Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA Florida Tax-Free Income Fund 4
USAA Florida Tax-Free Money Market Fund 10
Financial Information:
Portfolios of Investments:
USAA Florida Tax-Free Income Fund 15
USAA Florida Tax-Free Money Market Fund 19
Notes to Portfolios of Investments 22
Statements of Assets and Liabilities 23
Statements of Operations 24
Statements of Changes in Net Assets 25
Notes to Financial Statements 26
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 Florida 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.
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.
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD: MICHAEL J.C. ROTH, CFA
APPEARS HERE]
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 FLORIDA TAX-FREE INCOME FUND
OBJECTIVE: Provide Florida investors with a high level of current interest
income that is exempt from federal income taxes and shares that are exempt from
the Florida intangible personal property tax.
TYPES OF INVESTMENTS: Invests primarily in long-term investment grade Florida
tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/98 9/30/98
- --------------------------------------------------------------------------------
Net Assets $145.9 Million $166.6 Million
Net Asset Value Per Share $9.94 $10.20
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
5.21%(+) 4.49%
- --------------------------------------------------------------------------------
(*) 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 to Dividends-Periods Ending September 30, 1998
- -------------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
- --------------------------------------------------------------------------------
Since 10/1/93 5.87% = 5.47% + .40%
- --------------------------------------------------------------------------------
5 Years 5.87% = 5.47% + .40%
- --------------------------------------------------------------------------------
1 Year 9.89% = 5.38% + 4.51%
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR THE 5-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 Florida Tax-Free Income Fund
for the 5-year period ended September 30, 1998.
Total Return for Years Ended:
- ----------------------------
9/30/94 -6.68%
9/30/95 9.67%
9/30/96 7.30%
9/30/97 10.18%
9/30/98 9.89%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
9/30/94 4.42%
9/30/95 6.07%
9/30/96 5.78%
9/30/97 5.79%
9/30/98 5.38%
Change in Share Price:
- ---------------------
9/30/94 -11.10%
9/30/95 3.60%
9/30/96 1.52%
9/30/97 4.39%
9/30/98 4.51%
** 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 Florida Tax-Free Income Fund to the 12
Month Dividend Yield of the Lipper Florida Municipal Debt Funds Average from
9/30/95 to 9/30/98.
USAA Florida Tax-Free Lipper Florida Municipal
Income Fund Yield Debt Funds Average Yield
----------------- ------------------------
9/30/95 5.54% 5.19%
9/30/96 5.54% 5.03%
9/30/97 5.28% 4.81%
9/30/98 4.92% 4.45%
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 Florida Tax-Free Income Fund,
Lehman Brothers Municipal Bond Index and the Lipper Florida Municipal Debt Funds
Average. The data points from the graph are as follows:
USAA Florida Tax-Free Income Fund
Year Amount
- -------- -------
10/01/93 $10,000
03/31/94 $ 9,179
09/30/94 $ 9,332
03/31/95 $ 9,822
09/30/95 $10,235
03/31/96 $10,574
09/30/96 $10,982
03/31/97 $11,262
09/30/97 $12,100
03/31/98 $12,639
09/30/98 $13,297
Lehman Brothers Municipal Bond Index
Year Amount
- -------- -------
10/01/93 $10,000
03/31/94 $ 9,584
09/30/94 $ 9,756
03/31/95 $10,296
09/30/95 $10,847
03/31/96 $11,159
09/30/96 $11,502
03/31/97 $11,767
09/30/97 $12,539
03/31/98 $13,028
09/30/98 $13,632
Lipper Florida Municipal Debt Funds Average
Year Amount
- -------- -------
10/01/93 $10,000
03/31/94 $ 9,437
09/30/94 $ 9,547
03/31/95 $10,085
09/30/95 $10,543
03/31/96 $10,842
09/30/96 $11,166
03/31/97 $11,352
09/30/97 $12,054
03/31/98 $12,517
09/30/98 $13,056
Data since inception on 10/1/93 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 Florida Municipal Debt Funds Average is the average
performance level of all Florida 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
[PHOTOGRAPH OF PORTFOLIO MANAGER: ROBERT R. PARISEAU, CFA, APPEARS HERE]
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.
