Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA Virginia Bond Fund 4
USAA Virginia Money Market Fund 11
Shareholder Voting Results 14
Financial Information:
Portfolios of Investments:
Categories and Definitions 15
USAA Virginia Bond Fund 16
USAA Virginia Money Market Fund 21
Notes to Portfolios of Investments 24
Statements of Assets and Liabilities 25
Statements of Operations 26
Statements of Changes in Net Assets 27
Notes to Financial Statements 28
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Virginia
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)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 Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500(Registered
Trademark) Index Moderate $3,000
Science & Technology Very high $3,000
Small Cap Stock Very high $3,000
World Growth Moderate to high $3,000
- --------------------------------------------------------
ASSET ALLOCATION
- --------------------------------------------------------
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax
Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
- --------------------------------------------------------
INCOME - TAXABLE
- --------------------------------------------------------
GNMA Low to moderate $3,000
High-Yield
Opportunities High $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Intermediate-Term
Bond Low to moderate $3,000
Short-Term Bond Low $3,000
- --------------------------------------------------------
INCOME - TAX EXEMPT
- --------------------------------------------------------
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
- --------------------------------------------------------
MONEY MARKET
- --------------------------------------------------------
Money Market Very low $3,000
Tax Exempt
Money Market Very low $3,000
Treasury Money
Market Trust Very low $3,000
State Money Market Very low $3,000
- --------------------------------------------------------
Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
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.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
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.
The Science & Technology 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 the President and Vice Chairman of the Board, Michael J.C. Roth,
CFA, appears here.]
FOR AS LONG AS I HAVE MANAGED MONEY
for customers, it has been obvious that few things puzzle or distress them as
much as a falling bond market. People generally view bonds as a risk-lowering
tool. They add bonds to a portfolio to reduce overall volatility and to create
an added buffer with the relatively high income. Some people use bond portfolios
as their sole investment. Their thinking is that they will live off the income
and not be concerned about market values because they intend to let the bonds
mature. These kinds of strategies were much easier to execute before the days of
fixed-income mutual funds.
Mutual funds did something for bond investors that had never been done before --
show investors every day what their portfolio was worth. In the process, the
funds revealed just how much bond prices can move in a day or a week. No
investor likes to see a portfolio lose market value, especially when the
investor is thinking in terms of "low risk." The latter part of 1998 and the
first three quarters of 1999 have been a period of generally rising interest
rates, which has meant falling market prices. Let me tell you how we approach
such times.
First, we believe interest-rate movements are nearly impossible to predict with
both accuracy and consistency. Second, we believe that most tax-exempt income
investors are primarily interested in a high and stable level of income. Since
the common way to preserve market value in a period of rising interest rates is
to switch to money market investments at much lower yields, the importance of
belief one is magnified. And third, we believe experience going back many years
indicates that the part of a portfolio that is invested in longer maturities may
provide returns that are superior to the money markets.
The chart below shows the one-, five-, and ten-year average annual total returns
for our four national tax-exempt funds. Please bear in mind that there are no
guarantees here -- just as with all mutual funds.
Average Annual Total Returns as of September 30, 1999
================================================================================
1 Year 5 Years 10 Years
================================================================================
USAA Tax Exempt Long-Term Fund -3.23 6.45 6.93
- --------------------------------------------------------------------------------
USAA Tax Exempt Intermediate-Term Fund -1.24 6.23 6.88
- --------------------------------------------------------------------------------
USAA Tax Exempt Short-Term Fund 2.06 4.90 5.21
- --------------------------------------------------------------------------------
USAA Tax Exempt Money Market Fund 3.10 3.39 3.67
================================================================================
Total return equals income plus share price change and assumes reinvestment of
all dividends and capital gains 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.
I think the best way to address volatility in bond markets is by allocating some
of your portfolio to the short-term part of the market. I believe that the
pattern of the average annual total returns shown in the chart above is viable.
So, the income part of my portfolio is concentrated in the USAA Tax Exempt
Long-Term Fund. If such a strategy leaves you uncomfortable, we have other
options. We'll be happy to help you craft a portfolio with which you are
comfortable.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, 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 VIRGINIA BOND FUND
OBJECTIVE: High level of current interest income that is exempt from federal and
Virginia state income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term, investment-grade Virginia
tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/99 9/30/99
- --------------------------------------------------------------------------------
Net Assets $402.4 Million $389.9 Million
Net Asset Value Per Share $11.52 $10.86
Tax-Exempt Dividends Per Share Last 12 Months $.603 $.595
Capital Gains Distributions Per Share Last 12 Months - -
- --------------------------------------------------------------------------------
Six-Month Total Return and 30-Day SEC Yield* as of 9/30/99
- --------------------------------------------------------------------------------
3/31/99 to 9/30/99 30-Day SEC Yield
-3.20%+ 5.13%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending September 30, 1999
- --------------------------------------------------------------------------------
Total Return Equals Dividend Return Plus Price Change
- --------------------------------------------------------------------------------
Since 10/15/90 7.09% = 5.95% + 1.14%
- --------------------------------------------------------------------------------
5 Years 6.49% = 5.93% + .56%
- --------------------------------------------------------------------------------
1 Year -2.20% = 4.98% + -7.18%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns
for the Eight-Year Period Ended September 30, 1999
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA Virginia Bond Fund for the
eight-year period ended September 30, 1999.
Total Return for Years Ended:
- ----------------------------
09/30/92 10.04%
09/30/93 13.12%
09/30/94 -3.19%
09/30/95 10.51%
09/30/96 6.98%
09/30/97 8.92%
09/30/98 8.73%
09/30/99 -2.20%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
09/30/92 6.53%
09/30/93 6.23%
09/30/94 5.22%
09/30/95 6.41%
09/30/96 5.97%
09/30/97 5.93%
09/30/98 5.65%
09/30/99 4.98%
Change in Share Price:
- ---------------------
09/30/92 3.51%
09/30/93 6.89%
09/30/94 -8.41%
09/30/95 4.10%
09/30/96 1.01%
09/30/97 2.99%
09/30/98 3.08%
09/30/99 -7.18%
** Compounded Dividend yield calculation includes only income distributions.
Total return equals dividend return plus share price change and assumes
reinvestment of all dividends and capital gains distributions. Dividend return
is the income from 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 gains distributions. No adjustment has been made for
taxes payable by shareholders on their reinvested dividends and capital gains
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.
