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:
Portfolios of Investments:
USAA New York Bond Fund 15
USAA New York Money Market Fund 17
Notes to Portfolios of Investments 20
Statements of Assets and Liabilities 21
Statements of Operations 22
Statements of Changes in Net Assets 23
Notes to Financial Statements 24
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*
--------- ---------- ----------
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 (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 the President and Vice Chairman of the Board, Michael J. C. Roth,
CFA, 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 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.
- --------------------------------------------------------------------------------
3/31/98 9/30/98
- --------------------------------------------------------------------------------
Net Assets $70.6 Million $79.8 Million
Net Asset Value Per Share $11.62 $11.88
- --------------------------------------------------------------------------------
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
4.97%+ 4.25%
- --------------------------------------------------------------------------------
* 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 8.69% = 6.08% + 2.61%
5 Years 5.96% = 5.81% + 0.15%
1 Year 10.12% = 5.73% + 4.39%
- --------------------------------------------------------------------------------
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 New York Bond Fund for the
7-year period ended September 30, 1998.
Total Return for Years Ended:
- ----------------------------
9/30/91 16.05%
9/30/92 10.81%
9/30/93 13.40%
9/30/94 -5.23%
9/30/95 9.71%
9/30/96 6.34%
9/30/97 9.69%
9/30/98 10.12%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
9/30/91 7.05%
9/30/92 6.49%
9/30/93 6.09%
9/30/94 4.79%
9/30/95 6.31%
9/30/96 5.97%
9/30/97 6.05%
9/30/98 5.73%
Change in Share Price:
- ---------------------
9/30/91 9.00%
9/30/92 4.32%
9/30/93 7.31%
9/30/94 -10.02%
9/30/95 3.40%
9/30/96 0.37%
9/30/97 3.64%
9/30/98 4.39%
** 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 New York Bond Fund to the 12 Month
Dividend Yield of the Lipper New York Municipal Debt Funds Average from 9/30/92
to 9/30/98.
USAA New York Lipper New York Municipal
Bond Fund Yield Debt Funds Average Yield
--------------- ------------------------
9/30/92 5.90% 6.07%
9/30/93 5.26% 5.29%
9/30/94 5.66% 5.52%
9/30/95 5.77% 5.17%
9/30/96 5.82% 5.00%
9/30/97 5.58% 4.77%
9/30/98 5.24% 4.52%
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 New York Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper New York 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 New York Bond Fund
Year Amount
- ---- ------
10/15/90 $10,000
03/31/91 $10,822
09/30/91 $11,605
03/31/92 $12,012
09/30/92 $12,860
03/31/93 $13,663
09/30/93 $14,583
03/31/94 $13,755
09/30/94 $13,821
03/31/95 $14,501
09/30/95 $15,163
03/31/96 $15,613
09/30/96 $16,124
03/31/97 $16,532
09/30/97 $17,688
03/31/98 $18,555
09/30/98 $19,477
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 New York Municipal Debt Funds Average
Year Amount
- ---- ------
10/15/90 $10,000
03/31/91 $10,560
09/30/91 $11,327
03/31/92 $11,701
09/30/92 $12,557
03/31/93 $13,352
09/30/93 $14,282
03/31/94 $13,602
09/30/94 $13,672
03/31/95 $14,278
09/30/95 $14,883
03/31/96 $15,267
09/30/96 $15,714
03/31/97 $16,004
09/30/97 $17,045
03/31/98 $17,680
09/30/98 $18,477
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 New York Municipal Debt Funds Average is the average
performance level of all New York 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
[Photograph of the Portfolio Manager, Kenneth E. Willmann, CFA, appears here.]
INTEREST RATE MARKET
Interest rates generally declined in the six months ended September 30, 1998.
The graph below illustrates this well.
MUNICIPAL, CORPORATE, AND U.S. TREASURY BOND YIELDS
A chart in the form of a line graph appears here illustrating the yields of the
Lehman Brothers Investment Grade Corporate Bond Index, the 30-year U.S. Treasury
Bond, and the Bond Buyer 40-Bond Index (BBI40) from 3/31/98 to 9/30/98.
