Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA New York Bond Fund 4
USAA New York Money Market Fund 10
Financial Information:
Independent Auditors' Report 14
Portfolios of Investments:
Categories & Definitions 15
USAA New York Bond Fund 16
USAA New York Money Market Fund 19
Notes to Portfolios of Investments 23
Statements of Assets and Liabilities 24
Statements of Operations 25
Statements of Changes in Net Assets 26
Notes to Financial Statements 27
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA New York
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)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 NEW YORK BOND FUND
OBJECTIVE: Provide New York investors with a high level of current interest
income that is exempt from federal income taxes and New York state and New York
City personal income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term, investment grade New York
tax-exempt securities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
3/31/98 3/31/99
==========================================================================================
<S> <C> <C>
Net Assets $70.6 Million $88.5 Million
Net Asset Value Per Share $11.62 $11.66
Tax-Exempt Dividends Per Share Last Twelve Months $.630 $.614
Capital Gains Distributions Per Share Last Twelve Months - -
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
30-DAY SEC YIELD* AS OF 3/31/99
==========================================================================================
30-Day SEC Yield 4.36%
- ------------------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
</TABLE>
AVERAGE ANNUAL COMPOUNDED RETURNS WITH
REINVESTMENT OF DIVIDENDS-PERIODS ENDING MARCH 31, 1999
- --------------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
================================================================================
Since 10/15/90 8.25% = 6.01% + 2.24%
- --------------------------------------------------------------------------------
5 years 7.36% = 5.87% + 1.49%
- --------------------------------------------------------------------------------
1 year 5.73% = 5.39% + 0.34%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns for the
9-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 New York Bond Fund for the
9-year period ended March 31, 1999.
Total Return for Years Ended:
- ----------------------------
03/31/91 8.22%
03/31/92 11.00%
03/31/93 13.74%
03/31/94 0.68%
03/31/95 5.42%
03/31/96 7.67%
03/31/97 5.89%
03/31/98 12.24%
03/31/99 5.73%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
03/31/91 3.22%
03/31/92 6.81%
03/31/93 6.45%
03/31/94 4.99%
03/31/95 5.97%
03/31/96 6.00%
03/31/97 5.98%
03/31/98 6.02%
03/31/99 5.39%
Change in Share Price:
- ---------------------
03/31/91 5.00%
03/31/92 4.19%
03/31/93 7.29%
03/31/94 -4.31%
03/31/95 -0.55%
03/31/96 1.67%
03/31/97 -0.09%
03/31/98 6.22%
03/31/99 0.34%
** Compounded Dividend yield calculation includes only income distributions.
Total return equals income return plus share price chnage and assumes
reinvestment of all dividends and capital gain distributions. Dividend return is
the dividends received over the period assuming reinvestment of all dividends.
Share price change is the change in net asset value over the period adjusted for
capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. The
performance data quoted represent past performance and are not an indication of
future results. Investment return and principal value of an investment will
fluctuate, and an investor's shares, when redeemed, may be worth more or less
than their original cost.
Comparison - 12 Month Dividend Yield
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA New York Bond Fund to the 12 Month
Dividend Yield of the Lipper New York Municipal Debt Funds Average from 3/31/92
to 3/31/99.
