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A M E R I C A N O D Y S S E Y F U N D S , I N C .
AMERICAN ODYSSEY GLOBAL HIGH-YIELD BOND FUND
AMERICAN ODYSSEY INTERNATIONAL EQUITY FUND
AMERICAN ODYSSEY EMERGING OPPORTUNITIES FUND
AMERICAN ODYSSEY CORE EQUITY FUND
AMERICAN ODYSSEY LONG-TERM BOND FUND
AMERICAN ODYSSEY INTERMEDIATE-TERM BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
(AS SUPPLEMENTED ON JULY 15, 1999)
American Odyssey Funds, Inc. is a diversified open-end management
investment company that is currently made up of six different "series" or
Funds. Each Fund is, for investment purposes, a separate investment fund, and
each issues a separate class of capital stock representing an interest in that
Fund.
Shares of American Odyssey Funds, Inc. may be sold only to: (1) life
insurance company separate accounts to serve as the underlying investment
vehicle for variable annuity and variable life insurance contracts; (2)
qualified retirement plans (including arrangements under section 403(b) of the
Internal Revenue Code), as permitted by Treasury Regulations; and (3) life
insurance companies and their affiliates.
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This statement of additional information is not a prospectus. You
should read it in conjunction with the American Odyssey Funds, Inc. prospectus
dated May 1, 1999. You may obtain the prospectus without charge by writing to
American Odyssey Funds, Inc., Two Tower Center, P.O. Box 1063, East Brunswick,
New Jersey 08816-1063, or by calling 1-800-242-7884. This statement of
additional information incorporates portions of the accompanying American
Odyssey Funds, Inc. Annual Report.
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American Odyssey Funds, Inc.
Two Tower Center, P.O. Box 1063
East Brunswick, New Jersey 08816-1063
Telephone: (732) 514-2000
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AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Preferred Stocks, Convertible Securities, and Warrants . . . . . . . . . . . . 4
Depository Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Mortgage-Related Securities . . . . . . . . . . . . . . . . . . . . . . . . . 5
Asset-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Additional Types of High-Yield Debt Securities . . . . . . . . . . . . . . . . 6
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Options on Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . 8
Options on Stock Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Options on Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Options on Foreign Currencies . . . . . . . . . . . . . . . . . . . . . . . . . 16
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Stock Index Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interest Rate Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . 19
Foreign Currency Futures Contracts . . . . . . . . . . . . . . . . . . . . . . 20
Options on Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 20
Forward Foreign Currency Exchange Contracts . . . . . . . . . . . . . . . . . . . . 21
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
When-Issued and Delayed Delivery Securities . . . . . . . . . . . . . . . . . . . . 24
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Temporary Defensive Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Money Market Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Ratings of Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Ratings of Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
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MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Investment Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Other Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
NET ASSET VALUE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
OWNERSHIP OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
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AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
INVESTMENT OBJECTIVES AND PROGRAMS
The investment objectives of the various Funds, their strategies for achieving
those objectives, and the associated risks are described in the prospectus.
This section supplements that description.
EQUITY SECURITIES
PREFERRED STOCKS, CONVERTIBLE SECURITIES, AND WARRANTS
Each Fund may invest in preferred stocks and convertible securities. Preferred
stocks are equity securities whose owners have a claim on a company's earnings
and assets before common stockholders but after debt holders. Convertible
securities are debt or preferred stock which are convertible into or
exchangeable for common stock. In addition, the Global High-Yield Bond Fund,
the International Equity Fund, the Emerging Opportunities Fund, and the Core
Equity Fund may invest in warrants. Warrants are options to buy a stated number
of shares of common stock at a specified price any time during the life of the
warrant (generally two or more years).
