Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
Texas Tax-Free Income Fund 4
Texas Tax-Free Money Market Fund 7
Financial Information:
Independent Auditors' Report 10
Statements of Assets and Liabilities 11
Portfolios of Investments in Securities:
Texas Tax-Free Income Fund 13
Texas Tax-Free Money Market Fund 16
Notes to Portfolios of Investments 19
Statements of Operations 20
Statements of Changes in Net Assets 21
Notes to Financial Statements 22
Important Information:
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are now "streamlined." One
copy of each report will be sent to each address, instead of our previous
practice of sending one report to every registered owner. For many shareholders
and their families, this eliminates duplicate copies, saving paper and postage
costs to the Funds.
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 Texas 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 funds.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(copyright)1995, USAA. All rights reserved.
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the performance
of our other funds. This summary is a snapshot of the performance of all 29
funds by investment objective as of March 31, 1995. If you're interested in
more information, please call us at 1-800-531-1087 for a prospectus. Please
read the prospectus carefully before investing.
<TABLE>
<CAPTION>
Average Annual Total Return**
Investment Inception Since 7-Day 30-Day***
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC
Capital Appreciation % % % % % %
<S> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 10/19/81 12.44 9.92 9.01 - - -
Emerging Markets 11/7/94 - - - (12.80) - -
Gold 8/15/84 (4.24) .87 1.51 - - -
Growth 4/5/71 20.03 12.05 11.71 - - -
Growth & Income 6/1/93 12.40 - - 6.96 - -
International 7/11/88 (1.37) 7.67 - 8.47 - -
World Growth 10/1/92 (.78) - - 9.20 - -
Diversified/Balanced
Balanced Portfolio 1/11/89 7.99 8.08 - 8.64 - 4.16
Cornerstone 8/15/84 2.18 7.66 11.59 - - -
Income - Taxable
GNMA 2/1/91 5.45 - - 7.29 - 7.10
Income 3/4/74 5.42 9.18 10.14 - - 7.34
Income Stock 5/4/87 11.41 11.17 - 10.84 - -
Short-Term Bond 6/1/93 3.27 - - 2.88 - 7.68
Income - Tax Exempt
Long-Term 3/19/82 5.07 7.68 9.13 - - 5.96
Intermediate-Term 3/19/82 6.16 7.58 8.22 - - 5.45
Short-Term 3/19/82 4.51 5.41 5.96 - - 4.58
California Bond* 8/1/89 6.89 7.66 - 7.09 - 5.94
Florida Tax-Free Income* 10/1/93 7.01 - - (1.19) - 5.80
New York Bond* 10/15/90 5.42 - - 8.59 - 5.73
Texas Tax-Free Income* 8/1/94 - - - 5.75 - 5.72
Virginia Bond* 10/15/90 6.61 - - 8.30 - 5.83
Money Market
Money Market 2/2/81 4.78 4.87 6.11 - 5.80 -
Tax Exempt Money Market 2/6/84 2.98 3.68 4.48 - 3.70 -
Treasury Money Market Trust 2/1/91 4.45 - - 3.91 5.63 -
California Money Market* 8/1/89 2.94 3.45 - 3.70 3.69 -
Florida Tax-Free Money Market* 10/1/93 2.86 - - 2.54 3.61 -
New York Money Market* 10/15/90 2.76 - - 2.94 3.48 -
Texas Tax-Free Money Market* 8/1/94 - - - 2.09 3.63 -
Virginia Money Market* 10/15/90 2.91 - - 3.15 3.60 -
</TABLE>
* Shares of the state funds are authorized for sale only to residents of the
states listed above.
** Total return equals income yield plus share price change and assumes
reinvestment of all dividends and 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
represents past performance and is 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.
An investment in any money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will
maintain a stable net asset value of $1 per share.
Some tax-exempt income may be subject to state or local taxes or the
federal alternative minimum tax.
Foreign investing is subject to certain risks, which are discussed in the
funds' prospectuses.
*** Calculated as prescribed by the Securities and Exchange Commission.
Message from the President
[A photo of Michael J.C. Roth, President appears here]
Recently in Houston, I had a fascinating conversation with a USAA member and
shareholder of our funds. This gentleman is an owner of the USAA Income Fund,
but our conversation is applicable, with some modification for returns, to any
of our longer-term fixed-income funds. Around 1990, after diligent research,
he had invested the bulk of his retirement funds into the Income Fund. When I
met him in Houston, he said to me, "The Income Fund had a 10-year record of 12%
compound returns*, so I chose it for my retirement fund." (From 1980 to 1990,
the Income Fund's annual compound return was actually 13.03%.)(1)
This gentleman then pulled out a large graph which he had constructed on
several pieces of graph paper carefully taped together. He had drawn a line
which began at the value of his account in 1990, which then curved upward for
20 years. The upward curve was simply an extrapolation of 12% returns for the
next 20 years. This mathematical exercise, created by the investor, will show
the original value to grow over 9 1/2 times. But, remember, this is a
hypothetical exercise, and as we always tell you, past performance is not a
guarantee of future results.(2) A second line on the graph plotted the actual
value of his account. Through 1993 this actual value stayed close to the
extrapolation, but in 1994 fell below it. He asked me, "How are you experts
going to get me back to the 12% line?"
