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:
Independent Auditors' Report 14
Statements of Assets and Liabilities 15
Portfolio of Investments in Securities:
USAA Florida Tax-Free Income Fund 17
USAA Florida Tax-Free Money Market Fund 22
Notes to Portfolio of Investments in Securities 25
Statements of Operations 26
Statements of Changes in Net Assets 27
Notes to Financial Statements 28
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, savings 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 Fund,
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
USAA 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 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 neither insured nor guaranteed by
the U.S. Government, and there is no assurance that any of the funds will
be able to maintain a stable net asset value of $1 per share.
(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
In the last few years I have turned my attention more and more to the
subject of tax-efficient investing. Though a few fund companies
are beginning to write about this subject, it remains off the beaten
track of mutual fund investing. But I believe it is of great importance.
[PHOTOGRAPH OF PRESIDENT: MICHAEL J.C. ROTH, CFA APPEARS HERE]
Just recently a close friend whom I have advised for years asked me, "Will my
tax bracket be lower when I retire?" I told him, "No. I will not permit that." I
believe that much financial planning makes an invalid assumption that a
retiree's tax bracket will fall substantially when retirement comes. But it is
quite possible for a person whose income is in a high tax bracket to build an
estate that will sustain that bracket upon retirement. If that occurs,
tax-efficient investing can be very important.
For a mutual fund investor that means maximizing potential tax-exempt income and
long-term capital gains. Unfortunately all of the distributions from IRAs,
401(k)s, and variable annuities will be taxed as ordinary income. But a
non-sheltered portfolio of index funds or efficiently run equity portfolios can
be harvested principally as long-term capital gains at a 20% tax rate. And an
accompanying investment in tax-exempt funds may provide the fixed-income buffer
to stock market risk along with the potential for significant tax-exempt
returns. Such a non-sheltered portfolio may be a valuable addition to an
individual's investment plan and may provide valuable assistance while you live
through your retirement.
Much of the attention of financial planners is concentrated on preparing for
retirement. You must not overlook the fact that you have a good possibility of
enjoying decades of reward for your good planning after you retire.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
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.
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.
===============================================================================
3/31/97 3/31/98
Net Assets $95.5 Million $145.9 Million
Net Asset Value Per Share $9.33 $9.94
===============================================================================
Average Annual Total Returns and 30-Day SEC Yield* as of 3/31/98
1 Year Since Inception on 10/1/93 30-Day SEC Yield
12.22% 5.34% 4.75%
==============================================================================
* Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested dividends and
capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's shares,
when redeemed, may be worth more or less than their original cost.
- -----------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- -----------------------------------
A chart in the form of a line graph appears here, comparing the cumulative
performance of the USAA Florida Tax-Free Income Fund, the 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
10/31/93 $ 9,960
12/31/93 $10,078
06/30/94 $ 9,290
12/31/94 $ 9,066
06/30/95 $10,016
12/31/95 $10,780
06/30/96 $10,666
12/31/96 $11,252
06/30/97 $11,709
12/31/97 $12,507
03/31/98 $12,639
Lehman Brothers Municipal Bond Index
Year Amount
---- ------
10/01/93 $10,000
10/31/93 $10,019
12/31/93 $10,140
06/30/94 $ 9,689
12/31/94 $ 9,616
06/30/95 $10,544
12/31/95 $11,295
06/30/96 $11,244
12/31/96 $11,795
06/30/97 $12,172
12/31/97 $12,879
03/31/98 $13,028
Lipper Florida Municipal Debt Funds Average
Year Amount
---- ------
10/01/93 $10,000
10/31/93 $10,018
12/31/93 $10,108
06/30/94 $ 9,521
12/31/94 $ 9,387
06/30/95 $10,287
12/31/95 $11,060
06/30/96 $10,904
12/31/96 $11,408
06/30/97 $11,713
12/31/97 $12,390
03/31/98 $12,509
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, 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
(Photo of Portfolio Manager, Robert R. Pariseau, CFA, appears here)
THE ECONOMY
The U.S. economy continues its 8th year of expansion with remarkably few signs
of inflation. The yield on the 30-year U.S. Treasury Bond (the "Long Bond") fell
to a decade low of 5.69% on January 12, 1998. Nevertheless, bond investors now
seem less confident that the weakness in Asia, higher productivity, El Nino, a
relatively tight monetary policy and other factors will suppress inflationary
pressures. Concerns over the robust U.S. economy have been a recurrent theme for
many months now. Currently, investors seem to lack a consensus regarding the
direction of the next interest rate adjustment by the Federal Open Market
Committee (FOMC, or "the Fed"). Personally, I'm more confident that economic
conditions are more akin to the stable prices and real growth experienced in the
1950s than the high inflation of the 1970s.