12-Month Dividend Yield Comparison
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Virginia Bond Fund to the 12 Month
Dividend Yield of the Lipper Virginia Municipal Debt Funds Average from 9/30/92
to 9/30/99.
USAA Virginia Lipper Virginia Municipal
Bond Fund Yield Debt Funds Average Yield
------------------ ------------------------
09/30/92 6.04% 5.91%
09/30/93 5.44% 5.24%
09/30/94 5.81% 5.32%
09/30/95 5.82% 5.06%
09/30/96 5.75% 4.86%
09/30/97 5.50% 4.73%
09/30/98 5.25% 4.46%
09/30/99 5.48% *
The 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. The graph represents data for periods ending
9/30/92 to 9/30/99.
* Information from Lipper Analytical Services, Inc. was not available at press
time.
Cumulative Performance Comparison
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 Investment for the USAA Virginia Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper Virginia Municipal Debt Funds
Average. The data is from 10/15/90 through 9/30/99. The data points from the
graph are as follows:
USAA Virginia Bond Fund
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 10,601
09/30/91 11,229
03/31/92 11,620
09/30/92 12,357
03/31/93 13,085
09/30/93 13,978
03/31/94 13,437
09/30/94 13,532
03/31/95 14,326
09/30/95 14,955
03/31/96 15,410
09/30/96 15,998
03/31/97 16,306
09/30/97 17,425
03/31/98 18,121
09/30/98 18,945
03/31/99 19,139
09/30/99 18,528
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
09/30/99 18,919
Lipper Virginia Municipal Debt Funds Average
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 10,554
09/30/91 11,161
03/31/92 11,519
09/30/92 12,260
03/31/93 12,940
09/30/93 13,852
03/31/94 13,108
09/30/94 13,173
03/31/95 13,928
09/30/95 14,551
03/31/96 14,950
09/30/96 15,406
03/31/97 15,684
09/30/97 16,698
03/31/98 17,359
09/30/98 18,088
03/31/99 18,221
09/30/99 17,683
Data since inception on 10/15/90 through 9/30/99
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 Virginia Municipal Debt Funds Average is the average
performance level of all Virginia municipal debt funds, as computed by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds. All tax-exempt bond funds will find it difficult to
outperform the Lehman Index since funds have expenses.
Message from the Manager
[Photograph of the Portfolio Manager, Robert R. Pariseau, CFA, appears here.]
A CHANGE IN SENTIMENT SHAKES THE MARKET
Fixed-income investors were reminded this year that the financial markets look
to the future -- not the past or even the present. Although most economic
statistics released this year suggest that inflation is well under control, the
fixed-income markets are clearly anticipating higher rates of inflation. After
all, reported inflation statistics such as the Consumer Price Index (CPI) are
historical numbers -- even though they may be only a month old. Higher inflation
causes bond prices to fall because inflation decreases the value of future
interest payments.
With a seemingly endless American economic expansion that, at times, seems to be
gaining strength, a bear market psychology has taken hold in the fixed-income
markets. Economists and investors wonder just how much longer economic growth
can continue in the United States without causing higher prices.
After falling to levels not seen in years, some inflation indicators have
increased slightly in 1999. Will inflation continue to rise or will it stabilize
at slightly higher levels than in 1998? This uncertainty has shaken the
confidence of many fixed-income investors. If inflation has stabilized, then the
rise in interest rates is probably closer to the end than the beginning -- given
current economic conditions.
The yield on the 30-year U.S. Treasury bond (the long bond) has steadily risen
from 5.625% to 6.05% from March 31 to September 30, 1999. The yield on the Bond
Buyer 40-Bond Index (BBI40) faired worse. The municipal market under-performed
the Treasury market as the BBI40 began the period at 5.23%, or 93% of the long
bond, and ended at 5.89% on September 30, or 97% of 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 3/31/99
to 9/30/99.
30-year Bond Buyer
U.S. 40-Bond
Treasury Index (BBI40)
-------- -------------
03/31/99 5.63% 5.23%
04/15/99 5.53% 5.21%
04/30/99 5.66% 5.28%
05/14/99 5.92% 5.38%
05/31/99 5.83% 5.37%
06/15/99 6.11% 5.53%
06/30/99 5.96% 5.55%
07/15/99 5.92% 5.50%
07/30/99 6.10% 5.59%
08/16/99 6.09% 5.88%
08/31/99 6.06% 5.78%
09/15/99 6.10% 5.86%
09/30/99 6.05% 5.89%
Note: Past performance is no guarantee of future results.
The 30-year U.S. Treasury bond is generally considered the benchmark for U.S.
long-term interest rates.
The Bond Buyer 40-Bond Index is the industry standard for the yield of
long-term, investment-grade municipal bonds.
INCOME STRATEGY
I consistently follow an income strategy for this Fund similar to that used by
other USAA tax-exempt funds. I focus primarily on generating maximum tax-exempt
income with the goal of producing the best after-tax total return over a three-
to five-year investment horizon. I remain fully invested in long-term,
investment-grade municipal bonds. My primary justifications for this strategy
are simple in concept:
- I believe that a large number of our investors own the Fund for the
tax-free income and invest for the long term -- meaning three to five
years or more.
- Although past performance is no guarantee of future results, the strategy
has worked in different kinds of markets over the years. Long-term
performance, measured by total return, has been well above the peer-group
average.
Although the Fund has behaved as expected given the increase in interest rates,
this year's total return performance has been very disappointing and
frustrating. Why does this income strategy produce such apparently contradictory
results -- weak short-term total return performance in 1999 but above-average
performance for long-term total return? Income performance is well above average
in the short and long term.
