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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[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
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if other than the Registrant)
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[USAA USAA Family of Funds
EAGLE Post Office Box 659442
LOGO (R)] San Antonio, Texas 78265-9442
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:
|X| Re-elect five trustees so that they can continue to serve on the Board
of all of the USAA Family of Funds (the Board); and
|X| 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.
The reorganizations 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, approval of the reorganization proposals will
result in minor changes to six Funds' investment objective(s), principal
investment strategies, or Lipper indexes; and to one Fund's fee structure.
Otherwise, the reorganizations 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 reorganizations, 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(s). Just follow the instructions on your
proxy card(s), sign and date the card(s) and send the card(s) 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
SUMMARY OF THE PROPOSALS
PROPOSAL 1 - RE-ELECT TRUSTEES
AT THE MEETING, YOU WILL BE ASKED TO RE-ELECT THE FUNDS' BOARD OF TRUSTEES.
|X| 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 the Trustees to shareholders for re-election.
|X| ARE ANY NEW NOMINEES BEING PRESENTED FOR ELECTION TO THE BOARD?
No. Each of the five nominees currently serves on the Funds' Board of
Trustees and was 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.
|X| 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 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
reorganizations will permit the Funds to develop uniform and improved
investment restrictions to seek additional operational efficiencies.
|X| 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 Minerals Fund o Remove secondary objective of "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.
o 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 fundamental investment policies after the
reorganizations that could be changed only with shareholder approval. The
reduction in the number of fundamental investment policies will not have a
material effect on fund operations. After the reorganizations, the Board
also could change, without shareholder approval, 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.
|X| WILL THE REORGANIZATIONS 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.
|X| WILL THE REORGANIZATIONS RESULT IN ANY FEE CHANGES?
The reorganizations 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 USAA Investment Management Company (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.
In addition, as described more fully below, with respect to the USAA
Capital Growth, USAA First Start Growth, and USAA Growth and Tax Strategy
Funds, the Lipper Index used to compare each Fund's performance for
purposes of calculating the performance adjustment to the Fund's base
advisory fee will be changed to reflect changes in each Fund's investment
style.
|X| WHY DID THE BOARD BELIEVE A CHANGE IN THE FEE STRUCTURE FOR THE USAA
AGGRESSIVE GROWTH FUND WAS NECESSARY?
The Fund's current subadviser, Marsico Capital Management, LLC (Marsico),
required that its fee from 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
manager-of-managers 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.
|X| WILL THE BASE FEE OR PERFORMANCE ADJUSTMENT FOR ANY OTHER FUND CHANGE AS A
RESULT OF THE REORGANIZATIONS?
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 Funds 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 A New Composite Index would replace the
Lipper Balanced Funds Index. The New
Composite Index would be comprised of
51% Lipper General Municipal Debt Funds
Index and 49% Lipper Large-Cap Core
Funds Index to reflect the Fund's unique
style of investing in securities so that
the majority of income is tax-exempt,
and the recent change in the Fund's
stock selection criteria from a solely
large-cap growth emphasis to a large-cap
core focus.
================================================================================
|X| ARE THERE ANY OTHER MATERIAL CHANGES TO THE ADVISORY AGREEMENTS?
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 Securities and Exchange
Commission's rules, interpretations, and other positions. The new advisory
agreements would authorize IMCO to implement a manager-of-managers
structure for all Funds in the USAA family of funds. The Board and IMCO
have no present intention to implement a manager-of-managers structure for
the USAA Precious Metals and Minerals Fund or any fixed income or money
market fund. Other than these changes, the new advisory agreements will be
substantially identical to existing advisory agreements for all other
Funds.
|X| 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.
|X| 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.
|X| 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 legal costs, and the costs of printing, mailing, tabulation,
and solicitation of proxies based in part on 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.
57846-0506
[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) and on Saturday from 8:30 a.m. to 5
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.
[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 Trustees of each Fund.
2. To approve proposed plans of reorganization 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.
================================================================
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 MAY 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 for each Fund you own. The proxy card(s) have been
included with this proxy statement, along with a postage-paid
envelope for your convenience in mailing us your proxy card.
4. You may vote in person by attending the shareholder
meeting.
* IF YOU VOTE BY TELEPHONE OR ACCESS THE INTERNET VOTING SITE,
YOUR VOTE MUST BE RECEIVED NO LATER THAN 12 A.M. EASTERN TIME
ON JULY 19, 2006.
================================================================
We encourage you to vote by Internet or telephone to minimize the costs of
solicitation.
Proxy Statement - 1
[ ] 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.
[ ] 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.