YOUR DIVIDEND YIELD
As interest rates have fallen, our sales force has received inquiries from
investors asking whether high coupon(1) bonds will be called away from various
USAA tax-exempt funds. These investors are obviously concerned that their fund's
yield will drop dramatically. The majority of municipal bonds permit issuers to
"call," or redeem, a bond many years before the stated maturity. Typically,
municipal bonds may not be called until after ten years from the date of issue.
An issuer would call, or refinance, a bond for the same primary reason that a
homeowner would refinance a mortgage -- when interest rates drop sufficiently to
more than offset the cost of refinancing.
(1) 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.
Let me assure you that I am very conscious of call features. I continually
evaluate the relative market value of various bond coupons and their respective
call dates. For high coupon bonds, I typically hold them as long as possible. If
I sold a higher coupon bond at a large premium (i.e. market value exceeds face
value), the Fund would lose the tax-exempt income stream prematurely. In
addition, the transaction may trigger a federal capital gain tax for our
investors. I consciously manage the Fund to minimize capital gain distributions.
When high coupon bonds are eventually called, typically the impact on the Fund's
distribution yield is quite muted, maybe a few basis points (a basis point is
.01%) for even a very large position of the Fund's highest yielding bond.
PORTFOLIO STRATEGY
I focus primarily on generating maximum tax-exempt income that potentially
should produce the best after-tax total return over a 3-5 year investment
horizon. I do not buy exotic derivatives, nor do I hedge the portfolio with
futures contracts. I have no intention of purchasing municipal bonds
that are subject to the federal alternative minimum tax (AMT) for individuals.
In fact, since inception, the USAA Florida Tax-Free Income Fund has never
distributed income that was subject to the AMT. Of course, I would certainly
advise our shareholders if there were a change in the Federal Tax Code that
compels me to reconsider my position on the AMT. I remain cautious about
investing in municipal lease obligations.
THE MUNICIPAL MARKET
Interest rates have fallen almost the entire fiscal year. The yield on the
30-year U.S. Treasury Bond (the "Long Bond") began the fiscal year at 7.10% and
ended the period at 5.93%. The tone of the municipal bond market is similar
to what I described last September in the Semiannual Report. In general, the
municipal market does not reward an investor for buying bonds much beyond 20
years in maturity, although on occasion I have found some interesting values.
And similar to last fall, I have been buying fewer BBB and A-rated bonds
compared to the past, because of their low yields relative to higher rated
bonds.
YOUR FUND'S PERFORMANCE
I'm very pleased to say that Morningstar recently awarded the Fund "Five Stars"
for the overall and 3-year ratings as of March 31, 1998, overall and among 1,525
funds in the municipal bond fund category.(2) In addition, the Fund earned
Lipper Analytical Services', Inc. Performance Achievement Certificate for
ranking #1 out of 64 in the Florida Municipal Debt Fund category for the
1-year period ended 12/31/97.* Average annual total returns for the
1-year period ended 12/31/97 and the 10/1/93 to 12/31/97 period were
11.16% and 5.40%, respectively.
- -----------------------------------
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 and the
Lipper Florida Municipal Debt Funds Average from 3/31/95 through 3/31/98.
USAA Florida Tax-Free Lipper Florida Municipal
Income Fund Debt Funds Average*
----------------- ------------------
3/31/95 5.44 5.34
3/31/96 5.57 5.10
3/31/97 5.57 5.04
3/31/98 5.11 4.66
12-month dividend yield is computed by dividing income dividends paid during the
previous 12 months by the latest month-end net asset value adjusted for capital
gains distribution. The graph represents data from 3/31/95 to 3/31/98.
*Refer to page 4 for the Lipper Average definition. Fund rankings awarded by
Lipper are based on cumulative total returns.
Past performance is no guarantee of future results.
(2) Morningstar proprietary ratings reflect historical risk-adjusted performance
through March 31, 1998. The ratings are subject to change monthly. Morningstar
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.
While past performance is no guarantee of future results, the Fund ranked #2 by
Lipper Analytical Services, Inc. among Florida Municipal Debt Funds for the past
12 months ending March 31, 1998,(3) with a total return(4) of 12.22% as
compared to the average of 10.25% for the 63 funds in the category. For the
same period and category, the Fund's dividend distribution yield(5) was 5.11%,
as compared to the Lipper average of 4.66%. Your Fund's net asset value per
share increased by $.61, or 6.5%, since March 31, 1997.
