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
Shareholder Voting Results 10
Financial Information:
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.
c1995, USAA. All rights reserved.
<TABLE>
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 32 funds by investment objective as of September 30,
1995. For more complete information about the mutual funds managed and distributed by USAA IMCO, including
charges and expenses, please call 1-800-531-8181 for a prospectus. Read it carefully before you invest.
Average Annual Total Return*
<CAPTION>
Investment Inception Since 7-Day 30-Day(1)
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 46.21 22.58 12.68 - - -
Emerging Markets(2) 11/7/94 - - - (.60) - -
Gold(2) 8/15/84 (9.21) 2.95 4.46 - - -
Growth 4/5/71 18.48 16.12 13.22 - - -
Growth & Income 6/1/93 23.46 - - 12.88 - -
International(2) 7/11/88 1.58 13.34 - 9.56 - -
World Growth(2) 10/1/92 6.47 - - 12.43 - -
Asset Allocation
Balanced Strategy 9/1/95 - - - .40 - -
Cornerstone Strategy(2)# 8/15/84 10.89 11.97 12.98 - - -
Growth and Tax Strategy**# 1/11/89 13.86 10.20 - 9.35 - 3.75
Growth Strategy(2) 9/1/95 - - - .30 - -
Income Strategy 9/1/95 - - - 1.50 - -
Income - Taxable
GNMA 2/1/91 12.56 - - 8.18 - 6.82
Income 3/4/74 18.64 10.98 10.47 - - 6.61
Income Stock 5/4/87 20.54 15.74 - 11.95 - -
Short-Term Bond 6/1/93 9.37 - - 5.15 - 6.58
Income - Tax Exempt
Long-Term(3)** 3/19/82 9.83 8.25 8.92 - - 5.73
Intermediate-Term(3)** 3/19/82 9.76 8.14 8.23 - - 5.15
Short-Term(3)** 3/19/82 6.41 5.65 5.94 - - 4.33
California Bond(3)** 8/1/89 11.24 8.28 - 7.39 - 5.75
Florida Tax-Free Income(3)** 10/1/93 9.67 - - 1.17 - 5.71
New York Bond(3)** 10/15/90 9.71 - - 8.68 - 5.65
Texas Tax-Free Income(3)** 8/1/94 13.26 - - 9.80 - 5.61
Virginia Bond(3)** 10/15/90 10.51 - - 8.38 - 5.72
Money Market
Money Market(4) 2/2/81 5.67 4.65 6.01 - 5.56 -
Tax Exempt Money Market(3),(4)** 2/6/84 3.57 3.45 4.40 - 3.89 -
Treasury Money Market Trust(4) 2/1/91 5.42 - - 4.09 5.35 -
California Money Market(3),(4)** 8/1/89 3.53 3.27 - 3.70 3.79 -
Florida Tax-Free Money
Market(3),(4)** 10/1/93 3.45 - - 2.81 3.67 -
New York Money Market(3),(4)** 10/15/90 3.42 - - 3.01 3.89 -
Texas Tax-Free Money
Market(3),(4)** 8/1/94 3.46 - - 3.33 3.57 -
Virginia Money Market(3),(4)** 10/15/90 3.44 - - 3.19 3.62 -
(1) Calculated as prescribed by the Securities and Exchange Commission.
(2) Foreign investing is subject to additional risks, which are discussed
in the funds' prospectuses.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is neither insured nor guaranteed
by the U.S. government and there is no assurance that any of the funds
will be able to maintain a stable net asset value of $1 per share.
* 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.
** 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, New York, Virginia,
Florida, and Texas funds available to residents only.
# Formerly known as Cornerstone Fund and Balanced Portfolio Fund,
respectively.
</TABLE>
Message from the President
[Photograph of Michael J. C. Roth, CFA, President and Vice Chairman of the
Board appears here]
In September I attended an Investment Company Institute conference for mutual
fund directors. It was in Washington D.C., and the speakers included a
current member of the House and a former senator. Both delivered similar
messages: Expect a reform of the tax system.
