Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA Texas Tax-Free Income Fund 4
USAA Texas Tax-Free Money Market Fund 10
Financial Information:
Portfolios of Investments:
USAA Texas Tax-Free Income Fund 15
USAA Texas Tax-Free Money Market Fund 18
Notes to Portfolios of Investments 20
Statements of Assets and Liabilities 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 "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA 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 Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1998, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 (Registered Trademark)
Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
===============================================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) 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.
(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 not insured or guaranteed by
by the FDIC or any other government agency. Although the fund seeks to
preserve the value of your investment at $1 per share, it is possible to
lose money by investing in the fund.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. IRAs are not available
for tax-exempt funds. The Growth and Tax Strategy Fund is not available as
an investment for your IRA because the majority of its income is tax
exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products 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, and may lose value.
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.
Message from the President
Over the past couple of years when Ken Willmann, who heads up our tax-exempt
bond area, has gone with us to speak to shareholders, he's said, "Bonds are like
Rodney Dangerfield. They get no respect." That was because the great performance
of stocks since 1995 made any bond look pale by comparison. But what a
difference a few months make!
After 1995, I told stock fund shareholders, "It was a great year, but it would
be a stretch to expect a repeat." After 1996, I said, "That's two great years in
a row. Any more would be unusual." After 1997, I said, "You should not
extrapolate 30% a year returns." Finally, by August of this year, my caution
proved correct. (The market is often reluctant to recognize genius.) Herein lies
the case for owning bonds.
[PHOTOGRAPH OF MICHAEL J. C. ROTH, CFA, PRESIDENT AND VICE CHAIRMAN OF THE BOARD
APPEARS HERE]
You have probably heard me say, that in my career I've known only two people who
could really stand a portfolio that is 100% stocks. That is being proven again.
The actual fear that accompanies a severe market drop is something difficult to
imagine. That fear is now impelling people toward fixed-income investments. The
behavior of stocks and bonds this past summer reinforces such a move, because as
stocks went into turmoil, a shift of money into bonds drove their prices up. If
you owned both in your portfolio, this difference in performance of the two
classes would have, I believe, left you much calmer than if you owned stocks
alone.
The ability to keep emotion out of investing and to look instead for opportunity
is very important. To be able to do that in a time like August 1998, for most
people, requires a portfolio that is a mix of stocks and bonds. And that's
because the markets will always surprise us.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
P.S. We have some news for those USAA funds that paid capital gain distributions
during 1998! President Clinton signed the appropriations bill October 23, 1998,
that modifies the long-term (12 months) capital gains holding period rules so
that essentially all registered investment company capital gain dividends paid
to shareholders during 1998 will be taxed at a maximum of 20%.
Past performance is no guarantee of future results.
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
Although none of the investment instruments mentioned are guaranteed or insured,
government bonds are backed by the full faith and credit of the U.S. Government.
Common stocks are considered to have the most risk, followed by corporate bonds
and government bonds. All of these vehicles are subject to tax. If held to
maturity, bonds offer a fixed rate of return and fixed principal value. Return
and principal value of an investment in stocks will fluctuate.
Investment Review
USAA 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.
- --------------------------------------------------------------------------------
3/31/98 9/30/98
- --------------------------------------------------------------------------------
Net Assets $21.1 Million $28.1 Million
Net Asset Value Per Share $11.10 $11.32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6-MONTH TOTAL RETURN AND 30-DAY SEC YIELD* AS OF 9/30/98
- --------------------------------------------------------------------------------
3/31/98 to 9/30/98 30-Day SEC Yield
4.74%+ 4.55%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
AVERAGE ANNUAL COMPOUNDED RETURNS WITH
REINVESTMENT OF DIVIDENDS - PERIODS ENDING SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
- --------------------------------------------------------------------------------
Since 8/1/94 9.79% = 5.28% + 4.51%
- --------------------------------------------------------------------------------
1 Year 10.39% = 5.46% + 4.93%
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR THE 4-YEAR PERIOD
ENDED SEPTEMBER 30, 1998
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA Texas Tax-Free Income Fund
for the 4-year period ended September 30, 1998.
Total Return for Years Ended:
- ----------------------------
9/30/94 -1.44%*
9/30/95 13.26%
9/30/96 8.56%
9/30/97 10.30%
9/30/98 10.39%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
9/30/94 0.66%*
9/30/95 6.21%
9/30/96 5.88%
9/30/97 5.91%
9/30/98 5.46%
Change in Share Price:
- ---------------------
9/30/94 -2.10%*
9/30/95 7.05%
9/30/96 2.68%
9/30/97 4.39%
9/30/98 4.93%
* This does not cover a 12 month period.
** Compounded Dividend yield calculation includes only income distributions.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. Dividend return is
the income dividends received over the period assuming reinvestment of all
dividends. Share price change is the change in net asset value over the period
adjusted for capital gain distributions. No adjustment has been made for taxes
payable by shareholders on their reinvested dividends and capital gain
distributions. The performance data quoted represent past performance and are
not an indication of future results. Investment return and principal value of an
investment will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
COMPARISON - 12 MONTH DIVIDEND YIELD
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Texas Tax-Free Income Fund to the 12
Month Dividend Yield of the Lipper Texas Municipal Debt Funds Average from
9/30/95 to 9/30/98.