USAA New York Lipper New York Municipal
Bond Fund Yield Debt Funds Average Yield
--------------- ------------------------
3/31/92 6.28% 6.41%
3/31/93 5.61% 5.69%
3/31/94 5.62% 5.60%
3/31/95 5.74% 5.36%
3/31/96 5.79% 5.10%
3/31/97 5.84% 4.98%
3/31/98 5.42% 4.70%
3/31/99 5.27% 4.48%
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 3/31/92 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 New York Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper New York Municipal Debt Funds
Average. The data is from 10/15/90 through 3/31/99. The data points from the
graph are as follows:
USAA New York Bond Fund
Year Amount
---- ------
10/15/90 $10,000
03/31/91 $10,822
09/30/91 $11,605
03/31/92 $12,012
09/30/92 $12,860
03/31/93 $13,663
09/30/93 $14,583
03/31/94 $13,755
09/30/94 $13,821
03/31/95 $14,501
09/30/95 $15,163
03/31/96 $15,613
09/30/96 $16,124
03/31/97 $16,532
09/30/97 $17,688
03/31/98 $18,555
09/30/98 $19,477
03/31/99 $19,618
Lehman Brothers Municipal Bond Index
Year Amount
---- ------
10/15/90 $10,000
03/31/91 $10,574
09/30/91 $11,220
03/31/92 $11,632
09/30/92 $12,395
03/31/93 $13,089
09/30/93 $13,974
03/31/94 $13,392
09/30/94 $13,633
03/31/95 $14,387
09/30/95 $15,159
03/31/96 $15,593
09/30/96 $16,073
03/31/97 $16,444
09/30/97 $17,526
03/31/98 $18,208
09/30/98 $19,053
03/31/99 $19,338
Lipper New York Municipal Debt Funds Average
Year Amount
---- ------
10/15/90 $10,000
03/31/91 $10,560
09/30/91 $11,327
03/31/92 $11,701
09/30/92 $12,557
03/31/93 $13,352
09/30/93 $14,282
03/31/94 $13,602
09/30/94 $13,672
03/31/95 $14,278
09/30/95 $14,883
03/31/96 $15,267
09/30/96 $15,714
03/31/97 $16,004
09/30/97 $17,045
03/31/98 $17,680
09/30/98 $18,474
03/31/99 $18,592
Data since inception on 10/15/90 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 New York Municipal Debt Funds Average is the average
performance level of all New York Municipal Debt Funds, as computed by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds. All tax-exempt bond funds will find it difficult to
outperform the Lehman Index, since funds have expenses.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: KENNETH E. WILLMANN, CFA, APPEARS HERE]
INTEREST RATE MARKETS
Interest rates on March 31, 1999, were a bit lower than a year earlier. But that
simple statement doesn't begin to describe the goings-on of the last twelve
months. The graph below shows what happened.
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%
Please note that the top line is the yield of the active 30-year U.S. Treasury
Bond, or the Long Bond, as it is known. This is generally considered the
benchmark for long-term interest rates in the U.S. The bottom line in the graph
represents the yield of the Bond Buyer 40-Bond Index (BBI40), which is the
industry standard for the yield of long-term, investment-grade municipal bonds.
Note: Past performance is no guarantee of future results. The results of the
comparison reflect current conditions as regards to tax laws, inflationary
trends, and general corporate policies and practices. Investors are encouraged
to closely monitor changes in any factor which may affect their investments.
In early summer of 1998, against a backdrop of economic depression in most of
Asia, Russia collapsed economically. Latin America, particularly Brazil, began
to show signs of weakness. Investors worldwide became fearful of spreading
economic collapse and purchased U.S. Treasury Bonds as the ultimate in safety
and liquidity. This forced prices up and yields down. The U.S. stock market was
also effected and on August 31, 1998, the Dow-Jones Industrial Average(1) fell
over 500 points. At the end of September, Russia had defaulted on its debt,
which led to the failure of several hedge funds. These are private investment
funds that invest in exotic securities with high degrees of leverage. This led
to worries about the health of U.S. bank and brokerage houses. On October 5,
1998, the Long Bond reached a yield of 4.72%, a level not seen in decades.
Much of the world's economy began to stabilize in the autumn and winter. While
recovery is very hard to find, it appears that the weakest economies are no
longer in free fall. Stock markets around the world began to recover. The
worldwide panic was over.
The U.S. economy and most of Western Europe never faltered. In fact, the
continued robustness of the U.S. economy is beginning to worry many people. Will
it cause a resurgence in inflation? Will it end in sudden collapse since much of
the strength is being financed by extremely high and growing consumer debt? This
caution is very apparent because interest rates have risen in the last six
months. This is just what you would expect given these worries.
(1) The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively traded blue chip stocks. It is prepared and published by Dow Jones
& Co.
THE MUNICIPAL BOND OPPORTUNITY
One of the most noticeable things in the graph above is the relative sedateness
of the BBI40. Municipal yields usually are less volatile than those of U.S.
Treasuries (which are among the most volatile bonds in the world). This
difference in volatility was extreme in the twelve months ended March 31, 1999.
For most of the period, from late September through January, the yield on the
BBI40 was higher than that of the Long Bond. This is very unusual since the
interest on most municipal bonds is exempt from federal income taxes, and the
interest on Treasury bonds is not. Although a more normal relationship has since
reestablished itself, tax-exempt municipal bonds are still very attractive
compared to U.S. Treasuries on an after-tax basis. And, municipal bonds did not
take you on the wild ride in price that Treasury bonds did. Tax-exempt municipal
bonds have once again proven their historical attractiveness -- solid after-tax
returns with relatively little riskiness.
