A chart in the form of a line graph appears here illustrating the yields of the
30-year U.S. Treasury Bond and the Bond Buyer 40-Bond Index (BBI40) from 3/31/97
to 3/31/98.
30-year U.S. Treasury Bond Buyer 40-Bond Index (BBI40)
--------------------- --------------------------------
03/31 7.10% 5.95%
04/14 7.17% 6.01%
04/30 6.96% 5.89%
05/15 6.87% 5.78%
05/30 6.91% 5.74%
06/13 6.72% 5.60%
06/30 6.78% 5.69%
07/15 6.54% 5.54%
07/31 6.30% 5.40%
08/15 6.55% 5.56%
08/29 6.61% 5.55%
09/15 6.57% 5.48%
09/30 6.40% 5.47%
10/15 6.40% 5.50%
10/31 6.15% 5.40%
11/17 6.07% 5.41%
11/28 6.05% 5.36%
12/15 5.97% 5.27%
12/31 5.92% 5.26%
01/15 5.74% 5.10%
01/30 5.80% 5.19%
02/17 5.80% 5.15%
02/27 5.92% 5.24%
03/16 5.86% 5.24%
03/31 5.93% 5.27%
Note: Past performance is no guarantee of future results. The results of the
comparison reflect current conditions as regards to tax laws, inflationary
trends, and general corporate policies and practices. Investors are encouraged
to closely monitor changes in any factor which may affect their investment.
Please note that the top line is the yield of the active 30-year U.S. Treasury
Bond, or the "Long Bond" as it is known. This is generally considered the
benchmark for long-term interest rates in the U.S. The bottom line in the graph
represents the yield of the Bond Buyer 40-Bond Index (BB140), which is the
industry standard for the yield of long-term, investment-grade municipal bonds.
The yield on the Long Bond began the period at 7.10%, fell sharply to 5.69% on
January 12, 1998, and settled at 5.93% on March 31, 1998. The BBI40 showed a
similar pattern. It began the period at 5.95%, fell to 5.10% on January 13,
1998, and ended the period at 5.27%.
NEW YORK BOND FUND PERFORMANCE
While past performance is no guarantee of future results, from March 31, 1997 to
March 31, 1998, your Fund paid a dividend distribution yield(1) of 5.42% versus
an average dividend distribution yield of 4.67% for the Lipper New York
Municipal Debt Funds Category.* During the fund's fiscal year, the share price
rose $.68 to $11.62. Over this period, the fund provided a total return(2)
of 12.24%, well above the Lipper average total return of 10.49%.
(1) 12-month dividend yield is computed by dividing income dividends paid
during the previous 12 months by the latest month-end net asset value
adjusted for capital gains distributions.
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 New York Bond Fund to the 12 Month
Dividend Yield of the Lipper New York Municipal Debt Funds Average from 3/31/92
to 3/31/98.
USAA New York Lipper New York Municipal
Bond Fund Yield Debt Funds Average
---------------- ------------------------
03/31/92 6.28% 6.41%
03/31/93 5.61% 5.68%
03/31/94 5.62% 5.60%
03/31/95 5.74% 5.37%
03/31/96 5.79% 5.11%
03/31/97 5.84% 4.96%
03/31/98 5.42% 4.67%
The graph represents data from 3/31/92 to 3/31/98.
Your Fund's performance earned a 5-star rating from Morningstar for the 3-year
period as of March 31, 1998, among 1,525 funds in the municipal bond fund
category.(3)
The graph represents data from 3/31/92 to 3/31/98.
* Refer to page 4 for the Lipper Average definition.
(2) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
Past performance is no guarantee of future results.
(3) The Fund was also awarded a 4-star rating for the overall and 5-year period
ended March 31, 1998, among overall and 782 funds in the municipal bond
fund category. Morningstar proprietary ratings reflect historical
risk-adjusted performance through March 31, 1998. The ratings are subject
to change monthly. Morningstar 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.
NEW YORK STATE
New York continues to be a wealthy state with a diverse economic base. Economic
improvement occurred during 1997 as employment growth exceeded prior years.