Lehman
Brothers 30-year Bond Buyer
Investment Grade U.S. 40-Bond
Corporate Bond Index Treasury Index (BBI40)
-------------------- -------- -------------
3/31/98 6.55% 5.93% 5.27%
4/15/98 6.47% 5.88% 5.29%
4/30/98 6.54% 5.95% 5.39%
5/15/98 6.57% 5.97% 5.28%
5/29/98 6.44% 5.80% 5.22%
6/15/98 6.33% 5.57% 5.16%
6/30/98 6.41% 5.63% 5.22%
7/15/98 6.44% 5.71% 5.25%
7/31/98 6.50% 5.71% 5.26%
8/14/98 6.43% 5.54% 5.20%
8/31/98 6.46% 5.27% 5.11%
9/15/98 6.30% 5.26% 5.14%
9/30/98 5.93% 4.98% 5.04%
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 investments.
Please note that the top line is the yield on the Lehman Brothers Investment
Grade Corporate Bond Index, which is a standard of interest rates on bonds
issued by corporations and other businesses. The middle 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
(BBI40), which is the industry standard for the yield of long-term,
investment-grade municipal bonds.
Besides the fact that all three lines in the graph trend downward, the most
striking observation is how different those trends are. By far, the Long Bond
declined the most. Its yield declined .95% over the period to 4.98%. Yes, you
are reading it correctly, 4.98%! Treasury bonds hit yield levels not seen in
over thirty years!
Corporate bonds followed, but not as steeply. Their yields declined .62% over
the period to 5.93%, most of which took place in September. The BBI40 yield line
has the most gentle decline of only .23%. In fact, on September 30, the yield on
the BBI40 of 5.04% was actually higher than that on the "Long Bond." This is a
very rare occurrence! Remember, the interest on most municipal bonds is free
from federal income tax while interest from government and corporate bonds is
taxable. The yield on taxable bonds is usually higher than that on tax-free
bonds to compensate the investor for the taxes which will be owed.
CHANGING RELATIONSHIPS
What caused these yield relationships to change? Why do municipal bonds yield
more than Treasury bonds and closer than usual to corporate bonds? Let's begin
by discussing what is going on with Treasury bonds.
While the U.S. economy is currently in good shape, many of the world's economies
are not. You have probably heard of the economic collapses in Asia and Russia.
It appears that Latin America is poised to follow. These collapses have led to
business failures, declining employment and wages, credit crunches, and
deflation of prices. In short, it looks a lot like the early 1930s in the U.S.
in many of the world's economies.
The economies of almost all countries in the world are increasingly intertwined
by technology and the expansion of world trade. Many people believe that it's
only a matter of time, and perhaps not much time, before the U.S. and Western
Europe are dragged into this scenario. The Federal Reserve Board in the U.S.,
which has been the leader in the fight against inflation for years, has recently
turned its attention to worries about recession. On September 29, 1998, it
lowered short-term interest rates .25% to 5.25%, the first change in over a
year. The lowering of interest rates is thought to stimulate the economy. Many
investors around the world, particularly those outside of this country, view
U.S. Treasury securities as a very safe investment. Therefore, demand is very
high for Treasury bonds as a haven against future economic turmoil and deflation
brought on by severe recession. As a result, prices of these bonds soared, which
in turn, caused yields to fall very rapidly.
Municipal and corporate bonds do not offer this "ultimate safety." Both entail
some default risk, though careful selection can reduce that risk. Municipal
bonds are suffering from a high level of issuance of new bonds, as well. The
lower level of interest rates is leading to much borrowing both to refinance
older outstanding bonds and to finance new projects. Demand for new bonds has
not kept pace with this large supply, causing the more restrained decline in
yields on the BBI40.
In summary, the continued decline in inflation is lowering interest rates, while
economic fear is driving people to buy U.S. Treasury securities. Municipal bonds
have also been affected by an oversupply of new issues.
AN OPPORTUNITY
All of the foregoing combine to make tax-free municipal bonds very attractive
investments, especially relative to other bonds. If the U.S. economy slows and
inflation continues to fall, yields will continue to fall, and prices on
existing bonds will rise.
NEW YORK ECONOMY
New York State has a diverse and substantial economic base which has experienced
some growth over the past few years. This growth has generally lagged the U.S.
as a whole. For example, as of August, the seasonally adjusted unemployment rate
for the state was 5.3% relative to 4.5% for the U.S. State per capita income is
well above the national average.