The first thing I told him was that if he updated his graph at the end of the
first quarter of 1995, he would find that the loss of 1994 had been recouped.
(3) But after that, we had a bit of a problem.
I pointed out to him that the period from the early 1980s until 1993 was an
unusual one in the bond market. Interest rates declined, with a few jiggles,
from all-time highs to notable lows. That meant, in addition to all the income
bonds produced, their market prices kept rising, and investors saw total returns
that rivaled those of stocks.(4, 5)
We had a great conversation. He smiled and said, "I know all that, I just
want to know how you're going to get me back to my line." I told him he
could not dismiss the market so easily. Over time, bonds may return their
interest rate, with perhaps a bit more for premiums received if they get called.
Investors may enjoy a market run like we had in the 1980s and early 1990s, but
they must not deceive themselves.(5)
1994 was a signal that a unique period in the bond market was over. We probably
won't keep on going at 12% a year. But so far, 1995 has sent another signal.
That is - remember! The bond market can fluctuate, but over the years it has
been a good place to invest.(5) Risks have been rewarded.
Sincerely,
Michael J.C. Roth
President and
Vice Chairman of the Board
(1) Average annual 10-year return at December 31, 1990.
(2) This hypothetical exercise does not imply that gain or income realized in
the past will be repeated in the future.
(3) Income Fund: One-year total return as of December 31, 1994: -5.21%
Quarter ending March 31, 1995 total return: 5.56%
(4) Based on price return data provided by Lehman Brothers, 1993 Bond
Market Annual Book.
(5) Source: (copyright)Stocks, Bonds, Bills and Inflation 1995 Yearbook,
Ibbotson Associates, Chicago (Annually updates work by Roger G. Ibbotson
and Rex A. Sinquefield). Used with permission. All rights reserved.
For more complete information about any of the USAA Family of Funds including
charges and expenses, call for a prospectus. Please read it carefully before
investing or sending money.
*Income Fund
Average Annual Total Return
as of 3/31/95
1 Year 5.42%
5 Years 9.18%
10 Years 10.14%
Total return equals income yield plus share price
change and assumes reinvestment of all dividends
and capital gains distributions. The performance
data quoted represents past performance and is 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 the original cost.
"The bond market can fluctuate, but over the years it has been a good place to
invest. Risks have been rewarded."
Investment Review
Texas Tax-Free Income Fund
OBJECTIVE: Provide Texas investors with a high level of current interest income
that is exempt from federal income taxes.
Types of Investments: Invests primarily in investment grade Texas tax-exempt
securities.
3/31/95
Net Assets $6.4 Million
Net Asset Value Per Share $10.21
Average Annual Total Return as of 3/31/95
Since inception on August 1, 1994 5.75%
30-Day SEC Yield* on March 31, 1995 5.72%
*Calculated as prescribed by the Securities and Exchange Commission.
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment for the period of 8/1/94 to 3/31/95, with dividends and
capital gains reinvested. The ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $10,435
USAA Texas Tax-Free Income Fund 10,575]
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks
total return performance for the long-term investment grade tax-exempt bond
market.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and 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 represents past
performance and is 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.
Message from the Manager
[A photo of David G. Miller, Portfolio Manager appears here]
A Tough Draw
This is the second report for the Texas Tax-Free Income Fund since its
inception on August 1, 1994. This past year drew a wild ride in rodeo terms.
Those who stayed for the full eight seconds saw their Fund suffer through
market shocks including interest rate hikes by the Federal Reserve Board,
derivative-induced bankruptcies, and the peso devaluation.
For the most part, rates increased and prices declined on bonds throughout the
year, with a slight price recovery in December 1994. However, with the new
year, the market seems less worried about another series of rate increases,
and, despite the weaker dollar, has staged a remarkable recovery.
At the end of 1994, the Fund had suffered a total return loss of 3.2%. However,
as of this writing, the Fund has recovered all of the 1994 decline and more,
with a calendar year-to-date total return of 9.25% at March 31, 1995.
Let's Sit a Spell
The Texas Tax-Free Income Fund is managed as a long-term bond fund. Although
longer-term bonds tend to have greater price volatility than shorter bonds, they
have historically provided higher income levels and higher total return levels.
In addition, because of the nature of bonds - you buy it, it pays interest for
the term of the bond, then you get your money back - we see the primary value
of a bond being the level of interest income it provides.