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 at 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 4-STAR FUND
I'm very pleased to say that your Fund's performance earned a 5-star rating from
Morningstar for the 3-year period ended September 30, 1998, 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 $.26, or 2.62%, since March 31, 1998.
While past performance is no guarantee of future results, the Fund's annualized
dividend distribution yield(5) for the past 6 months was 4.89%, as compared to
the Lipper Florida Municipal Debt Funds Average of 4.39% for the 64 funds in the
category.(6) For the same period and category, the Fund's total return(7) was
5.21% as compared to the Lipper Average of 4.30%.
THE STATE OF FLORIDA
Florida's strong economic growth continues. The unemployment rate improved to
4.3% in August 1998 from 4.7% posted a year earlier. This compares favorably to
the national rate of 4.5% in August 1998. Led by strong growth in the
sales-and-use tax, state general revenues increased by more than $1.1 billion,
or 7.2%, for fiscal year 1997-98. This revenue growth contributed to excellent
financial results for the state, although the economically sensitive sales tax
contributes about 70% of General Fund revenues. Estimated budget reserves are
over $1 billion, or a solid 6% of total general revenues. Expectations for
continued economic growth support a positive, although tempered, financial
outlook for fiscal 1998-99.
Past performance is no guarantee of future results.
(4) The Fund was also awarded 4- and 3-star ratings for the overall and 5-year
period ended September 30, 1998, among overall and 943 funds in the
municipal bond fund category. 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
Fund's 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 fund's 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) 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.
(6) Refer to page 5 for the Lipper Average definition.
(7) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
As I have mentioned before, Florida's rate of population growth has been more
than twice that of the U.S. over the last decade. The expanding population
generates its own economic growth but also creates budgetary pressures for
social programs and infrastructure needs. To this end, Florida's state debt
level has increased, and future borrowing is anticipated. Hopefully, relieving
some of this pressure is the tobacco industry settlement that may bring in $13
billion of revenue to the state over the next 25 years. Finally, the impact of
well publicized wild fires, while locally significant, is not expected to have a
materially adverse impact upon the state.
Reflecting strong credit fundamentals, Florida maintains high bond ratings of
Aa2, AA+, and AA from Moody's Investors Service, Standard & Poor's, and Fitch
IBCA, respectively.
To match the USAA Florida Tax-Free Income Fund's
closing 30-Day SEC yield of 4.49% and:
- --------------------------------------------------------------------------------
Assuming a Marginal Federal Tax Rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
Assuming an investor, filing jointly,
with $300,000 in intangible assets,
a fully taxable investment must pay: 5.29% 6.24% 6.51% 7.02% 7.44%
- --------------------------------------------------------------------------------
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 Florida Tax-Free Income Fund to be:
AAA - 31%; AA - 26%; A - 22%; BBB - 20%; 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
categories AAA and BBB account for 1.5% and 3.2%, respectively, 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 FLORIDA TAX-FREE MONEY MARKET FUND
OBJECTIVE: Provide Florida investors with a high level of current interest
income that is exempt from federal income taxes and shares that are exempt from
the Florida intangible personal property tax, while preserving capital and
maintaining liquidity.
TYPES OF INVESTMENTS: High quality Florida 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 $89.8 Million $88.4 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 5 Years on 10/1/93 Yield
1.64%(+) 3.28% 3.10% 3.10% 3.55%
- --------------------------------------------------------------------------------
(+) 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 Florida Tax-Free Money Market Fund and the IBC
Financial Data, Inc. SB (Stock Broker) and GP (General Purpose) (Tax-Free) Money
Funds.
USAA Florida Tax-Free
Money Market Fund IBC Financial Data, Inc.