---------------------------------------------------------------------
TABLE OF CONTENTS
PROPOSAL 1 - ELECTION OF BOARD OF TRUSTEES 3
PROPOSAL 2 - APPROVAL OF REORGANIZATIONS 8
FURTHER INFORMATION ABOUT VOTING AND THE SHAREHOLDER MEETING 24
EXHIBIT A - CORPORATE GOVERNANCE COMMITTEE CHARTER 29
EXHIBIT B - EXECUTIVE OFFICERS OF THE FUNDS 31
EXHIBIT C - COMPARISON OF THE EXISTING FUNDS' AND NEW FUNDS'
FUNDAMENTAL INVESTMENT RESTRICTIONS 33
EXHIBIT D - COMPARISON OF CERTAIN ATTRIBUTES OF USAA MUTUAL
FUNDS TRUST, THE MARYLAND FUNDS, AND THE MASSACHUSETTS FUNDS 43
EXHIBIT E - AUDIT AND AUDIT-RELATED FEES 45
USAA family of funds - 2
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
occupations 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)
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, USAA Investment
and Vice Management Company (IMCO)(12/04-present); President, CEO,
Chairman of Director, and Vice Chairman of the Board of Directors,
the Board IMCO (2/01-12/04). Mr. Claus serves as President, Director,
of Trustees and Chairman 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.
[FOOTNOTES]
(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.
Proxy Statement - 3
|X| 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 the
Trustees to shareholders for re-election. The Board was comprised of six
Trustees. Dr. Laura T. Starks recently resigned from the Board and thus is
not presented for re-election.
|X| 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.
|X| 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.
|X| 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:
|X| reviewing the investment performance of each Fund with management;
|X| 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;
|X| discussing with IMCO senior management steps being taken to address
any performance deficiencies;
|X| 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;
|X| 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
|X| monitoring potential conflicts among Funds to ensure that shareholders
continue to realize the benefits of participation in a large and
diverse family of funds.
|X| 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.
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.
USAA family of funds - 4
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
Richard A. Zucker Income Over $100,000 Over $100,000
International $10,001-$50,000
Money Market $10,001-$50,000
S&P 500 Index (Member Shares) Over $100,000
Small Cap Stock $10,001-$50,000
Tax Exempt Long Term Over $100,000
Barbara B. Dreeben S&P 500 Index (Member Shares) $0-$10,000 Over $100,000
Tax Exempt Intermediate-Term Over $100,000
Robert L. Mason Cornerstone Strategy $10,001-$50,000 Over $100,000
Growth & Income $10,001-$50,000
Income Stock $10,001-$50,000
Money Market Over $100,000
Tax Exempt Long-Term $10,001-$50,000
Total Return Strategy $0-$10,000
Michael F. Reimherr Capital Growth Over $100,000 Over $100,000
GNMA Trust $0-$10,000
High-Yield Opportunities $10,001-$50,000
Income $10,001-$50,000
Income Stock $50,001-$100,000
Intermediate-Term Bond $10,001-$50,000
Money Market $10,001-$50,000
S&P 500 Index (Member Shares) $50,001-$100,000
Short-Term Bond $10,001-$50,000
MANAGEMENT TRUSTEE
Christopher W. Claus Aggressive Growth $10,001-$50,000 Over $100,000
Balanced Strategy $0-$10,000
Capital Growth $10,001-$50,000
Emerging Markets $10,001-$50,000
Growth $10,001-$50,000
Growth & Income $10,001-$50,000
High-Yield Opportunities Over $100,000
Income Stock $50,001-$100,000
Intermediate-Term Bond Over $100,000
International $50,001-$100,000
S&P 500 Index (Member Shares) $50,001-$100,000
S&P 500 Index (Reward Shares) $0-$10,000
Short-Term Bond $50,001-$100,000
Small Cap Stock $10,001-$50,000
Tax Exempt Intermediate-Term Over $100,000
Tax Exempt Long-Term $10,001-$50,000
Tax Exempt Money Market $0-$10,000
Tax Exempt Short-Term Over $100,000
Total Return Strategy Over $100,000
Value $50,001-$100,000
Proxy Statement - 5
|X| 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 aggregate 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 currently 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.
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(7)
Richard A. Zucker $14,144 $3,430 $15,825 $1,944 $19,625 $19,625 $78,500
Barbara B. Dreeben $13,156 $3,099 $14,775 $1,756 $17,750 $17,750 $71,000
Robert L. Mason, Ph.D. $13,403 $3,166 $15,375 $1,794 $18,125 $18,125 $72,500
Michael F. Reimherr $12,415 $2,901 $14,175 $1,644 $16,625 $16,625 $66,500
Christopher W. Claus(8) 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, and exclude the
Index Funds.
(3) Amounts are only for the Index Funds for the fiscal year ended December
31, 2005.
(4) Amounts are for the fiscal year ended May 31, 2005, and excludes the
Total Return Strategy Fund.
