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 10
Financial Information
Distributions to Shareholders 13
Independent Auditors' Report 14
Portfolios of Investments:
Categories and Definitions 15
USAA Texas Tax-Free Income Fund 16
USAA Texas Tax-Free Money Market Fund 19
Notes to Portfolios of Investments 21
Statements of Assets and Liabilities 22
Statements of Operations 23
Statements of Changes in Net Assets 24
Notes to Financial Statements 25
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)2000, 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
(Registered Trademark) 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(Registered
Trademark) 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
(Registered Trademark) 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.
Nondeposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF THE PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J. C. ROTH,
CFA, APPEARS HERE.]
From the vantage point of March 2000, we can all look at the tax-exempt bond
market and breathe just a little more easily. It has been a long time since we
have been able to do that.
At USAA Investments we believe that many investors are, in truth, more
comfortable with some of their assets allocated to bonds. Bonds are less
volatile than stocks over long periods, and they can lessen the turmoil in a
portfolio. Many times I hear people ask, "Why would anyone invest in bonds when
stocks have such higher returns?" My answer is that I have known few people who
have the fortitude to have all of their money in stocks. That doesn't mean that
a person who allocates some of a portfolio to bonds is weak. That's simply the
way we are. When stocks drop precipitously, I am convinced that opportunities
are created. But only a calm, calculating person can take advantage of them.
That usually means a person who is properly allocated all the time. Those
precipitous drops tend to surprise everyone.
Another key belief of ours is that income is the basis of most of the potential
returns on bonds and that by maximizing income we may produce very good results
over time.
This emphasis on income can hurt in a year like 1999, but when you consider
periods of just a few years you get a clearer picture of what we mean.
- --------------------------------------------------------------------------------
Total Return for Periods Ending 12/31/99
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
USAA Tax Exempt Long-Term Fund -5.04% 6.59% 6.37%
USAA Tax Exempt Intermediate-Term Fund -2.61% 6.37% 6.49%
USAA Tax Exempt Short-Term Fund 1.64% 4.98% 5.06%
USAA Tax Exempt Money Market Fund 3.15% 3.40% 3.60%
- --------------------------------------------------------------------------------
Total return equals income plus share price change and assumes
reinvestment of all 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.
The key thing about this chart is that all of these returns include the bad
market of 1999. One poor year has not overturned the good returns of many years.
Markets will always move, but we believe that a sound and consistent strategy
will pay off.
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 (USAA Investments), 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 income exempt from federal income taxes.
TYPES OF INVESTMENTS: Invests principally in long-term, investment-grade Texas
tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/99 3/31/00
- --------------------------------------------------------------------------------
Net Assets $34.8 Million $31.9 Million
Net Asset Value Per Share $11.07 $10.12
Tax-Exempt Dividends Per Share Last 12 Months $.557 $.546
Capital Gain Distributions Per Share Last 12 Months $.018 $.034
- --------------------------------------------------------------------------------
30-Day SEC Yield* as of 3/31/00
- --------------------------------------------------------------------------------
30-Day SEC Yield 5.46%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending March 31, 2000
================================================================================
Total Return Equals Dividend Return Plus Price Change
- --------------------------------------------------------------------------------
Since 8/1/94 6.52% = 5.51% + 1.01%
- --------------------------------------------------------------------------------
5 Years 6.23% = 5.50% + 0.73%
- --------------------------------------------------------------------------------
1 Year -3.29% = 4.99% + -8.28%
================================================================================
Annual Total Returns and Compounded Dividend Returns
for the Five-Year Period Ending March 31, 2000
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 March 31, 2000.
Total Return for Years Ended:
- ----------------------------
03/31/96 9.42%
03/31/97 7.06%
03/31/98 13.71%
03/31/99 5.00%
03/31/00 -3.29%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
03/31/96 5.85%
03/31/97 5.86%
03/31/98 5.86%
03/31/99 5.11%
03/31/00 4.99%
Change in Share Price:
- ---------------------
03/31/96 3.57%
03/31/97 1.20%
03/31/98 7.85%
03/31/99 -0.11%
03/31/00 -8.28%
** 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 gain 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 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 3/31/00.