--------------------- ------------------------
09/30/97 3.60% 3.25%
10/28/97 3.29% 3.03%
11/25/97 3.58% 3.20%
12/30/97 3.44% 3.27%
01/27/98 3.04% 2.82%
02/24/98 2.99% 2.66%
03/31/98 3.29% 2.93%
04/28/98 3.81% 3.37%
05/26/98 3.44% 3.10%
06/30/98 3.32% 2.93%
07/28/98 3.18% 2.88%
08/25/98 3.00% 2.60%
09/29/98 3.54%* 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 9 out of 161 State Specific
Tax-Exempt Money Market Funds according to IBC Financial Data, Inc.(4) with a
compounded dividend yield of 3.28%. The average for the category over the same
period was 2.94%.
FLORIDA
Florida's service-based economy continues to perform well. The seasonally
adjusted unemployment rate improved to 4.3% in August 1998 from 4.7% in August
1997. This compares favorably to the U.S. rate of 4.5% in August 1998 and 4.9%
in August 1997. The state's strong population growth is one fundamental reason
why the state's economy has outperformed the nation as a whole. Over the last
decade, Florida's rate of population growth has been more than twice that of the
U.S. However, an expanding population base also creates budgetary pressure for
social programs and infrastructure needs. To this end, the level of Florida's
debt has increased, and future borrowing is anticipated.
Led by the strong growth in the cyclically vulnerable sales-and-use tax which
comprises approximately 70% of state general revenues, estimated state net
general revenues increased by more than $1.1 billion, or 7.2%, in fiscal year
1997-98. This revenue growth contributed to another excellent year of financial
results for the state. Estimated reserves in the Budget Stabilization Fund and
Working Capital Fund total over $1 billion, a solid 6% of total general
revenues. Expectations for continued economic growth support a positive,
although tempered, financial outlook for fiscal 1998-99. Of note is the
settlement of a state lawsuit against the tobacco companies, which is expected
to bring in $13 billion of revenue to the state over the next 25 years. In
addition, the impact of well publicized fires, while locally significant, is not
expected to have a materially adverse impact upon the state.
Reflecting strong credit fundamentals, Florida 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, comparing the cumulative
performance of a $10,000 investment for the USAA Florida Tax-Free Money Market
Fund. The data is from 10/1/93 through 9/30/98. The data points from the graph
are as follows:
USAA Florida Tax-Free Money Market Fund
Year Amount
- -------- -------
10/01/93 $10,000
03/31/94 $10,096
09/30/94 $10,218
03/31/95 $10,384
09/30/95 $10,570
03/31/96 $10,749
09/30/96 $10,923
03/31/97 $11,094
09/30/97 $11,281
03/31/98 $11,464
09/30/98 $11,652
Data since inception on 10/1/93 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 19 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) Asset Guaranty Insurance Co.
(6) American Capital Access.
(7) Continental General Corp.
The insurance does not guarantee the market value of the municipal bonds.