USAA Texas Tax-Free Lipper Texas Municipal
Income Fund Yield Debt Funds Average Yield
------------------- ------------------------
9/30/95 5.42% 5.18%
9/30/96 5.48% 4.94%
9/30/97 5.38% 4.80%
9/30/98 4.97% 4.49%
12-month dividend yield is computed by dividing income dividends paid during the
previous 12 months by the latest month-end net asset value adjusted for capital
gain distributions. The graph represents data for periods ending 9/30/95 to
9/30/98.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 Investment for the USAA Texas Tax-Free Income Fund,
Lehman Brothers Municipal Bond Index and the Lipper Texas Municipal Debt Funds
Average. The data is from 8/1/94 through 9/30/98. The data points from the graph
are as follows:
USAA Texas Tax-Free Income Fund
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 $ 9,856
03/31/95 $10,575
09/30/95 $11,163
03/31/96 $11,571
09/30/96 $12,118
03/31/97 $12,389
09/30/97 $13,366
03/31/98 $14,087
09/30/98 $14,755
Lehman Brothers Municipal Bond Index
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 $ 9,887
03/31/95 $10,435
09/30/95 $10,993
03/31/96 $11,309
09/30/96 $11,657
03/31/97 $11,925
09/30/97 $12,708
03/31/98 $13,203
09/30/98 $13,816
Lipper Texas Municipal Debt Funds Average
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 $ 9,834
03/31/95 $10,410
09/30/95 $10,867
03/31/96 $11,205
09/30/96 $11,547
03/31/97 $11,786
09/30/97 $12,530
03/31/98 $13,005
09/30/98 $13,561
Data since inception on 8/1/94 through 9/30/98
The broad-based Lehman Brothers Municipal Bond Index is an unmanaged index that
tracks total return performance for the long-term investment grade tax-exempt
bond market. The Lipper Texas Municipal Debt Funds Average is the average
performance level of all Texas Municipal Debt Funds, as computed by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds. All tax-exempt bond funds will find it difficult to
outperform the Lehman Index, since funds have expenses.
Message from the Manager
MUNICIPALS ON SALE?
The yield on the 30-year U.S. Treasury bond(1) (the Long Bond) fell almost a
full 1%, closing at 4.98%, during the six-month period ending on September 30,
1998. The yield on the Bond Buyer 40-Bond Index(2) (BBI40) fell less. It began
the period at 5.27% and ended at 5.04%. The current relationship between
U.S. Treasury and municipal bonds implies that an investor can buy a municipal
long bond at nearly the same yield as the U.S. Treasury long bond and receive
the tax exemption feature to boot.
[PHOTOGRAPH OF PORTFOLIO MANAGER: ROBERT R. PARISEAU, CFA, APPEARS HERE]
ROUND UP THE USUAL SUSPECTS -
SUPPLY & DEMAND
Why have the municipal and U.S. Treasury markets reacted the way they have?
Although the different fixed income market sectors tend to move together over
time, relative performance often varies during shorter periods. Typically, the
greatest influence on market prices is supply and demand.
Supply of U.S. Treasury bonds has been stable thanks to the budget surplus,
while demand has been very strong - especially from skittish foreign and stock
market investors. Foreign investors, who cannot benefit from a U.S. tax-exempt
security, prefer the widely quoted and more liquid U.S. Treasury bonds.
Municipal bonds are in ample supply, thanks to a near record level of
refinancing. Demand has been positive but restrained. Municipal prices have
moved generally with the market, but not as much as the U.S. Treasury bonds
which are more "in demand." Why should investors consider the municipal market
today? For the same reasons as before. When compared to taxable bonds for those
investors in the 28% federal income tax bracket and higher, municipal bonds
typically generate the highest tax-equivalent yields for a very reasonable level
of risk.
MARKET OUTLOOK
In late September, the Federal Reserve Board reduced the interbank lending (Fed
Funds) rate by .25% to 5.25%, the first reduction since January 1996. Chairman
Greenspan is concerned that the financial crisis in emerging foreign markets may
infect the more developed nations including the United States. A growing number
of economists believe that recessions could envelop a number of important
U.S.trading partners. Mr. Greenspan appears less concerned about the outlook for
the American economy. Our economy is beginning to show the first signs of
cooling-off after years of brisk economic expansion. In this current economic
environment, inflationary expectations are very low which should be favorable
for the bond markets.
(1) The 30-year U.S. Treasury Bond is generally considered the benchmark for U.S
long-term interest rates.
(2) The Bond Buyer 40-Bond Index is the industry standard for the yield of long-
term, investment-grade municipal bonds.
STRATEGY
I focus primarily on generating maximum tax-exempt income with the goal of
producing the best after-tax total return over a 3 to 5 year investment horizon.
I remain fully invested in long-term, investment-grade municipal bonds. There
are no exotic derivatives or futures contracts to leverage or hedge the
portfolio. I have no intention of purchasing municipal bonds that are subject to
the federal alternative minimum tax (AMT) for individuals. Of course, I would
certainly advise our shareholders if there is a change in the Federal Tax Code
that compels me to reconsider my position on the AMT.
THE PORTFOLIO IS A SUM OF ITS PARTS - DISCOUNT & PREMIUM BONDS
I consider how each bond will fit and interact with the rest of the portfolio.
