PROXY 2006:
RE-ELECT TRUSTEES AND APPROVE PLANS OF REORGANIZATION
THE ENTIRE CONTENTS OF THIS BOOKLET ARE FOR TRAINING PURPOSES ONLY. THIS IS FOR
INTERNAL USE ONLY AND NOT FOR DISTRIBUTION TO THE PUBLIC.
APRIL, 2006
CARMEN HERNANDEZ
6-7156
PROXY 2006
PURPOSE OF THE PROXY
Shareholders are being asked to re-elect trustees and approve plans of
reorganization. The reorganization would benefit the Fund 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.
PROPOSALS
* PROPOSAL 1 - Re-elect Trustees
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 the Board of Trustees to shareholders for
re-election.
* PROPOSAL 2 - Approve Plans of Reorganization
Shareholders are being 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.
* 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. USAA Investment Trust and USAA
Mutual Funds Trust are organized as a Massachusetts business trust
and a Delaware statutory trust, respectively. To date, each of
these four entities has been governed by boards of directors or
boards or trustees comprised of the same individuals for financial
and operational efficiencies.
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 will be mailed to shareholders
of record on or about May 26, 2006.
Each share is entitled to one vote (with proportionate voting for fractional
shares).
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 ARE ENTITLED TO VOTE
ONLY ON PROPOSAL 1. SHAREHOLDERS OF ALL OTHER FUNDS WILL BE ENTITLED TO VOTE ON
BOTH PROPOSALS.
SHAREHOLDER MEETING
Wednesday, July 19, 2006, at 2:00 p.m., CT in the McDermott Auditorium.
2
PROXY MAILING
On May 26, 2006, the following documents will be included in the Proxy mailing:
1. A Message from the Chairman and President plus a Summary of Proposals.
2. Proxy Information (voting instructions).
3. Proxy Statement.
4. Proxy card(s) (one for each account having the same SSN & 9-digit zip
code).
5. Return envelope.
VOTING OPTIONS
The Board of Trustees unanimously recommends that shareholders vote "FOR" all
proposals. Each shareholder may vote, and re-vote as many times as he or she
wishes. THE LAST VOTE RECEIVED IS THE ONE THAT COUNTS. Shareholders may vote by:
1. INTERNET (Advise the shareholder not to mail in the proxy card(s) if
this method is to be used; unless, of course, he or she wants to change
his/her vote).
* Going to WWW.PROXYVOTE.COM or the "Proxy Voting" link on usaa.com;
o If voting for more than one fund, remind shareholder to vote
each SEPARATE proxy card for as many as he or she received.
o Shareholders will need to vote for each applicable proposal
and will not have the option to cast ONE consolidated vote
"FOR" all proposals.
* Entering each 12-digit control # located on the middle right side
of each proxy card.
* Following the instructions on the site.
2. PHONE (Advise the shareholder not to mail in the proxy card(s) if this
method is used (unless, of course, he/she wants to change his/her
vote)).
* Calling toll-free 1-800-690-6903.
o If voting for more than one fund, remind the shareholder to
vote each SEPARATE proxy card for as many as he or she
receives.
o Shareholders will need to vote for each applicable proposal
and will not have the option to cast ONE consolidated vote
"FOR" all proposals.
* Entering each 12-digit control # located on the middle right side
of each proxy card.
* Following recorded instructions.
3. MAIL
* Marking, signing and dating each proxy card.
o If voting for more than one fund, remind the shareholder to
vote each SEPARATE proxy card for as many as he or she
receives.
o Shareholders will need to vote for each applicable proposal
and will not have the option to cast ONE consolidated vote
"FOR" all proposals.
o If card is signed but not marked to cast a vote, it will be
voted "FOR" all applicable proposals.
o If no signature, the card will be rejected and not re-mailed.
o If another proxy card needs to be re-mailed to an alternate
address, email Support Services.
* Returning in postage-paid envelope.
4. IN PERSON DURING SHAREHOLDER MEETING
* Attending meeting on July 19, 2006, at 2:00 p.m. in the McDermott
Auditorium;
* Bringing proxy card(s) to vote at the meeting.
3
2006 PROXY CARD INFORMATION AND SAMPLES
PROXY MAILING
* Proxy statements and proxy cards will be mailed in the same
envelope for all shareholders who have the same social security
number and same zip code. For example, a shareholder with an
individual account, a joint tenant account, and an IRA account
would receive his three proxies in ONE envelope (assuming same SSN
and ZIP).
* THERE WILL BE ONE CARD FOR EACH ACCOUNT. If a shareholder has 3
mutual fund accounts, he will receive 3 proxy cards. If he has 25
accounts, he will receive 25 cards.
