________________________________________________________________
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.................... 9
Financial Information:
Statements of Assets and Liabilities................13
Portfolios of Investments in Securities:
Texas Tax-Free Income Fund.....................15
Texas Tax-Free Money Market Fund...............18
Notes to Portfolios of Investments in Securities....21
Statements of Operations............................22
Statements of Changes in Net Assets.................23
Notes to Financial Statements.......................24
__________________________________________________________________
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)1996, 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 33
funds by investment objective as of September 30, 1996.
<TABLE>
______________________________________________________________________________________________
Average Annual Total Return*
______________________________________________________________________________________________
<CAPTION>
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
______________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 33.19 16.98 14.08 -
Emerging Markets(1) 11/7/94 10.41 - - 4.96
Gold(1) 8/15/84 1.19 7.93 2.40 -
Growth 4/5/71 14.86 13.79 12.67 -
Growth & Income 6/1/93 18.80 - - 14.61
International(1) 7/11/88 15.03 12.73 - 10.21
S&P 500 Index(4) 5/1/96 - - - 7.76 ++
World Growth(1) 10/1/92 14.79 - - 13.01
______________________________________________________________________________________________
Asset Allocation
Balanced Strategy 9/1/95 9.32 - - 8.97
Cornerstone Strategy(1) 8/15/84 14.28 12.30 10.57 -
Growth and Tax Strategy(2)** 1/11/89 12.63 9.89 - 9.77
Growth Strategy(1) 9/1/95 25.37 - - 23.43
Income Strategy 9/1/95 5.08 - - 6.13
______________________________________________________________________________________________
Income - Taxable
GNMA 2/1/91 3.98 6.92 - 7.43
Income 3/4/74 3.26 7.76 9.17 -
Income Stock 5/4/87 12.73 12.41 - 12.03
Short-Term Bond 6/1/93 5.60 - - 5.29
_______________________________________________________________________________________________
Income - Tax Exempt
Long-Term(2)** 3/19/82 6.91 7.06 7.52 -
Intermediate-Term(2)** 3/19/82 5.43 7.02 7.12 -
Short-Term(2)** 3/19/82 4.51 5.04 5.49 -
California Bond(2)** 8/1/89 8.34 7.34 - 7.52
Florida Tax-Free Income(2)** 10/1/93 7.30 - - 3.17
New York Bond(2)** 10/15/90 6.34 6.80 - 8.29
Texas Tax-Free Income(2)** 8/1/94 8.56 - - 9.23
Virginia Bond(2)** 10/15/90 6.98 7.34 - 8.15
_______________________________________________________________________________________________
Money Market
Money Market(3) 2/2/81 5.33 4.38 5.85 -
Tax Exempt Money Market(2),(3)** 2/6/84 3.45 3.09 4.23 -
Treasury Money Market Trust(3) 2/1/91 5.18 4.16 - 4.28
California Money Market(2),(3)** 8/1/89 3.37 2.98 - 3.65
Florida Tax-Free Money Market(2),(3)** 10/1/93 3.34 - - 2.99
New York Money Market(2),(3)** 10/15/90 3.35 2.82 - 3.06
Texas Tax-Free Money Market(2),(3)** 8/1/94 3.31 - - 3.32
Virginia Money Market(2),(3)** 10/15/90 3.24 2.91 - 3.20
_________________________________________________________________________________________
</TABLE>
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
including possible loss of the principal amount invested.
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.
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(3) 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.
(4) 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.
* 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 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.
** IRAs are not available for tax-exempt funds. The Growth and Tax
Strategy Fund is not available as an investment for your IRA because the
majority of its income is tax-exempt. California, Florida, New York,
Texas, and Virginia funds available to residents only.
++ Cumulative total return since inception.
(A photo of Michael J.C. Roth, President and Vice Chairman of the Board,
appears here)
I am writing this message in late October and every day it seems someone
asks what effect the election will have on the financial markets. My frank
answer is that I don't know. What I prefer to talk about are things that
concern me about the markets and things that give me hope.
