SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. __)
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[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
USAA INVESTMENT TRUST
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PRELIMINARY COPY
[USAA
EAGLE
LOGO (R)]
May 26, 2006
Dear Shareholder:
We are writing to ask for your vote on two proposals that affect your USAA
Fund(s). The proposals are to:
* Re-elect the current trustees so that they can continue to
serve on the Board of all of the USAA Family of Funds (the
Board); and
* Reorganize each Fund within the existing four legal entities
(except the two USAA Florida Funds) into Funds organized
under a single legal entity to take advantage of greater
flexibility now afforded under federal and state law.
This reorganization would benefit your Funds by achieving operational
efficiencies and cost savings through reductions in future reporting, filing,
and proxy costs, as well as reductions in costs associated with the Funds'
administration. These cost savings will help keep your Funds' expense ratios
below industry averages. As described in greater detail in the attached summary
and the proxy statement itself, the reorganization will result in minor changes
to five Funds' investment objective(s), principal investment strategies, or
Lipper indexes, and to one Fund's fee structure. Otherwise, the reorganization
should leave your Funds' investment operations substantially intact and fees
unchanged.
After careful consideration, your Funds' trustees recommend that you vote in
favor of both proposals. In reaching this decision, the Board determined that as
a result of the reorganization, the Funds should save certain costs by operating
more efficiently.
We have made voting quick and easy. YOU MAY VOTE BY INTERNET AT PROXYVOTE.COM OR
BY TELEPHONE AT (800) 690-6903. Should you wish to vote by mail, you can do so
by returning the enclosed proxy card. Just follow the instructions on your proxy
card, sign and date the card and send it back to us. All shareholders benefit
from timely voting. When shareholders don't promptly cast their votes, the
additional expense of follow-up communications must be incurred. PLEASE DO NOT
SET THIS PROXY ASIDE FOR ANOTHER TIME.
Your vote is very important to us. We appreciate the trust you place in USAA to
assist you in achieving your financial goals and the time and consideration you
will give in voting on these proposals.
Sincerely,
/S/ CHRISTOPHER W. CLAUS /S/ RICHARD A. ZUCKER
Christopher W. Claus Richard A. Zucker
Director and Trustee of Chairman of the Board of
USAA Family of Funds Directors/Trustees
President and Chief Executive Officer USAA Family of Funds
USAA Investment Management Company
PRELIMINARY COPY
SUMMARY OF THE PROPOSALS
PROPOSAL 1 - RE-ELECT TRUSTEES
AT THE MEETING, YOU WILL BE ASKED TO RE-ELECT THE FUNDS' BOARD OF TRUSTEES.
[ ] WHY ARE WE RE-ELECTING TRUSTEES NOW?
The Board of Trustees has adopted a policy that each Trustee be elected or
re-elected at least once every five years. The last time the Board of
Trustees was presented to shareholders for election was July 2001, so it is
now time to present each current Trustee to shareholders for re-election.
[ ] ARE ANY NEW NOMINEES BEING PRESENTED FOR ELECTION TO THE BOARD?
No. Each of the six nominees currently serves on the Funds' Board of
Trustees and were elected or re-elected in 2001.
PROPOSAL 2 - APPROVE PLANS OF REORGANIZATION
AT THE MEETING, YOU WILL BE ASKED TO APPROVE A PLAN OF REORGANIZATION FOR EACH
EXISTING FUND EXCEPT THE FLORIDA TAX-FREE INCOME FUND AND THE FLORIDA TAX-FREE
MONEY MARKET FUND.
[ ] WHAT IS THE BENEFIT OF THIS PROPOSAL?
We anticipate that the proposed reorganizations will achieve future
economies of scale and eliminate certain Fund expenses associated with
operating four different legal entities. Currently, the USAA family of
funds are organized under four different legal entities subject to three
different state laws that have different governing documents and
requirements for, among other things, shareholder meetings and shareholder
approval. We established each of the current four legal entities at
different times under the optimal form of organization available to the
USAA Funds at that time. We believe all USAA Funds would be best served
going forward by operating as series of a single Delaware statutory trust.
As such, the proposed reorganizations will result in all Funds being
organized under the same legal entity that is subject to the same state
law, the same governing documents, and the same legal requirements
regarding the operation of each Fund.
The reorganizations also will benefit the Funds and their shareholders by
allowing the Funds to operate under uniform and improved governing
documents that will streamline the governance process and reduce certain
future costs to the Funds associated with proxy solicitations, Fund
governance and other Fund administration matters. We also believe the
reorganization will permit the Funds to develop uniform and improved
investment restrictions to seek additional operational efficiencies.
[ ] HOW WILL THE REORGANIZATIONS AFFECT MY FUNDS' INVESTMENT ACTIVITIES?
Approval of the reorganizations will result in minor changes to only four
Funds' investment operations as detailed in the table below.
==========================================================================
NAME OF FUND CHANGE AND REASON FOR CHANGE
--------------------------------------------------------------------------
USAA Aggressive Growth Fund Change to non-diversified status
to permit the portfolio manager
more flexibility to invest a greater
portion of the Fund's assets in a
particular company.
--------------------------------------------------------------------------
USAA First Start Growth Fund Modify objective to permit the
portfolio manager more flexibility
to invest a greater portion of
the Fund's assets (up to 80%) in
bonds and cash during declining
stock markets to reduce volatility.
--------------------------------------------------------------------------
USAA International Fund Remove secondary objective of
"current income" to permit
portfolio manager to focus on
primary objective of capital
appreciation.
--------------------------------------------------------------------------
USAA Precious Metals and * Remove secondary objective of
Minerals Fund "current income" to permit portfolio
manager to focus on primary objective
of long-term capital appreciation
and to protect the purchasing power
of capital against inflation.
* Change to non-diversified status
to permit portfolio manager greater
flexibility to invest in a particular
company, which is particularly
important to this Fund due to
mergers and consolidation in this
sector.
==========================================================================
All of the Funds would have fewer investment policies after the
reorganization that could be changed only with shareholder approval. After
the reorganization, the Board also could change the investment objective(s)
of any Fund in light of market conditions or other events. In all
instances, the Funds would notify shareholders promptly after the Board
made these types of changes, without causing the Funds to incur the costs
of a shareholder meeting, which will improve the Funds' ability to respond
to changing market conditions.
[ ] WILL THE REORGANIZATION AFFECT THE BOARD OF TRUSTEES?
No. Your vote on the first proposal will determine the composition of the
Board of Trustees. If all of the reorganizations are approved, the Trustees
you elect will serve as the Board of Trustees for all Funds.
[ ] WILL THE REORGANIZATIONS RESULT IN ANY FEE CHANGES?
THE REORGANIZATION WILL NOT RESULT IN FEE CHANGES FOR ANY FUND EXCEPT THE
USAA AGGRESSIVE GROWTH FUND.
The Board has approved a price restructuring for the USAA Aggressive Growth
Fund, which, if approved, would decrease the transfer agency fees charged
by USAA Shareholder Account Services and increase the breakpoint levels for
the advisory fee paid to IMCO to manage the Fund. The net impact of this
price restructuring as of the Fund's last fiscal year would have been a
slight increase (6.8%) in the Fund's total operating expenses.
[ ] WHY DID THE BOARD BELIEVE A CHANGE IN THE FEE STRUCTURE FOR THE USAA
AGGRESSIVE GROWTH FUND WAS NECESSARY?
The current Fund subadviser, Marsico Capital Management, LLC (Marsico),
required that its fee to IMCO be increased from 0.20% to 0.35% to continue
managing the Fund's assets effective January 1, 2006. IMCO and the Board
believed that due to Marsico's strong performance in managing the Fund, it
was in the best interests of the Fund and its shareholders to continue with
Marsico at the higher fee rate. IMCO has absorbed the entire increase to
date. At current asset levels, IMCO now pays out 0.35% of the 0.37% it
collects from the Fund over to Marsico. Each new dollar coming into the
Fund is presently only charged a 0.33% advisory fee to IMCO. Accordingly,
as strong performance continues and assets increase, IMCO's blended base
advisory fee could fall below what it pays Marsico. The Board determined
that this situation was not economically sustainable over the long term,
and could impact IMCO's ability to hire and retain Marsico or any other
leading money manager in this asset class for this Fund.
IMCO and the Board reviewed the pricing structure of the Fund and its
performance relative to its peers, and determined that (1) its total
expense ratio was 30% below the universe average of all large cap growth
funds; and (2) the Fund's relative performance has improved dramatically
since the multi-manager structure was implemented, and Marsico was hired to
subadvise the Fund.
To ensure that IMCO and the Board continue to have the realistic ability to
hire and retain top money managers for this Fund to seek superior
performance as demonstrated by Marsico, the Board approved changes to the
net asset breakpoint levels for the advisory fee payable to IMCO. If the
Fund's proposed fee structure were in place as of the Fund's last fiscal
year end, the end result would have been an increase in the Fund's total
operating expense ratio from 1.02% to 1.09%, which represents an increase
of approximately 6.8%. Even with these proposed changes, the Fund's total
operating expense ratio would still be lower than the average of its
no-load peers, and significantly lower (25%) than the industry average of
all large cap growth funds.
[ ] WILL THE BASE FEE OR PERFORMANCE ADJUSTMENT FOR ANY OTHER FUND CHANGE AS A
RESULT OF THE REORGANIZATION?
The base advisory fee will NOT change for any Fund other than for the USAA
Aggressive Growth Fund. The advisory fee and performance adjustment for
each Fund will continue to be calculated in the same way. The Lipper Index
used to compare a Fund's performance for purposes of calculating the
performance adjustment for three Funds will be changed to reflect changes
in the Fund's investment style as described in the table below:
===========================================================================
NAME OF FUND NEW LIPPER INDEX AND REASON FOR CHANGE
--------------------------------------------------------------------------
USAA Capital Growth Fund Lipper Global Funds Index would replace
the Lipper Small Cap Growth Funds Index
to reflect the recent changes to the
fund's investment style from a small
cap growth focus to a "best ideas"
approach with greater global focus.
---------------------------------------------------------------------------
USAA First Start Growth Fund Lipper Flexible Portfolio Fund Index
would replace Lipper Large Cap Growth
Funds Index to reflect changes in the
Fund's ability to hold a greater
percentage (up to 80% of assets) of
bonds and cash in declining stock
markets to reduce volatility.
--------------------------------------------------------------------------
USAA Growth and Tax Strategy Fund New Composite Index would be used
comprised of 51% Lipper Municipal Funds
Index and 49% Lipper Large Cap Core
Funds Index.
---------------------------------------------------------------------------
The new advisory agreements also will allow the Board to change a Fund's
index used to calculate a performance adjustment to the Fund's base
advisory fee without shareholder approval, provided that such an action is
consistent with the federal securities laws and the SEC's rules,
interpretations, and other positions. The new advisory agreements would
authorize IMCO to implement a manager-of-manager structure for all Funds in
the USAA family of funds. The Board and IMCO have no present intention to
implement a manager-of-manager structure for the Precious Metals and
Minerals Fund, or any fixed income or money market funds. Other than these
changes, the new advisory agreements will be substantially identical to
existing advisory agreements for all other Funds.
[ ] WILL THERE BE ANY SALES LOAD, COMMISSION, OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATIONS?
No. The full value of your shares of a Fund will be exchanged for the same
number of shares of the same class of the corresponding reorganized Fund
without any sales load, commission or other transactional fee being
imposed.
[ ] WHAT WILL BE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS?
There should be no federal income tax consequences as a result of the
reorganizations. Each reorganization is designed to qualify for federal
income tax purposes as a tax-free reorganization.
[ ] WHO IS BEARING THE EXPENSES RELATED TO THE PROXY SOLICITATION AND THE
REORGANIZATIONS?
The Funds will bear the expenses associated with the reorganizations,
including the costs of printing, mailing, tabulation, and solicitation of
proxies based in part of each Fund's average net assets as a percentage of
the average net assets of all Funds in the USAA family of funds and in part
on the number of shareholders in each Fund. To the extent a Fund's expenses
exceed its expense limitations, if applicable, IMCO will bear those
expenses. IMCO also will bear the costs of internal personnel necessary to
plan, prepare, and execute the project in connection with the
reorganizations.
PRELIMINARY COPY
[USAA
EAGLE
LOGO(R)]
PROXY INFORMATION
The enclosed proxy statement provides details on important issues relating to
your USAA mutual funds. The board of trustees of your fund(s) recommends that
you vote "FOR" all proposals. A separate proxy card and vote is required for
each fund you own.
To make voting faster and more convenient for you, we are offering a variety of
ways to vote your proxy. You may vote by using the Internet or by telephone
instead of completing and mailing the enclosed proxy card. The Internet and
telephone are generally available 24 hours a day, and your vote will be
confirmed and posted immediately. The choice is yours. Use whichever method
works best for you! IF YOU CHOOSE TO VOTE VIA THE INTERNET OR BY PHONE, DO NOT
MAIL YOUR PROXY CARD.
TO VOTE ON THE INTERNET
[GRAPHIC] 1. Go to 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
1. Call toll-free 800-690-6903.
2. Enter the 12-digit CONTROL NUMBER on [GRAPHIC]
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 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. to 7 p.m. CT. We have retained Automatic Data
Processing, Inc. (ADP) to assist shareholders in the voting process. If we have
not received your proxy card as the date of the meeting approaches, ADP may call
you to remind you to exercise your right to vote.
PRELIMINARY COPY
[USAA NOTICE OF SPECIAL MEETING
EAGLE TO ALL SHAREHOLDERS
LOGO (R)] OF THE USAA FAMILY OF FUNDS
TO BE HELD JULY 19, 2006
A shareholder meeting of all USAA funds (each a Fund, or collectively the Funds)
will be held on Wednesday, July 19, 2006, at 2 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 re-elect the six Trustees of each Fund.
2. To approve proposed plans of reorganizations of certain Funds into
newly-established series of a single Delaware statutory trust
(each, a Reorganization and collectively, the Reorganizations).
3. To transact such other business as may properly come before the
meeting or any adjournments thereof.
By Order of the Board of Trustees
Mark S. Howard
SECRETARY
San Antonio, Texas
May 26, 2006
================================================================
WE URGE YOU TO VOTE ON THE INTERNET AT PROXYVOTE.COM; OR CALL
OUR SPECIAL TOLL-FREE NUMBER, (800) 690-6903; OR MARK, SIGN,
DATE, AND MAIL THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE
SO YOU WILL BE REPRESENTED AT THE MEETING.
================================================================
Proxy Statement - 1
USAA FAMILY OF FUNDS
USAA MUTUAL FUND, INC.
USAA INVESTMENT TRUST
USAA TAX EXEMPT FUND, INC.
USAA MUTUAL FUNDS TRUST (FORMERLY
USAA STATE TAX-FREE TRUST)
PROXY STATEMENT
This document will give you the information you need to vote on the matters
listed on the previous page. Much of the information in this proxy statement is
required under the rules and regulations of the Securities and Exchange
Commission (SEC) and is, therefore, quite detailed. If there is anything you
don't understand, please contact us at (800) 531-8448.
As an introductory matter, the USAA family of funds currently consists of 39
mutual funds. Each Fund is a series of one of four legal entities: USAA Mutual
Fund, Inc., USAA Tax Exempt Fund, Inc., USAA Investment Trust, and USAA Mutual
Funds Trust (formerly USAA State Tax-Free Trust). USAA Mutual Fund, Inc. and
USAA Tax Exempt Fund, Inc. are each organized as Maryland corporations. These
two legal entities are referred to in this proxy statement as Companies. USAA
Investment Trust and USAA Mutual Funds Trust are organized as a Massachusetts
business trust and a Delaware statutory trust, respectively. These two legal
entities are referred to in this proxy statement as Trusts. To date, each of
these four entities has been governed by boards of directors or boards of
trustees comprised of the same individuals for financial and operational
efficiencies. For simplicity throughout the rest of this proxy statement, the
boards of directors and boards of trustees of the four existing entities will be
identified simply as the Board of Trustees. If Proposal 2 is approved, a single
Board of Trustees will result for the Funds.
[ ] WHO IS ASKING FOR MY VOTE?
The Board of Trustees of the USAA Funds is soliciting the enclosed proxy.
How you vote, whether by Internet, telephone, mail, or in person, will be
used at the shareholder meeting; and if the shareholder meeting is
adjourned, at any later meetings, for the purposes stated in the Notice of
Special Meeting (see previous page).
[ ] WHAT ARE THE DIFFERENT WAYS I CAN CAST MY VOTE?
As a shareholder, you may vote in one of the following four ways:
================================================================
1. You may vote on the Internet at PROXYVOTE.COM.
2. you may vote by calling our special toll-free number,
(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.
================================================================
We encourage you to vote by Internet or telephone to minimize the costs of
solicitation.
[ ] HOW DOES THE BOARD OF TRUSTEES RECOMMEND THAT I VOTE ON THESE PROPOSALS?
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE:
1. FOR THE RE-ELECTION OF ALL NOMINEES FOR ELECTION TO THE FUNDS' BOARD
OF TRUSTEES; AND
2. FOR THE APPROVAL OF THE PLANS TO REORGANIZE CERTAIN FUNDS.
USAA family of funds - 2
[ ] WHO IS ELIGIBLE TO VOTE?
Shareholders of record of each Fund as of the close of business on May 26,
2006, are entitled to vote at the shareholder meeting or any adjournment
thereof. It is expected that the Notice of Special Meeting, the proxy card,
the proxy summary, and the proxy statement have been mailed to shareholders
of record on or about May 26, 2006.
Each share is entitled to one vote (with proportionate voting for
fractional shares). Shares represented by duly executed proxies will be
voted in accordance with shareholders' instructions. If you sign the proxy,
but don't fill in a vote, your shares will be voted "FOR" each of the
proposals. If any other business is brought before the shareholder meeting,
your shares will be voted as determined in the discretion of the proxies.
