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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] 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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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
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PRELIMINARY COPY
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 PORXY CARD.
TO VOTE ON THE INTERNET
[GRAPHIC] 1. Go to WWW.PROXYVOTE.COM or the
"Proxy voting" link on 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
[GRAPHIC]
1. Call toll-free 1-800-690-6903.
2. Enter the 12-digit CONTROL NUMBER
on 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 1-800-531-8448 MONDAY THROUGH
FRIDAY FROM 7 A.M. TO 10 P.M. CENTRAL TIME (CT), SATURDAY FROM 8:30 A.M. TO 5
P.M. CT, AND ON SUNDAY FROM 10:30 A.M. AND 7 P.M. CT. 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 NOTICE OF SPECIAL MEETING
EAGLE TO ALL SHAREHOLDERS
LOGO] OF THE FOLLOWING USAA FUNDS
AGGRESSIVE GROWTH FUND GROWTH AND TAX STRATEGY FUND
BALANCED STRATEGY FUND INCOME STOCK FUND
CAPITAL GROWTH FUND INTERNATIONAL FUND
CORNERSTONE STRATEGY FUND SCIENCE & TECHNOLOGY FUND
EMERGING MARKETS FUND SMALL CAP STOCK FUND
FIRST START GROWTH FUND VALUE FUND
GROWTH FUND WORLD GROWTH FUND
GROWTH & INCOME FUND
A shareholder meeting of the USAA Aggressive Growth Fund, USAA Balanced Strategy
Fund, USAA Capital Growth Fund, USAA Cornerstone Strategy Fund, USAA Emerging
Markets Fund, USAA First Start Growth Fund, USAA Growth Fund, USAA Growth &
Income Fund, USAA Growth and Tax Strategy Fund, USAA Income Stock Fund, USAA
International Fund, USAA Science & Technology Fund, USAA Small Cap Stock Fund,
USAA Value Fund, and USAA World Growth Fund (each a Fund, or collectively
Funds), will be held on Friday, October 18, 2002, at 3 p.m., Central Time, at
the McDermott Auditorium in the USAA Building, 9800 Fredericksburg Road, San
Antonio, Texas 78288, for the following purposes:
1. To approve new investment advisory agreements with USAA Investment
Management Company (IMCO).
2. To approve new investment subadvisory agreements between IMCO and
subadvisers with respect to the Funds.
A. Wellington Management Company, LLP with respect to the USAA
Balanced Strategy Fund, the USAA Cornerstone Strategy Fund,
the USAA Growth & Income Fund, and the USAA Science &
Technology Fund.
B. Marsico Capital Management, LLC with respect to the USAA
Aggressive Growth Fund, the USAA First Start Growth Fund, and
the USAA Growth Fund.
C. MFS Investment Management with respect to the USAA Cornerstone
Strategy Fund, the USAA International Fund, and the USAA World
Growth Fund.
D. The Boston Company Asset Management, LLC with respect to the
USAA Emerging Markets Fund and the USAA Income Stock Fund.
E. Dresdner RCM Global Investors LLC with respect to the USAA
Growth Fund and the USAA Growth and Tax Strategy Fund.
F. Westwood Management Corporation with respect to the USAA
Income Stock Fund and the USAA Value Fund.
G. Batterymarch Financial Management, Inc. with respect to the
USAA Capital Growth Fund.
H. Eagle Asset Management, Inc. with respect to the USAA Small
Cap Stock Fund.
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3. To approve a proposal to permit IMCO, with the Funds' board
approval, to appoint and replace subadvisers, enter into
subadvisory agreements, and approve amendments to subadvisory
agreements on behalf of each Fund without further shareholder
approval.
4. To approve an amendment to the investment objective of the USAA
Growth Fund.
5. To approve an amendment to the investment objective of the USAA
Growth & Income Fund.
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
August 23, 2002
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WE URGE YOU TO VOTE ON THE INTERNET AT WWW.PROXYVOTE.COM OR USE
THE "PROXY VOTING" LINK ON USAA.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.
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USAA funds - 2
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PROXY STATEMENT
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This proxy statement will give you the information you need to vote on the
matters listed on pages 1 and 2. Much of the information in this proxy statement
is required under Securities and Exchange Commission (SEC) rules and, therefore,
is quite detailed. If there is anything you do not understand, please contact us
at 1-800-531-8448.
As an introductory matter, each Fund included as part of this proxy statement is
in one of two legal entities: USAA Mutual Fund, Inc. or USAA Investment Trust.
USAA Mutual Fund, Inc. is organized as a Maryland corporation, and as such is
governed by a board of directors. It may be referred to in this proxy statement
as the Company. USAA Investment Trust is organized as a Massachusetts business
trust, and as such is governed by a board of trustees. It may be referred to in
this proxy statement as the Trust. Both entities are governed by boards of
directors and trustees comprised of the same individuals for financial and
operational efficiencies.
For simplicity throughout the rest of this proxy statement and in the notice,
the board of directors and board of trustees of the two legal entities will be
identified simply as the Board of Directors or just the Board.
o WHO IS ASKING FOR MY VOTE?
The Funds' Board of Directors 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 page 1).
o WHAT ARE THE DIFFERENT WAYS I CAN CAST MY VOTE?
AS A SHAREHOLDER, YOU MAY VOTE IN ONE OF THE FOLLOWING FOUR WAYS:
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1. YOU MAY VOTE ON THE INTERNET AT WWW.PROXYVOTE.COM or use
the "Proxy Voting" link on USAA.COM.
2. You may 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.
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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.
o HOW DOES THE BOARD OF DIRECTORS RECOMMEND THAT I VOTE ON THESE PROPOSALS?
The Board of Directors unanimously recommends that you vote:
1. "FOR" THE APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENTS WITH USAA
INVESTMENT MANAGEMENT COMPANY (IMCO);
Proxy Statement - 3
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2. "FOR" THE APPROVAL OF NEW INVESTMENT SUBADVISORY AGREEMENTS
BETWEEN IMCO AND EACH PROPOSED SUBADVISER ON BEHALF OF THE FUNDS;
3. "FOR" THE APPROVAL OF A PROPOSAL TO PERMIT IMCO AND THE BOARD TO
APPOINT AND REPLACE SUBADVISERS, ENTER INTO SUBADVISORY
AGREEMENTS, AND APPROVE AMENDMENTS TO SUBADVISORY AGREEMENTS ON
BEHALF OF EACH FUND WITHOUT FURTHER SHAREHOLDER APPROVAL;
4. "FOR" THE APPROVAL OF AN AMENDMENT TO THE INVESTMENT OBJECTIVE OF
THE USAA GROWTH FUND; AND
5. "FOR" THE APPROVAL OF AN AMENDMENT TO THE INVESTMENT OBJECTIVE OF
THE USAA GROWTH & INCOME FUND.
o WHO IS ELIGIBLE TO VOTE?
Shareholders of record of each Fund as of the close of business on
August 23, 2002, are entitled to vote at the shareholder meeting or any
adjournment thereof. The Notice of Special Meeting, the proxy card, the
letter to shareholders, and the proxy statement were mailed on or about
August 23, 2002, to shareholders of record.
Each share is entitled to one vote for each full share held and a
fractional vote for each fractional share held. Shares represented by
duly executed proxies will be voted in accordance with shareholders'
instructions. If you sign the proxy, but do not 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 at the discretion of the proxies.
Shareholders of every Fund will not be entitled to vote on every
proposal. The table on pages 6 and 7 of this proxy statement indicates
on a Fund-by-Fund basis the proposals on which shareholders of each
Fund will be entitled to vote.
USAA funds - 4
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[This page left blank intentionally]
Proxy Statement - 5
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PROPOSAL 1 PROPOSAL 2
APPROVE ADVISORY APPROVE SUBADVISORY
AGREEMENTS WITH IMCO AGREEMENTS WITH SUBADVISERS
USAA FUNDS
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AGGRESSIVE GROWTH FUND X 2-B
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BALANCED STRATEGY FUND X 2-A
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CAPITAL GROWTH FUND X 2-G
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CORNERSTONE STRATEGY FUND X 2-A,2-C
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EMERGING MARKETS FUND X 2-D
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FIRST START GROWTH FUND X 2-B
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GROWTH FUND X 2-B, 2-E
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GROWTH & INCOME FUND X 2-A
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GROWTH AND TAX STRATEGY FUND X 2-E
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INCOME STOCK FUND X 2-D, 2-F
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INTERNATIONAL FUND X 2-C
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SCIENCE & TECHNOLOGY FUND X 2-A
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SMALL CAP STOCK FUND X 2-H
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VALUE FUND X 2-F
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WORLD GROWTH FUND X 2-C
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USAA FUNDS - 6
PROPOSAL 3
APPROVE PROPOSAL TO PERMIT PROPOSAL 4 PROPOSAL 5
IMCO AND THE BOARD TO APPOINT APPROVE AN AMENDMENT APPROVE AN AMENDMENT TO
AND REPLACE SUBADVISERS,ENTER INVESTMENT OBJECTIVE OF INVESTMENT OBJECTIVE OF
INTO SUBADVISORY AGREEMENTS, THE GROWTH FUND THE GROWTH & INCOME FUND
AND APPROVE AMENDMENTS TO
SUBADVISORY AGREEMENTS WITHOUT
FURTHER SHAREHOLDER APPROVAL
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X
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X
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X
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X
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X
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X
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X X
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X X
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X
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X
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X
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X
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X
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X
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X
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Proxy Statement - 7
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NEW INVESTMENT MANAGEMENT STRUCTURE
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The Funds' Board of Directors recently approved proposals by IMCO to restructure
the manner in which each Fund's assets are managed by having one or more
subadvisers directly manage all or a portion of each Fund's assets, subject to
oversight by IMCO and the Board. On June 26, 2002, the Funds' Board of
Directors, including a majority of the Board members who are not "interested
persons" as that term is defined in Section 2(a)(19) of the Investment Company
Act of 1940 (Independent Board Members), voted to terminate the previous
investment advisory agreement between each Fund and IMCO (Former Agreements) and
approve both new interim investment advisory agreements with IMCO (Interim
Agreements) and interim investment subadvisory agreements (Interim Subadvisory
Agreements) between IMCO and each subadviser. These interim agreements, which
took effect on June 28, 2002, were implemented without shareholder approval in
accordance with Rule 15a-4 under the Investment Company Act of 1940, as amended
(1940 Act). The Board believes that each Fund will be able to achieve better
performance consistent with the investment objectives and strategies of each
Fund by employing the proposed subadvisers to manage each Fund's assets (as
allocated from time to time by IMCO).
Under the Interim Agreements, IMCO serves as investment adviser and manager for
each Fund and provides portfolio management oversight of the portion of the
Fund's assets managed by each subadviser. Each Fund pays IMCO the same advisory
fee under the Interim Agreements that it paid under the Former Agreements. Under
the Interim Subadvisory Agreements, each subadviser invests the Fund's assets
(as allocated from time to time by IMCO) for which IMCO, and not each Fund, pays
the subadviser an annual fee.
Under Rule 15a-4, the Interim Agreements and the Interim Subadvisory Agreements
typically will terminate 150 days after the date on which the Former Agreements
terminated. Thus, the Board is asking shareholders to approve new investment
advisory agreements between IMCO and each Fund (Proposed Agreements) as
described in Proposal 1 before the Interim Agreements terminate and investment
subadvisory agreements between IMCO and the applicable subadvisers (Subadvisory
Agreements) as identified and described in Proposal 2 before the Interim
Subadvisory Agreements terminate. If approved by shareholders, the Proposed
Agreements and the Subadvisory Agreements will take effect upon such approval.
PROPOSAL 1
APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENTS
WITH IMCO
o WHY ARE SHAREHOLDERS BEING ASKED TO VOTE ON THIS PROPOSAL?
The Funds' Board of Directors recently approved proposals by IMCO to
restructure the manner in which each Fund's assets are managed. To
implement the new investment management arrangements promptly, the
Board, among other actions, terminated the Former Agreements between
the Funds and IMCO and approved the Interim Agreements with IMCO. IMCO
has served as each Fund's manager and investment adviser since each
Fund's inception. Under applicable regulations, the Interim Agreements
typically will terminate 150 days after the date on which the Former
Agreements terminated. Thus, the Board is asking Fund shareholders to
approve the Proposed Agreements before the Interim Agreements
terminate.
o WHAT ARE THE KEY PROVISIONS OF THE AGREEMENTS?
THE PROVISIONS OF THE PROPOSED, INTERIM, AND FORMER AGREEMENTS (EACH,
AN AGREEMENT AND, COLLECTIVELY, AGREEMENTS) ARE SUBSTANTIALLY SIMILAR.
THE FORMER AGREEMENTS WERE LAST APPROVED BY THE FUNDS' BOARD OF
DIRECTORS ON APRIL 24, 2002, AND BY SHAREHOLDERS ON JULY 20, 2001.
USAA funds - 8
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Under the Agreements, IMCO provides an investment program, carries out
the investment policies, and manages certain other affairs and business
of the Funds. IMCO is authorized, subject to the oversight of the
Board, to determine the selection of, amount of, and time to buy or
sell securities for the Funds. IMCO also is authorized to delegate to
subadvisers the direct management of all or a portion of each Fund's
assets, subject to approval by the Board. When subadvisers are
employed, IMCO's role focuses on oversight of the Funds' subadvisers,
rather than on directly managing the portion of the Funds' assets
allocated to subadvisers. Under the Former Agreements, IMCO directly
managed all of the Funds' assets. Under the Interim Agreements, IMCO
directly manages any fixed income portion of each Fund's assets,
provides portfolio management oversight, and recommends to the Board
the hiring, termination, and replacement of subadvisers to manage the
equity portion of each Fund's assets. Under the Proposed Agreements,
IMCO will continue to provide the same services it provides under the
Interim Agreements.
Each Agreement provides for an advisory fee based on the amount of net
assets under management, with an adjustment based on the actual
performance of each Fund. As a result, advisory fees payable by a Fund
to IMCO increase if the Fund outperforms its benchmark and decrease if
the Fund under-performs its benchmark. 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 base fee payable to IMCO under each Agreement will
remain unchanged. With respect to the USAA Aggressive Growth Fund, the
USAA Capital Growth Fund, and the USAA Growth & Income Fund only, the
relevant Proposed Agreement replaces the current benchmark index used
to calculate the performance-based portion of the advisory fees payable
to IMCO with a benchmark index that more closely correlates to the way
each Fund is now being managed under the new investment management
structure.
Each Agreement also provides that, except for the services and
facilities provided by IMCO, each Fund pays all other expenses incurred
in its operations. Expenses for which a Fund is 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 shares for sale, fees of independent board
members, 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.
Any description of the Proposed Agreements set forth herein is
qualified in its entirety by the actual Proposed Agreements, a form of
which is attached as Exhibit A.
o WHAT ARE THE DIFFERENCES BETWEEN THE AGREEMENTS?
As noted above, the provisions of the Agreements are substantially
similar. The only differences of note between the Proposed and Interim
Agreements, which stem primarily from the provisional nature of Rule
15a-4 under the 1940 Act, are as follows. First, the Interim Agreements
likely will be in effect for a maximum of 150 days, whereas the
Proposed Agreements initially would be in effect until July 31, 2004,
unless terminated sooner. Second, with respect to the USAA Aggressive
Growth Fund, the USAA Capital Growth Fund, and the USAA Growth & Income
Fund (New Benchmark Funds), the applicable Proposed Agreement would
authorize the use of a more appropriate Lipper benchmark index, in
light of the manner that each New Benchmark Fund's assets are being
managed under the new investment management structure, to calculate the
performance-based portion of the advisory fee paid to IMCO.
The Proposed and Former Agreements are also substantially similar
except with respect to the effective date, the description of IMCO's
duties and responsibilities with respect to the selection and oversight
of subadvisers, and, with respect to the New Benchmark Funds, the
benchmark index used to calculate
Proxy Statement - 9
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the performance-based portion of the advisory fee paid to IMCO.
Moreover, while the Agreements are substantially similar, IMCO's actual
role will differ with respect to the portion of a Fund's assets IMCO
delegates to one or more subadvisers. IMCO will now provide portfolio
oversight and will recommend to the Board the hiring, termination, and
replacement of subadvisers, rather than directly managing that portion
of the Fund's assets.
o WHEN WILL THE NEW INVESTMENT ADVISORY AGREEMENTS TAKE EFFECT?
If approved by shareholders, the Proposed Agreements will take effect
upon shareholder approval and will remain in effect until July 31,
2004. Thereafter, the Proposed Agreements will continue automatically
with respect to each Fund for successive years, provided that each is
specifically approved at least annually by a vote of a majority of the
Independent Board Members and (i) by a majority of all Board members or
(ii) by a vote of a majority of the outstanding shares of the Fund. A
Fund may terminate its Proposed Agreement, without penalty, by a vote
of the Board or a majority of the Fund's outstanding voting securities
upon 60 days' written notice to IMCO. IMCO may at any time terminate a
Proposed Agreement, without penalty, upon 60 days' written notice to
the applicable Funds. A Proposed Agreement automatically will terminate
without penalty in the event of its assignment as such term is defined
in Section 2(a)(4) of the 1940 Act.
If the proposal is not approved by shareholders of a Fund, the
applicable Interim Agreement will remain in effect for 150 days after
the date on which the applicable Former Agreement terminated, or such
later date as may be consistent with applicable regulations and
interpretations. In such event, the Board and IMCO will consider
appropriate alternative actions.
o WHAT IS THE DIFFERENCE IN THE INDEX USED TO CALCULATE THE PERFORMANCE
ADJUSTMENT TO THE ADVISORY FEE FOR THE NEW BENCHMARK FUNDS?
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. Applicable
regulatory guidance requires that an appropriate benchmark index be
used for calculating any performance-based fees. As previously noted,
one way in which the Proposed Agreements differ from the Former and
Interim Agreements is with respect to the benchmark index that will be
used to calculate the performance adjustment for the three New
Benchmark Funds.
USAA AGGRESSIVE GROWTH FUND
Currently, the benchmark index used for calculating the performance
adjustment for the Fund is the Lipper Mid-Cap Growth Funds Index
(Present Index). If this proposal is approved, the Lipper Large- Cap
Growth Funds Index (New Index) would be used to calculate the
performance adjustment for the Fund. Both indices are maintained by
Lipper, Inc. (Lipper). The Present Index tracks the total return
performance of the 30 largest mutual funds within this category, which
typically includes mutual funds that, by portfolio practice, invest at
least 75% of their equity assets in companies with market
capitalizations (on a three-year weighted basis) less than 300% of the
dollar-weighted median market capitalization of the middle 1,000
securities of the S&P SuperComposite 1500 Index. Mid-cap growth funds
typically have an above-average price-to-earnings ratio, price-to-book
ratio, and three-year sales-per-share growth value, compared to the S&P
MidCap 400 Index. The New Index tracks the total return performance of
the 30 largest mutual funds within this category, which typically
includes mutual funds that, by portfolio practice, invest at least 75%
of their equity assets in companies with market capitalizations (on a
three-year weighted basis) greater than 300% of the dollar-weighted
median market capitalization of the middle 1,000 securities of the S&P
1500 SuperComposite Index. Large-cap growth funds typically have an
above-average price-to-earnings ratio, price-to-book ratio, and
three-year sales-per-share growth value, compared to the S&P 500 Index.
USAA funds - 10
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Prior to the implementation of the new investment management structure,
the investment style used by IMCO when managing the Fund's assets most
closely correlated to the management style of mutual funds within the
Lipper Mid-Cap Growth Funds Index. In the selection process for a
subadviser for this Fund under the new structure, the search focused on
advisers that excelled in managing assets consistent with the
aggressive growth of capital, as opposed to focusing on advisers that
invested in companies with a particular capitalization. Marsico Capital
Management, LLC, the interim and pro-posed subadviser for the Fund,
uses an investment style when managing the Fund's assets that most
closely correlates to the management style of mutual funds within the
Lipper Large-Cap Growth Funds Index. As a result, both IMCO and the
Fund's Board believe that the New Index is now a more appropriate
benchmark for the Fund because it provides a better representation of
the performance of funds with comparable management styles.
USAA CAPITAL GROWTH FUND
Currently, the benchmark index used for calculating the performance
adjustment for the Fund is the Lipper Mid-Cap Growth Funds Index
(Present Index). If this proposal is approved, the Lipper Small-Cap
Growth Funds Index (New Index) would be used to calculate the
performance adjustment for the Fund. Both indices are maintained by
Lipper. The Present Index tracks the total return performance of the 30
largest mutual funds within this category, which typically includes
mutual funds that, by portfolio practice, invest at least 75% of their
equity assets in companies with market capitalizations (on a three-year
weighted basis) less than 300% of the dollar-weighted median market
capitalization of the middle 1,000 securities of the S&P 1500
SuperComposite Index. Mid-cap growth funds typically have an
above-average price-to-earnings ratio, price-to-book ratio, and
three-year sales-per-share growth value, compared to the S&P MidCap 400
Index. The New Index tracks the total return performance of the 30
largest mutual funds within this category, which typically includes
mutual funds that, by portfolio practice, invest at least 75% of their
equity assets in companies with market capitalizations (on a three-year
weighted basis) less than 250% of the dollar-weighted median of the
smallest 500 of the middle 1,000 securities of the S&P SuperComposite
1500 Index. Small-cap growth funds typically have an above-average
price-to-earnings ratio, price-to-book ratio, and three-year
sales-per-share growth value, compared to the S&P SmallCap 600 Index.
