Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review
USAA California Bond Fund 4
USAA California Money Market Fund 10
Financial Information
Distributions to Shareholders 14
Independent Auditors' Report 15
Portfolios of Investments:
Categories and Definitions 16
USAA California Bond Fund 18
USAA California Money Market Fund 23
Notes to Portfolios of Investments 27
Statements of Assets and Liabilities 28
Statements of Operations 29
Statements of Changes in Net Assets 30
Notes to Financial Statements 31
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are streamlined. One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a mutual fund representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA California
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark
Office.(Copyright)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 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 investors 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 CALIFORNIA BOND FUND
OBJECTIVE: High level of current interest income that is exempt from federal and
California state income taxes.
TYPES OF INVESTMENTS: Invests principally in long-term, investment-grade
California tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/99 3/31/00
================================================================================
Net Assets $641.7 Million $576.7 Million
Net Asset Value Per Share $11.29 $10.38
Tax-Exempt Dividends Per Share Last 12 Months $.588 $.576
Capital Gain Distributions Per Share Last 12 Months - -
- --------------------------------------------------------------------------------
30-Day SEC Yield* as of 3/31/00
- --------------------------------------------------------------------------------
30-Day SEC Yield 4.99%
- --------------------------------------------------------------------------------
* 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
- --------------------------------------------------------------------------------
10 Years 6.95% = 6.02% + 0.93%
- --------------------------------------------------------------------------------
5 Years 6.24% = 5.69% + 0.55%
- --------------------------------------------------------------------------------
1 Year -2.91% = 5.15% + -8.06%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns
for the Ten-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 California Bond Fund for the
ten-year period ended March 31, 2000.
Total Return for Years Ended:
- ----------------------------
03/31/91 9.46%
03/31/92 9.52%
03/31/93 12.56%
03/31/94 0.31%
03/31/95 6.89%
03/31/96 9.35%
03/31/97 6.60%
03/31/98 12.33%
03/31/99 6.46%
03/31/00 -2.91%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
03/31/91 7.10%
03/31/92 6.81%
03/31/93 6.51%
03/31/94 5.15%
03/31/95 6.19%
03/31/96 6.08%
03/31/97 5.93%
03/31/98 5.95%
03/31/99 5.39%
03/31/00 5.15%
Change in Share Price:
- ---------------------
03/31/91 2.36%
03/31/92 2.71%
03/31/93 6.05%
03/31/94 -4.84%
03/31/95 0.70%
03/31/96 3.27%
03/31/97 0.67%
03/31/98 6.38%
03/31/99 1.07%
03/31/00 -8.06%
** 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 California Bond Fund to the 12 Month
Dividend Yield of the Lipper California Municipal Debt Funds Average from
3/31/91 to 3/31/00.
USAA California Bond Lipper California Municipal
Fund Yield Debt Funds Average Yield
-------------------- ---------------------------
03/31/91 6.63% 6.60%
03/31/92 6.40% 6.40%
03/31/93 5.80% 5.80%
03/31/94 5.85% 5.79%
03/31/95 5.83% 5.57%
03/31/96 5.74% 5.23%
03/31/97 5.77% 5.11%
03/31/98 5.36% 4.76%
03/31/99 5.20% 4.54%
03/31/00 5.54% 4.75%
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
3/31/91 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 California Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper California Municipal Debt Funds
Average. The data is from 3/31/90 through 3/31/00. The data points from the
graph are as follows:
USAA California Bond Fund
Year Amount
---- ------
03/31/90 $10,000
09/30/90 10,234
03/31/91 10,946
09/30/91 11,581
03/31/92 11,988
09/30/92 12,668
03/31/93 13,490
09/30/93 14,433
03/31/94 13,531
09/30/94 13,691
03/31/95 14,463
09/30/95 15,231
03/31/96 15,816
09/30/96 16,501
03/31/97 16,860
09/30/97 18,126
03/31/98 18,940
09/30/98 19,966
03/31/99 20,162
09/30/99 19,366
03/31/00 19,580
Lehman Brothers Municipal Bond Index
Year Amount
---- ------
03/31/90 $10,000
09/30/90 10,239
03/31/91 10,923
09/30/91 11,590
03/31/92 12,014
09/30/92 12,801
03/31/93 13,518
09/30/93 14,432
03/31/94 13,832
09/30/94 14,080
03/31/95 14,859
09/30/95 15,655
03/31/96 16,105
09/30/96 16,600
03/31/97 16,982
09/30/97 18,097
03/31/98 18,802
09/30/98 19,674
03/31/99 19,967
09/30/99 19,537
03/31/00 19,951
Lipper California Municipal Debt Funds Average
Year Amount
---- ------
03/31/90 $10,000
09/30/90 10,164
03/31/91 10,802
09/30/91 11,459
03/31/92 11,828
09/30/92 12,545
03/31/93 13,313
09/30/93 14,264
03/31/94 13,578
09/30/94 13,677
03/31/95 14,394
09/30/95 15,020
03/31/96 15,475
09/30/96 16,023
03/31/97 16,302
09/30/97 17,454
03/31/98 18,107
09/30/98 19,010
03/31/99 19,163
09/30/99 18,454
03/31/00 18,722
Data from 3/31/90 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 California Municipal Debt Funds Average is the average
performance level of all California municipal debt funds, as computed by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds. All tax-exempt bond funds will find it difficult to
outperform the Lehman Index since funds have expenses.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: ROBERT R. PARISEAU, CFA, APPEARS HERE.]