USAA Texas Tax-Free Lipper Texas Municipal
Income Fund Yield Debt Funds Average Yield
------------------- ------------------------
03/31/96 5.55% 5.15%
03/31/97 5.64% 5.11%
03/31/98 5.17% 4.77%
03/31/99 5.03% 4.54%
03/31/00 5.40% 4.86%
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 gain distributions. The graph represents data for periods ending 3/31/96
to 3/31/00.
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 3/31/00. 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
03/31/00 $14,305
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
03/31/00 $14,011
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
03/31/00 $13,245
Data since inception on 8/1/94 through 3/31/00.
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 THE PORTFOLIO MANAGER, ROBERT R. PARISEAU, CFA, APPEARS HERE.]
THE MUNICIPAL BOND MARKET
You just can't keep a strong economy down. Apparently, not even the Federal
Reserve Board (the Fed) can do it. After raising the fed funds target rate five
times since last June, the U.S. economy still grew by 7.35% in the fourth
quarter of 1999. Thankfully, inflation has remained under control -- although
it's been creeping up since early 1998. Last year, the fixed-income markets
suffered a crisis in confidence fearing that inflation would most certainly
increase. In response, bond prices fell as interest rates rose for most of 1999.
However, the virtuous cycle of robust noninflationary growth described by
Chairman Alan Greenspan continues as technological innovation allows industry to
use raw materials and labor more efficiently. Add a volatile stock market to
continued low inflation, and we have the ingredients for a bond-market rally
that began in late January of this year. Of course, that ignores Chairman
Greenspan's warning that the economy is growing well in excess of its
sustainable, noninflationary rate.
The yield on the Bond Buyer 40-Bond Index (BBI40) steadily increased by 1.1%
from March 1999 until January 2000. Since late January, the yield has fallen
roughly 0.4%, closing at 5.97% on March 31, 2000. The 30-year U.S. Treasury bond
(the long bond) ended the period at 5.83%. Investor redemptions last fall and a
reduction in future issuance of the long bond were major reasons why the
municipal market has underperformed the U.S. government long-bond market.
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 3/31/00.
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%
10/15/99 6.26% 6.06%
10/29/99 6.16% 6.08%
11/15/99 6.02% 5.99%
11/30/99 6.29% 6.11%
12/15/99 6.33% 6.11%
12/31/99 6.48% 6.22%
01/14/00 6.70% 6.29%
01/31/00 6.49% 6.31%
02/15/00 6.25% 6.24%
02/29/00 6.14% 6.17%
03/15/00 6.08% 6.09%
03/31/00 5.83% 5.97%
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.
STRATEGY
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. My rationale for this strategy is:
- I believe that a large number of our investors own the Fund for the
tax-free income and invest for the long term.
- 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.
The Fund remains fully invested in long-term, investment-grade municipal bonds.
Municipal 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. That's why we encourage only
those investors with an investment horizon of four or more years to buy our
tax-exempt bond funds. In regard to credit risk, I believe investment-grade
bonds (rated BBB or higher by a rating agency) offer the best risk/reward
compared to junk bonds.
Our shareholders have made it very clear that they do not want the income from
their USAA tax-exempt funds to be subject to the federal alternative minimum tax
(AMT) for individuals. Consequently, since their inception, no USAA tax-exempt
fund has ever distributed income that was subject to the AMT for individuals.
Looking ahead, we have no intention of purchasing municipal bonds that are
subject to the AMT for individuals in any of the USAA tax-exempt funds. Of
course we would certainly advise our shareholders if a change occurs in the
federal tax code that would compel us to reconsider our position.
FUND PERFORMANCE
While past performance is no guarantee of future results, from March 31, 1999,
to March 31, 2000, your Fund paid a dividend distribution yield of 5.40% versus
an average dividend distribution yield of 4.86% for the Lipper Texas Municipal
Debt Funds Average. During the fiscal year, the Fund's share price decreased by
$0.95 to $10.12. During this period, the Fund's total return was -3.29% compared
to the Lipper Average of -3.08%.
* * * *
I'm pleased to say that your Fund received an Overall Star Rating of 4 stars in
the municipal bond fund category from Morningstar Rating(Trademark) for the
period ended March 31, 2000.
