Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA Texas Tax-Free Income Fund 4
USAA Texas Tax-Free Money Market Fund 11
Shareholder Voting Results 14
Financial Information:
Portfolios of Investments:
Categories and Definitions 15
USAA Texas Tax-Free Income Fund 16
USAA Texas Tax-Free Money Market Fund 20
Notes to Portfolios of Investments 22
Statements of Assets and Liabilities 23
Statements of Operations 24
Statements of Changes in Net Assets 25
Notes to Financial Statements 26
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Texas Funds,
managed by USAA Investment Management Company (IMCO). It may be used as sales
literature only when preceded or accompanied by a current prospectus which gives
further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)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 Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500(Registered Trademark)
Index Moderate $3,000
Science & Technology Very high $3,000
Small Cap Stock Very high $3,000
World Growth Moderate to high $3,000
ASSET ALLOCATION
================================================================================
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
================================================================================
GNMA Low to moderate $3,000
High-Yield Opportunities High $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Intermediate-Term Bond Low to moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
================================================================================
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
MONEY MARKET
================================================================================
Money Market Very low $3,000
Tax Exempt Money Market Very low $3,000
Treasury Money Market Trust Very low $3,000
State Money Market Very low $3,000
Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
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.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
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.
The Science & Technology 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
FOR AS LONG AS I HAVE MANAGED MONEY
for customers, it has been obvious that few things puzzle or distress them as
much as a falling bond market. People generally view bonds as a risk-lowering
tool. They add bonds to a portfolio to reduce overall volatility and to create
an added buffer with the relatively high income. Some people use bond portfolios
as their sole investment. Their thinking is that they will live off the income
and not be concerned about market values because they intend to let the bonds
mature. These kinds of strategies were much easier to execute before the days of
fixed-income mutual funds.
[Photo of Michael J.C. Roth, CFA; President and Vice Chairman of the Board
appears here]
Mutual funds did something for bond investors that had never been done before --
show investors every day what their portfolio was worth. In the process, the
funds revealed just how much bond prices can move in a day or a week. No
investor likes to see a portfolio lose market value, especially when the
investor is thinking in terms of "low risk." The latter part of 1998 and the
first three quarters of 1999 have been a period of generally rising interest
rates, which has meant falling market prices. Let me tell you how we approach
such times.
First, we believe interest-rate movements are nearly impossible to predict with
both accuracy and consistency. Second, we believe that most tax-exempt income
investors are primarily interested in a high and stable level of income. Since
the common way to preserve market value in a period of rising interest rates is
to switch to money market investments at much lower yields, the importance of
belief one is magnified. And third, we believe experience going back many years
indicates that the part of a portfolio that is invested in longer maturities may
provide returns that are superior to the money markets.
The chart below shows the one-, five-, and ten-year average annual total returns
for our four national tax-exempt funds. Please bear in mind that there are no
guarantees here -- just as with all mutual funds.
Average Annual Total Returns as of September 30, 1999
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
USAA TAX EXEMPT LONG-TERM FUND -3.23 6.45 6.93
- --------------------------------------------------------------------------------
USAA TAX EXEMPT INTERMEDIATE-TERM FUND -1.24 6.23 6.88
- --------------------------------------------------------------------------------
USAA TAX EXEMPT SHORT-TERM FUND 2.06 4.90 5.21
- --------------------------------------------------------------------------------
USAA TAX EXEMPT MONEY MARKET FUND 3.10 3.39 3.67
- --------------------------------------------------------------------------------
Total return equals income plus share price change and assumes reinvestment of
all dividends and capital gains 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.
I think the best way to address volatility in bond markets is by allocating some
of your portfolio to the short-term part of the market. I believe that the
pattern of the average annual total returns shown in the chart above is viable.
So, the income part of my portfolio is concentrated in the USAA Tax Exempt
Long-Term Fund. If such a strategy leaves you uncomfortable, we have other
options. We'll be happy to help you craft a portfolio with which you are
comfortable.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, 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 TEXAS TAX-FREE INCOME FUND
OBJECTIVE: High level of current interest income that is exempt from federal
income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term, investment-grade Texas
tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/99 9/30/99
- --------------------------------------------------------------------------------
Net Assets $34.8 Million $37.1 Million
Net Asset Value Per Share $11.07 $10.26
Tax-Exempt Dividends Per Share Last 12 Months $.557 $.550
Capital Gains Distributions Per Share Last
12 Months $.018 $.034
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Six-Month Total Return and 30-day SEC Yield* as of 9/30/99
- --------------------------------------------------------------------------------
3/31/99 to 9/30/99 30-Day SEC Yield
-4.62%+ 5.27%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending September 30, 1999
- --------------------------------------------------------------------------------
Total Return Equals Dividend Return Plus Price Change
- --------------------------------------------------------------------------------
Since 8/1/94 6.89% = 5.52% + 1.37%
- --------------------------------------------------------------------------------
5 Years 7.44% = 5.59% + 1.85%
- --------------------------------------------------------------------------------
1 Year -4.38% = 4.69% + -9.07%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns
for the Five-Year Period Ended September 30, 1999
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA Texas Tax-Free Income Fund
for the five-year period ended September 30, 1999.
Total Return for Years Ended:
- ----------------------------
09/30/95 13.26%
09/30/96 8.56%
09/30/97 10.30%
09/30/98 10.39%
09/30/99 -4.38%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
09/30/95 6.21%
09/30/96 5.88%
09/30/97 5.91%
09/30/98 5.46%
09/30/99 4.69%
Change in Share Price:
- ---------------------
09/30/95 7.05%
09/30/96 2.68%
09/30/97 4.39%
09/30/98 4.93%
09/30/99 -9.07%
** Compounded Dividend yield calculation includes only income distributions.
Total return equals dividend return plus share price change and assumes
reinvestment of all dividends and capital gains distributions. Dividend return
is the income from 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 gains distributions. No adjustment has been made for
taxes payable by shareholders on their reinvested dividends and capital gains
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.
