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 11
Financial Information:
Independent Auditors' Report 15
Portfolios of Investments:
Categories & Definitions 16
USAA Florida Tax-Free Income Fund 17
USAA Florida Tax-Free Money Market Fund 21
Notes to Portfolios of Investments 24
Statements of Assets and Liabilities 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,
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)1999, 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 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, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
(Photograph of the President and Vice Chairman of the Board, Michael J. C. Roth,
CFA, appears here.)
I have always enjoyed the investment business because it is a great challenge
and it is endlessly fascinating. For me, one of the toughest things to learn was
that it was okay when people in this business strongly disagree with you. In
fact, the market would not work as well as it does without these differences in
opinion. I believe the key is to decide on the principles you choose to follow
and stick with them.
The roaring stock market of the past few years is a case in point. If you have
not invested in growth stocks, such as technology or internet, your total return
is probably lagging the market by a bunch. I've recently seen articles that
detail the relatively poor performance of value investing in stocks and of an
investment strategy of asset allocation. Yet, I believe in the long-term
soundness of both of these strategies. Value investing means using measures,
such as price/earnings or price/cash flow ratios, to identify companies which
are good businesses but whose stock is undervalued. Asset allocation means
combining investments in different classes, such as large cap stocks and
tax-exempt bonds, into one portfolio. In spite of the roaring stock market in
growth stocks, I continue to practice asset allocation.
My views were forged in the first ten years of my investment career, 1972 to
1982.
Those years taught me these things:
- It is important to be in stocks.
- It is especially important to be in stocks when they surge.
- Stocks can plummet mindlessly.
- When stocks plummet you will need great courage to stay the course.
- A portion of my portfolio in fixed income will help my courage at those
times.
And most importantly:
- Major market turns will be a surprise to almost everyone.
Therefore, I carry 30% to 40% of my portfolio in the USAA Tax-Exempt Long-Term
Fund. My return might have been higher in the past few years had I invested 100%
in stocks. But, I am very comfortable with my allocation. It was especially
comforting last summer when the stock market sank. And today, I am very happy
that I held my allocation in stocks.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Past performance is no guarantee of future results.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and operating expenses, please call for a
prospectus. Read it carefully before investing.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
3/31/98 3/31/99
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net Assets $145.9 Million $182.0 Million
Net Asset Value Per Share $9.94 $10.02
Tax-Exempt Dividends Per Share Last Twelve Months $.508 $.498
Capital Gains Distributions Per Share Last Twelve Months - -
- -------------------------------------------------------------------------------------------
30-DAY SEC YIELD* AS OF 3/31/99
- -------------------------------------------------------------------------------------------
30-Day SEC Yield 4.57%
- -------------------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
</TABLE>
AVERAGE ANNUAL COMPOUNDED RETURNS WITH
REINVESTMENT OF DIVIDENDS - PERIODS ENDING MARCH 31, 1999
- --------------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
- --------------------------------------------------------------------------------
Since 10/1/93 5.45% = 5.41% + 0.04%
5 Years 7.84% = 5.62% + 2.22%
1 Year 5.91% = 5.11% + 0.80%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns
for the 6-Year Period Ended March 31, 1999
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 6-year period ended March 31, 1999.
Total Return for Years Ended:
- ----------------------------
03/31/94 -8.22%*
03/31/95 7.01%
03/31/96 7.66%
03/31/97 6.51%
03/31/98 12.22%
03/31/99 5.91%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
03/31/94 1.99%*
03/31/95 5.78%
03/31/96 5.79%
03/31/97 5.76%
03/31/98 5.68%
03/31/99 5.11%
Change in Share Price:
- ---------------------
03/31/94 -10.20%*
03/31/95 1.22%
03/31/96 1.87%
03/31/97 0.76%
03/31/98 6.54%
03/31/99 0.80%
* This does not cover a 12 month period.
** Compounded Dividend yield calculation includes only income distributions.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. Dividend return is
the income dividends received over the period assuming reinvestment of all
dividends. Share price change is the change in net asset value over the period
adjusted for capital gain distributions. No adjustment has been made for taxes
payable by shareholders on their reinvested dividends and capital gain
distributions. The performance data quoted represent past performance and are
not an indication of future results. Investment return and principal value of an
investment will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
Comparison - 12 Month Dividend Yield
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Florida Tax-Free Income Fund to the 12
Month Dividend Yield of the Lipper Florida Municipal Debt Funds Average from
3/31/95 to 3/31/99.
USAA Florida Tax-Free Lipper Florida Municipal
Income Fund Yield Debt Funds Average Yield
--------------------- ------------------------
03/31/95 5.44% 5.35%
03/31/96 5.57% 5.10%
03/31/97 5.57% 5.04%
03/31/98 5.11% 4.66%
03/31/99 4.96% 4.44%
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 3/31/95 to
3/31/99.
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
03/31/99 $13,386
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
03/31/99 $13,835
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
03/31/99 $13,142
Data since inception on 10/1/93 through 3/31/99
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 the Portfolio Manager, Robert R. Pariseau, CFA, appears here.)
SIGNIFICANT VOLATILITY
The yield on the 30-year U.S. Treasury Bond(1) (the Long Bond) began our fiscal
year at 5.93% and one year later, on March 31, 1999, the Long Bond closed at
5.63%. That's a pretty dry statement when you think about all of the excitement
that occurred during those 12 months. Events like the economic meltdown in the
Far East, the Russian devaluation of the ruble and economic collapse, the Dow
Jones Industrial Average(2) falling 512 points in one day, and persistent but
false rumors of a major U.S. bank failure.
