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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-2
American Odyssey Funds, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of Each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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THE TRAVELERS INSURANCE COMPANY
AMERICAN ODYSSEY FUNDS, INC.
Dear Contract Owner:
American Odyssey Funds, Inc. ("AOF") will hold a special meeting of persons
having voting rights with respect to the American Odyssey Short-Term Bond Fund
and the American Odyssey Emerging Opportunities Fund, each a portfolio of AOF,
at the offices of The Copeland Companies, Two Tower Center, East Brunswick, New
Jersey, on April 24, 1998, at 10:00 a.m.
The attached Notice and Proxy Statement discuss the issues to be considered
at the meeting: (1) for the Short-Term Bond Fund, three interrelated proposals
that together would permit the conversion of the Fund to a new Fund, the Global
High-Yield Bond Fund, which would invest primarily in high-yield debt securities
(sometimes called "junk bonds") from the United States and abroad; and (2) for
the Emerging Opportunities Fund, a proposal to hire a new subadviser, Chartwell
Investment Partners, for the Fund and to raise the maximum fee rate that may be
paid to the Fund's subadvisers. The AOF Board of Directors has considered each
of the proposals and determined that its approval is in the best interest of
contract owners with a beneficial interest in the respective Fund.
You, as the owner of a variable annuity or variable life insurance contract
with a beneficial interest in the Short-Term Bond Fund and/or the Emerging
Opportunities Fund as of the record date of February 9, 1998, are entitled to
instruct The Travelers Insurance Company how to vote the number of shares
representing your beneficial interest in the respective Fund as of the close of
business February 9, 1998.
YOU HAVE RECEIVED EITHER ONE OR TWO VOTING INSTRUCTION CARDS, DEPENDING
UPON WHETHER YOU HAVE A BENEFICIAL INTEREST IN ONE OR BOTH OF THE SHORT-TERM
BOND FUND AND THE EMERGING OPPORTUNITIES FUND. WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING, PLEASE SPECIFY YOUR CHOICES AND SIGN, DATE, AND RETURN THE ENCLOSED
VOTING INSTRUCTION CARD OR CARDS IN THE ENCLOSED SELF-ADDRESSED ENVELOPE, WHICH
REQUIRES NO POSTAGE. IN ORDER TO BE GIVEN EFFECT, YOUR VOTING INSTRUCTIONS MUST
BE RECEIVED NO LATER THAN APRIL 17, 1998.
If you have questions about these materials, please contact AOF at
1-800-242-7884.
March 16, 1998 The Travelers Insurance Company
American Odyssey Funds, Inc.
<PAGE> 4
AMERICAN ODYSSEY FUNDS, INC.
TWO TOWER CENTER
EAST BRUNSWICK, NJ 08816
NOTICE OF SPECIAL MEETING OF PERSONS HAVING VOTING RIGHTS WITH RESPECT TO THE
AMERICAN ODYSSEY SHORT-TERM BOND FUND AND THE AMERICAN ODYSSEY EMERGING
OPPORTUNITIES FUND
APRIL 24, 1998
You are hereby notified that a special meeting of persons having voting
rights with respect to the American Odyssey Short-Term Bond Fund and the
American Odyssey Emerging Opportunities Fund (collectively, the "Funds"), each a
portfolio of American Odyssey Funds, Inc. ("AOF"), will be held on April 24,
1998, at 10:00 a.m. at the offices of The Copeland Companies, Two Tower Center,
East Brunswick, New Jersey for the following purposes:
1. FOR THE SHORT-TERM BOND FUND ONLY: To consider three interrelated
proposals that together would convert the American Odyssey Short-Term
Bond Fund into the American Odyssey Global High-Yield Bond Fund, which
would invest primarily in high-yield debt securities (sometimes called
"junk bonds") from the United States and abroad:
a. To approve or disapprove changes to the Fund's investment objective
and policies;
b. To approve or disapprove a new investment subadvisory agreement
with BEA Associates; and
c. To approve or disapprove amendments to the investment management
agreement with American Odyssey Funds Management, Inc.
2. FOR THE EMERGING OPPORTUNITIES FUND ONLY: To approve or disapprove a new
subadvisory agreement and amendments to the investment management
agreement to add Chartwell Investment Partners as a new subadviser for
the Emerging Opportunities Fund and to increase the maximum fee rate
that may be paid to subadvisers of the Emerging Opportunities Fund.
3. To consider and transact such other business that may properly come
before the meeting.
In accordance with the AOF By-Laws, the number of votes entitled to be cast
was determined as of February 9, 1998. Only those persons who had voting rights
with respect to one or both Funds as of February 9, 1998 are
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entitled to notice of, and to vote at, the meeting. If you plan to attend the
meeting, please call 1-800-242-7884.
By order of the Board of Directors.
Paul S. Feinberg
Senior Vice President and Secretary
March 16, 1998
<PAGE> 6
AMERICAN ODYSSEY FUNDS, INC.
SPECIAL MEETING OF PERSONS HAVING VOTING RIGHTS WITH RESPECT TO THE AMERICAN
ODYSSEY SHORT-TERM BOND FUND AND THE AMERICAN ODYSSEY EMERGING OPPORTUNITIES
FUND
APRIL 24, 1998
PROXY STATEMENT
The Board of Directors of American Odyssey Funds, Inc. ("AOF") hereby
solicits voting instructions for a special meeting of persons having voting
rights with respect to the American Odyssey Short-Term Bond Fund and the
American Odyssey Emerging Opportunities Fund (each, a "Fund," and collectively,
the "Funds"). The meeting will be held on April 24, 1998, at 10:00 a.m. at the
offices of The Copeland Companies, Two Tower Center, East Brunswick, New Jersey,
and at any and all adjournments thereof. The approximate date on which this
proxy statement and the voting instruction card(s) will first be sent to persons
having voting rights is March 16, 1998.
The record date for determination of persons entitled to vote for purposes
of this special meeting ("persons having voting rights") was February 9, 1998.
Each of the Funds is a separate portfolio of AOF. AOF also includes four other
portfolios, but none of those portfolios are affected by the proposals discussed
in this proxy statement. Each portfolio issues a separate class of capital stock
representing an interest in that portfolio. As of the record date, the
Short-Term Bond Fund had 5,807,583.136 shares outstanding, and the Emerging
Opportunities Fund had 18,352,278.375 shares outstanding. No person or entity
beneficially owns more than 5% of the outstanding stock of either Fund.
More than 97% of each Fund's shares are held by The Travelers Insurance
Company ("Travelers") in separate accounts funding variable annuity and variable
life insurance contracts. Pursuant to current law, AOF anticipates that
Travelers will request voting instructions from contract holders, and will vote
the shares represented by the value of the each contract owner's contract
allocated to the particular Fund in accordance with the instructions received.
Travelers will vote Fund shares held in a separate account for which it does not
receive properly executed voting instructions in the same proportion as it votes
shares of that Fund held in that separate account for which it does receive
properly executed voting instructions. With respect to Fund shares held by
qualified plans, AOF will
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distribute proxy materials to shareholders of record, and will vote the shares
in accordance with any instructions received from them.
Each person having voting rights in a Fund is entitled to have the number
of shares related to his or her interest in that Fund voted in accordance with
his or her instructions. Each full share shall have one vote, and each
fractional share shall have a proportionate fractional vote. The votes of
persons who abstain are not counted. If a person having voting rights submits a
properly executed voting instruction card but omits voting instructions with
respect to any item, the appropriate number of shares will be voted as if the
person had given instructions to vote for approval of the item.
Voting instructions, in order to be effective, must be received by
Travelers or AOF prior to the close of business on April 17, 1998. Such
instructions may be revoked provided written notice of revocation is received
prior to the close of business on April 17, 1998. Alternatively, persons having
voting rights may attend the meeting and vote in person, in which case any prior
instructions will be revoked. This solicitation is being made by mail, but it
may also be made by telephone, telecopier, or personal interview. AOF's overall
investment adviser, American Odyssey Funds Management, Inc. (the "Manager"), or
an affiliate will bear the costs of this solicitation attributed by the Manager
to Proposal 1, and the Emerging Opportunities Fund will bear the costs of this
solicitation attributed by the Manager to Proposal 2.
UPON REQUEST, AOF WILL FURNISH, WITHOUT CHARGE, A COPY OF THE MOST RECENT
ANNUAL REPORT TO ANY PERSON HAVING VOTING RIGHTS. IF YOU WISH TO OBTAIN A COPY
OF THIS REPORT, MAIL A REQUEST TO AMERICAN ODYSSEY FUNDS MANAGEMENT, INC., TWO
TOWER CENTER, EAST BRUNSWICK, NEW JERSEY 08816, OR CALL 1-800-242-7884.
PERSONS VOTING ON EACH PROPOSAL
Four proposals are scheduled to be considered at the special meeting. As
shown in the table below:
- The first three proposals (the "Short-Term Bond Fund Proposals"), which
are interrelated and which are numbered Proposals 1(a), 1(b), and 1(c),
affect only the Short-Term Bond Fund. Only persons having voting rights
with respect to the Short-Term Bond Fund will vote on the Short-Term Bond
Fund Proposals. IN ADDITION, NONE OF THESE THREE PROPOSALS WILL BE
ADOPTED UNLESS PERSONS HAVING VOTING RIGHTS APPROVE ALL THREE OF THEM.
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- The last proposal (the "Emerging Opportunities Fund Proposal"), which is
numbered Proposal 2, affects only the Emerging Opportunities Fund. Only
persons having voting rights with respect to the Emerging Opportunities
Fund will vote on the Emerging Opportunities Fund Proposal.
FUND SHARES ELIGIBLE TO VOTE ON EACH PROPOSAL
<TABLE>
<CAPTION>
EMERGING
OPPORTUNITIES SHORT-TERM
FUND BOND FUND
------------- ----------
<S> <C> <C>
To convert the American Odyssey Short-Term Bond Fund into
the American Odyssey Global High-Yield Bond Fund:
Proposal 1(a): To approve changes to the Short-Term Bond
Fund's investment objective and policies................. X
Proposal 1(b): To approve a new investment subadvisory
agreement with BEA Associates............................ X
Proposal 1(c): To approve amendments to the investment
management agreement with American Odyssey Funds
Management, Inc.......................................... X
Note: None of Proposals 1(a), 1(b), and 1(c) will be adopted
unless persons having voting rights approve all three
proposals.
Proposal 2: To approve a new investment subadvisory
agreement and amendments to the investment management
agreement to add Chartwell Investment Partners as a new
subadviser for the Emerging Opportunities Fund and to
increase the maximum fee rate that may be paid to
subadvisers of the Emerging Opportunities Fund.............. X
</TABLE>
INVESTMENT MANAGEMENT AND ADMINISTRATION
American Odyssey Funds Management, Inc. (the "Manager"), Two Tower Center,
East Brunswick, New Jersey 08816, serves as the overall investment adviser to
AOF. The Manager is a wholly-owned, indirect subsidiary of Travelers Group Inc.
and a member of The Copeland Companies (a related group of indirect subsidiaries
of Travelers Group Inc.). Each Fund has one or more subadvisers, who perform the
actual day-to-day investment management of the Fund. The Manager supervises the
performance of the subadvisers and recommends changes if warranted. RogersCasey
Sponsor Services ("RogersCasey"), 1 Parklands Drive, Darien, Connecticut 06820,
assists the Manager in monitoring the performance of the subadvisers and
comparing that performance to that of other investment managers. The Manager
pays RogersCasey's fees; RogersCasey does not receive a fee from AOF.
The Manager provides accounting services to and keeps the accounts and
records of AOF (other than those maintained by the Investors Bank and Trust
Company). The Manager also serves as transfer agent and dividend disbursing
agent. Investors Bank and Trust Company, 200 Claren-
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don Street, Boston, Massachusetts 02116, serves as the custodian of the assets
and is also the accounting services agent for each Fund. The Funds pay the fees
for those services. Investors Bank and Trust Company also assists the Manager in
providing certain administrative services for the Funds, and the Manager, not
AOF, pays the fees for these administrative services. Copeland Equities, Inc.,
Two Tower Center, East Brunswick, New Jersey 08816, a wholly-owned, indirect
subsidiary of Travelers Group Inc., serves as principal underwriter of AOF.
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
serves as AOF's independent accountants, providing audit services.
THE CURRENT MANAGEMENT AGREEMENT
Both the Board of Directors and persons having voting rights have approved
a new Management Agreement that is scheduled to become effective on May 1, 1998.
This new Management Agreement was approved by the Board on February 13, 1997,
and by persons having voting rights on April 23, 1997.
This proxy statement includes three interrelated proposals relating to the
Short-Term Bond Fund ("the Short-Term Bond Fund Proposals") and one proposal
relating to the Emerging Opportunities Fund ("the Emerging Opportunities Fund
Proposal"). Both the Short-Term Bond Fund Proposals and the Emerging
Opportunities Fund Proposal involve amendments to the Management Agreement that
would also become effective May 1, 1998. Thus, if either the Short-Term Bond
Fund Proposals or the Emerging Opportunities Fund Proposal (or both) are
approved, the Management Agreement approved last year will be amended.
Otherwise, the Management Agreement approved last year will still go into effect
in its current form on May 1, 1998. Accordingly, the Management Agreement
approved last year, although not yet effective, is referred to in this proxy
statement as the "Current Management Agreement." The Management Agreement in
effect through April 30, 1998 is described in Appendix A.
The Current Management Agreement sets the Manager's fee for each Fund at an
annual rate of 0.25% of the Fund's average daily net assets. The agreement calls
for each Fund to pay its subadviser(s) directly. The agreement permits AOF to
enter into new subadvisory agreements at fee rates different than those
currently charged, so long as the fee is less than or equal to a specified
maximum rate (expressed as a percentage of average daily net assets). The
maximum rate for the Emerging Opportunities Fund is 0.60%, and the maximum rate
for the Short-Term Bond Fund is 0.35%.
The Current Management Agreement generally requires that the Manager serve
as overall investment adviser for each of the Funds of AOF.
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The agreement requires the Manager to monitor the performance of each
subadviser. It also requires the Manager to meet periodically with each
subadviser to review and agree upon current investment strategies and programs
in light of anticipated cash flows. It requires the Manager to provide periodic
information to the Board of Directors about each Fund and about the subadvisers'
investment performance. The agreement also provides that the Manager shall be
responsible for the administration of AOF. AOF is responsible for the payment of
certain fees and expenses including, among others, the following: (1) management
and investment advisory and subadvisory fees; (2) the fees of non-interested
directors; (3) the fees of the Funds' custodian; (4) the fees of legal counsel
and independent accountants; (5) brokerage commissions incurred in connection
with fund transactions; (6) all taxes and charges of governmental agencies; (7)
the reimbursement of organizational expenses; and (8) expenses of printing and
mailing prospectuses and other expenses related to shareholder communications.
For any Fund with more than one subadviser (which currently is only the Emerging
Opportunities Fund), the agreement authorizes the Manager to determine the
allocation of Fund assets among the subadvisers. As required by the Investment
Company Act of 1940, as amended (the "1940 Act"), the agreement provides that it
shall continue in effect for a period of more than two years only so long as
such continuance is specifically approved at least annually by the Board of
Directors, including a majority of directors who are not "interested persons" of
AOF (as that term is defined in the 1940 Act). AOF and the Manager each have the
right to terminate the agreement with not more than 60 days' nor less than 30
days' written notice.
The following chart shows the advisory fee rates under the Current
Management Agreement (and subadvisory agreements already scheduled to go into
effect on May 1, 1998). The fee rates are expressed as a percentage of average
daily net assets.
EMERGING OPPORTUNITIES FUND
<TABLE>
<CAPTION>
TOTAL MANAGER SUBADVISORY
ASSETS FEE FEE FEE
------ ----- ------- -----------
<S> <C> <C> <C>
First $50 million in assets allocated to
Cowen.................................... 0.75% 0.25% 0.50%
Next $50 million in assets allocated to
Cowen.................................... 0.70% 0.25% 0.45%
Asset over $100 million allocated to
Cowen.................................... 0.65% 0.25% 0.40%
First $100 million in assets allocated to
Wilke/Thompson........................... 0.65% 0.25% 0.40%
Assets over $100 million allocated to
Wilke/Thompson........................... 0.55% 0.25% 0.30%
</TABLE>
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SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
TOTAL MANAGER SUBADVISORY
ASSETS FEE FEE FEE
------ ----- ------- -----------
<S> <C> <C> <C>
First $100 million in assets............... 0.50% 0.25% 0.25%
Assets over $100 million................... 0.40% 0.25% 0.15%
</TABLE>
The Short-Term Bond Fund Proposals would amend the Management Agreement
only with respect to the Short-Term Bond Fund. The Emerging Opportunities Fund
Proposal would amend the Management Agreement only with respect to the Emerging
Opportunities Fund.
Currently, Smith Graham & Co. Asset Managers, L.P. ("Smith Graham") serves
as the Short-Term Bond Fund's subadviser. If all three Short-Term Bond Fund
Proposals are approved, Smith Graham will be replaced. Currently, the Emerging
Opportunities Fund has two subadvisers: Cowen & Co., through its asset
management division, Cowen Asset Management ("Cowen"), and Wilke/Thompson
Capital Management, Inc. ("Wilke/Thompson"). If the Emerging Opportunities
Proposal is approved, Wilke/Thompson, but not Cowen, will be replaced.
Additional information about the Manager appears in Appendix A. Additional
information about each current subadviser appears in Appendix B.
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MEETING PROPOSALS
AOF must receive a proposal intended to be presented at a meeting of
persons having voting rights a reasonable time before the solicitation of
proxies is made, usually 120 days before the mailing. AOF does not ordinarily
hold annual meetings. Therefore, AOF will retain all proposals received from
persons having voting rights, which will then be eligible to be considered for
distribution with the proxy materials for the next called special meeting of
such persons.
SHORT-TERM BOND FUND PROPOSALS
The following three Short-Term Bond Fund Proposals affect, and will be
voted upon by, only persons having voting rights with respect to the American
Odyssey Short-Term Bond Fund.