The state enjoyed a $1.56 billion General Fund operating surplus in the fiscal
year ended March 31, 1998. While the budget for the current fiscal year was late
again, the delay was only 14 days which was much less than recent experience.
This solid financial performance partly resulted from very strong tax revenues
from Wall Street. Recent market volatility raises uncertainty for these
revenues.
NEW YORK BOND FUND PERFORMANCE
While past performance is no guarantee of future results, from March 31, 1998,
to September 30, 1998, your Fund paid an annualized dividend distribution
yield(1) of 5.19% versus the Lipper New York Municipal Debt Funds Average of
4.49% for the 98 funds in the category.(2) During the six-month period, the
share price rose $.26 to $11.88. For the six months, the Fund provided a total
return(3) of 4.97%, well above the Lipper Average total return of 4.49%.
Your Fund's performance earned a 5-star rating from Morningstar for the 3-year
period ending September 30, 1998, among 1,581 funds in the municipal bond fund
category.(4)
(1) Dividend yield is computed by dividing income dividends paid during the
previous 6 months by the latest month-end net asset value adjusted for capital
gain distributions and annualizing the result.
(2) See page 5 for the Lipper Average definition.
(3) 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.
(4) The Fund was also awarded a 4-star rating for the overall and 5-year period
ended September 30, 1998, overall and among 943 funds in the municipal bond fund
category. 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.
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 4.25% and:
- --------------------------------------------------------------------------------
Assuming a New York State Tax Rate of 6.85%
and a Marginal Federal Tax Rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investmnet must pay: 5.37% 6.34% 6.62% 7.13% $7.56%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Assuming a New York State and City Tax
Rate of 6.85% 11.99%
--------------------------------------
and a Marginal Federal Tax Rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investment must pay: 5.69% 6.71% 7.00% 7.55% 8.00%
- --------------------------------------------------------------------------------
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 New York Bond Fund to be:
AA - 37%; AAA - 27%; A - 25%; BBB - 11%.
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service.
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 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 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 $62.2 Million $61.9 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOAL 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
1.56%+ 3.19% 3.06% 3.10% 3.39%
- --------------------------------------------------------------------------------
+ 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 New York Money Market Fund and the IBC Financial
Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose) (Tax-Free):
New York Money Funds.
USAA New York
Money Market Fund IBC Financial Data, Inc.
----------------- ------------------------
09/30/97 3.48% 3.24%
10/28/97 3.21% 3.03%
11/25/97 3.47% 3.22%
12/30/97 3.60% 3.29%
01/27/98 3.15% 2.84%
02/24/98 3.06% 2.70%
03/31/98 3.19% 2.92%
04/28/98 3.68% 3.34%
05/26/98 3.35% 3.09%
06/30/98 3.11% 2.95%
07/28/98 3.08% 2.92%
08/25/98 2.74% 2.64%
09/29/98 3.40%* 3.11%*
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): New York Money
Funds, an average of money market fund yields.
Message from the Manager
[Photograph of the 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%.
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 4 out of 36 New York Money Market
Funds according to IBC Financial Data, Inc.(4) with a compounded dividend yield
of 3.19%. The average for the category over the same period was 2.95%.
NEW YORK
New York State, which has experienced flat population growth over the past few
years, is still the third most populous state in the nation with approximately
18.1 million residents. The state derives strength from a diverse and
substantial economic base. Although some economic growth has occurred in recent
years, expansion has lagged the nation's. Generally, New York's employment
growth has taken place in the downstate area with the upstate economy being
weaker. As of August, the seasonally adjusted unemployment rate for the state
was 5.3% versus 4.5% for the U.S. Wealth remains high as state per capita income
is well above the national average.
During the fiscal year ending March 31, 1998, financial performance was very
strong with a $1.56 billion General Fund operating surplus (GAAP basis). Also,
the state's accumulated General Fund deficit was eliminated for the first time
since GAAP financial reporting started in 1983. The budget for the fiscal year
ending March 31, 1999, was again late. However, the budget was passed only 14
days after the start of the fiscal year compared to 126 days last year. Given
the budgetary reliance on tax revenues related to Wall Street, some uncertainty
is present due to recent market volatility. Although this has yet to have a
material impact on the state's financial plan, we will continue to monitor the
situation as always. The state continues to carry bond ratings of A2, A, and A+
from Moody's Investors Service, Standard & Poor's, and Fitch IBCA, respectively.
(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.
