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 11
Financial Information:
Independent Auditors' Report 15
Portfolios of Investments:
Categories & Definitions 16
USAA California Bond Fund 17
USAA California Money Market Fund 22
Notes to Portfolios of Investments 26
Statements of Assets and Liabilities 27
Statements of Operations 28
Statements of Changes in Net Assets 29
Notes to Financial Statements 30
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)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 (Registered Trademark)
Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
===============================================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The Product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the Product.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is not insured or guaranteed by the
FDIC or any other government agency. Although the fund seeks to preserve
the value of your investment at $1 per share, it is possible to lose money
by investing in the fund.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. IRAs are not available
for tax-exempt funds. The Growth and Tax Strategy Fund is not available as
an investment for your IRA because the majority of its income is tax
exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH ,CFA
APPEARS HERE]
I have always enjoyed the investment business because it is a great challenge
and it is endlessly fascinating. For me, one of the toughest things to learn was
that it was okay when people in this business strongly disagree with you. In
fact, the market would not work as well as it does without these differences in
opinion. I believe the key is to decide on the principles you choose to follow
and stick with them.
The roaring stock market of the past few years is a case in point. If you
have not invested in growth stocks, such as technology or internet, your total
return is probably lagging the market by a bunch. I've recently seen articles
that detail the relatively poor performance of value investing in stocks and of
an investment strategy of asset allocation. Yet, I believe in the long-term
soundness of both of these strategies. Value investing means using measures,
such as price/earnings or price/cash flow ratios, to identify companies which
are good businesses but whose stock is undervalued. Asset allocation means
combining investments in different classes, such as large cap stocks and
tax-exempt bonds, into one portfolio. In spite of the roaring stock market in
growth stocks, I continue to practice asset allocation.
My views were forged in the first ten years of my investment career, 1972 to
1982.
Those years taught me these things:
- - It is important to be in stocks.
- - It is especially important to be in stocks when they surge.
- - Stocks can plummet mindlessly.
- - When stocks plummet you will need great courage to stay the course.
- - A portion of my portfolio in fixed income will help my courage at those
times.
And most importantly:
- - Major market turns will be a surprise to almost everyone.
Therefore, I carry 30% to 40% of my portfolio in the USAA Tax-Exempt Long-Term
Fund. My return might have been higher in the past few years had I invested 100%
in stocks. But, I am very comfortable with my allocation.
It was especially comforting last summer when the stock market sank. And today,
I am very happy that I held my allocation in stocks.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Past performance is no guarantee of future results.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and operating expenses, please call for a
prospectus. Read it carefully before investing.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
3/31/98 3/31/99
===========================================================================================
<S> <C> <C>
Net Assets $533.7 Million $641.7 Million
Net Asset Value Per Share $11.17 $11.29
Tax-Exempt Dividends Per Share Last Twelve Months $.598 $.588
Capital Gains Distributions Per Share Last Twelve Months - -
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
30-DAY SEC YIELD* AS OF 3/31/99
============================================================================================
30 day SEC Yield 4.12%
- --------------------------------------------------------------------------------------------
</TABLE>
* Calculated as prescribed by the Securities and Exchange Commission.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending March 31, 1999
- --------------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
- --------------------------------------------------------------------------------
Since 8/1/89 7.74% = 6.18% + 1.56%
- --------------------------------------------------------------------------------
5 years 8.30% = 5.91% + 2.39%
- --------------------------------------------------------------------------------
1 year 6.46% = 5.39% + 1.07%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns for the
10-Year Period Ended March 31, 1999
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
10-year period ended March 31, 1999.
Total Return for Years Ended:
- ----------------------------
03/31/90 1.97%
03/31/91 9.46%
03/31/92 9.52%
03/31/93 12.56%
03/31/94 0.31%
03/31/95 6.89%
03/31/96 9.35%
03/31/97 6.60%
03/31/98 12.33%
03/31/99 6.46%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
03/31/90 4.47%
03/31/91 7.10%
03/31/92 6.81%
03/31/93 6.51%
03/31/94 5.15%
03/31/95 6.19%
03/31/96 6.08%
03/31/97 5.93%
03/31/98 5.95%
03/31/99 5.39%
Change in Share Price:
- ---------------------
03/31/90 -2.50%
03/31/91 2.36%
03/31/92 2.71%
03/31/93 6.05%
03/31/94 -4.84%
03/31/95 0.70%
03/31/96 3.27%
03/31/97 0.67%
03/31/98 6.38%
03/31/99 1.07%
** 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
3/31/91 to 3/31/99.
USAA California Bond Lipper California Municipal
Fund Yield Debt Funds Average Yield
-------------------- ---------------------------
03/31/91 6.63% 6.60%
03/31/92 6.40% 6.39%
03/31/93 5.77% 5.77%
03/31/94 5.80% 5.74%
03/31/95 5.83% 5.56%
03/31/96 5.74% 5.21%
03/31/97 5.77% 5.10%
03/31/98 5.36% 4.75%
03/31/99 5.20% 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 3/31/91 to
3/31/99.
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 3/31/99. 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
03/31/99 $20,564
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
03/31/99 $20,560
Lipper California Municipal Debt Funds Average
Year Amount
---- ------
08/01/89 $10,000
09/30/89 $ 9,869
03/31/90 $10,221
09/30/90 $10,385
03/31/91 $11,028
09/30/91 $11,698
03/31/92 $12,068
09/30/92 $12,800
03/31/93 $13,580
09/30/93 $14,542
03/31/94 $13,851
09/30/94 $13,944
03/31/95 $14,681
09/30/95 $15,314
03/31/96 $15,778
09/30/96 $16,328
03/31/97 $16,606
09/30/97 $17,783
03/31/98 $18,445
09/30/98 $19,362
03/31/99 $19,522
Data since inception on 8/1/89 through 3/31/99
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 PORTFOLIO MANAGER: ROBERT R. PARISEAU, CFA, APPEARS HERE]
SIGNIFICANT VOLATILITY
The yield on the 30-year U.S. Treasury Bond(1) (the Long Bond) began our fiscal
year at 5.93% and one year later, on March 31, 1999, the Long Bond closed at
5.63%. That's a pretty dry statement when you think about all of the excitement
that occurred during those 12 months. Events like the economic meltdown in the
Far East, the Russian devaluation of the ruble and economic collapse, the Dow
Jones Industrial Average(2) falling 512 points in one day, and persistent but
false rumors of a major U.S. bank failure.