In a sense, different types of bonds play different roles, in particular,
discount and premium bonds. While a relatively small percentage of the Fund is
invested in zero coupon bonds (zero coupons), a much larger percentage is
invested in bonds originally purchased at their stated face value, or "par," but
when interest rates were higher. Some of these bonds are priced at significant
premiums above par. While these premium bonds contribute very nicely to your
monthly dividend, over time they expose the portfolio to significant coupon
reinvestment and call risk (early redemption risk). In addition, premium bonds
are less sensitive to the changes in interest rates.
WHAT IS A ZERO COUPON BOND?
A zero coupon bond is a security that makes no periodic coupon(3) payments, but
instead is sold at a deep discount from its face value. A zero coupon bond
gradually appreciates in value at the market rate of interest until the bond is
worth the stated face value in maturity. The current Federal Tax Code requires
that we account for this gradual increase by distributing it as tax-exempt
interest. As interest accrues on all of the bonds in the portfolio, including
the zero coupons, shareholders are paid monthly dividends.
Since the compounding interest rate never changes, zero coupons have no
reinvestment risk, unlike coupon bonds. In addition, because of the single lump
sum payment at maturity, the market value of a zero coupon bond is very
sensitive to changes in interest rates.
(3) A bond's coupon is the fixed amount of interest that is paid annually
stated as a percentage of face value, normally $1000. For example, a 6.5% coupon
pays $65 (6.5% times $1000 = $65) normally in two semiannual payments of $32.50
for the life of the bond.
HOW DO ZERO COUPON BONDS ADD UP?
In summary, zero coupon bonds are an excellent complement to my yield strategy
for two reasons:
- Zero coupons accrue and distribute interest typically at yields higher
than coupon bonds of equal maturity priced near par.
- Zero coupons offset the Fund's less interest-rate sensitive, premium bonds
by significantly contributing to total return performance in strong
markets.
YOUR FUND'S PERFORMANCE - MORNINGSTAR 5-STAR FUND
I'm very pleased to say that your Fund's performance earned 5-star ratings from
Morningstar for the overall and 3-year periods ended September 30, 1998, overall
and among 1,581 funds in the municipal bond fund category.(4) The Fund's
performance compared very favorably to its peer group. Your Fund's net asset
value (NAV) per share increased by $.22, or 2.0%, since March 31, 1998,
adjusting for the $.0182 capital gain distributed on May 8, 1998.
While past performance is no guarantee of future results, the Fund ranked #1 by
Lipper Analytical Services, Inc.(5) among Texas Municipal Debt Funds for the
past 12 months, ending September 30, 1998, with a total return(6) of 10.39% as
compared to the average of 8.16% for the 20 funds in the category.(7) For the
same category, the Fund's annualized dividend distribution yield(8) for the past
6 months was 4.91%, as compared to the Lipper Average of 4.41%.
THE STATE OF TEXAS
The Texas economy remains one of the strongest in America, significantly
outperforming the nation over the last five years. This growth trend is expected
to continue at a more moderate pace. Driven by solid performance in sales tax
collections, representing 55.3% of the state revenues, Texas finished fiscal
year 1997 with a $2.7 billion general fund balance. Texas may receive $14.5
billion, distributed over the next 25 years, from the tobacco industry
settlement.
Past performance is no guarantee of future results.
(4) Morningstar proprietary ratings reflect historical risk-adjusted performance
through September 30, 1998. The ratings are subject to change monthly. The
ratings are calculated from the Funds 3-, 5-, and 10-year average annual total
returns, as applicable, in excess of 90-day Treasury bill returns with
appropriate fee adjustments, and a risk factor that reflects fund performance
below 90-day Treasury bill returns. There is a 3-year minimum performance
requirement before a fund is rated. Overall rating is a weighted average of a
funds 3-, 5-, and 10-year ratings, as applicable. The top ten percent of the
funds in a rating category receive five stars and the next 22.5% receive four
stars.
(5) Lipper Analytical Services is an independent organization that monitors the
performance of mutual funds. Fund rankings awarded by Lipper are based on total
return.
(6) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
(7) Refer to page 5 for the Lipper Average definition.
(8) 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
gain distributions and annualizing the result.
During the past five years Texas has added 1.4 million new jobs, second only to
California. The state's unemployment rate fell to 5% last August, a .4% drop
from last year, but still above the national rate of 4.5%. Per capita personal
income of $24,058 in 1997 was 92% of the national figure, ranking 34th among all
states. Per capita income continues to improve, but its growth is restrained by
the substitution of high wage jobs in the aerospace and petroleum industries
with lower salary jobs in the service sector and counties along the Mexican
border.
Residential and commercial construction remains the driving force of the Texas
economy. Texas single-family housing permits have reached their highest level
since the mid-1980s - up 33.5% from last year! The improving Mexican economy has
helped the Texas border economy by increasing the trade demand for U.S. and
Texas goods. Recent flooding along the Rio Grande caused locally heavy damage,
but none of your Fund's holdings were affected.
Reflecting strong credit fundamentals, Texas maintains high bond ratings of Aa2
from Moody's Investors Service, AA by Standard & Poor's, and AA+ from Fitch
IBCA.
