Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review
USAA Virginia Bond Fund 4
USAA Virginia Money Market Fund 10
Financial Information
Distributions to Shareholders 14
Independent Auditors' Report 15
Portfolios of Investments:
Categories and Definitions 16
USAA Virginia Bond Fund 17
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)2000, 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
(Registered Trademark) 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(Registered
Trademark) 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
(Registered Trademark) 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, and Virginia funds available to residents only.
Nondeposit 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.]
From the vantage point of March 2000, we can all look at the tax-exempt bond
market and breathe just a little more easily. It has been a long time since we
have been able to do that.
At USAA Investments we believe that many investors are, in truth, more
comfortable with some of their assets allocated to bonds. Bonds are less
volatile than stocks over long periods, and they can lessen the turmoil in a
portfolio. Many times I hear people ask, "Why would anyone invest in bonds when
stocks have such higher returns?" My answer is that I have known few people who
have the fortitude to have all of their money in stocks. That doesn't mean that
a person who allocates some of a portfolio to bonds is weak. That's simply the
way we are. When stocks drop precipitously, I am convinced that opportunities
are created. But only a calm, calculating person can take advantage of them.
That usually means a person who is properly allocated all the time. Those
precipitous drops tend to surprise everyone.
Another key belief of ours is that income is the basis of most of the potential
returns on bonds and that by maximizing income we may produce very good results
over time.
This emphasis on income can hurt in a year like 1999, but when you consider
periods of just a few years you get a clearer picture of what we mean.
- --------------------------------------------------------------------------------
Total Return for Periods Ending 12/31/99
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
USAA Tax Exempt Long-Term Fund -5.04% 6.59% 6.37%
USAA Tax Exempt Intermediate-Term Fund -2.61% 6.37% 6.49%
USAA Tax Exempt Short-Term Fund 1.64% 4.98% 5.06%
USAA Tax Exempt Money Market Fund 3.15% 3.40% 3.60%
- --------------------------------------------------------------------------------
Total return equals income plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
The performance data quoted represent past performance and are not
an indication of future results. Investment return and principal
value of an investment will fluctuate, and an investor's shares,
when redeemed, may be worth more or less than their original cost.
The key thing about this chart is that all of these returns include the bad
market of 1999. One poor year has not overturned the good returns of many years.
Markets will always move, but we believe that a sound and consistent strategy
will pay off.
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 (USAA Investments), 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 principally in long-term, investment-grade
Virginia tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/99 3/31/00
- --------------------------------------------------------------------------------
Net Assets $402.4 Million $377.2 Million
Net Asset Value Per Share $11.52 $10.69
Tax-Exempt Dividends Per Share Last Twelve
Months $.603 $.593
Capital Gain Distributions Per Share Last
Twelve Months - -
- --------------------------------------------------------------------------------
30-Day SEC Yield* as of 3/31/00
- --------------------------------------------------------------------------------
30-Day SEC Yield 5.30%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending March 31, 2000
================================================================================
Total Return Equals Dividend Return Plus Price Change
- --------------------------------------------------------------------------------
Since 10/15/90 6.84% = 5.93% + 0.91%
- --------------------------------------------------------------------------------
5 Years 5.54% = 5.67% + -0.13%
- --------------------------------------------------------------------------------
1 Year -2.00% = 5.20% + -7.20%
================================================================================
Annual Total Returns and Compounded Dividend Returns
for the Nine-Year Period Ending March 31, 2000
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
nine-year period ended March 31, 2000.
Total Return for Years Ended:
- ----------------------------
03/31/92 9.61%
03/31/93 12.61%
03/31/94 2.69%
03/31/95 6.61%
03/31/96 7.57%
03/31/97 5.82%
03/31/98 11.13%
03/31/99 5.62%
03/31/00 -2.00%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
03/31/92 6.79%
03/31/93 6.46%
03/31/94 5.38%
03/31/95 6.14%
03/31/96 5.99%
03/31/97 5.91%
03/31/98 5.91%
03/31/99 5.36%
03/31/00 5.20%
Change in Share Price:
- ---------------------
03/31/92 2.82%
03/31/93 6.15%
03/31/94 -2.69%
03/31/95 0.47%
03/31/96 1.58%
03/31/97 -0.09%
03/31/98 5.22%
03/31/99 0.26%
03/31/00 -7.20%
** 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 gain 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 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.
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 3/31/92
to 3/31/00.
USAA Virginia Lipper Virginia Municipal
Bond Fund Yield Debt Funds Average Yield
------------------ ------------------------
03/31/92 6.37% 6.20%
03/31/93 5.75% 5.58%
03/31/94 5.77% 5.43%
03/31/95 5.80% 5.14%
03/31/96 5.77% 4.96%
03/31/97 5.80% 4.91%
03/31/98 5.40% 4.62%
03/31/99 5.24% 4.47%
03/31/00 5.55% 4.70%
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 gain distributions. The graph represents data for periods ending 3/31/92
to 3/31/00.