Of course, in the short run, price change can overwhelm the income distribution
to create a negative total return for a given period. I believe that an income
strategy works because, over time, the vast majority of your total return from a
fixed-income security will be from the income. Price changes tend to even out
over longer investment horizons. Please refer to the table and chart on page 4.
YOUR INVESTMENT HORIZON IS IMPORTANT!
I consistently invest the Fund in long-term, investment grade, tax-exempt
municipal securities. Why long-term bonds? Because bonds maturing in 20 years or
longer almost always yield more than shorter bonds of the same credit quality.
However, longer-maturity bonds are more volatile in price than shorter-maturity
bonds. In regard to credit risk, I believe investment-grade bonds (rated BBB or
higher) offer the best risk/reward compared to either junk bonds or insured
bonds. That's why we encourage only those investors with a three- to five-year
investment horizon to buy our tax-exempt bond funds. These long-term investors
seeking high current income must be willing to assume moderate credit risk and
price volatility in return.
A TIME TO REFLECT
Because interest rates have risen in 1999, investors have suffered for owning
any kind of long-maturity bond -- municipals, corporates, or governments. That's
the mathematics of bond investing. An investor can mitigate, but not eliminate,
the volatility risk by investing for the long term. Although our strategy has
produced good results for our investors in the past, to guard against
complacency, we are constantly examining and analyzing our investment
strategies.
Is there a better way to invest a tax-exempt bond fund? An alternative to an
income strategy is to focus on total return. However, a total-return strategy
requires the manager to successfully time the market cycles by correctly
forecasting interest rates again and again over extended periods of time. No
person, to my knowledge, has ever done that.
Enduring a bear market like 1999 can be very unsettling. It's a good time to
review why you purchased the Fund in the first place:
- Are you most interested in receiving a high level of interest income
that is free of federal and state taxes?
- Is your investment horizon long enough to cope with the ups and downs
of the market?
- Do you need to raise cash? Do you maintain a sufficient cash reserve?
- Are you comfortable with the moderate credit risk of investment-grade
municipal bonds? (Please review the Portfolio Ratings Mix chart on
page 10.)
I view the current environment as an opportunity to increase the Fund's
distribution yield by buying bonds that offer very attractive yields at value
prices.
YOUR FUND'S PERFORMANCE * * * * *
I'm very pleased to say that your Fund received an Overall Star Rating of five
stars in the municipal bond fund category from Morningstar Rating(Trademark) for
the period ended September 30, 1999. Your Fund's net asset value (NAV) per share
decreased by $0.66, or -5.73%, since March 31, 1999.
While past performance is no guarantee of future results, the Fund's annualized
dividend distribution yield for the past six months was 5.45%. At press time,
Lipper yield data was not available for the same time period. The Fund's total
return was -3.20%, which lagged the Lipper Virginia Municipal Debt Fund Average
total return of -2.95% for the 35 funds in the category.
Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk-adjusted performance as of September 30, 1999.
The ratings are subject to change every month. Morningstar ratings are
calculated from the Fund's three- and five-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 three-, five-, and ten-year ratings, as
applicable. The USAA Virginia Bond Fund received five stars for the three- and
five-year periods, respectively. The top 10% of the funds in a broad asset class
receive five stars, the next 22.5% receive four stars, and the next 35% receive
three stars. The Fund was rated among 1,611 and 1,241 funds in the municipal
bond fund category for the three- and five-year periods, respectively.
Dividend yield is computed by dividing income dividends paid during the previous
six months by the latest month-end net asset value adjusted for capital gains
distributions and annualizing the result.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gains distributions.
THE COMMONWEALTH OF VIRGINIA
Virginia benefits from a dynamic and diverse economy. Overall, economic activity
in the commonwealth is robust with strong employment trends. As of August 1999,
unemployment remains very low at 2.8%, comparing favorably to the national rate
of 4.2%. Additionally, Virginia has become home to the sixth-largest
concentration of high-technology companies in the nation. Creation of
high-technology jobs has allowed Virginia's per capita income to remain above
the national average.
Historically, the commonwealth has employed conservative financial management to
ensure balanced budgets. The fiscal year ending June 30 was no exception with
another general fund operating surplus. Virginia is one of the few states rated
AAA by all three major rating agencies -- Moody's Investors Service, Fitch IBCA,
and Standard and Poor's. Recently, the governor unveiled a transportation
program totaling $2.5 billion over a six-year period to help solve traffic
congestion. We are confident that the plan will be implemented prudently.
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 that could potentially impact
the value of your holdings.
TAX EQUIVALENT YIELDS
The table below compares the yield of the USAA Virginia Bond Fund with a taxable
equivalent investment.
To match the USAA Virginia Bond Fund's closing 30-day SEC yield of 5.13% and:
- --------------------------------------------------------------------------------
Assuming a Virginia state tax rate of 5.75%
and a marginal federal tax rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investment must pay: 6.40% 7.55% 7.88% 8.50% 9.00%
- --------------------------------------------------------------------------------
This table is based on a hypothetical investment calculated for illustrative
purposes only. It is not an indication of performance for any of the USAA family
of funds.
Note: Some income may be subject to federal, state, or local taxes, or the
federal alternative minimum tax.
Portfolio Ratings Mix
September 30, 1999
A pie chart is shown here depicting the Portfolio Ratings Mix as of September
30, 1999 of the USAA Virginia Bond Fund to be:
AAA - 31.8%; AA - 33.3%; A - 17.5%; BBB - 17.1%; and Cash Equivalents - 0.3%.
The four highest long-term credit ratings, in descending order of credit
quality, are AAA, AA, A, and BBB. This chart reflects the higher rating of
either Moody's Investors Service, Standard & Poor's Rating Group, or Fitch IBCA.
Unrated securities that have been determined by USAA IMCO to be of equivalent
investment quality to categories AAA and BBB account for 0.03% and 0.01%,
respectively, of the Fund's investments, and are included in their appropriate
category above.
See page 16 for a complete listing of the Portfolio of Investments.
Investment Review
USAA VIRGINIA MONEY MARKET FUND
OBJECTIVE: High level of current interest income that is exempt from federal and
Virginia state income taxes and a further objective of preserving capital and
maintaining liquidity.