DEPOSITORY RECEIPTS
The Global High-Yield Bond Fund, the International Equity Fund, the Emerging
Opportunities Fund, and the Core Equity Fund may each invest in foreign equity
securities. In some cases, the Funds might not purchase securities on the
principal market. For example, the Funds may purchase American Depository
Receipts ("ADRs"). ADRs are registered receipts typically issued in the United
States by a bank or trust company evidencing ownership of an underlying foreign
security. The Funds may invest in ADRs which are structured by a U.S. bank
without the sponsorship of the underlying foreign issuer. In addition to the
risks of foreign investment described in the prospectus, such unsponsored ADRs
may also be subject to the risks that the foreign issuer may not be obligated
to cooperate with the U.S. bank, and may not provide additional financial and
other information to the bank or the investor, or that such information in the
U.S. market may not be current. The Funds may likewise utilize European
Depository Receipts ("EDRs"), which are similar instruments, in bearer form,
designed for use in the European securities markets.
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DEBT SECURITIES
MORTGAGE-RELATED SECURITIES
The Global High-Yield Bond Fund, the Long-Term Bond Fund, and the
Intermediate-Term Bond Fund may invest in mortgage-backed securities issued by
the Government National Mortgage Association ("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 not
applicable to most other fixed-income 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 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.
The same Funds may invest in mortgage-backed securities issued by private
entities, such as commercial or mortgage banks, savings and loan associations,
or broker-dealers, that meet the quality standards set forth above for
corporate debt. 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.
The same Funds 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.
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ASSET-BACKED SECURITIES
The Global High-Yield Bond Fund, the Long-Term Bond Fund, and the
Intermediate-Term Bond 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). 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.
ADDITIONAL TYPES OF HIGH-YIELD DEBT SECURITIES
In furtherance of their respective investment objectives, the Global High-Yield
Bond Fund, Long-Term Bond Fund, and Intermediate-Term Bond Fund may invest in
the following specialized types of high-yield instruments. The latter two
Funds may invest up to 15% of their assets in high-yield debt securities, which
may include those described below. The Global High-Yield Bond Fund may invest
up to 100% of its assets in high-yield debt securities, but the Manager does
not anticipate that the Fund ordinarily will invest more than 15% of its assets
in the specialized instruments described below.
Zero Coupon Bonds. Zero coupon bonds do not pay interest for several years,
and then pay full coupon interest until maturity. These bonds are sold at a
substantial original issue discount equal to the missing interest payment
compounded at the coupon rate. Zero coupon bonds give the issuer the
flexibility of reduced cash interest expense for several years, while giving
the purchaser the potential advantage of compounding the coupons at a higher
rate than might otherwise be available.
Zero coupon bonds bear special risks beyond those ordinarily associated with
high-yield securities. Because the bonds' cash flows are deferred and because
the bonds often represent very subordinated debt, their prices are subject to
more volatility than most other bonds and may be more greatly affected by
interest rate changes.
Step-up Bonds. Step-up bonds are a variant of zero coupon bonds. Step-up
bonds pay a low initial interest rate for several years and then pay a higher
rate until maturity. They are
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also issued at an original issue discount, and bear similar risks to those
associated with zero coupon bonds, although generally to a lesser degree.
Pay-in-kind Bonds. Pay-in-kind ("PIK") bonds pay interest either in cash or in
additional securities at the issuer's option for a specified period. Like zero
coupon bonds, PIK bonds are designed to give the issuer flexibility in managing
cash flow. Unlike zero coupon bonds, however, PIK bonds offer the investor the
opportunity to sell the additional securities issued in lieu of interest and
thus obtain current income on the original investment. Interest rate changes
tend to affect the market prices of PIK bonds to a greater extent than
securities that pay interest in cash.
Reset Bonds. The interest rate on reset bonds is adjusted periodically to a
level which should allow the bonds to trade at a specified dollar level,
generally par or $101. The rate can usually be raised, but the bonds have a
low call premium, limiting the opportunity for capital gains by the Fund. Some
resets have a maximum rate, generally 2.5% or 3% above the initial rate.
Increasing Rate Notes. Increasing rate notes ("IRNs") have interest rates that
increase periodically (by 1/4% per quarter, for example). IRNs are generally
used as a temporary financing instrument, because the increasing rate provides
an incentive for the issuer to refinance with longer-term debt. Thus,
principal is likely to be repaid more quickly than with other types of
high-yield securities, and it may not be possible for a Fund to reinvest the
proceeds at the same rates.
