SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. __)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
USAA Investment Trust
(Name of Registrant as Specified In Its Charter)
_________________________________________________________________
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
___________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
___________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fees paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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PRELIMINARY PROXY STATEMENT
USAA EAGLE LOGO
PROXY INFORMATION
The enclosed proxy statement provides details on important issues relating to
your USAA mutual funds. The board of directors of your fund(s) recommends that
you vote FOR all proposals. A separate proxy card and vote is required for each
fund you own.
To make voting faster and more convenient for you, we are offering a variety of
ways to vote your proxy. You may vote by using the Internet or by telephone
instead of completing and mailing the enclosed proxy card. The Internet and
telephone are generally available 24 hours a day, and your vote will be
confirmed and posted immediately. The choice is yours. Use whichever method
works best for you! IF YOU CHOOSE TO VOTE VIA THE INTERNET OR BY PHONE, DO NOT
MAIL YOUR PROXY CARD.
TO VOTE ON THE INTERNET
[GRAPHIC OF KEYBOARD] 1. Go to WWW.PROXYVOTE.COM or the
"Proxy voting" link on WWW.USAA.COM.
2. Enter the 12-digit CONTROL NUMBER on
the upper right side of your proxy
card.
3. Follow the instructions on the site.
TO VOTE BY TELEPHONE
1. Call toll-free 1-800-690-6903.
2. Enter the 12-digit CONTROL NUMBER on [GRAPHIC OF TELEPHONE KEYS]
the upper right side of your proxy card.
3. Follow the recorded instructions.
NOTE: EACH PROXY CARD YOU RECEIVE HAS A UNIQUE CONTROL NUMBER.
PLEASE BE SURE TO VOTE ALL YOUR PROXY CARDS.
YOUR PROXY VOTE IS IMPORTANT! PLEASE VOTE TODAY.
QUESTIONS:
We urge you to spend some time reviewing this proxy statement and the brief
summary of the proposals included in this package. Should you have any
questions, we invite you to call toll-free at 1-800-245-4275 Monday through
Friday from 6 a.m. to 10 p.m. Central Time, Saturday from 8:30 a.m. to 5 p.m.
Central Time, and on Sunday from 11:30 a.m. and 8 p.m. Central Time. We have
retained Georgeson Shareholder Communications, Inc. (GSC) to assist
shareholders in the voting process. If we have not received your proxy card as
the date of the meeting approaches, GSC may call you to remind you to exercise
your right to vote.
[USAA EAGLE LOGO]
NOTICE OF SPECIAL MEETING
TO ALL SHAREHOLDERS
OF THE USAA FAMILY OF FUNDS
TO BE HELD JULY 20, 2001
A shareholder meeting of all USAA funds (each a Fund, or collectively Funds)
will be held on Friday, July 20, 2001, at 2 p.m., Central Daylight Time, at the
McDermott Auditorium in the USAA Building, 9800 Fredericksburg Road, San
Antonio, Texas 78288, for the following purposes:
1. To elect directors of each Fund.
2. To amend or eliminate certain investment restrictions.
3. To approve a change in the Gold Fund's concentration policy to
permit greater investment in precious metals and minerals other
than gold.
4. To approve new advisory agreements with USAA Investment Management
Company (IMCO).
5. To approve a sub-advisory agreement for the S&P 500 Index Fund and
to permit IMCO to change the Fund's sub-adviser in the future
without shareholder approval.
6. To transact such other business as may properly come before the
meeting or any adjournments thereof.
By Order of the Board of Directors
Michael D. Wagner
SECRETARY
San Antonio, Texas
May 25, 2001
===========================================================================
WE URGE YOU TO VOTE ON THE INTERNET AT www.proxyvote.com; OR CALL OUR
SPECIAL TOLL-FREE NUMBER, 1-800-690-6903; OR MARK, SIGN, DATE, AND MAIL
THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE SO YOU WILL BE REPRESENTED
AT THE MEETING.
===========================================================================
PROXY STATEMENT
This document will give you the information you need to vote on the matters
listed on the previous page. Much of the information in this proxy statement is
required under the rules and regulations of the Securities and Exchange
Commission (SEC) and is, therefore, quite detailed. If there is anything you
don't understand, please contact us at 1-800-245-4275.
As an introductory matter, the USAA family of funds currently consists of 40
mutual funds. Each Fund is a series of one of four legal entities: USAA Mutual
Fund, Inc., USAA Tax Exempt Fund, Inc., USAA Investment Trust, and USAA State
Tax-Free Trust. USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc. are each
organized as Maryland corporations, and as such are governed by boards of
directors. These two legal entities may be referred to in this proxy statement
as Companies. USAA Investment Trust and USAA State Tax-Free Trust are organized
as a Massachusetts business trust and Delaware business trust, respectively,
and as such are governed by boards of trustees. These two legal entities may be
referred to in this proxy statement as Trusts. To date, each of these four
entities has been governed by boards of directors and trustees comprised of the
same individuals for financial and operational efficiencies. If Proposal 1 is
approved, this approach will continue. For simplicity throughout the rest of
this proxy statement, the boards of directors and boards of trustees of the
four legal entities will be identified simply as the Board of Directors.
* WHO IS ASKING FOR MY VOTE?
The Board of Directors of the USAA family of funds is soliciting the
enclosed proxy. How you vote, whether by Internet, telephone, mail, or in
person, will be used at the shareholder meeting, and if the shareholder
meeting is adjourned, at any later meetings, for the purposes stated in
the Notice of Special Meeting (see previous page).
* WHAT ARE THE DIFFERENT WAYS I CAN CAST MY VOTE?
As a shareholder, you may vote in one of the following four ways:
======================================================================
1. You may cast your vote through the Internet at www.proxyvote.com.
2. You may cast your vote by calling our special toll-free number,
1-800-690-6903.
3. You may vote by sending us a completed and executed proxy card. The
proxy card has been included with this proxy statement, along with
a postage-paid envelope for your convenience in mailing us your
proxy card.
4. You may vote in person by attending the shareholder meeting.
======================================================================
If you do not anticipate attending the meeting in person, we encourage you
to vote by Internet or telephone to minimize the costs of solicitation.
* HOW DOES THE BOARD OF DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE ON THESE
PROPOSALS?
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE:
1. FOR THE ELECTION OF ALL NOMINEES FOR ELECTION TO THE FUNDS' BOARD
OF DIRECTORS;
2. FOR THE AMENDMENT OR ELIMINATION OF CERTAIN INVESTMENT
RESTRICTIONS;
3. FOR THE APPROVAL OF A CHANGE IN THE GOLD FUND'S CONCENTRATION
POLICY;
4. FOR THE APPROVAL OF NEW ADVISORY AGREEMENTS; AND
5. FOR THE APPROVAL OF A SUB-ADVISORY AGREEMENT FOR THE S&P 500 INDEX
FUND AND TO PERMIT IMCO TO CHANGE THE FUND'S SUB-ADVISER IN THE
FUTURE WITHOUT SHAREHOLDER APPROVAL.
USAA family of funds - 2
* WHO IS ELIGIBLE TO VOTE?
Shareholders of record of each Fund as of the close of business on May 25,
2001, are entitled to vote at the shareholder meeting or any adjournment
thereof. The Notice of Special Meeting, the proxy card, the proxy summary,
and the proxy statement have been mailed to shareholders of record on or
about May 25, 2001.
Each share is entitled to one vote (with proportionate voting for
fractional shares). Shares represented by duly executed proxies will be
voted in accordance with shareholders' instructions. If you sign the
proxy, but don't fill in a vote, your shares will be voted "FOR" each of
the proposals. If any other business is brought before the shareholder
meeting, your shares will be voted as determined in the discretion of the
proxies.
Shareholders of every Fund will not be entitled to vote on every proposal.
The table on pages 4 and 5 of this proxy statement indicates on a
Fund-by-Fund basis the proposals on which shareholders of each Fund will
be entitled to vote.
Proxy Statement - 3
PROPOSAL 1 PROPOSAL 2
USAA FAMILY OF FUNDS AMEND OR ELIMINATE CERTAIN
ELECTION OF DIRECTORS INVESTMENT RESTRICTIONS
USAA TAXABLE BOND FUNDS
- -------------------------------------------------------------------------------
GNMA Trust X 2-A, 2-C
HIGH-YIELD OPPORTUNITIES FUND X 2-A
INCOME FUND X 2-A, 2-B, 2-C, 2-D, 2-E
INTERMEDIATE-TERM BOND FUND X 2-A
SHORT-TERM BOND FUND X 2-A, 2-B, 2-C, 2-D, 2-E
USAA TAX EXEMPT BOND FUNDS
- -------------------------------------------------------------------------------
LONG-TERM FUND X 2-A, 2-B, 2-C, 2-D
INTERMEDIATE-TERM FUND X 2-A, 2-B, 2-C, 2-D
SHORT-TERM FUND X 2-A, 2-B, 2-C, 2-D
CALIFORNIA BOND FUND X 2-A, 2-B, 2-C, 2-D
NEW YORK BOND FUND X 2-A, 2-B, 2-C, 2-D
VIRGINIA BOND FUND X 2-A, 2-B, 2-C, 2-D
FLORIDA TAX-FREE INCOME FUND X 2-A
USAA ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------
BALANCED STRATEGY FUND X 2-A
CORNERSTONE STRATEGY FUND X 2-A, 2-B, 2-C, 2-D, 2-E
GROWTH AND TAX STRATEGY FUND X 2-A, 2-B, 2-C, 2-D, 2-E
GROWTH STRATEGY FUND X 2-A
INCOME STRATEGY FUND X 2-A
USAA EQUITY FUNDS
- -------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND X 2-A, 2-B, 2-C, 2-D, 2-E
CAPITAL GROWTH FUND X 2-A
EMERGING MARKETS FUND X 2-A
FIRST START GROWTH FUND X 2-A
GOLD FUND X 2-A, 2-B, 2-C, 2-D, 2-E
GROWTH FUND X 2-A, 2-B, 2-C, 2-D, 2-E
GROWTH & INCOME FUND X 2-A, 2-B, 2-C, 2-D, 2-E
INCOME STOCK FUND X 2-A, 2-B, 3-C, 2-D, 2-E
INTERNATIONAL FUND X 2-A, 2-B, 2-C, 2-D, 2-E
SCIENCE & TECHNOLOGY FUND X 2-A
SMALL CAP STOCK FUND X 2-A
WORLD GROWTH FUND X 2-A, 2-B, 2-C, 2-D, 2-E
USAA INDEX FUNDS
- -------------------------------------------------------------------------------
EXTENDED MARKET INDEX FUND X
GLOBAL TITANS INDEX FUND X
NASDAQ-100 INDEX FUND X
S&P 500 INDEX FUND X
USAA MONEY MARKET FUNDS
- -------------------------------------------------------------------------------
MONEY MARKET FUND X 2-A, 2-B, 2-C, 2-D, 2-E
TREASURY MONEY MARKET TRUST X 2-A, 2-C
TAX EXEMPT MONEY MARKET FUND X 2-A, 2-B, 2-C, 2-D
CALIFORNIA MONEY MARKET FUND X 2-A, 2-B, 2-C, 2-D
NEW YORK MONEY MARKET FUND X 2-A, 2-B, 2-C, 2-D
VIRGINIA MONEY MARKET FUND X 2-A, 2-B, 2-C, 2-D
FLORIDA TAX-FREE MONEY MARKET FUND X 2-A
USAA family of funds - 4
PROPOSAL 3 PROPOSAL 4 PROPOSAL 5
APPROVE CHANGE APPROVE SUB-ADVISORY
IN GOLD FUND'S APPROVE NEW AGREEMENT AND PERMIT IMCO TO
CONCENTRATION POLICY ADVISORY AGREEMENTS CHANGE SUB-ADVISERS WITHOUT
SHAREHOLDER APPROVAL
- --------------------------------------------------------------------------------
X
X
X
X
X
- -------------------------------------------------------------------------------
X
X
X
X
X
X
X
- -------------------------------------------------------------------------------
X
X
X
X
X
- -------------------------------------------------------------------------------
X
X
X
X
X X
X
X
X
X
X
X
X
- -------------------------------------------------------------------------------
X
- -------------------------------------------------------------------------------
X
X
X
X
X
X
X
Proxy Statement - 5
PROPOSAL I
ELECTION OF BOARD OF DIRECTORS
ALL FUNDS
* WHO ARE THE NOMINEES FOR THE BOARD OF DIRECTORS?
> Robert G. Davis*
Mr. Davis, age 54, is President and Chief Executive Officer of United
Services Automobile Association (USAA) (4/00-present); President and Chief
Operating Officer of USAA (6/99-3/00); Director of USAA (2/99-present);
Deputy Chief Executive Officer for Capital Management of USAA (6/98-5/99);
President, Chief Executive Officer, Director, and Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/97-present); President, Chief Executive Officer, Director,
and Chairman of the Board of Directors of USAA Financial Planning Network,
Inc. (1/97-present); Executive Vice President, Chief Operating Officer,
Director, and Vice Chairman of the Board of Directors of USAA Financial
Planning Network, Inc. (6/96-12/96); Special Assistant to Chairman, USAA
(6/96-12/96); and President and Chief Executive Officer, Banc One Credit
Corporation (12/95-6/96). Mr. Davis serves as a Director and Chairman of
the Boards of Directors of USAA Investment Management Company (IMCO), USAA
Federal Savings Bank, and USAA Real Estate Company.
> Christopher W. Claus*
Mr. Claus, age 40, is President and Chief Executive Officer, Director, and
Vice Chairman of the Board of Directors, IMCO (2/01-present); Senior Vice
President, Investment Sales and Service, IMCO (7/00-2/01); Vice President,
Investment Sales and Service, IMCO (12/94-07/00). Mr. Claus serves as
President, Director, and Chairman of the Board of Directors of USAA
Shareholder Account Services; Director of USAA Life Insurance Company; and
Senior Vice President of USAA Life Investment Trust.
> David G. Peebles*
Mr. Peebles, age 61, is Senior Vice President, Equity Investments, IMCO
(11/98-present); Vice President, Equity Investments, IMCO (2/88-11/98).
> Barbara B. Dreeben
Mrs. Dreeben, age 55, is President, Postal Addvantage (7/92-present).
> Robert L. Mason, Ph.D.
Dr. Mason, age 54, is Staff Analyst, Southwest Research Institute
(9/98-present); Manager, Statistical Analysis Section, Southwest Research
Institute (2/79-9/98).
> Michael F. Reimherr
Mr. Reimherr, age 55, is President of Reimherr Business Consulting
(5/95-present).
> Laura T. Starks, Ph.D.
Dr. Starks, age 51, is the Charles E. and Sarah M. Seay Regents Chair
Professor of Finance, University of Texas at Austin (9/96-present); Sarah
Meadows Seay Regents, Professor of Finance, University of Texas at Austin
(9/94-9/96).
> Richard A. Zucker
Mr. Zucker, age 57, is Vice President, Beldon Roofing and Remodeling
(1985-present).
- --------------------
* Indicates individual who is deemed to be an "interested person" of the
Funds under the Investment Company Act of 1940 (1940 Act) because of his
affiliation with IMCO and its affiliates.
USAA family of funds - 6
Except as indicated above, the principal occupations and business
experience of the nominees for the Board of Directors for the last five
years have been with the employers indicated, although in some cases they
have held different positions with those employers. Mrs. Dreeben and Mr.
Zucker were originally elected by the shareholders in October 1995 and
reelected in October 1999. Dr. Mason, Messrs. Davis, Peebles, and Reimherr
were elected by the shareholders in October 1999. Dr. Starks and Mr. Claus
were appointed by the Funds' Board of Directors on May 10, 2000, and
February 15, 2001, respectively. Each director serves until his or her
successor is elected and qualified. Each of the nominees has agreed to
serve on the Board of Directors if elected. If any of the nominees is
unavailable for election at the time of the Shareholder Meeting, which is
not anticipated, the Board of Directors may vote for other nominees at
their discretion. The business address of each nominee who is an
"interested person" is 9800 Fredericksburg Road, San Antonio, Texas 78288,
and the business address of all other nominees is USAA, P. O. Box 47110,
San Antonio, Texas 78265-8110.
* WHAT ARE THE RESPONSIBILITIES OF THE BOARD OF DIRECTORS?
The Board of Directors is responsible for the general oversight of the
Funds' business and for assuring that your Funds are managed in the best
interests of each Fund's respective shareholders. The Board of Directors
periodically reviews your Funds' investment performance as well as the
quality of other services provided to your Funds and their shareholders by
each of the Funds' service providers, including IMCO and its affiliates.
IMCO acts as the investment adviser to the Funds. IMCO's address is 9800
Fredericksburg Road, San Antonio, Texas 78288. At least annually, the
Board of Directors reviews the fees paid by the Funds for these services
and the overall level of your Funds' operating expenses.
* WHY ARE WE NOW ELECTING NEW MEMBERS TO THE BOARD OF DIRECTORS?
By electing directors at this time, the Funds may be able to delay the
time at which another shareholder meeting is required for the election of
directors, which will result in a savings of the time and expense
associated with holding such a meeting.
Under the 1940 Act, the Board of Directors may fill vacancies on the Board
of Directors or appoint new directors only if, immediately thereafter, at
least two-thirds of the directors will have been elected by shareholders.
Currently, two of the Funds' eight directors have not been elected by
shareholders. After considering a Best Practices Report recently issued by
the Investment Company Institute, the Board of Directors' Corporate
Governance Committee has determined that it would be in the best interests
of shareholders to have at least two-thirds of the Funds' directors
comprised of individuals that are not "interested persons" of the Funds or
IMCO (Independent Directors), which would be in line with the report's
recommendations. Accordingly, the Corporate Governance Committee
anticipates nominating a new director for appointment by the full Board of
Directors sometime in 2002 or in early 2003. This would bring the Funds'
board to nine directors, of which six would be independent. At that point,
only six of the nine directors would have been elected if this election
did not occur. Should any previously elected director resign or be unable
to serve, the Board of Directors would not be able to fill the vacancy
without first calling a shareholder meeting, resulting in the time and
expense of an additional proxy solicitation. This can be avoided by
electing directors at this shareholder meeting.
* HOW LONG CAN DIRECTORS SERVE ON THE BOARD OF DIRECTORS?
Pursuant to a policy adopted by the Board of Directors, each duly elected
or appointed director will continue to serve as a director until the
director either reaches age 70 or has served fifteen (15) years in such
capacity. All members of the Board of Directors shall be presented to
shareholders for election or reelection, as the case may be, at least once
every five (5) years. A Fund director may resign or be removed by a vote
of the holders of a majority of the outstanding shares of the Funds at any
time.
Proxy Statement - 7
* DOES USAA OWN SHARES IN ANY OF THE FUNDS?
As of April 30, 2001, USAA, a Texas reciprocal interinsurance exchange,
beneficially owned directly or indirectly through one or more of its
affiliates the following number of shares of the Funds:
================================================================
FUND NAME SHARES OWNED
----------------------------------------------------------------
CAPITAL GROWTH FUND
EMERGING MARKETS FUND
EXTENDED MARKET INDEX FUND
FIRST START GROWTH FUND
GLOBAL TITANS INDEX FUND
HIGH-YIELD OPPORTUNITIES FUND
INTERMEDIATE-TERM BOND FUND
MONEY MARKET FUND
NASDAQ-100 INDEX FUND
S&P 500 INDEX FUND
SHORT-TERM BOND FUND
SMALL CAP STOCK FUND
================================================================
It is anticipated that shares owned by USAA and its affiliates will be
voted in favor of each of the proposals. IMCO is a wholly owned indirect
subsidiary of USAA whose address, along with its affiliates, is 9800
Fredericksburg Road, San Antonio, Texas 78288.
The following table identifies all persons, who as of April 30, 2001, held
of record or owned beneficially 5% or more of the Funds' shares.
===============================================================================
NAME AND ADDRESS
TITLE OF FUND OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF FUND
------------- ------------------- ---------------- ---------------
===============================================================================
* WHAT ARE SOME OF THE WAYS IN WHICH THE BOARD OF DIRECTORS REPRESENTS
SHAREHOLDER INTERESTS?
The Board of Directors seeks to represent shareholder interests by:
> reviewing the investment performance of each Fund with management;
> reviewing the quality of the various other services provided to the
Funds and their shareholders by each of the Funds' service providers,
including IMCO and its affiliates;
> discussing with senior management of IMCO steps being taken to address
any performance deficiencies;
USAA family of funds - 8
> reviewing the fees paid to IMCO and its affiliates to ensure that such
fees remain reasonable and competitive with those of the other mutual
funds, while at the same time providing sufficient resources to
continue to provide high-quality services in the future;
> monitoring potential conflicts between the Funds and IMCO and its
affiliates to ensure that the Funds continue to be managed in the best
interests of their shareholders; and
> monitoring potential conflicts among Funds to ensure that shareholders
continue to realize the benefits of participation in a large and
diverse family of funds.
* HOW OFTEN DOES THE BOARD OF DIRECTORS MEET?
The Board of Directors typically conducts regular meetings five or six
times a year to review the operations of the Funds in the USAA family of
funds. A portion of these meetings is devoted to meetings of various
committees of the Board of Directors, which focus on particular matters.
In addition, the Board of Directors may hold special meetings by telephone
or in person to discuss specific matters that may require action prior to
the next regular meeting.
Between the meetings of the Board of Directors and while the Board of
Directors is not in session, the Executive Committee of the Board of
Directors has all the powers and may exercise all the duties of the Board
of Directors in the management of the business of the Funds that may be
delegated to it by the Board of Directors. The Pricing and Investment
Committee of the Board of Directors acts upon various investment-related
issues and other matters that have been delegated to it by the Board of
Directors. The Audit Committee of the Board of Directors reviews the
financial statements and the auditors' reports and undertakes certain
studies and analyses as directed by the Board of Directors. The Corporate
Governance Committee of the Board of Directors maintains oversight of the
organization, performance, and effectiveness of the Board and Independent
Directors. See Further INFORMATION ABOUT YOUR FUNDS -- COMMITTEES OF THE
BOARD OF DIRECTORS.
During each Fund's most recent full fiscal year, the Board of Directors
met eight times on behalf of USAA Mutual Fund, Inc., USAA Tax Exempt Fund,
Inc., and USAA State Tax-Free Trust and nine times on behalf of USAA
Investment Trust. During each Fund's most recent full fiscal year, the
Audit Committee met four times on behalf of USAA Mutual Fund, Inc., USAA
Tax Exempt Fund, Inc., and State Tax-Free Trust and five times on behalf
of USAA Investment Trust. During each Fund's most recent full fiscal year,
the Pricing and Investment Committee met four times on behalf of USAA
Mutual Fund, Inc., USAA Tax Exempt Fund, Inc., and State Tax-Free Trust
and five times on behalf of USAA Investment Trust. During each Fund's most
recent full fiscal year, the Corporate Governance Committee met five times
on behalf of USAA Mutual Fund, Inc. and six times on behalf of USAA Tax
Exempt Fund, Inc., USAA Investment Trust, and State Tax-Free Trust. Each
director attended at least 75% of the total number of meetings of the
Board of Directors and any committee on which he or she served.
* WHAT ARE THE MEMBERS OF THE BOARD OF DIRECTORS PAID FOR THEIR SERVICES?
The Funds pay each Independent Director a fee for his or her services.
Directors affiliated with IMCO and its affiliates are not compensated by
the Funds for their service on the Board of Directors. Directors and
committee members are compensated on the basis of an annual retainer of
$21,000 from the Funds plus reimbursement for reasonable expenses incurred
in attending any meetings of the Board of Directors or a committee. The
fee for attending a regular or special meeting of the Board of Directors
is $1,500. All Funds in the USAA family of funds meet on a combined basis
for regular meetings, and one meeting fee is allocated evenly among the
total number of Funds represented at the meeting. The fee for serving on
one or more committees is $500 per committee meeting. All compensation
paid to directors is used to acquire shares of one or more Funds in the
USAA family of funds under an automatic investment program for directors.
The directors periodically review their fees to assure that such fees
continue to be appropriate in light of their responsibilities as well as
in relation to fees paid to directors of other mutual fund companies.
Proxy Statement - 9
The fees paid to each director by the Funds in the USAA family of funds
are shown below:
===================================================================================================================================
AGGREGATE COMPENSATION FROM THE FUNDS
NAME OF USAA USAA USAA TAX USAA STATE TOTAL COMPENSATION
DIRECTORS MUTUAL FUND, INC.1 INVESTMENT TRUST2 EXEMPT FUND, INC.3 TAX-FREE TRUST3 FROM THE FUND COMPLEX
- -----------------------------------------------------------------------------------------------------------------------------------
Robert G. Davis None (a)(b) None (a)(b) None (a)(b) None (a)(b) None (a)(b)
Christopher W. Claus None (a)(b) None (a)(b) None (a)(b) None (a)(b) None (a)(b)
David G. Peebles None (a)(b) None (a)(b) None (a)(b) None (a)(b) None (a)(b)
Barbara B. Dreeben $ 9,875 $ 10,000 $ 6,250 $ 9,250 $ 35,375
Robert L. Mason, Ph.D. $ 9,875 $ 10,000 $ 6,250 $ 9,250 $ 35,375
Michael F. Reimherr $ 6,375 $ 5,000 $ 6,250 $ 9,250 $ 26,875
Laura T. Starks, Ph.D. $ 3,500 $ 1,688 $ 6,688 $ 10,125 $ 22,001
Richard A. Zucker $ 9,875 $ 10,000 $ 6,250 $ 9,250 $ 35,375
- ---------
1 Amounts are for fiscal year ended July 31, 2000.
2 Amounts are for fiscal year ended May 31, 2000.
3 Amounts are for fiscal year ended March 31, 2001.
(a) Robert G. Davis, Christopher W. Claus, and David G. Peebles are affiliated
with the Funds' investment adviser, IMCO, and, accordingly, receive no
remuneration from any Fund in the USAA family of funds.
(b) No pension or retirement benefits are accrued as part of fund expenses.
===================================================================================================================================
No compensation is paid by any Fund to any director who is a director,
officer, or employee of IMCO or its affiliates. As of April 30, 2001, the
directors and their families as a group owned beneficially or of record
less than 1% of the outstanding shares of all Funds within the USAA family
of funds.
* HOW DOES THE BOARD OF DIRECTORS RECOMMEND I VOTE ON THIS PROPOSAL?
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
ELECTION OF ALL NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS OF THE
FUNDS.
* WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO ELECT THE NOMINEES
TO THE BOARD OF DIRECTORS?
The nominees for directors of the Funds receiving the vote of a plurality
of the outstanding voting shares of each of the four Companies and Trusts
cast at a meeting at which a quorum is present shall be elected.
Shareholders of all Funds in a Company or Trust will vote as a single
class on the election of directors.
PROPOSAL 2
AMENDMENT OR ELIMINATION OF
CERTAIN INVESTMENT RESTRICTIONS
THE FUNDS' BOARD OF DIRECTORS, INCLUDING THE INDEPENDENT DIRECTORS, HAS
PROPOSED THAT SHAREHOLDERS APPROVE AMENDING OR ELIMINATING CERTAIN FUNDAMENTAL
INVESTMENT RESTRICTIONS OF CERTAIN OF THE FUNDS. THE PROPOSED CHANGES TO THE
INVESTMENT RESTRICTIONS OF EACH FUND ARE BASED ON RECOMMENDATIONS PREPARED BY
IMCO, WHICH WERE REVIEWED AND APPROVED BY THE BOARD OF DIRECTORS AT A MEETING
HELD ON APRIL 26, 2001.
* WHAT IS A FUNDAMENTAL INVESTMENT RESTRICTION?
Under the 1940 Act, all investment policies of a mutual fund must be
classified as either "fundamental" or "nonfundamental." A fundamental
policy may not be changed without the approval of the Fund's
USAA family of funds - 10
shareholders; a nonfundamental policy may be changed by the Board of
Directors without shareholder approval. Under the 1940 Act, only certain
policies are required to be classified as fundamental.
Some of the current fundamental investment restrictions for the Funds
reflect regulatory, business, or industry conditions in existence at the
time the Funds commenced operations, which in many cases are no longer in
effect. The Board of Directors recently reviewed each Fund's fundamental
investment restrictions and determined that it would be in the best
interest of shareholders to eliminate certain investment restrictions that
are not required under applicable law, and to modify certain other
restrictions that are required to be fundamental.
* WHY IS THE BOARD OF DIRECTORS PROPOSING THESE CHANGES?
The Board of Directors believes that the ability of IMCO to manage the
Funds' portfolios in a changing regulatory or investment environment will
be enhanced by approval of these proposals. In addition, the Board of
Directors believes that approval of these proposals will reduce the need
for future shareholder meetings, thereby reducing the Funds' ongoing costs
of operation. Furthermore, it is anticipated that increased
standardization will help to promote operational efficiencies and
facilitate monitoring of compliance with investment restrictions.
At the meeting, shareholders of each Fund will vote on each of the
proposals separately. If approved by shareholders, a change to a Fund's
investment restriction will become effective as soon as practicable
thereafter, but no sooner than August 1, 2001.
* WILL THESE CHANGES MATERIALLY AFFECT HOW THE FUNDS ARE MANAGED?
Although the proposed changes to each Fund's investment restrictions
generally give broader authority to make certain investments or engage in
certain practices than do the current investment restrictions of the
Funds, IMCO does not currently intend to change in any material way the
principal investment strategies or operations of any Fund.
* HOW DOES THE BOARD OF DIRECTORS RECOMMEND SHAREHOLDERS VOTE ON PROPOSALS
2-A THROUGH 2-E?
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
APPROVAL OF PROPOSALS 2-A THROUGH 2-E.
* WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO AMEND OR ELIMINATE
THESE INVESTMENT RESTRICTIONS?