In reaction over concerns of a worldwide economic recession, interest rates fell
dramatically for the six months from May until October 1998. The Long Bond
bottomed out on October 5, 1998, at 4.72%, the lowest level on record. To
complete the roller coaster ride, interest rates then reversed direction and
began to climb for the final six months of the fiscal year as the overseas
economic crisis stabilized and the U.S. economy remained very strong.
The yield on the Bond Buyer 40-Bond Index(3)(BBI40) behaved roughly the same.
The flight to quality caused the Long Bond's yield to fall much faster than the
yield on the BBI40. The reason being is that investors sought the relative
safety of the riskless U.S. government bond. In fact, at various times, the
yield on the BBI40 was nearly the same as the Long Bond --which is quite
unusual. You could say that investors who bought a long maturity, tax-exempt
municipal bond received the tax exemption feature for "free". Since October
1998, when interest rates began to rise, the BBI40's yield didn't rise as fast
- -- and prices didn't fall as much -- as the Long Bond.
Municipal and U.S. Treasury Bond Yields
A chart in the form of a line graph appears here illustrating the yields of the
30-year U.S. Treasury Bond and the Bond Buyer 40-Bond Index (BBI40) from 3/31/98
to 3/31/99.
30-year Bond Buyer
U.S. 40-Bond
Treasury Index (BBI40)
-------- -------------
03/31/98 5.93% 5.27%
04/15/98 5.88% 5.29%
04/30/98 5.95% 5.39%
05/15/98 5.97% 5.28%
05/29/98 5.80% 5.22%
06/15/98 5.57% 5.16%
06/30/98 5.63% 5.22%
07/15/98 5.71% 5.25%
07/31/98 5.71% 5.26%
08/14/98 5.54% 5.20%
08/31/98 5.27% 5.11%
09/15/98 5.26% 5.14%
09/30/98 4.98% 5.04%
10/15/98 4.97% 5.09%
10/30/98 5.16% 5.13%
11/16/98 5.29% 5.15%
11/30/98 5.06% 5.10%
12/15/98 5.03% 5.11%
12/31/98 5.10% 5.16%
01/15/99 5.11% 5.17%
01/29/99 5.09% 5.09%
02/15/99 5.43% 5.15%
02/26/99 5.58% 5.17%
03/15/99 5.52% 5.20%
03/31/99 5.63% 5.23%
(1) The 30-year U.S. Treasury Bond is generally considered the benchmark for
U.S. long-term interest rates.
(2) The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively traded blue chip stocks. Prepared and published by Dow Jones & Co.
(3) The Bond Buyer 40-Bond Index is the industry standard for the yield of
long-term, investment-grade municipal bonds.
MARKET OUTLOOK
In some ways, the U.S. economic outlook hasn't changed very much since our
semiannual report. Chairman Alan Greenspan of the Federal Reserve Board
frequently expresses his amazement at the ability of the U.S. economy to grow
robustly without inflationary pressures. Economists give most of the credit to
improved productivity and lack of pricing power by corporations faced with
strong competition. Some investors remain skeptical that "it's different this
time" and are concerned that inflation will re-ignite. Many investors no longer
seem to believe that interest rates will fall much further, because the U.S.
economy shows no sign of slowing down. In other words, there is less of a
bullish tone to the fixed income market than six months ago, despite the fact
that inflationary pressures are still absent.
STRATEGY
I focus primarily on generating maximum tax-exempt income with the goal of
producing the best after-tax total return over a 3-5 year investment horizon. I
remain fully invested in long-term, investment-grade municipal bonds. 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 were a change in the Federal Tax Code that
compels me to reconsider my position on the AMT.
HOW I BUY A BOND
Since I tend to focus on yield, I'd like to discuss my approach to bond
selection. Like any buyer, I seek value. We define value at USAA as a
combination of:
- Yield (the bond may be a great fit, but if the yield is too low -- it's
overpriced)
- Structure (coupon, maturity, call features, sinking funds, etc.)
- Liquidity (ability to quickly sell the bond and receive the price you
expect)
- Credit Quality (how strong and stable is the issuer?)
Finding value should be a straightforward process, except that, what represents
value is always changing in the marketplace. Sometimes the best value is the
highest quality bond with the lower yield, other times it may be the lower
quality bond with a higher yield. The same can be said for buying bonds of
different maturities, for example, deciding on a 20-year versus a 30-year
maturity. The process requires market savvy, independent research, and
experience. Although, in some aspects it's a team approach, I make the final
decision. The process works something like this:
- Our municipal traders see a bond in the market with an attractive yield.
The fixed income markets are not auction exchanges like the New York Stock
Exchange. Instead, they are negotiated markets and bonds trade "over the
counter." Potential buyers and sellers bargain until they agree upon a
price. When bonds trade in the municipal market, the results are not
posted in a central location -- investors must seek out price levels. Our
municipal traders are in constant telephone and electronic contact with
all major participants gathering information on recent trades and bond
offerings -- so we can determine the value of any given bond, whether
buying or selling.
- The portfolio manager decides that the yield, structure and liquidity of
the bond fit well with the rest of the portfolio. The bond must also
comply with the portfolio diversification requirements mandated by
various regulations and constraints (SEC, your prospectus, etc.).
- Often, the research analyst and portfolio manager are already familiar and
current with the issuer's financial outlook. If not, the analyst contacts
senior financial officers of the issuer for the latest financial
statements and outlook. The analyst closely examines the bond indenture
and legal structure. He or she may need to discuss a legal issue with
bond counsel. The objective of our credit research is to anticipate
credit problems, those factors affecting an entire industry and those
impacting a specific issuer, before they impact our portfolio.
- After gathering sufficient information, the analyst approves, or
disapproves, the purchase of the bond and provides his/her independent
appraisal of the bond's credit rating. After the credit review, the
portfolio manager decides whether the bond still represents good "value."
On occasion, we may feel that a particular bond's financial outlook is
suitable for purchase, but the bond's credit rating is too optimistic. If
the bonds were over-rated, I would bid lower in price, or "pass" on them
entirely.