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 5.54% versus
an average dividend distribution yield of 4.75% for the Lipper California
Municipal Debt Funds Average. During the fiscal year, the Fund's share price
decreased by $0.91 to $10.38. During this period, the Fund's total return was
- -2.91% compared to the Lipper Average of -2.45%.
* * * *
I'm pleased to say that your Fund received an Overall Star Rating of 4 stars in
the municipal bond fund category from Morningstar Rating(Trademark) for the
period ended March 31, 2000.
THE STATE OF CALIFORNIA
California's economy, the largest among the 50 states, continues to expand.
Strong gains in employment and personal income tax have allowed the state to
achieve favorable financial results. In recognition of these factors, Fitch IBCA
upgraded California's general obligation bond rating to AA from AA- on February
16, 2000. Moody's Investors Service and Standard & Poor's retain their Aa3 and
AA- ratings, respectively. 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 California Bond Fund
received 4 stars, 5 stars, and 4 stars for the three-, five- and 10-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, 1,394,
and 403 funds in the municipal bond fund category for the three-, five-, and
10-year periods, respectively.
TAXABLE EQUIVALENT YIELDS
The table below compares the yield of the USAA California Bond Fund with a
taxable equivalent investment.
- --------------------------------------------------------------------------------
To match the USAA California Bond Fund's closing 30-day SEC yield of
4.99% and:
Assuming a California state tax rate of: 8.00% 8.00% 9.30% 9.30% 9.30%
and a marginal federal tax rate of: 15% 28% 31% 36% 39.6%
A fully taxable investment must pay: 6.38% 7.53% 7.97% 8.60% 9.11%
- --------------------------------------------------------------------------------
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 California Bond Fund to be:
AAA - 41%; AA - 25%; A - 25%; and BBB - 9%.
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, AA, and BBB account for 3.3%,
0.9%, and 0.4%, respectively, of the Fund's investments, and are included in
their appropriate category above.
See page 18 for a complete listing of the portfolio of investments.
Investment Review
USAA CALIFORNIA MONEY MARKET FUND
OBJECTIVE: High level of current interest income that is exempt from federal and
California state income taxes and a further objective of preserving capital and
maintaining liquidity.
TYPES OF INVESTMENTS: Invests principally in high-quality, California tax-exempt
securities with maturities of 397 days or less. The Fund will maintain a
dollar-weighted average portfolio maturity of 90 days or less and will endeavor
to maintain a constant net asset value per share of $1.00.*
* An investment in a money market fund is not insured or guaranteed by the FDIC
or any government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
- --------------------------------------------------------------------------------
3/31/99 3/31/00
================================================================================
Net Assets $439.2 Million $425.2 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
Average Annual Total Returns and 7-Day Yield as of 3/31/00
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years 7-Day Yield
2.86% 3.21% 3.33% 2.94%
- --------------------------------------------------------------------------------
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 California Money Market Fund and the iMoneyNet, Inc.
(formerly IBC Financial Data) State Specific SB (Stock Broker) and GP (General
Purpose) (Tax-Free) California Money Funds.
USAA California
Money Market Fund iMoneyNet, Inc.
----------------- ---------------
03/29/99 2.65% 2.31%
04/26/99 3.01% 2.67%
05/31/99 2.88% 2.55%
06/28/99 3.09% 2.80%
07/26/99 2.60% 2.28%
08/30/99 2.76% 2.44%
09/27/99 3.12% 2.75%
10/25/99 2.80% 2.51%
11/29/99 3.26% 2.96%
12/27/99 3.51% 3.24%
01/31/00 2.60% 2.34%
02/28/00 2.67% 2.30%
03/27/00 2.87% 2.62%
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) California 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%. Yields for one-year
California issues have not been as high, as the heavy demand for California
tax-exempt issues has driven those yields lower.
STRATEGY
We continue to believe that variable-rate demand notes (VRDNs) provide the best
value for the USAA California Money Market 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 66% of the
Fund's assets on March 31, 2000. In addition, the Fund 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 46 days on March 31, 2000. This average is
slightly longer than the average California money market fund according
iMoneyNet, Inc. (formerly IBC Financial Data).
Portfolio Mix
March 31, 2000
A pie chart is shown here depicting the Portfolio Mix as of March 31, 2000 of
the USAA California Money Market Fund to be:
VRDNs - 66%; Bonds/Notes - 21%; Commercial Paper - 8%; and Put Bonds - 4%.