Approval of each proposal with respect to any Fund will require the "yes"
vote of a "majority of the outstanding voting securities" of the Fund, as
provided in the 1940 Act. For this purpose, this means the "yes" vote of
the lesser of (i) more than 50% of the outstanding shares of each Fund, or
(ii) 67% or more of the shares present at the meeting, if more than 50% of
the outstanding shares are present at the meeting in person or by proxy.
Because abstentions and broker non-votes are treated as shares present but
not voting, any abstentions and broker non-votes will have the effect of
votes against this proposal, which requires the approval of a specified
percentage of the outstanding shares of each Fund.
Proxy Statement - 11
PROPOSAL 2-A
ELIMINATION OF THE INVESTMENT RESTRICTION
REGARDING INVESTMENTS IN A SINGLE ISSUER
* WHAT IS THE SINGLE ISSUER RESTRICTION FOR EACH FUND REFERENCED BELOW?
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the extent to which the Fund can invest
in any single issuer:
AGGRESSIVE GROWTH FUND BALANCED STRATEGY FUND
CORNERSTONE STRATEGY FUND CAPITAL GROWTH FUND
EMERGING MARKETS FUND FIRST START GROWTH FUND
FLORIDA TAX-FREE INCOME FLORIDA TAX-FREE MONEY MARKET FUND
GNMA TRUST GOLD FUND
GROWTH FUND GROWTH & INCOME FUND
GROWTH STRATEGY FUND GROWTH AND TAX STRATEGY FUND
HIGH-YIELD OPPORTUNITIES FUND INCOME FUND
INCOME STOCK FUND INCOME STRATEGY FUND
INTERMEDIATE-TERM BOND FUND INTERNATIONAL FUND
MONEY MARKET FUND SCIENCE & TECHNOLOGY FUND
SHORT-TERM BOND FUND SMALL CAP STOCK FUND
TREASURY MONEY MARKET TRUST WORLD GROWTH FUND
"[A FUND MAY NOT,] WITH RESPECT TO 75% OF ITS TOTAL ASSETS, PURCHASE
THE SECURITIES OF ANY ISSUER (EXCEPT [U.S.] GOVERNMENT SECURITIES, AS
SUCH TERM IS DEFINED IN THE [1940 ACT]) IF, AS A RESULT, THE FUND
WOULD OWN MORE THAN 10% OF THE OUTSTANDING VOTING SECURITIES OF SUCH
ISSUER OR THE FUND WOULD HAVE MORE THAN 5% OF THE VALUE OF ITS TOTAL
ASSETS INVESTED IN THE SECURITIES OF SUCH ISSUER . . . ."
------------------------------------------------------
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the extent to which the Fund can invest
in any single issuer:
CALIFORNIA BOND FUND CALIFORNIA MONEY MARKET FUND
INTERMEDIATE-TERM FUND LONG-TERM FUND
NEW YORK BOND FUND NEW YORK MONEY MARKET FUND
SHORT-TERM FUND TAX EXEMPT MONEY MARKET FUND
VIRGINIA BOND FUND VIRGINIA MONEY MARKET FUND
"[A FUND MAY NOT,] WITH RESPECT TO 75% OF ITS TOTAL ASSETS, PURCHASE
THE SECURITIES OF ANY ISSUER ([EXCEPT GOVERNMENT SECURITIES, AS SUCH
TERM IS DEFINED IN THE 1940 ACT]) IF, AS A RESULT, THE FUND WOULD HAVE
MORE THAN 5% OF THE VALUE OF ITS TOTAL ASSETS INVESTED IN THE
SECURITIES OF SUCH ISSUER . . . ."
AND
"[A FUND MAY NOT] PURCHASE MORE THAN 10% OF THE OUTSTANDING VOTING
SECURITIES OF ANY ISSUER."
* WHAT DOES THE "SINGLE ISSUER" RESTRICTION MEAN?
In substance, this restriction limits a Fund's investments in the
securities of any single issuer to 5% of the Fund's assets and 10% of the
issuer's outstanding voting stock, except that 25% of the Fund's assets
are not subject to this restriction.
USAA family of funds - 12
Each of these Funds has also elected to be classified as a "diversified
company" under the 1940 Act. As a diversified company, at least 75% of the
value of each Fund's total assets must be represented by cash and cash
items, U.S. government securities, securities of other investment
companies, and other securities limited with respect to any one issuer to
an amount not greater in value than 5% of the value of the Fund's total
assets and not more than 10% of the outstanding voting securities of such
issuer (the Diversification Requirement). The Diversification Requirement
has the effect, with respect to 75% of a Fund's assets, of limiting
investments by the Fund in the securities of any single issuer (other than
U.S. government securities and securities of other investment companies)
to 5% of the Fund's assets and 10% of the issuer's outstanding voting
stock. A Fund may not change its classification as a diversified company
without shareholder approval.
* WHY IS IT BENEFICIAL TO ELIMINATE THE SINGLE ISSUER RESTRICTION?
The single issuer restriction creates an investment limitation that is
more restrictive than the Diversification Restriction required under the
1940 Act, because this restriction does not contain an exception regarding
securities of other investment companies. By eliminating this restriction,
each Fund referenced above will have the flexibility to invest in
securities of other investment companies to the maximum extent permissible
under the 1940 Act.
The single issuer restriction also creates a limitation on the ability of
a Fund to adapt to regulatory changes should the Diversification
Requirement under the 1940 Act change in the future. By eliminating this
restriction at this time, each Fund will be able to respond to future
changes in the Diversification Requirement without delay and without the
time and expense of holding a shareholder meeting.
If this restriction is eliminated, each Fund will continue to be subject
to the limitations on investments in other registered investment companies
imposed under the 1940 Act. In general, the 1940 Act prohibits a mutual
fund from (i) acquiring more than 3% of the voting stock of any other
investment company, (ii) investing more than 5% of its total assets in any
one investment company, or (iii) investing more than 10% of its total
assets in any two or more investment companies. However, under the 1940
Act, these limitations do not apply to purchases of shares of an
investment company by a mutual fund that charges a sales load of not more
than 1 1/2% (such as each of the Funds, which charge no sales loads)
provided that such fund, together with all affiliates, does not own more
than 3% of the outstanding shares of such investment company.
Eliminating the investment restriction will allow each Fund greater
investment flexibility and will allow the Fund to respond to developments
in the securities markets and to regulatory changes without delay and
without the time and expense of holding a shareholder meeting. For
example, subject to regulatory and Board of Directors approval, a Fund may
wish to buy shares of an affiliated money market fund as a means of
investing excess cash on a short-term basis. The removal of the
restriction will permit such investments, subject to appropriate exemptive
relief from the SEC.
If this restriction is eliminated, each of the above referenced Funds will
continue to be subject to the limitations of the 1940 Act's
Diversification Requirement. For this reason, approval of Proposal 2-A is
not expected to materially affect the operations of any Fund.
Proxy Statement - 13
PROPOSAL 2-B
ELIMINATION OF THE INVESTMENT RESTRICTION
REGARDING THE PURCHASE OF SECURITIES OF
OTHER INVESTMENT COMPANIES
* WHAT IS THE INVESTMENT RESTRICTION REGARDING INVESTMENTS IN OTHER
INVESTMENT COMPANIES FOR EACH FUND REFERENCED BELOW?
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the purchase of securities of other
investment companies:
AGGRESSIVE GROWTH FUND GROWTH FUND
GROWTH & INCOME FUND INCOME FUND
INCOME STOCK FUND MONEY MARKET FUND
SHORT-TERM BOND FUND
"[A FUND MAY NOT] ACQUIRE SECURITIES OF OTHER OPEN-END INVESTMENT
COMPANIES, EXCEPT IN CONNECTION WITH A MERGER, CONSOLIDATION, OR
ACQUISITION OF ASSETS APPROVED BY THE SHAREHOLDERS."
------------------------------------------------------
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the purchase of securities of other
investment companies:
CORNERSTONE STRATEGY FUND GROWTH AND TAX STRATEGY FUND
GOLD FUND INTERNATIONAL FUND
WORLD GROWTH FUND
"[A FUND MAY NOT] PURCHASE SECURITIES OF OTHER OPEN-END INVESTMENT
COMPANIES, EXCEPT A FUND MAY INVEST UP TO 10% OF THE MARKET VALUE OF
ITS TOTAL ASSETS IN SUCH SECURITIES THROUGH PURCHASES IN THE OPEN
MARKET INVOLVING ONLY CUSTOMARY BROKER'S COMMISSIONS OR IN CONNECTION
WITH A MERGER, CONSOLIDATION, REORGANIZATION, OR ACQUISITION OF
ASSETS APPROVED BY THE SHAREHOLDERS."
-------------------------------------------------------
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the purchase of securities of other
investment companies:
CALIFORNIA BOND FUND CALIFORNIA MONEY MARKET FUND
INTERMEDIATE-TERM FUND LONG-TERM FUND
NEW YORK BOND FUND NEW YORK MONEY MARKET FUND
SHORT-TERM FUND TAX EXEMPT MONEY MARKET FUND
VIRGINIA BOND FUND VIRGINIA MONEY MARKET FUND
"[A FUND MAY NOT] INVEST ITS ASSETS IN SECURITIES OF OTHER INVESTMENT
COMPANIES EXCEPT BY PURCHASES IN THE OPEN MARKET INVOLVING ONLY
CUSTOMARY BROKERS' COMMISSIONS OR AS PART OF A MERGER, CONSOLIDATION,
REORGANIZATION, OR PURCHASE OF ASSETS APPROVED BY THE SHAREHOLDERS."
* WHAT IS THE BOARD OF DIRECTORS PROPOSING WITH RESPECT TO THIS INVESTMENT
RESTRICTION?
The Board of Directors proposes that shareholders approve eliminating this
restriction. This restriction is not required by the 1940 Act and was
based, in part, on requirements formerly imposed by state securities
regulators as a condition to registration. These state law requirements
are no longer applicable to mutual funds.
USAA family of funds - 14
* HOW WILL THE CHANGE AFFECT THE FUNDS?
If this restriction is eliminated, each Fund will continue to be subject
to the limitations on investments in other registered investment companies
imposed under the 1940 Act. In general, the 1940 Act prohibits a mutual
fund from (i) acquiring more than 3% of the voting stock of any other
investment company, (ii) investing more than 5% of its total assets in any
one investment company or (iii) investing more than 10% of its total
assets in any two or more investment companies. However, under the 1940
Act, these limitations do not apply to purchases of shares of an
investment company by a mutual fund that charges a sales load of not more
than 1 1/2% (such as each of the Funds, which charge no sales loads)
provided that such fund, together with all affiliates, does not own more
than 3% of the outstanding shares of such investment company.
Eliminating the investment restriction will allow each Fund greater
investment flexibility and will allow the Fund to respond to developments
in the securities markets and to regulatory changes without delay and
without the time and expense of holding a shareholder meeting. For
example, subject to regulatory and Board of Directors approval, a Fund may
wish to buy shares of an affiliated money market fund as a means of
investing excess cash on a short-term basis. The removal of the
restriction will permit such investments, subject to appropriate exemptive
relief from the SEC.
PROPOSAL 2-C
AMENDMENT OF THE INVESTMENT RESTRICTION
REGARDING THE ISSUANCE OF SENIOR SECURITIES
* WHAT IS THE INVESTMENT RESTRICTION REGARDING THE ISSUANCE OF SENIOR
SECURITIES FOR EACH FUND REFERENCED BELOW?
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the issuance of senior securities:
AGGRESSIVE GROWTH FUND CALIFORNIA BOND FUND
CALIFORNIA MONEY MARKET FUND CORNERSTONE STRATEGY FUND
GNMA TRUST GOLD FUND
GROWTH FUND GROWTH & INCOME FUND
GROWTH AND TAX STRATEGY FUND INCOME FUND
INCOME STOCK FUND INTERMEDIATE-TERM FUND
INTERNATIONAL FUND LONG-TERM FUND
MONEY MARKET FUND NEW YORK BOND FUND
NEW YORK MONEY MARKET FUND SHORT-TERM FUND
SHORT-TERM BOND FUND TAX EXEMPT MONEY MARKET FUND
TREASURY MONEY MARKET TRUST VIRGINIA BOND FUND
VIRGINIA MONEY MARKET FUND WORLD GROWTH FUND
"[A FUND MAY NOT] ISSUE SENIOR SECURITIES, AS DEFINED IN [THE 1940
ACT], EXCEPT [THAT IT MAY PURCHASE TAX-EXEMPT SECURITIES ON A
"WHEN-ISSUED" BASIS AND MAY PURCHASE OR SELL FINANCIAL FUTURES
CONTRACTS AND OPTIONS] AS PERMITTED BY SECTION 18(F)(2) [AND RULES
THEREUNDER]."
* WHAT AMENDMENT IS THE BOARD OF DIRECTORS PROPOSING?
The Board of Directors proposes that shareholders approve replacing each
of the above referenced Fund's current fundamental investment restriction
regarding the issuance of senior securities with the following fundamental
investment restriction:
"A FUND MAY NOT ISSUE SENIOR SECURITIES, EXCEPT AS PERMITTED UNDER THE
1940 ACT."
Proxy Statement - 15
The proposed change will permit each Fund to issue senior securities to
the maximum extent permitted by the 1940 Act.
* TO WHAT EXTENT DOES THE 1940 ACT PERMIT A FUND TO ISSUE SENIOR SECURITIES?
In general, under the 1940 Act, a "senior security" is an obligation of a
fund that has a claim to the fund's assets or earnings that takes
precedence over the claims of the fund's shareholders. The 1940 Act
generally prohibits a mutual fund from issuing any senior security, except
that a mutual fund is permitted to borrow money from a bank. In addition,
a fund may engage in certain types of investment transactions that might
otherwise be considered a "senior security," provided that certain
conditions are met. For example, a transaction that obligates a fund to
pay money at a future date (e.g., the purchase of securities to be settled
on a date that is beyond the normal settlement period) may be considered a
"senior security." Under the 1940 Act, a mutual fund is permitted to enter
into this type of transaction if it maintains a segregated account
containing liquid securities in an amount equal to its obligation to pay
cash for the securities at a future date.
PROPOSAL 2-D
AMENDMENT OF THE INVESTMENT RESTRICTION
REGARDING THE PURCHASE OR SALE OF COMMODITIES
* WHAT IS THE INVESTMENT RESTRICTION REGARDING INVESTMENTS IN COMMODITIES
FOR EACH FUND REFERENCED BELOW?
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the purchase or sale of commodities:
AGGRESSIVE GROWTH FUND CALIFORNIA BOND FUND
CALIFORNIA MONEY MARKET FUND CORNERSTONE STRATEGY FUND
GOLD FUND GROWTH FUND
GROWTH & INCOME FUND GROWTH AND TAX STRATEGY FUND
INCOME FUND INCOME STOCK FUND
INTERMEDIATE-TERM FUND INTERNATIONAL FUND
LONG-TERM FUND MONEY MARKET FUND
NEW YORK BOND FUND NEW YORK MONEY MARKET FUND
SHORT-TERM FUND SHORT-TERM BOND FUND
TAX EXEMPT MONEY MARKET FUND VIRGINIA BOND FUND
VIRGINIA MONEY MARKET FUND WORLD GROWTH FUND
"[A FUND MAY NOT] PURCHASE OR SELL COMMODITIES [OR] COMMODITY
CONTRACTS [. . . .]"
* WHAT AMENDMENT IS THE BOARD OF DIRECTORS PROPOSING?
The Board of Directors proposes that shareholders approve replacing each
of the above referenced Funds' current fundamental investment restriction
regarding the purchase or sale of commodities with the following
fundamental investment restriction:
"A FUND MAY NOT PURCHASE OR SELL COMMODITIES, EXCEPT THAT EACH FUND
MAY INVEST IN FINANCIAL FUTURES CONTRACTS, OPTIONS THEREON, AND OTHER
SIMILAR INSTRUMENTS."
USAA family of funds - 16
* HOW WILL THE CHANGE AFFECT THE FUNDS?
The primary purpose of the proposed amendment is to clarify the types of
commodities that the Funds may purchase, as well as to standardize these
investment restrictions for all Funds (other than the Index Funds).
The current policy for each of the Funds prohibits the purchase or sale of
any commodity or commodity contract. This policy does not contain any
exceptions for the purchase or sale of financial futures contracts and
options on such contracts. Although IMCO does not currently intend to
invest in financial futures contracts and options on such contracts for
any of these Funds, IMCO believes that in certain circumstances and under
certain market conditions investments in these products may be appropriate
for the Funds. Although the proposed change regarding commodities will
have no current impact on these Funds, the adoption of the proposal will
standardize and clarify the investment restriction concerning commodities
for the Funds and will provide flexibility to adapt to future regulatory
and tax changes.
PROPOSAL 2-E
AMENDMENT OF THE INVESTMENT RESTRICTION
REGARDING THE PURCHASE OR SALE OF REAL ESTATE
* WHAT IS THE INVESTMENT RESTRICTION REGARDING INVESTMENTS IN REAL ESTATE
FOR EACH FUND REFERENCED BELOW?
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the purchase or sale of real estate:
AGGRESSIVE GROWTH FUND GROWTH FUND
GROWTH & INCOME FUND INCOME FUND
INCOME STOCK FUND MONEY MARKET FUND
SHORT-TERM BOND FUND
"[A FUND MAY NOT] PURCHASE OR SELL . . . REAL ESTATE, ALTHOUGH A
FUND MAY INVEST IN THE SECURITIES OF REAL ESTATE INVESTMENT
TRUSTS."
----------------------------------------------------------
Each of the Funds referenced below currently has the following fundamental
investment restriction regarding the purchase or sale of real estate:
CORNERSTONE STRATEGY FUND GOLD FUND
GROWTH AND TAX STRATEGY FUND INTERNATIONAL FUND
WORLD GROWTH FUND
"[A FUND MAY NOT] PURCHASE OR SELL REAL ESTATE OR PARTNERSHIP
INTERESTS THEREIN, [EXCEPT THAT THE CORNERSTONE STRATEGY FUND MAY
PURCHASE SECURITIES SECURED BY REAL ESTATE INTERESTS THEREIN, OR
ISSUED BY COMPANIES OR INVESTMENT TRUSTS WHICH INVEST IN REAL ESTATE
OR INTERESTS THEREIN.]"
* WHAT AMENDMENT IS THE BOARD OF DIRECTORS PROPOSING?
The Board of Directors proposes that shareholders approve replacing the
above referenced Funds' current fundamental investment restriction
regarding the purchase or sale of real estate with the following
fundamental investment restriction:
"A FUND MAY NOT PURCHASE OR SELL REAL ESTATE UNLESS ACQUIRED AS A
RESULT OF OWNERSHIP OF SECURITIES OR OTHER INSTRUMENTS, EXCEPT THAT
EACH FUND MAY INVEST IN SECURITIES OR OTHER INSTRUMENTS BACKED BY
REAL ESTATE OR SECURITIES OF COMPANIES THAT DEAL IN REAL ESTATE OR
ARE ENGAGED IN THE REAL ESTATE BUSINESS."
Proxy Statement - 17
* HOW WILL THE CHANGE AFFECT THE FUNDS?
The primary purpose of the proposed amendments is to clarify the types of
real estate that the above referenced Funds may purchase, as well as to
standardize these investment restrictions for all Funds other than the
Index Funds.
The proposed change clarifies that a Fund may acquire real estate as a
result of ownership of securities or other instruments, and that each Fund
may invest in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the
real estate business. Although the proposed change will have no current
impact on any Fund, adoption of the proposed investment restriction will
assist in standardizing the investment restrictions of all Funds other
than the Index Funds.
PROPOSAL 3
APPROVAL OF A CHANGE IN THE GOLD FUND'S
CONCENTRATION POLICY
GOLD FUND
CURRENTLY, THE GOLD FUND'S INVESTMENT OBJECTIVE IS TO SEEK LONG-TERM CAPITAL
APPRECIATION AND TO PROTECT THE PURCHASING POWER OF YOUR CAPITAL AGAINST
INFLATION. CURRENT INCOME IS A SECONDARY OBJECTIVE. THE FUND HAS OPERATED WITH
A CONCENTRATION POLICY OF INVESTING AT LEAST 80% OF ITS ASSETS DURING NORMAL
MARKET CONDITIONS IN EQUITY SECURITIES OF COMPANIES PRINCIPALLY ENGAGED IN GOLD
EXPLORATION, MINING, OR PROCESSING. THE REMAINDER OF THE FUND'S ASSETS MAY BE
INVESTED IN EQUITY SECURITIES OF COMPANIES SIMILARLY ENGAGED IN THE
EXPLORATION, MINING, OR PROCESSING OF OTHER PRECIOUS METALS AND MINERALS AND IN
CERTAIN INVESTMENT-GRADE SHORT-TERM DEBT INSTRUMENTS.
* WHAT CHANGE IS THE BOARD OF DIRECTORS PROPOSING TO THE FUND'S CONCENTRATION
POLICY?
The Board of Directors proposes to change the Fund's concentration policy
to read as follows:
"THE FUND SHALL INVEST AT LEAST 25% OF ITS ASSETS DURING NORMAL
MARKET CONDITIONS IN EQUITY SECURITIES OF COMPANIES PRINCIPALLY
ENGAGED IN THE EXPLORATION, MINING, OR PROCESSING OF GOLD OR OTHER
PRECIOUS METALS AND MINERALS, SUCH AS PLATINUM, SILVER, AND
DIAMONDS."
* WHY IS THE BOARD OF DIRECTORS PROPOSING THIS CHANGE?
The Fund's current policy restricts IMCO's ability to invest the Fund's
assets in equity securities of companies principally engaged in the
exploration, mining, or processing of precious metals and minerals, other
than gold. The Board of Directors believes that the current policy unduly
impairs the Fund's ability to achieve its stated objectives. If this
proposal is approved by shareholders, the Fund will have increased
flexibility with respect to investing in equity securities of companies
principally engaged in the exploration, mining, or processing of all types
of precious metals and minerals, including gold.
* WILL THE NAME OF THE FUND CHANGE AS A RESULT OF A CHANGE IN ITS
CONCENTRATION POLICY?
Yes, if the change in concentration policy is approved by the
shareholders, the name of the Gold Fund will be changed to accurately
reflect the investment focus of the Fund. The proposed name of the Fund
will be the "Precious Metals and Minerals Fund." The SEC recently enacted
Rule 35d-1 under the 1940 Act requiring that a registered investment
company with a name suggesting that the company focuses on a particular
type of an investment (such as precious metals and minerals) invest at
least 80% of its assets in the type of investment suggested by its name.
Accordingly, consistent with its new name, the Fund will invest at least
80% of its assets in equity securities of companies principally engaged in
the exploration, mining or processing of gold, and other precious metals
and minerals. Should this proposal be approved, it will become effective
on October 1, 2001.
USAA family of funds - 18
* HOW DOES THE BOARD OF DIRECTORS RECOMMEND I VOTE ON THIS PROPOSAL?
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS "FOR" THE CHANGE
IN CONCENTRATION OF INVESTMENT POLICY WITH REGARD TO THE GOLD FUND.
* WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO CHANGE THE FUND'S
CONCENTRATION POLICY?
Approval of this proposal will require the "yes" vote of a "majority of
the outstanding voting securities" of the Gold Fund, as provided in the
1940 Act. For this purpose, this means the "yes" vote of the lesser of (i)
more than 50% of the outstanding shares of the Gold Fund, or (ii) 67% or
more of the shares present at the meeting, if more than 50% of the
outstanding shares are present at the meeting in person or by proxy.
Because abstentions and broker non-votes are treated as shares present but
not voting, any abstentions and broker non-votes will have the effect of
votes against this proposal, which requires the approval of a specified
percentage of the outstanding shares of the Gold Fund.
PROPOSAL 4
APPROVAL OF New ADVISORY AGREEMENTs
with USAA INVESTMENT
MANAGEMENT COMPANY (IMCO)
ALL FUNDS
(EXCEPT THE INDEX FUNDS)
THE BOARD OF DIRECTORS, INCLUDING THE DIRECTORS WHO ARE NOT "INTERESTED
PERSONS" OF THE FUNDS OR OF IMCO (THE INDEPENDENT DIRECTORS), HAS UNANIMOUSLY
APPROVED, AND RECOMMENDS THAT SHAREHOLDERS OF EACH APPLICABLE FUND VOTE "FOR"
THE APPROVAL OF A NEW ADVISORY AGREEMENT. THE PROPOSED NEW ADVISORY AGREEMENTS
(NEW AGREEMENTS) (I) ADD A PERFORMANCE ADJUSTMENT COMPONENT (THE PERFORMANCE
ADJUSTMENT) TO THE ADVISORY FEE THAT IMCO RECEIVES FROM EACH FUND (OTHER THAN
THE USAA MONEY MARKET FUNDS) FOR MANAGING ITS INVESTMENTS UNDER EACH FUND'S
EXISTING ADVISORY AGREEMENT WITH IMCO (THE PRESENT AGREEMENTS) AND (II) MODIFY
THE SERVICES PERFORMED UNDER THE PRESENT AGREEMENTS IN SUCH A MANNER AS TO
UNBUNDLE THE ADVISORY AND ADMINISTRATIVE SERVICES INTO TWO AGREEMENTS INSTEAD
OF THE CURRENT ONE.
* WHAT ARE THE PROVISIONS OF THE PRESENT AGREEMENTS?
Under the Present Agreements, IMCO provides an investment program, carries
out the investment policies, and manages the other affairs and business of
the Funds. IMCO is authorized, subject to the control of the Funds' Board
of Directors, to determine the selection, amount, and time to buy or sell
securities for the Funds. In addition to providing investment services,
IMCO provides office space, facilities, simple business equipment,
supplies, utilities, telephone service, and accounting services (in
addition to those provided by the custodian and transfer agent) for the
Funds. IMCO compensates all personnel, officers, and directors of the
Funds if such persons are also employees of IMCO or its affiliates. IMCO
also is responsible for the provision and maintenance of a fidelity bond
for the benefit of the Funds. For performing these services under the
Present Agreements, the Funds pay IMCO an advisory fee calculated as a
percentage of each Fund's average net assets. Advisory fees are accrued
daily and are payable monthly.
Except for the services and facilities provided by IMCO, the Funds pay all
other expenses incurred in their operations. Expenses for which the Funds
are responsible include taxes (if any), brokerage commissions on portfolio
transactions, expenses of issuance and redemption of shares, charges of
transfer agents, custodians and dividend disbursing agents, costs of
preparing and distributing proxy material, costs of printing and engraving
stock certificates, auditing and legal expenses, certain expenses of
registering and qualifying
Proxy Statement - 19
shares for sale, fees of directors who are not interested persons (not
affiliated) of IMCO, costs of printing and mailing the prospectus,
statement of additional information (SAI), and financial reports to
existing shareholders, and any other charges or fees not specifically
enumerated. IMCO pays the cost of printing and mailing copies of the
prospectus, SAI, and financial reports to prospective shareholders.
The Present Agreements will remain in effect for the Funds until June 30,
2002, and will continue in effect from year to year thereafter for the
Funds as long as they are approved at least annually by (i) a vote of the
outstanding voting securities of the applicable Fund (as defined in the
1940 Act) or by the Board of Directors (on behalf of the Fund) and (ii) in
either event, a majority of the Independent Directors, at a meeting called
for the purpose of voting on such approval. The following chart
illustrates when the Funds' Present Agreements were last approved by
shareholders.
===============================================================================
FUND NAME DATE OF APPROVAL
- -------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND SEPTEMBER 21, 1990(1)
BALANCED STRATEGY FUND SEPTEMBER 1, 1995(5)
CALIFORNIA BOND FUND JULY 20, 1990(3)
CALIFORNIA MONEY MARKET FUND JULY 20, 1990(3)
CAPITAL GROWTH FUND OCTOBER 27, 2000(5)
CORNERSTONE STRATEGY FUND SEPTEMBER 21, 1990(1)
EMERGING MARKETS FUND SEPTEMBER 7, 1994(5)
FIRST START GROWTH FUND AUGUST 1, 1997(5)
FLORIDA TAX-FREE INCOME FUND OCTOBER 1, 1993(5)
FLORIDA TAX-FREE MONEY MARKET FUND OCTOBER 1, 1993(5)
GNMA TRUST AUGUST 23, 1991(2)
GOLD FUND SEPTEMBER 21, 1990(1)
GROWTH FUND SEPTEMBER 21, 1990(1)
GROWTH & INCOME FUND JUNE 1, 1993(5)
GROWTH STRATEGY FUND SEPTEMBER 1, 1995(5)
GROWTH AND TAX STRATEGY FUND SEPTEMBER 21, 1990(1)
HIGH-YIELD OPPORTUNITIES FUND AUGUST 2, 1999(5)
INCOME FUND JANUARY 31, 1986(4)
FUND NAME DATE OF APPROVAL
- -------------------------------------------------------------------------------
INCOME STOCK FUND SEPTEMBER 21, 1990(1)
INCOME STRATEGY FUND SEPTEMBER 1, 1995(5)
INTERMEDIATE-TERM FUND JULY 20, 1990(1)
INTERMEDIATE TERM BOND FUND AUGUST 2, 1999(5)
INTERNATIONAL FUND SEPTEMBER 21, 1990(1)
LONG-TERM FUND JULY 20, 1990(1)
MONEY MARKET FUND JANUARY 31, 1986(4)
NEW YORK BOND FUND AUGUST 23, 1991(2)
NEW YORK MONEY MARKET FUND AUGUST 23, 1991(2)
SCIENCE & TECHNOLOGY FUND AUGUST 1, 1997(5)
SHORT-TERM FUND JULY 20, 1990(1)
SHORT- TERM BOND FUND JUNE 1, 1993(5)
SMALL CAP STOCK FUND AUGUST 2, 1999(5)
TAX EXEMPT MONEY MARKET FUND JULY 20, 1990(10)
TREASURY MONEY MARKET TRUST AUGUST 23, 1991(2)
VIRGINIA BOND FUND AUGUST 23, 1991(2)
VIRGINIA MONEY MARKET FUND AUGUST 23, 1991(2)
WORLD GROWTH FUND JULY 21, 1992(5)
- -----------------
1 SHAREHOLDER MEETING HELD FOR THE PURPOSE OF APPROVING A NEW ADVISORY
AGREEMENT.