To match the USAA Texas Tax-Free Income Fund's closing
30-Day SEC yield of 4.55% and:
- -------------------------------------------------------------------------------
Assuming a Marginal Federal Tax Rate of: 15% 28% 31% 36% 39.6%
- -------------------------------------------------------------------------------
A fully Taxable Investment must pay: 5.35% 6.32% 6.59% 7.11% 7.53%
- -------------------------------------------------------------------------------
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.
PORTFOLIO RATINGS/MIX
A pie chart is shown here depicting the Portfolio Mix as of September 30, 1998
of the USAA Texas Tax-Free Income Fund to be:
BBB - 43%; AAA - 30%; AA - 14%; A - 12%; Cash Equivalent - 1%.
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality to
category AAA account for .6% of the Fund's investments.
Note: Income may be subject to the federal alternative minimum tax.
See page 15 for a complete listing of the Portfolio of Investments.
Investment Review
USAA 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 a money market fund is not insured or guaranteed by the
FDIC or any government agency. Although the Fund seeks to preserve the value
of your investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
- --------------------------------------------------------------------------------
3/31/98 9/30/98
- --------------------------------------------------------------------------------
Net Assets $5.9 Million $6.4 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY YIELD AS OF 9/30/98
- --------------------------------------------------------------------------------
3/31/98 Since Inception 7-Day
to 9/30/98 1 Year on 8/1/94 Yield
1.66%+ 3.35% 3.34% 3.58%
- --------------------------------------------------------------------------------
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income return and assumes reinvestment of all dividends and
any capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. Past
performance is no guarantee of future results. Yields and returns fluctuate. The
7-day yield quotation more closely reflects current earnings of the Fund than
the total return quotation.
7-DAY YIELD COMPARISON
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day Yield of the USAA Texas Tax-Free Money Market Fund and the IBC
Financial Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose)
(Tax-Free) Money Funds.
USAA Texas Tax-Free
Money Market Fund IBC Financial Data, Inc.
------------------- ------------------------
09/30/97 3.70% 3.25%
10/28/97 3.37% 3.03%
11/25/97 3.79% 3.20%
12/30/97 3.67% 3.27%
01/27/98 3.16% 2.82%
02/24/98 2.99% 2.66%
03/31/98 3.34% 2.93%
04/28/98 3.95% 3.37%
05/26/98 3.50% 3.10%
06/30/98 3.28% 2.93%
07/28/98 3.31% 2.88%
08/25/98 3.04% 2.60%
09/29/98 3.58%* 3.10%*
Data represent the last Monday of each month.
*Ending date 9/28/98
The graph tracks the Fund's 7-day yield against IBC Financial Data, Inc. State
Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free) Money Funds, an
average of money market fund yields.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: JOHN C. BONNELL, CFA APPEARS HERE]
THE MARKET
The six-month period ending September 30, 1998, was certainly eventful. The
focus at the beginning of the period was on the ideal economic environment -
strong growth with low inflation. Focus quickly shifted course to concerns over
negative economic events unfolding globally and the potential impact on the
domestic economy. These concerns induced a massive "flight to quality" into U.S.
Treasury securities, seen as a safe haven from market uncertainty. In response,
the Federal Reserve (Fed) lowered the federal funds rate (the rate banks charge
one another for overnight loans) .25% to 5.25% on September 29, 1998. The
perception in the market is for further decreases before year end.
This action reversed the Fed's prior stance from a bias toward raising rates to
a more accommodative easing mode. One-year Treasury bills that stood at 5.39%
March 31, 1998, ended September 30, 1998, at 4.40%.
This year's municipal "note season"(1) was anything but typical. For one, the
new supply of notes was substantially reduced since most issuers' cash positions
improved last year. In addition, some underwriters purchased large quantities of
notes at inflated prices only to convert the notes into variable rate
securities(2) with even shorter effective maturities. This caused prices on
fixed-rate notes to soar (yields fall) and prices on variable rate securities to
be relatively attractive (higher yields). One-year municipal note yields, as
measured by the Bond Buyer One-Year Note Index,(3) dropped from 3.64% to 3.24%
over the six months ending September 30, 1998. Yields on variable rate
securities, as measured by the BMA Swap Index (a weekly high-grade market index
composed of 7-day tax-exempt demand notes), fluctuated from 2.79% to 4.37% over
the same period but averaged 3.58%.
(1) Note season is typically June through August when many issuers sell one-year
notes in order to smooth the uneven timing of taxes and other revenues.
(2) Variable rate demand notes represent borrowings that are payable on demand
and that bear interest reflective of a money market rate.
(3) The Bond Buyer One-Year Note Index is representative of yields on 10 large
one-year tax-exempt notes.
STRATEGY
As always, we focus on buying the best relative value in the market at any time.
Given the relative abundance of variable rate securities compared to longer
maturity fixed-rate securities, variable rate securities currently offer a
better risk/reward value. For this reason, the average maturity of the Fund may
drift lower in the near term. In addition, the variable rate securities provide
the liquidity necessary to extend the Fund's average maturity as opportunities
arise. The fixed-rate securities already in the Fund will help stabilize the
seasonally fluctuating yields on variable rate securities. We continue to
utilize our internal credit research staff to analyze each security on a
case-by-case basis and remain very selective when investing fund assets.
