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AMERICAN ODYSSEY FUNDS, INC.
SUPPLEMENT TO
PROSPECTUS DATED MAY 1, 1997
SUPPLEMENT DATE: FEBRUARY 9, 1998
OVERVIEW
On February 5, 1998, the Board of Directors of American Odyssey Funds, Inc.
(the "Company") approved changes for the Emerging Opportunities Fund and the
Short-Term Bond Fund. Those changes require shareholder approval, and that
approval will be sought through a proxy solicitation and a meeting scheduled for
April 24, 1998. If those changes are approved by shareholders, they will become
effective May 1, 1998. This supplement describes those changes. Current and
prospective investors should consider these proposed changes.
In addition, as noted on pages 24-25 of the Prospectus, shareholders have
already approved a proposal that would permit the Board of Directors to change
subadvisers or amend existing subadviser agreements without shareholder
approval. That arrangement required issuance of an order by the Securities and
Exchange Commission (the "SEC"). It is expected that the SEC order will be
issued prior to May 1, 1998, and thus it is expected that the arrangement
(including the new Management Agreement and new subadvisory agreements referred
to on page 25 of the Prospectus) will become effective on May 1, 1998.
CONVERSION OF THE SHORT-TERM BOND FUND
INTO THE GLOBAL HIGH-YIELD BOND FUND
On February 5, 1998, the Board of Directors approved a proposal to convert
the Short-Term Bond Fund into a Global High-Yield Bond Fund. That conversion
would involve changes to the Fund's name, investment objectives, investment
policies and investment restrictions. The conversion would mean a new subadviser
and revised fees.
The conversion requires shareholder approval, and that approval will be
sought through a proxy solicitation and a meeting scheduled for April 24, 1998.
If the conversion is approved by shareholders, it will become effective May 1,
1998. This supplement describes the changes that would result from the
conversion.
Investment Objective and Program. If this Proposal is adopted, the
investment objective and program for the Short-Term Bond Fund listed on pages
15-16 of the Prospectus will be replaced by the following:
AMERICAN ODYSSEY GLOBAL HIGH-YIELD BOND FUND
Investment Objective. 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.
Investment Program. To achieve its objective, the Fund generally invests
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
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securities; (7) U.S. government securities; and (8) money market instruments.
Most securities in which the Fund invests are characterized by high income
potential, but in selecting securities the Fund's subadviser also considers
potential for growth of capital.
Domestic high-yield debt. The portfolio ordinarily includes 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 Fund may also purchase unrated debt
securities of comparable quality. The Fund may invest in a debt security of
any rating; i.e., there is no minimum rating.
Foreign high-yield debt. The portfolio ordinarily also includes a
substantial number of 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 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.
Investment-grade debt. The Fund may also 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. The 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.
Equity securities. The Fund may invest in equity securities,
including both preferred and common stock, that the subadviser believes has
potential to generate high dividend income. The Fund may also invest in
convertible securities, warrants, and units that combine debt and equity
securities or that share characteristics of each. The Fund may retain
equity securities acquired if the Fund exercises conversion options in
securities it holds. Equity securities held by the Fund may be issued by
domestic or foreign corporations. In addition to the risks ordinarily
associated with equity securities, the equity securities in which the 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, asset-backed securities, U.S. government
securities, and money market instruments (including repurchase agreements
and reverse repurchase agreements). The Fund may also invest in these
securities, which are described in the Prospectus in connection with the
Long-Term Bond Fund.
Risks of Investing in Emerging Market and Other Foreign
Securities. General information about the risks of investing in foreign
securities is set forth in the Prospectus in connection with the International
Equity Fund. The risks of international investing may be intensified in the case
of investments 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
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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. Foreign issuers, particularly those in
emerging markets, are generally not bound by uniform accounting, auditing, and
financial reporting requirements and standards of practice comparable to those
applicable to U.S. issuers.
The following 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 from time to time.
Foreign Currency Transactions. To facilitate the purchase and sale of
foreign securities and to manage foreign exchange risk, the Fund may enter into
forward contracts to purchase or sell foreign currencies. In addition, the Fund
may enter into such forward contracts for investment purposes. More information
is set forth in the Prospectus in connection with the International Equity Fund
and in the Statement of Additional Information.
General Risk Considerations. The general risk inherent in investing in the
Fund is 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
Fund will achieve its investment objective. Income and yields on high-yield
securities, as on all securities, will fluctuate over time.
In addition, special considerations pertain to high-yield securities. The
Fund invests 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. 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 Fund's shares.
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 Fund's subadviser will attempt to control risk
through diversification, credit analysis, review of sector and industry
trends, interest rate forecasts, and economic analysis, as well as
fundamental analysis of individual securities. The Fund's subadviser
performs its own credit analyses of the 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 Fund's
investment objective may be more dependent on the subadviser's credit
analyses than is the case for Funds that invest in higher quality bonds.