In reaction over concerns of a worldwide economic recession, interest rates fell
dramatically for the six months from May until October 1998. The Long Bond
bottomed out on October 5, 1998, at 4.72%, the lowest level on record. To
complete the roller coaster ride, interest rates then reversed direction and
began to climb for the final six months of the fiscal year as the overseas
economic crisis stabilized and the U.S. economy remained very strong.
The yield on the Bond Buyer 40-Bond Index(3)(BBI40) behaved roughly the same.
The flight to quality caused the Long Bond's yield to fall much faster than the
yield on the BBI40. The reason being is that investors sought the relative
safety of the riskless U.S. government bond. In fact, at various times, the
yield on the BBI40 was nearly the same as the Long Bond --which is quite
unusual. You could say that investors who bought a long maturity, tax-exempt
municipal bond received the tax exemption feature for "free". Since October
1998, when interest rates began to rise, the BBI40's yield didn't rise as fast
- -- and prices didn't fall as much -- as the Long Bond.
Municipal and U.s. Treasury Bond Yields
A chart in the form of a line graph appears here illustrating the yields of the
30-year U.S. Treasury Bond and the Bond Buyer 40-Bond Index (BBI40) from 3/31/98
to 3/31/99.
30-year Bond Buyer
U.S. 40-Bond
Treasury Index (BBI40)
-------- -------------
03/31/98 5.93% 5.27%
04/15/98 5.88% 5.29%
04/30/98 5.95% 5.39%
05/15/98 5.97% 5.28%
05/29/98 5.80% 5.22%
06/15/98 5.57% 5.16%
06/30/98 5.63% 5.22%
07/15/98 5.71% 5.25%
07/31/98 5.71% 5.26%
08/14/98 5.54% 5.20%
08/31/98 5.27% 5.11%
09/15/98 5.26% 5.14%
09/30/98 4.98% 5.04%
10/15/98 4.97% 5.09%
10/30/98 5.16% 5.13%
11/16/98 5.29% 5.15%
11/30/98 5.06% 5.10%
12/15/98 5.03% 5.11%
12/31/98 5.10% 5.16%
01/15/99 5.11% 5.17%
01/29/99 5.09% 5.09%
02/15/99 5.43% 5.15%
02/26/99 5.58% 5.17%
03/15/99 5.52% 5.20%
03/31/99 5.63% 5.23%
(1) The 30-year U.S. Treasury Bond is generally considered the benchmark for
U.S. long-term interest rates.
(2) The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively traded blue chip stocks. Prepared and published by Dow Jones & Co.
(3) The Bond Buyer 40-Bond Index is the industry standard for the yield of
long-term, investment-grade municipal bonds.
MARKET OUTLOOK
In some ways, the U.S. economic outlook hasn't changed very much since our
semiannual report. Chairman Alan Greenspan of the Federal Reserve Board
frequently expresses his amazement at the ability of the U.S. economy to grow
robustly without inflationary pressures. Economists give most of the credit to
improved productivity and lack of pricing power by corporations faced with
strong competition. Some investors remain skeptical that "it's different this
time" and are concerned that inflation will re-ignite. Many investors no longer
seem to believe that interest rates will fall much further, because the U.S.
economy shows no sign of slowing down. In other words, there is less of a
bullish tone to the fixed income market than six months ago, despite the fact
that inflationary pressures are still absent.
STRATEGY
I focus primarily on generating maximum tax-exempt income with the goal of
producing the best after-tax total return over a 3-5 year investment horizon. I
remain fully invested in long-term, investment-grade municipal bonds. 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 were a change in the Federal Tax Code that
compels me to reconsider my position on the AMT.
HOW I BUY A BOND
Since I tend to focus on yield, I'd like to discuss my approach to bond
selection. Like any buyer, I seek value. We define value at USAA as a
combination of:
- Yield (the bond may be a great fit, but if the yield is too low -- it's
overpriced)
- Structure (coupon, maturity, call features, sinking funds, etc.)
- Liquidity (ability to quickly sell the bond and receive the price you
expect)
- Credit Quality (how strong and stable is the issuer?)
Finding value should be a straightforward process, except that, what represents
value is always changing in the marketplace. Sometimes the best value is the
highest quality bond with the lower yield, other times it may be the lower
quality bond with a higher yield. The same can be said for buying bonds of
different maturities, for example, deciding on a 20-year versus a 30-year
maturity. The process requires market savvy, independent research, and
experience. Although, in some aspects it's a team approach, I make the final
decision. The process works something like this:
- Our municipal traders see a bond in the market with an attractive yield.
The fixed income markets are not auction exchanges like the New York Stock
Exchange. Instead, they are negotiated markets and bonds trade "over the
counter." Potential buyers and sellers bargain until they agree upon a
price. When bonds trade in the municipal market, the results are not
posted in a central location -- investors must seek out price levels. Our
municipal traders are in constant telephone and electronic contact with
all major participants gathering information on recent trades and bond
offerings -- so we can determine the value of any given bond, whether
buying or selling.
- The portfolio manager decides that the yield, structure and liquidity of
the bond fit well with the rest of the portfolio. The bond must also
comply with the portfolio diversification requirements mandated by various
regulations and constraints (SEC, your prospectus, etc.).
- Often, the research analyst and portfolio manager are already familiar and
current with the issuer's financial outlook. If not, the analyst contacts
senior financial officers of the issuer for the latest financial
statements and outlook. The analyst closely examines the bond indenture
and legal structure. He or she may need to discuss a legal issue with bond
counsel. The objective of our credit research is to anticipate credit
problems, those factors affecting an entire industry and those impacting a
specific issuer, before they impact our portfolio.