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 3/31/00. 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
03/31/00 18,756
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
03/31/00 19,318
Lipper Virginia Municipal Debt Funds Average
Year Amount
- -------- -------
10/15/90 $10,000
03/31/91 10,560
09/30/91 11,161
03/31/92 11,520
09/30/92 12,260
03/31/93 12,940
09/30/93 13,853
03/31/94 13,122
09/30/94 13,194
03/31/95 13,943
09/30/95 14,567
03/31/96 14,963
09/30/96 15,417
03/31/97 15,692
09/30/97 16,699
03/31/98 17,355
09/30/98 18,081
03/31/99 18,214
09/30/99 17,681
03/31/00 17,906
Data since inception on 10/15/90 through 3/31/00.
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 PORTFOLIO MANAGER, ROBERT R. PARISEAU, CFA, APPEARS HERE.]
THE MUNICIPAL BOND MARKET
You just can't keep a strong economy down. Apparently, not even the Federal
Reserve Board can do it. After raising the federal funds target rate five times
since last June, the U.S. economy still grew by 7.35% in the fourth quarter of
1999. Thankfully, inflation has remained under control -- although it's been
creeping up since early 1998. Last year, the fixed-income markets suffered a
crisis in confidence fearing that inflation would most certainly increase. In
response, bond prices fell as interest rates rose for most of 1999.
However, the virtuous cycle of robust noninflationary growth described by
Chairman Alan Greenspan continues as technological innovation allows industry to
use raw materials and labor more efficiently. Add a volatile stock market to
continued low inflation, and we have the ingredients for a bond-market rally
that began in late January of this year. Of course, that ignores Chairman
Greenspan's warning that the economy is growing well in excess of its
sustainable, noninflationary rate.
The yield on the Bond Buyer 40-Bond Index (BBI40) steadily increased by 1.1%
from March 1999 until January 2000. Since late January, the yield has fallen
roughly 0.4%, closing at 5.97% on March 31, 2000. The 30-year U.S. Treasury bond
(the long bond) ended the period at 5.83%. Investor redemptions last fall and a
reduction in future issuance of the long bond were major reasons why the
municipal market has underperformed the U.S. government long-bond market.
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 3/31/00.
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%
10/15/99 6.26% 6.06%
10/29/99 6.16% 6.08%
11/15/99 6.02% 5.99%
11/30/99 6.29% 6.11%
12/15/99 6.33% 6.11%
12/31/99 6.48% 6.22%
01/14/00 6.70% 6.29%
01/31/00 6.49% 6.31%
02/15/00 6.25% 6.24%
02/29/00 6.14% 6.17%
03/15/00 6.08% 6.09%
03/31/00 5.83% 5.97%
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.
STRATEGY
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. My rationale for this strategy is:
- I believe that a large number of our investors own the Fund for the tax-
free income and invest for the long term.
- 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.
The Fund remains fully invested in long-term, investment-grade municipal bonds.
Municipal 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. That's why we encourage only
those investors with an investment horizon of four or more years to buy our
tax-exempt bond funds. In regard to credit risk, I believe investment-grade
bonds (rated BBB or higher by a rating agency) offer the best risk/reward
compared to junk bonds.
Our shareholders have made it very clear that they do not want the income from
their USAA tax-exempt funds to be subject to the federal alternative minimum tax
(AMT) for individuals. Consequently, since their inception, no USAA tax-exempt
fund has ever distributed income that was subject to the AMT for individuals.
Looking ahead, we have no intention of purchasing municipal bonds that are
subject to the AMT for individuals in any of the USAA tax-exempt funds. Of
course we would certainly advise our shareholders if a change occurs in the
federal tax code that would compel us to reconsider our position.
FUND PERFORMANCE
While past performance is no guarantee of future results, from March 31, 1999,
to March 31, 2000, your Fund paid a dividend distribution yield of 5.55% versus
an average dividend distribution yield of 4.70% for the Lipper Virginia
Municipal Debt Funds Average. During the fiscal year, the Fund's share price
decreased by $0.83 to $10.69. During this period, the Fund's total return was
- -2.00% compared to the Lipper Average of -1.64%.
* * * * *
I'm pleased to say that your Fund received an Overall Star Rating of 5 stars in
the municipal bond fund category from Morningstar Rating(Trademark) for the
period ended March 31, 2000.