These two observations form the basis for our income-oriented investment
philosophy in this Fund. Our focus on maintaining a high level of income ensures
the best prospects for dependable and solid long-term total returns. Managing
for stable income does not mean we ignore price movement. However, this income
philosophy does avoid the distractions of chasing an ever-changing market price,
which adds inappropriate risk.
Although the Fund's track record is brief, this philosophy has allowed us to
provide above average-income levels while still maintaining total returns that,
thus far in 1995, place us at the top of our peer class.(1)
A Shade Different
As we have explained in previous reports, we do not try to predict the level or
direction of interest rates. It is a risky strategy, comparable to puttin'
socks on a rooster, that invites unstable income levels, while exposing the
portfolio to undue volatility. Instead, we prefer to seek out the best relative
values in the current market environment consistent with our long-term income
orientation.
While previously we had concentrated our buying in the 15- to 20-year
maturities, recently we decided to extend our average maturity and take
advantage of the longer-term higher yields. We view the market as more receptive
to the Federal Reserve's actions to manage a "soft landing" and keep inflation
in check. This extension of the average maturity has been a major factor in the
excellent performance of the Fund so far this year. As of this writing, we are
maintaining this approach.
Down the Road a Piece
Although the peso devaluation has directly impacted our state's export sales,
Mexico is not viewed as the proverbial economic disaster that will take us down
with it. Mexico is wrestling with the transition from a patriarchal structure
to an economy heavily dependent on outside investment. However, we need to be
cautious not to disrupt some fundamental strengths such as their export systems.
Through it all, investors still view our relationship with Mexico as positive,
benefiting both of us.
Lastly, for whatever reasons - tax relief or the financial comfort of buying
close to home - the response to the Texas Tax-Free Income Fund has been good,
as has the general demand for Texas bonds. Considering the continuing optimism
for Texas with the general reduction in the supply of new bonds, this strong
investor demand for Texas bonds should provide good price support for our Fund.
In fact, the general supply of new Texas bonds declined nearly 38% last year,
with this year's first quarter new issuance off another 50% from last year.
(1) Source: Lipper Analytical Services, an independent organization that
monitors the performance of mutual funds. Total return equals income yield
plus share price change and assumes reinvestment of all dividends and
capital gain distributions.
Total return
with ranking
Data as of 3/31/95: Year-to-date
USAA Texas Tax-Free Income Fund 9.25% 1/25
Lipper Texas Municipal 6.88%
Debt Funds Average
See page 13 for a complete listing of the Portfolio of Investments in
Securities.
Note: Income may be subject to federal, state or local taxes, or the
alternative minimum tax.
Portfolio Ratings/Mix
March 31, 1995
[A pie chart is shown here depicting the Portfolio Ratings/Mix as of March
31, 1995 for the USAA Texas Tax-Free Income Fund to be: AAA - 35%, AA - 25%,
A - 18%, BBB - 17%, and Cash Equivalents - 5%]
Investment Review
Texas Tax-Free Money Market Fund
OBJECTIVE: Provide Texas investors with a high level of current interest income
that is exempt from federal income taxes, while preserving capital and
maintaining liquidity.
Types of Investments: High quality Texas 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 this Fund is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that the Fund can maintain a stable
net asset value of $1.00 per share.
3/31/95
Net Assets $3.9 Million
Net Asset Value Per Share $1.00
Average Annual Total Return as of 3/31/95
Since inception on August 1, 1994 2.09%
7-Day Simple Yield on March 31, 1995 3.63%
[A graph is shown here comparing the 7-day yield of the USAA Texas Tax-Free
Money Market Fund and the IBC/Donoghue's State Specific SB & GP (Tax-Free) from
8/94 to 3/95. The vertical axis shows the yield and the horizontal axis shows
the time period. The ending value, on 3/27/95, for the USAA Texas Tax-Free
Money Market Fund is 3.61% and the ending value for the IBC Donoghue's State
Specific SB & GP (Tax-Free) is 3.38%.]
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and 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
and the value of your investment may vary according to the Fund's performance.
The graph tracks the Fund's 7-day simple yield against IBC/Donoghue's State
Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free) Money Funds, an
average of all major money market fund yields.
Message from the Manager
[A photo of Robert R. Pariseau, Portfolio Manager appears here]
Factors That Affect Performance
Last month, an investor asked me what were the most critical determinants of
money market fund performance. The answer provides insight into how I manage
the Texas Tax-Free Money Market Fund. Two factors typically have the greatest
impact on a fund's yield: maturity and credit risk.
A portfolio manager adjusts the fund's average maturity to benefit from the
current interest rate environment. If rates are falling, I lengthen the Fund's
maturity to lock in high rates. But as rates increased last year, I kept the
portfolio moderately short to reinvest at ever-higher rates. Since portfolio
managers may buy only a limited number of fixed-rate instruments to comply
with the SEC's 90-day limit, they must buy at the most opportune time to
maximize a fund's yield. I expect rates to stabilize or decline over the coming
year, so I am extending the Fund's average maturity from its March 31, 1995
level of 44 days.