BECAUSE SHAREHOLDERS OF THE USAA FLORIDA TAX-FREE INCOME FUND AND THE USAA
FLORIDA TAX-FREE MONEY MARKET FUND ARE ALREADY FUNDS OF USAA MUTUAL FUNDS
TRUST, THEY ARE NOT REQUIRED TO VOTE ON A REORGANIZATION, AND THEY WILL
ONLY BE ENTITLED TO VOTE ON PROPOSAL 1. SHAREHOLDERS OF ALL OTHER FUNDS
WILL BE ENTITLED TO VOTE ON BOTH PROPOSALS.
Proxy Statement - 3
PROPOSAL 1
ELECTION OF BOARD OF TRUSTEES
ALL FUNDS
[ ] WHO ARE THE NOMINEES FOR THE BOARD OF TRUSTEES?
Information about the nominees, including their addresses, principal
occupation during the past five years, and other current directorships, is
set forth in the table below. For purposes of this proxy statement, "Fund
Complex" includes the 39 USAA retail mutual funds holding this shareholder
meeting, which we also refer to as the "USAA family of funds."
INFORMATION REGARDING NOMINEES
FOR ELECTION AT THE MEETING
POSITION(S) HELD NUMBER OF
NAME, YEAR WITH THE FUNDS PRINCIPAL OCCUPATION DURING PORTFOLIOS IN
OF BIRTH, AND LENGTH OF PAST FIVE YEARS AND OTHER DIRECTORSHIPS FUND COMPLEX
ADDRESS(1) TIME SERVED HELD BY TRUSTEE OVERSEEN BY TRUSTEE(2)
- ---------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES(3)
Richard A. Trustee since Vice President, Beldon Roofing Company 39
Zucker (1943) 1992; Chairman (7/85-present).
of the Board of
Trustees since
2005
Barbara B. Trustee President, Postal Addvantage (7/92-present). 39
Dreeben (1945) since 1994
Robert L. Trustee Institute Analyst, Southwest Research Institute 39
Mason, Ph.D. since 1997 (3/02-present); Staff Analyst, Southwest Research
(1946) Institute (9/98-3/02).
Michael F. Trustee President of Reimherr Business Consulting 39
Reimherr since 2000 (5/95-present).
(1945)
Laura T. Trustee Charles E. and Sarah M. Seay Regents Chair 39
Starks, Ph.D. since 2000 Professor of Finance, University of Texas at
(1950) Austin (9/96-present).
MANAGEMENT TRUSTEE(4)
Christopher W. Trustee since President and Chief Executive Officer (CEO), Director, 39
Claus (1960) 2001; President, and Chairman of the Board of Directors, IMCO
and Vice (12/04-present); President, CEO, Director, and Vice
Chairman of Chairman of the Board of Directors, IMCO (2/01-12/04).
the Board Mr. Claus serves as President, Director, and Chairman
of Trustees of the Board of Directors of USAA Shareholder Account
Services (SAS); and Senior Vice President of USAA
Life Investment Trust, a registered investment
company offering five individual funds.
USAA family of funds - 4
(1) The addresses for each Nominee is c/o USAA, P.O. Box 659442, San
Antonio, Texas 78265-9442.
(2) If Proposal 2 is approved, these same Trustees will oversee all Funds
in the Fund Complex.
(3) These are the Trustees who are not "interested persons" of the Funds
or IMCO, as that term is defined in Section 2(a)(19) of the Investment
Company Act of 1940 (1940 Act). We refer to them as Independent
Trustees.
(4) Mr. Claus is deemed to be an "interested person" of the Funds under
the 1940 Act because of his position with IMCO and its affiliates. We
refer to him as a Management Trustee.
[ ] WHY ARE WE NOW RE-ELECTING MEMBERS TO THE BOARD OF TRUSTEES?
The Board of Trustees has adopted a policy that each Trustee shall be
presented to shareholders for election or re-election, as the case may be,
at least once every five years. The last time each Trustee was presented to
shareholders for election was July 2001, so it is now time to present each
Trustee to shareholders for re-election.
[ ] HOW LONG CAN TRUSTEES SERVE ON THE BOARD OF TRUSTEES?
Pursuant to a policy adopted by the Board of Trustees, each elected or
appointed Independent Trustee may serve as a Trustee until the Trustee
either reaches age 70 or has served 20 years and the Management Trustee may
serve as a Trustee until the Trustee either reaches age 65 or has served 20
years. A Trustee may resign or be removed by a vote of the holders of a
majority of the outstanding shares of the Funds at any time.
[ ] WHAT ARE THE RESPONSIBILITIES OF THE BOARD OF TRUSTEES?
The Board of Trustees is responsible for the general oversight of the
Funds' business and for assuring that your Funds are managed in the best
interests of each Fund's respective shareholders. The Board of Trustees
periodically reviews your Funds' investment performance as well as the
quality of other services provided to your Funds and their shareholders by
each of the Funds' service providers, including USAA Investment Management
Company (IMCO) and its affiliates. IMCO acts as the investment adviser,
principal underwriter, and administrator of the Funds. IMCO's address is
9800 Fredericksburg Road, San Antonio, Texas 78288. At least annually, the
Board of Trustees reviews the fees paid by the Funds for these services and
the overall level of your Funds' operating expenses.
[ ] WHAT ARE SOME OF THE WAYS IN WHICH THE BOARD OF TRUSTEES REPRESENTS
SHAREHOLDER INTERESTS?
The Board of Trustees seeks to represent shareholder interests by:
* reviewing the investment performance of each Fund with management;
* reviewing the quality of the various other services provided to the
Funds and their shareholders by each of the Funds' service providers,
including IMCO and its affiliates;
* discussing with IMCO senior management steps being taken to address
any performance deficiencies;
* reviewing the fees paid to IMCO and its affiliates to ensure that such
fees remain reasonable and competitive with those of other mutual
funds, while at the same time providing sufficient resources to
continue to provide high-quality services in the future;
* monitoring potential conflicts between the Funds and IMCO and its
affiliates to ensure that the Funds continue to be managed in the best
interests of their shareholders; and
* monitoring potential conflicts among Funds to ensure that shareholders
continue to realize the benefits of participation in a large and
diverse family of funds.
[ ] WHAT IS THE SHARE OWNERSHIP IN THE FUNDS BY THE NOMINEES?
As of April 30, 2006, the Trustees and their families as a group owned
beneficially or of record less than 1% of the outstanding shares of all
Funds within the USAA family of funds.
Proxy Statement - 5
The following table sets forth information describing the dollar range of
equity securities beneficially owned by each nominee in each Fund and in
all Funds in the aggregate as of April 30, 2006.
AGGREGATE DOLLAR
RANGE OF
SECURITIES
IN INVESTMENT
COMPANIES OVERSEEN
NAME OF AGGREGATE DOLLAR RANGE BY TRUSTEE IN THE
TRUSTEE FUND NAME OF SECURITIES OWNED FUND COMPLEX
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Barbara B. Dreeben [to come] [$50,001-$100,000] [Over $100,000]
Robert L. Mason [to come] [$50,001-$100,000] [Over $100,000]
Michael F. Reimherr [to come] [$50,001-$100,000] [Over $100,000]
Laura T. Starks [to come] [$50,001-$100,000] [Over $100,000]
Richard A. Zucker [to come] $50,001-$100,000 [Over $100,000]
MANAGEMENT TRUSTEE
Christopher W. Claus [to come] [$50,001-$100,000] [Over $100,000]
[ ] WHAT ARE THE MEMBERS OF THE BOARD OF TRUSTEES PAID FOR THEIR SERVICES?
The Funds pay each Independent Trustee a fee for his or her services.
Independent Trustees are compensated on the basis of an annual retainer of
$29,000 from the Funds plus reimbursement for reasonable expenses incurred
in attending any meeting of the Board of Trustees or one of its committees.
The Independent Trustee serving as Chair of the Board of Trustees receives
an additional annual fee of $12,000 while each Independent Trustee serving
as Chair of a committee of the Board of Trustees receives an additional
annual fee of $6,000. The fee for attending an in-person regular or special
meeting of the Board of Trustees is $3,000 and $750 for telephonic meetings
called by the Fund officers. The fee for serving on one or more committees
is $1,500 per meeting. All Funds in the USAA family of funds meet on a
combined basis for regular meetings. All compensation is allocated evenly
among all Funds. All compensation paid to Independent Trustees is used to
acquire shares of one or more Funds in the USAA family of funds under an
automatic investment program for Trustees. The Independent Trustees
periodically review their compensation to assure that it continues to be
appropriate in light of their responsibilities as well as in relation to
fees paid to trustees of other comparable mutual fund companies. Management
Trustees are not compensated by the Funds for their service on the Board of
Trustees or any committee of the Board of Trustees.
USAA family of funds - 6
The table below sets forth the fees paid to each Trustee by the Funds in
the USAA family of funds.
====================================================================================================================================
AGGREGATE COMPENSATION FROM THE FUNDS(1)
USAA TOTAL
USAA MUTUAL USAA INVESTMENT TRUST USAA COMPENSATION
NAME OF USAA MUTUAL FUND, INC. INVESTMENT (TOTAL RETURN TAX EXEMPT USAA MUTUAL FROM THE
TRUSTEE FUND, INC.(2) (INDEX FUNDS)(3) TRUST(4) STRATEGY FUND)(5) FUND, INC.(6) FUNDS TRUST(6) FUND COMPLEX
Richard A. Zucker $17,175 $19,438 $15,825 $19,438 $19,625 $19,625 $78,500
Barbara B. Dreeben $15,975 $17,563 $14,775 $17,563 $17,750 $17,750 $71,000
Robert L. Mason, Ph.D. $16,275 $17,938 $15,375 $17,938 $18,125 $18,125 $72,500
Michael F. Reimherr $15,075 $16,438 $14,175 $16,438 $16,625 $16,625 $66,500
Laura T. Starks, Ph.D. $15,075 $16,438 $14,175 $16,438 $16,625 $16,625 $66,500
Christopher W. Claus(7) None None None None None None None
(1) No pension or retirement benefits are accrued as part of fund expenses.
(2) Amounts are for the fiscal year ended July 31, 2005.
(3) Amounts are for the Index Funds for the fiscal year ended December 31,
2005.
(4) Amounts are for the fiscal year ended May 31, 2005.
(5) Amounts are for the Total Return Strategy Fund for the fiscal year ended
December 31, 2005.
(6) Amounts are for the fiscal year ended March 31, 2006.
(7) Mr. Claus is a Management Trustee because of his position with IMCO and,
accordingly, receives no compensation from any Fund in the USAA family
of funds.
====================================================================================================================================
[ ] HOW OFTEN DOES THE BOARD OF TRUSTEES MEET?
The Board of Trustees typically conducts regular meetings five or six times
a year to review the operations of the Funds in the USAA family of funds. A
portion of these meetings is devoted to meetings of various committees of
the Board of Trustees, which focus on particular matters. In addition, the
Board of Trustees may hold special meetings by telephone or in person to
discuss specific matters that may require action prior to the next regular
meeting.
During each Fund's most recent full fiscal year, the Board of Trustees met
five times on behalf of USAA Mutual Fund, Inc.; five times on behalf of
USAA Tax Exempt Fund, Inc. and USAA Mutual Funds Trust; and six times on
behalf of USAA Investment Trust. During each Fund's most recent full fiscal
year, the Audit Committee met four times on behalf of USAA Mutual Fund,
Inc., USAA Tax Exempt Fund, Inc., USAA Mutual Funds Trust, and USAA
Investment Trust. During each Fund's most recent full fiscal year, the
Pricing and Investment Committee met four times on behalf of USAA Mutual
Fund, Inc., USAA Tax Exempt Fund, Inc., USAA Mutual Funds Trust, and USAA
Investment Trust. During each Fund's most recent full fiscal year, the
Corporate Governance Committee met five times on behalf of USAA Mutual
Fund, Inc., USAA Tax Exempt Fund, Inc., USAA Investment Trust, and USAA
Mutual Funds Trust. Each Trustee attended at least 75% of the total number
of meetings of the Board of Trustees and any committee on which he or she
served.
[ ] WHAT ARE THE FUNDS' STANDING COMMITTEES?
The Boad of Trustees has four standing committees: an Executive Committee,
an Audit Committee, a Pricing and Investment Committee, and a Corporate
Governance Committee. Between the meetings of the Board of Trustees and
while it is not in session, the Executive Committee may exercise all of the
powers of the Board of Trustees in the management of the business of the
Funds, which may be delegated to it by the Board of Trustees. The Executive
Committee consists of two Trustees, currently Messrs. Claus and Zucker.
Proxy Statement - 7
The Audit Committee consists of all five Independent Trustees, with Dr.
Mason serving as Chair. The Audit Committee is responsible for, among other
things, overseeing the Funds' accounting, financial reporting, and internal
controls, approving the selection, retention, or termination of the Funds'
independent registered public accounting firm, evaluating the independence
of the Funds' independent registered public accountants, pre-approving any
audit and non-audit services provided to the Funds and certain non-audit
services provided to IMCO or any of its affiliates, meeting with the
auditors to discuss the audit plan, audit results, and any matters of
concern that may be raised by the auditors, receiving reports from Fund
management regarding the design or operation of the Funds' internal
controls, investigating improprieties or suspected improprieties in the
Funds' accounting or financial reporting, and reporting its activities to
the full Board on a regular basis. The Audit Committee also is responsible
for receiving reports from the Funds' Chief Compliance Officer.
The Pricing and Investment Committee consists of all six Trustees, with Mr.
Claus serving as Chair. The Pricing and Investment Committee reviews and
oversees the investment-related activities of the Funds, including
overseeing and receiving reports on the administration of certain policies
and procedures adopted by the Board with respect to the valuation of
portfolio securities, pricing of Fund shares, and liquidity determinations,
reviewing and approving certain affiliated transactions, and overseeing and
receiving reports related to the Funds' performance, investment objectives,
strategies and policies, trade execution, commission recapture program, and
other related or similar matters.
The Corporate Governance Committee consists of all five Independent
Trustees, with Mrs. Dreeben serving as Chair. The Corporate Governance
Committee is responsible for overseeing the Board and the USAA Funds'
compliance with corporate governance requirements and best practices, and
to ensure that the Board and its officers conduct themselves ethically in
accordance with the law. The Committee, among other things, reviews and
oversees the organization and performance of the Board, the annual
evaluation of the Board and each Committee of the Board, and the annual
review and approval of the Funds' advisory agreements. The Committee meets
at least quarterly without any Management Trustee in attendance at the
meeting. The Committee also reviews and monitors any Code of Ethics related
to the Funds and recommends changes to those Codes.
In addition, the Corporate Governance Committee is responsible for
maintaining a policy on Board tenure and term limitations for the
Independent Trustees, and establishing procedures to identify and recruit
potential candidates for Board membership, and to recommend candidates to
fill any vacancy for Independent Trustees on the Board. The Committee does
not have any procedure to consider Board candidates suggested by
shareholders. The Committee does not believe that such procedures are
necessary because, unlike public operating companies that have annual
shareholder meetings to elect board members, Trustee elections occur
infrequently (every five years or as necessary) and cannot be predicted
with reasonable certainty. The Committee has a Charter, a copy of which is
attached to this proxy statement as Exhibit A.
[ ] WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO ELECT THE NOMINEES
TO THE BOARD OF TRUSTEES?
The nominees for Trustees of the Funds receiving the vote of a plurality of
the outstanding voting shares of each of the four Companies and Trusts cast
at a meeting shall be elected, provided a quorum is present. Shareholders
of all Funds in a Company or Trust will vote as a single class on the
election of Trustees.
[ ] HOW DOES THE BOARD OF TRUSTEES RECOMMEND SHAREHOLDERS VOTE ON THIS
PROPOSAL?
THE BOARD OF TRUSTEES RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
RE-ELECTION OF ALL NOMINEES FOR ELECTION TO THE BOARD OF TRUSTEES OF THE
FUNDS.
[ ] IS THERE MORE INFORMATION ABOUT THE FUNDS?
Yes. Exhibit B contains certain information about the Funds' officers.
These officers are appointed by the Board and are not being presented for
election.
USAA family of funds - 8
PROPOSAL 2
APPROVAL OF REORGANIZATIONS
OVERVIEW
ALL FUNDS (EXCEPT FOR THE FLORIDA TAX-FREE INCOME FUND
AND THE FLORIDA TAX-FREE MONEY MARKET FUND)
[ ] WHAT IS THE PURPOSE OF THE REORGANIZATION?
The primary purposes of the proposed Reorganizations are to seek future
economies of scale and to eliminate certain costs, some of which are paid
by the Funds, associated with operating four different legal entities
organized in three different states, each of which has different
fundamental investment restrictions. On April 19, 2006, the Board of each
existing Fund, except the Florida Tax-Free Income Fund and the Florida
Tax-Free Money Market Fund (each an Existing Fund), approved a series of
initiatives that are designed to streamline and modernize the operations of
the Existing Funds by reorganizing all of the USAA family of funds into one
legal entity, leaving all Funds subject to one state law and one set of
governing documents. After the reorganizations there will be one legal
entity (USAA Mutual Funds Trust) operating under one uniform set of legally
required investment restrictions.
[ ] WHAT EFFECTS WILL THE REORGANIZATIONS HAVE ON THE EXISTING FUNDS AND THEIR
SHAREHOLDERS?
Overall, the Reorganizations will have little effect on Existing Funds and
their shareholders. Specifically, approval of the Reorganizations will
result in minor changes to the following:
* three of the Existing Funds' investment objectives (First Start Growth
Fund, International Fund, and Precious Metals and Minerals Fund),
* three other Existing Funds' Lipper Indexes used to compute performance
adjustments fees (Capital Growth Fund, First Start Growth Fund, and
Growth and Tax Strategy Fund),
* two other Existing Funds' abilities to concentrate investments in the
same issuer (Aggressive Growth Fund and Precious Metals and Minerals
Fund), and
* the Aggressive Growth Fund's fee structure.
Other than these changes, the Reorganizations will not result in any change
to the fees charged by any New Fund or in any material change in the
investment objective(s) or principal investment strategies of any of the
Existing Funds. The New Funds also will have fewer "fundamental" investment
policies, which can be changed only with shareholder approval and restrict
the Funds' ability to respond to new developments and changing economic
conditions. The investment adviser, subadvisers, portfolio managers, and
other service providers will remain the same. The services provided by
those service providers will be the same as those currently being provided
to each Existing Fund.