Prior to April 2002 and the implementation of the new investment
management structure, the investment style used by IMCO when managing
the Fund's assets most closely correlated to the management style of
mutual funds within the Lipper Mid-Cap Growth Funds Index. In April
2002, IMCO, on behalf of the Fund, notified Fund shareholders that
while the Fund could continue to purchase and hold securities of all
capitalizations, the emphasis would shift toward small-cap companies.
In the selection process for a subadviser for this Fund under the new
investment management structure, the search focused on advisers that
excelled in managing assets consistent with funds in the Lipper
Small-Cap Growth Funds Index. Batterymarch Financial Management, Inc.,
the interim and proposed subadviser for the Fund, uses an investment
style when managing the Fund's assets that more closely correlates to
the management style of mutual funds within the Lipper Small-Cap Growth
Funds Index. As a result, both IMCO and the Fund's Board believe that
the New Index is now a more appropriate benchmark for the Fund because
it provides a better representation of the performance of funds with
comparable management styles.
USAA GROWTH & INCOME FUND
Currently, the benchmark index used for calculating the performance
adjustment for the Fund is the Lipper Large-Cap Core Funds Index
(Present Index). If this proposal is approved, the Lipper Multi-Cap
Core Funds Index (New Index) would be used to calculate the performance
adjustment for the Fund. Both indices are maintained by Lipper. The
Present Index tracks the total return performance of the 30 largest
mutual funds within this category, which typically includes mutual
funds that, by portfolio practice, invest at least 75% of their equity
assets in companies with market capitalizations (on a three-year
weighted basis) greater than 300% of the dollar-weighted median market
capitalization
Proxy Statement - 11
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of the middle 1,000 securities of the S&P SuperComposite 1500 Index.
These funds typically have an average price-to-earnings ratio,
price-to-book ratio, and three-year sales-per-share growth value,
compared to the S&P 500 Index. The New Index tracks the total return
performance of the 30 largest mutual funds within this category, which
typically includes mutual 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 typically 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
SuperComposite 1500 Index. These funds typically have an average
price-to-earnings ratio, price-to-book ratio, and three-year
sales-per-share growth value, compared to the S&P SuperComposite 1500
Index.
The investment style used by IMCO when managing the Fund's assets more
closely correlated to the management style of mutual funds within the
Lipper Large-Cap Core Funds Index. In the selection process for a
subadviser for this Fund under the new investment management structure,
the search focused on advisers that excelled in managing assets
consistent with the funds in the Lipper Multi-Cap Core Funds Index.
IMCO believes that this slight adjustment will give the Fund greater
flexibility in the universe of companies in which the Fund may invest
while staying true to its mandate. Wellington Management Company, LLP,
the interim and proposed subadviser for the Fund, will use an
investment style when managing the Fund's assets that more closely
correlates to the management style of mutual funds within the Lipper
Multi-Cap Core Funds Index. As a result, both IMCO and the Fund's Board
believe that the New Index is now a more appropriate benchmark for the
Fund because it provides a better representation of the performance of
funds with comparable management styles.
The Agreements expressly provide that the Board, including a majority
of the Independent Board Members, may change the performance benchmark
for the Fund if the Board determines that another benchmark would be
more appropriate for measuring the Fund's performance. However, the SEC
staff currently interprets certain provisions of the 1940 Act as
requiring shareholder approval for a change in the benchmark index.
o HOW IS THE PERFORMANCE ADJUSTMENT UNDER THE AGREEMENTS CALCULATED?
The performance adjustments under all of the Agreements are calculated
in the same manner. The performance adjustment to the advisory fee is
calculated by comparing the Fund's performance to that of a benchmark
index over a specified period (referred to in the Agreements as the
Performance Period). Before a 36-month Performance Period has been
reached and beginning with the month ended July 31, 2002, the
Performance Period generally will consist of the period from August 1,
2001, to the current month. After a 36-month Performance Period has
been reached, the Performance Period will be a rolling 36-month period
consisting of the most recently completed month and the previous 35
months.
The Fund measures its investment performance by comparing the beginning
and ending redeemable value of an investment in the Fund during the
measurement period, assuming the reinvestment of dividends and capital
gain distributions during the period. Lipper uses this same methodology
when it measures the investment performance of the component mutual
funds within the applicable benchmark index.
Based on how much the performance of the Fund is over or under the
performance of the benchmark index during the Performance Period, an
appropriate adjustment rate (referred to in the Agreements as the
Adjustment Rate) is determined. The Adjustment Rate schedule for each
Fund is:
USAA funds - 12
- ---------------
OVER/UNDER PERFORMANCE PERFORMANCE ADJUSTMENT RATE
RELATIVE TO INDEX (IN BASIS POINTS AS A PERCENTAGE
(IN BASIS POINTS)* OF THE FUND'S AVERAGE NET ASSETS)
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
* Based on the difference between average annual performance of the
Fund and its benchmark index, rounded to the nearest basis point
(.01%).
If shareholders approve the Proposed Agreements for the New Benchmark
Funds, the Adjustment Rate will be based on each Fund's New Index
beginning with the first month following shareholder approval of the
Proposed Agreements. The Adjustment Rate for any preceding month will
still be based on the Previous Index.
The appropriate Adjustment Rate is multiplied by the average net assets
of the Fund during the Performance Period. This number is then
multiplied by a fraction, the numerator of which is the number of days
in the last month of the specified period and the denominator of which
is 365 (366 in leap years). The resulting number is then added to, or
subtracted from, the base fee.
Further information on the method for calculating the Performance
Adjustment to the advisory fee is found in Schedule B to Exhibit A of
this proxy statement.
o WILL THE FUNDS' TOTAL EXPENSES CHANGE AS A RESULT OF THE PROPOSED
AGREEMENTS?
Approval of the Proposed Agreements will result in no change to the
base fees charged to the Funds. With respect to the New Benchmark
Funds, the impact to the Performance Adjustment will depend on each
Fund's future performance relative to the applicable New Index. The new
indices will not be used to calculate the Performance Adjustment for
any periods prior to shareholder approval. Each Fund's total expense
ratio as set forth below for its most recent fiscal year would have
been the same under both the Former Agreements and the Proposed
Agreements. In subsequent periods, Performance Adjustments may affect
any of the Funds' total expense ratios.
Table 1 below provides data concerning each Fund's fees and expenses as
a percentage of average net assets for each Fund's most recently
completed fiscal year. The data reflects fees and expenses under both
the Former Agreements and the Proposed Agreements, if the Proposed
Agreements had been in effect during the same period.
TABLE 1
EXPENSES
=================================================================================================================
TOTAL ANNUAL
ADVISORY 12B-1 OTHER FUND OPERATING EXPENSE NET
FEES FEES EXPENSES EXPENSES REIMBURSEMENTS EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Aggressive Growth Fund .38% None .61% .99% - .99%
Balanced Strategy Fund .75% None .61% 1.36% .36% 1.00%
Capital Growth Fund .85% None 1.70% 2.55% 1.55% 1.00%
Cornerstone Strategy Fund .75% None .45% 1.20% .01% 1.19%
Proxy Statement - 13
--------------------
TOTAL ANNUAL
ADVISORY 12B-1 OTHER FUND OPERATING EXPENSE NET
FEES FEES EXPENSES EXPENSES REIMBURSEMENTS EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Emerging Markets Fund 1.00% None 1.52% 2.52% - 2.52%
First Start Growth Fund .75% None 2.27% 3.02% 1.57% 1.45%
Growth Fund .75% None .48% 1.23% .23% 1.00%
Growth & Income Fund .60% None .45% 1.05% - 1.05%
Growth and Tax Strategy Fund .50% None .35% .85% - .85%
Income Stock Fund .50% None .32% .82% - .82%
International Fund .75% None .59% 1.34% - 1.34%
Science & Technology Fund .75% None 1.04% 1.79% - 1.79%
Small Cap Stock Fund .75% None .95% 1.70% .30% 1.40%
Value Fund .75% None .73% 1.48% .33% 1.15%
World Growth Fund .75% None .67% 1.42% - 1.42%
==============================================================================================================
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, and redemption at the
end of each period. This example does not reflect the impact of any fee
waivers or expense reimbursements. Your actual cost may be higher or
lower.
================================================================================
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Aggressive Growth Fund $ 101 $ 315 $ 547 $ 1,213
Balanced Strategy Fund 138 431 745 1,635
Capital Growth Fund 257 791 1,350 2,875
Cornerstone Strategy Fund 122 381 660 1,455
Emerging Markets Fund 255 785 1,340 2,856
First Start Growth Fund 305 933 1,587 3,337
Growth Fund 125 390 676 1,489
Growth & Income Fund 107 334 579 1,283
Growth and Tax Strategy Fund 87 271 471 1,049
Income Stock Fund 84 262 455 1,014
International Fund 136 425 734 1,613
Science & Technology Fund 182 563 970 2,105
Small Cap Stock Fund 173 536 923 2,009
Value Fund 151 468 808 1,768
World Growth Fund 145 449 776 1,702
===============================================================================
USAA funds - 14
- ---------------
Table 2 below sets forth IMCO's advisory fees under the Former and
Interim Agreements for each Fund's most recently completed fiscal year.
Except as otherwise noted, IMCO would have received the same amount in
advisory fees had the Proposed Agreements been in effect for the most
recently completed fiscal year.
TABLE 2
IMCO ADVISORY FEES
===============================================================================
FUND NAME AMOUNT
- -------------------------------------------------------------------------------
Aggressive Growth Fund $ 3,536,408*
Balanced Strategy Fund 984,577
Capital Growth Fund -
Cornerstone Strategy Fund 7,180,124
Emerging Markets Fund 461,357
First Start Growth Fund -
Growth Fund 5,130,292
Growth & Income Fund 6,108,206
Growth and Tax Strategy Fund 1,103,636
Income Stock Fund 9,206,751
International Fund 2,805,580
Science & Technology Fund 2,307,453
Small Cap Stock Fund 430,303
Value Fund 184,823
World Growth Fund 2,131,034
* If the Proposed Agreement (including the applicable New Index) had been in
effect for the Aggressive Growth Fund's most recently completed fiscal
year, IMCO's advisory fees would have amounted to $3,528,373, which is
0.20% less than what IMCO's advisory fees were under the Former and Interim
Agreements.
================================================================================
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF IMCO?
IMCO is a wholly-owned indirect subsidiary of United Services
Automobile Association (USAA), a large, diversified financial services
organization. USAA's principal address is 9800 Fredericksburg Road, San
Antonio, Texas 78288. IMCO's affairs are conducted by its principal
executive officers and board of directors. The names, titles, and
principal occupations of the officers of the Funds (which includes the
current directors and principal executive officer of IMCO) are as
follows:
NAME, ADDRESS,* AND
POSITION WITH FUNDS PRINCIPAL OCCUPATION
Robert G. Davis Director and Chairman of the Board of Directors, President and Chief
Director and Chairman Executive Officer, USAA; Director and Chairman of the Board of
of the Board of Directors Directors, IMCO
Christopher W. Claus Chief Executive Officer, President, Director, and Vice Chairman of
President, Director, and the Board of Directors, IMCO
Vice Chairman of the
Board of Directors
Proxy Statement - 15
--------------------
Clifford A. Gladson Vice President, Fixed Income Investments, IMCO
Vice President
Stuart H. Wester Vice President, Equity Investments, IMCO
Vice President
Michael D. Wagner Senior Vice President, USAA Capital Corporation General Counsel,
Secretary USAA; Vice President, Secretary, and Counsel, IMCO
Mark S. Howard Senior Vice President, Securities Counsel and Compliance, and
Assistant Secretary Assistant Secretary, IMCO
David M. Holmes Senior Vice President, Senior Financial Officer, and Treasurer, IMCO
Treasurer
Roberto Galindo, Jr. Assistant Vice President, Mutual Fund Analysis & Support, IMCO
Assistant Treasurer
* The principal address for each officer and director is 9800
Fredericksburg Road, San Antonio, Texas 78288.
Because of their affiliation with the Funds' investment adviser, IMCO,
the Funds' directors and officers listed above receive no compensation
from the Funds for their services. There are no family relationships
among the Board members, officers, and managerial level employees of
the Funds or IMCO.
As of the record date, the Board members and officers of the Funds, as
a group, owned less than 1% of the Funds' outstanding shares.
o DOES IMCO OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL SERVICES TO
THE FUNDS?
IMCO also provides administrative and shareholder services to the Funds
pursuant to Administration and Servicing Agreements (Administration
Agreements) approved by the Board. Under the Administration Agreements,
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 furnishes necessary assistance to the Funds in the
preparation of required regulatory reports, including, among other
things, Fund registration statements and is responsible for the
provision and maintenance of a fidelity bond for the benefit of the
Funds.
For performing services under the Administration Agreements, each Fund
pays IMCO a fee of 0.15 of 1% (15 basis points) annually, except that
the Aggressive Growth Fund pays 0.25 of 1% (25 basis points) annually.
For the most recently completed fiscal year, Table 3 shows amounts paid
by each Fund to IMCO under its Administration Agreement.
USAA funds - 16
- ---------------
TABLE 3
ADMINISTRATION AND SHAREHOLDER SERVICING FEES
===========================================================
FUND NAME AMOUNT
- -----------------------------------------------------------
Aggressive Growth Fund $ 1,633,093
Balanced Strategy Fund 305,216
Capital Growth Fund -
Cornerstone Strategy Fund 1,215,924
Emerging Markets Fund 57,828
First Start Growth Fund -
Growth Fund 1,472,395
Growth & Income Fund 1,527,052
Growth and Tax Strategy Fund 272,088
Income Stock Fund 2,762,025
International Fund 461,092
Science & Technology Fund 461,491
Small Cap Stock Fund 143,587
Value Fund 66,127
World Growth Fund 349,175
===========================================================
From time to time, and consistent with obtaining the best overall terms
available, brokerage trans-actions may be effected through USAA
Brokerage Services (Broker), a discount brokerage service of IMCO. For
the most recently completed fiscal year, the Funds effected no
transactions through Broker and, as a result, paid no brokerage
commissions to Broker.
In addition, USAA Shareholder Account Services (SAS) serves as the
Funds' transfer agent. Table 4 below shows the aggregate amount of
transfer agency fees paid by each Fund during the most recently
completed fiscal year.
TABLE 4
TRANSFER AGENCY FEES
=======================================================
FUND NAME AMOUNT
- -------------------------------------------------------
Aggressive Growth Fund $ 3,116,195
Balanced Strategy Fund 707,543
Capital Growth Fund 228,624
Cornerstone Strategy Fund 1,904,407
Emerging Markets Fund 252,835
First Start Growth Fund 2,474,499
Growth Fund 2,390,511
Growth & Income Fund 2,245,498
Growth and Tax Strategy Fund 240,678
Income Stock Fund 2,178,858
International Fund 891,068
Science & Technology Fund 1,991,585
Small Cap Stock Fund 428,132
Value Fund 83,640
World Growth Fund 811,772
=======================================================
Proxy Statement - 17
-------------------
IMCO also provides investment advisory services to four other mutual
funds having similar investment objectives. These funds are available
only through the purchase of certain variable insurance products
offered by USAA Life Insurance Company. Table 5 below identifies the
funds, the size of each fund as of its last fiscal year end, December
31, 2001, and the rate of compensation for advisory services (as a
percentage of average net assets).
TABLE 5
AFFILIATED FUNDS
==============================================================================
NET ASSETS ADVISORY
FUND NAME* 12/31/01 FEE
- ------------------------------------------------------------------------------
USAA Life Aggressive Growth Fund $ 25,803,796 .50%
USAA Life Diversified Assets Fund 42,862,727 .20%
USAA Life Growth and Income Fund 70,511,611 .20%
USAA Life World Growth Fund 25,234,506 .20%
* The USAA Life Diversified Assets Fund has an objective of long-term capital
growth consistent with preservation of capital and balanced by current
income. Each other USAA Life Fund listed above has substantially the same
objective as that of the similarly named retail USAA Fund.
================================================================================
o WHAT DID THE BOARD CONSIDER IN REVIEWING THIS PROPOSAL?
On April 24 and May 29, 2002, the Board and IMCO held preliminary
discussions regarding the possibility of a proposed new management
structure for each Fund. At these meetings, the Board and IMCO
discussed, among other matters, the process for identifying and
evaluating potential subadvisers for the Funds and the benefits and
challenges relating to the proposed new management structure. IMCO
provided the Board with information regarding its proposed process for
identifying and evaluating potential subadvisers, including extensive
due diligence on each subadvisory candidate and the retention of
Evaluation Associates, Inc. (EAI), an independent consultant with
experience in these types of investment management evaluations, to
assist IMCO during this process.
The Proposed Agreement for each Fund and IMCO's recommendation to seek
the necessary shareholder approvals were considered by the Board,
including the Independent Board Members, at a meeting of the Board held
on June 26, 2002. In addition, the Independent Board Members met
separately as a group on that date to consider these matters. The Board
also held a meeting on July 3, 2002, to consider, among other matters,
portions of the draft proxy solicitation materials to be sent to each
Fund's shareholders seeking approval of the Proposed Agreement. At each
of these meetings, the Independent Board Members were advised by their
independent counsel.
As part of its deliberations during one or more of its meetings, the
Board reviewed information provided by management relating to the
services to be rendered by IMCO under the Proposed Agreements, the
services to be rendered by each subadviser under the proposed
Subadvisory Agreements, the reasonableness of the fees that would be
paid under these agreements to IMCO and by IMCO to each sub-adviser,
and the terms of the Proposed Agreement for each Fund, which are
substantially the same as those in the Former Agreement and the Interim
Agreement for each Fund. The Board also reviewed materials that
included (i) a listing of the qualitative and quantitative criteria
employed by IMCO to identify subadviser candidates; (ii) the
qualifications of EAI and the subadviser search process employed by EAI
in connection with its recommendations to IMCO; (iii) detailed data
regarding each proposed subadviser, including its prior investment
performance relative to applicable Funds and benchmark indices, its
investment performance in both up and down market cycles, its
investment process, the depth
USAA funds - 18
- ---------------
of its investment personnel resources, the experience of its key
investment personnel, its total assets under management, and its tenure
in the advisory business; (iv) the fees to be paid by IMCO to each
subadviser and the overall impact of those costs to IMCO; (v) the
reasons identified by IMCO for proposing a New Index for the New
Benchmark Funds; and (vi) information regarding the benefits and
challenges to IMCO associated with employing subadvisers to manage the
day-to-day activities of each Fund, subject to oversight by IMCO and
the Board.
During its deliberations, the Board concluded that the proposed new
management structure is in the best interests of the Funds'
shareholders. The Board believes the proposed structure offers the best
means for each Fund to identify and retain the highest quality
portfolio management services and, thereby, seek to obtain consistently
superior investment performance. In the course of its deliberations,
the Board considered, among other information, the foregoing materials,
each of which was discussed during one or more of the Board's meetings.
During its deliberations, the Board also considered (i) the
organizational and financial implications of the proposed new
arrangements to IMCO, (ii) the impact, if any, that each proposed New
Index may have on the total fees paid to IMCO by each of the New
Benchmark Funds for advisory services, (iii) the appropriateness of
each New Index to be used in measuring the Performance Adjustment for
the New Benchmark Funds given the investment styles to be employed on a
going-forward basis by those Funds' subadvisers, subject to oversight
by IMCO, (iv) the extent to which IMCO has been able and willing to
waive fees and pay expenses of each Fund from time to time and the
ability and willingness of IMCO to continue this practice in the
future, (v) the benefits and challenges to a management structure where
one or more independent advisory firms would directly manage some or
all of each Fund's assets subject to the portfolio oversight of IMCO,
(vi) IMCO's experience supervising subadvisers, (vii) IMCO's
recommendations to implement subadvisory arrangements, which included
input from EAI, and (viii) the process used by IMCO, with input from
EAI, to identify the specific proposed subadvisers.
In approving a Proposed Agreement for each Fund and recommending this
proposal to each Fund's shareholders, the Board did not identify any
single factor as all-important or controlling. Rather, the Board
considered the foregoing factors in the context that the primary
purpose of each Proposed Agreement is to enable IMCO to maintain for
each Fund the newly implemented management structure of employing one
or more experienced, independent investment teams that could enhance
the investment performance of each Fund consistent with that Fund's
investment objectives and strategies.
Based on its evaluation of all material factors and with the assistance
of independent counsel, the Board, including the Independent Board
Members, approved a Proposed Agreement with respect to each Fund and
authorized the submission of the applicable Proposed Agreement to each
Fund's shareholders for their approval. Accordingly, the Board,
including the Independent Board Members, recommends that shareholders
of each Fund vote "FOR" the applicable Proposed Agreement.
o HOW DOES THE BOARD RECOMMEND SHAREHOLDERS VOTE ON PROPOSAL 1?
The Board recommends that shareholders vote "For" Proposal 1.
o WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO APPROVE A NEW
INVESTMENT ADVISORY AGREEMENT?