* EACH CARD WILL HAVE ITS OWN SPECIFIC CONTROL NUMBER.
* ALL COMMON MATERIAL WILL BE MAILED IN ONE ENVELOPE.
ADDRESS HIERARCHY
The address hierarchy will be as usual:
* Seasonal address first, if applicable;
* Mailing address next, if applicable;
* Registration address, if only address on file.
RETURN MAIL
All return mail will be forwarded to Support Services for handling.
RE-MAIL PROXY CARD
If the shareholder requests that the proxy card(s) be re-mailed:
* Confirm address.
* Send an email to Support Services for all re-mail requests with
shareholder's name, USAA member #, and mutual fund account
number(s), and new address, if applicable.
* If member has an address change, update and indicate on email to
Support Services.
INCOMING LETTERS
Any incoming correspondence will be routed as follows:
* Chris Claus mail goes to Yolanda Escalante for handling.
* Bob Davis mail goes to Yolanda Escalante for further routing.
* Board Member mail goes to Cherie Black for further routing.
* General Correspondence goes to Javier Morales for further routing.
* Emailed Proxy questions/concerns goes to Javier Morales for further
routing.
* Any notes written on proxy cards will be routed to Javier Morales.
PROXY INQUIRIES
Calls from shareholders asking for additional information regarding the proxy
should be transferred to:
o 2-4066 (or 7-6654)
o 7-6670 (USAA employee shareholders)
4
PROXY CARD SAMPLE WITH TWO PROPOSALS
[GRAPHIC OMITTED]
5
PROXY CARD SAMPLE WITH ONE PROPOSAL
(FOR THE FLORIDA FUNDS)
[GRAPHIC OMITTED]
6
AUTOMATIC DATA PROCESSING, INC. (ADP)
TELEPHONE SOLICITATION
ADP may call shareholders at the following times to assist in the voting process
if IMCO has not received enough proxy cards as the date of the meeting
approaches:
* Monday - Friday between the hours of 9:00 a.m. and 7:00 p.m. CT
* Saturday from 9:00 a.m. to 5:00 p.m. CT
If a shareholder wants to vote when solicited by ADP, the ADP rep will record
the vote. A confirmation statement will be generated and mailed to the
shareholder.
USAA TRANSFERS TO ADP
After confirming that the shareholder wants to vote now by telephone:
* USAA MSR:
o Initiates transfer to ADP at 1-800-690-6903.
o Introduces himself/herself to ADP.
o States the shareholder name and address.
o Introduces ADP rep to shareholder.
* Script Suggestion:
o Hello, this is _____ from USAA. I have ____ on the line to vote
his/her proxy card(s). The address of the customer is ____,
City and State.
o Hello, ___ thank you for holding, I have __ on the line who will
take your vote.
ADP TRANSFERS TO USAA:
Shareholders who have questions about their accounts or the proxy will be
transferred to IMCO MSRs.
7
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PROPOSAL 1
ELECTION OF BOARD OF DIRECTORS
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FUNDS AFFECTED
* All Funds
PROPOSAL
* Re-elect the five Trustees of each Fund.
WHY?
* 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 the Board of Trustees to shareholder for
re-election.
* Each of the five nominees currently serves on the Funds' Board of
Trustees and was elected or re-elected in 2001.
WHO ARE THE CURRENT TRUSTEES?
* INDEPENDENT TRUSTEES
o Richard A. Zucker
o Barbara B. Dreeben
o Robert L. Mason, Ph.D.
o Michael F. Reimherr
* MANAGEMENT TRUSTEE
o Christopher W. Claus
* Dr. Laura Starks recently resigned from the Board of Trustees to pursue
another business opportunity.
APPROVAL
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 quorum is present.
QUESTIONS ANSWERED IN THE PROXY STATEMENT:
* Who are the nominees for the Board of Trustees?
* Why are we now re-electing members to the Board of Trustees?
* How long can Trustees serve on the Board of Trustees?
* What are the responsibilities of the Board of Trustees?
* What are some of the ways in which the Board of Trustees represents
shareholder interests?
* What is the share ownership in the Funds by the nominees?
* What are the members of the Board of Trustees paid for their services?
* How often does the Board of Trustees meet?
* What are the Funds' standing committees?
* What percentage of shareholders' votes is required to elect the
nominees to the Board of Trustees?
* How does the Board of Trustees recommend shareholders vote on this
proposal?
* Is there more information about the Funds?
8
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PROPOSAL 2
APPROVE PLANS OF REORGANIZATION
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FUNDS AFFECTED
* All Funds except for the Florida Tax-Free Income Fund and the Florida
Tax-Free Money Market Fund.