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending September 30, 1998, your Fund ranked 5 out of 161 State Specific
Tax-Exempt Money Market Funds according to IBC Financial Data, Inc.(4) with a
compounded dividend yield of 3.35%. The average for the category over the same
period was 2.94%.
TEXAS
The Texas economy is one of the most solid in the nation and continues to grow.
Reflecting strong economic underpinnings, the state unemployment rate
(seasonally adjusted) dropped to 5.0% in August 1998 from 5.4% in August 1997.
Driven by solid performance in sales tax collections, that comprise 55.3% of the
state's revenues, Texas finished fiscal year 1997 with a $2.7 billion positive
cash balance in the General Revenue Fund (the state's main operating fund). This
represents the tenth consecutive year the state ended with a positive balance in
the General Revenue Fund. The consistent financial results are also indicative
of the state's long-term trend of diversification away from reliance on the oil
and gas industry, into the services, manufacturing, and computer/electronics
industries. Positive financial results are expected to continue even though the
state will face increased spending for education, projected at 9.5% in the
1998-99 two-year budget. Of note is the settlement of a state lawsuit against
the tobacco companies, which is expected to bring in $14.5 billion of revenue to
the state over the next 25 years.
Reflecting strong credit fundamentals, Texas maintains high bond ratings of Aa2,
AA, and AA+ from Moody's Investors Service, Standard & Poor's, and Fitch IBCA,
respectively.
(4) IBC Financial Data, Inc. provides independent analysis of trends in the
financial services and investing industries, with particular concentration on
money market funds.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here illustrating the cumulative
performance of a $10,000 investment of the USAA Texas Tax-Free Money Market
Fund. The data is from 8/1/94 through 9/30/98. The data points from the graph
are as follows:
USAA Texas Tax-Free Money Market Fund
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 $10,044
03/31/95 $10,209
09/30/95 $10,392
03/31/96 $10,566
09/30/96 $10,736
03/31/97 $10,906
09/30/97 $11,096
03/31/98 $11,280
09/30/98 $11,468
Data since inception on 8/1/94 through 9/30/98
Past performance is no guarantee of future results and the value of your
investment will vary according to the Fund's performance. Income may be subject
to federal, state or local taxes, or to the alternative minimum tax. For 7-day
yield information, please refer to the Fund's Investment Review page.
An investment in a money market fund is not insured or guaranteed by the FDIC or
any government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
See page 18 for a complete listing of the Portfolio of Investments.
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS
September 30, 1998
(unaudited)
Fixed-Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The interest rate is constant to maturity. Prior to maturity, the price
of a fixed-rate instrument generally varies inversely to the movement of
interest rates.
Put Bonds - provide the right to sell the bond at face value at specific tender
dates prior to final maturity. The put feature shortens the effective maturity
to the next tender date.
Variable Rate Demand Notes (VRDN) - provide the right, on any business day, to
sell the security 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 the date on which the underlying principal amount may be
recovered or the next rate adjustment date consistent with 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 of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high quality bank, insurance company, or
other corporation, or a collateral trust. Typically, the rating agencies
evaluate the security based upon the credit standing of the provider of the
credit enhancement, rather than the credit standing of the issuer. If the
securities are enhanced by a bond insurer, scheduled principal and interest
payments are insured by:
(1) Municipal Bond Insurance Association.
(2) AMBAC Indemnity Corp.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance, Inc.
(5) American Capital Access.
(6) Texas Permanent School Fund.
The insurance does not guarantee the market value of the municipal bonds.
PORTFOLIO DESCRIPTION ABBREVIATIONS
CP Commercial Paper IDC Industrial Development Corporation
CRE Credit Enhanced IDRB Industrial Development Revenue
GO General Obligation Bond
IDA Industrial Development ISD Independent School District
Authority/Agency MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
<TABLE>
USAA TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- -------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (97.9%)
<C> <S> <C> <C> <C>
Texas (94.0%)
$ 200 Austin Community College District RB,
Series 1995 (CRE) (1), (a) 6.10% 2/01/15 $ 225
1,300 Austin Higher Education Auth. RB,
Series 1998 5.25 8/01/23 1,299
250 Bexar Metropolitan Water District RB,
Series 1995 (CRE) (1) 5.88 5/01/22 271
500 Brazos County Health Facilities RB,
Series 1993B 6.00 1/01/19 530
1,000 Cedar Hill ISD GO, Series 1996 (CRE)(6),(b) 6.30 8/15/15 411
Cleburne Tax, Waterworks,
and Sewer System GO,
1,595 Series 1998 (CRE) (4), (b) 5.67 2/15/17 601
