Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA California Bond Fund 4
USAA California Money Market Fund 10
Financial Information:
Portfolios of Investments:
USAA California Bond Fund 15
USAA California Money Market Fund 20
Notes to Portfolios of Investments 24
Statements of Assets and Liabilities 25
Statements of Operations 26
Statements of Changes in Net Assets 27
Notes to Financial Statements 28
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 California
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 CALIFORNIA BOND FUND
OBJECTIVE: Provide California investors with a high level of current interest
income that is exempt from federal and California state income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade California
tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/98 9/30/98
- --------------------------------------------------------------------------------
Net Assets $533.7 Million $594.2 Million
Net Asset Value Per Share $11.17 $11.47
- --------------------------------------------------------------------------------
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
5.42%+ 4.14%
- --------------------------------------------------------------------------------
* 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 8/1/89 8.07% = 6.26% + 1.81%
5 Years 6.71% = 5.88% + .83%
1 Year 10.15% = 5.69% + 4.46%
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS
FOR THE 9-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 California Bond Fund for the
9-year period ended September 30, 1998.
Total Return for Years Ended:
- ----------------------------
9/30/89 -1.73%*
9/30/90 6.19%
9/30/91 13.17%
9/30/92 9.38%
9/30/93 13.96%
9/30/94 -5.14%
9/30/95 11.24%
9/30/96 8.34%
9/30/97 9.85%
9/30/98 10.15%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
9/30/89 1.07%*
9/30/90 6.91%
9/30/91 7.26%
9/30/92 6.54%
9/30/93 6.35%
9/30/94 5.06%
9/30/95 6.47%
9/30/96 6.02%
9/30/97 5.97%
9/30/98 5.69%
Change in Share Price:
- ---------------------
9/30/89 -2.80%
9/30/90 -0.72%
9/30/91 5.91%
9/30/92 2.84%
9/30/93 7.61%
9/30/94 -10.20%
9/30/95 4.77%
9/30/96 2.32%
9/30/97 3.88%
9/30/98 4.46%
* This does not cover a 12 month period.
** Compounded Dividend yield calculation includes only income distributions.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. Dividend return is
the income dividends received over the period assuming reinvestment of all
dividends. Share price change is the change in net asset value over the period
adjusted for capital gain distributions. No adjustment has been made for taxes
payable by shareholders on their reinvested dividends and capital gain
distributions. The performance data quoted represent past performance and are
not an indication of future results. Investment return and principal value of an
investment will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
COMPARISON - 12 MONTH DIVIDEND YIELD
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA California Bond Fund to the 12 Month
Dividend Yield of the Lipper California Municipal Debt Funds Average from
9/30/90 to 9/30/98.
USAA California Bond Lipper California Municipal
Fund Yield Debt Funds Average Yield
-------------------- ---------------------------
9/30/90 6.82% 6.79%
9/30/91 6.53% 6.42%
9/30/92 6.10% 6.08%
9/30/93 5.41% 5.36%
9/30/94 5.84% 5.79%
9/30/95 5.80% 5.35%
9/30/96 5.70% 5.09%
9/30/97 5.48% 4.85%
9/30/98 5.18% 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 9/30/90 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 California Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper California Municipal Debt Funds
Average. The data is from 8/1/89 through 9/30/98. The data points from the graph
are as follows:
USAA California Bond Fund
Year Amount
- ---- ------
08/01/89 $10,000
09/30/89 $ 9,827
03/31/90 $10,197
09/30/90 $10,435
03/31/91 $11,161
09/30/91 $11,809
03/31/92 $12,224
09/30/92 $12,917
03/31/93 $13,758
09/30/93 $14,720
03/31/94 $13,800
09/30/94 $13,964
03/31/95 $14,751
09/30/95 $15,534
03/31/96 $16,130
09/30/96 $16,829
03/31/97 $17,196
09/30/97 $18,487
03/31/98 $19,316
09/30/98 $20,363
Lehman Brothers Municipal Bond Index
Year Amount
- ---- ------
08/01/89 $10,000
09/30/89 $ 9,872
03/31/90 $10,297
09/30/90 $10,543
03/31/91 $11,247
09/30/91 $11,934
03/31/92 $12,371
09/30/92 $13,181
03/31/93 $13,919
09/30/93 $14,861
03/31/94 $14,242
09/30/94 $14,498
03/31/95 $15,301
09/30/95 $16,119
03/31/96 $16,583
09/30/96 $17,093
03/31/97 $17,486
09/30/97 $18,634
03/31/98 $19,360
09/30/98 $20,258
Lipper California Municipal Debt Funds Average
Year Amount
- ---- ------
08/01/89 $10,000
09/30/89 $ 9,869
03/31/90 $10,228
09/30/90 $10,392
03/31/91 $11,036
09/30/91 $11,705
03/31/92 $12,076
09/30/92 $12,809
03/31/93 $13,588
09/30/93 $14,552
03/31/94 $13,860
09/30/94 $13,953
03/31/95 $14,690
09/30/95 $15,324
03/31/96 $15,788
09/30/96 $16,338
03/31/97 $16,615
09/30/97 $17,793
03/31/98 $18,456
09/30/98 $19,373
Data since inception on 8/1/89 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 California Municipal Debt Funds Average is the average
performance level of all California 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, Robert R. Pariseau, CFA, appears here.]
MUNICIPALS ON SALE?