The Board of Directors recommends approval of the three Short-Term Bond
Fund Proposals, which together would convert the American Odyssey Short-Term
Bond Fund (the "Old Fund") into a new Fund, the American Odyssey Global
High-Yield Bond Fund (the "New Fund"). If persons having voting rights approve
all three proposals, the conversion will occur, and the New Fund will
essentially become a fund entirely different from the Old Fund. The Old Fund
invests primarily in investment-grade, short-term debt securities. The New Fund
would invest primarily in high-yield debt securities (sometimes referred to as
"junk bonds"), which typically are rated below investment grade, from the United
States and abroad. The proposed investment program of the New Fund involves
substantially greater risk and volatility than the current investment program of
the Old Fund. It also offers potentially greater return over the long term. In
addition, the New Fund's advisory fees and other expenses will be somewhat
higher than the Old Fund's.
In order for this conversion to occur, persons having voting rights must
approve three interrelated proposals. Specifically, persons having voting rights
must approve:
Proposal 1(a): Changes to the Old Fund's investment objective and
investment restrictions;
Proposal 1(b): An investment subadvisory agreement with a new subadviser
that specializes in investing in domestic and emerging market high-yield
debt securities; and
Proposal 1(c): Amendments to the Management Agreement with American Odyssey
Funds Management, Inc.
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Discussion of these three proposals, along with additional information about the
conversion, appears below.
The Board has concluded that approval of the three Short-Term Bond Fund
Proposals, which together will permit the conversion of the Old Fund into the
New Fund, is in the best interests of the Old Fund and its investors, as well as
of AOF as a whole. Conversion to the New Fund will create an attractive new
investment option for investors in AOF and will eliminate a smaller fund, whose
investment objective and policies closely resemble those of another AOF Fund.
The Board of Directors also believes that approval of the Short-Term Bond
Proposals is in the best interest of persons who participate in the CHART
Program(R) ("CHART Participants"), an asset allocation service. The vast
majority of persons who invest in the Old Fund are CHART participants. For these
and other reasons, the Board has concluded that approval of the three proposals
is in the best interests of the Old Fund and its investors. More detailed
information about the Board's consideration appears in the discussion of each
proposal.
IF PERSONS HAVING VOTING RIGHTS DO NOT APPROVE ALL THREE SHORT-TERM BOND
FUND PROPOSALS, THEN NONE OF THE THREE WILL BE ADOPTED, AND THE CONVERSION WILL
NOT OCCUR.
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PROPOSAL 1(A)
SHORT-TERM BOND FUND
TO CONVERT THE SHORT-TERM BOND FUND
INTO THE GLOBAL HIGH-YIELD BOND FUND:
APPROVAL OF CHANGES
TO THE SHORT-TERM BOND FUND'S
INVESTMENT OBJECTIVE AND RESTRICTIONS
As explained above, this proposal is one of the three interrelated
Short-Term Bond Fund Proposals. Together, these three proposals would permit the
conversion of the Short-Term Bond Fund (the "Old Fund") into the Global
High-Yield Bond Fund (the "New Fund"). This proposal will be adopted only if
persons having voting rights approve all three Short-Term Bond Fund Proposals.
Only persons having voting rights with respect to the Short-Term Bond Fund will
vote on this proposal.
If adopted, and as part of the conversion of the Old Fund into the New
Fund, this proposal would change the investment objective to reflect that the
New Fund, rather than investing in investment-grade, short-term debt securities,
will instead invest in high-yield debt securities (which are sometimes referred
to as "junk bonds" and which typically are rated below investment grade) from
the United States and abroad. This proposal would also change some of the Fund's
investment restrictions to accommodate the new investment objective. These
changes will go into effect on May 1, 1998, if persons having voting rights
approve this and the other two Short-Term Bond Fund Proposals. A detailed
discussion of these proposed changes appears below, following a discussion of
the reasons for the proposed conversion and an explanation of the differences
between the Old Fund and the New Fund.
REASONS FOR THE PROPOSED CONVERSION
Elimination of Old Fund. The Manager has recommended to the Board that the
Old Fund be eliminated for several related reasons. As an initial matter, AOF
seeks to offer Funds that each represent a distinct asset category because most
persons invest in AOF as part of the CHART Program's asset allocation service.
For example, the Core Equity Fund generally focuses on large-cap stocks, the
Emerging Opportunities Fund generally focuses on small-cap stocks, the
International Equity Fund focuses primarily on foreign stock, and the Long-Term
Bond Fund focuses on investment-grade bonds with durations between eight and
twenty-five years. The Old Fund's focus overlaps substantially, however, with
that of the Intermediate-Term Bond Fund. First, the Old Fund's investment
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<PAGE> 15
objective and investment program to achieve that objective are similar to those
of the Intermediate-Term Bond Fund. The Old Fund's investment objective is to
seek maximum long-term total return by investing primarily in investment-grade,
short-term debt securities, while the Intermediate-Term Bond Fund seeks maximum
long-term total return by investing in intermediate-term corporate debt
securities. Thus, the types of securities in which the two Funds
invest -- investment-grade bonds -- are quite similar, and the target duration
ranges of the bonds in which each Fund invests overlap to a large extent. The
dollar-weighted average maturity of the Old Fund's investments generally varies
between one and five years, compared to two to seven years for the
Intermediate-Term Bond Fund. For purposes of asset allocation, CHART
Participants, who have a beneficial ownership interest in the vast majority of
the shares of both Funds, may not need access to two Funds with overlapping
asset category focuses.
In addition, the Old Fund has a small asset base compared to the other AOF
Funds. As a result, the Old Fund is less able to take advantage of economies of
scale, and its expenses are therefore higher than they would otherwise be.
Because of its conservative investment style, the Old Fund's returns over the
long term are generally lower than those of the other Funds, making the expense
issue especially important. The Old Fund's small size may be explained in part
by the fact that the vast majority of the Old Fund's shares fund variable
annuity contracts. Owners of variable annuity contracts tend to have a longer
term outlook that may make a focus on short-term bonds, which emphasize lower
volatility rather than greater return over the long term, less desirable.
For these reasons, the Manager has advised the Board that the
Intermediate-Term Bond Fund can serve the function currently served by the Old
Fund. Persons currently investing in the Old Fund can transfer that investment
to the Intermediate-Term Bond Fund. CHART Participants have received from their
investment adviser information about the conversion and how it will affect them
and their asset allocation. Other persons investing in the Old Fund have
received information about the conversion.
Introduction of New Fund. The Manager also recommended to the Board that
AOF introduce a new fund that focused on high-yield debt securities, including
securities from the United States and from foreign countries, especially
developing markets. The Manager believes that a fund of this type will offer an
attractive investment option to AOF's investors, who will benefit from its
availability. Such a fund would offer the potential for higher expected returns
than AOF's existing fixed-income Funds. Moreover, this type of global high-yield
bond fund would broaden the asset categories available through AOF. The New Fund
would invest in types of
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<PAGE> 16
debt securities not well represented in the portfolios of the other fixed-
income Funds, and its expected performance is likely to have a low correlation
to any of the existing AOF Funds. CHART Participants would benefit from the
availability of such a fund because of the opportunity to diversify among more
diverse asset categories.
Conversion. After exploring a number of alternative methods of phasing out
the Old Fund and introducing the New Fund, the Manager determined that the most
efficient course was simply to convert the Old Fund into the New Fund.
Accordingly, the Manager recommended that alternative to the Board.
THE DIFFERENCES BETWEEN THE NEW FUND AND THE OLD FUND
Conversion of the Old Fund to the New Fund would result in a significant
change in the Fund's investment objective and in the types of securities in
which the Fund invests. Upon conversion, the New Fund would sell most securities
owned by the Old Fund and purchase new securities consistent with the New Fund's
investment objective. The New Fund (and indirectly, its investors) would bear
any brokerage costs associated with these transactions. The investment objective
of the New Fund and its program for achieving that objective is described below,
along with a discussion of how that objective and program differ from those of
the Old Fund.
Investment Objective. The investment objective of the New Fund will be
maximum long-term total return (capital appreciation and income) by investing
primarily in high-yield debt securities (which sometimes are referred to as
"junk bonds" and which typically are rated below investment grade) from the
United States and abroad. In contrast, although the Old Fund also sought
long-term total return, its investment objective required that it invest in
investment-grade, short-term instruments. These latter securities tend to offer
lower income and growth potential but greater stability of capital than
high-yield debt securities because they generally have less risk of default and,
because of their shorter average duration, less sensitivity to interest rate
changes.
Investment Program. As a general matter, the New Fund will invest in debt
securities expected to generate high income. These securities are generally
rated below investment grade and, although they may be of any duration, they
will tend to be of longer duration. In contrast, the Old Fund invests in
investment-grade debt securities that generate less income than high-yield
securities and that have an average duration of one to five years.
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<PAGE> 17
More specifically, to achieve its objective, the New Fund generally will
invest at least 85% of its assets in a diversified portfolio of (1) domestic
high-yield debt securities; (2) foreign high-yield debt securities, particularly
from emerging markets; (3) investment-grade debt securities; (4) equity
securities with high income potential or that are related to debt securities;
(5) mortgage-related securities; (6) asset-backed securities; (7) U.S.
government securities; and (8) money market instruments. In contrast, the Old
Fund does not invest any significant part of its portfolio in domestic or
foreign high-yield securities, emerging markets, or equity securities. The Old
Fund does invest in mortgage-related securities, asset-backed securities, U.S.
government securities, and money market instruments. Each of the instruments in
which the New Fund will invest is discussed below.
Domestic High-Yield Debt. Unlike the Old Fund, the New Fund's portfolio
ordinarily will include a substantial number of bonds and other debt securities
that, as a class, sell at discounts from par value. These securities, sometimes
referred to as junk bonds, are generally rated below investment grade by
nationally recognized statistical rating organizations ("NRSROs") -- for
example, ratings of Ba or lower by Moody's Investors Service, Inc. ("Moody's")
or of BB or lower by Standard & Poor's Corporation ("S&P") -- and are typically
considered high risk securities. The New Fund may also purchase unrated debt
securities of comparable quality. The New Fund may invest in a debt security of
any rating; i.e., it will have no minimum rating, whereas the Old Fund must
invest in securities rated at least Baa by Moody's or BBB by S&P or unrated
securities of similar quality. A description of Moody's and S&P's ratings
appears in Appendix F.
Foreign High-Yield Debt. The New Fund's portfolio ordinarily will also
include bonds or other debt instruments issued by foreign companies or
governmental agencies that, like domestic high-yield debt securities, sell at
discounts from par value. Some or all of these securities may issue from
emerging markets, i.e., countries with limited or developing capital markets.
The Manager anticipates, however, that the Fund's portfolio ordinarily will be
more heavily weighted toward domestic, rather than foreign, high-yield debt
securities. The portfolio's foreign securities may be denominated in foreign or
U.S. currencies. Like their domestic counterparts, these securities are
generally rated below investment grade by NRSROs or are unrated, are typically
considered high risk securities, and may be referred to as junk bonds. In
contrast, although the Old Fund may invest in foreign debt securities, they must
be investment grade rather than high-yield and ordinarily do not issue from
emerging markets.
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Investment-Grade Debt. Both the Old Fund and the New Fund may invest in
investment grade debt, i.e., corporate and other debt securities rated at least
Baa by Moody's or at least BBB by S&P at the time of purchase, or other debt
securities judged to be of comparable quality by another NRSRO or by the
subadviser. (A description of Moody's and S&P's ratings appears in Appendix F.)
Both the Old Fund and the New Fund may invest in investment-grade debt
securities issued in the United States or issued in foreign countries. Foreign
debt securities may be denominated in either U.S. or foreign currencies. It is
anticipated that the New Fund will invest a relatively small proportion of its
assets in investment-grade debt securities, while a majority of the portfolio of
the Old Fund consists of such securities.
Equity Securities. Unlike the Old Fund, the New Fund may invest in certain
equity securities. In particular, the New Fund may invest in equity securities,
including both preferred and common stock, that the subadviser believes has
potential to generate high dividend income. The New Fund may also invest in
convertible securities, warrants, and units that combine debt and equity
securities or that share characteristics of each. The New Fund may retain equity
securities it acquires by exercising conversion options in other securities it
holds. Equity securities held by the New Fund may be may issued by domestic or
foreign corporations. In addition to the risks ordinarily associated with equity
securities, the equity securities in which the New Fund may invest may be
subject to some or all of the risks associated with investment grade and/or
high-yield debt securities.
Mortgage-Related Securities. Both the Old Fund and the New Fund may invest
in mortgage-backed securities issued by the Government National Mortgage
Associate ("GNMA"), the Federal National Mortgage Association ("FNMA"), and the
Federal Home Loan Mortgage Corporation ("FHLMC"). These securities represent an
interest in a pool of mortgages, such as 30-year and 15-year fixed mortgages and
adjustable rate mortgages. For GNMA securities, the payment of principal and
interest on the underlying mortgages is guaranteed by the full faith and credit
of the U.S. government; for FNMA and FHLMC securities the payment of principal
and interest is guaranteed by the issuing agency, but not the U.S. government.
The guarantees, however, do not extend to the securities' value or yield, which
like other fixed income securities, are likely to fluctuate inversely with
fluctuations in interest rates. Mortgage-backed securities have an investment
characteristic that is generally not applicable to other fixed-income
investment-grade securities. When interest rates fall appreciably, mortgage
borrowers tend to refinance and prepay their mortgages, increasing the principal
payments from the pool. The proceeds can
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<PAGE> 19
then be reinvested, but only at lower rates. Thus, although the value of
mortgage-backed securities will generally decrease in the same way as other
bonds when interest rates are rising, their value may not increase as much when
interest rates are falling.
Both the Old Fund and the New Fund may invest in mortgage-backed securities
issued by private entities, such as commercial or mortgage banks, savings and
loan associations, or broker-dealers. With respect to the Old Fund, however,
such securities must be of investment-grade, whereas they need not be for the
New Fund to invest in them. The issuer's obligation may vary, but often it is to
"pass-through" the payments of principal and interest upon the mortgages in the
pool. In some cases timely payment of principal and interest is guaranteed or
insured by a third party, but in all cases, like any other fixed-income
security, a default by the issuer could lead to a loss.
Both the Old Fund and the New Fund may invest in collateralized mortgage
obligations ("CMOs"). CMOs are mortgage-backed securities that have been
partitioned into several classes with a ranked priority with respect to payments
on the underlying mortgages. The prepayment risks of certain CMOs are higher
than that of other mortgage-backed securities because of this partitioning. In
addition, certain CMOs have encountered liquidity problems in rising interest
rate environments with consequent adverse effects on their market values.
Asset-Backed Securities. Both the Old Fund and the New Fund may invest in
asset-backed securities, which represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, most
often a pool or pools of similar assets (e.g., trade receivables). The
asset-backed securities in which the New Fund will invest may not be as of high
quality as those in which the Old Fund can invest. Asset-backed commercial
paper, one type of asset-backed securities, is issued by a special purpose
entity, organized solely to issue the commercial paper and to purchase interests
in the assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided.
U.S. Government Securities. Both the Old Fund and the New Fund may
purchase (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds), (2) obligations guaranteed as to principal and interest by the
U.S. Treasury (such as obligations of the Farmers Home Administration and the
Export-Import Bank), and (3) obligations issued by U.S. government agencies and
instrumentalities that are neither direct obligations of nor guaranteed by the
U.S. Treasury (such as obligations of
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<PAGE> 20
Federal Land Banks, Central Banks, Central Bank for Cooperatives, and Federal
Intermediate Credit Banks).
Money Market Instruments. Both the Old Fund and the New Fund may invest in
money market instruments, including bank obligations and commercial paper, and
may engage in repurchase agreements and reverse repurchase agreements. The New
Fund will invest in these types of low-risk investments primarily for temporary
defensive purposes or for liquidity reasons.
Some of the risks of investing in the above types of securities are
discussed below.
General Risk Considerations for the New Fund. The general risk inherent in
investing in the New Fund will be that the net asset value will fluctuate in
response to changes in economic conditions, interest rates, and the market's
perception of the underlying portfolio securities of the Fund. There can be no
assurance that the New Fund will achieve its investment objective. Income and
yields on high-yield securities, as on all securities, will fluctuate over time,
but such fluctuations are likely to be more severe with respect to high-yield
securities than the investment-grade securities in which the Old Fund invests.
In addition, special risk considerations pertain to high-yield debt
securities. The New Fund will invest aggressively and seeks to maximize return
over time from a combination of many factors, including high current income and
capital appreciation. Such aggressive investing involves greater risk and
additional considerations than are present when investing in higher quality debt
securities like those held by the Old Fund. These risks and considerations
relate, among other things, to: (1) the speculative nature of high-yield
securities, (2) their sensitivity to interest rate and economic changes, (3)
payment expectations, and (4) liquidity and valuation issues. While these risks,
which are described below, provide the opportunity for maximizing return over
time, they may result in greater fluctuation of the net asset value of the New
Fund's shares compared to those of the Old Fund.
Speculative Nature of High-Yield Securities. Bonds rated below investment
grade generally involve greater volatility of price and risk of principal and
income than bonds in the higher rating categories and are, on balance,
considered predominantly speculative. While such bonds will usually have some
quality and protective characteristics, these characteristics are outweighed by
uncertainties of major risk exposures to adverse conditions. The New Fund's
subadviser will attempt to control risk through
15
<PAGE> 21
diversification, credit analysis, review of sector and industry trends, interest
rate forecasts, and economic analysis, as well as fundamental analysis of
individual securities. The New Fund's subadviser performs its own credit
analyses of the New Fund's investments, obtains research from third-party
sources, and does not rely solely on ratings assigned by rating services; as a
result, achievement of the New Fund's investment objective may be more dependent
on the subadviser's credit analyses than is the case for the Old Fund or any
mutual fund that invests primarily in higher quality bonds. The subadviser will
monitor the issuers of the New Fund's securities to determine if they will have
sufficient cash flow and profits to meet required principal and interest
payments. Credit ratings are meant to evaluate the safety of bond principal and
interest payments, and do not necessarily serve as a proxy for the market value
risk of a high-yield security. The New Fund may retain a security whose NRSRO
credit rating has changed.
Sensitivity to Interest Rate and Economic Changes. As a general matter,
the yields of high-yield debt securities will fluctuate over time. The prices of
high-yield bonds tend to be less sensitive to interest rate changes than
higher-rated debt securities of similar duration, but are more sensitive to
adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress that can adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. Such events
could severely disrupt the market for high-yield bonds and adversely affect the
value of outstanding bonds and the ability of the issuers to repay principal and
interest, leading to a greater incidence of default. If the issuer of a bond
defaulted, the New Fund might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes can be expected to result in
increased volatility of market prices of high-yield securities and therefore in
the New Fund's asset value.
Payment Expectations. High-yield bonds present certain risks based on
payment expectations. For example, high-yield bonds may contain redemption or
call provisions. If an issuer exercises such a provision in a declining interest
rate market, the New Fund may have to replace the security with a lower yielding
security, resulting in a decreased return for investors.
Liquidity and Valuation. Some high-yield securities may lack an
established retail secondary market and therefore may be thinly traded. This may
make it more difficult to value such securities accurately or to sell them. To
the extent reliable data is unavailable from an outside source, the
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<PAGE> 22
subadviser's judgment will play a greater role in valuation. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of high-yield bonds, especially in a
thinly-traded market. In addition, illiquid or restricted high-yield securities
may involve special registration responsibilities, liabilities, and costs.
Risks of Investing in Emerging Market and Other Foreign Securities. Foreign
investments involve sovereign risk, which includes the risk of adverse local
political or economic developments, expropriation or nationalization of assets,
imposition of withholding taxes on dividend or interest payments, and currency
blockage (which would prevent local currency from being sold). Foreign
investments may also be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may also be a risk that the
subadviser may not adequately hedge those risks. Less information may be
publicly available about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing, and financial
reporting standards and requirements comparable to those applicable to U.S.
companies. Securities of some foreign companies are less liquid than securities
of U.S. companies, the financial markets on which they are traded may be subject
to less strict governmental supervision, and foreign brokerage commissions and
custodian fees are generally higher than in the United States.
Although the Old Fund bears the above risks to the extent it invests in
foreign debt securities, these risks will be intensified for the New Fund
because some or all of its foreign investment may be in emerging markets.
Security prices in emerging markets can be significantly more volatile than in
the more developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the risk
of nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. Local securities markets
may trade a small number of securities and may be unable to respond effectively
to increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements. The following
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<PAGE> 23
countries currently are not considered to have emerging market economies:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland,
the United Kingdom, and the United States. This list may change.
Foreign Currency Transactions. To facilitate the purchase and sale of
foreign securities and to manage foreign exchange risk, both the Old Fund and
the New Fund may enter into forward contracts to purchase or sell foreign
currencies. Although such instruments may reduce the risk of loss due to a
decline in the value of the currency that is sold, they also limit any possible
gain that might result should the currency increase. Similarly, although such
instruments are used primarily to protect a Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
be accurately predicted, thus adversely affecting the Fund's total return.
In addition, the New Fund, but not the Old Fund, may enter into such
forward contracts for investment purposes, as opposed to hedging purposes.
Successful investment in foreign currency forward contracts depends upon the
subadviser's ability accurately to forecast changes in foreign currency exchange
rates. Making such forecasts involves techniques and capabilities different from
those required to analyze debt or equity securities.
CHANGES IN INVESTMENT POLICIES
The Investment Company Act of 1940, as amended (the "1940 Act"), requires
every mutual fund to recite in its prospectus or statement of additional
information all investment policies that may be changed only if authorized by a
shareholder vote. These policies are generally referred to as "fundamental"
policies. In contrast, "non-fundamental" policies are those that may be changed
by the fund's board of directors without shareholder approval.
The Old Fund has two types of fundamental policies -- its investment
objective listed in the Prospectus, and a list of investment restrictions that
appear in the Statement of Additional Information ("SAI"). To convert the Old
Fund to the New Fund, the investment objective must be changed. In addition, the
Board proposed revisions to certain investment restrictions with respect to the
New Fund to accommodate the new objective. By approving this proposal, persons
having voting rights would approve the new investment objective and the
revisions to the investment restrictions.
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<PAGE> 24
Investment Objective. The Old Fund's investment objective currently reads
as follows:
"The investment objective of the Short-Term Bond Fund is maximum long-term
total return (capital appreciation and income) by investing primarily in
investment-grade, short-term debt securities."
If persons having voting rights approve this and the other two Short-Term Bond
Fund Proposals, the investment objective will change to the following:
"The investment objective of the Global High-Yield Bond Fund is maximum
long-term total return (capital appreciation and income) by investing
primarily in high-yield debt securities (which sometimes are referred to as
junk bonds and which typically are rated below investment grade) from the
United States and abroad."
The new objective would make clear that the New Fund will invest in high-yield
debt securities from the United States and abroad. As discussed above, the
change in investment objective reflects a profound change in focus between the
Old Fund and New Fund.
Three of the Old Fund's fundamental restrictions need to be changed to
accommodate the new investment objective. Each is discussed below.
Restriction on Illiquid Securities. If persons having voting rights
approve this and the other two Short-Term Bond Fund Proposals, AOF's fundamental
restriction relating to illiquid securities will be revised to read as follows
(the new language is in italics):
"[No Fund shall:] Invest in illiquid securities (including repurchase
agreements maturing in more than 7 days) or in the securities of issuers
(other than U.S. government agencies or instrumentalities) having a record,
together with predecessors, of less than 3 years' continuous operation if,
regarding all such securities, more than 10% of the Fund's total assets
would be invested in them, except that this restriction shall not apply to
the Global High-Yield Bond Fund. For purposes of this restriction, illiquid
securities are those that are subject to legal or contractual restrictions
on resale or for which no readily available market exists. Restricted
securities that have not been registered but may be sold and resold to
institutional investors are not considered illiquid for purposes of this
restriction, provided that there is dealer or institutional trading market
in such securities."
As described in the restriction itself, illiquid securities refer to securities
subject to legal or contractual restrictions on resale or for which no readily
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<PAGE> 25
available market exists. The current restriction mirrors a prior requirement by
the Securities and Exchange Commission (the "SEC") that to preserve liquidity in
case of redemption requests and for other reasons, a mutual fund should have no
more than 10% of its assets in illiquid investments. The SEC has since changed
that requirement to no more than 15% of a fund's net assets. Because a
significant portion of high-yield debt securities are privately placed, have
restrictions on resale, or otherwise may qualify as illiquid, the Manager
believes that the New Fund would benefit from having additional freedom to
invest in illiquid securities. Accordingly, the proposal would make the
restriction inapplicable to the New Fund. Instead, the Board of Directors has
prospectively adopted the following non-fundamental investment restriction (the
"New Fund Illiquid Security Restriction") for the New Fund:
"The Global High-Yield Bond Fund may not invest more than 15% of its net
assets in illiquid securities, i.e., securities subject to legal or
contractual restrictions on resale or for which no readily available market
exists. Restricted securities that have not been registered but may be sold
and resold to institutional investors are not considered illiquid for
purposes of this restriction, provided that there is dealer or
institutional trading market in such securities."
These changes would permit the New Fund to invest up to the full 15% of net
assets in illiquid securities, as the SEC now permits. In addition, because the
New Fund Illiquid Security Restriction is non-fundamental, in the event the SEC
were to raise that limit, the Board could change the restriction without
obtaining any additional approval of persons having voting rights if the Board
concluded that doing so was in the best interests of the Fund and its investors.
At this time, however, the Board does not anticipate making any such change.
Restriction on Loans. If persons having voting rights approve this and the
other two Short-Term Bond Fund Proposals, AOF's fundamental restriction relating
to lending will be revised to read as follows (the new language is in italics):
"[No Fund shall:] Lend money, except that loans of up to 10% of the value
of each Fund except for the Global High-Yield Bond Fund, and loans of up to
100% of the value of the Global High-Yield Bond Fund, may be made through
the purchase of privately placed bonds, debentures, notes, and other
evidences of indebtedness of a character customarily acquired by
institutional investors that may or may not be convertible into stock or
accompanied by warrants or rights to acquire stock. Repurchase agreements
and the purchase of publicly traded
20
<PAGE> 26
debt obligations are not considered to be "loans" for this purpose and may
be entered into or purchased by a Fund in accordance with its investment
objectives and policies."
This change is necessary because the SEC has taken the view that the purchase of
privately-placed bonds is equivalent to lending money. Privately-placed bonds
are debt securities that have not been registered with the SEC for public
trading. Although the current restriction does not permit loans per se, it does
permit a Fund to purchase privately-placed bonds of up to 10% of the Fund's
assets. That 10% limit corresponds to the 10% limit on illiquid securities
discussed above. Limiting privately-placed bonds to 10% of assets could severely
limit, however, the New Fund's investment options. Many high-yield debt
instruments are privately-placed. In recent years, moreover, a number of types
of privately-placed bonds have become institutionally-traded and thus are
considered liquid. Accordingly, to give additional investment flexibility, the
New Fund would have no limit on its investment in privately-placed bonds
generally. Of course, due to the SEC's limitations and the New Fund Illiquid
Security Restriction, investments in illiquid privately-placed bonds would be
limited to 15% of net assets.
Restriction on Short Sales. If persons having voting rights approve this
and the other two Short-Term Bond Fund Proposals, AOF's fundamental restriction
relating to short sales will be revised to read as follows (deleted language is
struck out and new language is in italics):
"[No Fund shall:] Make a short sale of securities or maintain a short
position, except that the International Equity Fund, the Emerging
Opportunities Fund, and the Core Equity Fund, and the Global High-Yield
Bond Fund may make short sales against-the-box. Collateral arrangements
entered into by the Funds with respect to futures contracts and related
options and the writing of options are not deemed to be short sales."
The revision would permit the New Fund to engage in short sales against-
the-box. A short sale against-the-box is an investment technique in which a fund
sells a security short when it simultaneously either owns that security or
another instrument that gives the fund the absolute right to acquire the
security. Because the short sale is therefore considered "covered," it does not
present the same risks that are normally present when selling a security short.
A short sale against-the-box does present the risk of not benefitting from a
subsequent appreciation in price of the security. Each of the AOF equity Funds
(the International Equity Fund, the Emerging Opportunities Fund, and the Core
Equity Fund) has authority to engage in short sales
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<PAGE> 27
against-the-box. The New Fund also may invest in certain types of equity
securities (generally, equity securities expected to pay high dividends, equity
securities that bear some characteristics of debt securities, and equity
securities acquired through exercise of a right of conversion or an option right
associated with another security). Accordingly, the revision would give the New
Fund authority to use the same investment technique available to the equity
Funds.
BOARD CONSIDERATION
On February 5, 1998, the full Board of Directors, including all directors
who are not "interested persons" of AOF (as that term is defined under the 1940
Act), met in person to discuss the Manager's recommendation to convert the Old
Fund to the New Fund. The Board was given a variety of information about the Old
Fund and the proposed New Fund.
After presentations by the Manager, the Manager's consultant (RogersCasey)
and the New Fund's proposed subadviser, the Board unanimously passed resolutions
approving the changes in investment objective and investment restrictions. As
explained below in connection with Proposals 1(b) and 1(c), the Board also
approved a new investment subadvisory agreement and amendments to the Management
Agreement. The Board submitted each of these actions -- the subjects of this and
the other two Short-Term Bond Fund Proposals -- for the approval of persons
having voting rights with respect to the Old Fund.
In addition, the Board passed several additional resolutions intended to
help carry out the conversion. Pursuant to these additional resolutions, if
persons having voting rights approve all three Short-Term Bond Fund Proposals,
the name of the Fund will change to its new name, the "American Odyssey Global
High-Yield Bond Fund"; the investment subadvisory agreement with the Old Fund's
subadviser will terminate; and the New Fund Illiquid Security Restriction
(described in Restrictions on Illiquid Securities, above) will become effective.
Although these additional actions do not require shareholder approval, none of
them will be implemented unless persons having voting rights approve all three
Short-Term Bond Fund Proposals.
The Board passed the resolutions after concluding that the conversion was
in the best interests of the Old Fund and its investors, as well as of AOF as a
whole. In making this determination, the Board considered a variety of factors,
including those discussed below.
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<PAGE> 28
Elimination of the Old Fund. The Board had previously considered
information from the Manager and from RogersCasey about the Old Fund, its asset
size and growth, its performance compared to the benchmark index, and a
comparison of its investment objective and target maturity with those of the
Intermediate-Term Bond Fund. The Board also considered information about
investors in the Old Fund and the high percentage of shares of the Fund that
underlie variable annuity contracts owned by CHART Participants. According to
the Manager, the asset allocation category of the Old Fund and the
Intermediate-Term Bond Fund overlap, the Intermediate-Term Bond Fund could
adequately serve in place of the two separate Funds, and present investors in
the Old Fund desiring to invest in a similar asset class could transfer their
investments to the Intermediate-Term Bond Fund. The Board concluded that
elimination of the Old Fund was in the best interests of the Old Fund and its
investors, most of whom invest in the Fund as part of the CHART asset allocation
program. Given that the investment program followed by the Old Fund would
terminate, the Board decided also to terminate the Old Fund's subadvisory
agreement with its subadviser.
Creation of the New Fund. The Board considered information from the Manager
and from RogersCasey about the need for a fund investing in global high-yield
securities and the extent to which such a fund would differ from current AOF
offerings. According to the Manager, broadening the asset categories available
was in the best interests of AOF and its investors. Most AOF investors
participate in the CHART Program and therefore, according to the Manager, would
benefit from the availability of an additional asset category. The Manager also
supplied information about the further diversification provided by combining
domestic high-yield bonds and emerging market bonds. The Board concluded that
creation of the New Fund was in the best interests of AOF and its investors. The
Board also considered information about the proposed changes to the investment
objective and restrictions, and concluded that the changes were necessary and
appropriate in light on the conversion and were therefore in the best interests
of the Old Fund and its investors.
EFFECT ON CURRENT INVESTORS
If this and the other two Short-Term Bond Fund Proposals are approved, the
conversion of the Old Fund to the New Fund will occur on May 1, 1998. The
Manager anticipates that current investors in the Old Fund desiring to maintain
an investment in a similar asset category will transfer their investment to the
Intermediate-Term Bond Fund. In addition, CHART Participants have received from
their investment adviser
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<PAGE> 29
information about the conversion and how it will affect them and their asset
allocation. Other investors have also received information about the conversion
and should arrange to make the necessary transfer prior to May 1, 1998, unless
they intend to invest in the New Fund the amount previously invested in the Old
Fund.
REQUIRED VOTE
The proposal will be adopted if it and the other two Short-Term Bond Fund
Proposals are each approved by the vote of a majority of outstanding Fund
shares. The 1940 Act defines a majority of outstanding shares as the lesser of
(a) a vote of 67% or more of the Fund shares whose holders are present or
represented by proxy at the meeting if the holders of more than 50% of all
outstanding Fund shares are present in person or represented by proxy at the
meeting, or (b) a vote of more than 50% of all outstanding Fund shares. If the
three Short-Term Bond Fund Proposals are adopted, the conversion will occur on
May 1, 1998. If one or more of the Short-Term Bond Fund Proposals are not
approved, then none will be adopted, and the conversion will not occur.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL NO. 1(A)
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PROPOSAL 1(b)
SHORT-TERM BOND FUND
TO CONVERT THE SHORT-TERM BOND FUND
INTO THE GLOBAL HIGH-YIELD BOND FUND:
APPROVAL OF INVESTMENT SUBADVISORY AGREEMENT
WITH BEA ASSOCIATES
As explained above, this proposal is one of the three interrelated
Short-Term Bond Fund Proposals. Together, these three proposals would permit the
conversion of the Short-Term Bond Fund (the "Old Fund") into the Global
High-Yield Bond Fund (the "New Fund"). This proposal will be adopted only if
persons having voting rights approve all three Short-Term Bond Fund Proposals.
Only persons having voting rights with respect to the Short-Term Bond Fund will
vote on this proposal.
A detailed discussion of the reasons for the proposed conversion, the
differences between the Old Fund and the New Fund, and the effect of the
conversion upon current investors in the Old Fund appears above in connection
with Proposal 1(a).
If adopted, and as part of the conversion of the Old Fund into the New
Fund, this proposal would approve an investment subadvisory agreement with BEA
Associates ("BEA"), an investment adviser with expertise in investing in
high-yield debt securities from the United States and from foreign emerging
markets. That subadvisory agreement with BEA will go into effect on May 1, 1998,
if persons having voting rights approve this and the other two Short-Term Bond
Fund Proposals.
INFORMATION ABOUT THE NEW SUBADVISER
The Old Fund's subadviser was selected for its expertise in investing in
short-term bonds, not the high-yield bonds in which the New Fund will invest.
Accordingly, in conjunction with its recommendation to convert the Old Fund to
the New Fund, the Manager, with the assistance of RogersCasey, conducted a
search for a new subadviser that specialized in investing in high-yield debt
securities from the United States and from abroad. The Manager and RogersCasey
reviewed information about many subadvisers, from which they selected six for
further consideration. After further analysis of these six subadvisers, the
Manager determined to propose to the Board that BEA Associates ("BEA") be hired
as subadviser to the New Fund.
25
<PAGE> 31
BEA serves as an investment adviser to a variety of individual and
institutional investors, including mutual funds. As of December 31, 1997, BEA
managed approximately $34 billion in assets. BEA is a partnership organized
under the laws of New York. BEA's sole general partner is Credit Suisse Capital
Corp, a New York corporation, which is a wholly-owned subsidiary of Credit
Suisse Investment Corp., a Delaware corporation. The address for each of these
entities is One Citicorp Center, 153 East 53rd Street, New York, New York 10022.
Credit Suisse Investment Corp. is a wholly-owned subsidiary of Credit Suisse
Group, Uetlibergstrasse 231, P.O. Box 800, CH-8070 Zurich, Switzerland, a
publicly-traded Swiss corporation. BEA is a member of Credit Suisse Asset
Management, an international group of companies owned or controlled by Credit
Suisse Group that together manage over $128 billion in assets globally. BEA has
expertise in investing in securities from various asset categories, including
high-yield debt securities issued by U.S. companies and emerging market debt
securities. BEA serves as investment adviser to four other registered investment
companies with investment objectives similar to the New Fund's. Relevant
information appears in the following chart.
<TABLE>
<CAPTION>
ADVISORY FEE
RATE AS A
APPROXIMATE PERCENTAGE OF
NAME OF REGISTERED SIZE AS OF AVERAGE DAILY
INVESTMENT COMPANY DECEMBER 31, 1997 NET ASSETS
------------------ ----------------- -------------
<S> <C> <C>
BEA Income Fund, Inc. $292 million 0.50%
BEA Strategic Global Income Fund, Inc. $ 91 million 0.50%
The RBB Fund, Inc./BEA High Yield Fund $ 96 million 0.70%*
SEI High Yield Bond Portfolio $207 million 0.34%
</TABLE>
- ---------------
* BEA waived a portion of its advisory fee for The RBB Fund, Inc./BEA High Yield
Fund for its most recent fiscal year. Because of this fee waiver, its actual
fee equaled 0.44% of average daily net assets.
After negotiations, the Manager and BEA agreed to present to the Board a
proposed fee structure pursuant to which AOF would pay BEA on an annual basis a
subadvisory fee equal to 0.425% of the New Fund's average daily net assets. This
fee is higher than the fee currently paid to the Old Fund's subadviser. After
reviewing information provided by RogersCasey, the Manager concluded, however,
that the proposed fee is reasonable and within the range of fees paid to
subadvisers that advise funds with investment objectives similar to the New
Fund's and that are of BEA's quality. More information about the fee is set
forth below.
The Board of Directors of AOF approved the arrangement with BEA as
consistent with the best interests of investors in the Fund. More information
about the Board's considerations is set forth below.
26
<PAGE> 32
PROPOSED FEE SCHEDULE
Under the proposed subadvisory agreement fee schedule, BEA will receive a
fee equal on an annual basis to 0.425% of the New Fund's average daily net
assets. (If additional subadvisers were later hired for the New Fund, then BEA
would receive on an annual basis 0.425% of the average daily net assets actually
allocated to it by the Manager.) None of the Short-Term Bond Fund Proposals
would change the fee paid to the Manager, who will continue to receive on an
annual basis a net fee of 0.25% of the average daily net assets. Thus, under the
proposed fee schedule, the total advisory fees (including the fees paid to the
subadviser and to the Manager) will equal on an annual basis 0.675% of the New
Fund's average daily net assets.
The subadvisory fee schedule for the Old Fund, shown in a chart in the
section above on "Investment Management and Administration," ranges from 0.15%
to 0.25% of average daily net assets (although, because of the Old Fund's small
asset base, the fee never actually dropped below 0.25%). The New Fund's proposed
subadvisory fee of 0.425% is thus higher than the Old Fund subadvisory fee. In
the Manager's opinion that comparison is not apt, however, because of
differences in investment objective and investment program. Among other reasons,
the Manager believes that a higher fee is both reasonable and necessary because
the New Fund's subadviser will place far less reliance upon ratings assigned by
nationally recognized statistical rating organizations such as Moody's Investors
Service, Inc., and Standard & Poor's Corporation, and instead will have to
engage in a much greater degree of fundamental analysis of individual
securities.
The Old Fund's subadviser received subadvisory fees of $135,707 in 1997.
Had BEA served as subadviser during 1997 under the proposed fee schedule, and
assuming that average daily net assets were the same, BEA would have received
subadvisory fees of $230,702, or 70% more than the fees the Old Fund's
subadviser received.
PROPOSED SUBADVISORY AGREEMENT
By approving this proposal, persons having voting rights would approve the
Investment Subadvisory Agreement with BEA. The agreement, and its differences
from the current agreement, are discussed below.
Current Subadvisory Agreement. The Old Fund's subadvisory agreement has
been in effect since AOF commenced operations. Prior to commencement of
operations, the agreement was approved by the Old
27
<PAGE> 33
Fund's initial shareholder. The agreement was most recently re-approved by the
Board on May 15, 1997. The agreement provides that the subadviser shall manage
the investment operations of the Fund in accordance with the Old Fund's
investment objectives and policies as well as applicable law. The agreement
requires the subadviser to keep certain of the Old Fund's books and records. As
required by the 1940 Act, the agreement provides that it shall continue in
effect for a period of more than two years only so long as such continuance is
specifically approved at least annually by the Board of Directors, including a
majority of directors who are not "interested persons" of AOF (as that term is
defined in the 1940 Act). AOF, the Manager, and the subadviser each have the
right to terminate the agreement with not more than 60 days' nor less than 30
days' written notice. A new subadvisory agreement is scheduled to go into effect
on May 1, 1998, if this proposal is not adopted. The new agreement includes
technical revisions to reflect the fact that as of May 1, 1998, the Old Fund
would pay the subadviser directly and to reflect the fact that the Old Fund
could have more than one subadviser. The new agreement was approved by the Board
on February 13, 1997 and by persons having voting rights on April 23, 1997.
Since this new agreement is already scheduled to go into effect on May 1, 1998,
it is referred to in this proposal as the "Current Subadvisory Agreement." If
this and the other two Short-Term Bond Fund Proposals are approved, however, the
Current Subadvisory Agreement will never go into effect.
Proposed Subadvisory Agreement. The Proposed Subadvisory Agreement with
BEA, which is set forth in Appendix D, is virtually identical to the Current
Subadvisory Agreement with the Old Fund's current subadviser. The only material
difference (other than names and addresses of the subadviser and the name of the
New Fund) is the higher fee structure for BEA. The other provisions, such as
duties, indemnification, and termination, are the same.
BOARD CONSIDERATION
As discussed above in connection with Proposal 1(a), on February 5, 1998,
the full Board of Directors, including all directors who are not "interested
persons" of AOF (as that term is defined under the 1940 Act), met in person to
discuss the Manager's recommendation to convert the Old Fund to the New Fund.
Among other things, the Board specifically considered the proposed subadvisory
agreement with BEA and whether hiring BEA as subadviser for the New Fund would
serve the best interests of the Fund and its shareholders. The Board received
information about BEA, including information about the firm's history and
ownership, biogra-
28
<PAGE> 34
phies of BEA's key personnel, information about BEA's investment approach for
domestic high-yield bond portfolios and for emerging market bond portfolios,
past performance data for these types of portfolios managed by BEA, and
information about fees charged by BEA for those accounts. The Board was also
given general information about fees and expenses of high-yield bond funds,
including global high-yield bond funds.
After presentations by the Manager, the Manager's consultant (RogersCasey),
and BEA, the Board unanimously passed resolutions approving of the conversion of
the Old Fund to the New Fund. As part of these resolutions, the Board expressly
approved the proposed subadvisory agreement with BEA and voted to submit that
subadvisory agreement for the approval of persons having voting rights. The
Board passed the resolutions after concluding that the conversion was in the
best interests of the Old Fund and its investors, as well as of AOF as a whole.
In reaching this conclusion, the Board also concluded that the proposed
subadvisory agreement with BEA was in the best interests of the Old Fund and its
investors. In making these determinations, the Board considered a variety of
factors, including those discussed below.
The Nature and Quality of BEA's Services. The Board considered BEA's
personnel and its proposed investment approach. BEA explained that it will
divide the portfolio up between a domestic high-yield bond component and a
smaller emerging market bond component, and that each component generally would
be managed by different personnel. BEA uses a top-down process that focuses on
industrial sectors and emerging market regions to make initial screening
decisions and to provide diversification, coupled with fundamental analysis at
the individual security level. BEA explained how its international expertise
makes it particularly suited as a subadviser to the Fund. The Board also
examined the composition of sample portfolios managed by BEA.
BEA's Historical Performance. The Board considered materials presented by
RogersCasey and BEA showing BEA's past performance managing domestic high-yield
bond accounts and emerging market bond accounts. Those returns showed strong
performance over the long-term when compared to the relevant indices and the
performance of other managers of similar funds.
Fees. The Board considered the fact that the proposed subadvisory fee is
higher than the Old Fund's subadvisory fees. The Board also considered the fact
that unlike other AOF Funds, the subadvisory fee rate does not decline as assets
increase. The Manager and RogersCasey explained to the Board that the proposed
fee was reasonable compared to
29
<PAGE> 35
other subadvisers of similar quality specializing in this type of investment
portfolio. The Board compared the proposed fee with fees charged by other
advisers for high-yield bond funds. The Board agreed with the Manager's
conclusion that the proposed fees for the New Fund, after taking into account
both the Manager's fee and BEA's fee, are within the range of fees charged by
similar advisers for similar services and that the fees are reasonable.
ADDITIONAL FEE INFORMATION
1997 Fee Information. The following table summarizes the expenses of the
Old Fund during 1997. It follows the format used in the "Summary of Expenses"
section on pages 3-4 of the prospectus. Expenses are expressed as a percentage
of average net assets during the year. This table and example do not include any
expenses charged under any variable contract, such as sales charges or mortality
and expense risk charges.
<TABLE>
<CAPTION>
SHORT-TERM
BOND FUND
----------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load on Purchases................................... None
Sales Load on Reinvested Dividends........................ None
Deferred Sales Load Imposed on Redemption................. None
Exchange Fees............................................. None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Advisory Fees............................................. 0.50%
12b-1 Fees................................................ None
Other Expense............................................. 0.16%
TOTAL FUND OPERATING EXPENSES............................. 0.66%(1)
</TABLE>
- ---------------
(1) Expenses have been restated so that they do not include the Short-Term Bond
Fund's repayment to the Manager of fees the Manager previously waived and
expenses the Manager previously reimbursed. The Fund completed these
repayments in August 1997 and will not have to make them in the future. Had
the above expenses reflected these repayments, Total Fund Operating Expenses
would equal 0.74% instead of 0.66%.
The following example shows the total expenses that would be payable if a
shareholder redeemed his or her shares in the Old Fund after having held them
for one, three, five, and ten year periods respectively. The example is based on
the expenses listed in the table above. Actual expenses may be greater or less
than shown. The example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance.
30
<PAGE> 36
<TABLE>
<CAPTION>
SHORT-TERM
BOND FUND
----------
<S> <C>
EXAMPLE
A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return
and (2) redemption at end of each time period:
1 year................................... $ 7
3 years.................................. $21
5 years.................................. $37
10 years.................................. $82
</TABLE>
Pro Forma Fee Information
The following table shows an estimate of what 1997 expenses would have been
had BEA served as subadviser for the New Fund under the Proposed Subadvisory
Agreement. As in the first table, expenses are expressed as a percentage of
average net assets during the year. In addition, this table and example do not
include any expenses charged under any variable contract, such as sales charges
or mortality and expense risk charges.
<TABLE>
<CAPTION>
GLOBAL
HIGH-YIELD
BOND FUND
----------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load on Purchases.................................... None
Sales Load on Reinvested Dividends......................... None
Deferred Sales Load Imposed on Redemption.................. None
Exchange Fees.............................................. None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Advisory Fees.............................................. 0.68%
12b-1 Fees................................................. None
Other Expenses............................................. 0.16%
TOTAL FUND OPERATING EXPENSES.............................. 0.84%
</TABLE>
The following example shows the total expenses that would be payable if a
shareholder in the New Fund redeemed his or her shares after having held them
for one, three, five, and ten year periods respectively. The example is based on
the pro forma expenses listed in the above table. Actual expenses may be greater
or less than shown. The example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance.
31
<PAGE> 37
<TABLE>
<CAPTION>
GLOBAL
HIGH-YIELD
BOND FUND
----------
<S> <C>
EXAMPLE
A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return
and (2) redemption at end of each time period:
1 year.................................... $ 9
3 years................................... $ 27
5 years................................... $ 46
10 years................................... $103
</TABLE>
REQUIRED VOTE
The proposal will be adopted if it and the other two Short-Term Bond Fund
Proposals are each approved by the vote of a majority of outstanding Fund
shares. The 1940 Act defines a majority of outstanding shares as the lesser of
(a) a vote of 67% or more of the Fund shares whose holders are present or
represented by proxy at the meeting if the holders of more than 50% of all
outstanding Fund shares are present in person or represented by proxy at the
meeting, or (b) a vote of more than 50% of all outstanding Fund shares. If the
three Short-Term Bond Fund Proposals are adopted, the conversion will occur on
May 1, 1998. If one or more of the Short-Term Bond Fund Proposals are not
approved, then none will be adopted, and the conversion will not occur.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL NO. 1(b)
32
<PAGE> 38
PROPOSAL 1(c)
SHORT-TERM BOND FUND
TO CONVERT THE SHORT-TERM BOND FUND
INTO THE GLOBAL HIGH-YIELD BOND FUND:
APPROVAL OF AMENDMENTS
TO MANAGEMENT AGREEMENT
As explained above, this proposal is one of the three interrelated
Short-Term Bond Fund Proposals. Together, these three proposals would permit the
conversion of the Short-Term Bond Fund (the "Old Fund") into the Global
High-Yield Bond Fund (the "New Fund"). This proposal will be adopted only if
persons having voting rights approve all three Short-Term Bond Fund Proposals.
Only persons having voting rights with respect to the Short-Term Bond Fund will
vote on this proposal.
A detailed discussion of the reasons for the proposed conversion, the
differences between the Old Fund and the New Fund, and the effect of the
conversion upon current investors in the Old Fund appears above in connection
with Proposal 1(a).
If adopted, and as part of the conversion of the Old Fund into the New
Fund, this proposal would approve amendments to the Management Agreement with
the Manager. This amended Management Agreement (the "Proposed Management
Agreement") will go into effect on May 1, 1998, if persons having voting rights
approve this and the other two Short-Term Bond Fund Proposals.
The Current Management Agreement is described in the section above on
"Investment Management and Administration." The Proposed Management Agreement is
set forth in Appendix C. It is substantially similar to the Current Management
Agreement, with two exceptions. First, the Proposed Management Agreement
reflects the New Fund's new name, the American Odyssey Global High-Yield Bond
Fund, rather than the Old Fund's name. Second, under the Current Management
Agreement, the maximum annual fee AOF may pay a subadviser to the Old Fund is
0.35% of average daily net assets; the proposed Management Agreement would raise
this maximum to 0.525% for the New Fund.
Although the Proposed Management Agreement would thus authorize AOF to pay
higher subadvisory fees to the New Fund's subadviser, it would not itself
increase any such fee. Instead, the New Fund's subadvisory fee is set forth in
the New Fund's investment subadvisory agreement. A discus-
33
<PAGE> 39
sion of that subadvisory fee appears above in connection with Proposal 1(b).
The Proposed Management Agreement would not change the fee paid to the
Manager. The Manager's fee remains constant at an annual net rate of 0.25% of
average daily net assets regardless of what fees AOF pays subadvisers.
Raising the maximum subadvisory fee permitted under the Management
Agreement to 0.525% of average daily net assets would make that maximum
consistent with the Current Management Agreement's maximum fees for AOF's other
portfolios, each of which has a maximum 0.10% of average daily net assets higher
than the highest subadvisory fee currently paid. The higher maximum preserves
the Board's flexibility to enter into new or amended subadvisory agreements at
slightly higher fee rates if doing so was in the best interests of the New Fund
and its investors. The Board will not enter any future new or amended
subadvisory agreement for the New Fund unless it concludes that the fees to be
paid under that agreement are reasonable, comparable to those charged for
similar services offered by other subadvisers, justified under the
circumstances, and in the best interests of the New Fund and its investors.
BOARD CONSIDERATION
As discussed above in connection with Proposal 1(a), on February 5, 1998,
the full Board of Directors, including all directors who are not "interested
persons" of AOF (as that term is defined under the 1940 Act), met in person to
discuss the Manager's recommendation to convert the Old Fund to the New Fund. As
part of those discussions, the Board specifically considered the proposed
amendments to the Management Agreement. After due consideration, the Board
unanimously passed a resolution approving the Proposed Management Agreement. The
Board also passed a resolution to submit the Proposed Management Agreement for
the approval of persons having voting rights with respect to the Old Fund.
The Board passed the resolutions after concluding that the conversion was
in the best interests of the Old Fund and its investors, as well as of AOF as a
whole. In reaching this conclusion, the Board also concluded that the proposed
amendments to the Management Agreement were in the best interests of the Old
Fund and its investors. The Board specifically considered the reasonableness of
the fee flexibility provided through the New Fund's new maximum subadvisory fee
in the Proposed Management Agreement. It concluded the maximum fee was both
reasonable and provided sufficient flexibility for future subadvisory
agreements. The Board
34
<PAGE> 40
will not enter into any future new or amended subadvisory agreement for the New
Fund, however, unless it concludes that the fees to be paid under that agreement
are reasonable, comparable to those charged for similar services offered by
other subadvisers, justified under the circumstances, and in the best interests
of the New Fund and its investors.
REQUIRED VOTE
The proposal will be adopted if it and the other two Short-Term Bond Fund
Proposals are each approved by the vote of a majority of outstanding Fund
shares. The 1940 Act defines a majority of outstanding shares as the lesser of
(a) a vote of 67% or more of the Fund shares whose holders are present or
represented by proxy at the meeting if the holders of more than 50% of all
outstanding Fund shares are present in person or represented by proxy at the
meeting, or (b) a vote of more than 50% of all outstanding Fund shares. If the
three Short-Term Bond Fund Proposals are adopted, the conversion will occur on
May 1, 1998. If one or more of the Short-Term Bond Fund Proposals are not
approved, then none will be adopted, and the conversion will not occur.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL NO. 1(c)
35
<PAGE> 41
PROPOSAL NO. 2
EMERGING OPPORTUNITIES FUND
APPROVAL OF SUBADVISORY AGREEMENT AND AMENDMENTS TO MANAGEMENT AGREEMENT TO ADD
CHARTWELL INVESTMENT PARTNERS AS A SUBADVISER FOR THE EMERGING OPPORTUNITIES
FUND AND TO RAISE THE MAXIMUM SUBADVISORY FEE FOR THE FUND
This proposal affects, and will be voted upon by, only persons having
voting rights with respect to the Emerging Opportunities Fund (the "Fund").
The Board of Directors recommends approval of a proposal that would (i) add
Chartwell Investment Partners ("Chartwell") as a new subadviser for the Fund and
(ii) amend the Current Management Agreement to raise the maximum fee AOF may pay
subadvisers for the Fund in order to enter into the subadvisory agreement with
Chartwell and to provide future flexibility to hire other subadvisers for the
Fund if necessary. The fee proposed for Chartwell is higher than the fees paid
to the Fund's current subadvisers.
On February 5, 1998, the Board of Directors of AOF voted to terminate,
effective May 1, 1998, the subadvisory agreement with Wilke/ Thompson Capital
Management, Inc. ("Wilke/Thompson"), pursuant to which Wilke/Thompson serves as
a subadviser to the Fund. The Board, including all directors who are not
"interested persons" of AOF or the Manager, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), also approved a new subadvisory
agreement that would add, effective May 1, 1998, Chartwell as a new subadviser
for the Fund. In addition, the Board of Directors, again including all directors
who are not "interested persons" of AOF or the Manager, approved a revised
Management Agreement between AOF and the Manager that would raise, effective May
1, 1998, the maximum subadvisory fee that AOF may pay a subadviser to the Fund
to 0.80% of average daily net assets per year (the "Proposed Management
Agreement"). To become effective, the subadvisory agreement with Chartwell and
the revised Management Agreement require shareholder approval.
Currently, the Fund has two subadvisers: Wilke/Thompson and Cowen & Co.,
through its asset management division, Cowen Asset Management ("Cowen"). The
Manager allocates the Fund's assets between the two subadvisers. Pursuant to its
responsibilities to AOF under the Management Agreement, the Manager recommended
the termination
36
<PAGE> 42
of the subadvisory agreement with Wilke/Thompson. The Manager arrived at this
recommendation after a detailed examination of Wilke/Thompson's performance
compared to other money managers that follow a similar investment strategy.
Although Wilke/Thompson has provided the services it is required to provide
under its subadvisory agreement, the Manager concluded that the best interests
of the Fund and its shareholders would be better served if another subadviser
replaced Wilke/Thompson.
Although the Fund already has a second subadviser (Cowen), the Manager also
determined that the Fund benefits from the diversification provided by having
multiple subadvisers. Pursuant to its investment objective, the Fund seeks to
maximize total return by investing primarily in smaller, rapidly growing
companies. By having assets managed by separate subadvisers who employ different
investment approaches in pursuing that objective, shareholders in the Fund
receive the benefits of diversifying among investment philosophies. Cowen
utilizes a "value" approach, which emphasizes, among other things, a focus on
smaller companies that have fallen out of favor with, or are not well covered
by, Wall Street analysts. Wilke/Thompson employs a "growth" approach to
investing in small companies, pursuant to which it focuses on small companies it
believes will experience significant growth in earnings over the long term. The
Manager, with the assistance of RogersCasey, conducted a search for a new
subadviser that also employed a similar growth approach to small company
investing, and whose record held out prospects for improved performance. The
Manager and RogersCasey reviewed information about many subadvisers, and
selected seven for more detailed review. After interviews with those seven
subadvisers, the Manager determined to propose to the Board that Chartwell be
hired to replace Wilke/Thompson as a second subadviser for the Fund.
After negotiations, the Manager and Chartwell agreed to present to the
Board a fee structure that provided somewhat higher fees for Chartwell than the
fees currently paid to either Cowen or Wilke/Thompson. After reviewing
information provided by RogersCasey, the Manager concluded that the prevailing
rates for fund advisers focusing on investing in small companies has increased
since last year when Cowen became a subadviser for the Fund. The Manager and
RogersCasey believe that Chartwell's proposed fee is reasonable and within the
range of fees currently paid to subadvisers of the caliber of Chartwell. More
information about the fee appears below.
37
<PAGE> 43
The Board of Directors of AOF approved the arrangement with Chartwell as
consistent with the best interests of investors in the Fund. More information
about the Board's considerations appears below.
Persons having voting rights have approved an arrangement, and the
Securities and Exchange Commission has issued an order, that grants, effective
May 1, 1998, the Board of Directors authority to hire new subadvisers and to
enter into new or amended subadvisory agreements without obtaining the approval
of persons having voting rights. For the Board to use this authority, however,
the new or amended subadvisory agreement must specify a subadvisory fee at or
below a maximum fee rate approved by persons having voting rights. The proposed
fee for Chartwell is greater than the current maximum approved fee. Accordingly,
the Board decided to submit this proposal to persons having voting rights in the
Fund. By approving this proposal, persons having voting rights will approve the
subadvisory agreement, including the new fee structure, with Chartwell. In
addition, approval of the proposal will raise the maximum permissible
subadvisory fee for the Fund. These matters are discussed in more detail below.
PROPOSED SUBADVISORY FEE SCHEDULE
The proposed subadvisory agreement provides for a higher fee for Chartwell
than the Fund currently pays it subadvisers. The current annual subadvisory
fees, shown in a chart in the section above on "Investment Management and
Administration," range from 0.30% to 0.50% of average daily net assets. The
proposed subadvisory agreement with Chartwell calls for fees ranging from 0.45%
to 0.70%. The chart below shows the advisory fees that would be effect if this
Proposal is approved. No fee increase is proposed for either the Manager or for
Cowen, both of which will continue to serve in their current capacities.
<TABLE>
<CAPTION>
TOTAL MANAGER SUBADVISORY
ASSETS FEE FEE FEE
------ ----- ------- -----------
<S> <C> <C> <C>
First $50 million in assets allocated to
Chartwell 0.95% 0.25% 0.70%
Next $50 million in assets allocated to
Chartwell 0.75% 0.25% 0.50%
Asset over $100 million allocated to
Chartwell 0.70% 0.25% 0.45%
First $50 million in assets allocated to
Cowen 0.75% 0.25% 0.50%
Next $50 million in assets allocated to
Cowen 0.70% 0.25% 0.45%
Assets over $100 million allocated to Cowen 0.65% 0.25% 0.40%
</TABLE>
The maximum annual fee rate payable to Chartwell under the proposed
subadvisory agreement is 0.70% of average daily net assets. This rate applies if
the Manager allocated $50 million or less of the Fund's assets to
38
<PAGE> 44
Chartwell; if the Manager allocates more than $50 million in assets to
Chartwell, its fee rate will decrease to below 0.70%. As of December 31, 1997,
the Fund had net assets of $258,886,428, of which the Manager had allocated
$118,649,250 to Cowen and $140,237,178 to Wilke/Thompson.
Wilke/Thompson received subadvisory fees of $571,429 in 1997. Had Chartwell
served as subadviser during 1997 under the proposed fee schedule, and assuming
that it had managed the same average daily net assets as Wilke Thompson did,
then Chartwell would have received subadvisory fees of $857,144, or 50% more
than the fees Wilke Thompson received.
CURRENT AGREEMENTS
Management Agreement. The Current Management Agreement is described in the
section above on "Investment Management and Administration."
Subadvisory Agreements. Cowen and Wilke/Thompson each have a separate
subadvisory agreement with AOF. The two agreements are substantially similar,
except for the subadvisory fee each subadviser receives. Persons having voting
rights approved both agreements on April 23, 1997, and both agreements have been
in effect since May 1, 1997. The Board re-approved both agreements on May 15,
1997. The agreements provide that the respective subadviser shall manage the
investment operations of the assets of the Fund allocated to it in accordance
with the Fund's investment objectives and policies as well as applicable law.
Each agreement requires the respective subadviser to keep certain of the Fund's
books and records. As required by the 1940 Act, each agreement provides that it
shall continue in effect for a period of more than two years only so long as the
Board of Directors, including a majority of directors who are not "interested
persons" of AOF (as that term is defined in the 1940 Act), specifically approves
that continuance. AOF, the Manager, and the respective subadviser each have the
right to terminate the agreement with not more than 60 days' nor less than 30
days' written notice. New subadvisory agreements are already scheduled to go
into effect on May 1, 1998. The new agreements include technical revisions to
reflect the fact that as of May 1, 1998, the Fund will pay each subadviser
directly. The Board approved those new agreements on February 13, 1997, and
persons having voting rights approved them on April 23, 1997. Since these new
agreements are already scheduled to go into effect on May 1, 1998, they are
referred to in this proxy statement as the "Current Subadvisory Agreements."
39
<PAGE> 45
PROPOSED AGREEMENTS
The proposed agreements are set forth in Appendices C and E. Set forth
below is a description of the material differences between the proposed
agreements and the current agreements.
Proposed Management Agreement. The Proposed Management Agreement is
substantially the same as the Current Management Agreement, with one exception.
Under the Current Management Agreement, the maximum fee AOF may pay a subadviser
to the Fund on an annual basis is 0.60% of average daily net assets; the
Proposed Management Agreement would raise this maximum to 0.80%. The Proposed
Management Agreement would thus authorize AOF to pay higher subadvisory fees,
but would not affect the advisory fee AOF will pay the Manager, which remains
constant regardless what fees AOF pays subadvisers.
As explained above, the proposed subadvisory agreement with Chartwell would
pay the subadviser annually up to 0.70% of average daily net assets, which would
require raising the maximum permitted to at least that rate. Raising the maximum
to 0.80% would make that maximum consistent with the Current Management
Agreement's maximum fees for AOF's other portfolios, each of which has a maximum
0.10% higher than the highest subadvisory fee currently paid. The higher maximum
preserves the Board's flexibility to enter into new or amended subadvisory
agreements at slightly higher fee rates if doing so was in the best interests of
the Fund and its investors. The Board will not enter any future new or amended
subadvisory agreement for the Fund unless it concludes that the fees to be paid
under that agreement are reasonable, comparable to those charged for similar
services offered by other subadvisers, justified under the circumstances, and in
the best interests of the Fund and its investors.
Proposed Subadvisory Agreement. The Proposed Subadvisory Agreement with
Chartwell is virtually identical to the Current Subadvisory Agreements with the
Fund's current subadvisers. The only material difference (other than names and
addresses of the parties) is the higher fee structure for Chartwell. The other
provisions, such as duties, indemnification, and termination, are the same.
INFORMATION ABOUT CHARTWELL
Set forth below is additional information about Chartwell. More information
about the Manager is included in Appendix A. More information about
Wilke/Thompson and Cowen is included in Appendix B.
40
<PAGE> 46
Chartwell serves as investment adviser to one other registered investment
company with an investment objective focusing on small-cap companies. Relevant
information appears in the following chart.
<TABLE>
<CAPTION>
NAME OF REGISTERED SIZE AS OF
INVESTMENT COMPANY DECEMBER 31, 1997 ADVISORY FEE RATE
------------------ --------------------- ----------------------------------
<S> <C> <C>
Vanguard Explorer Fund $2.5 billion, of 0.40% of first $250 million
which Chartwell managed by Chartwell, plus 0.30%
manages $220 million of the next $250 million managed
by Chartwell, plus 0.20% of assets
over $500 million managed by
Chartwell*
</TABLE>
- ---------------
* Chartwell's advisory fee may be increased or decreased by up to 20% of its
base fee depending upon its performance compared to the Small Company Growth
Fund Stock Index, an index of small capitalization stocks.
Chartwell is a limited partnership organized under the laws of the state of
Pennsylvania. Winthrop S. Jessup serves as Chartwell's principal executive
officer. Chartwell has one general partner, Chartwell G.P., Inc. The address for
Chartwell, for Chartwell G.P., and for Mr. Jessup is 1235 Westlakes Drive, Suite
330, Berwyn, Pennsylvania 19312.
BOARD CONSIDERATION
On February 5, 1998, the full Board of Directors, including all directors
who are not "interested persons" of AOF (as that term is defined under the 1940
Act), met in person to discuss the Manager's recommendation to replace
Wilke/Thompson with Chartwell as a subadviser for the Fund. The Board was given
a variety of information about Chartwell, including information about the firm's
history and ownership, biographies of Chartwell's key personnel, information
about Chartwell's investment approach for small capitalization portfolios, past
performance data for small capitalization accounts managed by Chartwell, and
information about fees charged by Chartwell for those accounts. Chartwell was
founded in April 1997, and therefore has a limited investment performance
history. Its key personnel, however, formerly worked at Delaware Management Co.
("Delaware"), which also provide investment advisory services. For that reason,
the Board also looked at the investment record of the key personnel while at
Delaware. The Board also received information about fees and expenses of small
capitalization funds generally.
After presentations by the Manager, the Manager's consultant, Rogers
Casey, and Chartwell, the Board unanimously voted to terminate Wilke/ Thompson's
subadvisory agreement effective May 1, 1998, and to approve the revised
Management Agreement and the new subadvisory agreement with Chartwell. The Board
determined that the proposed agreements were
41
<PAGE> 47
in the best interests of investors in the Fund. In making that determination,
the Board considered a variety of factors, including those discussed below.
Replacement of Wilke/Thompson. The Board considered information provided
by the Manager and RogersCasey about Wilke/Thompson's performance as a
subadviser for the Fund. The Board agreed with the Manager's conclusion that
Wilke/Thompson's rate of return on investment has not been as strong as was
hoped, while volatility has been high compared with other small cap-oriented
funds. The Board concluded that the best interests of the Fund and its investors
would be better served by replacing Wilke/Thompson with a different subadviser.
Diversification. As noted above, the Manager recommended to the Board that
the Fund continue to have more than one subadviser with different investment
styles to foster diversification of the Fund's assets, with the goal of reducing
volatility. Wilke/Thompson takes what is generally viewed as a "growth" approach
to investing. It focuses primarily on projected earnings growth. Cowen takes
what is often termed a "value" approach, which emphasizes the search for
companies that are undervalued by the market. Because Wilke/Thompson was to be
replaced, the Manager and RogersCasey focused their search on advisers that take
the growth approach. Chartwell was among the subadvisers meeting this criterion.
The Board considered materials presented by RogersCasey analyzing the
composition of representative Chartwell portfolios. The Board also considered
the Fund's performance compared to benchmark indices, and determined that it
would be appropriate to continue to seek to reduce volatility through
diversification.
The Nature and Quality of Chartwell's Services. The Board considered
Chartwell's personnel and investment approach. Chartwell explained that it
focuses on small growth companies that demonstrate strong increases in earnings
per share. In particular, Chartwell looks for companies that continually broaden
their fundamental capabilities, competitive positions, product and service
offerings, and customer bases. Chartwell uses fundamental analysis, rather than
relying solely upon "momentum-driven" quantitative data. Accounts managed by
Chartwell have typically reflected concentrations in the consumer, consumer and
business services, health care, and technology sectors and are characterized by
relatively low turnover compared to many growth portfolios.
Chartwell's Historical Performance. The Board considered materials
presented by RogersCasey and Chartwell showing the performance record of
Chartwell's key personnel managing small capitalization accounts both at
Chartwell and at Delaware (their previous employer). Those returns
42
<PAGE> 48
showed strong performance over the long-term when compared to the relevant
indices and the performance of other small capitalization managers.
Fees. The Board considered the fact that the fees proposed for Chartwell
are higher than the fees currently paid to the Fund's subadvisers and, for the
first $50 million allocated to Chartwell, higher than authorized under the
Current Management Agreement. The Manager and Rogers
Casey explained to the Board that the market for investment advisers has
continued to become more expensive in the past year since Cowen was hired, and
that they believed that the Fund would not be able to retain an adviser of the
quality demonstrated by Chartwell at the same fee currently being paid to the
Fund's subadvisers. The Board also compared the proposed Chartwell fee with fees
charged by other advisers to mutual funds or other clients. In this regard, the
Board considered information gathered by RogersCasey regarding advisory fees for
small capitalization funds. The Board agreed with the Manager's conclusion that
the proposed fees for the Fund -- taking into account the Manager's fee, Cowen's
fee, and Chartwell's fee -- are within the range of fees charged by similar
advisers for similar services and that the fees are reasonable. The Board also
considered the reasonableness of the fee flexibility provided through the new
maximum subadvisory fee in the proposed Management Agreement. It concluded the
maximum fee was both reasonable and provided sufficient flexibility for future
subadvisory agreements. The Board will not enter any future new or amended
subadvisory agreement for the Fund, however, unless it concludes that the fees
to be paid under that agreement are reasonable, comparable to those charged for
similar services offered by other subadvisers, justified under the
circumstances, and in the best interests of the Fund and its investors.
ADDITIONAL FEE INFORMATION
A. 1997 Fee Information
The following table summarizes the expenses of the Fund during 1997. It
follows the format used in the "Summary of Expenses" section on pages 3-4 of the
prospectus. Expenses are expressed as a percentage of average net assets during
the year. The table and example do not include any
43
<PAGE> 49
expenses charged under your contract, such as sales charges or mortality and
expense risk charges.
<TABLE>
<CAPTION>
EMERGING
OPPORTUNITIES
FUND
-------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load on Purchases.................................. None
Sales Load on Reinvested Dividends....................... None
Deferred Sales Load Imposed on Redemption................ None
Exchange Fees............................................ None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Advisory Fees............................................ 0.65%
12b-1 Fees............................................... None
Other Expenses........................................... 0.21%
TOTAL FUND OPERATING EXPENSES............................ 0.86%
</TABLE>
The following example shows the total expenses that would be payable if a
shareholder redeemed his or her shares after having held them for one, three,
five, and ten year periods respectively. The example is based on the 1997
expenses listed in the table above. Actual expenses may be greater or less than
shown. The example assumes a 5% annual rate of return pursuant to requirements
of the Securities and Exchange Commission. This hypothetical rate of return is
not intended to be representative of past or future performance.
<TABLE>
<CAPTION>
EMERGING
OPPORTUNITIES
FUND
-------------
<S> <C>
EXAMPLE
A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return
and (2) redemption at end of each time period:
1 year.................................. $ 9
3 years................................. $ 28
5 years................................. $ 48
10 years................................. $ 106
</TABLE>
B. Pro Forma Fee Information
The following table shows an estimate what 1997 expenses would have been
had Chartwell and Cowen served as subadvisers for the Fund under Chartwell's
Proposed Subadvisory Agreement and Cowen's Current Subadvisory Agreement.
Because the two subadvisers have different fees,
44
<PAGE> 50
overall fees will vary depending on the allocation of assets between the
subadvisers. The chart below assumes that during 1997 the Fund's assets were
equally divided between the subadvisers. As in the first table, expenses are
expressed as a percentage of average net assets during the year. In addition,
the table and example do not include any expenses charged under any variable
contract, such as sales charges or mortality and expense risk charges.
<TABLE>
<CAPTION>
EMERGING
OPPORTUNITIES
FUND
-------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load on Purchases.................................. None
Sales Load on Reinvested Dividends....................... None
Deferred Sales Load Imposed on Redemption................ None
Exchange Fees............................................ None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Advisory Fees............................................ 0.78%
12b-1 Fees............................................... None
Other Expenses........................................... 0.21%
TOTAL FUND OPERATING EXPENSES............................ 0.99%
</TABLE>
The following example shows the total expenses that would be payable if a
shareholder redeemed his or her shares after having held them for one, three,
five, and ten year periods respectively. The example is based on the pro forma
1997 expenses listed in the above table. Actual expenses may be greater or less
than shown. The example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance.
<TABLE>
<CAPTION>
EMERGING
OPPORTUNITIES
FUND
-------------
<S> <C>
EXAMPLE
A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return
and (2) redemption at end of each time period:
1 year.................................. $ 10
3 years................................. $ 32
5 years................................. $ 55
10 years................................. $122
</TABLE>
45
<PAGE> 51
REQUIRED VOTE
The proposal will be adopted if approved by the vote of a majority of
outstanding Fund shares as defined in the 1940 Act, which is the lesser of (a) a
vote of 67% or more of the Fund shares whose holders are present or represented
by proxy at the meeting if the holders of more than 50% of all outstanding Fund
shares are present in person or represented by proxy at the meeting, or (b) a
vote of more than 50% of all outstanding Fund shares. If adopted, the proposed
changes will be effective on May 1, 1998.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL NO. 2
46
<PAGE> 52
APPENDIX A
ADDITIONAL INFORMATION ABOUT THE MANAGER
AND MANAGEMENT AGREEMENTS
The chart below sets forth the name and principal occupation of the
principal executive officer and each director of the Manager. The address for
each person is Two Tower Center, East Brunswick, NJ 08816.
<TABLE>
<CAPTION>
NAME POSITION WITH MANAGER PRINCIPAL OCCUPATION
---- --------------------- --------------------
<S> <C> <C>
Robert C. Dughi Chairman of the Board and Board of Directors and
President Chief Executive Officer,
The Copeland Companies and
various affiliates
Mark M. Skinner Director and Executive Vice Executive Vice President
President and Chief Marketing
Officer, The Copeland
Companies; President,
Copeland Equities, Inc.;
Executive Vice President,
Copeland Financial
Services, Inc. ("CFS")
Paul S. Feinberg Director, Senior Vice Senior Vice President and
President, and General General Counsel, The
Counsel Copeland Companies. Also:
Senior Vice President and
General Counsel of CFS and
Copeland Equities, Inc.
William A. Arnold Senior Vice President, Senior Vice President,
Chief Financial Officer, Chief Financial Officer,
and Treasurer and Treasurer, The Copeland
Companies. Also: Senior
Vice President, Chief
Financial Officer, and
Treasurer of CFS
Michael R. Zarelli Director, Senior Vice Senior Vice President,
President, Finance Finance, The Copeland
Companies. Also: Senior
Vice President, Chief
Financial Officer, and
Treasurer of Copeland
Equities, Inc. and Senior
Vice President, Finance of
CFS.
</TABLE>
A-1
<PAGE> 53
The following chart provides information about the directors and officers
of AOF who are also directors or officers of the Manager.
<TABLE>
<CAPTION>
NAME POSITION WITH MANAGER POSITION WITH AOF
---- --------------------- -----------------
<S> <C> <C>
Robert C. Dughi Chairman of the Board and Chairman of the Board and
President President
Mark M. Skinner Director and Executive Director
Vice President
Paul S. Feinberg Director, Senior Vice Senior Vice President and
President, General Counsel Secretary
and Secretary
William A. Arnold Senior Vice President, Senior Vice President and
Chief Financial Officer Treasurer
and Treasurer
Mark E. Freemyer Vice President Vice President
</TABLE>
In 1997, the Emerging Opportunities Fund paid the Manager $1,405,303; the
Manager retained $543,656 of this amount as its net fee and paid the remainder
to the Fund's subadvisers. In 1997, the Short-Term Bond Fund paid the Manager
$271,414; the Manager retained $135,707 of this amount as its net fee and paid
the remainder to the Fund's subadviser. In addition, AOF's other portfolios paid
the Manager a total of $4,780,707, of which the Manager retained $2,158,621 as
its net fee and paid the remainder to the portfolios' various subadvisers.
The Manager is a wholly-owned subsidiary of The Copeland Companies, Two
Tower Center, East Brunswick, NJ 08816, which is a wholly-owned subsidiary of
The Plaza Corporation, One Tower Square, Hartford, Connecticut 06183, which is a
wholly-owned subsidiary of The Travelers Insurance Company, One Tower Square,
Hartford, Connecticut 06183, which is a wholly-owned subsidiary of The Travelers
Insurance Group Inc., One Tower Square, Hartford, Connecticut 06183, which is a
wholly-owned subsidiary of PFS Services, Inc., 388 Greenwich Street, New York,
New York 10013, which is a wholly-owned subsidiary of Associated Madison
Companies, Inc., 388 Greenwich Street, New York, New York 10013, which is a
wholly-owned subsidiary of Travelers Group Inc., 388 Greenwich Street, New York,
New York 10013, a publicly-owned corporation.
As explained in the previous section on "Investment Management and
Administration," the proxy statement refers to the "Current Management
Agreement" as the form of the agreement already scheduled to go into effect on
May 1, 1998 because persons having voting rights have already approved that form
of the agreement. The form of the Management Agreement in effect through April
30, 1998 (the "Original Management
A-2
<PAGE> 54
Agreement") differs from the Current Management Agreement in three material
respects. First, although both versions set forth the same total advisory fees,
the Original Management Agreement calls for AOF to pay the full advisory fee to
the Manager, who then in turn pays a portion of that fee to the subadviser,
while the Current Management Agreement calls for the AOF to pay a portion of the
fee to the Manager directly and the remainder of the fee to the subadviser
directly. Second, the Original Management Agreement does not contemplate an
arrangement under which the Board can approve subadvisers without shareholder
approval, and thus does not include the subadvisory fee limits included in the
Current Management Agreement. Third, the Original Management Agreement gives the
Manager the authority to determine the allocation of the Emerging Opportunities
Fund's assets among its several subadvisers, and the Current Management
Agreement extends this authority to any portfolio that may in the future have
more than one subadviser.
The Original Management Agreement has been in effect since AOF commenced
operations. Prior to commencement of operations, the agreement was approved by
AOF's initial shareholder. The Board most recently re-approved the agreement on
May 15, 1997. On April 23, 1997, persons having voting rights with respect to
the Emerging Opportunities Fund approved amendments to the Original Management
Agreement with respect to that Fund. Those amendments, which added Cowen as a
subadviser and changed the Emerging Opportunities Fund's advisory fee to reflect
Cowen's subadvisory fee, became effective May 1, 1997.
A-3
<PAGE> 55
APPENDIX B
ADDITIONAL INFORMATION ABOUT SUBADVISERS
AND SUBADVISORY AGREEMENTS
The subadvisory agreement for the Short-Term Bond Fund has been in effect
since AOF commenced operations. Prior to commencement of operations, this
agreement was approved by the Fund's initial shareholder. The agreement was most
recently re-approved by the Board on May 15, 1997. The agreement provides that
the subadviser shall manage the investment operations of the Fund in accordance
with the Fund's investment objectives and policies as well as applicable law.
The agreement requires the subadviser to keep certain of the Fund's books and
records. As required by the 1940 Act, the agreement provides that it shall
continue in effect for a period of more than two years only so long as such
continuance is specifically approved at least annually by the Board of
Directors, including a majority of directors who are not "interested persons" of
AOF (as that term is defined in the 1940 Act). AOF, the Manager and the
subadviser each have the right to terminate the agreement with not more than 60
days' nor less than 30 days' written notice. On April 23, 1997, persons having
voting rights with respect to the Short-Term Bond Fund approved a new
subadvisory agreement, which is scheduled to become effective on May 1, 1998.
That new agreement is substantially similar to the existing agreement, except
that it implements certain changes to permit the Fund to have more than one
subadviser. Specifically, the new agreement provides that the subadviser will
manage that portion of the Fund's assets allocated to the subadviser, and that
the subadviser's fee (which will now be paid directly by AOF rather than by the
Manager) will be based upon the assets actually allocated to the subadviser,
rather than all of the Fund's assets.
Smith Graham & Co. Asset Managers, L.P.
(Short-Term Bond Fund)
The chart below sets forth the name and principal occupation of the
principal executive officers of Smith Graham & Co. Asset Managers, L.P. ("Smith
Graham"). The address for each person and for Smith Graham is 6900 Chase Tower,
600 Travis Street, Houston, Texas 77002-3007.
B-1
<PAGE> 56
<TABLE>
<CAPTION>
POSITION WITH
NAME SMITH GRAHAM PRINCIPAL OCCUPATION
---- ------------- --------------------
<S> <C> <C>
Gerald B. Smith......... Chairman & Chief Chairman & Chief Executive
Executive Officer Officer, Smith Graham &
Company
Jamie G. House.......... Executive Vice Executive Vice President &
President & Chief Chief Financial Officer,
Financial Officer Smith Graham & Company
Gilbert Andrew Garcia... Executive Vice Executive Vice President -
President - Director of Domestic
Director of Investments, Smith Graham &
Domestic Company
Investments
Ed van Wijk............. Executive Vice Executive Vice President -
President - Director of Global
Director of Global Investments, Smith Graham &
Investments Company
</TABLE>
During 1997, Smith Graham did not pay any brokerage commissions to
affiliated brokers.
Smith Graham received subadvisory fees totaling $135,707 for advisory
services provided to the Short-Term Bond Fund in 1997.
Smith Graham is organized as a limited partnership. It has two general
partners, Smith, Graham & Company, 6900 Chase Tower, 600 Travis Street, Houston,
Texas 77002 and Robeco Texas, Coolsingel 120, Postbus 973, N.L. 3000 AZ,
Rotterdam, The Netherlands. The principal shareholder of Smith, Graham & Company
is Gerald B. Smith, whose address is the same as Smith, Graham & Company. Robeco
Texas is a wholly-owned subsidiary of the Robeco Group, Coolsingel 120, NL 3011
AG, Rotterdam, The Netherlands, which is a Netherlands corporation.
Wilke/Thompson Capital Management, Inc.
(Emerging Opportunities Fund)
The chart below sets forth the name and principal occupation of the
principal executive officer and directors of Wilke/Thompson Capital Man-
B-2
<PAGE> 57
agement, Inc. ("Wilke/Thompson"). The address for each person is 3800 Norwest
Center, 90 South 7th Street, Minneapolis, MN 55402.
<TABLE>
<CAPTION>
POSITION WITH
NAME WILKE/THOMPSON PRINCIPAL OCCUPATION
---- -------------- --------------------
<S> <C> <C>
Anthony L. Ventura..... President and Director President, Wilke/Thompson
Mark A. Thompson....... Director Chief Investment Officer,
Wilke/Thompson
</TABLE>
Wilke/Thompson received subadvisory fees totaling $571,429 for advisory
services provided to the Emerging Opportunities Fund in 1997.
Cowen & Co.
(Emerging Opportunities Fund)
The principal executive officer for Cowen & Co. ("Cowen") is Joseph M.
Cohen. Cowen is a limited partnership with one general partner, Cowen
Incorporated. Cowen Incorporated is controlled by Mr. Cohen. The address for Mr.
Cohen and for Cowen Incorporated is Financial Square, 31st Floor, New York, NY
10005. At the time this proxy statement was distributed, Societe Generale
Securities Corporation, a subsidiary of Societe Generale, an international
commercial bank based in France, had agreed to acquire Cowen, but that
transaction had not been completed.
Cowen received subadvisory fees totaling $290,218 for advisory services
provided to the Emerging Opportunities Fund in 1997.
Cowen serves as investment adviser to one other registered investment
company with an objective similar to the Fund. Relevant information appears in
the following table.
<TABLE>
<CAPTION>
NAME OF REGISTERED SIZE AS OF
INVESTMENT COMPANY DECEMBER 31, 1997 ADVISORY FEE RATE
------------------ ----------------- --------------------------
<S> <C> <C>
Cowen Opportunity Fund, a
series of Cowen Funds, 0.90% of average daily net
Inc.......................... $115 million assets*
</TABLE>
- ---------------
* For 1997, Cowen voluntarily absorbed expenses equal to 0.03% of average net
assets.
During 1997, neither Cowen nor Wilke/Thompson paid any brokerage
commissions to affiliated brokers.
B-3
<PAGE> 58
APPENDIX C
Both the Short-Term Bond Fund Proposals and the Emerging Opportunities Fund
Proposal involve amendments to the Current Management Agreement. Only one
paragraph -- paragraph 9 -- would be affected by the proposed amendments. The
full text of the Proposed Management Agreement appears below. Changes relating
to the Short-Term Bond Fund Proposals are underlined. Changes relating to the
Emerging Opportunities Fund Proposal appear in BOLD.
INVESTMENT MANAGEMENT AGREEMENT
Agreement, made this 1st day of May, 1998, between American Odyssey Funds,
Inc., a Maryland corporation (the "Series Fund"), and American Odyssey Funds
Management, Inc., a New Jersey corporation (the "Manager").
WHEREAS, the Series Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Series Fund is currently divided into six separate series
(each a "Fund"), each of which is established pursuant to a resolution of the
Board of Directors of the Series Fund, and the Series Fund may in the future add
additional Funds; and
WHEREAS, the Series Fund desires to retain the Manager to render, or
contract to obtain as hereinafter provided, investment advisory services to the
Series Fund and also to avail itself of the facilities available to the Manager
with respect to the administration of the Series Fund's day to day business
affairs; and
WHEREAS, the Manager is willing to render such investment advisory and
administrative services;
NOW, THEREFORE, the parties agree as follows:
1. The Series Fund hereby appoints the Manager to act as manager of the
Series Fund and administrator of its business affairs for the period and on the
terms set forth in this Agreement. The Manager accepts such appointment and
agrees to render the services described below for the compensation provided in
paragraph 9. The Manager is authorized to enter into Subadvisory agreements for
investment advisory services in connection with the management of each of the
Funds of the Series Fund (the "Subadvisory agreements"), provided that no such
contract shall be made
C-1
<PAGE> 59
until it has been approved by the Board of Directors of the Series Fund. The
Series Fund shall be a party to each such agreement. Any such agreement may be
entered into by the Manager on such terms and in such manner as may be permitted
by paragraph 9(b) and by the 1940 Act and the rules thereunder (subject to any
applicable exemptions). The Manager will continue to have supervisory
responsibility for all investment advisory services furnished pursuant to any
such Subadvisory agreements. The Manager will review the performance of all
Subadvisers, determine the allocation of assets among the Subadvisers, and make
recommendations to the Board of Directors with respect to the retention and
renewal of such Subadvisory agreements.
2. Subject to the supervision of the Board of Directors and, subject to
paragraph 1 hereof, the Manager shall manage the operations of the Series Fund
and each Fund thereof. More particularly:
(a) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles of
Incorporation, By-Laws, Prospectus, and Statement of Additional Information
of the Series Fund and with the instructions and directions of the Board of
Directors of the Series Fund and will conform to and comply with the
requirements of the 1940 Act and all other applicable federal and state
laws and regulations.
(b) The Manager will monitor the performance of each of the
Subadvisers and will be generally responsible for their activities. The
Manager shall meet periodically with each Subadviser to review and agree
upon its current investment strategies and programs in the light of
anticipated cash flows. The Manager shall periodically provide the Board of
Directors with evaluations of the performance of the Subadvisers and shall
make recommendations concerning the renewal or termination of the
Subadvisory contracts.
(c) For any Fund with more than one Subadviser, the Manager is
authorized to determine the allocation of Fund assets among the
Subadvisers.
(d) The Manager shall provide the Board of Directors of the Series
Fund such periodic and special reports as the Board may reasonably request.
(e) The Manager shall be responsible for the financial and accounting
records maintained by the Series Fund, other than those being maintained by
the Series Fund's custodian or accounting services agent.
C-2
<PAGE> 60
(f) The Manager shall provide, or cause to be provided, to the Series
Fund's custodian on each business day all information relating to the
transactions in the securities owned, purchased, or sold by each Fund.
(g) The Manager shall provide such staff assistance as the Board of
Directors of the Series Fund shall reasonably request in connection with
the conduct of meetings of the Board and otherwise.
(h) The investment management services of the Manager to the Series
Fund under this Agreement are not to be deemed exclusive, and the Manager
shall be free to render investment advisory services to others.
3. The Series Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) The Articles of Incorporation of the Series Fund, as filed with
the Secretary of State of Maryland;
(b) The By-Laws of the Series Fund;
(c) Certified resolutions of the Board of Directors of the Series Fund
authorizing the appointment of the Manager and approving the form of this
Agreement;
(d) The Notification of Registration of the Series Fund under the 1940
Act on Form N-8A as filed with the Securities and Exchange Commission (the
"Commission");
(e) The Registration Statement under the 1940 Act and the Securities
Act of 1933, as amended, on Form N-1A (the "Registration Statement"), as
filed with the Commission relating to the Series Fund and shares of the
Series Fund and all amendments thereto; and
(f) The Prospectus and Statement of Additional Information of the
Series Fund as currently in effect and as amended or supplemented from time
to time.
4. The Manager shall authorize and permit any of its directors, officers,
and employees who may be elected as members of the Board of Directors or
officers of the Series Fund to serve in the capacities in which they are
elected. All services to be furnished by the Manager under this Agreement may be
furnished through the medium of any such directors, officers, or employees of
the Manager.
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5. The Manager shall keep the Series Fund's books and records required to
be maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Series Fund are the property of the Series
Fund and it will surrender promptly to the Series Fund any such records upon the
Series Fund's request, provided however that the Manager may retain a copy of
such records. The Manager further agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act (or any successor provision) any such records
as are required to be maintained by the Manager pursuant to paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the following
expenses:
(i) the salaries and expenses of all personnel of the Series Fund and
the Manager except the fees and expenses of members of the Board of
Directors who are not interested persons of the Series Fund, as that term
is defined in the 1940 Act;
(ii) all expenses incurred by the Manager or by the Series Fund in
connection with managing the ordinary course of the Series Fund's business,
other than those stated below that will be paid by the Series Fund; and
(iii) expenses incurred in connection with meetings of the Board of
Directors of the Series Fund, including such staff assistance as the Board
shall reasonably request, but not including the fees and expenses of
directors of the Series Fund who are not interested persons of the Series
Fund, as that term is defined in the 1940 Act.
7. The Series Fund will pay the expenses described below:
(a) the fees and expenses incurred by the Series Fund in connection
with the management of the investment and reinvestment of each Fund's
assets, including the fees described in paragraph 9;
(b) brokers' commissions and any issue or transfer taxes chargeable to
the Series Fund in connection with its securities, options, and futures
transactions;
(c) the fees and expenses of directors of the Series Fund who are not
interested persons of the Series Fund, as that term is defined in the 1940
Act;
(d) the fees and expenses of the Series Fund's custodian(s) or
accounting services agent(s) that relate to (i) the custodial function and
the recordkeeping connected therewith, (ii) preparing and main-
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<PAGE> 62
taining the general accounting records of the Series Fund (other than those
relating to the shares and shareholder accounts of the Series Fund) and the
providing of any such records to the Manager useful to the Manager in
connection with the Manager's responsibility for the accounting records of
the Series Fund pursuant to Section 31 of the 1940 Act and the rules
promulgated thereunder, and (iii) the pricing of the shares of the Series
Fund, including the cost of any pricing service or services which may be
retained pursuant to the authorization of the directors of the Series Fund;
(e) the charges and expenses of legal counsel and independent
accountants for the Series Fund;
(f) all taxes and corporate fees payable by the Series Fund to
federal, state, and other governmental agencies;
(g) the fees of any trade associations of which the Series Fund may be
a member;
(h) the cost of fidelity, directors and officers, and errors and
omissions insurance;
(i) the fees and expenses involved in registering and maintaining
registration of the Series Fund and of its shares with the Commission, and
qualifying its shares, to the extent required, under state securities laws,
including the preparation and printing of the Series Fund's registration
statements, prospectuses and statements of additional information for
filing under federal and state securities laws;
(j) communications expenses with respect to investor services and
expenses of preparing, printing, and mailing reports to shareholders in the
amount necessary for distribution to the shareholders;
(k) all expenses incurred in connection with the holding of
shareholder meetings; and
(l) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Series Fund's business.
8. In the event the expenses of the Series Fund for any fiscal year
(including the fees payable to the Manager but excluding interest, taxes,
brokerage commissions and litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Series Fund's
business) exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statute or regulations of
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any jurisdictions in which shares of the Series Fund are then qualified for
offer and sale, the compensation due the Manager will be reduced by the amount
of such excess, and, if such reduction exceeds the compensation payable to the
Manager, the Manager will pay to the Series Fund the amount of such reduction
which exceeds the amount of such compensation.
9. (a) For the services provided and the expenses assumed pursuant to this
Agreement, the Series Fund shall pay to the Manager as full compensation
therefor a fee at an annual rate of 0.25% of each Fund's average daily net
assets. The fee shall be computed daily and shall be paid to the Manager monthly
as of the first business day of the next succeeding calendar month. Any
reduction in the fee payable and any payment by the Manager to the Fund pursuant
to paragraph 8 shall be made monthly. Any such reductions or payments are
subject to readjustment during the year. The Series Fund shall pay the fee
described in this subparagraph (a) in addition to the subadvisory fees the
Series Fund pays pursuant to subparagraph (b).
(b) The Series Fund shall pay to each subadviser the fee set forth in
the respective subadvisory agreement, which shall specify a fee rate or rates
based upon the average daily net assets allocated to that subadviser; provided,
however, that the annual fee rate for a subadviser shall not exceed the maximum
annual fee rates specified below:
<TABLE>
<CAPTION>
MAXIMUM ANNUAL SUBADVISER
FEE RATE AS A PERCENTAGE OF
AVERAGE DAILY NET ASSETS
FUND ALLOCATED TO THE SUBADVISER
---- ---------------------------
<S> <C>
American Odyssey Core Equity Fund........ 0.45%
American Odyssey Emerging Opportunities
Fund................................... 0.80%
American Odyssey International Equity
Fund................................... 0.55%
American Odyssey Global High-Yield Bond
Fund................................... 0.525%
American Odyssey Long-Term Bond Fund..... 0.35%
American Odyssey Intermediate-Term Bond
Fund................................... 0.35%
</TABLE>
10. The Manager shall not be liable for any loss suffered by the Series
Fund as the result of any negligent act or error of judgment of the Manager in
connection with the matters to which this Agreement relates, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the
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<PAGE> 64
1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement. The Series
Fund shall indemnify the Manager and hold it harmless from all cost, damage and
expense, including reasonable expenses for legal counsel, incurred by the
Manager resulting from actions for which it is relieved of responsibility by
this paragraph. The Manager shall indemnify the Series Fund and hold it harmless
from all cost, damage and expense, including reasonable expenses for legal
counsel, incurred by the Series Fund resulting from actions for which the
Manager is not relieved of responsibility by this paragraph.
11. The words "American Odyssey" and the design set forth in Appendix A
hereto [omitted] (the "Design") are service marks of the Manager. The Manager
hereby grants to the Series Fund a license to use the words "American Odyssey"
in the Series Fund's corporate name, "American Odyssey Funds, Inc.," and a
license to use the words "American Odyssey" and the Design in connection with
the Series Fund's operations as an investment company. This license is granted
on a royalty-free basis. The Manager retains the right to use, or license the
use of, the words "American Odyssey" and any derivative thereof, as well as the
Design, in connection with any other business enterprise. If the holders of the
outstanding voting securities of any Fund fail to approve this Agreement, or if
at any time after such approval the Manager ceases to be investment manager of
any Fund, the Manager shall have the absolute right to terminate the license
herein granted forthwith upon written notice to the Series Fund. Upon
termination of the license herein granted, the Series Fund shall immediately
change its corporate name to one which does not include the words "American
Odyssey" or any derivative thereof, and will discontinue all use by it of the
words "American Odyssey," the Design or anything resembling the Design, in
connection with its business. The terms of the license herein granted shall
inure to the benefit of and be binding upon any successors or assigns of the
Series Fund or the Manager.
12. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Series Fund
without the payment of any penalty, by the Board of Directors of the Series Fund
or by vote of a majority of the Series Fund's outstanding voting securities (as
defined in the 1940 Act), or by the Manager at any time, without the payment of
any penalty, on not more than 60 days' nor less than 30 days' written notice to
the other party. This
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<PAGE> 65
Agreement shall terminate automatically in the event of its assignment (as
defined in the 1940 Act).
13. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Series Fund to engage in any other business or to
devote his or her time and attention in part to the management or other aspects
of any business, whether of a similar or dissimilar nature, nor limit or
restrict the right of the Manager to engage in any other business or to render
services of any kind to any other corporation, firm, individual, or association.
14. Except as otherwise provided herein or authorized by the Board of
Directors of the Series Fund from time to time, the Manager shall for all
purposes herein be deemed to be an independent contractor and shall have no
authority to act for or represent the Series Fund in any way or otherwise be
deemed an agent of the Series Fund.
15. During the term of this Agreement, the Series Fund agrees to furnish
the Manager at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature, or other material prepared for distribution
to shareholders of the Series Fund or the public, which refer in any way to the
Manager, prior to use thereof and not to use such material if the Manager
reasonably objects in writing within five business days (or such other time as
may be mutually agreed) after receipt thereof. In the event of termination of
this Agreement, the Series Fund will continue to furnish to the Manager copies
of any of the above mentioned materials which refer in any way to the Manager.
Sales literature may be furnished to the Manager hereunder by first class mail,
overnight delivery service, facsimile transmission equipment, or hand delivery.
The Series Fund shall furnish or otherwise make available to the Manager such
other information relating to the business affairs of the Series Fund as the
Manager at any time, or from time to time, reasonably requests in order to
discharge its obligations hereunder.
16. This Agreement may be amended by mutual consent, but the consent of the
Series Fund must be obtained in conformity with the requirements of the 1940
Act.
17. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by certified or
registered mail, return receipt requested and postage prepaid, (1) to American
Odyssey Funds Management, Inc. at Two Tower Center, East Brunswick, NJ 08816,
Attention: Secretary; or (2) to American
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<PAGE> 66
Odyssey Funds, Inc. at Two Tower Center, East Brunswick, NJ 08816, Attention:
President.
18. This Agreement shall be governed by and construed in accordance with
the laws of the State of New Jersey.
19. This Agreement may be executed in two or more counterparts, which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
<TABLE>
<S> <C> <C>
AMERICAN ODYSSEY FUNDS, INC.
- ---------------------------- By: ----------------------------
Witness
AMERICAN ODYSSEY FUNDS
MANAGEMENT, INC.
- ---------------------------- By: ----------------------------
Witness
</TABLE>
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<PAGE> 67
APPENDIX D
The Proposed Subadvisory Agreement with BEA appears below. This agreement
relates only to the Short-Term Bond Fund Proposals.
INVESTMENT SUBADVISORY AGREEMENT
Agreement made as of this 1st day of May, 1998, among American Odyssey
Funds, Inc., a Maryland corporation (the "Series Fund"), American Odyssey Funds
Management, Inc., a New Jersey corporation (the "Manager"), and BEA Associates,
a partnership organized under the laws of the state of New York (the
"Subadviser").
WHEREAS, American Odyssey Funds Management, Inc. has entered into a
management agreement (the "Management Agreement") with the Series Fund, a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"), pursuant to which American
Odyssey Funds Management, Inc. will act as Manager of the Series Fund.
WHEREAS, the Series Fund is currently divided into six separate series or
Funds, each of which is established pursuant to a resolution of the Board of
Directors of the Series Fund, and the Series Fund may in the future add
additional Funds; and
WHEREAS, the Manager has the responsibility of evaluating, recommending,
and supervising investment advisers to each Fund and, in connection therewith,
desires to retain the Subadviser to provide investment advisory services to the
Global High-Yield Bond Fund (the "Fund"), the Series Fund desires to retain the
Subadviser to provide investment advisory services to the Fund, and the
Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Series Fund, the Subadviser shall manage the investment
operations of the assets of the Fund allocated by the Manager to the Subadviser
(such assets referred to as the "Allocated Assets"), including the purchase,
retention and disposition of portfolio investments, in accordance with the
Fund's investment objectives, policies and restrictions as stated in the
Prospectus (such Prospectus and Statement of Additional Information as currently
in effect and as amended or supplemented from time to time, being herein called
the "Prospectus") and subject to the following understandings:
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(i) The Subadviser shall consult periodically with the Manager and
they shall agree upon the current investment strategy for the Allocated
Assets in the light of anticipated cash flows.
(ii) The Subadviser shall provide supervision of the Allocated Asset's
investments and determine from time to time what securities, options,
futures contracts, and other investments included in the Allocated Assets
will be purchased, retained, sold, or loaned by the Fund, and what portion
of the Allocated Assets will be invested or held uninvested as cash.
(iii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation, By-Laws, and Prospectus of the Series Fund and with the
instructions and directions of the Manager and of the Board of Directors of
the Series Fund and will conform to and comply with the requirements of the
1940 Act, the Internal Revenue Code of 1986, and all other applicable
federal and state laws and regulations.
(iv) The Subadviser will place orders for the securities, options,
futures contracts, and other investments to be purchased or sold as part of
the Allocated Assets with or through such persons, brokers, dealers, or
futures commission merchants (including but not limited to persons
affiliated with the Manager) as the Subadviser may select in order to carry
out the policy with respect to brokerage set forth in the Series Fund's
Registration Statement and Prospectus or as the Board of Directors may
direct from time to time. In providing the Fund with investment advice and
management, the Subadviser will give primary consideration to securing the
most favorable price and efficient execution. Within the framework of this
policy, the Subadviser may consider such factors as the price of the
security, the rate of the commission, the size and difficulty of the order,
the reliability, integrity, financial condition, general execution and
operational capabilities of competing broker-dealers and futures commission
merchants, and the brokerage and research services they provide to the
Subadviser or the Fund. The parties agree that it is desirable for the Fund
that the Subadviser have access to supplemental investment and market
research and security and economic analysis that certain brokers or futures
commission merchants are able to provide. The parties further agree that
brokers and futures commission merchants that provide such research and
analysis may execute brokerage transactions at a higher cost to the Fund
than would result if orders to execute such transactions had been placed
with other brokers on the sole basis of ability to obtain the most
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<PAGE> 69
favorable price and efficient execution. Therefore, notwithstanding the
second sentence of this paragraph 1(a)(iv), the Subadviser is authorized to
place orders for the purchase and sale of securities, options, futures
contracts, and other investments for the Fund with brokers or futures
commission merchants who provide the Subadviser with such research and
analysis, subject to review by the Manager and the Series Fund's Board of
Directors from time to time with respect to the extent and continuation of
this practice. The Series Fund and the Manager acknowledge that the
services provided by such brokers or futures commission merchants may be
useful to the Subadviser in connection with the Subadviser's services to
other clients.
When the Subadviser deems the purchase or sale of a security, option,
futures contract, or other investment to be in the best interest of the
Fund as well as other clients of the Subadviser, the Subadviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities, options, futures
contracts, or other investments to be sold or purchased in order to obtain
the most favorable price or lower brokerage commissions and efficient
execution and to allocate the shares purchased or sold among the Series
Fund and the Subadviser's other clients on a fair and nondiscriminatory
basis, in a manner consistent with the Subadviser's fiduciary obligations
to the Fund and to such other clients.
(v) The Subadviser shall maintain all books and records with respect
to the portfolio transactions of the Allocated Assets required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of
Rule 31a-1 under the 1940 Act and by Rule 17e-1(c)(2) under the 1940 Act
and shall render to the Series Fund such periodic and special reports as
its Board of Directors or the Manager may reasonably request.
(vi) The Subadviser shall provide the Series Fund's custodian on each
business day with information relating to all transactions concerning the
Allocated Assets and shall provide the Manager with such information upon
request of the Manager.
(vii) The investment management services provided by the Subadviser
hereunder are not exclusive, and the Subadviser shall be free to render
similar services to others; provided, however, that the Subadviser agrees
that, unless the Subadviser obtains the prior express written approval of
the Manager, the Subadviser shall not serve or accept retention as
investment adviser, investment manager, or similar service provider during
the term of this Agreement with or for the
D-3
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benefit of any investment company registered under the 1940 Act that meets
the following conditions: (1) at least 25% of the shares of the investment
company (or in the case of a series investment company, at least 25% of the
shares of the series of that investment company to which the Subadviser
would provide services) are owned by one or more separate accounts that
fund individual or group variable annuity contracts, and (2) the owners of
(or, for a group variable annuity contract, the participants in) one or
more of the variable annuity contracts funded by the investment company (or
series thereof) are eligible to participate in a fee-based investment
advisory asset allocation program associated with that variable annuity
contract; provided, however, that the foregoing restriction shall not apply
to any services provided to the Financial Services Department, or any other
unit, of The Travelers Insurance Company.
(b) Services to be furnished by the Subadviser under this Agreement may be
furnished through the medium of any directors, officers, or employees of the
Subadviser or its affiliates.
(c) The Subadviser shall keep the books and records with respect to the
Allocated Assets required to be maintained by the Subadviser pursuant to
paragraph 1(a)(v) hereof and shall timely furnish to the Manager or the Series
Fund's custodian all information relating to the Subadviser's services hereunder
needed to keep the other books and records of the Fund required by Rules
17e-1(c)(2) and 31a-1 under the 1940 Act. The Subadviser agrees that all records
which it maintains for the Fund are the property of the Fund and the Subadviser
will surrender promptly to the Fund any of such records upon the Fund's request,
provided however that the Subadviser may retain a copy of such records. The
Subadviser further agrees to preserve for the periods prescribed by Rules
17e-1(c)(2) and 31a-2 under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph 1(a)(v) hereof.
(d) The Subadviser agrees to maintain procedures adequate to ensure its
compliance with the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers
Act"), and other applicable state and federal laws and regulations.
(e) The Subadviser shall furnish to the Manager, upon the Manager's
reasonable request, copies of all records prepared in connection with (i) the
performance of this Agreement and (ii) the maintenance of compliance procedures
pursuant to paragraph 1(d) hereof.
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<PAGE> 71
(f) The Subadviser agrees to provide upon reasonable request of the Manager
or the Series Fund, information regarding the Subadviser, including but not
limited to background information about the Subadviser and its personnel and
performance data, for use in connection with efforts to promote the Series Fund
and the sale of its shares.
2. The Manager shall continue to have responsibility for all services to be
provided to the Fund pursuant to the Management Agreement and shall oversee and
review the Subadviser's performance of its duties under this Agreement.
3. The Series Fund shall pay the Subadviser, for the services provided and
the expenses assumed pursuant to this Subadvisory Agreement, a fee at an annual
rate of 0.425% of the average daily Net Allocated Assets. The term "Net
Allocated Assets" means the Allocated Assets less related liabilities as
determined by the Manager or its designee. This fee will be computed daily and
paid monthly.
4. The Subadviser shall not be liable for any loss suffered by the Series
Fund or the Manager as a result of any negligent act or error of judgment of the
Subadviser in connection with the matters to which this Agreement relates,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services (in which case any award of damages shall
be limited to the period and the amount set forth in Section 36(b)(3) of the
1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on the Subadviser's part in the performance of its duties or from its
reckless disregard of its obligations and duties under this Agreement. The
Series Fund shall indemnify the Subadviser and hold it harmless from all loss,
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by the Subadviser resulting from actions from which it is relieved of
responsibility by this paragraph. The Subadviser shall indemnify the Series Fund
and the Manager and hold them harmless from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the Series Fund and
the Manager resulting from actions from which the Subadviser is not relieved of
responsibility by this paragraph.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the
Series Fund or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, or
D-5
<PAGE> 72
by the Manager or the Subadviser at any time, without the payment of any
penalty, on not more than 60 days' nor less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or dissimilar nature, nor
limit the Subadviser's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual, or association,
except as described in Paragraph 1(a)(vii) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature or other material prepared for distribution to
shareholders of the Fund or the public, which refer to the Subadviser in any
way, prior to use thereof and not to use material if the Subadviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Such materials may be furnished to the Subadviser
hereunder by first class mail, overnight delivery service, facsimile
transmission equipment, or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of the
Series Fund must be obtained in conformity with the requirements of the 1940
Act.
9. Except as otherwise specifically provided in this Agreement, any notice
or other communication required to be given pursuant to this Agreement shall be
deemed duly given if delivered or mailed by certified or registered mail, return
receipt requested and postage prepaid, (1) to the American Odyssey Funds, Inc.
at Two Tower Center, East Brunswick, New Jersey 08816, Attention: President; (2)
to American Odyssey Funds Management, Inc. at Two Tower Center, East Brunswick,
New Jersey 08816, Attention: Secretary; or (3) to BEA Associates, One Citicorp
Center, 153 East 53rd Street, New York, New York 10022, Attention: General
Counsel.
10. This Agreement shall be governed by the laws of the State of New
Jersey.
11. This Agreement may be executed in two or more counterparts, which taken
together shall constitute one and the same instrument.