THE STATE OF TEXAS
Texas concluded the year with a robust economy and sound financial health.
During the 1990s, the Texas economy moved away from oil and gas to become more
diversified, like the rest of the nation. As a result, the booming U.S. economy
has been one of the major factors in the state's economic growth. Texas'
economic fundamentals remain strong due to low business costs such as wages and
taxes, substantial growth of the high-tech sector, and its favorable geographic
location for international trade. Texas added 2.35 million jobs in the 1990s,
more than any other state. I discuss these general economic issues because,
although they may not directly relate to each of your Fund's holdings, they
indicate the financial and economic environment of the state. We will closely
monitor those specific credit issues and litigation that could potentially
impact the value of your holdings.
================================================================================
Important Notice:
By the time you receive this annual shareholder report, you should have been
informed that the USAA State Tax-Free Trust Board of Trustees has voted to close
the Texas Funds as of June 30, 2000. A letter that explains the closure has been
sent to you from IMCO's president, Michael J.C. Roth. In addition, an IMCO
member service representative should have contacted you by telephone. If you
have any concerns or questions, please contact a member service representative.
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 gain distributions.
Refer to the bottom of page 5 for the Lipper Average definition.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
Past performance is no guarantee of future results. Morningstar proprietary
ratings on U.S.-domiciled funds reflect historical risk-adjusted performance as
of March 31, 2000. The ratings are subject to change every month. Morningstar
ratings on U.S.-domiciled funds are calculated from the fund's three- and
five-year average annual returns in excess of 90-day U.S. Treasury bill returns
with appropriate fee adjustments and a risk factor that reflects fund
performance below 90-day U.S. T-bill returns. The USAA Texas Tax-Free Income
Fund received 3 stars and 4 stars for the three- and five-year periods,
respectively. The top 10% of the funds in a broad asset class receive 5 stars,
the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5%
receive 2 stars, and the bottom 10% receive 1 star. The Fund was rated
exclusively against U.S.-domiciled funds. The Fund was rated among 1,682 and
1,394 funds in the municipal bond fund category for the three- and five-year
periods, respectively.
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
5.46% and:
Assuming a marginal federal tax rate of: 15% 28% 31% 36% 39.6%
A fully taxable investment must pay: 6.42% 7.58% 7.91% 8.53% 9.04%
- --------------------------------------------------------------------------------
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.
Some income may be subject to the federal alternative minimum tax.
Portfolio Ratings Mix
March 31, 2000
A pie chart is shown here depicting the Portfolio Mix as of March 31, 2000 of
the USAA Texas Tax-Free Income Fund to be:
AAA - 43%; AA - 26%; A - 12%; and BBB - 19%.
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 Services, or Fitch
IBCA. Unrated securities that have been determined by USAA IMCO to be of
equivalent investment quality to category AAA account for 0.5% 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 income exempt from federal income taxes and a
further objective of preserving capital and maintaining liquidity.
TYPES OF INVESTMENTS: Invests principally in 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 3/31/00
- --------------------------------------------------------------------------------
Net Assets $7.5 Million $9.6 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
Average Annual Total Returns and 7-Day Yield as of 3/31/00
- --------------------------------------------------------------------------------
Since Inception 7-Day
1 Year 5 Years on 8/1/94 Yield
3.20% 3.30% 3.29% 3.42%
- --------------------------------------------------------------------------------
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
seven-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 iMoneyNet,
Inc. (formerly IBC Financial Data) State Specific SB (Stock Broker) and GP
(General Purpose) (Tax-Free) Money Funds.
USAA Texas Tax-Free
Money Market Fund iMoneyNet, Inc.
------------------- ---------------
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%
10/25/99 3.08% 2.65%
11/29/99 3.51% 3.03%
12/27/99 4.05% 3.40%
01/31/00 2.94% 2.61%
02/28/00 3.51% 2.90%
03/27/00 3.38% 2.94%
Data represent the last Monday of each month.
Ending date 3/27/00.
The graph tracks the Fund's seven-day yield against iMoneyNet, Inc. (formerly
IBC Financial Data) State Specific SB (Stock Broker) & GP (General Purpose)
(Tax-Free) Money Funds, an average of money market fund yields.