The yield on the 30-year U.S. Treasury bond(1) (the Long Bond) fell almost a
full 1%, closing at 4.98%, during the six-month period ending on September 30,
1998. The yield on the Bond Buyer 40-Bond Index(2) (BBI40) fell less. It began
the period at 5.27% and ended at 5.04%. The current relationship between U.S.
Treasury and municipal bonds implies that an investor can buy a municipal long
bond at nearly the same yield as the U.S. Treasury long bond and receive the tax
exemption feature to boot.
ROUND UP THE USUAL SUSPECTS --
SUPPLY & DEMAND
Why have the municipal and U.S. Treasury markets reacted the way they have?
Although the different fixed income market sectors tend to move together over
time, relative performance often varies during shorter periods. Typically, the
greatest influence on market prices is supply and demand.
Supply of U.S. Treasury bonds has been stable thanks to the budget surplus,
while demand has been very strong - especially from skittish foreign and stock
market investors. Foreign investors, who cannot benefit from a U.S. tax-exempt
security, prefer the widely quoted and more liquid U.S. Treasury bonds.
Municipal bonds are in ample supply, thanks to a near record level of
refinancing. Demand has been positive but restrained. Municipal prices have
moved generally with the market, but not as much as the U.S. Treasury bonds
which are more "in demand." Why should investors consider the municipal market
today? For the same reasons as before. When compared to taxable bonds for those
investors in the 28% federal income tax bracket and higher, municipal bonds
typically generate the highest tax-equivalent yields for a very reasonable level
of risk.
MARKET OUTLOOK
In late September, the Federal Reserve Board reduced the interbank lending (Fed
Funds) rate by .25% to 5.25%, the first reduction since January 1996. Chairman
Greenspan is concerned that the financial crisis in emerging foreign markets may
infect the more developed nations including the United States. A growing number
of economists believe that recessions could envelop a number of important U.S.
trading partners. Mr. Greenspan appears less concerned about the outlook for the
American economy. Our economy is beginning to show the first signs of
cooling-off after years of brisk economic expansion. In this current economic
environment, inflationary expectations are very low which should be favorable
for the bond markets.
STRATEGY
I focus primarily on generating maximum tax-exempt income with the goal of
producing the best after-tax total return over a 3 to 5 year investment horizon.
I remain fully invested in long-term, investment-grade municipal bonds. There
are no exotic derivatives or futures contracts to leverage or hedge the
portfolio. I have no intention of purchasing municipal bonds that are subject to
the federal alternative minimum tax (AMT) for individuals. Of course, I would
certainly advise our shareholders if there is a change in the Federal Tax Code
that compels me to reconsider my position on the AMT.
THE PORTFOLIO IS A SUM OF ITS PARTS -- DISCOUNT & PREMIUM BONDS
I consider how each bond will fit and interact with the rest of the portfolio.
In a sense, different types of bonds play different roles, in particular,
discount and premium bonds. While a relatively small percentage of the Fund is
invested in zero coupon bonds (zero coupons), a much larger percentage is
invested in bonds originally purchased at their stated face value, or "par," but
when interest rates were higher. Some of these bonds are priced at significant
premiums above par. While these premium bonds contribute very nicely to your
monthly dividend, over time they expose the portfolio to significant coupon
reinvestment and call risk (early redemption risk). In addition, premium bonds
are less sensitive to the changes in interest rates.
WHAT IS A ZERO COUPON BOND?
A zero coupon bond is a security that makes no periodic coupon(3) payments, but
instead is sold at a deep discount from its face value. A zero coupon bond
gradually appreciates in value at the market rate of interest until the bond is
worth the stated face value at maturity. The current Federal Tax Code requires
that we account for this gradual increase by distributing it as tax-exempt
interest. As interest accrues on all of the bonds in the portfolio, including
the zero coupons, shareholders are paid monthly dividends.
Since the compounding interest rate never changes, zero coupons have no
reinvestment risk, unlike coupon bonds. In addition, because of the single lump
sum payment at maturity, the market value of a zero coupon bond is very
sensitive to changes in interest rates.
HOW DO ZERO COUPON BONDS ADD UP?
In summary, zero coupon bonds are an excellent complement to my yield strategy
for two reasons:
- Zero coupons accrue and distribute interest typically at yields higher
than coupon bonds of equal maturity priced near par.
- Zero coupons offset the Fund's less interest-rate sensitive, premium bonds
by significantly contributing to total return performance in strong
markets.
YOUR FUND'S PERFORMANCE -- MORNINGSTAR 5-STAR FUND
I'm very pleased to say that your Fund's performance earned 5-star ratings from
Morningstar for the overall, 3-, and 5-year periods ended September 30, 1998,
overall and among 1,581 and 943 funds, respectively, in the municipal bond fund
category.(4) The Fund's performance compared very favorably to its peer group.
Your Fund's net asset value (NAV) per share increased by $.30, or 2.69%, since
March 31, 1998.
While past performance is no guarantee of future results, the Fund's annualized
dividend distribution yield(5) for the past 6 months was 5.15%, as compared to
the Lipper California Municipal Debt Funds Average of 4.44% for the 107 funds in
the category.(6) For the same period and category, the Fund's total return(7)
was 5.42% as compared to the Lipper Average of 4.83%.
THE STATE OF CALIFORNIA
The State of California is on a roll. Last year's personal income growth of 7.3%
was well above the nation's 5.6% gain. While still lagging national levels,
unemployment has fallen steadily and reached an eight-year low of 5.7% in July
1998. The current economic outlook remains very favorable, but the state's
exposure to international trade is a concern.