(4) IBC Financial Data, Inc. provides independent analysis of trends in the
financial services and investing industries, with particular concentration on
money market funds.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here illustrating the cumulative
performance of a $10,000 investment of the USAA New York Money Market Fund. The
data is from 10/15/90 to 9/30/98. The data points from the graph are as follows:
USAA New York Money Market Fund
Year Amount
- ---- ------
10/15/90 $10,000
03/31/91 $10,223
09/30/91 $10,428
03/31/92 $10,603
09/30/92 $10,753
03/31/93 $10,869
09/30/93 $10,979
03/31/94 $11,086
09/30/94 $11,214
03/31/95 $11,392
09/30/95 $11,597
03/31/96 $11,797
09/30/96 $11,985
03/31/97 $12,171
09/30/97 $12,371
03/31/98 $12,570
09/30/98 $12,766
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 17 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) 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
BAN Bond Anticipation Note MFH Multi-Family Housing
CP Commercial Paper PCRB Pollution Control
COP Certificate of Participation Revenue Bond
CRE Credit Enhanced RB Revenue Bond
GO General Obligation TAN Tax Anticipation Note
IDA Industrial Development
Authority/Agency
USAA NEW YORK BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (98.2%)
<C> <S> <C> <C> <C>
New York
$ 1,550 Buffalo Municipal Water Finance Auth. RB,
Series 1998A (CRE) (3) 5.00% 7/01/28 $ 1,556
Dormitory Auth. RB,
1,750 Series 1990A (Devereux Foundation)
(CRE) (a) 7.40 7/01/15 1,896
2,000 Series 1992 (Manhattan College) (CRE) (5) 6.50 7/01/19 2,185
2,000 Series 1994 (Gurwin Geriatric Center) 7.35 8/01/29 2,337
2,500 Series 1994B (State Univ. System) (a) 6.25 5/15/20 2,840
1,785 Series 1996-2 (City Univ. System) (a) 6.00 7/01/26 2,046
765 Series 1996-2 (City Univ. System) 6.00 7/01/26 835
2,800 Series 1997 (Lutheran Center) (CRE) 6.05 7/01/26 3,090
1,650 Environmental Facilities Corp. PCRB,
Series 1990B 7.50 3/15/11 1,710
1,940 Groton Community Health Care Facilities RB,
Series 1994A 7.45 7/15/21 2,298
Housing Finance Agency MFH RB,
1,865 Series 1992E (Secured Mortgage Program) 6.75 8/15/25 2,005
2,440 Series 1996A (Housing Project) (CRE) (4) 6.13 11/01/20 2,672
3,245 Housing New York Corp. RB, Series 1993 5.00 11/01/18 3,237
4,500 Long Island Power Auth. RB, Series 1998A 5.25 12/01/26 4,608
Medical Care Facilities Finance Agency RB,
2,500 Series 1994A (Community General Hospital
of Sullivan County) 6.25 2/15/24 2,680
1,930 Series 1994A (Hospital and Nursing
Home Facilities) 6.50 2/15/34 2,131
2,000 Series 1994A (New York Hospital)
(CRE) (2), (a) 6.90 8/15/34 2,369
2,000 Series 1994E (Mental Health Services) 6.50 8/15/24 2,286
2,500 Series 1995A (Brookdale Hospital) (a) 6.85 2/15/17 2,955
2,500 Series 1995A (Health Center Projects) 6.38 11/15/19 2,838
3,250 Monroe County IDA RB, Series 1998 5.20 12/20/39 3,278
6,250 Mortgage Agency RB, Series EE-3 7.75 4/01/16 6,584
New York City GO,
3,000 Series 1995B (a) 7.25 8/15/19 3,560
3,000 Series 1997I 6.25 4/15/17 3,374
2,500 New York City IDA RB, Series 1997 5.80 8/01/16 2,685
11,090 New York City Municipal Water Finance
Auth. RB, Series 1998D (b) 5.09 6/15/20 3,804
3,300 Niagara Falls City School District COP,
Series 1998 5.38 6/15/28 3,372
3,040 Orange County GO, Series 1997A 5.13 9/01/22 3,110
- ----------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $71,499) 78,341
- ----------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (0.5%)