Nevertheless, the State's economic performance has lagged the nation with
February 1998 unemployment of 6.2 percent relative to a national rate of 4.6
percent. The State's total personal income growth during 1997 also compared
favorably to past years but trailed the national average. Per capita income for
the State remains notably higher than the national level.
Fueled by strong tax revenues related to Wall Street earnings, New York is
currently projecting a general fund budget surplus of $1.8 billion for the
fiscal year ending March 31, 1998. This sound financial performance certainly
produces a degree of budgetary strength for the near future. Although long-term
financial pressure may result due to significant tax relief, it is anticipated
the State will take actions as necessary to maintain balanced operations. The
State again failed to enact a budget prior to the start of the new fiscal year
on April 1. However, as budget negotiations seem to be moving forward in a
positive manner, the current delay should not be significant in length.
Importantly, debt service appropriations were enacted in a timely manner.
SEARCH FOR VALUE
When I am asked to describe the strategy I employ when managing the Fund, my
response is that I try to buy value. I simply don't make bets on the direction
of interest rates. Rather, I search for securities that represent value at the
time given current market conditions. The other side of that search is selling
securities from the portfolio that no longer represent value.
When I am further asked to explain what value is, or how it is determined, I
must respond that there are no hard rules. Value is a combination of yield,
credit quality, structure (maturity, coupon, redemption features, etc.), and
liquidity. The ability to recognize value is the ability to simultaneously
analyze the interaction of these four factors. It comes mostly from lots of
experience and market awareness. It is more art than science. Determining value
in the tax-exempt bond market is a full-time job and is almost impossible to do
single-handed. We have an excellent team of portfolio managers, analysts, and
traders who give input from slightly different perspectives.
TAX THOUGHTS
An interesting thing falls out of this value discipline. If you only purchase
securities when they represent value, and only sell them when they don't
represent value, you don't do many transactions. Real value is not constantly
available and neither is real overvaluation. In short, we only trade when a
compelling reason exists.
This fits right into my philosophy - as much as possible of the return from this
Fund should be free of taxation. When there is relatively low trading in a fund,
there tends to be low taxable capital gains distributions. I prefer to keep
capital gains in the Fund and let you decide when to realize them.
I further believe that tax-exempt income is now and always will be the biggest
part of return from a municipal bond fund. My aim is to pursue a high level of
income. I also believe that income should be tax-exempt to everyone.
Consequently, since its inception, neither this Fund nor any other USAA
tax-exempt fund has ever distributed income that was subject to the Alternative
Minimum Tax (AMT) for individuals. I have no intention of changing that in the
future. Of course, I would certainly advise our shareholders if there is a
change in the Federal Tax Code which compels us to reconsider our position.
The table below compares the yield of the USAA New York Bond Fund with a taxable
equivalent investment.
To match the USAA New York Bond Fund's closing 30-Day SEC yield of 4.54% and:
- -------------------------------------------------------------------------------
Assuming a New York State Tax Rate of 6.85%
and a Marginal Federal Tax Rate of: 28% 31% 36% 39.6%
- -------------------------------------------------------------------------------
A fully taxable investment must pay: 6.77% 7.06% 7.62% 8.07%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Assuming a New York State and City Tax Rate | 11.25% | 11.31%
of and a Marginal Federal Tax Rate of: | 28% | 31% 36% 39.6%
- -------------------------------------------------------------------------------
A fully taxable investment must pay: 7.10% 7.42% 8.00% 8.48%
- -------------------------------------------------------------------------------
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 March 31, 1998 of
the USAA New York Bond Fund to be:
Cash Equivalents - 1%, BBB - 14%, AAA - 19%, AA - 38%, A - 28%
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Investor's Service.
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
USAA NEW YORK MONEY MARKET FUND
OBJECTIVE: Provide New York investors with a high level of current interest
income that is exempt from federal income taxes and New York state and New York
City personal income taxes, while preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality New York tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will endeavor to maintain a constant
net asset value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
Government, and there can be no assurance that the fund will maintain a stable
net asset value of $1.00 per share.