Credit risk, the second factor, typically affects the fund's yield in a more
subtle manner. The trick is to buy bonds that have "value"- a beneficial
relationship between credit risk and market return. Our analysts and I work as
a team in an analytical process - independent of the rating agencies and "the
street" - to judge whether the bond is appropriate for a money market fund.
Only after understanding all of the pertinent credit issues can I accurately
make this determination. I completely avoid low-quality bonds or derivatives.
The benefits of stretching for yield are illusionary, since you cannot be paid
enough to take speculative risks in a money market fund. This cautious process
hasn't hampered our performance.
While past performance is no guarantee of future results, the Fund's total
return was 2.09% for the eight-month period ending March 31, 1995, compared
to the 1.96% average total return for the same period according to
IBC/Donoghue's Money Vision.(1)
The Orange County Experience
Although it didn't involve a Texas municipality, the Orange County, California
bankruptcy presents vivid examples of our research process and investment
strategy. In the spring of 1994 one of our analysts, John Bonnell, CFA, visited
the Orange County office to discover why the returns on their investment pool
were excessively high. Although he couldn't determine the exact magnitude of
risk, he disapproved the purchase of any municipality that participated in the
Orange County investment pool. His astute analysis months before the event
meant that none of USAA's mutual funds held any security jeopardized by the
bankruptcy.
But the story doesn't end there. After further analysis, we decided that the
market turmoil also presented an opportunity to buy safe, secure bonds in
Orange County. The county and its agencies often function solely as "conduits"
to issue bonds, for example, to finance low-income, multi-family housing
projects. The bond cash flows are entirely independent of the Orange County
office and investment pool. In addition, an unconditional, irrevocable letter
of credit issued by a top-quality bank absolutely supports the bond's principal,
interest, and the put option. The same penetrating analysis which kept the USAA
funds clear of the tragic Orange County bankruptcy, has been used to buy these
and other types of securities that represent value for our investors.
The Texas Economy
After a strong 1994 in which Texas led the nation in job growth, the peso
crisis, military cutbacks, and higher interest rates will dampen economic
growth to a more sustainable level. Texas is now the second most populous
state, surpassing New York in 1994 due to strong migration into the Lone Star
State. The state's finances remain healthy, characterized by low debt.
(1) Source: IBC/Donoghue's Money Vision, a monthly market industry analysis
prepared by IBC USA, Inc. Total return equals income yield plus share price
change and assumes reinvestment of all dividends and capital gain
distributions.
See page 16 for a complete listing of the Portfolio of Investments in
Securities.
[A graph is here showing the growth of $10,000, from 8-1-94 to 3-31-95, invested
in the USAA Texas Tax-Free Money Market Fund. The vertical axis shows the
dollar amount and the horizontal axis shows the time period. The ending value
is $10,209]
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND THE VALUE OF YOUR
INVESTMENT MAY VARY ACCORDING TO THE FUND'S PERFORMANCE. INCOME MAY BE
SUBJECTED TO FEDERAL, STATE OR LOCAL TAXES, OR TO THE ALTERNATIVE MINIMUM TAX.
Independent Auditors' Report
The Shareholders and Board of Trustees
USAA State Tax-Free Trust:
We have audited the accompanying statements of assets and liabilities and
portfolios of investments in securities of the Texas Tax-Free Income and Texas
Tax-Free Money Market Funds, separate Funds of USAA State Tax-Free Trust, as of
March 31, 1995, the related statements of operations and changes in net assets
for the eight-month period then ended, and the financial highlights information
presented in note 7 to the financial statements for the eight-month period then
ended. These financial statements and the financial highlights information are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights
information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights information 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, 1995, 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 information
referred to above present fairly, in all material respects, the financial
position of the Texas Tax-Free Income and Texas Tax-Free Money Market Funds,
separate Funds of USAA State Tax-Free Trust, as of March 31, 1995, the results
of their operations, changes in their net assets, and the financial highlights
information for the eight-month period then ended, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 3, 1995
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
(In Thousands)
March 31, 1995
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $6,346 and $3,804, respectively) $ 6,622 $ 3,804
Cash 11 76
Receivables:
Capital shares sold 2 -
Interest 85 22
---------- ----------
Total assets 6,720 3,902
---------- ----------
Liabilities
Securites purchased 268 -
Capital shares redeemed - 18
Accounts payable and accrued expenses 3 3
Dividends on capital shares 3 -
---------- ----------
Total liabilities 274 21
---------- ------------
Net assets applicable to capital shares outstanding $ 6,446 $ 3,881
=========== ============
Represented by:
Paid-in capital $ 6,180 $ 3,881
Accumulated net realized loss on investments (10) -
Net unrealized appreciation of investments 276 -
----------- -----------
Net assets applicable to capital shares outstanding $ 6,446 $ 3,881
=========== ============
Capital shares outstanding, unlimited number of shares
authorized, $.001 par value 631 3,881
=========== ============
Net asset value, redemption price, and offering price per share $ 10.21 $ 1.00
=========== ============
</TABLE>
See accompanying notes to financial statements.