TYPES OF INVESTMENTS: High-quality Virginia tax-exempt securities with
maturities of 397 days or less. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will endeavor to maintain a constant
net asset value per share of $1.00.*
* An investment in 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.
- --------------------------------------------------------------------------------
3/31/99 9/30/99
- --------------------------------------------------------------------------------
Net Assets $138.4 Million $141.1 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
Average Annual Total Returns and 7-Day Yield as of 9/30/99
- --------------------------------------------------------------------------------
3/31/99 Since Inception 7-Day
to 9/30/99 1 Year 5 Years on 10/15/90 Yield
1.43%+ 2.79% 3.20% 3.17% 3.20%
- --------------------------------------------------------------------------------
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income return and assumes reinvestment of all dividends and
any capital gains distributions. No adjustment has been made for taxes payable
by shareholders on their reinvested dividends and capital gains distributions.
Past performance is no guarantee of future results. Yields and returns
fluctuate. The 7-day yield quotation more closely reflects current earnings of
the Fund than the total return quotation.
7-Day Yield Comparison
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day Yield of the USAA Virginia Money Market Fund and the IBC Financial
Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose) (Tax-Free):
Money Funds.
USAA Virginia
Money Market Fund IBC Financial Data, Inc.
----------------- ------------------------
09/29/98 3.44% 3.10%
10/27/98 2.84% 2.55%
11/24/98 3.01% 2.64%
12/29/98 3.12% 2.85%
01/26/99 2.51% 2.28%
02/22/99 2.33% 2.11%
03/29/99 2.56% 2.34%
04/26/99 2.91% 2.66%
05/31/99 2.88% 2.58%
06/28/99 2.97% 2.82%
07/26/99 2.72% 2.40%
08/30/99 2.84% 2.53%
09/27/99 3.15% 2.90%
Data represent the last Monday of each month.
Ending date 9/27/99
The graph tracks the Fund's 7-day yield against IBC Financial Data, Inc. State
Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free): Money Funds, an
average of money market fund yields.
Message from the Manager
[Photograph of the Portfolio Manager, Regina G. Shafer, CFA, appears here.]
THE MARKET
Since our last shareholder report, the national economy has continued to
strengthen. Consumer confidence has been very high due, in part, to continued
strong employment. In August, national unemployment reached the lowest levels of
the decade -- 4.2%. This strong economy has caused the Federal Reserve Board to
take action in order to keep inflation in check. The Federal Open Market
Committee has raised the federal funds rate (the interest rate banks charge
other banks) twice since March -- an increase of 0.25% in both June and August
to bring the federal funds rate to 5.25%. During this time period, the 30-year
Treasury rate ranged from 5.4% in April to 6.3% in August. One-year municipal
note yields have also inched up over the last six months. According to the Bond
Buyer One-Year Note Index, municipal notes have risen from a low of 3.05% in
April to a high of 3.73% as of September.
STRATEGY
Instead of trying to determine where interest rates will be in the near term, we
continue to focus on finding relative value. Our credit research team
contributes to this effort by assessing the creditworthiness of each issue that
the Fund purchases. The Fund's average maturity of 35 days on September 30 is
shorter than the industry's average maturity of 57 days. The Fund holds
approximately 75% of its assets in issues whose rates are reset daily or weekly,
with the belief that this sector represents the best value at the time. This
provides us the flexibility to selectively move to longer-term investments once
those become more attractive.
PERFORMANCE
For the 12 months ending September 30, 1999, the USAA Virginia Money Market Fund
ranked 17 out of 166 state-specific tax-exempt money market funds, according to
IBC Financial Data, Inc., with a return of 2.79%. The average return for the
category over the same period was 2.52%. Please keep in mind that past
performance is no guarantee of future results.
The Bond Buyer One-Year Note Index is representative of yields on ten large
one-year tax-exempt notes.
IBC Financial Data, Inc. provides independent analysis of trends in the
financial services and investing industries, with particular concentration on
money market funds.
VIRGINIA
Virginia benefits from a substantial and diverse economy. Unemployment remained
very low at 2.8% as of August 1999. This compares very favorably to the national
rate of 4.2%. The commonwealth's financial picture also remains strong.
Historically, the commonwealth has employed conservative financial management,
ensuring balanced budgets. The fiscal year ending June 30 was no exception. A
general fund operating surplus (unaudited) was generated because tax revenues
were stronger than expected. Recently, the governor unveiled a transportation
program totaling $2.5 billion over a six-year period. We remain confident that,
if enacted, the plan will be implemented in a manner consistent with Virginia's
typically prudent fiscal practices.
A strong economy and solid financial performance have contributed to the
financial strength of the commonwealth. Credit ratings on the commonwealth's
general obligation debt are Aaa by Moody's Investors Service, AAA by Standard
and Poor's, and AAA by Fitch IBCA - the highest rating possible for each credit
agency.
Cumulative Performance of $10,000
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 investment of the USAA Virginia Money Market Fund. The
data is from 10/15/90 through 9/30/99. The data points from the graph are as
follows:
USAA Virginia Money Market Fund
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 10,238
09/30/91 10,464
03/31/92 10,657
09/30/92 10,811
03/31/93 10,940
09/30/93 11,060
03/31/94 11,174
09/30/94 11,312
03/31/95 11,499
09/30/95 11,701
03/31/96 11,893
09/30/96 12,080
03/31/97 12,267
09/30/97 12,474
03/31/98 12,676
09/30/98 12,881
03/31/99 13,054
09/30/99 13,241
Data since inception on 10/15/90 through 9/30/99
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 21 for a complete listing of the Portfolio of Investments.
Shareholder Voting Results
On October 15, 1999, a special meeting of shareholders was held to vote on the
following proposals. All proposals were approved by the shareholders. All
shareholders of record on August 19, 1999, were entitled to vote on each
proposal. The number of votes shown below are shown for the entire USAA Tax
Exempt Fund, Inc. (the Company) for proposals 1 and 2.