2 SHAREHOLDER MEETING HELD FOR THE PURPOSE OF RATIFYING THE ADVISORY AGREEMENT.
3 SHAREHOLDER MEETING HELD FOR THE PURPOSE OF RATIFYING AN AMENDED ADVISORY
AGREEMENT AND APPROVING A NEW ADVISORY AGREEMENT.
4 SHAREHOLDER MEETING HELD FOR THE PURPOSE OF APPROVING AN AMENDMENT TO THE
ADVISORY AGREEMENT REGARDING AN EXPENSE LIMITATION.
5 APPROVED BY IMCO AS SOLE SHAREHOLDER.
===============================================================================
The Present Agreements were last approved by the Funds' Board of Directors
on April 26, 2001. The Present Agreements may be terminated at any time by
vote of either the directors of the Funds or a majority of the outstanding
shares of the Funds or by IMCO on 60 days' written notice. It will
automatically terminate in the event of its assignment (as defined in the
1940 Act).
* WHAT ARE THE PROVISIONS OF THE NEW AGREEMENTS?
A copy of the Form of New Agreements is attached as Exhibit A. The New
Agreements would (i) add a Performance Adjustment component to the
advisory fee of each applicable Fund (except the USAA money market funds)
that would reward IMCO by increasing advisory fees when a Fund outperforms
its proposed benchmark index, and penalize IMCO by decreasing advisory
fees when a Fund underperforms its
USAA family of funds - 20
proposed benchmark index, and (ii) unbundle advisory and administrative
services provided under the Present Agreements to each Fund by removing
administrative services under the New Agreements.
Except for the modifications discussed above, the New Agreements are
substantially identical to each Fund's Present Agreement with IMCO. If
approved by shareholders, the New Agreements will take effect on the first
day of the first month following approval, which is anticipated to be
August 1, 2001. The Performance Adjustment will take effect for a Fund at
the end of the 12th month after the effective date of the New Agreement
for the Fund. The New Agreements, if approved, will remain in effect
through July 31, 2003, and thereafter, but only as long as its continuance
is approved annually by (i) the vote, cast in person at a meeting called
for the purpose of a majority of the Independent Directors and (ii) the
vote of either a majority of the directors or a majority of the
outstanding shares of a Fund.
* WHAT IS THE PERFORMANCE ADJUSTMENT AND HOW DOES IT WORK?
A performance adjustment aligns the interests of shareholders with those
of the investment adviser by rewarding a Fund's investment adviser for
good investment performance and penalizing a Fund's investment adviser for
bad investment performance. The SEC has adopted rules that generally
ensure that performance fees result from the adviser's management skills
and not from other factors. These rules require that an appropriate
benchmark index be used for calculating any performance-based fees.
If this proposal is approved, the Board of Directors intends to use the
indices listed in Table 1 (Relevant Index or Relevant Indices) as the
benchmarks for calculating the performance adjustment for each Fund.
Lipper Analytical Services, Inc. provides these indices, which are market
capitalization-weighted indices that are designed to represent the
performance of mutual funds that have particular investment objectives and
policies. With respect to each Fund, IMCO believes that the Lipper index
identified in Table 1 is an appropriate benchmark for the Fund because it
is representative of the Fund's investment universe. A description of each
Lipper index listed in Table 1 is set forth in Exhibit B. The Board of
Directors, including a majority of Independent Directors, may change the
performance benchmark for any Fund if the Board of Directors determines
that another benchmark would be more appropriate for measuring the Fund's
performance.
Proxy Statement - 21
TABLE 1
FUND AND PROPOSED LIPPER INDEX
===============================================================================
USAA TAXABLE BOND FUNDS LIPPER INDEX*
- -------------------------------------------------------------------------------
GNMA TRUST GNMA
HIGH-YIELD OPPORTUNITIES FUND HIGH CURRENT YIELD FUNDS
INCOME FUND CORPORATE DEBT FUNDS A RATED
INTERMEDIATE-TERM BOND FUND INTERMEDIATE INVESTMENT GRADE DEBT
SHORT-TERM BOND FUND SHORT INVESTMENT GRADE DEBT
USAA TAX EXEMPT BOND FUNDS
- -------------------------------------------------------------------------------
LONG-TERM FUND GENERAL MUNICIPAL DEBT
INTERMEDIATE-TERM FUND INTERMEDIATE MUNICIPAL DEBT
SHORT-TERM FUND SHORT MUNICIPAL DEBT
CALIFORNIA BOND FUND CALIFORNIA MUNICIPAL DEBT
NEW YORK BOND FUND NEW YORK MUNICIPAL DEBT
VIRGINIA BOND FUND VIRGINIA MUNICIPAL DEBT
FLORIDA TAX-FREE INCOME FUND FLORIDA MUNICIPAL DEBT
USAA ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------
BALANCED STRATEGY FUND BALANCED
CORNERSTONE STRATEGY FUND GLOBAL FLEXIBLE PORTFOLIO
GROWTH STRATEGY FUND FLEXIBLE PORTFOLIO
GROWTH AND TAX STRATEGY FUND BALANCED
INCOME STRATEGY FUND GENERAL BOND
USAA EQUITY FUNDS
- -------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND MULTI-CAP GROWTH
CAPITAL GROWTH FUND MULTI-CAP GROWTH
EMERGING MARKETS FUND EMERGING MARKETS
FIRST START GROWTH FUND LARGE-CAP GROWTH
GOLD FUND GOLD-ORIENTED**
GROWTH FUND LARGE-CAP GROWTH
GROWTH & INCOME FUND LARGE-CAP CORE
INCOME STOCK FUND EQUITY INCOME
INTERNATIONAL FUND INTERNATIONAL
SCIENCE & TECHNOLOGY FUND SCIENCE & TECHNOLOGY
SMALL CAP STOCK FUND SMALL-CAP CORE
WORLD GROWTH FUND GLOBAL
===============================================================================
* LIPPER ANALYTICAL SERVICES, INC. IS AN INDEPENDENT ORGANIZATION THAT
MONITORS THE PERFORMANCE OF MUTUAL FUNDS.
** IF PROPOSAL 3 IS APPROVED, THE APPLICABLE INDEX WOULD BE THE LIPPER
NATURAL RESOURCES INDEX.
The Performance Adjustment, which is calculated monthly, is based on a
Fund's performance relative to the benchmark index for the most recent 36
months. If a Fund were to outperform its Relevant Index over 36 months,
IMCO would receive a positive Performance Adjustment, which would increase
the advisory fee paid to IMCO. If a Fund were to underperform its Relevant
Index, the advisory fee paid to IMCO would be reduced by a negative
Performance Adjustment. The following table reflects the Performance
Adjustment rate applicable to the Funds. The following table reflects the
Performance Adjustment Rates applicable to the Funds.
USAA family of funds - 22
TABLE 2
PERFORMANCE ADJUSTMENT RATES
===============================================================================
FIXED INCOME FUNDS:
CALIFORNIA BOND FUND FLORIDA TAX-FREE INCOME FUND
GNMA TRUST GROWTH AND TAX STRATEGY FUND
HIGH-YIELD OPPORTUNITIES FUND INCOME FUND
INCOME STRATEGY FUND INTERMEDIATE-TERM FUND
INTERMEDIATE-TERM BOND FUND LONG-TERM FUND
NEW YORK BOND FUND SHORT-TERM FUND
SHORT-TERM BOND FUND VIRGINIA BOND FUND
OVER/UNDER PERFORMANCE RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS) (IN BASIS POINTS AS A PERCENTAGE
OF A FUND'S AVERAGE NET ASSETS)
+/- 20 to 50 +/- 4
+/- 51 to 100 +/- 5
+/-101 and greater +/- 6
EQUITY FUNDS:
AGGRESSIVE GROWTH FUND BALANCED STRATEGY FUND
CAPITAL GROWTH FUND CORNERSTONE STRATEGY FUND
EMERGING MARKETS FUND FIRST START GROWTH FUND
GOLD FUND GROWTH FUND
GROWTH & INCOME FUND GROWTH STRATEGY FUND
INCOME STOCK FUND INTERNATIONAL FUND
SCIENCE & TECHNOLOGY FUND SMALL CAP STOCK FUND
WORLD GROWTH FUND
OVER/UNDER PERFORMANCE RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS) (IN BASIS POINTS AS A PERCENTAGE
OF A FUND'S AVERAGE NET ASSETS)
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/-701 and greater +/- 6
===============================================================================
Under the New Agreement, IMCO will receive a monthly advisory fee for each
Fund that is comprised of a base fee (Base Fee) and a Performance
Adjustment that will increase or decrease the Base Fee depending upon the
performance of the Fund relative to its Relevant Index. The Base Fee for
each Fund is determined using the same rate currently used in determining
the Fund's advisory fee under the Present Agreement, which rate is
indicated in Table 5 at page 29 of the proxy statement. For any month, the
Base Fee of a Fund will equal the Fund's average net assets for that month
multiplied by the annual Base Fee rate for the Fund, multiplied by a
fraction, the numerator of which is the number of days in the month and
the denominator of which is 365. The Base Fee is then adjusted based upon
the Fund's average annual performance during the prior 36-month period
compared to the average annual performance of the Fund's Relevant Index
over the same time period. Using the information provided in Table 2
above, the appropriate annual Performance Adjustment rate is determined
based upon the extent to which the Fund overperformed or underperformed
its Relevant Index. The annual Performance Adjustment rate is multiplied
by the average net assets of the Fund over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the
number of days in the month and the denominator of which is 365. The
resulting amount is then added to (in the case of overperformance) or
subtracted from (in the case of underperformance) the Base Fee.
Proxy Statement - 23
For example, assume that an equity fund with average net assets of $300
million has a Base Fee of .75 of 1% (75 basis points) of the fund average
net assets. Also assume that the fund's had average net assets during the
performance period of $250 million. The following examples demonstrate the
effect of the Performance Adjustment during a given 30-day month in
various market environments, including situations in which the fund has
outperformed, underperformed, and approximately matched its relevant
index:
EXAMPLES
1 2 3 4 5 6
Fund Performance (a) 12.80% 15.02% 6.75% (12.25%) (10.07%) (8.17%)
Index Performance (a) 8.75% 18.29% 6.28% (19.87%) (5.45%) (7.98%)
----- ------ ----- ------ ----- -----
Over/Under Performance (b) + 405 - 327 + 47 + 762 - 462 - 19
Annual Adjustment Rate (b) + 5 - 4 0 + 6 - 5 0
Monthly Adjustment Rate (c) .0041% (.0033%) n/a .0049% (.0041%) n/a
Base Fee for Month $ 187,500 $ 187,500 $ 187,500 $187,500 $ 187,500 $ 187,500
Performance Adjustment 10,250 (8,333) 0 12,250 (10,250) 0
----------------------------------------------------------------------------
Monthly Fee $ 197,750 $ 179,250 $ 187,500 $197,750 $ 177,250 $ 187,500
============================================================================
- -----------------------
(a) Average annual performance over a 36-month period
(b) In basis points
(c) Annual Adjustment Rate divided by 365, multiplied by 30, and stated as a
percentage
If this proposal is approved, the Performance Adjustment will be
implemented prospectively. For the first eleven months following
shareholder approval, there will be no Performance Adjustment and a
Fund's advisory fee will equal the rate currently charged under the
Present Agreements. Starting with the twelfth month after shareholder
approval, the Performance Adjustment will take effect and the advisory
fee will be adjusted upward or downward, depending on a Fund's
performance relative to its Relevant Index. Following the twelfth month,
a new month will be added to the performance period until the performance
period equals 36 months. Thereafter, the performance period will consist
of the current month plus the previous 35 months.
The impact of the proposed addition of a Performance Adjustment component
to each Fund's advisory fee will depend on the Fund's future performance
relative to the Relevant Index. In Table 3, the past performance of the
Relevant Indices and the Funds can be used to show what the impact would
have been on advisory fees for each Fund's most recent full fiscal year,
if the Fund had operated with the proposed Performance Adjustment using
the Relevant Indices as benchmarks. For this purpose, the Performance
Adjustment amounts presented for the New Agreements for each Fund's most
recent full fiscal year have been calculated using the rolling 36-month
historical performance of the Fund and the Relevant Index during the same
period.
USAA family of funds - 24
TABLE 3
PRESENT AND PROPOSED FEES
===============================================================================
PRESENT NEW PERCENTAGE
AGREEMENT* AGREEMENT DIFFERENCE
USAA TAXABLE BOND FUNDS
- -------------------------------------------------------------------------------
GNMA TRUST
Base Fee $ 567,415 $ 567,415
Performance Adjustment - (178,230)
--------------------------------
TOTAL FEE $ 567,415 $ 389,185 (31%)
================================
HIGH-YIELD OPPORTUNITIES FUND
Base Fee [Fund not offered for 36 months]
Performance Adjustment
TOTAL FEE
INCOME FUND
Base Fee $ 3,164,580 $ 3,164,580
Performance Adjustment - 674,493
------------------------------
TOTAL FEE $ 3,164,580 $ 3,839,073 21%
==============================
INTERMEDIATE-TERM BOND FUND
Base Fee [Fund not offered for 36 months]
Performance Adjustment
TOTAL FEE
SHORT-TERM BOND FUND
Base Fee $ 631,655 $ 631,655
Performance Adjustment - 81,084
-------------------------------
TOTAL FEE $ 631,655 $ 712,739 13%
===============================
USAA TAX EXEMPT BOND FUNDS
- -------------------------------------------------------------------------------
LONG-TERM FUND
Base Fee $ 5,575,304 $ 5,575,304
Performance Adjustment - (616,664)
-------------------------------
TOTAL FEE $ 5,575,304 $ 4,958,640 (11%)
===============================
INTERMEDIATE-TERM FUND
Base Fee $ 6,100,470 $ 6,100,470
Performance Adjustment - 211,108
-------------------------------
TOTAL FEE $ 6,100,470 $ 6,311,578 3%
===============================
SHORT-TERM FUND
Base Fee $ 2,772,932 $ 2,772,932
Performance Adjustment - 197,067
-------------------------------
TOTAL FEE $ 2,772,932 $ 2,967,999 7%
===============================
CALIFORNIA BOND FUND
Base Fee $ 1,936,258 $ 1,936,258
Performance Adjustment - 76,882
-------------------------------
TOTAL FEE $ 1,936,258 $ 2,013,140 4%
===============================
NEW YORK BOND FUND
Base Fee $ 350,942 $ 350,942
Performance Adjustment - 41,282
-------------------------------
TOTAL FEE $ 350,942 $ 392,224 12%
===============================
VIRGINIA BOND FUND
Base Fee $ 1,305,019 $ 1,305,019
Performance Adjustment - 100,560
-------------------------------
TOTAL FEE $ 1,305,019 $ 1,405,579 8%
===============================
FLORIDA TAX-FREE INCOME FUND
Base Fee $ 622,766 $ 622,766
Performance Adjustment - 0
-------------------------------
TOTAL FEE $ 622,766 $ 622,766 0%
===============================
===============================================================================
Proxy Statement - 25
===============================================================================
PRESENT NEW PERCENTAGE
AGREEMENT* AGREEMENT DIFFERENCE
USAA ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------
BALANCED STRATEGY FUND
Base Fee $ 908,744 $ 908,744
Performance Adjustment - 0
-------------------------------
TOTAL FEE $ 908,744 $ 908,744 0%
===============================
CORNERSTONE STRATEGY FUND
Base Fee $ 8,779,370 $ 8,779,370
Performance Adjustment - (612,262)
-------------------------------
TOTAL FEE $ 8,779,370 $ 8,167,108 (7%)
===============================
GROWTH STRATEGY FUND
Base Fee $ 2,203,829 $ 2,203,829
Performance Adjustment - (12,341)
-------------------------------
TOTAL FEE $ 2,203,829 $ 2,191,488 (1%)
===============================
GROWTH AND TAX STRATEGY FUND
Base Fee $ 1,303,703 $ 1,303,703
Performance Adjustment - (88,775)
-------------------------------
TOTAL FEE $ 1,202,703 $ 1,214,928 (7%)
===============================
INCOME STRATEGY FUND
Base Fee $ 339,472 $ 339,472
Performance Adjustment - 18,512
-------------------------------
TOTAL FEE $ 339,472 $ 357,984 5%
===============================
USAA EQUITY FUNDS
- -------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
Base Fee $ 5,822,616 $ 5,822,616
Performance Adjustment - 283,009
-------------------------------
TOTAL FEE $ 5,822,616 $ 6,105,625 5%
===============================
CAPITAL GROWTH FUND
Base Fee [Fund not offered for 36 months]
Performance Adjustment
TOTAL FEE
EMERGING MARKETS FUND
Base Fee $ 2,889,999 $ 2,889,999
Performance Adjustment - 454
-------------------------------
TOTAL FEE $ 2,889,999 $ 2,890,453 0%
================================
FIRST START GROWTH FUND
Base Fee $ 1,554,077 $ 1,554,077
Performance Adjustment - (27,261)
-------------------------------
TOTAL FEE $ 1,554,007 $ 1,526,816 (2%)
===============================
GOLD FUND
Base Fee $ 623,509 $ 623,509
Performance Adjustment - 53,673
-------------------------------
TOTAL FEE $ 623,509 $ 677,182 9%
===============================
GROWTH FUND
Base Fee $ 13,497,972 $ 13,497,972
Performance Adjustment - (919,640)
-------------------------------
TOTAL FEE $ 13,497,972 $ 12,578,332 (7%)
===============================
GROWTH & INCOME FUND
Base Fee $ 6,705,641 $ 6,705,641
Performance Adjustment - (573,067)
-------------------------------
TOTAL FEE $ 6,705,641 $ 6,132,574 (9%)
===============================
INCOME STOCK FUND
Base Fee $ 10,829,542 $ 10,829,542
Performance Adjustment - (151,718)
-------------------------------
TOTAL FEE $ 10,829,542 $ 10,677,824 (1%)
===============================
===============================================================================
USAA family of funds - 26
===============================================================================
PRESENT NEW PERCENTAGE
AGREEMENT* AGREEMENT DIFFERENCE
INTERNATIONAL FUND
Base Fee $ 4,216,784 $ 4,216,784
Performance Adjustment - (254,762)
-------------------------------
TOTAL FEE $ 4,216,784 $ 3,962,022 (6%)
===============================
SCIENCE & TECHNOLOGY FUND
Base Fee $ 3,451,959 $ 3,451,959
Performance Adjustment - (100,413)
-------------------------------
TOTAL FEE $ 3,451,959 $ 3,351,546 (3%)
===============================
SMALL CAP STOCK FUND
Base Fee [Fund not offered for 36 months]
Performance Adjustment
TOTAL FEE
WORLD GROWTH FUND
Base Fee $ 2,805,705 $ 2,805,705
Performance Adjustment - (101,370)
-------------------------------
TOTAL FEE $ 2,805,705 $ 2,704,335 (4%)
===============================
- -----------------
*These amounts reflect fees after expense reimbursements.
===============================================================================
* WHAT ARE THE SERVICES BEING MODIFIED IN THE NEW AGREEMENTS?
As described above, under the Present Agreements, IMCO performs both
advisory and administrative services. Your Funds' Board of Directors has
determined that it is in the best interests of the shareholders to
unbundle advisory and administrative services into two agreements instead
of the current one agreement. First, this would eliminate the need to call
a shareholder meeting to make adjustments to a separate agreement that
addresses administrative services provided by IMCO, thereby reducing the
costs of solicitation. And second, it would allow your Board of Directors
to adjust fees for administrative services placing the Funds more in line
with the industry.
The Funds' Board of Directors has approved a separate Administration and
Servicing Agreement with IMCO for each of the Funds voting on this
proposal to be implemented on the first day of the month following
approval of this proposal. This Administration and Servicing Agreement
would only be implemented for a Fund if the New Agreement is approved for
the Fund. The overall objective is to have an advisory agreement and an
administration and servicing agreement for each Fund that substantially
mirrors the forms of agreements presently in place for the four USAA Index
Funds not voting on this proposal.
As part of a pricing strategy presented by IMCO and its affiliated
transfer agent, USAA Transfer Agency Company, dba USAA Shareholder Account
Services (SAS), the Funds' Board of Directors, is proposing to restructure
the fees for advisory, transfer agency, administration and shareholder
services to be more in line with fees charged by the rest of the mutual
fund industry. After an extensive review, the Board of Directors has
concluded that additional revenues are necessary to enable IMCO to
maintain and improve its high level of service as well as attract and
retain the quality personnel required to perform more competitively.
Should the proposal be approved, the Board of Directors plans to pay IMCO
an administrative and servicing fee and reduce the transfer agency fee
presently paid to SAS. After giving effect to fee waivers and expense caps
by IMCO, the overall fees for these services will increase for some Funds
and decrease or remain the same for other Funds. Importantly, if the new
arrangements had been in effect for the most recently completed fiscal
years, each Fund's total expense ratio would have been less than the
average expense ratio for its peer group of mutual funds, and in some
cases significantly less. In fact, in the aggregate, the average expense
ratio of all USAA mutual funds would have been approximately 18% below the
average of the Funds' peer groups. This is even after the effects of the
performance adjustment. Table 4 compares the estimated total expense
ratios of each Fund should the proposal be approved with the Lipper
average total expense ratio for the Fund's category.
Proxy Statement - 27
TABLE 4
EXPENSE RATIO COMPARISON
===============================================================================
TOTAL NET EXPENSE RATIO
FUND
(AFTER PROPOSAL LIPPER CATEGORY
APPROVED) AVERAGE DIFFERENCE
USAA TAXABLE BOND FUNDS % % %
- -------------------------------------------------------------------------------
GNMA TRUST .41 .85 (.44)
HIGH-YIELD OPPORTUNITIES FUND(1) 1.00 1.09 (.09)
INCOME FUND .60 .79 (.19)
INTERMEDIATE-TERM BOND FUND(2) .65 .70 (.05)
SHORT-TERM BOND FUND .65 .83 (.18)
USAA TAX EXEMPT BOND FUNDS
- -------------------------------------------------------------------------------
LONG-TERM FUND .48 .81 (.33)
INTERMEDIATE-TERM FUND .52 .80 (.28)
SHORT-TERM FUND .54 .65 (.11)
CALIFORNIA BOND FUND .56 .78 (.22)
NEW YORK BOND FUND .76 1.04 (.28)
VIRGINIA BOND FUND .60 .90 (.30)
FLORIDA TAX-FREE INCOME FUND .63 .84 (.21)
USAA ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------
BALANCED STRATEGY FUND(1) 1.00 1.04 (.04)
CORNERSTONE STRATEGY FUND 1.17 1.55 (.38)
GROWTH STRATEGY FUND(3) .98 1.00 (.02)
GROWTH AND TAX STRATEGY FUND .82 1.05 (.23)
INCOME STRATEGY FUND(4) .95 .98 (.03)
USAA EQUITY FUNDS
- -------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND .75 1.06 (.31)
CAPITAL GROWTH FUND(1) 1.00 1.06 (.06)
EMERGING MARKETS FUND 1.42 1.81 (.39)
FIRST START GROWTH FUND(5) 1.45 1.49 (.04)
GOLD FUND 1.73 2.13 (.40)
GROWTH FUND(1) 1.00 1.03 (.03)
GROWTH & INCOME FUND .98 1.05 (.07)
INCOME STOCK FUND .80 .88 (.08)
INTERNATIONAL FUND 1.19 1.28 (.09)
SCIENCE & TECHNOLOGY FUND 1.31 1.76 (.45)
SMALL CAP STOCK FUND(6) 1.40 1.43 (.03)
WORLD GROWTH FUND 1.22 1.58 (.36)
USAA MONEY MARKET FUNDS
- -------------------------------------------------------------------------------
MONEY MARKET FUND .56 .64 (.08)
TREASURY MONEY MARKET TRUST .44 .67 (.23)
TAX EXEMPT MONEY MARKET FUND .47 .64 (.17)
CALIFORNIA MONEY MARKET FUND .51 .62 (.11)
NEW YORK MONEY MARKET FUND(7) .60 .66 (.06)
VIRGINIA MONEY MARKET FUND .59 .73 (.14)
FLORIDA TAX-FREE MONEY MARKET FUND .63 .73 (.10)
-----------------------
1 Total expenses capped at 1% 5 Total expenses capped at 1.45%
2 Total expenses capped at .65% 6 Total expenses capped at 1.40%
3 Total expenses capped at .98% 7 Total expenses capped at .60%
4 Total expenses capped at .95%
===============================================================================
* WHAT IS THE OVERALL IMPACT OF THE PROPOSAL ON THE FUNDS' TOTAL EXPENSE
RATIOS?
Table 5 below provides data concerning each Fund's fees and expenses as a
percentage of average net assets for each Fund's most recent full fiscal
year, under the Present Agreements and if the New Agreements (including
the Performance Adjustment and the new administrative and servicing fee
and reduction in transfer agency fees) had been in effect during the same
period.
TABLE 5
CURRENT AND PRO FORMA EXPENSES
===============================================================================
TOTAL
ANNUAL
ADVISORY 12b-1 OTHER* FUND EXPENSE NET
FEES FEES EXPENSES OPERATING REIMBURSE- EXPENSES
EXPENSES MENTS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
USAA TAXABLE BOND FUNDS
- -------------------------------------------------------------------------------
GNMA TRUST
Current .13% None .19% .32% - .32%
Pro Forma .09% None .32% .41% - .41%
HIGH-YIELD
OPPORTUNITIES FUND
Current .50% None .69% 1.19% .44% .75%
Pro Forma .50% None .83% 1.33% .33% 1.00%
INCOME FUND
Current .24% None .18% .42% - .42%
Pro Forma .29% None .31% .60% - .60%
INTERMEDIATE-TERM
BOND FUND
Current .50% None .53% 1.03% .38% .65%
Pro Forma .50% None .67% 1.17% .52% .65%
SHORT-TERM BOND FUND
Current .24% None .24% .48% - .48%
Pro Forma .27% None .38% .65% - .65%
USAA TAX EXEMPT BOND FUNDS
- -------------------------------------------------------------------------------
LONG-TERM FUND
Current .28% None .08% .36% - .36%
Pro Forma .25% None .23% .48% - .48%
INTERMEDIATE-TERM FUND
Current .28% None .08% .36% - .36%
Pro Forma .29% None .23% .52% - .52%
SHORT-TERM FUND
Current .28% None .10% .38% - .38%
Pro Forma .30% None .24% .54% - .54%
CALIFORNIA BOND FUND
Current .31% None .09% .40% - .40%
Pro Forma .32% None .24% .56% - .56%
NEW YORK BOND FUND
Current .39% None .18% .57% .07% .50%
Pro Forma .44% None .32% .76% - .76%
VIRGINIA BOND FUND
Current .33% None .10% .43% - .43%
Pro Forma .36% None .24% .60% - .60%
FLORIDA TAX-FREE
INCOME FUND
Current .35% None .13% .48% - .48%
Pro Forma .35% None .28% .63% - .63%
===============================================================================
Proxy Statement - 29
===============================================================================
TOTAL
ANNUAL
ADVISORY 12b-1 OTHER* FUND EXPENSE NET
FEES FEES EXPENSES OPERATING REIMBURSE- EXPENSES
EXPENSES MENTS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
USAA ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------
BALANCED STRATEGY FUND
Current .75% None .51% 1.26% .01% 1.25%
Pro Forma .75% None .63% 1.38% .38% 1.00%
CORNERSTONE STRATEGY FUND
Current .75% None .34% 1.09% - 1.09%
Pro Forma .70% None .47% 1.17% - 1.17%
GROWTH STRATEGY FUND
Current .75% None .49% 1.24% - 1.24%
Pro Forma .75% None .61% 1.36% .38% .98%
GROWTH AND TAX STRATEGY
FUND
Current .50% None .21% .71% - .71%
Pro Forma .47% None .35% .82% - .82%
INCOME STRATEGY FUND
Current .50% None .51% 1.01% - 1.01%
Pro Forma .53% None .64% 1.17% .22% .95%
USAA EQUITY FUNDS
- -------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
Current .35% None .25% .60% - .60%
Pro Forma .37% None .38% .75% - .75%
CAPITAL GROWTH FUND
Current (estimated) .85% None .54% 1.39% - 1.39%
Pro Forma .85% None .67% 1.52% .52% 1.00%
EMERGING MARKETS FUND
Current 1.00% None .28% 1.28% - 1.28%
Pro Forma 1.00% None .42% 1.42% - 1.42%
FIRST START GROWTH FUND
Current .75% None 1.20% 1.95% .30% 1.65%
Pro Forma .74% None 1.25% 1.99% .54% 1.45%
GOLD FUND
Current .75% None .83% 1.58% - 1.58%
Pro Forma .81% None .92% 1.73% - 1.73%
GROWTH FUND
Current .75% None .21% .96% - .96%
Pro Forma .70% None .34% 1.04% .04% 1.00%
GROWTH & INCOME FUND
Current .60% None .30% .90% - .90%
Pro Forma .55% None .43% .98% - .98%
INCOME STOCK FUND
Current .50% None .17% .67% - .67%
Pro Forma .49% None .31% .80% - .80%
INTERNATIONAL FUND
Current .75% None .36% 1.11% - 1.11%
Pro Forma .70% None .49% 1.19% - 1.19%
SCIENCE & TECHNOLOGY FUND
Current .75% None .47% 1.22% - 1.22%
Pro Forma .73% None .58% 1.31% - 1.31%
SMALL CAP STOCK FUND
Current .75% None .68% 1.43% - 1.43%
Pro Forma .75% None .79% 1.54% .14% 1.40%
WORLD GROWTH FUND
Current .75% None .37% 1.12% - 1.12%
Pro Forma .72% None .50% 1.22% - 1.22%
===============================================================================
USAA family of funds - 30
===============================================================================
TOTAL
ANNUAL
ADVISORY 12b-1 OTHER* FUND EXPENSE NET
FEES FEES EXPENSES OPERATING REIMBURSE- EXPENSES
EXPENSES MENTS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
USAA MONEY MARKET FUNDS
- -------------------------------------------------------------------------------
MONEY MARKET FUND
Current .24% None .24% .48% .02% .46%
Pro Forma .24% None .32% .56% - .56%
TAX EXEMPT MONEY MARKET FUND
Current .28% None .09% .37% - .37%
Pro Forma .28% None .19% .47% - .47%
TREASURY MONEY MARKET TRUST
Current .13% None .22% .35% - .35%
Pro Forma .13% None .31% .44% - .44%
CALIFORNIA MONEY MARKET FUND
Current .31% None .10% .41% - .41%
Pro Forma .31% None .20% .51% - .51%
NEW YORK MONEY MARKET FUND
Current .39% None .18% .57% .07% .50%
Pro Forma .39% None .28% .67% .07% .60%
VIRGINIA MONEY MARKET FUND
Current .33% None .17% .50% - .50%
Pro Forma .33% None .26% .59% - .59%
FLORIDA TAX-FREE MONEY MARKET FUND
Current .35% None .18% .53% - .53%
Pro Forma .35% None .28% .63% - .63%
- -----------------------------
* Includes the impact of the following proposed administrative and servicing
fees: .10% for each USAA money market fund and .15% for all other Funds.