Message from the Manager
[PHOTOGRAPH OF THE PORTFOLIO MANAGER, REGINA G. SHAFER, CFA, APPEARS HERE.]
MARKET SUMMARY
Since our last shareholder report, the national economy has continued to
strengthen. In response, the Federal Reserve has increased the federal funds
rate (the interest rate banks charge other banks) three times since September in
order to curb inflation. Normally, the raising of the federal funds rate causes
interest rates to rise. However, the Treasury market has instead been reacting
to the news that there will be a reduction in the issuance of long-term Treasury
bonds, and thus the yields for 30-year Treasuries have declined.
Rates have increased in the short-term, tax-exempt market. According to the Bond
Buyer One-Year Note Index, municipal notes have increased to 4.08% at the end of
March, up from 3.73% last September -- an increase of 0.35%.
STRATEGY
We believe that variable-rate demand notes (VRDNs) provide the best value for
the USAA Texas Tax-Free Money Market Fund. VRDNs provide the owner the option to
sell the security back to the issuer with a notice of seven days or less at a
price of par (100% of face value) plus accrued interest. The interest rates on
these securities also reset at least every seven days. The VRDNs are
particularly attractive now as they allow the Fund to participate in rising
rates as well as provide the needed flexibility to extend into longer-term
securities as they become more attractive. In addition, our team of analysts
continues to research each security before it is purchased to ensure it meets
our high credit standards.
THE FUND
Daily and weekly VRDNs represent 96% of the Fund's assets on March 31, 2000.
This has been a positive for the Fund since average weekly rates have been
attractive when compared to other alternatives.
The Bond Buyer One-Year Note Index is representative of yields on 10 large
one-year, tax-exempt notes.
FUND PERFORMANCE
For the 12 months ending March 31, 2000, your Fund ranked 4 out of 172 state
specific tax-exempt money market funds according to iMoneyNet, Inc. (formerly
IBC Financial Data), with a return of 3.20%. The average for the category over
the same period was 2.72%. Please keep in mind that past performance is no
guarantee of future results.
================================================================================
Important Notice:
By the time you receive this annual shareholder report, you should have been
informed that the USAA State Tax-Free Trust Board of Trustees has voted to close
the Texas Funds as of June 30, 2000. A letter that explains the closure has been
sent to you from IMCO's president, Michael J.C. Roth. In addition, an IMCO
member service representative should have contacted you by telephone. If you
have any concerns or questions, please contact a member service representative.
Cumulative Performance Comparison
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 3/31/00. 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
03/31/00 $12,010
Data since inception on 8/1/94 through 3/31/00.
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 the seven-day yield information, please refer to the Fund's Investment
Review.
See page 19 for a complete listing of the portfolio of investments.
Distributions to Shareholders
The Funds completed their fiscal year on March 31, 2000. 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 of what
portion of its earnings was exempt from federal taxation and which dividends
represented long-term gains. The net investment income earned and distributed by
each of the Funds was 100% tax exempt for federal income tax purposes. The Texas
Tax-Free Income Fund distributed $0.03372 per share of long-term capital gains
for the year ended March 31, 2000. The Texas Tax-Free Money Market Fund had no
long-term distributions for the year ended March 31, 2000.
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, series of the USAA State Tax-Free Trust, as of
March 31, 2000, 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 7 to
the financial statements, for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2000, 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, 2000, the results of their operations for the year then ended, the
changes in their net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the five-year
period then ended, in conformity with accounting principles generally accepted
in the United States of America.
KPMG LLP
San Antonio, Texas
May 5, 2000
CATEGORIES AND DEFINITIONS
PORTFOLIOS OF INVESTMENTS
March 31, 2000
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 (VRDNs) - provide the right, on any business day, to
sell the security at face value on either that day or within 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.
(ETM) Escrowed to final maturity.