Completed six weeks late, the 1998-99 state budget contained spending increases,
primarily for education, and $1.4 billion of tax cuts. The most notable tax cut
was a reduction in vehicle license fees (VLF). In the past, VLF revenues were
directly transferred to cities and counties. Subject to appropriation, the new
budget requires the state to offset the lost VLF revenues. As a result, local
governments must now depend upon the state for what used to be a highly reliable
revenue source. However, our concern is that the state's generosity may falter
during lean years. Meanwhile, the state incurs an additional budget commitment.
By the 1999-2000 fiscal year, VLF cuts will cost the state about $1 billion
annually.
As part of our surveillance, we monitor statewide ballot initiatives and
litigation that may affect municipal securities. In August, the California
Supreme Court ruled unanimously in favor of the City of San Diego with regard to
the lease financing of its convention center's expansion. The high court ruled
that lease revenue bonds issued through "joint power agencies" do not qualify as
debt for local governments and, therefore, do not require two-thirds voter
approval for issuance. I'm not very positive on local municipal lease
obligations that are subject to annual appropriation. The Supreme Court has
eliminated some legal risk. I remain cautious concerning local governments'
ability and willingness to pay lease obligations, if California should suffer
another economic downturn similar to the 1990-94 recession.
Reflecting California's improved credit quality, Moody's Investors Service
upgraded the state's general obligation bond rating to AA3 from A1 on October 5,
1998, following Fitch IBCA's upgrade to AA- last year. Standard & Poor's
maintain its A+ rating (with a positive outlook).
Past performance is no guarantee of future results.
(1) The 30-year U.S. Treasury Bond is generally considered the benchmark for
U.S. long-term interest rates.
(2) The Bond Buyer 40-Bond Index is the industry standard for the yield of
long-term, investment-grade municipal bonds.
(3) A bond's coupon is the fixed amount of interest that is paid annually stated
as a percentage of face value, normally $1000. For example, a 6.5% coupon pays
$65 (6.5% times $1000 = $65) normally in two semiannual payments of $32.50 for
the life of the bond.
(4) Morningstar proprietary ratings reflect historical risk-adjusted performance
through September 30, 1998. The ratings are subject to change monthly. The
ratings are calculated from the Fund's 3-, 5-, and 10-year average annual total
returns, as applicable, in excess of 90-day Treasury bill returns with
appropriate fee adjustments, and a risk factor that reflects fund performance
below 90-day Treasury bill returns. There is a 3-year minimum performance
requirement before a fund is rated. Overall rating is a weighted average of a
fund's 3-, 5-, and 10-year ratings, as applicable. The top ten percent of the
funds in a rating category receive five stars and the next 22.5% receive four
stars.
(5) Dividend yield is computed by dividing income dividends paid during the
previous 6 months by the latest month-end net asset value adjusted for capital
gain distributions and annualizing the result.
(6) Refer to page 5 for the Lipper Average definition.
(7) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
To match the USAA California Bond Fund's closing 30-Day SEC yield of 4.14% and:
- --------------------------------------------------------------------------------
Assuming a California State Tax Rate of: 4.00% 8.00% 9.30% 9.30% 9.30%
and a Marginal Federal Tax Rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully Taxable Investment must pay: 5.08% 6.26% 6.62% 7.14% 7.56%
- --------------------------------------------------------------------------------
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 California Bond Fund to be:
AAA - 38%; A - 31%; BBB - 21%; AA - 9%; Cash Equivalent - 1%.
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality to
categories AAA and BBB account for 1.5% and .4%, respectively, of the Fund's
investments.
Note: Income may be subject to federal, state or local taxes, or the alternative
minimum tax.
See page 15 for a complete listing of the Portfolio of Investments.
Investment Review
USAA CALIFORNIA MONEY MARKET FUND
OBJECTIVE: Provide California investors with a high level of current interest
income that is exempt from federal and California state income taxes, while
preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: High quality California 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 $431.8 Million $361.7 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY YIELD AS OF 9/30/98
- --------------------------------------------------------------------------------
3/31/98 Since Inception 7-Day
to 9/30/98 1 Year 5 Years on 8/1/89 Yield
1.63%+ 3.29% 3.16% 3.58% 3.51%
- --------------------------------------------------------------------------------
+ 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 California Money Market Fund and the IBC Financial
Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose) (Tax-Free):
California Money Funds.
USAA California
Money Market Fund IBC Financial Data, Inc.
----------------- ------------------------
09/30/97 3.58% 3.21%
10/28/97 3.30% 2.97%
11/25/97 3.54% 3.14%
12/30/97 3.63% 3.22%
01/27/98 3.12% 2.75%
02/24/98 3.09% 2.58%
03/31/98 3.29% 2.89%
04/28/98 3.78% 3.36%
05/26/98 3.49% 3.07%
06/30/98 3.31% 2.86%
07/28/98 3.18% 2.73%
08/25/98 2.81% 2.30%
09/29/98 3.44%* 2.98%*
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): California 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 2 out of 44 California Money Market
Funds according to IBC Financial Data, Inc.(4) with a compounded dividend yield
of 3.29%. The average for the category over the same period was 2.84%.