PORTFOLIO DESCRIPTION ABBREVIATIONS
CP Commercial Paper GO General Obligation
CRE Credit Enhanced MFH Multi-Family Housing
IDA Industrial Development PCRB Pollution Control Revenue
Authority/Agency Bond
IDRB Industrial Development RB Revenue Bond
Revenue Bond TRAN Tax Revenue Anticipation Note
<TABLE>
USAA FLORIDA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED RATE INSTRUMENTS (94.0%)
Florida (86.2%)
$3,400 Alachua County Health Facilities
Auth. RB, Series 1996A (CRE) (1) 5.80% 12/01/26 $ 3,706
Board of Education Capital Outlay Bonds,
3,500 Series 1995B (CRE) 5.88 6/01/20 3,795
4,000 Series 1997B (CRE) 4.50 6/01/27 3,799
2,000 Series 1998C (CRE) (4), (e) 4.50 6/01/22 1,913
Broward County Housing Finance Auth. MFH RB,
1,100 Series 1995A 7.00 2/01/25 1,223
1,000 Series 1997A-1 6.00 5/01/32 1,068
2,000 Cape Canaveral Hospital District RB,
Series 1998 5.25 1/01/28 2,003
Cape Coral Health Facilities Auth. RB,
1,000 Series 1997 (CRE) (5) 5.50 10/01/17 1,061
1,400 Series 1997 (CRE) (5) 5.63 10/01/27 1,493
1,855 Citrus County PCRB, Series 1992B 6.35 2/01/22 2,032
1,750 Clearwater Housing Auth. RB (CRE) (6) 5.35 5/01/24 1,795
2,000 Collier County Health Facilities Auth. RB,
Series 1994 (f) 7.00 12/01/19 2,239
2,000 Dade County Special Obligation Bonds,
Series 1995 6.10 4/01/20 2,190
7,160 Department of Transportation Right of Way GO,
Series 1997B (CRE) 5.00 7/01/27 7,190
Department of Transportation Turnpike Auth. RB,
1,700 Series 1997A (CRE) (3) 4.75 7/01/20 1,683
4,000 Series 1998B (CRE) (3) 5.00 7/01/27 4,028
Duval County Housing Finance Auth. MFH RB,
1,700 Series 1996 5.90 9/01/16 1,800
2,510 Series 1996 6.00 3/01/21 2,639
1,000 Escambia County Housing Finance Agency MFH
RB, Series 1985 5.63 8/01/16 1,046
700 Gulf County School District Sales Tax RB (CRE) (5) 5.75 6/01/17 756
2,000 Hillsborough County IDA PCRB 6.25 12/01/34 2,237
Housing Finance Agency RB,
1,575 Series 1994B 6.35 7/01/14 1,691
1,000 Series 1995H (CRE) 6.50 11/01/25 1,073
1,200 Indian River County Hospital District RB,
Series 1996 (CRE) (4) 5.70 10/01/15 1,318
2,000 Jacksonville Electric Auth. RB, Series 1997A 5.63 10/01/37 2,095
8,820 Jacksonville Health Facilities Auth. RB,
Series 1997B 5.25 8/15/27 9,014
1,000 Martin County Health Facilities Auth.
Hospital RB, Series 1997A (CRE) (1) 5.25 11/15/17 1,053
1,000 Miami Beach Health Facilities Auth. Hospital RB,
Series 1992 (CRE) (7) 6.25 11/15/19 1,098
36,000 Miami Dade County Special Obligation RB,
Series 1997B (CRE) (1), (c) 5.65 10/01/31 6,256
1,000 Miramar Wastewater Improvement Assessment
Bonds, Series 1994 (CRE) (3) 6.75 10/01/25 1,164
5,000 North Miami Educational Facilities RB,
Series 1994A (f) 6.13 4/01/20 5,308
2,130 North Miami Health Facilities Auth. RB,
Series 1996 (CRE) 6.00 8/15/24 2,297
5,750 Orange County Health Facilities Auth. RB,
Series 1995 (f) 6.75 7/01/20 6,873
1,000 Orange County Housing Finance Auth. RB,
Series 1994B 6.40 2/01/30 1,075
3,575 Orlando and Orange County Expressway Auth. RB,
Series 1993 5.95 7/01/23 3,734
4,000 Orlando Utilities Commission RB, Series 1993B 5.25 10/01/23 4,075
3,405 Palm Beach County Health Facilities Auth.