THE STATE OF FLORIDA
Florida's economy performed strongly enough in fiscal 1997 to generate a 7.2%
increase in the state's general fund revenues. The sales and use tax rose a
healthy 5.5%, but is vulnerable to economic slowdowns and it comprises over 70%
of general revenues. Expectations for sustained economic growth support a
positive outlook for fiscal 1998. The unemployment rate improved to 4.8% in 1997
from 5.1% posted in 1996 and compared to the U.S. rate of 4.9% in 1997.
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.
Florida's vibrant 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 pressures for social programs
and infrastructure projects. To this end, the level of Florida's debt has
increased, and future borrowing is anticipated. We will closely monitor these
and other issues that might impact your Fund's holdings.
The table below compares the yield of the USAA Florida Tax-Free Income Fund with
a taxable equivalent investment.
To match the USAA Florida Tax-Free Income Fund's
closing 30-Day SEC yield of 4.75% and:
Assuming a Marginal Federal Tax Rate of: 28% 31% 36% 39.6%
Assuming an investor, filing jointly,
with $300,000 in intangible assets,
a fully taxable investment must pay: 6.61% 6.89% 7.43% 7.87%
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.
(3) Lipper Analytical Services Inc. is an independent organization that monitors
the performance of mutual funds. Fund rankings awarded by Lipper are based on
cumulative total returns.
(4) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
(5) 12-month dividend yield is computed by dividing income dividends paid
during the previous 12 months by the latest month-end net asset value adjusted
for capital gains distributions.
---------------------
PORTFOLIO RATINGS/MIX
MARCH 31, 1998
---------------------
A pie chart is shown here depicting the Portfolio Mix as of March 31, 1998 of
the USAA Florida Tax-Free Income Fund to be:
Cash Equivalent - 4%, BBB - 21%, AAA - 20%, A - 28%, AA - 27%
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 BBB account for 3.6% of the Fund's investments.
Note: Income may be subject to the federal alternative minimum tax.
See page 17 for a complete listing of the Portfolio of Investments in
Securities.
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 this Fund is neither insured nor guaranteed by the U.S.
Government, and there can be no assurance that the Fund will maintain a stable
net asset value of $1.00 per share.
============================================================================
3/31/97 3/31/98
Net Assets $87.1 Million $89.8 Million
Net Asset Value Per Share $1.00 $1.00
============================================================================
Average Annual Total Returns and 7-Day Simple Yield as of 3/31/98
1 Year Since Inception on 10/1/93 7-Day Simple Yield
3.34% 3.08% 3.30%
============================================================================
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 to the
IBC Financial Data, Inc. State Specific SB & GP Money Funds from
3/97 through 3/98.
USAA Florida Tax-Free IBC Financial
Money Market Fund Data, Inc.
--------------------- ------------
3/97 2.96% 2.7%
4/97 3.65% 3.48%
5/97 3.46% 3.24%
6/97 3.64% 3.27%
7/97 3.3% 3.02%
8/97 3.05% 2.79%
9/97 3.6% 3.25%
10/97 3.29% 3.03%
11/97 3.58% 3.2%
12/97 3.44% 3.27%
01/98 3.04% 2.82%
02/98 2.99% 2.66%
03/98 3.29%* 2.93%*
Data represent the last Monday of each month.
*Ending date 3/30/98
The graph tracks the Fund's 7-day simple 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 Managers
(Photo of Portfolio Manager, John C. Bonnell, CFA, appears here.)
THE MARKET
How long can the economy continue to expand? How long can inflation stay low
despite rising wages and falling unemployment? To what extent will Asian
economic problems affect our economy? Who knows!
It certainly would be nice to have the foresight to answer the above questions,
but even with the correct answers, one would not know whether to lock in one
year rates or invest in shorter term securities. As mentioned in the last
semiannual report, the short-term municipal market is primarily driven by supply
and demand relationships.
The Federal Reserve (Fed) increased the federal funds rate (the rate banks
charge one another for overnight loans) .25% in March 1997. The Fed has been on
hold since then. For the last twelve months, one year treasury bill yields
generally declined within a range of 6.07% to 5.08%, and ended March 1998 at
5.39%. During the same period, yields on municipal notes as measured by the Bond
Buyer's One-Year Note Index,(1) ranged from 3.97% to 3.51%, and ended March 1998
at 3.64%. Supply and demand factors caused a spike up in yield at the end of the
calendar year. Yields were low during the first three months of 1998 as the
market experienced large cash inflows (which increased demand) during a period
of little new supply. How long will this continue? Again, no one really knows.