(5) Amounts are only 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) Represents compensation as of March 31, 2006. It may not equal the sum
of the amounts shown in the table, which represents compensation for
each Fund's recently completed fiscal year.
(8) 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.
====================================================================================================================================
|X| 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., 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.
USAA family of funds - 6
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.
|X| WHAT ARE THE FUNDS' STANDING COMMITTEES?
The Board 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.
The Audit Committee consists of all 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 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 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 has
adopted procedures to consider Board candidates suggested by shareholders.
The procedures are initiated by the receipt of nominations submitted by a
Fund shareholder sent to Board member(s) at the address specified in Fund
disclosure documents or as received by IMCO or a Fund officer. Any
recommendation for a nomination submitted by a shareholder, to be
considered by the Board, must include at least the following information:
name; date of birth; contact information; education; business profession
and other expertise; affiliations; experience relating to serving on the
board; and references. The Committee has a Charter, a copy of which is
attached to this proxy statement as Exhibit A.
Proxy Statement - 7
|X| 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.
|X| 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.
|X| 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.
PROPOSAL 2
APPROVAL OF REORGANIZATIONS
OVERVIEW
ALL FUNDS (EXCEPT FOR THE FLORIDA TAX-FREE INCOME FUND
AND THE FLORIDA TAX-FREE MONEY MARKET FUND)
|X| WHAT ARE THE PURPOSES OF THE REORGANIZATIONS?
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.
|X| 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 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 name of each New Fund after the
Reorganizations will be the same as its corresponding Existing Fund, except
for the Long-Term Fund, Intermediate-Term Fund, and Short-Term Fund, which
will be changed to officially add Tax Exempt to their names to distinguish
them from our taxable bond funds with similar durations.
|X| 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:
o three of the Existing Funds' investment objectives (First Start Growth
Fund, International Fund, and Precious Metals and Minerals Fund);
USAA family of funds - 8
o 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);
o two other Existing Funds' abilities to concentrate investments in the
same issuer (Aggressive Growth Fund and Precious Metals and Minerals
Fund);
o the Aggressive Growth Fund's fee structure; and
o the names of the Short-Term Fund, Intermediate-Term Fund, and
Long-Term Fund will be changed to officially add Tax Exempt into their
names to distinguish them from our taxable bond funds with similar
durations.
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.
|X| 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 July 31, 2006 (the Closing Date), although this date
could be adjusted.
EACH REORGANIZATION AGREEMENT CONTEMPLATES:
|X| The transfer of all of the assets of each Existing Fund to a
corresponding New Fund in exchange for shares of the New Fund;
|X| The assumption by the corresponding New Fund of all of the liabilities
of the Existing Fund;
|X| 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
|X| 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 of 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,
Proxy Statement - 9
a change will be made to the advisory and transfer agency fees of one
of the New Funds, and, similar to the equity funds, a change will be
made to permit IMCO to implement a manager-of-managers 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 objectives 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 fewer and more streamlined fundamental
investment restrictions than those currently in effect for the
Existing Funds.
(8) Each Lipper Index 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 these 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.
|X| WILL FEES FOR THE NEW FUNDS CHANGE IF SHAREHOLDERS APPROVE THE
REORGANIZATIONS?
Voting "FOR" the Reorganizations 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.
In addition, as described more fully below, with respect to the Capital
Growth Fund, First Start Growth Fund, and Growth and Tax Strategy Fund, the
Lipper Index used to compare each Fund's performance for purposes of
calculating the performance adjustment to the Fund's base advisory fee will
be changed to reflect changes in each Fund's investment style.
USAA family of funds - 10
|X| 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:
|X| In recent years, many mutual funds have reorganized as Delaware
statutory trusts. Based on the input of IMCO and Fund and independent
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.
|X| 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 New Funds' administration.
|X| 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 a manager-of-managers structure; and the
average net asset breakpoints applicable to the base advisory fee of
the Aggressive Growth Fund will be increased, which, when combined
with the reduction in transfer agency fees, 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.
|X| Based upon information presented by IMCO, the Board determined that as
a result of the Reorganizations (1) the investment objectives 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.
|X| 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 of the New Funds.
|X| 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.
Proxy Statement - 11
|X| 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.
|X| 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 New 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 C 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.
|X| 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.
|X| WHAT WILL BE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS?
As a condition to closing 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
Reorganizations.
|X| WHO IS BEARING THE EXPENSES RELATED TO THE REORGANIZATIONS?
The Existing Funds will bear the expenses associated with the
Reorganizations, including the legal costs, and 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
|X| 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 on the SEC's Web site at http://www.sec.gov or upon request by
calling toll free (800) 531-8448.
USAA family of funds - 12
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 close 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) USAA Mutual Funds 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 these 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 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.
|X| 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;
Proxy Statement - 13
(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.
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.