(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
USAA TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 2000
Principal Coupon Final Market
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (86.2%)
Texas (82.9%)
$ 200 Austin Community College District RB,
Series 1995 (PRE) 6.10% 2/01/2015 $ 210
1,300 Austin Higher Education Auth. RB,
Series 1998 5.25 8/01/2023 1,105
1,500 Austin Hotel Occupancy Tax RB,
Series 1999 (INS)(2) 5.80 11/15/2029 1,491
145 Bexar Metropolitan Water District RB,
Series 1995 (INS)(1) 5.88 5/01/2022 145
500 Brazos County Health Facilities RB,
Series 1993B 6.00 1/01/2019 469
1,025 Brazos River Auth. RB, Series 1999A 5.38 4/01/2019 888
1,000 Canadian River Municipal Water
Authority RB, Series 1999 (INS)(1) 5.63 2/15/2020 988
750 Columbus Community IDC Sales Tax RB,
Series 1998 5.75 11/01/2023 687
165 Department of Housing and Community
Affairs RB, Series 1991A 6.95 7/01/2023 172
275 Guadalupe-Blanco River Auth. IDC RB,
Series 1982A 6.35 7/01/2022 284
1,200 Harlingen Consolidated ISD GO,
Series 1999 (NBGA) 5.65 8/15/2029 1,167
1,250 Harris County Health Facilities
Development Corp. RB, Series 1999A
(INS)(4) 5.20 5/15/2020 1,145
Harris County Health Facilities RB,
200 Series 1991A (ETM) 6.75 2/15/2021 207
150 Series 1992 (PRE) 7.13 6/01/2015 159
400 Harris County IDC RB, Series 1992 6.95 2/01/2022 409
600 Harrison County Health Facilities
Development Corp. RB, Series 1998 (INS)(5) 5.50 1/01/2018 539
100 Health Facilities Development Corp. RB,
Series 1993B (INS)(1) 6.38 8/15/2023 102
65 Housing Agency Single-Family Mortgage RB,
Series 1991A 7.15 9/01/2012 67
150 Houston Water and Sewer System RB,
Series 1992B 6.38 12/01/2014 156
1,300 Irving GO, Series 2000 5.50 3/15/2015 1,312
1,350 Leander ISD RB, Refunding (NBGA) 5.50 8/15/2017 1,340
1,000 Lewisville RB, Series 1998 (INS)(5) 5.80 9/01/2025 977
500 Lower Neches Valley Auth. IDC RB,
Series 1997 5.80 5/01/2022 489
1,000 Lubbock Tax and Waterworks RB, Series 1999 5.70 2/15/2020 999
400 Matagorda County Navigation District PCRB,
Series 1993 6.00 7/01/2028 372
700 Northeast Hospital Auth. RB, Series 1997
(INS)(4) 5.63 5/15/2022 676
1,000 Nueces River Auth. Water Supply Facilities
RB, Series 1997 (INS)(4) 5.50 3/01/2027 956
800 Orange County Navigation and Port
District IDC RB, Series 1996 6.38 2/01/2017 823
Pantego GO,
60 Series 1994 7.75 2/15/2014 64
65 Series 1994 7.75 2/15/2015 69
Port of Corpus Christi IDC PCRB,
1,400 Series 1997A 5.45 4/01/2027 1,159
1,000 Series 1997B 5.40 4/01/2018 854
1,300 San Antonio Electric and Gas RB, Series
1998A 5.25 2/01/2013 1,286
1,500 State GO, Series 1999A 5.50 8/01/2024 1,448
1,400 Travis County Health Facilities
Development Corp. RB, Series 1999A
(INS)(2) 5.88 11/15/2024 1,391
150 Turnpike Auth. Dallas North Tollway RB,
Series 1994 (PRE) (INS)(3) 6.75 1/01/2015 164
1,500 University of Texas RB, Series 1999A 5.70 8/15/2020 1,496
Water Development Board GO,
50 Series 1994 (PRE) 7.00 8/01/2020 54
150 Series 1994 7.00 8/01/2020 161
Puerto Rico (3.3%)
600 Electric Power Auth. RB, Series 1995Z 5.25 7/01/2021 562
475 Highway Auth. RB, Series Q (PRE) 6.00 7/01/2020 478
- --------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $28,289) 27,520
- --------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (12.5%)
Texas
200 Angelina and Neches River Auth. RB,
Series 1984D (LOC) 4.00 5/01/2014 200
1,000 Harris County Housing Finance Corp. MFH RB,
Series 1988A (NBGA) 3.90 6/01/2005 1,000
1,600 Port Arthur Navigation District IDC PCRB,
Series 1985 (LOC) 4.10 5/01/2003 1,600
1,200 Travis County Housing Finance Corp. MFH RB,
Series 1999 (NBGA) 3.90 12/15/2029 1,200
- --------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $4,000) 4,000
- --------------------------------------------------------------------------------