1,330 Series 1998 (CRE) (4), (b) 5.67 2/15/18 474
150 Coastal Water Auth. Contract RB,
Series 1995 (CRE) (4) 5.95 12/15/25 165
Columbus Community IDC Sales Tax RB,
400 Series 1998 5.40 11/01/13 407
750 Series 1998 5.75 11/01/23 766
500 Denison Hospital Auth. RB, Series 1997 6.13 8/15/27 535
190 Department of Housing and Community
Affairs RB, Series 1991A 6.95 7/01/23 205
300 Guadalupe-Blanco River Auth. IDC RB,
Series 1982A 6.35 7/01/22 327
1,270 Gulf Coast Water Auth. Water System
Contract RB, Series 1998C (CRE) (3) 5.00 8/15/22 1,272
300 Harlingen Higher Education Facilities
Corp. RB, Series 1995 6.38 8/15/15 323
Harris County Health Facilities RB,
200 Series 1991A 6.75 2/15/21 218
150 Series 1992 (a) 7.13 6/01/15 169
400 Harris County IDC RB, Series 1992 6.95 2/01/22 434
600 Harrison County Health Facilities
Development Corp. RB, Series 1998 (CRE)(5) 5.50 1/01/18 615
100 Health Facilities Development Corp. RB,
Series 1993B (CRE) (1) 6.38 8/15/23 111
70 Housing Agency Single-Family Mortgage RB,
Series 1991A 7.15 9/01/12 75
Houston Water and Sewer System RB,
150 Series 1992B 6.38 12/01/14 165
350 Series 1997C (CRE) (3) 5.25 12/01/22 362
1,000 Lewisville RB, Series 1998 (CRE) (5) 5.80 9/01/25 1,087
500 Lower Neches Valley Auth. IDC RB,
Series 1997 5.80 5/01/22 544
400 Matagorda County Navigation District PCRB,
Series 1993 6.00 7/01/28 422
1,500 Mesquite Health Facilities Development
Corp. RB, Series 1996A 6.40 2/15/20 1,625
500 Midland County Hospital District RB,
Series 1997 (CRE)(2) 5.38 6/01/16 522
North Central Health Facilities
Development Corp. RB,
300 Series 1993 (a) 5.90 6/01/21 334
400 Series 1996 6.30 2/15/15 434
500 Series 1998 5.38 2/15/25 503
Northeast Hospital Auth. RB,
400 Series 1993B (a) 7.25 7/01/22 460
700 Series 1997 (CRE) (4) 5.63 5/15/22 749
1,200 Nueces River Auth. RB, Series 1998 5.60 1/01/27 1,238
800 Orange County Navigation and Port
District IDC RB, Series 1996 6.38 2/01/17 892
Pantego GO,
60 Series 1994 7.75 2/15/14 69
65 Series 1994 7.75 2/15/15 74
Port of Corpus Christi IDC PCRB,
1,400 Series 1997A 5.45 4/01/27 1,418
1,000 Series 1997B 5.40 4/01/18 1,013
150 Sabine River Auth. PCRB, Series 1992
(CRE) (3) 6.55 10/01/22 166
San Antonio Electric and Gas RB,
80 Series 1989 (a) 6.50 2/01/12 82
120 Series 1989 6.50 2/01/12 123
300 Series 1992 5.00 2/01/17 301
150 Tarrant County Health Facilities
Development Corp. RB, Series 1994 6.00 9/01/24 164
1,000 Travis County Health Facilities Development
Corp. RB, Series 1998A 5.13 11/01/24 1,005
Turnpike Auth. Dallas North Tollway RB,
150 Series 1994 (CRE) (3), (a) 6.75 1/01/15 176
350 Series 1995 (CRE) (3) 5.25 1/01/23 360
Tyler Health Facilities Development
Corp. Hospital RB,
270 Series 1993B (East Texas Medical Center) 6.63 11/01/11 291
135 Series 1993B (East Texas Medical Center) 6.75 11/01/25 146
680 Series 1997A (Mother Frances Hospital) 5.63 7/01/13 688
1,800 United ISD Unlimited Tax School Building
& Refunding Bonds, Series 1998 (CRE)(6),(b)5.30 8/15/22 563
200 Water Development Board GO, Series 1994 7.00 8/01/20 230
1,410 Waxahachie ISD GO, Series 1997 (CRE) (6),(b)5.50 8/15/15 635
265 Weimar ISD GO, Series 1997 (CRE) (6), (b) 5.60 8/15/16 113
Puerto Rico (3.9%)
600 Electric Power Auth. RB, Series 1995Z 5.25 7/01/21 611
475 Highway Auth. RB, Series Q(a) 6.00 7/01/20 494
- ------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $25,688) 27,492
- ------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (0.9%)
Texas
265 Nueces River Auth. PCRB,
Series 1985 (CRE) (cost: $265) 4.20 12/01/99 265
- ------------------------------------------------------------------------------------
Total investments (cost: $25,953) $ 27,757
====================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Hospitals 18.5%
General Obligations 11.3
Nursing/Continuing Care Centers 9.1
Oil & Gas - Refining/Manufacturing 8.6
Escrowed Bonds 8.3
Water/Sewer Utilities - Municipal 7.9
Education 5.8
Metals/Mining 4.4
Sales Tax 4.2
Real Estate Tax/Free 3.9
Electric/Gas Utilities - Municipal 3.7
Agricultural Products 3.2
Electric Utilities 2.1
Oil - International Integrated 1.9
Leasing 1.5
Toll Roads 1.3
Chemicals 1.2
Single-Family Housing 1.0
Aluminum .9
----
Total 98.8%
====
<TABLE>
USAA TEXAS TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES (81.9%)
Texas
$ 280 Amarillo Health Facilities Corp. RB,
Series 1985 (CRE) 3.70% 5/31/25 $ 280
485 Arlington IDC RB, Series 1985 (CRE) 4.40 10/01/20 485
200 Austin Higher Education Auth. RB,
Series 1995 (CRE) 4.05 8/01/19 200
270 Bell County Health Facilities Development
Corp. RB, Series 1998 (CRE) 4.05 5/01/23 270
115 Bexar County Housing Finance Corp. MFH RB,
Series 1988B (CRE) 3.55 6/01/05 115
200 Comal County Health Facilities Development
Corp. RB, Series 1997 (CRE) 4.05 2/01/27 200
100 Euless IDA RB, Series 1985 (CRE) 4.00 12/01/15 100
100 Guadalupe-Blanco River Auth. IDRB,
Series 1993 (CRE) 4.00 6/01/02 100
200 Gulf Coast IDA RB, Series 1989 (CRE) 4.05 11/01/19 200
200 Harris County Housing Finance Corp. MFH RB,
Series 1988A (CRE) 3.63 6/01/05 200
305 Matagorda County Hospital District RB,
Series 1988 (CRE) 4.30 8/01/18 305
100 Maverick County IDC RB, Series 1991 (CRE) 4.05 12/01/01 100
630 Metropolitan Higher Education Auth. RB,
Series 1984 (CRE) 4.40 12/01/04 630
670 North Central IDA RB, Series 1983 3.80 10/01/13 670