1 Proposal to elect a Board of Directors as follows:
DIRECTORS VOTES FOR VOTES WITHHELD
Robert G. Davis 1,653,325,550 19,504,676
Michael J.C. Roth 1,653,325,550 19,504,676
David G. Peebles 1,653,325,550 19,504,676
Robert L. Mason 1,653,325,550 19,504,676
Michael F. Reimherr 1,653,325,550 19,504,676
Richard A. Zucker 1,653,325,550 19,504,676
Barbara B. Dreeben 1,653,325,550 19,504,676
John W. Saunders, Jr. and Howard L. Freeman, Jr. did not stand for re-election
to the Board. Their term of office will terminate on December 31, 1999.
2 Proposal to ratify or reject the selection by the Board of Directors of KPMG
LLP as auditors for the Company for the fiscal year ending March 31, 2000.
NUMBER OF SHARES VOTING
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
1,631,286,201 19,197,037 22,346,988
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS
September 30, 1999
(Unaudited)
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 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 Virginia 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. With respect
to quality, "eligible securities" generally consist of 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. The Manager also attempts to
minimize credit risk in the USAA Virginia Money Market Fund through rigorous
internal credit research.
(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) Asset Guaranty Insurance Co.
(6) ACA Financial Guaranty Corp.
PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CP Commercial Paper MFH Multi-Family Housing
GO General Obligation PCRB Pollution Control Revenue Bond
IDA Industrial Development RB Revenue Bond
Authority/Agency RN Revenue Note
USAA VIRGINIA BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1999
(Unaudited)
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (98.7%)
Virginia (86.3%)
Abingdon Town IDA Hospital RB,
$ 3,305 Series 1998 5.25% 7/01/2016 $ 3,116
2,610 Series 1998 5.38 7/01/2028 2,413
7,500 Augusta County IDA Hospital RB,
Series 1991 (PRE) 7.00 9/01/2021 8,019
Chesapeake Toll Road RB,
1,250 Series 1999A 5.63 7/15/2019 1,205
6,260 Series 1999A (b) 5.63 7/15/2032 5,878
Chesterfield County Health Center
Commission Mortgage RB,
1,500 Series 1996 5.95 12/01/2026 1,512
12,195 Series 1996 6.00 6/01/2039 12,309
College Building Auth. Educational
Facilities RB,
3,525 Series 1992 (PRE) 6.40 1/01/2012 3,749
2,885 Series 1992 (PRE) 6.63 5/01/2013 3,099
2,505 Series 1992 (PRE) 6.60 9/01/2016 2,665
3,350 Series 1994 (PRE) 5.80 1/01/2024 3,570
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/2015 3,028
4,500 Covington IDA RB, Series 1994 6.65 9/01/2018 4,785
6,000 Danville IDA Hospital RB,
Series 1998 (INS)(2) 5.20 10/01/2018 5,667
2,250 Emporia GO, Series 1995 5.75 7/15/2015 2,280
15,180 Fairfax County IDA RB, Series 1996 6.00 8/15/2026 15,361
2,000 Fairfax County Redevelopment and
Housing Auth. MFH RB, Series 1996A 6.00 12/15/2028 2,050
1,500 Fairfax County Redevelopment and
Housing Auth. RB, Series 1989A (PRE) 7.50 11/01/2019 1,535
12,000 Fairfax County Sewer RB, Series 1996
(INS)(1) 5.88 7/15/2028 12,048
21,125 Fairfax County Water Auth. RB,
Series 1997 5.00 4/01/2029 18,901
8,750 Galax IDA Hospital RB,
Series 1995 (INS)(5) 5.75 9/01/2020 8,567
1,000 Halifax County IDA Hospital RB,
Series 1998 5.25 9/01/2017 903
Hampton Redevelopment and Housing
Auth. RB,
1,885 Series 1996A 5.88 7/20/2016 1,913
1,255 Series 1996A 6.00 1/20/2026 1,287
1,000 Hanover County IDA Hospital RB,
Series 1995 (INS)(1) 5.50 8/15/2025 955
5,525 Henrico County IDA Educational
Facilities RB, Series 1998 5.10 10/15/2029 4,882
Henrico County IDA Residential and
Healthcare Facility RB,
1,025 Series 1997 6.10 7/01/2020 975
2,070 Series 1997 6.15 7/01/2026 1,967
6,900 Henrico County Water and Sewer System RB,
Series 1999 5.00 5/01/2028 6,086
2,500 Henry County IDA Hospital RB,
Series 1997 6.00 1/01/2027 2,491
Housing Development Auth. Commonwealth
Mortgage RB,
5,440 Series 1992A 7.10 1/01/2022 5,600
10,000 Series 1992A 7.10 1/01/2025 10,287
1,455 Series 1992C 6.40 1/01/2015 1,487
885 Series 1994D 6.40 7/01/2017 907
2,090 Series 1994H, Subseries H-2 6.55 1/01/2017 2,118
Housing Development Auth. MFH RB,
17,355 Series 1982A(a) 7.00 11/01/2017 3,346
2,630 Series 1991F 7.10 5/01/2013 2,741
4,220 Isle of Wight County IDA RB, Series 1990 7.38 1/01/2010 4,329
Loudoun County IDA Hospital RB,
3,000 Series 1995 (INS)(4) 5.80 6/01/2020 3,004
8,000 Series 1995 (INS)(4) 5.80 6/01/2026 7,951
Metropolitan Washington Airports Auth. RB,
7,000 Series 1997A 5.38 10/01/2023 6,613
5,400 Series 1998 5.00 10/01/2028 4,766
1,850 Norfolk Redevelopment and Housing
Auth. RB, Series 1999 5.50 11/01/2019 1,801
4,000 Norfolk Water RB, Series 1995 (INS)(1) 5.88 11/01/2020 4,030
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A (PRE) 6.25 7/01/2021 9,539
11,000 Peninsula Ports Auth. RB,
Series 1992 (NBGA)(c) 7.38 6/01/2020 11,616
3,690 Pittsylvania County GO, Series 1994 6.00 7/01/2014 3,975
1,725 Portsmouth Golfcourse System RB,
Series 1998 (INS)(5) 5.00 5/01/2023 1,516
1,000 Portsmouth Redevelopment and Housing
Auth. RB, Series 1997A 5.85 12/20/2030 997
2,500 Prince William County IDA Hospital RB,
Series 1995 (PRE) 6.85 10/01/2025 2,831
4,000 Prince William County Service Auth.