This news is not a surprise to tax-exempt fund investors. As I pointed out
in a letter earlier this year, the tax-exempt bond market has spent much of
1995 adjusting to the expectation of lower tax rates. It has done this by
narrowing the difference in yields between taxable and tax-exempt bonds. This
adjustment has been well masked by the very handsome total returns in
tax-exempt bonds this year. The portfolio managers will give you details in
their reports.
"We will always remember that you are
the reason we are in business."
I wish I could give you simple guidance on where to go from here, but I
cannot. In fact, one of the most difficult questions in reforming the
tax system will be how to approach the tax-exempt bond market. It is not
only important to you, the investor, but also to the state and local
entities that borrow your money through these bonds.
Do we suddenly, in one fell swoop, dramatically raise their cost of
borrowing? If we do, current owners of bonds will be hurt, but so will
everyone who pays taxes in states and cities. Those borrowers will need
more revenue to pay interest on their bonds. Therefore, a radical reform
might lower federal taxes, but raise state and local taxes. I do not
think this is a desirable or desired outcome. It certainly is not a simple
problem to solve.
I do not believe that any major change will take place until after the
next national election. At this uncertain time I will make this pledge
to you:
We will watch the tax reform situation very closely.
Our guidance to you will keep your interests uppermost.
We will always remember that you are the reason we are in business.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
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 9/30/95
Net Assets $6.4 Million $7.3 Million
Net Asset Value Per Share $10.21 $10.48
Average Annual Total Returns as of 9/30/95
March 31, 1995 to September 30, 1995 5.56%*
1 Year 13.26%
Since inception on August 1, 1994 9.80%
*Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
30-Day SEC Yield on September 30, 1995 5.61%**
** 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 9/30/95, with dividends
and capital gains reinvested. The ending values for the items graphed
are: Lehman Brothers Muni. Bond Index $10,993
USAA Texas Tax-Free Income Fund 11,163]
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. All tax-exempt bond funds will find it difficult
to outperform such an index, since funds have expenses.
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
[Photograph of Robert R. Pariseau, CFA, Portfolio Manager appears here]
The Municipal Market
Compared to the roller-coaster ride last fall, the last six months have
been pretty tame. The yield on the Bond Buyer 40 Bond Index traded in a
narrow range from 6.00% to 6.35%. Last October it was quite different
when the Bond Buyer Index increased .80% to 7.40% within a month, then
fell a full 1.0% by March 1995, as the economy peaked, then decelerated.
Confident that inflation was in check, Chairman Greenspan lowered the
federal funds rate by .25% on July 6, 1995 _ the first cut in nearly
three years _ as the Federal Reserve Board successfully engineered the
economy's "soft landing."
In this favorable environment, your fund's net asset value (NAV) per
share rose $.27 to $10.48, or 2.64%, since March 31, 1995. The Fund's
performance compared very favorably to its peer group. For the past six
months, the Fund's annualized dividend yield(1) was 5.55%, compared to
Lipper's Texas Municipal Debt Funds average of 5.08%.(2) For the same
period, the Fund's total return(3) was 5.56%, compared to the Texas Debt
Funds average of 4.36%.
A tax-exempt mutual fund may provide more income after taxes than a
fully taxable mutual fund. The table below compares the yield of the
USAA Texas Tax-Free Income Fund with a taxable equivalent investment.(4)
To match the Texas Tax-Free Income Fund's closing 30-Day SEC yield of
5.61% and:
Assuming a marginal federal tax rate of:
28% 31% 36% 39.6%
A fully taxable investment must pay: 7.79% 8.13% 8.77% 9.29%
Strategy & Outlook
As the yield curve steepened, the best market values were 25-year
maturities and longer, as evidenced by the particularly wide spread
between interest rates for the 15- and 25-year maturities. I pursue a
strategy to maximize tax-exempt interest because, over the long run,
shareholders of tax-exempt bonds receive the greatest portion of their
total return from interest. Over time, the increased yield from longer
maturities offsets the increased sensitivity of market value to changes
in interest rates, so this policy rewards long-term investors.
