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:
Independent Auditors' Report 12
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 21
Statements of Operations 22
Statements of Changes in Net Assets 23
Notes to Financial Statements 25
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 32 funds by investment objective as of March 31,
1996. 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.
<TABLE>
<CAPTION>
Average Annual Total Return* Yield
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 53.09 16.33 11.30 - - -
Emerging Markets(2) 11/7/94 22.89 - - 4.97 - -
Gold(2) 8/15/84 22.74 11.44 6.69 - - -
Growth 4/5/71 28.37 14.63 11.60 - - -
Growth & Income 6/1/93 31.71 - - 15.08 - -
International(2) 7/11/88 22.25 12.71 - 10.15 - -
World Growth(2) 10/1/92 24.29 - - 13.28 - -
Asset Allocation
Balanced Strategy 9/1/95 - - - 5.16 - -
Cornerstone Strategy(2) 8/15/84 22.70 12.02 11.45 - - -
Growth and Tax Strategy(3)** 1/11/89 17.89 9.91 - 9.87 - 3.59
Growth Strategy(2) 9/1/95 - - - 14.32 - -
Income Strategy 9/1/95 - - - 4.46 - 5.04
Income - Taxable
GNMA 2/1/91 9.42 7.90 - 7.69 - 6.81
Income 3/4/74 12.98 9.15 9.37 - - 6.68
Income Stock 5/4/87 24.73 13.01 - 12.32 - -
Short-Term Bond 6/1/93 9.03 - - 5.01 - 6.30
Income - Tax Exempt
Long-Term(3)** 3/19/82 7.88 7.57 7.60 - - 5.72
Intermediate-Term(3)** 3/19/82 7.97 7.51 7.17 - - 5.23
Short-Term(3)** 3/19/82 5.83 5.32 5.54 - - 4.33
California Bond(3)** 8/1/89 9.35 7.64 - 7.42 - 5.54
Florida Tax-Free Income(3)** 10/1/93 7.66 - - 2.26 - 5.61
New York Bond(3)** 10/15/90 7.67 7.61 - 8.42 - 5.49
Texas Tax-Free Income(3)** 8/1/94 9.42 - - 9.08 - 5.41
Virginia Bond(3)** 10/15/90 7.57 7.77 - 8.16 - 5.37
Money Market
Money Market(4) 2/2/81 5.64 4.46 5.92 - 5.00 -
Tax Exempt Money Market(3)(4)** 2/6/84 3.65 3.22 4.30 - 3.17 -
Treasury Money Market Trust(4) 2/1/91 5.48 4.20 - 4.21 4.96 -
California Money Market(3),(4)** 8/1/89 3.58 3.08 - 3.68 3.14 -
Florida Tax-Free Money Market(3,4)**10/1/93 3.51 - - 2.93 3.06 -
New York Money Market(3),(4)** 10/15/90 3.56 2.91 - 3.05 3.07 -
Texas Tax-Free Money Market(3,4)** 8/1/94 3.49 - - 3.34 3.06 -
Virginia Money Market(3),(4)** 10/15/90 3.42 3.04 - 3.20 2.99 -
(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 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.
</TABLE>
Message from the President
[A photo of Michael J.C. Roth, President and Vice Chairman of the Board,
appears here.]
One of the most striking reactions of an audience to a speaker
that I have ever witnessed came during a shareholders' meeting that
we had last year. The speaker was Ken Willmann, who guides our efforts
in the tax-exempt bond area. He was talking about bond investors in general,
and the statement that evoked such a memorable reaction was, "If you are going
to take the income, you should not invest in bonds." There was dead silence in
the room.
Ken's statement is magnificently perceptive. There has been a tradition of
opposite thinking. For as long as I can remember people talking about
investments, the phrase, "I only spend the income - I never touch the
principal," has elicited nods of admiration. Here was a disciplined person.
