Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA Virginia Bond Fund 4
USAA Virginia Money Market Fund 10
Financial Information:
Independent Auditors' Report 13
Statements of Assets and Liabilities 14
Portfolios of Investments in Securities:
USAA Virginia Bond Fund 16
USAA Virginia Money Market Fund 21
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 Virginia
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1998, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
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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 VIRGINIA BOND FUND
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade Virginia
tax-exempt securities.
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3/31/97 3/31/98
===============================================================================
Net Assets $292.9 Million $346.2 Million
Net Asset Value Per Share $10.92 $11.49
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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
11.13% 6.73% 8.24% 4.69%
- -------------------------------------------------------------------------------
* 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 Virginia Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper Virginia Municipal Debt Funds
Average. The data points from the graph are as follows:
USAA Virginia Bond Fund
Year Amount
- --------- -------
10/15/90 $10,000
10/31/90 $10,135
04/30/91 $10,744
10/31/91 $11,342
04/30/92 $11,724
10/31/92 $12,098
04/30/93 $13,218
10/31/93 $14,048
04/30/94 $13,498
10/31/94 $13,252
04/30/95 $14,338
10/31/95 $15,208
04/30/96 $15,375
10/31/96 $16,161
04/30/97 $16,474
10/31/97 $17,520
03/31/98 $18,121
Lehman Brothers Municipal Bond Index
Year Amount
- -------- --------
10/15/90 $10,000
10/31/90 $10,143
04/30/91 $10,768
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
10/31/95 $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 Virginia Municipal Debt Funds Average
Year Amount
- -------- -------
10/15/90 $10,000
10/31/90 $10,086
04/30/91 $10,696
10/31/91 $11,259
04/30/92 $11,625
10/31/92 $12,027
04/30/93 $13,099
10/31/93 $13,887
04/30/94 $13,149
10/31/94 $12,910
04/30/95 $13,938
10/31/95 $14,793
04/30/96 $14,890
10/31/96 $15,561
04/30/97 $15,824
10/31/97 $16,820
03/31/98 $17,364
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 Virginia Municipal Debt Funds Average is the average
performance level of all Virginia Municipal Debt Funds, as computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. All tax-exempt bond funds will find it difficult to outperform
the Lehman Index, since funds have expenses.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: ROBERT R. PARISEAU, CFA IS HERE]
THE ECONOMY
The U.S. economy continues its 8th year of expansion with remarkably few signs
of inflation. The yield on the 30-year U.S. Treasury Bond (the "Long Bond") fell
to a decade low of 5.69% on January 12, 1998. Nevertheless, bond investors now
seem less confident that the weakness in Asia, higher productivity, El Nino, a
relatively tight monetary policy and other factors will suppress inflationary
pressures. Concerns over the robust U.S. economy have been a recurrent theme for
many months now. Currently, investors seem to lack a consensus regarding the
direction of the next interest rate adjustment by the Federal Open Market
Committee (FOMC, or "the Fed"). Personally, I'm more confident that economic
conditions are more akin to the stable prices and real growth experienced in the
1950s than the high inflation of the 1970s.
YOUR DIVIDEND YIELD
As interest rates have fallen, our sales force has received inquiries from
investors asking whether high coupon(1) bonds will be called away from various
USAA tax-exempt funds. These investors are obviously concerned that their fund's
yield will drop dramatically. The majority of municipal bonds permit issuers to
"call", or redeem, a bond many years before the stated maturity. Typically,
municipal bonds may not be called until after ten years from the date of issue.
An issuer would call, or refinance, a bond for the same primary reason that a
homeowner would refinance a mortgage -- when interest rates drop sufficiently to
more than offset the cost of refinancing.
Let me assure you that I am very conscious of call features. I continually
evaluate the relative market value of various bond coupons and their respective
call dates. For high coupon bonds, I typically hold them as long as possible. If
I sold a higher coupon bond at a large premium (i.e. market value exceeds face
value), the Fund would lose the tax-exempt income stream prematurely. In
addition, the transaction may trigger a federal capital gain tax for our
investors. I consciously manage the Fund to minimize capital gain distributions.