485 Nueces River Auth. PCRB, Series 1985 (CRE) 4.20 12/01/99 485
200 Port Development Corp. RB, Series 1984 (CRE) 4.25 12/01/04 200
Tarrant County Housing Finance Corp. MFH RB,
200 Series 1985 (CRE) 3.70 12/01/25 200
300 Series 1994 (CRE) 4.00 11/01/07 300
100 Trinity River IDA RB, Series 1984 (CRE) 4.13 11/01/14 100
100 Victoria Health Facilities Development
Corp. RB,
Series 1997 (CRE) 4.05 9/01/27 100
- ------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $5,240) 5,240
- ------------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (17.0%)
Texas
290 Arlington Combination Tax and Revenue
Certificate of Obligation, Series 1998 6.00 8/15/99 295
200 Bexar Metropolitan Water District RB,
Series 1995 (CRE) 1 4.35 5/01/99 201
250 Dallas Area Rapid Transit Sales Tax Revenue
CP Notes, Series 1998B (CRE) 3.65 11/18/98 250
155 Frenship ISD GO, Series 1998 (CRE) 6 4.75 2/15/99 155
45 McAllen ISD School Bonds, Series 1998
(CRE) 6 6.25 2/15/99 45
80 River Place Municipal Utility District RB,
Series 1998 (CRE) 3 6.00 9/01/99 82
60 Woodlands Road Utility District GO,
Series 1997 (CRE) 4 4.80 10/01/98 60
- ------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $1,088) 1,088
- ------------------------------------------------------------------------------------------
Total investments (cost: $6,328) $ 6,328
==========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Education 13.0%
Multi-Family Housing 12.7
Manufacturing - Diversified Industries 10.5
Healthcare - Miscellaneous 10.1
General Obligations 9.9
Hospitals 7.9
Aluminum 7.6
Publishing/Newspapers 7.6
Airport/Port 6.2
Water/Sewer Utilities - Municipal 4.7
Sales Tax 3.9
Building Material Group 1.6
Lodging/Hotel 1.6
Retail - Specialty 1.6
-----
Total 98.9%
=====
NOTES TO PORTFOLIO OF INVESTMENTS
September 30, 1998
(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.
SPECIFIC NOTES
(a) Prerefunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase. For the Texas Tax-Free Income Fund these securities represent 10.0% of
the Fund's net assets.
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<CAPTION>
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
---------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $25,953 and $6,328, respectively) $ 27,757 $ 6,328
Cash 9 10
Receivables:
Capital shares sold 4 27
Interest 358 36
--------------------------
Total assets 28,128 6,401
--------------------------
LIABILITIES
Capital shares redeemed - 2
USAA Investment Management Company 12 -
USAA Transfer Agency Company 2 -
Accounts payable and accrued expenses 7 -
Dividends on capital shares 22 1
--------------------------
Total liabilities 43 3
--------------------------
Net assets applicable to capital shares outstanding $ 28,085 $ 6,398
==========================
Represented by:
Paid-in capital $ 26,282 $ 6,398
Accumulated net realized loss on investments (1) -
Net unrealized appreciation of investments 1,804 -
--------------------------
Net assets applicable to capital shares outstanding $ 28,085 $ 6,398
==========================
Capital shares outstanding, unlimited number of shares
authorized, $.001 par value 2,482 6,398
Net asset value, redemption price, and offering price per share $ 11.32 $ 1.00
==========================
</TABLE>
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1998
(Unaudited)
<CAPTION>
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
--------------------------------
<S> <C> <C>
Net investment income:
Interest income $ 669 $ 114
-----------------------
Expenses:
Management fees 61 15
Transfer agent's fees 10 4
Custodian's fees 15 6
Postage 1 1
Shareholder reporting fees 1 -
Trustees' fees 4 4
Registration fees 12 -
Professional fees 4 5
Other 1 -
-----------------------
Total expenses before reimbursement 109 35
Expenses reimbursed (48) (20)
-----------------------
Total expenses after reimbursement 61 15
-----------------------
Net investment income 608 99
-----------------------
Net realized and unrealized gain (loss) on investments:
Net realized loss (1) -
Change in net unrealized appreciation/depreciation 568 -
-----------------------
Net realized and unrealized gain 567 -
-----------------------
Increase in net assets resulting from operations $1,175 $ 99
=======================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended September 30, 1998 and Year ended March 31, 1998
(Unaudited)
<CAPTION>
USAA USAA
Texas Tax-Free Texas Tax-Free
Income Fund Money Market Fund
---------------------------------------------
9/30/98 3/31/98 9/30/98 3/31/98
---------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 608 $ 808 $ 99 $ 186
Net realized gain (loss) on investments (1) 112 - -
Change in net unrealized appreciation/
depreciation of investments 568 959 - -
-------------------------------------------
Increase in net assets resulting from
operations 1,175 1,879 99 186
-------------------------------------------
Distributions to shareholders from:
Net investment income (608) (808) (99) (186)
-------------------------------------------
Net realized gains (37) (129) - -
From capital share transactions:
Proceeds from shares sold 7,577 9,743 4,660 10,140
Dividend reinvestments 516 781 93 166
Cost of shares redeemed (1,654) (1,556) (4,243) (9,698)
-------------------------------------------
Increase in net assets from
capital share transactions 6,439 8,968 510 608