This thinking even found its way into our legal process. During my six years
as a trust investment officer, I frequently saw trust instruments which
allowed beneficiaries to spend income but forbade them to "invade corpus."
In 1990, we first published information showing the experience of an
investor who made one of two theoretical choices in 1975. One was to purchase
a 9% bond, and the other was to buy the S&P 40 Utilities Index (an unmanaged
index representing the market value weighted performance of a group of
approximately 40 publicly traded utilities stocks). Although this is
theoretical, it provides us easy measurement. In this report we have updated
the bond data through 1995. The black bars on the chart show the value of the
bond portfolio assuming all the interest is spent, and we applied the actual
rates of inflation to the portfolio. The income from the bond, by 1995, is of
course unchanging, and its purchasing power has also fallen, to about 1/3 of
its 1975 level.
The gray bars on the chart reflect the real value of the portfolio if
interest is reinvested. This chart illustrates just what Ken Willmann said.
The only way to maintain the purchasing power of a bond portfolio is to
reinvest the income. The primary purpose of investing in bonds is the
excellent synergy they add to a portfolio. Their combination with stocks
can result in a portfolio that has better return and risk characteristics
than either stocks or bonds alone.
But when it comes time to take some of your investment return, you do
not want to only take your bond portfolio's income. That is the time
to look at total return.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
[A graph is shown here entitled "Real Value of a Bond Portfolio - $100,000
Invested on January 1, 1975". The graph shows the impact of inflation on a
$100,000 investment with interest reinvested vs. interest distributed. The
vertical axis shows the dollar amount and the horizontal axis shows the year.
The data is as follows:
Interest Interest
Reinvested Distributed
1975 101,860 93,449
1976 105,932 89,161
1977 108,144 83,507
1978 108,114 76,591
1979 104,002 67,594
1980 100,856 60,137
1981 100,912 55,202
1982 105,896 53,145
1983 111,200 51,200
1984 116,603 49,254
1985 122,480 47,465
1986 132,011 46,934
1987 137,814 44,952
1988 143,859 43,049
1989 149,839 41,136
1990 153,920 38,768
1991 162,791 37,617
1992 172,442 36,557
1993 182,931 35,578
1994 194,209 34,653
1995 206,042 33,729]
NOTE: Real value is the purchasing power of the dollars accumulated
when the actual rate of inflation is applied. The return used in this
example of a fixed-rate investment is hypothetical and for illustrative
purposes only. Investors are encouraged to closely monitor changes in
any factor which may affect their investments.
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 3/31/96
Net Assets $6.4 Million $8.1 Million
Net Asset Value Per Share $10.21 $10.45
Average Annual Total Return as of 3/31/96
1 Year 9.42%
Since inception on August 1, 1994 9.08%
30-Day SEC Yield* on March 31, 1996 5.41%
*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 3/31/96, with dividends
and capital gains reinvested. The ending values for the items graphed are:
Lehman Brothers Muni. Bond Index $11,309
USAA Texas Tax-Free Income Fund 11,571]
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 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
[A photograph of Robert R. Pariseau, Portfolio Manager appears here]
When Good News is Bad
Interest rates had been falling for 15 months, but on February 20,
1996, news screens flashed, "Greenspan says U.S. Economy 'On Track for
Sustained Growth'." Two weeks later, on March 8th, the screens read,
"Non-Farm Jobs Up 705,000; Biggest Gain since 1983." The bond and
stock markets, seemingly unable to cope with so much good news,
promptly suffered their worst single day's decline in years. What
caused interest rates to increase on the 30-year U.S. Treasury bond
(the "Long Bond") from 5.95% last December to 6.67% on March 31, 1996?
Investors perceived that if the economy were strengthening too fast,
then inflation would eventually follow.