THE STATE OF VIRGINIA
Virginia benefits from a diverse and expanding economic base. Employment growth
continues at a solid pace with the creation of high-tech jobs -- an important
driving influence. Additionally, the commonwealth's unemployment rate remains
below the national level. Per capita income compares favorably to the national
average. A sound economy, in combination with the commonwealth's prudent fiscal
practices, has produced a reputation of financial strength. For instance,
Moody's, Standard & Poor's, and Fitch IBCA all rate the commonwealth's general
obligation debt AAA. Furthermore, Moody's recently upgraded Virginia's
appropriation-backed debt to Aa1 from Aa2. I discuss these general economic
issues because, although they may not directly relate to each of your Fund's
holdings, they indicate the 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.
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 gain distributions.
Refer to the bottom of page 5 for the Lipper Average definition.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
Past performance is no guarantee of future results. Morningstar proprietary
ratings on U.S.-domiciled funds reflect historical risk-adjusted performance as
of March 31, 2000. The ratings are subject to change every month. Morningstar
ratings on U.S.-domiciled funds are calculated from the fund's three-, five-,
and 10-year average annual returns in excess of 90-day U.S. Treasury bill
returns with appropriate fee adjustments and a risk factor that reflects fund
performance below 90-day U.S. T-bill returns. The USAA Virginia Bond Fund
received 4 stars and 5 stars for the three- and five-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 exclusively against
U.S.-domiciled funds. The Fund was rated among 1,682 and 1,394 funds in the
municipal bond fund category for the three- and five-year periods, respectively.
TAXABLE 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 5.30% 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: 6.62% 7.81% 8.15% 8.79% 9.31%
- --------------------------------------------------------------------------------
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.
Some income may be subject to federal, state, or local taxes, or the federal
alternative minimum tax.
Portfolio Ratings Mix
March 31, 2000
A pie chart is shown here depicting the Portfolio Ratings Mix as of March 31,
2000 of the USAA Virginia Bond Fund to be:
AAA - 29%; AA - 36%; A - 20%; BBB - 12%; and BB - 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 Services, 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 2.1% and
1.0%, respectively, of the Fund's investments, and are included in their
appropriate category above.
See page 17 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: Invests principally in 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 3/31/00
- --------------------------------------------------------------------------------
Net Assets $138.4 Million $157.1 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
Average Annual Total Returns and 7-Day Yield as of 3/31/00
- --------------------------------------------------------------------------------
Since Inception 7-Day
1 Year 5 Years on 10/15/90 Yield
3.06% 3.19% 3.17% 3.36%
- --------------------------------------------------------------------------------
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
seven-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 iMoneyNet, Inc.
(formerly IBC Financial Data) State Specific SB (Stock Broker) and GP (General
Purpose) (Tax-Free) Money Funds.
USAA Virginia
Money Market Fund iMoneyNet, Inc.
----------------- ---------------
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%
10/25/99 2.90% 2.65%
11/29/99 3.34% 3.03%
12/27/99 3.81% 3.40%
01/31/00 2.94% 2.61%
02/28/00 3.44% 2.90%
03/27/00 3.32% 2.94%
Data represent the last Monday of each month.
Ending date 3/27/00.
The graph tracks the Fund's seven-day yield against iMoneyNet, Inc. (formerly
IBC Financial Data) State Specific SB (Stock Broker) & GP (General Purpose)
(Tax-Free) Money Funds, an average of money market fund yields.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER, REGINA G. SHAFER, CFA, APPEARS HERE.]
MARKET SUMMARY
Since our last shareholder report, the national economy has continued to
strengthen. In response, the Federal Reserve has increased the federal funds
rate (the interest rate banks charge other banks) three times since September in
order to curb inflation. Normally, the raising of the federal funds rate causes
interest rates to rise. However, the Treasury market has instead been reacting
to the news that there will be a reduction in the issuance of long-term Treasury
bonds, and thus the yields for 30-year Treasuries have declined.
Rates have increased in the short-term, tax-exempt market. According to the Bond
Buyer One-Year Note Index, municipal notes have increased to 4.08% at the end of
March, up from 3.73% last September -- an increase of 0.35%.
STRATEGY
We continue to believe that variable-rate demand notes (VRDNs) provide the best
value for the Fund. VRDNs provide the owner the option to sell the security back
to the issuer with a notice of seven days or less at a price of par (100% of
face value) plus accrued interest. The interest rates on these securities also
reset at least every seven days. The VRDNs are particularly attractive now as
they allow the Fund to participate in rising rates as well as provide the needed
flexibility to extend into longer-term securities as they become more
attractive. In addition, our team of analysts continues to research each
security before it is purchased to ensure it meets our high credit standards.
The Bond Buyer One-Year Note Index is representative of yields on 10 large
one-year, tax-exempt notes.
THE FUND
As you can see in the chart below, daily and weekly VRDNs represent 76% of the
Fund's assets on March 31, 2000. In addition, the Fund also has positions in
tax-exempt commercial paper, put bonds, and bonds/notes. These securities have
the potential to provide the Fund with some stability when the VRDN rates fall
- -- as they do seasonally when there is a shortage of supply in the market.