Also reflects the impact of a $3 per shareholder account reduction in each
Fund's transfer agency fee.
The following example indicates the cost of investing in each Fund,
assuming an initial investment of $10,000, a 5% total annual return each
year with no changes in operating expenses (except for advisory,
administration and servicing, and transfer agent fees in the pro forma)
and redemption at the end of each period. Your actual cost may be higher
or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
(PRESENT/ (PRESENT/ (PRESENT/ (PRESENT/
PRO FORMA) PRO FORMA) PRO FORMA) PRO FORMA)
USAA TAXABLE BOND FUNDS
- -------------------------------------------------------------------------------
GNMA TRUST $ 32/42 $ 101/132 $ 177/230 $ 400/518
HIGH-YIELD OPPORTUNITIES
FUND 121/135 378/421 654/729 1,443/1,601
INCOME FUND 43/61 135/192 235/335 530/750
INTERMEDIATE-TERM BOND
FUND 105/119 328/372 569/644 1,259/1,420
SHORT-TERM BOND FUND 49/66 154/208 269/362 604/810
USAA TAX EXEMPT BOND FUNDS
- -------------------------------------------------------------------------------
LONG-TERM FUND $ 37/49 $ 116/154 $ 202/269 $ 456/604
INTERMEDIATE-TERM FUND 37/53 116/167 202/291 456/653
SHORT-TERM FUND 39/55 122/173 213/302 480/677
CALIFORNIA BOND FUND 41/57 128/179 224/313 505/701
NEW YORK BOND FUND 58/78 183/243 318/422 714/942
VIRGINIA BOND FUND 44/61 138/192 241/335 542/750
FLORIDA TAX-FREE
INCOME FUND 49/64 154/202 269/351 604/786
===============================================================================
Proxy Statement - 31
===============================================================================
1 YEAR 3 YEARS 5 YEARS 10 YEARS
(PRESENT/ (PRESENT/ (PRESENT/ (PRESENT/
PRO FORMA) PRO FORMA) PRO FORMA) PRO FORMA)
USAA ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------
BALANCED STRATEGY FUND $ 128/140 $ 400/437 $ 692/755 $1,523/1,657
CORNERSTONE STRATEGY FUND 111/119 347/372 601/644 1,329/1,420
GROWTH STRATEGY FUND 126/138 393/431 681/745 1,500/1,635
GROWTH AND TAX
STRATEGY FUND 73/84 227/262 359/455 883/1,014
INCOME STRATEGY FUND 103/119 322/372 558/644 1,236/1,420
USAA EQUITY FUNDS
- ------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND $ 61/77 $ 192/240 $ 335/417 $ 750/930
CAPITAL GROWTH FUND 142/155 440/480 N/A N/A
EMERGING MARKETS FUND 130/145 406/449 702/776 1,545/1,702
FIRST START GROWTH FUND 198/202 612/624 1,052/1,073 2,275/2,317
GOLD FUND 161/176 499/545 860/939 1,878/2,041
GROWTH FUND 98/106 306/331 531/574 1,178/1,271
GROWTH & INCOME FUND 92/100 287/312 498/542 1,108/1,201
INCOME STOCK FUND 68/82 214/255 373/444 835/990
INTERNATIONAL FUND 113/121 353/378 612/654 1,352/1,443
SCIENCE & TECHNOLOGY FUND 124/133 387/415 670/718 1,477/1,579
SMALL CAP STOCK FUND 146/157 452/486 782/839 1,713/1,834
WORLD GROWTH FUND 114/124 356/387 617/670 1,363/1,477
USAA MONEY MARKET FUNDS
- -------------------------------------------------------------------------------
MONEY MARKET FUND $ 49/57 $ 154/179 $ 269/313 $ 604/701
TAX EXEMPT MONEY
MARKET FUND 38/48 119/151 208/263 468/591
TREASURY MONEY MARKET
TRUST 36/45 113/141 197/246 444/555
CALIFORNIA MONEY MARKET
FUND 42/52 132/164 230/285 518/640
NEW YORK MONEY MARKET
FUND 58/68 183/214 318/373 714/835
VIRGINIA MONEY MARKET
FUND 51/60 160/189 280/329 628/738
FLORIDA TAX-FREE MONEY
MARKET FUND 54/64 170/202 296/351 665/786
===============================================================================
* DOES IMCO OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL SERVICES TO THE
FUNDS?
From time to time, and consistent with obtaining the best overall terms
available, brokerage transactions may be effected through USAA Brokerage
Services, a discount brokerage service of IMCO. The aggregate amount of
brokerage commissions and the percentage of the Funds' aggregate brokerage
commissions paid to USAA Brokerage Services during the most recent fiscal
year were as follows:
TABLE 6
AFFILIATED BROKERAGE FEES
===============================================================================
PERCENTAGE OF
FUND NAME AMOUNT COMMISSIONS PAID
- -------------------------------------------------------------------------------
BALANCED STRATEGY FUND $ 10,199 17.60%
CORNERSTONE STRATEGY FUND 12,963 1.00%
FIRST START GROWTH FUND 8,910 4.31%
GROWTH FUND 20,706 .67%
GROWTH & INCOME FUND 4,397 .70%
GROWTH STRATEGY FUND 3,013 1.30%
GROWTH AND TAX STRATEGY FUND 8,250 12.70%
INCOME STRATEGY FUND 2,379 19.90%
SCIENCE & TECHNOLOGY FUND 9,990 3.01%
SMALL CAP STOCK FUND 2,053 4.36%
WORLD GROWTH FUND 4,110 .90%
===============================================================================
In addition, USAA Shareholder Account Services (SAS) serves as the Funds'
transfer agent. The aggregate amount of transfer agency fees paid by each
Fund during the most recent fiscal year were as follows. It is anticipated
that such services will continue to be provided by SAS after the New
Agreements are approved.
TABLE 7
TRANSFER AGENCY FEES
===============================================================================
FUND NAME AMOUNT FUND NAME AMOUNT
- -------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND $2,842,262 INCOME STOCK FUND $2,823,037
BALANCED STRATEGY FUND 368,279 INCOME STRATEGY FUND 168,509
CALIFORNIA BOND FUND 256,899 INTERMEDIATE-TERM FUND 1,084,171
CALIFORNIA MONEY MARKET FUND 209,587 INTERMEDIATE-TERM BOND FUND 28,286
CAPITAL GROWTH FUND N/A INTERNATIONAL FUND 303,626
CORNERSTONE STRATEGY FUND 2,660,259 LONG-TERM FUND 982,768
EMERGING MARKETS FUND 1,029,667 MONEY MARKET FUND 5,472,800
FIRST START GROWTH FUND 1,857,626 NEW YORK BOND FUND 54,882
FLORIDA TAX-FREE INCOME FUND 82,396 NEW YORK MONEY MARKET FUND 43,479
FLORIDA TAX-FREE MONEY SCIENCE & TECHNOLOGY FUND 1,545,334
MARKET FUND 73,190 SHORT-TERM FUND 565,951
GNMA TRUST 558,789 SHORT-TERM BOND FUND 379,200
GOLD FUND 447,540 SMALL CAP STOCK FUND 190,789
GROWTH FUND 2,733,704 TAX EXEMPT MONEY MARKET FUND 981,326
GROWTH & INCOME FUND 2,557,041 TREASURY MONEY MARKET TRUST 155,798
GROWTH STRATEGY FUND 889,031 VIRGINIA BOND FUND 220,158
GROWTH AND TAX STRATEGY FUND 289,204 VIRGINIA MONEY MARKET FUND 114,577
HIGH-YIELD OPPORTUNITIES FUND 33,200 WORLD GROWTH FUND 839,746
===============================================================================
* WHAT DID THE BOARD OF DIRECTORS CONSIDER IN REVIEWING THIS PROPOSAL?
The proposal to approve the New Agreements and present the New Agreements
to shareholders for approval was considered by the Board of Directors of
the Funds, including the Independent Directors, at meetings of the Board
held on April 9, 2001 and April 26, 2001. In addition, the Independent
Directors met separately as a group on April 25, 2001 to consider the
proposal. At each of these meetings, the Independent Directors were
advised by independent counsel. In advance of these meetings, the Board of
Directors received substantial information relating to the proposal and
was given the opportunity to ask questions and request additional
information from management. After full consideration, on April 26, 2001,
the Board of Directors, including the Independent Directors, voted
unanimously to approve the New Agreements and submit the New Agreements to
shareholders for your approval. The Board of Directors, including the
Independent Directors, unanimously recommends that shareholders vote "FOR"
the proposal.
As part of its deliberations, the Board of Directors reviewed substantial
information provided by management relating to the quality of the services
provided by IMCO and its affiliated companies and the reasonableness of
the fees charged for these services. The materials provided included
comparative information about the investment performance of each Fund
relative to other peer groups of mutual funds and appropriate indices or
combinations of indices. The Board of Directors also received comparative
fee and expense information showing, among other things, the fees paid for
advisory, administrative, transfer agency, and shareholder services and
the total expense ratio of each Fund relative to other comparable mutual
funds, both before and after giving effect to the proposed changes to the
fee and service arrangements. In addition, the Board of Directors received
financial information about IMCO and its affiliated companies, including
an analyses of the profitability on a Fund-by-Fund basis of the mutual
fund operations of IMCO.
Proxy Statement - 33
In the course of its deliberations, the Board of Directors considered,
among other things, (i) the organizational strength of IMCO and the effect
that the proposed new arrangements are expected to have on the short-term
and long-term financial condition of IMCO; (ii) the impact of the proposed
performance adjustment on the total fees to be paid for advisory services
and the manner in which the adjustment may further align the interests of
management and the Funds; (iii) the appropriateness of the amount of the
proposed performance adjustment and the specific index or other benchmark
proposed to be used in measuring the performance adjustment for each Fund;
(iv) the historical performance of the Funds and the resources being
committed by IMCO to managing the Funds' portfolios; (v) the ability of
IMCO to compete in the marketplace to attract and retain qualified
investment professionals; (vi) the effect that the proposed changes to the
service arrangements will have on the total expense ratio of each Fund and
the extent to which the proposal for the Funds to pay separately for
administrative and shareholder services is consistent with industry
practice; (vii) the extent to which the expense ratios of the Funds will
continue to be lower than the average expense ratios of other comparative
mutual funds and the appropriateness of the peer groups selected for these
comparative purposes; (viii) the extent to which IMCO has been able and
willing to waive fees and pay expenses of the Funds from time to time and
the ability and willingness of IMCO to continue this practice in the
future; (ix) the impact that the proposed reduction in transfer agency
fees is expected to have on the expense ratios of the Funds and the
appropriateness of the proposed fees to be paid for these services; (x)
the potential for achieving further economies of scale that will benefit
the Funds; and (xi) the extent to which IMCO has borne a disproportionate
share of the expenditures made to improve shareholder communication and
related services.
In evaluating the quality of the services and the reasonableness of the
fees proposed to be paid for these services, the Board of Directors also
considered other information and materials periodically provided by
management to the Board relating to: (i) the nature and quality of the
services provided by IMCO in distributing the Funds' shares; (ii) the
nature and quality of the services provided by SAS as transfer agent for
the Funds; (iii) the procedures employed by IMCO to ensure compliance with
the Funds' investment policies and restrictions and with policies on
personal securities transactions; (iv) the manner in which IMCO allocates
the Funds' brokerage and investment opportunities; (v) the extent to which
IMCO uses "soft" commission dollars to pay for research and other similar
services and the benefits to the Funds of such uses; (vi) the services
performed by IMCO in monitoring the performance of the Funds' other
service providers, such as the Funds' custodian and subcustodians; and
(vii) the nature and quality of other non-investment management services
provided by IMCO and its affiliates.
In approving the New Agreements and recommending this proposal to
shareholders, the Board of Directors did not identify any single factor as
all-important or controlling. The following summarizes some of the more
significant conclusions reached by the Board of Directors in connection
with these matters.
The Board of Directors recognized that the proposed changes to the
advisory and service arrangements will result in an overall increase in
the revenues payable in the aggregate to IMCO for these services. The
Board of Directors concluded that the increase is warranted in light of
the significant increase in expenses incurred by IMCO in recent years,
which have materially decreased the overall profitability of IMCO's mutual
fund operations. The Board of Directors determined that the new
arrangements will permit IMCO for the foreseeable future to operate at
reasonable profit margins, which will also permit IMCO to maintain and
improve the quality of services provided to shareholders. In this regard,
the Board of Directors noted that the new fee structure will enable IMCO
to continue to make significant investments in technology necessary to
support improved shareholder communication and portfolio management
systems. In addition, the Board of Directors concluded that the additional
revenues will enable IMCO to compensate its staff at competitive levels
necessary to attract and retain qualified portfolio management personnel.
The Board of Directors also concluded that the proposed Performance
Adjustment to the advisory fee will benefit shareholders by further
aligning the interests of management with the interests of shareholders.
The Board of Directors noted that IMCO has implemented a performance-based
compensation model for its investment professionals and concluded that the
Performance Adjustment for fees payable to IMCO is
USAA family of funds - 34
consistent with this model. The Board of Directors also concluded that the
amount of the adjustment will not cause IMCO to assume inappropriate risks
in managing the portfolios of the Funds.
The Board of Directors considered the impact of the proposed new
arrangements on the overall expenses of the Funds and concluded that the
total expense ratio of each Fund would continue to be reasonable for the
foreseeable future. The Board of Directors noted that, if the proposed
arrangements had been in effect for the most recent fiscal year of each
Fund, including IMCO's commitment to cap the expenses of certain Funds
through April 30, 2001, the total expense ratio for each Fund would have
been below the average for its peer group of mutual funds. The Board of
Directors also noted that, except for the USAA Growth Fund, which modified
its advisory agreement in 1986, IMCO has never received a fee increase
with respect to advisory services for any Fund, although the cost to IMCO
of providing these services has increased materially over time.
Furthermore, the Board of Directors noted that the expense ratios have
decreased for many Funds since their inception because of the growth in
assets of the Funds and that the decrease in expense ratios experienced by
the Funds over the past 20 years differs from the experience of the mutual
fund industry as a whole, as reflected in a recent study by the SEC of
trends in the mutual fund industry.
The Board of Directors considered the appropriateness of compensating IMCO
separately for administrative and shareholder servicing activities. The
Board of Directors noted that these arrangements are common in the mutual
fund industry and that the fees proposed to be paid to IMCO for such
services are at or below the fees charged by other organizations for
comparable services. The Board of Directors noted that, unlike many other
mutual funds, the Funds have not implemented any Rule 12b-1 plans or
similar shareholder servicing plans to compensate management for these
services. Accordingly, the Board of Directors concluded that IMCO has
borne a disproportionately large percentage of the cost of providing these
services and that the proposed new arrangements will permit such costs to
be shared in an equitable manner by the Funds and IMCO. Furthermore, the
Board of Directors concluded that it would be in the interest of
shareholders to remove these services from the advisory agreement for each
Fund because this change will permit the Board of Directors in the future
to amend the agreements for administration or shareholder servicing
without the delays and potential costs of a shareholder meeting and proxy
solicitation.
Based on its evaluation of all material factors and with the assistance of
independent counsel, the Board of Directors, including the Independent
Directors, concluded that (i) the advisory fee structure as it is proposed
to be modified is fair and reasonable to IMCO and the Funds, (ii) the
proposed modifications to the advisory fee rates, that is, the adoption of
the Performance Adjustment, is fair and reasonable to IMCO and the Funds,
and (iii) the proposed modification to the Present Agreements to exclude
administrative and shareholder services and the intent to enter into an
administration and servicing agreement for each Fund is fair and
reasonable to IMCO and the Funds. Accordingly, the Board of Directors,
including the Independent Directors, voted unanimously to approve the New
Agreements and to recommend that shareholders of the Funds vote FOR the
New Agreements.
* WHEN WILL THE NEW AGREEMENTS TAKE EFFECT?
If approved, the New Agreements will take effect for each Fund on the
first day of the first month following approval by shareholders of that
Fund. If the proposal is not approved for any Fund, the Present Agreement
will remain unchanged and in effect for that Fund while the Board of
Directors and IMCO consider appropriate actions. In this regard, it should
be noted that IMCO has indicated it may not be willing to continue serving
as the investment adviser of the Funds indefinitely under the terms of the
Present Agreement.
* HOW DOES THE BOARD OF DIRECTORS RECOMMEND I VOTE ON THIS PROPOSAL?
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
APPROVAL OF THE NEW AGREEMENTS THAT ADD A PERFORMANCE COMPONENT TO EACH
FUND (EXCEPT THE USAA MONEY MARKET FUNDS) AND AMEND THE SERVICES TO BE
PROVIDED TO EACH FUND UNDER THE AGREEMENTS.
Proxy Statement - 35
* WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO APPROVE NEW ADVISORY
AGREEMENTS?
Approval of the New Agreements will require the "yes" vote of a "majority
of the outstanding voting securities" of each Fund, as provided in the
1940 Act. For this purpose, this means the "yes" vote of the lesser of (i)
more than 50% of the outstanding shares of each Fund, or (ii) 67% or more
of the shares present at the meeting, if more than 50% of the outstanding
shares are present at the meeting in person or by proxy. Because
abstentions and broker non-votes are treated as shares present but not
voting, any abstentions and broker non-votes will have the effect of votes
against this proposal, which requires the approval of a specified
percentage of the outstanding shares of each Fund.
PROPOSAL 5
APPROVAL OF A SUB-ADVISORY AGREEMENT FOR THE S&P 500
INDEX FUND AND APPROVAL OF A PROPOSAL TO PERMIT IMCO
TO CHANGE THE FUND'S SUB-ADVISER IN THE FUTURE
WITHOUT SHAREHOLDER APPROVAL
S&P 500 INDEX FUND
CURRENTLY, THE S&P 500 INDEX FUND (THE FUND) OPERATES IN A MASTER-FEEDER
STRUCTURE. UNDER THIS STRUCTURE, THE FUND INVESTS ALL OF ITS ASSETS IN ANOTHER
MUTUAL FUND, THE EQUITY 500 INDEX PORTFOLIO (THE EQUITY 500 PORTFOLIO), WHICH
IS CURRENTLY MANAGED BY DEUTSCHE ASSET MANAGEMENT, INC. (DEUTSCHE). THE EQUITY
500 PORTFOLIO HAS THE SAME OBJECTIVES AND POLICIES AS THE FUND AND ALSO SERVES
AS THE MASTER FUND FOR OTHER S&P 500 MUTUAL FUNDS. THE DIRECTORS BELIEVE THAT
THE FUND MAY BE ABLE TO TRACK MORE CLOSELY THE PERFORMANCE OF THE S&P 500 INDEX
BY WITHDRAWING THE FUND'S ASSETS FROM THE EQUITY 500 PORTFOLIO AND MANAGING THE
ASSETS AS A STAND-ALONE MUTUAL FUND USING DEUTSCHE AS A SUB-ADVISER. IN
ADDITION, THE DIRECTORS BELIEVE THAT IT WOULD BE IN THE BEST INTERESTS OF
SHAREHOLDERS TO OPERATE THE FUND AS A "MANAGER-OF-MANAGERS" FUND. UNDER THIS
ARRANGEMENT, AND SUBJECT TO RECEIVING SPECIAL RELIEF FROM THE SEC AND WITH THE
APPROVAL OF THE DIRECTORS, IMCO WOULD BE ABLE TO CHANGE SUB-ADVISERS TO THE
FUND WITHOUT OBTAINING SHAREHOLDER APPROVAL.
* WHY AM I BEING ASKED TO VOTE ON THESE PROPOSALS?
The directors have determined that it would be in the best interest of
shareholders to operate the Fund as a stand-alone fund operating in a
"manager-of-managers" structure (and not in a master-feeder structure) and
to engage Deutsche as a sub-adviser to the Fund. Currently, IMCO is not
permitted to enter into a new sub-advisory agreement without first
obtaining shareholder approval of the agreement. By approving Proposal
5-A, you will permit IMCO to enter into a sub-advisory agreement with
Deutsche.
The directors also believe that it would be advantageous for IMCO to have
the ability to change sub-advisers to the Fund without first obtaining
shareholder approval for such changes. The Fund, along with the other
funds comprising USAA Mutual Fund, Inc., has applied to the SEC for an
order that will permit IMCO in the future to appoint and change
sub-advisers from time to time for the Fund without first obtaining
shareholder approval. The SEC has granted similar orders for other mutual
fund groups in the past, subject to certain conditions that are
substantially similar to the conditions described in Proposal 5-B. The SEC
may decide not to grant the requested order, or it may impose additional
conditions prior to granting the order. It is anticipated that if the SEC
grants the order requested, then the SEC will also require the
shareholders to approve the "manager-of-managers" arrangement. By
approving Proposal 5-B, and subject to the Fund receiving the order
requested from the SEC, you will be allowing the Fund in the future to
enter into a new sub-advisory agreement with Deutsche or another
sub-adviser, without first obtaining shareholder approval, and for the
Fund to change its sub-adviser in the future without first obtaining
shareholder approval.
USAA family of funds - 36
* WHY WAS THE FUND ORIGINALLY SET UP IN THE MASTER-FEEDER STRUCTURE?
When the Fund was initially formed, the Board of Directors did not believe
that the Fund had sufficient assets to operate efficiently as a
stand-alone fund. Since any number of feeder funds can invest their assets
in a single master fund, a master-feeder structure permits greater pooling
of assets than does a stand-alone fund. The Board of Directors determined
that the ability to pool the Fund's assets with the assets of other feeder
funds would, in turn, allow the Fund to more rapidly achieve increased
economies of scale and efficiencies in portfolio management.
* WHY IS THE BOARD OF DIRECTORS PROPOSING TO REMOVE THE FUND FROM THE
MASTER-FEEDER STRUCTURE?
The Fund currently has in excess of $2.9 billion of assets, and is large
enough to achieve economies of scale and efficiencies in portfolio
management as a stand-alone fund. The Board of Directors believes that the
Fund is currently subject to certain issues as a feeder fund in a
master-feeder structure that would not be present if the Fund were
operated as a stand-alone fund, and that these issues may impair the
Fund's ability to track the performance of the S&P 500 Index. The Board of
Directors has noted that actions of certain feeder funds may materially
affect other feeder funds investing in the Equity 500 Portfolio. For
example, if a large feeder fund withdraws from the Equity 500 Portfolio,
the remaining funds may experience proportionately higher operating
expenses resulting in lower returns. Additionally, the Equity 500
Portfolio may become less diverse, resulting in increased portfolio risk.
Also, feeder funds with a greater pro rata ownership in the Equity 500
Portfolio could have effective voting control of the operations of the
Equity 500 Portfolio.
* HOW WILL THE FUND BE MANAGED FOLLOWING THIS CHANGE?
As described in the Fund's prospectus, in the event the Fund withdraws its
investment in the Equity 500 Portfolio, IMCO will be directly responsible
for managing the Fund's assets. If Proposal 5-A is approved by the Fund's
shareholders, IMCO will hire Deutsche to serve as the sub-adviser to
manage the day-to-day investing of the Fund's assets. IMCO will be
responsible for paying all fees charged by Deutsche for these sub-advisory
services. This arrangement will be substantially similar to the current
arrangements in place for the Nasdaq-100 Index Fund and the Global Titans
Index Fund, for which Barclays Global Fund Advisers serves as the
sub-adviser to each of these Funds under a separate sub-advisory
agreement.
PROPOSAL 5-A
APPROVAL OF A SUB-ADVISORY AGREEMENT
FOR THE S&P 500 Index Fund
* WHAT SERVICES WILL DEUTSCHE PROVIDE AS SUB-ADVISER TO THE FUND?
If shareholders approve the appointment of Deutsche as the Fund's
sub-adviser, IMCO will enter into a sub-advisory agreement (Sub-Advisory
Agreement) with Deutsche in substantially the form attached hereto as
Exhibit C. Under the Sub-Advisory Agreement, Deutsche will be responsible
for the day-to-day management of the Fund's assets pursuant to the Fund's
investment objectives, policies, and restrictions. Deutsche currently
serves as the adviser to the Equity 500 Portfolio. If shareholders approve
Deutsche's appointment as sub-adviser, Deutsche will provide directly to
the Fund substantially the same portfolio management services that it
currently provides to the Fund indirectly through the master-feeder
structure.
Proxy Statement - 37
* WHAT INFORMATION DID THE BOARD OF DIRECTORS CONSIDER PRIOR TO PROPOSING
THIS CHANGE?
At a meeting on April 26, 2001, the Board of Directors determined that it
would be in the best interests of the Fund and its shareholders to retain
Deutsche as an investment sub-adviser to the Fund. In making this
decision, the Board of Directors considered, among other factors, the
expertise that Deutsche offers in providing portfolio management services
to other equity portfolios. The Board of Directors also considered the
experience of the persons comprising Deutsche's investment committee,
Deutsche's fee proposal, and the financial strength and quality of
services offered by Deutsche. Among other things, the Board of Directors
concluded that (i) Deutsche is capable of providing high quality service
for the Fund, as reflected by the qualification and experience of its
advisory personnel, its available organizational resources, and its
long-term performance record, and (ii) the current size of the Fund and
its expected growth make it advisable for the Fund to be managed on a
stand-alone basis rather than as part of a master-feeder structure.
* WHAT ARE THE MATERIAL TERMS OF THE SUB-ADVISORY AGREEMENT?
Under the Sub-Advisory Agreement, Deutsche will manage the investment of
the Fund's assets and will be responsible for placing all orders for the
purchase and sale of portfolio securities for which it is responsible,
subject to the supervision of the directors and IMCO. As compensation for
Deutsche's services and for expenses borne by Deutsche under the
Sub-Advisory Agreement, Deutsche will be paid a monthly sub-advisory fee
by IMCO (not by the Fund) at an annual rate equal to 0.015%.
If approved by shareholders, the Sub-Advisory Agreement would be executed
promptly by IMCO and Deutsche and become effective as soon as practicable,
which is expected to be on or about August 1, 2001. Unless sooner
terminated, it would remain in effect continuously for two years following
its effective date. Thereafter, it would continue automatically for
successive years, provided that it is specifically approved at least
annually (i) by a vote of a majority of the Independent Directors and (ii)
by a majority of all directors or by a vote of a majority of the
outstanding shares of the Fund. The Fund may terminate the proposed
Sub-Advisory Agreement by a vote of a majority of the Independent
Directors or a majority of its outstanding voting securities on 60 days'
written notice to IMCO and Deutsche. IMCO or Deutsche may at any time
terminate the proposed Sub-Advisory Agreement upon 60 days' written notice
to the other party. The Sub-Advisory Agreement automatically will
terminate without penalty in the event of its assignment or termination.
* WILL THE FUND'S TOTAL EXPENSES CHANGE?
The total expense ratio of the Fund, after fee waivers and expense
reimbursements, will remain unchanged at 0.18% of the Fund's ANA for the
foreseeable future. Under the current master-feeder structure, Deutsche
receives a fee, computed daily and paid monthly, at the annual rate of
0.05% of the ANA of the Equity 500 Portfolio for advisory services and
IMCO receives a fee, computed daily and paid monthly, at an annual rate of
up to 0.06% of the Fund's ANA for administrative services. Under the new
structure, IMCO will be entitled to receive advisory fees of 0.10% of the
Fund's ANA and will be obligated to pay Deutsche 0.015% of the Fund's ANA
for sub-advisory services. In addition, IMCO will be entitled to receive
up to 0.06% of the Fund's ANA for administrative services. Through April
30, 2002, IMCO has agreed to waive fees and reimburse expenses of the Fund
to the extent the total expenses of the Fund exceed 0.18% of the Fund's
ANA, which is the Fund's current expense ratio. There can be no assurance
that IMCO will continue to maintain this expense cap in subsequent
periods, in which case the Fund's total expense ratio could exceed 0.18%
of the Fund's ANA.
* WHAT OTHER INFORMATION IS AVAILABLE ABOUT DEUTSCHE?