Hospital RB, Series 1993 (a) 6.30 10/01/22 3,903
2,500 Palm Beach County Health Facilities Auth. RB,
Series 1997 5.50 10/01/15 2,534
4,900 Palm Beach County Health Facilities Retirement
Community RB, Series 1996 5.63 11/15/20 5,191
625 Palm Beach County Housing Finance Auth. RB,
Series 1994B 6.40 4/01/14 670
1,800 Plantation Health Facilities Auth. RB,
Series 1998 5.13 12/01/22 1,788
3,000 Sarasota County Public Hospital Board RB,
Series 1998B (CRE) (1) 5.25 7/01/24 3,177
6,805 St. Johns County IDA Hospital RB, Series 1992 6.00 8/01/22 7,178
2,000 St. Johns County IDA RB, Series 1997A
(CRE) (1), (d) 5.50 3/01/17 2,091
3,215 Sunrise Special Tax District #1 GO,
Series 1991 (CRE) 6.38 11/01/21 3,487
1,150 Tallahassee Consolidated Utility Systems RB,
Series 1994 6.20 10/01/19 1,282
8,400 Tampa Bay Water Utility Systems RB,
Series 1998B (CRE) (3) 4.75 10/01/27 8,263
1,300 Turtle Run Community Development District RB (a) 6.40 5/01/11 1,437
1,500 Volusia County Education Facility Auth. RB,
Series 1996A 6.13 10/15/26 1,627
3,000 Volusia County Health Facilities Auth. Hospital RB,
Series 1996 (CRE) (2) 5.50 11/15/26 3,141
Guam (0.7%)
1,000 Government Limited Obligation
Infrastructure Improvement RB, Series 1989A (a) 7.10 11/15/09 1,060
Puerto Rico (7.1%)
Commonwealth GO,
1,000 Series 1996 5.40 7/01/25 1,044
2,000 Series 1998 5.00 7/01/27 2,001
5,150 Electric Power Auth. RB, Series 1995Z 5.25 7/01/21 5,241
1,000 Highway and Transportation Auth. RB,
Series 1998A 5.00 7/01/38 994
2,500 Highway Auth. RB, Series Q (a) 6.00 7/01/20 2,603
- ----------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $145,524) 156,532
- ----------------------------------------------------------------------------------------------
PUT BOND (4.6%)
Florida
7,055 Duval County Housing Finance Auth. MFH RB,
Series 1995 (CRE) (cost: $7,161) 6.75 4/01/25 7,720
- ----------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (1.1%)
Florida
1,760 Dade County Health Facilities Auth. RB,
Series 1990 (CRE) (cost: $1,760) 4.20 9/01/20 1,760
- ----------------------------------------------------------------------------------------------
Total investments (cost: $154,445) $166,012
==============================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
Hospitals 20.1%
Special Assessment/Tax/Fee 15.7
Multi-Family Housing 11.7
Nursing/Continuing Care Centers 10.0
Water/Sewer Utilities - Municipal 7.7
Toll Roads 5.7
Electric/Gas Utilities - Municipal 5.6
Escrowed Bonds 5.4
Education 4.2
Healthcare - Miscellaneous 4.1
General Obligations 3.9
Electric Utilities 2.6
Single-Family Housing 1.4
Miscellaneous 1.2
Sales Tax .4
-----
Total 99.7%
=====
<TABLE>
USAA FLORIDA 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 (67.8%)
Florida
$5,130 Atlantic Beach Improvement and Refunding RB,
Series 1994B (CRE) 4.20% 10/01/24 $5,130
3,000 Brevard County Housing Finance Auth. MFH RB,
Series 1993 (CRE) 4.10 7/01/05 3,000
1,385 Brevard County Mental Health Facilities RB,
Series 1994C (CRE) 4.10 1/01/10 1,385
3,000 Broward County Education Research and
Training Auth. IDRB, Series 1997 (CRE) 4.05 8/01/04 3,000
2,170 Broward County Housing Finance Auth. MFH RB,
Series 1990 (CRE) 3.70 10/01/07 2,170
600 Broward County IDA RB, Series 1992 3.75 3/01/99 600
850 Dade County IDA RB, Series 1996 (CRE) 4.05 10/01/16 850
3,830 Fort Pierce Health Facility RB, Series 1997 (CRE) 4.05 10/01/17 3,830