A Change in Sentiment
Since last spring, bond market sentiment has been very positive,
meaning investors were expecting the continuation of weak economic
conditions and falling interest rates. At one point, the market was
also counting on Congress to develop a bi-partisan deficit reduction
plan and for fiscal conservatives to capture the White House and
dominate Congress. Confounding the situation was the delayed release
of critical economic statistics caused by last fall's federal government
shutdown and then the distortion of the statistics by the January blizzard
and major strikes at Boeing and General Motors. Financial markets rely upon
this information to gauge the strength of the economy, the resulting demand
for credit, and the relative risk of inflation. I believe that bond
market sentiment has swung from overly optimistic to a more realistic
and cautious outlook.
The Municipal Market
As interest rates rose during the recent correction, the municipal
bond market fell less in value and has out-performed the government
market. This process started when the pro-flat tax presidential
candidates did poorly in the Republican primary elections.
The improvement continued when several influential financial
publications printed articles projecting that the middle class
would end up paying higher taxes under a flat tax system or that
massive changes to the tax code would create unwise economic risks.
Does this mean that worries over major tax reform have vanished? No,
but for now, markets are less concerned that significant tax reform
is likely. I promise to monitor the situation very closely.
Strategy & Outlook
Although inflation has remained very tame since 1990, the bond market
is uneasy because of the recent rise in commodity prices - especially
gasoline. Key indicators of prevailing economic conditions are very
anemic now compared to 1994 when inflation last spooked the financial
markets. How will this uncertainty impact my strategy for managing
the fund? You may be surprised, but under most market conditions, the
near-term economic outlook will have little influence on my long-term
strategy. I plan to do what has worked successfully over the years -
primarily concentrate on generating a high level of tax-exempt income
and invest in quality securities. Secondarily, I will focus on total
return. This strategy means that I typically will buy maturities 20 years
or longer with higher yields, although the market values of these
bonds are more sensitive to changes in interest rates. I rely on our
seasoned research staff to find value in lesser-known issuers and to
help me avoid credit problems. In short, I position the fund for
long-term investors that want to enhance tax-exempt income and reduce
taxable capital gain distributions. I do not buy derivatives, hedge
the portfolio with futures, or try to time the market because no one
has demonstrated that they can consistently predict the future course
of interest rates.
Your Fund's Performance
Looking over the past 12 months, the bond market had a very good year
as the Long Bond rates fell from 7.43% last March 1995 to 6.67% on
March 31, 1996. Your Fund's net asset value (NAV) per share rose $.24
to $10.45, or 2.4%, since March 31, 1995. The Fund's performance
compared very favorably to its peer group. For the past year, the
Fund's dividend yield(1) was 5.52% compared to the Lipper Texas
Municipal Debt Funds average of 5.03% for the 26 funds in the
category.(2) For the same period, the Fund's total return(3)
was 9.42% compared to the Texas Debt Funds average of 7.56%.
The State of Texas
The credit rating agencies continue to rate Texas as a "AA" category
credit because of its well-managed finances and steady economic
performance. Since 1990,Texas has added more jobs than any other state.
Despite a bright economic outlook, the challenge remains to improve
the state's 32nd place standing in per capita personal income. Growth
in personal income has been slowed by lower paying service-sector jobs
that replaced higher paying jobs in the oil & gas and aerospace industries.
Preliminary indications suggest that the border towns have turned the
corner from the "peso crisis" and their economies will gradually
improve.
Governor Bush, fulfilling a campaign promise, has appointed a
committee to study alternatives to property taxes. The committee's
recommendations must be revenue neutral and may not include a state
income tax. A viable solution has eluded the state's policymakers
for years. I remain very cautious regarding municipal lease obligations
that rely on annual appropriations, despite their somewhat higher
yields.
(1) 12-month dividend yield is computed by dividing income dividends
paid during the previous 12 months by the latest month-end net asset
value adjusted for capital gains distributions.
(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 gains distributions.
[A pie chart is shown here depicting the Portfolio Ratings/Mix as of
March 31, 1996 for the USAA Texas Tax-Free Income Fund to be: AAA - 33%,
AA - 26%, A - 9%, BBB - 21%, and Cash Equivalents - 11%.]