- After gathering sufficient information, the analyst approves, or
disapproves, the purchase of the bond and provides his/her independent
appraisal of the bond's credit rating. After the credit review, the
portfolio manager decides whether the bond still represents good "value".
On occasion, we may feel that a particular bond's financial outlook is
suitable for purchase, but the bond's credit rating is too optimistic. If
the bonds were over-rated, I would bid lower in price, or "pass" on them
entirely.
YOUR FUND'S PERFORMANCE-MORNINGSTAR 5-STAR FUND
I'm very pleased to say that your Fund received an Overall Star Rating of 5
stars in the municipal bond fund category from Morningstar Rating(TradeMark) for
the period ended March 31, 1999.(4) The Fund's performance compared very
favorably to its peer group. Your Fund's net asset value (NAV) per share
increased by $.08, or .8%, since March 31, 1998.
While past performance is no guarantee of future results, the Fund's dividend
distribution yield(5) for the past 12 months was 4.96%, as compared to Lipper's
Florida Municipal Debt Funds average of 4.44% for the 64 funds in the
category.(6) For the same period and category, the Fund's total return(7) was
5.91% compared to the Lipper average of 4.90%.
(4) Past performance is no guarantee of future results.
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of March 31, 1999. The ratings are subject to change every month. Morningstar
ratings are calculated from the fund's 3-, and 5-year average annual returns in
excess of 90-day Treasury bill returns with appropriate fee adjustments, and a
risk factor that reflects fund performance below 90-day T-bill returns. Overall
rating is a weighted average of a fund's 3-, 5-, and 10-year ratings, as
applicable. The USAA Florida Tax-Free Income Fund received 5 stars for the 3-,
and 5-year periods, respectively. The top 10% of the funds in a broad asset
class receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3
stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The
fund was rated among 1,578, and 1,131 in the municipal bond fund category for
the 3-, 5- year periods, respectively.
(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.
(6) Refer to page 5 for the Lipper Average definition.
(7) Total return equals income return plus share price change and assumes
reinvestment of dividends and capital gains distributions.
THE STATE OF FLORIDA
Driven by an expanding population, Florida's economy continues to grow and
diversify. Although the future growth rate is forecast to slow, expectations are
for the state's economy to continue to outperform the U.S. as a whole. Current
reserve levels are satisfactory and are expected to increase over the next few
years. A cash reserve is vital to a state, like Florida, that relies greatly
upon its sales tax receipts as a source of most operating revenues. Sales tax
revenues generally decline during a recession.
The downside to Florida's expanding population base is the resulting budgetary
pressure for social programs and infrastructure needs. To this end, Florida's
debt has increased in amount and complexity and future borrowing is anticipated.
The state has increasingly utilized dedicated revenue pledges to meet financing
needs. While a ceiling on state revenue collections may restrict some revenue
streams, the revenues pledged to state bonds are exempt from this Florida
constitutional amendment. Reflecting strong credit fundamentals, Florida
maintains high credit ratings of Aa2, AA+, and AA from Moody's Investors
Service, Standard & Poor's, and Fitch IBCA, respectively.
I discuss these general economic issues because, although they may not directly
relate to each of your Fund's holdings, they do indicate the general financial
and economic environment of the state. We will closely monitor those specific
credit issues, ballot initiatives, and litigation that could potentially impact
the value of your holdings.
- ----------------------------------
As we go to press, the Florida legislature, with Governor Bush's support, has
passed a bill reducing Florida's Intangible Tax effective 1/1/2000. Although the
exact changes are not finalized, the Intangible Tax mil rate will most certainly
be reduced next year. Additional reductions are possible in later years. Despite
the political rhetoric, future Intangible Tax reductions for individuals may
still depend upon the strength of the Florida economy and the state's ability to
replace Intangible Tax revenues.
The current Intangible Tax is quite small and has little impact upon your
effective marginal tax rate.(8) As a result, even the elimination of the tax
should have minimal effect on the Fund's tax equivalent yield. Investors should
consult their tax advisers with questions specific to their own tax situation.
The historic demand for Florida bonds has been very strong. Although on the
margin, this is a negative for Florida municipal bonds, I do not foresee a
significant adverse market reaction.
(8) Please refer to Appendix B of the current Prospectus for a discussion of Tax
Equivalent Yield and the Florida Intangibles Tax.
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 4.57% 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: 5.38% 6.36% 6.63% 7.15% 7.58%
- --------------------------------------------------------------------------------
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 Ratings/Mix as of March 31,
1999 of the USAA Florida Tax-Free Income Fund to be:
AAA - 34%; AA - 27%; A - 21%; BBB - 16%; and Cash Equivalents - 2%.
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 1.4% and 2.9%, respectively, 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.
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, and a further objective of
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 3/31/99
- --------------------------------------------------------------------------------
Net Assets $89.8 Million $98.6 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY YIELD AS OF 3/31/99
- --------------------------------------------------------------------------------
Since Inception 7-Day
1 Year 5 Years on 10/1/93 Yield
3.05% 3.19% 3.08% 2.71%
- --------------------------------------------------------------------------------
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.
--------------------- ------------------------
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%
10/27/98 2.93% 2.55%
11/24/98 3.02% 2.64%
12/29/98 3.09% 2.85%
01/26/99 2.62% 2.28%
02/22/99 2.38% 2.11%
03/29/99 2.71%* 2.34%*
Data represent the last Monday of each month.