My greatest concern is the promises we as a nation have made to our citizens
coupled with our unwillingness to face the cost of those promises. Some of
these promises are highly noble. We have tried to provide decent housing
for those in our midst who cannot afford it. With a decent and safe home
most people would have the opportunity to seek the education and work that
could lift families out of poverty. But effective solutions are very difficult
to achieve, and too often we succeed only in creating generations mired in
hopeless dependency. We have promised medical care to the poor and the
elderly, but the cost of that care runs away from the tax revenues we have
dedicated to it. We have promised a safety net, social security, to our
elderly, and we did take decisive steps to raise the tax revenue to fund that.
But the excess of social security taxes over benefits, which should
have built a meaningful trust fund, has been systematically borrowed by the
treasury and spent on other current needs. That trust fund consists solely of
promises by the federal government which will have to be funded somehow in
the future. And then we have quite properly promised our citizens a strong
national defense. These are decent and noble promises but they translate to a
debt burden whose service requires a large and growing part of what we produce
as a nation.
But there is much we are prone to overlook. We forgot in the 80s that the
Japanese borrowed heavily from American knowledge and American methods
to work their economic miracle. We forget that the freedom of our society,
both political and intellectual, draws bright people from all over the world
and allows them and our own citizens the opportunity to take risks and reap
the rewards. We are a vibrant nation in the forefront of change that is
shaping the world. From IMCO's standpoint this means that there are great
opportunities for investors.
We tend, at times, to dwell on the problems. USAA, as a citizen of San Antonio
and the other great cities in which we have a presence, has confronted these.
Hundreds of our employees are mentors in schools. They and others in our
company devote their skills and their money to bettering the lives of people
in our communities. But while we in the Investment Management Company
participate in these endeavors, our attention is focused on the opportunities
that abound in the U.S. and other countries. We see, perhaps more clearly than
most people, that those opportunities offer great hope to very many people and
that great hope offers great opportunity to our investors.
This election is a small step on a long journey.
Sincerely,
Michael J.C. Roth
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.
__________________________________________________________________________
3/31/96 9/30/96
__________________________________________________________________________
Net Assets $8.1 Million $9.5 Million
Net Asset Value Per Share $10.45 $10.44
__________________________________________________________________________
Average Annual Total Returns as of 9/30/96
March 31, 1996 to September 30, 1996........................... 4.73% **
1 Year......................................................... 8.56%
Since inception on August 1, 1994.............................. 9.23%
** 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, 1996 5.43%*
* 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
9/30/96, with dividends and capital gains reinvested. The ending
values for the items graphed are:
Lehman Brothers Muni. Bond Index $11,657
USAA Texas Tax-Free Income Fund 12,118 ]
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 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.
Message from the Manager
(Photo of Robert R. Pariseau,CFA, Portfolio Manager, appears here)
A Volatile Market
Since March, bond market investors have held passionate feelings towards the
future direction of the economy and interest rates. The problem was that
investors did not hold a particular feeling very long. Emotions ranged from
elation to depression, mixed with numbing confusion. Interest rate trends,
either up or down, lasted only weeks. The reason for such vacillation is
quite simple. The economy itself has behaved in fits and starts since late
last fall.
From March 31, 1996, to September 30, 1996, the 30-year U.S. Treasury bond
(the "Long Bond") started at 6.67%, peaked at 7.19% in June and again in July,
and then ended the quarter at 6.92%. Municipal bonds outperformed the Long
Bond, as the yield on the Bond Buyer 40 Index, which is the industry standard
for the yield of long-term, investment-grade municipal bonds, declined
slightly during the same period. In volatile periods such as these, how
should a single state municipal fund fit into your investment strategy?
Why a State Municipal Fund?
In a growth-oriented portfolio, municipal bonds provide essential
diversification and respectable after-tax total return. For investors who
focus on income and are in the 28% and higher federal tax brackets, single
state funds typically generate higher tax-equivalent yields than fully taxable
funds of comparable credit quality.
The table below compares the yield of the USAA Texas Tax-Free Income Fund with
a taxable equivalent investment.
To match the Texas Tax-Free Income Fund's closing 30-Day SEC yield of
5.43% and:
assuming a marginal federal tax rate of:
28% 31% 36% 39.6%
A fully taxable investment must pay: 7.54% 7.87% 8.48% 8.99%
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.