YOUR FUND'S PERFORMANCE - MORNINGSTAR 5-STAR FUND
I'm very pleased to say that your Fund received an Overall Star Rating of 5
stars in the municipal bond fund category from Morningstar Rating(TradeMark) for
the period ended March 31, 1999.(4) The Fund's performance compared very
favorably to its peer group. Your Fund's net asset value (NAV) per share
increased by $0.12, or 1.1%, since March 31, 1998.
While past performance is no guarantee of future results, the Fund's dividend
distribution yield(5) for the past 12 months was 5.20%, as compared to the
Lipper's California Municipal Debt Funds average of 4.52% for the 105 funds in
the category.(6) For the same period and category, the Fund's total return(7)
was 6.46% compared to the Lipper average of 5.58%.
(4) Past performance is no guarantee of future results.
(5) 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.
(6) Refer to page 5 for the Lipper Average definition.
(7) Total return equals income return plus share price change and assumes
reinvestment of dividends and capital gains distribution.
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of March 31, 1999. The ratings are subject to change every month. Morningstar
ratings are calculated from the fund's 3-, 5-, and 10-year average annual
returns in excess of 90-day Treasury bill returns with appropriate fee
adjustments, and a risk factor that reflects fund performance below 90-day
T-bill returns. Overall rating is a weighted average of a fund's 3-, 5-, and
10-year ratings, as applicable. The USAA California Bond Fund received 5 stars
for the 3-, and 5-year periods, respectively. The top 10% of the funds in a
broad asset class receive 5 stars, the next 22.5% receive 4 stars, the next 35%
receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1
star. The fund was rated among 1,578, and 1,131 funds in the municipal bond fund
category for the 3-, and 5-year periods, respectively.
THE STATE OF CALIFORNIA
Strong economic growth in California contributed to the state government's
excellent financial performance in fiscal 1997-98. For example, in the fourth
quarter of 1998, state employment grew by 1.6% compared to the U.S. average of
1.3%. The unemployment rate improved to 5.6% in February 1999, down from 6.0% in
February 1998.
The state budget relies heavily upon two revenue sources for 83% of general fund
revenues. These two sources, the state personal income tax and sales tax, are
very sensitive to economic cycles. The economic rebound has boosted revenues
from these taxes significantly -- a critical contribution to the elimination of
the state's accumulated General Fund Balance deficit.
The state is moderately leveraged with debt. In the November 1998 general
election, voters approved proposition 1A totaling $9.2 billion for public school
construction and renovation and for higher education facilities. With additional
infrastructure projects -- many badly needed -- debt could increase still
further. The additional debt should not be a significant problem as long as
California isn't faced with another prolonged recession similar to the early
1990s. For its size, the state has a relatively meager cash reserve. Credit
ratings on the state's general obligation debt are Aa3 by Moody's Investors
Service, AA- by Fitch IBCA, and A+ from Standard and Poor's.
I discuss these general economic issues because, although they may not directly
relate to each of your Fund's holdings, they do indicate the general financial
and economic environment of the state. We will closely monitor those specific
credit issues, ballot initiatives and litigation which could potentially impact
the value of your holdings.
The table below compares the yield of the USAA California Bond Fund with a
taxable equivalent investment.
To match the USAA California Bond Fund's closing 30-Day SEC yield of 4.12% 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: 5.05% 6.22% 6.58% 7.10% 7.52%
- --------------------------------------------------------------------------------
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 Ratings/Mix as of March 31,
1999 of the USAA California Bond Fund to be:
AAA - 48%; A - 31%; BBB - 11%; AA - 9%; and Cash Equivalents - 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
category AAA account for 7.8%, of the Fund's investments.
Note: Income may be subject to federal, state or local taxes, or the alternative
minimum tax.
See page 17 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, and a
further objective of 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 3/31/99
================================================================================
Net Assets $431.8 Million $439.2 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY YIELD AS OF 3/31/99
================================================================================
Since Inception 7-Day
1 Year 5 Years on 8/1/89 Yield
3.03% 3.22% 3.53% 2.66%
- --------------------------------------------------------------------------------
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.
----------------- ------------------------
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%
10/27/98 2.90% 2.39%
11/24/98 3.00% 2.51%
12/29/98 3.17% 2.76%
01/26/99 2.49% 2.15%
02/22/99 2.39% 2.02%
03/29/99 2.65%* 2.31%*
Data represent the last Monday of each month.
*Ending date 3/29/99
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 PORTFOLIO MANAGER: JOHN C. BONNELL, CFA, APPEARS HERE]
THE MARKET
It is interesting to hear what economists are saying about the direction of
interest rates. Over the last year, we heard predictions of lower interest
rates, predictions of higher interest rates, and you guessed it, predictions of
stable rates! At the time of this writing, some are calling for lower rates
suggesting our economy is on the verge of a slowdown due to depressed economies
abroad. Others are calling for higher rates because the domestic economy still
appears strong, which is likely to lead to inflation if held unchecked. Valid
arguments can be made for lower, constant, and higher interest rates. This is
why we continue to focus more on ascertainable concepts such as supply and
demand, and seasonal effects.
The supply of traditional money market fund eligible securities has not kept up
with the asset growth in tax-exempt money market funds -- which drives demand.
This has led to the creation of structured municipal variable rate securities
out of long-term fixed rate municipal bonds. The end result is a security with
an effective maturity within money market fund guidelines. While we currently do
not own this type of synthetic municipal security, we do closely analyze them
and may participate in this market some time in the future.
Beginning in the late summer of 1998, negative global economic events induced a
flight to quality into U.S. Treasury securities which were seen as a safe haven
from market uncertainty. In addition, the Federal Reserve lowered the Federal
Funds rate -- the rate banks charge one another for overnight loans -- three
times between September and November 1998 bringing the target rate down 0.75% to
4.75%. One-year municipal note yields, as measured by the Bond Buyer's One-Year
Note Index,(1) dropped from the 3.6% range in early August, to the 2.9% range in
early November. However, during March 1999, municipal note yields inched back up
above 3.0%.
(1) The Bond Buyer One-Year Note Index is representative of yields on 10 large
one-year tax-exempt notes.