Immediately after the Reorganizations, shareholders of the Existing Funds
will own the same number of shares with the same value of the corresponding
class of the New Fund that they held in the Existing Fund immediately prior
to the closing of the Reorganizations. For example, if you currently own
100 shares of an Existing Fund, immediately after the closing of the
Reorganization, you would own 100 shares of the corresponding New Fund
having the same net asset value as your original 100 shares of the Existing
Fund immediately prior to the closing.
[ ] HOW WILL THE EXISTING FUNDS BE REORGANIZED?
At a meeting held on April 19, 2006, the Board of each Existing Fund
approved an Agreement and Plan of Conversion and Termination (each a
Reorganization Agreement and collectively, the Reorganization Agreements)
pursuant to which each Existing Fund would be reorganized into a newly
established corresponding series of the
Proxy Statement - 9
USAA Mutual Funds Trust (each a New Fund), which is an existing Delaware
statutory trust that was formerly known as USAA State Tax-Free Trust (the
New Trust). The name of each New Fund after the Reorganizations will be the
same as its corresponding Existing Fund.
[ ] WHAT ARE SHAREHOLDERS BEING ASKED TO APPROVE IN PROPOSAL 2?
Shareholders of each Existing Fund are now being asked to approve the
applicable Reorganization Agreement. If approved, it is expected that the
Reorganization for each Existing Fund will take effect after the close of
business on or about [August 1, 2006] (the Closing Date), although this
date could be adjusted.
EACH REORGANIZATION AGREEMENT CONTEMPLATES:
* The transfer of all of the assets of each Existing Fund to a
corresponding New Fund in exchange for shares of the New Fund;
* The assumption by the corresponding New Fund of all of the
liabilities of the Existing Fund;
* The distribution to shareholders of each class of the Existing Fund,
in exchange for his or her shares of the Existing Fund, the same
number of full and fractional shares of the corresponding class of
the respective New Fund having an aggregate net asset value equal to
the aggregate net asset value of the full and fractional shares of
that class of the Existing Fund held by that shareholder at the
close of business on the Closing Date; and
* The subsequent termination of the Existing Fund.
The closing of any one Existing Fund's Reorganization is not contingent on
the closing of any other Fund's Reorganization.
If approved, the Reorganizations will have the following effects with
respect to the New Funds:
(1) If elected, the same Trustees nominated for re-election in Proposal 1
will serve as Trustees for the New Funds.
(2) The New Funds will enter into investment advisory agreements with IMCO
that are substantially similar to the agreements currently in place
with respect to the Existing Funds, except that, as discussed below,
there will be changes to the Lipper Indexes used to compute the
performance adjustment for three of the New Funds, a provision will be
added permitting the Board to change a New Fund's benchmark without
shareholder approval, a change to the advisory and transfer agency
fees of one of the New Funds, and, similar to the equity funds, a
change to permit IMCO to implement a manager-of-manager structure for
all Funds in the USAA family of funds.
(3) IMCO will enter into subadvisory agreements on behalf of the New Funds
with the current subadvisers of the Existing Funds that are
substantially identical as the agreements currently in place with
respect to the Existing Funds.
(4) The investment objective(s) of each New Fund will be classified as
non-fundamental, meaning that the Board of the New Funds may change
the investment objective(s) in light of market circumstances or other
events, without shareholder approval.
(5) The investment objective of the New Funds corresponding to the First
Start Growth Fund, the International Fund, and the Precious Metals and
Minerals Fund will be revised as discussed below.
(6) The classification of the New Funds corresponding to the Aggressive
Growth Fund and the Precious Metals and Minerals Fund will be changed
to non-diversified as discussed below.
(7) The New Funds will adopt more modernized and streamlined fundamental
investment restrictions than those currently in effect for the
Existing Funds.
USAA family of funds - 10
(8) The Lipper Indexes used to compute the performance adjustment for the
New Funds corresponding to the Capital Growth Fund, the First Start
Growth Fund, and the Growth and Tax Strategy Fund will be changed to a
Lipper Index that is more appropriate to the investment strategies of
each of the Existing Funds.
(9) Under the new advisory agreement for all Funds in the USAA family of
funds, IMCO will have the ability to hire, replace, or terminate
subadvisers with Board approval alone. IMCO does not have any present
intention to hire subadvisers to manage the day-to-day activities of
the Precious Metals and Minerals Fund, or any fixed income or money
market fund.
(10) The transfer agency fee of the New Fund corresponding to the
Aggressive Growth Fund will be reduced and the average net asset
breakpoints applicable to the base advisory fee will be increased to
make the Fund's pricing structure more competitive with comparable
funds and enable IMCO to continue retaining leading money managers in
this asset class to manage the Fund's assets.
Shareholders of each Existing Fund are not being asked to vote separately
on these matters. By voting "FOR" Proposal 2 shareholders will effect all
the actions described above that are applicable to each Existing Fund.
[ ] WILL FEES FOR THE NEW FUNDS CHANGE IF SHAREHOLDERS APPROVE THE
REORGANIZATION?
Voting FOR the Reorganization will not result in changed fees for any Fund
except for the Aggressive Growth Fund.
The Board has approved a pricing restructuring for the Aggressive Growth
Fund, including a decrease in the transfer agency fees charged by USAA
Shareholder Account Services and an increase in the average net asset
breakpoint levels for the advisory fee paid to IMCO to manage the Fund. The
net impact of this pricing restructuring would have been a small increase
(6.8%) in the Fund's total operating expenses for its last fiscal year. See
WHAT ARE THE CHANGES TO THE FEE STRUCTURE FOR THE AGGRESSIVE GROWTH FUND on
page 20.
[ ] WHY IS THE BOARD RECOMMENDING APPROVAL OF THE REORGANIZATION AGREEMENTS?
In unanimously approving the Reorganization Agreements and recommending
that shareholders of the Existing Funds also approve the Reorganization
Agreements, the Board of the Existing Funds was provided and evaluated
information it reasonably believed necessary to consider the proposed
Reorganizations. The Board of the Existing Funds determined that the
Reorganizations would not dilute the interests of each Existing Fund's
shareholders and would be in the best interests of each Existing Fund and
its shareholders. Summarized below are the key factors considered by the
Board:
* In recent years, many mutual funds have reorganized as Delaware
statutory trusts. Based on the input of IMCO and Fund and directors'
counsel, the Board determined that the Delaware statutory trust form
of organization provides more flexibility with respect to the
administration of the New Funds, which potentially could lead to
greater operating efficiencies and lower expenses for shareholders of
the New Funds.
* Based upon information presented by IMCO, the Board determined that
the New Funds may be able to realize greater operating efficiencies
because the Reorganizations would permit the New Funds to (1)
eliminate differences in voting, record date, quorum, and other
corporate requirements under the different governing documents of the
Existing Funds and (2) operate under uniform, modern, and flexible
governing documents that would streamline the Fund governance process,
reduce future reporting, filing, and proxy costs, and reduce costs
associated with the Funds' administration.
* The Board considered that the investment adviser, the subadvisers, and
other service providers will remain the same. The advisory agreements
will remain the same, except that the Lipper Indexes used to compute
the performance adjustment for the Capital Growth Fund, the First
Start Growth Fund, and the Growth and Tax Strategy Fund will be
revised to utilize Lipper Indexes that are more appropriate given the
recent changes to the investment strategies of these Funds, a
provision will be added permitting the Board to change a benchmark
index without shareholder approval, a provision will be added to
permit each Fund to implement
Proxy Statement - 11
a manager-of-manager structure, and the average net asset breakpoints
applicable to the base advisory fee of the Aggressive Growth Fund will
be increased, which will result in a slight increase to the total
operating expenses of the Fund. The subadvisory agreements will remain
the same. The services provided by these service providers will be the
same as those currently being provided to each Existing Fund.
* Based upon information presented by IMCO, the Board determined that as
a result of the Reorganizations (1) the investment objective of the
New Funds corresponding to the First Start Growth Fund, the
International Fund, and the Precious Metals and Minerals Fund will be
revised, as described below, and (2) the classification of the
Aggressive Growth Fund and the Precious Metals and Minerals Fund will
be changed to non-diversified, as described below. IMCO also informed
the Board that, other than these changes, the Reorganizations will not
result in any material change in the investment objective(s) or
principal investment strategies of any of the Existing Funds even
though the New Funds will adopt investment objectives that may be
changed with approval of the Board only.
* The New Funds will adopt certain investment restrictions that update,
standardize, and streamline the investment restrictions currently in
effect for the Existing Funds, which would simplify portfolio
management and the administration for the New Funds.
* The Board considered the estimated cost of the Reorganizations,
including the costs of holding shareholder meetings and of obtaining
shareholder approval of the Reorganizations, the fact that a
significant portion of these costs would have been incurred even if
the Reorganizations had not been proposed since shareholder approval
of the Trustees was necessary in light of the requirement to seek
shareholder approval every five years, and the anticipated long-term
benefits of the Reorganizations, including anticipated cost savings.
The Board also considered the fact that IMCO represented to it that,
other than the increase to the average net asset breakpoints
applicable to the base advisory fee of the Aggressive Growth Fund,
which combined with the reduction in transfer agency fees would result
in a small increase to that Fund's annual total operating expenses,
there would be no increase in shareholder fees or changes to existing
services as a result of the Reorganizations.
* Based upon information presented by IMCO and advice of counsel, the
Board determined that there were no anticipated direct or indirect
federal income tax consequences of the Reorganizations to Existing
Fund shareholders.
[ ] HOW WILL THE INVESTMENT RESTRICTIONS OF THE NEW FUNDS DIFFER FROM THE
INVESTMENT RESTRICTIONS IN EFFECT FOR THE EXISTING FUNDS?
The 1940 Act requires each fund to adopt certain fundamental investment
restrictions regarding specific activities. Each Existing Fund has adopted
similar fundamental investment restrictions with respect to these required
restrictions and certain fundamental investment restrictions not required
by the 1940 Act. In connection with the Reorganizations, the New Funds
intend to adopt uniform fundamental investment restrictions required under
the 1940 Act to conform these policies to the flexibility now afforded
under federal and state law. The New Funds also intend to eliminate
duplicative or unnecessary fundamental investment restrictions of the
Existing Funds. The Board of the New Funds has reviewed and approved the
modifications to the fundamental investment restrictions of the Existing
Funds that will be applicable to the New Funds.
In general, the purpose of the modifications is to permit the New Funds
greater flexibility in portfolio management, harmonize minor differences in
the wording of similar restrictions, simplify the Funds' administration,
and make the restrictions uniform among all New Funds. The New Funds do not
intend to have different investment objectives or strategies as a result of
the modifications to, or in some cases elimination of, the Existing Funds'
fundamental investment restrictions.
Exhibit D lists and describes the activities that must be addressed by a
fundamental investment restriction under the 1940 Act and each fundamental
investment restriction adopted by each Existing Fund and the corresponding
fundamental investment restriction, if any, for each New Fund.
USAA family of funds - 12
[ ] WILL THERE BE ANY SALES LOAD, COMMISSION, OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATIONS?
No. The full value of your shares of an Existing Fund will be exchanged for
shares of the same class of the corresponding New Fund without any sales
load, commission, or other fee imposed.
[ ] WHAT WILL BE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS?
As a condition to consummation of each Reorganization, the Companies and
Trusts will receive an opinion from Kirkpatrick & Lockhart Nicholson Graham
LLP to the effect that neither the participating Existing Fund or New Fund
nor the shareholders will recognize any gain or loss as a result of the
Reorganization.
[ ] WHO IS BEARING THE EXPENSES RELATED TO THE REORGANIZATIONS?
The Existing Funds will bear the expenses associated with the
Reorganizations, including the costs of printing, mailing, tabulation, and
solicitation of proxies. The share to be paid by each Existing Fund will be
based in part on the Existing Fund's average net assets as a percentage of
the average net assets of the Existing Funds in the Fund Complex and in
part on the number of shareholders in each Existing Fund. To the extent a
Fund's expenses exceed its expense limitations, if applicable, IMCO will
bear those expenses. IMCO also will bear the costs of internal personnel
necessary to plan, prepare, and execute the project associated with the
Reorganizations.
SUMMARY OF THE REORGANIZATION AGREEMENTS
[ ] WHAT ARE THE MATERIAL TERMS AND CONDITIONS OF THE REORGANIZATION
AGREEMENTS?
The terms and conditions under which each Reorganization would be completed
are contained in each Reorganization Agreement. A copy of which is
available upon request by calling toll free (800) 531-8448.
The Reorganization Agreements provide that each New Fund will acquire all
of the assets of the corresponding Existing Fund in exchange solely for
shares of the New Fund and the New Fund's assumption of such Existing
Fund's liabilities. The Reorganization Agreements further provide that,
after the applicable Closing Date, each Existing Fund will distribute the
shares of the New Fund it receives in the Reorganization to its
shareholders, by class.
The number of full and fractional shares of the New Fund you will receive
in the Reorganizations will be equal in value, as calculated at the close
of business (generally 4 p.m. Eastern Time) on the applicable Closing Date,
to the number of full and fractional shares of the Existing Fund you own on
that Closing Date and will be of the same class as the shares you own on
that Closing Date. The New Funds will not issue certificates representing
the New Fund shares issued in connection with such exchange. Outstanding
certificates for shares of the Existing Funds will be canceled and
shareholders holding such certificates shall be credited the appropriate
amount of shares in the Reorganization. After such distribution, each
Existing Fund will wind up its affairs and terminate or dissolve the
Existing Fund as soon as practicable after the closing of the
Reorganization.
Any Reorganization Agreement may be terminated, and any Reorganization may
be abandoned at any time prior to its closing, before or after approval by
Existing Fund shareholders, if circumstances should develop that, in the
Board's opinion, make proceeding with the Reorganization inadvisable with
respect to such Existing Fund(s). The completion of each Reorganization
also is subject to various conditions, including: (1) completion of all
necessary filings with the SEC and state securities authorities; (2) the
receipt of all material consents, orders, and permits of federal, state,
and local regulatory authorities necessary to consummate the
Reorganization; (3) delivery of a legal opinion regarding the federal tax
consequences of the Reorganization; (4) the issuance by the New Fund of
initial shares to IMCO or its affiliate, to permit IMCO or its affiliate to
take all necessary actions as such New Fund's sole shareholder, required to
be taken by the New Fund; (5) the New Trust (on behalf of the New Fund)
shall have entered into or adopted an investment advisory contract, and
such other agreements and plans necessary for each New Fund's operations;
and (6) other customary corporate and securities matters. Subject to the
satisfaction of those conditions, each Reorganization will take place
immediately after the close of business on the Closing Date. The
Reorganization Agreements provide that either of the Existing Funds or the
New Funds may waive compliance
Proxy Statement - 13
with any of the covenants or conditions if such waiver will not have a
material adverse effect on the Existing Funds' shareholders other than the
requirements specifically listed in clauses (1)-(5) above.
The Reorganization Agreement for each Existing Fund must be approved by
shareholders of that Existing Fund. The closing of one Reorganization is
not contingent on the closing of any other Reorganization. In the event
that shareholders of a particular Existing Fund do not approve the
Reorganization Agreement of that Existing Fund or the Reorganization is not
consummated with respect to that Existing Fund for any other reasons, the
Board will consider other courses of action.
[ ] WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS?
Each Reorganization is intended to qualify for federal income tax purposes
as a tax-free reorganization under section 368(a) of the Internal Revenue
Code of 1986, as amended (the Code).
As a condition to the closing of each Reorganization, each Existing Fund
and New Fund will receive an opinion from Kirkpatrick & Lockhart Nicholson
Graham LLP to the effect that, based on certain stated facts and
assumptions, and certain representations of each Existing Fund and New
Fund, and conditioned on each Reorganization's being completed in
accordance with the Reorganization Agreement, for federal income tax
purposes, with respect to each Reorganization and the Existing Funds and
New Funds participating therein:
(1) the Reorganization will qualify as a "reorganization" (as defined in
section 368(a)(1)(F) of the Code), and each Existing Fund and New Fund
will be a "party to a reorganization" (within the meaning of section
368(b) of the Code);
(2) no Existing Fund or New Fund will recognize any gain or loss on the
Reorganization;
(3) an Existing Fund's shareholders will not recognize any gain or loss on
the exchange of shares of the Existing Fund for shares of the New
Fund;
(4) the holding period for, and the aggregate tax basis in, the shares of
a New Fund a shareholder receives pursuant to the Reorganization will
include the holding period for, and will be the same as the aggregate
tax basis in, the shares of an Existing Fund the shareholder holds
immediately prior to the Reorganization (provided the shareholder
holds the shares as capital assets on the Closing Date);
(5) the New Fund's holding period for, and tax basis in, each asset the
Existing Fund transfers to it will include the Existing Fund's holding
period for, and will be the same as the Existing Fund's tax basis in,
that asset immediately prior to the Reorganization; and
(6) for purposes of section 381 of the Code, the New Fund will be treated
as if there had been no Reorganization. Accordingly, the
Reorganization will not result in the termination of the Existing
Fund's taxable year, the Existing Fund's tax attributes enumerated in
section 381(c) will be taken into account by the New Fund as if there
had been no Reorganization, and the part of the Existing Fund's
taxable year before the Reorganization will be included in the New
Fund's taxable year after the Reorganization.
Notwithstanding clauses (2) and (5), such opinion may state that no opinion
is expressed as to the effect of the Reorganization on the Existing Fund or
the New Fund or the Existing Funds' shareholders with respect to any
transferred asset as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year (or
on the termination or transfer thereof) under a mark-to-market system of
accounting.
If a Reorganization were to fail to meet the requirements of section
368(a)(1)(F), a shareholder could realize a gain or loss on the
transaction.
USAA family of funds - 14
COMPARISON OF THE NEW FUNDS AND THE EXISTING FUNDS
[ ] HOW WILL THE NEW FUNDS BE ORGANIZED?
Each of the Existing Funds is currently organized as a series of either a
Maryland corporation or a Massachusetts business trust as indicated below.