The Fund's average maturity was relatively short at 31 days on March 31, 2000.
This is slightly shorter than the average state-specific money market fund.
Portfolio Mix
March 31, 2000
A pie chart is shown here depicting the Portfolio Mix as of March 31, 2000 of
the USAA Virginia Money Market Fund to be:
VRDNs - 76%; Bonds/Notes - 12%; Put Bonds - 7%; and Commercial Paper - 2%.
Percentages are of the net assets and may or may not equal 100%.
See page 21 for a complete listing of the portfolio of investments.
FUND PERFORMANCE
For the 12 months ending March 31, 2000, your Fund ranked 14 out of 172
state-specific tax-exempt money market funds according to iMoneyNet, Inc.
(formerly IBC Financial Data), with a return of 3.06%. The average for the
category over the same period was 2.72%. Please keep in mind that past
performance is no guarantee of future results.
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 3/31/00. 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
03/31/00 13,455
Data since inception on 10/15/90 through 3/31/00.
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
seven-day yield information, please refer to the Fund's Investment Review.
Distributions to Shareholders
The Funds completed their fiscal year on March 31, 2000. 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 of what
portion of its earnings was exempt from federal taxation and dividends which
represent long-term gains. The net investment income earned and distributed by
each of the Funds was 100% tax exempt for federal income tax purposes. There
were no long-term capital gain distributions for the year ended March 31, 2000.
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 Virginia Bond and USAA Virginia Money
Market Funds, series of the USAA Tax Exempt Fund, Inc., as of March 31, 2000,
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 7 to the financial
statements, for each of the years in the five-year period then ended. These
financial statements and financial highlights are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2000, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Virginia Bond and USAA Virginia Money Market Funds as of March 31, 2000,
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 accounting principles generally accepted in the United States
of America.
KPMG LLP
San Antonio, Texas
May 5, 2000
CATEGORIES AND DEFINITIONS
PORTFOLIOS OF INVESTMENTS
March 31, 2000
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 (VRDNs) - provide the right, on any business day, to
sell the security at face value on either that day or within 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.
(LIQ) Enhanced by a bank liquidity agreement.
(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 IDRB Industrial Development Revenue Bond
GO General Obligation MFH Multi-Family Housing
IDA Industrial Development PCRB Pollution Control Revenue Bond
Authority/Agency RB Revenue Bond
USAA VIRGINIA BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 2000
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (97.2%)
Virginia (89.1%)
Abingdon Town IDA Hospital RB,
$ 3,305 Series 1998 5.25% 7/01/2016 $ 3,006
2,610 Series 1998 5.38 7/01/2028 2,293
Alexandria IDA Educational Facilities RB,
1,060 Series 1999 6.00 1/01/2017 1,100
2,505 Series 1999 5.88 1/01/2023 2,519
3,280 Arlington County IDA RB, Series 1997A 5.45 7/01/2027 3,129
7,500 Augusta County IDA Hospital RB,
Series 1991 (PRE) 7.00 9/01/2021 7,881
Chesapeake Toll Road RB,
1,250 Series 1999A 5.63 7/15/2019 1,208
6,260 Series 1999A 5.63 7/15/2032 5,867
Chesterfield County Health Center
Commission Mortgage RB,
1,500 Series 1996 5.95 12/01/2026 1,491
12,195 Series 1996 6.00 6/01/2039 12,094
College Building Auth. Educational
Facilities RB,
3,525 Series 1992 (PRE) 6.40 1/01/2012 3,691
2,885 Series 1992 (PRE) 6.63 5/01/2013 3,047
2,505 Series 1992 (PRE) 6.60 9/01/2016 2,625
1,390 Series 2000 5.80 4/01/2016 1,417
1,000 Series 2000 6.00 4/01/2020 1,018
3,000 Commonwealth Univ. RB, Series 1995 5.75 5/01/2015 3,058
4,500 Covington IDA RB, Series 1994 6.65 9/01/2018 4,731
3,000 Danville IDA Hospital RB,
Series 1998 (INS)(2) 5.20 10/01/2018 2,856
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 15,193
2,000 Fairfax County Redevelopment and
Housing Auth. MFH RB, Series 1996A 6.00 12/15/2028 1,975
12,000 Fairfax County Sewer RB, Series 1996
(INS)(1) 5.88 7/15/2028 12,047
Fairfax County Water Auth. RB,
4,750 Series 1992 6.00 4/01/2022 4,864
16,125 Series 1997 5.00 4/01/2029 14,233
8,750 Galax IDA Hospital RB, Series 1995 (INS)(5) 5.75 9/01/2020 8,469
1,000 Halifax County IDA Hospital RB, Series 1998 5.25 9/01/2017 877
Hampton Redevelopment and Housing Auth. RB,
1,885 Series 1996A 5.88 7/20/2016 1,862
1,255 Series 1996A 6.00 1/20/2026 1,236
Hanover County IDA Hospital RB,
6,185 Series 1995 (INS)(1) 6.38 8/15/2018 6,694
1,000 Series 1995 (INS)(1) 5.50 8/15/2025 946
5,525 Henrico County IDA Educational Facilities
RB, Series 1998 5.10 10/15/2029 4,869
Henrico County IDA Residential and
Healthcare Facility RB,
1,025 Series 1997 6.10 7/01/2020 925
2,070 Series 1997 6.15 7/01/2026 1,856
2,500 Henry County IDA Hospital RB, Series 1997 6.00 1/01/2027 2,485
Housing Development Auth.
Commonwealth Mortgage RB,
5,440 Series 1992A 7.10 1/01/2022 5,548
10,000 Series 1992A 7.10 1/01/2025 10,194
1,455 Series 1992C 6.40 1/01/2015 1,474
740 Series 1994D 6.40 7/01/2017 753
Housing Development Auth. MFH RB,
17,355 Series 1982A (a) 7.00 11/01/2017 3,441
2,630 Series 1991F 7.10 5/01/2013 2,717
4,220 Isle of Wight County IDA RB, Series 1990 7.38 1/01/2010 4,281
Loudoun County IDA Hospital RB,
2,500 Series 1995 (INS)(4) 5.80 6/01/2020 2,493
8,000 Series 1995 (INS)(4) 5.80 6/01/2026 7,867
7,000 Metropolitan Washington Airports Auth. RB,
Series 1997A 5.38 10/01/2023 6,634
1,850 Norfolk Redevelopment and Housing Auth. RB,
Series 1999 5.50 11/01/2019 1,820
4,000 Norfolk Water RB, Series 1995 (INS)(1) 5.88 11/01/2020 4,041
9,090 Peninsula Ports Auth. Health Systems RB,
Series 1992A (PRE)(INS)(2) 6.25 7/01/2021 9,382
11,000 Peninsula Ports Auth. RB,
Series 1992 (NBGA) 7.38 6/01/2020 11,351
3,690 Pittsylvania County GO, Series 1994 6.00 7/01/2014 3,904
1,000 Portsmouth Redevelopment and Housing
Auth. RB, Series 1997A 5.85 12/20/2030 960
2,500 Prince William County IDA Hospital RB,
Series 1995 (PRE) 6.85 10/01/2025 2,777
4,000 Prince William County Service Auth. Water
RB, Series 1999 (INS)(3) 5.60 7/01/2024 3,919
4,645 Public School Auth. GO, Series 1999B 6.00 8/01/2019 4,801
1,790 Resources Auth. Clean Water RB, Series 1999 5.63 10/01/2022 1,774
4,710 Resources Auth. Railway Transportation RB,
Series 1990 7.13 10/01/2015 4,767
Resources Auth. Water and Sewer RB,
7,210 Series 1996A 5.63 4/01/2027 7,033
1,620 Series 1997 5.30 11/01/2022 1,525
4,270 Series 1998 5.20 10/01/2028 3,899
Richmond Convention Center Auth. RB,
6,295 Series 2000 6.13 6/15/2020 6,430
14,750 Series 2000 6.13 6/15/2025 14,951
12,840 Richmond RB, Series 1999A (INS)(4) 5.13 1/15/2024 11,662
1,250 Roanoke County Educational Facility IDA RB,
Series 1998 5.25 3/15/2023 1,123
4,250 Russell County IDA PCRB, Series 1990G 7.70 11/01/2007 4,379
1,250 Spotsylvania County GO, Series 1994 (PRE) 6.88 12/01/2014 1,371
4,050 Suffolk Redevelopment and Housing
Auth. MFH RB, Series 1998 (INS)(6) 5.35 10/01/2028 3,568
11,820 Virginia Beach Development Auth.
Hospital RB, Series 1991 (PRE) 6.30 11/01/2021 12,348
1,000 Virginia Beach Development Auth.