A manager who concentrates exclusively on total return must correctly
and consistently time the market. At USAA IMCO, we strongly believe that
no one can accurately predict the future course of interest rates. More
often than not, managing by a total-return strategy results in higher
taxable capital gains and trading costs and lower tax-exempt income.
Although my primary focus is on tax-exempt distributions, I do pay attention
to total return. For example, if interest rates should increase dramatically,
I would position the Fund more defensively by buying shorter-maturity and
higher-coupon bonds.
Purchase Criteria
Before buying a new security, our experienced municipal analysts conduct
an independent, bottom-up, credit analysis. In their critical judgement,
the bond must be investment grade, standing on its own fundamental
merits without relying on good fortune or municipal bond insurance.
The Texas Economy
After leading the nation in job creation since 1990, Texas employment
gains may slow to the national average this year. The impact of military
cutbacks and a slow tourist season are the reasons for the deceleration
rather than the much publicized peso devaluation. Although Mexico's
ailing economy has depressed retail sales along the border, Texas
exports to Mexico fell less than 1% in the first quarter of 1995. The
high-technology industry, manufacturing and the housing industry
continue to be the bright spots. The real challenge will be to raise the
state's per capita personal income, as Texas ranked 32nd in 1994.
(1) Dividend yield is computed by dividing income dividends paid during
the previous 6 months by the latest month-end net asset value adjusted
for capital gains distributions and annualizing the result.
(2) Source: Lipper Analytical Services, an independent organization that
monitors the performance of mutual funds.
(3)Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gains distributions.
(4) 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.
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
September 30, 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 -34%,
AA-30%, A - 11%, BBB - 22%, and Cash Equivalents - 3%.]
This chart reflects the highest rating of either Moody's Investors
Service, Standard & Poor's Rating Group or Fitch Investors Service.
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 will be able
to maintain a stable net asset value of $1.00 per share.
3/31/95 9/30/95
Net Assets $3.9 Million $4.5 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Returns as of 9/30/95
March 31, 1995 to September 30, 1995 1.79%*
1 Year 3.46%
Since inception on August 1, 1994 3.33%
*Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
7-Day Simple Yield on September 30, 1995 3.57%
[A graph is hown 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 9/94 to 9/95. The vertical axis shows the yeild and the horizontal
axis shows the time period. The ending value, on 9/25/95, for USAA Texas
Tax-Free Money Market Fund is 3.50% and the ending value for the IBC
Donoghue's State Specific SB & GP (Tax-Free) is 3.33%.]
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
[Photograph of Pamela K. Bledsoe, CFA Portfolio Manager appears here]
Economic Volatility in the Market
Contrary to the long-term bond market, the money market continues to
experience a roller-coaster ride. Since March, the yield on the Tax
Exempt Note Rate (TENR)(1) has traded from a high of 4.75% in May to a low
of 2.65% in early June. These ups and downs have been driven by mixed
economic data, supply and demand factors and credit risk. The Federal
Reserve (Fed) uses economic data such as unemployment levels, retail
sales and new housing starts to make interest rate decisions. On July 6,
1995, the Fed reduced interest rates .25% after raising interest rates
seven times during 1994 and 1995. This reduction was spurred by easing
inflationary pressures and the Fed's desire to keep the economy strong
enough to avoid a recession. In anticipation of this activity, I
extended the Fund's maturity to lock in the higher rates and will try to
continue to do so as I expect rates to be in a generally downward trend.