STRATEGY
As always, we focus on buying the best relative value in the market at any given
time. The Fund's average maturity looks relatively short at this time because of
the amount of variable rate securities(2) compared to fixed rate securities in
the Fund. The variable rate securities recently offered a better relative value
in terms of risk/return versus fixed-rate securities. We may be able to extend
the Fund's maturity in the coming months to both protect against lower rates and
to help stabilize the interest rate fluctuations of the variable rate
securities. We continue to utilize our internal credit research staff to analyze
each security on a case by case basis and we remain very selective when
investing fund assets.
(2) Variable rate demand notes represent borrowings that are payable on demand
and that bear interest reflective of a money market rate.
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending March 31, 1999, your Fund ranked 3 out of 54 California Money Market
Funds according to IBC Financial Data, Inc. with a yield of 3.03%. The average
for the category over the same period was 2.61%.
CALIFORNIA
California's economy continues to perform well. The unemployment rate, a key
economic indicator, improved to 5.6% (seasonally adjusted) in February 1999,
down from 6.0% in February 1998. Favorable employment and economic conditions
contributed to excellent financial performance in fiscal 1997-98, allowing for
the elimination of the state's accumulated General Fund Balance deficit.
Revenues were driven by the cyclically sensitive income tax and the sales tax,
which comprise about 50% and 33%, respectively, of General Fund revenues.
Despite the recent improvements, economic and financial concerns remain. This is
evident by the Governor's 1999-2000 budget, which assumes continued, though
slowing, growth. International trade, an important underpinning to California's
business environment, has felt the sting of the Asian recession. In 1999, the
problems in Asia are anticipated to negatively impact durable goods
manufacturing. In addition, state financial reserves are currently slim.
Financial operations in fiscal 1998-99 and fiscal 1999-2000 are expected to draw
on the balance achieved in fiscal 1997-98.
The state's debt position is moderate. In the November 1998 general election,
voters approved proposition 1A totaling $9.2 billion for public school
construction and renovation, and for higher education facilities. With
additional infrastructure needs, the debt position could weaken if the State
Treasurer's debt affordability recommendations are not followed.
Credit ratings on the State's general obligation debt are Aa3 by Moody's
Investors Service, AA- by Fitch IBCA, and A+ from Standard and Poor's.
As part of our surveillance, we monitor statewide ballot initiatives and
litigation that may affect municipal securities. In late 1998, the State settled
a pending lawsuit with the four major cigarette manufacturers. Under the
settlement (which is subject to adjustment), the companies will pay
approximately $25 billion over 25 years with the proceeds being split equally
between the state government and local governments (cities and counties). In
addition, the State Mandates Commission held hearings to determine if the
property tax revenues diverted from counties to school districts is a
reimbursable state-mandated cost. The commission found for the state but an
appeal through the court system has begun. Exposure could be at the
multi-billion dollar level.
Cumulative Performance of $10,000
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 3/31/99. 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
03/31/99 $13,990
Data since inception on 8/1/89 through 3/31/99
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.
See page 22 for a complete listing of the Portfolio of Investments.
Independent Auditors' Report
KPMG
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 of the USAA California Bond and USAA California
Money Market Funds, funds of the USAA Tax Exempt Fund, Inc., as of March 31,
1999, 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 the financial highlights, presented in note 9 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. Our procedures included confirmation of securities owned as of March
31, 1999, 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 California Bond and USAA California Money Market Funds as of March 31,
1999, 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 LLP
San Antonio, Texas
May 7, 1999
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS
March 31, 1999
Fixed Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The interest rate is constant to maturity. Prior to maturity, the market
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
of the security.
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 generally adjusted at a stipulated daily, weekly, or monthly
interval to a rate that reflects current market conditions. In money market
funds, the effective maturity of these instruments is deemed to be less than 397
days in accordance with detailed regulatory requirements. In bond funds, the
effective maturity is the next put date.
Credit Enhancements - add 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.
The USAA California Money Market Fund's investments consist of securities
meeting the requirements to qualify as "eligible securities" under the
Securities and Exchange Commission (SEC) rules applicable to money market funds.
The Manager attempts to minimize credit risk in the USAA California Money Market
Fund through rigorous internal credit research and by investing in securities
rated in one of the two highest categories for short-term securities, or, if not
rated, of comparable quality, at the time of purchase.
(ETM) Escrowed to final maturity.
(PRE) Prerefunded to a date prior to maturity.
(LOC) Enhanced by a bank letter of credit.
(NBGA) Enhanced by a non-bank guarantee agreement.
(INS) Scheduled principal and interest payments are insured by:
(1) MBIA, Inc. (4) Financial Security Assurance
(2) AMBAC Financial Group, Inc. Holdings Ltd.
(3) Financial Guaranty Insurance Co. (5) College Construction Loan
Insurance Association.
PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CAB Capital Appreciation Bond MFH Multi-Family Housing
COP Certificate of Participation PCRB Pollution Control Revenue Bond
CP Commercial Paper RB Revenue Bond
GO General Obligation TRAN Tax Revenue Anticipation Note
IDA Industrial Development
Authority/Agency
<TABLE>
USAA CALIFORNIA BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 1999
<CAPTION>
Principal Coupon Market
Amount Security Rate Maturity Value
- -------------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (97.5%)
<S> <C> <C> <C> <C>
California (94.1%)
Adelanto School District GO,
$ 4,715 Series 1997A (INS) (1),(a) 5.67% 9/01/2021 $ 1,505
5,530 Series 1997A (INS) (1),(a) 5.67 9/01/2022 1,674
Alameda Corridor Transportation Auth. CAB,
38,765 Series 1999A (INS) (1),(a) 5.26 10/01/2033 6,414
18,155 Series 1999A (INS) (1),(a) 5.27 10/01/2034 2,843
40,340 Series 1999A (INS) (1),(a) 5.27 10/01/2037 5,372
7,205 Alameda County Water District RB,
Series 1998 (INS) (1) 4.75 6/01/2020 6,966
3,000 Alameda Housing Auth. MFH RB,
Series 1998A 5.35 2/20/2031 3,043
7,500 Antelope Valley Healthcare District RB,
Series 1997B (INS) (4) 5.20 1/01/2027 7,607
2,000 Association of Bay Area Governments
Finance Auth. COP, Series 1998 (NBGA) 5.13 5/15/2023 1,970
Burbank Unified School District GO,
4,025 Series 1998B (INS) (3),(a) 5.30 8/01/2022 1,219
3,130 Series 1998B (INS) (3,(a) 5.30 8/01/2023 900
4,210 Campbell Union School District GO,
Series 1998 (INS) (3),(a) 5.20 8/01/2019 1,505
30,000 Central Valley Finance Auth. RB,
Series 1993 (PRE) 6.20 7/01/2020 33,556
Commerce Community Development
Commission Tax Allocation Bonds,
3,740 Series 1997A, Project #1 (INS) (1),(a) 5.50 8/01/2022 1,133
3,740 Series 1997A, Project #1 (INS) (1),(a) 5.50 8/01/2023 1,075
Contra Costa Water District RB,
7,175 Series D (PRE)(INS) (2) 6.38 10/01/2022 7,980
2,650 Series G (INS) (1) 5.50 10/01/2019 2,766
Department of Water Resources RB,
11,000 Series K (PRE) 6.00 12/01/2021 11,970
5,400 Series L 5.75 12/01/2019 5,707
5,000 Desert Hospital District COP (PRE) 6.39 7/28/2020 5,462
Educational Facilities Auth. RB,
9,500 Series 1991 (PRE) 7.15 5/01/2021 10,394
5,000 Series 1992 6.00 2/15/2017 5,360
1,775 Series 1992 (PRE) 6.88 9/01/2022 1,996
8,990 Series 1992 (PRE) 6.50 10/01/2022 10,023
9,000 Series 1994 (INS) (5) 6.20 5/01/2021 9,924
8,015 Series 1995 6.00 10/01/2025 8,562
8,050 Series 1995A 5.60 12/01/2020 8,441
4,330 Series 1999 (INS) (2),(a) 5.16 10/01/2023 1,234
2,750 Series 1999 5.00 11/01/2029 2,722
5,000 Series 1999P 5.00 12/01/2023 4,992
Fallbrook Union High School District GO,
3,000 Series 1998 (INS) (3),(a) 5.40 9/01/2018 1,131
3,360 Series 1998 (INS) (3),(a) 5.40 9/01/2019 1,196
Fontana Unified School District GO
Convertible Zero Coupon,
2,500 Series 1990D (INS) (3),(a) 5.80 5/01/2017 2,632
2,000 Series 1990D (INS) (3),(a) 5.85 5/01/2022 2,090
8,270 Foothill/Eastern Transportation
Corridor Agency RB, Series 1995A 5.00 1/01/2035 7,867
2,330 Fresno COP, Series 1991 8.50 5/01/2016 2,458
Health Facilities Financing Auth. RB,
8,000 Series 1990 (PRE) 7.50 10/01/2010 8,645
6,500 Series 1990A (NBGA) 7.70 9/01/2010 6,993
35,000 Series 1990A (PRE) 6.50 12/01/2020 37,557
11,500 Series 1991 (PRE) 6.75 6/01/2021 12,515
3,175 Series 1992A (INS) (1) 6.38 10/01/2022 3,470
5,000 Series 1993A 5.40 5/01/2028 5,035
3,500 Series 1993C 5.60 5/01/2033 3,578
2,000 Series 1994 (NBGA) 6.50 9/01/2014 2,213
5,000 Series 1994A 6.63 7/01/2018 5,515
1,000 Series 1997A (NBGA) 5.50 1/01/2019 1,024
5,000 Series 1998 (INS) (2) 4.50 10/01/2028 4,570
2,320 Series 1998A (NBGA) 5.25 5/01/2021 2,319
4,000 Series 1998A 5.00 7/01/2028 3,877
3,325 Series 1998A (NBGA) 5.30 11/01/2028 3,322
5,000 Series 1998B 5.00 10/01/2020 4,849
4,180 Hollister Joint Powers Financing Auth. RB 5.90 12/01/2023 4,330
Housing Finance Agency Home Mortgage RB,
705 Series 1988F 7.88 8/01/2019 720
10,310 Series 1991F 6.85 8/01/2017 10,903
5,990 Series 1994A 6.55 8/01/2026 6,424
3,000 Housing Finance Agency MFH RB,
Series 1996A (INS) (2) 6.05 8/01/2027 3,177
1,500 Housing Finance Agency RB, Series 1997D 5.85 8/01/2017 1,591
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/2025 5,911
Metropolitan Water District RB,
5,000 Series 1992 5.50 7/01/2019 5,216
11,000 Series 1998A 4.75 7/01/2022 10,543
12,000 Modesto Irrigation District RB,
Series 1992A (PRE) 6.13 9/01/2019 13,209
3,000 Mojave Water Agency Improvement
District GO, Series 1992 (PRE) 6.60 9/01/2022 3,352
Montebello Unified School District GO,
2,350 Series 1998 (INS) (3),(a) 5.30 8/01/2021 750
2,405 Series 1998 (INS) (3),(a) 5.30 8/01/2022 728
2,455 Series 1998 (INS) (3),(a) 5.30 8/01/2023 706
Murrieta Valley Unified School District GO,
4,855 Series 1998A (INS) (3),(a) 5.28 9/01/2018 1,831
5,000 Series 1998A (INS) (3),(a) 5.30 9/01/2020 1,681
5,255 Series 1998A (INS) (3),(a) 5.30 9/01/2022 1,585
New Haven Unified School District GO,
14,725 Series 1996B (INS) (3),(a) 5.52 8/01/2022 4,324
10,975 Series 1997A (INS) (4),(a) 6.10 8/01/2021 3,165
10,375 Pleasanton Joint Powers Financing Auth. RB,
Series 1993A 6.15 9/02/2012 11,122
13,400 Riverside County Public Financing Auth.