PROPOSAL
* Organize all Funds under the same legal entity (USAA Mutual Funds
Trust, formerly known as USAA State Tax-Free Trust) that is subject to
the same state law (Delaware), the same governing documents, and the
same legal requirements regarding the operation of each Fund.
o 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 organizing all of the USAA family of funds into one legal
entity, leaving all Funds (New 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.
WHY?
* 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.
* The primary purpose of the proposed reorganizations is to seek future
economies of scale and to eliminate certain costs associated with
operating four different legal entities organized in three different
states.
* Also, the reorganization will permit the funds to develop uniform and
modern fundamental investment restrictions to seek additional
efficiency of operations.
APPROVAL
Shareholders of each Fund are being asked to vote separately. By voting "FOR"
Proposal 2, shareholders of a Fund will effect all the actions that are
applicable to that Fund.
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, GNMA Trust, and Treasury Money Market
Trust.
Approval of Proposal 2 will require the "yes" vote of a "majority of the
aggregate number of shares entitled to vote: for all other Existing Funds
entitled to vote on Proposal 2.
9
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, there will be a change to the advisory and
transfer agency fees of one of the New Funds, and, similar to the
equity funds, there will be 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 to 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.
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.
10
QUESTIONS ANSWERED IN THE PROXY STATEMENT:
* What is the purpose of the Reorganization?
* What effects will the Reorganizations have on the Existing Funds and
their shareholders?
* How will the existing Funds be Reorganized?
* What are shareholders being asked to approve in Proposal 2?
* Will fees for the New Funds change if shareholders approve the
Reorganization?
* Why is the Board recommending approval of the Reorganization
Agreements?
* How will the Investment Restrictions of the New Funds Differ from the
Investment Restrictions in Effect for the Existing Funds?
* Will there be any sales load, commission, or other transactional fee
in connection with the Reorganizations?
* What will be the federal income tax consequences of the
Reorganizations?
* Who is bearing the expenses related to the Reorganizations?
* What are the Material Terms and Conditions of the Reorganization
Agreements?
* What are the Federal Income Tax Consequences of the Reorganizations?
* How will the New Funds be Organized?
* How will the Existing Funds' Investment Objectives Change?
* Why are the Aggressive Growth Fund and the Precious Metals and Minerals
* Fund being changed from diversified to non-diversified?
* 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?
* What are the Material Terms of the Investment Advisory Agreement with
IMCO?
* What are the changes to the fee structure for the Aggressive Growth
Fund?
* What are the Material Terms of the Subadvisory Agreements?
* Why did the Board Approve the New Advisory Agreements and the New
Subadvisory Agreements?
* What percentage of shareholders' votes is required to approve Proposal
2?
* How does the Board of Trustees recommend shareholders vote on this
proposal?
11
QUESTIONS THAT MAY COME UP.....
Be prepared for any additional questions that may come up such as the following:
MEMBER QUESTION #1
WHY SHOULD WE APPROVE THE REORGANIZATION INTO THE DELAWARE STATUTORY TRUST?
ANSWER:
In recent years, many mutual funds have reorganized as Delaware statutory
trusts.
a. The Delaware statutory trust form of organization provides more
flexibility with respect to the administration of the New Funds.
b. The reorganization could potentially lead to greater operating
efficiencies and lower expenses for shareholders of the New Funds.
The New funds may be able to realize greater operating efficiencies because
the Reorganizations would permit the New Funds to:
c. Eliminate differences in voting, record date, quorum, and other
corporate requirements under the different governing documents of the
Existing Funds, and
d. Operate under a uniform, modern, and flexible governing document
that would streamline the Fund governance process, reduce future
reporting, filing, and proxy costs, and reduce costs associated with
compliance monitoring.
MEMBER QUESTION #2
WHY ARE SHAREHOLDERS OF THE USAA FLORIDA TAX-FREE INCOME FUND AND THE USAA
FLORIDA TAX-FREE MONEY MARKET FUND NOT REQUIRED TO VOTE ON THE REORGANIZATION?
ANSWER:
The Florida Tax-Free Income Fund and the Florida Tax-Free Money Market Fund are
already organized in USAA Mutual Funds Trust (formerly known as USAA State
Tax-Free Trust).
MEMBER QUESTION #3
WHAT ARE SOME OF THE DIFFERENCES THAT SHAREHOLDERS WILL NOTICE AS A RESULT OF
THE REORGANIZATION?
ANSWER:
REGARDING 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.
REGARDING PAYMENT OF INCOME AND CAPITAL GAINS DISTRIBUTIONS:
The Existing 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 only two options: to reinvest distributions or
to receive payment by electronic funds transfer.