When high coupon bonds are eventually called, typically the impact on the Fund's
distribution yield is quite muted, maybe a few basis points (a basis point is
.01%) for even a very large position of the Fund's highest yielding bond.
PORTFOLIO STRATEGY
I focus primarily on generating maximum tax-exempt income that potentially
should produce the best after-tax total return over a 3-5 year investment
horizon. I do not buy exotic derivatives, nor do I hedge the portfolio with
futures contracts. I have no intention of purchasing municipal bonds that are
subject to the federal alternative minimum tax (AMT) for individuals. In fact,
since inception, the Virginia Bond Fund has never distributed income that was
subject to the AMT. Of course, I would certainly advise our shareholders if
there were a change in the Federal Tax Code that compels me to reconsider my
position on the AMT. I remain cautious about investing in municipal lease
obligations.
(1) A bond's coupon is the fixed amount of interest that is paid annually
stated as a percentage of face value, normally $1000. For example, a 6.5%
coupon pays $65 (6.5% times $1000= $65) normally in two semiannual payments
of $32.50 for the life of the bond.
In the graphic below, notice that income typically is the largest component of
total return.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending March 31, 1998
- -------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
- -------------------------------------------------------------------------
Since 10/15/90 8.24% = 6.12% + 2.12%
- -------------------------------------------------------------------------
5 Years 6.73% = 5.88% + .85%
- -------------------------------------------------------------------------
1 Year 11.13% = 5.91% + 5.22%
- -------------------------------------------------------------------------
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA Virginia Bond Fund for
the 7-year period ended March 31, 1998.
Total Return for years **Compounded Dividend
ended Yield for years ended:
- ---------------------- ----------------------
03/31/92 9.61% 03/31/92 6.79%
03/31/93 12.61% 03/31/93 6.46%
03/31/94 2.69% 03/31/94 5.38%
03/31/95 6.61% 03/31/95 6.14%
03/31/96 7.57% 03/31/96 5.99%
03/31/97 5.82% 03/31/97 5.91%
03/31/98 11.13% 03/31/98 5.91%
Change in Share Price
- ----------------------
03/31/92 2.82%
03/31/93 6.15%
03/31/94 -2.69%
03/31/95 0.47%
03/31/96 1.58%
03/31/97 -0.09%
03/31/98 5.22%
*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.
THE MUNICIPAL MARKET
Interest rates have fallen almost the entire fiscal year. The yield on the
30-year U.S. Treasury Bond (the "Long Bond") began the fiscal year at 7.10% and
ended the period at 5.93%. The tone of the municipal bond market is similar to
what I described last September in the Semiannual Report. In general, the
municipal market does not reward an investor for buying bonds much beyond 20
years in maturity, although on occasion I have found some interesting values.
And similar to last fall, I have been buying fewer BBB and A-rated bonds
compared to the past, because of their low yields relative to higher rated
bonds.
YOUR FUND'S PERFORMANCE: MORNINGSTAR 5 STARS
Your Fund's net asset value per share increased by $.57, or 5.2%, since March
31, 1997. I'm very pleased to say that your Fund's performance earned 5-star
ratings from Morningstar for the overall, 3-, and 5-year periods ended March 31,
1998, overall and among 1,525 and 782 funds, respectively, in the municipal bond
fund category.(2) The Fund's performance compared very favorably to its peer
group.
While past performance is no guarantee of future results, the Fund's dividend
distribution yield(3) for the past 12 months was 5.40%, as compared to the
Lipper's Virginia Municipal Debt Funds average of 4.62% for the 34 funds in the
category.(4) For the same period and category, the Fund's total return(5)
was 11.13% as compared to the Lipper average of 10.69%.
12 MONTH DIVIDEND YIELD
- -----------------------
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Virginia Bond Fund to the Lipper
Virginia Municipal Debt Funds Average from 3/31/92 to 3/31/98.
USAA Virginia Lipper Virginia Municipal
Bond Fund Yield Debt Funds Average Yield*
---------------- ------------------------
03/31/92 6.37% 6.17%
03/31/93 5.74% 5.58%
03/31/94 5.73% 5.40%
03/31/95 5.80% 5.17%
03/31/96 5.77% 4.97%
03/31/97 5.80% 4.91%
03/31/98 5.4% 4.62%
The graph represents data from 3/31/92 to 3/31/98.