Economic volatility is intensified by the short-term market's sensitivity
to supply and demand factors, especially during the months of January,
April, May, June, July, and December. Yields on variable-rate money market
instruments typically rise in April and May as the need to cover tax payments
creates an excess of bonds in the market. This situation reverses itself in
the first weeks of June, July, December, and January since excess cash that
needs to be invested creates a shortage of bonds leading to a sharp decline
in yields. To minimize the impact of this phenomenon, I aggressively manage
our variable rate demand notes (VRDNs)(2) to pursue top performance in this
segment of the portfolio.
Credit risk, the relationship between market value and the likelihood of
receiving payment at maturity, has also added to the volatility in the
municipal note market. Our own research staff has proven invaluable in
making credit-quality determinations. We'll continue to carefully
evaluate credit risk to determine if a security is appropriate for this
fund.
Outlook
The Lone Star State continues to lead the national economic recovery.
Strong economic growth has led to an influx of new jobs, led by
construction and service-related industries somewhat offset by defense
cutbacks. With the passage of NAFTA in 1994, international trade has
helped to further diversify the Texas economy. Due to changes in state
funding methods, we are expecting a decline in the supply of debt issued
by state agencies which may negatively impact yields in money market
funds. We take pride in investing in the great state of Texas.
(1) Tax Exempt Note Rate (TENR): A general market "AAA" weekly index as
determined by Bankers Trust.
(2) Variable rate demand note (VRDN): A note representing borrowings that
is payable on demand and that bears interest tied to a money market
rate.
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 be able to maintain a stable net asset value of $1 per share.
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 9/30/95,
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 $10,392.]
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
subject to federal, state or local taxes, or to the alternative minimum
tax.
Shareholder Voting Results
On October 13, 1995, a special meeting of shareholders was held to vote
on the following proposals. All proposals were approved by the shareholders.
All shareholders of record on August 17, 1995 were entitled to vote on each
proposal. The number of votes shown below are in aggregate for the entire
USAA State Tax-Free Trust (the Trust).
(1) Proposal to elect a Board of Trustees as follows:
Votes Votes
Trustee For Withheld
Hansford T. Johnson 43,808,597 1,071,761
Michael J.C. Roth 43,769,955 1,110,403
John W. Saunders, Jr. 43,806,446 1,073,912
George E. Brown 43,419,645 1,460,713
Howard L. Freeman, Jr. 43,762,837 1,117,521
Richard A. Zucker 43,718,516 1,161,842
Barbara B. Dreeben 43,642,054 1,238,304
Mr. C. Dale Briscoe did not stand for re-election to the Board. His term
of office will terminate on December 31, 1995.
(2) Proposal to ratify or reject the selection by the Board of Trustees
of KPMG Peat Marwick LLP as auditors for the Trust for the fiscal year
ending March 31, 1996.
Number of Shares Voting
For Against Abstain
43,311,082 180,939 1,392,391
Statements of Assets and Liabilities
(In Thousands)
September 30, 1995
(Unaudited)
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
Assets
Investments in securities, at market value
(identified cost of $6,712 and $4,616,
respectively) $7,063 $4,616
Cash 107 20
Receivables:
Capital shares sold 2 9
Interest 106 31
----- -----
Total assets 7,278 4,676
----- -----
Liabilities
Securities purchased _ 118
Capital shares redeemed _ 11
Accounts payable and accrued expenses 10 5
Dividends on capital shares 4 1
----- -----
Total liabilities 14 135
----- -----
Net assets applicable to capital
shares outstanding $7,264 $4,541
===== =====
Represented by:
Paid-in capital $6,834 $4,541
Accumulated net realized gain on investments 79 _
Net unrealized appreciation of investments 351 _
----- -----
Net assets applicable to capital shares $7,264 $4,541
outstanding ===== =====
Capital shares outstanding, unlimited number
of shares authorized, $.001 par value 693 4,541
===== =====
Net asset value, redemption price, and offering
price per share $10.48 $ 1.00
===== =====
See accompanying notes to financial statements.