This chart reflects the highest rating of either Moody's Investors
Service, Standard & Poor's Rating Group or Fitch Investors Service.
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.
To match the Texas Tax-Free Income Fund's closing 30-Day SEC yield of
5.41% and:
Assuming a marginal federal tax rate of:
28% 31% 36% 39.6%
A fully taxable investment must pay: 7.51% 7.84% 8.45% 8.96%
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 15 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.
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
maintain a stable net asset value of $1.00 per share.
3/31/95 3/31/96
Net Assets $3.9 Million $4.7 Million
Net Asset Value Per Share $1.00 $1.00
Average Annual Total Return as of 3/31/96
1 Year 3.49%
Since inception on August 1, 1994 3.34%
7-Day Simple Yield on March 31, 1996 3.06%
[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 3/95 to 3/96. The vertical axis shows the
yield and the horizontal axis shows the time period. The ending
value, on 3/25/96, for the USAA Texas Tax-Free Money Market Fund is
3.05% and the ending value for the IBC/Donoghue's State Specific SB
& GP (Tax-Free) is 2.72%.]
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 photograph of Pamela K. Bledsoe, Portfolio Manager, appears here]
The Market
A year ago the Federal Reserve (Fed) instituted a directional shift
from increasing short-term interest rates to lowering them. Short-term
interest rates have been decreased by the Fed three times since July 1995
in an effort to stimulate growth in the national economy. If the economy
grows too slowly, it could result in a recession; if it grows too
rapidly, it could cause inflation. Reports used to measure the
country's level of economic growth show mixed signals for the rate of
growth. The impact of these mixed signals results in fluctuating
yields for money market funds.
As we make new purchases, we consider the trends in interest rates
although we do not attempt to forecast rates. In general, if rates are
trending higher, purchasing securities with very short maturities
allows the Fund to reinvest at higher rates. If rates are trending
lower, securities with longer maturities allow the Fund to hold on to
higher rates as long as possible. Over the last six months, I have
tried to maintain a longer average maturity as the Fed has continued
to lower short-term rates. However, the need for liquidity requires
that the Fund hold a large percentage of variable rate demand notes
(VRDNs).(1) These notes have yields that change weekly and will
fluctuate with changing market conditions.
(1) Variable rate demand note (VRDN): A note representing borrowings that
is payable on demand and that bears interest tied to a money market rate.
Regardless of the trend in interest rates, we strive to maintain a
portfolio of high quality, competitive yielding securities. All of our
holdings must meet our standards for liquidity, credit quality, yield,
and maturity.
Texas
The Texas economy continues to be one of the strongest in the nation.
Job growth has been concentrated in manufacturing, construction, electronics,
telecommunications and health care. Increased employment opportunities have
led to population growth in excess of national levels. The State continues to
struggle to increase per capita income because new job creation has been higher
among lower paying service-sector jobs, rather than the higher-paying oil
& gas and aerospace jobs. Exports to Mexico are an increasing component of
trade and have been relatively unaffected by political and economic events
in Mexico.
[A graph appears here showing the growth of $10,000, from 8/1/94 to 3/31/96,
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 $10,566.]
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 18 for a complete listing of the Portfolio of Investments in
Securities.
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, 1996, the related statements
of operations for the year then ended, the statements of changes
in net assets for the year ended March 31, 1996, and the eight-month
period ended March 31, 1995, and the financial highlights information
presented in note 7 to the financial statements for the year ended
March 31, 1996, and the eight-month period ended March 31, 1995.