* Ending date 3/29/99
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 the Portfolio Manager, John C. Bonnell, CFA, appears here.)
THE MARKET
It is interesting to hear what economists are saying about the direction of
interest rates. Over the last year, we heard predictions of lower interest
rates, predictions of higher interest rates, and you guessed it, predictions of
stable rates! At the time of this writing, some are calling for lower rates
suggesting our economy is on the verge of a slowdown due to depressed economies
abroad. Others are calling for higher rates because the domestic economy still
appears strong, which is likely to lead to inflation if held unchecked. Valid
arguments can be made for lower, constant, and higher interest rates. This is
why we continue to focus more on ascertainable concepts such as supply and
demand, and seasonal effects.
The supply of traditional money market fund eligible securities has not kept up
with the asset growth in tax-exempt money market funds -- which drives demand.
This has led to the creation of structured municipal variable rate securities
out of long-term fixed rate municipal bonds. The end result is a security with
an effective maturity within money market fund guidelines. While we currently do
not own this type of synthetic municipal security, we do closely analyze them
and may participate in this market some time in the future.
Beginning in the late summer of 1998, negative global economic events induced a
flight to quality into U.S. Treasury securities which were seen as a safe haven
from market uncertainty. In addition, the Federal Reserve lowered the Federal
Funds rate -- the rate banks charge one another for overnight loans -- three
times between September and November 1998 bringing the target rate down 0.75% to
4.75%. One-year municipal note yields, as measured by the Bond Buyer's One-Year
Note Index,(1) dropped from the 3.6% range in early August, to the 2.9% range in
early November. However, during March 1999, municipal note yields inched back up
above 3.0%.
(1) 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 given
time. The Fund's average maturity looks relatively short at this time because of
the amount of variable rate securities(2) compared to fixed rate securities in
the Fund. The variable rate securities recently offered a better relative value
in terms of risk/return versus long-term fixed-rate securities. We may be able
to extend the Fund's maturity in the coming months, both to protect against
lower rates and to help stabilize the interest rate fluctuations of the variable
rate securities. We continue to utilize our internal credit research staff to
analyze each security on a case by case basis and we remain very selective when
investing fund assets.
(2) Variable rate demand notes represent borrowings that are payable on demand
and that bear interest reflective of a money market rate.
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending March 31, 1999, your Fund ranked 10 out of 166 State Specific Tax-Exempt
Money Market Funds according to IBC Financial Data, Inc. with a yield of 3.05%.
The average for the category over the same period was 2.69%.
FLORIDA
Driven by population growth, Florida's economy continues to grow and diversify.
Although future economic expansion is forecasted to slow, expectations are for
the state economy to continue to outperform the U.S. as a whole. Current state
reserve levels are good with expectations for further augmentation in the
current fiscal year as well as the 1999-00 fiscal year. This is important due to
Florida's disproportionate reliance upon cyclical sales tax receipts as a source
of operating revenues.
The downside to Florida's expanding population base is the corresponding
budgetary pressure for social programs and infrastructure needs. To this end,
Florida's debt has increased in amount and complexity, and future borrowing is
anticipated. The state has increasingly utilized dedicated revenue pledges to
meet financing needs. While a ceiling on state revenue collections may become
fiscally restrictive, revenues pledged to state bonds are exempt from this
Florida constitutional amendment.
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.
Cumulative Performance of $10,000
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 3/31/99. 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
03/31/99 $11,813
Data since inception on 10/1/93 through 3/31/99
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.
As we go to press, the Florida legislature, with Governor Bush's support, has
passed a bill reducing Florida's Intangible Tax effective 1/1/2000. Although the
exact changes are not finalized, the Intangible Tax mil rate will most certainly
be reduced next year. Additional reductions are possible in later years. Despite
the political rhetoric, future Intangible Tax reductions for individuals may
still depend upon the strength of the Florida economy and the state's ability to
replace Intangible Tax revenues.
The current Intangible Tax is quite small and has little impact upon your
effective marginal tax rate.(3) As a result, even the elimination of the tax
should have minimal effect on the Fund's tax equivalent yield. Investors should
consult their tax advisers with questions specific to their own tax situation.
The historic demand for Florida bonds has been very strong. Although on the
margin, this is a negative for Florida municipal bonds, I do not foresee a
significant adverse market reaction.
(3) Please refer to Appendix B of the current Prospectus for a discussion of Tax
Equivalent Yield and the Florida Intangibles Tax.
See page 17 for a complete listing of the Portfolio of Investments.
Independent Auditors' Report
KPMG
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 of the USAA Florida Tax-Free Income and USAA
Florida Tax-Free Money Market Funds, funds of the USAA State Tax-Free Trust, as
of March 31, 1999, 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 the financial highlights, presented in note 9 to
the financial statements, for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Trust'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. Our procedures included confirmation of securities owned as of March
31, 1999, 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 as of
March 31, 1999, 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 in the five-year
period then ended, in conformity with generally accepted accounting principles.
KPMG LLP
San Antonio, Texas
May 7, 1999
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS
March 31, 1999
Fixed Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The interest rate is constant to maturity. Prior to maturity, the market
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
of the security.
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 generally adjusted at a stipulated daily, weekly, or monthly
interval to a rate that reflects current market conditions. In money market
funds, the effective maturity of these instruments is deemed to be less than 397
days in accordance with detailed regulatory requirements. In bond funds, the
effective maturity is the next put date.
Credit Enhancements - add 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.