12-Month Dividend Yield Comparison
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Texas Tax-Free Income Fund to the 12
Month Dividend Yield of the Lipper Texas Municipal Debt Funds Average from
9/30/95 to 9/30/99.
USAA Texas Tax-Free Lipper Texas Municipal
Income Fund Yield Debt Funds Average Yield
------------------- ------------------------
09/30/95 5.42% 5.33%
09/30/96 5.48% 5.05%
09/30/97 5.38% 4.90%
09/30/98 4.95% 4.57%
09/30/99 5.36% *
The 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. The graph represents data for periods ending
9/30/95 to 9/30/99.
* Information from Lipper Analytical Services, Inc. was not available at press
time.
Cumulative Performance Comparison
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 Investment for the USAA Texas Tax-Free Income Fund,
Lehman Brothers Municipal Bond Index and the Lipper Texas Municipal Debt Funds
Average. The data is from 8/1/94 through 9/30/99. The data points from the graph
are as follows:
USAA Texas Tax-Free Income Fund
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 9,856
03/31/95 10,575
09/30/95 11,163
03/31/96 11,571
09/30/96 12,118
03/31/97 12,389
09/30/97 13,366
03/31/98 14,087
09/30/98 14,755
03/31/99 14,791
09/30/99 14,108
Lehman Brothers Municipal Bond Index
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 9,887
03/31/95 10,435
09/30/95 10,993
03/31/96 11,309
09/30/96 11,657
03/31/97 11,925
09/30/97 12,708
03/31/98 13,203
09/30/98 13,816
03/31/99 14,022
09/30/99 13,719
Lipper Texas Municipal Debt Funds Average
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 9,830
03/31/95 10,392
09/30/95 10,849
03/31/96 11,187
09/30/96 11,509
03/31/97 11,757
09/30/97 12,512
03/31/98 12,991
09/30/98 13,543
03/31/99 13,632
09/30/99 13,081
Data since inception on 8/1/94 through 9/30/99
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 Texas Municipal Debt Funds Average is the average
performance level of all Texas municipal debt funds, as computed by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds. All tax-exempt bond funds will find it difficult to
outperform the Lehman Index since funds have expenses.
Message from the Manager
[PHOTO OF THE PORTFOLIO MANAGER, ROBERT R. PARISEAU, CFA, APPEARS HERE]
A CHANGE IN SENTIMENT SHAKES THE MARKET
Fixed-income investors were reminded this year that the financial markets look
to the future -- not the past or even the present. Although most economic
statistics released this year suggest that inflation is well under control, the
fixed-income markets are clearly anticipating higher rates of inflation. After
all, reported inflation statistics such as the Consumer Price Index (CPI) are
historical numbers -- even though they may be only a month old. Higher inflation
causes bond prices to fall because inflation decreases the value of future
interest payments.
With a seemingly endless American economic expansion that, at times, seems to be
gaining strength, a bear market psychology has taken hold in the fixed-income
markets. Economists and investors wonder just how much longer economic growth
can continue in the United States without causing higher prices.
After falling to levels not seen in years, some inflation indicators have
increased slightly in 1999. Will inflation continue to rise or will it stabilize
at slightly higher levels than in 1998? This uncertainty has shaken the
confidence of many fixed-income investors. If inflation has stabilized, then the
rise in interest rates is probably closer to the end than the beginning -- given
current economic conditions.
The yield on the 30-year U.S. Treasury bond (the long bond) has steadily risen
from 5.625% to 6.05% from March 31 to September 30, 1999. The yield on the Bond
Buyer 40-Bond Index (BBI40) faired worse. The municipal market under-performed
the Treasury market as the BBI40 began the period at 5.23%, or 93% of the long
bond, and ended at 5.89% on September 30, or 97% of 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 3/31/99
to 9/30/99.
30-year Bond Buyer
U.S. 40-Bond
Treasury Index (BBI40)
-------- -------------
03/31/99 5.63% 5.23%
04/15/99 5.53% 5.21%
04/30/99 5.66% 5.28%
05/14/99 5.92% 5.38%
05/31/99 5.83% 5.37%
06/15/99 6.11% 5.53%
06/30/99 5.96% 5.55%
07/15/99 5.92% 5.50%
07/30/99 6.10% 5.59%
08/16/99 6.09% 5.88%
08/31/99 6.06% 5.78%
09/15/99 6.10% 5.86%
09/30/99 6.05% 5.89%
Note: Past performance is no guarantee of future results.
The 30-year U.S. Treasury bond is generally considered the benchmark for U.S.
long-term interest rates.
The Bond Buyer 40-Bond Index is the industry standard for the yield of
long-term, investment-grade municipal bonds.
INCOME STRATEGY
I consistently follow an income strategy for this Fund similar to that used by
other USAA tax-exempt funds. I focus primarily on generating maximum tax-exempt
income with the goal of producing the best after-tax total return over a three-
to five-year investment horizon. I remain fully invested in long-term,
investment-grade municipal bonds. My primary justifications for this strategy
are simple in concept:
- I believe that a large number of our investors own the Fund for the
tax-free income and invest for the long term -- meaning three to five
years or more.
- Although past performance is no guarantee of future results, the strategy
has worked in different kinds of markets over the years. Long-term
performance, measured by total return, has been well above the peer-group
average.
Although the Fund has behaved as expected given the increase in interest rates,
this year's total return performance has been very disappointing and
frustrating. Why does this income strategy produce such apparently contradictory
results -- weak short-term total return performance in 1999 but above-average
performance for long-term total return? Income performance is well above average
in the short and long term.