NEW YORK ECONOMY
The State of New York derives strength from a diverse and substantial economic
base. At approximately 120% of the U.S. norm, the State's per capita income
indicates a high degree of wealth. Economic growth continues to lag the nation
as a whole, but this gap narrowed in 1998. An important factor driving the
State's economic gains has been a profitable Wall Street. Economic performance
in upstate New York has generally trailed the downstate region. As of February
1999, the State's unemployment rate was 5.3%, displaying an improvement since
the 6.0% mark a year earlier. Nevertheless, New York's unemployment rate remains
well above the 4.4% national level.
With a substantial operating surplus projected for the fiscal year ending March
31, 1999, financial performance for the State is sound. Although the State
failed to enact a timely budget for the fiscal year beginning April 1, 1999,
this will have no impact on debt service payments. Traditionally, the State
appropriates funds as necessary to honor debt service requirements regardless of
discord over the operating budget. In fact, a debt service appropriations bill
was passed by the State Legislature. The governor's proposed budget, which is
now under consideration by the Legislature, contains modest expenditure growth.
However, the Legislature will surely propose spending adjustments. Also, the
Governor's financial plan limits future borrowing. The implementation of this
recommendation would be a positive credit event.
NEW YORK BOND FUND PERFORMANCE
While past performance is no guarantee of future results, from March 31, 1998,
to March 31, 1999, your Fund paid an annualized dividend distribution yield(2)of
5.27% versus the Lipper New York Municipal Debt Funds Average(3)of 4.48% for the
99 funds in the category. During the twelve-month period, the share price rose
$.04 to $11.66. For the fiscal year, the Fund provided a total return(4) of
5.73%, well above the Lipper average total return of 5.17%.
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.(5)
(2) 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 distribution.
(3) Refer to page 5 for the Lipper Average definition.
(4) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
(5) Past performance is no guarantee of future results.
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 New York 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 table below compares the yield of the USAA New York Bond Fund with a taxable
equivalent investment.
To match the USAA New York Bond Fund's closing 30-Day SEC yield of 4.36%
and:
- --------------------------------------------------------------------------------
Assuming a New York State Tax Rate of 6.85%
and a Marginal Federal Tax Rate of 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investment must pay: 6.50% 6.78% 7.31% 7.75%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Assuming a New York State and City Tax Rate of 10.68%
and a Marginal Federal Tax Rate of: 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investment must pay: 6.78% 7.07% 7.63% 8.08%
- --------------------------------------------------------------------------------
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 New York Bond Fund to be:
AA - 36%; AAA - 35%; A - 17%; BBB - 10%; and Cash Equivalents - 2%.
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality to
category AAA account for 2.1% of the Fund's investments.
Note: Income may be subject to federal, state or local taxes, or the alternative
minimum tax.
See page 16 for a complete listing of the Portfolio of Investments.
Investment Review
USAA NEW YORK MONEY MARKET FUND
OBJECTIVE: Provide New York investors with a high level of current interest
income that is exempt from federal income taxes and New York state and New York
City personal income taxes and a further objective of preserving capital and
maintaining liquidity.
TYPES OF INVESTMENTS: High quality New York tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will endeavor to maintain a constant
net asset value per share of $1.00.*
* An investment in a money market fund is not insured or guaranteed by the FDIC
or any government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
- --------------------------------------------------------------------------------
3/31/98 3/31/99
================================================================================
Net Assets $62.2 Million $68.8 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 10/15/90 Yield
2.90% 3.13% 3.07% 2.60%
- --------------------------------------------------------------------------------
Total return equals income return and assumes reinvestment of all dividends and
any capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. Past
performance is no guarantee of future results. Yields and returns fluctuate. The
7-day yield quotation more closely reflects current earnings of the Fund than
the total return quotation.
7-Day Yield Comparison
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day Yield of the USAA New York Money Market Fund and the IBC Financial
Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose) (Tax-Free):
New York Money Funds.
USAA New York
Money Market Fund IBC Financial Data, Inc.