Categories & Definitions
Portfolios of Investments in Securities
March 31, 1995
This year's Portfolios of Investments in Securities have a new format. The
securities are now divided into three categories - fixed rate instruments, put
bonds, and variable rate demand notes. We hope this presentation enhances your
understanding of the securities held in each fund.
Fixed Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The coupon rate is constant to maturity. Prior to maturity, the price of
a fixed rate instrument generally varies inversely to the movement of interest
rates. At maturity, the security pays face value.
Put Bonds - provide the right to tender, or put, the bond for redemption at face
value at specific tender dates prior to final maturity. The put feature shortens
the effective maturity to the next tender date. Between tender dates, the price
of a put bond generally varies inversely to the movement of interest rates.
Variable Rate Demand Notes (VRDN) - provide the right, on any business day, to
demand, or put, the security for redemption at face value on either that day or
in seven days. The interest rate is adjusted at the stipulated daily, weekly,
or monthly interval to a rate that reflects current market conditions. In
money market funds, the VRDN's effective maturity is the longer of the next put
date or the interest reset date rather than the final maturity. In bond funds,
the effective maturity is the next put date. Most VRDNs possess a credit
enhancement.
Credit Enhancement (CRE) - adds the financial strength of the provider to
support the underlying obligor's debt service obligations and/or the put option.
The enhancement may be provided by either a high quality bank, insurance company
or other corporation, or a collateral trust. Typically, the rating agencies
evaluate the security based upon the credit standing of the credit enhancement.
<TABLE>
<CAPTION>
Texas Tax-Free Income Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1995
Principal Coupon Final Market
Amount Security Rate Maturity Value
<C> <S> <C> <C> <C>
Fixed Rate Instruments (98.1%)
Texas
$ 140 Austin Utility Systems RB, (CRE) 5.88% 5/15/21 $ 137
100 Brazos County Health Facilities RB,
Series 1993B 6.00 1/01/19 89
Brownwood Independent School
100 District GO, (CRE) 6.30 2/15/13 103
Coppell Independent School District GO,
550 Series 1995, (CRE) 6.45(a) 8/15/22 102
1,000 Series 1995, (CRE) 6.85(a) 8/15/23 174
100 Dallas-Fort Worth Regional Airport
Joint RB, Series A, (CRE) 6.00 11/01/12 100
130 Fort Bend County Levee Improvement
District #7 GO Series 1994 6.38 9/01/15 130
120 Fort Bend County Municipal Utility District
#68 GO 6.40 4/01/12 119(b)
85 Fort Bend County Municipal Utility District
#69 GO 6.50 9/01/14 86
600 Gatesville Independent School District GO,
Series 1995 7.00(a) 2/01/15 178
220 Grapevine-Colleyville Independent School
District GO, (CRE) 6.30(a) 8/15/15 63
Harris County Health Facilities RB,
150 Series 1992 7.13 6/01/15 155
200 Series 1991A 6.75 2/15/21 206
100 Series 1994, (CRE) 6.38 10/01/17 102
600 Harris County IDC RB, Series 1992 6.95 2/01/22 616
250 Harris County Toll Road GO,
Series 1994 A, (CRE) 6.13 8/15/20 253
100 Health Facilities Development Corp. RB,
Series 1993B, (CRE) 6.38 8/15/23 101
85 Housing Agency Single-Family Mortgage RB,
Series A 7.15 9/01/12 89
150 Houston Water and Sewer System RB,
Series 1992B 6.38 12/01/14 153
100 Longview Water and Sewer RB, (CRE) 6.00 3/01/12 100
$ 240 Lower Colorado River Auth. RB, Fourth
Supplemental Series, (CRE) 5.63% 1/01/17 $ 224
150 Mabank Water and Sewer Systems GO,
Series 1994 6.70 8/15/11 155
200 Matagorda County Navigation District PCRB,
Series 1993 6.00 7/01/28 190
100 North Central Texas Health Facilities
Development Corp. RB, Series 1993 5.90 6/01/21 94
200 Northeast Hospital Auth. RB, Series B 7.25 7/01/22 199
Pantego GO,
60 Series 1994 7.75 2/15/14 64
65 Series 1994 7.75 2/15/15 69
100 Plano GO, Series 1994 6.30 9/01/14 103
1,000 Robstown Independent School District GO,
Series 1994, (CRE) 7.45(a) 2/15/22 188
150 Sabine River Auth. PCRB, Series 1992, (CRE) 6.55 10/01/22 154