New York
395 St. Lawrence County IDA PCRB,
Series 1985 (CRE) (cost: $395) 4.10 12/01/07 395
- ----------------------------------------------------------------------------------------
Total investments (cost: $71,894) $78,736
========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Escrowed Bonds 19.6%
Nursing/Continuing Care Centers 13.8
Water/Sewer Utilities - Municipal 8.9
Single-Family Housing 8.2
General Obligations 8.1
Healthcare - Miscellaneous 6.4
Hospitals 6.0
Multi-Family Housing 5.9
Electric/Gas Utilities - Municipal 5.8
Appropriated Debt 4.2
Buildings 4.1
Education 3.8
Community Service 3.4
Aluminum .5
----
Total 98.7%
====
USAA NEW YORK MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (65.5%)
<C> <S> <C> <C> <C>
New York
Dormitory Auth. RB,
$ 1,785 Series 1993 (CRE) 4.20 7/01/23 1,785
3,895 Series 1994A (CRE) 3.45 7/01/24 3,895
1,700 Series 1995 (CRE) 3.45 7/01/25 1,700
3,275 Dutchess County IDA RB, Series 1997 (CRE) 4.00 9/01/17 3,275
4,950 Erie County IDA RB, Series 1998B (CRE) 3.45 2/01/05 4,950
Local Government Assistance Corp. RB,
2,200 Series 1994B (CRE) 3.25 4/01/23 2,200
900 Series 1995F (CRE) 3.25 4/01/25 900
2,800 Long Island Power Auth. RB, Series 2 (CRE) 3.50 5/01/33 2,800
2,790 Medical Care Facilities Finance Agency RB,
Series 1994A (CRE) 3.40 11/01/03 2,790
1,100 Monroe County IDA RB, Series 1995D (CRE) 3.55 6/15/16 1,100
2,100 Municipal Assistance Corp. RB,
Series K-2 (CRE) 3.30 7/01/08 2,100
1,000 Nassau County IDA RB, Series 1984 (CRE) 4.00 12/01/99 1,000
New York City GO,
2,060 Series 1994A-4 (CRE) 4.00 8/01/21 2,060
2,500 Series 1995F (CRE) 3.30 2/15/12 2,500
New York City IDA RB,
2,200 Series 1985 (CRE) 3.55 12/01/15 2,200
2,400 Series 1985 (CRE) 3.55 12/01/15 2,400
2,000 Ramapo Housing Auth. RB, Series 1998 (CRE) 4.01 12/01/29 2,000
900 Suffolk County IDA RB, Series 1992 (CRE) 3.70 12/01/12 900
- ---------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $40,555) 40,555
- ---------------------------------------------------------------------------------------------
PUT BONDS (5.2%)
New York
Hudson IDA RB,
480 Series 1985 (Emsig Project) (CRE) 4.25 12/15/00 480
150 Series 1985 (Rual Project) (CRE) 4.25 12/15/00 150
2,600 Long Island Power Auth. RB, Series 3 (CRE) 3.40 5/01/33 2,600
- ---------------------------------------------------------------------------------------------
Total put bonds (cost: $3,230) 3,230
- ---------------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (28.0%)
New York
285 Adirondack Central School District GO,
Series 1998 (CRE) (4) 4.65 6/15/99 287
300 Canton Central School District GO,
Series 1998 (CRE) (4) 4.63 6/15/99 302
350 Chemung County GO Public Improvement Bonds,
Series 1998 (CRE) (3) 4.50 6/15/99 352
575 Cobleskill-Richmondville Central School
District GO, Series 1998 (CRE) (3) 4.25 6/15/99 577
350 Columbia County GO Public Improvement
Bonds, Series 1998 (CRE) (2) 4.50 8/01/99 352
275 Connetquot Central School District of
Islip GO TAN, Series 1998 (CRE) (3) 4.20 6/15/99 276
2,500 Dormitory Auth. CP, 2nd Series 1989A (CRE) 4.35 10/06/98 2,500
300 Dover Union Free School District GO,
Series 1998B (CRE) (4) 6.50 9/01/99 308
355 East Meadow Union Free School District GO,
Series 1998 (CRE) (3) 4.50 6/15/99 356
177 Eastchester GO Public Improvement Bonds,
Series 1997A (CRE) (1) 4.80 10/15/98 177
280 Eastchester Union Free School District GO,