COMPARISON OF THE NEW FUNDS AND THE EXISTING FUNDS
|X| 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
* These funds' names will be changed to Tax Exempt Long-Term Fund,
Tax Exempt Intermediate-Term Fund, and Tax Exempt Short-Term Fund
to reduce confusion with taxable funds with similar names.
If the Reorganizations are approved, each Existing Fund will re-domicile
into a corresponding series of USAA Mutual Funds 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 USAA Mutual Funds Trust
will consist of the same five 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 USAA Mutual Funds 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
USAA family of funds - 14
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 D. Although Exhibit D does not provide a complete
comparison, all material differences, to the best of our knowledge, are
summarized. Copies of the governing documents of the Existing Funds and the
New Funds 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.
|X| 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 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 their secondary objectives 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 changes is to give the
portfolio managers 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 a New Fund whenever the
Board believes that changes are necessary or appropriate in light of market
circumstances or other events, without causing the New Fund to incur the
costs of shareholder meetings.
|X| 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.
Proxy Statement - 15
AGGRESSIVE GROWTH FUND
Both the Board and IMCO believe that the current diversification policy
might in some circumstances restrict the flexibility of the subadviser in
managing the Fund in an aggressive growth style, and believe that the
proposed change authorizing the Fund to qualify as a non-diversified
portfolio will allow the portfolio manager more flexibility to manage the
Fund more opportunistically, if and to the extent desired, by IMCO and the
subadviser. 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 given the flexibility to potentially implement a
strategy that could increase the size of a few stock positions in the
portfolio, if and to the extent desired, by IMCO and the subadviser. In
those circumstances, the subadviser could invest a greater portion of the
Fund's assets in a single issuer. 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 by
authorizing the Fund to qualify as a non-diversified portfolio, although
presenting increased risks if this flexibility is used, may in some
circumstances offer greater potential rewards, and may be generally
consistent with an aggressive growth investment style.
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 potentially 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 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.
|X| 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. Lipper Inc., is an independent organization that
monitors the performance of mutual funds. Because each Lipper Index tracks
the total return performance of a group of mutual funds, the fees and
expenses of these mutual funds are included in calculating the performance
of the Lipper Index, just as the fees and expenses of each Fund are
included in calculating the performance of the Fund. 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. The
performance adjustment is calculated monthly by comparing a Fund's
performance to that of the applicable Lipper Index over the performance
period. The performance
USAA family of funds - 16
period for a Fund consists of the current month plus the previous 35
months. When a Fund transitions to a new Lipper Index, the performance
adjustment is calculated by prorating comparisons of the performance of the
Fund to (i) the new Lipper Index for the portion of the performance period
after the transition date and (ii) the old Lipper Index for the portion of
the performance period prior to the transition date. 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 indexes 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 Composite 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 selecting 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 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 indexes are maintained by Lipper.
The Existing Index tracks the total return performance of the 30 largest
mutual funds within the Large Cap-Growth Funds 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 Composite
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 30 largest funds within the Lipper
Flexible Portfolio Funds category. This category includes funds that
allocate their investments across various asset classes, including domestic
common stocks, bonds, and money market instruments with a focus on total
return.
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
Proxy Statement - 17
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 Debt 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 Existing Index to the New Composite
Index, including a fixed blend of the Lipper General Municipal Debt 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 Debt 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 for individual taxpayers.
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. The returns of the two component indexes of the New
Composite Index are publicly available and the calculation of the New
Composite Index would be auditable.
|X| WHAT ARE THE MATERIAL TERMS OF THE INVESTMENT ADVISORY AGREEMENTS WITH
IMCO?
The Reorganization Agreements require USAA Mutual Funds 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."
USAA family of funds - 18
The Current Advisory Agreements were approved by Existing Fund shareholders
in 2005 for the Total Return Strategy Fund, 2002 for the equity Funds
(other than the Precious Metals and Minerals Fund), and 2001 for all other
Funds. 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 available on
the SEC's Web site at http://www.sec.gov or upon request by calling toll
free (800) 531-8448.
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,
without the approval of the shareholders, to implement a
manager-of-managers structure for each equity Fund (other than the Precious
Metals and Minerals Fund) whereby IMCO is authorized, with the approval of
the Board, to hire, terminate, or replace unaffiliated subadvisers to
manage the Fund's day-to-day activities. The Current Advisory Agreements
for the Precious Metals and Minerals Fund, the fixed income funds, and the
money market funds do not authorize IMCO to implement such a structure.