-------------------------------------------
Net increase in net assets 6,969 9,910 510 608
Net assets:
Beginning of period 21,116 11,206 5,888 5,280
-------------------------------------------
End of period $ 28,085 $ 21,116 $ 6,398 $ 5,888
===========================================
Change in shares outstanding:
Shares sold 682 894 4,660 10,140
Shares issued for dividends reinvested 47 72 93 166
Shares redeemed (149) (144) (4,243) (9,698)
-------------------------------------------
Increase in shares outstanding 580 822 510 608
===========================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(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
USAA Texas Tax-Free Income Fund and USAA 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 USAA Texas Tax-Free Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation - Investments in the USAA 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 under the Investment Company Act of 1940, as amended, all
securities in the USAA 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 - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in 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, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($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 its agreement with CAPCO, each Fund may borrow
from CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with
no markup. Subject to availability under its agreement with NationsBank, each
Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 15% of its total assets at
NationsBank's borrowing rate plus a markup. The Funds had no borrowings under
either of these agreements during the six-month period ended September 30, 1998.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the
six-month period ended September 30, 1998 were as follows:
USAA Texas Tax-Free USAA Texas Tax-Free
Income Fund Money Market Fund
($000) ($000)
------------------- -------------------
Purchases $13,266 $ 7,694
Sales/maturities $ 6,730 $ 7,210
For the USAA Texas Tax-Free Income Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at September 30,
1998 was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
------------ ------------ ------
USAA Texas Tax-Free
Income Fund $1,804 $ - $1,804
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company (the Manager) carries
out each Fund's investment policies and manages each Fund's portfolio.
Management fees are computed as a percentage of aggregate average net assets
(ANA) of both Funds combined, which on an annual basis is equal to .50% of the
first $50 million, .40% of that portion over $50 million but not over $100
million, and .30% of that portion over $100 million. These fees are allocated on
a proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund to
.50% of its average net assets through August 1, 1999.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Funds based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Funds.
<TABLE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA TEXAS TAX-FREE INCOME FUND
September 30, 1998
(Unaudited)
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
---------------------------------------------
1998 1998 1997 1996 1995**
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.10 $ 10.38 $ 10.45 $ 10.21 $ 10.00
Net investment income .28 .57 .59 .58 .34
Net realized and
unrealized gain .24 .82 .13 .36 .21
Distributions from net
investment income (.28) (.57) (.59) (.58) (.34)
Distributions of realized
capital gains (.02) (.10) (.20) (.12) -
----------------------------------------------------------
Net asset value at
end of period $ 11.32 $ 11.10 $ 10.38 $ 10.45 $ 10.21
==========================================================
Total return (%) * 4.74 13.71 7.06 9.42 5.75
Net assets at end
of period (000) $ 28,085 $ 21,116 $ 11,206 $ 8,053 $ 6,446
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50(a)
Ratio of expenses to
average net assets
excluding
reimbursements (%) .90(a) .98 1.35 1.66 2.40(a)
Ratio of net investment
income to average
net assets (%) 5.01(a) 5.27 5.63 5.51 5.56(a)
Portfolio turnover (%) 28.07 56.29 86.17 71.14 49.63
</TABLE>
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
** Fund commenced operations August 1, 1994.
<TABLE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA TEXAS TAX-FREE MONEY MARKET FUND
September 30, 1998
(Unaudited)
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-Month
Period Ended Year Ended March 31,
September 30, -----------------------------------------------
1998 1998 1997 1996 1995**
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .02 .03 .03 .03 .02
Distributions from net
investment income (.02) (.03) (.03) (.03) (.02)
-------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=============================================================
Total return (%) * 1.66 3.43 3.22 3.49 2.09
Net assets at end
of period (000) $ 6,398 $ 5,888 $ 5,280 $ 4,695 $ 3,881
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50(a)
Ratio of expenses to
average net assets
excluding
reimbursements (%) 1.17(a) 1.37 1.77 2.02 2.63(a)
Ratio of net investment
income to average
net assets (%) 3.31(a) 3.38 3.17 3.42 3.18(a)
</TABLE>
(a) 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.
DIRECTORS
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