Water RB, Series 1999 (LOC) 5.60 7/01/2024 3,939
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/2015 4,769
Resources Auth. Sewer System RB,
3,985 Series 1992A (PRE) 6.00 5/01/2022 4,183
2,000 Series 1998 5.00 5/01/2022 1,796
Resources Auth. Water and Sewer RB,
7,210 Series 1996A 5.63 4/01/2027 7,062
1,620 Series 1997 5.30 11/01/2022 1,511
4,270 Series 1998 5.20 10/01/2028 3,898
2,200 Richmond Metropolitan Auth. Expressway RB,
Series 1998 (INS)(3) 5.25 7/15/2022 2,081
12,840 Richmond RB, Series 1999A (LOC) 5.13 1/15/2024 11,681
1,250 Roanoke County Educational Facility
IDA RB, Series 1998 5.25 3/15/2023 1,145
4,250 Russell County IDA PCRB, Series 1990G 7.70 11/01/2007 4,439
1,250 Spotsylvania County GO,
Series 1994 (PRE) 6.88 12/01/2014 1,401
4,050 Suffolk Redevelopment and Housing Auth.
MFH RB, Series 1998 (INS)(6) 5.35 10/01/2028 3,748
Upper Occoquan Sewage Auth. RB,
7,000 Series 1995A (INS)(1) 5.15 7/01/2020 6,575
11,000 Series 1995A (INS)(1) 4.75 7/01/2029 9,201
11,820 Virginia Beach Development Auth.
Hospital RB, Series 1991 (PRE) 6.30 11/01/2021 12,531
1,000 Virginia Beach Development Auth.
Residential and Health Care Facility RB,
Series 1997 6.15 7/01/2027 944
1,500 Virginia College Building Auth. RB,
Series 1998 (c) 5.00 9/01/2016 1,357
12,000 West Point IDA Solid Waste Disposal RB,
Series 1994B (c) 6.25 3/01/2019 12,106
6,000 Williamsburg Hospital Facilities IDA RB,
Series 1993 (c) 5.75 10/01/2022 5,811
3,500 Winchester IDA RB, Series 1994 (INS)(5) 6.75 10/01/2019 3,865
Guam (2.5%)
1,000 Government Limited Obligation
Infrastructure Improvement RB,
Series 1989A (PRE) 7.10 11/15/2009 1,025
8,050 Power Auth. RB, Series 1992A 6.30 10/01/2022 8,695
Puerto Rico (9.9%)
8,365 Commonwealth GO, Series 1998 5.00 7/01/2027 7,379
Electric Power Auth. RB,
7,025 Series 1995 5.50 7/01/2025 6,740
7,700 Series 1995Z 5.25 7/01/2021 7,166
Highway and Transportation Auth. RB,
5,000 Series 1993X 5.00 7/01/2022 4,466
8,600 Series 1996Y 5.50 7/01/2026 8,245
4,000 Series 1998A 5.00 7/01/2038 3,472
1,250 Series 1998A 4.75 7/01/2038 1,031
- --------------------------------------------------------------------------------
Total-fixed rate instruments (cost: $385,882) 384,932
- --------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTE (0.2%)
Virginia
890 Waynesboro IDA RB,
Series 1997 (LOC) (cost: $890) 3.95 12/15/2028 890
- --------------------------------------------------------------------------------
Total investments (cost: $386,772) $385,822
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
--------------------------------------------------------
Water/Sewer Utilities - Municipal 19.3%
Hospitals 14.4
Escrowed Bonds 13.9
General Obligations 6.5
Airport/Port 5.9
Electric/Gas Utilities - Municipal 5.8
Nursing/Continuing Care Centers 5.6
Paper & Forest Products 5.4
Single-Family Housing 5.2
Special Assessment/Tax/Fee 4.4
Education 4.1
Multi-Family Housing 3.3
Toll Roads 2.4
Miscellaneous 1.2
Electric Utilities 1.1
Community Service .4
----
Total 98.9%
====
USAA VIRGINIA MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1999
(Unaudited)
Principal Coupon Final
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (71.6%)
Virginia
$ 3,050 Arlington Public Improvement RB,
Series 1984 (LOC) 3.75% 8/01/2017 $ 3,050
8,750 Chesterfield County IDA PCRB,
Series 1993 3.95 8/01/2009 8,750
5,600 Chesterfield County IDA RB,
Series 1989 (LOC) 3.88 2/01/2003 5,600
4,970 Culpeper IDA RB, Series 1997 (LOC) 4.10 1/01/2008 4,970
2,100 Fluvanna County IDA, Series 1984 (LOC) 3.75 12/01/2009 2,100
2,500 Hampton Redevelopment and Housing
Auth. RB, Series 1998 (LOC) 3.75 2/01/2028 2,500
7,000 Harrisonburg Redevelopment and Housing
Auth. RB, Series 1991A (LOC) 3.83 3/01/2016 7,000
Henrico County IDA RB,
4,050 Series 1986C (LOC) 3.85 7/15/2016 4,050
5,895 Series 1998 (LOC) 3.80 8/01/2023 5,895
4,500 Loudoun County IDA RB, Series 1998 (LOC) 3.70 11/01/2028 4,500
2,950 Newport News Redevelopment and Housing
Auth. MFH RB, Series 1984 (LOC) 3.80 11/01/2006 2,950