However certain seasonal factors and corporate buying habits are more
predictable and should produce buying opportunities to lock in higher yields.
STRATEGY
Your Fund strives to meet its objective in any prevailing market environment.
Rather than trying to predict future interest rates, we focus on buying the best
relative value in the market at any given time. This reflects our longstanding
commitment to credit research, and a judgment as to whether the Fund would be
sufficiently compensated with additional yield to invest in longer term
securities. Because of the lack of supply during the first three months of
1998(and low yields on what was available), your Fund's average maturity is
relatively short. This will provide the liquidity necessary to take advantage of
higher yields during the coming months as opportunities arise.
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending March 31, 1998, your Fund ranked 11 out of 156 State Specific Money
Market Funds according to IBC Financial Data, Inc.(2) with a compounded dividend
yield of 3.34%. The average for the category over the same period was 3.04%.
FLORIDA
Florida's economy continues to perform well as evidenced by an increase in
fiscal 1997 state general revenues of more than $1 billion, or 7.2%, to $15.7
billion. The cyclically vulnerable sales and use tax, which comprises over 70%
of general revenues, rose a healthy 5.5%. This revenue growth contributed to
strong financial results for the state in fiscal 1997. Expectations for
continued economic growth support a positive financial outlook for fiscal 1998.
The unemployment rate, a key economic indicator, improved to 4.8% in 1997 from
5.1% in 1996. This compares favorably to the U.S. rate of 4.9% in 1997 and 5.4%
in 1996.
The state's vibrant population growth is one fundamental reason why it'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. 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.
(1) Bond Buyer Index is the industry standard for yields of investment-grade
municipal bonds.
(2) 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 of $10,000
- -----------------------------------
A chart in the form of a line graph appears here illustrating the cumulative
performance of a $10,000 Investment in the Florida Tax-Free Money Market Fund.
Data since inception on 10/01/93 through 3/31/98. The data points are
as follows:
10/01/93 $10,000
10/31/93 $10,014
12/31/93 $10,048
06/30/94 $10,153
12/31/94 $10,298
06/30/95 $10,481
12/31/95 $10,666
06/30/96 $10,836
12/31/96 $11,011
06/30/97 $11,189
12/31/97 $11,378
03/31/98 $11,464
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 this Fund is neither insured nor guaranteed by the U.S.
Government and there is no assurance that the fund will maintain a stable net
asset value of $1 per share.
See page 22 for a complete listing of the Portfolio of Investments in
Securities.
Independent Auditors' Report
The Shareholders and Board of Trustees
USAA STATE TAX-FREE TRUST:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments in securities, of the USAA Florida Tax-Free Income
and USAA Florida Tax-Free Money Market Funds, portfolios of the USAA State
Tax-Free Trust as of March 31, 1998, and the related statements of operations
for the year then ended, the statements of changes in net assets for each
of the years in the two-year period then ended, and financial highlights
presented in note 7 to the financial statements for each of the years or
periods in the five-year period then ended. These financial statements
and financial highlights are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of March 31, 1998, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Florida Tax-Free Income and USAA Florida Tax-Free Money Market Funds,
portfolios of the USAA State Tax-Free Trust as of March 31, 1998, the results of
their operations for the year then ended, the changes in their net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the five-year period then ended,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 8, 1998
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 1998
<TABLE>
<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 $135,967 and $81,745, respectively) $ 143,630 $ 81,745
Cash 88 98
Receivables:
Capital shares sold 22 70
Interest 2,562 673
Securities sold - 7,500
-------- -------
Total assets 146,302 90,086
-------- -------
LIABILITIES
Capital shares redeemed 117 245
USAA Investment Management Company 35 7
USAA Transfer Agency Company 4 5
Accounts payable and accrued expenses 29 17
Dividends on capital shares 196 13
--------- ------
Total liabilities 381 287
--------- ------
Net assets applicable to capital shares outstanding $145,921 $ 89,799
========= =======
REPRESENTED BY:
Paid-in capital $139,664 $ 89,799
Accumulated net realized loss on investments (1,406) -
Net unrealized appreciation of investments 7,663 -
---------- ----------
Net assets applicable to capital shares outstanding $145,921 $ 89,799
========== ==========
Capital shares outstanding, unlimited number of shares
authorized, $.001 par value 14,675 89,799
======= =======
Net asset value, redemption price, and offering price per share $ 9.94 $ 1.00
======= =======
See accompanying notes to financial statements.
</TABLE>
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS IN SECURITIES
March 31, 1998
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 Reinsurance Co.
(6) American Capital Access.