* Refer to page 4 for the Lipper Average definition.
Past performance is no guarantee of future results.
(2) 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.
(3) 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.
(4) Refer to page 4 for the Lipper Average definition.
(5) Total return equals income return plus share price change and assumes
reinvestment of dividends and capital gains distributions.
THE STATE OF VIRGINIA
Virginia, with a diverse economic base, has enjoyed sound economic performance
over the last year. Unemployment was a low 3.2% compared to the national average
of 4.6% as of February, 1998. During 1997, employment growth in Virginia
exceeded the national rate. The state's above average per capita income provides
the framework for the high credit quality of Virginia bonds.
The political landscape has changed with the General Assembly now under divided
party control for the first time this century. Republicans lead the Senate and
Democrats control the House, both by narrow margins. Governor Gilmore is pushing
towards the reduction of the vehicle property tax, his central campaign issue.
Although an important funding source for local governments, the State may
provide offsetting revenues. We will closely monitor the implementation, but
given past history, we expect the State to act prudently.
Various localities are discussing the merits of including income taxes as a
local revenue source. Such a change would allow cities and counties to benefit
from Virginia's robust growth in personal income. A reliance on property taxes
tends to limit revenue growth since assessed values do not rise quickly during
strong economic expansions. We will closely monitor these and other issues that
might impact your Fund's holdings.
The table below compares the yield of the USAA Virginia Bond Fund with a taxable
equivalent investment.
To match the USAA Virginia Bond Fund's closing
30-Day SEC yield of 4.69% and:
- -----------------------------------------------------------------------------
Assuming a Virginia State Tax Rate of 5.75%
and a Marginal Federal Tax Rate of: 28% 31% 36% 39.6%
- -----------------------------------------------------------------------------
A fully taxable investment must pay: 6.91% 7.21% 7.78% 8.24%
- -----------------------------------------------------------------------------
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 Virginia Bond Fund to be:
Cash Equivalent - 1%, BBB - 18%, A - 18%, AA - 39%, AAA - 24%
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality to
category AAA account for 2.4% of the Fund's investments.
Note: Income may be subject to federal, state or local taxes, or the alternative
minimum tax.
See page 16 for a complete listing of the Portfolio of Investments in
Securities.
Investment Review
USAA VIRGINIA MONEY MARKET FUND
OBJECTIVE: Provide Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state income taxes, while
preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality Virginia tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will endeavor to maintain a constant
net asset value per share of $1.00.*
* An investment in 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 $113.3 Million $122.5 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
3.34% 2.99% 3.21% 3.35%
- -------------------------------------------------------------------------------
Total return equals income return and assumes reinvestment of all dividends and
any capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. Past
performance is no guarantee of future results. Yields and returns fluctuate. The
7-day yield quotation more closely reflects current earnings of the Fund than
the total return quotation.
7-DAY YIELD COMPARISON
- ------------------------
A chart in the form of a line graph appears here illustrating the comparison of
the 7 day Yield of the USAA Virginia Money Market Fund and the IBC Financial
Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose) (Tax-
Free): Money Funds.
USAA Virginia
Money Market Fund IBC Financial Data, Inc.
----------------- ------------------------
03/25/97 2.96% 2.7%
04/29/97 3.71% 3.48%
05/27/97 3.5% 3.24%
06/24/97 3.56% 3.27%
07/29/97 3.25% 3.02%
08/26/97 3.09% 2.79%
09/30/97 3.51% 3.25%
10/28/97 3.3% 3.03%
11/25/97 3.5% 3.2%
12/30/97 3.58% 3.27%
01/27/98 3.12% 2.82%
02/24/98 3.09% 2.66%
03/30/98 3.33%* 2.93%*
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): 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 11 out of 156 State Specific Tax-Exempt
Money Market Funds according to IBC Financial Data, Inc. with a compounded
dividend yield of 3.34%. The average for the category over the same period was
3.04%.
(1) Bond Buyer Index is the industry standard for yields of investment-grade
municipal bonds.