The USAA Florida Tax-Free Money Market Fund's investments consist of securities
meeting the requirements to qualify as "eligible securities" under the
Securities and Exchange Commission (SEC) rules applicable to money market funds.
The Manager attempts to minimize credit risk in the USAA Florida Tax-Free Money
Market Fund through rigorous internal credit research and by investing in
securities rated in one of the two highest categories for short-term securities,
or, if not rated, of comparable quality, at the time of purchase.
(PRE) Prerefunded to a date prior to maturity.
(LOC) Enhanced by a bank letter of credit.
(LIQ) Enhanced by a bank liquidity agreement.
(NBGA) Enhanced by a non-bank guarantee agreement.
(INS) Scheduled principal and interest payments are insured by:
(1) MBIA, Inc.
(2) AMBAC Financial Group, Inc.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance Holdings Ltd.
(5) Asset Guaranty Insurance Co.
(6) ACA Financial Guaranty Corp.
PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CP Commercial Paper MFH Multi-Family Housing
GO General Obligation PCRB Pollution Control Revenue Bond
IDA Industrial Development RB Revenue Bond
Authority/Agency TAN Tax Anticipation Note
IDRB Industrial Development TRAN Tax Revenue Anticipation Note
Revenue Bond
USAA FLORIDA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 1999
Principal Coupon Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (94.6%)
Florida (87.6%)
$ 3,400 Alachua County Health Facilities
Auth. RB, Series 1996A (INS) (1) 5.80% 12/01/2026 $ 3,629
Board of Education Capital Outlay
Bonds,
3,500 Series 1995B (NBGA) 5.88 6/01/2020 3,774
4,000 Series 1997B (NBGA) 4.50 6/01/2027 3,635
3,000 Series 1998A (NBGA) 4.75 6/01/2028 2,830
2,000 Series 1998C (INS) (4) 4.50 6/01/2022 1,842
3,000 Series 1999A (NBGA) 4.50 6/01/2019 2,816
2,500 Board of Regents University Systems
Improvement RB, Series 1998
(INS) (2) 4.50 7/01/2023 2,297
Broward County Housing Finance
Auth. MFH RB,
1,100 Series 1995A 7.00 2/01/2025 1,223
1,000 Series 1997A-1 6.00 5/01/2032 1,065
2,000 Cape Canaveral Hospital District RB,
Series 1998 5.25 1/01/2028 1,920
Cape Coral Health Facilities Auth.
RB,
1,000 Series 1997 (INS) (5) 5.50 10/01/2017 1,037
1,400 Series 1997 (INS) (5) 5.63 10/01/2027 1,460
1,855 Citrus County PCRB, Series 1992B 6.35 2/01/2022 2,009
1,750 Clearwater Housing Auth. RB,
Series 1997 (INS) (6) 5.35 5/01/2024 1,769
2,000 Collier County Health Facilities
Auth. RB,
Series 1994(e) 7.00 12/01/2019 2,218
2,000 Dade County Special Obligation
Bonds, Series 1995 (PRE) 6.10 4/01/2020 2,247
Department of Transportation Right
of Way GO,
7,160 Series 1997B (NBGA) 5.00 7/01/2027 7,047
4,000 Series 1999A (NBGA) (d) 4.75 7/01/2020 3,832
Department of Transportation
Turnpike Auth. RB,
1,700 Series 1997A (INS) (3) 4.75 7/01/2020 1,626
4,000 Series 1998B (INS) (3) 5.00 7/01/2027 3,967
Duval County Housing Finance Auth.
MFH RB,
1,700 Series 1996 5.90 9/01/2016 1,785
2,510 Series 1996 6.00 3/01/2021 2,626
1,000 Escambia County Housing Finance
Agency MFH RB, Series 1985 5.63 8/01/2016 1,040
700 Gulf County School District Sales
Tax RB, Series 1997 (INS) (5) 5.75 6/01/2017 746
2,000 Hillsborough County IDA PCRB,
Series 1994 6.25 12/01/2034 2,206
Housing Finance Agency RB,
1,500 Series 1994A 6.35 7/01/2014 1,597
1,000 Series 1995H (NBGA) 6.50 11/01/2025 1,074
1,200 Indian River County Hospital
District RB, Series 1996 (INS) (4) 5.70 10/01/2015 1,288
8,820 Jacksonville Health Facilities Auth.
RB, Series 1997B 5.25 8/15/2027 8,823
Martin County Health Facilities
Auth. Hospital RB,
1,000 Series 1997A (INS) (1) 5.25 11/15/2017 1,022
1,700 Series 1998 (INS) (2) 5.00 11/15/2028 1,673
1,000 Miami Beach Health Facilities Auth.
Hospital RB, Series 1992 (INS) (4) 6.25 11/15/2019 1,089
36,000 Miami Dade County Special Obligation
RB, Series 1997B (INS) (1),(a) 5.65 10/01/2031 6,223
1,000 Miramar Wastewater Improvement
Assessment Bonds,
Series 1994 (PRE) (INS) (3) 6.75 10/01/2025 1,150
5,000 North Miami Educational Facilities
RB, Series 1994A (e) 6.13 4/01/2020 5,230
2,130 North Miami Health Facilities Auth.
RB, Series 1996 (LOC) 6.00 8/15/2024 2,257
5,750 Orange County Health Facilities
Auth. RB, Series 1995 (e) 6.75 7/01/2020 6,628
1,000 Orange County Housing Finance Auth.