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 Bond
Authority/Agency RB Revenue Bond
IDRB Industrial Development TAN Tax Anticipation Note
Revenue Bond
USAA FLORIDA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
March 31, 1998
<TABLE>
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- -----------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (89.0%)
<C> <S> <C> <C> <C>
Florida (80.8%)
$ 3,400 Alachua County Health Facilities Auth. RB,
Series 1996A (CRE) (1) 5.80 % 12/01/26 $ 3,608
3,500 Board of Education Capital Outlay Bonds,
Series 1995B (CRE) 5.88 6/01/20 3,686
Broward County Housing Finance
Auth. MFH RB,
1,100 Series 1995A 7.00 2/01/25 1,195
1,000 Series 1997A-1 6.00 5/01/32 1,044
Cape Coral Health Facilities Auth. RB,
1,000 Series 1997 (CRE) (5) 5.50 10/01/17 1,017
1,400 Series 1997 (CRE) (5) 5.63 10/01/27 1,442
1,855 Citrus County PCRB, Series 1992B 6.35 2/01/22 2,003
1,750 Clearwater Housing Auth. RB (CRE) (6) 5.35 5/01/24 1,754
2,000 Collier County Health Facilities Auth. RB,
Series 1994 7.00 12/01/19 2,222
2,000 Dade County Special Obligation Bonds,
Series 1995 6.10 4/01/20 2,156
7,160 Department of Transportation Right of Way
GO, Series 1997B (CRE) 5.00 7/01/27 6,956
2,700 Department of Transportation Turnpike
Authority RB, Series 1997A (CRE) (3) 4.75 7/01/20 2,547
Duval County Housing Finance Auth. MFH RB,
1,700 Series 1996 5.90 9/01/16 1,763
2,510 Series 1996 6.00 3/01/21 2,591
1,000 Escambia County Housing Finance
Agency MFH RB, Series 1985 5.63 8/01/16 1,026
700 Gulf County School District Sales Tax
RB (CRE) (5) 5.75 6/01/17 736
2,000 Hillsborough County IDA PCRB 6.25 12/01/34 2,175
Housing Finance Agency RB,
1,620 Series 1994B 6.35 7/01/14 1,721
1,000 Series 1995H (CRE) 6.50 11/01/25 1,051
1,200 Indian River County Hospital District RB,
Series 1996 (CRE) (4) 5.70 10/01/15 1,280
2,000 Jacksonville Electric Auth. RB,
Series 1997A 5.63 10/01/37 2,062
7,820 Jacksonville Health Facilities Auth.
RB, Series 1997B 5.25 8/15/27 7,773
1,000 Martin County Health Facilities Auth.
Hospital RB, Series 1997A (CRE) (1) 5.25 11/15/17 1,012
1,000 Miami Beach Health Facilities Auth.
Hospital RB, Series 1992 (CRE) 6.25 11/15/19 1,089
36,000 Miami Dade County Special Obligation RB,
Series 1997B (CRE) (1),(c) 5.65 10/01/31 5,855
1,000 Miramar Wastewater Improvement
Assessment Bonds, Series 1994
(CRE) (3) 6.75 10/01/25 1,131
5,000 North Miami Educational Facilities RB,
Series 1994A 6.13 4/01/20 5,236
2,130 North Miami Health Facilities Auth. RB,
Series 1996 (CRE) 6.00 8/15/24 2,237
5,750 Orange County Health Facilities Auth. RB,
Series 1995 6.75 7/01/20 6,674
1,000 Orange County Housing Finance Auth. RB 6.40 2/01/30 1,060
3,575 Orlando and Orange County Expressway
Auth. RB, Series 1993 5.95 7/01/23 3,687
5,500 Orlando Utilities Commission RB,
Series 1993B 5.25 10/01/23 5,462
3,405 Palm Beach County
Health Facilities Auth.
Hospital RB, Series 1993 6.30 10/01/22 3,816
2,500 Palm Beach County Health Facilities Auth.
RB, Series 1997 5.50 10/01/15 2,517
4,900 Palm Beach County Health Facilities
Retirement Community RB, Series 1996 5.63 11/15/20 5,056
625 Palm Beach County Housing Finance
Auth. RB, Series 1994B 6.40 4/01/14 663
750 Plantation Health Facilities Auth. RB,
Series 1998 5.13 12/01/22 737
6,805 St. Johns County IDA Hospital RB,
Series 1992 6.00 8/01/22 7,043
2,000 St. Johns County IDA RB,
Series 1997A (CRE) (1), (d) 5.50 3/01/17 2,070
3,215 Sunrise Special Tax District #1 GO,
Series 1991 (CRE) 6.38 11/01/21 3,449
1,150 Tallahassee Consolidated Utility
Systems RB, Series 1994 6.20 10/01/19 1,261
1,300 Turtle Run Community Development
District RB (CRE) 6.40 5/01/11 1,427
1,500 Volusia County Education Facility Auth. RB,
Series 1996A 6.13 10/15/26 1,594
3,000 Volusia County Health Facilities Auth.