Percentages are of the net assets and may or may not equal 100%.
See page 23 for a complete listing of the portfolio of investments.
FUND PERFORMANCE
For the 12 months ending March 31, 2000, your Fund ranked 5 out of 48 California
tax-exempt money market funds, according to iMoneyNet, Inc., with a return of
2.86%. The average for the category over the same period was 2.57%. 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 illustrating the cumulative
performance of a $10,000 investment of the USAA California Money Market Fund.
The data is from 3/31/90 to 3/31/00. The data points from the graph are as
follows:
USAA California Money Market Fund
Year Amount
---- ------
03/31/90 $10,000
09/30/90 10,275
03/31/91 10,544
09/30/91 10,771
03/31/92 10,969
09/30/92 11,127
03/31/93 11,261
09/30/93 11,390
03/31/94 11,511
09/30/94 11,654
03/31/95 11,849
09/30/95 12,065
03/31/96 12,274
09/30/96 12,472
03/31/97 12,670
09/30/97 12,884
03/31/98 13,094
09/30/98 13,308
03/31/99 13,490
09/30/99 13,679
03/31/00 13,877
Data from 3/31/90 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. Some income may be
subject to federal, state, or local taxes, or to the federal 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 California Bond and USAA California
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 California Bond and USAA California 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 California Money Market Fund's investments consist of securities
meeting the requirements to qualify as "eligible securities" under the
Securities and Exchange Commission (SEC) rules applicable to money market funds.
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 California Money Market Fund through
rigorous internal credit research.
(ETM) Escrowed to final maturity.
(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.
(2) AMBAC Financial Group, Inc.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance Holdings Ltd.
(5) College Construction Loan Insurance Association.
(6) ACA Financial Guaranty Corp.
PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CAB Capital Appreciation Bond MFH Multi-Family Housing
COP Certificate of Participation PCRB Pollution Control Revenue Bond
CP Commercial Paper P-FLOAT Puttable Floating Option
GO General Obligation Tax-Exempt Receipts
IDA Industrial Development RAN Revenue Anticipation Note
Authority/Agency RB Revenue Bond
MERLOT Municipal Exempt Receipts - TRAN Tax Revenue Anticipation Note
Liquidity Optional Tender
<TABLE>
USAA CALIFORNIA BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 2000
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED-RATE INSTRUMENTS (102.8%)
California (101.1%)
$ 3,000 Alameda Housing Auth. MFH RB,
Series 1998A 5.35% 2/20/2031 $ 2,655
7,500 Antelope Valley Healthcare District RB,
Series 1997B (INS)(4) 5.20 1/01/2027 6,856
Association of Bay Area Governments
Finance Auth. COP,
2,000 Series 1998 (NBGA) 5.13 5/15/2023 1,807
21,000 Series 1999 (INS)(6) 6.20 11/01/2029 21,155
Burbank Unified School District GO,
4,025 Series 1998B (INS)(3),(a) 5.30 8/01/2022 1,095
3,130 Series 1998B (INS)(3),(a) 5.30 8/01/2023 801
5,000 Central Valley Finance Auth. RB,
Series 1993 (PRE) 6.20 7/01/2020 5,343
Commerce Community Development
Commission Tax Allocation Bonds,
3,740 Series 1997A, Project #1 (INS)(1),(a) 5.50 8/01/2022 1,017
3,740 Series 1997A, Project #1 (INS)(1),(a) 5.50 8/01/2023 958
2,270 Contra Costa Water District RB,
Series 1994G (INS)(1) 5.50 10/01/2019 2,250
4,150 Department of Water Resources RB,
Series L 5.75 12/01/2019 4,179
5,000 Desert Hospital District COP (PRE) 6.39 7/28/2020 5,280
Educational Facilities Auth. RB,
9,500 Series 1991 (National University) (PRE) 7.15 5/01/2021 9,996