Deutsche, an indirect wholly owned subsidiary of Deutsche Bank AG, is a
worldwide merchant bank dedicated to servicing the needs of corporations,
governments, financial institutions, and private clients. Investment
management is a core business of Deutsche, with assets under its global
management totaling $253.5 billion as of September 30, 2000. Of that
total, approximately $17.6 billion is in U.S. assets.
USAA family of funds - 38
Deutsche's principal business address is 130 Liberty Street, New York, New
York 10006. The names, titles and principal occupations of the current
managing partners and executive officers of Deutsche are set forth as
follows:
DEAN BARR, Managing Director and Global Chief Investment Officer for
the Americas
GARY COHEN, Chief Investment Officer for the Americas
JAMES CREIGHTON, Managing Director and Head of Global Index
Management for Deutsche Asset Management.
Deutsche also acts as an investment adviser for the following investment
companies:
=========================================================================================================
FIDELITY ASSET SIZE FEES
FIDELITY COMMONWEATH TRUST - $ 8,451,272,726 At an annual rate of 0.006% (0.6 basis points)
SPARTAN 500 INDEX FUND of the average daily net assets of the Fund
VARIABLE INSURANCE PRODUCTS
FUND II - $ 3,604,150,211 At an annual rate of 0.006% (0.6 basis points)
INDEX 500 PORTFOLIO of the average daily net assets of the Portfolio
FIDELITY CONCORD STREET TRUST $15,801,430,121 At an annual rate of 0.006% (0.6 basis points)
SPARTAN U.S. EQUITY INDEX FUND of the average daily net assets of the Portfolio
MASSMUTUAL
MML EQUITY INDEX FUND $ 163,314,263 An annual rate of .01% on the first $1 billion
of aggregate assets, and .0075% on aggregate
assets in excess of $1 billion
MASSMUTUAL INDEXED EQUITY FUND $ 851,286,600 An annual rate of .01% on the first $1 billion
of aggregate assets, and .0075% on aggregate
assets in excess of $1 billion
SCUDDER
KEMPER VARIABLE SERIES - $ 54,189,128 At an annual rate of 0.07 of 1% on the first
KVS INDEX 500 PORTFOLIO(a) $200 million of the series net assets, then
0.03 of 1% on the next $550 million; then 0.01
of 1% on the balance over $750 million
SCUDDER INVESTORS TRUST - $ 103,440,239 At an annual rate of 0.07 of 1% on the first
SCUDDER S&P 500 STOCK $100 million of the trust's net assets, then
INDEX FUND 0.03 of 1% on the next $100 million; then 0.01
of 1% on the balance over $200 million
==========================================================================================================
* HOW DOES THE BOARD OF DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE ON
PROPOSAL 5-A?
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
PROPOSAL 5-A.
* WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO APPROVE THE
SUB-ADVISORY AGREEMENT?
Approval of Proposal 5-A will require the "yes" vote of a "majority of the
outstanding voting securities" of the S&P 500 Index Fund, as provided in
the 1940 Act. For this purpose, this means the "yes" vote of the lesser of
(i) more than 50% of the outstanding shares of the Fund, or (ii) 67% or
more of the shares present at the meeting, if more than 50% of the
outstanding shares are present at the meeting in person or by proxy.
Because abstentions and broker non-votes are treated as shares present but
not voting, any abstentions and broker non-votes will have the effect of
votes against this proposal, which requires the approval of a specified
percentage of the outstanding shares of the Fund.
Proxy Statement - 39
PROPOSAL 5-B
APPROVAL OF A PROPOSAL TO PERMIT IMCO TO
CHANGE SUB-ADVISERS FOR THE S&P 500 FUND
WITHOUT OBTAINING SHAREHOLDER APPROVAL
* WHY IS THIS PROPOSAL BEING PRESENTED TO SHAREHOLDERS?
This proposal is being submitted to shareholders of the Fund pursuant to
the requirements of a proposed exemptive order (the Proposed Order) that
the Fund and IMCO are currently seeking from the SEC. The Proposed Order
would grant exemptive relief from certain provisions of the 1940 Act and
the rules thereunder, as discussed below.
Section 15 of the 1940 Act makes it unlawful for any person to act as an
investment adviser to an investment company, except pursuant to a written
contract that has been approved by shareholders. For purposes of Section
15, the term "investment adviser" includes any sub-adviser to an
investment company. Section 15 also requires that an investment advisory
agreement provide that it will terminate automatically upon its
assignment. "Assignment," for purposes of the 1940 Act, includes, in
substance, the transfer of an advisory agreement or the transfer of
control of the investment adviser through the transfer of a controlling
block of the adviser's outstanding voting securities.
In conformity with Section 15 of the 1940 Act, the Fund currently must
obtain shareholder approval of a Sub-Advisory Agreement in the following
general situations:
> The employment of a new Sub-Adviser;
> The replacement of an existing Sub-Adviser;
> A change in the terms of a Sub-Advisory Agreement; and
> The continued employment of an existing Sub-Adviser when there has been
or is expected to be an assignment of a Sub-Advisory Agreement as a
result of a change of control of the Sub-Adviser.
The directors and IMCO may currently terminate a Sub-Advisory Agreement
without shareholder approval. Fund shareholders may also currently
terminate a Sub-Advisory Agreement at any time by a vote of a majority of
the Fund's outstanding shares, as defined in the 1940 Act. The proposed
form of Sub-Advisory Agreement attached hereto as Exhibit C is the type of
Sub-Advisory Agreement that would no longer require shareholder approval
if this proposal is approved, subject to compliance with other conditions
of the Proposed Order, which are set forth below.
If the proposal is approved, IMCO and the Fund would be permitted to enter
into new or amended Sub-Advisory Agreements without obtaining shareholder
approval. In all cases, however, approval by the Board of Directors,
including the Independent Directors, will continue to be required to
approve any new or amended Sub-Advisory Agreement.
* WHO IS RESPONSIBLE FOR MANAGING THE FUND?
The Fund employs IMCO, subject to the supervision of the directors, to
manage or provide for the management of the Fund. The primary
responsibility for management of the Fund is vested in IMCO, pursuant to
the current management agreement in place between IMCO and the Fund (the
Management Agreement) and subject to the general oversight and approval by
the Fund's Board of Directors.
Currently, the Fund invests all of its investable assets in the Equity 500
Portfolio, which is a separate mutual fund advised by Deutsche with
substantially the same objectives and policies as the Fund. Similar
USAA family of funds - 40
to the sub-advisory arrangement currently in place with respect to the
Global Titans Index Fund and the Nasdaq-100 Index Fund, IMCO intends to
seek to achieve the Fund's objective by selecting one or more Sub-Advisers
that have particular skill and experience in managing a S&P 500 Index
Fund. The Board of Directors and IMCO believe that requiring shareholders
to approve changes in a Sub-Adviser and to the Sub-Advisory Agreement
(including continuation of an assigned Sub-Advisory Agreement) not only
result in unnecessary administrative expenses to the Fund, but may also
cause harmful delays in executing changes that the directors and IMCO have
determined are necessary or desirable. The directors and IMCO believe that
such expenses, and the possibility of delays, may result in shareholders
receiving less satisfactory service than would be the case if this
proposal is implemented.
* HOW WILL SHAREHOLDERS KNOW IF IMCO CHANGES THE FUND'S SUB-ADVISER?
Pursuant to the Proposed Order and subject to receipt of shareholder
approval of this proposal and the other conditions described below, the
Fund's shareholders will receive an information statement complying with
certain provisions of the Securities Exchange Act of 1934, as amended (the
Exchange Act), and the rules promulgated thereunder, following a change of
a Sub-Adviser. The information statement will contain substantially all of
the information about the Sub-Adviser and the Sub-Advisory Agreement that
would otherwise be contained in a proxy statement. The information
statement will include disclosure as to the level of fees to be paid by
IMCO to the Sub-Adviser.
The information statement, as well as adherence to the anticipated
conditions of the Proposed Order as set forth below, will protect the
Fund's shareholders, by, among other things, enabling Fund shareholders to
receive adequate disclosure about the Sub-Adviser. If the proposal is
approved, amendments to the Management Agreement between IMCO and the
Company will remain subject to the shareholder and director approval
requirements of Section 15 of the 1940 Act and related proxy statement
disclosure requirements. Moreover, although approval of the proposal will
generally permit the directors and IMCO to change the fees payable to a
Sub-Adviser without shareholder approval, such changes will not permit the
directors and IMCO to increase the rate of the fees payable by the Fund to
IMCO under the Management Agreement without first obtaining shareholder
approval.
* WHAT ARE THE TERMS OF THE PROPOSED ORDER?
The Proposed Order would grant the Fund relief from Section 15(a) of the
1940 Act and certain rules thereunder in order for the Fund to operate in
the manner described in this proposal, subject to certain conditions,
including approval of this proposal by the Fund's shareholders. The Fund
will not rely on the Proposed Order until it is granted and all such
conditions have been met. Although the SEC has granted similar orders for
other mutual fund groups in the past with conditions substantially similar
to those listed below, it is possible that the SEC will decide not to
grant the Proposed Order. Alternatively, the SEC may decide to impose
additional conditions on the Fund before granting the Proposed Order.
The conditions for the relief set forth in the Proposed Order are as
follows:
> IMCO will provide management and administrative services to the Fund,
including overall supervisory responsibility for the general management
and investment of the Fund, and, subject to review and approval by the
Board of Directors with respect to the Fund, will (i) set the Fund's
overall investment strategies; (ii) evaluate, select, and recommend
Sub-Advisers to manage all or part of the Fund's assets; (iii) when
appropriate, allocate and reallocate the Fund's assets among multiple
Sub-Advisers; (iv) monitor and evaluate the investment performance of
Sub-Advisers; and (v) implement procedures reasonably designed to
ensure that the Sub-Advisers comply with the Fund's investment
objectives, policies, and restrictions.
> Before the Fund may rely on the Proposed Order, the operation of the
Fund in the manner described in the application will be approved by a
majority of its outstanding voting securities of the Fund, as defined
in the 1940 Act.
Proxy Statement - 41
> Within 90 days of the hiring of any new Sub-Adviser, IMCO will furnish
shareholders of the Fund all the information that would have been
included in a proxy statement. Such information will include any
changes in such information caused by the addition of a new
Sub-Adviser. To meet this obligation, IMCO will provide the Fund's
shareholders with an information statement meeting the requirements of
Regulation 14C and Schedule 14C of the Exchange Act, as well as the
requirements of Item 22 of Schedule 14A under the Exchange Act.
> The Fund will disclose in its prospectus the existence, substance, and
effect of the Proposed Order. In addition, the Fund will hold itself
out to the public as employing the "Manager/Sub-Adviser" approach
described in the application. The prospectus relating to the Fund will
prominently disclose that IMCO has ultimate responsibility to oversee
the Sub-Adviser and recommend its hiring, termination, and replacement.
> No director or officer of the Fund or officer of IMCO will own directly
or indirectly (other than through a pooled investment vehicle that is
not controlled by any such director or officer) have any interest in
any Sub-Adviser except for (i) ownership of interests in IMCO or any
entity that controls, is controlled by or is under common control with
IMCO; or (b) ownership of less than 1% of the outstanding securities of
any class of equity or debt of a publicly traded company that is either
a Sub-Adviser or any entity that controls, is controlled by or is under
common control with a Sub-Adviser.
> Neither IMCO nor the Fund will enter into a Sub-Advisory Agreement with
any Sub-Adviser that is an affiliated person of the Fund or IMCO, as
defined in Section 2(a)(3) of the 1940 Act, other than by reason of
serving as Sub-Adviser to one or more Funds (an Affiliated Sub-Adviser)
without such agreement, including the compensation to be paid
thereunder, being approved by the shareholders of the Fund.
> At all times, a majority of the Board of Directors will be Independent
Directors, and the nomination of new or additional Independent
Directors will be placed within the discretion of the then existing
Independent Directors.
> When a Sub-Adviser change is proposed for the Fund with an Affiliated
Sub-Adviser, the Board of Directors, including a majority of the
Independent Directors, will make a separate finding, reflected in the
Board of Directors' minutes, that such change is in the best interest
of the Fund and its shareholders and does not involve a conflict of
interest from which IMCO or the Affiliated Sub-Adviser derives an
inappropriate advantage.
* HOW DOES THE BOARD OF DIRECTORS RECOMMEND SHAREHOLDERS VOTE ON THIS
PROPOSAL?
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
PROPOSAL 5-B.
* WHAT PERCENTAGE OF SHAREHOLDERS' VOTES ARE REQUIRED TO PERMIT IMCO TO
ENTER INTO NEW OR AMENDED SUB-ADVISORY AGREEMENTS WITHOUT OBTAINING
SHAREHOLDER APPROVAL?
Approval of Proposal 5-B will require the "yes" vote of a "majority of the
outstanding voting securities" of the Fund, as provided in the 1940 Act.
For this purpose, this means the "yes" vote of the lesser of (i) more than
50% of the outstanding shares of the Fund, or (ii) 67% or more of the
shares present at the meeting, if more than 50% of the outstanding shares
are present at the meeting in person or by proxy. Because abstentions and
broker non-votes are treated as shares present but not voting, any
abstentions and broker non-votes will have the effect of votes against
this proposal, which requires the approval of a specified percentage of
the outstanding shares of the Fund.
USAA family of funds - 42
FURTHER INFORMATION ABOUT VOTING AND THE SHAREHOLDER MEETING
QUORUM AND METHODS OF TABULATION. With respect to each proposal on which
shareholders of USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc., and USAA
Investment Trust are entitled to vote, a majority of the shares of the Funds
entitled to vote, represented in person or by proxy, is required to constitute
a quorum at the shareholder meeting. With respect to each proposal on which
shareholders of USAA State Tax-Free Trust are entitled to vote, 30% of the
shares of the Funds entitled to vote, represented in person or by proxy, is
required to constitute a quorum at the shareholder meeting. Abstentions do not
constitute a vote "for" or "against" a matter but will be included in
determining the number of shares present for purposes of a quorum. Each
proposal requires a vote based on the total votes cast. As a result,
abstentions will assist the Funds in obtaining a quorum, and will have the
effect of a "no" vote on the outcome of proposals 2 through 5. Abstentions will
have no effect on the election of directors. Broker "non-votes" (i.e., proxies
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owner or other person entitled to vote shares
on a particular matter with respect to which the brokers or nominees do not
have discretionary power) will be treated the same as abstentions.
With respect to Fund shares held in USAA individual retirement accounts
(including Traditional, Rollover, SEP, SARSEP, Roth, and SIMPLE IRAs), the IRA
Custodian, USAA Federal Savings Bank, will vote those shares for which it has
received instructions from shareholders only in accordance with such
instructions. If USAA IRA shareholders do not vote their shares, the IRA
Custodian will vote their shares for or against any proposal in the same
proportion as other USAA IRA shareholders have voted.
In the event a quorum is not present at the shareholder meeting or in the event
a quorum is present at the shareholder meeting but sufficient votes to approve
the proposals are not received, the persons named as proxies may propose one or
more adjournments of the shareholder meeting to permit further solicitation of
proxies, provided that such persons determine such an adjournment and
additional solicitation is reasonable and in the interest of shareholders after
consideration of all relevant factors, including the nature of the relevant
proposals, the percentage of votes then cast, the percentage of negative votes
then cast, the nature of the proposed solicitation activities, and the nature
of the reasons for such further solicitation. One or more of the proposals in
this proxy statement may be voted on prior to any adjournment if sufficient
votes have been received for a proposal and such vote is otherwise appropriate.
With respect to each matter, any such adjournment will require the affirmative
vote of a majority of those shares of the Company present at the shareholder
meeting in person or by proxy and entitled to vote thereon.
OTHER BUSINESS. The Board of Directors knows of no other business to be brought
before the shareholder meeting. However, if any other matters properly come
before the shareholder meeting, it is their intention that proxies that do not
contain specific restrictions to the contrary will be voted on such matters in
accordance with the judgment of the persons named as proxies on the enclosed
proxy card.
SOLICITATION OF PROXIES. Officers of the Funds and employees of IMCO may
solicit proxies by mail or by telephone. In addition, an outside proxy
solicitation service, Georgeson Shareholder Communications, Inc., may solicit
proxies by telephone at an estimated cost of $150 million. The exact cost will
depend upon the services rendered. Your Funds may also arrange to have votes
recorded by telephone. The telephone voting procedure is designed to
authenticate shareholders' identities, to allow shareholders to authorize the
voting of their shares in accordance with their instructions, and to confirm
that their instructions have been properly recorded. Shareholders would be
called at the phone number IMCO has in its records for their accounts and would
be asked for the last four digits of their Social Security number or other
identifying information. The shareholders would then be given an opportunity to
authorize proxies to vote their shares at the meeting in accordance with their
instructions. To ensure that the shareholders' instructions have been recorded
correctly, they will also receive a confirmation of their instructions in the
mail. A special toll-free number will be available in case the information
contained in the confirmation is incorrect.
The cost of preparing, printing, and mailing the enclosed proxy card(s) and
proxy statement, and any other costs incurred in connection with this
solicitation, including any additional solicitation made by mail, Internet, or
telephone for all Funds is expected to be shared between IMCO and the Funds.
IMCO has agreed to bear 75% of such costs, with the balance to be allocated
equitably among all Funds.
Proxy Statement - 43
REVOCATION OF PROXIES. Proxies, including proxies given on the Internet or by
telephone, may be revoked at any time before they are voted by a written
revocation received by your Funds, by properly executing a later-dated proxy,
or by attending the shareholder meeting and voting in person.
DATE FOR RECEIPT OF SHAREHOLDERS' PROPOSALS FOR SUBSEQUENT SHAREHOLDER
MEETINGS. Under the provisions of the Funds' charter documents and applicable
law, no annual meeting of shareholders is required, and your Funds do not
currently intend to hold such a meeting. Ordinarily, there will be no
shareholder meeting unless required by the 1940 Act or otherwise. Shareholder
proposals for inclusion in the proxy statement for any subsequent meeting must
be received by your Funds within a reasonable period of time prior to any such
shareholder meeting. Shareholders collectively holding at least 10% of the
outstanding shares of the Funds may request a shareholder meeting at any time
for the purpose of voting to remove one or more of the directors. The Funds
will assist in communicating to other shareholders about such meeting.
FINANCIAL INFORMATION. YOUR FUNDS WILL FURNISH, WITHOUT CHARGE, TO YOU UPON
REQUEST A COPY OF THE FUNDS' ANNUAL REPORTS FOR THEIR MOST RECENT FISCAL YEAR,
AND A COPY OF THEIR SEMIANNUAL REPORTS FOR ANY SUBSEQUENT SEMIANNUAL PERIOD.
SUCH REQUEST MAY BE DIRECTED TO USAA INVESTMENT MANAGEMENT COMPANY, 9800
FREDERICKSBURG ROAD, SAN ANTONIO, TEXAS 78288 OR 1-800-245-4275.
FURTHER INFORMATION ABOUT YOUR FUNDS
COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors has four
committees: an Executive Committee, an Audit Committee, a Pricing and
Investment Committee, and a Corporate Governance Committee. Between the
meetings of the Board of Directors and while it is not in session, the
Executive Committee may exercise all of the powers of the Board of Directors in
the management of the business of the Funds, which may be delegated to it by
the Board of Directors. The Executive Committee consists of two directors,
currently Messrs. Davis and Claus.
The Audit Committee consists of five directors, currently Messrs. Zucker and
Reimherr, Mrs. Dreeben, Dr. Mason, and Dr. Starks, none of whom is an
"interested person" of the Funds. The Audit Committee (a) selects an external
auditor; (b) reviews and approves an annual audit plan; (c) reviews summaries
of financial results; (d) reviews the reports of the auditors; and (e)
undertakes such studies and analyses of various matters as shall from time to
time be deemed necessary by the Board of Directors, and makes appropriate
recommendations to the Board of Directors on such matters.
The Pricing and Investment Committee consists of six directors, currently
Messrs. Peebles, Zucker, and Reimherr, Mrs. Dreeben, Dr. Mason, and Dr. Starks.
The Pricing and Investment Committee (a) acts upon and deals with certain
questions, issues, and matters that may arise under Rule 2a-7 and the
"Procedures to Stabilize Net Asset Value" adopted by the Funds as it impacts
money market funds; and (b) considers and acts upon such investment issues and
matters as may be presented relevant to the Funds.
The Corporate Governance Committee consists of all the directors who are not
"interested persons" of the Funds, which presently consists of Messrs. Zucker
and Reimherr, Mrs. Dreeben, Dr. Mason, and Dr. Starks. Its purpose is to
maintain oversight of the organization and performance of the Board of
Directors; to evaluate the effectiveness of the Board of Directors, and to
ensure that the Board of Directors conducts itself ethically and in accordance
with applicable laws; to establish a policy on its tenure and term limitations
for Independent Directors; to recommend candidates to fill vacancies for
independent directorship positions of the Board of Directors; and to consider
and act upon such other issues as may be presented to it by the Board of
Directors.
USAA family of funds - 44
INFORMATION ABOUT INDEPENDENT PUBLIC ACCOUNTANTS. The 1940 Act provides that
every registered investment company shall be audited at least once each year by
independent public accountants selected by a majority of the Independent
Directors.
The Funds' Board of Directors, including a majority of the Independent
Directors, has selected KPMG LLP to be each Fund's independent public
accountants for its current fiscal year. KPMG LLP has no direct or material
indirect financial interest in the Funds or in IMCO other than receipt of fees
for services to the Funds.
Representatives of KPMG LLP are expected to be present at the meeting. Those
representatives will be given the opportunity to make a statement to the
shareholders if they desire to do so and are expected to be available to
respond to any questions that may be raised at the meeting.
AUDIT FEES. Audit and other fees were paid to KPMG LLP with respect to each
Company and Trust during the most recently completed fiscal year in the amounts
set forth below. The other fees primarily related to tax services provided to
the Funds.
AUDIT FEES
USAA Mutual Funds, Inc. $ 302,000
USAA Tax Exempt Fund, Inc. 206,000
USAA Investment Trust 278,000
USAA State Tax-Free Trust 84,000
FINANCIAL INFORMATION SYSTEMS DESIGN
AND IMPLEMENTATION FEES None
OTHER FEES $ 354,000
The Audit Committee of each Company and Trust has considered whether the
provisions of the services covered above under "Other Fees" is compatible with
maintaining the independence of KPMG LLP.
OFFICERS AND OTHER INFORMATION. In addition to officers that are directors, the
officers of the Funds are as follows:
NAME, AGE
AND POSITION YEAR FIRST PRINCIPAL
WITH FUNDS ELECTED TO OFFICE OCCUPATION FOR PAST FIVE YEARS
- ----------- ----------------- -------------------------------
Kenneth E. Willmann 1999 Senior Vice President, Fixed Income
Vice President Investments, IMCO (12/99-present);
Age: 54 Vice President, Mutual Fund
Portfolios, IMCO (9/94-12/99).
Michael D. Wagner Senior Vice President, USAA Capital
Secretary Corporation (CAPCO) General Counsel
Age:52 (1/99-present); Vice President,
Corporate Counsel, USAA (1982-1/99).
Mr. Wagner has held various
positions in the legal department of
USAA since 1970 and serves as Vice
President, Secretary, and Counsel,
IMCO and USAA Shareholder Account
Services; Vice President, Corporate
Counsel, for various other USAA
subsidiaries and affiliates.
Mark S. Howard 1997 Vice President, Securities Counsel &
Assistant Secretary Compliance, IMCO (7/00-present);
Age: 37 Assistant Vice President, Securities
Counsel, USAA (2/98-7/00); Executive
Director, Securities Counsel, USAA
(9/96-2/98); Senior Associate
Counsel, Securities Counsel, USAA
(5/95-8/96). Mr. Howard serves as
Assistant Secretary for IMCO, USAA
Shareholder Account Services, USAA
Financial Planning Network, Inc.,
and for USAA Life Investment Trust.
Proxy Statement - 45
Sherron A. Kirk 1992 Senior Vice President, Senior
Treasurer Financial Officer, IMCO
Age: 56 (1/00-present); Vice President,
Senior Financial Officer, IMCO
(8/98-1/00). Vice President,
Controller, IMCO (10/92-8/98). Ms.
Kirk serves as Senior Vice
President, Senior Financial Officer
of USAA Shareholder Account
Services.
Roberto Galindo, Jr. 2000 Executive Director, Mutual Fund
Assistant Treasurer Analysis & Support, IMCO
Age: 40 (6/00-present); Director, Mutual
Fund Analysis & Support, IMCO
(9/99-6/00); Vice President,
Portfolio Administration, Founders
Asset Management LLC (7/98-8/99);
Assistant Vice President, Director
of Fund & Private Client Accounting,
Founders Asset Management LLC
(7/93-6/98).
Because of their affiliation with the Funds' investment adviser, IMCO, the
Funds' officers receive no compensation from the Funds for their services.
There are no family relationships among the directors, officers, and managerial
level employees of the Funds or IMCO.
USAA family of funds - 46
NUMBER OF EACH FUND'S SHARES OUTSTANDING AT APRIL 30, 2001
=======================================================================================================
USAA MUTUAL USAA INVESTMENT USAA TAX USAA STATE
FUND, INC. TRUST EXEMPT FUND, INC. TAX-FREE TRUST
USAA TAXABLE BOND FUNDS
- -------------------------------------------------------------------------------------------------------
GNMA TRUST X,XXX,XXX,XXX X,XXX,XXX,XXX X,XXX,XXX,XXX X,XXX,XXX,XXX
HIGH-YIELD OPPORTUNITIES FUND
INCOME FUND
INTERMEDIATE-TERM BOND FUND
SHORT-TERM BOND FUND
USAA TAX EXEMPT BOND FUNDS
- -------------------------------------------------------------------------------------------------------
LONG-TERM FUND
INTERMEDIATE-TERM FUND
SHORT-TERM FUND
CALIFORNIA BOND FUND
NEW YORK BOND FUND
VIRGINIA BOND FUND
FLORIDA TAX-FREE INCOME FUND
USAA ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------------------------------
BALANCED STRATEGY FUND
CORNERSTONE STRATEGY FUND
GROWTH AND TAX STRATEGY FUND
GROWTH STRATEGY FUND
INCOME STRATEGY FUND
USAA EQUITY FUNDS
- -------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
CAPITAL GROWTH FUND
EMERGING MARKETS FUND
FIRST START GROWTH FUND
GOLD FUND
GROWTH FUND
GROWTH & INCOME FUND
INCOME STOCK FUND
INTERNATIONAL FUND
SCIENCE & TECHNOLOGY FUND
SMALL CAP STOCK FUND
WORLD GROWTH FUND
USAA INDEX FUNDS
- -------------------------------------------------------------------------------------------------------
EXTENDED MARKET INDEX FUND
GLOBAL TITANS INDEX FUND
NASDAQ-100 INDEX FUND
S&P 500 INDEX FUND
USAA MONEY MARKET FUNDS
- -------------------------------------------------------------------------------------------------------
MONEY MARKET FUND
TREASURY MONEY MARKET TRUST
TAX EXEMPT MONEY MARKET FUND
CALIFORNIA MONEY MARKET FUND
NEW YORK MONEY MARKET FUND
VIRGINIA MONEY MARKET FUND
FLORIDA TAX-FREE MONEY MARKET FUND
TOTALS
=======================================================================================================
Proxy Statement - 47
EXHIBIT A
FORM OF ADVISORY AGREEMENT
AGREEMENT made as of the ____ day of ____________, 2001 between USAA
INVESTMENT MANAGEMENT COMPANY, a corporation organized under the laws of the
state of Delaware and having a place of business in San Antonio, Texas (the
"Manager"), and___________________, a __________ organized under the laws of
the state of ______________and having a place of business in San Antonio, Texas
(the "Company").
WHEREAS, the Company is engaged in business as an open-end management
investment company and is so registered under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Manager is engaged principally in the business of rendering
investment management services and is registered under the Investment Advisers
Act of 1940, as amended; and
WHEREAS, the Company is authorized to issue shares of capital stock (the
"Shares") in separate classes with each such class representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Company presently offers Shares in each of the classes
identified in Schedule A hereto (the "Existing Funds") (such classes, together
with all other classes subsequently established by the Company with respect to
which the Company desires to retain the Manager to render investment advisory
services hereunder and with respect to which the Manager is willing so to do,
being herein collectively referred to as the "Funds");
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties
hereto as follows:
1. APPOINTMENT OF MANAGER.
(a) EXISTING FUNDS. The Company hereby appoints the Manager to act as
manager and investment adviser for each of the Existing Funds for the period
and on the terms herein set forth. The Manager accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
(b) ADDITIONAL FUNDS. In the event that the Company establishes one
or more classes of Shares other than the Existing Funds with respect to which
it desires to retain the Manager to render management and investment advisory
services hereunder, it shall so notify the Manager in writing. If the Manager
is willing to render such services it shall notify the Company in writing,
whereupon the Company shall appoint the Manager to act as manager and
investment adviser for each of such classes of Shares for the period and on the
terms herein set forth, the Manager shall accept such appointment and agree to
render the services herein set forth for the compensation herein provided, and
each of such classes of Shares shall become a Fund hereunder.
2. DUTIES OF MANAGER.
The Manager, at its own expense, shall furnish the following services
and facilities to the Company:
(a) INVESTMENT PROGRAM. The Manager will (i) furnish continuously an
investment program for each Fund, (ii) determine (subject to the overall
supervision and review of the Board of Directors of the Company) what
investments shall be purchased, held, sold or exchanged for each Fund and what
portion, if any, of the assets of each Fund shall be held uninvested, and (iii)
make changes on behalf of the Company in the investments of each Fund.