Total investments (cost: $32,289) $31,520
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
General Obligations 17.4%
Water/Sewer Utilities - Municipal 10.2
Hospitals 9.9
Education 8.1
Multi-Family Housing 6.9
Oil & Gas - Refining/Manufacturing 6.3
Electric/Gas Utilities - Municipal 5.8
Oil & Gas - Exploration & Production 5.0
Special Assessment/Tax/Fee 4.7
Escrowed Bonds 4.0
Electric Utilities 3.9
Buildings 3.6
Real Estate Tax-Free 3.1
Agricultural Products 2.6
Sales Tax 2.1
Oil - International Integrated 1.5
Leasing 1.3
Other 2.3
----
Total 98.7%
====
USAA TEXAS TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
March 31, 2000
Principal Coupon Final
Amount Security Rate Maturity Value
- --------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (95.7%)
Texas
$ 400 Alamo Heights Higher Education Facility RB,
Series 1999A (LOC) 4.05% 4/01/2019 $ 400
200 Amarillo Health Facilities Corp. RB,
Series 1985 (LOC) 4.10 5/31/2025 200
800 Angelina and Neches River Auth. RB,
Series 1984D (LOC) 4.00 5/01/2014 800
485 Arlington IDC RB, Series 1985 (LOC) 4.20 10/01/2020 485
330 Bell County Health Facilities
Development Corp. RB, Series 1998 (LOC) 3.90 5/01/2023 330
380 Bexar County Health Facilities RB,
Series 1985B (LOC) 3.90 3/01/2012 380
Bexar County Housing Finance Corp. MFH RB,
200 Series 1988A (NBGA) 3.90 8/01/2006 200
300 Series 1988B (NBGA) 3.90 6/01/2005 300
300 Comal County Health Facilities
Development Corp. RB, Series 1997 (LOC) 3.90 2/01/2027 300
800 Garland IDA PCRB, Series 1985 4.30 12/01/2005 800
200 Gulf Coast IDA RB, Series 1989 (LOC) 4.05 11/01/2019 200
200 Gulf Coast Waste PCRB, Series 1994 3.90 4/01/2013 200
200 Harris County Housing Finance Corp. MFH RB,
Series 1988A (NBGA) 3.90 6/01/2005 200
300 Lower Neches Valley Auth. IDC RB,
Series 1994A 3.75 2/01/2004 300
495 Matagorda County Hospital District RB,
Series 1988 (LOC) 4.20 8/01/2018 495
600 North Central Health Facility
Development Corp. RB, Series 1999C (LOC) 3.95 11/15/2029 600
870 North Central IDA RB, Series 1983 4.05 10/01/2013 870
400 Port Arthur Navigation District IDC PCRB,
Series 1985 (LOC) 4.10 5/01/2003 400
210 Port Corpus Christi IDC RB, Series 1992
(LOC) 4.05 7/01/2002 210
200 Port Development Corp. RB, Series 1984
(LOC) 4.15 12/01/2004 200
400 Tarrant County Housing Finance Corp. MFH
RB, Series 1985 (LOC) 3.95 12/01/2025 400
600 Travis County Housing Finance Corp. MFH RB,
Series 1999 (NBGA) 3.90 12/15/2029 600
100 Trinity River IDA RB, Series 1984 (LOC) 4.03 11/01/2014 100
250 Victoria Health Facilities Development
Corp. RB, Series 1997 (LOC) 3.90 9/01/2027 250
- --------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $9,220) 9,220
- --------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (3.9%)
Texas
125 Central College District Building RB,
Series 1999 (INS)(2) 4.50 5/15/2000 125
50 Palestine Waterworks Sewer Systems RB,
Series 1999 (INS)(2) 6.75 7/15/2000 51
200 Tyler GO, Series 1990 (PRE) 7.00 8/15/2006 202
- --------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $378) 378
- --------------------------------------------------------------------------------
Total investments (cost: $9,598) $9,598
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Multi-Family Housing 17.6%
Electrical Equipment 11.2
Nursing/Continuing Care Centers 10.2
Containers - Paper 8.3
Hospitals 8.3
Manufacturing - Diversified Industries 8.3
Health Care - Miscellaneous 8.1
Education 5.4
Publishing/Newspapers 5.0
Airport/Port 4.2
Oil & Gas - Exploration & Production 4.2
Oil - International Integrated 3.1
Chemicals - Diversified 2.1
Escrowed Bonds 2.1
Retail - Specialty 1.0
Water/Sewer Utilities - Municipal 0.5
----
Total 99.6%
====
NOTES TO PORTFOLIOS OF INVESTMENTS
March 31, 2000
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.