MARYLAND FUNDS MASSACHUSETTS FUNDS
Aggressive Growth S&P 500 Index Balanced Strategy
Growth Nasdaq-100 Index Cornerstone Strategy
Growth & Income Extended Market Index Growth and Tax Strategy
Income Long-Term Total Return Strategy
Income Stock Intermediate-Term Emerging Markets
Short-Term Bond Short-Term International
Money Market Tax Exempt Money Market Precious Metals and Minerals
First Start Growth California Bond World Growth
Science & Technology California Money Market GNMA Trust
Intermediate-Term Bond New York Bond Treasury Money Market
High-Yield Opportunities New York Money Market
Small Cap Stock Virginia Bond
Capital Growth Virginia Money Market
Value
If the Reorganizations are approved, each Existing Fund will re-domicile
into a corresponding series of the New Trust, which is a Delaware statutory
trust governed by its own Trust Instrument and By-Laws. Subject to
shareholder approval, the Board of Trustees of the New Trust will consist
of the same six nominees identified in Proposal 1. The operations of each
Existing Fund and New Fund are also governed by applicable state and
federal law.
Under the Trust Instrument and By-Laws of the New Trust, the Trustees of
the New Funds will have more flexibility than Trustees of the Existing
Funds and, subject to applicable requirements of the 1940 Act and Delaware
law, broader authority to act without shareholder approval. The increased
flexibility may allow the Trustees of the New Funds to react more quickly
to changes in competitive and regulatory conditions and, as a consequence,
may allow the New Funds to operate in a more efficient and economical
manner and will reduce the circumstances in which shareholder approval will
be required. Delaware law also promotes ease of administration by
permitting the Board of Trustees of the New Funds to take certain actions,
for example, establishing new investment series, without filing additional
documentation with the state, which would otherwise require additional time
and costs.
Importantly, the Trustees of the New Funds will have the same fiduciary
obligations to act with due care and in the interest of the New Funds and
their shareholders as do the Trustees of the Existing Funds with respect to
the Existing Funds and their shareholders.
Certain other similarities and differences among these types of entities
are summarized at Exhibit C, although this is not a complete comparison.
Shareholders should refer to the provisions of these governing documents
and the relevant state law directly for a more thorough comparison. Copies
of these governing documents are available to shareholders without charge
upon written request to the Legal Department, USAA Investment Management
Company, 9800 Fredericksburg Road, San Antonio, Texas 78288 or by calling
(800) 531-8448.
[ ] HOW WILL THE EXISTING FUNDS' INVESTMENT OBJECTIVES CHANGE?
If the Reorganizations are approved, changes will be made to the investment
objectives of only three of the New Funds. The investment objective of the
New Fund corresponding to the First Start Growth Fund will be revised from
that of seeking "long-term capital appreciation" to that of seeking
"long-term capital growth with reduced volatility over time." The Fund's
strategy to achieve this objective will be to invest primarily in equity
securities when IMCO believes the reward characteristics outweigh the risk
in the market. The Fund's principal strategy will also emphasize
Proxy Statement - 15
that the Fund may invest up to 80% in bonds and cash equivalents to reduce
volatility depending on IMCO's view of the overall direction of the stock
market. These changes are intended to give the portfolio managers more
flexibility to invest a portion of the Fund's assets in non-equity
securities to reduce the volatility of the Fund during bear equity markets.
The investment objectives of the New Funds corresponding to the
International Fund and the Precious Metals and Minerals Fund will also be
amended to remove the secondary objective of current income. The new
investment objective of the International Fund would state that the New
Fund "seeks capital appreciation." The new investment objective of the
Precious Metals and Minerals Fund would state that the New Fund "seeks
long-term capital appreciation and to protect the purchasing power of your
capital against inflation." The purpose of these two changes is to give the
portfolio manager more flexibility to choose investments offering the best
total return potential.
Other than these three changes, each Existing Fund's investment objectives
will remain the same. However, the investment objectives of each New Fund
will be classified as non-fundamental. This would allow the Board of the
New Funds to change the investment objective(s) of the New Funds whenever
the Board believes that changes are necessary or appropriate in light of
market circumstances or other events, without causing the New Funds to
incur the costs of shareholder meetings.
[ ] WHY ARE THE AGGRESSIVE GROWTH FUND AND THE PRECIOUS METALS AND MINERALS
FUND BEING CHANGED FROM DIVERSIFIED TO NON-DIVERSIFIED?
Mutual funds must classify themselves as either diversified or
non-diversified. The difference is that a diversified fund is subject to
stricter percentage limits on the amount of assets that can be invested in
any one company. Both the Aggressive Growth Fund and the Precious Metals
and Minerals Fund are currently classified as diversified mutual funds
under the 1940 Act. Therefore, each of these Funds has a fundamental policy
that it may not purchase securities of an issuer if, with respect to 75% of
its total assets, (i) more than 5% of the Fund's total assets would be
invested in securities of that issuer, or (ii) the Fund would hold more
than 10% of the outstanding voting securities of that issuer. With respect
to the remaining 25% of its total assets, each of these Funds can invest
more than 5% of its assets in any one issuer. These limitations do not
apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or to securities issued by other investment
companies. These limits also apply only at the time a Fund purchases a
security.
AGGRESSIVE GROWTH FUND
Both the Board and IMCO believe that the current policy unduly restricts
the flexibility of the subadviser in managing an aggressive growth style
fund, and believe that the proposed change will allow the portfolio manager
more flexibility to manage the Fund more opportunistically. Currently, the
Fund normally holds a core position of 35 to 50 common stocks. By changing
the Fund's status to "non-diversified," the Fund's subadviser would be able
to implement a more focused strategy and invest a greater portion of its
assets in a single issuer and in fewer holdings. To the extent the value of
a particular security may be adversely affected by business or other
developments relating to the issuer, the impact on the Fund's net asset
value could be greater than it would be on a diversified fund. Both the
Board and IMCO believe that giving the Fund's subadviser more flexibility
to invest a greater percentage of the Fund's assets in particular
companies, although presenting increased risk, offers greater potential
rewards, and is consistent with an aggressive growth investment style.
Other aggressive growth funds that follow a more focused strategy are also
"non-diversified."
PRECIOUS METALS AND MINERALS FUND
Both the Board and IMCO believe that the current policy unduly restricts
the flexibility of IMCO in managing the Fund, and believe that the proposed
change will allow the portfolio manager to improve returns by being able to
more aggressively exploit opportunities, and to more effectively deal with
mergers involving Fund holdings. Over the last few years, the precious
metals industry has experienced a substantial amount of consolidation, and
other attractive investment opportunities within this industry are limited.
Changing the Fund's status to "non-diversified" will mitigate this
opportunity problem. Both the Board and IMCO believe that giving the
portfolio manager flexibility
USAA family of funds - 16
to acquire larger positions in individual companies when he or she believes
that potential returns justify the additional risks, offers greater
potential rewards and furthers the Fund's existing investment objective and
strategies. To the extent the value of a particular security may be
adversely affected by business or other developments relating to the
issuer, the impact on the Fund's net asset value could be greater than it
would be on a diversified fund.
The Board, including the Independent Trustees, approved these changes and
recommends making both the Aggressive Growth Fund and the Precious Metals
and Minerals Fund "non-diversified" under the 1940 Act. The Board and IMCO
believe that the proposed changes will facilitate each Fund's pursuit of
its current investment objective. If the Reorganizations are approved, each
Fund would be prohibited from investing more than 25% of its assets in any
one issuer and each Fund will still be subject to diversification standards
under the Internal Revenue Code. These standards generally provide that, to
maintain favorable tax treatment, a fund may not purchase a security if, as
a result, with respect to 50% (instead of 75%) of its total assets, more
than 5% of a Fund's total assets would be invested in securities of a
single issuer or more than 10% of the outstanding voting securities of the
issuer would be held by a Fund. With respect to the remaining 50% of its
total assets, a Fund would be limited to 25% in any one issuer. These
limits apply only as of the end of each quarter of the Fund's fiscal year,
so the Fund may actually have a higher concentration in an issuer during
periods between the ends of its fiscal quarters.
[ ] WHAT IS THE DIFFERENCE IN THE LIPPER INDEXES USED TO CALCULATE THE
PERFORMANCE ADJUSTMENT TO THE ADVISORY FEE FOR THE CAPITAL GROWTH FUND, THE
FIRST START GROWTH FUND, AND THE GROWTH AND TAX STRATEGY FUND?
Each Fund's investment management fee is comprised of a base fee and a
performance adjustment that will increase or decrease the base fee
depending upon the performance of the Fund relative to the performance of a
particular Lipper Index. 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 index be used for calculating any
performance-based fees. As previously noted, one way in which the new
Investment Advisory Agreements will differ from the current Investment
Advisory Agreements is with respect to the benchmark index that will be
used to calculate the performance adjustment for the Capital Growth Fund,
the First Start Growth Fund, and the Growth and Tax Strategy Fund.
CAPITAL GROWTH FUND
Currently, the benchmark index used for calculating the performance
adjustment for the Fund is the Lipper Small-Cap Growth Funds Index. If the
Reorganization is approved, the Lipper Global Funds Index would be used to
calculate the performance adjustment for the Fund. Both indices are
maintained by Lipper.
Prior to December 2005 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 Small-Cap Growth Funds Index. The Lipper Small-Cap
Growth Funds 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.
In December 2005, 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 a new "best ideas"
approach. Batterymarch Financial Management, Inc., the Fund's subadviser,
now uses an investment style when managing the Fund's assets that more
closely correlates to the management style of mutual funds within the
Lipper Global Funds Index. As a result, IMCO voluntarily agreed to
calculate the performance adjustment by comparing the Fund's performance to
both the Lipper Small-Cap Growth Funds Index and the Lipper Global Funds
Index and then select the comparison that results in the lesser fee for the
Fund's shareholders. The Lipper Global Funds Index tracks the total return
performance of the 30 largest funds within this category. This category
includes funds that
Proxy Statement - 17
invest at least 25% of their portfolio in securities traded outside of the
United States and that may own U.S. securities as well. As a result of
changes to the investment style of the Fund, both IMCO and the Fund's Board
believe that the Lipper Global Funds Index is now a more appropriate
benchmark for the New Fund because it provides a better representation of
the performance of funds with comparable management styles.
FIRST START GROWTH FUND
Currently, the benchmark index used for calculating the performance
adjustment for this Fund is the Lipper Large-Cap Growth Funds Index
(Existing Index). If the Reorganization is approved, the Lipper Flexible
Portfolio Funds Index (New Index) would be used to calculate the
performance adjustment for the Fund. Both indices are maintained by Lipper.
The Existing 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 Index. Large-cap growth funds
normally invest in companies with long-term earnings expected to grow
significantly faster than the earnings of the stocks represented in a major
unmanaged index. The New Index tracks the total return performance of the
10 largest funds within the Lipper Flexible Portfolio Funds category. This
category includes funds that allocate their investments across various
asset classes, including both domestic and foreign stocks, bonds, and money
market instruments with a focus on total return. At least 25% of each
portfolio is invested in securities traded outside of the United States.
The current investment style used by IMCO when managing the Fund's assets
most closely correlates to the management style of mutual funds within the
Lipper Large-Cap Growth Funds Index. After the Reorganization, as discussed
above, the investment objective of the Fund will be to seek long-term
capital growth with reduced volatility over time and, therefore, the Fund
would be using an investment style when managing the Fund's assets that
more closely correlates to the management style of mutual funds within the
Lipper Flexible Portfolio Funds Index. As a result, both IMCO and the
Fund's Board believe that the New Index would be a more appropriate
benchmark for the New Fund based on its changed investment objective and
principal strategy because it provides a better representation of the
performance of funds with comparable management styles.
GROWTH AND TAX STRATEGY FUND
Currently, the benchmark index used for calculating the performance
adjustment for this Fund is the Lipper Balanced Funds Index (Existing
Index). If the Reorganization is approved, the Existing Index would be
replaced with a composite index, composed of 51% of the Lipper General
Municipal Bond Funds Index and 49% of the Lipper Large Cap Core Funds Index
(New Composite Index).
The Existing Index tracks the total return performance of the 30 largest
mutual funds within the balanced category, which typically includes mutual
funds that seek to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds, with the typical stock/bond
ratio being 60%/40% under normal market conditions. On the other hand, the
Fund's investment objective is to seek a conservative balance between
income, the majority of which is exempt from federal income tax, and the
potential for long-term growth of capital to preserve purchasing power. The
Fund invests between 50-70% in tax-exempt bonds and money market
instruments and 30-50% in blue chip stocks.
Based on information provided by IMCO regarding differences in the Fund's
investment objective, investment policies, and portfolio holdings, the
Board determined that the Lipper Balanced Funds Index was not the
appropriate index to measure this Fund's performance. Balanced funds,
unlike the Growth and Tax Strategy Fund, generally hold a split of 60%/40%
between equity securities and bonds, as compared with the Fund, which
generally holds at least 50% of its portfolio in debt securities. Also,
balanced funds can and do hold a larger proportion of taxable fixed income
securities than the Fund, which generally holds a larger proportion of
tax-exempt securities. The end result is that it is extremely unlikely that
the Fund will ever outperform the Lipper Balanced Funds Index based on its
investment objective, principal strategies, and style. Based on other
information provided by IMCO about the unavailability of a comparable
Lipper Index for the Fund, the Board also determined that a single index
was not appropriate for measuring this Fund's performance. For that reason,
the Board approved changing the Fund's
USAA family of funds - 18
Existing Index to the New Composite Index, including a fixed blend of the
Lipper General Municipal Bond Funds Index and the Lipper Large Cap Core
Funds Index to compare the Fund's performance to an index reflecting its
unique mix of tax-exempt and equity securities. The Board determined that
the New Composite Index would be fixed at 51% for the Lipper General
Municipal Bond Funds Index and 49% for the Lipper Large Cap Core Funds
Index to correspond to the Fund's investment strategy, under normal market
conditions, to invest in securities so that at least 50% of the Fund's
annual income will be exempt from federal personal income tax and excluded
from the calculation of federal alternative minimum tax.
The Board approved implementing the New Composite Index for the Fund
beginning if shareholders approve the Reorganization of this Fund. If the
shareholders approve the Reorganization of this Fund, the performance fee
adjustment for the New Fund would be calculated based solely on the New
Composite Index.
[ ] WHAT ARE THE MATERIAL TERMS OF THE INVESTMENT ADVISORY AGREEMENT WITH IMCO?
The Reorganization Agreements require the New Trust to enter into
investment advisory agreements for the New Funds. Together, the current
Investment Advisory Agreements for the Existing Funds are referred to as
the "Current Advisory Agreements," the Investment Advisory Agreements for
each of the New Funds are referred to as the "New Advisory Agreements," and
the Current Advisory Agreements and the New Advisory Agreements are
referred to together as the "Advisory Agreements."
The Current Advisory Agreements were approved by Existing Fund shareholders
in 2001. The Board of the Existing Funds, including the Independent
Trustees, last approved the continuation of the Current Advisory Agreements
on April 19, 2006. The Board of the New Funds separately approved the New
Advisory Agreements on April 19, 2006.
The New Advisory Agreements are the same as the Current Advisory
Agreements, except for the changes to the Lipper Indexes used to compute
the performance adjustment for the Capital Growth Fund, the First Start
Growth Fund, and the Growth and Tax Strategy Fund, the increase to the
average net assets breakpoints applicable to the base advisory fee of the
Aggressive Growth Fund, the names of the contracting parties, and dates of
the Agreements. Under the Current Advisory Agreements, IMCO has the power
to implement a manager-of-manager structure for each equity fund whereby
IMCO is authorized, with the approval of the Board, to hire, terminate, or
replace subadvisers to manage the day-to-day activities of those equity
funds. The Current Advisory Agreements for the Precious Metals and Minerals
Fund, the fixed income and money market funds do not authorize IMCO to
implement such a structure. Under the New Advisory Agreement, IMCO will
have the power for all funds in the USAA family of funds to implement a
manager-of-manager structure and hire, terminate, or replace subadvisers
with only Board approval. This change will provide IMCO with greater
flexibility to manage all funds in the USAA family of funds, and by making
this authority consistent across all types of funds in the USAA family of
funds, we can make all New Funds (other than the Index Funds) subject to
the same advisory agreement with IMCO. IMCO has no present intention to
implement a multi-manager structure for its fixed income or money market
funds.
The New Advisory Agreements for the New Funds also will allow the Board of
Trustees, on behalf of the applicable New Fund, to change the fund's
benchmark used to calculate the performance adjustment to the base advisory
fee without a shareholder vote. This Board power will be subject to the
provisions of the federal securities laws, including the 1940 Act and the
Investment Advisers Act of 1940, as modified by rule, exemptive order, or
interpretation of the SEC or its staff, which currently requires that such
changes be approved by shareholders. If future changes to the federal
securities laws occur, or the SEC's or its staff interpretation of those
laws change to permit such changes without shareholder approval, the Board
would be permitted to change the index without shareholder vote. If ever
legally permissible, this provision would give the Board added flexibility
to change the index used to calculate performance adjustments to the base
advisory fee in response to material changes in investment policies of a
fund, or changes to indexes to ensure that each New Fund's index remains
the most appropriate by which to measure its comparative performance.
Proxy Statement - 19
Under the Advisory 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 Fund's subadvisers, rather than on directly managing
the portion of the Funds' assets allocated to subadvisers.
Each Advisory Agreement provides for an advisory fee based on the amount of
net assets under management, with an adjustment, for certain Funds, 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 underperforms 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,
except as discussed below with respect to the Aggressive Growth Fund. With
respect only to the Capital Growth Fund, the First Start Growth Fund, and
the Growth and Tax Strategy Fund, the relevant New Advisory Agreement
replaces the current Lipper Index used to calculate the performance
adjustment with a Lipper Index that more closely correlates to the way each
Fund will be managed.
Each Advisory 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 Trustees, 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.
[ ] WHAT ARE THE CHANGES TO THE FEE STRUCTURE FOR THE AGGRESSIVE GROWTH FUND?
With respect to the Aggressive Growth Fund, under the New Advisory
Agreement, the blended base fee payable to IMCO will be increased by
increasing the breakpoint thresholds as detailed in the table below.