USAA family of funds - 48
(b) MONITORING. Should the Company's Board of Directors determine it
is in the best interests of a Fund's shareholders to invest all of its
investable assets in another mutual fund with substantially the same investment
objective (the "Portfolio"), the Manager will monitor the services provided to
the Portfolio, subject always to the control of the Company's Board of
Directors. Such monitoring may include among other things, review of Portfolio
reports showing the composition of securities in the Portfolio on a periodic
basis and periodic review of investment practices of the Portfolio. The Manager
will report to the Company's Board of Directors, at least annually, on the
results of such monitoring such that the Board may determine whether continued
investment exclusively in the Portfolio is in the best interests of the Fund's
shareholders.
3. SUB-ADVISERS.
The Manager may employ one or more sub-advisers from time to time to
perform such of the acts and services of the Manager, including the selection
of brokers or dealers to execute the Fund's portfolio security transactions,
and upon such terms and conditions as may be agreed upon between the Manager
and such investment adviser and approved by the Company's Board of Directors.
4. ALLOCATION OF EXPENSES.
Except for the services and facilities to be provided by the Manager
set forth in Paragraph 2 above, the Company assumes and shall pay all expenses
for all other Company operations and activities and shall reimburse the Manager
for any such expenses incurred by the Manager. The expenses to be borne by the
Company shall include, without limitation:
(a) the charges and expenses of any registrar, share transfer or
dividend disbursing agent, custodian, or depository appointed by the Company
for the safekeeping of its cash, portfolio securities and other property;
(b) the charges and expenses of auditors;
(c) brokerage commissions for transactions in the portfolio
securities of the Company;
(d) all taxes, including issuance and transfer taxes, and fees
payable by the Company to Federal, state or other governmental agencies;
(e) the cost of share certificates representing Shares of the
Company;
(f) fees involved in registering and maintaining registrations of the
Company and of its Shares with the Securities and Exchange Commission and
various states and other jurisdictions;
(g) all expenses of shareholders' and Directors' meetings and of
preparing, printing and mailing proxy statements, quarterly reports, semiannual
reports, annual reports and other communications (including Prospectuses) to
existing shareholders;
(h) compensation and travel expenses of Directors who are not
"interested persons" within the meaning of the 1940 Act;
(i) the expense of furnishing or causing to be furnished to each
shareholder a statement of his account, including the expense of mailing;
(j) charges and expenses of legal counsel in connection with matters
relating to the Company, including, without limitation, legal services rendered
in connection with the Company's legal and financial structure and relations
with its shareholders, issuance of Company Shares, and registration and
qualification of securities under Federal, state and other laws;
(k) membership or association dues for the Investment Company
Institute or similar organizations;
(l) interest payable on Company borrowings; and
(m) postage.
Exhibit A- 49
5. ADVISORY FEE.
(a) For the services and facilities to be provided by the Manager as
provided in Paragraph 2(a) hereof, the Company shall pay to the Manager a
monthly fee with respect to each Fund computed as set forth in Schedule B or
Schedule C hereto. For the services and facilities to be provided by the
Manager as provided in Paragraph 2(b) hereof, the Company shall pay no fee.
(b) The Manager may from time to time and for such periods as it
deems appropriate voluntarily waive fees or otherwise reduce its compensation
hereunder. With respect to each Fund identified in Schedule D hereto, in
addition to any amounts otherwise payable to the Manager as an advisory fee for
current services under this Agreement, the Company shall be obligated to pay
the Manager amounts previously waived or expenses paid by the Manager with
respect to such Fund, provided that such additional payments are made not later
than the date identified in Schedule D hereto as the "Ending Date" and provided
further that the amount of such additional payment in any year, together with
all other expenses of the Fund, in the aggregate, would not cause the Fund's
expense ratio in such year to exceed the percentage of the Fund's average net
assets identified in Schedule D.
(c) In the event this Agreement is terminated with respect to any one
or more Funds as of a date other than the last day of any month, the Manager
shall pay the Company a pro rata portion of the amount that the Manager would
have been required to pay, if any, had this Agreement remained in effect for
the full month, subject to such other adjustments as may be provided in
Schedule B hereto.
6. COMPANY TRANSACTIONS.
In connection with the management of the investment and reinvestment
of the assets of the Company, the Manager, acting by its own officers,
directors or employees or by a duly authorized subcontractor, is authorized to
select the brokers or dealers that will execute purchase and sale transactions
for the Company and is directed to use its best efforts to seek on behalf of a
Fund the best overall terms available. In assessing the best overall terms
available for any transaction, the Manager shall consider all factors it deems
relevant, including the breadth of the market in and the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, with respect to the specific
transaction and on a continuing basis. Subject to this primary requirement, and
maintaining as its first consideration the benefits to the Company and its
shareholders, the Manager shall have the right, subject to the control of the
Board of Directors, to follow a policy of selecting brokers and dealers who
furnish statistical, research and other services to the Company or to the
Manager.
7. RELATIONS WITH COMPANY.
Subject to and in accordance with the ________________ and Bylaws of
the Company and of the Manager, respectively, it is understood that Directors,
officers, agents and shareholders of the Company are or may be interested in
the Manager (or any successor thereof) as directors, officers, or otherwise,
that directors, officers, agents and shareholders of the Manager are or may be
interested in the Company as Directors, officers, shareholders or otherwise,
that the Manager (or any such successor) is or may be interested in the Company
as a shareholder or otherwise and that the effect of any such interests shall
be governed by said ______________________ and Bylaws.
8. LIABILITY OF MANAGER.
Neither the Manager nor its officers, directors, employees, agents or
controlling persons or assigns shall be liable for any error of judgment or
mistake of law or for any loss suffered by the Company or its shareholders in
connection with the matters to which this Agreement relates; provided that no
provision of this Agreement shall be deemed to protect the Manager against any
liability to the Company or its shareholders to which it might otherwise be
subject by reason of any willful misfeasance, bad faith or gross negligence in
the performance of its duties or the reckless disregard of its obligations and
duties under this Agreement. Nor shall any provision hereof be deemed to
protect any Director or officer of the Company against any such liability to
which he might otherwise be subject by reason of any willful misfeasance, bad
faith or gross negligence in the
USAA family of funds - 50
performance of his duties or the reckless disregard of his obligations and
duties. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
9. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) DURATION. This Agreement shall be executed on the first date upon
which the Agreement shall have been approved by a majority of the outstanding
voting securities (as that term is defined in the 1940 Act) of any Existing
Fund. This Agreement shall become effective with respect to any Existing Fund
on the first day of the first month following the date upon which the Agreement
shall have been approved by a majority of the outstanding voting securities (as
that term is defined in the 1940 Act) of such Existing Fund, and with respect
to any additional Fund on the date set forth in the notice from the Manager in
accordance with Paragraph 1(b) hereof that the Manager is willing to serve as
Manager with respect to such Fund. Unless terminated as herein provided, this
Agreement shall remain in full force and effect with respect to each Existing
Fund through June 30, 2003, and, with respect to each additional Fund, through
the first June 30 occurring more than twelve months after the date on which
such Fund becomes a Fund hereunder, and shall continue in full force and effect
for periods of one year thereafter with respect to each Fund so long as such
continuance with respect to any such Fund is approved at least annually (a) by
either the Directors of the Company or by vote of a majority of the outstanding
voting shares (as defined in the 1940 Act) of such Fund, and (b) in either
event by the vote of a majority of the Directors of the Company who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval.
Any approval of this Agreement by the holders of a majority of the
outstanding shares (as defined in the 1940 Act) of any Fund shall be effective
to continue this Agreement with respect to any such Fund notwithstanding (A)
that this Agreement has not been approved by the holders of a majority of the
outstanding shares of any other Fund affected thereby, and (B) that this
Agreement has not been approved by the vote of a majority of the outstanding
shares of the Company, unless such approval shall be required by any other
applicable law or otherwise.
(b) TERMINATION. This Agreement may be terminated at any time,
without payment of any penalty, by vote of the Directors of the Company or by
vote of a majority of the outstanding shares (as defined in the 1940 Act), or
by the Manager on sixty (60) days' written notice to the other party.
(c) AUTOMATIC TERMINATION. This Agreement shall automatically
terminate in the event of its assignment.
10. NAME OF COMPANY.
It is understood that the name "USAA," and any logo associated with
that name, is the valuable property of the United Services Automobile
Association, and that the Company has the right to include "USAA" as a part of
its name only so long as this Agreement shall continue and the Manager is a
wholly owned subsidiary of the United Services Automobile Association. Upon
termination of this Agreement the Company shall forthwith cease to use the
"USAA" name and logo and shall submit to its shareholders an amendment to its
Articles of Incorporation to change the Company's name.
11. PRIOR AGREEMENT SUPERSEDED.
This Agreement supersedes any prior agreement relating to the subject
matter hereof between the parties.
Exhibit A - 51
12. SERVICES NOT EXCLUSIVE.
The services of the Manager to the Company hereunder are not to be
deemed exclusive, and the Manager shall be free to render similar services to
others so long as its services hereunder are not impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first set forth above.
[NAME OF COMPANY] USAA INVESTMENT MANAGEMENT
COMPANY
BY: ___________________________ BY: ___________________________
President President
USAA family of funds - 52
SCHEDULE A TO ADVISORY AGREEMENT
LISTING OF FUNDS
NAME OF FUND
AGGRESSIVE GROWTH FUND
BALANCED STRATEGY FUND
CALIFORNIA BOND FUND
CALIFORNIA MONEY MARKET FUND
CAPITAL GROWTH FUND
CORNERSTONE STRATEGY FUND
EMERGING MARKETS FUND
FIRST START GROWTH FUND
FLORIDA TAX-FREE INCOME FUND
FLORIDA TAX-FREE MONEY MARKET FUND
GNMA TRUST
GOLD FUND
GROWTH FUND
GROWTH & INCOME FUND
GROWTH AND TAX STRATEGY FUND
GROWTH STRATEGY FUND
HIGH-YIELD OPPORTUNITIES FUND
INCOME FUND
INCOME STRATEGY FUND
INCOME STOCK FUND
INTERMEDIATE-TERM FUND
INTERMEDIATE-TERM BOND FUND
INTERNATIONAL FUND
LONG-TERM FUND
MONEY MARKET FUND
NEW YORK BOND FUND
NEW YORK MONEY MARKET FUND
SCIENCE & TECHNOLOGY FUND
SHORT-TERM FUND
SHORT-TERM BOND FUND
SMALL CAP STOCK FUND
TAX EXEMPT MONEY MARKET FUND
TREASURY MONEY MARKET TRUST
VIRGINIA BOND FUND
VIRGINIA MONEY MARKET FUND
WORLD GROWTH FUND
Exhibit A - 53
SCHEDULE B TO ADVISORY AGREEMENT - FOR
FUNDS WITH PERFORMANCE ADJUSTMENTS
This Schedule B shall apply to each of the Funds identified on Schedule B-1
hereto (each, a "Fund").
(a) GENERAL. The Company shall pay to the Manager, as compensation
for the Manager's services and expenses assumed hereunder, a fee determined
with respect to each Fund, which shall be composed of the Basic Fee (defined
below) and a Performance Adjustment (defined below) to the Basic Fee based upon
the investment performance of a class of shares of the Fund in relation to the
investment record of a securities index determined by the Directors of the
Company to be appropriate over the same period.
(b) INDEX, CLASS AND CHANGES THERETO. The Directors have initially
designated for each Fund the index and class of shares of the Fund identified
on Schedule B-1 as the index and class to be used for purposes of determining
the Performance Adjustment (referred to herein as the "Index" and the "Class,"
respectively). From time to time, the Directors may, by a vote of the Directors
of the Company voting in person, including a majority of the Directors who are
not parties to this Agreement or "interested persons" (as defined in the 1940
Act) of any such parties, determine (i) that another securities index is a more
appropriate benchmark than the Index for purposes of evaluating the performance
of the Company; and/or (ii) that a different class of shares of the Company
representing interests in a Fund other than the Class is most appropriate for
use in calculating the Performance Adjustment. After ten days' written notice
to the Manager, a different index (the "Successor Index") may be substituted
for the Index in prospectively calculating the Performance Adjustment, and/or a
different class of shares (the "Successor Class") may be substituted in
calculating the Performance Adjustment. However, the calculation of that
portion of the Performance Adjustment attributable to any portion of the
performance period prior to the adoption of the Successor Index will still be
based upon the Fund's performance compared to the Index. The use of a Successor
Class of shares for purposes of calculating the Performance Adjustment shall
apply to the entire performance period so long as such Successor Class was
outstanding at the beginning of such period. In the event that such Successor
Class of shares was not outstanding for all or a portion of the Performance
Period, it may only be used in calculating that portion of the Performance
Adjustment attributable to the period during which such Successor Class was
outstanding and any prior portion of the Performance Period shall be calculated
using the Class of shares previously designated.
(c) BASIC FEE. The basic fee for a Fund (the "Basic Fee") for any
period shall equal: (i) the Fund's average net assets during such period,
multiplied by (ii) the annual rate identified for such Fund on Schedule B-1
hereto, multiplied by (iii) a fraction, the numerator of which is the number of
calendar days in the payment period and the denominator of which is 365.
(d) PERFORMANCE ADJUSTMENT. The amount of the performance adjustment
(the "Performance Adjustment") shall equal: (i) the average net assets of the
Fund over the Performance Period (as defined below), multiplied by (ii) the
Adjustment Rate (as defined below), multiplied by (iii) a fraction, the
numerator of which shall be the number of days in the last month of the
Performance Period and the denominator of which shall be 365. The resulting
dollar figure will be added to or subtracted from the Basic Fee depending on
whether the Fund experienced better or worse performance than the Index.
(e) ADJUSTMENT RATE. The adjustment rate (the "Adjustment Rate")
shall be as set forth in Schedule B-2 for each Fund, PROVIDED, HOWEVER, that
the Performance Adjustment may be further adjusted to the extent necessary to
insure that the total adjustment to the Basic Fee on an annualized basis does
not exceed the maximum Performance Adjustment identified for such Fund in
Schedule B-2.
(f) PERFORMANCE PERIOD. The performance period (the "Performance
Period") shall commence on the first day of the month next occurring after this
Agreement becomes effective with respect to the Fund (the "Commencement Date"),
PROVIDED, HOWEVER, that if this Agreement should become effective on the first
day of a month with respect to a Fund, then the Commencement Date shall be the
first day of such month. The Performance Period shall consist of the current
month plus the preceding months through the Commencement Date until a period of
36 months is included in the Performance Period, PROVIDED, HOWEVER, that no
USAA family of funds - 54
Performance Adjustment shall be made with respect to any period that is less
than 12 months. In months subsequent to a 36-month Performance Period having
been reached, the Performance Period will be a rolling 36-month period
consisting of the most recently completed month and the previous 35 months.
(g) MEASUREMENT CALCULATION. The Fund's investment performance will
be measured by comparing the (i) opening net asset value of one share of the
Class of the Fund on the first business day of the Performance Period with (ii)
the closing net asset value of one share of the Class of the Fund as of the
last business day of such period. In computing the investment performance of
the Fund and the investment record of the Index, distributions of realized
capital gains, the value of capital gains taxes per share paid or payable
undistributed realized long-term capital gains accumulated to the end of such
period and dividends paid out of investment income on the part of the Fund, and
all cash distributions of the companies or portfolios whose securities comprise
the Index, will be treated as reinvested in accordance with Rule 205-1 or any
other applicable rule under the Investment Advisers Act of 1940, as the same
from time to time may be amended.
(h) PAYMENT OF FEES. The Management Fee payable hereunder shall be
computed daily and paid monthly in arrears.
(i) AVERAGE NET ASSETS. The term "average net assets" of a Fund as
used herein for any period shall mean the quotient produced by dividing (i) the
sum of the net assets of the Fund, as determined in accordance with procedures
established from time to time under the direction of the Board of Directors of
the Company, for each calendar day of such period, by (ii) the number of such
days.
(j) TERMINATION. In the event this Agreement with respect to any Fund
is terminated as of a date other than the last day of any month, the Basic Fee
shall be computed on the basis of the period ending on the last day on which
this Agreement is in effect for such Fund, subject to a pro rata adjustment
based on the number of days elapsed in the current month as a percentage of the
total number of days in such month. The amount of any Performance Adjustment to
the Basic Fee will be computed on the basis of and applied to the average net
assets over the Performance Period ending on the last day on which this
Agreement is in effect for such Fund.
Exhibit A - 55
SCHEDULE B-1 TO ADVISORY AGREEMENT - LISTING OF FUNDS
WITH PERFORMANCE ADJUSTMENT
ANNUAL BASIC FEE RATE
(AS A PERCENTAGE OF
NAME OF FUND PERFORMANCE INDEX+ AVERAGE NET ASSETS)
- ------------ ------------------- --------------------
AGGRESSIVE GROWTH FUND MULTI-CAP GROWTH *
BALANCED STRATEGY FUND BALANCED .75%
CALIFORNIA BOND FUND CA MUNICIPAL DEBT **
CAPITAL GROWTH FUND MULTI-CAP GROWTH .85%
CORNERSTONE STRATEGY FUND GLOBAL FLEXIBLE PORTFOLIO .75%
EMERGING MARKETS FUND EMERGING MARKETS 1.00%
FIRST START GROWTH FUND LARGE-CAP GROWTH .75%
FLORIDA TAX-FREE INCOME FUND FL MUNICIPAL DEBT **
GNMA TRUST GNMA .13%
GOLD FUND GOLD ORIENTED .75%
GROWTH FUND LARGE-CAP GROWTH .75%
GROWTH & INCOME FUND LARGE-CAP CORE .60%
GROWTH AND TAX STRATEGY FUND BALANCED .50%
GROWTH STRATEGY FUND FLEXIBLE PORTFOLIO .75%
HIGH-YIELD OPPORTUNITIES FUND HIGH YIELD BOND .50%
INCOME FUND A RATED BOND .24%
INCOME STRATEGY FUND GENERAL BOND .50%
INCOME STOCK FUND EQUITY INCOME .50%
INTERMEDIATE-TERM FUND INTERMEDIATE MUNICIPAL DEBT .28%
INTERMEDIATE-TERM BOND FUND INTERMEDIATE INVESTMENT GRADE ***
INTERNATIONAL FUND INTERNATIONAL .75%
LONG-TERM FUND GENERAL MUNICIPAL DEBT .28%
NEW YORK BOND FUND NY MUNICIPAL DEBT **
SCIENCE & TECHNOLOGY FUND SCIENCE & TECHNOLOGY .75%
SHORT-TERM FUND SHORT MUNICIPAL DEBT .28%
SHORT-TERM BOND FUND SHORT INVESTMENT GRADE .24%
SMALL CAP STOCK FUND SMALL-CAP CORE .75%
VIRGINIA BOND FUND VA MUNICIPAL DEBT **
WORLD GROWTH FUND GLOBAL .75%
- -------------------------
* THE FEE IS COMPUTED AT ONE-HALF OF ONE PERCENT (.50%) OF THE FIRST
$200 MILLION OF AVERAGE NET ASSETS, TWO-FIFTHS OF ONE PERCENT (.40%)
FOR THAT PORTION OF AVERAGE NET ASSETS IN EXCESS OF $200 MILLION BUT
NOT OVER $300 MILLION, AND ONE-THIRD OF ONE PERCENT (.33%) FOR THAT
PORTION OF AVERAGE NET ASSETS IN EXCESS OF $300 MILLION.
** THE FEE IS COMPUTED AT ONE-HALF OF ONE PERCENT (.50%) OF THE FIRST
$50 MILLION OF AVERAGE NET ASSETS, TWO-FIFTHS OF ONE PERCENT (.40%)
FOR THAT PORTION OF AVERAGE NET ASSETS OVER $50 MILLION BUT NOT OVER
$100 MILLION, AND THREE-TENTHS OF ONE PERCENT (.30%) FOR THAT PORTION
OF AVERAGE NET ASSETS OVER $100 MILLION. IN CALCULATING THE FEE FOR
THE FUND, THE AVERAGE NET ASSETS OF THE CALIFORNIA BOND FUND, THE
FLORIDA TAX-FREE INCOME FUND, THE NEW YORK BOND FUND, AND THE
VIRGINIA BOND FUND ARE COMBINED WITH THE AVERAGE NET ASSETS OF THE
CALIFORNIA MONEY MARKET FUND, FLORIDA TAX-FREE MONEY MARKET FUND, NEW
YORK MONEY MARKET FUND, AND VIRGINIA MONEY MARKET FUND, RESPECTIVELY,
AND THE FEE IS ALLOCATED PRO RATA BASED UPON THE AVERAGE NET ASSETS
OF THE TWO FUNDS.
*** THE FEE IS COMPUTED AT ONE-HALF OF ONE PERCENT (.50%) OF THE FIRST
$50 MILLION OF AVERAGE NET ASSETS, TWO-FIFTHS OF ONE PERCENT (.40%)
OF THAT PORTION OF AVERAGE NET ASSETS OVER $50 MILLION BUT NOT OVER
$100 MILLION, AND THREE-TENTHS OF ONE PERCENT (.30%) OF THAT PORTION
OF AVERAGE NET ASSETS IN EXCESS OF $100 MILLION.
+ UNLESS OTHERWISE INDICATED, NAME REFERS TO LIPPER INDEX.
USAA family of funds - 56
SCHEDULE B-2 TO ADVISORY AGREEMENT - PERFORMANCE ADJUSTMENT RATE
AGGRESSIVE GROWTH FUND BALANCED STRATEGY FUND
CAPITAL GROWTH FUND CORNERSTONE STRATEGY FUND
EMERGING MARKETS FUND FIRST START GROWTH FUND
GOLD FUND GROWTH FUND
GROWTH & INCOME FUND GROWTH STRATEGY FUND
INCOME STOCK FUND INTERNATIONAL FUND
SCIENCE & TECHNOLOGY FUND SMALL CAP STOCK FUND
WORLD GROWTH FUND
OVER/UNDER PERFORMANCE RELATIVE PERFORMANCE ADJUSTMENT RATE
TO INDEX (IN BASIS POINTS) (IN BASIS POINTS AS A PERCENTAGE
OF AVERAGE NET ASSETS)
+/- 20 to 50 +/- 4
+/- 51 to 100 +/- 5
---------------------------------------------------------------------
+/-101 and greater +/- 6
CALIFORNIA BOND FUND FLORIDA TAX-FREE INCOME FUND
GNMA TRUST GROWTH AND TAX STRATEGY FUND
HIGH-YIELD OPPORTUNITIES FUND INCOME FUND
INCOME STRATEGY FUND INTERMEDIATE-TERM FUND
INTERMEDIATE-TERM BOND FUND LONG-TERM FUND
NEW YORK BOND FUND SHORT-TERM FUND
SHORT-TERM BOND FUND VIRGINIA BOND FUND
OVER/UNDER PERFORMANCE RELATIVE PERFORMANCE ADJUSTMENT RATE
TO INDEX (IN BASIS POINTS) (IN BASIS POINTS AS A PERCENTAGE
OF AVERAGE NET ASSETS)
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/-701 and greater +/- 6
Exhibit A - 57
SCHEDULE C TO ADVISORY AGREEMENT - FOR FUNDS
WITH NO PERFORMANCE ADJUSTMENT
This Schedule C shall apply to each of the Funds identified on Schedule C-1
hereto (each, a "Fund").
(a) The Company shall pay to the Manager a fee for each Fund, calculated
daily and payable monthly in arrears, computed as a percentage of the average
net assets of the Fund for such month at the rate set forth in Schedule C-1
thereto.
(b) The "average net assets" of the Fund for any month shall be equal to
the quotient produced by dividing (i) the sum of the net assets of such Fund,
determined in accordance with procedures established from time to time by or
under the direction of the Board of Directors of the Company, for each calendar
day of such month, by (ii) the number of such days.
USAA family of funds - 58
SCHEDULE C-1 TO ADVISORY AGREEMENT - LISTING OF FUNDS
AND FEE RATES
NAME OF FUND FEE RATE
CALIFORNIA MONEY MARKET FUND *
FLORIDA TAX-FREE MONEY MARKET FUND *
MONEY MARKET FUND .24%
NEW YORK MONEY MARKET FUND *
TAX EXEMPT MONEY MARKET FUND .28%
TREASURY MONEY MARKET TRUST .13%
VIRGINIA MONEY MARKET FUND *
* The fee is computed at one-half of one percent (.50%) of the first $50
million of average net assets, two-fifths of one percent (.40%) for that
portion of average net assets over $50 million but not over $100 million,
and three-tenths of one percent (.30%) for that portion of average net
assets over $100 million. In calculating the fee for the Fund, the average
net assets of the California Money Market Fund, the Florida Tax-Free Money
Market Fund, the New York Money Market Fund, and the Virginia Money Market
Fund are combined with the average net assets of the California Bond Fund,
Florida Tax-Free Income Fund, New York Bond Fund, and Virginia Bond Fund,
respectively, and the fee is allocated pro rata based upon the average net
assets of the two Funds.
Exhibit A - 59
SCHEDULE D TO ADVISORY AGREEMENT- FOR FUNDS WITH FEE
WAIVER AND EXPENSE REIMBURSEMENT RECOVERY PLANS
NAME OF FUND ENDING DATE PERCENTAGE OF ANA
HIGH YIELD OPPORTUNITIES FUND AUGUST 2, 2002 .75%
INTERMEDIATE TERM BOND FUND AUGUST 2, 2002 .65%
USAA family of funds - 60
EXHIBIT B
EQUITY FUNDS
EMERGING MARKETS FUNDS-- A fund that seeks long-term capital appreciation by
investing at least 65% of total assets in emerging market equity securities,
where "merging market" is defined by a country's GNP per capita or other
economic measures.
EQUITY INCOME FUNDS--A fund that seeks relatively high current income and
growth of income through investing 60% or more of its portfolio in equities.
GOLD-ORIENTED FUNDS -- A fund that invests at least 65% of its equity portfolio
in shares of gold mines, gold-oriented mining finance houses, gold coins, or
bullion.
INTERNATIONAL FUNDS-- A fund that invests its assets in securities with primary
trading markets outside of the United States.
LARGE-CAP CORE FUNDS-- Funds that, by portfolio practice, invest at least 75%
of their equity assets in companies with market capitalizations (on a
three-year weighted basis) of greater than 300% of the dollar-weighted median
market capitalization of the middle 1,000 securities of the S&P 1500 Index.
Large-cap core funds have more latitude in the companies in which they invest.
These funds will normally have an average price-to-earnings ratio,
price-to-book ratio, and three-year sales growth figure, compared to the S&P
500 Index.
LARGE-CAP GROWTH FUNDS-- Funds that, by portfolio practice, invest at least 75%
of their equity assets in companies with market capitalizations (on a
three-year weighted basis) of greater than 300% of the dollar-weighted median
market capitalization of the middle 1,000 securities of the S&P 1500 Index.
Large-cap growth funds normally invest in companies with long-term earnings
expected to grow significantly faster than the earnings of the stocks
represented in a major unmanaged stock index. These funds will normally have an
above-average price-to-earnings ratio, price-to-book ratio, and three-year
sales growth figure, compared to the S&P 500 Index.
MULTI-CAP GROWTH FUNDS-- Funds that, by portfolio practice, invest in a variety
of market capitalization ranges, without concentrating 75% of their equity
assets in any one market capitalization range over an extended period of time.
Multi-cap funds will generally have between 25% to 75% of their assets invested
in companies with market capitalizations (on a three-year weighted basis) above
300% of the dollar-weighted median market capitalization of the middle 1,000
securities of the S&P 1500 index. Multi-cap growth funds normally invest in
companies with long-term earnings expected to grow significantly faster than
the earnings of the stocks represented in a major unmanaged stock index. These
funds will normally have an above-average price-to-earnings ratio,
price-to-book ratio, and three-year sales growth figure, compared to the S&P
1500 Index.
SCIENCE & Technology Funds--A fund that invests 65% of its equity portfolio in
science and technology stocks.
SMALL-CAP CORE FUNDS--Funds that, by portfolio practice, invest at least 75% of
their equity assets in companies with market capitalizations (on a three-year
weighted basis) of less than 250% of the dollar-weighted median of the smallest
500 of the middle 1,000 securities of S&P 1500 Index. Small-cap core funds have
more latitude in the companies in which they invest. These funds will normally
have an average price-to-earnings ratio, price-to-book ratio, and three-year
sales growth figure, compared to the S&P 600 Index.
Exhibit B - 61
FIXED INCOME FUNDS
CORPORATE DEBT FUNDS A RATED -- A fund that invests at least 65% of its assets
in corporate debt issues rated "A" or better or government issues.
HIGH CURRENT YIELD FUNDS-- A fund that aims at high (relative) current yield
from fixed income securities, has no quality or maturity restrictions, and
tends to invest in lower grade debt issues.
INTERMEDIATE INVESTMENT GRADE DEBT FUNDS-- A fund that invests at least 65% of
its assets in investment grade debt issues (rated in top four grades) with
dollar-weighted average maturities of five to ten years.
SHORT INVESTMENT GRADE DEBT FUNDS-- A fund that invests at least 65% of its
assets in investment grade debt issues (rated in top four grades) with
dollar-weighted average maturities of less than three years.
BALANCED FUNDS--A fund whose primary objective is to conserve principal by
maintaining at all times a balanced portfolio of both stocks and bonds.
Typically, the stock/bond ratio ranges around 60%/40%.
FLEXIBLE PORTFOLIO FUNDS-- A fund that allocates its investments across various
asset classes, including domestic common stocks, bonds, and money market
instruments with a focus on total return.
GENERAL BOND FUNDS --A fund that does not have any quality or maturity
restrictions. Intend to keep bulk of assets in corporate and government debt
issues.
GLOBAL FLEXIBLE PORTFOLIO FUNDS-- A fund that allocates its investments across
various asset classes, including both domestic and foreign stocks, bonds, and
money market instruments with a focus on total return. At least 25% of its
portfolio is invested in securities traded outside of the Unite States,
including shares of gold mines, gold-oriented mining finance houses, gold
coins, or bullion.