Series 1997A (CRE) (3) 4.75 10/15/98 280
282 Freeport Village New York GO,
Series 1998A (CRE) (1) 6.25 5/01/99 286
355 Kenmore Village GO, Series 1998 (CRE) (4) 4.38 8/01/99 357
504 Liverpool Central School District GO,
Series 1998 (CRE) (3) 6.75 7/15/99 516
249 Malone Central School District GO,
Series 1998 (CRE) (3) 4.85 6/15/99 251
220 Middletown GO Public Improvement Bonds,
Series 1997 (CRE) (3) 4.75 10/01/98 220
Nassau County GO,
150 Series 1993 (CRE) (2) 4.00 10/01/98 150
132 Series Z (CRE) (1) 5.00 11/01/98 132
214 New Rochelle GO Public Improvement Bonds,
Series 1998A (CRE) (1) 4.80 7/15/99 216
2,800 New York City Water Finance Auth. CP,
Series 4 (CRE) 3.60 11/05/98 2,800
2,500 North Babylon Union Free School District
GO TAN, Series 1998 4.00 6/29/99 2,505
2,000 Oneida County GO BAN, Series 1998 4.00 4/23/99 2,002
278 Orchard Park Central School District GO,
Series 1998 (CRE) (4) 4.60 6/01/99 279
265 Palmyra-Macedon Central School District GO,
Series 1998 (CRE) (4) 4.40 6/15/99 266
390 Queensbury Union Free School District GO,
Series 1998 (CRE) (4) 4.80 6/15/99 392
236 Rockville Centre GO Public Improvement
Bonds, Series 1998 (CRE) (3) 4.20 9/01/99 237
160 Southeast General Purpose Bonds,
Series 1998 (CRE) (4) 4.38 3/15/99 160
355 Southold Union Free School District GO,
Series 1998 (CRE) (3) 4.75 6/01/99 357
145 Washington County GO, Series 1998 (CRE) (2) 4.75 4/15/99 146
255 Watertown GO, Series 1997B (CRE) (2) 5.00 11/15/98 255
- ---------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $17,294) 17,294
- ---------------------------------------------------------------------------------------------
Total investments (cost: $61,079) $ 61,079
=============================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
General Obligations 26.7%
Nursing/Continuing Care Centers 20.3
Electric/Gas Utilities - Municipal 8.7
Sales Tax 8.4
Lodging/Hotel 7.4
Community Service 6.8
Water/Sewer Utilities - Municipal 4.5
Hospitals 4.5
Finance - Municipal 4.1
Buildings 3.4
Publishing 2.9
Manufacturing - Diversified Industries 1.0
----
Total 98.7%
====
NOTES TO PORTFOLIOS 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.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<TABLE>
<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 $71,894 and $61,079, respectively) $ 78,736 $ 61,079
Cash 90 161
Receivables:
Capital shares sold 2 731
Interest 1,157 300
--------------------------
Total assets 79,985 62,271
--------------------------
LIABILITIES
Capital shares redeemed - 282
USAA Investment Management Company 69 54
USAA Transfer Agency Company 4 3
Accounts payable and accrued expenses 17 13
Dividends on capital shares 87 5
--------------------------
Total liabilities 177 357
--------------------------
Net assets applicable to capital shares outstanding $ 79,808 $ 61,914
==========================
REPRESENTED BY:
Paid-in capital $ 75,658 $ 61,914
Accumulated net realized loss on investments (2,692) -
Net unrealized appreciation of investments 6,842 -
--------------------------
Net assets applicable to capital shares outstanding $ 79,808 $ 61,914
==========================
Capital shares outstanding 6,719 61,914
==========================
Authorized shares of $.01 par value 100,000 1,060,000
==========================
Net asset value, redemption price, and offering price
per share $ 11.88 $ 1.00
==========================
See accompanying notes to financial statements.
</TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1998
(Unaudited)
USAA
USAA New York
New York Money Market
Bond Fund Fund
------------------------
Net investment income:
Interest income $ 2,133 $ 1,113
----------------------
Expenses:
Management fees 152 127
Transfer agent's fees 24 19
Custodian's fees 20 20
Postage 2 2
Shareholder reporting fees 1 2
Directors' fees 2 2
Registration fees 3 1
Professional fees 8 10
Other 3 3
----------------------
Total expenses before reimbursement 215 186
Expenses reimbursed (30) (31)
----------------------
Total expenses after reimbursement 185 155
----------------------
Net investment income 1,948 958
----------------------
Net realized and unrealized gain on investments:
Net realized gain 84 -
Change in net unrealized appreciation/depreciation 1,588 -
----------------------
Net realized and unrealized gain 1,672 -
----------------------
Increase in net assets resulting from operations $ 3,620 $ 958
======================
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
New York New York
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 $ 1,948 $ 3,516 $ 958 $ 1,679
Net realized gain on investments 84 409 - -
Change in net unrealized appreciation/
depreciation of investments 1,588 3,325 - -
---------------------------------------------------
Increase in net assets resulting from
operations 3,620 7,250 958 1,679
---------------------------------------------------
Distributions to shareholders from:
Net investment income (1,948) (3,516) (958) (1,679)
---------------------------------------------------
From capital share transactions:
Proceeds from shares sold 10,524 15,762 32,654 65,305
Dividend reinvestments 1,432 2,624 911 1,599
Cost of shares redeemed (4,431) (9,544) (33,877) (54,674)
---------------------------------------------------
Increase (decrease) in net assets from
capital share transactions 7,525 8,842 (312) 12,230
---------------------------------------------------
Net increase (decrease) in net assets 9,197 12,576 (312) 12,230
Net assets:
Beginning of period 70,611 58,035 62,226 49,996
---------------------------------------------------
End of period $ 79,808 $ 70,611 $ 61,914 $ 62,226
===================================================
Change in shares outstanding:
Shares sold 900 1,383 32,654 65,305
Shares issued for dividends reinvested 123 230 911 1,599
Shares redeemed (380) (842) (33,877) (54,674)
---------------------------------------------------
Increase (decrease) in
shares outstanding 643 771 (312) 12,230
===================================================
See accompanying notes to financial statements.
</TABLE>
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 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 under 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. During the six-month period ended
September 30, 1998, the USAA New York Bond Fund had two borrowings, averaging
$390,000, and incurred $119 in interest expense. The USAA New York Money Market
Fund had no borrowings under either of these agreements.
(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 New York Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $2.7 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.
(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 New York USAA New York
Bond Fund Money Market Fund
($000) ($000)
--------------------------------
Purchases $ 18,410 $ 96,936
Sales/maturities $ 10,928 $ 97,416
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 September 30,
1998 was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------
USAA New York Bond Fund $ 6,842 $ - $6,842
(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.
USAA NEW YORK BOND FUND
(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 $ 11.62 $ 10.94 $ 10.95 $ 10.77 $ 10.83 $ 11.62
Net investment income .31 .63 .64 .63 .62 .62
Net realized and
unrealized gain (loss) .26 .68 (.01) .18 (.06) (.50)
Distributions from net
investment income (.31) (.63) (.64) (.63) (.62) (.62)
Distributions of realized
capital gains - - - - - (.29)
---------------------------------------------------------------------
Net asset value at
end of period $ 11.88 $ 11.62 $ 10.94 $ 10.95 $ 10.77 $ 10.83
=====================================================================
Total return (%) * 4.97 12.24 5.89 7.67 5.42 .68
Net assets at end
of period (000) $ 79,808 $ 70,611 $ 58,035 $ 53,987 $ 50,507 $ 56,912
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements (%) .58(a) .61 .66 .69 .71 .69
Ratio of net investment
income to average
net assets (%) 5.28(a) 5.54 5.83 5.75 5.83 5.24
Portfolio turnover (%) 15.05 49.49 41.42 74.80 74.74 124.40
(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.
</TABLE>
USAA NEW YORK MONEY MARKET FUND
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
--------------------------------------------------------------------
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 .04 .03 .02
Distributions from net
investment income (.02) (.03) (.03) (.04) (.03) (.02)
---------------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=====================================================================
Total return (%) * 1.56 3.29 3.16 3.56 2.76 2.00
Net assets at end
of period (000) $ 61,914 $ 62,226 $ 49,996 $ 45,554 $ 27,525 $ 24,513
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements (%) .60(a) .63 .69 .78 .85 .98
Ratio of net investment
income to average
net assets (%) 3.09(a) 3.23 3.12 3.47 2.74 1.98
(a) Annualized. The ratio is not necessarily indicative of 12 months of operations.
* Assumes reinvestment of all dividend income distributions during the period.
</TABLE>
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