- -------------------------------------------------------------------------------
3/31/97 3/31/98
===============================================================================
Net Assets $50.0 Million $62.2 Million
Net Asset Value Per Share $1.00 $1.00
===============================================================================
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY SIMPLE YIELD AS OF 3/31/98
===============================================================================
1 Year 5 Years Since Inception on 10/15/90 7-Day Simple Yield
3.29% 2.95% 3.10% 3.20%
- -------------------------------------------------------------------------------
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 New York Money Market Fund and the IBC/Donoghue's
State Specific SB (Stock Broker) and GP (General Purpose) (Tax-Free): New York
Money Funds.
USAA New York
Money Market Fund IBC/Donoghue
----------------- ------------
03/25/97 2.88% 2.67%
04/29/97 3.7% 3.46%
05/27/97 3.46% 3.22%
06/24/97 3.52% 3.25%
07/29/97 3.17% 3.01%
08/26/97 2.96% 2.78%
09/30/97 3.48% 3.24%
10/28/97 3.21% 3.03%
11/25/97 3.47% 3.22%
12/30/97 3.6% 3.29%
01/27/98 3.15% 2.84%
02/24/98 3.06% 2.7%
03/30/98 3.19%* 2.92%*
Data represent the last Monday of each month.
*Ending date 3/30/98
The graph tracks the Fund's 7-day simple yield against IBC Financial Data, Inc.
State Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free): New York
Money Funds, an average of money market fund yields.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: JOHN C. BONNELL, CFA IS HERE]
THE MARKET
How long can the economy continue to expand? How long can inflation stay low
despite rising wages and falling unemployment? To what extent will Asian
economic problems affect our economy? Who knows!
It certainly would be nice to have the foresight to answer the above questions,
but even with the correct answers, one would not know whether to lock in one
year rates or invest in shorter term securities. As mentioned in the last
semiannual report, the short-term municipal market is primarily driven by supply
and demand relationships.
The Federal Reserve increased the federal funds rate (the rate banks charge one
another for overnight loans) .25% in March 1997. The Fed has been on hold since
then. For the last twelve months, one year treasury bill yields generally
declined within a range of 6.07% to 5.08%, and ended March 1998 at 5.39%. During
the same period, yields on municipal notes, as measured by the Bond Buyer's
One-Year Note Index,(1) ranged from 3.97% to 3.51%, and ended March 1998 at
3.64%. Supply and demand factors caused a spike up in yield at the end of the
calendar year. Yields were low during the first three months of 1998 as the
market experienced large cash inflows (which increased demand) during a period
of little new supply. How long will this continue? Again, no one really knows.
However certain seasonal factors and corporate buying habits are more
predictable and should produce buying opportunities to lock in higher yields.
STRATEGY
Your Fund strives to meet its objective in any prevailing market environment.
Rather than trying to predict future interest rates, we focus on buying the best
relative value in the market at any given time. This reflects our longstanding
commitment to credit research, and a judgment as to whether the Fund would be
sufficiently compensated with additional yield to invest in longer term
securities. Because of the lack of supply during the first three months of
1998(and low yields on what was available), your Fund's average maturity is
relatively short. This will provide the liquidity necessary to take advantage of
higher yields during the coming months as opportunities arise.
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending March 31, 1998, your Fund ranked 2 out of 35 New York Money Market Funds
according to IBC Financial Data, Inc. with a compounded dividend yield of 3.29%.
The average for the category over the same period was 3.02%.
(1) Bond Buyer Index is the industry standard for yields of investment-grade
municipal bonds.
NEW YORK
New York continues to derive strength from its substantial and diverse economy.
Both employment and personal income growth compared favorably to prior years.
However, the state's unemployment rate of 6.2% in February 1998 was still higher
than the national rate of 4.6%.
Reflecting strong tax revenues related to Wall Street earnings, the state is
currently projecting a budget surplus of $1.8 billion for the fiscal year ending
March 31, 1998. The state's improved financial performance led to a ratings
upgrade by Standard & Poor's in August 1997 to "A" from "A-." Moody's and Fitch
IBCA continue to rate the state "A2" and "A+" respectively. While the recent
sound financial results certainly produce budgetary strength, long-term
pressures still exist. Increased spending expected to be phased in over time,
significant tax relief, and the state's chronic inability to enact a timely
budget all could have negative impacts on the state's budget. We will continue
to closely monitor financial and legislative issues that may ultimately have an
impact on the relative attractiveness of New York municipal securities. As
always, we continue to analyze each issue on a case by case basis and remain
very selective when investing fund assets.
- -----------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- -----------------------------------
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 investment of the USAA New York Money Market Fund. The
data points from the graph are as follows:
USAA New York Money Market Fund
Year Amount
- -------- -------
10/15/90 $10,000
10/31/90 $10,019
12/31/90 $10,108
04/30/91 $10,257
10/31/91 $10,461
04/30/92 $10,630
10/31/92 $10,775
04/30/93 $10,886
10/31/93 $10,998
04/30/94 $11,104
10/31/94 $11,240
04/30/95 $11,425
10/31/95 $11,634
04/30/96 $11,830
10/31/96 $12,016
04/30/97 $12,204
10/31/97 $12,405
03/31/98 $12,570
Data since inception on 10/15/90 through 3/31/98
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 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 Auditors' Report
The Shareholders and Board of Directors
USAA TAX EXEMPT FUND, INC.:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments in securities, of the USAA New York Bond and USAA
New York Money Market Funds, portfolios of the USAA Tax Exempt Fund, Inc. as of
March 31, 1998, and 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 financial highlights presented in note 7 to the
financial statements for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights 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 are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of March 31, 1998, 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 referred to
above present fairly, in all material respects, the financial position of the
USAA New York Bond and USAA New York Money Market Funds, portfolios of the USAA
Tax Exempt Fund, Inc. as of March 31, 1998, 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 for each of the
years in the five-year period then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick
San Antonio, Texas
May 8, 1998
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 1998
<CAPTION>
USAA
USAA New York
New York Money Market
Bond Fund Fund
--------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $64,303 and $61,597, respectively) $69,557 $ 61,597
Cash 90 457
Receivables:
Capital shares sold 41 44
Interest 1,053 390
------- --------
Total assets 70,741 62,488
------- --------
LIABILITIES
Capital shares redeemed 5 218
USAA Investment Management Company 18 16
USAA Transfer Agency Company 4 3
Accounts payable and accrued expenses 19 19
Dividends on capital shares 84 6
------- --------
Total liabilities 130 262
------- --------
Net assets applicable to capital shares outstanding $70,611 $ 62,226
======= ========
REPRESENTED BY:
Paid-in capital $68,133 $62,226
Accumulated net realized loss on investments (2,776) -
Net unrealized appreciation of investments 5,254 -
------- -------
Net assets applicable to capital shares outstanding $70,611 $62,226
======= =======
Capital shares outstanding 6,076 62,226
======= =======
Authorized shares of $.01 par value 25,000 100,000
======= =======
Net asset value, redemption price, and offering
price per share $ 11.62 $ 1.00
======= =======
</TABLE>
See accompanying notes to financial statements.
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS IN SECURITIES
March 31, 1998
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) AMBAC Indemnity Corp.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance, Inc.
(5) Asset Guaranty Reinsurance Co.
The insurance does not guarantee the market value of the municipal bonds.
PORTFOLIO DESCRIPTION ABBREVIATIONS
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TAN Tax Anticipation Note
USAA NEW YORK BOND FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
March 31, 1998
Principal Coupon Final Market
Amount Security Rate Maturity Value
- -------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (97.9%)
New York
Dormitory Auth. RB,
$ 1,750 Series 1990A
(Devereux Foundation) (CRE) a 7.40% 7/01/15 $ 1,912
2,000 Series 1992 (Manhattan College)
(CRE) 5 6.50 7/01/19 2,171
2,000 Series 1994 (Gurwin Geriatric
Center) 7.35 8/01/29 2,309
2,500 Series 1994B (State Univ. System)a 6.25 5/15/20 2,799
2,550 Series 1996-2 (City Univ. System) 6.00 7/01/26 2,716
2,800 Series 1997 (Lutheran Center)
(CRE) 6.05 7/01/26 3,013
1,650 Environmental Facilities Corp.