Approval of the Proposed Agreements will require a "FOR" vote by a
"majority of the outstanding voting securities" of a Fund, as provided
in the 1940 Act. For this purpose, this means a "FOR" vote by 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.
Proxy Statement - 19
--------------------
PROPOSAL 2
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENTS
BETWEEN IMCO AND SUBADVISERS
o WHY ARE SHAREHOLDERS BEING ASKED TO VOTE ON THIS PROPOSAL?
The Funds' Board of Directors recently approved proposals by IMCO to
restructure the manner in which each Fund's assets are managed. To
implement the new investment management arrangements promptly, the
Board, among other actions, approved Interim Subadvisory Agreements
between IMCO and the subadvisers, with respect to the Funds. No
subadviser is affiliated with USAA. Under applicable regulations, the
Interim Subadvisory Agreements typically will terminate 150 days after
the date on which the Former Agreements terminated. Thus, the Board is
asking Fund shareholders to approve the proposed Subadvisory Agreements
before the Interim Subadvisory Agreements terminate.
o WHAT WAS THE PROCESS LEADING TO THIS PROPOSAL AND WHO ARE THE PROPOSED
SUBADVISERS?
IMCO recently conducted a comprehensive review of each USAA mutual
fund's performance. Upon completion, IMCO determined that affirmative
steps should be taken in the equity portfolio management area to
progress toward the desired objective of superior investment
performance across ALL USAA funds. IMCO then embarked upon a process
that resulted in a strategy of retaining highly regarded outside
investment firms to manage the equity portions of fifteen USAA funds.
IMCO retained an independent consultant specializing in the evaluation
of investment management firms. Upon receiving extensive materials from
the consultant, IMCO performed its own additional analysis using the
consultant's data, as well as other third-party data. An IMCO working
group of senior management assessed the information and developed short
lists of firms to interview. Those candidates made presentations to the
working group. Upon identifying its candidates, negotiations transpired
resulting in the recommendation to engage the subadvisers listed below
that was made to and approved by the Funds' Board on June 26, 2002.
IMCO will continue to oversee the management of each Fund as its
investment adviser. IMCO also will continue to perform the day-to-day
portfolio management for the fixed income portion of the Balanced
Strategy, Cornerstone Strategy, and Growth and Tax Strategy Funds as
well as the science portion of the Science & Technology Fund.
The following are the proposed subadvisers for the Funds currently
operating under the Interim Sub-advisory Agreements. Each subadviser is
described more specifically in Proposals 2-A through 2-H.
================================================================================
FUND SUBADVISER(S)
- -------------------------------------------------------------------------------
Aggressive Growth Fund Marsico Capital Management, LLC
Balanced Strategy Fund Wellington Management Company, LLP
Capital Growth Fund Batterymarch Financial Management, Inc.
Cornerstone Strategy Fund Wellington Management Company, LLP
MFS Investment Management
Emerging Markets Fund The Boston Company Asset Management, LLC
First Start Growth Fund Marsico Capital Management, LLC
Growth Fund Dresdner RCM Global Investors LLC
Marsico Capital Management, LLC
USAA funds - 20
- ---------------
Growth & Income Fund Wellington Management Company, LLP
Growth and Tax Strategy Fund Dresdner RCM Global Investors LLC
Income Stock Fund The Boston Company Asset Management, LLC
Westwood Management Corporation
International Fund MFS Investment Management
Science & Technology Fund Wellington Management Company, LLP
Small Cap Stock Fund Eagle Asset Management, Inc.
Value Fund Westwood Management Corporation
World Growth Fund MFS Investment Management
===============================================================================
o WHAT ARE THE KEY PROVISIONS OF THE SUBADVISORY AGREEMENTS?
Under each Subadvisory Agreement, IMCO will continue to employ the
current subadviser to manage the day-to-day investment of all or a
portion of each Fund's assets (as allocated from time to time by IMCO),
consistent with each Fund's investment objectives, policies, and
restrictions. Each subadviser will be responsible for, among other
things, placing all orders for the purchase and sale of portfolio
securities for which it is responsible, subject to the supervision and
monitoring of IMCO and the over-sight of the Funds' Board. IMCO, and
not the Fund, will be responsible for paying all fees charged by the
applicable subadviser for these subadvisory services. Any description
of the Subadvisory Agreements set forth herein is qualified in its
entirety by the actual Subadvisory Agreements, a form of which is
attached as Exhibit B.
o WHAT ARE THE DIFFERENCES BETWEEN THE SUBADVISORY AND INTERIM
SUBADVISORY AGREEMENTS?
The Subadvisory Agreements and the Interim Subadvisory Agreements are
substantially similar. The only differences of note between the two
types of agreements, which stem primarily from the provisional nature
of Rule 15a-4 under the 1940 Act, are as follows. First, each Interim
Subadvisory Agreement likely will be in effect for a maximum of 150
days, whereas each Subadvisory Agreement initially would be in effect
for two years, unless terminated sooner. Second, each Interim
Subadvisory Agreement can be terminated by the Board, IMCO, or a vote
of a majority of the outstanding shares of the Fund (as defined in the
1940 Act) or by the subadviser upon 60 days' written notice to the
other party. Each Subadvisory Agreement may be terminated by the
Independent Board Members or the vote of a majority of the Fund's
outstanding shares on not more than 60 days' written notice to IMCO and
the subadviser. IMCO also may terminate a Subadvisory Agreement at any
time by written notice to the subadviser.
o WHEN WILL THE INVESTMENT SUBADVISORY AGREEMENTS TAKE EFFECT?
If approved by shareholders, each Subadvisory Agreement will take
effect upon shareholder approval and will remain in effect for an
initial two-year period. Thereafter, each Subadvisory Agreement would
continue automatically for successive years, provided that it is
specifically approved at least annually by a vote of a majority of the
Independent Board Members and by a majority of all Board members. Each
Fund may terminate its proposed Subadvisory Agreement, without penalty,
by a vote of a majority of the Independent Board Members or by vote of
a majority of the outstanding shares of the Fund, without penalty, on
not more than 60 days' written notice to IMCO and the subadviser. IMCO
may at any time terminate a proposed Subadvisory Agreement, without
penalty, by written notice to the other party. Each subadviser may
terminate its proposed Subadvisory Agreement, without penalty, by not
less than 90 days' written notice to IMCO. Each Subadvisory Agreement
automatically will terminate without penalty in the event of its
assignment.
Proxy Statement - 21
--------------------
If the proposal is not approved by shareholders of a Fund, the
applicable Interim Subadvisory Agreement will remain in effect for 150
days from the date on which the Former Agreement terminated, or such
later date as may be consistent with applicable regulations and
interpretations. In such event, the Board and IMCO will consider
appropriate alternative actions.
o WILL THE FUNDS' TOTAL EXPENSES CHANGE AS A RESULT OF THE SUBADVISORY
AGREEMENTS?
No, the Subadvisory Agreements will not impact the Funds' total expense
ratios. IMCO (not the Fund) pays a fee to the subadvisers for services
under the Subadvisory Agreements.
o WHAT INFORMATION DID THE BOARD CONSIDER PRIOR TO PROPOSING THESE
CHANGES?
At a meeting on June 26, 2002, the Board determined that it would be in
the best interests of each Fund and its shareholders to approve the
Subadvisory Agreements relating to that Fund. In making this decision,
the Board considered many of the same materials and factors that it
considered when it decided, as described in Proposal 1, to maintain the
newly implemented management structure, to approve the Proposed
Agreements with IMCO with respect to each Fund, and to recommend that
each Fund's shareholders approve the Proposed Agreements. In addition,
among other factors, the Board also considered the expertise of each
proposed subadviser, the financial strength and quality of services
offered by each proposed subadviser, the rigorous due diligence process
employed by IMCO and EAI with respect to each proposed subadviser, and
the input of EAI, an independent investment management consultant. The
Board concluded that each proposed subadviser is capable of providing
high-quality service as reflected by (i) the qualifications and
experience of its advisory personnel, (ii) its available organizational
resources, and (iii) its investment performance track record when
managing accounts that are comparable to the applicable Fund or Funds.
o HOW DOES THE BOARD RECOMMEND SHAREHOLDERS VOTE ON PROPOSAL 2?
The Board recommends that shareholders vote "For" approval of Proposals
2-A through 2-H.
o WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO APPROVE EACH
SUBADVISORY AGREEMENT?
Approval of each proposal with respect to any Fund will require a "FOR"
vote by a "majority of the outstanding voting securities" of the Fund,
as provided in the 1940 Act. For this purpose, this means a "FOR" vote
by 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.
USAA funds - 22
- ---------------
PROPOSAL 2-A
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND WELLINGTON MANAGEMENT COMPANY, LLP
BALANCED STRATEGY FUND
CORNERSTONE STRATEGY FUND
GROWTH & INCOME FUND
SCIENCE & TECHNOLOGY FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT WELLINGTON MANAGEMENT
COMPANY, LLP?
Wellington Management Company, LLP (Wellington Management) is a
Massachusetts limited liability partnership with principal offices at
75 State Street, Boston, Massachusetts 02109. Wellington Management is
a professional investment counseling firm that provides investment
services to investment companies, employee benefit plans, endowments,
foundations, and other institutions. Wellington Management and its
predecessor organizations have provided investment advisory services
for over 70 years. As of June 30, 2002, Wellington Management had
approximately $312 billion in assets under management.
o WHO ARE THE PARTNERS AND PRINCIPAL EXECUTIVE OFFICER OF WELLINGTON
MANAGEMENT?
Wellington Management is managed by its 74 partners, all of whom are
active employees of the firm. The managing partners of Wellington
Management are Laurie A. Gabriel, Duncan M. McFarland, and John R.
Ryan. It should be noted that the managing partners are not necessarily
those with the largest economic interests in the firm. Matthew E.
Megargel, Senior Vice President and Partner, has significant portfolio
management responsibility for all or a portion of the following Funds:
USAA Growth & Income Fund, USAA Balanced Strategy Fund, and USAA
Cornerstone Strategy Fund. James P. Hoffmann, Vice President, also has
significant portfolio management responsibility for a portion of the
USAA Cornerstone Strategy Fund. Scott E. Simpson, Senior Vice President
and Partner, has significant management responsibility for a portion of
the USAA Science & Technology Fund.
o DOES WELLINGTON MANAGEMENT OR ANY OF ITS AFFILIATES PROVIDE ANY
ADDITIONAL SERVICES TO THE USAA BALANCED STRATEGY FUND, THE USAA
CORNERSTONE STRATEGY FUND, THE USAA GROWTH & INCOME FUND, OR THE USAA
SCIENCE & TECHNOLOGY FUND?
No.
o WHAT WILL IMCO PAY WELLINGTON MANAGEMENT FOR ITS SUBADVISORY SERVICES?
IMCO will pay Wellington Management at the same rates under the
proposed Subadvisory Agreements as it pays Wellington Management under
the Interim Subadvisory Agreements. For the USAA Balanced Strategy
Fund, IMCO pays Wellington Management a fee in the annual amount of
0.20% of the Fund's average net assets that Wellington Management
manages. For the USAA Cornerstone Strategy Fund, IMCO pays Wellington
Management a fee in the annual amount of 0.40% of the Fund's average
net assets for the first $50 million of assets that Wellington
Management manages and are invested in REITs, plus 0.35% of the Fund's
average net assets for assets over $50 million that Wellington
Management manages and are invested in REITs, plus 0.20% of the Fund's
average net assets for assets that Wellington Management manages and
invests in securities other than REITs. For
Proxy Statement - 23
--------------------
the USAA Growth & Income Fund, IMCO pays Wellington Management a fee in
the annual amount of 0.20% of the Fund's average net assets that
Wellington Management manages. For the USAA Science & Technology Fund,
IMCO pays Wellington Management a fee in the annual amount of 0.45% of
the Fund's average net assets for the first $100 million in assets that
Wellington Management manages, plus 0.35% of the Fund's average net
assets for assets over $100 million that Wellington Management manages.
o DOES WELLINGTON MANAGEMENT ACT AS ADVISER FOR SIMILAR FUNDS?
Wellington Management also provides investment advisory services to
other mutual funds with similar investment objectives as the portions
of the USAA Balanced Strategy Fund, the USAA Cornerstone Strategy Fund,
the USAA Growth & Income Fund, and the USAA Science & Technology Fund
that Wellington Management manages. The table below identifies the
funds, the size of each fund as of June 30, 2002, and the rate of
compensation for advisory services (as a % of average net assets).
================================================================================
FUND ASSETS ANNUAL FEE RATE
- -------------------------------------------------------------------------------
BALANCED STRATEGY (EQUITY)
CORNERSTONE STRATEGY (U.S. STOCKS)
GROWTH & INCOME
Anchor Series Growth Fund $663 million 0.325% First $50 million
0.225% Next $100 million
0.200% Next $350 million
0.150% Over $500 million
First Investors Life Growth* $207 million 0.400% First $50 million
0.275% Next $100 million
0.220% Next $350 million
0.200% Over $500 million
SCIENCE & TECHNOLOGY (TECHNOLOGY)
Hartford Global Technology $45 million 0.450% First $100 million
Fund (mutual fund) 0.350% Next $400 million
0.300% Over $500 million
Hartford Global Technology $78 million 0.450% First $100 million
Fund (variable annuity) 0.350% Next $400 million
0.300% Over $500 million
Security Benefit Life Technology $5 million 0.500%
Fund (mutual fund)
Security Benefit Life Technology $12 million 0.500%
Series (variable annuity)
CORNERSTONE STRATEGY (REITS)
Prudential Real Estate Securities $49 million 0.400% First $50 million
Fund 0.350% Over $50 million
* This Fund may be subject to a voluntary fee waiver.
===============================================================================
USAA funds - 24
- ---------------
PROPOSAL 2-B
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND MARSICO CAPITAL MANAGEMENT, LLC
AGGRESSIVE GROWTH FUND
FIRST START GROWTH FUND
GROWTH FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT MARSICO CAPITAL MANAGEMENT,
LLC?
Marsico Capital Management, LLC (Marsico) is located at 1200
Seventeenth Street, Suite 1300, Denver, Colorado 80202. Marsico is a
registered investment adviser formed in 1997 that became a wholly owned
indirect subsidiary of Bank of America Corporation (BOA) in January
2001. BOA, a Delaware corporation, is a bank holding company and a
financial holding company headquartered at Bank of America Center, 100
North Tryon Street, Charlotte, North Carolina 29255-0065. Marsico
provides investment advisory services to mutual funds and other
institutions, and handles separately managed accounts for individuals,
corporations, charities, and retirement plans. As of June 30, 2002,
Marsico had $14 billion in assets under management.
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF MARSICO?
The names and principal occupations of the current directors and
principal executive officer of Marsico are set forth as follows:
======================================================================
NAME, ADDRESS,
AND POSITION WITH MARSICO PRINCIPAL OCCUPATION
----------------------------------------------------------------------
Robert H. Gordon President and CEO, Banc of America
Director Capital Management
NY1-301-48-02
9 West 57th Street
New York, NY 10019
Christopher J. Marsico President, Marsico
President and Director
1200 17th Street, Suite 1300
Denver, CO 80202
======================================================================
o DOES MARSICO OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL SERVICES
TO THE USAA AGGRESSIVE GROWTH FUND, THE USAA FIRST START GROWTH FUND,
OR THE USAA GROWTH FUND?
Marsico is affiliated with other investment advisers through their
common ultimate parent, Bank of America Corporation. The affiliated
advisers include Banc of America Securities LLC (BAS), Banc of America
Capital Management, LLC, Banc of America Advisors, LLC, and other
advisers listed in Schedule D of Part I of Marsico's Form ADV. BAS, as
a registered broker-dealer, may execute trades for Marsico's clients.
o WHAT WILL IMCO PAY MARSICO FOR ITS SUBADVISORY SERVICES?
IMCO will pay Marsico at the same rate under the proposed Subadvisory
Agreement as it pays Marsico under the Interim Subadvisory Agreement.
IMCO pays Marsico a fee in the annual amount of 0.20% of each Fund's
average net assets that Marsico manages.
Proxy Statement - 25
--------------------
o DOES MARSICO ACT AS ADVISER FOR SIMILAR FUNDS?
Marsico also provides investment advisory services to other mutual
funds with similar investment objectives as the portions of the USAA
Aggressive Growth Fund, the USAA First Start Growth Fund, and the USAA
Growth Fund that Marsico manages. The table below identifies the funds,
the size of the portion of each fund managed by Marsico as of June 30,
2002, and the rate of compensation for advisory services (as a % of
average net assets).
===============================================================================
FUND ASSETS ANNUAL FEE RATE
- -------------------------------------------------------------------------------
ASAF Marsico Capital Growth $706.8 million 0.40% First $1.5 billion
0.35% Over $1.5 billion
AST Marsico Capital Growth $1.2 billion 0.40% First $1.5 billion
0.35% Over $1.5 billion
Diversified Large Cap Equity $330.3 million* *
Growth Portfolio
Enterprise Capital Appreciation $196.1 million 0.45%
Fund
Enterprise Accumulation Trust VA $57.1 million 0.45%
Equitable Aggressive Large Cap $542.4 million* *
Growth Portfolio
Frank Russell Investment $72 million 0.325% First $500 million
Equity I Fund 0.275% Next $250 million
0.225% Over $750 million
Frank Russell Investment Co. $101.6 million 0.325% First $500 million
Diversified Equity 0.275% Next $250 million
0.225% Over $750 million
Marsico Growth Fund $690.4 million 0.85%
Nations Marsico Growth Fund $528.6 million 0.45%
Nations Marsico Annuity Growth $72 million 0.45%
SunAmerica Series Trust Marsico $46 million 0.40%
Growth Portfolio
Commonfund Institutional Fund $26 million* *
Core Equity Fund
* These portfolios have more than one manager. Marsico manages only
the amount of the fund's assets listed in the table and receives
an undisclosed fee for its services.
================================================================================
USAA funds - 26
- ---------------
PROPOSAL 2-C
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND MFS INVESTMENT MANAGEMENT
CORNERSTONE STRATEGY FUND
INTERNATIONAL FUND
WORLD GROWTH FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT MFS INVESTMENT MANAGEMENT?
MFS Investment Management (MFS), a registered investment adviser, is
America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and
the founding of the first mutual fund, Massachusetts Investors Trust.
MFS is a majority-owned subsidiary of Sun Life of Canada (U.S.)
Financial Services Holding, Inc., which in turn is an indirect
wholly-owned subsidiary of Sun Life Financial Services of Canada, Inc.
(Sun Life of Canada). MFS is located at 500 Boylston Street, Boston,
Massachusetts 02116. Sun Life of Canada is located at 150 King Street
West, Toronto, Ontario, M5H 1J9 Canada. As of June 30, 2002, MFS
managed approximately $123 billion in net assets.
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF MFS?
The names and principal occupations of the current directors and
principal executive officer of MFS are set forth as follows:
===============================================================================
NAME, ADDRESS,
AND POSITION WITH MFS PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------
James C. Baillie, QC* Counsel, Torys
Director
John W. Ballen** President, MFS
Director and President
Martin E. Beaulieu** President, MFS Fund Distributors
Director
Joseph W. Dello Russo** Executive Vice President and Chief
Director, Executive Vice President, Administrative Officer, MFS
and Chief Administrative Officer
Robert J. Manning** Chief Fixed Income Officer, MFS
Director, Senior Vice President, and
Chief Fixed Income Officer
Kevin R. Parke** Chief Investment Officer, MFS
Director, Executive Vice President,
and Chief Investment Officer
C. James Prieur*** President and Chief Operations Officer,
Director Sun Life Assurance Co. of Canada
Richard D. Schmalensee**** John C. Head III Dean, Sloan School of
Director Management at MIT
Proxy Statement - 27
---------------------
William W. Scott, Jr.** Vice Chairman, MFS
Director and Vice President
Jeffrey L. Shames** Chairman and Chief Executive Officer,
Director, Chairman, and Chief MFS
Executive Officer
Donald A. Stewart, FIA, FCIA*** Chairman and Chief Executive Officer,
Director Sun Life Assurance Co. of Canada
William W. Stinson*** Chairman, Executive Committee, United
Director Dominion Industries Limited
* The principal address for this director is Suite 3000, Maritime
Life Tower, Box 270, TD Centre, Toronto, Ontario M5K 1N2, Canada.
** The principal address for the directors is MFS Investment
Management, 500 Boylston Street, Boston, Massachusetts 02116.
*** The principal address for these directors is Sun Life of Canada,
150 King Street West, Toronto, Ontario, M5H 1J9, Canada.
**** The principal address for this director is Massachusetts Institute
of Technology, Sloan School of Management, Room E52-473, 50
Memorial Drive, Cambridge, Massachusetts 02142-1347.
================================================================================
o DOES MFS OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL SERVICES TO
THE USAA CORNERSTONE STRATEGY FUND, THE USAA INTERNATIONAL FUND, OR THE
USAA WORLD GROWTH FUND?
No.
o WHAT WILL IMCO PAY MFS FOR ITS SUBADVISORY SERVICES?