Hospital RB, Series 1996 (CRE) (2) 5.50 11/15/26 3,076
Guam (0.7%)
1,000 Government Limited Obligation Infrastructure
Improvement RB, Series 1989A (CRE) 7.10 11/15/09 1,071
Puerto Rico (7.5%)
1,000 Commonwealth GO, Series 1996 5.40 7/01/25 1,014
5,150 Electric Power Auth. RB, Series 1995Z 5.25 7/01/21 5,115
2,500 Highway Auth. RB, Series Q 6.00 7/01/20 2,610
2,350 Public Improvement GO, Series 1998 4.50 7/01/23 2,120
-------
Total fixed rate instruments (cost: $122,575) 129,890
--------
PUT BOND (5.1%)
Florida
7,055 Duval County Housing Finance Auth.
MFH RB, Series 1995 (CRE)
(cost: $7,162) 6.75 4/01/25 7,510
-------
VARIABLE RATE DEMAND NOTES (4.3%)
Florida
$ 3,180 Atlantic Beach Improvement and
Refunding RB, Series 1994B (CRE) 4.00 % 10/01/24 $ 3,180
800 Hillsborough County IDA RB,
Series 1992 3.80 5/15/18 800
900 Manatee County PCRB, Series 1994 3.85 9/01/24 900
800 Martin County PCRB, Series 1994 3.85 9/01/24 800
550 Volusia County Health Facilities
Auth. RB, Series 1995 (CRE) 3.90 9/01/20 550
--------
Total variable rate demand notes (cost: $6,230) 6,230
--------
Total investments (cost: $135,967) $143,630
=========
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Hospitals 19.7%
Special Assessment/Tax/Fee 14.6
Multi-Family Housing 13.0
Nursing/Continuing Care Centers 13.0
Electric/Gas Utilities - Municipal 7.2
Education 4.7
Electric Utilities 4.6
Healthcare - Miscellaneous 4.6
General Obligations 4.5
Toll Roads 4.3
Water/Sewer Utilities - Municipal 3.0
Single-Family Housing 1.6
Miscellaneous 1.4
Sales Tax 1.2
Real Estate Tax/Free 1.0
------
Total 98.4%
======
USAA FLORIDA TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
March 31, 1998
Principal Coupon Final
Amount Security Rate Maturity Value
- ------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (63.7%)
Florida
$ 4,970 Atlantic Beach Improvement and
Refunding RB, Series 1994B (CRE) 4.00 % 10/01/24 $ 4,970
3,700 Brevard County Housing Finance Auth.
MFH RB, Series 1993 (CRE) 3.80 7/01/05 3,700
1,385 Brevard County Mental Health Facilities RB,
Series 1994C (CRE) 3.75 1/01/10 1,385
3,000 Broward County Education Research and
Training Auth. IDRB, Series 1997 (CRE)3.75 8/01/04 3,000
2,170 Broward County Housing Finance Auth.
MFH RB, Series 1990 (CRE) 3.85 10/01/07 2,170
600 Broward County IDA RB, Series 1992 3.85 3/01/99 600
3,645 Dade County Special Obligation Bonds,
Series 1990 (CRE) 4.35 10/01/10 3,645
3,830 Fort Pierce Health Facility RB,
Series 1997 (CRE) 3.70 10/01/17 3,830
Housing Finance Agency MFH RB,
4,300 Series 1985GGG (CRE) 4.25 12/01/08 4,300
565 Series 1990B (CRE) 3.85 12/01/09 565
450 Series 1990D (CRE) 3.85 12/01/09 450
3,400 Jacksonville Hospital RB, Series
1988 (CRE) 4.20 2/01/18 3,400
1,900 Miami Health Facilities Auth. RB,
Series 1996 (CRE) 3.70 12/01/16 1,900
1,000 Orange County IDA, Series 1996A (CRE) 3.70 2/01/16 1,000
Palm Beach County Housing Finance Auth.