The subadviser will monitor the issuers of the 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 Fund may retain a security whose NRSRO credit rating has
changed.
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Sensitivity to Interest Rate and Economic Changes. As a general
matter, the yields of high-yield 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, 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 Fund may 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 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 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 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.
Additional Investment Information. If this Proposal is adopted, the
"Additional Investment Information" section on pages 16-18 of the Prospectus
will be revised to state the following: (1) that the Global High-Yield Bond Fund
may purchase and write options on stocks or stock indices; (2) that the Global
High-Yield Bond Fund may purchase and sell stock index futures contracts and
options thereon; (3) that the Global High-Yield Bond Fund may invest in
preferred stocks, convertible securities, and warrants; and (4) that the Global
High-Yield Bond Fund may utilize short sales against the box.
Fees. If this proposal is adopted, the fees on page 20 of the Prospectus
for the Short-Term Bond Fund would be revised to state the proposed fees for the
Global High-Yield Bond Fund. The proposed fees total 0.675% of average daily net
assets -- a fee of 0.425% paid by the Fund to the subadviser, plus a fee of
0.250% paid by the Fund to the Manager.
Subadviser. If this Proposal is adopted, BEA Associates would become the
sole subadviser for the Global High-Yield Bond Fund. Thus, the description on
page 24 of the current subadviser for the Short-Term Bond Fund, Smith Graham &
Co. Asset Managers, would be replaced by the following:
BEA Associates ("BEA") serves as subadviser for the Global High-Yield
Bond Fund. Its offices are at One Citicorp Center, 153 East 53rd Street,
New York, New York 10022. It is an indirect wholly-owned subsidiary of
Credit Suisse Group, a Swiss corporation. BEA serves as an investment
adviser to a variety of individual and institutional investors, including
mutual funds. As of December 31, 1997, BEA managed more than $34 billion of
assets, and Credit Suisse Asset Management, a group of affiliated companies
of which BEA is a member, together managed more than $128 billion of assets
in the United States and abroad. The Fund currently pays BEA, on a monthly
basis, an annual subadvisory fee based on the average daily net assets of
the Fund at the rate of 0.425%. BEA first began serving as subadviser for
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the Global High-Yield Bond Fund effective May 1, 1998, and thus did not
receive any subadvisory fees in 1997. The following individuals are
responsible for the day-to-day management of the Global High-Yield Bond
Fund:
Richard Lindquist serves as Executive Director and is a Portfolio
Manager at BEA and heads its high yield portfolio team. Mr. Lindquist
joined BEA in 1995 as a result of BEA's acquisition of CS First Boston
Investment Management. Prior to joining CS First Boston, Mr. Lindquist
worked for Prudential Insurance Company of America, where he managed high
yield portfolios totaling approximately $1.3 billion, and T. Rowe Price
Associates, where he managed a high-yield bond mutual fund.
Gregg Diliberto serves as Managing Director and is a Portfolio Manager
at BEA, where he is responsible for the interest rate sensitivity of all
BEA bond assignments and the management of structured fixed income
portfolios (domestic and international) and insurance accounts. His work
includes managing interest rate futures, options, municipals, and
convertibles, as well as more conventional securities. Mr. Diliberto built
BEA's proprietary computer models for trading, option valuation, and asset
liability modeling. Prior to joining BEA in 1984, Mr. Diliberto spent seven
years at Buck Consultants, where he analyzed pension fund finances.
Diane Damskey serves as Senior Vice President and is a Portfolio
Manager at BEA. Ms. Damskey joined BEA in 1997 as a portfolio manager
dedicated to emerging markets fixed income. She has spent 16 years in
investment or financial capacities focused on emerging markets, and her
experience spans the entire universe of developing nations. Previously, she
managed fixed income portfolios at Global Emerging Markets Advisors;
developed and marketed emerging market debt strategies for The First
National Bank of Chicago; advised and represented the Republic of Venezuela
regarding the restructuring of its commercial bank debt into Brady bonds
while at Shearson Lehman Hutton; and served as a credit officer and risk
analyst at Manufacturers Hanover Trust Company.
NEW SUBADVISER AND REVISED FEE STRUCTURE
FOR THE EMERGING OPPORTUNITIES FUND
On February 5, 1998, the Board of Directors approved a Proposal to replace
one of the subadvisers for the Emerging Opportunities Fund and to increase the
maximum subadvisory fee that can be implemented without shareholder approval.
This Proposal requires shareholder approval, and that approval will be
sought through a proxy solicitation and a meeting scheduled for April 24, 1998.
If the Proposal is approved by shareholders, it will become effective May 1,
1998. This supplement describes those changes that would result from the
Proposal.