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,
1996, 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, 1996, the results of their operations for the year then ended,
the changes in their net assets for the year ended March 31, 1996, and
the eight-month period ended March 31, 1995, and the financial
highlights information for the year ended March 31, 1996, and the
eight-month period ended March 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 10, 1996
Statements of Assets and Liabilities
(In Thousands)
<TABLE>
<CAPTION>
March 31, 1996
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
<S> <C> <C>
Assets
Investments in securities, at market value
(identified cost of $8,050 and $4,611,
respectively) $ 8,289 $ 4,611
Cash 29 45
Receivables:
Capital shares sold 6 9
Interest 117 45
---------- ----------
Total assets 8,441 4,710
---------- ----------
Liabilities
Securities purchased 376 -
Capital shares redeemed - 4
Accounts payable and accrued expenses 7 5
Dividends on capital shares 5 6
---------- ----------
Total liabilities 388 15
---------- ----------
Net assets applicable to
capital shares outstanding $ 8,053 $ 4,695
========== ==========
Represented by:
Paid-in capital $ 7,654 $ 4,695
Accumulated net realized gain on investments 160 -
Net unrealized appreciation of investments 239 -
---------- ----------
Net assets applicable to capital shares
outstanding $ 8,053 $ 4,695
========== ==========
Capital shares outstanding, unlimited number
of shares authorized, $.001 par value 771 4,695
========== ==========
Net asset value, redemption price, and
offering price per share $ 10.45 $ 1.00
========== ==========
See accompanying notes to financial statements.
</TABLE>
Categories & Definitions
Portfolios of Investments in Securities
March 31, 1996
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 orother 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, 1996
Principal Coupon Final Market
Amount Security Rate Maturity Value
Fixed Rate Instruments (91.7%)
<C> <S> <C> <C> <C>
Texas
$ 200 Abilene Higher Education Facilities Corp. RB,
Series 1995 6.25 % 10/01/11 $ 203
200 Austin Community College District RB,
Series 1995 (CRE) 6.10 2/01/15 205
250 Bexar Metropolitan Water District RB,
Series 1995 (CRE) 5.88 5/01/22 249
1,405 Burleson ISD Tax Refunding Bonds,
Series 1995 (CRE) 5.95(a) 8/01/24 253
150 Coastal Water Auth. Contract RB,
Series 1995 (CRE) 5.95 12/15/25 146
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 7/01/22 313
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 2/15/21 208
150 Series 1992 7.13 6/01/15 160
100 Series 1994 (CRE) 6.38 10/01/17 106
275 Series 1995 5.50 10/01/13 260
600 Harris County IDC RB, Series 1992 6.95 2/01/22 631
100 Health Facilities Development Corp. RB,
Series 1993B (CRE) 6.38 8/15/23 104
85 Housing Agency Single-Family Mortgage RB,
Series 1991A 7.15 9/01/12 90
150 Houston Water and Sewer System RB,
Series 1992B 6.38 12/01/14 156
1,300 Keller ISD Tax Refunding Bonds,
Series 1996A (CRE) 5.90(a) 8/15/18 338
240 Lower Colorado River Auth. RB, Fourth
Supplemental Series (CRE) 5.63 1/01/17 234
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
200 Northeast Hospital Auth. RB,
Series 1993B 7.25 7/01/22 203
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 10/01/22 158
200 San Antonio Electric and Gas RB,
Series 1989 6.50 2/01/12 209
200 San Antonio Hotel Occupancy Tax RB,
Series 1996 (CRE) 5.70 8/15/26 194(c)
150 Tarrant County Health Facilities Development