San Antonio Electric and Gas RB,
200 Series 1989 6.50 2/01/12 206
200 Series 1989B 5.00 2/01/16 174
100 Series 1991B 6.00 2/01/14 99
150 San Antonio Water RB, Series 1992, (CRE) 6.00 5/15/16 148
150 Tarrant County Health Facilities Development
Corp. RB, Series 1994 6.00 9/01/24 142
150 Turnpike Auth. Dallas North Tollway RB,
Series 1994, (CRE) 6.75 1/01/15 158
Tyler Health Facilities Development Corp. RB,
150 Series 1992, (CRE) 6.50 7/01/22 153
300 Series 1993B 6.63 11/01/11 281
150 Univ. of Houston Consolidated RB,
Series 1995, (CRE) 6.00 2/15/17 148(b)
100 Veteran's Land Board Program RB 6.50 12/01/21 104
200 Water Development Board GO, Series 1994 7.00 8/01/20 213
--------
Total fixed rate instruments (cost: $6,046) 6,322
--------
Variable Rate Demand Notes (4.6%)
Texas
$ 100 Bexar County Health Facilities Development
Corp. RB, Series 1985B, (CRE) 4.13% 3/01/12 $ 100
100 Capital IDC PCRB, Series 1984 4.15 10/01/00 100
100 Port Arthur Navigation District PCRB,
Series 1994 4.60 10/01/24 100
-------
Total variable rate demand notes (cost: $300) 300
--------
Total investments (cost: $6,346) $ 6,622
=========
</TABLE>
Portfolio Summary By Industry
General Obligations 28.7%
Hospitals 23.6
Electric Power 18.4
Leasing 9.6
Toll Roads 6.4
Water/Sewer 3.9
Education 2.3
Water Utilities 2.3
Retirement Homes 1.6
Airports 1.5
Electronics - Semi-Conductors 1.5
Oil - International 1.5
Housing - Single/Family 1.4
------
Total 102.7%
=======
<TABLE>
<CAPTION>
Texas Tax-Free Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1995
Principal Coupon Final
Amount Security Rate Maturity Value
<C> <S> <C> <C>
Variable Rate Demand Notes (68.3%)
Texas
$ 500 Austin Housing Finance Corp. MFH RB,
Series 1985, (CRE) 4.30% 4/01/15 $ 500
100 Brazos River Auth. PCRB, Series 1988, (CRE) 4.25 11/01/00 100
100 Corpus Christi Port Auth. RB, Series 1984, (CRE) 4.15 9/01/14 100
100 DeSoto IDA RB, Series 1989, (CRE) 4.25 12/01/16 100
100 Euless IDA RB, Series 1985, (CRE) 4.25 12/01/15 100
100 Galveston County Health Facilities
Development Corp. RB, Series 1991, (CRE) 4.25 1/01/16 100
100 Gulf Coast IDA RB, Series 1989, (CRE) 4.35 11/01/19 100
100 Housing Agency MFH RB, Series 1984A, (CRE) 4.14 3/01/06 100
100 Hunt County Health Facilities Development
Corp. RB, Series 1985, (CRE) 4.10 10/01/15 100
100 Hunt County IDC RB, Series 1987, (CRE) 4.30 10/01/02 100
100 Maverick County IDC RB, Series 1991, (CRE) 4.35 12/01/01 100
150 McAllen IDA RB, Series 1985, (CRE) 4.35 12/01/99 150
100 Metropolitan Higher Education Auth. RB,
Series 1984, (CRE) 4.35 12/01/04 100
100 North Central Texas Health Facilities
Development Corp. RB, Series 1989, (CRE) 4.35 12/01/98 100
100 Port Arthur Navigation District PCRB,
Series 1994 4.60 10/01/24 100
100 Port Development Corp. RB, Series 1984, (CRE) 4.38 12/01/04 100
100 San Antonio Higher Education Auth. RB,
Series 1985, (CRE) 3.90 12/01/15 100
100 Tarrant County Housing Finance Corp. MFHRB,
Series 1994, (CRE) 4.35 11/01/07 100
100 Tom Green County Health Facilities
Development Corp. RB, Series 1985B, (CRE) 6.25 1/01/06 100
100 Travis County Housing Finance Corp. MFH RB,
Series 1985S, (CRE) 4.50 12/01/07 100
100 Trinity River IDA RB, Series 1984, (CRE) 4.25 11/01/14 100
100 Water Development Board RB,
Series 1992A, (CRE) 4.50 3/01/15 100
------
Total variable rate demand notes (cost: $2,650) 2,650
------
Put Bonds (5.1%)
Texas
$ 100 Hale County IDC PCRB, Series 1986, (CRE) 4.40% 3/01/13 $ 100
100 Lower Neches Valley Auth. PCRB,
Series 1987, (CRE) 4.45 2/15/17 100
--------
Total put bonds (cost: $200) 200
--------
Fixed Rate Instruments (24.6%)
Texas
200 Dallas Independent School District, 1994 TAN 4.88 8/30/95 201
100 Houston GO CP Notes, Series A 4.20 6/14/95 100
100 Houston Independent School District TRAN,
Series 1994B 4.50 8/31/95 100
100 Public Finance Auth. GO CP Notes,
Series 1993A 4.35 6/06/95 100
150 San Antonio GO, Series 1993 8.00 8/01/95 152
100 San Antonio Water Systems CP Notes,
Series 1992 4.50 8/07/95 100
100 Tarrant County Health Facilities Development
Corp. RB, Series 1987B, (CRE) 6.00 9/01/95 101