Imco will pay MFS at the same rate under the proposed Subadvisory
Agreement as it pays MFS under the Interim Subadvisory Agreement,
although under the proposed Subadvisory Agreement, for purposes of
reaching the $350 million breakpoint at which the fee rate will be
reduced, assets of all funds in the USAA family of funds managed by MFS
will be aggregated, not just assets of funds in the USAA Investment
Trust that MFS manages. Thus, for the USAA International Fund, the USAA
World Growth Fund, and the international portion of the USAA
Cornerstone Strategy Fund, IMCO will pay MFS a fee in the annual amount
of 0.335% of the first $350 million of the aggregate average net assets
of all funds in the USAA family of funds that MFS manages (I.E., the
USAA International Fund, the USAA World Growth Fund, the international
portion of the USAA Cornerstone Strategy Fund, and the USAA Life
Investment Trust's World Growth Fund), plus 0.225% of the aggregate
average net assets for assets over $350 million of all funds in the
USAA family of funds that MFS manages.
o DOES MFS ACT AS ADVISER FOR SIMILAR FUNDS?
MFS also provides investment advisory services to other mutual funds
with similar investment objectives as the USAA International Fund, the
USAA World Growth Fund, and the portion of the USAA Cornerstone
Strategy Fund that MFS manages. The table below identifies the funds,
the size of each fund as of June 30, 2002, and the rate of compensation
for advisory services (as a % of average net assets).
USAA funds - 28
- ---------------
================================================================================
FUND ASSETS ANNUAL FEE RATE
- --------------------------------------------------------------------------------
INTERNATIONAL
CORNERSTONE STRATEGY (INTERNATIONAL)
MFS Institutional
International Equity Fund $68.2 million 0.75%
WORLD GROWTH
MFS Global Equity Fund $637.1 million 1.00%
MFS Global Equity Series VIT $6.1 million 1.00%
American Skandia
AST/MFS Global Equity Portfolio $72.7 million 0.425% (subadvisory fee)
Hartford Global Equity HLS Fund $13.2 million 0.60% First $200 million
0.55% Next $300 million
0.50% Over $500 million
================================================================================
PROPOSAL 2-D
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND THE BOSTON COMPANY
ASSET MANAGEMENT, LLC
EMERGING MARKETS FUND
INCOME STOCK FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT THE BOSTON COMPANY ASSET
MANAGEMENT, LLC?
The Boston Company Asset Management, LLC (The Boston Company) is
located at Mellon Financial Center, One Boston Place, Boston,
Massachusetts 02108-4408. The Boston Company Asset Management Holdings
LLC (Manager) is the manager of The Boston Company. The Boston Company
is a majority-owned subsidiary of Boston Safe Deposit & Trust Company
(BSDT), a state chartered bank. BSDT is a wholly-owned subsidiary of
Mellon Financial Corporation (Mellon), located at One Mellon Center,
Pittsburgh, Pennsylvania 15258. Mellon is a publicly owned global
financial holding company incorporated under Pennsylvania law. As of
June 30, 2002, The Boston Company had approximately $6.2 billion in
assets under management.
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF THE BOSTON
COMPANY?
The names and principal occupations of the current directors and
principal executive officer of The Boston Company are set forth as
follows:
Proxy Statement - 29
--------------------
================================================================================
NAME, ADDRESS,
AND POSITION WITH
THE BOSTON COMPANY PRINCIPAL OCCUPATION
- --------------------------------------------------------------------------------
Corey Griffin* President and Chief Executive Officer, The
Director of Manager, Boston Company
and President and Chief
Executive Officer, The Boston
Company
Francis Antin** President and Chief Executive Officer,
Director of Manager Mellon Growth Advisors
Stephen Cantor*** Chief Executive Officer and Chairman, The
Director of Manager Dreyfus Corporation
John Nagoniak* Retired
Director of Manager
Ronald O'Hanley* President, Mellon Institutional Management
Director of Manager
Peter Higgins*
Director of Manager, and Senior Vice President and Portfolio
Senior Vice President and Manager, The Boston Company
Portfolio Mananger, The Boston
Company
* The principal address for these directors is The Boston Company
Asset Management, LLC, One Boston Place, Boston, Massachusetts
02108.
** The principal address for this director is Mellon Growth Advisors,
One Boston Place, Boston, Massachusetts 02108.
*** The principal address for this director is The Dreyfus
Corporation, 200 Park Avenue, New York, New York 10166.
================================================================================
o DOES THE BOSTON COMPANY OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL
SERVICES TO THE USAA EMERGING MARKETS FUND OR THE USAA INCOME STOCK
FUND?
No.
o WHAT WILL IMCO PAY THE BOSTON COMPANY FOR ITS SUBADVISORY SERVICES?
IMCO will pay The Boston Company at the same rates under the proposed
Subadvisory Agreements as it pays The Boston Company under the Interim
Subadvisory Agreements. For the USAA Emerging Markets Fund, IMCO pays
The Boston Company a fee in the annual amount of 0.69% of the Fund's
average net assets that The Boston Company manages. For the USAA Income
Stock Fund, IMCO pays The Boston Company a fee in the annual amount of
0.17% of the Fund's average net assets that The Boston Company manages.
o DOES THE BOSTON COMPANY ACT AS ADVISER FOR SIMILAR FUNDS?
The Boston Company also provides investment advisory services to other
mutual funds with similar investment objectives as the USAA Emerging
Markets Fund and the portion of the USAA Income Stock Fund that The
Boston Company manages. The following table identifies the funds, the
size of each fund as of June 30, 2002, and the rate of compensation for
advisory services (as a % of average net assets).
USAA funds - 30
- ---------------
================================================================================
FUND ASSETS ANNUAL FEE RATE
- -------------------------------------------------------------------------------
INCOME STOCK
Consulting Group Capital Markets $347.4 million 0.30% First $250 million
0.25% Over $250 million
EMERGING MARKETS
American AAdvantage Emerging $19 million 0.80% First $50 million
Markets Fund 0.70% Over $50 million
RBC Advisor Emerging Market Equity $6.9 million 0.90% First $50 million
Class of RBC Advisor Global Fund 0.85% Next $50 million
0.75% Next $100 million
0.60% Over $200 million
SEI Canada Emerging Markets $14.8 million 0.60%
Equity Fund
SEI Emerging Markets Equity Fund $5.2 million 0.60%
SEI Institutional Investments Trust
Emerging Market Equity Fund $186.2 million 0.60%
Top Managers Emerging Markets $51 million 0.60%
Alpha Fund
================================================================================
PROPOSAL 2-E
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND DRESDNER RCM GLOBAL INVESTORS LLC
GROWTH FUND
GROWTH AND TAX STRATEGY FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT DRESDNER RCM GLOBAL
INVESTORS LLC?
Dresdner RCM Global Investors LLC (Dresdner) is located at 4
Embarcadero Center, San Francisco, California 94111. Dresdner is an
indirect wholly-owned subsidiary of Dresdner Bank AG, which, in turn,
is an indirect wholly-owned subsidiary of Allianz AG, located at
Koniginstrasse 28, D-80802, Munich, Germany. Founded in 1890 in
Germany, Allianz AG is one of the world's leading multi-national
insurance and financial services companies. With assets under
management of over one trillion dollars as of December 31, 2001,
Allianz provides its clients with a broad range of services in over 70
countries. As of June 30, 2002, Dresdner had approximately $49.9
billion in assets under management.
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF DRESDNER?
The names and principal occupations of the current directors and
principal executive officer of Dresdner are set forth as follows:
Proxy Statement - 31
--------------------
================================================================================
NAME, ADDRESS,
AND POSITION WITH DRESDNER PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------
Susan C. Gause* Senior Managing Director and Chief
Director and Chief Executive Officer Executive Officer, Dresdner
William L. Price* Senior Managing Director, Chairman, and
Director Global Chief Investment Officer,
Dresdner
Joachim Madler** Deputy Global Chief Executive Officer,
Director Allianz Dresdner Asset Management
Robert J. Goldstein* Secretary and General Counsel
Managing Director
Dora Fong Director of Finance
* These directors can be contacted at Dresdner RCM Global Investors
LLC, 4 Embarcadero Center, San Francisco, California 94111.
** This director can be contacted at Dresdner Bank AG, Gallusanlage 8,
2nd Floor, D-60301, Frankfurt, Germany.
================================================================================
o DOES DRESDNER OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL SERVICES
TO THE USAA GROWTH FUND OR THE USAA GROWTH AND TAX STRATEGY FUND?
No.
o WHAT WILL IMCO PAY DRESDNER FOR ITS SUBADVISORY SERVICES?
IMCO will pay Dresdner at the same rates under the proposed Subadvisory
Agreements as it pays Dresdner under the Interim Subadvisory
Agreements. For both the USAA Growth Fund and the USAA Growth and Tax
Strategy Fund, IMCO pays Dresdner a fee in the annual amount of 0.20%
of each Fund's average net assets that Dresdner manages.
o DOES DRESDNER ACT AS ADVISER FOR SIMILAR FUNDS?
Dresdner also provides investment advisory services to other mutual
funds with similar investment objectives as the portions of the USAA
Growth Fund and the USAA Growth and Tax Strategy Fund that Dresdner
manages. The following table identifies the funds, the size of each
fund as of June 30, 2002, and the rate of compensation for advisory
services (as a % of average net assets).
================================================================================
FUND ASSETS ANNUAL FEE RATE
- --------------------------------------------------------------------------------
AB Funds - Growth Equity Fund $434.2 million 0.70% First $10 million
0.60% Next $10 million
0.50% Next $20 million
0.35% Next $20 million
0.30% Next $40 million
0.25% Next $300 million
0.20% Next $600 million
0.15% Over $1 billion
AXA Premier Large Cap $2.9 million 0.42% First $100 million
Growth Fund 0.25% Next $300 million
0.20% Next $600 million
0.15% Over $1 billion
USAA funds - 32
- ----------------
AXA Premier VIP Large Cap $12.9 million 0.42% First $100 million
Growth Fund 0.25% Next $300 million
0.20% Next $600 million
0.15% Over $1 billion
CIGNA Retirement and Investment $311.7 million 0.35% First $50 million
Large Cap Growth/Dresdner 0.30% Next $50 million
RCM Fund 0.25% Next $150 million
0.20% Next $250 million
0.18% Over $500 million
CUIT Growth Fund $65.8 million 0.70% First $10 million
0.60% Next $10 million
0.50% Next $20 million
0.35% Next $20 million
0.30% Next $40 million
0.25% Next $300 million
0.20% Next $600 million
0.15% Over $1 billion
Diversified Investment Advisors $647 million 0.22% First $700 million
Large Cap Growth Equity 0.15% Over $700 million
First Mercantile Trust Large $67.6 million 0.50%
Cap Fund
Guardian Group of Funds Alexandria $7 million 0.70% First $15 million
American Growth Fund* 0.60% Next $15 million
0.50% Next $30 million
0.35% Next $30 million
0.30% Next $60 million
0.25% Over $150 million
PIMCO RCM Large-Cap Growth $156.7 million 0.45%
Fund "I"
PIMCO RCM Tax-Managed $3.9 million 0.60%
Fund "I"
SAFECO U.S. Growth Fund $4.6 million 0.35% First $100 million
0.25% Next $150 million
0.20% Over $250 million
* This fund will be closing and merging with the Bank of Montreal
following an acquisition that took place last year.
================================================================================
Proxy Statement - 33
--------------------
PROPOSAL 2-F
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND WESTWOOD MANAGEMENT CORPORATION
INCOME STOCK FUND
VALUE FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT WESTWOOD MANAGEMENT
CORPORATION?
Westwood Management Corporation (Westwood) is located at 300 Crescent
Court, Suite 1300, Dallas, Texas 75201 and has been in the investment
management business since 1983. Westwood is a wholly-owned subsidiary
of Westwood Holdings Group, Inc. (WHG), an institutional asset
management company, located at 300 Crescent Court, Suite 1300, Dallas,
Texas 75201. As of June 30, 2002, Westwood had approximately $4.6
billion in assets under management.
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF WESTWOOD?
The names and principal occupations of the current directors and
principal executive officer of Westwood are set forth as follows:
================================================================================
NAME, ADDRESS,*
AND POSITION WITH WESTWOOD PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------
Susan M. Byrne Chief Investment Officer, Westwood
Director and Chairman
Brian O. Casey President and Chief Operating Officer,
Director and President Westwood
Joyce Schaer Senior Vice President, Director of Marketing,
Director Westwood
Patricia Fraze Executive Vice President, Client Relationship
Director Manager, Westwood
Lynda Calkin Senior Vice President, Portfolio Manager,
Director Westwood
* The principal address for each officer and director is Westwood
Management Corp., 300 Crescent Court, Suite 1300, Dallas, Texas 75201.
================================================================================
o DOES WESTWOOD OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL SERVICES
TO THE USAA INCOME STOCK FUND OR THE USAA VALUE FUND?
No.
o WHAT WILL IMCO PAY WESTWOOD FOR ITS SUBADVISORY SERVICES?
IMCO will pay Westwood at the same rate under the proposed Subadvisory
Agreement as it pays Westwood under the Interim Subadvisory Agreement.
For the USAA Income Stock Fund, IMCO pays Westwood a fee in the annual
amount of 0.18% of the Fund's average net assets that Westwood manages.
For the USAA Value Fund, IMCO pays Westwood a fee in the annual amount
of 0.20% of the Fund's average net assets for the first $250 million in
assets that Westwood manages and 0.18% of the Fund's average net assets
for assets over $250 million that Westwood manages.
USAA fund - 34
- --------------
o DOES WESTWOOD ACT AS ADVISER FOR SIMILAR FUNDS?
Westwood also provides investment advisory services to one other mutual
fund with a similar investment objective as the USAA Value Fund and the
portion of the USAA Income Stock Fund that Westwood manages. The
following table identifies the fund, the size of the fund as of its
last fiscal year end, and the rate of compensation for advisory
services (as a % of average net assets).
===============================================================================
FUND ASSETS ANNUAL FEE RATE
- ------------------------------------------------------------------------------
Gabelli Westwood Equity Fund $281.7 million 1.00%
===============================================================================
PROPOSAL 2-G
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND BATTERYMARCH FINANCIAL
MANAGEMENT, INC.
CAPITAL GROWTH FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT BATTERYMARCH FINANCIAL
MANAGEMENT, INC.?
Batterymarch Financial Management, Inc. (Batterymarch) is located at
200 Clarendon Street, Boston, Massachusetts 02116 and has been in the
investment management business since 1969. Batterymarch, a registered
investment adviser, is a wholly-owned, independently managed subsidiary
of Legg Mason, Inc. (Legg Mason), located at 100 Light Street,
Baltimore, Maryland 21202. Legg Mason is a publicly owned diversified
financial services holding company incorporated under Maryland law. As
of June 30, 2002, Batterymarch had approximately $6.9 billion in assets
under management.
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF BATTERYMARCH?
The names and principal occupations of the current directors and
principal executive officer of Batterymarch are set forth as follows:
================================================================================
NAME, ADDRESS,*
AND POSITION WITH BATTERYMARCH PRINCIPAL OCCUPATION
- --------------------------------------------------------------------------------
William L. Elcock Chief Executive Officer, Batterymarch
Director and Chief Executive Officer
Tania Zouikin Senior Executive, Batterymarch
Director and Chairman
Edward A. Taber, III Senior Executive Vice President and Head
Director of Asset Management, Legg Mason, Inc.
Timothy C. Scheve Senior Executive Vice President,
Director Legg Mason, Inc.
Deepak Chowdury Managing Director, Asset Management,
Director Legg Mason, Inc.
* Any notices with respect to the directors can be forwarded to Mr. Edward
A. Taber, III, Senior Executive Vice President and Head of Investment
Management, Legg Mason, Inc., 100 Light Street, 35th Floor, Baltimore,
Maryland 21202.
================================================================================
Proxy Statement - 35
--------------------
o DOES BATTERYMARCH OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL
SERVICES TO THE USAA CAPITAL GROWTH FUND?
No.
o WHAT WILL IMCO PAY BATTERYMARCH FOR ITS SUBADVISORY SERVICES?
IMCO will pay Batterymarch at the same rate under the proposed
Subadvisory Agreement as it pays Batterymarch under the Interim
Subadvisory Agreement. IMCO pays Batterymarch a fee in the annual
amount of 0.50% of the USAA Capital Growth Fund's average net assets
that Batterymarch manages.
o DOES BATTERYMARCH ACT AS ADVISER FOR SIMILAR FUNDS?
While Batterymarch provides investment advisory services to advisory
accounts with similar investment objectives as the USAA Capital Growth
Fund, Batterymarch does not provide such services to other mutual funds
with a similar investment objective as that of the USAA Capital Growth
Fund.
PROPOSAL 2-H
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
BETWEEN IMCO AND EAGLE ASSET MANAGEMENT, INC.
SMALL CAP STOCK FUND
o WHAT GENERAL INFORMATION IS AVAILABLE ABOUT EAGLE ASSET MANAGEMENT,
INC.?
Eagle Asset Management, Inc. (Eagle), located at 880 Carillon Parkway,
St. Petersburg, Florida 33716, is a registered investment adviser
formed in 1984. Eagle is a wholly owned subsidiary of Raymond James
Financial, Inc. (RJF), which is also located at 880 Carillon Parkway,
St. Petersburg, Florida 33716. RJF is a diversified financial services
holding company whose subsidiaries engage primarily in investment and
financial planning, including securities and insurance brokerage,
investment banking, asset management, banking and cash management, and
trust services. As of June 30, 2002, Eagle had approximately $5.8
billion in assets under management.
o WHO ARE THE DIRECTORS AND PRINCIPAL EXECUTIVE OFFICER OF EAGLE?
The names and principal occupations of the current directors and
principal executive officer of Eagle are set forth as follows:
===============================================================================
NAME, ADDRESS,*
AND POSITION WITH EAGLE PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------
Thomas A. James Chairman and Chief Executive Officer, Raymond
Chairman James Financial, Inc.
Richard K. Riess Chief Executive Officer, Eagle; Executive
Director and Chief Vice President, Managing Director of Asset
Executive Officer Management, Raymond James Financial, Inc.
Stephen G. Hill President and Chief Operating Officer, Eagle
Director, President, and
Chief Operating Officer
* The principal address for each director is 880 Carillon Parkway, P. O.
Box 10520, St. Petersburg, Florida 33733-0520.
===============================================================================
USAA funds - 36
- ----------------
o DOES EAGLE OR ANY OF ITS AFFILIATES PROVIDE ANY ADDITIONAL SERVICES TO
THE USAA SMALL CAP STOCK FUND?
No.
o WHAT WILL IMCO PAY EAGLE FOR ITS SUBADVISORY SERVICES?
IMCO will pay Eagle at the same rate under the proposed Subadvisory
Agreement as it pays Eagle under the Interim Subadvisory Agreement.
IMCO pays Eagle a fee in the annual amount of 0.56% of the USAA Small
Cap Stock Fund's average net assets for the first $100 million in
assets that Eagle manages and 0.45% of the Fund's average net assets
for assets over $100 million that Eagle manages.
o DOES EAGLE ACT AS ADVISER FOR SIMILAR FUNDS?
Eagle also provides investment advisory services to other mutual funds
with similar investment objectives as the USAA Small Cap Stock Fund.
The table below identifies the funds, the size of each fund as of June
30, 2002, and the rate of compensation for advisory services (as a % of
average net assets).
================================================================================
FUND ASSETS ANNUAL FEE RATE
- -------------------------------------------------------------------------------
The First Puerto Rico Equity $6 million 0.75% (on total assets)
Opportunities Fund
Heritage Mid Cap Stock Fund $352 million 0.75% (on total assets)
===============================================================================
PROPOSAL 3
APPROVAL OF A PROPOSAL TO PERMIT IMCO AND THE BOARD
TO APPOINT AND REPLACE SUBADVISERS, ENTER INTO SUBADVISORY
AGREEMENTS AND APPROVE AMENDMENTS TO SUBADVISORY
AGREEMENTS WITHOUT FURTHER SHAREHOLDER APPROVAL
o WHY ARE SHAREHOLDERS BEING ASKED TO VOTE ON THIS PROPOSAL?
The Board has determined that it would be in the best interests of
shareholders for IMCO to have the ability to appoint and replace
subadvisers for a Fund and to enter into, and approve amendments of,
subadvisory agreements, in the future without first obtaining
shareholder approval. Thus, at its meeting on June 26, 2002, the Board
approved, and recommended that each Fund's shareholders also be asked
to approve, a policy to permit IMCO, subject to prior Board approval,
to appoint and replace subadvisers, to enter into subadvisory
agreements, and to amend subadvisory agreements on behalf of a Fund
without further shareholder approval.
On June 18, 2002, the SEC granted an order permitting IMCO to change
subadvisers for each Fund without first calling a special shareholder
meeting and obtaining shareholder approval (Order). One of the
conditions for approval by the SEC is that the shareholders approve
this "manager-of-managers" arrangement. By approving this proposal, you
will be authorizing IMCO to change, with prior Board approval,
subadvisers in the future without first obtaining shareholder approval.