Of course, in the short run, price change can overwhelm the income distribution
to create a negative total return for a given period. I believe that an income
strategy works because, over time, the vast majority of your total return from a
fixed-income security will be from the income. Price changes tend to even out
over longer investment horizons. Please refer to the table and chart on page 4.
YOUR INVESTMENT HORIZON IS IMPORTANT!
I consistently invest the Fund in long-term, investment-grade, tax-exempt
municipal securities. Why long-term bonds? Because bonds maturing in 20 years or
longer almost always yield more than shorter bonds of the same credit quality.
However, longer-maturity bonds are more volatile in price than shorter-maturity
bonds. In regard to credit risk, I believe investment-grade bonds (rated BBB or
higher) offer the best risk/reward compared to either junk bonds or insured
bonds. That's why we encourage only those investors with a three- to five-year
investment horizon to buy our tax-exempt bond funds. These long-term investors
seeking high current income must be willing to assume moderate credit risk and
price volatility in return.
A TIME TO REFLECT
Because interest rates have risen in 1999, investors have suffered for owning
any kind of long-maturity bond -- municipals, corporates, or governments. That's
the mathematics of bond investing. An investor can mitigate, but not eliminate,
the volatility risk by investing for the long term. Although our strategy has
produced good results for our investors in the past, to guard against
complacency, we are constantly examining and analyzing our investment
strategies.
Is there a better way to invest a tax-exempt bond fund? An alternative to an
income strategy is to focus on total return. However, a total-return strategy
requires the manager to successfully time the market cycles by correctly
forecasting interest rates again and again over extended periods of time. No
person, to my knowledge, has ever done that.
Enduring a bear market like 1999 can be very unsettling. It's a good time to
review why you purchased the Fund in the first place:
- Are you most interested in receiving a high level of interest income
that is free of federal and state taxes?
- Is your investment horizon long enough to cope with the ups and downs
of the market?
- Do you need to raise cash? Do you maintain a sufficient cash reserve?
- Are you comfortable with the moderate credit risk of investment-grade
municipal bonds? (Please review the Portfolio Ratings Mix chart on page
10.)
I view the current environment as an opportunity to increase the Fund's
distribution yield by buying bonds that offer very attractive yields at value
prices.
YOUR FUND'S PERFORMANCE * * * * *
I'm very pleased to say that your Fund received an Overall Star Rating of five
stars in the municipal bond fund category from Morningstar Rating(Trademark) for
the period ended September 30, 1999. Your Fund's net asset value (NAV) per share
decreased by $0.81, or -7.32%, since March 31, 1999.
While past performance is no guarantee of future results, the Fund's annualized
dividend distribution yield for the past six months was 5.29%. At press time,
Lipper yield data was not available for the same time period. The Fund's total
return was -4.62%.
THE STATE OF TEXAS
Texas not only has one of the strongest economies in the nation, the Lone Star
state ranks as the 11th largest economy in the world. In the past five years,
Texas has added 1.1 million jobs. The state's economic fundamentals are strong
due to low business costs, such as wages and taxes, substantial growth of the
high-tech sector, and favorable geographic location for international trade.
However, a growing population, which in 1999 exceeded 20 million for the first
time, will exert pressures on the state for water resources, roads, education,
housing, and health care.
In 1999, the state's unemployment rate declined to its lowest level since 1979.
Although per capita personal income is below the national average, it is inching
upward. Per capita personal income averaged $24,957 for 1998, or approximately
95% of the U.S. average, compared to $17,288, or 90% at the beginning of the
decade. A predominantly young labor force, an expanding service sector with
lower-paying jobs, and a border economy adversely influenced by Mexico, account
for the shortfall.
The state's financial position has strengthened during this extended economic
expansion. Texas finished fiscal year 1998 with a $3.3 billion cash balance.
Texas has traditionally financed capital projects on a pay-as-you-go basis
keeping debt issuance low. In June, Moody's Investors Service raised the state's
credit rating on its general obligation debt from Aa2 to Aa1. Standard and
Poor's and Fitch IBCA have maintained their state general obligation debt credit
ratings of AA and AA+, 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.
Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk-adjusted performance as of September 30, 1999.
The ratings are subject to change every month. Morningstar ratings are
calculated from the Fund's three- and five-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 three-, five-, and ten-year ratings, as
applicable. The USAA Texas Tax-Free Income Fund received four and five stars for
the three- and five-year periods, respectively. The top 10% of the funds in a
broad asset class receive five stars, the next 22.5% receive four stars, and the
next 35% receive three stars. The Fund was rated among 1,611 and 1,241 funds in
the municipal bond fund category for the three- and five-year periods,
respectively.
Dividend yield is computed by dividing income dividends paid during the previous
six months by the latest month-end net asset value adjusted for capital gains
distributions and annualizing the result.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gains distributions.
TAXABLE EQUIVALENT YIELDS
The table below compares the yield of the USAA Texas Tax-Free Income Fund with a
taxable equivalent investment.
To match the USAA Texas Tax-Free Income Fund's closing
30-day SEC yield of 5.27% and:
- --------------------------------------------------------------------------------
Assuming a marginal federal tax rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investment must pay: 6.20% 7.32% 7.64% 8.24% 8.73%
- --------------------------------------------------------------------------------
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.
Note: Some income may be subject to the federal alternative minimum tax.
Portfolio Ratings Mix
September 30, 1999
A pie chart is shown here depicting the Portfolio Ratings Mix as of September
30, 1999 of the USAA Texas Tax-Free Income Fund to be:
AAA - 36%; BB - 0.6%; BBB - 36.3%; AA - 14.9%; A - 10.4%; and Cash Equivalents -
1.8%.
The four highest long-term credit ratings, in descending order of credit
quality, are AAA, AA, A, and BBB. This chart reflects the higher rating of
either Moody's Investors Service, Standard & Poor's Rating Group, or Fitch IBCA.