Single state funds allow investors to invest close to home where they may be
more comfortable with regional economic and fiscal issues. Your fund consists
of over 30 different securities all thoroughly researched by experienced
credit analysts. Geographic, industry and issuer diversification mitigates
the risk of investing in a single state. Proper diversification and credit
research are critical, yet daunting tasks for the average investor to achieve
on his own with individual bonds.
Although most municipal bonds pay their interest coupons at six-month
intervals, mutual funds provide the convenience and efficiency of monthly
dividends and automatic reinvestment of nterest and other proceeds. As for
liquidity, your money is available sooner than the normal 3-day settlement
with individual bonds. Convenient periodic statements and worry-free
custodial services are additional benefits.
Each business day the mutual fund is "marked to market" by an independent
pricing service to reflect fairly the market value of the fund's assets.
USAA has three full-time fixed income traders who monitor the pulse of the
bond market. Municipals are not traded in an organized exchange with posted
quotes. Instead, each trade is the result of a unique negotiation. When we
enter the market to buy or sell, our traders are in contact with dozens of
market makers, primary dealers and brokers to obtain the best price. The
spread, or markup, is the difference between the bid and the asking price.
Effectively, it is the broker's compensation for the trade. Because of its
greater buying power, the spread for an institution's $1 million block is
much smaller than the individual's order for $25,000 of bonds.
Strategy & Outlook
With no real consensus over the future direction of interest rates, the bond
market is prone to volatility as investors react to the latest economic data.
I continue to pursue tax-exempt income and invest in investment-grade quality
securities. Secondarily, I will focus on total return. When pursuing tax-exempt
income, I will typically buy bonds with 20-year or longer maturities, although
their market values are more sensitive to changes in interest rates. I do not
buy exotic derivatives, hedge the portfolio with futures, or try to time the
market because no one has demonstrated that they can consistently predict the
future direction of interest rates.
Your Fund's Performance
Since municipal rates declined slightly during the same period, your Fund's net
asset value (NAV) per share, adjusted by the $.196 capital gain paid on May
14th, increased $.19 to $10.44, or 1.8%, since March 31, 1996. The Fund's
performance compared favorably to its peer group. While past performance
is no guarantee of future results, the Fund's annualized dividend yield(1) for
the past six months was 5.56%, as compared to Lipper's Texas Municipal Debt
Funds average of 4.94% for the 23 funds in the category.(2) For the same
period, the Fund's total return(3) was 4.73%, compared to the Lipper average
of 2.96%.
The State of Texas
Texas has experienced net migration unrivaled since the early 1980s. Employment
has outpaced the nation's growth in five of the last six years. Commercial real
estate is quite firm as low vacancy rates have pushed up rents and even
stimulated some new construction. Housing sector growth has decelerated, but
from the record levels of the 2nd quarter. Trade with Mexico is now larger
than the oil & gas industry while Texas is the nation's #2 exporter behind
California. I will continue to monitor the lingering effects of defense
cutbacks, the peso devaluation and the drought. Per capita personal income has
improved relative to the national average each year since 1989 and reached 91%
in 1995 according to Standard & Poor's. Median household income in Texas still
ranks 31st, the lowest of populous states except for Florida and North
Carolina. I will follow closely the impact of welfare reform upon state and
local finances. Our analysts remain cautious in regard to municipal lease
obligations that rely on annual appropriations.
(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) Lipper Analytical Services is 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 gain distributions.
PORTFOLIO RATINGS MIX
SEPTEMBER 30, 1996
[A pie chart is shown here depicting the Portfolio Ratings/Mix as of
September 30, 1996 for the USAA Texas Tax-Free Income Fund to be:
AAA - 22%, AA - 28%, A - 9%, BBB - 34%, and Cash Equivalents -7%.]
This chart reflects the highest rating of either Moody's Investors
Service, Standard & Poor's Rating Group or Fitch Investors Service.
Note: Income may be subject to federal, state or local taxes, or the
alternative minimum tax.
See page 15 for a complete listing of the Portfolio of Investments
in Securities.
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.