Categories & Definitions
Portfolios of Investments in Securities
September 30, 1995
(Unaudited)
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.
Texas Tax-Free Income Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1995
(Unaudited)
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------- -------- ------ -------- ------
Fixed Rate Instruments (94.5%)
Texas
$ 300 Abilene Higher Education Facilities Corp. RB,
Series 1995 6.25% 10/01/11 $303
200 Austin Community College District RB,
Series 1995 (CRE) 6.10 2/01/15 203
140 Austin Utility Systems RB (CRE) 5.88 5/15/21 139
250 Bexar Metropolitan Water District RB,
Series 1995 (CRE) 5.88 5/01/22 247
150 Coastal Water Auth. Contract RB,
Series 1995 (CRE) 5.95 12/15/25 145
1,000 Coppell Independent School District GO,
Series 1995 (CRE) 6.85(a) 8/15/23 187
200 Department of Housing and Community Affairs
RB, Series 1991A 6.95 7/01/23 208
300 Guadalupe-Blanco River Auth. IDC RB,
Series 1982A 6.35 7/01/22 308
Harris County Health Facilities RB,
200 Series 1991A 6.75 2/15/21 209
150 Series 1992 7.13 6/01/15 159
100 Series 1994 (CRE) 6.38 10/01/17 103
275 Series 1995 5.50 10/01/13 257
600 Harris County IDC RB, Series 1992 6.95 2/01/22 631
100 Health Facilities Development Corp. RB,
Series 1993B (CRE) 6.38 8/15/23 103
85 Housing Agency Single-Family Mortgage RB,
Series 1991A 7.15 9/01/12 89
150 Houston Water and Sewer System RB,
Series 1992B 6.38 12/01/14 154
240 Lower Colorado River Auth. RB,
Fourth Supplemental Series (CRE) 5.63 1/01/17 231
300 Lower Neches Valley Auth. IDC PCRB 5.65 2/01/29 279
300 Matagorda County Navigation District PCRB,
Series 1993 6.00 7/01/28 297
100 North Central Texas Health Facilities
Development Corp. RB, Series 1993 5.90% 6/01/21 97
200 Northeast Hospital Auth. RB, Series 1993B 7.25 7/01/22 204
Pantego GO,
60 Series 1994 7.75 2/15/14 64
65 Series 1994 7.75 2/15/15 70
1,000 Robstown Independent School District GO,
Series 1994 (CRE) 7.45(a) 2/15/22 201
150 Sabine River Auth. PCRB, Series 1992 (CRE) 6.55 10/01/22 156
San Antonio Electric and Gas RB,
200 Series 1989 6.50 2/01/12 209
200 Series 1989B 5.00 2/01/16 178
150 Tarrant County Health Facilities Development
Corp. RB, Series 1994 6.00 9/01/24 149
150 Turnpike Auth. Dallas North Tollway RB,
Series 1994 (CRE) 6.75 1/01/15 161
Tyler Health Facilities Development Corp. RB,
150 Series 1992 (CRE) 6.50 7/01/22 155
300 Series 1993B 6.63 11/01/11 294
150 Univ. of Houston Consolidated RB,
Series 1995 (CRE) 6.00 2/15/17 151
Water Development Board GO,
200 Series 1994 7.00 8/01/20 221
300 Series 1995 6.00 8/01/26 301
-----
Total fixed rate instruments (cost: $6,512) 6,863
-----
Variable Rate Demand Notes (2.7%)
Texas
100 Harris County IDC PCRB, Series 1984A 4.60 3/01/24 100
100 Nueces River Auth. PCRB, Series 1985 (CRE) 4.60 12/01/99 100
-----
Total variable rate demand notes (cost: $200) 200
-----
Total investments (cost: $6,712) $7,063
=====
Portfolio Summary By Industry
-----------------------------
Hospitals 23.8%
Electric Power 16.6
General Obligations 14.4
Education 9.1
Leasing 8.7
Oil - International 5.2
Chemicals 4.2
Single-Family Housing 4.1
Water/Sewer 4.1
Water Utilities 3.4
Toll Roads 2.2