PCRB, Series 1990B 7.50 3/15/11 1,733
1,950 Groton Community Health Care
Facilities RB, Series 1994A 7.45 7/15/21 2,276
Housing Finance Agency MFH RB,
1,890 Series 1992E
(Secured Mortgage Program) 6.75 8/15/25 2,004
2,450 Series 1996A (Housing Project)
(CRE) 4 6.13 11/01/20 2,652
1,500 Housing New York Corp. RB,
Series 1993 5.00 11/01/18 1,437
2,540 Local Government Assistance Corp.
RB, Series 1993E 5.00 4/01/21 2,513
1,350 Lockport Housing Development Corp.
RB, Series 1997A 6.00 10/01/18 1,378
Medical Care Facilities Finance
Agency RB,
2,500 Series 1994A (Community General
Hospital of Sullivan County) 6.25 2/15/24 2,666
1,950 Series 1994A (Hospital and Nursing
Home Facilities) 6.50 2/15/34 2,121
2,000 Series 1994A
(New York Hospital) (CRE) 2,a 6.90 8/15/34 2,331
2,000 Series 1994E (Mental Health
Services) 6.50 8/15/24 2,190
2,500 Series 1995A (Brookdale Hospital)a 6.85 2/15/17 2,900
2,500 Series 1995A (Health Center
Projects) 6.38 11/15/19 2,784
6,250 Mortgage Agency RB, Series EE-3 7.75 4/01/16 6,615
New York City GO,
2,995 Series 1995Ba 7.25 8/15/19 3,517
5 Series 1995B 7.25 8/15/19 6
3,000 Series 1997I 6.25 4/15/17 3,257
2,500 New York City IDA RB, Series 1997 5.80 8/01/16 2,615
10,090 New York City Municipal Water
Finance Auth. RB, Series 1998Db 5.08 6/15/20 3,213
3,000 New York State GO, Series 1998B 5.13 3/01/28 2,952
3,040 Orange County GO, Series 1997A 5.13 9/01/22 3,022
- ------------------------------------------------------------------------------
Total fixed rate instruments (cost: $63,848) 69,102
- ------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (0.6%)
New York
455 St. Lawrence County IDA PCRB,
Series 1985 (CRE) (cost: $455) 3.85 12/01/07 455
- ------------------------------------------------------------------------------
Total investments (cost: $64,303) $69,557
==============================================================================
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Escrowed Bonds 19.1%
General Obligations 13.1
Nursing/Continuing Care Centers 10.8
Single-Family Housing 9.4
Multi-Family Housing 8.5
Healthcare - Miscellaneous 7.0
Water/Sewer Utilities - Municipal 7.0
Education 6.9
Hospitals 6.8
Community Service 3.7
Sales Tax 3.6
Buildings 2.0
Aluminum .6
----
Total 98.5%
====
USAA NEW YORK MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
March 31, 1998
Principal Coupon Final
Amount Security Rate Maturity Value
- -------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (80.2%)
New York (77.6%)
$ 1,000 Capital District Youth Center RB,
Series 1997B (CRE) 3.50% 8/01/98 $ 1,000
Dormitory Auth. RB,
1,500 Series 1993 (Oxford Univ. Press)
(CRE) 3.75 7/01/23 1,500
3,895 Series 1994A (CRE) 3.55 7/01/24 3,895
1,800 Series 1995 (CRE) 3.55 7/01/25 1,800
2,935 Dutchess County IDA RB,
Series 1997 (CRE) 3.70 9/01/17 2,935
4,450 Erie County IDA RB, Series 1998B
(CRE) 3.55 2/01/05 4,450
Job Development Auth.