____________________________________________________________________________
3/31/96 9/30/96
Net Assets $4.7 Million $5.3 Million
Net Asset Value Per Share $1.00 $1.00
_____________________________________________________________________________
Average Annual Total Returns as of 9/30/96
March 31, 1996 to September 30, 1996 1.61%**
1 Year 3.31%
Since inception on August 1, 1994 3.32%
** 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, 1996 3.47%
_____________________________________________________________________________
[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 9/95 to 9/96. The vertical axis shows the yield and the horizontal
axis shows the time period. The ending value, on 9/30/96, for the USAA
Texas Tax-Free Money Market Fund is 3.47% and the ending value for the IBC
Donoghue's State Specific SB & GP (Tax-Free) is 3.09%.]
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 John C. Bonnell, CFA, Portfolio Manager, appears here)
INTEREST RATES
When 1996 began, interest rates were falling. The Federal Reserve (Fed)
lowered the Federal Funds rate (the rate banks charge other banks for
overnight loans) by .25% at the end of January. This move proved
to be the only action taken so far this year by the Fed. Not long after the
Fed's action, however, economic indicators and statistics came out reflecting
much stronger growth than expected, sending short-term interest rates higher.
With investors trying to anticipate interest rate actions by the Fed and
reacting to each economic indicator released, short-term interest rates
remained very volatile throughout 1996. Many investors were caught off guard
after expecting the Fed to raise the rate .25% to .50% following their
September 24th meeting. When the Fed left the Federal Funds rate
unchanged, market interest rates fell significantly. Clearly, the true
magnitude of economic growth taking place remains elusive. This illustrates
why we do not forecast interest rates. It is difficult, if not impossible,
for anyone to consistently predict future interest rate movements. Your money
market fund strives to meet its objective in any prevailing interest rate
environment.
STRATEGY
Your Fund's success stems from two major advantages. First is the expense
ratio. Your Fund's expense ratio was .50%, net of reimbursements, versus
an industry average of .63%.* The lower a fund's expense ratio (everything
else being equal), the higher the potential return is to you. The second
major advantage your fund has is the quality of research provided by our
internal research department. Our credit research team, which includes four
full-time money market analysts, not only pores over financial statements, but
also interrogates the appropriate individuals (often including on-site
tours/visits) responsible for repayment of the debt we are considering
purchasing for the portfolio. This type of analysis helps avoid problems
such as the Orange County, California, bankruptcy and helps us identify
opportunities to enhance performance without taking risks inappropriate
for a money market fund. Credit quality and preservation of capital remain
top priorities of the Fund.
Our conservative approach to managing the Fund includes strict limits we place
on the portfolio regarding diversification. These limits go beyond the rules
governing money market funds set forth by the Securities and Exchange
Commission (SEC) which are intended to protect the safety and quality of money
market funds.
* Source: IBC/Donoghue's State Specific SB & GP (Tax-Free)
[A graph is here showing the growth of $10,000 from 8/1/94 to 9/30/96,
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 $10,736.]
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending 9/30/96 your fund ranked 13 out of 144 state specific Tax-Exempt Money
Market Funds according to IBC/Donoghue, Inc. with a yield of 3.29%. The average
for the category over the same time period was 2.98%.
TEXAS
Texas continues its seventh year of economic expansion and many expect growth
to continue, albeit at a slower rate, through the end of the century. Although
Texas has long been identified with the oil and gas industry, the economy has
become increasingly diversified. Industries experiencing strong growth include
high technology, healthcare, construction, and petrochemicals. Of particular
significance to tax-exempt investors are the ongoing discussions looking at
ways to provide property tax relief to homeowners. This is an issue we will
monitor closely. Any legislative action could have sweeping effects on the
attractiveness and valuations of Texas municipal bonds and notes. We continue
to analyze each security on a case by case basis and remain very selective
when investing fund assets.
An investment in any money market 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.
See page 18 for a complete listing of the Portfolio of Investments of
Securities.