MFH RB,
1,900 Series 1988C (CRE) 3.75 11/01/07 1,900
3,845 Series 1988D (CRE) 3.75 11/01/07 3,845
2,270 Plant City Hospital RB, Series 1993
(CRE) 3.70 3/01/13 2,270
1,930 Sarasota Educational Facilities RB,
Series 1996 (CRE) 3.70 2/01/21 1,930
740 St. Johns County IDA RB,
Series 1997 (CRE) 3.75 5/01/09 740
1,000 St. Petersburg Capital Improvement RB,
Series 1997B (CRE) 3.70 10/01/17 1,000
3,500 St. Petersburg Health Facilities
Auth. RB, Series 1997 (CRE) 3.75 7/01/27 3,500
3,000 Volusia County Housing Finance
Auth. RB, Series 1985C (CRE) (b) 4.03 9/01/05 3,000
4,150 Wauchula IDA RB, Series 1993 (CRE) 3.70 12/01/13 4,150
- -------------------------------------------------------------------------------
Total variable rate demand notes (cost: $57,250) 57,250
- -------------------------------------------------------------------------------
PUT BONDS (4.5%)
Florida
Tampa Guaranteed Entitlement RB,
2,980 Series 1988A(a) 8.38 10/01/08 3,048
960 Series 1988B(a) 8.40 10/01/08 982
- --------------------------------------------------------------------------------
Total put bonds (cost: $4,030) 4,030
- --------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (22.8%)
Florida
2,000 Broward County Sales Tax Revenue CP Notes,
Series A 3.70 5/22/98 2,000
2,995 Dade County Public Improvement GO,
Series H (CRE)(2) 6.50 6/01/98 3,008
3,000 Department of Environmental Protection
Preservation RB, Series 1996A
(CRE)(1) 5.50 7/01/98 3,012
700 Gainesville Utilities System CP Notes,
Series C 3.50 6/02/98 700
3,300 Halifax Hospital Medical Center TAN,
Series 1997 (CRE) 4.13 4/15/98 3,300
1,500 Jacksonville CP Notes, Series A 3.55 7/13/98 1,500
4,000 Local Government Finance Commission
Pooled CP Notes, Series A (CRE) 3.55 6/10/98 4,000
2,945 Municipal Power Agency CP Notes,
Series 1996A (CRE) 3.50 4/06/98 2,945
- -------------------------------------------------------------------------------
Total fixed rate instruments (cost: $20,465) 20,465
- -------------------------------------------------------------------------------
Total investments (cost: $81,745) $ 81,745
===============================================================================
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Multi-Family Housing 22.2%
Nursing/Continuing Care Centers 11.5
Hospitals 10.0
Special Assessment/Tax/Fee 8.5
Buildings 8.0
Healthcare - Miscellaneous 5.8
General Obligations 5.0
Escrowed Bonds 4.5
Finance - Municipal 4.4
Electric Utilities 3.3
Education 3.3
Sales Tax 2.2
Aluminum .8
Water/Sewer Utilities - Municipal .8
Manufacturing - Diversified Industries .7
---------
Total 91.0%
=========
NOTES TO PORTFOLIOS OF INVESTMENTS IN SECURITIES
March 31, 1998
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 March 31, 1998, this security represents 3.3% 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 March 31, 1998, this security
represented 1.4% of the USAA Florida Tax-Free Income Fund's net assets.
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 1998
<TABLE>
<CAPTION>
USAA USAA
Florida Florida Tax-Free
Tax-Free Money Market
Income Fund Fund
----------- ----
<S> <C> <C>
Net investment income:
Interest income $ 6,694 $ 3,285
------- -----
Expenses:
Management fees 438 323
Transfer agent's fees 62 56
Custodian's fees 52 43
Postage 5 5
Shareholder reporting fees 2 3
Trustees' fees 7 7
Registration fees 13 1
Professional fees 10 10
Other 7 7
------- ------
Total expenses before reimbursement 596 455
Expenses reimbursed (10) (21)
------- ------
Total expenses after reimbursement 586 434
------- ------
Net investment income 6,108 2,851
------- ------
Net realized and unrealized gain on investments:
Net realized gain 451 -
Change in net unrealized appreciation/depreciation 6,424 -
------- ------
Net realized and unrealized gain 6,875 -
------- ------
Increase in net assets resulting from operations $12,983 $ 2,851
======= =======
See accompanying notes to financial statements.