Refer to Exhibit C of the Proxy Statement for other comparisons.
12
MEMBER QUESTION #4
HOW WILL THE NEW TRUST OFFER MORE FLEXIBILITY TO THE TRUSTEES OF THE NEW FUNDS?
ANSWER:
Under the Master Trust Agreement 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
As a consequence, this 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.
MEMBER QUESTION #5
CAN YOU SUMMARIZE THE CHANGES TO THE INVESTMENT OBJECTIVES OF THE FIRST START
GROWTH FUND, INTERNATIONAL FUND, AND PRECIOUS METALS AND MINERALS FUNDS?
ANSWER:
REGARDING THE FIRST START GROWTH FUND:
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 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.
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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.
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REGARDING THE INTERNATIONAL FUND AND THE PRECIOUS METALS AND MINERALS FUND:
The revised 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 revised investment objective of the International Fund would state
that the New Fund "seeks capital appreciation."
* The revised 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."
13
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The purpose of these two changes is to give the portfolio manager more
flexibility to choose investments offering the best total return potential.
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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.
MEMBER QUESTION #6
CAN YOU EXPLAIN WHAT WILL HAPPEN WITH THE DIVERSIFICATION OF THE AGGRESSIVE
GROWTH FUND AND THE PRECIOUS METALS AND MINERALS FUND?
ANSWER:
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.
The 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.
REGARDING THE 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
Fund to be managed 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 will be able to implement a more focused strategy and to
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 subadviser flexibility
to implement a more focused strategy, 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."
REGARDING THE 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
14
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 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.
MEMBER QUESTION #7
CAN YOU EXPLAIN THE CHANGES TO THE LIPPER INDEXES USED TO COMPUTE PERFORMANCE
ADJUSTMENT FEES FOR THE CAPITAL GROWTH FUND, THE FIRST START GROWTH FUND, AND
THE GROWTH AND TAX STRATEGY FUND?
ANSWER:
The investment management fee of each of these funds 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.
REGARDING THE CAPITAL GROWTH FUND:
Currently, the benchmark index used for calculating the performance adjustment
to 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.
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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 is more representative of the
performance of funds with comparable management styles.
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REGARDING THE 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.
15
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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.
After the Reorganization, the investment objective of the Fund will be to seek
long-term capital growth and preservation of capital 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.
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REGARDING THE 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 Fund Index
and 49% of the Lipper Large Cap Core Funds Index (New Composite Index).
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The Board approved implementing the New Composite Index for the Fund 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.
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MEMBER QUESTION #8
WHAT EXACTLY IS THE CHANGE IN FEE STRUCTURE FOR THE AGGRESSIVE GROWTH FUND?
ANSWER:
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.
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BASE FEE CURRENT BREAKPOINTS PROPOSED BREAKPOINTS
(AVERAGE NET ASSETS) (AVERAGE NET ASSETS)
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0.50% $0 to $200 million $0 to $750 million
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0.40% Next $100 million Next $750 million
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0.33% Over $300 million Over $1.5 billion
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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 to 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.
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MEMBER QUESTION #9
WHY CHANGE THE FEE STRUCTURE FOR THE AGGRESSIVE GROWTH FUND NOW?
ANSWER:
There are two good reasons:
1. To preserve the Fund's competitive posture against similar funds, and
2. To be able to retain the best money managers.
The overall impact of the 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.
MEMBER QUESTION #10
IS IT POSSIBLE TO PASS PROPOSAL 2 FOR SOME FUNDS AND NOT PASS IT FOR OTHERS?
ANSWER:
Yes.
MEMBER QUESTION #11
THE NEW FUNDS WILL OFFER SHAREHOLDERS THE OPTION TO REINVEST DISTRIBUTIONS OR
PAYMENT BY ELECTRONIC FUNDS TRANSFER ONLY. WILL THIS ALSO BE TRUE FOR BROKERAGE
DISTRIBUTIONS?
ANSWER:
Yes.
MEMBER QUESTION #12
WILL ATTORNEYS BE AVAILABLE TO RESPOND TO SHAREHOLDER INQUIRIES? HOW ABOUT CHRIS
CLAUS?
ANSWER:
Yes. If, after speaking with your manager, the shareholder still wants to speak
to Chris Claus or an attorney, a return call will be made. Please refer call
back requests to Carmen Hernandez at 456-7156. Do not transfer the shareholder.
MEMBER QUESTION #13
WHY DID DR. LAURA STARKS RESIGN FROM THE BOARD?
ANSWER:
Dr. Starks decided to pursue a business opportunity with another mutual fund
company and, as a result, decided that it would be best for her to resign now
to avoid any potential conflicts of interest.
17