100 TRAN, Series 1995 5.00 8/31/95 100
--------
Total fixed rate instruments (cost: $954) 954
--------
Total investments (cost: $3,804) $3,804
========
</TABLE>
Texas Tax-Free Money Market Fund
Portfolio of Investments in Securities (continued)
March 31, 1995
Portfolio Summary By Industry
Housing - Multi/Family 23.2%
General Obligations 19.4
Hospitals 10.3
Oil - International 10.3
Community Service 3.8
Chemicals 2.6
Education 2.6
Hotel - Motel 2.6
Machinery - Diversified 2.6
Nursing Care 2.6
Oil Well Equipment & Service 2.6
Ports/Wharfs 2.6
Retail Stores - Specialty 2.6
Water/Sewer 2.6
Water Utilities 2.6
Aluminum 2.5
Building Materials Group 2.5
------
Total 98.0%
======
Notes to Portfolios of Investments
(In thousands)
March 31, 1995
General Notes
Market 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.
Portfolio Description Abbreviations
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
IDC Industrial Development Corporation
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TAN Tax Anticipation Note
TRAN Tax Revenue Anticipation Note
Specific Notes
(a) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(b) At March 31, 1995, the cost of ecurities purchased on a delayed
delivery basis for the Texas Tax-Free Income Fund was $268.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Statements of Operations
(In Thousands)
Eight-month period ended March 31, 1995*
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
<S> <C> <C>
Net investment income:
Interest income $ 168 $ 82
--------- --------
Expenses (note 5):
Management fees 14 11
Transfer agent's fees 3 2
Custodian's fees 29 23
Postage 1 -
Shareholder reporting fees - 1
Trustees' fees 3 3
Registration fees 2 5
Audit fees 10 10
Legal fees 3 3
Other 1 1
--------- -------
Total expenses before reimbursement 66 59
Expenses reimbursed (52) (48)
--------- --------
Total expenses after reimbursement 14 11
--------- --------
Net investment income 154 71
--------- --------
Net realized and unrealized gain (loss)
on investments (note 4):
Net realized loss (10) -
Change in net unrealized appreciation/depreciation 276 -
--------- --------
Net realized and unrealized gain 266 -
--------- --------
Increase in net assets resulting from operations $ 420 $ 71
========= ========
</TABLE>
*Funds commenced operations August 1, 1994.
See accompanying notes to financial statements.
<TABLE>
Statements of Changes in Net Assets
(In Thousands)
Eight-month period ended March 31, 1995*
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
<S> <C> <C>
From operations:
Net investment income $ 154 $ 71
Net realized loss on investments (10) -
Change in net unrealized appreciation/
depreciation of investments 276 -
---------- ---------
Increase in net assets resulting from operations 420 71
---------- ---------
Distributions to shareholders from:
Net investment income (note 3) (154) (71)
---------- ---------
From capital share transactions:
Shares sold 7,898 6,562
Shares issued for dividends reinvested 139 67
Shares redeemed (1,857) (2,748)
---------- ---------
Increase in net assets from capital share transactions 6,180 3,881
---------- ---------
Net increase in net assets 6,446 3,881
Net assets:
Beginning of period - -
---------- ---------
End of period $ 6,446 $ 3,881
========= =========
Change in shares outstanding:
Shares sold 808 6,562
Shares issued for dividends reinvested 14 67
Shares redeemed (191) (2,748)
----------- ---------
Increase in shares outstanding 631 3,881
=========== =========
</TABLE>
*Funds commenced operations August 1, 1994.
See accompanying notes to financial statements.
Notes to Financial Statements
(In Thousands)
March 31, 1995
(1) Summary of Significant Accounting Policies
USAA State Tax-Free Trust (the Trust), registered under the Investment Company
Act of 1940, is a diversified, open-end management investment company organized
as a Delaware business trust consisting of four separate Funds. The information
presented in this annual report pertains only to the Texas Tax-Free Income Fund
and the Texas Tax-Free Money Market Fund (the Funds) which commenced operations
on August 1, 1994.