STATEMENTS OF ASSETS AND LIABILITIES
(In Thousands)
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
------------ -------------
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $9,418 and $5,179, respectively) $ 9,804 $ 5,179
Cash 63 78
Receivables:
Capital shares sold 1 10
Interest 113 30
Securities sold 874 -
------- -------
Total assets 10,855 5,297
------- -------
Liabilities
Securities purchased 1,355 -
Capital shares redeemed - 6
Accounts payable and accrued expenses 4 4
Dividends on capital shares 7 6
------- --------
Total liabilities 1,366 16
------- --------
Net assets applicable to capital shares outstanding $9,489 $ 5,281
======= =========
Represented by:
Paid-in capital $ 9,074 $ 5,281
Accumulated net realized gain on investments 29 -
Net unrealized appreciation of investments 386 -
------- -------
Net assets applicable to capital shares outstanding $ 9,489 $5,281
======= ========
Capital shares outstanding, unlimited number of shares
authorized, $.001 par value 909 5,281
======= ========
Net asset value, redemption price, and offering price
per share $ 10.44 $1.00
======= =======
See accompanying notes to financial statements.
</TABLE>
Categories & Definitions
Portfolios of Investments in Securities
September 30, 1996
(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 a stipulated daily, weekly,
or monthly interval to a rate that reflects current market conditions. In money
market funds, the effective maturity is equal to either the date on which the
underlying principal amount may be recovered through demand or the next rate
adjustment date consistent with applicable regulatory requirements. 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, 1996
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
------ -------- ------ --------- -------
Fixed Rate Instruments (95.9%)
Texas (91.9%)
<C> <S> <C> <C> <C>
$ 200 Austin Community College District RB,
Series 1995 (CRE) 6.10 % 2/01/15 $ 206
250 Bexar Metropolitan Water District RB,
Series 1995 (CRE) 5.88 5/01/22 253
400 Canadian River Municipal Water Auth. RB,
Series 1996 (CRE) 5.88 2/15/16 403
1,000 Cedar Hill ISD RB, Series 1996 (CRE) 6.30(a) 8/15/15 322
150 Coastal Water Auth. Contract RB,
Series 1995 (CRE) 5.95 12/15/25 148
200 Department of Housing and Community
Affairs RB, Series 1991A 6.95 7/01/23 209
300 Guadalupe-Blanco River Auth. IDC RB,
Series 1982A 6.35 7/01/22 315
300 Harlingen Higher Education Facilities
Corp. RB, Series 1995 6.38 8/15/15 291
Harris County Health Facilities RB,
200 Series 1991A 6.75 2/15/21 213
150 Series 1992 7.13 6/01/15 161
275 Series 1995 5.50 10/01/13 267
400 Harris County IDC RB, Series 1992 6.95 2/01/22 423
100 Health Facilities Development Corp. RB,
Series 1993B (CRE) 6.38 8/15/23 105
75 Housing Agency Single-Family Mortgage
RB, Series 1991A 7.15 9/01/12 79
150 Houston Water and Sewer System RB,
Series 1992B 6.38 12/01/14 157
1,000 Keller ISD RB, Series 1996A (CRE) 5.91(a) 8/15/21 233
300 Lower Neches Valley Auth. IDC PCRB 5.65 2/01/29 289
400 Matagorda County Navigation District PCRB,
Series 1993 6.00 7/01/28 401
1,400 Mesquite Health Facilities Development
Corp. RB, Series 1996A 6.40 2/15/20 1,370(c)
300 North Central Texas Health Facilities
Development Corp. RB, Series 1993 5.90 6/01/21 294
400 Northeast Hospital Auth. RB, Series 1993B 7.25 7/01/22 428
800 Orange County Navigation and Port District
IDC RB, Series 1996 6.38 2/01/17 833
Pantego GO,
60 Series 1994 7.75 2/15/14 65
65 Series 1994 7.75 2/15/15 71
150 Sabine River Auth. PCRB, Series 1992 (CRE) 6.55 10/01/22 160
200 San Antonio Electric and Gas RB,
Series 1989 6.50 2/01/12 208
150 Tarrant County Health Facilities
Development Corp. RB, Series 1994 6.00 9/01/24 147
150 Turnpike Auth. Dallas North Tollway RB,
Series 1994 (CRE) 6.75 1/01/15 164
290 Tyler Health Facilities Development
Corp. RB, Series 1993B 6.63 11/01/11 288
200 Water Development Board GO, Series 1994 7.00 8/01/20 222