1,775 Series 1992 (Mills College) (PRE) 6.88 9/01/2022 1,909
5,000 Series 1992 (Pomona College) 6.00 2/15/2017 5,106
8,990 Series 1992 (University of San Diego) (PRE) 6.50 10/01/2022 9,603
9,000 Series 1994 (National University) (INS)(5) 6.20 5/01/2021 9,289
8,015 Series 1995 (Redland University) 6.00 10/01/2025 8,099
8,050 Series 1995A (California Education Pool) 5.60 12/01/2020 7,833
5,945 Escondido COP, Series 2000A (INS)(3) 5.75 9/01/2030 5,962
Fallbrook Union High School District GO,
3,000 Series 1998 (INS)(3),(a) 5.40 9/01/2018 1,051
3,360 Series 1998 (INS)(3),(a) 5.40 9/01/2019 1,104
Fontana Unified School District GO
Convertible Zero Coupon,
2,500 Series 1990D (INS)(3),(a) 5.80 5/01/2017 2,472
2,000 Series 1990D (INS)(3),(a) 5.85 5/01/2022 1,939
2,270 Fresno COP, Series 1991 8.50 5/01/2016 2,345
Health Facilities Financing Auth. RB,
8,000 Series 1990 (Sisters of Providence) (PRE) 7.50 10/01/2010 8,296
35,000 Series 1990A (Kaiser Permanente) (PRE)(d) 6.50 12/01/2020 36,255
6,500 Series 1990A (Lodi Memorial Hospital) (NBGA) 7.70 9/01/2010 6,716
11,500 Series 1991 (Southern Presbyterian) (PRE) 6.75 6/01/2021 12,056
3,175 Series 1992A (Scripps Memorial Hospital)
(INS)(1) 6.38 10/01/2022 3,262
3,500 Series 1993C (Kaiser Permanente) 5.60 5/01/2033 3,159
2,000 Series 1994 (St. Pauls Episcopal Home)
(NBGA) 6.50 9/01/2014 2,092
5,000 Series 1994A (Scripps Research Institute) 6.63 7/01/2018 5,173
1,000 Series 1997A (Sunny View) (NBGA) 5.50 1/01/2019 974
4,000 Series 1998A (Catholic Healthcare West) 5.00 7/01/2028 2,955
3,325 Series 1998A (Marshall Hospital) (NBGA) 5.30 11/01/2028 3,055
2,320 Series 1998A (Sacramento Medical) (NBGA) 5.25 5/01/2021 2,162
5,000 Series 1998B (Kaiser Permanente) 5.00 10/01/2020 4,179
4,180 Hollister Joint Powers Financing Auth. RB 5.90 12/01/2023 3,897
Housing Finance Agency Home Mortgage RB,
10,310 Series 1991F (d) 6.85 8/01/2017 10,633
5,990 Series 1994A 6.55 8/01/2026 6,136
1,500 Series 1997D 5.85 8/01/2017 1,532
3,000 Housing Finance Agency MFH RB,
Series 1996A (INS)(2) 6.05 8/01/2027 2,984
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/2025 5,643
Infrastructure and Economic Development RB,
2,500 Series 1999 (INS)(6) 5.70 12/01/2019 2,404
3,090 Series 1999 (INS)(6) 5.75 12/01/2024 2,925
7,000 Series 1999 (INS)(6) 5.80 12/01/2029 6,617
5,000 Metropolitan Water District RB, Series 1992 5.50 7/01/2019 4,991
3,000 Mojave Water Agency Improvement District GO,
Series 1992 (PRE) 6.60 9/01/2022 3,209
4,855 Murrieta Valley Unified School District GO,
Series 1998A (INS)(3),(a) 5.28 9/01/2018 1,701
10,975 New Haven Unified School District GO,
Series 1997A (INS)(4),(a) 6.10 8/01/2021 3,132
15,200 Oakland Unified School District GO,
Series 2000 (INS)(1),(c) 5.50 8/01/2024 14,762
10,325 Pleasanton Joint Powers Financing Auth. RB,
Series 1993A 6.15 9/02/2012 10,594
5,000 Poway Redevelopment Agency Tax
Allocation RB, Series 2000 (INS)(1) 5.75 6/15/2033 4,996
13,400 Riverside County Public Financing Auth.
Tax Allocation RB, Series 1997A 5.63 10/01/2033 11,690
6,500 Sacramento Cogeneration Auth. RB,
Series 1995 (PRE) 6.50 7/01/2021 7,158
Sacramento Power Auth. RB,
3,700 Series 1995 5.88 7/01/2015 3,623
6,000 Series 1995 6.00 7/01/2022 5,748
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/2025 7,253
San Diego Unified School District CAB,
6,940 Series 1999A (INS)(3),(a) 5.54 7/01/2020 2,157
5,360 Series 1999A (INS)(3),(a) 5.55 7/01/2021 1,563
8,440 Series 1999A (INS)(3),(a) 5.56 7/01/2022 2,307
11,120 Series 1999A (INS)(3),(a) 5.99 7/01/2023 2,861
18,000 San Francisco Bay Area RB, Series 1999 5.50 7/01/2029 17,451
San Francisco City and County Airport RB,
3,190 2nd Series-Issue 24B (INS)(4),(c) 5.63 5/01/2025 3,164