RB, Series 1994B 6.40 2/01/2030 1,067
Orange County Tourist Development
Tax RB,
4,660 Series 1998A (INS) (2) 4.75 10/01/2024 4,438
2,880 Series 1998B (INS) (2) 4.75 10/01/2024 2,743
3,575 Orlando and Orange County Expressway
Auth. RB, Series 1993 5.95 7/01/2023 3,715
4,000 Orlando Utilities Commission RB,
Series 1993B 5.25 10/01/2023 4,029
3,405 Palm Beach County Health Facilities
Auth. Hospital RB,
Series 1993 (PRE) 6.30 10/01/2022 3,790
Palm Beach County Health Facilities
Auth. RB,
4,900 Series 1996 5.63 11/15/2020 5,072
2,500 Series 1998 5.13 11/15/2029 2,378
625 Palm Beach County Housing Finance
Auth. RB, Series 1994B 6.40 4/01/2014 665
1,800 Plantation Health Facilities Auth.
RB, Series 1998 5.13 12/01/2022 1,726
3,000 Sarasota County Public Hospital
Board RB, Series 1998B (INS) (1) 5.25 7/01/2024 3,087
6,805 St. Johns County IDA Hospital RB,
Series 1992 6.00 8/01/2022 7,070
2,000 St. Johns County IDA RB,
Series 1997A (INS) 1,c 5.50 3/01/2017 2,077
3,215 Sunrise Special Tax District #1 GO,
Series 1991 (LOC) 6.38 11/01/2021 3,461
1,150 Tallahassee Consolidated Utility
Systems RB, Series 1994 6.20 10/01/2019 1,271
8,400 Tampa Bay Water Utility Systems RB,
Series 1998B (INS) (3) 4.75 10/01/2027 7,955
1,300 Turtle Run Community Development
District RB, Series 1997 (PRE) 6.40 5/01/2011 1,422
1,500 Volusia County Education Facility
Auth. RB, Series 1996A 6.13 10/15/2026 1,595
3,000 Volusia County Health Facilities
Auth. Hospital RB, Series 1996
(INS) (2) 5.50 11/15/2026 3,103
Guam (0.6%)
1,000 Government Limited Obligation
Infrastructure Improvement RB,
Series 1989A (PRE) 7.10 11/15/2009 1,044
Puerto Rico (6.4%)
Commonwealth GO,
1,000 Series 1996 5.40 7/01/2025 1,028
2,000 Series 1998 5.00 7/01/2027 1,963
5,150 Electric Power Auth. RB,
Series 1995Z 5.25 7/01/2021 5,173
1,000 Highway and Transportation Auth. RB,
Series 1998A 5.00 7/01/2038 975
2,500 Highway Auth. RB, Series Q (PRE) 6.00 7/01/2020 2,583
- --------------------------------------------------------------------------------
Total fixed rate instruments (cost: $164,338) 172,130
- --------------------------------------------------------------------------------
PUT BOND (4.2%)
Florida
7,055 Duval County Housing Finance Auth.
MFH RB, Series 1995 (NBGA)
(cost: $7,159) 6.75 4/01/2025 7,655
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (1.8%)
Florida
2,810 Pinellas County Health Facilities
Auth. RB, Series 1985 (LIQ)
(INS)(2) 3.10 12/01/2015 2,810
495 Volusia County Health Facilities
Auth. RB, Series 1995 (LOC) 3.15 9/01/2020 495
- --------------------------------------------------------------------------------
Total variable rate demand notes (cost: $3,305) 3,305
- --------------------------------------------------------------------------------
Total investments (cost: $174,802) $183,090
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Special Assessment/Tax/Fee 18.1%
Hospitals 18.0
Multi-Family Housing 10.6
Nursing/Continuing Care Centers 9.2
Escrowed Bonds 6.7
Toll Roads 5.1
Water/Sewer Utilities - Municipal 5.1
Electric/Gas Utilities - Municipal 5.1
Education 5.0
Sales Tax 4.4
Healthcare - Miscellaneous 3.6
General Obligations 3.6
Electric Utilities 2.3
Finance - Municipal 1.5
Single-Family Housing 1.2
Miscellaneous 1.1
-----
Total 100.6%
=====
USAA FLORIDA TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 1999
Principal Coupon Final
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (70.3%)
Florida
$ 3,000 Brevard County Housing Finance Auth.
MFH RB, Series 1993 (NBGA) 3.10% 7/01/2005 $ 3,000
1,305 Brevard County Mental Health
Facilities RB, Series 1994C (LOC) 3.10 1/01/2010 1,305
3,000 Broward County Education Research
and Training Auth. IDRB,
Series 1997 (LOC) 3.05 8/01/2004 3,000
2,460 Broward County Housing Finance Auth.