See accompanying notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 2000
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
----------------------------
ASSETS
Investments in securities, at market value
(identified cost of $32,289 and $9,598,
respectively) $ 31,520 $ 9,598
Cash 1 69
Receivables:
Capital shares sold 5 20
Interest 468 39
Securities sold 26 -
----------------------------
Total assets 32,020 9,726
----------------------------
LIABILITIES
Capital shares redeemed 10 78
USAA Investment Management Company 2 -
USAA Transfer Agency Company 2 1
Accounts payable and accrued expenses 25 8
Dividends on capital shares 37 2
----------------------------
Total liabilities 76 89
----------------------------
Net assets applicable to capital
shares outstanding $ 31,944 $ 9,637
============================
REPRESENTED BY:
Paid-in capital $ 34,268 $ 9,637
Accumulated net realized loss on investments (1,555) -
Net unrealized depreciation of investments (769) -
----------------------------
Net assets applicable to capital
shares outstanding $ 31,944 $ 9,637
============================
Capital shares outstanding, unlimited number
of shares authorized, $.001 par value 3,158 9,637
============================
Net asset value, redemption price, and offering
price per share $ 10.12 $ 1.00
============================
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 2000
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
----------------------------
Net investment income:
Interest income $ 2,024 $ 298
----------------------------
Expenses:
Management fees 174 41
Transfer agent's fees 32 11
Custodian's fees 41 18
Postage 4 2
Shareholder reporting fees 4 1
Trustees' fees 6 6
Registration fees 5 3
Professional fees 24 25
Other 2 1
----------------------------
Total expenses before reimbursement 292 108
Expenses reimbursed (118) (68)
----------------------------
Total expenses after reimbursement 174 40
----------------------------
Net investment income 1,850 258
----------------------------
Net realized and unrealized loss on investments:
Net realized loss (1,554) -
Change in net unrealized
appreciation/depreciation (1,788) -
----------------------------
Net realized and unrealized loss (3,342) -
----------------------------
Increase (decrease) in net assets resulting from
operations $ (1,492) $ 258
============================
See accompanying notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<TABLE>
<CAPTION>
USAA USAA
Texas Tax-Free Texas Tax-Free
Income Fund Money Market Fund
-----------------------------------------
2000 1999 2000 1999
-----------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 1,850 $ 1,387 $ 258 $ 204
Net realized gain (loss) on investments (1,554) 111 - -
Change in net unrealized appreciation/
depreciation of investments (1,788) (217) - -
-----------------------------------------
Increase (decrease) in net assets
resulting from operations (1,492) 1,281 258 204
-----------------------------------------
Distributions to shareholders from:
Net investment income (1,850) (1,387) (258) (204)
-----------------------------------------
Net realized gains (111) (37) - -
-----------------------------------------
From capital share transactions:
Proceeds from shares sold 12,025 17,875 13,563 11,241
Dividend reinvestments 1,492 1,120 240 193
Cost of shares redeemed (12,886) (5,202) (11,670) (9,818)
-----------------------------------------
Increase in net assets from
capital share transactions 631 13,793 2,133 1,616
-----------------------------------------
Net increase (decrease) in net assets (2,822) 13,650 2,133 1,616
Net assets:
Beginning of period 34,766 21,116 7,504 5,888
-----------------------------------------
End of period $ 31,944 $ 34,766 $ 9,637 $ 7,504
=========================================
Change in shares outstanding:
Shares sold 1,135 1,603 13,563 11,241
Shares issued for dividends reinvested 145 101 240 193
Shares redeemed (1,262) (466) (11,670) (9,818)
-----------------------------------------
Increase in shares outstanding 18 1,238 2,133 1,616
=========================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
(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.