Corp. RB, Series 1994 6.00 9/01/24 146
Turnpike Auth. Dallas North Tollway RB,
150 Series 1994 (CRE) 6.75 1/01/15 161
200 Series 1995 (CRE) 5.00 1/01/16 181
Tyler Health Facilities Development Corp. RB,
150 Series 1992 (CRE) 6.50 7/01/22 157
290 Series 1993B 6.63 11/01/11 286
600 Veteran's Housing Assistance GO,
Series 1995A 6.15 12/01/25 604
200 Water Development Board GO,
Series 1994 7.00 8/01/20 223
--------
Total fixed rate instruments (cost: $7,150) 7,389
--------
Variable Rate Demand Notes (11.2%)
Texas
300 Austin Higher Education Auth. RB,
Series 1995 (CRE) 3.55 8/01/19 300
300 Capital IDC PCRB, Series 1984 3.40 10/01/00 300
300 Gulf Coast IDA RB, Series 1989 (CRE) 3.55 11/01/19 300
--------
Total variable rate demand notes (cost: $900) 900
--------
Total investments (cost: $8,050) $ 8,289
========
</TABLE>
Portfolio Summary By Industry
Hospitals 20.2%
General Obligations 19.3
Education 12.4
Electric Power 11.2
Leasing 7.8
Oil - International 7.2
Toll Roads 4.2
Chemicals 3.9
Water/Sewer 3.8
Electronics - Semi-Conductors 3.7
Single-Family Housing 3.7
Water Utilities 3.1
Sales Tax Obligations 2.4
-----
Total 102.9%
=====
<TABLE>
<CAPTION>
Texas Tax-Free Money Market Fund
Portfolio of Investments in Securities
(In Thousands)
March 31, 1996
Principal Coupon Final
Amount Security Rate Maturity Value
Variable Rate Demand Notes (56.5%)
<C> <S> <C> <C> <C>
Texas
$ 100 Amarillo Health Facilities Corp. RB,
Series 1985 (CRE) 3.55% 5/31/25 $ 100
200 Arlington IDC RB, Series 1985 (CRE) 3.80 10/01/20 200
100 DeSoto IDA RB, Series 1989 (CRE) 3.45 12/01/16 100
100 Euless IDA RB, Series 1985 (CRE) 3.45 12/01/15 100
100 Gulf Coast IDA RB, Series 1989 (CRE) 3.55 11/01/19 100
100 Hunt County IDC RB, Series 1987 (CRE) 3.40 10/01/02 100
100 Maverick County IDC RB, Series 1991 (CRE) 3.55 12/01/01 100
150 McAllen IDA RB, Series 1985 (CRE) 3.55 12/01/99 150
200 Metropolitan Higher Education Auth. RB,
Series 1984 (CRE) 3.70 12/01/04 200
100 North Central Texas Health Facilities
Development Corp. RB,
Series 1989 (CRE) 3.55 12/01/98 100
200 Port Development Corp. RB, Series 1984 (CRE) 3.55 12/01/04 200
400 Tarrant County Housing Finance Corp. MFH RB,
Series 1994 (CRE) 3.65 11/01/07 400
700 Travis County Housing Finance Corp. MFH RB,
Series 1985 (CRE) 3.70 12/01/07 700
100 Trinity River IDA RB, Series 1984 (CRE) 3.43 11/01/14 100
-------
Total variable rate demand notes (cost: $2,650) 2,650
-------
Put Bond (2.1%)
Texas
100 Lower Neches Valley Auth. PCRB,
Series 1987 (cost: $100) 3.10 2/15/17 100
-------
Fixed Rate Instruments (39.6%)
Texas (35.0%)
115 Allen Waterworks and Sewer RB,
Series 1995 (CRE) 7.13 6/01/96 116
115 Austin Utility Systems RB, Series 1985
(Escrowed) 9.50 5/15/96 116
100 Dallas Waterworks and Sewer Systems RB,
Series 1995 7.50 4/01/96 100
150 El Paso County Hospital District GO,
Series 1988A (CRE) 7.20 7/01/96 151
100 Fort Bend ISD Refunding RB, Series 1993 (CRE) 3.90 2/15/97 101
100 Harris County Toll Road RB,
Series 1985F (CRE) 6.50 8/15/96 101
100 Houston GO CP Notes, Series 1995A 3.15 5/16/96 100
100 Houston ISD Refunding RB, Series 1989 6.90 8/15/96 101
100 Houston ISD TRAN, Series 1995 4.50 8/29/96 100
150 Maple Run at Austin RB, Series 1986 8.25 11/15/05(b) 156
100 Marshall ISD GO (CRE) 6.75 2/15/04(b) 103
100 Public Finance Auth. GO CP Notes 3.20 5/08/96 100
100 Richardson ISD TRAN, Series 1995 4.50 8/30/96 100
100 San Antonio Water Systems CP, Series 1995 3.20 4/10/96 100
100 TRAN, Series 1995A 4.75 8/30/96 100