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 subadviser to
an investment company. Section 15 also requires that an investment
advisory agreement provide that it will terminate automatically upon
its "assignment," which, under the 1940 Act, generally includes the
transfer of an
Proxy Statement - 37
--------------------
advisory agreement or the transfer of control of the investment adviser
through the transfer of a con-trolling block of the adviser's
outstanding voting securities.
In conformity with Section 15 of the 1940 Act, each Fund currently must
obtain shareholder approval of a subadvisory agreement in order to
employ new subadvisers, replace existing subadvisers, change the terms
of a subadvisory agreement, or continue the employment of an existing
subadviser when that subadviser's contract terminates because of an
assignment.
The Board and IMCO currently may terminate a subadvisory agreement
without shareholder approval. Fund shareholders currently may terminate
a subadvisory 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 subadvisory agreement attached as Exhibit B is the type of
subadvisory agreement that would no longer require shareholder approval
if this proposal is approved, subject to compliance with other
conditions that the SEC requires.
If the proposal is approved, IMCO and the Funds would be permitted to
enter into new or amended subadvisory agreements without obtaining
shareholder approval. In all cases, however, approval by the Board,
including the Independent Board Members, will continue to be required
to approve any new or amended subadvisory agreement.
If the proposal is not approved by shareholders of a Fund, then IMCO
and the Fund would only enter into new or amended subadvisory
agreements with shareholder approval, adding additional time and
expense to making a change deemed beneficial by the Fund's Board.
Subadvisory agreements with affiliated subadvisers would remain subject
to the shareholder approval requirement even if the proposal is
approved.
o HOW WILL SHAREHOLDERS BE INFORMED OF NEW SUBADVISERS FOR A FUND?
Within 90 days following the hiring of any new subadviser, a Fund will
send to shareholders an information statement containing all of the
relevant information that otherwise would be in proxy materials. The
information statement will include, for example, disclosure as to the
level of fees to be paid by IMCO to the subadviser.
If this proposal is approved, amendments to the Agreement between IMCO
and a Fund will remain subject, where applicable, to the shareholder
and Board approval requirements of Section 15 of the 1940 Act and
related proxy statement disclosure requirements. Moreover, although
approval of the proposal generally will permit the Board and IMCO to
change the fees payable to a subadviser without shareholder approval,
which in turn may result in a different net fee retained by IMCO, such
changes will not permit the Board and IMCO to increase the rate of the
fees payable by the Fund to IMCO under the agreement without first
obtaining shareholder approval.
o WHAT ARE THE BENEFITS TO EACH FUND?
The Board believes that it is in the best interests of each Fund's
shareholders to allow IMCO the maximum flexibility to select,
supervise, and evaluate subadvisers without incurring the expense and
potential delay of seeking specific shareholder approval.
Generally, a change in investment management arrangements involving one
or more subadvisers requires that a Fund must call and hold a meeting
of the Fund's shareholders, create and distribute proxy materials, and
arrange for the solicitation of voting instructions from shareholders.
This process results in unnecessary administrative expenses to a Fund
and may cause harmful delays in executing changes that the Board and
IMCO have determined are necessary or desirable. These costs are
generally borne entirely by a Fund. If IMCO and the Board can rely on
the proposed policy, the Board would be able to act more quickly and
with less expense to a Fund to appoint an unaffiliated subadviser when
the Board and IMCO believe that the appointment would benefit the Fund
and its shareholders. If a
USAA funds - 38
- ---------------
Fund's shareholders are not satisfied with the subadvisory arrangements
that IMCO and the Board implement, they would, of course, be able to
exchange or sell their shares.
Also, the Board will oversee the subadviser selection process to ensure
that shareholders' interests are protected whenever IMCO selects a
subadviser or modifies a subadvisory agreement. The Board, including a
majority of the Independent Board Members, will continue to evaluate
and approve all new subadvisory agreements as well as any modification
to existing subadvisory agreements. In each review, the Board will
analyze all factors that it considers to be relevant to the
determination, including the nature, quality, and scope of services
provided by the subadvisers. The Board will compare the investment
performance of the assets managed by the subadviser with other accounts
with similar investment objectives managed by other advisers and will
review the subadviser's compliance with federal securities laws and
regulations. The Board believes that its review will ensure that IMCO
continues to act in the best interests of each Fund and its
shareholders.
o WHAT ARE THE CONDITIONS OF THE ORDER?
The Order grants each Fund relief from Section 15(a) of the 1940 Act
and certain rules thereunder in order for each Fund to operate in the
manner described in this proposal, subject to certain conditions,
including approval of this proposal by each Fund's shareholders. A Fund
will not rely on the Order unless all such conditions have been met.
The conditions for the relief set forth in the Order are as follows:
o Before a Fund may rely on the Order, the proposed "manager of
managers" structure of the Fund will be approved by a majority
of the Fund's outstanding voting securities, as defined in the
1940 Act.
o A Fund will disclose in its prospectus the existence,
substance, and effect of the Order. In addition, the Fund will
hold itself out to the public as employing a
"Manager/Subadviser" approach. The prospectus relating to the
Fund will prominently disclose that IMCO has ultimate
responsibility to oversee the subadviser and recommend its
hiring, termination, and replacement.
o IMCO will provide management and administrative services to a
Fund, including overall supervisory responsibility for the
general management and investment of the Fund, and, subject to
review and approval by the Board, will (i) set the Fund's
overall investment strategies; (ii) evaluate, select, and
recommend subadvisers to manage all or part of the Fund's
assets; (iii) when appropriate, allocate and reallocate the
Fund's assets among multiple subadvisers; (iv) monitor and
evaluate the investment performance of subadvisers; and (v)
implement procedures reasonably designed to ensure that the
subadvisers comply with the Fund's investment objectives,
policies, and restrictions.
o At all times, a majority of a Fund's Board will be Independent
Board Members, and the nomination of new or additional
Independent Board Members will be placed within the discretion
of the then existing Independent Board Members.
o IMCO will not enter into a subadvisory agreement with any
subadviser that is an affiliated person of a Fund or IMCO, as
defined in Section 2(a)(3) of the 1940 Act, without such
agreement, including the compensation to be paid thereunder,
being approved by the shareholders of the Fund.
o When a subadviser change is proposed for a Fund with an
affiliated subadviser, the Board, including a majority of the
Independent Board Members, will make a separate finding,
reflected in the Board's minutes, that such change is in the
best interests of the Fund and its shareholders and does not
involve a conflict of interest from which IMCO or the
affiliated subadviser derives an inappropriate advantage.
Proxy Statement - 39
--------------------
o No director or officer of a Fund or director 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) any interest in any subadviser for the
Fund except for (i) ownership of interests in IMCO or any
entity that controls, is controlled by, or is under common
control with IMCO or (ii) 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 subadviser or any
entity that controls, is controlled by, or is under common
control with a subadviser for the Fund.
o Within 90 days of the hiring of any new subadviser, IMCO will
furnish shareholders of a Fund all the information that would
have been included in a proxy statement. Such information will
include any changes in such disclosure caused by the addition
of a new subadviser.
o HOW DOES THE BOARD RECOMMEND SHAREHOLDERS VOTE ON PROPOSAL 3?
The Board recommends that shareholders vote "For" Proposal 3.
o WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO PERMIT IMCO TO
ENTER INTO NEW OR AMENDED SUBADVISORY AGREEMENTS WITHOUT OBTAINING
SHAREHOLDER APPROVAL?
Approval of Proposal 3 will require a "FOR" vote by a "majority of the
outstanding voting securities" of a Fund, as provided in the 1940 Act.
For this purpose, this means a "FOR" vote by 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.
PROPOSAL 4
APPROVAL OF AN AMENDMENT TO THE INVESTMENT
OBJECTIVE OF THE USAA GROWTH FUND
o WHAT CHANGE IS THE BOARD OF DIRECTORS PROPOSING TO THE FUND'S
INVESTMENT OBJECTIVE?
The Board of Directors proposes to change the Fund's investment
objective to read as follows:
"The Fund's investment objective is long-term growth of
capital."
o WHY IS THE BOARD OF DIRECTORS PROPOSING THIS CHANGE?
In connection with the new investment management structure, IMCO and
the Fund's Board have determined that it is most appropriate for the
USAA Growth Fund to have the sole investment objective of long-term
growth of capital. To date, in addition to the primary objective of
long-term growth of capital, the Fund has had secondary objectives of
regular income and conservation of principal. Although removing the
secondary objectives could add risk to the Fund's portfolio, the Board
and IMCO no longer believe the secondary objectives are appropriate
given the strategic direction of the Fund and investment style of the
current subadvisers.
o HOW DOES THE BOARD OF DIRECTORS RECOMMEND SHAREHOLDERS VOTE ON THIS
PROPOSAL?
The Board of Directors recommends that shareholders vote "For" Proposal
4.
USAA funds - 40
- ---------------
o WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO CHANGE THE FUND'S
INVESTMENT OBJECTIVE?
Approval of Proposal 4 will require a "FOR" vote by a "majority of the
outstanding voting securities" of the USAA Growth Fund, as provided in
the 1940 Act. For this purpose, this means a "FOR" vote by the lesser
of (i) more than 50% of the outstanding shares of the USAA Growth 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.
PROPOSAL 5
APPROVAL OF AN AMENDMENT TO THE INVESTMENT
OBJECTIVE OF THE USAA GROWTH & INCOME FUND
o WHAT CHANGE IS THE BOARD OF DIRECTORS PROPOSING TO THE FUND'S
INVESTMENT OBJECTIVE?
The Board of Directors proposes to change the Fund's investment
objective to read as follows:
"The Fund's primary investment objective is capital growth and
its secondary investment objective is current income."
o WHY IS THE BOARD OF DIRECTORS PROPOSING THIS CHANGE?
The Fund's current investment objective places equal emphasis on growth
and income. In recent years, there has been a dramatic reduction in the
number of companies that pay dividends with respect to their common
stock. As a result, it is increasingly difficult for any fund that
invests primarily in equity securities to comply with an objective that
places equal emphasis on growth and income. Thus, the Board proposes
that the Fund's objective be modified as described above.
o HOW DOES THE BOARD OF DIRECTORS RECOMMEND SHAREHOLDERS VOTE ON THIS
PROPOSAL?
The Board of Directors recommends that shareholders vote "For" Proposal
5.
o WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO CHANGE THE FUND'S
INVESTMENT OBJECTIVE?
Approval of Proposal 5 will require a "FOR" vote by a "majority of the
outstanding voting securities" of the USAA Growth & Income Fund, as
provided in the 1940 Act. For this purpose, this means a "FOR" vote by
the lesser of (i) more than 50% of the outstanding shares of the USAA
Growth & Income 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.
Proxy Statement - 41
--------------------
FURTHER INFORMATION ABOUT VOTING
AND THE SHAREHOLDER MEETING
QUORUM AND METHODS OF TABULATION
With respect to each proposal on which shareholders of a Fund are entitled to
vote, a majority of the shares of the Fund entitled to vote, represented in
person or by proxy, is required to constitute a quorum at the shareholder
meeting. Shareholders are entitled to one vote for each full share held and a
fractional vote for each fractional share held.
Each proposal requires a vote based on the total votes cast. As a result,
abstentions will assist the Fund in obtaining a quorum, and will have the effect
of an "AGAINST" vote on the outcome of the proposals. 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 and, as a result,
will have the effect of an "AGAINST" vote on the outcome of the proposals.
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 interests 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
by a majority of those shares of the Fund present at the shareholder meeting in
person or by proxy and entitled to vote thereon. The persons named as proxies
will vote those proxies that they are entitled to vote "FOR" the proposals in
favor of such an adjournment and will vote those proxies required to be voted
"AGAINST" the proposals against such adjournment.
SHARES OWNED BY USAA
As of July 31, 2002, USAA, a Texas reciprocal interinsurance exchange, held of
record or beneficially owned directly or indirectly through one or more of its
affiliates 15.07% (1,000,000 shares) of the USAA Value Fund.
Shares owned by USAA and its affiliates may be voted in favor of (or "FOR") 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.
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.
USAA funds - 42
- ---------------
LARGE SHAREHOLDERS
The following table identifies all persons other than USAA and its affiliates,
who, as of July 31, 2002, held of record or owned beneficially 5% or more of any
Fund's shares.
================================================================================
NAME AND ADDRESS NUMBER PERCENT
TITLE OF FUND OF BENEFICIAL OWNER OF SHARES OF FUND
- -------------------------------------------------------------------------------
Emerging Markets Fund Fidelity Investments Institutional 393,973 5.6%
Operations Company FIIOC
Agent Certain Employee Benefit Plans
100 Magellan Way
Covington, KY 41015-1999
================================================================================
OTHER BUSINESS
The Board 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 the Board's 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
Fund officers and IMCO employees may solicit proxies by mail or by telephone. In
addition, an outside proxy solicitation service, Georgeson Shareholder
Communications, Inc., anticipates soliciting proxies by telephone at an
estimated cost of $225,000. The exact cost will depend upon the services
rendered.
Votes also may be 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 SAS has in its records for their accounts
and would be asked for the last four digits of their Social Security numbers 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 also will 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, will be borne by the Funds.
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 any Fund,
by properly executing a later-dated proxy, or by attending the shareholder
meeting and voting in person. The last instruction we receive from you, either
paper or electronic, will be the one tabulated.
Proxy Statement - 43
--------------------
DATE FOR RECEIPT OF SHAREHOLDERS' PROPOSALS
FOR SUBSEQUENT SHAREHOLDER MEETINGS
Under the provisions of each Fund's charter documents and applicable law, no
annual meeting of shareholders is required. No Fund currently intends to hold
such a meeting. Ordinarily, there will be no shareholder meet-ing unless
required by the 1940 Act or otherwise. Shareholder proposals for inclusion in
the proxy statement for any subsequent meeting must be received by a Fund within
a reasonable period of time prior to any such shareholder meeting. Shareholders
collectively holding at least 10% of the outstanding shares of a Fund may
request a shareholder meeting at any time for the purpose of voting to remove
one or more of the directors. A Fund will assist in communicating to other
shareholders about such meeting.
FINANCIAL INFORMATION
EACH FUND, WITHOUT CHARGE, WILL FURNISH TO YOU UPON REQUEST A COPY OF THE FUND'S
ANNUAL REPORT FOR ITS MOST RECENT FISCAL YEAR AND A COPY OF ITS SEMI-ANNUAL
REPORT 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.
=================================================================
NUMBER OF EACH FUND'S SHARES OUTSTANDING AT AUGUST 9, 2002
FUND NAME SHARES
----------------------------------------------------------------
Aggressive Growth Fund 35,069,752
Balanced Strategy Fund 23,282,146
Capital Growth Fund 6,688,932
Cornerstone Strategy Fund 50,161,395
Emerging Markets Fund 7,029,354
First Start Growth Fund 18,421,049
Growth Fund 70,333,964
Growth & Income Fund 58,072,141
Growth and Tax Strategy Fund 14,045,006
Income Stock Fund 109,993,622
International Fund 21,480,183
Science & Technology Fund 35,260,510
Small Cap Stock Fund 10,708,569
Value Fund 6,678,041
World Growth Fund 18,620,608
==================================================================
USAA funds - 44
- ---------------
EXHIBIT A
FORM OF INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the ____ day of ______________, 2002 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 (IMCO),
and [USAA MUTUAL FUND, INC./USAA INVESTMENT TRUST], a [corporation/business
trust] organized under the laws of the state of [Maryland/Massachusetts] 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, IMCO is engaged in the business of rendering investment
management and advisory 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/beneficial interest] (the Shares) in separate series with each such series
representing interests in a separate portfolio of securities and other assets;
and
WHEREAS, the Company presently offers Shares in each of the series
identified in Schedule A hereto (the "Existing Funds") (such series, together
with all other series subsequently established by the Company with respect to
which the Company desires to retain IMCO to render management and investment
advisory services hereunder and with respect to which IMCO 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 IMCO.
(a) EXISTING FUNDS. The Company hereby appoints IMCO to act as manager
and investment adviser for each of the Existing Funds for the period and on the
terms herein set forth. IMCO 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 Existing Funds with respect to which it
desires to retain IMCO to render management and investment advisory services
hereunder, it shall so notify IMCO in writing. If IMCO is willing to render such
services it shall notify the Company in writing, whereupon the Company shall
appoint IMCO to act as manager and investment adviser for each of such series of
Shares for the period and on the terms herein set forth, IMCO shall accept such
appointment and agree to render the services herein set forth for the
compensation herein provided, and each of such series of Shares shall become a
Fund hereunder.
2. DUTIES OF IMCO.
Subject to the delegation of any such duties to one or more investment
subadvisers ("Subadvisers") as provided in Paragraph 3 hereof, IMCO, at its own
expense, shall furnish the following services and facilities to the Company:
(a) INVESTMENT PROGRAM. IMCO will (i) furnish continuously an
investment program for each Fund, (ii) determine (subject to the overall
supervision and review of the Board of [Directors/Trustees] of the Company (the
Board)) 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.
Exhibit A - 45
--------------
(b) MONITORING. Should the Board 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),
IMCO will monitor the services provided to the Portfolio, subject always to the
control of the Board. 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.
IMCO will report to the Board, 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. SUBADVISERS.
(a) Subject to the general supervision and control of the Board and
under the terms and conditions set forth in this Agreement, IMCO, at its own
expense, may select and contract with one or more Subadvisers to manage the
investment operations and composition of each Fund and render investment advice
for each Fund, including the purchase, retention and disposition of the
investments, securities and cash contained in each Fund, in accordance with such
Fund's investment objectives, policies and restrictions as stated in the
Company's [Articles of Incorporation/Agreement and Declaration of Trust],
By-Laws and such Fund's Prospectus and Statement of Additional Information
(SAI), as is from time to time in effect; provided that, (i) IMCO will continue
to have overall supervisory responsibility for the general management and
investment of each Fund's assets, and (ii) any contract with a Subadviser (a
Subadvisory Agreement) shall be in compliance with and approved in the manner
required by the 1940 Act and rules thereunder or in accordance with exemptive or
other relief granted by the Securities and Exchange Commission (SEC) or its
staff.
(b) Subject to the general supervision and control of the Board, IMCO
will have full discretion to (i) select new or additional Subadvisers for each
Fund, (ii) enter into and materially modify existing Subadvisory Agreements, and
(iii) terminate and replace any Subadviser. In connection with IMCO's
responsibilities herein, IMCO will assess each Fund's investment focus and will
seek to implement decisions with respect to the allocation and reallocation of
each Fund's assets among one or more current or additional Subadvisers from time
to time, as IMCO deems appropriate, to enable each Fund to achieve its
investment goals. In addition, IMCO will monitor compliance of each Subadviser
with the investment objectives, policies and restrictions of any Fund or Funds
(or portions of any Fund) under the management of such Subadviser, and review
and report to the Board on the performance of each Subadviser. IMCO will
furnish, or cause the appropriate Subadviser(s) to furnish, to the Company such
statistical information, with respect to the investments that a Fund (or
portions of any Fund) may hold or contemplate purchasing, as the Company may
reasonably request. On IMCO's own initiative, IMCO will apprise, or cause the
appropriate Subadviser(s) to apprise, the Company of important developments
materially affecting each Fund (or any portion of a Fund that they advise) and
will furnish the Company, from time to time, with such information as may be
appropriate for this purpose. Further, IMCO agrees to furnish, or cause the
appropriate Subadviser(s) to furnish, to the Board such periodic and special
reports as the Board may reasonably request. In addition, IMCO agrees to cause
the appropriate Subadviser(s) to furnish to third-party data reporting services
all currently available standardized performance information and other customary
data.
4. ALLOCATION OF EXPENSES.
Except for the services and facilities to be provided by IMCO set forth
in Paragraphs 2 and 3 above, the Company assumes and shall pay all expenses for
all other Company operations and activities and shall reimburse IMCO for any
such expenses incurred by IMCO. 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;
USAA funds - 46
- ---------------
(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 SEC and various states and other
jurisdictions;
(g) all expenses of shareholders' and Board 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 Board members 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.
5. ADVISORY FEE.
(a) For the services and facilities to be provided by IMCO as provided
in Paragraphs 2(a) and 3 hereof, the Company shall pay to IMCO 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 IMCO as provided in
Paragraph 2(b) hereof, the Company shall pay no fee.
(b) IMCO 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 IMCO as an advisory fee for current
services under this Agreement, the Company shall be obligated to pay IMCO
amounts previously waived or expenses paid by IMCO 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 Company
shall pay IMCO a pro rata portion of the amount that the Company 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, IMCO, acting by its own officers, directors or
employees or by a duly authorized subcontractor, is authorized to
Exhibit A - 47
--------------
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, IMCO 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.