========================================================================
CURRENT BREAKPOINTS PROPOSED BREAKPOINTS
BASE FEE (AVERAGE NET ASSETS) (AVERAGE NET ASSETS)
-----------------------------------------------------------------------
0.50% $0 to $200 million $0 to 750 million
0.40% Next $100 million Next $750 million
0.33% Over $300 million Over $1.5 billion
=======================================================================
The increase to these breakpoint thresholds is just one component of
changes to the overall pricing of this Fund to ensure that the Fund retains
its competitive position and enable IMCO and the Board to continue to hire
the best money managers. First, to bring the Fund's transfer agency fee in
line with the other actively managed USAA equity funds and adjust to the
increase in the average account size of this Fund over the past two years,
IMCO proposed and the Board approved a reduction of the fee payable to the
New Fund's transfer agent from $26 per account to $23 per account. Second,
to address the Fund's management fee, the Board approved the changes
described above to the average net asset breakpoints applicable to the base
advisory fee paid to IMCO to manage the Fund.
The reason for these changes is that in conjunction with the annual review
of advisory agreements by the Board of the Fund, IMCO and the Board
reviewed the pricing structure of the Fund and its performance relative to
its peers. Similar to past years, according to Lipper, the Fund's
management fees (advisory and administration fee) and total expense ratios
are at or below the median of its peer group, which consists of a small
group of no-load large cap growth funds, and below its peer universe, which
consists of most comparable no-load large cap growth funds, and
substantially below the average total fees (1.45%) of the universe of all
large cap growth funds. IMCO also noted that the Fund's transfer agency fee
was higher than the median expense for its peer group and universe.
USAA family of funds - 20
As detailed in the table below, the overall impact of this revised fee
structure would have increased the Fund's annual total operating expense
ratio by only 0.07, which represents an increase in the Fund's operating
expenses of only approximately 6.8%. If the proposed fee changes are
implemented, the Fund's total operating expense ratio will still remain 25%
below the industry average of comparable funds, and in line with comparable
no-load funds, based on recent industry data. The impact of the performance
adjustment will continue to depend on the Fund's future performance
relative to the Lipper Large-Cap Growth Funds Index. The table below
reflects the Fund's fees and expenses, as of its most recent fiscal year
ended July 31, 2005, under both the Current Advisory Agreement and the New
Advisory Agreement, if the New Advisory Agreement had been in effect during
the same period, and also includes the impact that the reduced transfer
agency fees would have had on the Other Expenses and Total Operating
Expenses of the Fund.
===============================================================================
CURRENT TOTAL PROPOSED CURRENT TOTAL
OPERATING EXPENSES OPERATING EXPENSES
- -------------------------------------------------------------------------------
Management Fees(1) 0.40% 0.50%
- -------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.00% 0.00%
- -------------------------------------------------------------------------------
Other Expenses(2) 0.62% 0.59%
- -------------------------------------------------------------------------------
Total Annual Operating Expenses 1.02% 1.09%
- -------------------------------------------------------------------------------
(1) A performance fee adjustment increased the management fee of 0.37% by
0.03% for the most recent fiscal year ended July 31, 2005. If the breakpoint
changes were implemented, the management base fee would have been 0.47%.
(2) If the changes to the transfer agency fees had been implemented, the
Fund's Other Expenses would have decreased 0.03%.
EXAMPLE
This example is intended to help you compare the cost of investing in this
Fund with the cost of investing in other mutual funds under both the current
and proposed advisory agreements. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment, assuming
(1) a 5% annual return, (2) the Fund's operating expenses (including the
performance fee adjustment for the most recent fiscal year, but before any
applicable reimbursement or fee offset arrangement) remain the same, and (3)
you redeem all of your shares at the end of the periods shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
(CURRENT/PROPOSED) (CURRENT/PROPOSED) (CURRENT/PROPOSED) (CURRENT/PROPOSED)
- -------------------------------------------------------------------------------
$104/$111 $325/$347 $563/$601 $1,248/$1,329
================================================================================
One factor influencing the pricing change is that the Fund's current
subadviser, Marsico Capital Management (Marsico), recently requested, and
was granted by IMCO and the Board, an increase in its annual subadvisory
fee payable by IMCO from 0.20% to 0.35%, which is comparable to the fee it
charges other clients for managing similar funds and accounts. The Board
and IMCO believe that other leading money managers, if asked to manage the
Fund, would seek a comparable rate. As of March 31, 2006, the base advisory
fee earned by IMCO was 0.37%, and IMCO pays Marsico 0.35% to subadvise the
Fund. IMCO incurs substantially more than 0.02% in expenses in rendering
management services to the Fund. In addition, as the Fund continues to
grow, IMCO's blended base advisory fee will decrease further and could fall
below what it pays Marsico. The Board determined that this situation is not
economically sustainable over the long term, and could impact the Fund's
ability to hire and retain leading money managers to manage the Fund. The
Board was advised that the Fund's current operating expense ratio (1.02%)
was 30% below the industry average (1.45%) of all large cap growth funds
and 7% below the average of comparable no-load funds 1.10%. The Board was
advised that, if the proposed fee changes are implemented, the Fund's total
operating expense ratio will still be 25% below the industry average of
comparable funds, and 1% below comparable no-load funds, based on recent
industry data supplied by Lipper in connection with the Board review of
each Fund's advisory agreement.*
* Lipper data on comparable fund expenses is based on expense information for
each fund's fiscal year end, which may be different from our Fund's fiscal
year end.
Proxy Statement - 21
Although the Board and IMCO agreed that the pricing of the Fund needed to
be changed to preserve the Fund's competitive posture against similar funds
and to be able to retain the best money managers, they both agreed that
steps should be taken first to improve the Fund's relative performance
before seeking shareholder approval of a changed fee structure. In 2002,
the Board and IMCO implemented a "manager-of-manager" structure, and hired
Marsico to manage the Fund's investments on a day-to-day basis. Since the
implementation of this structure, the Fund's comparative performance has
improved relative to its Lipper benchmark as detailed in the tables below.
Since the implementation of the "manager-of-managers" structure, your
Fund's relative performance, as of March 31, 2006, has improved as shown in
the performance of the Fund relative to its Lipper benchmark since Marsico
was hired as a subadviser on June 28, 2002, to manage the Fund's
investments.
==========================================================================
AVERAGE ANNUAL TOTAL RETURN
(AS OF MARCH 31, 2006)
--------------------------------------------------------------------------
SINCE MARSICO BEGAN MANAGING THE FUND
--------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND 9.37%
--------------------------------------------------------------------------
LIPPER LARGE-CAP GROWTH FUNDS INDEX* 7.59%
==========================================================================
* The Lipper Large-Cap Growth Funds Index tracks the total return
performance of the 30 largest funds within this category. This category
includes funds that, by portfolio practice, invest at least 75% of their
equity assets in companies with market capitalizations (on a three-year
weighted basis) of greater than 300% of the dollar-weighted median
market capitalization of the middle 1,000 securities of the S&P 1500
Index. Large-cap growth funds normally invest in companies with
long-term earnings expected to grow significantly faster than the
earnings of the stocks represented in a major unmanaged stock index.
The table below sets forth your Fund's standardized performance as of March
31, 2006.
===========================================================================
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 3 YEARS 5 YEARS* 10 YEARS*
---------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND 15.75% 17.27% 2.78% 5.06%
---------------------------------------------------------------------------
LIPPER LARGE-CAP GROWTH FUNDS INDEX* 15.36% 15.11% 1.07% 5.90%
---------------------------------------------------------------------------
* The five and 10 year performance figures include the Fund's performance
before Marsico was hired.
===========================================================================
Also, the Fund's ranking against other funds in its Lipper category has
improved dramatically since Marsico was hired. As of January 31, 2006, the
Fund's Lipper ranking since Marsico was hired in 2002 was 14%, which means
it outperformed 86% of the funds in its Lipper category. The tables below
show the Fund's Lipper ranking as of June 30, 2002 (before Marsico was
hired), and as of March 31, 2006, in which the one and three year periods
reflect solely Marsico's management of the Fund.
=========================================================
LIPPER RANKING AS OF MARCH 31, 2006
LIPPER LARGE-CAP GROWTH FUNDS INDEX
- ---------------------------------------------------------
1 YEAR 3 YEAR 5 YEAR 10 YEAR
- ---------------------------------------------------------
FUNDS IN
CATEGORY: 694 593 479 163
- ---------------------------------------------------------
RANKING: 211/694 83/593 93/479 123/163
- ---------------------------------------------------------
PERCENTILE: 31% 14% 20% 75%
- ---------------------------------------------------------
Rankings are based on total return.
Illustration: a fund with a 10% percentile rank
outperformed 90% of the funds in its category for a
given period.
=========================================================
=========================================================
LIPPER RANKING AS OF JUNE 30, 2002
LIPPER MID-CAP GROWTH FUNDS INDEX
- ---------------------------------------------------------
1 YEAR 3 YEAR 5 YEAR 10 YEAR
- ---------------------------------------------------------
FUNDS IN
CATEGORY: 497 310 204 52
- ---------------------------------------------------------
RANKING: 400/497 254/310 138/204 28/52
- ---------------------------------------------------------
PERCENTILE: 81% 82% 68% 53%
- ---------------------------------------------------------
Rankings are based on total return.
Illustration: a fund with a 10% percentile rank
outperformed 90% of the funds in its category for a
given period.
=========================================================
USAA family of funds - 22
Based upon the dramatically improved performance of the Fund, and evidence
that the current fee structure could affect the quality of the subadviser
willing to manage this Fund's investments on a day-to-day basis, the Board
and IMCO determined that it was the appropriate time to fix the pricing the
structure of this Fund. The Board and IMCO believe that increasing the
breakpoints for the existing base management fee and reducing the transfer
agency fee will enhance the long-term competitive position of the Fund by
enabling IMCO and the Board to have the realistic ability to continue to
retain leading money managers to manage the Fund.
[ ] WHAT ARE THE MATERIAL TERMS OF THE SUBADVISORY AGREEMENTS?
The Reorganization Agreements require that IMCO enter into new subadvisory
agreements for the New Funds with the current subadvisers of the Existing
Funds.
The New Subadvisory Agreements are substantially the same as the Current
Subadvisory Agreements. Under the Subadvisory Agreements, each subadviser
manages the day-to-day investment of all or a portion of a Fund's assets
(as allocated from time to time by IMCO), consistent with the Fund's
investment objectives, policies, and restrictions. Each subadviser is
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 Fund's
Board. IMCO, and not the Fund, is responsible for paying all fees charged
by the applicable subadviser for these subadvisory services.
[ ] WHY DID THE BOARD APPROVE THE NEW ADVISORY AGREEMENTS AND THE NEW
SUBADVISORY AGREEMENTS?
In determining whether to approve the New Advisory Agreements and the New
Subadvisory Agreements, the Board of the New Funds reviewed and considered:
(i) the information provided to it in advance of the meeting; (ii) the
presentations made by IMCO at the meeting; and (iii) a variety of other
factors. The material factors considered by the Board in approving these
agreements included, but were not limited to, the following:
* that, except as discussed above with respect to changes to the fee
structure of the Aggressive Growth Fund, the base advisory fee and
amount of any performance adjustment would not change; and
* that, except as discussed above with respect to the minor changes to the
investment objectives of the First Start Growth Fund, the International
Fund, and the Precious Metals and Minerals Fund, and the diversification
status of the Aggressive Growth Fund and the Precious Metals and
Minerals Fund, the investment objective(s) and principal investment
strategies of the Existing Funds will not materially change; and
* that, except as discussed above with respect to the Lipper Index changes
to the Capital Growth Fund, the First Start Growth Fund, and the Growth
and Tax Strategy Fund, the ability of the Board to change such Indexes
in the future without shareholder approval and giving the Board and IMCO
the ability to implement a manager-of-manager structure for all Funds in
the USAA family of funds; the substantive terms of the New Advisory
Agreements are the same as those of the Current Advisory Agreements;
that the terms of the New Subadvisory Agreements are the same as the
Current Subadvisory Agreements, respectively; and that there would be no
changes in the nature, extent, and quality of the services provided to
the New Funds under each such agreement.
Based upon the foregoing and other factors, the Board, including the
Independent Trustees, concluded that each of the New Advisory Agreements
and the New Subadvisory Agreements is in the best interests of the
applicable Existing Fund and its respective shareholders and unanimously
approved the adoption of each New Advisory Agreement and New Subadvisory
Agreement.
[ ] WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO APPROVE PROPOSAL 2?
Approval of Proposal 2 will require the "yes" vote of a "majority of the
outstanding voting securities," as provided in the 1940 Act, of the
following Funds: Balanced Strategy Fund, Cornerstone Strategy Fund, Growth
and Tax Strategy Fund, Emerging Markets Fund, Precious Metals and Minerals
Fund, International Fund, World Growth Fund, Total Return Strategy Fund,
GNMA Trust, and Treasury Money Market Trust. For this purpose, this means
the "yes" vote
Proxy Statement - 23
of the lesser of (i) more than 50% of the outstanding shares of a 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.
Approval of Proposal 2 will require the "yes" voteof a "majority of the
aggregate number of shares entitled to vote" for all other Existing Funds
entitled to vote on Proposal 2.
[ ] HOW DOES THE BOARD OF TRUSTEES RECOMMEND SHAREHOLDERS VOTE ON THIS
PROPOSAL?
THE BOARD OF TRUSTEES RECOMMENDS THAT THE SHAREHOLDERS OF EACH EXISTING
FUND VOTE "FOR" THE APPROVAL OF THE APPLICABLE REORGANIZATION AGREEMENT.
FURTHER INFORMATION ABOUT VOTING
AND THE SHAREHOLDER MEETING
MORE INFORMATION ABOUT THE SHAREHOLDER MEETING AND VOTING MATTERS
THE SHAREHOLDER MEETING
This Proxy Statement is being furnished in connection with the solicitation of
proxies by the Board to approve the two proposals at a special meeting of
shareholders (the Meeting). The Meeting will be held on July 19, 2006, at 2 p.m.
Central Time, at the McDermott Auditorium in the USAA Building, 9800
Fredericksburg Road, San Antonio, TX 78288.
WAYS TO VOTE
As described in greater detail on page 2 of the Proxy Statement, you may vote
your proxy by telephone, mail, or through a secure Internet site. To vote via
the Internet or by telephone, please access the web site or call the toll-free
number located on your proxy. Please note that to vote via the Internet or
telephone, you will need the "control number" that is printed on your ballot
card.
PROXY VOTING
Each share is entitled to one vote (with proportionate voting for fractional
shares). Shares represented by duly executed proxies will be voted in accordance
with shareholders' instructions. If you sign the proxy, but don't fill in a
vote, your shares will be voted "FOR" each of the proposals. If any other
business is brought before the shareholders' meeting, your shares will be voted
as determined in the discretion of the proxies.
Proxies, including proxies given on the Internet or by telephone, may be revoked
at any time before they are voted. If you wish to revoke a proxy, you must
submit a written revocation or a later-dated proxy to the Fund. You also may
revoke a proxy by attending the shareholders' meeting and voting in person. The
last instruction we receive from you, whether received in paper or electronic
form, will be the one counted.
MORE INFORMATION ON VOTING
Only shareholders of record on May 26, 2006, are entitled to vote at the
shareholders' meeting. The presence, in person or by proxy, of a majority of the
shares of each Fund entitled to vote is required to constitute a quorum.
Your vote will be counted at the Meeting if cast in person or by proxy. The
election inspectors will count:
* Votes case "FOR" approval of each proposal to determine whether
sufficient affirmative votes have been cast; and
* Abstentions and broker non-votes of shares (in addition to all votes
cast "FOR" or "AGAINST") to determine whether a quorum is present.
Abstentions and broker non-votes are not counted to determine whether
a proposal has been approved.
Broker non-votes are shares held in street name for which the broker indicates
that instructions have not been received from the beneficial owners or other
persons entitled to vote and for which the broker lacks discretionary voting
authority. Each proposal requires a vote based on the total votes cast. Because
abstentions and broker non-votes are treated as shares present for purposes of
quorum but not voting, any abstentions and broker non-votes will have the effect
of votes cast "AGAINST" a proposal.
USAA family of funds - 24
SOLICITATION OF PROXIES
Fund officers and IMCO employees may solicit proxies by mail or by telephone. In
addition, an outside proxy solicitation service, Automatic Data Processing, Inc.
(ADP), anticipates soliciting proxies by telephone at an estimated cost of
$________. The exact cost will depend upon the services rendered. The costs of
preparing, printing, and mailing the enclosed proxy card 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 provided the expenses do not exceed a Fund's voluntary expense cap.
Expenses exceeding a Fund's voluntary expense cap will be paid by IMCO.
OTHER BUSINESS AND PROPOSALS TO ADJOURN THE MEETING
The Board knows of no other business to be brought before the Meeting. However,
if any other matters properly come before the Meeting, it is the Board's
intention that proxies will be voted on such matters based on the judgment of
the persons named in the enclosed proxy ballot.
In the event a quorum is not present at the Meeting, or in the event a quorum is
present at the Meeting but sufficient votes to approve the proposals are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies if such an adjournment and
additional solicitation is reasonable and in the interests of shareholders. In
determining whether adjournment and additional solicitation is in the interests
of shareholders, the proxies shall consider all relevant factors, including the
nature of the 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 additional solicitation. The proposals may be
voted on prior to any adjournment if sufficient votes have been received for the
proposals and such vote is otherwise appropriate. Any adjournment will require
the affirmative vote of a majority of the shares present at the Meeting in
person or by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote "FOR" the proposal in favor of any adjournment and
will vote those proxies required to be voted "AGAINST" the proposal against any
adjournment.