Under the New Advisory Agreements, IMCO will have the power, without the
approval of shareholders, for all funds in the USAA family of funds to
implement a manager-of-managers structure and hire, terminate, or replace
unaffiliated subadvisers with only Board approval, subject to satisfying
certain conditions including sending an informational statement to affected
shareholders within 90 days of any change in a subadviser. 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 manager-of-managers structure for the
Precious Metals and Minerals Fund, the fixed income funds, or the 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's interpretation of those
laws change to permit such changes without shareholder approval, the Board
would be permitted to change the benchmark without shareholder vote. If
ever legally permissible, this provision would give the Board added
flexibility to change the benchmark used to calculate performance
adjustments to the base advisory fee in response to material changes in
investment policies of a fund, or changes to benchmarks to ensure that each
New Fund's benchmark remains the most appropriate by which to measure its
comparative performance.
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 a Fund's subadvisers, rather than on directly managing the
portion of the Fund's 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. 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. 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. Under
the performance fee arrangement, a Fund will pay a positive performance fee
adjustment for a performance period whenever the Fund outperforms its
benchmark over that period, even if the Fund had overall negative returns
during the performance period. The base fee payable to IMCO under each
Proxy Statement - 19
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, 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.
|X| 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.
As detailed in the following table, 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.
USAA family of funds - 20
===============================================================================
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%
- -------------------------------------------------------------------------------
[footnote]
(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, LLC (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.*
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-managers 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.
[footenote]
* 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
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
Composite 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 5- 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 March 31, 2006, the
Fund's Lipper ranking since Marsico was hired in 2002 was 16%, which means
it outperformed 84% of the funds in its Lipper category. The tables below
show the Fund's Lipper ranking as of March 31, 2006, in which the one- and
three-year periods reflect solely Marsico's management of the Fund and as
of June 30, 2002 (before Marsico was hired).
=========================================================
LIPPER RANKING AS OF MARCH 31, 2006
LIPPER LARGE-CAP GROWTH FUNDS CATEGORY
- ---------------------------------------------------------
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
(BEFORE MARSICO WAS HIRED)
LIPPER MID-CAP GROWTH FUNDS CATEGORY*
- ---------------------------------------------------------
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%
- ---------------------------------------------------------
* Before Marsico was hired, Lipper classified the Fund
as a mid-cap growth fund.
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.
=========================================================
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
structure of this Fund. The Board and IMCO believe that increasing the
breakpoint thresholds for the existing base management fee and reducing the
transfer
USAA family of funds - 22
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.
|X| 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 New 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 objective(s), 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.
|X| 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:
|X| 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;
|X| 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
|X| 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-managers
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, 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 New Fund and its respective shareholders and unanimously
approved the adoption of each New Advisory Agreement and New Subadvisory
Agreement.
|X| WHAT PERCENTAGE OF SHAREHOLDERS' VOTES IS REQUIRED TO APPROVE PROPOSAL 2?
Approval of Proposal 2 will require the "FOR" 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 "FOR" vote 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 "FOR" vote of a "majority of the
aggregate number of shares entitled to vote" for all other Existing Funds
entitled to vote on Proposal 2.
Proxy Statement - 23
|X| 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, Texas 78288.
WAYS TO VOTE
As described in greater detail on page 1 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
Meeting. With respect to each proposal on which shareholders of USAA Mutual
Fund, Inc., USAA Tax Exempt Fund, Inc., and USAA Investment Trust are entitled
to vote, a majority of shares of the Funds entitled to vote, represented in
person or by proxy, is required to constitute a quorum at the Meeting. With
respect to the proposal on which shareholders of USAA Mutual Funds Trust are
entitled to vote, 30% of the shares of the Funds entitled to vote, represented
in person or by proxy, is required to constitute a quorum at the Meeting.
Your vote will be counted at the Meeting if cast in person or by proxy. The
election inspectors will count:
O Votes cast "FOR" approval of each proposal to determine whether
sufficient affirmative votes have been cast; and
O 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
$200,000. The exact cost will depend upon the services rendered. Legal costs,
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. IMCO will bear expenses exceeding a Fund's voluntary expense cap.
IMCO also will bear the costs of internal personnel necessary to plan, prepare,
and execute the project in connection with the reorganizations.
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
SHARES OWNED BY USAA
As of April 30, 2006, United Services Automobile Association (USAA), a Texas
reciprocal interinsurance exchange, beneficially owned shares of each Fund as
follows:
========================================================================
FUND NUMBER OF SHARES PERCENTAGE OF FUND
------------------------------------------------------------------------
Intermediate-Term Fund 2,293,000 1.1%
Money Market Fund 3,000 0.0%*
Total Return
Strategy Fund 2,500,000 10.3%
*Represents less than 0.1% 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. In addition, certain
financial intermediaries, such as IMCO, which hold shares in accounts for their
customers, may have similar voting authority.