2,100 Norfolk Redevelopment and Housing
Auth. RB, Series 1999 (LOC) 3.80 3/01/2021 2,100
4,000 Norfolk IDA Hospital Facilities RB,
Series 1999 3.80 6/01/2020 4,000
4,225 Norfolk IDA RB, Series 1998 (LOC) 3.80 9/01/2020 4,225
4,000 Norfolk Virginia Redevelopment and
Housing Authority, Series 1999 (LOC) 3.80 9/01/2009 4,000
6,280 Peninsula Ports Auth. RB,
Series 1987D (LOC) 3.90 7/01/2016 6,280
Prince William County IDA RB,
6,300 Series 1988 (LOC) 3.88 6/30/2004 6,300
1,031 Series 1989D (LOC) 3.95 10/01/2000 1,031
522 Richmond IDA RB, Series 1989A (LOC) 3.95 6/01/2002 522
1,745 Richmond Redevelopment and Housing
Auth. RB, Series 1995 (LOC) 3.85 4/01/2029 1,745
10,000 Roanoke IDA RB, Series 1994 3.95 12/01/2013 10,000
1,940 Rockingham County IDA RB, Series 1983A 4.00 10/01/2020 1,940
Virginia Beach IDA RB,
1,000 Series 1984 (LOC) 5.36 12/01/2004 1,000
2,865 Series 1998 (LOC) 3.80 7/01/2017 2,865
3,630 Waynesboro City IDA RB,
Series 1997 (LOC) 3.95 12/15/2028 3,630
- --------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $101,003) 101,003
- --------------------------------------------------------------------------------
PUT BONDS (9.8%)
Virginia
3,100 Chesterfield County IDA RB, Series 1985 3.40 10/01/2009 3,100
3,000 Peninsula Ports Auth. RB,
Series 1992 (LOC) 3.40 12/15/2012 3,000
Prince William County IDA RB,
1,000 Series 1986 3.40 8/01/2016 1,000
1,680 Series 1992 (LOC) 3.80 9/01/2007 1,680
3,585 Richmond IDA RB, Series 1987A (LOC) 3.50 8/15/2015 3,585
1,400 York County IDA PCRB, Series 1985 3.40 7/01/2009 1,400
- --------------------------------------------------------------------------------
Total put bonds (cost: $13,765) 13,765
- --------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (18.4%)
Virginia
1,545 Arlington County GO, Series 1998 4.25 10/01/1999 1,545
1,005 Charlottesville IDA RB,
Series 1990 (PRE) 7.38 10/01/2020 1,059
2,000 Chesterfield County GO, Series 1999A 4.00 1/01/2000 2,005
500 Commonwealth GO, Series 1997 5.00 6/01/2000 506
1,175 Fairfax County GO, Series 1992B (PRE) 6.00 5/01/2006 1,198
695 Lynchburg GO, Series 1999 4.25 12/01/1999 696
385 Montgomery County IDA Lease RB,
Series 1999C (INS)(1) 3.30 1/15/2000 385
1,365 Norfolk Water RB, Series 1998 (INS)(4) 4.00 11/01/1999 1,366
3,580 Norfolk Airport Authority CP Notes,
Series A (LOC) 3.40 3/07/2000 3,580
6,300 Norfolk IDA RN, Series 1999 3.50 1/27/2000 6,300
1,500 Portsmouth GO, Series 1991 (PRE) 6.75 8/01/2004 1,567
Richmond GO,
1,260 Series 1999A 4.25 1/15/2000 1,264
940 Series 1999B 4.00 1/15/2000 942
1,000 Roanoke IDA Hospital RB,
Series 1990 (PRE) 6.50 7/01/2025 1,021
2,000 Virginia Beach GO, Series 1993 4.65 7/15/2000 2,019
540 Waynesboro GO, Series 1999 (INS)(4) 3.30 2/01/2000 540
- --------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $25,993) 25,993
- --------------------------------------------------------------------------------
Total investments (cost: $140,761) $140,761
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
--------------------------------------------------------
Multi-Family Housing 11.6%
Manufacturing - Diversified Industries 10.2
Nursing/Continuing Care Centers 9.9
Hospitals 7.3
Buildings 7.2
Machinery - Diversified 7.1
Airport/Port 7.0
General Obligations 6.7
Aerospace/Defense 4.5
Electric Utilities 3.9
Community Service 3.5
Escrowed Bonds 3.4
Electric/Gas Utilities - Municipal 2.9
Real Estate - Other 2.8
Real Estate Investment Trusts 2.5
Railroads/Shipping 2.1
Metals/Mining 1.5
Drugs 1.4
Retail - Food 1.2
Education 1.1
Water/Sewer Utilities - Municipal 1.0
Telecommunications - Cellular/Wireless .7
Appropriated Debt .3
----
Total 99.8%
====
NOTES TO PORTFOLIO OF INVESTMENTS
September 30, 1999
(Unaudited)
GENERAL NOTES
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) Zero-Coupon security. Rate represents the effective yield at date of
purchase.
(b) At September 30, 1999, the cost of securities purchased on a
delayed-delivery basis for the USAA Virginia Bond Fund was $2.2 million.