Special Purpose Bonds,
795 Series 1984 C1-C30 (CRE) 4.10 3/01/99 795
805 Series 1984 D1-D9 (CRE) 4.10 3/01/99 805
150 Series 1984 E1-E55 (CRE) 4.10 3/01/99 150
570 Series 1984 F1-F17 (CRE) 4.10 3/01/99 570
475 Series 1984 H1-H11 (CRE) 4.10 3/01/99 475
100 Series 1985 B1-B6 (CRE) 3.90 3/01/00 100
200 Series 1985 C1-C34 (CRE) 3.90 3/01/00 200
1,130 Series 1985 D1- D16 (CRE) 3.90 3/01/00 1,130
Local Government Assistance
Corp. RB,
2,000 Series 1994B (CRE) 3.40 4/01/23 2,000
900 Series 1995F (CRE) 3.40 4/01/25 900
1,900 Medical Care Facilities Finance
Agency RB,
Series 1994A (CRE) 3.55 11/01/03 1,900
1,100 Monroe County IDA RB,
Series 1995D (CRE) 3.65 6/15/16 1,100
2,100 Municipal Assistance Corp. RB,
Series K-2 (CRE) 3.50 7/01/08 2,100
1,000 Nassau County IDA RB, Series 1984
(CRE) 3.65 12/01/99 1,000
New York City GO,
1,600 Series 1994A-10 (CRE) 3.80 8/01/16 1,600
545 Series 1994A-4 (CRE) 3.65 8/01/21 545
2,300 New York City Health and Hospital
Corp. GO, Series 1997A (CRE) 3.50 2/15/26 2,300
New York City IDA RB,
2,200 Series 1985 (CRE) 3.50 12/01/15 2,200
2,400 Series 1985 (CRE) 3.50 12/01/15 2,400
2,410 Niagara County IDA RB,
Series 1994A (CRE) 3.70 11/15/24 2,410
2,835 St. Lawrence County IDA PCRB,
Series 1985 (CRE) 3.85 12/01/07 2,835
900 Suffolk County IDA RB, Series
1992 (CRE) 3.60 12/01/12 900
4,300 Westchester County IDA RB,
Series 1983 (CRE) 4.50 7/01/98 4,300
Puerto Rico (2.6%)
1,600 Industrial, Tourist, Educational, Medical
and Environmental Control Facilities
Financing Auth. RB, Series
1995A (CRE) 3.45 1/01/15 1,600
- ------------------------------------------------------------------------------
Total variable rate demand notes (cost: $49,895) 49,895
- ------------------------------------------------------------------------------
PUT BONDS (1.2%)
New York
Hudson IDA RB,
575 Series 1985 (Emsig Project) (CRE) 4.25 12/15/00 575
180 Series 1985 (Rual Project) (CRE) 4.25 12/15/00 180
- ------------------------------------------------------------------------------
Total put bonds (cost: $755) 755
- ------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (17.6%)
New York
400 Arlington Central School District
GO, Series 1997A (CRE)3 7.00 5/15/98 401
250 Brewster Central School District
GO, Series 1997 (CRE)1 6.75 6/15/98 251
225 Caledonia-Mumford Central School
District GO, Series 1998 (CRE)3 4.45 6/15/98 225
515 Cattaraugus County GO,
Series 1997 (CRE)3 4.88 7/15/98 517
330 Central Square Central School
District GO, Series 1997 (CRE)2 5.00 6/15/98 331
200 Colonie GO Public Improvement Bonds,
Series 1997 (CRE) 1 4.65 5/15/98 200
394 Columbia County GO, Series 1997
(CRE)2 5.50 4/15/98 394
160 Copenhagen Central School District
GO, Series 1997 (CRE)1 4.90 6/15/98 160
350 Corning School District GO,
Series 1997 (CRE)1 4.38 6/15/98 350
300 Deer Park Union Free School
District GO, Series 1997B (CRE)3 4.85 6/15/98 301
700 Dunkirk City School District GO,
Series 1997 (CRE)2 4.35 9/01/98 701
170 East Aurora GO, Series 1997 (CRE)4 4.60 8/15/98 171
450 East Islip Union Free School
District RB, Series 1993 (CRE)2 4.70 8/01/98 451
177 Eastchester Public Improvement Bonds
GO, Series 1997A (CRE)1 4.80 10/15/98 178
280 Eastchester Union Free School
District GO, Series 1997A (CRE)3 4.75 10/15/98 281
361 Ellenville Central School District
GO, Series 1997 (CRE)2 5.70 5/01/98 362
275 Fulton GO, Series 1997 (CRE)2 4.85 9/01/98 276
472 Hamilton Central School District
GO, Series 1997 (CRE)3 4.55 6/15/98 473
144 Hempstead Village GO,
Series 1997A (CRE)3 4.90 5/15/98 144
200 Hilton Central School District GO,
Series 1998 (CRE)1 4.20 6/15/98 200
267 Merrick Union Free School District
GO, Series 1998 (CRE)1 4.20 6/15/98 267
220 Middletown GO Public Improvement
Bonds, Series 1997 (CRE)3 4.75 10/01/98 221