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 MUTUAL
FUND, INC. TRUST EXEMPT FUND, INC. FUNDS TRUST
USAA TAXABLE BOND FUNDS
- ----------------------------------------------------------------------------------------------------------------
GNMA TRUST 56,645,522
HIGH-YIELD OPPORTUNITIES FUND 49,681,382
INCOME FUND 147,337,430
INTERMEDIATE-TERM BOND FUND 42,012,052
SHORT-TERM BOND FUND 49,680,634
USAA TAX EXEMPT BOND FUNDS
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM FUND 170,559,250
INTERMEDIATE-TERM FUND 212,403,024
SHORT-TERM FUND 108,113,265
CALIFORNIA BOND FUND 62,803,439
NEW YORK BOND FUND 11,772,468
VIRGINIA BOND FUND 46,523,249
FLORIDA TAX-FREE INCOME FUND 27,782,029
USAA ASSET ALLOCATION FUNDS
- ----------------------------------------------------------------------------------------------------------------
BALANCED STRATEGY FUND 42,484,955
CORNERSTONE STRATEGY FUND 64,403,158
GROWTH AND TAX STRATEGY FUND 13,381,299
TOTAL RETURN STRATEGY FUND 24,274,350
USAA EQUITY FUNDS
- ----------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND 37,262,566
CAPITAL GROWTH FUND 17,324,752
EMERGING MARKETS FUND 19,014,272
FIRST START GROWTH FUND 23,495,249
PRECIOUS METALS AND MINERALS FUND 21,606,148
GROWTH FUND 63,651,598
GROWTH & INCOME FUND 76,183,112
INCOME STOCK FUND 134,904,774
INTERNATIONAL FUND 38,041,232
SCIENCE & TECHNOLOGY FUND 33,539,758
SMALL CAP STOCK FUND 26,203,300
VALUE FUND 23,791,051
WORLD GROWTH FUND 20,977,221
USAA INDEX FUNDS
- ----------------------------------------------------------------------------------------------------------------
EXTENDED MARKET INDEX FUND 16,588,437
NASDAQ-100 INDEX FUND 24,901,409
S&P 500 INDEX FUND 149,695,070
USAA MONEY MARKET FUNDS
- ----------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND 4,136,792,370
TREASURY MONEY MARKET TRUST 183,960,710
TAX EXEMPT MONEY MARKET FUND 2,339,197,578
CALIFORNIA MONEY MARKET FUND 507,701,620
NEW YORK MONEY MARKET FUND 81,818,554
VIRGINIA MONEY MARKET FUND 217,690,619
FLORIDA TAX-FREE MONEY MARKET FUND 134,314,980
- ----------------------------------------------------------------------------------------------------------------
TOTALS 5,053,044,944 484,788,867 3,758,583,066 162,097,009
- ----------------------------------------------------------------------------------------------------------------
USAA family of funds - 26
LARGE SHAREHOLDERS
The following table identifies all persons other than USAA and its affiliates,
who, as of April 30, 2006, owned beneficially 5% or more of any Fund's shares.
==================================================================================================================
NAME AND ADDRESS OF
FUND BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OF FUND
- ------------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund Brown Brothers Harriman & Co. 2,471,378 6.6%
Cust Invst Management - Cash
Attn R&A - Investment Fund Global
Distribution Center
525 Washington Blvd
Jersey City, NJ 07310
- ------------------------------------------------------------------------------------------------------------------
California Money Market Fund Idanta Partners Ltd 28,476,506 5.6%
12526 High Bluff Dr Ste 160
San Diego, CA 92130
- ------------------------------------------------------------------------------------------------------------------
California Money Market Fund Clark Wilmot Valentine 25,573,826 5.0%
Susan Jane Valentine
JTWROS
21702 Montbury
El Toro, CA 92630
- ------------------------------------------------------------------------------------------------------------------
High-Yield Opportunities Fund USAA Brokerage Services 49,681,382 12.1%
Attn: Michelle Graham
for the exclusive benefit of
our customers
9800 Fredericksburg Road
San Antonio, TX 78288
- ------------------------------------------------------------------------------------------------------------------
Intermediate-Term Bond Fund USAA Brokerage Services 42,012,052 5.2%
Attn: Michelle Graham
for the exclusive benefit of
our customers
9800 Fredericksburg Road
San Antonio, TX 78288
- ------------------------------------------------------------------------------------------------------------------
Precious Metals and Minerals Fund Pershing LLC 1,395,723 6.5%
Attn Mutual Funds
1 Pershing Plaza
Jersey City, NJ 07399
- ------------------------------------------------------------------------------------------------------------------
Short-Term Fund Robert M. Kommerstad 8,016,132 7.4%
Lila M. Kommerstad
Trst Kommerstad Fam Trust
DTD 05/16/88
218 Deodar Ln
Bradbury, CA 91010
- ------------------------------------------------------------------------------------------------------------------
Short-Term Bond Fund USAA Brokerage Services 49,680,634 10.1%
Attn: Michelle Graham
for the exclusive benefit of
our customers
9800 Fredericksburg Road
San Antonio, TX 78288
==================================================================================================================
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 any Fund.