Fees. If this Proposal is adopted, the fees on page 20 of the Prospectus
for the Emerging Opportunities Fund would be revised to show the following fees.
<TABLE>
<CAPTION>
ASSETS TOTAL FEE MANAGER FEE SUBADVISORY 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>
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Subadviser. If this Proposal is adopted, Chartwell Investment Partners
will replace Wilke/Thompson Capital Management, Inc. ("Wilke/Thompson") as a
subadviser of the Emerging Opportunities Fund. Thus, the description on pages
21-22 of the Prospectus of Wilke/Thompson would be replaced by the following:
Chartwell Investment Partners ("Chartwell") serves as one of the two
subadvisers for the Emerging Opportunities Fund. Its offices are at 1235
Westlakes Drive, Suite 330, Berwyn, PA 19312. Chartwell serves as an
investment adviser to a variety of individual and institutional investors,
including mutual funds. As of December 31, 1997, Chartwell managed
approximately $1.25 billion of assets. The Fund currently pays Chartwell,
on a monthly basis, an annual subadvisory fee based on the average daily
net assets of the Fund at the rate of 0.70% for the first $50 million in
assets, 0.50% for the next $50 million in assets, and 0.45% for assets over
$100 million. Chartwell first began serving as subadviser for the Emerging
Opportunities Fund effective May 1, 1998, and thus did not receive any
subadvisory fees in 1997. The following individuals are responsible for the
day-to-day management of the portion of the Emerging Opportunities Fund
managed by Chartwell:
Edward N. Antoian co-founded Chartwell in 1997 and is currently a
partner there. From 1984 to 1997, Mr. Antoian was a Senior Portfolio
Manager at Delaware Investment Advisers, managing institutional assets in
small- and mid-cap growth styles as well as the Trend and DelCap Funds.
Prior to joining Delaware, Mr. Antoian was employed by E.F. Hutton in the
institutional equity division. Mr. Antoian has eighteen years' experience
in equity investing.
David C. Dalrymple co-founded Chartwell in 1997 and is currently a
partner there. From 1991 to 1997, Mr. Dalrymple was a Portfolio Manager for
Delaware Investment Advisers, managing a small-cap value mutual fund, the
Value Fund, and assisting in managing mutual funds and institutional assets
in small and mid-cap styles. Prior to joining Delaware, he was an assistant
portfolio manager at Lord Abbet & Co. Mr. Dalrymple has eleven years'
experience in equity investing.
Michelle C. Egan has worked as a Securities Analyst for Chartwell
since 1997. Prior to joining Chartwell, Ms. Egan was an associate with the
Boston Consulting Group and an analyst-intern with Delaware Investment
Advisers. Ms. Egan has four years' experience in the investment and
financial fields.
Maximum Fee. If this proposal is adopted, the new Management Agreement
described on page 25, of the Prospectus which is scheduled to become effective
May 1, 1998, would set 0.80% as the maximum subadviser fee for the Emerging
Opportunities Fund. Any subadviser fee above that maximum would require
additional shareholder approval.
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AMERICAN ODYSSEY FUNDS, INC.
SUPPLEMENT TO
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1997
SUPPLEMENT DATE: February 9, 1998
On February 5, 1998, the Board of Directors of American Odyssey Funds,
Inc. (the "Company") approved a proposal to convert the Short-Term Bond Fund
into a Global High-Yield Bond Fund. That conversion would involve changes to the
Fund's name, investment objectives, investment policies, and investment
restrictions. The conversion would mean a new subadviser and revised fees. The
conversion requires shareholder approval, and that approval will be sought
through a proxy solicitation and a meeting scheduled for April 24, 1998. If the
conversion is approved by shareholders, it will become effective May 1, 1998.
This supplement describes changes that will apply to the fundamental investment
restrictions if the conversion is approved by shareholders.
For further information about the proposed conversion, see the
Supplement to the Prospectus dated February 9, 1998. This Supplement and the
Statement of Additional Information should be read in conjunction with the
Company's Prospectus dated May 1, 1997 and the Supplement to that Prospectus
dated February 9, 1998.
If the conversion is approved, investment restriction no. 5 on page 20
will be revised as follows:
5. [No Fund shall:] Make a short sale of securities or maintain a
short position, except that the International Equity Fund, the
Emerging Opportunities Fund, 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.
If the conversion is approved, investment restriction no. 9 on page 20
will be revised as follows:
9. [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 debt obligations are not
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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.
If the conversion is approved, investment restriction no. 13 on page 22
will be revised as follows:
13. [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 up to 15%
of the Global High-Yield Bond Fund's assets may be invested in
them. 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.
If the conversion is approved, the following will be added on page 22
as a non-fundamental investment policy, which means that the Board of Directors
may change it without shareholder approval:
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.