132 Nassau County GO, Series Z (CRE)1 5.00 11/01/98 133
2,500 New Rochelle City School District
GO TAN, Series 1997 4.25 6/30/98 2,502
300 Northport-East Northport Union Free
School District GO, Series
1997 (CRE) 1 5.50 4/15/98 300
160 Southeast General Purpose Bonds,
Series 1998 (CRE)4 4.38 3/15/99 161
240 Vestal Central School District GO,
Series 1997 (CRE)4 4.80 6/15/98 240
255 Watertown GO, Series B (CRE)2 5.00 11/15/98 257
134 Waverly Central School District
GO, Series 1997 (CRE)1 4.80 6/15/98 134
125 Waverly Village GO, Series 1997
(CRE) 1 4.13 6/15/98 125
240 Westbury Union Free School District
GO, Series 1997 (CRE)1 4.90 5/15/98 240
- ------------------------------------------------------------------------------
Total fixed rate instruments (cost: $10,947) 10,947
- ------------------------------------------------------------------------------
Total investments (cost: $61,597) $61,597
==============================================================================
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
General Obligations 21.0%
Nursing/Continuing Care Centers 16.3%
Sales Tax 8.0%
Lodging/Hotel 7.4%
Electronics - Semiconductors 6.9%
Finance - Municipal 6.8%
Hospitals 6.7%
Community Service 6.2%
Buildings 5.0%
Aluminum 4.6%
Solid Waste Disposal 3.9%
Education 2.6%
Publishing 2.4%
Manufacturing - Diversified Industries 1.2%
-----
Total 99.0%
=====
NOTES TO PORTFOLIOS OF INVESTMENTS IN SECURITIES
March 31, 1998
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.
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 1998
USAA
USAA New York
New York Money Market
Bond Fund Fund
------------------------
Net investment income:
Interest income $3,833 $1,933
------ ------
Expenses:
Management fees 273 218
Transfer agent's fees 45 37
Custodian's fees 37 36
Postage 4 4
Shareholder reporting fees 1 3
Directors' fees 4 4
Registration fees 2 2
Professional fees 17 17
Other 6 5
------ ------
Total expenses before reimbursement 389 326
Expenses reimbursed (72) (72)
------ ------
Total expenses after reimbursement 317 254
------ ------
Net investment income 3,516 1,679
------ ------
Net realized and unrealized gain on investments:
Net realized gain 409 -
Change in net unrealized appreciation/depreciation 3,325 -
------ ------
Net realized and unrealized gain 3,734 -
------ ------
Increase in net assets resulting from operations $7,250 $1,679
====== ======
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<CAPTION>
USAA USAA
New York New York
Bond Fund Money Market Fund
---------------------------------------
1998 1997 1998 1997
---------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 3,516 $ 3,238 $ 1,679 $ 1,459
Net realized gain (loss) on investments 409 (437) - -
Change in net unrealized appreciation/
depreciation of investments 3,325 345 - -
------- -------- -------- -------
Increase in net assets resulting from
operations 7,250 3,146 1,679 1,459
------- -------- -------- -------
Distributions to shareholders from:
Net investment income (3,516) (3,238) (1,679) (1,459)
------- -------- -------- -------
From capital share transactions:
Proceeds from shares sold 15,762 11,430 65,305 53,699
Dividend reinvestments 2,624 2,480 1,599 1,404
Cost of shares redeemed (9,544) (9,770) (54,674) (50,661)
------- -------- -------- -------
Increase in net assets from
capital share transactions 8,842 4,140 12,230 4,442
------- -------- -------- -------
Net increase in net assets 12,576 4,048 12,230 4,442
Net assets:
Beginning of period 58,035 53,987 49,996 45,554
------- -------- -------- -------
End of period $70,611 $ 58,035 $ 62,226 $49,996
======= ======== ======== =======
Change in shares outstanding:
Shares sold 1,383 1,041 65,305 53,699
Shares issued for dividends reinvested 230 226 1,599 1,404
Shares redeemed (842) (891) (54,674) (50,661)