CALIFORNIA
California's economy continues to improve. Personal income growth of 7.3% last
year was well above the nation's 5.6% gain. Unemployment, while still below
national levels, has fallen steadily and reached an eight-year low of 5.7%
(seasonally adjusted) in July 1998. The current economic outlook remains
favorable, although exposure to potential weakness in international trade is
noted.
Positive financial results for 1997-98 reflect strong revenue growth. The State
Department of Finance estimates that the state's budget reserve improved from
$639.8 million as of June 30, 1997, to nearly $1.8 billion on June 30, 1998. The
1998-99 Budget Act projects a reduction in this reserve to $1.26 billion,
approximately 2% of General Fund revenues.
Continuing a trend of missed budget deadlines, the 1998-99 budget was ratified
six weeks late. This budget is most notable for certain spending increases and
the agreement on $1.4 billion of tax cuts. Spending increases are primarily
occurring in education, criminal justice, and health/welfare. The primary
component of the tax cuts was a phased-in reduction in vehicle license fees
(VLF). Reflecting California's improved credit quality, Fitch IBCA upgraded the
state's general obligation bond rating to AA- from A+ in October 1997. Moody's
Investors Service and Standard & Poor's maintain their A1 and A+ ratings,
respectively, (with positive outlooks) on the State's general obligation debt.
Statewide initiatives and litigation affecting municipal securities are
monitored on an ongoing basis as part of our surveillance. In August, the
California Supreme Court ruled in favor of the City of San Diego with regard to
the lease financing of its convention center expansion utilizing a joint powers
agency. In a unanimous vote, the high court ruled that lease revenue bonds
issued through joint power agencies do not qualify as debt for local governments
and, therefore, do not require two-thirds voter approval for issuance. A
different decision would have had negative implications for municipal issuers
throughout the state.
(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 California Money Market Fund.
The data is from 8/01/89 to 9/30/98. The data points from the graph are as
follows:
USAA California Money Market Fund
Year Amount
- ---- ------
08/01/89 $10,000
09/30/89 $10,089
03/31/90 $10,370
09/30/90 $10,655
03/31/91 $10,935
09/30/91 $11,170
03/31/92 $11,375
09/30/92 $11,539
03/31/93 $11,678
09/30/93 $11,812
03/31/94 $11,937
09/30/94 $12,086
03/31/95 $12,288
09/30/95 $12,512
03/31/96 $12,728
09/30/96 $12,934
03/31/97 $13,139
09/30/97 $13,362
03/31/98 $13,579
09/30/98 $13,801
Data since inception on 8/1/89 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 20 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) College Construction Loan Insurance Association.
The insurance does not guarantee the market value of the municipal bonds.
PORTFOLIO DESCRIPTION ABBREVIATIONS
COP Certificate of Participation
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development
Authority/Agency
IDRB Industrial Development
Revenue Bond
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TRAN Tax Revenue Anticipation Note
USAA CALIFORNIA 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 (97.4%)
<C> <S> <C> <C> <C>
California (93.7%)
Adelanto School District GO,
$ 4,715 Series 1997A (CRE) (1), (c) 5.67% 9/01/21 $ 1,541
5,530 Series 1997A (CRE) (1), (c) 5.67 9/01/22 1,719
3,000 Alameda Housing Auth. MFH RB, Series 1998A 5.35 2/20/31 3,047
7,500 Antelope Valley Healthcare District RB,
Series 1997B (CRE) (4) 5.20 1/01/27 7,657
2,000 Association of Bay Area Governments Finance
Auth. for Nonprofit Corporations COP,
Series 1998 (CRE) 5.13 5/15/23 2,007
Burbank Unified School District GO,
4,025 Series 1998B (CRE) (3), (c) 5.30 8/01/22 1,257
3,130 Series 1998B (CRE) (3), (c) 5.30 8/01/23 929
4,210 Campbell Union School District GO,
Series 1998 (CRE) (3), (c) 5.20 8/01/19 1,534
30,000 Central Valley Finance Auth. RB, Series
1993 (a) 6.20 7/01/20 33,793
Commerce Community Development Commission
Tax Allocation Bonds,
3,740 Series 1997A, Project #1 (CRE) (1), (c) 5.50 8/01/22 1,168
3,740 Series 1997A, Project #1 (CRE) (1), (c) 5.50 8/01/23 1,110
Contra Costa Water District RB,
7,175 Series D (CRE) (2), (a) 6.38 10/01/22 8,070
2,650 Series G (CRE) (1) 5.50 10/01/19 2,805
Department of Water Resources RB,
11,000 Series K (a) 6.00 12/01/21 12,094
5,400 Series L 5.75 12/01/19 5,748