OPTIONS
Each Fund may write (i.e., sell) options under certain limitations described
below. In general, (1) the Global High-Yield Bond Fund, the International
Equity Fund, the Emerging Opportunities Fund, and the Core Equity Fund may
purchase and write (i.e., sell) put and call options on stocks or stock indices
that are traded on national securities exchanges or that are listed on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"); (2) any Fund other than the Emerging Opportunities and the Core
Equity Funds may purchase and write (i.e., sell) put and call options on debt
securities (including U.S. government debt securities) that are traded on
national securities exchanges or that result from privately negotiated
transactions with primary U.S. government securities dealers recognized by the
Federal Reserve Bank of New York; and (3) any Fund may purchase and
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write (i.e., sell) put and call options on foreign currencies traded on U.S. or
foreign securities exchanges or boards of trade. The Funds will only write
covered options, as explained below. An option gives the owner the right to buy
or sell securities at a predetermined exercise price for a given period of
time. Although options are primarily used to minimize principal fluctuations,
or to generate additional premium income for the Funds, they do involve certain
risks. Writing covered call options involves the risk of not being able to
effect closing transactions at a favorable price or participate in the
appreciation of the underlying securities or index above the exercise price.
Writing covered put options also involves the risk of not being able to effect
closing transactions at favorable prices or losing part or all of the
securities used for cover if the price of the underlying security falls below
the exercise price. Purchasing put or call options involves the risk of losing
the entire premium (i.e., purchase price of the option).
OPTIONS ON EQUITY SECURITIES
The Global High-Yield Bond Fund, the International Equity Fund, the Emerging
Opportunities Fund, and the Core Equity Fund may purchase and write (i.e.,
sell) put and call options on equity securities that are traded on national
securities exchanges or that are listed on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"). A call option is a
short-term contract pursuant to which the purchaser or holder, in return for a
premium paid, has the right to buy the equity security underlying the option at
a specified exercise price (the strike price) at any time during the term of
the option. The writer of the call option, who received the premium, has the
obligation, upon exercise of the option, to deliver the underlying equity
security against payment of the strike price. A put option is a similar
contract which gives the purchaser or holder, in return for a premium, the
right to sell the underlying equity security at a specified exercise price (the
strike price) during the term of the option. The writer of the put, who
receives the premium, has the obligation to buy the underlying equity security
at the strike price upon exercise by the holder of the put.
A Fund will write call options on stocks only if they are covered, and such
options must remain covered so long as the Fund is obligated as a writer. A
call option is "covered" if: (1) the Fund owns the security underlying the
option; or (2) the Fund has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account) upon conversion or exchange of
other securities held in its portfolio; or (3) the Fund holds on a
share-for-share basis a call on the same security as the call written where the
strike price of the call held is equal to or less than the strike price of the
call written or greater than the strike price of the call written if the
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Statement of Additional Information
difference is maintained by the Fund in cash, Treasury bills or other liquid
high-grade short-term debt obligations in a segregated account.
A Fund will write put options on stocks only if they are covered, and such
options must remain covered so long as the Fund is obligated as a writer. A
put option is "covered" if: (1) the Fund holds in a segregated account cash,
Treasury bills, or other liquid high-grade short-term debt obligations of a
value equal to the strike price; or (2) the Fund holds on a share-for-share
basis a put on the same security as the put written where the strike price of
the put held is equal to or greater than the strike price of the put written or
less than the strike price of the put written if the difference is maintained
by the Fund in cash, Treasury bills, or other liquid high-grade short-term
obligations in a segregated account.
A Fund may purchase "protective puts," i.e., put options acquired for the
purpose of protecting a portfolio security from a decline in market value. In
exchange for the premium paid for the put option, the Fund acquires the right
to sell the underlying security at the strike price of the put regardless of
the extent to which the underlying security declines in value. The loss to the
Fund is limited to the premium paid for, and transaction costs in connection
with, the put plus the initial excess, if any, of the market price of the
underlying security over the strike price. However, if the market price of the
security underlying the put rises, the profit the Fund realizes on the sale of
the security will be reduced by the premium paid for the put option less any
amount (net of transaction costs) of which the put may be sold.