GLOBAL FUNDS-- A fund that invests at least 25% of its portfolio in securities
traded outside of the United States and that may own U.S. securities as well.
GNMA FUNDS--A fund that invests at least 65% of its assets in Government
National Mortgage Association securities.
CALIFORNIA MUNICIPAL DEBT FUNDS-- A fund that limits its assets to those
securities that are exempt from taxation in that state of California.
FLORIDA MUNICIPAL DEBT FUNDS-- A fund that limits its assets to those
securities that are exempt from taxation in the state of Florida.
GENERAL MUNICIPAL DEBT FUNDS--A fund that invests at least 65% of its assets in
municipal debt issues in the top four credit ratings.
INTERMEDIATE MUNICIPAL DEBT FUNDS-- A fund that invests in municipal debt
issues with dollar-weighted average maturities of five to ten years.
NEW YORK MUNICIPAL DEBT FUNDS-- A fund that limits its assets to those
securities that are exempt from taxation in that state of New York and New York
City.
SHORT MUNICIPAL DEBT FUNDS-- A fund that invests in municipal debt issues with
dollar-weighted average maturities of less than three years.
VIRGINIA MUNICIPAL DEBT FUNDS-- A fund that limits its assets to those
securities that are exempt from taxation in that Commonwealth of Virginia.
USAA family of funds - 62
EXHIBIT C
FORM OF SUB-ADVISORY AGREEMENT
AGREEMENT made as of the _____ day of ____________, 2001 (the
"Effective Date"), between USAA INVESTMENT MANAGEMENT COMPANY, a corporation
organized under the laws of the state of Delaware and having its principal
place of business in San Antonio, Texas (the "Adviser") and DEUTSCHE ASSET
MANAGEMENT, INC., a corporation organized under the laws of the state of
Delaware and having its principal place of business in New York City, New York
(the "Sub-Adviser").
WHEREAS, the Adviser is engaged principally in the business of
rendering investment management services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"); and
WHEREAS, the Sub-Adviser is engaged principally in the business of
rendering investment management services and is registered as an investment
adviser under the Advisers Act; and
WHEREAS, USAA MUTUAL FUND, INC., a corporation organized under the
laws of the state of Maryland (the "Company"), is an open-end management
investment company and is so registered under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Company is authorized to issue shares of beneficial
interest in separate series, with each such series representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Company has established one (1) separate series, the
USAA S&P 500 Index Fund, such series together with all other series
subsequently established by the Company with respect to which the Sub-Adviser
renders investment advisory services pursuant to the terms of this Agreement,
being herein referred to as the "Fund"; and
WHEREAS, pursuant to an Advisory Agreement, dated as of June 30,
2000, between the Company and the Adviser (the "Advisory Agreement"), the
Adviser is required to perform investment advisory services for the Fund.
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the
parties hereto as follows:
1. APPOINTMENT OF SUB-ADVISER.
(a) USAA S&P 500 INDEX FUND. The Adviser hereby employs the
Sub-Adviser to provide investment advisory services to the USAA S&P 500
Index Fund for the period and on the terms herein set forth. The
Sub-Adviser accepts such appointment and agrees to render the services
herein set forth for the compensation herein provided.
(b) ADDITIONAL FUNDS. In the event that the Company establishes
one or more series of shares other than the USAA S&P 500 Index Fund with
respect to which the Adviser desires to retain the Sub-Adviser to render
investment advisory services hereunder, the Adviser shall so notify the
Sub-Adviser in writing, indicating the advisory fee to be payable with
respect to the additional series of shares. If the Sub-Adviser is willing
to render such services on the terms provided for herein, it shall so
notify the Adviser in writing, whereupon such series shall become a Fund
hereunder.
2. DUTIES OF ADVISER AND SUB-ADVISER.
(i) DELIVERY OF DOCUMENTS. The Adviser has furnished the
Sub-Adviser with true copies of each of the following:
(a) The Company's Articles of Incorporation, as filed with the
Department of Assessments and Taxation of the state of Maryland and
all amendments and supplements
Exhibit C -63
thereto (such Articles of Incorporation, as presently in effect and
as it shall from time to time be amended or supplemented, is herein
called the "Declaration");
(b) The Company's Bylaws and amendments and supplements thereto
(such Bylaws, as presently in effect and as it shall from time to
time be amended and supplemented, is herein called the "Bylaws");
(c) Resolutions of the Company's Board of Directors authorizing
the appointment of the Adviser and Sub-Adviser and approving the
Advisory Agreement and this Agreement and copies of the written
consent in lieu of initial meeting of sole shareholder of the Fund;
(d) The most recent amendment to the Company's Registration
Statement on Form N-1A under the Securities Act of 1933, as amended
(the "1933 Act"), and the 1940 Act (File Nos. 2-49560 and 811-2429)
as filed with the Securities and Exchange Commission (the
"Commission") on __________, 200_, and
(e) The current prospectus and Statement of Additional
Information (collectively, such prospectus and Statement of
Additional Information, as in effect from time to time and all
amendments and supplements thereto, are herein called the
"Prospectus") of each Fund;
The Adviser will furnish the Sub-Adviser from time to time with
copies of all amendments of or supplements to items (a), (b), (c),
(d), and (e).
(ii) The Sub-Adviser, at its own expense, shall furnish the
following services to the Company:
(a) INVESTMENT PROGRAM. The Sub-Adviser is hereby authorized and
directed and hereby agrees, subject to the overall supervision of the
Adviser and the Board of Directors of the Company, to (i) develop and
furnish continuously an investment program and strategy for the Fund,
(ii) provide index information and analysis relative to the
investment program and investments of the Fund, (iii) determine what
investments shall be purchased, held, sold or exchanged by the Fund
and what portion, if any, of the assets of the Fund shall be held in
cash or cash equivalents, and (iv) purchase and sell portfolio
securities on behalf of the Company with respect to each Fund. The
Sub-Adviser shall perform these duties in conformity with (1) the
stated investment objectives, policies and restrictions of the Fund
as set forth in the Company's effective Registration Statement, (2)
any additional policies or guidelines established by the Adviser or
Board of Directors of the Company that have been furnished in writing
to the Sub-Adviser, (3) the provisions of the Internal Revenue Code
of 1986, as amended (the "Code") applicable to "regulated investment
companies" (as defined in Section 851 of the Code), as from time to
time in effect, and (4) applicable provisions of law, including
without limitation all applicable provisions of the 1940 Act and the
rules and regulations thereunder. The Adviser shall provide the
Sub-Adviser with prior written notice of any material change to the
Company's Registration Statement that would affect the Sub-Adviser's
management of the Fund. In accordance with paragraph 2(ii)(b), the
Sub-Adviser shall arrange for the execution of all orders for the
purchase and sale of securities and other investments for the Fund's
account and will exercise full discretion and act for the Company in
the same manner and with the same force and effect as the Company
might or could do with respect to such purchases, sales, or other
transactions, as well as with respect to all other things necessary
or incidental to the furtherance or conduct of such purchases, sales,
or other transactions. The Sub-Adviser will make its officers and
employees available to meet with the Adviser's officers and directors
on due notice at reasonable times to review the investments and
investment program of the Fund in the light of current and
prospective economic and market conditions.
USAA family of funds - 64
In the performance of its duties hereunder, the Sub-Adviser is
and shall be an independent contractor and except as expressly
provided for herein or otherwise expressly provided or authorized
shall have no authority to act for or represent any Fund or the
Company in any way or otherwise be deemed to be an agent of any Fund,
the Company or of the Adviser. If any occasion should arise in which
the Sub-Adviser gives any advice to its clients concerning the shares
of a Fund, the Sub-Adviser will act solely as investment counsel for
such clients and not in any way on behalf of the Company or any Fund.
(b) PORTFOLIO TRANSACTIONS. In connection with the management of
the investment and reinvestment of the Fund's assets, the
Sub-Adviser, acting by its own officers, directors or employees or by
a duly authorized subcontractor, is authorized to select the broker
or dealers that will execute purchase and sale transactions for the
Company of behalf of the Fund.
In executing portfolio transactions and selecting brokers or
dealers, if any, the Sub-Adviser will use its best efforts to seek on
behalf of a Fund the best overall terms available. In assessing the
best overall terms available for any transaction, the Sub-Adviser
shall consider all factors it deems relevant, including (without
limitation) the breadth of the market in and the price of the
security, the financial condition and execution capability of the
broker or dealer, the quality of research provided and the
reasonableness of the commission, if any, with respect to the
specific transaction and on a continuing basis.
The Sub-Adviser may buy securities for the Fund at the same time
it is selling such securities for another client account and may sell
securities for the Fund at the time it is buying such securities for
another client account. In such cases, subject to applicable legal
and regulatory requirements, and in compliance with such procedures
of the Company as may be in effect from time to time, the Sub-Adviser
may effectuate cross transactions between the Fund and such other
account if it deems this to be advantageous. The Sub-Adviser also may
cause the Fund to enter into other types of investment transactions
(e.g., a long position on a particular securities index) at the same
time it is causing other client accounts to take opposite economic
positions (e.g., a short position on the same index).
On occasions when the Sub-Adviser deems the purchase or sale of
a security to be in the best interest of the Fund as well as other
clients, the Sub-Adviser, to the extent permitted by applicable laws
and regulations, and in compliance with such procedures of the
Company as may be in effect from time to time, may aggregate the
securities to be sold or purchased in order to obtain the best
execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Sub-Adviser
in the manner it considers to be the most equitable and consistent
with its fiduciary obligations to the subject Fund and to such
clients.
The Sub-Adviser will advise the Fund's custodian or such
depository or agents as may be designated by the custodian and the
Adviser promptly of each purchase and sale of a portfolio security,
specifying the name of the issuer, the description and amount or
number of shares of the security purchased, the market price, the
commission and gross or net price, the trade date and settlement
date, the identity of the effecting broker or dealer and any other
pertinent data that the Fund's custodian may need to settle a
security's purchase or sale. The Sub-Adviser shall not have
possession or custody of any Fund investments. The Company shall be
responsible for all custodial agreements and the payment of all
custodial charges and fees and, upon the Sub-Adviser giving proper
instructions to the custodian, the Sub-Adviser shall have no
responsibility or liability for the acts, omissions or other conduct
of the custodian.
Notwithstanding the foregoing, the Sub-Adviser agrees that the Adviser
shall have the right by written notice to identify securities that may not
be purchased on behalf of any Fund and/or brokers and dealers through
which portfolio transaction on behalf of the Fund may not be effected,
including,
Exhibit C -65
without limitation, brokers or dealers affiliated with the Adviser. The
Sub-Adviser shall refrain from purchasing such securities for the Fund or
directing any portfolio transaction to any such broker or dealer on behalf
of the Fund, unless and until the written approval of the Adviser to do so
is obtained. In addition, the Sub-Adviser agrees that it shall not direct
portfolio transactions for the Fund through any broker or dealer that is
an "affiliated person" of the Sub-Adviser (as that term is defined in the
Act or interpreted under applicable rules and regulations of the
Commission) without the prior written approval of the Adviser except as
permitted under the 1940 Act. Consistent with applicable law and the
Sub-Adviser's procedures, the Sub-Adviser may direct portfolio
transactions on behalf of the Fund to any broker/dealer in recognition of
sales of shares of any investment company or receipt of research or other
service without prior written approval of the Adviser. The Adviser agrees
that it will provide the Sub-Adviser with a list of brokers and dealers
that are "affiliated persons" of the Fund.
(c) REPORTS. The Sub-Adviser shall render to the Board of
Directors of the Company such periodic and special reports as the Board of
Directors may reasonably request with respect to matters relating to the
duties of the Sub-Adviser set forth herein.
3. SUB-ADVISORY FEE.
For the services to be provided by the Sub-Adviser as provided in
Paragraph 2 hereof, the Adviser shall pay to the Sub-Adviser an annual fee as
set forth on Schedule A to this Agreement.
In the case of commencement or termination of this Agreement with respect
to any Fund during any calendar month, the fee with respect to such Fund for
that month shall be reduced proportionately based upon the number of calendar
days during which it is in effect, and the fee shall be computed based upon the
average daily net assets of such Fund for the days during which it is in
effect.
4. EXPENSES.
During the term of this Agreement, the Sub-Adviser will bear all
expenses incurred by it in the performance of its duties hereunder, other than
those expenses specifically assumed by the Company hereunder. The Company shall
assume and shall pay (i) all expenses, fees, and taxes chargeable to the
Company in connection with securities transactions to which any Fund is a
party; (ii) all interest on borrowed money, if any; (iii) all brokers' and
underwriting commissions chargeable to the Company in connection with the
securities transactions to which any Fund is a party; and (iv) all transaction
costs and fees payable in connection with any securities lending program.
5. COMPLIANCE WITH APPLICABLE REGULATIONS.
In performing its duties hereunder, the Sub-Adviser
(i) shall establish compliance procedures reasonably
calculated to ensure compliance at all times with: all
applicable provisions of the 1940 Act and the Advisers Act,
and any rules and regulations adopted thereunder; Subchapter
M of the Code; the provisions of the Registration Statement;
the provisions of the Declaration and the Bylaws of the
Company, as the same may be amended from time to time; and
any other applicable provisions of state, federal or foreign
law.
(ii) acknowledges that it has adopted a written code of
ethics complying with the requirements of Rule 17j-1 under
the 1940 Act and that the Sub-Adviser and certain of its
employees, officers and directors are subject to reporting
requirements thereunder and, accordingly, agrees that it
shall, on a timely basis, furnish, and shall cause its
employees, officers and directors to furnish, to the Adviser
and/or to the Company, all reports and information required
to be provided under such code of ethics with respect to such
persons.
(iii) agrees that it will maintain for the Company all and
only such records as required under Rules 31a-1 and 31a-2
under the 1940 Act in respect to its services hereunder and
that such records are also the property of the Company and
further agrees to surrender promptly to the Company a copy of
any such records upon the Company's request, all in
accordance with Rule 31a-3 under the 1940 Act.
USAA family of funds - 66
6. LIABILITY OF SUB-ADVISER; INDEMNIFICATION
Neither the Sub-Adviser nor the officers, directors, employees,
agents, or legal representatives (collectively, "Related Persons") of the
Sub-Adviser shall be liable for any error of judgment or mistake of law, or for
any loss suffered by any Fund or its shareholders in connection with the
matters to which this Agreement relates; provided that, except as set forth in
the succeeding paragraph, no provision of this Agreement shall be deemed to
protect the Sub-Adviser or its Related Persons against any liability to which
it might otherwise be subject by reason of any willful misfeasance, bad faith
or negligence or the reckless disregard of the Sub- Adviser's obligations and
duties (each of which is hereby referred to as a "Culpable Act") under this
Agreement.
Neither the Sub-Adviser nor its Related Persons shall be liable for
any error of judgment or mistake of law, or for any loss suffered by the
Adviser or its Related Persons in connection with the matters to which this
Agreement relates; provided that this provision shall not be deemed to protect
the Sub-Adviser or its Related Persons against any liability to which it might
otherwise be subject by reason of any Culpable Act by the Sub-Adviser or its
Related Persons.
Neither the Sub-Adviser and its Related Persons nor the Adviser and
its Related Persons shall be liable for delays or errors by reason of
circumstances beyond their control, including, but not limited to, acts of
civil or military authority, national emergencies, labor difficulties,
suspensions of trading, fire, mechanical breakdown, flood or catastrophe, "Acts
of God," insurrection, war, riots or failure of communication or power supply;
provided, however, that the Sub-Adviser and its Related Persons or the Adviser
and its Related Persons, as the case may be, have acted reasonably in
preventing the occurrence of such events and eliminating the continuation of
such events; provided further that neither the Adviser and its Related Persons
nor the Sub-Adviser and its Related Persons, as the case may be, shall be
liable for any consequential damages related thereto.
The Adviser shall indemnify the Sub-Adviser and its Related Persons
and hold them harmless from and against any and all actions, suits or claims
whether groundless or meritorious, and from and against any and all losses,
damages, costs, charges, reasonable counsel fees, payments, expenses and
liabilities (collectively, "Damages") arising directly or indirectly out of or
in connection with the performance of services by the Sub-Adviser or its
Related Persons hereunder to the extent such Damages result from any willful
misfeasance, bad faith or negligence or the reckless disregard of the Adviser's
obligation and duties under this agreement.
The Sub-Adviser shall indemnify the Adviser and its Related Persons
from and against any Damages arising directly or indirectly out of or in
connection with the performance of services by the Adviser or its Related
Persons under this Agreement or the Advisory Agreement, in each case, to the
extent such Damages result from any Culpable Act of the Sub-Adviser or any of
its Related Persons.
7. REPRESENTATIONS AND WARRANTIES.
(a) ADVISER. The Adviser represents and warrants to the
Sub-Adviser that (i) the retention of the Sub-Adviser by the Adviser as
contemplated by this Agreement is authorized by the respective governing
documents of the Company and the Adviser; (ii) the execution, delivery and
performance of each of this Agreement and the Advisory Agreement does not
violate any obligation by which the Company or the Adviser or their respective
property is bound, whether arising by contract, operation of law or otherwise;
and (iii) each of this Agreement and the Advisory Agreement has been duly
authorized by appropriate action of the Company and the Adviser and when
executed and delivered by the Adviser will be the legal, valid and binding
obligation of the Company and the Adviser, enforceable against the Company and
Adviser in accordance with its terms hereof subject, as to enforcement, to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and to general equitable principles (regardless of whether
enforcement is sought in a proceeding in equity or law); and (iv) the Adviser
is registered as an investment adviser under the Advisers Act.
(b) SUB-ADVISER. The Sub-Adviser represents and warrants to the
Adviser that (i) the retention of the Sub-Adviser by the Adviser as
contemplated by this Agreement is authorized by the Sub-Adviser's governing
documents; (ii) the execution, delivery and performance of this Agreement does
not
Exhibit C - 67
violate any obligation by which the Sub-Adviser or its property is bound,
whether arising by contract, operation of law or otherwise; and (iii) this
Agreement has been duly authorized by appropriate action of the Sub-Adviser and
when executed and delivered by the Sub-Adviser will be the legal, valid and
binding obligation of the Sub-Adviser, enforceable against the Sub-Adviser in
accordance with its terms hereof, subject, as to enforcement, to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and to general equitable principles (regardless of whether enforcement is
sought in a proceeding in equity or law); and (iv) the Sub-Adviser is either
registered as an investment adviser under the Advisers Act, or is not required
to so register under applicable law.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) DURATION. This Agreement shall become effective with respect
to the USAA S&P 500 Index Fund on the Effective Date and, with respect to any
additional Fund, on the date of receipt by the Adviser of notice from the
Sub-Adviser in accordance with Paragraph 1(b) hereof that the Sub-Adviser is
willing to serve as Sub-Adviser with respect to such Fund. Unless terminated as
herein provided, this Agreement shall remain in full force and effect for two
years from the date hereof with respect to the USAA S&P 500 Index Fund and,
with respect to each additional Fund, for two years from the date on which such
Fund becomes a Fund hereunder. Subsequent to such initial periods of
effectiveness, this Agreement shall continue in full force and effect for
periods of one year thereafter with respect to the Fund so long as such
continuance with respect to any such Fund is approved at least annually (a) by
either the Directors of the Company or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of such Fund, and (b) in either
event, by the vote of a majority of the Directors of the Company who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval.
(b) AMENDMENT. This Agreement may be amended by agreement of the
parties, provided that the amendment shall be approved by the vote of a
majority of each of the Directors of the Company and the Directors of the
Company who are not parties to this Agreement or interested persons of any such
party to this Agreement, in each case at a meeting called for that purpose.
(c) TERMINATION. This Agreement may be terminated with respect to
any Fund at any time, without payment of any penalty, (i) by vote of the
Directors of the Company or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of that Fund, (ii) by the Adviser, or
(iii) by the Sub-Adviser, in each case on sixty (60) days' prior written notice
to the other party. Upon the effective date of termination of this Agreement,
the Sub-Adviser shall deliver all books and records of the Company or any Fund
held by it (i) to such entity as the Company may designate as a successor
sub-adviser, or (ii) to the Adviser.
(d) AUTOMATIC TERMINATION. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
(e) APPROVAL, AMENDMENT, OR TERMINATION BY INDIVIDUAL FUND. Any
approval, amendment, or termination of this Agreement by the holders of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
any Fund shall be effective to continue, amend or terminate this Agreement with
respect to any such Fund notwithstanding (i) that such action has not been
approved by the holders of a majority of the outstanding voting securities of
any other Fund affected thereby, and/or (ii) that such action has not been
approved by the vote of a majority of the outstanding voting securities of the
Company, unless such action shall be required by any applicable law or
otherwise.
9. SERVICES NOT EXCLUSIVE.
The services of the Sub-Adviser to the Adviser in connection with the
Fund hereunder are not to be deemed exclusive, and the Sub-Adviser shall be
free to render similar services to others so long as its services hereunder are
not impaired thereby. It is understood that the persons employed by the
Sub-Adviser to assist in the performance of its duties hereunder will not
devote their full time to such services and nothing hereunder contained shall
be deemed to limit or restrict in any manner whatsoever the right of the
Sub-Adviser to engage in or devote time and attention to other businesses or to
render services of whatever kind or nature.
USAA family of funds - 68
10. ADDITIONAL AGREEMENTS
(a) ACCESS TO INFORMATION. The Sub-Adviser shall, upon reasonable
notice, afford the Adviser at all reasonable times access to Sub-Adviser's
officers, employees, agents and offices and to all its relevant books and
records and shall furnish the Adviser with all relevant financial and other
data and information as requested; provided, however, that nothing contained
herein shall obligate the Sub-Adviser to provide the Adviser with access to the
books and records of the Sub-Adviser relating to any other funds other than the
Fund.
(b) CONFIDENTIALITY. Each party agrees that it shall hold in
strict confidence all data and information obtained from another party hereto
(unless such information is or becomes readily ascertainable from public or
published information or trade sources) and shall ensure that its officers,
employees and authorized representatives do not disclose such information to
others without the prior written consent of the party from whom it was
obtained, unless such disclosure is required by the Commission, other
regulatory body with applicable jurisdiction, or the Fund's auditors, or in the
opinion of its counsel, law, and then only with as much prior written notice to
the other party as is practical under the circumstances.
(c) PUBLIC ANNOUNCEMENTS. No party shall issue any press release
or otherwise make any public statements with respect to the matters covered by
this Agreement without the prior written consent of the other parties hereto,
which consent shall not be reasonably withheld; provided, however, that consent
shall not be required if, in the opinion of counsel, such disclosure is
required by law; provided further, however, that the party making such
disclosure shall provide the other parties hereto with as much prior written
notice of such disclosure as is practical under the circumstances.
(d) NOTIFICATIONS. The Sub-Adviser agrees that it will promptly
notify the Adviser and the Company in the event that the Sub-Adviser or any of
its affiliates: (i) becomes subject to a statutory or regulatory
disqualification that prevents the Sub-Adviser from serving as investment
adviser pursuant to this Agreement; or (ii) is or expects to become the subject
of an administrative proceeding or enforcement action by the Commission or
other regulatory body with applicable jurisdiction.
(e) INSURANCE. The Sub-Adviser agrees to maintain errors and
omissions or professional liability insurance coverage in an amount that is
reasonable in light of the nature and scope of the Sub-Adviser's business
activities.
(f) SHAREHOLDER MEETING EXPENSES. In the event that the Company
shall be required to call a meeting of shareholders solely due to actions
involving the Sub-Adviser, including, without limitation, a change of control
of the Sub-Adviser, the Sub-Adviser shall bear all reasonable expenses
associated with such shareholder meeting.
11. MISCELLANEOUS.
(a) NOTICES. All notices or other communications given under this
Agreement shall be made by guaranteed overnight delivery, telecopy or certified
mail; notice is effective when received. Notice shall be given to the parties
at the following addresses:
The Adviser: USAA Investment Management Company
10750 Robert F. McDermott Freeway, BK-B-04-S
San Antonio, Texas 78288
Facsimile No.: (210) 498-4022
Attention: Securities Counsel & Compliance Dept.
Sub-Adviser: Deutsche Asset Management, Inc.
130 Liberty Street, NYCO2-3100
New York, New York 10006
Facsimile No.: (212) 250-2154
Attention: Legal Department - William G. Butterly
Exhibit C - 69
(b) SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible.
(c) SUCCESSORS AND ASSIGNMENTS. Each and all of the provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and, except as otherwise specifically provided in this Agreement, their
respective successors and assigns. Notwithstanding the foregoing, no party
shall make any assignment of this Agreement or any rights or obligations
hereunder without the written consent of all other parties. As used herein, the
term "assignment" shall have the meaning ascribed thereto in the 1940 Act.
(d) APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with and governed by the laws of the state of Delaware
without giving effect to the choice of law or conflicts of law provisions
thereof.
(e) COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(f) EXPENSES. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs and expenses.
(g) HEADINGS. The headings and captions contained in this
Agreement are for reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) ENTIRE AGREEMENT. This Agreement states the entire agreement
of the parties hereto, and is intended to be the complete and exclusive
statement of the terms hereof. It may not be added to or changed orally, and
may not be modified or rescinded except by a writing signed by the parties
hereto and in accordance with the 1940 Act.
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed as of the date first set forth above.
USAA INVESTMENT MANAGEMENT COMPANY
By: _______________________________
Name: Christopher W. Claus
Title: President
DEUTSCHE ASSET MANAGEMENT, INC.
By: __________________________________
Name:
Title:
Acknowledged and agreed:
USAA MUTUAL FUND, INC.
By: ______________________________
Name: David G. Peebles
Title: Vice President
USAA family of funds - 70
SCHEDULE A
SUB-ADVISORY FEES
USAA S&P 500 INDEX FUND:
The Adviser shall pay to the Sub-Adviser a fee calculated daily and
payable monthly in arrears at the annual rate of .02 of 1% per annum for
average net assets up to $2.5 billion; .01 of 1% per annum for the next
$1.5 billion average net assets; and .005 of 1% per annum of the amount by
which the average net assets exceed $4 billion of the USAA S&P 500 Index
Fund.
The "average net assets" of the Fund for any month shall be equal to the
quotient produced by dividing (i) the sum of the net assets of such Fund,
determined in accordance with procedures established from time to time by
or under the direction of the Board of Directors of the Company, for each
calendar day of such month, by (ii) the number of such days.
Exhibit C - 71
[THIS PAGE LEFT BLANK INTENTIONALLY]
USAA WE KNOW WHAT IT MEANS TO SERVE.(R)
EAGLE ----------------------------------------------------
LOGO INSURANCE * BANKING * INVESTMENTS * MEMBER SERVICES
RECYCLED
PAPER LOGO
26856-0501 (C) 2001, USAA. All rights reserved.
PRELIMINARY PROXY CARDS
[CARD #1
THIS CARD IS FOR THE GOLD FUND]
[USAA] USAA
[EAGLE] FAMILY
[LOGO] OF FUNDS
P.O. BOX 47110
SAN ANTONIO, TX 78265-8110
FUND NAME HERE
PROXY FOR THE SHAREHOLDER MEETING
2 P.M., Central Daylight Time, on July 20, 2001
The undersigned hereby appoints Christopher W. Claus, David G.
Peebles, and Richard A. Zucker, and each of them, with full power of
substitution, as proxies of the undersigned to vote all shares of
stock that the undersigned is entitled in any capacity to vote at the
above-stated shareholder meeting, and at any and all adjournments or
postponements thereof (the "Shareholder Meeting"), on the matters set
forth in this Proxy Card, and, in their discretion, upon all matters
incident to the conduct of the Shareholder Meeting and upon such
other matters as may properly be brought before the Shareholder
Meeting. This proxy revokes all prior proxies given by the
undersigned.
All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, the proxy
will be voted FOR approval of the applicable proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH
RESPECT TO THE FUNDS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR PROXY CARD.
-----------------------------------
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED
-----------------------------------
[ARROWS]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
- ------------------ --------------------------------
*Dail the toll-free number
TELEPHONE [ARROW] *Enter the CONTROL NUMBER
1-800-690-6903 indicated to the right
*Follow the voice instructions
- ------------------ --------------------------------
- ------------------ --------------------------------
*Log on to the voting site
INTERNET *Enter the CONTROL NUMBER
www.proxyvote.com [ARROW] indicated to the right
*Follow the screen instructions
- ------------------ --------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
USAA01 KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
FUND NAME HERE
VOTE ON DIRECTORS
1. Election of Messrs. FOR WITHHOLD FOR ALL To withhold authority to
01) Davis ALL ALL EXCEPT vote, mark "For All Except"
02) Claus, __ __ __ and the write the nominee's
03) Peebles, number on the line below.
04) Reimherr, __________________________
05) Zucker,
06) Mrs. Dreeben,
07) Dr. Mason, and
08) Dr. Starks
to the Board of Directors.
VOTE ON PROPOSALS FOR
IF YOU WOULD LIKE TO VOTE "FOR" ALL
PROPOSALS PLEASE MARK BOX TO THE RIGHT. __
2. To approve the amendment or elimination of
certain investment restrictions regarding the
following:
FOR AGAINST ABSTAIN
2A. investing in a single issuer __ __ __
3. To approve a change in the Gold
Fund's concentration policy. __ __ __
2E. purchasing or selling real
estate __ __ __
2D. purchasing or selling commodities __ __ __
2C. issuing senior securities __ __ __
2B. purchasing securities of other
investment companies __ __ __
4. To approve a new advisory
agreement with USAA Investment
Management Company. __ __ __
5. NOT APPLICABLE
_______________________________________ _____________________________
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
===============================================================================
[CARD #2
THIS CARD IS FOR THE AGGRESSIVE GROWTH FUND, CORNERSTONE STRATEGY FUND,
GROWTH & INCOME FUND, GROWTH AND TAX STRATEGY FUND, GROWTH FUND, INCOME
FUND, INTERNATIONAL FUND, MONEY MARKET FUND, SHORT-TERM BOND FUND, AND
WORLD GROWTH FUND]
[USAA] USAA
[EAGLE] FAMILY
[LOGO] OF FUNDS
P.O. BOX 47110
SAN ANTONIO, TX 78265-8110
FUND NAME HERE
PROXY FOR THE SHAREHOLDER MEETING
2 P.M., Central Daylight Time, on July 20, 2001
The undersigned hereby appoints Christopher W. Claus, David G.