Unrated securities that have been determined by USAA IMCO to be of equivalent
investment quality to categories AAA and BBB account for 0.4% and 8.7%,
respectively, of the Fund's investments, and are included in their appropriate
category above.
See page 16 for a complete listing of the Portfolio of Investments.
Investment Review
USAA TEXAS TAX-FREE MONEY MARKET FUND
OBJECTIVE: High level of current interest income that is exempt from federal
income taxes and a further objective of preserving capital and maintaining
liquidity.
TYPES OF INVESTMENTS: High-quality Texas tax-exempt securities with maturities
of 397 days or less. The Fund will maintain a dollar-weighted average portfolio
maturity of 90 days or less and will endeavor to maintain a constant net asset
value per share of $1.00.*
* An investment in a money market fund is not insured or guaranteed by the FDIC
or any government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
- --------------------------------------------------------------------------------
3/31/99 9/30/99
- --------------------------------------------------------------------------------
Net Assets $7.5 Million $7.7 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
Average Annual Total Returns and 7-Day Yield as of 9/30/99
- --------------------------------------------------------------------------------
3/31/99 Since Inception 7-Day
to 9/30/99 1 Year 5 Years on 8/1/94 Yield
1.53%+ 3.02% 3.30% 3.28% 3.44%
- --------------------------------------------------------------------------------
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income return and assumes reinvestment of all dividends and
any capital gains distributions. No adjustment has been made for taxes payable
by shareholders on their reinvested dividends and capital gains distributions.
Past performance is no guarantee of future results. Yields and returns
fluctuate. The 7-day yield quotation more closely reflects current earnings of
the Fund than the total return quotation.
7-Day Yield Comparison
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day Yield of the USAA Texas Tax-Free Money Market Fund and the IBC
Financial Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose)
(Tax-Free): Money Funds.
USAA Texas Tax-Free
Money Market Fund IBC Financial Data, Inc.
------------------- ------------------------
09/29/98 3.58% 3.10%
10/27/98 3.16% 2.55%
11/24/98 3.15% 2.64%
12/29/98 3.40% 2.85%
01/26/99 2.80% 2.28%
02/22/99 2.68% 2.11%
03/29/99 2.88% 2.34%
04/26/99 3.17% 2.66%
05/31/99 3.06% 2.58%
06/28/99 3.23% 2.82%
07/26/99 2.91% 2.40%
08/30/99 2.97% 2.53%
09/27/99 3.40% 2.90%
Data represent the last Monday of each month.
Ending date 9/27/99
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
[PHOTO OF THE PORTFOLIO MANAGER, REGINA G. SHAFER, CFA, APPEARS HERE]
THE MARKET
Since our last shareholder report, the national economy has continued to
strengthen. Consumer confidence has been very high due, in part, to continued
strong employment. In August, national unemployment reached the lowest levels of
the decade -- 4.2%. This strong economy has caused the Federal Reserve Board to
take action in order to keep inflation in check. The Federal Open Market
Committee has raised the federal funds rate (the interest rate banks charge
other banks) twice since March -- an increase of 0.25% in both June and August
- -- to bring the federal funds rate to 5.25%. During this time period, the
30-year Treasury rate ranged from 5.4% in April to 6.3% in August. One-year
municipal note yields have also inched up over the last six months. According to
the Bond Buyer One-Year Note Index, municipal notes have risen from a low of
3.05% in April to a high of 3.73% as of September.
STRATEGY
Instead of trying to determine where interest rates will be in the near term, we
continue to focus on finding relative value. Our credit research team
contributes to this effort by assessing creditworthiness of each issue that the
Fund purchases. The Fund's average maturity of 37 days on September 30 is
shorter than the industry's average maturity of 57 days. The Fund holds over 76%
of its assets in issues whose rates are reset daily or weekly, with the belief
that this sector represents the best value at the time. This provides us the
flexibility to selectively move to longer-term investments once those become
more attractive.
The Bond Buyer One-Year Note Index is representative of yields on ten large one-
year tax-exempt notes.
PERFORMANCE
For the 12 months ending September 30, 1999, the USAA Texas Tax-Free Money
Market Fund ranked 1 out of 166 state-specific tax-exempt money market funds,
according to IBC Financial Data, Inc., with a return of 3.02%. The average
return for the category over the same period was 2.52%. Please keep in mind that
past performance is no guarantee of future results.
TEXAS
Texas continues to have one of the strongest economies in the nation. In August,
the state's unemployment level dropped to 4.4% -- the lowest level since 1979.
Between June 1998 and June 1999, Texas added 251,000 jobs, with growth in
construction, manufacturing, and the high-technology sectors. Not surprisingly,
the state's financial position has benefited from the strong economy. During the
recently completed 76th Legislature, the state approved a $98.1 billion budget
for the 2000-2001 biennium without increasing current tax rates. The budget
includes close to $1.3 billion for local school districts for property tax
relief and teacher pay raises.
A strong economy and solid financial performance have contributed to the
financial strength of the state. During June, Moody's Investors Service upgraded
the state's general obligation debt rating to Aa1. The state also has AA and AA+
ratings from both Standard and Poor's and Fitch IBCA, respectively.
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 of the USAA Texas Tax-Free Money Market
Fund. The data is from 8/1/94 to 9/30/99. The data points from the graph are as
follows:
USAA Texas Tax-Free Money Market Fund
Year Amount
- ---- ------
08/01/94 $10,000
09/30/94 10,044
03/31/95 10,209
09/30/95 10,392
03/31/96 10,566
09/30/96 10,736
03/31/97 10,906
09/30/97 11,096
03/31/98 11,280
09/30/98 11,468
03/31/99 11,637
09/30/99 11,814
Data since inception on 8/1/94 through 9/30/99
Past performance is no guarantee of future results, and the value of your
investment will vary according to the Fund's performance. Some income may be
subject to federal, state, or local taxes, or to the federal alternative minimum
tax. For 7-day yield information, please refer to the Fund's Investment Review
page.