5,000 Desert Hospital District COP (CRE) (4),(a) 6.39 7/28/20 5,547
Educational Facilities Auth. RB,
9,500 Series 1991 (a) 7.15 5/01/21 10,548
5,000 Series 1992 6.00 2/15/17 5,399
1,775 Series 1992 (a) 6.88 9/01/22 2,022
8,990 Series 1992 (a) 6.50 10/01/22 10,139
9,000 Series 1994 (CRE) (5) 6.20 5/01/21 10,061
8,015 Series 1995 6.00 10/01/25 8,679
8,050 Series 1995A 5.60 12/01/20 8,544
Fallbrook Union High School District GO,
3,000 Series 1998 (CRE) (3), (c) 5.40 9/01/18 1,147
3,360 Series 1998 (CRE) (3), (c) 5.40 9/01/19 1,219
Fontana Unified School District GO Convertible
Zero Coupon,
2,500 Series 1990D (CRE) (3), (c) 5.80 5/01/17 2,532
2,000 Series 1990D (CRE) (3), (c) 5.85 5/01/22 2,017
8,270 Foothill/Eastern Transportation Corridor
Agency RB, Series 1995A 5.00 1/01/35 8,127
2,330 Fresno COP, Series 1991 8.50 5/01/16 2,488
Health Facilities Financing Auth. RB,
8,000 Series 1990 (a) 7.50 10/01/10 8,765
6,500 Series 1990A (CRE) 7.70 9/01/10 7,087
35,000 Series 1990A 6.50 12/01/20 37,412
11,500 Series 1991 (CRE) (a) 6.75 6/01/21 12,406
3,175 Series 1992A (CRE) (1) 6.38 10/01/22 3,511
5,000 Series 1993A 5.40 5/01/28 5,167
3,500 Series 1993C 5.60 5/01/33 3,653
2,000 Series 1994 (CRE) 6.50 9/01/14 2,239
5,000 Series 1994A 6.63 7/01/18 5,625
1,000 Series 1997A (CRE) 5.50 1/01/19 1,052
2,320 Series 1998A (CRE) 5.25 5/01/21 2,362
3,325 Series 1998A (CRE) 5.30 11/01/28 3,397
4,180 Hollister Joint Powers Financing Auth. RB 5.90 12/01/23 4,392
Housing Finance Agency Home Mortgage RB,
865 Series 1988F 7.88 8/01/19 884
10,310 Series 1991F 6.85 8/01/17 11,009
5,990 Series 1994A 6.55 8/01/26 6,481
3,000 Housing Finance Agency MFH RB,
Series 1996A (CRE) (2) 6.05 8/01/27 3,211
1,500 Housing Finance Agency RB, Series 1997D 5.85 8/01/17 1,607
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/25 5,900
Metropolitan Water District RB,
5,000 Series 1992 5.50 7/01/19 5,188
5,000 Series 1998A 4.75 7/01/22 4,919
12,000 Modesto Irrigation District RB,
Series 1992A (CRE) (2), (a) 6.13 9/01/19 13,359
3,000 Mojave Water Agency Improvement District GO,
Series 1992 (a) 6.60 9/01/22 3,393
Montebello Unified School District GO,
2,350 Series 1998 (CRE) (3), (c) 5.30 8/01/21 771
2,405 Series 1998 (CRE) (3), (c) 5.30 8/01/22 751
2,455 Series 1998 (CRE) (3), (c) 5.30 8/01/23 729
Murrieta Valley Unified School District GO,
4,855 Series 1998A (CRE) (3), (c) 5.28 9/01/18 1,856
5,000 Series 1998A (CRE) (3), (c) 5.30 9/01/20 1,726
5,255 Series 1998A (CRE) (3), (c) 5.30 9/01/22 1,634
New Haven Unified School District GO,
14,725 Series 1996B (CRE) (3), (c) 6.10 8/01/22 4,267
10,975 Series 1997A (CRE) (4), (c) 5.52 8/01/21 3,099
10,415 Pleasanton Joint Powers Financing Auth. RB,
Series 1993A 6.15 9/02/12 11,287
13,400 Riverside County Public Financing Auth. Tax
Allocation RB, Series 1997A 5.63 10/01/33 14,005
Sacramento Cogeneration Auth. RB,
6,500 Series 1995 (a) 6.50 7/01/21 7,643
6,000 Series 1995 6.00 7/01/22 6,502
3,700 Sacramento Power Auth. RB, Series 1995 5.88 7/01/15 3,975
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/25 7,576
San Joaquin Hills Transportation Corridor
Agency RB,
13,500 Senior Lien (a) 6.75 1/01/32 15,414
97,650 Series 1997A (CRE) (1), (c) 5.67 1/15/32 18,895
10,035 San Joaquin Hills Transportation Corridor
Agency Senior Lien RB 5.00 1/01/33 9,849
11,320 San Mateo Sewer RB, Series 1992 (CRE) (2) 6.30 8/01/17 12,493
San Ramon Valley Unified School District GO,
9,305 Series 1998A (CRE) (3), (c) 5.25 7/01/17 3,785
9,635 Series 1998A (CRE) (3), (c) 5.25 7/01/18 3,714
12,455 Southern California Public Power Auth. RB,
Series 1989 (CRE) 6.00 7/01/18 12,781
2,000 State GO, Series 1998 5.00 10/01/23 2,009
Statewide Communities Development Auth. COP,
13,500 Huntington Memorial Hospital (CRE) (5) 5.80 7/01/26 14,535
5,420 Lutheran Homes (CRE) 5.75 11/15/21 5,826
4,000 San Gabriel Valley (CRE) 5.50 9/01/14 4,185
1,055 The Arc of San Diego (CRE) 5.63 5/01/21 1,122
1,000 Stockton Health Facilities RB, Series 1997A 5.70 12/01/14 1,032
Suisun City Public Financing Auth. RB,
17,855 Series A (c) 5.37 10/01/28 3,816
20,080 Series A (c) 5.37 10/01/33 3,307
Univ. of California RB,
12,000 Series 1991A (a) 6.88 9/01/16 13,684
4,000 Series 1996 (CRE) (2) 5.75 7/01/24 4,365
18,000 Vallejo Sanitation and Flood Control COP,
Series 1993 (CRE) (3) 5.00 7/01/19 18,697
Washington Township Hospital RB,
9,500 Series 1993 5.50 7/01/18 9,777
7,845 Series 1993 5.25 7/01/23 7,949
Watsonville Hospital RB,
5,000 Series 1995A (CRE) 6.35 7/01/24 5,849
1,515 Series 1996A (CRE) 6.20 7/01/12 1,758