A Fund may purchase call options for hedging and investment purposes. No Fund
intends to invest more than 5% of its net assets at any one time in the
purchase of call options on stocks.
If the writer of an option wishes to terminate the obligation, he or she may
effect a "closing purchase transaction" by buying an option of the same series
as the option previously written. Similarly, the holder of an option may
liquidate his or her position by exercising the option or by effecting a
"closing sale transaction," i.e., selling an option of the same series as the
option previously purchased. A Fund may effect closing sale and purchase
transactions. A Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from a
closing purchase transaction with respect to a call option is likely to be
offset in whole or in part by appreciation of the underlying equity security
owned by the Fund. There is no guarantee that closing purchase or closing sale
transactions can be effected.
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A Fund's use of options on equity securities is subject to certain special
risks, in addition to the risk that the market value of the security will move
adversely to the Fund's option position. An option position may be closed out
only on an exchange, board of trade or other trading facility which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
on an exchange will exist for any particular option, or at any particular time,
and for some options no secondary market on an exchange or otherwise may exist.
In such event it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through the exercise of call options or upon the
purchase of underlying securities or the exercise of put options. If a Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or a
clearing corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of
options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facility of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders.
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OPTIONS ON STOCK INDICES
The Global High-Yield Bond Fund, the International Equity Fund, the Emerging
Opportunities Fund, and the Core Equity Fund may purchase and sell (i.e.,
write) put and call options on stock indices traded on national securities
exchanges or listed on NASDAQ. Options on stock indices are similar to options
on stock except that, rather than the right to take or make delivery of stock
at a specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than (in the case of
a call) or less than (in the case of a put) the strike price of the option.
This amount of cash is equal to such difference between the closing price of
the index and the strike price of the option times a specified multiple (the
"multiplier"). If the option is exercised, the writer is obligated, in return
for the premium received, to make delivery of this amount. Unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
A Fund will write call options on stock indices only if they are covered, and
such options remain covered as long as the Fund is obligated as a writer. A
call option is covered if the Fund follows the segregation requirements set
forth in this paragraph. When a Fund writes a call option on a broadly based
stock market index, the Fund will segregate or pledge to a broker as collateral
for the option, cash, Treasury bills or other liquid high-grade short-term debt
obligations, or "qualified securities" (defined below) with a market value at
the time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts. A "qualified security" is
an equity security which is listed on a national securities exchange or listed
on NASDAQ against which the Fund has not written a stock call option and which
has not been hedged by the Fund by the sale of stock index futures. When a
Fund writes a call option on an industry or market segment index, it will
segregate or pledge to a broker as collateral for the option, cash, Treasury
bills or other liquid high-grade short-term debt obligations, or at least five
qualified securities, all of which are stocks of issuers in such industry or
market segment, with a market value at the time the option is written of not
less than 100% of the current index value times the multiplier times the number
of contracts. Such stocks will include stocks which represent at least 50% of
the weighting of the industry or market segment index and will represent at
least 50% of the Fund's holdings in that industry or market segment. No
individual security will represent more than 15% of the amount so segregated or
pledged in the case of broadly based stock market stock options or 25% of such
amount in the case of industry or market segment index
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Statement of Additional Information
options. If at the close of business on any day the market value of such
qualified securities so segregated or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will
so segregate or pledge an amount in cash, Treasury bills, or other liquid
high-grade short-term obligations equal in value to the difference. In
addition, when a Fund writes a call on an index which is in-the-money at the
time the call is written, it will segregate or pledge to the broker as
collateral, cash or U.S. government or other liquid high-grade short-term debt
obligations equal in value to the amount by which the call is in-the-money
times the multiplier times the number of contracts. Any amount segregated
pursuant to the foregoing sentence may be applied to the Fund's obligation to
segregate additional amounts in the event that the market value of the
qualified securities falls below 100% of the current index value times the
multiplier times the number of contracts. A call option is also covered and
the Fund need not follow the segregation requirements set forth in this
paragraph if the Fund holds a call on the same index as the call written where
the strike price of the call held is equal to or less than the strike price of
the call written or greater than the strike price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other liquid
high-grade short-term obligations in a segregated account.