Puerto Rico (4.6%)
215 Public Improvement GO, Series 1990 (CRE) 6.50 7/01/96 216
-------
Total fixed rate instruments (cost: $1,861) 1,861
-------
Total investments (cost: $4,611) $ 4,611
=======
</TABLE>
Portfolio Summary By Industry
Multi-Family Housing 23.4 %
General Obligations 15.3
Education 8.5
Escrowed Securities 8.0
Water/Sewer 6.7
Oil - International 4.3
Ports/Wharfs 4.3
Publishing/Newspapers 4.3
Hospitals 3.2
Real Estate 3.2
Building Materials Group 2.2
Toll Roads 2.2
Healthcare - Miscellaneous 2.1
Hotel/Motel 2.1
Machinery - Diversified 2.1
Nursing Care 2.1
Oil Well Equipment & Service 2.1
Retail - Specialty 2.1
-----
Total 98.2%
=====
Notes to Portfolios of Investments in Securities
(In thousands)
March 31, 1996
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
ISD Independent School District
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 March 31, 1996, the cost of securities purchased on a delayed
delivery basis for the Texas Tax-Free Income Fund was $191.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Statements of Operations
(In Thousands)
Year ended March 31, 1996
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
<S> <C> <C>
Net investment income:
Interest income $ 429 $ 178
----------- --------------
Expenses:
Management fees 36 23
Transfer agent's fees 8 5
Custodian's fees 41 32
Postage 1 1
Shareholder reporting fees 3 2
Trustees' fees 6 6
Registration fees 2 2
Audit fees 8 8
Legal fees 10 10
Other 3 3
--------- ---------
Total expenses before reimbursement 118 92
Expenses reimbursed (83) (69)
--------- ---------
Total expenses after reimbursement 35 23
--------- ---------
Net investment income 394 155
--------- ---------
Net realized and unrealized gain (loss) on investments:
Net realized gain 255 -
Change in net unrealized appreciation/depreciation (37) -
--------- ---------
Net realized and unrealized gain 218 -
--------- ---------
Increase in net assets resulting from operations $ 612 $ 155
========= =========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
(In Thousands)
Years ended March 31,
Texas Texas
Tax-Free Tax-Free Money
Income Fund Market Fund
1996 1995* 1996 1995*
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 394 $ 154 $ 155 $ 71
Net realized gain (loss) on investments 255 (10) - -
Change in net unrealized appreciation/
depreciation of investments (37) 276 - -
------ ------ ------- ------
Increase in net assets resulting from operations 612 420 155 71
------ ------ ------- ------
Distributions to shareholders from:
Net investment income (394) (154) (155) (71)
------ ------ ------- ------
Net realized gains (85) - - -
------ ------ ------- ------
From capital share transactions:
Shares sold 6,568 7,898 3,978 6,562
Shares issued for dividends reinvested 412 139 123 67
Shares redeemed (5,506) (1,857) (3,287) (2,748)
------ ------ ------ ------
Increase in net assets from
capital share transactions 1,474 6,180 814 3,881
------- ------- ------ ------
Net increase in net assets 1,607 6,446 814 3,881
Net assets:
Beginning of period 6,446 - 3,881 -
------ ------ ------ ------
End of period $8,053 $6,446 $4,695 $3,881
====== ====== ====== ======
Change in shares outstanding:
Shares sold 621 808 3,978 6,562
Shares issued for dividends reinvested 39 14 123 67
Shares redeemed (520) (191) (3,287) (2,748)
------ ------ ------ ------
Increase in shares outstanding 140 631 814 3,881
====== ====== ====== ======
*Funds commenced operations August 1, 1994.