Proxy Statement - 27
DATE FOR RECEIPT OF SHAREHOLDERS' PROPOSALS
FOR SUBSEQUENT SHAREHOLDER MEETINGS
Under relevant state law and the Funds' organizational documents and applicable
law, no annual meeting of shareholders is required. The Funds currently do 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
a Fund within a reasonable period of time prior to any such shareholder meeting.
Shareholders collectively holding at least 10% of the outstanding shares of the
Fund may request a shareholder meeting at any time for the purpose of voting to
remove one or more of the trustees. The Fund will assist in communicating to
other shareholders about such meeting.
FINANCIAL INFORMATION
EACH FUND, WITHOUT CHARGE, WILL FURNISH TO YOU UPON REQUEST A COPY OF 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 Funds' investment adviser,
distributor, and administrator. USAA Transfer Agency Company (d/b/a USAA
Shareholder Account Services (SAS), serves as the Funds' 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.
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, INC.
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 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 Reorganizations, 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, First Start 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 and represents current 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 C - 33
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 1940 Act. Again, the 33 1/3%
limit in the Existing Funds' policy was derived from and represents current 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 and the Total
Return Strategy Fund, is a diversified fund 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 Reorganizations, 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
Reorganizations, only four New Funds -- the Aggressive Growth Fund, the
Nasdaq-100 Index Fund, the Precious Metals and Minerals Fund, and the Total
Return Strategy Fund -- 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 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 - 34
CONCENTRATION
The restrictions for each Existing Fund limit 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 Market 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 C - 35
====================================================================================================================================
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 industry or
which would cause more than 25% of the group of industries within the meaning of the 1940 Act,
value of that Fund's total assets at the [I.E., the Precious Metals and Minerals Fund, the Nasdaq-100
time of such purchase to be invested in Index Fund, and the Extended Market Index Fund], the Fund
securities the interest upon which is may not purchase the securities of any issuer (other than
derived from revenues or projects with securities issued or guaranteed by the U.S. government or any
similar characteristics, such as toll road of its agencies or instrumentalities) if, as aresult, more
revenue bonds, housing revenue bonds, than 25% of the fund's total assets would be invested in the
electric power project revenue bonds, or securities of companies whose principal business activities
in industrial revenue bonds which are are in the same 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
each Money Market Fund, certificates of
deposit and banker's acceptances of
domestic banks.
- ------------------------------------------------------------------------------------------------------------------------------------
USAA family of funds - 36
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 C - 37
AFFILIATED TRANSACTIONS
Certain Existing Funds have 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). As a result of the elimination of these
fundamental investment restrictions, certain transactions currently prohibited
would now be permitted, to the extent the transactions comply with applicable
laws, rules, and regulations. More specifically, an officer or director of a
Fund or IMCO may now individually own more than one-half of one percent (1/2%)
of the securities of an issuer that the Fund owns, and collectively the officers
and directors of the Fund and IMCO may together own more than 5% of the
securities of an issuer that the Fund owns, so long as these transactions comply
with applicable laws, rules, and regulations. 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.
- --------------------------------------------------------------------------------------------------------------------------
USAA family of funds - 38
====================================================================================================================================
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
Exhibit C - 39
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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. 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 - 40
OPERATION AS A REGISTERED INVESTMENT COMPANY
The New Funds have not adopted a fundamental restriction to operate as an
investment company because it duplicates current requirements under the 1940
Act, which permit a fund to cease operating as a Registered Investment Company
only if approved by shareholders.
====================================================================================================================================
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, gas, 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 C - 41
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 - 42
EXHIBIT D
COMPARISON OF CERTAIN ATTRIBUTES OF USAA MUTUAL FUNDS TRUST,
THE MARYLAND FUNDS, AND THE MASSACHUSETTS FUNDS
SHAREHOLDER LIABILITY
Generally, liability is limited for shareholders of USAA Mutual Funds Trust to
the same extent as for shareholders of the Maryland and Massachusetts Funds. The
Trust Instrument for USAA Mutual Funds Trust provides that shareholders are not
personally liable for the liabilities incurred by, contracted for, or otherwise
existing with respect to USAA Mutual Funds 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 USAA Mutual
Funds 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
the liquidation 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 USAA Mutual Funds 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 USAA Mutual Funds Trust, the
Maryland Funds, and the Massachusetts Funds are generally not personally liable
to the respective entity or for any obligation of the entity unless there are
certain "bad acts" (E.G., willful misfeasance, bad faith, gross negligence, or
reckless disregard of their duties) 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 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 USAA Mutual Funds Trust.
RIGHTS OF INSPECTION
The primary difference is that shareholders of USAA Mutual Funds 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
USAA Mutual Funds 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.