A Fund will write put options on stock indices only if they are covered, and
such options must remain covered so long as the Fund is obligated as a writer.
A put option is covered if: (1) the Fund holds in a segregated account cash,
Treasury bills, or other liquid high-grade short-term debt obligations of a
value equal to the strike price times the multiplier times the number of
contracts; or (2) the Fund holds a put on the same index as the put written
where the strike price of the put held is equal to or greater than the strike
price of the put written or less than the strike price of the put written if
the difference is maintained by the Fund in cash, Treasury bills, or other
liquid high-grade short-term debt obligations in a segregated account.
A Fund may purchase put and call options for hedging and investment purposes.
No Fund intends to invest more than 5% of its net assets at any one time in the
purchase of puts and calls on stock indices. A Fund may effect closing sale
and purchase transactions, as described above in connection with options on
equity securities.
The purchase and sale of options on stock indices will be subject to the same
risks as options on equity securities, described above. In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options. Index prices may be distorted if trading of
certain stocks included in the index is interrupted. Trading in the index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of stocks included in the index. If this
occurred, the Fund would not be
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able to close out options which it had purchased or written and, if
restrictions on exercise were imposed, may be unable to exercise an option it
holds, which could result in substantial losses to the Fund. It is the policy
of each Fund to purchase or write options only on stock indices which include a
number of stocks sufficient to minimize the likelihood of a trading halt in
options on the index.
Although the markets for certain index option contracts have developed rapidly,
the markets for other index options are still relatively illiquid. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that this market will develop in all index options contracts. No Fund will
purchase or sell any index option contract unless and until, in the
subadviser's opinion, the market for such options has developed sufficiently
that the risk in connection with such transactions is no greater than the risk
in connection with options on stocks.
Price movements in a Fund's equity security portfolio probably will not
correlate precisely with movements in the level of the index and, therefore, in
writing a call on a stock index a Fund bears the risk that the price of the
securities held by the Fund may not increase as much as the index. In such
event, the Fund would bear a loss on the call which is not completely offset by
movement in the price of the Fund's equity securities. It is also possible
that the index may rise when the Fund's securities do not rise in value. If
this occurred, the Fund would experience a loss on the call which is not offset
by an increase in the value of its securities portfolio and might also
experience a loss in its securities portfolio. However, because the value of a
diversified securities portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Fund's securities in the
opposite direction as the market would be likely to occur for only a short
period or to a small degree.
When a Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its stock portfolio in order to make settlement in cash,
and the price of such stocks might decline before they can be sold. This
timing risk makes certain strategies involving more than one option
substantially more risky with options in stock indices than with stock options.
There are also certain special risks involved in purchasing put and call
options on stock indices. If the Fund holds an index option and exercises it
before final determination of the
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closing index value for that day, it runs the risk that the level of the
underlying index may change before closing. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the strike price of the option
(times the applicable multiplier) to the assigned writer. Although the Fund
may be able to minimize the risk by withholding exercise instructions until
just before the daily cutoff time or by selling rather than exercising an
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.
OPTIONS ON DEBT SECURITIES
The Funds (other than the Emerging Opportunities and the Core Equity Funds) may
purchase and write (i.e., sell) put and call options on debt securities
(including U.S. government debt securities) that are traded on national
securities exchanges or that result from privately negotiated transactions with
primary U.S. government securities dealers recognized by the Federal Reserve
Bank of New York ("OTC options"). Options on debt are similar to options on
stock, except that the option holder has the right to take or make delivery of
a debt security, rather than stock.
A Fund will write options only if they are covered, and such options must
remain covered so long as the Fund is obligated as a writer. An option on debt
securities is covered in the same manner as explained in connection with
options on equity securities, except that, in the case of call options on U.S.