----------------- ------------------------
03/31/98 3.19% 2.92%
04/28/98 3.68% 3.34%
05/26/98 3.35% 3.09%
06/30/98 3.11% 2.95%
07/28/98 3.08% 2.92%
08/25/98 2.74% 2.64%
09/29/98 3.40% 3.11%
10/27/98 2.69% 2.56%
11/24/98 2.85% 2.64%
12/29/98 3.08% 2.86%
01/26/99 2.51% 2.30%
02/22/99 2.38% 2.15%
03/29/99 2.60%* 2.37%*
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): New York 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, both to 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 9 out of 43 New York Money Market Funds
according to IBC Financial Data, Inc. with a yield of 2.90%. The average for the
category over the same period was 2.73%.
NEW YORK
The state of New York derives strength from a diverse and substantial economic
base. At approximately 120% of the U.S. average, the state's per capita income
indicates a high degree of wealth. Economic growth continues to lag the nation
as a whole, but this gap narrowed in 1998. An important factor driving the
state's economic gains has been a profitable Wall Street. Economic performance
in upstate New York has generally trailed the downstate region. As of February
1999, the state's overall unemployment rate improved to 5.3% (seasonally
adjusted), down from 6.0% in February 1998. Nevertheless, New York's
unemployment rate remains well above the 4.4% national level.
Financial performance for the state continues to be sound with a substantial
operating surplus projected for the fiscal year ending March 31, 1999. Even
though the state once again failed to enact a timely budget for the fiscal year
beginning April 1, this should not have an impact on debt service payments. The
state has appropriated funds necessary to honor debt service requirements even
though the operating budget is not complete. The Governor's proposed budget,
which is now under consideration by the Legislature, contains modest expenditure
growth, and limits on future borrowing. Implementing the borrowing limitations
would certainly be a positive credit event, given the large amount of
outstanding state debt. The state continues to carry bond ratings of A2, A, and
A+ from Moody's, Standard & Poor's, and Fitch IBCA, respectively.
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 New York Money Market Fund. The
data is from 10/15/90 to 3/31/99. The data points from the graph are as follows:
USAA New York Money Market Fund
Year Amount
---- ------
10/15/90 $10,000
03/31/91 $10,223
09/30/91 $10,428
03/31/92 $10,603
09/30/92 $10,753
03/31/93 $10,869
09/30/93 $10,979
03/31/94 $11,086
09/30/94 $11,214
03/31/95 $11,392
09/30/95 $11,597
03/31/96 $11,797
09/30/96 $11,985
03/31/97 $12,170
09/30/97 $12,371
03/31/98 $12,570
09/30/98 $12,766
03/31/99 $12,935
Data since inception on 10/15/90 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 19 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 New York Bond and USAA New York 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 New York Bond and USAA New York 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 New York 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 New York 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.
(PRE) Prerefunded to a date prior to maturity.
(LOC) Enhanced by a bank letter of credit.
(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) Asset Guaranty Insurance Co.
PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
BAN Bond Anticipation Note MFH Multi-Family Housing
COP Certificate of Participation PCRB Pollution Control Revenue Bond
CP Commercial Paper RB Revenue Bond
GO General Obligation TAN Tax Anticipation Note
IDA Industrial Development
Authority/Agency
<TABLE>
USAA NEW YORK BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 1999
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- ----------------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (98.5%)
<C> <S> <C> <C> <C>
New York
$ 3,150 Buffalo Municipal Water Finance Auth. RB,
Series 1998A (INS) (3) 5.00% 7/01/2028 $ 3,090
Dormitory Auth. RB,
1,750 Series 1990A (Devereux Foundation)(PRE) 7.40 7/01/2015 1,871
2,000 Series 1992 (Manhattan College) (INS) (5) 6.50 7/01/2019 2,168
2,000 Series 1994 (Gurwin Geriatric Center) 7.35 8/01/2029 2,287
2,500 Series 1994B (State Univ. System) (PRE) 6.25 5/15/2020 2,817
1,785 Series 1996-2 (City Univ. System) (PRE) 6.00 7/01/2026 2,011
765 Series 1996-2 (City Univ. System) 6.00 7/01/2026 833
2,800 Series 1997 (Lutheran Center) (LOC) 6.05 7/01/2026 2,997
2,100 Series 1999 (Culinary Institute of
America) (INS) (1) 5.00 7/01/2022 2,070
4,500 Series 1999A (Upstate Community
Colleges) (b) 5.00 7/01/2028 4,323
2,500 Energy Research and Development Auth.