Peebles, and Richard A. Zucker, and each of them, with full power of
substitution, as proxies of the undersigned to vote all shares of
stock that the undersigned is entitled in any capacity to vote at the
above-stated shareholder meeting, and at any and all adjournments or
postponements thereof (the "Shareholder Meeting"), on the matters set
forth in this Proxy Card, and, in their discretion, upon all matters
incident to the conduct of the Shareholder Meeting and upon such
other matters as may properly be brought before the Shareholder
Meeting. This proxy revokes all prior proxies given by the
undersigned.
All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, the proxy
will be voted FOR approval of the applicable proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH
RESPECT TO THE FUNDS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR PROXY CARD.
-----------------------------------
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED
-----------------------------------
[ARROWS]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
- ------------------ --------------------------------
*Dail the toll-free number
TELEPHONE [ARROW] *Enter the CONTROL NUMBER
1-800-690-6903 indicated to the right
*Follow the voice instructions
- ------------------ --------------------------------
- ------------------ --------------------------------
*Log on to the voting site
INTERNET *Enter the CONTROL NUMBER
www.proxyvote.com [ARROW] indicated to the right
*Follow the screen instructions
- ------------------ --------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
USAA02 KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
FUND NAME HERE
VOTE ON DIRECTORS
1. Election of Messrs. FOR WITHHOLD FOR ALL To withhold authority to
01) Davis ALL ALL EXCEPT vote, mark "For All Except"
02) Claus, __ __ __ and the write the nominee's
03) Peebles, number on the line below.
04) Reimherr, __________________________
05) Zucker,
06) Mrs. Dreeben,
07) Dr. Mason, and
08) Dr. Starks to the
Board of Directors.
VOTE ON PROPOSALS FOR
IF YOU WOULD LIKE TO VOTE "FOR" ALL
PROPOSALS PLEASE MARK BOX TO THE RIGHT. __
2. To approve the amendment or elimination of
certain investment restrictions regarding the
following:
FOR AGAINST ABSTAIN
2A. investing in a single issuer __ __ __
2B. purchasing securities of other
investment companies __ __ __
2C. issuing senior securities __ __ __
2D. purchasing or selling commodities __ __ __
2E. purchasing or selling real estate __ __ __
4. To approve a new advisory
agreement with USAA Investment
Management Company. __ __ __
3. NOT APPLICABLE
4. To approve a new advisory agreement
with USAA Investment Management __ __ __
Company
5. NOT APPLICABLE
_______________________________________ _____________________________
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
===============================================================================
[CARD #3
THIS CARD IS FOR THE CALIFORNIA BOND FUND, CALIFORNIA MONEY MARKET FUND,
INTERMEIDATE-TERM FUND, LONG-TERM FUND, NEW YORK BOND FUND, NEW YORK
MONEY MARKET FUND, SHORT-TERM FUND, TAX EXEMPT MONEY MARKET FUND,
VIRGINIA BOND FUND, AND VIRGINIA MONEY MARKET FUND]
[USAA] USAA
[EAGLE] FAMILY
[LOGO] OF FUNDS
P.O. BOX 47110
SAN ANTONIO, TX 78265-8110
FUND NAME HERE
PROXY FOR THE SHAREHOLDER MEETING
2 P.M., Central Daylight Time, on July 20, 2001
The undersigned hereby appoints Christopher W. Claus, David G.
Peebles, and Richard A. Zucker, and each of them, with full power of
substitution, as proxies of the undersigned to vote all shares of
stock that the undersigned is entitled in any capacity to vote at the
above-stated shareholder meeting, and at any and all adjournments or
postponements thereof (the "Shareholder Meeting"), on the matters set
forth in this Proxy Card, and, in their discretion, upon all matters
incident to the conduct of the Shareholder Meeting and upon such
other matters as may properly be brought before the Shareholder
Meeting. This proxy revokes all prior proxies given by the
undersigned.
All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, the proxy
will be voted FOR approval of the applicable proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH
RESPECT TO THE FUNDS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR PROXY CARD.
-----------------------------------
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED
-----------------------------------
[ARROWS]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
- ------------------ --------------------------------
*Dail the toll-free number
TELEPHONE [ARROW] *Enter the CONTROL NUMBER
1-800-690-6903 indicated to the right
*Follow the voice instructions
- ------------------ --------------------------------
- ------------------ --------------------------------
*Log on to the voting site
INTERNET *Enter the CONTROL NUMBER
www.proxyvote.com [ARROW] indicated to the right
*Follow the screen instructions
- ------------------ --------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
USAA03 KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
FUND NAME HERE
VOTE ON DIRECTORS
1. Election of Messrs. FOR WITHHOLD FOR ALL To withhold authority to
01) Davis ALL ALL EXCEPT vote, mark "For All Except"
02) Claus, __ __ __ and the write the nominee's
03) Peebles, number on the line below.
04) Reimherr, __________________________
05) Zucker,
06) Mrs. Dreeben,
07) Dr. Mason, and
08) Dr. Starks to the
Board of Directors.
VOTE ON PROPOSALS FOR
IF YOU WOULD LIKE TO VOTE "FOR" ALL
PROPOSALS PLEASE MARK BOX TO THE RIGHT. __
2. To approve the amendment or elimination of
certain investment restrictions regarding the
following:
FOR AGAINST ABSTAIN
2A. investing in a single issuer __ __ __
2B. purchasing securities of other
investment companies __ __ __
2C. issuing senior securities __ __ __
2D. purchasing or selling commodities __ __ __
2E. NOT APPLICABLE
3. NOT APPLICABLE
4. To approve a new advisory agreement
with USAA Investment Management __ __ __
Company
5. NOT APPLICABLE
_______________________________________ _____________________________
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
===============================================================================
[CARD #4
THIS CARD IS FOR THE TREASURY MONEY MARKET TRUST AND GNMA TRUST]
[USAA] USAA
[EAGLE] FAMILY
[LOGO] OF FUNDS
P.O. BOX 47110
SAN ANTONIO, TX 78265-8110
FUND NAME HERE
PROXY FOR THE SHAREHOLDER MEETING
2 P.M., Central Daylight Time, on July 20, 2001
The undersigned hereby appoints Christopher W. Claus, David G.
Peebles, and Richard A. Zucker, and each of them, with full power of
substitution, as proxies of the undersigned to vote all shares of
stock that the undersigned is entitled in any capacity to vote at the
above-stated shareholder meeting, and at any and all adjournments or
postponements thereof (the "Shareholder Meeting"), on the matters set
forth in this Proxy Card, and, in their discretion, upon all matters
incident to the conduct of the Shareholder Meeting and upon such
other matters as may properly be brought before the Shareholder
Meeting. This proxy revokes all prior proxies given by the
undersigned.
All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, the proxy
will be voted FOR approval of the applicable proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH
RESPECT TO THE FUNDS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR PROXY CARD.
-----------------------------------
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED
-----------------------------------
[ARROWS]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
- ------------------ --------------------------------
*Dail the toll-free number
TELEPHONE [ARROW] *Enter the CONTROL NUMBER
1-800-690-6903 indicated to the right
*Follow the voice instructions
- ------------------ --------------------------------
- ------------------ --------------------------------
*Log on to the voting site
INTERNET *Enter the CONTROL NUMBER
www.proxyvote.com [ARROW] indicated to the right
*Follow the screen instructions
- ------------------ --------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
USAA04 KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
FUND NAME HERE
VOTE ON DIRECTORS
1. Election of Messrs. FOR WITHHOLD FOR ALL To withhold authority to
01) Davis ALL ALL EXCEPT vote, mark "For All Except"
02) Claus, __ __ __ and the write the nominee's
03) Peebles, number on the line below.
04) Reimherr, __________________________
05) Zucker,
06) Mrs. Dreeben,
07) Dr. Mason, and
08) Dr. Starks to the
Board of Directors.
VOTE ON PROPOSALS FOR
IF YOU WOULD LIKE TO VOTE "FOR" ALL
PROPOSALS PLEASE MARK BOX TO THE RIGHT. __
2. To approve the amendment or elimination of
certain investment restrictions regarding the
following:
FOR AGAINST ABSTAIN
2A. investing in a single issuer __ __ __
2B. NOT APPLICABLE
2C. issuing senior securities __ __ __
2D. NOT APPLICABLE
2E. NOT APPLICABLE
3. NOT APPLICABLE
4. To approve a new advisory agreement
with USAA Investment Management __ __ __
Company
5. NOT APPLICABLE
_______________________________________ _____________________________
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
===============================================================================
[CARD #5
THIS CARD IS FOR THE GROWTH STRATEGY FUND, BALANCED STRATEGY FUND, CAPITAL
GROWTH FUND, EMERGING MARKETS FUND, FIRST START GROWTH FUND, FLORIDA
TAX-FREE INCOME FUND, FLORIDA TAX-FREE MONEY MARKET FUND, HIGH-YIELD
OPPORTUNITIES FUND, INTERMEDIATE-TERM BOND FUND, SCIENCE & TECHNOLOGY
FUND, SMALL CAP STOCK FUND, AND INCOME STRATEGY FUND]
[USAA] USAA
[EAGLE] FAMILY
[LOGO] OF FUNDS
P.O. BOX 47110
SAN ANTONIO, TX 78265-8110
FUND NAME HERE
PROXY FOR THE SHAREHOLDER MEETING
2 P.M., Central Daylight Time, on July 20, 2001
The undersigned hereby appoints Christopher W. Claus, David G.
Peebles, and Richard A. Zucker, and each of them, with full power of
substitution, as proxies of the undersigned to vote all shares of
stock that the undersigned is entitled in any capacity to vote at the
above-stated shareholder meeting, and at any and all adjournments or
postponements thereof (the "Shareholder Meeting"), on the matters set
forth in this Proxy Card, and, in their discretion, upon all matters
incident to the conduct of the Shareholder Meeting and upon such
other matters as may properly be brought before the Shareholder
Meeting. This proxy revokes all prior proxies given by the
undersigned.
All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, the proxy
will be voted FOR approval of the applicable proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH
RESPECT TO THE FUNDS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR PROXY CARD.
-----------------------------------
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED
-----------------------------------
[ARROWS]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
- ------------------ --------------------------------
*Dail the toll-free number
TELEPHONE [ARROW] *Enter the CONTROL NUMBER
1-800-690-6903 indicated to the right
*Follow the voice instructions
- ------------------ --------------------------------
- ------------------ --------------------------------
*Log on to the voting site
INTERNET *Enter the CONTROL NUMBER
www.proxyvote.com [ARROW] indicated to the right
*Follow the screen instructions
- ------------------ --------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
USAA05 KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
FUND NAME HERE
VOTE ON DIRECTORS
1. Election of Messrs. FOR WITHHOLD FOR ALL To withhold authority to
01) Davis ALL ALL EXCEPT vote, mark "For All Except"
02) Claus, __ __ __ and the write the nominee's
03) Peebles, number on the line below.
04) Reimherr, __________________________
05) Zucker,
06) Mrs. Dreeben,
07) Dr. Mason, and
08) Dr. Starks to the
Board of Directors.
VOTE ON PROPOSALS FOR
IF YOU WOULD LIKE TO VOTE "FOR" ALL
PROPOSALS PLEASE MARK BOX TO THE RIGHT. __
2. To approve the amendment or elimination of
certain investment restrictions regarding the
following:
FOR AGAINST ABSTAIN
2A. investing in a single issuer __ __ __
2B. NOT APPLICABLE
2C. NOT APPLICABLE
2D. NOT APPLICABLE
2E. NOT APPLICABLE
3. NOT APPLICABLE
4. To approve a new advisory agreement
with USAA Investment Management __ __ __
Company
5. NOT APPLICABLE
_______________________________________ _____________________________
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
===============================================================================
[CARD #6
THIS CARD IS FOR THE S&P 500 INDEX FUND]
[USAA] USAA
[EAGLE] FAMILY
[LOGO] OF FUNDS
P.O. BOX 47110
SAN ANTONIO, TX 78265-8110
FUND NAME HERE
PROXY FOR THE SHAREHOLDER MEETING
2 P.M., Central Daylight Time, on July 20, 2001
The undersigned hereby appoints Christopher W. Claus, David G.
Peebles, and Richard A. Zucker, and each of them, with full power of
substitution, as proxies of the undersigned to vote all shares of
stock that the undersigned is entitled in any capacity to vote at the
above-stated shareholder meeting, and at any and all adjournments or
postponements thereof (the "Shareholder Meeting"), on the matters set
forth in this Proxy Card, and, in their discretion, upon all matters
incident to the conduct of the Shareholder Meeting and upon such
other matters as may properly be brought before the Shareholder
Meeting. This proxy revokes all prior proxies given by the
undersigned.
All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, the proxy
will be voted FOR approval of the applicable proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH
RESPECT TO THE FUNDS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR PROXY CARD.
-----------------------------------
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED
-----------------------------------
[ARROWS]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
- ------------------ --------------------------------
*Dail the toll-free number
TELEPHONE [ARROW] *Enter the CONTROL NUMBER
1-800-690-6903 indicated to the right
*Follow the voice instructions
- ------------------ --------------------------------
- ------------------ --------------------------------
*Log on to the voting site
INTERNET *Enter the CONTROL NUMBER
www.proxyvote.com [ARROW] indicated to the right
*Follow the screen instructions
- ------------------ --------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
USAA06 KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
FUND NAME HERE
VOTE ON DIRECTORS
1. Election of Messrs. FOR WITHHOLD FOR ALL To withhold authority to
01) Davis ALL ALL EXCEPT vote, mark "For All Except"
02) Claus, __ __ __ and the write the nominee's
03) Peebles, number on the line below.
04) Reimherr, __________________________
05) Zucker,
06) Mrs. Dreeben,
07) Dr. Mason, and
08) Dr. Starks
to the Board of Directors.
VOTE ON PROPOSALS FOR
IF YOU WOULD LIKE TO VOTE "FOR" ALL
PROPOSALS PLEASE MARK BOX TO THE RIGHT. __
FOR AGAINST ABSTAIN
2A. NOT APPLICABLE
2B. NOT APPLICABLE
2C. NOT APPLICABLE
2D. NOT APPLICABLE
2E. NOT APPLICABLE
3. NOT APPLICABLE
4. NOT APPLICABLE
5A. To approve a Sub-Advisory Agreement
for the S&P 500 Index Fund. __ __ __
5B. To approve a proposal to permit IMCO
to change sub-advisers for the S&P
500 Index Fund without obtaining
shareholder approval. __ __ __
_______________________________________ _____________________________
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
===============================================================================
[CARD #7
THIS CARD IS FOR THE EXTENDED MARKET INDEX FUND, GLOBAL TITANS INDEX FUND,
AND NASDAQ-100 INDEX FUND]
[USAA] USAA
[EAGLE] FAMILY
[LOGO] OF FUNDS
P.O. BOX 47110
SAN ANTONIO, TX 78265-8110
FUND NAME HERE
PROXY FOR THE SHAREHOLDER MEETING
2 P.M., Central Daylight Time, on July 20, 2001
The undersigned hereby appoints Christopher W. Claus, David G.
Peebles, and Richard A. Zucker, and each of them, with full power of
substitution, as proxies of the undersigned to vote all shares of
stock that the undersigned is entitled in any capacity to vote at the
above-stated shareholder meeting, and at any and all adjournments or
postponements thereof (the "Shareholder Meeting"), on the matters set
forth in this Proxy Card, and, in their discretion, upon all matters
incident to the conduct of the Shareholder Meeting and upon such
other matters as may properly be brought before the Shareholder
Meeting. This proxy revokes all prior proxies given by the
undersigned.
All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, the proxy
will be voted FOR approval of the applicable proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS WITH
RESPECT TO THE FUNDS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR PROXY CARD.
-----------------------------------
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED
-----------------------------------
[ARROWS]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
- ------------------ --------------------------------
*Dail the toll-free number
TELEPHONE [ARROW] *Enter the CONTROL NUMBER
1-800-690-6903 indicated to the right
*Follow the voice instructions
- ------------------ --------------------------------
- ------------------ --------------------------------
*Log on to the voting site
INTERNET *Enter the CONTROL NUMBER
www.proxyvote.com [ARROW] indicated to the right
*Follow the screen instructions
- ------------------ --------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
USAA07 KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
FUND NAME HERE
VOTE ON DIRECTORS
1. Election of Messrs. FOR WITHHOLD FOR ALL To withhold authority to
01) Davis ALL ALL EXCEPT vote, mark "For All Except"
02) Claus, __ __ __ and the write the nominee's
03) Peebles, number on the line below.
04) Reimherr, __________________________
05) Zucker,
06) Mrs. Dreeben,
07) Dr. Mason, and
08) Dr. Starks to the
Board of Directors.
2A. NOT APPLICABLE
2B. NOT APPLICABLE
2C. NOT APPLICABLE
2D. NOT APPLICABLE
2E. NOT APPLICABLE
3. NOT APPLICABLE
4. NOT APPLICABLE
5. NOT APPLICABLE
_______________________________________ _____________________________
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
===============================================================================
PRELIMINARY PROXY SUMMARY
USAA USAA Family of Funds
EAGLE Post Office Box 47110
LOGO San Antonio, Texas 78265-8110
A MESSAGE FROM THE CHAIRMAN
May 25, 2001
Dear Shareholder:
I am writing to you to ask for your vote on several important matters that
affect your investment in your USAA fund(s). The proposals described in the
enclosed materials involve a wide range of matters relevant to the funds'
ongoing operations.
WE NEED YOUR APPROVAL OF THESE PROPOSALS SO THAT YOUR ASSOCIATION
WILL BE ABLE TO FACILITATE YOUR INVESTMENT NEEDS IN THE FUTURE WITH
THE QUALITY YOU EXPECT. AFTER CAREFULLY CONSIDERING EACH OF THESE
PROPOSALS, YOUR FUNDS' DIRECTORS, INCLUDING MYSELF, RECOMMEND THAT
YOU VOTE IN FAVOR OF ALL OF THE PROPOSALS.
Although we would like to have each shareholder attend the shareholder meeting,
we realize this is not always possible. Whether or not you plan to be present,
we need your vote. We have taken several steps to help you in casting a vote:
> First, in addition to the traditional method of returning your
proxy card by mail, you may cast your vote on the Internet at
WWW.PROXYVOTE.COM or by calling toll-free 1-800-690-6903. However
you choose to cast your vote, we urge you to do so in a timely
manner.
> Second, while we encourage you to read the enclosed proxy
statement, we have attached on the following pages a summary of
the proposals to assist you in understanding them.
You may receive a telephone call from either a member service representative of
USAA Investment Management Company or a representative from Georgeson
Shareholder Communications, Inc. encouraging you to return your proxy. When
shareholders don't promptly cast their votes, the additional expense of
follow-up communications must be incurred. All shareholders benefit from timely
voting. PLEASE DO NOT SET THIS PROXY ASIDE FOR ANOTHER TIME.
Your vote is very important to us. I want you to know we appreciate the trust
you place in USAA to assist you in achieving your financial goals and the time
and consideration that I'm confident you will give in voting on these
proposals.
Sincerely yours,
Robert G. Davis
CHAIRMAN OF THE BOARD
SUMMARY OF THE PROPOSALS
PROPOSAL 1 - ELECTION OF DIRECTORS
AT THE MEETING, YOU WILL BE ASKED TO ELECT THE FUNDS' BOARD OF DIRECTORS.
* WHY ARE WE ELECTING DIRECTORS NOW?
By electing directors at this time, the Funds may be able to delay the
time at which another shareholder meeting is required for the election of
directors, which will result in a savings of the time and expense
associated with holding such a meeting.
* WHICH NOMINEES ARE NEW TO THE BOARD?
Each of the eight nominees currently serves on the Funds' board of
directors. Six of the eight directors were elected in 1999. Christopher W.
Claus and Laura T. Starks, Ph.D. were appointed by the board, but have not
been elected by shareholders. Mr. Claus was appointed to the board of
directors in February 2001 shortly after his appointment as president and
chief executive officer of IMCO. Prior to becoming IMCO's president and
CEO, Mr. Claus was senior vice president of IMCO investment sales and
service. Laura T. Starks, Ph.D. was appointed to the board in May 2000.
Dr. Starks is the Charles E. and Sarah M. Seay Regents Chair Professor of
Finance at the University of Texas in Austin.
PROPOSAL 2 - AMENDMENT OR ELIMINATION OF CERTAIN INVESTMENT RESTRICTIONS
AT THE MEETING, YOU WILL BE ASKED TO APPROVE A PROPOSAL TO AMEND OR ELIMINATE
INVESTMENT RESTRICTIONS FOR CERTAIN FUNDS.
* WHY IS THE BOARD PROPOSING THESE CHANGES?
The board is proposing these changes because it believes developments in
the rules governing mutual funds have left many of the existing investment
restrictions outdated. The board is concerned that these restrictions
could unnecessarily limit the Funds' operations going forward. The board
believes that by approving these changes, IMCO, in managing the Funds'
portfolios, will be able to adapt much more quickly in changing investment
environments. It is anticipated that the increased standardization that
would come with these changes will help to promote operational
efficiencies and facilitate monitoring of compliance with investment
restrictions. In addition, the board believes that approval of these
proposals may reduce the need for future shareholder meetings, thereby
reducing the Funds' ongoing costs of operation.
* WILL THESE CHANGES TO CERTAIN INVESTMENT RESTRICTIONS MATERIALLY AFFECT
HOW THE FUNDS ARE MANAGED?
Although the proposed changes generally give IMCO broader authority to
make certain investments or engage in certain practices, IMCO does not
currently intend to change in any material way the principal investment
strategies or operations of any fund. By approving these changes, IMCO
will be able to remain more competitive when new investment strategies and
techniques develop and alternatives become available.
PROPOSAL 3 - APPROVAL OF A CHANGE IN GOLD FUND'S CONCENTRATION POLICY
* WHY IS THE BOARD PROPOSING THIS CHANGE?
The Fund's current policy restricts IMCO's ability to invest the Fund's
assets in equity securities of companies principally engaged in the
exploration, mining or processing of precious metals and minerals other
than gold. The board believes that the current policy unduly impairs the
Fund's ability to achieve its stated objectives. If this proposal is
approved by shareholders, the Fund will have increased flexibility with
respect to investing in equity securities of companies principally engaged
in the exploration, mining or processing of all types of precious metals
and minerals, including gold.
* WILL THE NAME OF THE FUND CHANGE AS A RESULT OF A CHANGE IN ITS
CONCENTRATION POLICY?
Yes. If the change in concentration policy is approved by the
shareholders, the name of the Gold Fund will be changed to accurately
reflect the investment focus of the Fund. The proposed name of the Fund
will be the "Precious Metals and Minerals Fund." Consistent with its new
name, the Fund will invest at least 80% of its assets in equity securities
of companies principally engaged in the exploration, mining or processing
of gold, and other precious metals and minerals.
PROPOSAL 4 - APPROVAL OF NEW ADVISORY AGREEMENTS WITH USAA IMCO
AT THE MEETING, YOU WILL BE ASKED TO APPROVE A NEW ADVISORY AGREEMENT WITH IMCO
FOR EACH FUND, OTHER THAN THE S&P 500 INDEX FUND, THE GLOBAL TITANS INDEX FUND,
THE NASDAQ-100 INDEX FUND AND THE EXTENDED MARKET INDEX FUND (THE INDEX FUNDS).
THE NEW AGREEMENT IS PART OF A BROADER INITIATIVE TO RESTRUCTURE THE SERVICE
AND FEE ARRANGEMENTS FOR THESE FUNDS WITH IMCO AND OTHER USAA COMPANIES.
* WHY DO THE FUNDS NEED NEW ADVISORY AGREEMENTS?
Currently, IMCO serves as the investment adviser and distributor for each
Fund and USAA Shareholder Account Services (SAS) serves as each Fund's
transfer agent. Under the existing advisory agreements, IMCO provides a
wide range of administrative and shareholder services for each Fund, in
addition to investment management services. Some of these administrative
and shareholder services may also be provided by IMCO as the distributor
of the Funds (for which IMCO receives no fees) and by SAS as the transfer
agent for the Funds (for which SAS receives a fee). The board believes
that it would be in the best interests of shareholders to restructure the
service and fee arrangements with IMCO and SAS to more fairly and
equitably match the fees charged with the services provided in a manner
that is consistent with current industry practice.
* HOW WILL THE NEW ARRANGEMENTS AFFECT MY FUND?
Under the new arrangements, IMCO and SAS will continue to provide every
Fund with the full package of advisory, distribution, transfer agency,
administrative and shareholder services currently being provided. After
giving effect to fee waivers and expense caps by IMCO, the overall fees
for these services will increase for some Funds and decrease or remain the
same for other Funds. Importantly, if the new arrangements had been in
effect for the most recently completed fiscal years, each Fund's total
expense ratio would have been less than the average expense ratio for its
peer group of mutual funds, and in some cases significantly less. In fact,
in the aggregate, the average expense ratio of all USAA mutual funds would
have been approximately 18% below the average of the Funds' peer groups.
This is even after the effects of a performance adjustment covering all
USAA Funds except for money market and index funds. The effect on each
Fund is provided in the proxy statement.
* WILL THE NEW ADVISORY AGREEMENTS CHANGE THE WAY ADVISORY FEES ARE
CALCULATED?
The new advisory agreements will provide for a base advisory fee that is
the same for each Fund as the current fee. Under the new agreement this
base fee will be adjusted for each Fund (other than the USAA money market
funds and Index Funds) based on the actual performance of the Fund, such
that the fee will increase if the Fund outperforms its benchmark and
decrease by an equal amount if the Fund underperforms its benchmark. By
implementing performance-based fees across a broad array of BOTH equity
and fixed income funds, the interests of IMCO will be further aligned with
the interests of shareholders in a way unprecedented in the mutual fund
industry.
* HOW DOES THE FUNDS' BOARD OF DIRECTORS RECOMMEND I VOTE ON THIS PROPOSAL?
The board has given careful consideration to this proposal AND UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS APPROVE THE PROPOSAL. The board believes that
the new arrangements are fair and equitable for IMCO, the Funds, and the
Funds' shareholders and that the new arrangements will permit IMCO and its
affiliated companies to continue to (1) attract and retain the high
quality of investment professionals and support staff necessary to
maximize the performance of the Funds and (2) maintain the high quality of
services expected by our shareholders through investments in technology
for improved shareholder communication systems. In summary, the Funds'
board of
directors believes that by enhancing competitive performance and USAA
caliber service delivery while maintaining below-average fees and expenses
upon approval, the new arrangements will result in a better overall value
for the USAA Fund shareholder.
PROPOSAL 5 - APPROVAL OF A SUB-ADVISORY AGREEMENT FOR THE S&P 500 INDEX FUND
AND APPROVAL OF A PROPOSAL TO PERMIT IMCO TO CHANGE SUB-ADVISERS
IN THE FUTURE FOR THE S&P 500 INDEX FUND WITHOUT SHAREHOLDER
APPROVAL
AT THE MEETING, YOU WILL BE ASKED TO APPROVE A SUB-ADVISORY AGREEMENT BETWEEN
IMCO AND DEUTSCHE ASSET MANAGEMENT, INC. (DEUTSCHE) WITH RESPECT TO THE S&P 500
Index Fund, and to approve a proposal that will permit IMCO to change
sub-advisers in the future for the S&P 500 Index Fund without obtaining
shareholder approval.
* WHY ARE THESE PROPOSALS BEING PRESENTED?
Currently, the Fund invests all of its assets in another mutual fund
managed by Deutsche that also seeks to track the performance of the S&P
500 Index. The board believes that the Fund may be able to track more
closely the performance of the S&P 500 Index by withdrawing its assets
from the other mutual fund and directing IMCO to manage the assets using
Deutsche as its sub-adviser. IMCO is not permitted to hire Deutsche as a
sub-adviser, however, without first obtaining shareholder approval.
In addition, the board has determined that it would be in the best
interest of shareholders for IMCO to have the ability to change
sub-advisers to the Fund in the future without first obtaining shareholder
approval. The Fund and IMCO have applied to the Securities and Exchange
Commission (SEC) for an order that would permit IMCO to change
sub-advisers for the Fund without first calling a special shareholder
meeting and obtaining shareholder approval. By approving this proposal,
subject to the Fund receiving the order requested from the SEC and with
the approval of the board, you will be authorizing IMCO to change
sub-advisers in the future without first obtaining shareholder approval.
* HOW WILL THE FUND BENEFIT FROM THESE PROPOSALS?
If these proposals are approved, IMCO will hire Deutsche as a sub-adviser
for the Fund, and Deutsche will directly manage the day-to-day investment
activities of the Fund. The board believes the Fund may be able to track
more closely the performance of the S&P 500 Index by operating in this
manner.
In addition, if the SEC issues the order requested by IMCO and the Fund,
IMCO will be able to change sub-advisers for the Fund in the future
without the Fund incurring the time and expense of a shareholder meeting.
As the Fund's adviser, IMCO will be responsible for overseeing the
performance of the sub-adviser and recommending to the board when it may
be in the Fund's best interests to change sub-advisers. The board would
always be required to approve the appointment or change of sub-advisers
and you would always be notified when this occurs.
34610-0501