Housing Finance Agency MFH RB,
4,300 Series 1985GGG (CRE) 4.85 12/01/08 4,300
710 Series 1990B (CRE) 3.70 12/01/09 710
450 Series 1990D (CRE) 3.70 12/01/09 450
4,400 Jacksonville Hospital RB, Series 1988 (CRE) 5.00 2/01/18 4,400
1,900 Miami Health Facilities Auth. RB,
Series 1996 (CRE) 4.05 12/01/16 1,900
1,000 Orange County IDA RB, Series 1996A (CRE) 4.05 2/01/16 1,000
Palm Beach County Housing Finance Auth. MFH RB,
1,900 Series 1988C (CRE) 3.60 11/01/07 1,900
3,845 Series 1988D (CRE) 3.60 11/01/07 3,845
2,270 Plant City Hospital RB, Series 1993 (CRE) 4.05 3/01/13 2,270
1,930 Sarasota Educational Facilities RB,
Series 1996 (CRE) 4.05 2/01/21 1,930
2,740 St. Johns County IDA RB, Series 1997 (CRE) 4.05 5/01/09 2,740
3,475 St. Petersburg Health Facilities Auth. RB,
Series 1997 (CRE) 3.65 7/01/27 3,475
3,900 Volusia County Health Facilities Auth. RB,
Series 1994A (CRE) 3.95 11/15/23 3,900
3,000 Volusia County Housing Finance Auth. RB,
Series 1985C (CRE) (b) 4.38 9/01/05 3,000
4,150 Wauchula IDA RB, Series 1993 (CRE) 4.00 12/01/13 4,150
- --------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $59,935) 59,935
- --------------------------------------------------------------------------------------------------
PUT BONDS (5.6%)
Florida
4,000 Indian River Hospital District Hospital RB,
Series 1990 (CRE) 3.30 10/01/24 4,000
1,000 St. Lucie County PCRB, Series 1994A 3.45 7/01/29 1,000
- --------------------------------------------------------------------------------------------------
Total put bonds (cost: $5,000) 5,000
- --------------------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (20.4%)
Florida
2,000 Broward County Sales Tax Revenue CP Notes,
Series A 3.55 11/13/98 2,000
1,500 Jacksonville Electric Auth. CP Notes,
Series 1996A 3.55 10/27/98 1,500
3,500 Jacksonville GO CP Notes, Series 1998 3.40 12/07/98 3,500
3,365 Local Government Finance Commission
Pooled CP Notes, Series A (CRE) 3.70 10/07/98 3,365
3,000 Miami Dade County Florida School District TRAN,
Series 1998 4.00 6/30/99 3,008
700 Osceola County Capital Improvements RB,
Series 1998 (CRE) (1) 3.60 9/01/99 701
Tampa Guaranteed Entitlement RB,
2,980 Series 1988A (a) 8.38 10/01/08 2,980
960 Series 1988B (a) 8.40 10/01/08 960
- --------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $18,014) 18,014
- --------------------------------------------------------------------------------------------------
Total investments (cost: $82,949) $82,949
==================================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
Multi-Family Housing 21.9%
Hospitals 16.5
Nursing/Continuing Care Centers 11.9
Buildings 8.1
Healthcare - Miscellaneous 5.9
U.S. Government 4.4
General Obligations 4.0
Finance - Municipal 3.8
Real Estate Tax/Free 3.4
Education 3.3
Aluminum 3.1
Sales Tax 2.2
Electric/Gas Utilities - Municipal 1.7
Electric Utilities 1.1
Community Service 1.0
Appropriated Debt .8
Manufacturing - Diversified Industries .7
-----
Total 93.8%
=====
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) This security was purchased within the terms of a private placement
memorandum and is subject to a seven day demand feature. Under procedures
adopted by the Board of Trustees, the adviser has determined that this security
is liquid. At September 30, 1998, this security represents 3.4% of the USAA
Florida Tax-Free Money Market Fund's net assets.