See page 20 for a complete listing of the Portfolio of Investments.
Shareholder Voting Results
On October 15, 1999, a special meeting of shareholders was held to vote on the
following proposals. All proposals were approved by the shareholders. All
shareholders of record on August 19, 1999, were entitled to vote on each
proposal. The number of votes shown below are shown for the entire USAA State
Tax-Free Trust (the Trust) for proposals 1 and 2.
1 Proposal to elect a Board of Trustees as follows:
TRUSTEES VOTES FOR VOTES WITHHELD
-------- --------- --------------
Robert G. Davis 76,619,692 1,854,365
Michael J.C. Roth 76,619,692 1,854,365
David G. Peebles 76,619,692 1,854,365
Robert L. Mason 76,619,692 1,854,365
Michael F. Reimherr 76,619,692 1,854,365
Richard A. Zucker 76,619,692 1,854,365
Barbara B. Dreeben 76,619,692 1,854,365
John W. Saunders, Jr. and Howard L. Freeman, Jr. did not stand for re-election
to the Board. Their term of office will terminate on December 31, 1999.
2 Proposal to ratify or reject the selection by the Board of Trustees of KPMG
LLP as auditors for the Trust for the fiscal year ending March 31, 2000.
NUMBER OF SHARES VOTING
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
76,088,944 942,988 1,442,125
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS
September 30, 1999
(Unaudited)
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.
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 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 Texas 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.
With respect to quality, "eligible securities" generally consist of 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. The Manager also attempts
to minimize credit risk in the USAA Texas Tax-Free Money Market Fund through
rigorous internal credit research.
(PRE) Prerefunded to a date prior to maturity.
(LOC) Enhanced by a bank letter of credit.
(NBGA) Enhanced by a non-bank guarantee agreement.
(INS) Scheduled principal and interest payments are insured by:
(1) MBIA, Inc. (4) Financial Security
(2) AMBAC Financial Group, Inc. Assurance Holdings Ltd.
(3) Financial Guaranty Insurance Co. (5 ACA Financial Guaranty Corp.
PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
GO General Obligation ISD Independent School District
IDA Industrial Development MFH Multi-Family Housing
Authority/Agency PCRB Pollution Control Revenue Bond
IDC Industrial Development Corp. RB Revenue Bond
<TABLE>
USAA TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1999
(Unaudited)
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED-RATE INSTRUMENTS (99.5%)
Texas (96.7%)
$ 200 Austin Community College District RB,
Series 1995 (PRE) 6.10% 2/01/2015 $ 214
1,300 Austin Higher Education Auth. RB,
Series 1998 5.25 8/01/2023 1,148
Bexar Metropolitan Water District RB,
105 Series 1995 (PRE) 5.88 5/01/2022 113
145 Series 1995 (INS)(1) 5.88 5/01/2022 145
500 Brazos County Health Facilities RB,
Series 1993B 6.00 1/01/2019 489
1,025 Brazos River Auth. Revenue Refunding Bonds,
Series 1999A 5.38 4/01/2019 919
1,000 Canadian River Municipal Water Auth.
Contract Revenue and Refunding Bonds,
Series 1999 (INS)(1),(c) 5.63 2/15/2020 980
1,000 Cedar Hill ISD GO, Series 1996 (NBGA)(a) 6.30 8/15/2015 397
Cleburne Tax, Waterworks, and Sewer
System GO,
1,595 Series 1998 (INS)(4),(a) 5.67 2/15/2017 572
1,330 Series 1998 (INS)(4),(a) 5.67 2/15/2018 446
150 Coastal Water Auth. Contract RB,
Series 1995 (INS)(4) 5.95 12/15/2025 161
Columbus Community IDC Sales Tax RB,
400 Series 1998 5.40 11/01/2013 385
750 Series 1998 5.75 11/01/2023 710
1,500 De Soto Housing Finance Corp. MFH,
Series 1998A 5.25 2/01/2029 1,368
1,000 Denton County Refunding Permanent
Improvement Bonds, Series 1999 5.00 7/15/2021 891
180 Department of Housing and Community
Affairs RB, Series 1991A 6.95 7/01/2023 189
300 Guadalupe-Blanco River Auth. IDC RB,
Series 1982A 6.35 7/01/2022 313
1,200 Harlingen Consolidated ISD Building Bonds,
Series 1999 (NBGA) 5.65 8/15/2029 1,165
1,250 Harris County Health Facilities