INFORMATION ABOUT SHAREHOLDERS OF THE FUND
OUTSTANDING SHARES
As of April 30, 2006, each Fund's outstanding shares were as follows:
Proxy Statement - 25
NUMBER OF EACH FUND'S SHARES OUTSTANDING AT APRIL 30, 2006
==============================================================================================================
USAA MUTUAL USAA INVESTMENT USAA TAX USAA STATE
FUND, INC. TRUST EXEMPT FUND, INC. TAX-FREE TRUST
USAA TAXABLE BOND FUNDS
- --------------------------------------------------------------------------------------------------------------
GNMA TRUST
HIGH-YIELD OPPORTUNITIES FUND
INCOME FUND
INTERMEDIATE-TERM BOND FUND
SHORT-TERM BOND FUND
USAA TAX EXEMPT BOND FUNDS
- --------------------------------------------------------------------------------------------------------------
LONG-TERM FUND
INTERMEDIATE-TERM FUND
SHORT-TERM FUND
CALIFORNIA BOND FUND
NEW YORK BOND FUND
VIRGINIA BOND FUND
FLORIDA TAX-FREE INCOME FUND
USAA ASSET ALLOCATION FUNDS
- --------------------------------------------------------------------------------------------------------------
BALANCED STRATEGY FUND
CORNERSTONE STRATEGY FUND
GROWTH AND TAX STRATEGY FUND
TOTAL RETURN STRATEGY FUND
USAA EQUITY FUNDS
- --------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
CAPITAL GROWTH FUND
EMERGING MARKETS FUND
FIRST START GROWTH FUND
PRECIOUS METALS AND MINERALS FUND
GROWTH FUND
GROWTH & INCOME FUND
INCOME STOCK FUND
INTERNATIONAL FUND
SCIENCE & TECHNOLOGY FUND
SMALL CAP STOCK FUND
VALUE FUND
WORLD GROWTH FUND
USAA INDEX FUNDS
- --------------------------------------------------------------------------------------------------------------
EXTENDED MARKET INDEX FUND
NASDAQ-100 INDEX FUND
S&P 500 INDEX FUND
USAA MONEY MARKET FUNDS
- --------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND
TREASURY MONEY MARKET TRUST
TAX EXEMPT MONEY MARKET FUND
CALIFORNIA MONEY MARKET FUND
NEW YORK MONEY MARKET FUND
VIRGINIA MONEY MARKET FUND
FLORIDA TAX-FREE MONEY MARKET FUND
TOTALS
USAA family of funds - 26
SHARES OWNED BY USAA
As of April 30, 2006, United Services Automobile Association (USAA), a Texas
reciprocal interinsurance exchange, held of record or beneficially owned shares
of the each Fund directly or indirectly as follows:
========================================================================
FUND NUMBER OF SHARES PERCENTAGE OF FUND
------------------------------------------------------------------------
========================================================================
Shares owned by USAA and its affiliates may be voted in favor of (or "FOR") each
of the proposals.
With respect to shares held in USAA Tax Deferred Accounts, the custodian of
these accounts, USAA Federal Savings Bank, will vote those shares for which it
has received instructions from shareholders only in accordance with such
instructions. If such shareholders do not vote their shares, the custodian of
these accounts will vote their shares for or against each proposal in the same
proportion as other such shareholders have instructed.
LARGE SHAREHOLDERS
The following table identifies all persons other than USAA and its affiliates,
who, as of April 30, 2006, held of record or owned beneficially 5% or more of
any Fund's shares.
==========================================================================
NAME AND ADDRESS OF
FUND BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OF FUND
--------------------------------------------------------------------------
==========================================================================
As of April 30, 2006, none of the Company's directors and executive officers
owned beneficially or of record, as a group, more than 1% of the outstanding
shares of the Fund.
DATE FOR RECEIPT OF SHAREHOLDERS' PROPOSALS
FOR SUBSEQUENT SHAREHOLDER MEETINGS
Under relevant state law and the Fund's organizational documents and applicable
law, no annual meeting of shareholders is required. The Fund currently does not
intend to hold such a meeting. Ordinarily, there will be no shareholder meeting
unless required by the 1940 Act or otherwise. Shareholder proposals for
inclusion in the proxy statement for any subsequent meeting must be received by
the Fund within a reasonable period of time prior to any such shareholder
meeting. Shareholders collectively holding at least 10% of the outstanding
shares of the Fund may request a shareholder meeting at any time for the purpose
of voting to remove one or more of the directors. The Fund will assist in
communicating to other shareholders about such meeting.
FINANCIAL INFORMATION
THE FUND, WITHOUT CHARGE, WILL FURNISH TO YOU UPON REQUEST A COPY OF ITS ANNUAL
REPORT FOR ITS MOST RECENT FISCAL YEAR AND A COPY OF ITS SEMIANNUAL REPORT FOR
ANY SUBSEQUENT SEMIANNUAL PERIOD. SUCH REQUEST MAY BE DIRECTED TO USAA
INVESTMENT MANAGEMENT COMPANY, 9800 FREDERICKSBURG ROAD, SAN ANTONIO, TEXAS
78288 OR (800) 531-8448.
INFORMATION CONCERNING ADVISER,
DISTRIBUTOR, ADMINISTRATOR, AND TRANSFER AGENT
IMCO, a Delaware corporation, serves as the Fund's investment adviser,
distributor, and administrator. USAA Transfer Agency Company (d/b/a USAA
Shareholder Account Services (SAS) serves as the Fund's transfer agent. IMCO and
SAS are wholly owned indirect subsidiaries of USAA, whose address, along with
its affiliates, is 9800 Fredericksburg Road, San Antonio, Texas 78288.
Proxy Statement - 27
INFORMATION CONCERNING THE FUNDS'
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Ernst & Young, LLP (E&Y) is the independent registered public accountant for the
USAA family of funds. It is not anticipated that representatives of E&Y will be
present at the shareholders' meeting. Information about the fees paid to E&Y by
the Funds, IMCO, and SAS is included at Exhibit E.
USAA family of funds - 28
EXHIBIT A
CORPORATE GOVERNANCE COMMITTEE
BOARDS OF DIRECTORS/TRUSTEES
USAA MUTUAL FUND, INC.
USAA TAX EXEMPT FUND
USAA INVESTMENT TRUST
USAA STATE TAX-FREE TRUST
C H A R T E R
SCOPE AND PURPOSE:
To maintain oversight of the organization and performance of the Board;
to evaluate the effectiveness of the Board and to ensure that the Board
conducts itself ethically in accordance with the law; to maintain a
policy on Board tenure and term limitations for independent directors;
to recommend candidates to fill vacancies for independent directorship
positions on the Board; to oversee the annual review and approval of
the Funds' advisory agreements; to oversee the annual evaluation of the
performance of the Board and the Committees of the Boards.
FUNCTIONS:
The duties and responsibilities of the Governance Committee include but
are not limited to the following:
BOARD SIZE, STRUCTURE, TRAINING AND EVALUATION
Develop desired qualifications, experience, abilities, skills and
expectations of performance for individual independent directors.
Ensure that appropriate orientation and training are made available
to independent directors on the Board.
Establish, implement and oversee an evaluation process to annually
review the performance of the Board and the Committees of the Board,
including the effectiveness of the structure, size, and procedures
of the Board and the Committees of the Board.
Review and, as necessary, propose amendments to the Bylaws, Master
Trust Agreements, Resolutions and any other relevant documents as
they relate to the directorship positions on the Board.
At least annually review the compensation for the independent
directors to ensure that such members of the Board are being fairly
and equitably compensated for their services.
Oversee the structure and process of Board meetings to fully utilize
the capabilities of the USAA Investment Management Company in such
areas as portfolio management oversight, regulatory updates and
reports on items of special interest to the independent directors in
the performance of their oversight function.
Ensure that independent directors meet at least once quarterly in a
session where no directors who are interested persons of the Funds
are present.
Establish and implement a process to facilitate the independent
directors' annual review and approval of the advisory agreements
between the Funds and their investment advisers, including
communications with management, as necessary, to develop information
appropriate to evaluate the existing advisory agreements.
Meet in separate session before the annual Board meeting set for
review and approval of existing advisory agreements to review
relevant information and discuss each Fund's expense and asset
information, relative performance and other information requested by
the independent directors and/or provided by management to
facilitate the annual review and approval process of the advisory
agreements between the Funds and their investment advisers.
Exhibit A - 29
BOARD NOMINATIONS
Develop procedures for identifying and recruiting potential
candidates for Board membership.
Recruit and screen individuals who possess the qualifications
necessary to execute the responsibilities of an independent
director. Identify and recommend to the Board nominees for election
as independent directors.
Identify and recommend to the Board nominees for membership on
committees of the Board as vacancies occur.
Monitor the Board tenure policy providing for a rotation of Board
member terms for the independent directors.
GOVERNANCE COMMITTEE PERFORMANCE
At least annually, review and update the Charter of the Governance
Committee, and at least annually conduct a self-assessment of
Committee performance.
As necessary, recommend to the Board of Directors investigations
into any matters under the Committee's cognizance.
Review and monitor any Code of Ethics related to the USAA funds and
recommend revisions where necessary.
DURATION:
The Committee shall continue in existence on a permanent basis until
dissolved by the Board.
CHAIR:
The Chair of this Committee shall be elected by the Board.
MEMBERSHIP:
Committee membership shall be as determined by the Board. Membership of
the Committee, however, shall be limited to the Directors/Trustees who
are not interested persons of the USAA Funds as defined under the
Investment Company Act of 1940.
SUPPORT:
The Committee shall have the authority to hire employees and to retain
advisers and experts necessary to execute its duties, and to establish,
implement and oversee any policies and procedures necessary or
appropriate to implement this authority.
MEETINGS:
The Committee shall meet at such times and conduct such business as
designated by the Chair of the Committee, in accordance with the
responsibilities set forth in this charter.
Meetings are to be attended only by members of the Committee, the
appointed recorder, counsel for the independent directors/trustees, and
any guests whose attendance is approved in advance by the Committee
Chair.
MINUTES & REPORTS:
The Chair of the Committee shall designate a person to record the
proceedings of the Committee's meetings. The records of the Committee
meetings shall be confidential and retained by the Funds' Secretary for
a period of at least ten years.
EFFECTIVE DATE:
This Charter was approved by the Board to be effective on July 12, 1995
and shall govern the operation of the Committee, as last amended
November 29, 2005.
USAA family of funds - 30
EXHIBIT B
Executive officers of the Funds are appointed by the Board to oversee the
day-to-day activities of each Fund.
NAME, YEAR POSITION(S) HELD WITH
OF BIRTH, THE FUNDS AND LENGTH
ADDRESS(1) OF TIME SERVED PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
Clifford A. Vice President Senior Vice President, Fixed Income Investments,
Gladson (1950) since 2002 IMCO, (9/02-present); Vice President, Fixed
Income Investments, IMCO (5/02-9/02); Vice
President, Mutual Fund Portfolios, IMCO,
(12/99-5/02). Mr. Gladson also holds the
officer position of Vice President of USAA Life
Investment Trust, a registered investment
company offering five individual funds.
Stuart Wester Vice President Vice President, Equity Investments, IMCO
(1947) since 2002 (1/99-present). Mr. Wester also holds the officer
position of Vice President of USAA Life
Investment Trust, a registered investment company
offering five individual funds.
Mark S. Howard Secretary Senior Vice President, USAA Life Insurance
(1963) since 2002 Company (USAA Life/IMCO/USAA Financial Planning
Services (FPS) General Counsel, USAA (10/03-
present); Senior Vice President, Securities
Counsel, USAA (12/02-10/03); Senior Vice
President, Securities Counsel and Compliance,
IMCO (1/02-12/02); Vice President, Securities
Counsel & Compliance, IMCO (7/00-1/02). Mr.
Howard also holds the officer positions of
Senior Vice President, Secretary and Counsel for
USAA Life,IMCO, FPS, SAS, and USAA Financial
Advisors, Inc. (FAI); and Secretary of USAA Life
Investment Trust, a registered investment company
offering five individual funds.
Debra K. Dunn Treasurer Assistant Vice President, IMCO/FPS Finance, USAA
(1969) since 2005 (9/04-present); Executive Director IMCO/FPS
Finance, USAA (12/03-9/04); Executive
Director FPS Finance, USAA (2/03-12/03);
Director FPS Finance, USAA (12/02-2/03);
Director Strategic Financial Analysis, IMCO
(1/01-12/02). Ms. Dunn also holds the officer
positions of Assistant Vice President, Senior
Financial Officer, and Treasurer for IMCO, SAS,
FPS, and FAI; and Treasurer of USAA Life
Investment Trust, a registered investment
company offering five individual funds.
Eileen M. Smiley Assistant Secretary Vice President, Securities Counsel, USAA (2/04-
(1959) since 2003 present); Assistant Vice President, Securities
Counsel, USAA (1/03-2/04); attorney, Morrison &
Foerster, LLP (1/99-1/03). MS. Smiley also holds
the officer positions of Vice President and
Assistant Secretary of IMCO, SAS, FPS, and FAI;
and Assistant Secretary of USAA Life Investment
Trust, a registered investment company offering
five individual funds.
Exhibit B - 31
NAME, YEAR POSITION(S) HELD WITH
OF BIRTH, THE FUNDS AND LENGTH
ADDRESS(1) OF TIME SERVED PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
Roberto Galindo, Jr. Assistant Treasurer Assistant Vice President, Portfolio Accounting/
(1960) since 2000 Financial Administration, USAA (12/02-present);
Assistant Vice President, Mutual Fund Analysis &
Support, IMCO (10/01-12/02); Executive Director,
Mutual Fund Analysis & Support, IMCO (6/00-
10/01). Mr. Galindo also holds the officer
position of Assistant Treasurer of USAA Life
Investment Trust, a registered investment
company offering five individual funds.
Jeffrey D. Hill Chief Compliance Assistant Vice President, Mutual Funds Compliance,
(1967) officer since 2004 USAA (9/04-present); Assistant Vice President,
Investment Management Administration & Compliance,
USAA (12/02-9/04); Assistant Vice President,
Investment Management Administration & Compliance,
IMCO (9/01-12/02); Senior Manager, Investment
Management Assurance and Advisory Services, KPMG
LLP (6/98-8/01). Mr. Hill also holds the officer
position of Chief Compliance Officer of USAA
Life Investment Trust, a registered investment
company offering five individual funds.
(1) The addresses for each Officer is c/o USAA, P.O. Box 659442, San Antonio,
Texas 78265-9442.
USAA family of funds - 32
EXHIBIT C
COMPARISON OF CERTAIN ATTRIBUTES OF THE NEW TRUST,
THE MARYLAND FUNDS, AND THE MASSACHUSETTS FUNDS
SHAREHOLDER LIABILITY
Generally, liability is limited for shareholders of the New Trust to the same
extent as for shareholders of the Maryland and Massachusetts Funds. The Trust
Instrument for the New Trust provides that shareholders are not personally
liable for the liabilities incurred by, contracted for, or otherwise existing
with respect to the New Trust or the New Funds. The Articles of Incorporation
for the Maryland Funds do not include a similar provision, however, under
Maryland law, shareholders are generally not liable for the corporation's
obligations, except that shareholders may be liable if they receive any
distribution which exceeds permissible amounts under Maryland law or when
necessary to prevent fraud. The Declaration of Trust for the Massachusetts Funds
states that the shareholders will not be subject to any personal liability other
than any amount agreed to by the shareholders when subscribing for shares.
LIQUIDATION OR DISSOLUTION
The primary difference in this provision among the entities is that the New
Trust does not need shareholder approval for liquidations or mergers, unlike the
Maryland and Massachusetts Funds. The shareholders of the Maryland Funds and the
Massachusetts Funds currently have the right to vote to approve liquidations or
dissolution of a Fund. Maryland law requires approval by 2/3 of the shares
entitled to vote, and the Trust Instrument for the Massachusetts Funds requires
approval by a majority of the outstanding shares. The Trust Instrument for the
New Trust will permit the Board of Trustees to liquidate or dissolve a Fund upon
written notice to shareholders, without submitting the matter for shareholder
approval.
LIABILITY OF TRUSTEES AND INDEMNIFICATION
The Trustees or the Directors, as applicable, of the New Trust, Maryland Funds,
and Massachusetts Funds are generally not personally liable to the respective
entity or for any obligation of the entity unless there are certain "bad acts"
involved in their conduct. Furthermore, the organizational documents or
applicable state law permit Trustees and Directors to be indemnified against
liability to the maximum extent permitted by applicable law, including state law
and the Investment Company Act of 1940 (the "1940 Act"), although
indemnification is not permissible for all entities in the event of certain
defined "bad acts." Although the disqualifying "bad acts" are worded slightly
differently, there will be no material change in these provisions under the New
Trust.
RIGHTS OF INSPECTION
The primary difference is that shareholders of the New Trust and the
Massachusetts Funds do not have any right to inspect trust documents, unlike
shareholders of the Maryland Funds who have the right under Maryland law to
inspect certain documents (E.G., by-laws, shareholder meeting minutes) of the
corporation upon request, subject to certain limitations and conditions.
SHAREHOLDER VOTING RIGHTS AND SHAREHOLDER MEETINGS
The New Trust differs from the Existing Funds in certain respects, such as the
percentage of outstanding shares necessary for shareholders to call a special
meeting and the ability of shareholders to take action by written consent. In
addition, the New Trust entitle shareholders to vote based on the amount
invested, unlike the Massachusetts Funds and Maryland Funds that base voting on
the number of shares owned.
The New Trust, the Maryland Funds, and the Massachusetts Funds do not require
annual shareholder meetings unless required by law. Shareholders may hold
special meetings to vote on certain matter whenever ordered by the Trustees or
the President and upon, the written request of the shareholders owning at least
10% of the outstanding shares of such series or class entitled to vote.
Shareholders of the Maryland and Massachusetts Funds also may call meetings upon
written request of shareholders owning a specified percentage of shares. For the
Massachusetts Funds, the required percentage is 10%, which is the same as for
the New Trust. For the Maryland Funds, the minimum percentage is 25%, which is
higher than for the New Trust, unless the matter is for removal of directors, in
which case, the minimum percentage is 10%, similar to the New Trust.
Exhibit C - 33
Shareholders of the New Trust and Maryland Funds may take action by written
consent, whereas shareholders of the Massachusetts Funds may not take action by
written consent. Given the large number of shareholders of each Fund,
shareholder action by written consent would not be likely unless a Fund had a
very large shareholder.
