CONFIDENTIAL DRAFT
FINAL - APPROVED MAY 26, 2006
CONFIDENTIAL
FOR INTERNAL USE ONLY
DO NOT DISTRIBUTE
2006 PROXY STATEMENT
FOR USE ON MEDIA CALLS BETWEEN MAY 26, 2006 AND JULY 19, 2006
SUMMARY
PURPOSE OF THE PROXY
Shareholders are being asked to:
* Re-elect trustees
* Approve plans of reorganization
The reorganizations would benefit the 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.
PROPOSALS
PROPOSAL 1 - Re-elect Trustees
* The Board of Trustees has adopted a policy that each Trustee be elected
or re-elected at least once every five years.
* The last time the Board of Trustees was presented to shareholders for
election was July 2001, so it is now time to present the Board of
Trustees to shareholders for re-election.
PROPOSAL 2 - Approve Plans of Reorganization
* Shareholders are being asked to approve plans of reorganization for the
existing Funds (except the Florida Tax-Free Income Fund and the Florida
Tax-Free Money Market Fund).
* The USAA family of funds currently consists of 39 mutual funds. Each
Fund is a series of one of four legal entities: USAA Mutual Fund, Inc.,
USAA Tax Exempt Fund, Inc., USAA Investment Trust, and USAA Mutual Funds
Trust (formerly USAA State Tax-Free Trust). USAA Mutual Fund, Inc., and
USAA Tax Exempt Fund, Inc. are each organized as Maryland corporations.
USAA Investment Trust and USAA Mutual Funds Trust are organized as a
Massachusetts business trust and a Delaware statutory trust,
respectively. To date, each of these four entities has been governed by
boards of directors or boards or trustees comprised of the same
individuals for financial and operational efficiencies.
* Because shareholders of the Florida Tax-Free Income Fund and the Florida
Tax-Free Money Market Fund are already Funds of USAA Mutual Funds Trust,
they are not required to vote on a reorganization, and they are entitled
to vote only on Proposal 1.
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.
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* It is expected that the Notice of Special Meeting, the proxy card, the
proxy summary, and the proxy statement will be mailed to shareholders of
record on or about May 26, 2006.
SHAREHOLDER MEETING
Wednesday, July 19, 2006, at 2 p.m. CT in the McDermott Auditorium of the USAA
Building.
MORE INFORMATION: Shareholders of record date had a proxy statement and proxy
card mailed to them. Copies of the final proxy statement are available for free
at the SEC's website at WWW.SEC.GOV
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DETAILS ABOUT THE PROPOSALS
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PROPOSAL 1
ELECTION OF BOARD OF DIRECTORS
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FUNDS AFFECTED
* All Funds
PROPOSAL
* Re-elect the five Trustees of each Fund.
WHY?
* The Board of Trustees has adopted a policy that each Trustee be elected
or re-elected at least once every five years. The last time the Board of
Trustees was presented to shareholders for election was July 2001, so it
is now time to present the Board of Trustees to shareholder for
re-election.
* Each of the five nominees currently serves on the Funds' Board of
Trustees and was elected or re-elected in 2001.
WHO ARE THE CURRENT TRUSTEES?
* INDEPENDENT TRUSTEES*
o Richard A. Zucker
o Barbara B. Dreeben
o Robert L. Mason, Ph.D.
o Michael F. Reimherr
* MANAGEMENT TRUSTEE
o Christopher W. Claus
* Dr. Laura Starks recently resigned from the Board of Trustees.
APPROVAL
* The nominees for Trustees of the Funds receiving the vote of a plurality
of the outstanding voting shares of each of the four Companies and
Trusts cast at a meeting shall be elected, provided a quorum is present.
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PROPOSAL 2
APPROVE PLANS OF REORGANIZATION
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FUNDS AFFECTED
* All Funds (except for the Florida Tax-Free Income Fund and the Florida
Tax-Free Money Market Fund).
PROPOSAL
* Organize all Funds under the same legal entity (USAA Mutual Funds Trust,
formerly known as USAA State Tax-Free Trust) that is subject to the same
state law (Delaware), the same governing documents, and the same legal
requirements regarding the operation of each Fund.
* The primary purposes of the proposed Reorganizations are to seek future
economies of scale and to eliminate certain costs, some of which are
paid by the Funds, associated with operating four different legal
entities organized in three different states, each of which has
different fundamental investment restrictions.
* On April 19, 2006, the Board of each existing Fund, except the Florida
Tax-Free Income Fund and the Florida Tax-Free Money Market Fund (each an
Existing Fund), approved a series of initiatives that are designed to
streamline and modernize the operations of the Existing Funds by
organizing all of the USAA family of funds into one legal entity,
leaving all Funds (New Funds) subject to one state law and one set of
governing documents.
* After the reorganizations there will be one legal entity (USAA Mutual
Funds Trust) operating under one uniform set of legally required
investment restrictions.
WHY?
* Currently, the USAA family of funds are organized under four different
legal entities subject to three different state laws that have different
governing documents and requirements for, among other things,
shareholder meetings and shareholder approval.
* The primary purpose of the proposed reorganizations is to seek future
economies of scale and to eliminate certain costs associated with
operating four different legal entities organized in three different
states.
* Also, the reorganization will permit the funds to develop uniform and
modern fundamental investment restrictions to seek additional efficiency
of operations.
APPROVAL
* Shareholders of each Fund are being asked to vote separately. By voting
"FOR" Proposal 2, shareholders of a Fund will effect all the actions
that are applicable to that Fund.
* Approval of Proposal 2 will require the "yes" vote of a "majority of the
outstanding voting securities," as provided in the 1940 Act, of the
following Funds: Balanced Strategy Fund, Cornerstone Strategy Fund,
Growth and Tax Strategy Fund, Emerging Markets Fund, Precious Metals and
Minerals Fund, International Fund, World Growth Fund, GNMA Trust, and
Treasury Money Market Trust.
* Approval of Proposal 2 will require the "yes" vote of a "majority of the
aggregate number of shares entitled to vote: for all other Existing
Funds entitled to vote on Proposal 2.
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IF APPROVED, THE REORGANIZATIONS WILL HAVE THE FOLLOWING EFFECTS WITH RESPECT TO
THE NEW FUNDS:
1. If elected, the same Trustees nominated for re-election in Proposal 1
will serve as Trustees for the New Funds.
2. The New Funds will enter into investment advisory agreements with IMCO
that are substantially similar to the agreements currently in place
with respect to the Existing Funds, except that, as discussed below,
there will be changes to the Lipper Indexes used to compute the
performance adjustment for three of the New Funds, a provision will be
added permitting the Board to change a New Fund's benchmark without
shareholder approval, there will be a change to the advisory and
transfer agency fees of one of the New Funds, and, similar to the
equity funds, there will be a change to permit IMCO to implement a
manager-of 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 to the agreements currently in place with
respect to the Existing Funds.
4. The investment objective(s) of each New Fund will be classified as
non-fundamental, meaning that the Board of the New Funds may change the
investment objective(s) in light of market circumstances or other
events, without shareholder approval.
5. The investment objective of the New Funds corresponding to the First
Start Growth Fund, the International Fund, and the Precious Metals and
Minerals Fund will be revised.
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.
7. The New Funds will adopt more modernized and streamlined fundamental
investment restrictions than those currently in effect for the Existing
Funds.
8. The Lipper Indexes used to compute the performance adjustment for the
New Funds corresponding to the Capital Growth Fund, the First Start
Growth Fund, and the Growth and Tax Strategy Fund will be changed to a
Lipper Index that is more appropriate to the investment strategies of
each of the Existing Funds.
9. Under the new advisory agreement for all Funds in the USAA family of
funds, IMCO will have the ability to hire, replace, or terminate
subadvisers with Board approval alone. IMCO does not have any present
intention to hire subadvisers to manage the day-to-day activities of
the Precious Metals and Minerals Fund, or any fixed income or money
market fund.
10. The transfer agency fee of the New Fund corresponding to the Aggressive
Growth Fund will be reduced and the average net asset breakpoints
applicable to the base advisory fee will be increased to make the
Fund's pricing structure more competitive with comparable funds and
enable IMCO to continue retaining leading money managers in this asset
class to manage the Fund's assets.
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