IMCO may, to the extent permitted under Section 28(e) of the Securities
Exchange Act of 1934, as amended ("1934 Act"), cause a Fund to pay a broker or
dealer that provides brokerage or research services to IMCO, a Subadviser, the
Company or a Fund an amount of commission for effecting a Fund transaction in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction if IMCO determines, in good faith, that such
amount of commission is reasonable in relation to the value of such brokerage or
research services provided in terms of that particular transaction or IMCO's
overall responsibilities to the Fund, the Company or its other investment
advisory clients. To the extent permitted by Section 28(e), neither IMCO nor any
Subadviser shall be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of such action. In
addition, subject to seeking "best execution" and in compliance with the Conduct
Rules of the National Association of Securities Dealers, Inc., IMCO also may
consider sales of shares of the Company as a factor in the selection of brokers
and dealers. In this regard, the Company reserves the right to direct IMCO to
cause Subadvisers to effect transactions in Fund securities through
broker-dealers in a manner that will help generate resources to: (i) pay the
cost of certain expenses which the Company is required to pay or for which the
Company is required to arrange payment pursuant to this Agreement; or (ii)
recognize broker-dealers for the sale of shares of the Company. In addition, the
Company hereby agrees that any entity or person associated with IMCO or any
Subadviser that is a member of a national securities exchange is authorized to
effect any transaction on such exchange for the account of a Fund to the extent
and as permitted by Section 11(a)(1)(H) of the 1934 Act.
7. RELATIONS WITH COMPANY.
Subject to and in accordance with the [Articles of
Incorporation/Agreement and Declaration of Trust] and Bylaws of the Company and
of IMCO, respectively, it is understood that Board members, officers, agents and
shareholders of the Company are or may be interested in IMCO (or any successor
thereof) as directors, officers, or otherwise, that directors, officers, agents
and shareholders of IMCO are or may be interested in the Company as Board
members, officers, shareholders or otherwise, that IMCO (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 such [Articles of
Incorporation/Agreement and Declaration of Trust] and Bylaws.
8. LIABILITY OF IMCO.
Neither IMCO 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 IMCO 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 Board member 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 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 and become effective
with respect to any Existing Fund on the first date upon which the Agreement
shall have been approved by a majority of the outstanding voting
USAA funds - 48
- ---------------
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
IMCO in accordance with Paragraph 1(b) hereof that IMCO is willing to serve as
the manager and investment adviser 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 July 31, 2004, and, with respect to each
additional Fund, through the first July 31 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 Board 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 Board members 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 Board or by vote of a majority of the
outstanding shares (as defined in the 1940 Act) of a Fund, or by IMCO on sixty
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 IMCO 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 take appropriate action 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.
12. SERVICES NOT EXCLUSIVE.
The services of IMCO to the Company hereunder are not to be deemed
exclusive, and IMCO shall be free to render similar services to others so long
as its services hereunder are not impaired thereby.
13. MISCELLANEOUS.
(a) AMENDMENT OF AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought. No material amendment of this Agreement
shall be effective until approved in the manner required by the 1940 Act and
rules thereunder or in accordance with exemptive or other relief granted by the
SEC or its staff.
(b) SEVERABILITY. 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. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
Exhibit A - 49
--------------
(c) GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Texas, without giving effect to the conflicts of laws
principles thereof, and in accordance with the 1940 Act. To the extent that the
applicable laws of the State of Texas conflict with the applicable provisions of
the 1940 Act, the latter shall control.
(d) 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.
(e) HEADINGS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(f) 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.
(g) [For USAA Investment Trust only] LIABILITY OF BOARD MEMBERS AND
SHAREHOLDERS. Any obligations of the Funds under this Agreement are not binding
upon the Board members or the shareholders individually but are binding only
upon the assets and property of the Funds.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above.
USAA _____________________________ USAA INVESTMENT MANAGEMENT
COMPANY
By: By:
------------------------------- ---------------------------
Name: Name:
Title: Title:
USAA funds - 50
- ---------------
SCHEDULE A TO ADVISORY AGREEMENT
LISTING OF FUNDS
[NOTE: THE FOLLOWING LISTING WAS TAKEN FROM USAA MUTUAL FUND, INC. AND IS
INCLUDED AS AN EXAMPLE OF WHAT WOULD APPEAR IN THIS SECTION. THE LISTING WILL
NEED TO BE UPDATED TO REFLECT THE PARTICULAR COMPANY AND FUNDS INVOLVED.]
NAME OF FUND
Aggressive Growth Fund
Capital Growth Fund
First Start Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Science & Technology Fund
Small Cap Stock Fund
Value Fund
Exhibit A - 51
--------------
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 IMCO, as compensation for IMCO'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 Board to be appropriate over the
same period.
(b) INDEX, CLASS AND CHANGES THERETO. The Board has 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 Board may, by a vote of the Board voting in person, including
a majority of the Board members 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 or classes 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 IMCO, a different
index (the Successor Index) may be substituted for the Index in prospectively
calculating the Performance Adjustment, and/or a different class or classes 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 Successor 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 (366 in leap years).
(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 (366 in leap
years). 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 ensure
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)
for the Funds listed in Schedule B-1 on the effective date of this Agreement
shall be measured from August 1, 2001 (September 1, 2001 with respect to the
USAA Value Fund) (the Commencement Date). The Commencement Date for any Fund
added to Schedule B-1 after the effective date of this Agreement shall be the
effective date of the amendment adding such Fund to Schedule B-1. The
Performance Period shall consist of the current month plus the preceding months
USAA funds - 52
- ---------------
through the Commencement Date until a period of 36 months is included in the
Performance Period, provided, however, that no Performance Adjustment shall be
made with respect to any period that is less than 12 months, and provided
further, that any Performance Adjustment for a period prior to the effective
date of this Agreement shall be based on the Fund's performance relative to the
designated index in effect during that period under any prior agreement with
respect to the Fund. 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 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, 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 - 53
--------------
SCHEDULE B-1 TO ADVISORY AGREEMENT - LISTING OF FUNDS
WITH PERFORMANCE ADJUSTMENT
[NOTE: THE FOLLOWING LISTING WAS TAKEN FROM USAA MUTUAL FUND, INC. AND IS
INCLUDED AS AN EXAMPLE OF WHAT WOULD APPEAR IN THIS SECTION. THE LISTING WILL
NEED TO BE UPDATED TO REFLECT THE PARTICULAR COMPANY AND FUNDS INVOLVED.]
ANNUAL BASIC
NAME OF FUND1 PERFORMANCE INDEX FEE RATE
- -------------------------------------------------------------------------------
Aggressive Growth Fund Lipper Large-Cap Growth Funds Index *
Capital Growth Fund Lipper Small-Cap Growth Funds Index .85%
First Start Growth Fund Lipper Large-Cap Growth Funds Index .75%
Growth Fund Lipper Large-Cap Growth Funds Index .75%
Growth & Income Fund Lipper Multi-Cap Core Funds Index .60%
Income Stock Fund Lipper Equity Income Funds Index .50%
Science & Technology Fund Lipper Science & Technology Funds Index .75%
Small Cap Stock Fund Lipper Small-Cap Core Funds Index .75%
Value Fund Lipper Multi-Cap Value Funds Index .75%
- --------------------
1 The Performance Adjustment initially will be determined by reference to the
sole outstanding class of shares of each Fund. If, in the future, a Fund offers
more than one class of shares, the Performance Adjustment for that Fund will
continue to be determined by reference to the initial class of shares, unless
the Board determines otherwise.
* 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.
USAA funds - 54
- ---------------
SCHEDULE B-2 TO ADVISORY AGREEMENT - PERFORMANCE ADJUSTMENT RATE
[NOTE: THE FOLLOWING WAS TAKEN FROM USAA MUTUAL FUND, INC. AND IS INCLUDED AS AN
EXAMPLE OF WHAT WOULD APPEAR IN THIS SECTION. THE SCHEDULE WILL NEED TO BE
UPDATED TO REFLECT THE PARTICULAR COMPANY AND FUNDS INVOLVED.]
Aggressive Growth Fund
Capital Growth Fund
First Start Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Science & Technology Fund
Small Cap Stock Fund
Value Fund
Over/Under Performance Performance Adjustment Rate
Relative to Index (in basis points as a percentage
(in basis points) of average net assets)
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
Exhibit A - 55
--------------
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 IMCO 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, for each calendar day of such month, by (ii)
the number of such days.
USAA funds - 56
- ---------------
SCHEDULE C-1 TO ADVISORY AGREEMENT - LISTING OF FUNDS
AND FEE RATES
[NOTE: THE FOLLOWING LISTING WAS TAKEN FROM USAA MUTUAL FUND, INC. AND IS
INCLUDED AS AN EXAMPLE OF WHAT WOULD APPEAR IN THIS SECTION. THE LISTING WILL
NEED TO BE UPDATED TO REFLECT THE PARTICULAR COMPANY AND FUNDS INVOLVED.]
NAME OF FUND FEE RATE
- -----------------------------------------------------------------------
Exhibit A - 57
--------------
SCHEDULE D TO ADVISORY AGREEMENT- FOR FUNDS WITH FEE
WAIVER AND EXPENSE REIMBURSEMENT RECOVERY PLANS
[NOTE: THE FOLLOWING WAS TAKEN FROM USAA MUTUAL FUND, INC. AND IS INCLUDED AS AN
EXAMPLE OF WHAT WOULD APPEAR IN THIS SECTION. THE SCHEDULE WILL NEED TO BE
UPDATED TO REFLECT THE PARTICULAR COMPANY AND FUNDS INVOLVED.]
NAME OF FUND ENDING DATE PERCENTAGE OF
AVERAGE NET ASSETS
USAA funds - 58
- ---------------
EXHIBIT B
FORM OF INVESTMENT SUBADVISORY AGREEMENT
AGREEMENT made as of the ____th day of _________, 2002 (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 (IMCO) and [SUBADVISER], a [corporation/limited liability
partnership or company] organized under the laws of [___________________] and
having its principal place of business in [__________________________]
([Subadviser]).
WHEREAS, IMCO serves as the investment adviser to [USAA Mutual Fund,
Inc./USAA Investment Trust], a [corporation/business trust] organized under the
laws of the [state of Maryland/Commonwealth of Massachusetts] (the Company) and
registered as an open-end management investment company under the Investment
Company Act of 1940, as amended (the 1940 Act); and
WHEREAS, under its Investment Advisory Agreement with the Company
(Investment Advisory Agreement), IMCO is authorized to appoint subadvisers for
series of the Company (each a Fund, or collectively Funds); and
WHEREAS, IMCO wishes to retain [Subadviser] to render investment
advisory services to such series (or portions thereof) of the Company as now or
hereafter may be identified in Schedule A to this Agreement, as such Schedule A
may be amended from time to time (each such series or portion thereof referred
to herein as a Fund Account and collectively as Fund Accounts); and
WHEREAS, [Subadviser] is willing to provide such services to the Fund
Accounts and IMCO upon the terms and conditions and for the compensation set
forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. APPOINTMENT OF [SUBADVISER]. IMCO hereby appoints [Subadviser] to act as an
investment subadviser for each Fund Account in accordance with the terms and
conditions of this Agreement. [Subadviser] will be an independent contractor and
will have no authority to act for or represent the Company or IMCO in any way or
otherwise be deemed an agent of the Company or IMCO except as expressly
authorized in this Agreement or another writing by the Company, IMCO and
[Subadviser]. [Subadviser] accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. DUTIES OF [SUBADVISER].
(A) AUTHORITY TO INVEST. Subject to the control and supervision of IMCO
and the Company's Board of Directors (the Board), [Subadviser], at its own
expense, shall have full discretion to manage, supervise and direct the
investment and reinvestment of Fund Accounts allocated to it by IMCO from time
to time. It is understood that a Fund Account may consist of all, a portion of,
or none of the assets of the Fund, and that IMCO has the right to allocate and
reallocate such assets to a Fund Account at any time. [Subadviser] shall perform
its duties described herein in a manner consistent with the investment
objective, policies and restrictions set forth in the then current Prospectus
and Statement of Additional Information (SAI) for each Fund. Should [Subadviser]
anticipate materially modifying its investment process, it must provide written
notice in advance to IMCO, and any affected Prospectus and SAI should be amended
accordingly.
Exhibit B - 59
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With respect to the management of each Fund Account pursuant to this
Agreement, [Subadviser] shall determine what investments shall be purchased,
held, sold or exchanged by each Fund Account and what portion, if any, of the
assets of each Fund Account shall be held in cash or cash equivalents, and
purchase or sell portfolio securities for each Fund Account; except that, to the
extent [Subadviser] wishes to hold cash or cash equivalents in excess of 10% of
a Fund Account's assets for longer than two consecutive business days,
[Subadviser] must request in writing and receive advance permission from IMCO.
In accordance with Subsection (b) of this Section 2, [Subadviser] shall
arrange for the execution of all orders for the purchase and sale of securities
and other investments for each Fund 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.
In the performance of its duties, [Subadviser] will act in the best
interests of each Fund and will comply with (i) applicable laws and regulations,
including, but not limited to, the 1940 Act and the Investment Advisers Act of
1940, as amended (Advisers Act), and the rules under each, (ii) the terms of
this Agreement, (iii) the stated investment objective, policies and restrictions
of each Fund, as stated in the then-current Prospectus and Statement of
Additional Information of each Fund, (iv) the Company's compliance procedures
and other policies, procedures or guidelines as the Board or IMCO reasonably may
establish from time to time, (v) the provisions of the Internal Revenue Code of
1986, as amended (Code), applicable to "regulated investment companies" (as
defined in Section 851 of the Code), including Section 817(h), as from time to
time in effect, and (vi) the written instructions of IMCO. [Subadviser] shall
establish compliance procedures reasonably calculated to ensure compliance with
the foregoing. IMCO shall be responsible for providing [Subadviser] with the
Company's [Articles of Incorporation/Declaration of Trust], as amended and
supplemented, the Company's Bylaws and amendments thereto and current copies of
the materials specified in Subsections (a)(iii) and (iv) of this Section 2. IMCO
shall provide [Subadviser] with prior written notice of any material change to
the Company's Registration Statement under the Securities Act of 1933 and the
1940 Act that would affect [Subadviser]'s management of a Fund Account.
(B) PORTFOLIO TRANSACTIONS. In connection with the management of the
investment and reinvestment of the Fund Accounts' assets, [Subadviser] will
select the brokers or dealers that will execute purchase and sale transactions
for the Fund Accounts, subject to the conditions herein. In the selection of
broker-dealers and the placement of orders for the purchase and sale of
portfolio investments for the Fund Accounts, [Subadviser] shall use its best
efforts to obtain for the Fund Accounts the best overall terms available, except
to the extent it may be permitted to pay higher brokerage commissions for
brokerage and research services as described below. In using its best efforts to
obtain the best terms available, [Subadviser], bearing in mind each Fund's best
interests at all times, shall consider all factors it deems relevant, including
by way of illustration, price, the size of the transaction, the nature of the
market for the security, the amount of the commission and dealer's spread or
mark-up, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved, the general execution and operational facilities of the broker-dealer
and the quality of service rendered by the broker-dealer in other transactions.
Subject to such policies as the Board may determine and to the extent
authorized by Section 28(e) of the Securities Exchange Act of 1934 (Exchange
Act), [Subadviser] shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused a Fund Account to pay a broker-dealer that provides brokerage and
research services to [Subadviser] an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker-dealer offering equally good execution capability in the portfolio
investment would have charged for effecting that transaction if [Subadviser]
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or
[Subadviser]'s overall responsibilities with respect to the Fund and to other
clients of [Subadviser] as to which [Subadviser] exercises investment
discretion. The Board or IMCO may direct [Subadviser] to effect transactions in
portfolio securities through broker-dealers in a manner that will help generate
resources to pay the cost of certain expenses that the Company is required to
pay or for which the Company is required to arrange payment.
USAA funds - 60
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On occasions when [Subadviser] deems the purchase or sale of a security
to be in the best interest of a Fund as well as other clients of [Subadviser],
[Subadviser], to the extent permitted by applicable laws and regulations, may
aggregate the securities to be purchased or sold to attempt to obtain a more
favorable price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by [Subadviser] in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to its other clients over time.
[Subadviser] may buy securities for a Fund Account at the same time it
is selling such securities for another client account and may sell securities
for a Fund Account 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, [Subadviser] may effectuate cross transactions between a Fund
Account and such other account if it deems this to be advantageous.
[Subadviser] will advise the Funds' custodian or such depository or
agents as may be designated by the custodian and IMCO 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 Funds' custodian may need to settle a security's purchase or sale.
[Subadviser] shall not have possession or custody of any Fund's investments. The
Company shall be responsible for all custodial agreements and the payment of all
custodial charges and fees and, upon [Subadviser] giving proper instructions to
the custodian, [Subadviser] shall have no responsibility or liability for the
acts, omissions or other conduct of the custodian.
Notwithstanding the foregoing, [Subadviser] agrees that IMCO 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
transactions on behalf of the Fund may not be effected, including, without
limitation, brokers or dealers affiliated with IMCO. [Subadviser] shall refrain
from purchasing such securities for a Fund Account or directing any portfolio
transaction to any such broker or dealer on behalf of a Fund Account, unless and
until the written approval of IMCO to do so is obtained. In addition,
[Subadviser] agrees that it shall not direct portfolio transactions for the Fund
Accounts through any broker or dealer that is an "affiliated person" (as that
term is defined in the 1940 Act or interpreted under applicable rules and
regulations of the Commission) of [Subadviser], except as permitted under the
1940 Act. IMCO agrees that it will provide [Subadviser] with a list of brokers
and dealers that are affiliated persons of the Funds, or affiliated persons of
such persons, and shall timely update that list as the need arises. The Funds
agree that any entity or person associated with IMCO or [Subadviser] that is a
member of a national securities exchange is authorized to effect any transaction
on such exchange for the account of the Funds that is permitted by Section 11(a)
of the Exchange Act, and the Funds consent to the retention of compensation for
such transactions.
(C) EXPENSES. [Subadviser], at its expense, will furnish all necessary
facilities and personnel, including salaries, expenses and fees of any personnel
required for them to faithfully perform their duties under this Agreement and
administrative facilities, including bookkeeping, and all equipment and services
necessary for the efficient conduct of [Subadviser]'s duties under this
Agreement. However, [Subadviser] shall not be obligated to pay any expenses of
IMCO, the Company or the Funds, including without limitation, interest and
taxes, brokerage commissions and other costs in connection with the purchase or
sale of securities or other investment instruments for the Funds and custodian
fees and expenses.
(D) VALUATION. Securities traded on a national securities exchange or
the NASDAQ market for which market quotes are readily available will be valued
on each day the New York Stock Exchange is open for business. For those
securities held in Fund Accounts subadvised by [Subadviser] for which market
quotes are not readily available, [Subadviser], at its expense and in accordance
with procedures and methods established by the Board, which may be amended from
time to time, will provide assistance to IMCO in determining the fair value of
such securities, including providing market price information relating to these
assets of the Fund. [Subadviser] also shall monitor for "significant events"
that occur after the closing of a market but before the Funds calculate
Exhibit B - 61
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their net asset values and that may affect the valuation of any Fund Account's
portfolio securities and shall notify IMCO immediately of the occurrence of any
such events.
(E) REPORTS AND AVAILABILITY OF PERSONNEL. [Subadviser], at its
expense, shall render to the Board and IMCO such periodic and special reports as
the Board and IMCO may reasonably request with respect to matters relating to
the duties of [Subadviser] set forth herein. [Subadviser], at its expense, will
make available to the Board and IMCO at reasonable times its portfolio managers
and other appropriate personnel in order to review investment policies of the
Funds and to consult with the Board and IMCO regarding the investment affairs of
the Funds, including economic, statistical and investment matters relevant to
[Subadviser]'s duties hereunder.
(F) COMPLIANCE MATTERS. [Subadviser], at its expense, will provide IMCO
with such compliance reports relating to its duties under this Agreement as may
be agreed upon by such parties from time to time. [Subadviser] also shall
cooperate with and provide reasonable assistance to IMCO, the Company's
administrator, the Company's custodian and foreign custodians, the Company's
transfer agent and pricing agents and all other agents and representatives of
the Company and IMCO, keep all such persons fully informed as to such matters as
they may reasonably deem necessary to the performance of their obligations to
the Company and IMCO, provide prompt responses to reasonable requests made by
such persons and maintain any appropriate interfaces with each so as to promote
the efficient exchange of information.
(G) BOOKS AND RECORDS. [Subadviser] will maintain for the Funds all
books and records required to be maintained by the Funds pursuant to the 1940
Act and the rules and regulations promulgated thereunder insofar as such records
relate to the investment affairs of the Fund Accounts. Pursuant to Rule 31a-3
under the 1940 Act, [Subadviser] agrees that: (i) all records it maintains for a
Fund Account are the property of the Fund; (ii) it will surrender promptly to a
Fund or IMCO any such records (or copies of such records) upon the Fund's or
IMCO's request; and (iii) it will preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records it maintains for any Fund Account.
Notwithstanding subsection (ii) above, [Subadviser] may maintain copies of such
records to comply with its recordkeeping obligations.
(H) PROXIES. [Subadviser] will, unless and until otherwise directed by
IMCO or the Board, vote proxies with respect to a Fund Account's securities and
exercise rights in corporate actions or otherwise in accordance with
[Subadviser]'s proxy voting guidelines, as amended from time to time, which
shall be provided to IMCO.
3. ADVISORY FEE. IMCO shall pay to [Subadviser] as compensation for
[Subadviser]'s services rendered pursuant to this Agreement a fee based on the
average daily net assets of each Fund Account at the annual rates set forth in
Schedule C, which schedule can be modified from time to time, subject to any
appropriate approvals required by the 1940 Act. Such fees shall be calculated
daily and payable monthly in arrears within 15 business days after the end of
such month. IMCO (and not the Funds) shall pay such fees. If [Subadviser] shall
serve for less than the whole of a month, the compensation as specified shall be
prorated based upon the number of calendar days during which this Agreement is
in effect during such month, and the fee shall be computed based upon the
average daily net assets of a Fund Account for such days.