VIRGINIA
Virginia's economy performed well in 1997. Employment growth of 2.73% exceeded
the national rate of 2.20% in 1997, and unemployment in February 1998, was a low
3.2% compared to 4.6% nationally. The state continues to demonstrate very
conservative fiscal management, and this is reflected in the highest debt
ratings of "AAA" from all three major credit rating agencies. Fiscal 1998 is
expected to follow past trends and end with a sound general fund (the state's
primary operating fund) surplus.
The state is currently working on a plan to phase in a reduction of the vehicle
tax over a number of years. Because this is an important local government
funding source, the state is trying to offset any lost revenue at the local
level with state funds. We will continue to monitor how the tax reduction plan
is implemented and to what degree it pressures state and/or local government
finances. 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 Virginia Money Market Fund. The
data is from 10/15/90 to 3/31/98. The data points from the graph are as follows:
USAA Virginia Money Market Fund
Year Amount
- -------- -------
10/15/90 $10,000
10/31/90 $10,021
04/30/91 $10,278
10/31/91 $10,500
04/30/92 $10,687
10/31/92 $10,833
04/30/93 $10,960
10/31/93 $11,079
04/30/94 $11,193
10/31/94 $11,339
04/30/95 $11,532
10/31/95 $11,736
04/30/96 $11,925
10/31/96 $12,112
04/30/97 $12,300
10/31/97 $12,508
03/31/98 $12,676
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 21 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 Virginia Bond and USAA
Virginia 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 Virginia Bond and USAA Virginia 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 LLP
San Antonio, Texas
May 8, 1998
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 1998
<CAPTION>
USAA
USAA Virginia
Virginia Money Market
Bond Fund Fund
--------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $323,372 and $121,461, respectively) $343,654 $ 121,461
Cash 119 602
Receivables:
Capital shares sold 32 17
Interest 5,296 717
-------- ---------
Total assets 349,101 122,797
-------- ---------
LIABILITIES
Securities purchased 2,266 -
Capital shares redeemed 16 216
USAA Investment Management Company 97 20
USAA Transfer Agency Company 16 8
Accounts payable and accrued expenses 43 27
Dividends on capital shares 417 17
-------- ---------
Total liabilities 2,855 288
-------- ---------
Net assets applicable to capital shares outstanding $346,246 $ 122,509
======== =========
REPRESENTED BY:
Paid-in capital $326,249 $ 122,509
Accumulated net realized loss on investments (285) -
Net unrealized appreciation of investments 20,282 -
-------- ---------
Net assets applicable to capital shares outstanding $346,246 $ 122,509
======== =========
Capital shares outstanding 30,142 122,509
======== =========
Authorized shares of $.01 par value 45,000 175,000
======== =========
Net asset value, redemption price, and offering price per share $ 11.49 $ 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) Asset Guaranty Reinsurance Co.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance, Inc.
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
USAA VIRGINIA BOND FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
March 31, 1998
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (98.3%)
Virginia (84.0%)
$ 7,500 Augusta County IDA Hospital RB,
Series 1991a 7.00% 9/01/21 $ 8,296
Chesterfield County Health Center
Commission Mortgage RB,
1,500 Series 1996 5.95 12/01/26 1,597
12,195 Series 1996 6.00 6/01/39 12,975
College Building Auth. Educational
Facilities RB,
3,525 Series 1992 6.40 1/01/12 3,819
2,885 Series 1992 6.63 5/01/13 3,134
2,505 Series 1992 6.60 9/01/16 2,703
3,350 Series 1994 5.80 1/01/24 3,516
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/15 3,151
4,500 Covington IDA RB, Series 1994 6.65 9/01/18 5,027
2,250 Emporia GO, Series 1995 5.75 7/15/15 2,377
5,200 Fairfax County Economic Development
Auth. RB, Series 1991B 7.50 6/01/01 5,370
Fairfax County IDA RB,
10,750 Series 1993 5.00 8/15/23 10,704
15,180 Series 1996 6.00 8/15/26 16,294
2,000 Fairfax County Redevelopment and
Housing Auth. MFH RB, Series 1996A 6.00 12/15/28 2,101
1,500 Fairfax County Redevelopment and
Housing Auth. RB, Series 1989A
(CRE)a 7.50 11/01/19 1,612
12,000 Fairfax County Sewer RB,
Series 1996 (CRE)1 5.88 7/15/28 12,836
8,750 Galax IDA Hospital RB,
Series 1995 (CRE)2 5.75 9/01/20 9,098
1,000 Halifax County IDA Hospital RB,
Series 1998 5.25 9/01/17 985
Hampton Redevelopment and
Housing Auth. RB,
1,885 Series 1996A 5.88 7/20/16 1,964
1,255 Series 1996A 6.00 1/20/26 1,307
1,000 Hanover County IDA Hospital RB
(CRE)1 5.50 8/15/25 1,026
Henrico County IDA Residential and
Healthcare Facility RB,
1,025 Series 1997 6.10 7/01/20 1,040
2,070 Series 1997 6.15 7/01/26 2,098
2,500 Henry County IDA Hospital RB,
Series 1997 6.00 1/01/27 2,648
Housing Development Auth.
Commonwealth Mortgage RB,
5,440 Series 1992A 7.10 1/01/22 5,711
10,000 Series 1992A 7.10 1/01/25 10,498
1,455 Series 1992C 6.40 1/01/15 1,530
1,620 Series 1994D 6.40 7/01/17 1,710
3,000 Series 1994H, Subseries H-2 6.55 1/01/17 3,216
Housing Development Auth. MFH RB,
55,000 Series 1982A b 7.00 11/01/17 9,903
2,630 Series 1991F 7.10 5/01/13 2,789
4,220 Isle of Wight County IDA RB,
Series 1990 7.38 1/01/10 4,467
Loudoun County IDA Hospital RB,
3,000 Series 1995 (CRE)4 5.80 6/01/20 3,161
8,000 Series 1995 (CRE)4 5.80 6/01/26 8,441
6,000 Metropolitan District of Columbia
Airports Auth. RB 5.38 10/01/23 6,080
4,000 Norfolk Water RB, Series 1995
(CRE)1 5.88 11/01/20 4,279
9,090 Peninsula Ports Auth. Health
Systems RB, Series 1992A 6.25 7/01/21 9,526
11,000 Peninsula Ports Auth. RB,
Series 1992 (CRE)d 7.38 6/01/20 12,176
3,690 Pittsylvania County GO, Series
1994 6.00 7/01/14 3,977
1,000 Portsmouth Redevelopment and
Housing Auth. RB, Series 1997A 5.85 12/20/30 1,033
2,500 Prince William County IDA
Hospital RB, Series 1995 6.85 10/01/25 2,913
4,000 Prince William County Service Auth.
Water and Sewer RB, Series
1997 (CRE)3 4.75 7/01/29 3,723
4,710 Resources Auth. Railway Transportation
RB, Series 1990 7.13 10/01/15 4,879
Resources Auth. Sewer System RB,
3,985 Series 1992A 6.00 5/01/22 4,296
1,000 Series 1998 5.00 5/01/22 969
Resources Auth. Water and Sewer RB,
7,210 Series 1996A 5.63 4/01/27 7,495
1,620 Series 1997 5.30 11/01/22 1,639
2,200 Richmond Metropolitan Auth.
Expressway RB, Series 1998
(CRE)3,c 5.25 7/15/22 2,277
1,250 Roanoke County Educational
Facility IDA RB, Series 1998 5.25 3/15/23 1,238
4,250 Russell County IDA PCRB, Series G 7.70 11/01/07 4,631
1,250 Spotsylvania County GO, Series 1994 6.88 12/01/14 1,439
Upper Occoquan Sewage Auth. RB,
7,000 Series 1995A (CRE)1 5.15 7/01/20 7,136
8,000 Series 1995A (CRE)1 4.75 7/01/29 7,423
11,820 Virginia Beach Development Auth.
Hospital RB, Series 1991 6.30 11/01/21 12,726
1,000 Virginia Beach Development Auth.