Residential and Health Care Facility RB,
Series 1997 6.15 7/01/2027 853
7,610 Virginia Beach GO, Series 2000 5.50 3/01/2020 7,497
12,000 West Point IDA Solid Waste Disposal RB,
Series 1994B 6.25 3/01/2019 11,376
6,000 Williamsburg Hospital Facilities IDA RB,
Series 1993 5.75 10/01/2022 5,555
Winchester IDA Educational Facilities RB,
3,085 Series 1994 (PRE)(INS)(5) 6.75 10/01/2019 3,362
415 Series 1994 (INS)(5) 6.75 10/01/2019 445
Guam (2.2%)
8,050 Power Auth. RB, Series 1992A (PRE) 6.30 10/01/2022 8,551
Puerto Rico (5.9%)
Electric Power Auth. RB,
7,025 Series 1995 5.50 7/01/2025 6,751
7,700 Series 1995Z 5.25 7/01/2021 7,217
8,600 Highway and Transportation Auth. RB,
Series 1996Y 5.50 7/01/2026 8,248
- --------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $366,337) 366,884
- --------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (1.2%)
Virginia
2,700 Alexandria Redevelopment and Housing
Auth. RB, Series 1996B (LOC) 4.05 10/01/2006 2,700
1,730 Waynesboro IDA RB, Series 1997 (LOC) 4.05 12/15/2028 1,730
- --------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $4,430) 4,430
- --------------------------------------------------------------------------------
Total investments (cost: $370,767) $371,314
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Hospitals 15.6 %
Escrowed Bonds 14.6
Water/Sewer Utilities - Municipal 14.1
General Obligations 8.0
Nursing/Continuing Care Centers 6.5
Sales Tax 5.7
Paper & Forest Products 5.4
Airport/Port 4.8
Single-Family Housing 4.8
Education 4.6
Electric/Gas Utilities - Municipal 3.7
Multi-Family Housing 3.3
Special Assessment/Tax/Fee 2.2
Toll Roads 1.9
Miscellaneous 1.3
Electric Utilities 1.1
Community Service 0.8
----
Total 98.4%
====
USAA VIRGINIA MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 2000
Principal Coupon Final
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (75.8%)
Virginia
$ 3,160 Alexandria Redevelopment and Housing Auth.
RB, Series 1996B (LOC) 4.05% 10/01/2006 $ 3,160
3,050 Arlington Public Improvement RB,
Series 1984 (LOC) 3.90 8/01/2017 3,050
8,750 Chesterfield County IDA PCRB, Series 1993 4.05 8/01/2009 8,750
5,600 Chesterfield County IDA RB, Series 1989
(LOC) 4.05 2/01/2003 5,600
5,000 Clarke County IDA RB, Series 2000 (LIQ)
(INS)(4) 3.90 1/01/2030 5,000
4,490 Culpeper IDA RB, Series 1997 (LOC) 4.00 1/01/2008 4,490
6,000 Fairfax County IDA RB, Series 2000 3.75 1/01/2030 6,000
2,100 Fluvanna County IDA IDRB, Series 1984 (LOC) 3.90 12/01/2009 2,100
2,500 Hampton Redevelopment and Housing Auth. RB,
Series 1998 (LOC) 3.90 2/01/2028 2,500
8,000 Hanover County IDA Residential Care
Facility RB, Series 1999 (LOC) 4.00 7/01/2029 8,000
7,700 Harrisonburg Redevelopment and Housing
Auth. MFH RB, Series 1991A (LOC) 3.97 3/01/2016 7,700
Henrico County IDA RB,
4,050 Series 1986C (LOC) 3.95 7/15/2016 4,050
5,840 Series 1998 (LOC) 4.00 8/01/2023 5,840
Lynchburg IDA Hospital RB,
400 Series 1985C (LIQ)(INS)(2) 3.95 12/01/2025 400
500 Series 1985D (LIQ)(INS)(2) 3.95 12/01/2025 500
2,500 Series 1985F (LIQ)(INS)(2) 3.95 12/01/2025 2,500
2,950 Newport News Redevelopment and Housing
Auth. MFH RB, Series 1984 (LOC) 4.00 11/01/2006 2,950
12,300 Norfolk IDA Hospital Facilities RB,
Series 1999 (LOC) 4.00 6/01/2020 12,300
3,485 Norfolk IDA RB, Series 1998 (LOC) 4.00 9/01/2020 3,485
Norfolk Redevelopment and Housing Auth. RB,
1,400 Series 1999 (LOC) 4.00 9/01/2009 1,400
2,100 Series 1999 (LOC) 4.00 3/01/2021 2,100
7,555 Peninsula Ports Auth. Coal Terminal RB,
Series 1987D (LOC) 4.00 7/01/2016 7,555
Prince William County IDA RB,
6,300 Series 1988 (LOC) 4.05 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
1,725 Richmond Redevelopment and Housing Auth.