USAA Mutual Funds 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
USAA Mutual Funds Trust. For the Maryland Funds, the minimum percentage is 25%,
which is higher than for USAA Mutual Funds Trust, unless the matter is for
removal of directors, in which case, the minimum percentage is 10%, similar to
USAA Mutual Funds Trust.
Exhibit D - 43
Shareholders of USAA Mutual Funds Trust and the 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 USAA Mutual Funds Trust would 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 USAA Mutual Funds
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 USAA Mutual Funds
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 USAA Mutual
Funds 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 USAA Mutual
Funds 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 USAA Mutual Funds 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. USAA Mutual Funds Trust will not issue share certificates to any
shareholder, and as part of the Reorganizations, the existing share certificates
of the Existing Funds will have to be surrendered, or alternatively will be
canceled.
PAYMENT OF INCOME AND CAPITAL GAIN 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 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
USAA Mutual Funds 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 - 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 fees, audit-related fees, and tax fees 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 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, 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 PROVIDED 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 $0 $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
57845-0506 (C) 2006, USAA. All rights reserved.
[all funds except the Florida Funds]
[USAA USAA
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO(R)] OF FUNDS 2 p.m., Central Time, on July 19, 2006
[USAA FUND NAME]
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
All properly executed voting instructions
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.
=========================================
TO VOTE BY INTERNET
1) Read the Proxy Statement and have
the proxy card below at hand.
2) Go to Web site www.proxyvote.com.
3) Follow the instructions provided
on the Web site.
TO VOTE BY TELEPHONE
1) Read the Proxy Statement and have the
proxy card below at hand.
2) Call 1-800-690-6903.
3) Follow the instructions.
===========================================
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appear(s0 on this
card. When signing as attorney, trustee,
executor, administrator, guardian or
corporation officer, please give your FULL
title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS' BOARD OF TRUSTEES.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR VOTING INSTRUCTION
CARD.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
===============================================================================
[USAA FUND NAME]
PROPOSAL 1
To re-elect the following individuals as Trustees
of the Fund:
(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, Ph.D. __ __ __ and the write the nominee's
(4) Michael F. Reimherr number on the line below.
(5) Christopher W. Claus ________________________
PROPOSAL 2 For Against Abstain
To Approve the Reorganization [ ] [ ] [ ]
By my signature below, I appoint Debra K. Dunn and Roberto Galindo, Jr. as the
attorneys to vote, as specified above, all Fund shares that I am entitled to
vote at the Special Meeting of Shareholders to be held on 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 the attorneys above may appoint substitutes to vote these shares on their
behalf. A majority of the 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 the 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 Notice of Special Meeting and Proxy
Statement.
[ / ] [ / ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
================================================================================
[Florida Funds proxy card]
[USAA USAA
EAGLE FAMILY PROXY FOR THE SHAREHOLDER MEETING
LOGO(R)] OF FUNDS 2 p.m., Central Time, on July 19, 2006
[USAA FLORIDA FUND NAME]
P.O. BOX 659442
SAN ANTONIO, TX 78265-9442
All properly executed voting instructions
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.
=========================================
TO VOTE BY INTERNET
1) Read the Proxy Statement and have
the proxy card below at hand.
2) Go to Web site www.proxyvote.com.
3) Follow the instructions provided
on the Web site.
TO VOTE BY TELEPHONE
1) Read the Proxy Statement and have the
proxy card below at hand.
2) Call 1-800-690-6903.
3) Follow the instructions.
===========================================
Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appear(s) on this
card. When signing as attorney, trustee,
executor, administrator, guardian or
corporation officer, please give your FULL
title.
THIS PROXY IS SOLICITED ON BEHALF OF THE
FUNDS' BOARD OF TRUSTEES.
NOTE: IF YOU VOTE BY PHONE OR INTERNET,
PLEASE DO NOT RETURN YOUR VOTING INSTRUCTION
CARD.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
================================================================================
[USAA FLORIDA FUND NAME]
PROPOSAL 1
To re-elect the following individuals as Trustees
of the Fund:
(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, Ph.D. __ __ __ and the write the nominee's
(4) Michael F. Reimherr number on the line below.
(5) Christopher W. Claus _______________________
By my signature below, I appoint Debra K. Dunn and Roberto Galindo, Jr. as the
attorneys to vote, as specified above, all Fund shares that I am entitled to
vote at the Special Meeting of Shareholders to be held on 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 the attorneys above may appoint substitutes to vote these shares on their
behalf. A majority of the 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 the 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 Notice of Special Meeting and Proxy
Statement.
[ / ] [ / ]
SIGNATURE [PLEASE SIGN WITHIN BOX] DATE SIGNATURE (JOINT OWNERS) DATE
================================================================================