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<TABLE>
<CAPTION>
USAA USAA
Florida Tax-Free Florida Tax-Free
Income Fund Money Market Fund
- -----------------------------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 6,108 $4,555 $ 2,851 $ 2,418
Net realized gain on investments 451 80 - -
Change in net unrealized appreciation/
depreciation of investments 6,424 457 - -
------ ----- ------ ------
Increase in net assets resulting
from operations 12,983 5,092 2,851 2,418
------ ----- ------ ------
Distributions to shareholders from:
Net investment income (6,108) (4,555) (2,851) (2,418)
------- ------- ------ ------
From capital share transactions:
Proceeds from shares sold 60,753 41,561 159,243 147,643
Dividend reinvestments 4,066 3,019 2,630 2,229
Cost of shares redeemed (21,256) (18,713) (159,127) (134,043)
-------- -------- --------- ---------
Increase in net assets from
capital share transactions 43,563 25,867 2,746 15,829
-------- -------- --------- ---------
Net increase in net assets 50,438 26,404 2,746 15,829
Net assets:
Beginning of period 95,483 69,079 87,053 71,224
------- ------- ------- -------
End of period $145,921 $ 95,483 $ 89,799 $ 87,053
======= ======= ======= =======
Change in shares outstanding:
Shares sold 6,196 4,449 159,243 147,643
Shares issued for dividends reinvested 416 323 2,630 2,229
Shares redeemed (2,172) (1,999) (159,127) (134,043)
-------- ------- ------- --------
Increase in shares outstanding 4,440 2,773 2,746 15,829
======== ======= ====== ========
See accompanying notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(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 annual 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 of 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. The Funds had no borrowings
under either of these agreements during the year ended March 31, 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. At March 31, 1998, the
USAA Florida Tax-Free Income Fund had capital loss carryovers for federal income
tax purposes of approximately $1.4 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.
The Funds completed their fiscal year on March 31, 1998. Federal law (Internal
Revenue Code of 1986, as amended, and the regulations thereunder) requires each
Fund to notify its shareholders after the close of its taxable year as to what
portion of its earnings was exempt from federal taxation and dividend
distributions which represent long-term capital gains. The net investment income
earned and distributed by each of the Funds was 100% tax exempt for federal
income tax purposes. There were no long-term capital gain distributions for the
year ended March 31, 1998.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the year
ended March 31, 1998 were as follows:
USAA Florida Tax-Free USAA Florida Tax-Free
Income Fund Money Market Fund
($000) ($000)
--------------- --------
Purchases $72,009 $371,853
Sales/maturities $31,463 $370,585
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 March 31, 1998
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
- --------------------------------------------------------------------------------
USAA Florida Tax-Free
Income Fund $ 7,703 $ 40 $ 7,663
(5) TRANSACTIONS WITH MANAGER
A. Management fees - The investment policies of the Funds and the management of
the Funds' portfolios are carried out by USAA Investment Management Company (the
Manager). Management fees are computed as a percentage of aggregate average net
assets (ANA) of both Funds combined, which on an annual basis is equal to .50%
of the first $50 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.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA FLORIDA TAX-FREE INCOME FUND
March 31, 1998
FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows
<TABLE>
<CAPTION>
Year Ended March 31,
- -------------------------------------------------------------------------------
1998 1997 1996 1995 1994**
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.33 $ 9.26 $ 9.09 $ 8.98 $ 10.00
Net investment income .51 .52 .52 .49 .21
Net realized and
unrealized gain (loss) .61 .07 .17 .11 (1.02)
Distributions from net
investment income (.51) (.52) (.52) (.49) (.21)
------ ------ ------ ------ ------
Net asset value at
end of period $ 9.94 $ 9.33 $ 9.26 $ 9.09 $ 8.98
====== ====== ====== ===== ======
Total return (%) * 12.22 6.51 7.66 7.01 (8.22)
Net assets at end
of period (000) $145,921 $ 95,483 $ 69,079 $ 42,891 $ 24,948
Ratio of expenses to
average net assets(%) .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 (%) 5.21 5.57 5.52 5.59 4.63(a)
Portfolio turnover (%) 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>
NOTES TO FINANCIAL STATEMENTS (Continued)
USAA FLORIDA TAX-FREE MONEY MARKET FUND
March 31, 1998
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
- -------------------------------------------------------------------------------
1998 1997 1996 1995 1994**
- -------------------------------------------------------------------------------
<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 .03 .03 .03 .03 .01
Distributions from net
investment income (.03) (.03) (.03) (.03) (.01)
------ ----- ----- ----- -----
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ===== ===== ===== =====
Total return (%) * 3.34 3.20 3.51 2.86 .96
Net assets at end
of period (000) $ 89,799 $ 87,053 $ 71,224 $ 52,225 $ 29,877
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50(a)
Ratio of expenses to
average net
assets excluding
reimbursements (%) .52 .57 .64 .72 1.11(a)
Ratio of net investment
income to average
net assets (%) 3.28 3.15 3.45 2.97 1.98(a)
(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.
</TABLE>
===============================================================================
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
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
================================================================================