Puerto Rico (4.0%)
400 Electric Power Auth. RB, Series X 5.50 7/01/25 379
Total fixed rate instruments -----
(cost: $8,718) 9,104
------
Variable Rate Demand Notes (7.4%)
Texas
300 Nueces River Auth. PCRB, Series 1985 (CRE) 4.05 12/01/99 300
400 Port Arthur Navigation District IDC PCRB,
Series 1985 (CRE) 4.10 5/01/03 400
Total variable rate demand notes ---------
(cost: $700) 700
---------
Total investments (cost: $9,418) $ 9,804
=========
</TABLE>
Portfolio Summary By Industry
-----------------------------
Hospitals 20.1%
Nursing Care 14.4
Electric Power 12.1
General Obligations 9.6
Conglomerates 8.8
Oil - International 7.3
Water Utilities 6.9
Education 5.2
Leasing 4.5
Chemicals 3.3
Aluminum 3.2
Water/Sewer 3.2
Single-Family Housing 3.0
Toll Roads 1.7
--------
Total 103.3%
======
Texas Tax-Free Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
--------- -------- -------- --------- -------
Variable Rate Demand Notes (77.1%)
Texas
<C> <S> <C> <C> <C>
$ 100 Amarillo Health Facilities Corp. RB,
Series 1985 (CRE) 4.05 % 5/31/25 $ 100
200 Arlington IDC RB, Series 1985 (CRE) 4.13 10/01/20 200
200 Austin Higher Education Auth. RB,
Series 1995 (CRE) 3.90 8/01/19 200
100 Bexar County Health Facilities RB,
Series 1985B (CRE) 3.80 3/01/12 100
100 Desoto IDA RB, Series 1989 (CRE) 3.90 12/01/16 100
100 Euless IDA RB, Series 1985 (CRE) 3.90 12/01/15 100
200 Gulf Coast IDA RB, Series 1989 (CRE) 3.90 11/01/19 200
200 Gulf Coast Waste PCRB, Series 1994 3.85 4/01/13 200
100 Hunt County IDC RB, Series 1987 (CRE) 3.85 10/01/02 100
200 Lubbock Health Facilities Development
Corp. RB, Series 1992 (CRE) 3.85 10/01/13 200
100 Maverick County IDC RB, Series 1991
(CRE) 3.90 12/01/01 100
200 Metropolitan Higher Education Auth. RB,
Series 1984 (CRE) 4.10 12/01/04 200
250 North Central Texas Health Facilities
Development Corp. RB, Series 1989 (CRE) 3.90 12/01/98 250
100 Nueces River Auth. PCRB, Series 1985 (CRE) 4.05 12/01/99 100
200 Port Arthur Navigation District IDC PCRB,
Series 1985 (CRE) 4.10 5/01/03 200
Port Development Corp. RB,
200 Series 1984 (CRE) 4.05 12/01/04 200
200 Series 1989 (CRE) 3.80 1/15/14 200
Tarrant County Housing Finance Corp. MFH
120 RB, Series 1985 (CRE) 3.90 12/01/25 120
400 Series 1994 (CRE) 4.10 11/01/07 400
700 Travis County Housing Finance Corp. MFH RB,
Series 1985 (CRE) 4.00 12/01/07 700
100 Trinity River IDA RB, Series 1994 (CRE) 3.93 11/01/14 100
Total variable rate demand notes -------
(cost: $4,070) 4,070
-------
Fixed Rate Instruments (21.0%)
Texas
145 Association of School Boards TAN,
Series 1996A (CRE) 4.75 8/29/97 146
100 Fort Bend ISD Refunding GO, Series 1993
(CRE) 3.90 2/15/97 100
175 Harris County Flood Control District
Refunding Bonds, Series 1991 5.60 10/01/97 178
150 Maple Run at Austin RB, Series 1986 (CRE) 8.25 11/15/05(b) 153
100 Marshall ISD GO, Series 1986 (CRE) 6.75 2/15/04(b) 101
100 Public Finance Auth. GO CP Notes 3.55 10/08/96 100
100 San Antonio Water Systems CP,
Series 1995 3.60 10/29/96 100
225 Water Development Refunding RB,
Series 1986B 7.10 8/01/97 231
-------
Total fixed rate instruments (cost: $1,109) 1,109
-------
Total investments (cost: $5,179) $ 5,179
=========
</TABLE>
Portfolio Summary By Industry
------------------------------
Multi-Family Housing 23.1%
Education 10.3
Escrowed Securities 9.2
Oil - International 7.6
Ports/Wharfs 7.6
General Obligations 7.2
Nursing Care 4.7
Chemicals 3.8
Hospitals 3.8
Publishing/Newspapers 3.8
Aluminum 1.9
Building Materials 1.9
Healthcare - Miscellaneous 1.9
Hotel/Motel 1.9
Machinery - Diversified 1.9
Oil Well Equipment & Service 1.9
Retail - Specialty 1.9
Retirement Homes 1.9
Water/Sewer 1.8
--------
Total 98.1%
========
Notes to Portfolios of Investments in Securities
(In Thousands)
September 30, 1996
(Unaudited)
General Notes
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the
same as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net
assets.