Tax Allocation RB, Series 1997A 5.63 10/01/2033 13,707
Sacramento Cogeneration Auth. RB,
6,500 Series 1995 (PRE) 6.50 7/01/2021 7,561
6,000 Series 1995 6.00 7/01/2022 6,382
3,700 Sacramento Power Auth. RB,
Series 1995 5.88 7/01/2015 3,910
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/2025 7,589
San Joaquin Hills Transportation
Corridor Agency RB,
13,500 Senior Lien (PRE) 6.75 1/01/2032 15,232
10,035 Senior Lien 5.00 1/01/2033 9,556
97,650 Series 1997A (INS) (1),(a) 5.67 1/15/2032 17,768
11,320 San Mateo Sewer RB,
Series 1992 (PRE)(INS) (2) 6.30 8/01/2017 12,516
San Ramon Valley Unified School
District GO,
9,305 Series 1998A (INS) (3),(a) 5.25 7/01/2017 3,748
9,635 Series 1998A (INS) (3),(a) 5.25 7/01/2018 3,665
12,455 Southern California Public Power
Auth. RB,
Series 1989 (LOC) 6.00 7/01/2018 12,682
8,050 State GO, Series 1998 5.00 10/01/2023 7,977
Statewide Communities Development
Auth. COP,
13,500 Huntington Memorial Hospital (INS) (5) 5.80 7/01/2026 14,451
5,420 Lutheran Homes (NBGA) 5.75 11/15/2021 5,716
4,000 San Gabriel Valley (NBGA) 5.50 9/01/2014 4,084
1,055 The Arc of San Diego (NBGA) 5.63 5/01/2021 1,099
Suisun City Public Financing Auth. RB,
17,855 Series A (a) 5.37 10/01/2028 3,536
20,080 Series A (a) 5.37 10/01/2033 3,012
Univ. of California RB,
12,000 Series 1991A (PRE) 6.88 9/01/2016 13,513
4,000 Series 1996 (INS) (2) 5.75 7/01/2024 4,275
18,000 Vallejo Sanitation and Flood Control COP,
Series 1993 (INS) (3) 5.00 7/01/2019 18,124
Washington Township Hospital RB,
9,500 Series 1993 5.50 7/01/2018 9,637
7,845 Series 1993 5.25 7/01/2023 7,818
Watsonville Hospital RB,
5,000 Series 1995A (PRE)(NBGA) 6.35 7/01/2024 5,775
1,515 Series 1996A (ETM)(NBGA) 6.20 7/01/2012 1,730
Puerto Rico (3.4%)
Electric Power Auth. RB,
10,500 Series 1995Z 5.25 7/01/2021 10,547
10,000 Series X (PRE) 6.13 7/01/2021 11,329
- --------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $577,311) 625,378
- --------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (2.1%)
California
2,700 Irvine Assessment District RB,
Series 1997-16 (LOC) 3.00 9/02/2022 2,700
2,200 Irvine Ranch Water District RB,
Series 1993 (LOC) 3.00 4/01/2033 2,200
8,970 Statewide Communities Development Auth.
COP, Series 1996 (LOC) 3.00 6/01/2026 8,970
- --------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $13,870) 13,870
- --------------------------------------------------------------------------------------------
Total investments (cost: $591,181) $639,248
============================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Escrowed Bonds 34.9%
Hospitals 13.0
Water/Sewer Utilities - Municipal 8.7
General Obligations 6.9
Education 6.4
Real Estate Tax/Free 5.6
Toll Roads 5.5
Electric/Gas Utilities - Municipal 5.2
Nursing/Continuing Care Centers 3.1
Multi-Family Housing 3.1
Single-Family Housing 3.1
Airport/Port 2.3
Healthcare - Miscellaneous 1.4
Buildings .4
----
Total 99.6%
====
<TABLE>
USAA CALIFORNIA MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
<CAPTION>
Principal Coupon
Amount Security Rate Maturity Value
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES (69.0%)
California (68.8%)
$ 3,300 Alameda County IDA RB, Series 1994 3.10% 6/01/2004 $ 3,300
4,000 Berkeley YMCA RB, Series 1993 (LOC) 2.75 6/01/2023 4,000
8,700 Contra Costa County MFH RB,
Series 1990A (LOC) 3.00 8/01/2007 8,700
8,500 Corona MFH RB, Series 1985B (NBGA) (b) 2.80 2/01/2005 8,500
7,125 Covina Redevelopment Agency MFH RB,
Series 1994A (NBGA) 2.90 12/01/2015 7,125
17,105 Economic Development Financing Auth. RB,
Series 1998A (LOC) 3.00 4/01/2008 17,105
6,500 Educational Facilities Auth. RB,
Series 1999 (LOC) 2.90 1/01/2025 6,500
2,700 Fillmore COP, Series 1997 (LOC) 2.85 5/01/2029 2,700
13,800 Foothill/Eastern Transportation
Corridor Agency RB, Series 1995D (LOC) 2.75 1/02/2035 13,800
Fremont COP,
6,100 Series 1990 (LOC) 4.50 7/01/2015 6,100
4,500 Series 1991 (LOC) 4.50 8/01/2022 4,500
2,000 Series 1998 (LOC) 2.60 8/01/2028 2,000
2,070 Hesperia Public Financing Auth. Lease RB,
Series 1998B (LOC) 3.30 6/01/2022 2,070
4,800 Huntington Beach MFH RB,
Series 1985A (LOC) 4.00 2/01/2010 4,800
2,200 Irvine IDA RB, Series 1985 (LOC) 4.10 11/01/2005 2,200
3,658 Irvine Improvement Bonds, Assessment
District 94-13 (LOC) 3.00 9/02/2022 3,658
8,200 Irvine Ranch Water District COP,
Series 1986 (LOC) 3.00 8/01/2016 8,200
3,600 Irvine Ranch Water District GO,
Series 1989 (LOC) 3.00 6/01/2015 3,600
Irvine Ranch Water District RB,
3,600 Series 1985 (LOC) 3.00 10/01/2005 3,600
2,200 Series 1993A (LOC) 3.00 5/01/2009 2,200
9,000 Lancaster MFH RB, Series 1984A (NBGA) (C) 2.90 11/01/2004 9,000
1,395 Lemoore COP, Series 1995 (LOC) 3.50 11/01/2020 1,395
6,855 Loma Linda Water RB, Series 1995 (LOC) 3.30 6/01/2025 6,855
5,890 Los Angeles County Housing Auth. MFH RB,
Series 1994B (NBGA) 2.90 9/01/2018 5,890
4,200 Monrovia Redevelopment Agency COP,
Series 1984 (NBGA) 3.20 12/01/2014 4,200
3,625 Montebello Public Improvement Corp. COP,
Series 1997B (LOC) 4.00 4/01/2025 3,625