Residential and Health Care
Facility RB, Series 1997 6.15 7/01/27 1,015
12,000 West Point IDA Solid Waste Disposal
RB, Series 1994Bd 6.25 3/01/19 12,934
6,000 Williamsburg IDA RB, Series 1993d 5.75 10/01/22 6,124
3,500 Winchester IDA RB, Series 1994
(CRE)2 6.75 10/01/19 3,912
Guam (2.8%)
1,000 Government Limited Obligation
Infrastructure Improvement RB,
Series 1989A (CRE) 7.10 11/15/09 1,071
8,050 Power Auth. RB, Series 1992A 6.30 10/01/22 8,563
Puerto Rico (11.5%)
Electric Power Auth. RB,
7,700 Series 1995Z 5.25 7/01/21 7,648
7,025 Series X 5.50 7/01/25 7,134
Highway and Transportation Auth. RB,
5,000 Series 1993X 5.00 7/01/22 4,843
8,600 Series 1996Y 5.50 7/01/26 8,809
Public Improvement GO,
3,800 Series 1998b 4.95 7/01/17 1,438
5,000 Series 1998b 4.95 7/01/18 1,800
9,000 Series 1998 4.50 7/01/23 8,119
--------
Total fixed rate instruments (cost: $320,087) 340,369
--------
VARIABLE RATE DEMAND NOTES (1.0%)
Virginia
Henrico County IDA RB,
100 Series 1986C (CRE) 3.75 7/15/16 100
3,185 Series 1994 (CRE) 4.00 5/01/24 3,185
---------
Total variable rate demand notes (cost: $3,285) 3,285
---------
Total investments (cost: $323,372) $ 343,654
=========
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Hospitals 24.2%
Water/Sewer Utilities - Municipal 14.4
Nursing/Continuing Care Centers 7.3
Electric/Gas Utilities - Municipal 6.8
Single-Family Housing 6.5
Education 6.2
General Obligations 5.5
Airport/Port 5.3
Paper & Forest Products 5.2
Multi-Family Housing 4.6
Special Assessment/Tax/Fee 3.9
Escrowed Bonds 2.9
Broadcasting - Radio & TV 1.5
Miscellaneous 1.4
Electric Utilities 1.3
Containers - Paper 1.3
Toll Roads .7
Sales Tax .3
-----
Total 99.3%
=====
<TABLE>
USAA VIRGINIA MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
March 31, 1998
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- -------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (70.5%)
<C> <S> <C> <C> <C>
Virginia
$ 5,893 Alexandria IDA RB, Series 1989 (CRE) 4.10% 1/01/09 $ 5,893
5,650 Arlington Public Improvement RB (CRE) 3.70 8/01/17 5,650
6,300 Bedford County IDA RB,
Series 1993 (CRE) 4.50 10/01/04 6,300
8,750 Chesterfield County IDA PCRB, Series 1993 3.85 8/01/09 8,750
5,600 Chesterfield County IDA RB,
Series 1989 (CRE) 3.75 2/01/03 5,600
5,450 Culpeper IDA RB, Series 1997 (CRE) 3.75 1/01/08 5,450
2,495 Fauquier County IDA RB,
Series 1994 (CRE) 3.70 12/01/14 2,495
1,860 Hampton Redevelopment and
Housing Auth. RB, Series 1996A (CRE) 3.65 6/15/26 1,860
Henrico County IDA RB,
3,965 Series 1986C (CRE) 3.75 7/15/16 3,965
1,020 Series 1994 (CRE) 4.00 5/01/24 1,020
5,680 Housing Development Auth. RB,
Series 1987A (CRE) 4.10 9/01/17 5,680
14,080 Loudoun County IDA Residential
Care Facility RB, Series 1994B (CRE) 4.30 11/01/24 14,080
1,600 Newport News Redevelopment and
Housing Auth. MFH RB,
Series 1984 (CRE) 3.75 11/01/06 1,600
Prince William County IDA RB,
5,600 Series 1988 (CRE) 3.79 6/30/04 5,600
1,031 Series 1989D (CRE) 3.70 10/01/00 1,031
522 Richmond IDA RB, Series 1989A (CRE) 3.70 6/01/02 522
Richmond Redevelopment and
Housing Auth. RB,
2,000 Series 1995 (CRE) 3.75 4/01/29 2,000
1,400 Series 1995A (CRE) 3.75 12/01/25 1,400
5,475 Roanoke IDA RB, Series 1994 3.85 12/01/13 5,475
1,940 Rockingham County IDA RB,
Series 1983A 3.90 10/01/20 1,940
---------
Total variable rate demand notes (cost: $86,311) 86,311
---------
PUT BONDS (21.8%)
Virginia
3,100 Chesterfield County IDA PCRB,
Series 1985 3.85 10/01/09 3,100
4,200 Fairfax County Hospital IDA RB,
Series 1993B 3.40 8/15/25 4,200
4,800 Hampton IDA Hospital Facilities RB,
Series 1997B 3.65 11/01/11 4,800
5,000 Housing Development Auth.