Portfolio Description Abbreviations
CP Commercial Paper
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development Authority/Agency
IDC Industrial Development Corporation
ISD Independent School District
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
TAN Tax Anticipation Notes
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, 1996, the cost of securities purchased on a
delayed delivery basis for the Texas Tax-Free Income Fund was $1,351.
See accompanying notes to financial statements.
Statements of Operations
(In Thousands)
Six-month period ended September 30, 1996
(Unaudited)
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
--------- --------------
Net investment income:
Interest income $ 269 $ 91
---- ------
Expenses:
Management fees 22 12
Transfer agent's fees 5 3
Custodian's fees 21 16
Postage 1 -
Shareholder reporting fees 1 1
Trustees' fees 4 4
Registration fees 1 -
Audit fees 4 4
Legal fees 3 4
Other 1 1
------ -----
Total expenses before reimbursement 63 45
Expenses reimbursed (41) (33)
------ -----
Total expenses after reimbursement 22 12
------ -----
Net investment income 247 79
------ -----
Net realized and unrealized gain on investments:
Net realized gain 29 -
Change in net unrealized appreciation/
depreciation 147 -
------ -----
Net realized and unrealized gain 176 -
------- -----
Increase in net assets resulting from operations $ 423 $ 79
======= =====
See accompanying notes to financial statements.
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended September 30, 1996 and Year ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
------------ ---------------
9/30/96 3/31/96 9/30/96 3/31/96
-------- ------- ------- -------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 247 $ 394 $ 79 $ 155
Net realized gain on investments 29 255 - -
Change in net unrealized appreciation/
depreciation of investments 147 (37) - -
------ ------ ---- -----
Increase in net assets resulting from
operations 423 612 79 155
------ ------ ---- -----
Distributions to shareholders from:
Net investment income (247) (394) (79) (155)
------ -------- ------ -----
Net realized gains (160) (85) - -
------- ------- ------ -----
From capital share transactions:
Proceeds from shares sold 1,774 6,568 2,539 3,978
Shares issued for dividends reinvested 346 412 39 123
Cost of shares redeemed (700) (5,506) (1,992) (3,287)
-------- --------- --------- --------
Increase in net assets from
capital share transactions 1,420 1,474 586 814
-------- --------- --------- --------
Net increase in net assets 1,436 1,607 586 814
Net assets:
Beginning of period 8,053 6,446 4,695 3,881
-------- -------- --------- -------
End of period $ 9,489 $8,053 $ 5,281 $ 4,695
======== ========= ========= ========
Change in shares outstanding:
Shares sold 172 621 2,539 3,978
Shares issued for dividends reinvested 34 39 39 123
Shares redeemed (68) (520) (1,992) (3,287)
------- ------ --------- --------
Increase in shares outstanding 138 140 586 814
======= ====== ======== =======
See accompanying notes to financial statements.