9,750 Monterey County Financing Auth. RB,
Series 1995A (LOC) 2.80 9/01/2036 9,750
1,500 Monterey Peninsula Water Management
District COP, Series 1992 (LOC) 4.50 7/01/2022 1,500
8,410 Moreno Valley COP, Series 1997 (LOC) 3.30 6/01/2027 8,410
2,400 Ontario Redevelopment Agency Housing
Financing RB, Series 1997A (LOC) 4.35 9/01/2027 2,400
Orange County Apartment Development RB,
8,100 Series 1984D (LOC) 3.13 8/01/2019 8,100
7,000 Series 1985D (LOC) 4.50 4/01/2006 7,000
10,000 Series 1985U (NBGA) 2.75 11/01/2009 10,000
14,145 Series 1992B (LOC) 3.10 11/01/2005 14,145
4,550 Orange County District 88-1 Improvement RB,
Series 1988 (LOC) 3.00 9/02/2018 4,550
Pollution Control Financing Auth. PCRB,
3,930 Series 1996C (LOC) 3.15 11/01/2026 3,930
3,750 Series 1997A (LOC) 3.00 12/01/2018 3,750
7,200 Redlands MFH RB, Series 1991A (LOC) 2.75 2/01/2016 7,200
9,300 Rialto Public Financing Auth. RB,
Series 1998A (LOC) 3.40 9/01/2027 9,300
8,200 San Bernardino County COP,
Series 1996 (LOC) 3.30 11/01/2025 8,200
4,850 San Bernardino IDA RB, Series 1992 (LOC) 3.05 2/01/2012 4,850
8,300 San Diego MFH RB, Series 1993A (NBGA) 3.25 12/01/2015 8,300
3,600 San Francisco City and County MFH RB,
Series 1985A, Issue D (LOC) 2.85 12/01/2005 3,600
1,200 San Francisco City and County
Redevelopment RB, Series 1986A (LOC) 2.70 12/01/2016 1,200
Statewide Communities Development
Auth. COP,
3,625 Series 1992 (LOC) 3.00 11/01/2022 3,625
2,200 Series 1992 (LOC) 2.90 12/01/2022 2,200
3,500 Series 1998 (LOC) 3.25 6/01/2013 3,500
10,000 Series 1998 (LOC) 3.00 11/15/2028 10,000
21,000 Torrance Hospital RB, Series 1992 (LOC) 2.80 2/01/2022 21,000
Puerto Rico (0.2%)
970 Industrial, Tourist, Educational,
Medical and Environmental Control
Facilities Financing Auth. RB,
Series 1995A (LOC) 2.80 1/01/2015 970
- -----------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $303,103) 303,103
- -----------------------------------------------------------------------------------------------
PUT BONDS (3.5%)
California
2,660 Pollution Control Financing Auth. PCRB,
Series 1984 3.65 5/15/2002 2,660
12,700 Public Capital Improvement Finance
Auth. RB, Series 1988C (LOC) 2.95 6/01/2028 12,700
- -----------------------------------------------------------------------------------------------
Total put bonds (cost: $15,360) 15,360
- -----------------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (17.9%)
California
12,000 Alameda County TRAN, Series 1998-99 4.50 7/07/1999 12,028
1,105 Loomis Union Elementary School District
TRAN, Series 1998 4.00 9/21/1999 1,108
15,000 Los Angeles Department of Water and
Power CP (LOC) 2.60 6/17/1999 15,000
3,000 Placer Union High School District TRAN,
Series 1998 4.00 9/21/1999 3,009
3,330 Rocklin Union School District TRAN,
Series 1998 4.00 9/21/1999 3,339
4,000 San Francisco City and County TRAN,
Series 1998 4.50 9/22/1999 4,020
5,000 San Joaquin County Transport Auth. CP (LOC) 2.85 4/08/1999 5,000
12,000 San Ramon Valley Unified School
District TRAN, Series 1998 3.05 12/16/1999 12,000
7,740 State School Cash Reserve Program Auth. RB,
Series 1998A (INS) (2) 4.50 7/02/1999 7,757
15,475 West Contra Costa Unified School
District TRAN, Series 1998 4.00 6/30/1999 15,489
- ------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $78,750) 78,750
- ------------------------------------------------------------------------------------------------
Total investments (cost: $397,213) $ 397,213
================================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Multi-Family Housing 21.5%
General Obligations 11.6
Water/Sewer Utilities - Municipal 9.2
Electric Utilities 5.6
Hospitals 4.8
Real Estate Tax/Free 4.0
Buildings 3.8
Education 3.5
Water Utilities 3.4
Toll Roads 3.1
Finance - Municipal 2.9
Appropriated Debt 2.9
Nursing/Continuing Care Centers 2.8
Lodging/Hotel 2.1
Community Service 2.0
Nursing Care 1.8
Miscellaneous 1.4
Manufacturing - Diversified Industries 1.2
Sales Tax 1.1
Other 1.7
----
Total 90.4%
====
NOTES TO PORTFOLIO OF INVESTMENTS
March 31, 1999
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) Zero Coupon security. Rate represents the effective yield at date of
purchase. For the USAA California Bond Fund these securities represented 12.2%
of the Fund's net assets.
(b) This security is exempt from registration under the Securities Act of 1933
and has been determined to be liquid by management. Any resale of this security
may occur in an exempt transaction in the United States to a qualified
institutional buyer as defined by Rule 144A. At March 31, 1999, this security
represented 1.9% of the USAA California Money Market Fund's net assets.
(c) This security was purchased within the terms of a private placement
memorandum and is subject to a seven day demand feature. Under procedures
adopted by the Board of Directors, the adviser has determined that this security
is liquid. At March 31, 1999, this security represented 2.0% of the USAA
California Money Market Fund's net assets.