RB, Series 1995 (LOC) 3.95 4/01/2029 1,725
10,000 Roanoke IDA RB, Series 1994 4.05 12/01/2013 10,000
- --------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $119,008) 119,008
- --------------------------------------------------------------------------------
PUT BONDS (6.7%)
Virginia
2,900 Hampton IDA Hospital Facilities RB,
Series 1997B 3.90 11/01/2011 2,900
1,535 Prince William County IDA RB,
Series 1992 (LOC) 4.30 9/01/2007 1,535
3,535 Richmond IDA RB, Series 1987A (LOC) 4.10 8/15/2015 3,535
2,500 York County IDA PCRB, Series 1985MMM 4.05 7/01/2009 2,500
- --------------------------------------------------------------------------------
Total put bonds (cost: $10,470) 10,470
- --------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (14.2%)
Virginia
1,005 Charlottesville IDA RB, Series 1990 (PRE) 7.38 10/01/2020 1,042
1,920 College Building Auth. Educational
Facilities RB, Series 1998 4.25 8/01/2000 1,922
500 Commonwealth GO, Series 1997 5.00 6/01/2000 501
3,914 Norfolk Airport Auth. CP, Series A (LOC) 4.00 8/23/2000 3,914
1,500 Portsmouth GO, Series 1991 (PRE) 6.75 8/01/2004 1,545
2,180 Public Building Auth. Public Facilities RB,
Series 1999A 4.00 8/01/2000 2,180
3,865 Public School Auth. RB, Series 1997A 5.50 8/01/2000 3,884
1,000 Richmond GO, Series 1999A 4.25 1/15/2001 1,000
1,935 Richmond GO Equipment Notes, Series 1998 4.25 5/15/2000 1,936
1,450 Roanoke GO, Series 1999 A&B 3.70 10/01/2000 1,449
1,000 Roanoke IDA Hospital RB, Series 1990 (PRE) 6.50 7/01/2025 1,007
2,000 Virginia Beach GO, Series 1993 4.65 7/15/2000 2,007
- --------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $22,387) 22,387
- --------------------------------------------------------------------------------
Total investments (cost: $151,865) $151,865
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Hospitals 18.8 %
Electrical Equipment 11.9
Multi-Family Housing 10.8
Nursing/Continuing Care Centers 10.8
Airport/Port 7.3
General Obligations 6.9
Buildings 4.2
Aerospace/Defense 4.0
Manufacturing - Diversified Industries 3.6
Community Service 2.9
Appropriated Debt 2.6
Electric/Gas Utilities - Municipal 2.6
Escrowed Bonds 2.3
Real Estate Investment Trusts 2.2
Electric Utilities 1.6
Metals/Mining 1.3
Education 1.0
Retail - Food 1.0
Real Estate - Other 0.9
----
Total 96.7%
====
NOTES TO PORTFOLIOS OF INVESTMENTS
March 31, 2000
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.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 2000
USAA
USAA Virginia
Virginia Money Market
Bond Fund Fund
----------------------------
ASSETS
Investments in securities, at market value
(identified cost of $370,767 and $151,865,
respectively) $ 371,314 $ 151,865
Cash 114 282
Receivables:
Capital shares sold 58 168
Interest 6,452 695
Securities sold - 4,750
----------------------------
Total assets 377,938 157,760
----------------------------
LIABILITIES
Capital shares redeemed 63 598
USAA Investment Management Company 100 43
USAA Transfer Agency Company 18 9
Accounts payable and accrued expenses 35 34
Dividends on capital shares 506 22
----------------------------
Total liabilities 722 706
----------------------------
Net assets applicable to capital shares
outstanding $ 377,216 $ 157,054
============================
REPRESENTED BY:
Paid-in capital $ 386,111 $ 157,054
Accumulated net realized loss on investments (9,442) -
Net unrealized appreciation of investments 547 -
----------------------------
Net assets applicable to capital shares
outstanding $ 377,216 $ 157,054
============================
Capital shares outstanding 35,273 157,054
============================
Authorized shares of $.01 par value 120,000 1,125,000
============================
Net asset value, redemption price, and offering
price per share $ 10.69 $ 1.00
============================
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 2000
USAA
USAA Virginia
Virginia Money Market
Bond Fund Fund
----------------------------
Net investment income:
Interest income $ 22,754 $ 5,094
----------------------------
Expenses:
Management fees 1,270 473
Transfer agent's fees 231 114
Custodian's fees 88 65
Postage 29 17
Shareholder reporting fees 10 12
Directors' fees 3 3
Professional fees 33 30
Other 7 5
----------------------------
Total expenses 1,671 719
----------------------------
Net investment income 21,083 4,375
----------------------------
Net realized and unrealized loss on investments:
Net realized loss (8,891) -
Change in net unrealized
appreciation/depreciation (20,762) -
----------------------------
Net realized and unrealized loss (29,653) -
----------------------------
Increase (decrease) in net assets resulting from
operations $ (8,570) $ 4,375
============================
See accompanying notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<TABLE>
<CAPTION>
USAA USAA
Virginia Virginia
Bond Fund Money Market Fund
---------------------------------------------
2000 1999 2000 1999
---------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 21,083 $ 19,434 $ 4,375 $ 3,862
Net realized loss on investments (8,891) (266) - -
Change in net unrealized appreciation/
depreciation of investments (20,762) 1,027 - -
---------------------------------------------
Increase (decrease) in net assets
resulting from operations (8,570) 20,195 4,375 3,862
---------------------------------------------
Distributions to shareholders from:
Net investment income (21,083) (19,434) (4,375) (3,862)
---------------------------------------------
From capital share transactions:
Proceeds from shares sold 60,020 71,123 146,790 153,062
Dividend reinvestments 15,243 14,255 4,130 3,634
Cost of shares redeemed (70,746) (30,033) (132,282) (140,789)
---------------------------------------------
Increase in net assets from
capital share transactions 4,517 55,345 18,638 15,907
---------------------------------------------
Net increase (decrease) in net assets (25,136) 56,106 18,638 15,907
Net assets:
Beginning of period 402,352 346,246 138,416 122,509
---------------------------------------------
End of period $377,216 $402,352 $157,054 $138,416
=============================================
Change in shares outstanding:
Shares sold 5,477 6,157 146,790 153,062
Shares issued for dividends reinvested 1,405 1,233 4,130 3,634
Shares redeemed (6,538) (2,603) (132,282) (140,789)
---------------------------------------------
Increase in shares outstanding 344 4,787 18,638 15,907
=============================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company incorporated under the laws of Maryland consisting of ten
separate funds. The information presented in this annual report pertains only to
the USAA Virginia Bond Fund and USAA Virginia Money Market Fund (the Funds). The
Funds have a common objective of providing Virginia investors with a high level
of current interest income that is exempt from federal and Virginia state income
taxes. The USAA Virginia Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation - Investments in the USAA Virginia Bond Fund are valued
each business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgment, 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 tax-exempt securities of comparable
quality, coupon, maturity, and type, indications as to values from dealers in
securities, and general market conditions. Securities that cannot be 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 tax-exempt 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 year ended
March 31, 2000.
(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, 2000, the
USAA Virginia Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $9.4 million which, if not offset by subsequent
capital gains will expire between 2003-2009. 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, 2000, were as follows:
USAA Virginia USAA Virginia
Bond Fund Money Market Fund
($000) ($000)
-------------------------------------
Purchases $96,136 $424,921
Sales/maturities $93,105 $410,366
For the USAA Virginia Bond Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at March 31, 2000,
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------------
USAA Virginia Bond Fund $6,990 ($6,443) $547
(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, 2001.
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) FINANCIAL HIGHLIGHTS - USAA VIRGINIA BOND FUND
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------
Net asset value at
beginning of period $ 11.52 $ 11.49 $ 10.92 $ 10.93 $ 10.76
Net investment income .59 .60 .62 .63 .63
Net realized and
unrealized gain (loss) (.83) .03 .57 (.01) .17
Distributions from net
investment income (.59) (.60) (.62) (.63) (.63)
------------------------------------------------------
Net asset value at
end of period $ 10.69 $ 11.52 $ 11.49 $ 10.92 $ 10.93
======================================================
Total return (%) * (2.00) 5.62 11.13 5.82 7.57
Net assets at end
of period (000) $377,216 $402,352 $346,246 $292,914 $267,111
Ratio of expenses to
average net assets (%) .43 .43 .44 .46 .48
Ratio of net investment
income to average
net assets (%) 5.45 5.22 5.48 5.76 5.74
Portfolio turnover (%) 24.60 10.55 14.24 26.84 27.20
* Assumes reinvestment of all dividend income distributions during the period.
(7) FINANCIAL HIGHLIGHTS - USAA VIRGINIA MONEY MARKET FUND
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .03 .03
Distributions from net
investment income (.03) (.03) (.03) (.03) (.03)
-----------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=====================================================
Total return (%) * 3.06 2.98 3.34 3.14 3.42
Net assets at end
of period (000) $157,054 $138,416 $122,509 $113,330 $110,308
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements (%) n/a .50 .51 .53 .55
Ratio of net investment
income to average
net assets (%) 3.04 2.93 3.29 3.10 3.36
* Assumes reinvestment of all dividend income distributions during the period.
Directors
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, Vice Chairman of the Board
Barbara B. Dreeben
Robert L. Mason
David G. Peebles
Michael F. Reimherr
Richard A. Zucker
Investment Adviser, Underwriter, and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Transfer Agent Legal Counsel
USAA Shareholder Account Services Goodwin, Procter & Hoar LLP
9800 Fredericksburg Road Exchange Place
San Antonio, Texas 78288 Boston, Massachusetts 02109
Custodian Independent Auditors
State Street Bank and Trust Company KPMG LLP
P.O. Box 1713 112 East Pecan, Suite 2400
Boston, Massachusetts 02105 San Antonio, Texas 78205
Telephone Assistance Hours Internet Access
Call toll free - Central Time usaa.com(ServiceMark)
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.
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 touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