------- -------- -------- -------
Increase in shares outstanding 771 376 12,230 4,442
======= ======== ======== =======
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(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 USAA New York Bond Fund and USAA New York Money Market Fund (the Funds). The
Funds have a common objective of providing New York investors with a high level
of current interest income that is exempt from federal, New York state, and New
York City personal income taxes. The USAA New York Money Market Fund has a
further objective of preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA New York 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 USAA New York 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 New York 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 year ended March 31, 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 March 31, 1998, the
USAA New York Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $2.8 million which, if not offset by subsequent
capital gains will expire between 2003-2005. 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.
The Funds completed their fiscal year on March 31, 1998. 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, New
York state, and New York City income tax purposes. There were no long-term
capital gain distributions for the year ended March 31, 1998.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the year
ended March 31, 1998 were as follows:
USAA New York USAA New York
Bond Fund Money Market Fund
($000) ($000)
------------- -----------------
Purchases $ 41,140 $ 142,083
Sales/maturities $ 30,951 $ 130,045
For the USAA New York Bond Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at March 31, 1998
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-------------------------------------------------
USAA New York Bond Fund $ 5,378 $ 124 $ 5,254
(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 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.
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
Net asset value at
beginning of period $ 10.94 $ 10.95 $ 10.77 $ 10.83 $ 11.62
Net investment income .63 .64 .63 .62 .62
Net realized and
unrealized gain (loss) .68 (.01) .18 (.06) (.50)
Distributions from net
investment income (.63) (.64) (.63) (.62) (.62)
Distributions of realized
capital gains - - - - (.29)
------- ------- ------- ------- -------
Net asset value at
end of period $ 11.62 $ 10.94 $ 10.95 $ 10.77 $ 10.83
======= ======= ======= ======= =======
Total return(%)* 12.24 5.89 7.67 5.42 .68
Net assets at end
of period(000) $70,611 $58,035 $53,987 $50,507 $56,912
Ratio of expenses to
average net assets(%) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements(%) .61 .66 .69 .71 .69
Ratio of net investment
income to average
net assets(%) 5.54 5.83 5.75 5.83 5.24
Portfolio turnover(%) 49.49 41.42 74.80 74.74 124.40
*Assumes reinvestment of all dividend income and capital gain distributions
during the period.
NOTES TO FINANCIAL HIGHLIGHTS CONTINUED
USAA NEW YORK MONEY MARKET FUND
March 31, 1998
(7) FINANCIAL HIGHLIGHTS (Continued)
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .04 .03 .02
Distributions from net
investment income (.03) (.03) (.04) (.03) (.02)
------- ------- ------- ------- -------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return(%)* 3.29 3.16 3.56 2.76 2.00
Net assets at end
of period(000) $62,226 $49,996 $45,554 $27,525 $24,513
Ratio of expenses to
average net assets(%) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements(%) .63 .69 .78 .85 .98
Ratio of net investment
income to average
net assets(%) 3.23 3.12 3.47 2.74 1.98
*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
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