D-6
<PAGE> 73
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
<TABLE>
<S> <C> <C>
AMERICAN ODYSSEY FUNDS, INC.
- ----------------------------- By: -----------------------------
Witness
AMERICAN ODYSSEY FUNDS
MANAGEMENT, INC.
- ----------------------------- By: -----------------------------
Witness
BEA ASSOCIATES
- ----------------------------- By: -----------------------------
Witness
</TABLE>
D-7
<PAGE> 74
APPENDIX E
The Proposed Subadvisory Agreement with Chartwell appears below. This
agreement relates only to the Emerging Opportunities Fund Proposal (Proposal 2).
INVESTMENT SUBADVISORY AGREEMENT
Agreement made as of this 1st day of May, 1998, among American Odyssey
Funds, Inc., a Maryland corporation (the "Series Fund"), American Odyssey Funds
Management, Inc., a New Jersey corporation (the "Manager"), and Chartwell
Investment Partners, a partnership organized under the laws of the state of
Pennsylvania (the "Subadviser").
WHEREAS, American Odyssey Funds Management, Inc. has entered into a
management agreement (the "Management Agreement") with the Series Fund, a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"), pursuant to which American
Odyssey Funds Management, Inc. will act as Manager of the Series Fund.
WHEREAS, the Series Fund is currently divided into six separate series or
Funds, each of which is established pursuant to a resolution of the Board of
Directors of the Series Fund, and the Series Fund may in the future add
additional Funds; and
WHEREAS, the Manager has the responsibility of evaluating, recommending,
and supervising investment advisers to each Fund and, in connection therewith,
desires to retain the Subadviser to provide investment advisory services to the
Emerging Opportunities Fund (the "Fund"), the Series Fund has the responsibility
of compensating the investment advisers to each Fund and desires to retain the
Subadviser to provide investment advisory services to the Fund, and the
Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Series Fund, the Subadviser shall manage the investment
operations of the assets of the Fund allocated by the Manager to the Subadviser
(such assets referred to as the "Allocated Assets"), including the purchase,
retention and disposition of portfolio investments, in accordance with the
Fund's investment objectives, policies and restrictions as stated in the
Prospectus (such Prospectus and Statement of Additional Information as currently
in effect and as amended or supplemented from
E-1
<PAGE> 75
time to time, being herein called the "Prospectus") and subject to the following
understandings:
(i) The Subadviser shall consult periodically with the Manager and
they shall agree upon the current investment strategy for the Allocated
Assets in the light of anticipated cash flows.
(ii) The Subadviser shall provide supervision of the Allocated Asset's
investments and determine from time to time what securities, options,
futures contracts, and other investments included in the Allocated Assets
will be purchased, retained, sold, or loaned by the Fund, and what portion
of the Allocated Assets will be invested or held uninvested as cash.
(iii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation, By-Laws, and Prospectus of the Series Fund and with the
instructions and directions of the Manager and of the Board of Directors of
the Series Fund and will conform to and comply with the requirements of the
1940 Act, the Internal Revenue Code of 1986, and all other applicable
federal and state laws and regulations.
(iv) The Subadviser will place orders for the securities, options,
futures contracts, and other investments to be purchased or sold as part of
the Allocated Assets with or through such persons, brokers, dealers, or
futures commission merchants (including but not limited to persons
affiliated with the Manager) as the Subadviser may select in order to carry
out the policy with respect to brokerage set forth in the Series Fund's
Registration Statement and Prospectus or as the Board of Directors may
direct from time to time. In providing the Fund with investment advice and
management, the Subadviser will give primary consideration to securing the
most favorable price and efficient execution. Within the framework of this
policy, the Subadviser may consider such factors as the price of the
security, the rate of the commission, the size and difficulty of the order,
the reliability, integrity, financial condition, general execution and
operational capabilities of competing broker-dealers and futures commission
merchants, and the brokerage and research services they provide to the
Subadviser or the Fund. The parties agree that it is desirable for the Fund
that the Subadviser have access to supplemental investment and market
research and security and economic analysis that certain brokers or futures
commission merchants are able to provide. The parties further agree that
brokers and futures commission merchants that provide such research and
analysis may execute brokerage transactions at a higher cost to the
E-2
<PAGE> 76
Fund than would result if orders to execute such transactions had been
placed with other brokers on the sole basis of ability to obtain the most
favorable price and efficient execution. Therefore, notwithstanding the
second sentence of this paragraph 1(a)(iv), the Subadviser is authorized to
place orders for the purchase and sale of securities, options, futures
contracts, and other investments for the Fund with brokers or futures
commission merchants who provide the Subadviser with such research and
analysis, subject to review by the Manager and the Series Fund's Board of
Directors from time to time with respect to the extent and continuation of
this practice. The Series Fund and the Manager acknowledge that the
services provided by such brokers or futures commission merchants may be
useful to the Subadviser in connection with the Subadviser's services to
other clients.
When the Subadviser deems the purchase or sale of a security, option,
futures contract, or other investment to be in the best interest of the
Fund as well as other clients of the Subadviser, the Subadviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities, options, futures
contracts, or other investments to be sold or purchased in order to obtain
the most favorable price or lower brokerage commissions and efficient
execution and to allocate the shares purchased or sold among the Series
Fund and the Subadviser's other clients on a fair and nondiscriminatory
basis, in a manner consistent with the Subadviser's fiduciary obligations
to the Fund and to such other clients.
(v) The Subadviser shall maintain all books and records with respect
to the portfolio transactions of the Allocated Assets required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of
Rule 31a-1 under the 1940 Act and by Rule 17e-1(c)(2) under the 1940 Act
and shall render to the Series Fund such periodic and special reports as
its Board of Directors or the Manager may reasonably request.
(vi) The Subadviser shall provide the Series Fund's custodian on each
business day with information relating to all transactions concerning the
Allocated Assets and shall provide the Manager with such information upon
request of the Manager.
(vii) The investment management services provided by the Subadviser
hereunder are not exclusive, and the Subadviser shall be free to render
similar services to others; provided, however, that the Subadviser agrees
that it shall not serve or accept retention as investment adviser,
investment manager, or similar service provider
E-3
<PAGE> 77
during the term of this Agreement and, if this Agreement is terminated by
the Subadviser, for the period of one year after the termination of this
Agreement, with or for the benefit of any investment company registered
under the 1940 Act that meets the following conditions: (1) at least 25% of
the shares of the investment company (or in the case of a series investment
company, at least 25% of the shares of the series of that investment
company to which the Subadviser would provide services) are owned by one or
more separate accounts that fund individual or group variable annuity
contracts, and (2) the owners of (or, for a group variable annuity
contract, the participants in) one or more of the variable annuity
contracts funded by the investment company (or series thereof) are eligible
to participate in a fee-based investment advisory asset allocation program
associated with that variable annuity contract; provided, however, that the
foregoing restriction shall not apply to any services provided to the
Financial Services Department, or any other unit, of The Travelers
Insurance Company.
(b) Services to be furnished by the Subadviser under this Agreement may be
furnished through the medium of any directors, officers, or employees of the
Subadviser or its affiliates.
(c) The Subadviser shall keep the books and records with respect to the
Allocated Assets required to be maintained by the Subadviser pursuant to
paragraph 1(a)(v) hereof and shall timely furnish to the Manager or the Series
Fund's custodian all information relating to the Subadviser's services hereunder
needed to keep the other books and records of the Fund required by Rules
17e-1(c)(2) and 31a-1 under the 1940 Act. The Subadviser agrees that all records
which it maintains for the Fund are the property of the Fund and the Subadviser
will surrender promptly to the Fund any of such records upon the Fund's request,
provided however that the Subadviser may retain a copy of such records. The
Subadviser further agrees to preserve for the periods prescribed by Rules
17e-1(c)(2) and 31a-2 under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph 1(a)(v) hereof.
(d) The Subadviser agrees to maintain procedures adequate to ensure its
compliance with the 1940 Act, the Investment Advisers Act of 1940 (the "Advisers
Act"), and other applicable state and federal laws and regulations.
(e) The Subadviser shall furnish to the Manager, upon the Manager's
reasonable request, copies of all records prepared in connection with (i) the
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<PAGE> 78
performance of this Agreement and (ii) the maintenance of compliance procedures
pursuant to paragraph 1(d) hereof.
(f) The Subadviser agrees to provide upon reasonable request of the Manager
or the Series Fund, information regarding the Subadviser, including but not
limited to background information about the Subadviser and its personnel and
performance data, for use in connection with efforts to promote the Series Fund
and the sale of its shares.
2. The Manager shall continue to have responsibility for all services to be
provided to the Fund pursuant to the Management Agreement and shall oversee and
review the Subadviser's performance of its duties under this Agreement.
3. The Series Fund shall pay the Subadviser, for the services provided and
the expenses assumed pursuant to this Subadvisory Agreement, a fee at an annual
rate of 0.70% of the average daily Net Allocated Assets up to and including $50
million, plus a fee at an annual rate of 0.50% of the average daily Net
Allocated Assets over $50 million and up to and including $100 million, plus a
fee at an annual rate of 0.45% of the average daily Net Allocated Assets over
$100 million. The term "Net Allocated Assets" means the Allocated Assets less
related liabilities as determined by the Manager or its designee. This fee will
be computed daily and paid monthly.
4. The Subadviser shall not be liable for any loss suffered by the Series
Fund or the Manager as a result of any negligent act or error of judgment of the
Subadviser in connection with the matters to which this Agreement relates,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services (in which case any award of damages shall
be limited to the period and the amount set forth in Section 36(b)(3) of the
1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on the Subadviser's part in the performance of its duties or from its
reckless disregard of its obligations and duties under this Agreement. The
Series Fund shall indemnify the Subadviser and hold it harmless from all loss,
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by the Subadviser resulting from actions from which it is relieved of
responsibility by this paragraph. The Subadviser shall indemnify the Series Fund
and the Manager and hold them harmless from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the Series Fund and
the Manager resulting from actions from which the Subadviser is not relieved of
responsibility by this paragraph.
E-5
<PAGE> 79
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the
Series Fund or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, or by the Manager or the Subadviser at any
time, without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act) or
upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or dissimilar nature, nor
limit the Subadviser's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual, or association,
except as described in Paragraph 1(a)(vii) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature or other material prepared for distribution to
shareholders of the Fund or the public, which refer to the Subadviser in any
way, prior to use thereof and not to use material if the Subadviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Such materials may be furnished to the Subadviser
hereunder by first class mail, overnight delivery service, facsimile
transmission equipment, or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of the
Series Fund must be obtained in conformity with the requirements of the 1940
Act.
9. Except as otherwise specifically provided in this Agreement, any notice
or other communication required to be given pursuant to this Agreement shall be
deemed duly given if delivered or mailed by certified or registered mail, return
receipt requested and postage prepaid, (1) to the American Odyssey Funds, Inc.
at Two Tower Center, East Brunswick, NJ 08816, Attention: President; (2) to
American Odyssey Funds Management, Inc. at Two Tower Center, East Brunswick, NJ
08816, Attention: Secretary; or (3) to Chartwell Investment Partners, 1235
Westlakes Drive,
E-6
<PAGE> 80
Suite 330, Berwyn, Pennsylvania 19312, Attention: Chief Operating Officer.
10. This Agreement shall be governed by the laws of the State of New
Jersey.
11. This Agreement may be executed in two or more counterparts, which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
<TABLE>
<S> <C> <C>
AMERICAN ODYSSEY FUNDS, INC.
- ----------------------------- By: -----------------------------
Witness
AMERICAN ODYSSEY FUNDS
MANAGEMENT, INC.
- ----------------------------- By: -----------------------------
Witness
CHARTWELL INVESTMENT
PARTNERS
- ----------------------------- By: -----------------------------
Witness
</TABLE>
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<PAGE> 81
APPENDIX F
RATINGS OF DEBT SECURITIES
The following information about debt securities ratings relates to the
Short-Term Bond Fund Proposals.
Moody's Investors Service, Inc.
AAA -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged."
AA -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
A -- Bonds rated A possess many favorable investment attributes and are
generally considered as upper medium grade obligations.
BAA -- Bonds rated Baa are considered medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA -- Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterize
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
F-1
<PAGE> 82
C -- Bonds which are rated as C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation
A Standard & Poor's Corporation (S&P) corporate bond rating is a current
assessment of the creditworthiness of an obligor, including obligors outside the
U.S., with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
are based, in varying degrees, on the following considerations:
- Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
- Nature of and provisions of the obligation; and
- Protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
To provide more detailed indications of credit quality, ratings from "AA" to "A"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Bond ratings are as follows:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse
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<PAGE> 83
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB -- Bonds rated BBB are regarded as having adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC, and CC are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. As discussed in
greater detail below, while such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB -- Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Bonds rated B have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Bonds rated CCC have a currently identifiable vulnerability to default,
and are dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C -- The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating
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<PAGE> 84
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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<PAGE> 85
YOUR INSTRUCTIONS ARE IMPORTANT.
PLEASE (1) PROVIDE YOUR VOTING INSTRUCTIONS ON THE REVERSE SIDE OF THIS
INSTRUCTION CARD.
(2) SIGN AND DATE THE CARD IN THE SPACES BELOW, AND
(3) MAIL THE COMPLETED CARD AND ANY OTHER VOTING INSTRUCTION CARDS YOU HAVE
RECEIVED AS SOON AS POSSIBLE.
-- Please fold and detach card at perforation before mailing --
AMERICAN ODYSSEY SHORT-TERM BOND FUND This request for
instructions is Solicited
by The Travelers Insurance
Company and Board of
Directors of American
Odyssey Funds, Inc.
Special Meeting of Persons Having Voting Rights
To persons owning variable contracts issued by The Travelers Insurance Company
who have allocated all or part of their interest in their contract to the
American Odyssey Short-Term Bond Fund:
You are entitled to provide The Travelers Insurance Company with instructions
how to vote the shares representing your interest in the Short-Term Bond Fund on
Proposals 1(a), 1(b), and 1(c). These proposals are described in the Proxy
Statement accompanying this voting instruction card.
The Travelers Insurance Company will vote the shares in accordance with your
instructions at the special meeting of persons having voting rights to be held
by American Odyssey Funds, Inc., on April 24, 1998, at 10:00 a.m. at the
offices of The Copeland Companies, Two Tower Center, East Brunswick, New
Jersey. If you attend the meeting, you may revoke these instructions and give
other instructions to The Travelers Insurance Company.
Date: ________________,1998
PLEASE SIGN IN BOX BELOW
SIGNATURE(S)
(Please sign exactly as
your name appears at the
left of this proxy card)
<PAGE> 86
-- Please fold and detach card at perforation before mailing --
Your instructions are solicited only with respect to Proposals 1(a), 1(b), and
1(c) listed below. If you are eligible to give instructions on how to vote with
respect to Proposal 2, you will have received a separate voting instruction
card for that purpose.
Please vote by filing in the appropriate box below, as shown, using blue or
black ink or dark pencil, and by signing and dating the other side of this
card. Please do not use red ink. [X]
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
To convert the American Odyssey Short-Term
Bond Fund into the American Odyssey Global
High-Yield Bond Fund:
Proposal 1(a): To approve changes to the [ ] [ ] [ ]
Short-Term Bond Fund's investment objective
and policies.
Proposal 1(b): To approve a new investment [ ] [ ] [ ]
subadvisory agreement with BEA Associates.
Proposal 1(c): To approve amendments to the [ ] [ ] [ ]
investment management agreement with American
Odyssey Funds Management, Inc.
</TABLE>
Note: None of Proposals 1(a), 1(b), and 1(c) will be
adopted unless all three proposals are approved.
If you do not fill in a box above but return the instruction card signed and
dated, The Travelers Insurance Company will vote the shares "FOR" each of the
proposals.
<PAGE> 87
YOUR INSTRUCTIONS ARE IMPORTANT.
PLEASE (1) PROVIDE YOUR VOTING INSTRUCTIONS ON THE REVERSE SIDE OF THIS
INSTRUCTION CARD.
(2) SIGN AND DATE THE CARD IN THE SPACES BELOW, AND
(3) MAIL THE COMPLETED CARD AND ANY OTHER VOTING INSTRUCTION CARDS YOU HAVE
RECEIVED AS SOON AS POSSIBLE.
-- Please fold and detach card at perforation before mailing --
AMERICAN ODYSSEY EMERGING OPPORTUNITIES FUND This request for
instructions is
Solicited by The
Travelers Insurance
Company and Board of
Directors of American
Odyssey Funds, Inc.
Special Meeting of Persons Having Voting Rights
To persons owning variable contracts issued by The Travelers Insurance Company
who have allocated all or part of their interest in their contract to the
American Odyssey Emerging Opportunities Fund:
You are entitled to provide The Travelers Insurance Company with instructions
how to vote the shares representing your interest in the Emerging Opportunities
Fund on Proposal 2. Proposal 2 is described in the Proxy Statement accompanying
this voting instruction card.
The Travelers Insurance Company will vote the shares in accordance with your
instructions at the special meeting of persons having voting rights to be held
by American Odyssey Funds, Inc., on April 24, 1998, at 10:00 a.m., at the
offices of The Copeland Companies, Two Tower Center, East Brunswick, New
Jersey. If you attend the meeting, you may revoke these instructions and give
other instructions to The Travelers Insurance Company.
Date:_______________,1998
PLEASE SIGN IN BOX BELOW
SIGNATURE(S)
(Please sign exactly as
your name appears at the
left of this proxy card)
<PAGE> 88
-- Please fold and detach card at perforation before mailing --
Your instructions are solicited only with respect to Proposal 2 listed below.
If you are eligible to give instructions on how to vote with respect to
Proposals 1(a), 1(b), and 1(c), you will have received a separate voting
instruction card for that purpose.
Please vote by filing in the appropriate box below, as shown, using blue or
black ink or dark pencil, and by signing and dating the other side of this
card. Please do not use red ink. [X]
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Proposal 2: To approve a new investment
subadvisory agreement and amendments to the [ ] [ ] [ ]
management agreement to add Chartwell Investment
Partners as a new subadviser for the American
Odyssey Emerging Opportunities Fund and to
increase the maximum annual fee rate that may be
paid to subadvisers of the Fund.
</TABLE>
If you do not fill in a box above but return the instruction card signed and
dated, The Travelers Insurance Company will vote the shares "FOR" the proposal.