Commonwealth Mortgage RB,
Series 1997C 3.80 7/01/17 5,000
2,000 Peninsula Ports Auth. RB,
Series 1987A (CRE) 3.40 7/01/16 2,000
Prince William County IDA RB,
1,000 Series 1986 3.85 8/01/16 1,000
1,810 Series 1992 (CRE) 3.65 9/01/07 1,810
3,445 Richmond IDA RB, Series 1987A (CRE) 3.65 8/15/15 3,445
1,400 York County IDA PCRB, Series 1985 3.85 7/01/09 1,400
---------
Total put bonds (cost: $26,755) 26,755
---------
FIXED RATE INSTRUMENTS (6.8%)
Virginia
4,375 Commonwealth GO, Series 1996 5.38 6/01/98 4,387
1,000 Newport News Improvement Refunding
GO, Series 1988a 7.15 10/15/05 1,034
650 Norfolk IDA RB, Series 1997 (CRE)1 3.85 8/15/98 650
265 Peninsula Ports Auth. RB,
Series 1997 (CRE)1 3.85 8/15/98 265
2,000 Public Building Auth. RB, Series 1988Aa 7.00 8/01/00 2,059
---------
Total fixed rate instruments (cost: $8,395) 8,395
---------
Total investments (cost: $121,461) $ 121,461
=========
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Nursing/Continuing Care Centers 12.3%
Manufacturing - Diversified Industries 11.7
Community Service 10.4
Single-Family Housing 8.7
Hospitals 8.1
Paper & Forest Products 5.1
Buildings 4.6
Aerospace/Defense 4.6
Electric Utilities 4.5
Machinery - Diversified 4.5
Multi-Family Housing 4.5
General Obligations 3.6
Electric/Gas Utilities - Municipal 3.2
Real Estate Investment Trusts 2.8
Escrowed Bonds 2.5
Retail - General Merchandising 2.0
Airport/Port 1.6
Drugs 1.6
Retail - Food 1.5
Education 1.3
------
Total 99.1%
======
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.
(c) At March 31, 1998, the cost of securities purchased on a delayed delivery
basis for the USAA Virginia Bond Fund were $2.3 million.
(d) At March 31, 1998, these securities were segregated to cover delayed
delivery purchases.
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 1998
USAA
USAA Virginia
Virginia Money Market
Bond Fund Fund
------------------------
Net investment income:
Interest income $18,840 $ 4,394
------- -------
Expenses:
Management fees 1,063 388
Transfer agent's fees 200 105
Custodian's fees 76 53
Postage 16 12
Shareholder reporting fees 5 6
Directors' fees 4 4
Registration fees 5 2
Professional fees 20 18
Other 11 6
------- -------
Total expenses before reimbursement 1,400 594
Expenses reimbursed - (14)
------- -------
Total expenses after reimbursement 1,400 580
------- -------
Net investment income 17,440 3,814
------- -------
Net realized and unrealized gain on investments:
Net realized gain 1,317 -
Change in net unrealized appreciation/
depreciation 14,275 -
------- -------
Net realized and unrealized gain 15,592 -
------- -------
Increase in net assets resulting from operations $33,032 $ 3,814
======= =======
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<CAPTION>
USAA USAA
Virginia Virginia
Bond Fund Money Market Fund
----------------------------------------
1998 1997 1998 1997
----------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 17,440 $ 16,003 $ 3,814 $ 3,397
Net realized gain on investments 1,317 2,565 - -
Change in net unrealized appreciation/
depreciation of investments 14,275 (3,090) - -
-------- --------- --------- -------
Increase in net assets resulting from
operations 33,032 15,478 3,814 3,397
-------- --------- --------- -------
Distributions to shareholders from:
Net investment income (17,440) (16,003) (3,814) (3,397)
-------- --------- --------- -------
From capital share transactions:
Proceeds from shares sold 54,125 46,723 101,022 84,841
Dividend reinvestments 12,932 11,994 3,591 3,195
Cost of shares redeemed (29,317) (32,389) (95,434) (85,014)
-------- --------- -------- -------
Increase in net assets from
capital share transactions 37,740 26,328 9,179 3,022
-------- --------- -------- -------
Net increase in net assets 53,332 25,803 9,179 3,022
Net assets:
Beginning of period 292,914 267,111 113,330 110,308
-------- --------- -------- --------
End of period $346,246 $ 292,914 $122,509 $113,330
======== ========= ======== ========
Change in shares outstanding:
Shares sold 4,772 4,251 101,022 84,841
Shares issued for dividends reinvested 1,140 1,091 3,591 3,195