Puerto Rico (3.7%)
Electric Power Auth. RB,
10,500 Series 1995Z 5.25 7/01/21 10,687
10,000 Series X (a) 6.13 7/01/21 11,486
- -------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $521,022) 578,803
- -------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (1.4%)
California
2,345 Economic Development Financing Auth. RB,
Series 1998A (CRE) 4.00 4/01/08 2,345
100 Irvine Ranch Water District RB, Series
1985 (CRE) 3.95 10/01/00 100
600 Pollution Control Financing Auth. PCRB,
Series 1997A (CRE) 4.00 12/01/18 600
5,200 Statewide Communities Development Auth. COP,
Series 1996 (CRE) 3.85 6/01/26 5,200
- -------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $8,245) 8,245
- -------------------------------------------------------------------------------------------
Total investments (cost: $529,267) $587,048
===========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Escrowed Bonds 28.4%
Hospitals 19.7
Water/Sewer Utilities - Municipal 9.1
General Obligations 6.5
Toll Roads 6.2
Real Estate Tax/Free 5.9
Electric/Gas Utilities - Municipal 5.7
Education 5.5
Single-Family Housing 3.4
Multi-Family Housing 3.3
Nursing/Continuing Care Centers 2.7
Healthcare - Miscellaneous 1.5
Electric Utilities .5
Buildings .4
----
Total 98.8%
====
USAA CALIFORNIA 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 (69.4%)
<C> <S> <C> <C> <C>
California (69.0%)
$ 2,000 Alameda County IDA IDRB, Series 1994 4.10% 6/01/04 $ 2,000
4,000 Berkeley YMCA RB, Series 1993 (CRE) 3.65 6/01/23 4,000
1,395 Central Unified School District COP,
Series 1995 (CRE) 4.10 6/01/15 1,395
4,500 Contra Costa County MFH RB,
Series 1990A (CRE) 4.00 8/01/07 4,500
8,500 Corona MFH RB, Series 1985B (CRE) (b) 3.80 2/01/05 8,500
7,280 Covina Redevelopment Agency MFH RB,
Series 1994A (CRE) 4.00 12/01/15 7,280
5,565 Economic Development Financing Auth. RB,
Series 1998A (CRE) 4.00 4/01/08 5,565
4,250 Educational Facilities Auth. RB,
Series 1997 (CRE) 3.60 3/01/27 4,250
2,700 Fillmore COP, Series 1997 (CRE) 4.35 5/01/29 2,700
13,800 Foothill/Eastern Transportation Corridor
Agency RB, Series 1995D (CRE) 3.60 1/02/35 13,800
Fremont COP,
4,175 Series 1990 (CRE) 4.50 7/01/15 4,175
2,500 Series 1991 (CRE) 4.50 8/01/22 2,500
2,000 Series 1998 (CRE) 3.55 8/01/28 2,000
2,070 Hesperia Public Financing Auth. Lease RB,
Series 1998B (CRE) 4.10 6/01/22 2,070
4,900 Huntington Beach MFH RB, Series 1985A (CRE) 4.00 2/01/10 4,900
4,750 Irvine Ranch Water District RB,
Series 1988A (CRE) 3.95 11/15/13 4,750
9,000 Lancaster MFH RB, Series 1984A (CRE) (b) 3.25 11/01/04 9,000
6,855 Loma Linda Water RB, Series 1995 (CRE) 4.10 6/01/25 6,855
6,915 Los Angeles County Housing Auth. MFH RB,
Series 1994B (CRE) 4.00 9/01/18 6,915
4,300 Monrovia Redevelopment Agency COP,
Series 1984 (CRE) 3.60 12/01/14 4,300
2,625 Montebello Public Improvement Corp. COP,
Series 1997B (CRE) 4.30 4/01/25 2,625
7,500 Monterey County Financing Auth. RB,
Series 1995A (CRE) 3.75 9/01/36 7,500
8,715 Moreno Valley COP, Series 1997 (CRE) 4.35 6/01/27 8,715
2,400 Ontario Redevelopment Agency Housing
Financing RB, Series 1997A (CRE) 4.25 9/01/27 2,400
Orange County Apartment Development RB,
8,100 Series 1984D (CRE) 4.13 8/01/19 8,100
6,000 Series 1985D (CRE) 5.00 4/01/06 6,000
14,145 Series 1992B (CRE) 4.00 11/01/05 14,145
4,600 Orange County District 88-1 Improvement RB,
Series 1988 (CRE) 4.00 9/02/18 4,600
Pollution Control Financing Auth. PCRB,
7,400 Series 1996C (CRE) 3.70 11/01/26 7,400
3,650 Series 1997A (CRE) 4.00 12/01/18 3,650
11,300 Rialto Public Financing Auth. RB,
Series 1998A (CRE) 4.35 9/01/27 11,300
Sacramento County MFH RB,
4,300 Series 1985B (CRE) 4.60 4/15/07 4,300
7,000 Series 1985C (CRE) 4.60 4/15/07 7,000
5,000 Series 1996C (CRE) 4.85 12/01/21 5,000
4,000 Series 1996D (CRE) 4.85 12/01/21 4,000
8,200 San Bernardino County COP, Series 1996 (CRE) 4.35 11/01/25 8,200
5,025 San Bernardino IDA RB, Series 1992 (CRE) 4.05 2/01/12 5,025
8,300 San Diego MFH RB, Series 1993A (CRE) 4.00 12/01/15 8,300
4,300 Santa Clara County Transit District RB,
Series 1985A (CRE) 4.60 6/01/15 4,300
Statewide Communities Development Auth. COP,
3,775 Series 1992 (CRE) 4.00 11/01/22 3,775
2,200 Series 1992 (CRE) 3.80 12/01/22 2,200
100 Series 1996 (CRE) 3.85 6/01/26 100
3,500 Series 1998 (CRE) 4.20 6/01/13 3,500
16,000 Torrance Hospital RB, Series 1992 (CRE) 3.75 2/01/22 16,000
Puerto Rico (0.4%)
1,600 Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing
Auth. RB, Series 1995A (CRE) 3.55 1/01/15 1,600