Finally, shareholders of the New Trust would have be entitled to one vote for
each dollar of net asset value of the Funds (or Class), except for shareholders
of the Florida Tax-Free Income Fund and the Florida Tax-Free Money Market Fund,
which would be entitled to one vote per share owned. Shareholders of the
Maryland and Massachusetts Funds currently are entitled to one vote per share
owned.
REORGANIZATION/COMBINATION TRANSACTIONS
The primary difference in this area is that shareholders of the New Trust will
not have the right to approve such transactions unless specifically required
under the 1940 Act, provided that the Board approves a reorganization or
combination into, or sales of assets to, another mutual fund. Shareholders of
the Maryland Funds and the Massachusetts Funds have the right to approve
mergers, consolidations and sales of assets of one fund to another fund. The
1940 Act generally requires shareholder approval of certain mergers,
consolidations and sales of assets if the transaction will involve an increase
in an advisory fee, the implementation of a 12b-1 Plan or the change of a
fundamental investment policy. Therefore, shareholders of the New Trust will
still have the right to vote on certain reorganizations, consolidations, and
sales of assets as required under federal law, or if the Board determines to
present such a transaction to shareholders for approval.
AMENDMENT OF CHARTER DOCUMENT
The primary difference in this provision among the entities is that the New
Trust may amend its Trust Instruments without shareholder approval provided that
shareholder voting rights are not reduced, unlike the Maryland and Massachusetts
Funds. The By-Laws, or certain sections thereof, of the New Trust also may be
amended without shareholder approval. Shareholders of the Maryland Funds have
the right to vote on all amendments to the Articles of Incorporation, and
amendments to the By-Laws affecting investment restrictions and amendments to
the By-Laws. Shareholders of the Massachusetts Funds generally have the right to
vote for changes to the Trust Instrument, but not changes to the By-Laws, except
for certain provisions.
DERIVATIVE ACTIONS
Shareholders of the New Trust will have the right to bring a derivative action
on behalf of the Trust, provided that they first submit a written demand to the
Board of Trustees and the demand is refused, and the complaining shareholder
must be a shareholder at the time of bringing suit and at the time of the
disputed transaction. Shareholders of the Maryland Funds generally have the
right to bring a derivative action if the Board of Directors refuses a demand to
bring such a suit, and if refused, the complaining shareholder generally must
then make a demand on other shareholders before instituting a derivative suit.
Under Massachusetts corporate law, shareholders may bring a derivative suit
after first submitting a written demand to the corporation and waiting 90 days,
unless waiting for the expiration of the period would result in irreparable
injury to the entity.
SHARE CERTIFICATES
Currently, none of the Existing Funds issue certificates to new shareholders,
however, a small number of share certificates of certain Existing Funds still
exist. The New Trust will not issue share certificates to any shareholder, and
as part of the Reorganization, the existing share certificates of the Existing
Funds will have to be surrendered, or alternatively will be canceled.
PAYMENT OF INCOME AND CAPITAL GAINS DISTRIBUTION
The Old Funds currently reinvest income and capital gain distributions in
additional shares or pay proceeds out by check or electronic funds transfer. The
New Funds will offer shareholders the option to reinvest distributions or
payment by electronic funds transfer only.
*****
The foregoing is only a summary of certain characteristics of the operations of
the New Trust and the Existing Funds, their relevant corporate governance
documents, and relevant state law. The foregoing is not a complete description
of the documents cited. Shareholders can call us for copies of these corporate
documents, and such documents are generally filed with the SEC as part of each
Fund's registration statement.
USAA family of funds - 34
EXHIBIT D
COMPARISON OF THE EXISTING FUNDS' AND NEW FUNDS'
FUNDAMENTAL INVESTMENT RESTRICTIONS
The 1940 Act requires that mutual funds adopt fundamental investment
restrictions regarding specific activities, including the fund's ability to: (1)
concentrate its investments in any particular industry or group of industries;
(2) borrow money; (3) issue senior securities (I.E., securities with rights
superior to other fund securities); (4) purchase or sell real estate; (5)
purchase or sell commodities; and (6) underwrite securities issued by other
entities.
In addition to these activities that must be addressed with a fundamental
investment restriction, in the past state law required funds to adopt
fundamental investment restrictions with respect to other activities of the fund
and its officers. In 1996, Congress adopted a law that prohibits states from
imposing other requirements on mutual funds other than those required by the
1940 Act. As part of the Reorganization, the New Funds are adopting uniform
minimum fundamental investment restrictions covering the activities required by
the 1940 Act. The main purpose of each new restriction is to simplify the
wording of the restriction, and make the restriction and/or wording of the
restriction uniform among all New Funds, which would simplify compliance
monitoring and portfolio management. There is no current intention for the New
Funds to have different investment strategies (except the changed investment
objectives, and strategies detailed in the proxy statement for the Aggressive
Growth Fund, International Fund and Precious Metals and Minerals Funds). For
each activity, we have included a table describing the Existing Funds' policy,
if any, the New Funds' revised policy, and a narrative description of the
change.
BORROWING
The main differences between the existing and new restrictions include the
ability of a New Fund to borrow only as permitted under applicable law, as
opposed to borrowing only a certain amount (33 1/3%) for the Existing Funds.
However, the specified percentage (33 1/3%) in the Existing Funds policy was
derived from SEC staff interpretations, and we do not anticipate any material
change to the borrowing activities of the New Funds.
====================================================================================================================================
SUGGESTED REVISED
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
ALL EXISTING FUNDS
(EXCEPT EMERGING MARKETS) EMERGING MARKETS FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not borrow money, except The Fund may not borrow money, except The Fund may not borrow money, except
that the Fund may borrow money in an that it may borrow money for temporary to the extent permitted by the 1940 Act,
amount not exceeding 33 1/3% of its total or emergency purposes in an amount the rules and regulations thereunder and
assets including the amount borrowed less not exceeding 33 1/3% of its total assets any applicable exemptive relief.
liabilities (other than borrowings). including the amount borrowed less
liabilities (other than borrowings), nor
will it purchase securities when its
borrowings exceed 5% of its total assets.
====================================================================================================================================
Exhibit D - 35
LOANS
The existing restrictions provide that an Existing Fund may not make loans
except through loans of portfolio securities or repurchase agreements. The new
restriction permits loans only as allowed under the Investment Company Act of
1940 (1940 Act). Again, the 33 1/3% percentage limit in the Existing Funds'
policy was derived from SEC staff interpretations of the 1940 Act provisions
governing a fund's ability to leverage its assets, and we do not anticipate any
material changes in New Fund's lending ability.
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED
FOR THE EXISTING FUNDS FUNDMENTAL INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
ALL EXISTING FUNDS FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not lend any securities or make any loan if, as a result, more than The Fund may make loans only as permitted
33 1/3% of its total assets would be lent to other parties, except that this under the 1940 Act, the rules and
limitation does not apply to purchases of debt securities or to repurchase regulations thereunder and any applicable
agreements. exemptive relief.
====================================================================================================================================
DIVERSIFICATION
Each of the Existing Funds, except the Nasdaq-100 Index Fund is a diversified
funds within the meaning of the 1940 Act. As a diversified fund under the 1940
Act, at least 75% of the value of each Fund's total assets must be represented
by cash and cash items, U.S. government securities, securities of other
investment companies, and other securities limited with respect to any one
issuer to an amount not greater in value than 5% of the value of the Fund's
total assets and not more than 10% of the outstanding voting securities of such
issuer (the Diversification Requirement). The Diversification Requirement has
the effect, with respect to 75% of a Fund's assets, of limiting investments by
the Fund in the securities of any single issuer (other than U.S. government
securities and securities of other investment companies) to 5% of the Fund's
assets and 10% of the issuer's outstanding voting stock. A Fund may not change
its classification as a diversified company under the 1940 Act without
shareholder approval. In the 2001 proxy, shareholders of all of the Existing
Funds, except the S&P 500 Index Fund voted to remove a previous fundamental
restriction regarding diversification limits.
As a result of the Reorganization, each of the New Funds corresponding to a
diversified Existing Fund will remain diversified, except for the Precious
Metals and Minerals Fund and the Aggressive Growth Fund. Thus, after the
Reorganization, only three New Funds, the Aggressive Growth Fund, Nasdaq-100
Index Fund and the Precious Metals and Minerals Funds will be non-diversified.
The New Funds do not intend to classify their diversification status as a
fundamental policy because shareholders already have the right to vote for any
changes to a Fund's status as a diversified fund and the 1940 Act establishes
substantive restrictions on the investments of diversified funds.
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED
FOR THE EXISTING S&P 500 INDEX FUNDS FUNDMENTAL INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
S&P 500 INDEX FUND ALL OTHER EXISTING FUNDS FOR NEW S&P 500 INDEX FUND
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not with respect to 75% of None (removed in 2001) None
its total assets, purchase the securities
of any issuer (except U.S. government
securities, as such term is defined in
the 1940 Act) if, as a result, it would
own more than 10% of the outstanding
voting securities of such issuer or it
would have more than 5% of the value of
its total assets invested in the
securities of such issuer.
====================================================================================================================================
USAA family of funds - 36
CONCENTRATION
The existing restrictions for each Existing Fund restrict investments in
securities of issuers in the same industry to 25% of the Existing Fund's total
assets. These restrictions apply to each Existing Fund except the Precious
Metals and Minerals Fund, which concentrates investments in the precious metals
industry, and the Nasdaq-100 Index Fund and the Extended Market Index Fund,
which permits those Funds to concentrate in industries to the extent the
underlying index is so concentrated. The New Funds' fundamental investment
restriction will limit the New Funds, except the Precious Metals and Minerals
Fund, the Nasdaq-100 Index Fund, and the Extended Markets Index Fund, from
concentrating in particular industries. Because the test for concentration is
derived from the 1940 Act and has not changed, the new uniform wording of this
restriction is not expected to impact the investment strategies of the New
Funds.
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS
FOR THE EXISTING FUNDS
- -----------------------------------------------------------------------------------------------------------------------------------
GROWTH AND TAX
STRATEGY,
CORNERSTONE
STRATEGY, PRECIOUS LONG-TERM,
AGGRESSIVE GROWTH, GROWTH & INCOME METALS AND MINERALS INTERMEDIATE-TERM,
GROWTH, INCOME INCOME STOCK TOTAL RETURN STRATEGY, INTERNATIONAL, SHORT-TERM, TAX EXEMPT
MONEY MARKET SHORT-TERM BOND BALANCED STRATEGY WORLD GROWTH MONEY MARKET
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not The Fund may not The Fund may not The Fund may not invest The Fund may not purchase
concentrate its concentrate its concentrate its 25% or more of its any securities which would
investments in any investments in any investments in any one total assets in one cause more than 25% of the
one industry although one industry industry although it may industry, except that value of that Fund's total
it may invest up to although it may invest up to 25% of the such restriction shall assets at the time of such
25% of the value of invest up to 25% of value of its total assets not apply to the purchase to be invested in
its total assets in the value of its in any one industry; Precious Metals and either (i) the securities
any one industry. total assets in any provided, this limitation Minerals Fund. of issuers conducting their
Banks are not one industry. This does not apply to principal activities in the
considered a single limitation shall not securities issued or same state, or (ii) the
industry for purposes apply to securities guaranteed by the U.S. securities the interest
of this policy issued or guaranteed government and its upon which is derived from
(solely with respect by the U.S. agencies or revenues or projects with
to the Money Market government or its instrumentalities. similar characteristics,
Fund), nor shall this corporate such as toll road revenue
limitation apply to instrumentalities. bonds, housing revenue
securities issued or bonds, electric power
guaranteed by the project revenue bonds,
U.S. government or etc.; provided that the
its corporate foregoing limitation does
instrumentalities. not apply with respect to
investments in U.S. Treasury
Bills, other obligations
issued or guaranteed by
the U.S. government, its
agencies and instrumen-
talities, and, in the case
of the Tax Exempt Money
Market Fund, certificates of
deposit and banker's
acceptances of domestic
banks.
====================================================================================================================================
Exhibit D - 37
====================================================================================================================================
SCIENCE & TECHNOLOGY,
FIRST START GROWTH
INTERMEDIATE-TERM
BOND, HIGH-YIELD
OPPORTUNITIES,
SMALL CAP STOCK GNMA, TREASURY NASDAQ-100 INDEX
EMERGING MARKETS S&P 500 INDEX CAPITOL GROWTH, VALUE MONEY MARKET EXTENDED MARKET INDEX
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not The Fund may not The Fund may not invest The Fund may not The Fund may not
concentrate its invest 25% or more 25% or more of the value purchase any security concentrate its investments
investments in any of the value of its of its total assets in if immediately after (I.E. hold 25% or more of
one industry although total assets in any any one industry, the purchase 25% or its total assets in the
it may invest up to one industry; provided, this limitation more of the value of stocks of a particular
25% of the value of provided, this does not apply to its total assets will industry or group of
its total assets in limitation does not securities issued or be invested in related industries),
any one industry; apply to securities guaranteed by the U.S. securities of issuers provided, however, that (i)
provided, this issued or guaranteed government and its principally engaged in this limitation does not
limitation does not by the U.S. agencies or a particular industry apply to securities issued
apply to securities government or its instrumentalities. (except that such or guaranteed by the U.S.
issued or guaranteed corporate limitation does not government or its agencies
by the U.S. instrumentalities. apply to obligations or instrumentalities (or
government and its issued or guaranteed by repurchase agreements
agencies or corporate the U.S. government or thereto); and provided
instrumentalities. its agencies or further that (ii) the Fund
instrumentalities). will concentrate to
approximately the same
extent that its underlying
index concentrates in the
stocks of such particular
industry or group of
industries.
====================================================================================================================================
====================================================================================================================================
SUGGESTED REVISED
CALIFORNIA BOND, CALIFORNIA MONEY FUNDAMENTAL
MARKET, NEW YORK BOND, NEW YORK INVESTMENT RESTRICTION
MONEY MARKET, VIRGINIA BOND, VIRGINIA --------------------------------
MONEY MARKET FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not purchase any securities Except for any Fund that is concentrated in an
which would cause more than 25% of the industry or group of industries within the meaning
value of that Fund's total assets at the of the 1940 Act, the Fund may not purchase the
time of such purchase to be invested in securities of any issuer (other than securities
securities the interest upon which is issued or guaranteed by the U.S. Government or any
derived from revenues or projects with of its agencies or instrumentalities) if, as a
similar characteristics, such as toll road result, more than 25% of the fund's total assets
revenue bonds, housing revenue bonds, would be invested in the securities of companies
electric power project revenue bonds, or whose principal business activities are in the same
in industrial revenue bonds which are industry.
based, directly or indirectly, on the
credit of private entities of any one
industry; provided that the foregoing
limitation does not apply with respect to
investments in U.S. Treasury Bills, other
obligations issued or guaranteed by
the U.S. government, its agencies and
instrumentalities, and, in the case of the
each Money Market Fund, certificates of
deposit and banker's acceptances of
domestic banks.
- ------------------------------------------------------------------------------------------------------------------------------------
USAA family of funds - 38
COMMODITIES
Under the existing restrictions, no Existing Fund may buy or sell commodities or
commodity contracts. However, some Existing Funds may purchase certain futures,
forward contracts or other instruments. The new uniform policy states that each
New Fund may not invest in commodities except under certain circumstances but
may invest in financial futures contracts, options on financial futures,
warrants, swaps, forward contracts and other derivative instruments. There is no
current intention for the New Funds to have different investment strategies from
the Existing Funds as a result of a change to this policy.
====================================================================================================================================
SUGGESTED REVISED
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
ALL EXISTING FUNDS (EXCEPT GNMA
AND TREASURY MONEY MARKET) GNMA AND TREASURY MONEY MARKET FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not purchase or sell The Fund may not purchase or sell real The Fund may not purchase or sell
commodities, except that each Fund may estate, commodities or commodity commodities or commodity contracts
invest in futures contracts, options thereon, contracts, except that the GNMA Trust unless acquired as a result of owner-
and other similar instruments. may invest in financial futures ship of securities or other instruments
contracts and options thereon. issued by persons that purchase or sell
commodities or commodities contracts;
but this shall not prevent the Fund from
purchasing, selling and entering into
financial futures contracts (including
futures contracts on indices of
securities, interest rates and
currencies), options on financial
futures contracts (including futures
contracts on indices of securities,
interest rates and currencies),
warrants, swaps, forward contracts,
foreign currency spot and forward
contracts or other derivative
instruments that are not related to
physical commodities.
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING
The current restrictions provide that an Existing Fund may not underwrite
securities issued by other persons to the extent that it may be deemed an
underwriter under applicable federal securities laws with respect to the
disposition of its portfolio or restricted securities. The new restriction
maintains this restriction on the disposition of restricted securities or
investments in other investment companies. The purpose of the proposed change is
to clarify the application of underwriter status pursuant to the Securities Act
of 1933 (the 1933 Act) and to make uniform the restriction among the New Funds.
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH, GROWTH, INCOME,
MONEY MARKET, GROWTH & INCOME, ALL EXISTING FUNDS
INCOME STOCK, SHORT-TERM BOND (EXCEPT THOSE PREVIOUSLY LISTED) FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not underwrite securities The Fund may not underwrite securities of The Fund may not underwrite securities
of other issuers, except that the other issuers, except to the extent that of other issuers, except to the extent
Company may be deemed to be a statutory it may be deemed to act as a statutory that it may be deemed to act as a statu-
underwriter in the distribution of any underwriter in the distribution of any tory underwriter in the distribution of
restricted securities or not readily restricted securities or not readily any restricted securities or not readily
marketable securities. marketable securities. marketable securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Exhibit D - 39
AFFILIATED TRANSACTIONS
Certain Existing Funds had a fundamental restriction prohibiting certain
transactions between the Funds and certain affiliates, such as officers and
directors. There is no requirement under the 1940 Act for funds to have a
fundamental investment restriction for affiliated transactions. The 1940 Act,
however, does prohibit certain transactions between a fund and its affiliates
(or affiliates of affiliates). Because affiliated transactions are already
governed by a specific statutory provision, the New Funds do not believe they
need any fundamental policy governing permissible and impermissible conduct
among affiliates, and hence they have not adopted any fundamental policy
regarding affiliated transactions.