PCRB, Series 1998A (INS) (2) 5.15 11/01/2025 2,516
1,650 Environmental Facilities Corp. PCRB,
Series 1990B 7.50 3/15/2011 1,688
1,930 Groton Community Health Care Facilities RB,
Series 1994A 7.45 7/15/2021 2,223
Housing Finance Agency MFH RB,
1,865 Series 1992E (Secured Mortgage Program) 6.75 8/15/2025 1,998
2,440 Series 1996A (Housing Project) (INS) (4) 6.13 11/01/2020 2,635
4,500 Long Island Power Auth. RB, Series 1998A 5.25 12/01/2026 4,502
Medical Care Facilities Finance Agency RB,
2,500 Series 1994A (Community General
Hospital of Sullivan County) 6.25 2/15/2024 2,634
1,915 Series 1994A (Hospital and Nursing
Home Facilities) 6.50 2/15/2034 2,081
2,000 Series 1994A (New York Hospital) (PRE) 6.90 8/15/2034 2,333
1,965 Series 1994E (Mental Health Services) (PRE) 6.50 8/15/2024 2,231
2,500 Series 1995A (Brookdale Hospital) (PRE) 6.85 2/15/2017 2,910
2,395 Series 1995A (Health Center Projects) 6.38 11/15/2019 2,661
3,250 Monroe County IDA RB, Series 1998 5.20 12/20/2039 3,188
6,250 Mortgage Agency RB, Series EE-3 (c) 7.75 4/01/2016 6,516
New York City GO,
3,000 Series 1995B (PRE) 7.25 8/15/2019 3,506
55 Series 1997I (PRE) 6.25 4/15/2017 63
2,945 Series 1997I 6.25 4/15/2017 3,248
2,500 New York City IDA RB, Series 1997 5.80 8/01/2016 2,639
20,090 New York City Municipal Water Finance
Auth. RB, Series 1998D (a) 5.11 6/15/2020 6,750
3,300 Niagara Falls City School District COP,
Series 1998 5.38 6/15/2028 3,300
3,040 Orange County GO, Series 1997A 5.13 9/01/2022 3,055
- ----------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $81,869) 87,144
- ----------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (2.3%)
New York
2,060 St. Lawrence County IDA PCRB,
Series 1985 (LOC) (cost: $2,060) 3.30 12/01/2007 2,060
- ----------------------------------------------------------------------------------------------
Total investments (cost: $83,929) $ 89,204
==============================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Escrowed Bonds 20.1%
Water/Sewer Utilities - Municipal 13.0
Nursing/Continuing Care Centers 12.1
Appropriated Debt 8.6
Single-Family Housing 7.4
General Obligations 7.1
Education 5.7
Hospitals 5.3
Multi-Family Housing 5.2
Electric/Gas Utilities - Municipal 5.1
Healthcare - Miscellaneous 3.0
Community Service 3.0
Electric Utilities 2.9
Aluminum 2.3
-----
Total 100.8%
=====
<TABLE>
USAA NEW YORK MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 1999
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- -----------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (70.7%)
<C> <S> <C> <C> <C>
New York (68.5%)