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 1999
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $591,181 and $397,213, respectively) $639,248 $ 397,213
Cash 17 44,637
Receivables:
Capital shares sold 67 231
Interest 8,715 2,531
---------------------------
Total assets 648,047 444,612
---------------------------
LIABILITIES
Securities purchased 4,982 3,850
Capital shares redeemed 257 1,303
USAA Investment Management Company 170 108
USAA Transfer Agency Company 20 17
Accounts payable and accrued expenses 71 70
Dividends on capital shares 894 56
---------------------------
Total liabilities 6,394 5,404
---------------------------
Net assets applicable to capital shares outstanding $641,653 $ 439,208
===========================
REPRESENTED BY:
Paid-in capital $593,707 $ 439,208
Accumulated net realized loss on investments (121) -
Net unrealized appreciation of investments 48,067 -
---------------------------
Net assets applicable to capital shares outstanding $641,653 $ 439,208
===========================
Capital shares outstanding 56,827 439,208
===========================
Authorized shares of $.01 par value 140,000 2,435,000
===========================
Net asset value, redemption price,
and offering price per share $ 11.29 $ 1.00
===========================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year Ended March 31, 1999
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
----------------------------
<S> <C> <C>
Net investment income:
Interest income $ 32,721 $ 13,521
----------------------------
Expenses:
Management fees 1,843 1,251
Transfer agent's fees 252 204
Custodian's fees 102 102
Postage 22 27
Shareholder reporting fees 10 18
Directors' fees 4 4
Registration fees 29 15
Professional fees 26 39
Other 9 15
----------------------------
Total expenses 2,297 1,675
----------------------------
Net investment income 30,424 11,846
----------------------------
Net realized and unrealized gain on investments:
Net realized gain 119 -
Change in net unrealized appreciation/depreciation 5,588 -
----------------------------
Net realized and unrealized gain 5,707 -
----------------------------
Increase in net assets resulting from operations $ 36,131 $ 11,846
============================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<CAPTION>
USAA USAA
California California
Bond Fund Money Market Fund
- ----------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 30,424 $ 26,679 $ 11,846 $ 12,591
Net realized gain on investments 119 3,782 - -
Change in net unrealized appreciation/
depreciation of investments 5,588 25,458 - -
---------------------------------------------
Increase in net assets resulting from
operations 36,131 55,919 11,846 12,591
--------------------------------------------
Distributions to shareholders from:
Net investment income (30,424) (26,679) (11,846) (12,591)
---------------------------------------------
From capital share transactions:
Proceeds from shares sold 152,433 94,320 482,344 453,369
Dividend reinvestments 21,003 18,614 11,109 11,833
Cost of shares redeemed (71,237) (48,658) (485,999) (374,576)
---------------------------------------------
Increase in net assets from
capital share transactions 102,199 64,276 7,454 90,626
---------------------------------------------
Net increase in net assets 107,906 93,516 7,454 90,626
Net assets:
Beginning of period 533,747 440,231 431,754 341,128
---------------------------------------------
End of period $ 641,653 $ 533,747 $ 439,208 $ 431,754
=============================================
Change in shares outstanding:
Shares sold 13,515 8,611 482,344 453,369
Shares issued for dividends reinvested 1,859 1,696 11,109 11,833
Shares redeemed (6,329) (4,451) (485,999) (374,576)
---------------------------------------------
Increase in shares outstanding 9,045 5,856 7,454 90,626
=============================================
See accompanying notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(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 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 three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 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 both agreements 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, at
NationsBank's borrowing rate plus a markup, an amount which, when added to
outstanding borrowings under the CAPCO agreements, does not exceed 15% of its
total assets. The Funds had no borrowings under any of these agreements during
the year ended March 31, 1999.
(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, 1999, the
USAA California Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $121,000 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 year
ended March 31, 1999 were as follows:
USAA California USAA California
Bond Fund Money Market Fund
($000) ($000)
------------------------------------------
Purchases $129,757 $842,162
Sales/maturities $ 41,546 $868,969
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 March 31, 1999
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-------------------------------------------
USAA California Bond Fund $48,858 $791 $48,067
(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 $28.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) TRANSACTIONS WITH AFFILIATES
Certain directors and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated directors or Fund officers
received any compensation from the Funds.
(7) YEAR 2000 (UNAUDITED)
Like other mutual funds, the Funds could be adversely affected if the computer
systems used by the Manager and the Funds' other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager is taking steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that comparable steps are being taken by the Funds' other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Funds from this
problem.
(8) SHAREHOLDER DIVIDENDS (UNAUDITED)
The Funds completed their fiscal year on March 31, 1999. 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 dividends 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 California
state income tax purposes. There were no long-term capital gain distributions
for the year ended March 31, 1999.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA CALIFORNIA BOND FUND
March 31, 1999
(9) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
Net asset value at
beginning of period $ 11.17 $ 10.50 $ 10.43 $ 10.10 $ 10.03
Net investment income .59 .60 .61 .60 .59
Net realized and
unrealized gain .12 .67 .07 .33 .07
Distributions from net
investment income (.59) (.60) (.61) (.60) (.59)
----------------------------------------------------
Net asset value at
end of period $ 11.29 $ 11.17 $ 10.50 $ 10.43 $ 10.10
====================================================
Total return (%)* 6.46 12.33 6.60 9.35 6.89
Net assets at end
of period (000) $641,653 $533,747 $440,231 $409,180 $372,877
Ratio of expenses to
average net assets (%) .39 .40 .41 .42 .44
Ratio of net investment
income to average
net assets (%) 5.21 5.47 5.74 5.74 5.98
Portfolio turnover (%) 7.20 20.16 23.72 23.09 28.86
*Assumes reinvestment of all dividend income distributions during the period.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA CALIFORNIA MONEY MARKET FUND
March 31, 1999
(9) FINANCIAL HIGHLIGHTS (CONTINUED)
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .04 .03
Distributions from net
investment income (.03) (.03) (.03) (.04) (.03)
----------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================
Total return (%)* 3.03 3.35 3.23 3.58 2.94
Net assets at end
of period (000) $439,208 $431,754 $341,128 $296,349 $266,764
Ratio of expenses to
average net assets (%) .42 .41 .45 .47 .47
Ratio of net investment
income to average
net assets (%) 2.99 3.30 3.19 3.52 2.91
*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 LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:30 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 USAA TouchLine(Service Mark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