Development Corp. Special Facilities RB,
Series 1999A (INS)(4) 5.20 5/15/2020 1,143
Harris County Health Facilities RB,
200 Series 1991A (PRE) 6.75 2/15/2021 211
150 Series 1992 (PRE) 7.13 6/01/2015 163
400 Harris County IDC RB, Series 1992(d) 6.95 2/01/2022 418
600 Harrison County Health Facilities
Development Corp. RB, Series 1998 (INS)(5) 5.50 1/01/2018 562
100 Health Facilities Development Corp. RB,
Series 1993B (INS)(1) 6.38 8/15/2023 104
65 Housing Agency Single-Family Mortgage RB,
Series 1991A 7.15 9/01/2012 68
1,900 Houston Higher Education Finance Corp. RB,
Series 1999A 5.38 11/15/2029 1,769
Houston Water and Sewer System RB,
150 Series 1992B 6.38 12/01/2014 158
350 Series 1997C (INS)(3) 5.25 12/01/2022 324
1,000 Lewisville RB, Series 1998B (INS)(5) 5.80 9/01/2025 976
500 Lower Neches Valley Auth. IDC RB,
Series 1997 5.80 5/01/2022 499
1,000 Lubbock Tax and Waterworks System
Surplus Revenue GO, Series 1999(c) 5.70 2/15/2020 993
400 Matagorda County Navigation District PCRB,
Series 1993 6.00 7/01/2028 401
1,500 Mesquite Health Facilities Development
Corp. RB, Series 1996A(d) 6.40 2/15/2020 1,503
500 Midland County Hospital District RB,
Series 1997 (INS)(2) 5.38 6/01/2016 476
North Central Health Facilities
Development Corp. RB,
300 Series 1993 (PRE) 5.90 6/01/2021 318
400 Series 1996 6.30 2/15/2015 401
500 Series 1998 5.38 2/15/2025 433
1,500 North Harris Montgomery Community
College District GO, Series 1999 (INS)(2) 5.00 2/15/2021 1,336
Northeast Hospital Auth. RB,
400 Series 1993B (PRE)(d) 7.25 7/01/2022 441
700 Series 1997 (INS)(4),(d) 5.63 5/15/2022 674
800 Orange County Navigation and Port
District IDC RB, Series 1996(d) 6.38 2/01/2017 823
Pantego GO,
60 Series 1994 7.75 2/15/2014 65
65 Series 1994 7.75 2/15/2015 70
1,000 Parker County Hospital District RB,
Series 1999 6.25 8/15/2019 984
Port of Corpus Christi IDC PCRB,
1,400 Series 1997A 5.45 4/01/2027 1,245
1,000 Series 1997B 5.40 4/01/2018 907
150 Sabine River Auth. PCRB,
Series 1992 (INS)(3) 6.55 10/01/2022 159
San Antonio Electric and Gas RB,
15 Series 1992 (PRE) 5.00 2/01/2017 15
285 Series 1992 5.00 2/01/2017 261
150 Tarrant County Health Facilities
Development Corp. RB, Series 1994 (PRE) 6.00 9/01/2024 155
1,000 Travis County Health Facilities
Development Corp. RB, Series 1998A(d) 5.13 11/01/2024 894
Turnpike Auth. Dallas North Tollway RB,
150 Series 1994 (PRE) (INS)(3) 6.75 1/01/2015 167
350 Series 1995 (INS)(3) 5.25 1/01/2023 323
Tyler Health Facilities Development
Corp. Hospital RB,
260 Series 1993B (East Texas Medical Center) 6.63 11/01/2011 240
680 Series 1997A (Mother Frances Hospital) 5.63 7/01/2013 636
3,500 Veteran's Land Board GO, Series 1998(b) 6.20 11/15/2030 3,255
Water Development Board GO,
50 Series 1994 (PRE) 7.00 8/01/2020 55
150 Series 1994 7.00 8/01/2020 164
1,500 Series 1999A 5.50 8/01/2024 1,446
Puerto Rico (2.8%)
600 Electric Power Auth. RB, Series 1995Z 5.25 7/01/2021 558
475 Highway Auth. RB, Series Q (PRE) 6.00 7/01/2020 484
-------
Total fixed-rate instruments (cost: $38,171) 36,882
-------
VARIABLE-RATE DEMAND NOTES (1.8%)
Texas
545 Nueces River Auth. PCRB,
Series 1985 (LOC) 4.00 12/01/1999 545
130 Port Arthur Navigation District IDC PCRB,
Series 1985 (LOC) 4.00 5/01/2003 130
-------
Total variable-rate demand notes (cost: $675) 675
-------
Total investments (cost: $38,846) $37,557
=======
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
General Obligations 17.7%
Nursing/Continuing Care Centers 15.1
Hospitals 13.6
Education 7.9
Water/Sewer Utilities - Municipal 7.4
Escrowed Bonds 6.3
Oil & Gas - Refining/Manufacturing 5.8
Electric Utilities 4.0
Multi-Family Housing 3.7
Buildings 3.1
Sales Tax 3.0
Real Estate Tax/Free 2.6
Agricultural Products 2.2
Electric/Gas Utilities - Municipal 2.2
Aluminum 1.5
Oil - International Integrated 1.3
Leasing 1.1
Other 2.8
-----
Total 101.3%
=====
<TABLE>
USAA TEXAS TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1999
(Unaudited)
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VARIABLE-RATE DEMAND NOTES (75.8%)
Texas
$200 Amarillo Health Facilities Corp. RB,
Series 1985 (LOC) 4.00% 5/31/2025 $ 200
485 Arlington IDC RB, Series 1985 (LOC) 4.25 10/01/2020 485
330 Bell County Health Facilities
Development Corp. RB, Series 1998 (LOC) 3.90 5/01/2023 330
300 Bexar County Housing Finance Corp. MFH RB,
Series 1988B (NBGA) 3.85 6/01/2005 300
300 Comal County Health Facilities
Development Corp. RB, Series 1997 (LOC) 3.90 2/01/2027 300
365 Garland IDA PCRB, Series 1985 4.30 12/01/2005 365
200 Gulf Coast IDA RB, Series 1989 (LOC) 3.85 11/01/2019 200
350 Gulf Coast Waste Disposal Auth. PCRB,
Series 1995 3.85 6/01/2020 350
200 Harris County Housing Finance Corp. MFH RB,
Series 1988A (NBGA) 3.85 6/01/2005 200
495 Matagorda County Hospital District RB,
Series 1988 (LOC) 4.05 8/01/2018 495
670 North Central IDA RB, Series 1983 3.95 10/01/2013 670
330 Nueces River Auth. PCRB,
Series 1985 (LOC) 4.00 12/01/1999 330
355 Port Arthur Navigation District IDC PCRB,
Series 1985 (LOC) 4.00 5/01/2003 355
210 Port Corpus Christi IDC RB,
Series 1992 (LOC) 3.90 7/01/2002 210
200 Port Development Corp. RB,
Series 1984 (LOC) 4.00 12/01/2004 200
615 Tarrant County Housing Finance Corp.
MFH RB, Series 1985 (LOC) 3.90 12/01/2025 615
100 Trinity River IDA RB, Series 1984 (LOC) 3.88 11/01/2014 100
100 Victoria Health Facilities Development
Corp. RB, Series 1997 (LOC) 3.90 9/01/2027 100
------
Total variable-rate demand notes (cost: $5,805) 5,805
------
FIXED-RATE INSTRUMENTS (23.6%)
Texas
125 Central College District Building RB,
Series 1999 (INS)(2) 4.50 5/15/2000 126
150 College Station GO, Series 1999 (INS)(4) 3.40 2/15/2000 150
130 Collin County Community College
District Consolidated RB,
Series 1998 (INS)(2) 4.50 2/01/2000 131
25 Dallas Waterworks and Sewer Systems RB,
Series 1991A 5.90 10/01/1999 25
330 Greenville Electric Utility Systems RB,
Series 1997 (INS)(4) 4.25 2/15/2000 331
35 Houston Water and Sewer Systems Junior
Lien RB, Series 1991C (INS)(2) 5.90 12/01/1999 35
100 Lewisville Water and Sewer RB,
Series 1999 (INS)(2) 4.50 2/15/2000 100
50 Mesquite GO, Series 1992 (INS)(3) 5.50 2/15/2000 50
90 Mount Pleasant Utility System RB,
Series 1999A (INS)(1) 5.00 3/15/2000 90
50 Palestine Waterworks Sewer Systems RB,
Series 1999 (INS)(2) 6.75 7/15/2000 51
100 Public Finance Auth. GO, Series 1992A 5.13 10/01/1999 100
115 Shepherd ISD RB, Series 1996 (NBGA) 6.00 2/15/2000 116
300 Trinity River IDA RB, Series 1967 (INS)(1) 4.75 10/15/1999 300
200 Tyler GO, Series 1990 (PRE) 7.00 8/15/2006 205
------
Total fixed-rate instruments (cost: $1,810) 1,810
------
Total investments (cost: $7,615) $7,615
======
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Multi-Family Housing 14.6%
Manufacturing - Diversified Industries 13.5
Hospitals 10.4
Health Care - Miscellaneous 8.2
Water/Sewer Utilities - Municipal 7.9
Publishing/Newspapers 6.3
General Obligations 5.4
Airport/Port 5.2
Oil & Gas - Exploration & Production 4.6
Oil - International Integrated 4.6
Electric Utilities 4.3
Aluminum 4.3
Education 3.4
Electrical Equipment 2.7
Escrowed Bonds 2.7
Retail - Specialty 1.3
----
Total 99.4%
====
NOTES TO PORTFOLIOS OF INVESTMENTS
September 30, 1999
(Unaudited)
GENERAL NOTES
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) Zero-Coupon security. Rate represents the effective yield at date of
purchase.
(b) Illiquid security valued using methods determined by a pricing service under
general supervision of the Board of Directors. This security is exempt from
registration under the Securities Act of 1933 and any resale of the security
must occur in an exempt transaction in the United States to a qualified
institutional buyer as defined by Rule 144A. For the USAA Texas Tax-Free Income
Fund this security represents 8.8% of the Fund's net assets.
(c) At September 30, 1999, the cost of securities purchased on a
delayed-delivery basis for the USAA Texas Tax-Free Income Fund was $2.0 million.
(d) At September 30, 1999, these securities were segregated to cover
delayed-delivery purchases.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1999
(Unaudited)
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
--------------------------
ASSETS
Investments in securities, at market value
(identified cost of $38,846 and $7,615,
respectively) $37,557 $7,615
Cash 4 24
Receivables:
Capital shares sold 80 12
Interest 605 45
Securities sold 900 -
--------------------
Total assets 39,146 7,696
--------------------
LIABILITIES
Securities purchased 1,979 -
Capital shares redeemed 9 26
USAA Investment Management Company 33 -
USAA Transfer Agency Company 3 -
Accounts payable and accrued expenses 4 7
Dividends on capital shares 37 1
--------------------
Total liabilities 2,065 34
--------------------
Net assets applicable to capital shares
outstanding $37,081 $7,662
====================
REPRESENTED BY:
Paid-in capital $38,784 $7,662
Accumulated net realized loss on investments (414) -
Net unrealized depreciation of investments (1,289) -
--------------------
Net assets applicable to capital shares
outstanding $37,081 $7,662
====================
Capital shares outstanding, unlimited number of
shares authorized, $.001 par value 3,615 7,662
====================
Net asset value, redemption price, and
offering price per share $ 10.26 $ 1.00
====================
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1999
(Unaudited)
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
--------------------------
Net investment income:
Interest income $ 1,031 $134
--------------------
Expenses:
Management fees 92 19
Transfer agent's fees 16 4
Custodian's fees 21 9
Postage 1 -
Shareholder reporting fees 1 1
Trustees' fees 4 4
Registration fees 5 -
Professional fees 11 10
Other - 1
--------------------
Total expenses before reimbursement 151 48
Expenses reimbursed (59) (29)
--------------------
Total expenses after reimbursement 92 19
--------------------
Net investment income 939 115
--------------------
Net realized and unrealized loss on investments:
Net realized loss (413) -
Change in net unrealized appreciation/
depreciation (2,308) -
--------------------
Net realized and unrealized loss (2,721) -
--------------------
Increase (decrease) in net assets resulting from
operations $(1,782) $115
====================
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended September 30, 1999, and year ended March 31, 1999
(Unaudited)
<CAPTION>
USAA USAA
Texas Tax-Free Texas Tax-Free
Income Fund Money Market Fund
-----------------------------------------------
9/30/99 3/31/99 9/30/99 3/31/99
-----------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 939 $ 1,387 $ 115 $ 204
Net realized gain (loss) on investments (413) 111 - -
Change in net unrealized appreciation/
depreciation of investments (2,308) (217) - -
-----------------------------------------------