Dormitory Auth. RB,
$ 5,390 Series 1993 (LOC) 3.10% 7/01/2023 $ 5,390
2,000 Series 1994A (LOC) 2.90 7/01/2024 2,000
1,700 Series 1995 (LOC) 2.90 7/01/2025 1,700
3,275 Dutchess County IDA RB,
Series 1997 (LOC) 3.10 9/01/2017 3,275
2,450 Erie County IDA RB, Series 1998B (LOC) 2.90 2/01/2005 2,450
3,100 Long Island Power Auth. RB,
Series 2 (LOC) 2.80 5/01/2033 3,100
1,100 Monroe County IDA RB, Series 1995D (LOC) 2.85 6/15/2016 1,100
3,300 Municipal Assistance Corp.,
Series K (LOC) 3.15 7/01/2008 3,300
1,000 Nassau County IDA RB, Series 1984 (LOC) 3.00 12/01/1999 1,000
1,000 New York City GO, Series 1994A-4 (LOC) 3.10 8/01/2021 1,000
5,590 New York City Health and Hospital Corp. GO,
Series 1997A (LOC) 2.80 2/15/2026 5,590
500 New York City Housing Development Corp.
Special Obligation RB,
Series 1989-A (LOC) 2.95 1/01/2016 500
2,000 New York City IDA Civic Facility RB,
Series 1998 (LOC) 3.15 12/01/2013 2,000
5,700 Ramapo Housing Auth. RB,
Series 1998 (LOC) 3.29 12/01/2029 5,700
2,750 Rockland County IDA RB,
Series 1999 (LOC) 3.29 2/01/2029 2,750
2,500 St. Lawrence County IDA RB, Series 1999A 3.01 1/01/2022 2,500
1,650 St. Lawrence County IDA PCRB,
Series 1985 (LOC) 3.30 12/01/2007 1,650
850 Suffolk County IDA RB, Series 1992 (LOC) 3.00 12/01/2012 850
1,300 Westchester County IDA RB,
Series 1998 (LOC) 3.15 10/01/2028 1,300
Puerto Rico (2.2%)
1,530 Industrial, Tourist, Educational,
Medical and Environmental Control
Facilities Financing Auth. RB,
Series 1995A (LOC) 2.80 1/01/2015 1,530
- -----------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $48,685) 48,685
- -----------------------------------------------------------------------------------------
PUT BONDS (4.5%)
New York
Hudson IDA RB,
385 Series 1985 (Emsig Project) (LOC) 3.75 12/15/2000 385
120 Series 1985 (Rual Project) (LOC) 3.75 12/15/2000 120
2,600 Long Island Power Auth. RB,
Series 3 (LOC) 2.75 5/01/2033 2,600
- -----------------------------------------------------------------------------------------
Total put bonds (cost: $3,105) 3,105
- -----------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (28.2%)
New York
285 Adirondack Central School District GO,
Series 1998 (INS) (4) 4.65 6/15/1999 285
300 Babylon Waste Facilities GO,
Series 1993 (INS) (3) 3.90 8/01/1999 301
300 Canton Central School District GO,
Series 1998 (INS) (4) 4.63 6/15/1999 300
350 Chemung County GO Public Improvement
Bonds, Series 1998 (INS) (3) 4.50 6/15/1999 350
215 Chili GO Public Improvement Bonds,
Series 1998 (INS) (3) 4.00 12/15/1999 216
575 Cobleskill-Richmondville Central School
District GO, Series 1998 (INS) (3) 4.25 6/15/1999 576
350 Columbia County GO Public Improvement
Bonds, Series 1998 (INS) (2) 4.50 8/01/1999 351
275 Connetquot Central School District of
Islip GO TAN, Series 1998 (INS) (3) 4.20 6/15/1999 275
226 Croton-on-Hudson GO, Series1998A (INS) (4) 3.75 9/01/1999 226
985 Dormitory Auth RB, Series 1998 (INS) (1) 4.00 8/01/1999 988
300 Dover Union Free School District GO,
Series 1998B (INS) (4) 6.50 9/01/1999 303
355 East Meadow Union Free School District GO,
Series 1998 (INS) (3) 4.50 6/15/1999 355
282 Freeport Village New York GO,
Series 1998A (INS) (1) 6.25 5/01/1999 283
230 Indian River Central School District GO,
Series 1999 (INS) (2) 4.13 1/15/2000 232
655 Johnstown School District GO,
Series 1998 (INS) (4) 4.10 6/15/1999 656
355 Kenmore Village GO, Series 1998 (INS) (4) 4.38 8/01/1999 356
504 Liverpool Central School District GO,
Series 1998 (INS) (3) 6.75 7/15/1999 508
535 Livonia Central School District GO,
Series 1999 (INS) (3) 3.85 6/15/1999 536
249 Malone Central School District GO,
Series 1998 (INS) (3) 4.85 6/15/1999 250
225 Medford Fire District GO,
Series 1998 (INS) (1) 4.25 12/15/1999 227
227 Mount Vernon GO, Series 1998 (INS) (4) 4.00 12/01/1999 228
3,600 Municipal Water Finance Auth. CP,
Series 1 (LOC) 2.65 4/01/1999 3,600
214 New Rochelle GO Public Improvement
Bonds, Series 1998B (INS) (1) 4.80 7/15/1999 215
2,500 North Babylon Union Free School
District GO TAN, Series 1998 4.00 6/29/1999 2,502
300 North Warren Central School District GO,
Series 1999 (INS) (3) 4.13 6/15/1999 301
2,000 Oneida County GO BAN, Series 1998 4.00 4/23/1999 2,000
Orchard Park Central School District GO,
200 Series 1992 (INS) (3) 5.90 6/15/1999 201
278 Series 1998 (INS) (4) 4.60 6/01/1999 278
265 Palmyra-Macedon Central School District GO,
Series 1998 (INS) (4) 4.40 6/15/1999 265
450 Perry New York Central School District GO,
Series 1999 (INS) (1) 4.30 6/15/1999 451
390 Queensbury Union Free School District GO,
Series 1998 (INS) (4) 4.80 6/15/1999 391
236 Rockville Centre GO Public Improvement
Bonds, Series 1998 (INS) (3) 4.20 9/01/1999 237
355 Southold Union Free School District GO,
Series 1998 (INS) (3) 4.75 6/01/1999 355
201 Spring Valley GO, Series 1998 (INS) (2) 3.90 12/15/1999 202
250 Thruway Authority Highway and Bridge
Trust Fund RB, Series 1995B (INS) (1) 5.00 4/01/1999 250
145 Washington County GO, Series 1998 (INS) (2) 4.75 4/15/1999 145