(c) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(d) This security is exempt from registration under the Securities Act of 1933
and has been determined to be liquid by management. Any resale of this security
may occur in an exempt transaction in the United States to a qualified
institutional buyer as defined by Rule 144A. At September 30, 1998, this
security represented 1.3% of the USAA Florida Tax-Free Income Fund's net assets.
(e) At September 30, 1998, the cost of securities purchased on a delayed
delivery basis for the USAA Florida Tax-Free Income Fund was $1.9 million.
(f) At September 30, 1998, these securities were segregated to cover delayed
delivery purchases.
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1998
(Unaudited)
<CAPTION>
USAA USAA
Florida Florida Tax-Free
Tax-Free Money Market
Income Fund Fund
---------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $154,445 and $82,949, respectively) $166,012 $ 82,949
Cash 75 119
Receivables:
Capital shares sold 25 85
Interest 2,648 512
Securities sold - 4,949
-------- --------
Total assets 168,760 88,614
-------- --------
LIABILITIES
Securities purchased 1,871 -
Capital shares redeemed - 94
USAA Investment Management Company 49 45
USAA Transfer Agency Company 6 5
Accounts payable and accrued expenses 27 13
Dividends on capital shares 217 14
-------- --------
Total liabilities 2,170 171
-------- --------
Net assets applicable to capital shares outstanding $166,590 $ 88,443
======== ========
REPRESENTED BY:
Paid-in capital $156,201 $ 88,443
Accumulated net realized loss on investments (1,178) -
Net unrealized appreciation of investments 11,567 -
-------- --------
Net assets applicable to capital shares outstanding $166,590 $ 88,443
======== ========
Capital shares outstanding, unlimited number of shares
authorized, $.001 par value 16,328 88,443
======== ========
Net asset value, redemption price, and offering price per share $ 10.20 $ 1.00
======== ========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1998
(Unaudited)
<CAPTION>
USAA USAA
Florida Florida Tax-Free
Tax-Free Money Market
Income Fund Fund
---------------------------------
<S> <C> <C>
Net investment income:
Interest income $ 4,221 $ 1,660
------- -------
Expenses:
Management fees 279 160
Transfer agent's fees 37 29
Custodian's fees 31 19
Postage 3 3
Shareholder reporting fees 2 2
Trustees' fees 4 4
Registration fees 10 -
Professional fees 5 8
Other 3 4
------- -------
Total expenses before reimbursement 374 229
Expenses reimbursed - (7)
------- -------
Total expenses after reimbursement 374 222
------- -------
Net investment income 3,847 1,438
------- -------
Net realized and unrealized gain on investments:
Net realized gain 228 -
Change in net unrealized appreciation/depreciation 3,904 -
------- -------
Net realized and unrealized gain 4,132 -
------- -------
Increase in net assets resulting from operations $ 7,979 $ 1,438
======= =======
</TABLE>
See accompanying notes to financial statements.