MFH RB, Series 1990 (NBGA) 3.10 10/01/2007 2,460
1,300 Dade County Special Obligation
Bonds, Series 1990 (LOC) 4.40 10/01/2010 1,300
3,725 Fort Pierce Health Facility RB,
Series 1997 (LOC) 3.10 10/01/2017 3,725
1,725 Hillsborough County IDA PCRB,
Series 1990 3.15 9/01/2025 1,725
2,100 Hillsborough County Port District
RB, Series 1992 (LOC) 3.00 2/01/2004 2,100
Housing Finance Agency MFH RB,
7,430 Series 1985 EE (LOC) 3.00 9/01/2008 7,430
1,515 Series 1985C (LOC) 3.10 8/01/2006 1,515
1,100 Series 1985GGG (LOC) 4.75 12/01/2008 1,100
3,305 Series 1990B (NBGA) 3.10 12/01/2009 3,305
450 Series 1990D (NBGA) 3.10 12/01/2009 450
4,300 Jacksonville Hospital RB,
Series 1988 (LOC) 4.50 2/01/2018 4,300
1,800 Miami Health Facilities Auth. RB,
Series 1996 (LOC) 3.10 12/01/2016 1,800
755 Orange County Health Facilities
Auth. RB, Series 1998 (LOC) 3.05 11/01/2028 755
1,000 Orange County IDA RB, Series 1996A
(LOC) 3.10 2/01/2016 1,000
4,205 Pinellas County Health Facilities
Auth. RB, Series 1985
(LIQ)(INS)(2) 3.10 12/01/2015 4,205
1,890 Sarasota Educational Facilities RB,
Series 1996 (LOC) 3.10 2/01/2021 1,890
2,740 St. Johns County IDA RB, Series
1997 (LOC) 3.05 5/01/2009 2,740
St. Petersburg Health Facilities
Auth. RB,
3,475 Series 1997 (LOC) 3.05 7/01/2027 3,475
5,000 Series 1999 (LOC) 3.08 1/01/2024 5,000
Volusia County Health Facilities
Auth. RB,
3,800 Series 1994A (LOC) 3.05 11/15/2023 3,800
800 Series 1995 (LOC) 3.15 9/01/2020 800
3,000 Volusia County Housing Finance
Auth. RB, Series 1985C (LOC) (b) 3.38 9/01/2005 3,000
4,150 Wauchula IDA RB, Series 1993 (LOC) 3.15 12/01/2013 4,150
- --------------------------------------------------------------------------------
Total variable rate demand notes (cost: $69,330) 69,330
- --------------------------------------------------------------------------------
PUT BOND (1.2%)
Florida
1,200 Indian River County Hospital
District RB, Series 1989
(LOC) (cost: $1,200) 2.65 10/01/2019 1,200
- --------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (21.3%)
Florida
1,000 East County Water Control District
RB, Series 1994 (INS) (5) 5.10 11/01/1999 1,011
4,790 Gainesville Utilities System CP
Notes, Series C 2.95 5/03/1999 4,790
1,800 Halifax Hospital Medical Center TAN,
Series 1999 (LOC) 3.50 3/15/2000 1,808
5,200 Jacksonville GO CP Notes 2.65 5/03/1999 5,200
4,000 Local Government Finance Commission
Pooled CP Notes, Series A (LOC) 2.70 5/07/1999 4,000
3,000 Miami Dade County School District
TRAN, Series 1998 4.00 6/30/1999 3,003
700 Osceola County Capital Improvements
RB, Series 1998 (INS) (1) 3.60 9/01/1999 700
500 Pinellas County Resources Recovery
RB, Series 1990A (INS) (1) 6.50 10/01/1999 508
- --------------------------------------------------------------------------------
Total fixed rate instruments (cost: $21,020) 21,020
- --------------------------------------------------------------------------------
Total investments (cost: $91,550) $ 91,550
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Multi-Family Housing 22.6%
Hospitals 9.4
Finance - Municipal 8.3
Buildings 7.3
Nursing/Continuing Care Centers 6.9
Water/Sewer Utilities - Municipal 5.9
General Obligations 5.3
Healthcare - Miscellaneous 5.1
Community Service 5.1
Real Estate Tax/Free 4.9
Education 2.9
Aluminum 2.8
Chemicals 2.1
Electric Utilities 1.7
Special Assessment/Tax/Fee 1.3
Appropriated Debt .7
Solid Waste Disposal .5
----
Total 92.8%
====
NOTES TO PORTFOLIO OF INVESTMENTS
March 31, 1999
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) Zero Coupon security. Rate represents the effective yield at date of
purchase.
(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, 1999, this security represents 3.0% of the USAA Florida
Tax-Free Money Market Fund's net assets.
(c) 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, 1999, this security
represented 1.1% of the USAA Florida Tax-Free Income Fund's net assets.
(d) At March 31, 1999, the cost of securities purchased on a delayed delivery
basis for the USAA Florida Tax-Free Income Fund was $3.9 million.
(e) At March 31, 1999, these securities were segregated to cover delayed
delivery purchases.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 1999
<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 $174,802 and $91,550, respectively) $ 183,090 $ 91,550
Cash 27 72
Receivables:
Capital shares sold 28 62
Interest 3,062 418
Securities sold - 6,752
------------------------------
Total assets 186,207 98,854
------------------------------
LIABILITIES
Securities purchased 3,863 -
Capital shares redeemed 16 157
USAA Investment Management Company 55 45
USAA Transfer Agency Company 6 5
Accounts payable and accrued expenses 31 20
Dividends on capital shares 272 11
------------------------------
Total liabilities 4,243 238
------------------------------
Net assets applicable to capital shares outstanding $ 181,964 $ 98,616
==============================
REPRESENTED BY:
Paid-in capital $ 174,709 $ 98,616
Accumulated net realized loss on investments (1,033) -
Net unrealized appreciation of investments 8,288 -
------------------------------
Net assets applicable to capital shares outstanding $ 181,964 $ 98,616
==============================
Capital shares outstanding, unlimited number of shares
authorized, $.001 par value 18,160 98,616
==============================
Net asset value, redemption price, and offering price per share $ 10.02 $ 1.00
==============================
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
March 31, 1999
<TABLE>
<CAPTION>
USAA USAA
Florida Florida Tax-Free
Tax-Free Money Market
Income Fund Fund
-------------------------------
<S> <C> <C>
Net investment income:
Interest income $ 8,899 $ 3,391
-------------------------------
Expenses:
Management fees 586 345
Transfer agent's fees 78 63
Custodian's fees 60 42
Postage 6 5
Shareholder reporting fees 5 5
Trustees' fees 7 7
Registration fees 10 3
Professional fees 15 22
Other 7 4
-------------------------------
Total expenses before reimbursement 774 496
Expenses reimbursed - (11)
-------------------------------
Total expenses after reimbursement 774 485
-------------------------------
Net investment income 8,125 2,906
-------------------------------
Net realized and unrealized gain on investments:
Net realized gain 373 -
Change in net unrealized appreciation/depreciation 625 -
-------------------------------
Net realized and unrealized gain 998 -
-------------------------------
Increase in net assets resulting from operations $ 9,123 $ 2,906
===============================
</TABLE>
See accompanying notes to financial statements.