</TABLE>
See accompanying notes to financial statements.
Notes to Financial Statements
(In Thousands)
March 31, 1996
(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 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 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.
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, 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 at the lending institution's
borrowing rate plus a markup to cover costs. The Funds had no
borrowings under either of these agreements during the year ended
March 31, 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 March 31, 1996.
Distributions of realized gains from security transactions not offset
by capital losses are generally made in the succeeding fiscal year.
Distributions of a short-term capital gain of $.1874 per share and
a long-term capital gain of $.0081 per share for the Texas Tax-Free
Income Fund, declared and paid in May 1996, is not reflected in the
accompanying financial statements.
The Funds completed their fiscal year on March 31, 1996. 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. The Texas Tax-Free Income Fund paid $.0081 per
share of long-term capital gain distributions for the year ended March
31, 1996.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term
securities, for the year ended March 31, 1996 for the Texas Tax-Free
Income Fund were $5,751 and $4,939, respectively. Purchases and sales/
maturities of securities for the year ended March 31, 1996 for the Texas
Tax-Free Money Market Fund were $12,478 and $11,645, respectively.
Gross unrealized appreciation and depreciation of investments at March
31, 1996 for the Texas Tax-Free Income Fund was $273 and $34, 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 $100,000. These fees are allocated on a
proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of
each Fund to .50% of its average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Trust. Shareholder accounting service
fees are based on an annual charge per shareholder account plus
out-of-pocket expenses.
C. Underwriting agreement - The Trust has an agreement with the
Manager for exclusive underwriting and distribution of the Funds'
shares on a continuing best efforts basis. The agreement provides that
the Manager will receive no fee or other remuneration for such
services.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by
United Services Automobile Association (the Association), a large,
diversified financial services institution. At March 31, 1996, the
Association and its affiliates owned 2,195 shares (46.7%) of the Texas
Tax-Free Money Market Fund.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout
each period is as follows:
<TABLE>
<CAPTION>
Net Asset Net Realized Distributions
Fiscal Value At Net and from Net Distributions
Year Beginning Investment Unrealized Investment of Realized
Ended of Period Income Gain (Loss) Income Capital Gains
($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Texas Tax-Free Income Fund:
March 31,
1995* 10.00 .34 .21 (.34) -
1996 10.21 .58 .36 (.58) (.12)
Texas Tax-Free Money Market Fund:
March 31,
1995* 1.00 .02 - (.02) -
1996 1.00 .03 - (.03) -
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets Expenses Income
Fiscal End Total at End to Average to Average Portfolio
Year of Period Return of Period Net Assets Net Assets Turnover
Ended ($) ($) ($) ($) ($) (%)
<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) 49.63(c)
1996 10.45 9.42 8,053 .50(a) 5.51(a) 71.14(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 3.49 4,695 .50(a) 3.42(a) -
</TABLE>
<TABLE>
<CAPTION> Ratio of Ratio of Net
Expenses Investment Income
to Average to Average
Net Assets Net Assets
(%) (%)
<S> <C> <C>
Texas Tax-Free Income Fund:
March 31,
1995* 2.40(b) 3.66(b)
1996 1.66 4.35
Texas Tax-Free Money Market Fund:
March 31,
1995* 2.63(b) 1.05(b)
1996 2.02 1.90
</TABLE>
*Funds commenced operations August 1, 1994.
(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 Funds' ratios
would have been:
(b) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(c) Portfolio turnover rates have been calculated excluding short-term
variable rate securities which are those with put date intervals of less
than one year.
Total return assumes reinvestment of all dividend income and capital
gains distributions during the period.