On April 18, 2000, the Board of Trustees voted to close and liquidate the Funds
as of June 30, 2000. As of April 19, 2000, the Funds were closed to all new
investors.
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
judgment, 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 tax-exempt securities of comparable
quality, coupon, maturity, and type, indications as to values from dealers in
securities, and general market conditions. Securities that cannot be 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 tax-exempt 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, assets 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 year ended March 31, 2000.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes. At March 31, 2000, the
USAA Texas Tax-Free Income Fund had capital loss carryovers for federal income
tax purposes of approximately $1.6 million which, if not offset by subsequent
capital gains will expire in 2009. It is unlikely that the Company's Board of
Trustees will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the year
ended March 31, 2000, were as follows:
USAA Texas Tax-Free USAA Texas Tax-Free
Income Fund Money Market Fund
($000) ($000)
-----------------------------------------
Purchases $28,220 $19,759
Sales/maturities $32,249 $17,626
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, 2000,
was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-----------------------------------------
USAA Texas Tax-Free
Income Fund $289 ($1,058) ($769)
(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 June 30, 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) FINANCIAL HIGHLIGHTS - USAA TEXAS TAX-FREE INCOME FUND
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------
Net asset value at
beginning of period $ 11.07 $ 11.10 $ 10.38 $ 10.45 $ 10.21
Net investment income .55 .56 .57 .59 .58
Net realized and
unrealized gain (loss) (.92) (.01) .82 .13 .36
Distributions from net
investment income (.55) (.56) (.57) (.59) (.58)
Distributions of realized
capital gains (.03) (.02) (.10) (.20) (.12)
------------------------------------------------------
Net asset value at
end of period $ 10.12 $ 11.07 $ 11.10 $ 10.38 $ 10.45
======================================================
Total return (%) * (3.29) 5.00 13.71 7.06 9.42
Net assets at end
of period (000) $31,944 $34,766 $21,116 $11,206 $ 8,053
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements (%) .84 .87 .98 1.35 1.66
Ratio of net investment
income to average
net assets (%) 5.31 5.00 5.27 5.63 5.51
Portfolio turnover (%) 86.02 55.83 56.29 86.17 71.14
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(7) FINANCIAL HIGHLIGHTS - USAA TEXAS TAX-FREE MONEY MARKET FUND
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .03 .03
Distributions from net
investment income (.03) (.03) (.03) (.03) (.03)
-----------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=====================================================
Total return (%) * 3.20 3.16 3.43 3.22 3.49
Net assets at end
of period (000) $ 9,637 $ 7,504 $ 5,888 $ 5,280 $ 4,695
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50
Ratio of expenses to
average net assets
excluding
reimbursements (%) 1.33 1.33 1.37 1.77 2.02
Ratio of net investment
income to average
net assets (%) 3.17 3.10 3.38 3.17 3.42
* Assumes reinvestment of all dividend income distributions during the period.
Trustees
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, Vice Chairman of the Board
Barbara B. Dreeben
Robert L. Mason
David G. Peebles
Michael F. Reimherr
Richard A. Zucker
Investment Adviser, Underwriter, and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Transfer Agent Legal Counsel
USAA Shareholder Account Services Goodwin, Procter & Hoar LLP
9800 Fredericksburg Road Exchange Place
San Antonio, Texas 78288 Boston, Massachusetts 02109
Custodian Independent Auditors
State Street Bank and Trust Company KPMG LLP
P.O. Box 1713 112 East Pecan, Suite 2400
Boston, Massachusetts 02105 San Antonio, Texas 78205
Telephone Assistance Hours Internet Access
Call toll free - Central Time usaa.com(ServiceMark)
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.
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 touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