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
--------------------------------------------
1999 1998 1999 1998
--------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 8,125 $ 6,108 $ 2,906 $ 2,851
Net realized gain on investments 373 451 - -
Change in net unrealized appreciation/
depreciation of investments 625 6,424 - -
--------------------------------------------
Increase in net assets resulting from
operations 9,123 12,983 2,906 2,851
--------------------------------------------
Distributions to shareholders from:
Net investment income (8,125) (6,108) (2,906) (2,851)
--------------------------------------------
From capital share transactions:
Proceeds from shares sold 61,581 60,753 182,464 159,243
Dividend reinvestments 5,417 4,066 2,699 2,630
Cost of shares redeemed (31,953) (21,256) (176,346) (159,127)
--------------------------------------------
Increase in net assets from
capital share transactions 35,045 43,563 8,817 2,746
--------------------------------------------
Net increase in net assets 36,043 50,438 8,817 2,746
Net assets:
Beginning of period 145,921 95,483 89,799 87,053
--------------------------------------------
End of period $181,964 $145,921 $ 98,616 $ 89,799
============================================
Change in shares outstanding:
Shares sold 6,133 6,196 182,464 159,243
Shares issued for dividends reinvested 538 416 2,699 2,630
Shares redeemed (3,186) (2,172) (176,346) (159,127)
--------------------------------------------
Increase in shares outstanding 3,485 4,440 8,817 2,746
============================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(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 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 three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 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 both agreements 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, at
NationsBank's borrowing rate plus a markup, an amount which, when added to
outstanding borrowings under the CAPCO agreements, does not exceed 15% of its
total assets. During the year ended March 31, 1999, the USAA Florida Tax-Free
Income Fund had two borrowings, averaging $1.8 million with an average length of
one day, and incurred $519 in interest expense. The USAA Florida Tax-Free Money
Market Fund had no borrowings under any 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 March 31, 1999, the
USAA Florida Tax-Free Income Fund had capital loss carryovers for federal income
tax purposes of approximately $1.0 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 year
ended March 31, 1999 were as follows:
USAA Florida Tax-Free USAA Florida Tax-Free
Income Fund Money Market Fund
($000) ($000)
---------------------------------------------
Purchases $ 81,550 $333,914
Sales/maturities $ 40,523 $323,973
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, 1999
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------------
USAA Florida Tax-Free
Income Fund $ 8,623 $ 335 $ 8,288
(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, 2000.
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 $28.50 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.
(7) YEAR 2000 (UNAUDITED)
Like other mutual funds, the Funds could be adversely affected if the computer
systems used by the Manager and the Funds' other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager is taking steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that comparable steps are being taken by the Funds' other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Funds from this
problem.
(8) SHAREHOLDER DIVIDENDS (UNAUDITED)
The Funds completed their fiscal year on March 31, 1999. 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 dividends 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, 1999.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA FLORIDA TAX-FREE INCOME FUND
March 31, 1999
(9) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.94 $ 9.33 $ 9.26 $ 9.09 $ 8.98
Net investment income .50 .51 .52 .52 .49
Net realized and
unrealized gain .08 .61 .07 .17 .11
Distributions from net
investment income (.50) (.51) (.52) (.52) (.49)
-------------------------------------------------------
Net asset value at
end of period $ 10.02 $ 9.94 $ 9.33 $ 9.26 $ 9.09
=======================================================
Total return (%) * 5.91 12.22 6.51 7.66 7.01
Net assets at end
of period (000) $181,964 $145,921 $ 95,483 $ 69,079 $ 42,891
Ratio of expenses to
average net assets (%) .47 .50 .50 .50 .50
Ratio of expenses to
average net
assets excluding
reimbursements (%) - .51 .57 .67 .81
Ratio of net investment
income to average
net assets (%) 4.96 5.21 5.57 5.52 5.59
Portfolio turnover (%) 25.28 27.48 44.75 88.20 71.76
</TABLE>
* Assumes reinvestment of all dividend income distributions during the period.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA FLORIDA TAX-FREE MONEY MARKET FUND
March 31, 1999
(9) FINANCIAL HIGHLIGHTS (CONTINUED)
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .03 .03
Distributions from net
investment income (.03) (.03) (.03) (.03) (.03)
-------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=======================================================
Total return (%) * 3.05 3.34 3.20 3.51 2.86
Net assets at end
of period (000) $ 98,616 $ 89,799 $ 87,053 $ 71,224 $ 52,225
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50
Ratio of expenses to
average net
assets excluding
reimbursements (%) .51 .52 .57 .64 .72
Ratio of net investment
income to average
net assets (%) 3.00 3.28 3.15 3.45 2.97
</TABLE>
* Assumes reinvestment of all dividend income distributions during the period.
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 LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:30 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 USAA TouchLine(Service Mark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