Aluminum 1.4
----
Total 97.2%
====
Texas Tax-Free Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1995
(Unaudited)
Principal Coupon Final
Amount Security Rate Maturity Value
- --------- -------- ------ -------- -----
Variable Rate Demand Notes (67.2%)
Texas
$ 100 Amarillo Health Facilities Corp. RB,
Series 1985 (CRE) 4.40 % 5/31/25 $ 100
200 Austin Higher Education Auth. RB (CRE) 4.15 10/01/10 200
100 Brazos River Auth. PCRB, Series 1988 4.40 11/01/00 100
100 Corpus Christi Port Auth. RB,
Series 1984 (CRE) 4.30 9/01/14 100
100 DeSoto IDA RB, Series 1989 (CRE) 4.40 12/01/16 100
100 Euless IDA RB, Series 1985 (CRE) 4.40 12/01/15 100
100 Galveston County Health Facilities
Development Corp. RB, Series 1991 (CRE) 4.55 1/01/16 100
200 Gulf Coast IDA RB, Series 1989 (CRE) 4.50 11/01/19 200
100 Harris County Health Facilities RB,
Series 1988 (CRE) 4.40 5/01/18 100
100 Hunt County IDC RB, Series 1987 (CRE) 4.60 10/01/02 100
100 Lone Star Airport Improvement Auth. RB,
Series B-4 (CRE) 4.75 12/01/14 100
100 Maverick County IDC RB, Series 1991 (CRE) 4.50 12/01/01 100
150 McAllen IDA RB, Series 1985 (CRE) 4.50 12/01/99 150
100 Metropolitan Higher Education Auth. RB,
Series 1984 (CRE) 4.50 12/01/04 100
100 North Central Texas Health Facilities
Development Corp. RB, Series 1989 (CRE) 4.50 12/01/98 100
100 Nueces River Auth. PCRB, Series 1985 (CRE) 4.60 12/01/99 100
100 Port Arthur Navigation District PCRB,
Series 1994 4.45 10/01/24 100
200 Port Development Corp. RB,
Series 1984 (CRE) 4.65 12/01/04 200
200 Tarrant County Housing Finance Corp. MFH RB,
Series 1994 (CRE) 4.85 11/01/07 200
600 Travis County Housing Finance Corp. MFH RB,
Series 1985S (CRE) 4.60 12/01/07 600
100 Trinity River IDA RB, Series 1984 (CRE) 4.53 11/01/14 100
-----
Total variable rate demand notes (cost: $3,050) 3,050
-----
Put Bonds (2.2%)
Texas
100 Lower Neches Valley Auth. PCRB,
Series 1987 4.45 % 2/15/17 100
-----
Total put bonds (cost: $100) 100
-----
Fixed Rate Instruments (32.3%)
Texas
115 Allen Waterworks and Sewer RB,
Series 1995 (CRE) 7.13 6/01/96 117(c)
115 Austin Utility Systems RB, Series 1985 9.50 5/15/96(b) 118
100 Dallas GO, Series 1985 8.45 2/15/96 102
100 Dallas Waterworks and Sewer Systems RB,
Series 1995 7.50 4/01/96 102
125 Denton Independent School District Unlimited
Tax Refunding Bonds, Series 1992 (CRE) 4.60 2/15/96 125
100 Harris County GO, Series 1985 8.70 10/01/95 100
100 Houston GO CP Notes, Series 1995A 3.50 10/05/95 100
100 Houston Independent School District TRAN,
Series 1995 4.50 8/29/96 101
100 Houston Water and Sewer System RB,
Series 1991D (CRE) 5.55 12/01/95 100
100 Public Finance Auth. GO CP Notes 3.55 11/02/95 100
100 Richardson Independent School District TRAN,
Series 1995 4.50 8/30/96 100
100 San Antonio Water Systems CP Notes,
Series 1992 3.70 10/12/95 100
100 Sugarland GO, Series 1995 (CRE) 3.90 3/15/96 100
100 TRAN, Series 1995A 4.75 8/30/96 101
-----
Total fixed rate instruments (cost: $1,466) 1,466
-----
Total investments (cost: $4,616) $ 4,616
=======
Portfolio Summary By Industry
-----------------------------
Multi-Family Housing 17.6%
Education 13.8
General Obligations 13.3
Water/Sewer 9.3
Oil - International 8.8