8,845 2nd Series-Issue 24B (INS)(4),(c) 5.63 5/01/2030 8,731
13,500 San Joaquin Hills Transportation
Corridor Agency RB, Series 1993 (PRE) 6.75 1/01/2032 14,553
11,320 San Mateo Sewer RB, Series 1992 (PRE)(INS)(2) 6.30 8/01/2017 12,017
14,000 Santa Ana Unified School District GO,
Series 2000 (INS)(3),(c) 5.70 8/01/2029 13,997
11,215 Santa Clara Valley Water District RB,
Series 2000A 5.63 2/01/2025 11,184
12,455 Southern California Public Power Auth. RB,
Series 1989 (LOC) 6.00 7/01/2018 12,461
State GO,
22,100 Series 1998 5.00 10/01/2027 19,798
10,000 Series 1999 5.50 9/01/2024 9,744
10,000 Series 1999 5.88 10/01/2026 10,125
8,865 Series 1999 5.75 12/01/2029 8,896
12,325 Series 2000 5.75 3/01/2030 12,359
Statewide Communities Development Auth. COP,
13,500 Huntington Memorial Hospital (INS)(5) 5.80 7/01/2026 13,520
5,420 Lutheran Homes (ETM)(NBGA) 5.75 11/15/2021 5,377
1,055 The Arc of San Diego (NBGA) 5.63 5/01/2021 1,032
Suisun City Public Financing Auth. RB,
17,855 Series 1998A (a) 5.37 10/01/2028 3,078
20,080 Series 1998A (a) 5.37 10/01/2033 2,526
Union Elementary School District CAB,
3,200 Series 1999A (INS)(3),(a) 6.20 9/01/2022 861
2,600 Series 1999A (INS)(3),(a) 6.21 9/01/2023 658
Univ. of California RB,
12,000 Series 1991A (PRE)(d) 6.88 9/01/2016 12,910
4,000 Series 1996 (INS)(2) 5.75 7/01/2024 3,966
17,000 Vallejo Sanitation and Flood Control COP,
Series 1993 (INS)(3) 5.00 7/01/2019 15,892
Washington Township Health Care District RB,
7,085 Series 1999 5.13 7/01/2023 6,079
3,005 Series 1999 5.25 7/01/2029 2,587
Washington Township Hospital RB,
11,000 Series 1993 5.50 7/01/2018 10,284
7,845 Series 1993 5.25 7/01/2023 6,885
1,515 Watsonville Hospital RB,
Series 1996A (ETM)(NBGA) 6.20 7/01/2012 1,639
Puerto Rico (1.7%)
10,500 Electric Power Auth. RB, Series 1995Z 5.25 7/01/2021 9,841
- ----------------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $587,534) 592,569
- ----------------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (1.0%)
California
1,100 Irvine Improvement Bonds, Assessment
District 89-10 (LOC) 3.40 9/02/2015 1,100
2,900 Pollution Control Financing Auth. PCRB,
Series 1996D (LOC) 3.35 11/01/2026 2,900
1,900 Statewide Communities Development Auth. COP,
Series 1996 (LOC) 3.45 6/01/2026 1,900
- ----------------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $5,900) 5,900
- ----------------------------------------------------------------------------------------
Total investments (cost: $593,434) $598,469
========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Escrowed Bonds 25.2%
General Obligations 19.7
Hospitals 12.7
Water/Sewer Utilities - Municipal 8.4
Electric/Gas Utilities - Municipal 5.5
Education 5.3
Real Estate Tax-Free 5.2
Nursing/Continuing Care Centers 4.8
Multi-Family Housing 3.2
Single-Family Housing 3.2
Toll Roads 3.0
Airport/Port 2.1
Community Service 2.1
Health Care - Miscellaneous 1.5
Special Assessment/Tax/Fee 1.1
Other 0.8
-----
Total 103.8%
=====
<TABLE>
USAA CALIFORNIA MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 2000
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- ------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VARIABLE-RATE DEMAND NOTES (66.3%)
California (60.1%)
$ 9,000 Alameda County IDA RB, Series 1994 3.60% 6/01/2004 $ 9,000
2,100 Covina Redevelopment Agency MFH RB,
Series 1994A (NBGA) 3.30 12/01/2015 2,100
2,000 Davis Community Facilities District RB,
Series 2000 (LOC) 3.25 9/01/2024 2,000
2,400 Elsinore Valley Municipal Water
District COP, Series 2000A (NBGA) 3.20 7/01/2029 2,400
Fremont COP,
6,275 Series 1990 (LOC) 3.25 7/01/2015 6,275
4,400 Series 1991 (LOC) 3.25 8/01/2022 4,400
2,000 Hacienda Puente Unified School