4. REPRESENTATIONS AND WARRANTIES.
(A) [SUBADVISER]. [Subadviser] represents and warrants to IMCO that (i)
the retention of [Subadviser] by IMCO as contemplated by this Agreement is
authorized by [Subadviser]'s governing documents; (ii) the execution, delivery
and performance of this Agreement does not violate any obligation by which
[Subadviser] or its property is bound, whether arising by contract, operation of
law or otherwise; (iii) this Agreement has been duly authorized by appropriate
action of [Subadviser] and when executed and delivered by [Subadviser] will be a
legal, valid and binding obligation of [Subadviser], enforceable against
[Subadviser] in accordance with its terms, 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); (iv) [Subadviser] is registered
USAA funds - 62
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as an investment adviser under the Advisers Act; (v) [Subadviser] has adopted a
written code of ethics complying with the requirements of Rule 17j-1 under the
1940 Act and instituted implementation procedures and that [Subadviser] and
certain of its employees, officers and partners are subject to reporting
requirements thereunder and, accordingly, agrees that it shall, on a timely
basis, furnish a copy of such code of ethics to IMCO, and shall cause its
employees, officers, and partners to furnish to IMCO all reports and information
required to be provided under Rule 17j-1(c)(2) with respect to such persons;
(vi) [Subadviser] is not prohibited by the 1940 Act, the Advisers Act or other
law, regulation or order from performing the services contemplated by this
Agreement; (vii) [Subadviser] will promptly notify IMCO of the occurrence of any
event that would disqualify [Subadviser] from serving as investment manager of
an investment company pursuant to Section 9(a) of the 1940 Act or otherwise;
(viii) [Subadviser] has provided IMCO with a copy of its Form ADV, which as of
the date of this Agreement is its Form ADV as most recently filed with the SEC,
and promptly will furnish a copy of all amendments to IMCO at least annually;
(ix) [Subadviser] will notify IMCO of any "assignment" (as defined in the 1940
Act) of this Agreement or change of control of [Subadviser], as applicable, and
any changes in the key personnel who are either the portfolio manager(s) of any
Fund Account or senior management of [Subadviser], in each case prior to or
promptly after, such change; and (x) [Subadviser] has adequate disaster recovery
and interruption prevention measures reasonably designed to ensure business
resumption in accordance with applicable law and within industry standards.
(B) IMCO. IMCO represents and warrants to [Subadviser] that (i) the
retention of [Subadviser] by IMCO as contemplated by this Agreement is
authorized by the respective governing documents of the Company and IMCO; (ii)
the execution, delivery and performance of each of this Agreement and the
Investment Advisory Agreement does not violate any obligation by which the
Company or IMCO or their respective property is bound, whether arising by
contract, operation of law or otherwise; (iii) each of this Agreement and the
Investment Advisory Agreement has been duly authorized by appropriate action of
the Company and IMCO and when executed and delivered by IMCO will be a legal,
valid and binding obligation of the Company and IMCO, enforceable against the
Company and IMCO in accordance with its terms, 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); (iv) IMCO is registered as an
investment adviser under the Advisers Act; (v) IMCO has adopted a written code
of ethics complying with the requirements of Rule 17j-1 under the 1940 Act and
instituted implementation procedures and that IMCO and certain of its employees,
officers and directors are subject to reporting requirements thereunder; (vi)
IMCO is not prohibited by the 1940 Act, the Advisers Act or other law,
regulation or order from performing the services contemplated by this Agreement;
and (vii) IMCO will promptly notify [Subadviser] of the occurrence of any event
that would disqualify IMCO from serving as investment manager of an investment
company pursuant to Section 9(a) of the 1940 Act or otherwise.
5. LIABILITY AND INDEMNIFICATION.
(A) [SUBADVISER]. [Subadviser] shall indemnify and hold harmless the
Company, a Fund, IMCO, any affiliated persons thereof (within the meaning of the
1940 Act) and any controlling persons thereof (as described in Section 15 of the
Securities Act of 1933, as amended (the 1933 Act))(collectively, IMCO
Indemnities) for any and all losses, claims, damages, liabilities or litigation
(including reasonable legal and other expenses) to which the IMCO Indemnities
may become subject under the 1933 Act, the 1940 Act, the Advisers Act, or under
any other statute, at common law or otherwise arising out of (i) any negligence,
willful misconduct, bad faith or reckless disregard of [Subadviser] in the
performance of any of its duties or obligations hereunder or (ii) any untrue
statement of a material fact contained in the Prospectus and SAI, proxy
materials, reports, advertisements, sales literature, or other materials
pertaining to the Funds or the omission to state therein a material fact known
to [Subadviser] which was required to be stated therein or necessary to make the
statements therein not misleading, if such statement or omission was made in
reliance upon information furnished in writing to IMCO or the Company by
[Subadviser] Indemnities (as defined below) for use therein.
Exhibit B - 63
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(B) IMCO. IMCO shall indemnify and hold harmless [Subadviser], any
affiliated persons thereof (within the meaning of the 1940 Act) (collectively,
[Subadviser] Indemnities) for any and all losses, claims, damages, liabilities
or litigation (including reasonable legal and other expenses) to which the
[Subadviser] Indemnities may become subject under the 1933 Act, the 1940 Act,
the Advisers Act, or under any other statute, at common law or otherwise arising
out of (i) any negligence, willful misconduct, bad faith or reckless disregard
by IMCO in the performance of any of its duties or obligations hereunder or (ii)
any untrue statement of a material fact contained in the Prospectus and SAI,
proxy materials, reports, advertisements, sales literature, or other materials
pertaining to the Funds or the omission to state therein a material fact known
to IMCO which was required to be stated therein or necessary to make the
statements therein not misleading, unless such statement or omission was made in
reliance upon information furnished in writing by [Subadviser] Indemnities to
IMCO or the Company.
6. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement shall become
effective with respect to a Fund upon its execution; provided, however, that
this Agreement shall not become effective with respect to a Fund unless it has
first been approved in the manner required by the 1940 Act and rules thereunder
or in accordance with exemptive or other relief granted by the SEC or its staff.
This Agreement shall remain in full force and effect continuously thereafter,
except as follows:
(a) By vote of a majority of (i) the Board members who are not
"interested persons" (as defined in the 1940 Act) of the Company, IMCO, or
[Subadviser] (Independent Board Members) or (ii) the outstanding voting shares
of a Fund, such Fund may at any time terminate this Agreement, without the
payment of any penalty, by providing not more than 60 days' nor less than 10
days' written notice delivered or mailed by registered mail, postage prepaid, to
IMCO and [Subadviser].
(b) This Agreement will terminate automatically with respect to a Fund,
without the payment of any penalty, unless within two years after its initial
effectiveness and at least annually thereafter, the continuance of the Agreement
is specifically approved by (i) the Board or the shareholders of the Fund by the
affirmative vote of a majority of the outstanding shares of the Fund, and (ii) a
majority of the Independent Board Members, by vote cast in person at a meeting
called for the purpose of voting on such approval. If the continuance of this
Agreement is submitted to the shareholders of the Fund for their approval and
such shareholders fail to approve such continuance as provided herein,
[Subadviser] may continue to serve hereunder in a manner consistent with the
1940 Act and the rules thereunder.
(c) IMCO may at any time terminate this Agreement with respect to a
Fund, without the payment of any penalty, by written notice delivered in person
or by facsimile, or mailed by registered mail, postage prepaid, to [Subadviser].
[Subadviser] may at any time, without the payment of any penalty, terminate this
Agreement with respect to a Fund by not less than 90 days' written notice
delivered or mailed by registered mail, postage prepaid, to IMCO.
(d) This Agreement automatically and immediately shall terminate with
respect to the Funds, without the payment of any penalty, in the event of its
assignment (as that term is defined in the 1940 Act or interpreted under
applicable rules and regulations of the Commission) or if the Investment
Advisory Agreement shall terminate for any reason.
(e) Any notice of termination served on [Subadviser] by IMCO shall be
without prejudice to the obligation of [Subadviser] to complete transactions
already initiated or acted upon with respect to a Fund.
Upon termination of this Agreement, the duties of IMCO delegated to
[Subadviser] under this Agreement automatically shall revert to IMCO.
Notwithstanding any termination of this Agreement with respect to a Fund,
Sections 5, 10(a), 10(e), 11(a), 11(c) and 11(g) of this Agreement shall remain
in effect after any such termination.
USAA funds - 64
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7. AMENDMENT OF AGREEMENT. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought. No material amendment of this Agreement shall be
effective until approved in the manner required by the 1940 Act, any rules
thereunder or any exemptive or other relief granted by the SEC or its staff
(Applicable Law).
8. 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 [Subadviser] to IMCO in connection
with the Funds hereunder are not to be deemed exclusive, and [Subadviser] shall
be free to render investment advisory services to others so long as its services
hereunder are not impaired thereby. It is understood that the persons employed
by [Subadviser] to assist in the performance of its duties hereunder will not
devote their full time to such services and nothing contained herein shall be
deemed to limit or restrict in any manner whatsoever the right of [Subadviser]
to engage in or devote time and attention to other businesses or to render
services of whatever kind or nature. It is understood that IMCO may appoint at
any time in accordance with Applicable Law one or more subadvisers, in addition
to [Subadviser], or IMCO itself, to perform investment advisory services to any
portion of the Funds.
10. ADDITIONAL AGREEMENTS.
(A) ACCESS TO INFORMATION. [Subadviser] shall, upon reasonable notice,
afford IMCO at all reasonable times access to [Subadviser]'s officers,
employees, agents and offices and to all its relevant books and records and
shall furnish IMCO with all relevant financial and other data and information as
requested; provided, however, that nothing contained herein shall obligate
[Subadviser] to provide IMCO with access to the books and records of
[Subadviser] relating to any other accounts other than the Funds or where such
access is prohibited by law.
(B) CONFIDENTIALITY. [Subadviser], and its officers, employees and
authorized representatives, shall treat confidentially and as proprietary
information of the Company all records and information relative to the Company
and prior, present or potential shareholders, and will not use such records and
information for any purpose other than performance of its responsibilities and
duties hereunder, except after prior notification to and approval in writing by
the Company, which approval shall not be unreasonably withheld and may not be
withheld where [Subadviser] may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Company.
(C) PRIVACY POLICY. [Subadviser] acknowledges that nonpublic customer
information (as defined in Regulation S-P, including any amendments thereto) of
customers of the Funds received from IMCO is subject to the limitations on
redisclosure and reuse set forth in Section 248.11 of such Regulation, and
agrees such information (i) shall not be disclosed to any third party for any
purpose without the written consent of IMCO unless permitted by exceptions set
forth in Sections 248.14 or 248.15 of such Regulation and (ii) shall be
safeguarded pursuant to procedures adopted under Section 248.30 of such
Regulation if so required.
(D) 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 unreasonably 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. During the term of this
Agreement, IMCO agrees to furnish to
Exhibit B - 65
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[Subadviser] at its principal office all Prospectuses, Statements of Additional
Information, proxy statements, reports to shareholders, sales literature, or
other material prepared for distribution to sales personnel, share-holders of
the Company or the public, which refer to [Subadviser] or its clients in any
way, prior to use thereof and not to use such material if [Subadviser]
reasonably objects in writing two business days (or such other time as may be
mutually agreed upon) after receipt thereof. Advance review shall not be
required from [Subadviser] with respect to 1) sales literature in which
[Subadviser] is only referenced in a listing of subadvisers to USAA funds; and
2) other materials as agreed upon mutually by IMCO and [Subadviser]. Sales
literature may be furnished to [Subadviser] hereunder by first-class or
overnight mail, electronic or facsimile transmission, or hand delivery.
(E) NOTIFICATIONS. [Subadviser] agrees that it will promptly notify
IMCO in the event that [Subadviser] or any of its affiliates is or expects to
become the subject of an administrative proceeding or enforcement action by the
Commission or other regulatory body with applicable jurisdiction.
(F) INSURANCE. [Subadviser] 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 [Subadviser]'s business activities.
(G) SHAREHOLDER MEETING EXPENSES. In the event that the Company shall
be required to call a meeting of shareholders solely due to actions involving
[Subadviser], including, without limitation, a change of control of
[Subadviser], [Subadviser] 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:
IMCO: USAA Investment Management Company
9800 Fredericksburg Road, A-O3-W
San Antonio, Texas 78288
Facsimile No.: (210) 498-4022
Attention: Securities Counsel & Compliance Dept.
[Subadviser]: [Subadviser's Address and Contact]
(B) SEVERABILITY. 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. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
(C) GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Texas, without giving effect to the conflicts of laws
principles thereof, and in accordance with the 1940 Act. To the extent that the
applicable laws of the State of Texas conflict with the applicable provisions of
the 1940 Act, the latter shall control.
(D) 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.
(E) HEADINGS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
USAA funds - 66
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(F) 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.
(G) [FOR AGREEMENTS RELATING TO FUNDS IN USAA INVESTMENT TRUST]
LIABILITY OF TRUSTEES AND SHAREHOLDERS. Any obligations of the Funds under this
Agreement are not binding upon the Directors or the shareholders individually
but are binding only upon the assets and property of the Funds.
IN WITNESS WHEREOF, IMCO and [Subadviser] have caused this Agreement to
be executed as of the date first set forth above.
Attest: USAA INVESTMENT MANAGEMENT
COMPANY
By: ____________________________ By: _____________________________
Name: Name: Christopher W. Claus
Title: Title: President
Attest: [SUBADVISER]
By: _____________________________ By: ______________________________
Name: Name:
Title: Title:
Exhibit B - 67
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SCHEDULE A
[LIST OF FUNDS]
USAA funds - 68
- ---------------
SCHEDULE B
FEES
Rate per annum of the average daily net
Fund Account assets of the Fund Account
Exhibit B - 69
---------------
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[USAA USAA USAA BALANCED STRATEGY FUND
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 3 p.m., Central Time, on October 18, 2002
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
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.
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appears on this card.
When signing as attorney, trustee executor,
administrator, guardian or corporation
officer, please give your FULL title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS BOARD OF DIRECTORS.
NOTE: If you vote by phone or Internet,
please do not return your proxy card.
===================================
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED BELOW
===================================
[down arrows]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
TELEPHONE * Dial the toll-free number
1-800-690-6903 * Enter to the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site CONTROL NUMBER
www.proxyvote.com * Enter the CONTROL NUMBER ACCOUNT NUMBER
indicated to the right
* Follow the screen instructions
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
DETACH AND RETURN THIS PORTION ONLY
USAA Balanced Strategy Fund
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE PROPOSALS.
Vote on Proposals For Against Abstain
1. Approval of New Investment
Advisory Agreement with IMCO [ ] [ ] [ ]
2A. Approval of New Investment
Subadvisory Agreement between
IMCO and Wellington Management [ ] [ ] [ ]
2B. Not Applicable
2C. Not Applicable
2D. Not Applicable
2E. Not Applicable
2F. Not Applicable
2G. Not Applicable
2H. Not Applicable
3. Approval of a proposal to permit
IMCO and the Board to appoint and
replace subadvisers, enter into
subadvisory agreements, and approve
amendments to subadvisory agreements
without shareholder approval [ ] [ ] [ ]
4. Not Applicable
5. Not Applicable
By my signature below, I appoint David Holmes
and Roberto Galindo as my attorneys to vote,
as specified above, all Fund shares that I am
entitled to vote at the Special Meeting of
Shareholders to be held on October 18, 2002,
at 3 p.m. CT, at the McDermott Auditorium in
the USAA Building, 9800 Fredericksburg Road,
San Antonio, Texas 78288, and at any
adjournments thereof. Any one or more of my
attorneys above may appoint substitutes to
vote my shares on their behalf. A majority of
my attorneys, or their substitutes, may
exercise all powers, except that if only one
votes and acts, then that one may act alone.
I also instruct my attorneys to vote any
other matters that arise at the meeting in
accordance with their best judgment. I revoke
previous proxies that I have executed and
acknowledge receipt of the Funds Notice of
Special Meeting and proxy statement.
[ ] [ ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
[USAA USAA USAA CORNERSTONE STRATEGY FUND
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 3 p.m., Central Time, on October 18, 2002
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
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.
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appears on this card.
When signing as attorney, trustee executor,
administrator, guardian or corporation
officer, please give your FULL title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS BOARD OF DIRECTORS.
NOTE: If you vote by phone or Internet,
please do not return your proxy card.
===================================
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED BELOW
===================================
[down arrows]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
TELEPHONE * Dial the toll-free number
1-800-690-6903 * Enter to the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site CONTROL NUMBER
www.proxyvote.com * Enter the CONTROL NUMBER ACCOUNT NUMBER
indicated to the right
* Follow the screen instructions
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
DETACH AND RETURN THIS PORTION ONLY
USAA Cornerstone Strategy Fund
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE PROPOSALS.
Vote on Proposals For Against Abstain
1. Approval of New Investment
Advisory Agreement with IMCO [ ] [ ] [ ]
2A. Approval of New Investment
Subadvisory Agreement between
IMCO and Wellington Management [ ] [ ] [ ]
2B. Not Applicable
2C. Approval of New Investment
Subadvisory Agreement between
IMCO and MFS [ ] [ ] [ ]
2D. Not Applicable
2E. Not Applicable
2F. Not Applicable
2G. Not Applicable
2H. Not Applicable
3. Approval of a proposal to permit
IMCO and the Board to appoint and
replace subadvisers, enter into
subadvisory agreements, and approve
amendments to subadvisory agreements
without shareholder approval [ ] [ ] [ ]
4. Not Applicable
5. Not Applicable
By my signature below, I appoint David Holmes
and Roberto Galindo as my attorneys to vote,
as specified above, all Fund shares that I am
entitled to vote at the Special Meeting of
Shareholders to be held on October 18, 2002,
at 3 p.m. CT, at the McDermott Auditorium in
the USAA Building, 9800 Fredericksburg Road,
San Antonio, Texas 78288, and at any
adjournments thereof. Any one or more of my
attorneys above may appoint substitutes to
vote my shares on their behalf. A majority of
my attorneys, or their substitutes, may
exercise all powers, except that if only one
votes and acts, then that one may act alone.
I also instruct my attorneys to vote any
other matters that arise at the meeting in
accordance with their best judgment. I revoke
previous proxies that I have executed and
acknowledge receipt of the Funds Notice of
Special Meeting and proxy statement.
[ ] [ ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
[USAA USAA USAA GROWTH AND TAX STRATEGY FUND
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 3 p.m., Central Time, on October 18, 2002
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
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.
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appears on this card.
When signing as attorney, trustee executor,
administrator, guardian or corporation
officer, please give your FULL title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS BOARD OF DIRECTORS.
NOTE: If you vote by phone or Internet,
please do not return your proxy card.
===================================
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED BELOW
===================================
[down arrows]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
TELEPHONE * Dial the toll-free number
1-800-690-6903 * Enter to the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site CONTROL NUMBER
www.proxyvote.com * Enter the CONTROL NUMBER ACCOUNT NUMBER
indicated to the right
* Follow the screen instructions
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
DETACH AND RETURN THIS PORTION ONLY
USAA Growth and Tax Strategy Fund
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE PROPOSALS.
Vote on Proposals For Against Abstain
1. Approval of New Investment
Advisory Agreement with IMCO [ ] [ ] [ ]
2A. Not Applicable
2B. Not Applicable
2C. Not Applicable
2D. Not Applicable
2E. Approval of New Investment
Subadvisory Agreement between
IMCO and Dresdner [ ] [ ] [ ]
2F. Not Applicable
2G. Not Applicable
2H. Not Applicable
3. Approval of a proposal to permit
IMCO and the Board to appoint and
replace subadvisers, enter into
subadvisory agreements, and approve
amendments to subadvisory agreements
without shareholder approval [ ] [ ] [ ]
4. Not Applicable
5. Not Applicable
By my signature below, I appoint David Holmes
and Roberto Galindo as my attorneys to vote,
as specified above, all Fund shares that I am
entitled to vote at the Special Meeting of
Shareholders to be held on October 18, 2002,
at 3 p.m. CT, at the McDermott Auditorium in
the USAA Building, 9800 Fredericksburg Road,
San Antonio, Texas 78288, and at any
adjournments thereof. Any one or more of my
attorneys above may appoint substitutes to
vote my shares on their behalf. A majority of
my attorneys, or their substitutes, may
exercise all powers, except that if only one
votes and acts, then that one may act alone.
I also instruct my attorneys to vote any
other matters that arise at the meeting in
accordance with their best judgment. I revoke
previous proxies that I have executed and
acknowledge receipt of the Funds Notice of
Special Meeting and proxy statement.
[ ] [ ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
[USAA USAA USAA EMERGING MARKETS FUND
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 3 p.m., Central Time, on October 18, 2002
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
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.
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appears on this card.
When signing as attorney, trustee executor,
administrator, guardian or corporation
officer, please give your FULL title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS BOARD OF DIRECTORS.