Shares redeemed (2,597) (2,955) (95,434) (85,014)
-------- --------- -------- --------
Increase in shares outstanding 3,315 2,387 9,179 3,022
======== ========= ======== ========
</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 Virginia Bond Fund and USAA Virginia Money Market Fund (the Funds). The
Funds have a common objective of providing Virginia investors with a high level
of current interest income that is exempt from federal and Virginia state income
taxes. The USAA Virginia Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation - Investments in the USAA Virginia Bond Fund are valued
each business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued by
the Service, and all other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 of the Investment Company Act of 1940, as amended, all securities
in the USAA Virginia Money Market Fund, are stated at amortized cost which
approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in Virginia municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, each Fund may borrow
from CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with
no markup. Subject to availability under its agreement with NationsBank, each
Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 15% of its total assets at
NationsBank's borrowing rate plus a markup. The Funds had no borrowings under
either of these agreements during the 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 Virginia Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $285 thousand which, if not offset by subsequent
capital gains will expire in 2003. It is unlikely that the Company's Board of
Directors will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been utilized or expire.
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 and
Virginia state 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 Virginia USAA Virginia
Bond Fund Money Market Fund
($000) ($000)
-----------------------------------
Purchases $82,699 $225,316
Sales/maturities $44,654 $212,565
For the USAA Virginia Bond Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at March 31, 1998
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------------------
USAA Virginia Bond Fund $20,492 $ 210 $20,282
(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.
<TABLE>
NOTES TO FINANCIAL STATEMENTS (Continued)
USAA VIRGINIA BOND FUND
March 31, 1998
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.92 $ 10.93 $ 10.76 $ 10.71 $ 11.16
Net investment income .62 .63 .63 .62 .62
Net realized and
unrealized gain (loss) .57 (.01) .17 .05 (.30)
Distributions from net
investment income (.62) (.63) (.63) (.62) (.62)
Distributions of realized
capital gains - - - - (.15)
-------- -------- -------- -------- --------
Net asset value at
end of period $ 11.49 $ 10.92 $ 10.93 $ 10.76 $ 10.71
======== ======== ======== ======== ========
Total return(%)* 11.13 5.82 7.57 6.61 2.69
Net assets at end
of period (000) $346,246 $292,914 $267,111 $238,920 $235,901
Ratio of expenses to
average net assets %) .44 .46 .48 .50 .49
Ratio of net investment
income to average
net assets(%) 5.48 5.76 5.74 5.95 5.44
Portfolio turnover(%) 14.24 26.84 27.20 27.77 92.17
</TABLE>
*Assumes reinvestment of all dividend income and capital gains distribution
during the period.
<TABLE>
NOTES TO FINANCIAL STATEMENTS (Continued)
USAA VIRGINIA MONEY MARKET FUND
March 31, 1998
(7) FINANCIAL HIGHLIGHTS (Continued)
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Year Ended March 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .03 .02
Distributions from net
investment income (.03) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- --------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return(%)* 3.34 3.14 3.42 2.91 2.14
Net assets at end
of period (000) $122,509 $113,330 $110,308 $ 98,049 $ 92,570
Ratio of expenses to
average net assets(%) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements(%) .51 .53 .55 .56 .61
Ratio of net investment
income to average
net assets(%) 3.29 3.10 3.36 2.88 2.12
</TABLE>
*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