(c) At September 30, 1999, these securities were segregated to cover
delayed-delivery purchases.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1999
(Unaudited)
USAA USAA Virginia
Virginia Money Market
Bond Fund Fund
----------------------------
ASSETS
Investments in securities, at market value
(identified cost of $386,772 and $140,761,
respectively) $ 385,822 $ 140,761
Cash 53 388
Receivables:
Capital shares sold 71 126
Interest 7,076 684
----------------------------
Total assets 393,022 141,959
----------------------------
LIABILITIES
Securities purchased 2,150 -
Capital shares redeemed 283 783
USAA Investment Management Company 106 38
USAA Transfer Agency Company 21 11
Accounts payable and accrued expenses 31 29
Dividends on capital shares 486 19
----------------------------
Total liabilities 3,077 880
----------------------------
Net assets applicable to capital
shares outstanding $ 389,945 $ 141,079
============================
REPRESENTED BY:
Paid-in capital $ 392,732 $ 141,079
Accumulated net realized loss on investments (1,837) -
Net unrealized depreciation of investments (950) -
----------------------------
Net assets applicable to capital
shares outstanding $ 389,945 $ 141,079
============================
Capital shares outstanding 35,912 141,079
============================
Authorized shares of $.01 par value 120,000 1,125,000
============================
Net asset value, redemption price, and
offering price per share $ 10.86 $ 1.00
============================
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1999
(Unaudited)
USAA USAA Virginia
Virginia Money Market
Bond Fund Fund
--------------------------
Net investment income:
Interest income $ 11,398 $ 2,291
--------------------------
Expenses:
Management fees 657 225
Transfer agent's fees 116 57
Custodian's fees 39 30
Postage 7 6
Shareholder reporting fees 5 4
Directors' fees 2 2
Registration fees 1 1
Professional fees 13 15
Other 2 2
--------------------------
Total expenses 842 342
--------------------------
Net investment income 10,556 1,949
--------------------------
Net realized and unrealized loss on investments:
Net realized loss (1,286) -
Change in net unrealized
appreciation/depreciation (22,259) -
--------------------------
Net realized and unrealized loss (23,545) -
--------------------------
Increase (decrease) in net assets resulting from
operations $ (12,989) $ 1,949
==========================
See accompanying notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended September 30, 1999, and year ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
USAA USAA
Virginia Virginia
Bond Fund Money Market Fund
------------------------------------------------
9/30/99 3/31/99 9/30/99 3/31/99
------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 10,556 $ 19,434 $ 1,949 $ 3,862
Net realized loss on investments (1,286) (266) - -
Change in net unrealized appreciation/
depreciation of investments (22,259) 1,027 - -
------------------------------------------------
Increase (decrease) in net assets
resulting from operations (12,989) 20,195 1,949 3,862
------------------------------------------------
Distributions to shareholders from:
Net investment income (10,556) (19,434) (1,949) (3,862)
------------------------------------------------
From capital share transactions:
Proceeds from shares sold 35,829 71,123 60,468 153,062
Dividend reinvestments 7,710 14,255 1,836 3,634
Cost of shares redeemed (32,401) (30,033) (59,641) (140,789)
------------------------------------------------
Increase in net assets from
capital share transactions 11,138 55,345 2,663 15,907
------------------------------------------------
Net increase (decrease) in net assets (12,407) 56,106 2,663 15,907
Net assets:
Beginning of period 402,352 346,246 138,416 122,509
------------------------------------------------
End of period $ 389,945 $ 402,352 $ 141,079 $ 138,416
================================================
Change in shares outstanding:
Shares sold 3,189 6,157 60,468 153,062
Shares issued for dividends reinvested 691 1,233 1,836 3,634
Shares redeemed (2,897) (2,603) (59,641) (140,789)
------------------------------------------------
Increase in shares outstanding 983 4,787 2,663 15,907
================================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company incorporated under the laws of Maryland consisting of ten
separate funds. The information presented in this semiannual report pertains
only to the USAA Virginia Bond Fund and USAA Virginia Money Market Fund (the
Funds). The Funds have a common objective of providing Virginia investors with a
high level of current interest income that is exempt from federal and Virginia
state income taxes. The USAA Virginia Money Market Fund has a further objective
of preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA Virginia Bond Fund are valued
each business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity, and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued by
the Service, and all other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 under the Investment Company Act of 1940, as amended, all
securities in the USAA Virginia Money Market Fund, are stated at amortized cost
which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in Virginia municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in 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 Bank of America ($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
Bank of America, each Fund may borrow from Bank of America, at Bank of America'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 six-month
period ended September 30, 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 September 30, 1999,
the USAA Virginia Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $1.8 million which, if not offset by subsequent
capital gains, will expire in 2008. 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
Costs of purchases and proceeds from sales/maturities of securities for the
six-month period ended September 30, 1999, were as follows:
USAA Virginia USAA Virginia
Bond Fund Money Market Fund
($000) ($000)
---------------------------------
Purchases $40,250 $188,204
Sales/maturities $38,865 $184,855
For the USAA Virginia Bond Fund, costs of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at September 30,
1999, was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------------
USAA Virginia Bond Fund $8,933 ($9,883) ($950)
(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
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 has taken steps to address this potential year 2000 problem with
respect to the computer systems that it uses 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.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA VIRGINIA BOND FUND
September 30, 1999
(Unaudited)
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
----------------------------------------------------------------
1999 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.52 $ 11.49 $ 10.92 $ 10.93 $ 10.76 $ 10.71
Net investment income .30 .60 .62 .63 .63 .62
Net realized and
unrealized gain (loss) (.66) .03 .57 (.01) .17 .05
Distributions from net
investment income (.30) (.60) (.62) (.63) (.63) (.62)
------------------------------------------------------------------------------
Net asset value at
end of period $ 10.86 $ 11.52 $ 11.49 $ 10.92 $ 10.93 $ 10.76
==============================================================================
Total return (%) * (3.20) 5.62 11.13 5.82 7.57 6.61
Net assets at end
of period (000) $389,945 $402,352 $346,246 $292,914 $267,111 $238,920
Ratio of expenses to
average net assets (%) .42(a) .43 .44 .46 .48 .50
Ratio of net investment
income to average
net assets (%) 5.29(a) 5.22 5.48 5.76 5.74 5.95
Portfolio turnover (%) 9.93 10.55 14.24 26.84 27.20 27.77
</TABLE>
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the period.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA VIRGINIA MONEY MARKET FUND
September 30, 1999
(Unaudited)
(8) FINANCIAL HIGHLIGHTS (Continued)
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
----------------------------------------------------------------
1999 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .01 .03 .03 .03 .03 .03
Distributions from net
investment income (.01) (.03) (.03) (.03) (.03) (.03)
------------------------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==============================================================================
Total return (%) * 1.43 2.98 3.34 3.14 3.42 2.91
Net assets at end
of period (000) $141,079 $138,416 $122,509 $113,330 $110,308 $ 98,049
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements (%) - .50 .51 .53 .55 .56
Ratio of net investment
income to average
net assets (%) 2.85(a) 2.93 3.29 3.10 3.36 2.88
</TABLE>
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* 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
LEGAL COUNSEL
Goodwin Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Sundays 11:30 a.m. to 8:00 p.m.
Internet Access
www.usaa.com
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 (Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction, or fund prices
1-800-531-8777, (in San Antonio) 498-8777