A. Security valuation - Investments in the Texas Tax-Free Income Fund are
valued each business day by a pricing service (the Service) approved by the
Trust's Board of Trustees. The Service uses the mean between quoted bid and
asked prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods
which include consideration of yields or prices of municipal securities of
comparable quality, coupon, maturity and type, indications as to values from
dealers in securities, and general market conditions. Securities which are not
valued by the Service, and all other assets, are valued in good faith at fair
value using methods determined by the Manager under the general supervision of
the Board of Trustees. Securities purchased with maturities of 60 days or less
and, pursuant to Rule 2a-7 of the Securities and Exchange Commission, all
securities in the Texas Tax-Free 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 - As is common in the industry, 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 bonds.
The Funds concentrate their investments in Texas municipal securities, and
therefore may be exposed to more credit risk than portfolios with a broader
geographical diversification.
(2) Line of Credit
The Funds participate with other USAA Funds in a joint $150 million short-term
revolving loan agreement (the Agreement) through January 15, 1996, for
temporary or emergency purposes, including the meeting of redemption requests
that might otherwise require the untimely disposition of securities. Subject
to availability under this Agreement, each Fund may borrow amounts not to
exceed 10% of the value of its total assets. Neither Fund may purchase
securities when it borrowings exceed 5% of its total assets. Borrowings under
this Agreement will bear interest at .125% over the Federal Funds Rate as
published by the Federal Reserve Bank of New York or at .125% over the London
Interbank Offered Rate. The Funds had no borrowings under this Agreement
during the eight-month period ended March 31, 1995.
(3) Distributions
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. All net investment income available for distribution
was distributed at March 31, 1995.
Distributions of realized gains from security transactions not offset by capital
losses are generally made in the succeeding fiscal year. At March 31, 1995,
the Texas Tax-Free Income Fund had a capital loss carryover of approximately
$10 which will expire in or before 2004. It is unlikely that the Board of
Trustees of the Trust will authorize a distribution of capital gains realized in
the future until the capital loss carryover has been utilized or expires.
The Funds completed their fiscal year on March 31, 1995. Federal law (Internal
Revenue Code of 1986, as amended, and the regulations thereunder) requires each
Fund to notify its shareholders after the close of its taxable year as to what
portion of its earnings was exempt from federal taxation and the dividend
distributions which represent long-term capital 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 distrubutions
for the period ended March 31, 1995.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the eight-month period ended March 31, 1995, for the Texas Tax-Free Income
Fund were $14,802 and $8,452, respectively. Purchases and sales/maturities of
securities for the eight-month period ended March 31, 1995, for the Texas Tax-
Free Money Market Fund were $10,604 and $6,800, respectively.
Gross unrealized appreciation and depreciation of investments at March 31, 1995
for the Texas Tax-Free Income Fund was $279 and $3, respectively.
(5) Transactions With Manager
A. Management fees - The investment policy of the Funds and the management of
Funds' portfolios is carried out by USAA Investment Management Company (the
Manager). 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 $50,000, .40% of that portion over $50,000 but not over
$100,000, and .30% of that portion over $100,000. 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 average net assets. This limitation may be rescinded at any time
and in the event of rescission the terms of the advisory agreement would govern.
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 the Trust. Shareholder accounting service fees are based on an annual
charge per shareholder account plus out-of-pocket expenses.
C. Underwriting agreement - The Trust has an agreement with the Manager for
exclusive underwriting and distribution of the Fund's shares on a continuing
best efforts basis. The agreement provides that the Manager will receive no
fee or other remuneration for such services.
(6) Transactions with Affiliates
USAA Investment Mangement Company is wholly owned by United Services Automobile
Association (the Association), a large, diversified financial services
institution.
At March 31, 1995, the Association and its affiliates owned 218 shares (34.5%)
of the Texas Tax-Free Income Fund and 2,144 shares (55.2%) of the Texas Tax-
Free Money Market Fund.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout the period
is as follows:
<TABLE>
<CAPTION>
Eight-Month Period
Ended March 31, 1995
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
<S> <C> <C>
Net asset value at beginning of period $ 10.00 $ 1.00
Net investment income .34 .02
Net realized and unrealized gain .21 -
Distibutions from net investment income (.34) (.02)
-------- ----------
Net asset value at end of period $ 10.21 $ 1.00
======== ==========
Total return (%) 5.75* 2.09*
Net assets at end of period $ 6,446 $ 3,881
Ratio of expenses to average net assets (%) .50(a)(b) .50(a)(b)
Ratio of net investment income to average net assets (%) 5.56(a)(b) 3.18(a)(b)
Portfolio turnover (%) 196.62 -
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursements of expenses by the Manager.
Absent such reimbursements to the Funds' ratios would have been.
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
Ratio of expenses to average net assets (%) 2.40(a) 2.63(a)
Ratio of net investment income to average net assets(%) 3.66(a) 1.05(a)
</TABLE>
*Funds commenced operations August 1, 1994.