District COP (LOC) 3.35 10/01/2009 2,000
2,015 Hesperia Public Financing Auth. Lease RB,
Series 1998B (LOC) 3.55 6/01/2022 2,015
4,700 Huntington Beach MFH RB, Series 1985A (LOC) 4.00 2/01/2010 4,700
2,400 Irvine IDA RB, Series 1985 (LOC) 4.70 11/01/2005 2,400
Irvine Improvement Bonds,
2,900 Assessment District 94-13 (LOC) 3.40 9/02/2022 2,900
1,400 Assessment District 97-16 (LOC) 3.40 9/02/2022 1,400
2,900 Assessment District 97-17 (LOC) 3.40 9/02/2023 2,900
Irvine Ranch Water District Consolidated Bonds,
1,000 Series 1985 (LOC) 3.40 10/01/2010 1,000
800 Series 1995 (LOC) 3.45 1/01/2021 800
9,000 Lancaster MFH RB, Series 1984A (NBGA)(b) 3.36 11/01/2029 9,000
1,390 Lemoore COP, Series 1995 (LOC) 3.60 11/01/2020 1,390
6,950 Livermore MFH RB, Series 1990A (NBGA) 3.15 5/15/2029 6,950
6,800 Loma Linda Water RB, Series 1995 (LOC) 3.55 6/01/2025 6,800
14,000 Los Angeles Community Redevelopment
Agency COP, Series 1994 (LOC) 3.15 12/01/2014 14,000
6,500 Los Angeles MFH RB, Series 1991B (LOC) 3.20 12/01/2010 6,500
15,600 Los Angeles Unified School District COP,
Series 1997A (LOC) 3.20 12/01/2017 15,600
4,200 Monrovia Redevelopment Agency COP,
Series 1984 (NBGA) 3.65 12/01/2014 4,200
6,350 Monterey County Financing Auth. RB,
Series 1995A (LOC) 3.20 9/01/2036 6,350
8,085 Moreno Valley COP, Series 1997 (LOC) 3.55 6/01/2027 8,085
10,000 Newport Beach Hospital RB, Series 1999A 3.15 12/01/2029 10,000
3,000 Oakland RB, Series 1999A-MERLOT
Series 2000M (LIQ)(INS)(2),(b) 3.65 1/01/2029 3,000
9,000 Ontario Industrial Development Auth. RB,
Series 1985 (LOC) 3.60 4/01/2015 9,000
Orange County Apartment Development RB,
8,100 Series 1984D (LOC) 4.03 8/01/2019 8,100
10,000 Series 1999C (NBGA) 3.25 12/01/2029 10,000
2,300 Orange County Sanitation District COP,
Series 1990-92A (LOC) 3.40 8/01/2015 2,300
6,200 Orange County Special Financing Auth. RB,
Series 1995B (LIQ)(INS)(2) 2.95 11/01/2014 6,200
9,300 Rialto Public Financing Auth. RB,
Series 1998A (LOC) 3.80 9/01/2027 9,300
3,500 Sacramento County Multifamily Housing RB,
Series 1985C (NBGA) 3.25 4/15/2007 3,500
8,000 San Bernardino County COP,
Series 1996 (LOC) 3.55 11/01/2025 8,000
4,650 San Bernardino IDA RB, Series 1992 (LOC) 4.05 2/01/2012 4,650
4,000 San Dimas Redevelopment Agency IDA RB,
Series 1985 (LOC) 4.05 11/01/2015 4,000
3,600 San Francisco City and County MFH RB,
Series 1985A (LOC) 3.05 12/01/2005 3,600
9,800 Santa Paula Public Financing Auth. RB,
Series 1996 (NBGA) 3.25 2/01/2026 9,800
3,200 School Facilities Financing Corp. COP,
Series 1998A (LOC) 3.30 7/01/2022 3,200
Statewide Communities Development Auth. COP,
3,475 Series 1992 (LOC) 4.00 11/01/2022 3,475
2,200 Series 1992 (LOC) 3.40 12/01/2022 2,200
4,800 Series 1994 3.45 7/01/2024 4,800
3,200 Series 1998 (LOC) 4.01 6/01/2013 3,200
21,000 Torrance Hospital RB, Series 1992 (LOC) 3.40 2/01/2022 21,000
1,000 Upland Community Redevelopment Agency
MFH RB, Series 1999A (NBGA) 3.25 2/15/2030 1,000
Puerto Rico (6.2%)
19,825 Commonwealth Public Improvement Bonds,
Series 1988, P-FLOAT
Series PT-1025 (LIQ)(INS)(1),(b) 3.36 7/01/2016 19,825
6,700 Industrial, Medical and Environmental
Pollution Control Facilities Financing
Auth. RB, Series 1985 (LOC) 3.55 12/01/2015 6,700
- ------------------------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $282,015) 282,015
- ------------------------------------------------------------------------------------------------
PUT BONDS (3.6%)
California
2,660 Pollution Control Financing Auth. PCRB,
Series 1984 3.10 5/15/2002 2,660
12,700 Public Capital Improvement Finance
Auth. RB, Series 1988C (LOC) 3.60 6/01/2028 12,700
- ------------------------------------------------------------------------------------------------