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH, GROWTH, INCOME, MONEY
MARKET, LONG-TERM, INTERMEDIATE-TERM, SHORT-
TERM, TAX EXEMPT MONEY MARKET, CALIFORNIA BOND,
CALIFORNIA MONEY MARKET, NEW YORK BOND, NEW
YORK MONEY MARKET, VIRGINIA BOND, ALL EXISTING FUNDS
VIRGINIA MONEY MARKET (EXCEPT THOSE PREVIOUSLY LISTED) FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not purchase or retain securities of None. None.
any issuer if any officer or Director of the
Company or its Manager own individually more than
one-half of one percent (1/2%) of the securities of
that issuer, and collectively the officers and
Directors of the Company and Manager together own
more than 5% of the securities of that issuer.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH, GROWTH, INCOME ALL EXISTING FUNDS
MONEY MARKET (EXCEPT THOSE PREVIOUS LISTED) FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not purchase from or sell None. None.
to any officer or Director of the Company or
its Manager any securities other than shares
of the capital stock of the Funds.
- --------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH, GROWTH, INCOME ALL EXISTING FUNDS
MONEY MARKET (EXCEPT THOSE PREVIOUS LISTED) FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not allow its Manager or None. None.
officers or Directors of itself or its
Manager to take long or short positions
in shares of a Fund, except that such
persons may purchase shares for their
own account for investment purposes only
at the price available to the public at
the moment of such purchase.
- ------------------------------------------------------------------------------------------------------------------------------------
USAA family of funds - 40
CONTROL
Certain Existing Funds adopted policies regarding investments for control
purposes. These restrictions were originally included to meet certain state law
requirements that no longer exist. There is no requirement under federal law to
adopt a fundamental policy regarding investments for control purposes.
Therefore, the New Funds did not adopt such a fundamental investment
restriction.
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM, INTERMEDIATE-TERM,
SHORT-TERM, TAX EXEMPT MONEY,
MARKET, CALIFORNIA BOND, CALIFORNIA
MONEY MARKET, NEW YORK BOND, NEW
AGGRESSIVE GROWTH, GROWTH YORK MONEY MARKET, VIRGINIA BOND, ALL OTHER
INCOME, MONEY MARKET VIRGINIA MONEY MARKET EXISTING FUNDS FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not invest in companies The Fund may not invest in issuers for
for the purpose of exercising the purpose of exercising control or
control or management. management. None. None.
- ------------------------------------------------------------------------------------------------------------------------------------
PLEDGING
The New Funds do not have a fundamental investment restriction because the
restrictions for the Existing Funds originally were included to meet certain
state law requirements that no longer apply and because they duplicate current
requirements under the 1940 Act. There is no current intention for the New Funds
to have different investment strategies from the Existing Funds as a result of
the elimination of this restriction.
====================================================================================================================================
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS SUGGESTED REVISED FUNDAMENTAL
FOR THE EXISTING FUNDS INVESTMENT RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM, INTERMEDIATE-TERM, SHORT-
TERM, TAX EXEMPT MONEY MARKET,
CALIFORNIA BOND, CALIFORNIA MONEY
MARKET, NEW YORK BOND, NEW YORK
AGGRESSIVE GROWTH, GROWTH, INCOME, MONEY MARKET, VIRGINIA BOND, VIRGINIA
MONEY MARKET MONEY MARKET FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not mortgage, pledge, or The Fund may not pledge, mortgage, or None.
hypothecate any of its assets. A hypothecate its assets to any extent
security covered by a call is not greater than 10% of the value of its
considered pledged. total assets.
- ------------------------------------------------------------------------------------------------------------------------------------
Exhibit D - 41
MARGIN PURCHASES
The Existing Funds adopted a fundamental restriction regarding margin purchases.
These restrictions were originally included to meet certain state law
requirements that no longer exist. The New Funds do not have a fundamental
investment restriction because these restrictions for the Existing Funds
originally were included to meet certain state law requirements that no longer
apply. There is no requirement under federal law to adopt a fundamental policy
regarding margin purchases. Therefore, the New Funds did not adopt such a
fundamental investment restriction. As discussed above with borrowing and
loaning, because the 1940 Act imposes limitations on a fund's ability to borrow
money, it is not anticipated that the removal of this fundamental restriction
will impact the investment strategies of any of the New Funds.
====================================================================================================================================
SUGGESTED REVISED
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS FUNDAMENTAL INVESTMENT
FOR THE EXISTING FUNDS RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA BOND,
CALIFORNIA MONEY
MARKET, NEW YORK
AGGRESSIVE GROWTH AND TAX STRATEGY LONG-TERM, INTERME- BOND, NEW YORK
GROWTH, GROWTH, CORNERSTONE STRATEGY, PRE- DIATE-TERM, SHORT- MONEY MARKET, VIR-
INCOME, MONEY CIOUS METALS AND MINERALS TERM, TAX EXEMPT GINIA BOND, VIRGINIA
MARKET INTERNATIONAL, WORLD GROWTH MONEY MARKET MONEY MARKET FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not The Fund may not purchase The Fund may not The Fund may not None.
engage in margin securities on margin or sell purchase on margin purchase on margin or
transactions or securities short, except that or sell short. sell short; for
arbitrage or short it may obtain such short-term purposes of this
sales, or in put, credits as are necessary for restriction the
call, straddle, or the clearance of securities deposit or payment of
spread activities. transactions. initial or variation
margin in connection
with financial futures
contracts or related
options will not be
deemed to be purchase
of securities on margin
by a Fund.
- ------------------------------------------------------------------------------------------------------------------------------------
USAA family of funds - 42
OPERATION AS A REGISTERED INVESTMENT COMPANY
The New Funds have not adopted a fundamental restriction to operate as an
investment company because this status, the benefits for the status, and the
requirements to maintain it addressed under applicable tax laws.it duplicates
current requirements under the 1940 Act.
====================================================================================================================================
SUGGESTED REVISED
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS FUNDAMENTAL INVESTMENT
FOR THE EXISTING FUNDS RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH, GROWTH, INCOME, MONEY MARKET,
GROWTH & INCOME, INCOME STOCK, SHORT-TERM BOND,
GROWTH AND TAX STRATEGY, CORNERSTONE STRATEGY,
PRECIOUS METALS AND MINERALS, INTERNATIONAL, WORLD ALL OTHER EXISTING FUNDS
GROWTH, GNMA, TREASURY MONEY MARKET (EXCEPT THOSE PREVIOUSLY LISTED) FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not change the nature of its business so None. None.
as to cease to be an investment company.
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURES/OPTIONS (OTHER THAN AS LISTED UNDER COMMODITIES)
Some Existing Funds adopted fundamental restrictions for futures/options because
they were required under state law that no longer exists. Federal law does not
require that funds adopt a fundamental policy regarding futures/options, and
thus the New Funds did not adopt such a fundamental investment limitation to
provide greater flexibility to portfolio management.
====================================================================================================================================
SUGGESTED REVISED
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS FUNDAMENTAL INVESTMENT
FOR THE EXISTING FUNDS RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA BOND, CALIFORNIA
GROWTH AND TAX STRATEGY, MONEY MARKET, NEW YORK
CORNERSTONE STRATEGY, PRE- LONG-TERM, INTERMEDIATE- BOND, NEW YORK MONEY
CIOUS METALS AND MINERALS, TERM, SHORT-TERM, TAX EXEMPT MARKET, VIRGINIA BOND,
INTERNATIONAL, WORLD GROWTH MONEY MARKET VIGINIA MONEY MARKET FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not invest in The Fund may not invest in put, The Fund may not invest in put, None.
put, call, straddle, or spread call, straddle, or spread options call, straddle, or spread options
options or interests in oil, gas or interests in oil, or other or interests in oil, as, or other
or other mineral exploration or mineral exploration or development mineral exploration or development
development programs, except programs. programs, except that a Fund may
that it may purchase securities write covered call options
of issuers whose principal and purchase put options.
business activities fall within
such areas in accordance with
its investment objectives and
policies.
- ------------------------------------------------------------------------------------------------------------------------------------
Exhibit D - 43
INVESTMENT COMPANIES
Certain Existing Funds adopted fundamental investment restrictions regarding
investments in other mutual funds and closed-end funds. The 1940 Act does not
require that funds adopt such a fundamental policy. The New Funds do not have a
fundamental investment restriction because fund investments in investment
companies are subject to specific percentage limitations (absent an SEC
exemptive order and other statutory exemptions).
====================================================================================================================================
SUGGESTED REVISED
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS FUNDAMENTAL INVESTMENT
FOR THE EXISTING FUNDS RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH AND TAX STRATEGY, CORNER-
STONE STRATEGY, PRECIOUS METALS ALL EXISTING FUNDS
AGGRESSIVE GROWTH, GROWTH AND MINERALS, INTERNATIONAL, (EXCEPT THOSE PREVIOUSLY
INCOME, MONEY MARKET WORLD GROWTH LISTED) FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not invest more The Fund may not invest more than None. None.
than 5% of the value of its 5% of the market value of its total
total assets in any closed-end assets in any closed-end investment
investment company and will company and will not hold more than
not hold more than 3% of the 3% of the outstanding voting stock
outstanding voting stock of of any closed-end investment
any closed-end investment company.
company.
- ------------------------------------------------------------------------------------------------------------------------------------
WARRANTS
The New Funds do not have a fundamental investment restriction because the
restrictions for the Existing Funds were originally included to meet certain
state law requirements that no longer apply.
====================================================================================================================================
SUGGESTED REVISED
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS FUNDAMENTAL INVESTMENT
FOR THE EXISTING FUNDS RESTRICTION
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH AND TAX STRATEGY,
CORNERSTONE STRATEGY, ALL EXISTING FUNDS
AGGRESSIVE GROWTH, GROWTH PRECIOUS METALS AND MINERALS, (EXCEPT THOSE
INCOME, MONEY MARKET INTERNATIONAL, WORLD GROWTH PREVIOUSLY LISTED) FOR ALL NEW FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
The Fund may not invest in The Fund may not invest more None. None.
warrants more than 2% of the than 2% of the market value of
value of its assets, taken at its total assets in marketable
the lower of cost or market warrants to purchase common
value. Warrants initially stock. Warrants initially
attached to securities and attached to securities and
acquired by the Fund upon acquired by a Fund upon original
original issuance thereof issuance thereof shall be deemed
shall be deemed to be without to be without value.
value.
- ------------------------------------------------------------------------------------------------------------------------------------
USAA family of funds - 44
EXHIBIT E
AUDIT AND AUDIT-RELATED FEES
The following table includes information regarding the audit fees, audit-related
fees, tax services fees, and all other fees paid to Ernst & Young LLP (E&Y) by
the Funds and their affiliated service providers, including IMCO, the Funds'
investment adviser and principal underwriter, and SAS, the Funds' transfer
agent, for the fiscal years ended in 2004 and 2005. All of the services for
audit fee, audit-related fees, and tax services paid to E&Y for the fiscal years
ended in 2004 and 2005 must be and were pre-approved by the Funds' Audit
Committees.
SEC rules also require that we detail the total non-audit fees paid to E&Y by
the Funds, and fees paid to E&Y for non-audit services for IMCO and any other
entity controlling, controlled by or under common control with IMCO that
provides ongoing services to the Funds even if the services were not related to
the Funds or required pre-approval by the Funds' Audit Committee. The final
column labeled "Aggregate Non-Audit Fees paid by to Funds, IMCO and SAS"
includes the aggregate amount of fees paid by the Funds, IMCO and SAS to E&Y for
non-audit services. The Funds' Audit Committees have determined that the
provision of non-audit services to the Funds and IMCO and SAS is compatible with
maintaining the independence of E&Y.
All audit and non-audit services to be performed for the Fund by E&Y must be
pre-approved by the Audit Committee. The Audit Committee Charter also permits
the Chair of the Audit Committee to pre-approve any permissible non-audit
service that must be commenced prior to a scheduled meeting of the Audit
Committee. All non-audit services were pre- approved by the Audit Committee or
its Chair, consistent with the Audit Committee's pre-approval procedures.
FYE 2004
==========================================================================================================================
AGGREGATE NON-AUDIT FEES
ALL OTHER PAID BY TO FUNDS, IMCO,
AUDIT FEES AUDIT-RELATED FEES(1) TAX FEES(2) FEES AND SAS
==========================================================================================================================
USAA TAX EXEMPT FUND, INC. $175,000 $15,000 $39,347 $0 $76,347
(FYE 3/31)
- --------------------------------------------------------------------------------------------------------------------------
USAA STATE TAX-FREE TRUST $27,300 $15,000 $9,147 $0 $46,147
(FYE 3/31)
- --------------------------------------------------------------------------------------------------------------------------
USAA INVESTMENT TRUST $154,195 $15,000 $55,814 $0 $92,814
(FYE 5/31)
- --------------------------------------------------------------------------------------------------------------------------
USAA MUTUAL FUND, INC. $240,900 $15,000 $68,347 $0 $105,347
(FYE 7/31) (ALL FUNDS BUT
INDEX FUNDS)
- --------------------------------------------------------------------------------------------------------------------------
USAA MUTUAL FUND, INC. (FYE $69,450 $15,500 $21,347 $0 $64,347
12/31) (INDEX FUNDS)
==========================================================================================================================
(1) Audit related fees are fees for services rendered in assessing the controls
of the USAA Funds' transfer agent.
(2) Tax fees are for services rendered in preparing and reviewing the Funds'
tax returns and services for tax compliance and tax advice.
Exhibit E - 45
FYE 2005
==========================================================================================================================
AGGREGATE NON-AUDIT FEES
ALL OTHER PAID BY TO FUNDS, IMCO,
AUDIT FEES AUDIT-RELATED FEES(1) TAX FEES(2) FEES AND SAS
==========================================================================================================================
USAA TAX EXEMPT FUND, INC. $183,221 $15,500 $48,107 $0 $91,107
(FYE 3/31)
- --------------------------------------------------------------------------------------------------------------------------
USAA STATE TAX-FREE TRUST $28,379 $15,500 $9,621 $0 $52,621
(FYE 3/31)
- --------------------------------------------------------------------------------------------------------------------------
USAA INVESTMENT TRUST $150,400 $15,500 $66,143 $0 $109,143
(FYE 5/31)
- --------------------------------------------------------------------------------------------------------------------------
USAA INVESTMENT TRUST (FYE $17,000 $50,000 $6,762 $118,762
12/31) (TOTAL RETURN STRATEGY
FUND ONLY)
- --------------------------------------------------------------------------------------------------------------------------
USAA MUTUAL FUND, INC. (FYE $249,300 $15,500 $73,349 $0 $116,349
7/31) (ALL FUNDS
BUT INDEX FUNDS)
- --------------------------------------------------------------------------------------------------------------------------
USAA MUTUAL FUND, INC. (FYE $71,900 $50,000 $21,832 $0 $133,832
12/31) (INDEX FUNDS)
==========================================================================================================================
(1) Audit related fees are fees for services rendered in assessing the controls
of the USAA Funds' transfer agent.
(2) Tax fees are for services rendered in preparing and reviewing the Funds'
tax returns and services for tax compliance and tax advice.
USAA family of funds - 46
USAA WE KNOW WHAT IT MEANS TO SERVE (R)
EAGLE ----------------------------------------------------
LOGO (R) INSURANCE * BANKING * INVESTMENTS * MEMBER SERVICES
[GRAPHIC]
RECYCLED
PAPER
XXXXX-0506 (C) 2006, USAA. All rights reserved.
PRELIMINARY COPY
[all funds except the Florida Funds]
[USAA USAA [USAA FUND NAME]
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 2 p.m., Central Time, on July 19, 2006
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
FUND'S BOARD OF TRUSTEES.
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 the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site
WWW.PROXYVOTE.COM * Enter the CONTROL 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 FUND NAME]
By my signature below, I appoint Debra K. Dunn and Roberto Galindo, Jr. as my
attorneys to vote, as specified below, all Fund shares that I am entitled to
vote at the Special Meeting of Shareholders to be held on July 19, 2006, at 2
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 Fund's Notice of Special Meeting and
Proxy Statement.
PROPOSAL 1
To re-elect the following individuals as Trustees
for the USAA family of funds listed below:
(1) Richard A. Zucker FOR WITHHOLD FOR ALL To withhold authority to
(2) Barbara B. Dreeben ALL ALL EXCEPT vote, mark "FOR ALL EXCEPT"
(3) Robert L. Mason __ __ __ and the write the nominee's
(4) Michael F. Reimherr number on the line below.
(5) Laura T. Starks __________________________
(6) Christopher W. Claus
PROPOSAL 2 For Against Abstain
To Approve the Reorganization [ ] [ ] [ ]
[ / ] [ / ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
PRELIMINARY COPY
[Florida Funds proxy card]
[USAA USAA [USAA FLORIDA FUND NAME]
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO] OF FUNDS 2 p.m., Central Time, on July 19, 2006
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 proposal.
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
FUND'S BOARD OF TRUSTEES.
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 the CONTROL NUMBER
indicated to the right
* Follow the voice instructions
INTERNET * Log on to the voting site
WWW.PROXYVOTE.COM * Enter the CONTROL 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 FLORIDA FUND NAME]
By my signature below, I appoint Debra K. Dunn and Roberto Galindo, Jr. as my
attorneys to vote, as specified below, all Fund shares that I am entitled to
vote at the Special Meeting of Shareholders to be held on July 19, 2006, at 2
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 Fund's Notice of Special Meeting and
Proxy Statement.
PROPOSAL 1
To re-elect the following individuals as Trustees
for the USAA family of funds listed below:
(1) Richard A. Zucker FOR WITHHOLD FOR ALL To withhold authority to
(2) Barbara B. Dreeben ALL ALL EXCEPT vote, mark "FOR ALL EXCEPT"
(3) Robert L. Mason __ __ __ and the write the nominee's
(4) Michael F. Reimherr number on the line below.
(5) Laura T. Starks __________________________
(6) Christopher W. Claus
[ / ] [ / ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE