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
Financial Information:
Independent Auditors' Report 15
Portfolios of Investments:
Categories & Definitions 16
USAA Texas Tax-Free Income Fund 17
USAA Texas Tax-Free Money Market Fund 21
Notes to Portfolios of Investments 23
Statements of Assets and Liabilities 24
Statements of Operations 25
Statements of Changes in Net Assets 26
Notes to Financial Statements 27
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(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 IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
Message from the President
[PHOTOGRAPH OF 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 TEXAS TAX-FREE INCOME FUND
OBJECTIVE: Provide Texas investors with a high level of current interest income
that is exempt from federal income taxes.
TYPES OF INVESTMENTS: Invests primarily in Long-term, investment-grade, Texas
tax-exempt securities.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
3/31/98 3/31/99
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net Assets $21.1 Million $34.8 Million
Net Asset Value Per Share $11.10 $11.07
Tax-Exempt Dividends Per Share Last Twelve Months $.574 $.557
Capital Gains Distributions Per Share Last Twelve Months $.095 $.018
- ---------------------------------------------------------------------------------------------
30-DAY SEC YIELD* AS OF 3/31/99
- ---------------------------------------------------------------------------------------------
30-Day SEC Yield 4.79%
- ---------------------------------------------------------------------------------------------
* 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 8/1/94 8.75% = 5.70% + 3.05%
1 Year 5.00% = 5.11% + -0.11%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns
for the 4-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 Texas Tax-Free Income Fund
for the 4-year period ended March 31, 1999.
Total Return for Years Ended:
- ----------------------------
03/31/95 5.75%*
03/31/96 9.42%
03/31/97 7.06%
03/31/98 13.71%
03/31/99 5.00%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
03/31/95 3.65%*
03/31/96 5.85%
03/31/97 5.86%
03/31/98 5.86%
03/31/99 5.11%
Change in Share Price:
- ---------------------
03/31/95 2.10%*
03/31/96 3.57%
03/31/97 1.20%
03/31/98 7.85%
03/31/99 0.11%
* This does not cover a 12 month period.
** Compounded Dividend yield calculation includes only income distributions.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. Dividend return is
the income dividends received over the period assuming reinvestment of all
dividends. Share price change is the change in net asset value over the period
adjusted for capital gain distributions. No adjustment has been made for taxes
payable by shareholders on their reinvested dividends and capital gain
distributions. The performance data quoted represent past performance and are
not an indication of future results. Investment return and principal value of an
investment will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
Comparison - 12 Month Dividend Yield
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA Texas Tax-Free Income Fund to the 12
Month Dividend Yield of the Lipper Texas Municipal Debt Funds Average from
3/31/96 to 3/31/99.
USAA Texas Tax-Free Lipper Texas Municipal
Income Fund Yield Debt Funds Average Yield
------------------- ------------------------
03/31/96 5.52% 5.14%
03/31/97 5.58% 5.09%
03/31/98 5.15% 4.76%
03/31/99 5.02% 4.52%
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 3/31/96 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 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 3/31/99. 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
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
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
Data since inception on 8/1/94 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 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
[PHOTOGRAPH OF 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 favorably to
its peer group. Your Fund's net asset value (NAV) per share decreased by $0.01,
or -0.1%, since March 31, 1998, adjusting for the $0.0182 capital gain
distributed on May 8, 1998.
While past performance is no guarantee of future results, the Fund's dividend
distribution yield(5) for the past 12 months was 5.02%, as compared to the
Lipper's Texas Municipal Debt Funds average of 4.52% for the 17 funds in the
category.(6) For the same period and category, the Fund's total return(7) was
5.00% compared to the Lipper average of 4.75%.
(4) Past performance is no guarantee of future results.
(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.
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-, 5-, and 10-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 Texas Fund received 5 stars for the
3-year period. 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 funds in the municipal bond fund category for the 3-year period.
THE STATE OF TEXAS
Texas continues its economic expansion although at a more moderate pace. With a
gross state product of $600 billion, Texas ranks as the eleventh largest economy
in the world. Job growth continues to drive the economy led by the high
technology and construction sectors. Employment is strong because of the state's
low business costs and favorable geographic location for international trade.
Since the Texas economy has become more diversified like the national economy,
it is now also more sensitive to swings of the global economy.
During the 1990s Texas has added more jobs than any other state. During the last
five years, construction has been the state's fastest growing source of jobs
because of the in-migration to Texas, the rise in personal income, and low
mortgage rates. Per capita personal income is $24,896 or approximately 94% of
the U.S. average compared to 90% at the beginning of the decade. High-wage jobs
in the high technology sector are replacing lost jobs in the aerospace and oil &
gas industries.
Sales tax collections increased 9.9% in 1998 greatly benefiting the state's
financial position. The sales tax comprises 60% of the state's tax revenues. The
underlying credit fundamentals are strong with Texas general obligation bond
ratings remaining unchanged at 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.
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 4.79% and:
- --------------------------------------------------------------------------------
Assuming a Marginal Federal Tax Rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully Taxable Investment must pay: 5.64% 6.65% 6.94% 7.48% 7.93%
- --------------------------------------------------------------------------------
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 Texas Tax-Free Income Fund to be:
BBB - 36%; AAA - 34%; A - 14%; AA - 14%; B - 1%; and Cash Equivalent - 1%.
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality to
category BBB account for 9.8% 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 TEXAS TAX-FREE MONEY MARKET FUND
OBJECTIVE: Provide Texas investors with a high level of current interest income
that is exempt from federal income taxes 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.
- --------------------------------------------------------------------------------
3/31/98 3/31/99
- --------------------------------------------------------------------------------
Net Assets $5.9 Million $7.5 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 on 8/1/94 Yield
3.16% 3.30% 2.89%
- --------------------------------------------------------------------------------
Total return equals income return and assumes reinvestment of all dividends and
any capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. Past
performance is no guarantee of future results. Yields and returns fluctuate. The
7-day yield quotation more closely reflects current earnings of the Fund than
the total return quotation.
7-Day Yield Comparison
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day Yield of the USAA Texas Tax-Free Money Market Fund and the IBC
Financial Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose)
(Tax-Free): Money Funds.
USAA Texas Tax-Free
Money Market Fund IBC Financial Data, Inc.
------------------- ------------------------
03/31/98 3.34% 2.93%
04/28/98 3.95% 3.37%
05/26/98 3.50% 3.10%
06/30/98 3.28% 2.93%
07/28/98 3.31% 2.88%
08/25/98 3.04% 2.60%
09/29/98 3.58% 3.10%
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%*
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 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 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 3 out of 166 State Specific Tax-Exempt
Money Market Funds according to IBC Financial Data, Inc. with a yield of 3.16%.
The average for the category over the same period was 2.69%.
TEXAS
Texas continues its economic expansion although at a more moderate pace than in
the early part of the decade. With a gross state product of $600 billion, Texas
accounts for 7.5% of the U.S. economy and ranks as the eleventh largest economy
in the world! While Texas has diversified to become more like the national
economy it has also become more sensitive to global swings. The state's economic
fundamentals continue to be strong due to low business costs -- such as wages
and taxes, substantial growth of the high technology sector, and a favorable
geographic location for international trade.
Texas has added 313,000 jobs between January 1998 and January 1999, its twelfth
consecutive year of job growth. During the 1990s, Texas added more jobs than any
other state, and comprised 11% of the nations' total job growth. The state's
unemployment rate, a key economic indicator, improved to 4.6% (seasonally
adjusted) in February 1999, down from 4.8% in February 1998.
The state's financial position has benefited from growth in the cyclically
sensitive sales tax collections, which comprise 60% of the state's tax revenues.
Prospects for continued economic growth remain favorable, although at a somewhat
slower pace.
Texas finished fiscal year 1998 with a $3.3 billion cash balance. This was the
eleventh consecutive year the state ended with a positive General Revenue Fund
balance. The current budget under consideration by the legislature for the
2000-2001 biennium is $94 billion, of which 40% will be dedicated to education.
The state's underlying credit fundamentals are strong with general obligation
bond ratings remaining unchanged at Aa2, AA, and AA+ by Moody's, Standard &
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 3/31/99. 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
Data since inception on 8/1/94 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.
See page 21 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 Texas Tax-Free Income and USAA Texas
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 or periods 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 Texas Tax-Free Income and USAA Texas 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 or periods 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 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.
The Manager attempts to minimize credit risk in the USAA Texas 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.
(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
CP Commercial Paper ISD Independent School District
GO General Obligation MFH Multi-Family Housing
IDA Industrial Development PCRB Pollution Control Revenue Bond
Authority/Agency RB Revenue Bond
IDC Industrial Development Corp. IDRB Industrial Development
Revenue Bond
USAA TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 1999
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (100.2%)
Texas (97.0%)
$ 200 Austin Community College District
RB, Series 1995 (PRE) 6.10% 2/01/2015 $ 222
1,300 Austin Higher Education Auth. RB,
Series 1998 5.25 8/01/2023 1,256
Bexar Metropolitan Water District
RB,
105 Series 1995 (PRE) 5.88 5/01/2022 117
145 Series 1995 (INS) (1) 5.88 5/01/2022 156
3,285 Boerne ISD GO, Series 1999 (a) 5.26 2/01/2022 1,006
500 Brazos County Health Facilities
RB, Series 1993B 6.00 1/01/2019 518
1,000 Cedar Hill ISD GO, Series 1996
(NBGA) (a) 6.30 8/15/2015 411
Cleburne Tax, Waterworks, and
Sewer System GO,
1,595 Series 1998 (INS) (4),(a) 5.67 2/15/2017 609
1,330 Series 1998 (INS) (4),(a) 5.67 2/15/2018 478
150 Coastal Water Auth. Contract RB,
Series 1995 (INS) (4) 5.95 12/15/2025 167
Columbus Community IDC Sales
Tax RB,
400 Series 1998 5.40 11/01/2013 405
750 Series 1998 5.75 11/01/2023 761
1,000 Dallas Special Tax RB, Series
1998A (INS) (2) 5.00 8/15/2020 986
1,500 De Soto Housing Finance Corp.
MFH, Series 1998A 5.25 2/01/2029 1,495
1,000 Denton County Refunding Permanent
Improvement Bonds, Series 1999 (c) 5.00 7/15/2021 981
185 Department of Housing and Community
Affairs RB, Series 1991A 6.95 7/01/2023 198
300 Guadalupe-Blanco River Auth. IDC
RB, Series 1982A 6.35 7/01/2022 323
Harris County Health Facilities RB,
200 Series 1991A (PRE) 6.75 2/15/2021 215
150 Series 1992 (PRE) 7.13 6/01/2015 168
400 Harris County IDC RB, Series
1992 (d) 6.95 2/01/2022 428
600 Harrison County Health Facilities
Development Corp. RB, Series 1998
(INS) (5) 5.50 1/01/2018 608
100 Health Facilities Development
Corp. RB, Series 1993B (INS) (1) 6.38 8/15/2023 110
70 Housing Agency Single-Family
Mortgage RB, Series 1991A 7.15 9/01/2012 75
Houston Water and Sewer System RB,
150 Series 1992B 6.38 12/01/2014 163
350 Series 1997C (INS) (3) 5.25 12/01/2022 353
1,000 Lamar Consolidated ISD Refunding
Bonds, Series 1998 (NBGA) 4.75 2/15/2020 951
1,000 Lewisville RB, Series 1998
(INS) (5) 5.80 9/01/2025 1,051
500 Lower Neches Valley Auth. IDC RB,
Series 1997 5.80 5/01/2022 533
400 Matagorda County Navigation
District PCRB, Series 1993 6.00 7/01/2028 416
1,500 Mesquite Health Facilities
Development Corp. RB,
Series 1996A (d) 6.40 2/15/2020 1,593
500 Midland County Hospital District
RB, Series 1997 (INS) (2) 5.38 6/01/2016 512
North Central Health Facilities
Development Corp. RB,
300 Series 1993 (PRE) 5.90 6/01/2021 330
400 Series 1996 6.30 2/15/2015 424
500 Series 1998 5.38 2/15/2025 481
Northeast Hospital Auth. RB,
400 Series 1993B (PRE) (d) 7.25 7/01/2022 454
700 Series 1997 (INS) (4),(d) 5.63 5/15/2022 733
800 Orange County Navigation and Port
District IDC RB, Series 1996 (d) 6.38 2/01/2017 873
Pantego GO,
60 Series 1994 7.75 2/15/2014 67
65 Series 1994 7.75 2/15/2015 72
Port of Corpus Christi IDC PCRB,
1,400 Series 1997A 5.45 4/01/2027 1,382
1,000 Series 1997B 5.40 4/01/2018 990
1,000 Round Rock ISD GO Refunding Bonds,
Series 1999 (NBGA) 5.00 8/01/2018 994
150 Sabine River Auth. PCRB,
Series 1992 (INS) (3) 6.55 10/01/2022 164
San Antonio Electric and Gas RB,
15 Series 1992 (PRE) 5.00 2/01/2017 16
285 Series 1992 5.00 2/01/2017 283
1,400 Series A 5.00 2/01/2018 1,390
1,000 Southwest Higher Education Auth.
RB, Series 1999A 5.00 10/01/2029 967
150 Tarrant County Health Facilities
Development Corp. RB, Series
1994 (PRE) 6.00 9/01/2024 169
1,000 Travis County Health Facilities
Development Corp. RB, Series
1998A (d) 5.13 11/01/2024 967
Turnpike Auth. Dallas North
Tollway RB,
150 Series 1994 (PRE) (INS) (3) 6.75 1/01/2015 174
350 Series 1995 (INS) (3) 5.25 1/01/2023 353
Tyler Health Facilities
Development Corp. Hospital RB,
260 Series 1993B (East Texas Medical
Center) 6.63 11/01/2011 253
680 Series 1997A (Mother Frances
Hospital) 5.63 7/01/2013 684
1,800 United ISD GO Unlimited Tax School
Building & Refunding Bonds,
Series 1998 (NBGA) (a) 5.30 8/15/2022 538
3,500 Veteran's Land Board GO,
Series 1998 (b) 6.20 11/15/2030 3,480
Water Development Board,
50 Series 1994 (PRE) 7.00 8/01/2020 57
150 Series 1994 7.00 8/01/2020 170
Puerto Rico (3.2%)
600 Electric Power Auth. RB,
Series 1995Z 5.25 7/01/2021 602
475 Highway Auth. RB, Series Q (PRE) 6.00 7/01/2020 491
- --------------------------------------------------------------------------------
Total fixed rate instruments
(cost: $33,804) 34,823
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (1.4%)
Texas
485 Nueces River Auth. PCRB,
Series 1985 (LOC) (cost: $485) 3.35 12/01/1999 485
- --------------------------------------------------------------------------------
Total investments (cost: $34,289) $35,308
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
General Obligations 18.1%
Nursing/Continuing Care Centers 17.2
Hospitals 12.6
Escrowed Bonds 7.0
Oil & Gas - Refining/Manufacturing 6.8
Electric/Gas Utilities - Municipal 6.6
Education 6.4
Sales Tax 6.2
Multi-Family Housing 4.3
Real Estate Tax/Free 3.0
Agricultural Products 2.5
Water/Sewer Utilities - Municipal 2.4
Electric Utilities 1.7
Oil - International Integrated 1.5
Aluminum 1.4
Leasing 1.2
Toll Roads 1.0
Chemicals .9
Single-Family Housing .8
-----
Total 101.6%
=====
USAA TEXAS TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 1999
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (76.3%)
Texas
$ 200 Amarillo Health Facilities Corp.
RB, Series 1985 (LOC) 3.20% 5/31/2025 $ 200
485 Arlington IDC RB, Series 1985
(LOC) 4.60 10/01/2020 485
230 Bell County Health Facilities
Development Corp. RB,
Series 1998 (LOC) 3.15 5/01/2023 230
300 Bexar County Housing Finance Corp.
MFH RB, Series 1988B (NBGA) 3.15 6/01/2005 300
300 Comal County Health Facilities
Development Corp. RB,
Series 1997 (LOC) 3.15 2/01/2027 300
100 Euless IDA RB, Series 1985 (LOC) 3.05 12/01/2015 100
270 Garland IDA PCRB 3.50 12/01/2005 270
100 Guadalupe-Blanco River Auth.
IDRB, Series 1993 (LOC) 3.05 6/01/2002 100
200 Gulf Coast IDA RB, Series
1989 (LOC) 3.05 11/01/2019 200
200 Harris County Housing Finance Corp.
MFH RB, Series 1988A (NBGA) 3.20 6/01/2005 200
200 Hunt County IDC RB,
Series 1987 (LOC) 3.05 10/01/2002 200
505 Matagorda County Hospital District
RB, Series 1988 (LOC) 3.30 8/01/2018 505
480 Metropolitan Higher Education
Auth. RB, Series 1984 (LOC) 4.05 12/01/2004 480
670 North Central IDA RB, Series 1983 3.10 10/01/2013 670
240 Nueces River Auth. PCRB,
Series 1985 (LOC) 3.35 12/01/1999 240
260 Port Corpus Christi IDC RB,
Series 1992 (LOC) 3.15 7/01/2002 260
200 Port Development Corp. RB,
Series 1984 (LOC) 3.25 12/01/2004 200
590 Tarrant County Housing Finance
Corp. MFH RB, Series 1985 (LOC) 3.10 12/01/2025 590
100 Trinity River IDA RB,
Series 1984 (LOC) 3.13 11/01/2014 100
100 Victoria Health Facilities
Development Corp. RB,
Series 1997 (LOC) 3.15 9/01/2027 100
- --------------------------------------------------------------------------------
Total variable rate demand notes
(cost: $5,730) 5,730
- --------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (23.4%)
Texas
290 Arlington Combination Tax and
Revenue Certificates of
Obligation, Series 1998 6.00 8/15/1999 292
200 Bexar Metropolitan Water District
RB, Series 1995 (INS) (1) 4.35 5/01/1999 200
250 Dallas Area Rapid Transit CP
Notes, Series B (LOC) 3.15 4/19/1999 250
193 Dallas Waterworks and Sewer
System CP Notes 3.25 4/21/1999 193
85 Ennis Certificates of Obligation,
Series 1998 (INS) (3) 5.25 8/01/1999 85
330 Greenville Electric Utility
Systems RB, Series 1997 (INS) (4) 4.25 2/15/2000 333
80 River Place Municipal Utility
District RB, Series 1998
(INS) (3) 6.00 9/01/1999 81
115 Shepherd ISD RB, Series
1996 (NBGA) 6.00 2/15/2000 117
200 Weslaco GO, Series 1989 (INS) (2) 6.75 9/01/1999 203
- --------------------------------------------------------------------------------
Total fixed rate instruments
(cost: $1,754) 1,754
- --------------------------------------------------------------------------------
Total investments (cost: $7,484) $ 7,484
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Multi-Family Housing 14.5%
Manufacturing - Diversified Industries 12.5
Hospitals 10.7
General Obligations 10.4
Healthcare - Miscellaneous 7.1
Water/Sewer Utilities - Municipal 6.6
Publishing/Newspapers 6.5
Education 6.4
Airport/Port 5.3
Electric Utilities 4.4
Electrical Equipment 3.5
Sales Tax 3.3
Aluminum 3.2
Oil & Gas - Drilling/Equipment 2.7
Building Material Group 1.3
Retail - Specialty 1.3
----
Total 99.7%
====
NOTES TO PORTFOLIOS 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) 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 10.0% of the Fund's net assets.
(c) At March 31, 1999, the cost of securities purchased on a delayed delivery
basis for the USAA Texas Tax-Free Income Fund was $1.0 million.
(d) 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
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
------------------------------
ASSETS
Investments in securities, at market value
(identified cost of $34,289 and
$7,484, respectively) $ 35,308 $ 7,484
Cash 33 17
Receivables:
Capital shares sold 6 24
Interest 473 37
------------------------------
Total assets 35,820 7,562
------------------------------
LIABILITIES
Securities purchased 989 -
Capital shares redeemed - 53
USAA Investment Management Company 11 -
USAA Transfer Agency Company 3 1
Accounts payable and accrued expenses 17 2
Dividends on capital shares 34 2
------------------------------
Total liabilities 1,054 58
------------------------------
Net assets applicable to capital
shares outstanding $ 34,766 $ 7,504
==============================
REPRESENTED BY:
Paid-in capital $ 33,637 $ 7,504
Accumulated net realized gain on investments 110 -
Net unrealized appreciation of investments 1,019 -
------------------------------
Net assets applicable to capital
shares outstanding $ 34,766 $ 7,504
==============================
Capital shares outstanding, unlimited number
of shares authorized, $.001 par value 3,140 7,504
==============================
Net asset value, redemption price,
and offering price per share $ 11.07 $ 1.00
==============================
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 1999
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
------------------------------
Net investment income:
Interest income $ 1,525 $ 237
------------------------------
Expenses:
Management fees 139 33
Transfer agent's fees 25 9
Custodian's fees 33 14
Postage 2 1
Shareholder reporting fees 2 1
Trustees' fees 7 7
Registration fees 14 1
Professional fees 15 21
Other 3 1
------------------------------
Total expenses before reimbursement 240 88
Expenses reimbursed (102) (55)
------------------------------
Total expenses after reimbursement 138 33
------------------------------
Net investment income 1,387 204
------------------------------
Net realized and unrealized gain (loss)
on investments:
Net realized gain 111 -
Change in net unrealized appreciation/
depreciation (217) -
------------------------------
Net realized and unrealized loss (106) -
------------------------------
Increase in net assets resulting from operations $ 1,281 $ 204
==============================
See accompanying notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
USAA USAA
Texas Tax-Free Texas Tax-Free
Income Fund Money Market Fund
-----------------------------------------
1999 1998 1999 1998
-----------------------------------------
From operations:
Net investment income $ 1,387 $ 808 $ 204 $ 186
Net realized gain on investments 111 112 - -
Change in net unrealized
appreciation/ depreciation
of investments (217) 959 - -
-----------------------------------------
Increase in net assets resulting
from operations 1,281 1,879 204 186
-----------------------------------------
Distributions to shareholders from:
Net investment income (1,387) (808) (204) (186)
-----------------------------------------
Net realized gains (37) (129) - -
From capital share transactions:
Proceeds from shares sold 17,875 9,743 11,241 10,140
Dividend reinvestments 1,120 781 193 166
Cost of shares redeemed (5,202) (1,556) (9,818) (9,698)
-----------------------------------------
Increase in net assets from
capital share transactions 13,793 8,968 1,616 608
-----------------------------------------
Net increase in net assets 13,650 9,910 1,616 608
Net assets:
Beginning of period 21,116 11,206 5,888 5,280
-----------------------------------------
End of period $34,766 $21,116 $ 7,504 $ 5,888
=========================================
Change in shares outstanding:
Shares sold 1,603 894 11,241 10,140
Shares issued for dividends
reinvested 101 72 193 166
Shares redeemed (466) (144) (9,818) (9,698)
-----------------------------------------
Increase in shares outstanding 1,238 822 1,616 608
=========================================
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
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. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
have been made on the statement of assets and liabilities to increase paid-in
capital by $1,000 and decrease accumulated net realized gain on investments by
$1,000 for the Texas Tax-Free Income Fund.
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 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. The Funds had no borrowings under any of these agreements during
the year ended March 31, 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
Cost of purchases and proceeds from sales/maturities of securities for the year
ended March 31, 1999 were as follows:
USAA Texas Tax-Free USAA Texas Tax-Free
Income Fund Money Market Fund
($000) ($000)
-----------------------------------------------
Purchases $29,781 $14,678
Sales/maturities $15,309 $13,030
For the USAA Texas Tax-Free Income Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at March 31, 1999
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------------------
USAA Texas Tax-Free
Income Fund $ 1,111 $ 92 $ 1,019
(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 TEXAS TAX-FREE INCOME FUND
March 31, 1999
(9) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
------------------------------------------------------
1999 1998 1997 1996 1995**
------------------------------------------------------
Net asset value at
beginning of period $ 11.10 $ 10.38 $ 10.45 $ 10.21 $ 10.00
Net investment income .56 .57 .59 .58 .34
Net realized and
unrealized gain (loss) (.01) .82 .13 .36 .21
Distributions from net
investment income (.56) (.57) (.59) (.58) (.34)
Distributions of realized
capital gains (.02) (.10) (.20) (.12) -
------------------------------------------------------
Net asset value at
end of period $ 11.07 $ 11.10 $ 10.38 $ 10.45 $ 10.21
======================================================
Total return (%) * 5.00 13.71 7.06 9.42 5.75
Net assets at end
of period (000) $34,766 $21,116 $11,206 $ 8,053 $ 6,446
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50(a)
Ratio of expenses to
average net
assets excluding
reimbursements (%) .87 .98 1.35 1.66 2.40(a)
Ratio of net investment
income to average
net assets (%) 5.00 5.27 5.63 5.51 5.56(a)
Portfolio turnover (%) 55.83 56.29 86.17 71.14 49.63
(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.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA TEXAS 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:
Year Ended March 31,
------------------------------------------------------
1999 1998 1997 1996 1995**
------------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .03 .02
Distributions from net
investment income (.03) (.03) (.03) (.03) (.02)
------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======================================================
Total return (%) * 3.16 3.43 3.22 3.49 2.09
Net assets at end
of period (000) $ 7,504 $ 5,888 $ 5,280 $ 4,695 $ 3,881
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50(a)
Ratio of expenses to
average net
assets excluding
reimbursements (%) 1.33 1.37 1.77 2.02 2.63(a)
Ratio of net investment
income to average
net assets (%) 3.10 3.38 3.17 3.42 3.18(a)
(a)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the period.
** Fund commenced operations August 1, 1994.
DIRECTORS
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG 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