Total put bonds (cost: $15,360) 15,360
- ------------------------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (29.4%)
California (21.4%)
6,300 Alameda Unified School District TRAN,
Series 1999 3.38 6/30/2000 6,303
2,150 Auburn Unified School District TRAN,
Series 1999 4.13 10/01/2000 2,154
5,725 Clovis Unified School District CAB,
Series 1993B (ETM)(INS)(1),(a) 3.65 8/01/2000 5,657
8,000 Kern High School District TRAN,
Series 1999 4.00 7/06/2000 8,012
1,000 Loma Linda Hospital RB,
Series 1990B (PRE) 7.00 12/01/2022 1,038
4,200 Montebello TRAN, Series 1999 (LOC) 4.00 6/30/2000 4,204
5,000 Orange County Fire Auth. TRAN,
Series 1999 4.50 7/12/2000 5,014
2,750 Oxnard School District TRAN, Series 1999 4.25 7/27/2000 2,756
1,000 Placer County Office of Education TRAN,
Series 1999 4.13 10/01/2000 1,002
310 Pleasanton Unified School District GO,
Series 1997D (INS)(1) 5.50 8/01/2000 312
1,300 Rocklin Unified School District TRAN,
Series 1999 4.13 10/01/2000 1,303
2,035 Roseville City School District TRAN,
Series 1999 4.13 10/01/2000 2,040
8,000 San Luis Coastal Unified School
District Project Notes, Series 1999 4.25 6/30/2000 8,017
2,500 San Luis Coastal Unified School
District TRAN, Series 1999 4.25 7/14/2000 2,506
15,000 San Ramon Valley Unified School
District TRAN, Series 1999-2000 3.80 12/16/2000 15,000
3,125 School Project for Utility Rate
Reduction RAN, Series 1999 3.86 10/06/2000 3,125
2,500 Solano County TRAN, Series 1999-2000B 4.50 12/15/2000 2,512
1,000 South Orange County Public Financing
Auth. RB, Series 1999A (INS)(4) 4.50 8/15/2000 1,003
6,495 State GO 9.00 6/01/2000 6,556
5,000 Statewide Communities Development Auth. TRAN,
Series A1 (INS)(4) 4.00 6/30/2000 5,009
3,725 Tahoe Truckee Unified School District TRAN,
Series 1999 4.25 11/23/2000 3,737
3,800 Yuba Community College District TRAN,
Series 1999-2000 4.50 2/28/2001 3,820
Puerto Rico (8.0%)
5,000 Government Development Bank CP 3.40 4/05/2000 5,000
10,814 Government Development Bank CP 3.50 4/18/2000 10,814
7,000 Government Development Bank CP 3.55 8/15/2000 7,000
11,000 Government Development Bank CP 3.60 8/18/2000 11,000
- ------------------------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $124,894) 124,894
- ------------------------------------------------------------------------------------------------
Total investments (cost: $422,269) $422,269
================================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
General Obligations 24.9%
Multi-Family Housing 11.1
Hospitals 9.1
Banks - Major Regional 8.0
Appropriated Debt 7.4
Water/Sewer Utilities - Municipal 7.4
Buildings 7.1
Real Estate Tax/Free 3.7
Finance - Municipal 3.0
Manufacturing - Diversified Industries 2.7
Special Assessment/Tax/Fee 2.4
Electronics - Computer Distributors 2.1
Lodging/Hotel 2.1
Nursing Care 1.9
Education 1.6
Other 4.8
----
Total 99.3%
====
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. For the USAA California Bond Fund and USAA California Money Market
Fund these securities represented 5.4% and 1.3% of the Fund's net assets,
respectively.
(b) These securities are exempt from registration under the Securities Act of
1933 and have been determined to be liquid by management. Any resale of these
securities may occur in an exempt transaction in the United States to a
qualified institutional buyer as defined by Rule 144A. At March 31, 2000, these
securities represented 7.5% of the USAA California Money Market Fund's net
assets.
(c) At March 31, 2000, the cost of securities purchased on a delayed-delivery
basis for the USAA California Bond Fund was $40.7 million.
(d) At March 31, 2000, these securities were segregated to cover
delayed-delivery purchases.