NOTE: If you vote by phone or Internet,
please do not return your proxy card.
===================================
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED BELOW
===================================
[down arrows]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
TELEPHONE * Dial the toll-free number
1-800-690-6903 * Enter to the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site CONTROL NUMBER
www.proxyvote.com * Enter the CONTROL NUMBER ACCOUNT NUMBER
indicated to the right
* Follow the screen instructions
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
DETACH AND RETURN THIS PORTION ONLY
USAA Emerging Markets Fund
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE PROPOSALS.
Vote on Proposals For Against Abstain
1. Approval of New Investment
Advisory Agreement with IMCO [ ] [ ] [ ]
2A. Not Applicable
2B. Not Applicable
2C. Not Applicable
2D. Approval of New Investment
Subadvisory Agreement between
IMCO and The Boston Company [ ] [ ] [ ]
2E. Not Applicable
2F. Not Applicable
2G. Not Applicable
2H. Not Applicable
3. Approval of a proposal to permit
IMCO and the Board to appoint and
replace subadvisers, enter into
subadvisory agreements, and approve
amendments to subadvisory agreements
without shareholder approval [ ] [ ] [ ]
4. Not Applicable
5. Not Applicable
By my signature below, I appoint David Holmes
and Roberto Galindo as my attorneys to vote,
as specified above, all Fund shares that I am
entitled to vote at the Special Meeting of
Shareholders to be held on October 18, 2002,
at 3 p.m. CT, at the McDermott Auditorium in
the USAA Building, 9800 Fredericksburg Road,
San Antonio, Texas 78288, and at any
adjournments thereof. Any one or more of my
attorneys above may appoint substitutes to
vote my shares on their behalf. A majority of
my attorneys, or their substitutes, may
exercise all powers, except that if only one
votes and acts, then that one may act alone.
I also instruct my attorneys to vote any
other matters that arise at the meeting in
accordance with their best judgment. I revoke
previous proxies that I have executed and
acknowledge receipt of the Funds Notice of
Special Meeting and proxy statement.
[ ] [ ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
[USAA USAA USAA INTERNATIONAL FUND
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 3 p.m., Central Time, on October 18, 2002
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
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.
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appears on this card.
When signing as attorney, trustee executor,
administrator, guardian or corporation
officer, please give your FULL title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS BOARD OF DIRECTORS.
NOTE: If you vote by phone or Internet,
please do not return your proxy card.
===================================
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED BELOW
===================================
[down arrows]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
TELEPHONE * Dial the toll-free number
1-800-690-6903 * Enter to the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site CONTROL NUMBER
www.proxyvote.com * Enter the CONTROL NUMBER ACCOUNT NUMBER
indicated to the right
* Follow the screen instructions
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
DETACH AND RETURN THIS PORTION ONLY
USAA International Fund
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE PROPOSALS.
Vote on Proposals For Against Abstain
1. Approval of New Investment
Advisory Agreement with IMCO [ ] [ ] [ ]
2A. Not Applicable
2B. Approval of New Investment
Subadvisory Agreement between
IMCO and MFS [ ] [ ] [ ]
2C. Not Applicable
2D. Not Applicable
2E. Not Applicable
2F. Not Applicable
2G. Not Applicable
2H. Not Applicable
3. Approval of a proposal to permit
IMCO and the Board to appoint and
replace subadvisers, enter into
subadvisory agreements, and approve
amendments to subadvisory agreements
without shareholder approval [ ] [ ] [ ]
4. Not Applicable
5. Not Applicable
By my signature below, I appoint David Holmes
and Roberto Galindo as my attorneys to vote,
as specified above, all Fund shares that I am
entitled to vote at the Special Meeting of
Shareholders to be held on October 18 2002,
at 3 p.m. CT, at the McDermott Auditorium in
the USAA Building, 9800 Fredericksburg Road,
San Antonio, Texas 78288, and at any
adjournments thereof. Any one or more of my
attorneys above may appoint substitutes to
vote my shares on their behalf. A majority of
my attorneys, or their substitutes, may
exercise all powers, except that if only one
votes and acts, then that one may act alone.
I also instruct my attorneys to vote any
other matters that arise at the meeting in
accordance with their best judgment. I revoke
previous proxies that I have executed and
acknowledge receipt of the Funds Notice of
Special Meeting and proxy statement.
[ ] [ ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
[USAA USAA USAA WORLD GROWTH FUND
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 3 p.m., Central Time, on October 18, 2002
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
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.
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appears on this card.
When signing as attorney, trustee executor,
administrator, guardian or corporation
officer, please give your FULL title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS BOARD OF DIRECTORS.
NOTE: If you vote by phone or Internet,
please do not return your proxy card.
===================================
YOUR CONTROL NUMBER FOR THIS
PROXY CARD IS INDICATED BELOW
===================================
[down arrows]
VOTE BY TELEPHONE OR INTERNET
24 hours a day, 7 days a week
TELEPHONE * Dial the toll-free number
1-800-690-6903 * Enter to the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site CONTROL NUMBER
www.proxyvote.com * Enter the CONTROL NUMBER ACCOUNT NUMBER
indicated to the right
* Follow the screen instructions
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
DETACH AND RETURN THIS PORTION ONLY
USAA World Growth Fund
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE PROPOSALS.
Vote on Proposals For Against Abstain
1. Approval of New Investment
Advisory Agreement with IMCO [ ] [ ] [ ]
2A. Not Applicable
2B. Approval of New Investment
Subadvisory Agreement between
IMCO and MFS [ ] [ ] [ ]
2C. Not Applicable
2D. Not Applicable
2E. Not Applicable
2F. Not Applicable
2G. Not Applicable
2H. Not Applicable
3. Approval of a proposal to permit
IMCO and the Board to appoint and
replace subadvisers, enter into
subadvisory agreements, and approve
amendments to subadvisory agreements
without shareholder approval [ ] [ ] [ ]
4. Not Applicable
5. Not Applicable
By my signature below, I appoint David Holmes
and Roberto Galindo as my attorneys to vote,
as specified above, all Fund shares that I am
entitled to vote at the Special Meeting of
Shareholders to be held on October 18, 2002,
at 3 p.m. CT, at the McDermott Auditorium in
the USAA Building, 9800 Fredericksburg Road,
San Antonio, Texas 78288, and at any
adjournments thereof. Any one or more of my
attorneys above may appoint substitutes to
vote my shares on their behalf. A majority of
my attorneys, or their substitutes, may
exercise all powers, except that if only one
votes and acts, then that one may act alone.
I also instruct my attorneys to vote any
other matters that arise at the meeting in
accordance with their best judgment. I revoke
previous proxies that I have executed and
acknowledge receipt of the Funds Notice of
Special Meeting and proxy statement.
[ ] [ ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
[USAA USAA Family of Funds
EAGLE Post Office Box 659442
LOGO] San Antonio, Texas 78265-9442
A MESSAGE FROM THE CHAIRMAN
August 23, 2002
Dear Shareholder:
In recent weeks, I communicated to you on some important steps that the USAA
mutual funds' board of directors has taken to improve your funds' investment
performance. After careful consideration, the funds' board authorized USAA
Investment Management Company to engage eight leading investment firms to take
over the equity portfolio management responsibilities for fifteen USAA funds. We
believe these steps were necessary to deliver the investment performance that
you expect from USAA.
WE NEED YOUR VOTE TO COMPLETE THIS INITIATIVE. YOUR FUNDS' DIRECTORS,
INCLUDING MYSELF, RECOMMEND THAT YOU VOTE IN FAVOR OF THE PROPOSALS
DESCRIBED IN THE ENCLOSED MATERIALS. THESE ARE SOME OF THE BENEFITS:
(_) Access to the leading investment firms in their investment
categories, each with significant resources and long-term proven
performance records.
(_) Continued oversight and management of your funds by USAA and the
USAA funds' board of directors.
(_) USAA's ongoing commitment to premier service.
(_) No changes to the funds' fee rates.
We believe that the additional investment expertise, at the same fee rates,
combined with USAA's commitment to service will result in a better overall value
to you.
Whether or not you plan to be present at the shareholder meeting, we need your
vote. We have taken several steps to help you cast your vote:
(_) First, in addition to the traditional method of returning your
proxy card by mail, you may vote on the Internet at
WWW.PROXYVOTE.COM or the "Proxy Voting" link on USAA.COM, or by
calling toll-free 1-800-690-6903.
(_) 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 funds will incur the
additional expense of follow-up communications. PLEASE DO NOT SET THIS PROXY
ASIDE FOR ANOTHER TIME.
Your vote is very important in completing this initiative to improve your funds'
performance. Please know that we appreciate the trust you place in USAA, and we
look forward to serving your investment needs for many years to come.
Sincerely yours,
/s/ Robert G. Davis
Robert G. Davis
CHAIRMAN OF THE BOARD
SUMMARY OF THE PROPOSALS
USAA Investment Management Company (IMCO) recently conducted a comprehensive
review of each USAA mutual fund's performance. Upon completion, IMCO determined
that affirmative steps should be taken in the equity portfolio management area
to progress toward the desired objective of superior investment performance
across ALL USAA funds. IMCO then embarked upon a process that has resulted in
the following:
(_) After analyzing various alternatives, IMCO recommended to the USAA
funds' board of directors a strategy of retaining highly regarded
outside investment firms to manage the equity portions of fifteen
USAA funds. The board reviewed, among other things, IMCO's
evaluation process for identifying subadvisers and the fact that
the long-term performance records of the proposed subadvisers
generally were superior to those of IMCO for the funds affected.
BOTH IMCO AND THE FUNDS' BOARD CONCLUDED THAT MAKING THE CHANGES
EXPEDITIOUSLY WAS IN EACH FUND SHAREHOLDER'S BEST INTERESTS. As a
result, on June 26, 2002, the funds' board of directors took
actions to engage the new subadvisers in accordance with an SEC
rule that permits these actions on an interim basis until
shareholders have an opportunity to vote on the changes.
(_) Should you approve Proposals 1 and 2, IMCO will continue to
oversee each fund as its investment adviser. IMCO will actively
monitor the activities of the subadvisers through ongoing audits
for compliance with investment policies and parameters and
regulatory requirements, reviews of reports from the subadvisers,
and ongoing dialogues with designated subadviser personnel. The
USAA funds' board of directors will continue to act in its
oversight role just as it has in the past.
(_) UNDER THE PROPOSED AGREEMENTS, THE ADVISORY FEE RATES CHARGED TO
THE FUNDS DO NOT CHANGE. The new subadvisers are paid by IMCO out
of the advisory fees it receives from a fund.
The interim agreements typically may only remain in effect up to 150 days. And
so the board is asking fund shareholders to approve the agreements described in
Proposals 1 and 2 before the interim agreements terminate.
The funds' board and IMCO also request the ability going forward for IMCO, with
board approval, to change subadvisers without the time and expense of obtaining
shareholder approval. As the funds' manager, IMCO will monitor the performance
of the subadvisers and will recommend a change in subadviser when deemed in the
best interests of shareholders. The SEC has granted the funds and IMCO an order
that would permit such an arrangement as long as it is initially approved by
shareholders. Approval of Proposal 3 would accomplish this objective.
Finally, as a result of the new investment management structure, the funds'
board is proposing amendments to the objectives of the Growth Fund and the
Growth & Income Fund, as set forth in Proposals 4 and 5.
The funds' board of directors unanimously recommends that shareholders vote for
the approval of all of the proposals summarized below.
PROPOSAL 1 - APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENTS WITH IMCO
AT THE MEETING, SHAREHOLDERS WILL BE ASKED TO APPROVE A NEW ADVISORY AGREEMENT
WITH IMCO FOR EACH FUND AS PART OF THE NEW INVESTMENT MANAGEMENT STRUCTURE.
(_) WHAT ARE THE DIFFERENCES BETWEEN THE PROPOSED AGREEMENTS AND THE FORMER AND
INTERIM AGREEMENTS?
The provisions of the former, interim, and proposed agreements are
substantially similar. Other than the temporary duration of the interim
agreement, the only difference of note is the use of a different Lipper
index as the benchmark to be used in calculating the performance adjustment
to the advisory fee of the Aggressive Growth Fund, the Capital Growth Fund,
and the Growth & Income Fund. In each instance, each fund's board and IMCO
believe the proposed new benchmark index is a more appropriate benchmark
because it provides a better representation of the performance of other
funds with comparable management styles.
(_) WILL THE ADVISORY FEE RATES CHARGED TO THE FUNDS INCREASE AS A RESULT OF
THE PROPOSED AGREEMENTS?
No, the advisory fee rates charged to the funds will not increase. With
respect to the three funds with a proposed new benchmark index, the impact
of the proposed agreements to the performance adjustment will depend on
each fund's future performance relative to the new index. The new indices
would not be used to calculate the performance adjustment for any periods
prior to shareholder approval.
PROPOSAL 2 - APPROVAL OF NEW INVESTMENT SUBADVISORY AGREEMENTS BETWEEN IMCO
AND SUBADVISERS
AT THE MEETING, SHAREHOLDERS WILL BE ASKED TO APPROVE NEW SUBADVISORY AGREEMENTS
BETWEEN IMCO AND SUBADVISERS.
(_) WHAT WAS THE PROCESS LEADING TO THIS PROPOSAL AND WHO ARE THE PROPOSED
SUBADVISERS?
After deciding to evaluate fully the possibility of engaging subadvisers,
IMCO retained an independent consultant specializing in the evaluation of
investment management firms. Upon receiving extensive materials from the
con-sultant, IMCO performed its own additional analysis using the
consultant's data, as well as other third-party data. An IMCO working group
of senior management assessed the information and developed short lists of
firms to interview. Those candidates made presentations to the working
group. Upon identifying its candidates, negotiations transpired resulting
in the recommendation to engage the subadvisers listed below that was made
to and approved by the funds' board on June 26, 2002.
IMCO will continue to oversee the management of each fund as its investment
adviser. IMCO also will continue to perform the day-to-day portfolio
management for the fixed income portion of the Balanced Strategy,
Cornerstone Strategy, and Growth and Tax Strategy Funds as well as the
science portion of the Science & Technology Fund.
The following are the proposed subadvisers for the funds currently
operating under interim agreements:
================================================================================
FUND SUBADVISER(S)
--------------------------------------------------------------------------
Aggressive Growth Fund Marsico Capital Management, LLC
Balanced Strategy Fund Wellington Management Company, LLP
Capital Growth Fund Batterymarch Financial Management, Inc.
Cornerstone Strategy Fund Wellington Management Company, LLP
MFS Investment Management
Emerging Markets Fund The Boston Company Asset Management, LLC
First Start Growth Fund Marsico Capital Management, LLC
Growth Fund Dresdner RCM Global Investors LLC
Marsico Capital Management, LLC
Growth & Income Fund Wellington Management Company, LLP
Growth and Tax Strategy Fund Dresdner RCM Global Investors LLC
Income Stock Fund The Boston Company Asset Management, LLC
Westwood Management Corporation
International Fund MFS Investment Management
Science & Technology Fund Wellington Management Company, LLP
Small Cap Stock Fund Eagle Asset Management, Inc.
Value Fund Westwood Management Corporation
World Growth Fund MFS Investment Management
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(_) WHAT ARE THE KEY PROVISIONS OF THE SUBADVISORY AGREEMENTS?
Under each subadvisory agreement, IMCO will continue to employ the current
subadviser to manage the day-to-day investment of all or a portion of each
fund's assets (as allocated from time to time by IMCO), consistent with
each fund's investment objectives, policies, and restrictions. Each
subadviser will be responsible for, among other things, placing all orders
for the purchase and sale of portfolio securities for which it is
responsible, subject to the supervision and monitoring of IMCO and the
oversight of the funds' board. IMCO, and not the fund, will be responsible
for paying all fees charged by the applicable subadviser for these
subadvisory services.
(_) WILL FEES CHARGED TO THE FUNDS CHANGE AS A RESULT OF THE SUBADVISORY
AGREEMENTS?
No, the fees charged to the funds will not change as a result of the
subadvisory agreements. IMCO (not the fund) pays a fee to the subadvisers
for services under the subadvisory agreements.
PROPOSAL 3 - APPROVAL OF A PROPOSAL TO PERMIT IMCO TO ENTER INTO AND AMEND
SUBADVISORY AGREEMENTS ON BEHALF OF EACH FUND WITHOUT SHAREHOLDER
APPROVAL
AT THE MEETING, SHAREHOLDERS WILL BE ASKED TO APPROVE A PROPOSAL THAT WOULD
PERMIT IMCO AND THE FUNDS' BOARD TO APPOINT AND REPLACE SUBADVISERS, ENTER INTO
SUBADVISORY AGREEMENTS, AND APPROVE AMENDMENTS TO SUBADVISORY AGREEMENTS ON
BEHALF OF EACH FUND WITHOUT SHAREHOLDER APPROVAL.
(_) WHY ARE SHAREHOLDERS BEING ASKED TO VOTE ON THIS PROPOSAL?
The board has determined that it would be in the best interests of each
fund's shareholders for IMCO to have the ability to appoint and replace
subadvisers for a fund and to enter into, and approve amendments of,
subadvisory agreements in the future without first obtaining shareholder
approval.
On June 18, 2002, the SEC granted an order permitting IMCO to change
subadvisers for a fund without first calling a special shareholder meeting
and obtaining shareholder approval. One of the conditions for approval by
the SEC is that the shareholders approve this arrangement. By approving
this proposal, you will be authorizing IMCO to change subadvisers in the
future with only prior fund board approval.
(_) WHAT ARE THE BENEFITS TO EACH FUND?
The board believes that it is in the best interests of each fund's
shareholders to allow IMCO the maximum flexibility to select, supervise,
and evaluate subadvisers without incurring the expense and potential delay
of seeking specific shareholder approval. Without the benefits of this
proposal, a fund must call and hold a meeting of the fund's shareholders,
create and distribute proxy materials, and arrange for the solicitation of
voting instructions from shareholders. This process results in unnecessary
administrative expenses to the fund and may cause harmful delays in
executing changes that the board and IMCO have determined are necessary or
desirable. These costs are generally borne entirely by a fund. If IMCO and
the board can rely on the proposed policy, the board and IMCO would be able
to act more quickly and with less expense to a fund to appoint an
unaffiliated subadviser when the board and IMCO believe that the
appointment would benefit the fund and its shareholders.
(_) HOW WILL SHAREHOLDERS BE INFORMED OF NEW SUBADVISERS FOR A FUND?
Within 90 days following the hiring of any new subadviser, a fund's
shareholders will receive an information statement containing all the
relevant information. The information statement will include, for example,
disclosure as to the level of fees to be paid by IMCO to the subadviser.
If this proposal is approved, amendments to the agreements between IMCO and
each fund will remain subject, where applicable, to shareholder and board
approval requirements. Although approval of the proposal generally will
permit the board and IMCO to change the fees payable to a subadviser
without shareholder approval, which in turn may result in a different net
fee retained by IMCO, such changes will not permit the board and IMCO to
increase the rate of the fees payable by the fund to IMCO under the
agreement without first obtaining shareholder approval.
PROPOSAL 4 - APPROVAL OF AN AMENDMENT TO THE INVESTMENT OBJECTIVE OF THE USAA
GROWTH FUND
AT THE MEETING, SHAREHOLDERS WILL BE ASKED TO APPROVE AN AMENDMENT TO THE
INVESTMENT OBJECTIVE OF THE USAA GROWTH FUND.
(_) WHAT CHANGE IS THE BOARD OF DIRECTORS PROPOSING TO THE FUND'S INVESTMENT
OBJECTIVE?
The board of directors proposes to change the fund's investment objective
to read as follows:
"The fund's investment objective is long-term growth of capital."
(_) WHY IS THE BOARD OF DIRECTORS PROPOSING THIS CHANGE?
IMCO and the fund's board have determined that it is most appropriate for
the Growth Fund to have the sole investment objective of long-term growth
of capital. To date, in addition to the primary objective of long-term
growth of capital, the fund has had secondary objectives of regular income
and conservation of principal. The board and IMCO no longer believe the
secondary objectives are appropriate given the strategic direction of the
fund and investment style of the current subadvisers.
PROPOSAL 5 - APPROVAL OF AN AMENDMENT TO THE INVESTMENT OBJECTIVE OF THE
USAA GROWTH & INCOME FUND
AT THE MEETING, SHAREHOLDERS WILL BE ASKED TO APPROVE AN AMENDMENT TO THE
INVESTMENT OBJECTIVE OF THE USAA GROWTH & INCOME FUND.
(_) WHAT CHANGE IS THE BOARD OF DIRECTORS PROPOSING TO THE FUND'S INVESTMENT
OBJECTIVE?
The board of directors proposes to change the fund's investment objective
to read as follows:
"The fund's primary investment objective is capital growth and
its secondary investment objective is current income."
(_) WHY IS THE BOARD OF DIRECTORS PROPOSING THIS CHANGE?
The fund's current investment objective places equal emphasis on growth and
income. In recent years, there has been a dramatic reduction in the number
of companies that pay dividends with respect to their common stock. As a
result, it is increasingly difficult for any fund that invests primarily in
equity securities to comply with an objective that places equal emphasis on
growth and income. Thus, the Board proposes that the fund's objective be
modified as described above.
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