Aluminum 4.4
Hospitals 4.4
Ports/Wharfs 4.4
Real Estate 3.3
Escrowed Securities 2.6
Airlines 2.2
Building Materials Group 2.2
Chemicals 2.2
Healthcare - Miscellaneous 2.2
Hotel/Motel 2.2
Machinery - Diversified 2.2
Nursing Care 2.2
Oil Well Equipment & Service 2.2
Retail Stores - Specialty 2.2
-----
101.7%
=====
Notes to Portfolios of Investments
(In Thousands)
September 30, 1995
(Unaudited)
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
TRAN Tax Revenue Anticipation Note
Specific Notes
(a) Zero Coupon security. Rate represents the effective yield at date
of purchase.
(b) Prerefunded to various dates prior to maturity at the call price.
(c) At September 30, 1995, the cost of securities purchased on a
delayed delivery basis for the Texas Tax-Free Money Market Fund was $118.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Six-month period ended September 30, 1995
(Unaudited)
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
----------- -----------
Net investment income:
Interest income $ 209 $ 88
----- -----
Expenses:
Management fees 17 11
Transfer agent's fees 4 3
Custodian's fees 21 17
Postage 1 _
Trustees' fees 3 3
Registration fees 2 _
Audit fees 4 4
Legal fees 5 5
Other 1 1
----- -----
Total expenses before reimbursement 58 44
Expenses reimbursed (41) (33)
----- -----
Total expenses after reimbursement 17 11
----- -----
Net investment income 192 77
----- -----
Net realized and unrealized gain on investments:
Net realized gain 89 _
Change in net unrealized appreciation/
depreciation 75 _
----- -----
Net realized and unrealized gain 164 _
----- -----
Increase in net assets resulting from operations $356 $ 77
===== =====
See accompanying notes to financial statements.
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended September 30, 1995 and Year ended March 31, 1995*
(Unaudited)
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
----------- -----------
9/30/95 3/31/95 9/30/95 3/31/95
------- ------- ------- -------
From operations:
Net investment income $ 192 $ 154 $ 77 $ 71
Net realized gain (loss) on investments 89 (10) _ -
Change in net unrealized appreciation/
depreciation of investments 75 276 _ _
------ ------ ----- ------
Increase in net assets resulting from
operations 356 420 77 71
------ ------ ----- ------
Distributions to shareholders from:
Net investment income (192) (154) (77) (71)
------ ------ ----- ------
From capital share transactions:
Shares sold 2,843 7,898 2,085 6,562
Shares issued for dividends reinvested 166 139 74 67
Shares redeemed (2,355) (1,857) (1,499) (2,748)
------ ------ ----- ------
Increase in net assets from
capital share transactions 654 6,180 660 3,881
------ ------ ----- -----
Net increase in net assets 818 6,446 660 3,881
Net assets:
Beginning of period 6,446 _ 3,881 _
------ ------ ----- -----
End of period $7,264 $6,446 $4,541 $3,881
====== ====== ===== =====
Change in shares outstanding:
Shares sold 273 808 2,085 6,562
Shares issued for dividends reinvested 16 14 74 67
Shares redeemed (227) (191) (1,499) (2,748)
------ ------ ----- -----
Increase in shares outstanding 62 631 660 3,881
====== ====== ===== =====
* Funds commenced operations August 1, 1994.