Increase (decrease) in net assets
resulting from operations (1,782) 1,281 115 204
-----------------------------------------------
Distributions to shareholders from:
Net investment income (939) (1,387) (115) (204)
-----------------------------------------------
Net realized gains (111) (37) - -
-----------------------------------------------
From capital share transactions:
Proceeds from shares sold 9,919 17,875 6,892 11,241
Dividend reinvestments 808 1,120 107 193
Cost of shares redeemed (5,580) (5,202) (6,841) (9,818)
-----------------------------------------------
Increase in net assets from
capital share transactions 5,147 13,793 158 1,616
-----------------------------------------------
Net increase in net assets 2,315 13,650 158 1,616
Net assets:
Beginning of period 34,766 21,116 7,504 5,888
-----------------------------------------------
End of period $37,081 $34,766 $7,662 $ 7,504
===============================================
Change in shares outstanding:
Shares sold 923 1,603 6,892 11,241
Shares issued for dividends reinvested 75 101 107 193
Shares redeemed (523) (466) (6,841) (9,818)
-----------------------------------------------
Increase in shares outstanding 475 1,238 158 1,616
===============================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA State Tax-Free Trust (the Trust), registered under the Investment Company
Act of 1940, as amended, is a diversified, open-end management investment
company organized as a Delaware business trust consisting of four separate
funds. The information presented in this semiannual report pertains only to the
USAA Texas Tax-Free Income Fund and USAA Texas Tax-Free Money Market Fund (the
Funds). The Funds have a common objective of providing Texas investors with a
high level of current interest income that is exempt from federal income taxes.
The USAA Texas Tax-Free Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation - Investments in the USAA Texas Tax-Free Income Fund are
valued each business day by a pricing service (the Service) approved by the
Trust's Board of Trustees. The Service uses the mean between quoted bid and
asked prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued by
the Service, and all other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision of the Board of
Trustees. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 under the Investment Company Act of 1940, as amended, all
securities in the USAA Texas Tax-Free Money Market Fund are stated at amortized
cost which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in Texas municipal securities and therefore may be exposed to more
credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in 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 Bank of America ($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
Bank of America, each Fund may borrow from Bank of America, at Bank of America'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.
The Funds had no borrowings under any of these agreements during the six-month
period ended September 30, 1999.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
Costs of purchases and proceeds from sales/maturities of securities for the
six-month period ended September 30, 1999, were as follows:
USAA Texas Tax-Free USAA Texas Tax-Free
Income Fund Money Market Fund
($000) ($000)
------------------------------------------------
Purchases $15,241 $9,734
Sales/maturities $10,509 $9,591
For the USAA Texas Tax-Free Income Fund, costs of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at September 30,
1999, was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------------------
USAA Texas Tax-Free
Income Fund $456 ($1,745) ($1,289)
(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
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 has taken steps to address this potential year 2000 problem with
respect to the computer systems that it uses 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.
<TABLE>
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
USAA TEXAS TAX-FREE INCOME FUND
Six-Month
Period Ended
September 30, Year Ended March 31,
---------------------------------------------------------
1999 1999 1998 1997 1996 1995**
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.07 $ 11.10 $ 10.38 $ 10.45 $10.21 $10.00
Net investment income .27 .56 .57 .59 .58 .34
Net realized and
unrealized gain (loss) (.78) (.01) .82 .13 .36 .21
Distributions from net
investment income (.27) (.56) (.57) (.59) (.58) (.34)
Distributions of realized
capital gains (.03) (.02) (.10) (.20) (.12) -
-----------------------------------------------------------------------
Net asset value at
end of period $ 10.26 $ 11.07 $ 11.10 $ 10.38 $10.45 $10.21
=======================================================================
Total return (%) * (4.62) 5.00 13.71 7.06 9.42 5.75
Net assets at end
of period (000) $37,081 $34,766 $21,116 $11,206 $8,053 $6,446
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50 .50(a)
Ratio of expenses to
average net
assets excluding
reimbursements (%) .82(a) .87 .98 1.35 1.66 2.40(a)
Ratio of net investment
income to average
net assets (%) 5.11(a) 5.00 5.27 5.63 5.51 5.56(a)
Portfolio turnover (%) 29.39 55.83 56.29 86.17 71.14 49.63
</TABLE>
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gains distributions
during the period.
** Fund commenced operations August 1, 1994.
<TABLE>
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
USAA TEXAS TAX-FREE MONEY MARKET FUND
Six-Month
Period Ended
September 30, Year Ended March 31,
--------------------------------------------------------
1999 1999 1998 1997 1996 1995**
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .02 .03 .03 .03 .03 .02
Distributions from net
investment income (.02) (.03) (.03) (.03) (.03) (.02)
----------------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======================================================================
Total return (%) * 1.53 3.16 3.43 3.22 3.49 2.09
Net assets at end
of period (000) $7,662 $7,504 $5,888 $5,280 $4,695 $3,881
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50 .50(a)
Ratio of expenses to
average net
assets excluding
reimbursements (%) 1.28(a) 1.33 1.37 1.77 2.02 2.63(a)
Ratio of net investment
income to average
net assets (%) 3.04(a) 3.10 3.38 3.17 3.42 3.18(a)
</TABLE>
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the
period.
** Fund commenced operations August 1, 1994.
TRUSTEES
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
LEGAL COUNSEL
Goodwin Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Sundays 11:30 a.m. to 8:00 p.m.
Internet Access
www.usaa.com
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 (Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction, or fund prices
1-800-531-8777, (in San Antonio) 498-8777