175 Westfield GO, Series 1998 (INS) (4) 4.25 11/15/1999 176
- ----------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $19,371) 19,371
- ----------------------------------------------------------------------------------------
Total investments (cost: $71,161) $ 71,161
========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
General Obligations 22.6%
Nursing/Continuing Care Centers 21.2
Hospitals 12.5
Electric/Gas Utilities - Municipal 8.3
Community Service 7.9
Publishing 7.8
Aluminum 6.0
Water/Sewer Utilities - Municipal 5.2
Sales Tax 4.8
Buildings 3.1
Education 2.2
Manufacturing - Diversified Industries .7
Multi-Family Housing .7
Toll Roads .4
-----
Total 103.4%
=====
NOTES TO PORTFOLIOS 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.
(b) At March 31, 1999, the cost of securities purchased on a delayed delivery
basis for the USAA New York Bond Fund was $4.4 million.
(c) At March 31, 1999, this security was segregated to cover delayed delivery
purchases.
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 1999
<CAPTION>
USAA
USAA NEW YORK
NEW YORK MONEY MARKET
BOND FUND FUND
--------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $83,929 and $71,161, respectively) $ 89,204 $ 71,161
Cash 4 162
Receivables:
Capital shares sold 3 25
Interest 1,194 506
Securities sold 2,604 -
-----------------------
Total assets 93,009 71,854
-----------------------
LIABILITIES
Securities purchased 4,355 2,498
Capital shares redeemed 4 469
USAA Investment Management Company 44 23
USAA Transfer Agency Company 3 3
Accounts payable and accrued expenses 24 20
Dividends on capital shares 99 7
-----------------------
Total liabilities 4,529 3,020
-----------------------
Net assets applicable to capital shares outstanding $ 88,480 $ 68,834
=======================
REPRESENTED BY:
Paid-in capital $ 85,856 $ 68,834
Accumulated net realized loss on investments (2,651) -
Net unrealized appreciation of investments 5,275 -
-----------------------
Net assets applicable to capital shares outstanding $ 88,480 $ 68,834
=======================
Capital shares outstanding 7,586 68,834
=======================
Authorized shares of $.01 par value 100,000 1,060,000
=======================
Net asset value, redemption price, and
offering price per share $ 11.66 $ 1.00
=======================
</TABLE>
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 1999
<CAPTION>
USAA USAA
New York New York
Bond Fund Fund
-------------------------
<S> <C> <C>
Net investment income:
Interest income $ 4,489 $ 2,110
-----------------------
Expenses:
Management fees 318 255
Transfer agent's fees 51 39
Custodian's fees 41 39
Postage 4 4
Shareholder reporting fees 3 4
Directors' fees 4 4
Registration fees 6 3
Professional fees 20 25
Other 3 3
-----------------------
Total expenses before reimbursement 450 376
Expenses reimbursed (59) (62)
-----------------------
Total expenses after reimbursement 391 314
-----------------------
Net investment income 4,098 1,796
-----------------------
Net realized and unrealized gain on investments:
Net realized gain 125 -
Change in net unrealized appreciation/depreciation 21 -
-----------------------
Net realized and unrealized gain 146 -
-----------------------
Increase in net assets resulting from operations $ 4,244 $ 1,796
=======================
</TABLE>
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<CAPTION>
USAA USAA
New York New York
Bond Fund Money Market Fund
-------------------------------------------
1999 1998 1999 1998
-------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 4,098 $ 3,516 $ 1,796 $ 1,679
Net realized gain on investments 125 409 - -
Change in net unrealized appreciation/
depreciation of investments 21 3,325 - -
-------------------------------------------
Increase in net assets resulting from
operations 4,244 7,250 1,796 1,679
-------------------------------------------
Distributions to shareholders from:
Net investment income (4,098) (3,516) (1,796) (1,679)
-------------------------------------------
From capital share transactions:
Proceeds from shares sold 24,751 15,762 69,814 65,305
Dividend reinvestments 3,049 2,624 1,708 1,599
Cost of shares redeemed (10,077) (9,544) (64,914) (54,674)
-------------------------------------------
Increase in net assets from
capital share transactions 17,723 8,842 6,608 12,230
-------------------------------------------
Net increase in net assets 17,869 12,576 6,608 12,230
Net assets:
Beginning of period 70,611 58,035 62,226 49,996
-------------------------------------------
End of period $ 88,480 $ 70,611 $ 68,834 $ 62,226
===========================================
Change in shares outstanding:
Shares sold 2,111 1,383 69,814 65,305
Shares issued for dividends reinvested 260 230 1,708 1,599
Shares redeemed (861) (842) (64,914) (54,674)
-------------------------------------------
Increase in shares outstanding 1,510 771 6,608 12,230
===========================================
</TABLE>
See accompanying notes to financial statements.