- ---------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $251,190) 251,190
- ---------------------------------------------------------------------------------------------
PUT BONDS (4.3%)
California
2,660 Pollution Control Financing Auth. PCRB,
Series 1984 3.65 5/15/02 2,660
12,700 Public Capital Improvement Finance Auth. RB,
Series 1988C (CRE) 3.45 6/01/28 12,700
- ---------------------------------------------------------------------------------------------
Total put bonds (cost: $15,360) 15,360
- ---------------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (25.3%)
California (24.4%)
12,000 Alameda County TRAN, Series 1998 4.50 7/07/99 12,080
2,350 Auburn Union School District TRAN,
Series 1997 4.25 10/13/98 2,350
3,400 Long Beach TRAN, Series 1997 4.50 10/08/98 3,400
1,105 Loomis Union Elementary School District TRAN,
Series 1998 4.00 9/21/99 1,112
15,000 Los Angeles Department of Water and Power CP,
Series 1998 (CRE) 3.25 2/10/99 15,000
3,000 Placer Union High School District TRAN,
Series 1998 4.00 9/21/99 3,018
3,330 Rocklin Union School District TRAN,
Series 1998 4.00 9/21/99 3,350
4,000 San Francisco City and County TRAN,
Series 1998 4.50 9/22/99 4,042
10,500 San Ramon Valley Unified School District TRAN,
Series 1997 4.00 11/11/98 10,501
10,000 State GO Tax Exempt CP Notes, Series 1998 3.20 11/02/98 10,000
7,740 State School Cash Reserve Program Auth. RB,
Series 1998A (CRE) (2) 4.50 7/02/99 7,790
15,475 West Contra Costa Unified School District TRAN,
Series 1998 4.00 6/30/99 15,517
Puerto Rico (0.9%)
3,500 Government Development Bank CP, Series 1995A 2.75 10/15/98 3,500
- ---------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $91,660) 91,660
- ---------------------------------------------------------------------------------------------
Total investments (cost: $358,210) $358,210
=============================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Multi-Family Housing 24.8%
General Obligations 17.4
Water/Sewer Utilities - Municipal 6.6
Buildings 4.7
Electric Utilities 4.6
Hospitals 4.4
Real Estate Tax/Free 4.4
Electric/Gas Utilities - Municipal 4.1
Toll Roads 3.8
Education 3.8
Finance - Municipal 3.5
Appropriated Debt 2.8
Lodging/Hotel 2.6
Nursing Care 2.2
Community Service 1.8
Miscellaneous 1.7
Sales Tax 1.2
Banks - Major Regional 1.0
Healthcare - Miscellaneous 1.0
Other 2.6
----
Total 99.0%
====
NOTES TO PORTFOLIO OF INVESTMENTS
September 30, 1998
(Unaudited)
GENERAL NOTES
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) Prerefunded to various dates prior to maturity at the call price.
(b) These securities were purchased within the terms of a private placement
memorandum and are subject to a seven day demand feature. Under procedures
adopted by the Board of Directors, the adviser has determined that these
securities are liquid. At September 30, 1998, these securities represented 4.8%
of the USAA California Money Market Fund's net assets.
(c) Zero Coupon security. Rate represents the effective yield at date of
purchase. For the USAA California Bond Fund these securities represented 10.9%
of the Fund's net assets.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
----------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $529,267 and $358,210, respectively) $ 587,048 $ 358,210
Cash 8 855
Receivables:
Capital shares sold 190 137
Interest 8,007 1,980
Securities sold - 1,709
--------------------------------
Total assets 595,253 362,891
--------------------------------
LIABILITIES
Capital shares redeemed 42 965
USAA Investment Management Company 152 94
USAA Transfer Agency Company 21 12
Accounts payable and accrued expenses 45 18
Dividends on capital shares 774 63
--------------------------------
Total liabilities 1,034 1,152
--------------------------------
Net assets applicable to capital shares outstanding $ 594,219 $ 361,739
================================
REPRESENTED BY:
Paid-in capital $ 536,456 $ 361,739
Accumulated net realized loss on investments (18) -
Net unrealized appreciation of investments 57,781 -
--------------------------------
Net assets applicable to capital shares outstanding $ 594,219 $ 361,739
================================
Capital shares outstanding 51,788 361,739
================================
Authorized shares of $.01 par value 140,000 2,435,000
================================
Net asset value, redemption price, and
offering price per share $ 11.47 $ 1.00
================================
See accompanying notes to financial statements.
</TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
-------------------------------
<S> <C> <C>
Net investment income:
Interest income $ 15,790 $ 7,282
-------------------------------
Expenses:
Management fees 881 629
Transfer agent's fees 120 94
Custodian's fees 50 47
Postage 8 10
Shareholder reporting fees 5 6
Directors' fees 2 2
Registration fees 12 4
Professional fees 12 14
Other 7 4
-------------------------------
Total expenses 1,097 810
-------------------------------
Net investment income 14,693 6,472
-------------------------------
Net realized and unrealized gain on investments:
Net realized gain 222 -
Change in net unrealized appreciation/depreciation 15,302 -
-------------------------------
Net realized and unrealized gain 15,524 -
Increase in net assets resulting from operations $ 30,217 $ 6,472
===============================
</TABLE>
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)
USAA USAA
California California
Bond Fund Money Market Fund
---------------------------------------
9/30/98 3/31/98 9/30/98 3/31/98
---------------------------------------
From operations:
Net investment income $ 14,693 $ 26,679 $ 6,472 $ 12,591
Net realized gain on investments 222 3,782 - -
Change in net unrealized appreciation/
depreciation of investments 15,302 25,458 - -
---------------------------------------
Increase in net assets resulting
from operations 30,217 55,919 6,472 12,591
---------------------------------------
Distributions to shareholders from:
Net investment income (14,693) (26,679) (6,472) (12,591)
---------------------------------------
From capital share transactions:
Proceeds from shares sold 72,952 94,320 205,830 453,369
Dividend reinvestments 10,163 18,614 6,077 11,833
Cost of shares redeemed (38,167) (48,658) (281,922) (374,576)
---------------------------------------
Increase (decrease) in net assets
from capital share transactions 44,948 64,276 (70,015) 90,626
---------------------------------------
Net increase (decrease) in net assets 60,472 93,516 (70,015) 90,626
Net assets:
Beginning of period 533,747 440,231 431,754 341,128
---------------------------------------
End of period $594,219 $533,747 $361,739 $431,754
=======================================
Change in shares outstanding:
Shares sold 6,520 8,611 205,830 453,369
Shares issued for dividends reinvested 904 1,696 6,077 11,833
Shares redeemed (3,418) (4,451) (281,922) (374,576)
---------------------------------------
Increase (decrease) in
shares outstanding 4,006 5,856 (70,015) 90,626
=======================================
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company incorporated under the laws of Maryland consisting of ten
separate funds. The information presented in this semiannual report pertains
only to the USAA California Bond Fund and USAA California Money Market Fund (the
Funds). The Funds have a common objective of providing California investors with
a high level of current interest income that is exempt from federal and
California state income taxes. The USAA California Money Market Fund has a
further objective of preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA California 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 California 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 California municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, each Fund may borrow
from CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with
no markup. Subject to availability under its agreement with NationsBank, each
Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 15% of its total assets at
NationsBank's borrowing rate plus a markup. The Funds had no borrowings under
either of these agreements during the six-month period ended September 30, 1998.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes. At September 30, 1998,
the USAA California Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $18,000 which, if not offset by subsequent capital
gains will expire in 2003. It is unlikely that the Company's Board of Directors
will authorize a distribution of capital gains realized in the future until the
capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the
six-month period ended September 30, 1998 were as follows:
USAA California USAA California
Bond Fund Money Market Fund
($000) ($000)
------------------------------------
Purchases $50,755 $ 466,964
Sales/maturities $17,142 $ 532,934
For the USAA California 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 California Bond Fund $57,781 $ - $57,781
(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.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Funds based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) TRANSACTIONS WITH AFFILIATES
Certain directors and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated directors or Fund officers
received any compensation from the Funds.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA CALIFORNIA BOND FUND
September 30, 1998
(Unaudited)
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
----------------------------------------------------
1998 1998 1997 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.17 $ 10.50 $ 10.43 $ 10.10 $ 10.03 $ 10.75
Net investment income .30 .60 .61 .60 .59 .59
Net realized and
unrealized gain (loss) .30 .67 .07 .33 .07 (.52)
Distributions from net
investment income (.30) (.60) (.61) (.60) (.59) (.59)
Distributions of realized
capital gains - - - - - (.20)
---------------------------------------------------------------------
Net asset value at
end of period $ 11.47 $ 11.17 $ 10.50 $ 10.43 $ 10.10 $ 10.03
=====================================================================
Total return (%) * 5.42 12.33 6.60 9.35 6.89 .31
Net assets at end
of period (000) $594,219 $533,747 $440,231 $409,180 $372,877 $382,766
Ratio of expenses to
average net assets (%) .39(a) .40 .41 .42 .44 .44
Ratio of net investment
income to average
net assets (%) 5.27(a) 5.47 5.74 5.74 5.98 5.40
Portfolio turnover (%) 3.12 20.16 23.72 23.09 28.86 102.85
(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>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA CALIFORNIA MONEY MARKET FUND
September 30, 1998
(Unaudited)
(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 (%) * 1.63 3.35 3.23 3.58 2.94 2.22
Net assets at end
of period (000) $361,739 $431,754 $341,128 $296,349 $266,764 $247,303
Ratio of expenses to
average net assets (%) .41(a) .41 .45 .47 .47 .49
Ratio of net investment
income to average
net assets (%) 3.25(a) 3.30 3.19 3.52 2.91 2.19
(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