<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
Florida Tax-Free Florida 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 $ 3,847 $ 6,108 $ 1,438 $ 2,851
Net realized gain on investments 228 451 - -
Change in net unrealized appreciation/
depreciation of investments 3,904 6,424 - -
-------------------------------------------------
Increase in net assets resulting from
operations 7,979 12,983 1,438 2,851
-------------------------------------------------
Distributions to shareholders from:
Net investment income (3,847) (6,108) (1,438) (2,851)
-------------------------------------------------
From capital share transactions:
Proceeds from shares sold 26,137 60,753 33,189 159,243
Dividend reinvestments 2,585 4,066 1,346 2,630
Cost of shares redeemed (12,185) (21,256) (35,891) (159,127)
-------------------------------------------------
Increase (decrease) in net assets from
capital share transactions 16,537 43,563 (1,356) 2,746
-------------------------------------------------
Net increase (decrease) in net assets 20,669 50,438 (1,356) 2,746
Net assets:
Beginning of period 145,921 95,483 89,799 87,053
-------------------------------------------------
End of period $166,590 $ 145,921 $ 88,443 $ 89,799
=================================================
Change in shares outstanding:
Shares sold 2,619 6,196 33,189 159,243
Shares issued for dividends reinvested 258 416 1,346 2,630
Shares redeemed (1,224) (2,172) (35,891) (159,127)
-------------------------------------------------
Increase (decrease) in
shares outstanding 1,653 4,440 (1,356) 2,746
=================================================
</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 Florida Tax-Free Income Fund and USAA Florida Tax-Free Money Market Fund
(the Funds). The Funds have a common objective of providing Florida investors
with a high level of current interest income that is exempt from federal income
taxes and shares that are exempt from the Florida intangible personal property
tax. The USAA Florida Tax-Free Money Market Fund has a further objective of
preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA Florida 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 Florida 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 Florida 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. During the six-month period ended
September 30, 1998, the USAA Florida Tax-Free Income Fund had one borrowing of
$1.6 million, and incurred $247 in interest expense. The USAA Florida Tax-Free
Money Market Fund had no borrowings under either of these agreements during the
period.
(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. At September 30, 1998,
the USAA Florida Tax-Free Income Fund had capital loss carryovers for federal
income tax purposes of approximately $1.2 million which, if not offset by
subsequent capital gains will expire between 2003-2004. It is unlikely that the
Trust's Board of Trustees will authorize a distribution of capital gains
realized in the future until the capital loss carryovers have been utilized or
expire.
(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 Florida Tax-Free USAA Florida Tax-Free
Income Fund Money Market Fund
($000) ($000)
--------------------- ---------------------
Purchases $46,118 $84,616
Sales/maturities $23,571 $83,295
For the USAA Florida 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 Florida Tax-Free
Income Fund $11,567 $ - $11,567
(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 FLORIDA 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 Year Ended March 31,
September 30, ---------------------------------------------------
1998 1998 1997 1996 1995 1994**
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.94 $ 9.33 $ 9.26 $ 9.09 $ 8.98 $ 10.00
Net investment income .25 .51 .52 .52 .49 .21
Net realized and
unrealized gain (loss) .26 .61 .07 .17 .11 (1.02)
Distributions from net
investment income (.25) (.51) (.52) (.52) (.49) (.21)
---------------------------------------------------------------------
Net asset value at
end of period $ 10.20 $ 9.94 $ 9.33 $ 9.26 $ 9.09 $ 8.98
=====================================================================
Total return (%) * 5.21 12.22 6.51 7.66 7.01 (8.22)
Net assets at end
of period (000) $166,590 $145,921 $95,483 $69,079 $42,891 $24,948
Ratio of expenses to
average net assets (%) .48(a) .50 .50 .50 .50 .50(a)
Ratio of expenses to
average net assets
excluding
reimbursements (%) - .51 .57 .67 .81 1.33(a)
Ratio of net investment
income to average
net assets (%) 4.99(a) 5.21 5.57 5.52 5.59 4.63(a)
Portfolio turnover (%) 15.71 27.48 44.75 88.20 71.76 284.11
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestments of all dividend income distributions during the period.
** Fund commenced operations October 1, 1993.
</TABLE>
<TABLE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA FLORIDA 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 1994**
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .02 .03 .03 .03 .03 .01
Distributions from net
investment income (.02) (.03) (.03) (.03) (.03) (.01)
---------------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=====================================================================
Total return (%) * 1.64 3.34 3.20 3.51 2.86 .96
Net assets at end
of period (000) $ 88,443 $ 89,799 $87,053 $71,224 $52,225 $29,877
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50 .50(a)
Ratio of expenses to
average net assets
excluding
reimbursements (%) .52(a) .52 .57 .64 .72 1.11(a)
Ratio of net investment
income to average
net assets (%) 3.25(a) 3.28 3.15 3.45 2.97 1.98(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 October 1, 1993.
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