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 New York Bond Fund and USAA New York Money Market Fund (the Funds). The
Funds have a common objective of providing New York investors with a high level
of current interest income that is exempt from federal, New York state, and New
York City personal income taxes. The USAA New York Money Market Fund has a
further objective of preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA New York Bond Fund are valued
each business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued by
the Service, and all other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 under the Investment Company Act of 1940, as amended, all
securities in the USAA New York Money Market Fund, are stated at amortized cost
which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in New York municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in 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. During the year ended March 31, 1999, the USAA New York Bond Fund
had seven borrowings, averaging $275,589 with an average length of one day, and
incurred $336 in interest expense. The USAA New York Money Market Fund had no
borrowings under any of these agreements during the period.
(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 New York Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $2.7 million which, if not offset by subsequent
capital gains will expire between 2003-2005. It is unlikely that the Company's
Board of Directors will authorize a distribution of capital gains realized in
the future until the capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the year
ended March 31, 1999 were as follows:
USAA New York USAA New York
Bond Fund Money Market Fund
($000) ($000)
------------------------------------------
Purchases $39,981 $186,231
Sales/maturities $21,305 $176,580
For the USAA New York Bond Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at March 31, 1999
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
------------------------------------------
USAA New York Bond Fund $ 5,528 $ 253 $ 5,275
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company (the Manager) carries
out each Fund's investment policies and manages each Fund's portfolio.
Management fees are computed as a percentage of aggregate average net assets
(ANA) of both Funds combined, which on an annual basis is equal to .50% of the
first $50 million, .40% of that portion over $50 million but not over $100
million, and .30% of that portion over $100 million. These fees are allocated on
a proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund to
.50% of its annual average net assets through August 1, 2000.
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, New York
state, and New York City income tax purposes. There were no long-term capital
gain distributions for the year ended March 31, 1999.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA NEW YORK 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 $ 11.62 $ 10.94 $ 10.95 $ 10.77 $ 10.83
Net investment income .61 .63 .64 .63 .62
Net realized and
unrealized gain (loss) .04 .68 (.01) .18 (.06)
Distributions from net
investment income (.61) (.63) (.64) (.63) (.62)
----------------------------------------------------
Net asset value at
end of period $ 11.66 $ 11.62 $ 10.94 $ 10.95 $ 10.77
====================================================
Total return (%)* 5.73 12.24 5.89 7.67 5.42
Net assets at end
of period (000) $ 88,480 $ 70,611 $ 58,035 $ 53,987 $ 50,507
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50
Ratio of expenses to
average net
assets excluding
reimbursements (%) .58 .61 .66 .69 .71
Ratio of net investment
income to average
net assets (%) 5.24 5.54 5.83 5.75 5.83
Portfolio turnover (%) 27.64 49.49 41.42 74.80 74.74
* Assumes reinvestment of all dividend income distributions during the period.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA NEW YORK 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 (%)* 2.90 3.29 3.16 3.56 2.76
Net assets at end
of period (000) $ 68,834 $ 62,226 $ 49,996 $ 45,554 $ 27,525
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50
Ratio of expenses to
average net
assets excluding
reimbursements (%) .60 .63 .69 .78 .85
Ratio of net investment
income to average
net assets (%) 2.86 3.23 3.12 3.47 2.74
* 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