See accompanying notes to financial statements.
Notes to Financial Statements
(In Thousands)
September 30, 1995
(Unaudited)
(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 semiannual report pertains only
to the Texas Tax-Free Income Fund and Texas Tax-Free Money Market Fund
(the Funds).
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 its 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
six-month period ended September 30, 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 September 30, 1995. Distributions of realized gains from
security transactions not offset by capital losses are generally made in
the succeeding fiscal year. A short-term capital gain distribution of
$.1249 per share for the Texas Tax-Free Income Fund, declared and paid in
November 1995, is not reflected in the accompanying financial statements.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term
securities, for the six-month period ended September 30, 1995 for the
Texas Tax-Free Income Fund were $3,272 and $2,920, respectively.
Purchases and sales/maturities of securities for the six-month period
ended September 30, 1995 for the Texas Tax-Free Money Market Fund were
$7,141 and $6,320, respectively. Gross unrealized appreciation and
depreciation of investments at September 30, 1995 for the Texas Tax-Free
Income Fund was $354 and $3, respectively.
(5) Transactions with Manager
A. Management fees - The investment policy of the Funds and the
management of the 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 $100,000. These fees are allocated on a proportional basis
to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each
Fund to .50% of its average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Trust. Shareholder accounting service
fees are based on an annual charge per shareholder account plus
out-of-pocket expenses.
C. Underwriting agreement - The Trust has an agreement with the Manager
for exclusive underwriting and distribution of the Funds' shares on a
continuing best efforts basis. The agreement provides that the Manager
will receive no fee or other remuneration for such services.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United
Services Automobile Association (the Association), a large, diversified
financial services institution.
At September 30, 1995, the Association and its affiliates owned 184
shares (26.6%) of the Texas Tax-Free Income Fund and 2,182 shares (48.1%)
of the Texas Tax-Free Money Market Fund.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
<TABLE>
<CAPTION>
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net Distributions
Year Beginning Investment Unrealized Investment of Realized
Ended of Period Income Gain (Loss) Income Capital Gains
($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Texas Tax-Free Income Fund:
March 31, 1995* 10.00 .34 .21 (.34) -
1996** 10.21 .29 .27 (.29) -
Texas Tax-Free Money Market Fund:
March 31, 1995* 1.00 .02 - (.02) -
1996** 1.00 .02 - (.02) -
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Ratio of Investment
Net Asset Net Assets Expenses Income
Value at Total at End to Average to Average Portfolio
End of Period Return of Period Net Assets Net Assets Turnover
($) (%) ($000) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
Texas Tax-Free Income Fund:
March 31, 1995* 10.21 5.75 6,446 .50(a)(b) 5.56(a)(b) 196.62
1996** 10.48 5.56 7,264 .50(a)(b) 5.60(a)(b) 43.97(c)
Texas Tax-Free Money Market Fund:
March 31, 1995* 1.00 2.09 3,881 .50(a)(b) 3.18(a)(b) -
1996** 1.00 1.79 4,541 .50(a)(b) 3.53(a)(b) -
</TABLE>
(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 the Funds' ratios would have been:
Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
Texas Tax-Free Income Fund:
March 31, 1995* 2.40(a) 3.66(a)
1996** 1.68(a) 4.42(a)
Texas Tax-Free Money Market Fund:
March 31, 1995* 2.63(a) 1.05(a)
1996** 2.01(a) 2.02(a)
* Funds commenced operations August 1, 1994.
** For the six-month period ended September 30, 1995.
Total return assumes reinvestment of all dividend income and capital
gains distributions during the period.
(c) Effective September 30, 1995, the portfolio turnover rate has been
calculated excluding short-term variable rate securities, which are those with
put date intervals of less than one year. Had these securities been excluded
for March 31, 1995, the portfolio turnover rate for the Texas Tax-Free Income
Fund would have been 49.63%.