</TABLE>
Notes to Financial Statements
September 30, 1996
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA State Tax-Free Trust (the Trust), registered under the Investment Company
Act of 1940, as amended, 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). The Funds have a common objective of providing Texas investors
with a high level of current interest income that is exempt from federal
income taxes. The Texas Tax-Free Money Market Fund has a further objective of
preserving capital and maintaining liquidity.
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 Investment Company Act of 1940, as
amended, 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.
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 two joint short-term revolving
loan agreements totaling $850 million through January 14, 1997, one with USAA
Capital Corporation (CAPCO), an affiliate of the Manager ($750 million
uncommitted), and one with an unaffiliated bank ($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 these agreements,
each Fund may borrow up to a maximum of 15% of its total assets, of which
only 5% may be borrowed from CAPCO, at the lending institution's borrowing
rate plus a markup. The Funds had no borrowings under either of these
agreements during the six-month period ended September 30, 1996.
(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, 1996. 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.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the six-month period ended September 30, 1996 for the Texas Tax-Free
Income Fund were $5,649,084 and $4,115,430, respectively. Purchases and
sales/maturities of securities for the six-month period ended September 30,
1996 for the Texas Tax-Free Money Market Fund were $6,225,696 and $5,645,000,
respectively.
Gross unrealized appreciation and depreciation of investments at September 30,
1996 for the Texas Tax-Free Income Fund was $391,019 and $5,007, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies 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 $50,000,000, .40% of that portion over $50,000,000
but not over $100,000,000, and .30% of that portion over $100,000,000. 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, 1996, the Association and
its affiliates owned 2,194,890 shares (41.6%) of the Texas Tax-Free Money
Market Fund.
Notes to Financial Statements (continued)
Texas Tax-Free Income Fund
September 30, 1996
(Unaudited)
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
Six-Month
Period Ended
September 30, Year Ended March 31,
--------------------
1996 1996 1995**
----- ------ ------
Net asset value at
beginning of period $ 10.45 $ 10.21 $ 10.00
Net investment income .29 .58 .34
Net realized and
unrealized gain .19 .36 .21
Distributions from net
investment income (.29) (.58) (.34)
Distributions of realized
capital gains (.20) (.12) -
-------- -------- ---------
Net asset value at
end of period $ 10.44 $ 10.45 $ 10.21
======== ======== =========
Total return (%) * 4.73 9.42 5.75
Net assets at end
of period ($000) $ 9,489 $ 8,053 $ 6,446
Ratio of expenses to
average net assets (%) .50(a)(b) .50(a) .50(a)(b)
Ratio of net investment
income to average
net assets (%) 5.64(a)(b) 5.51(a) 5.56(a)(b)
Portfolio turnover (%) 48.67 71.14 49.63
(a) 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 Fund's ratios would have been:
Ratio of expenses to
average net assets (%) 1.44(b) 1.66 2.40(b)
Ratio of net investment
income to average
net assets (%) 4.70 (b) 4.35 3.66(b)
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gains
distributions during the period.
** Fund commenced operations August 1, 1994.
Notes to Financial Statements (continued)
Texas Tax-Free Money Market Fund
September 30, 1996
(Unaudited)
(7) Financial Highlights (continued)
Per share operating performance for a share outstanding throughout each
period is as follows:
Six-Month
Period Ended
September 30, Year Ended March 31,
--------------------
1996 1996 1995**
----- ------ ------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
Net investment income .02 .03 .02
Distributions from net
investment income (.02) (.03) (.02)
------- -------- --------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00
======= ======== =======
Total return (%) * 1.61 3.49 2.09
Net assets at end
of period ($000) $5,281 $ 4,695 $3,881
Ratio of expenses to
average net assets (%) .50(a)(b) .50(a) .50(a)(b)
Ratio of net investment
income to average
net assets (%) 3.19(a)(b) 3.42(a) 3.18(a)(b)
(a) 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 Fund's ratios would have been:
Ratio of expenses to
average net assets (%) 1.85(b) 2.02 2.63(b)
Ratio of net investment
income to average
net assets (%) 1.84(b) 1.90 1.05(b)
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the
period.
** Fund commenced operations August 1, 1994.