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 2000
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
-----------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $593,434 and $422,269, respectively) $ 598,469 $ 422,269
Cash 241 1,726
Receivables:
Capital shares sold 128 326
Interest 9,059 3,048
Securities sold 10,833 -
---------------------------
Total assets 618,730 427,369
---------------------------
LIABILITIES
Securities purchased 40,675 -
Capital shares redeemed 316 1,886
USAA Investment Management Company 151 114
USAA Transfer Agency Company 21 17
Accounts payable and accrued expenses 36 60
Dividends on capital shares 824 57
---------------------------
Total liabilities 42,023 2,134
---------------------------
Net assets applicable to capital shares outstanding $ 576,707 $ 425,235
===========================
REPRESENTED BY:
Paid-in capital $ 582,096 $ 425,235
Accumulated net realized loss on investments (10,424) -
Net unrealized appreciation of investments 5,035 -
---------------------------
Net assets applicable to capital shares outstanding $ 576,707 $ 425,235
===========================
Capital shares outstanding 55,536 425,235
===========================
Authorized shares of $.01 par value 140,000 2,435,000
===========================
Net asset value, redemption price, and offering price per share $ 10.38 $ 1.00
===========================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 2000
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
---------------------------
<S> <C> <C>
Net investment income:
Interest income $ 35,398 $ 13,605
--------------------------
Expenses:
Management fees 1,911 1,318
Transfer agent's fees 277 215
Custodian's fees 113 105
Postage 32 35
Shareholder reporting fees 8 11
Directors' fees 3 3
Professional fees 36 33
Other 8 11
--------------------------
Total expenses 2,388 1,731
--------------------------
Net investment income 33,010 11,874
--------------------------
Net realized and unrealized loss on investments:
Net realized loss (10,303) -
Change in net unrealized appreciation/depreciation (43,032) -
--------------------------
Net realized and unrealized loss (53,335) -
--------------------------
Increase (decrease) in net assets resulting from operations $ (20,325) $ 11,874
==========================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<CAPTION>
USAA USAA
California California
Bond Fund Money Market Fund
--------------------------------------------
2000 1999 2000 1999
--------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 33,010 $ 30,424 $ 11,874 $ 11,846
Net realized gain (loss) on investments (10,303) 119 - -
Change in net unrealized appreciation/
depreciation of investments (43,032) 5,588 - -
---------------------------------------------
Increase (decrease) in net assets
resulting from operations (20,325) 36,131 11,874 11,846
---------------------------------------------
Distributions to shareholders from:
Net investment income (33,010) (30,424) (11,874) (11,846)
---------------------------------------------
From capital share transactions:
Proceeds from shares sold 88,729 152,433 455,436 482,344
Dividend reinvestments 22,730 21,003 11,176 11,109
Cost of shares redeemed (123,070) (71,237) (480,585) (485,999)
---------------------------------------------
Increase (decrease) in net assets
from capital share transactions (11,611) 102,199 (13,973) 7,454
---------------------------------------------
Net increase (decrease) in net assets (64,946) 107,906 (13,973) 7,454
Net assets:
Beginning of period 641,653 533,747 439,208 431,754
---------------------------------------------
End of period $ 576,707 $ 641,653 $ 425,235 $ 439,208
=============================================
Change in shares outstanding:
Shares sold 8,282 13,515 455,436 482,344
Shares issued for dividends reinvested 2,155 1,859 11,176 11,109
Shares redeemed (11,728) (6,329) (480,585) (485,999)
---------------------------------------------
Increase (decrease) in
shares outstanding (1,291) 9,045 (13,973) 7,454
=============================================
See accompanying notes to financial statements.
</TABLE>
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 California Bond Fund and USAA California Money Market Fund (the Funds).
The Funds have a common objective of providing California investors with a high
level of current interest income that is exempt from federal and California
state income taxes. The USAA California Money Market Fund has a further
objective of preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA California Bond Fund are
valued each business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between quoted bid and
asked prices or the last sale price to price securities when, in the Service's
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 California Money Market Fund are stated at amortized cost
which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in California 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 California Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $10.4 million which, if not offset by subsequent
capital gains will expire in 2003-2008. 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
Cost of purchases and proceeds from sales/maturities of securities for the year
ended March 31, 2000, were as follows:
USAA California USAA California
Bond Fund Money Market Fund
($000) ($000)
-----------------------------------------
Purchases $302,741 $1,212,138
Sales/maturities $285,460 $1,186,459
For the USAA California Bond Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at March 31, 2000,
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
------------------------------------------
USAA California Bond Fund $16,428 ($11,393) $5,035
(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) FINANCIAL HIGHLIGHTS - USAA CALIFORNIA 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 $ 11.29 $ 11.17 $ 10.50 $ 10.43 $ 10.10
Net investment income .58 .59 .60 .61 .60
Net realized and
unrealized gain (loss) (.91) .12 .67 .07 .33
Distributions from net
investment income (.58) (.59) (.60) (.61) (.60)
------------------------------------------------------
Net asset value at
end of period $ 10.38 $ 11.29 $ 11.17 $ 10.50 $ 10.43
======================================================
Total return (%) * (2.91) 6.46 12.33 6.60 9.35
Net assets at end
of period (000) $ 576,707 $ 641,653 $ 533,747 $ 440,231 $ 409,180
Ratio of expenses to
average net assets (%) .39 .39 .40 .41 .42
Ratio of net investment
income to average
net assets (%) 5.43 5.21 5.47 5.74 5.74
Portfolio turnover (%) 48.46 7.20 20.16 23.72 23.09
* Assumes reinvestment of all dividend income distributions during the period.
(7) FINANCIAL HIGHLIGHTS - USAA CALIFORNIA 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 .04
Distributions from net
investment income (.03) (.03) (.03) (.03) (.04)
----------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================
Total return (%) * 2.86 3.03 3.35 3.23 3.58
Net assets at end
of period (000) $425,235 $439,208 $431,754 $341,128 $296,349
Ratio of expenses to
average net assets (%) .41 .42 .41 .45 .47
Ratio of net investment
income to average
net assets (%) 2.83 2.99 3.30 3.19 3.52
* 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