Treasury bills, a Fund might own U.S. Treasury bills of a different series from
those underlying the call option, but with a principal amount and value
corresponding to the option contract amount and a maturity date no later than
that of the securities deliverable under the call option. The principal reason
for a Fund to write an option on one or more of its securities is to realize
through the receipt of the premiums paid by the purchaser of the option a
greater current return than would be realized on the underlying security alone.
Calls on debt securities will not be written when, in the opinion of the
subadviser, interest rates are likely to decline significantly, because under
those circumstances the premium received by writing the call likely would not
fully offset the foregone appreciation in the value of the underlying security.
A Fund may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same issue of
the security is considered "cover" for both the put and the call). In such
cases, the Fund will also segregate or deposit for the
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benefit of the Fund's broker cash or liquid high-grade debt obligations
equivalent to the amount, if any, by which the put is in-the-money. Each
Fund's use of straddles will be limited to 5% of its net assets (meaning that
the securities used for cover or segregated as described above will not exceed
5% of the Fund's net assets at the time the straddle is written). The writing
of a call and a put on the same security at the same strike price where the
call and the put are covered by different securities is not considered a
straddle for purposes of this limit.
A Fund may purchase "protective puts" in an effort to protect the value of a
security that they own against a substantial decline in market value.
Protective puts are described in OPTIONS ON EQUITY SECURITIES, page 8.
A Fund may also purchase call options on debt securities for hedging or
investment purposes. No Fund intends to invest more than 5% of its net assets
at any one time in the purchase of call options on debt securities.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a closing purchase or sale transaction in a manner similar
to that discussed above in connection with options on equity securities.
Unlike exchange-traded options, OTC options generally do not have a continuous
liquid market. Consequently, a Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it
to the dealer who issued it. Similarly, when the Fund writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Fund originally wrote the OTC option. While the Funds will seek to enter into
OTC options only with dealers who agree to and which are expected to be able to
be capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an OTC option at a favorable
price at any time prior to expiration. In the event of insolvency of the other
party, the Fund may be unable to liquidate an OTC option. There is, in
general, no guarantee that closing purchase or closing sale transactions can be
effected.
As explained in INVESTMENT RESTRICTIONS on page 31, no Fund other than the
Global High-Yield Bond Fund may invest more than 10% of its total assets
(determined at the time of investment) in illiquid securities, including debt
securities for which there is not an established market. The Global High-Yield
Bond Fund may invest up to 15% of its net assets (determined at the time of
investment) in such securities. The staff of the Securities and Exchange
Commission has taken the position that purchased OTC options and the assets
used as "cover" for written OTC options are illiquid securities. However,
pursuant to the terms of
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certain no-action letters issued by the staff, the securities used as cover for
written OTC options may be considered liquid provided that the Fund sells OTC
options only to qualified dealers who agree that the Fund may repurchase any
OTC option it writes for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
The Funds' purchase and sale of exchange-traded options on debt securities will
be subject to the risks described in OPTIONS ON EQUITY SECURITIES on page 8.
OPTIONS ON FOREIGN CURRENCIES
The Funds may purchase and write put and call options on foreign currencies
traded on U.S. or foreign securities exchanges or boards of trade to hedge
against unfavorable changes in exchange rates and to facilitate transactions
involving foreign securities. Options on foreign currencies are similar to
options on stock, except that the option holder has the right to take or make
delivery of a specified amount of foreign currency, rather than stock.
A Fund may purchase and write options to hedge its securities denominated in
foreign currencies. If there is a decline in the dollar value of a foreign
currency in which a Fund's securities are denominated, the dollar value of such
securities will decline even though the foreign currency value remains the
same. To hedge against the decline of the foreign currency, a Fund may
purchase put options on such foreign currency. If the value of the foreign
currency declines, the gain realized on the put option would offset, in whole
or in part, the adverse effect such decline would have on the value of the
Fund's securities. Alternatively, a Fund may write a call option on the
foreign currency. If the foreign currency declines, the option would not be
exercised and the decline in the value of the portfolio securities denominated
in such foreign currency would be offset in part by the premium the Fund
received for the option.
If, on the other hand, a subadviser anticipates purchasing a foreign security
and also anticipates a rise in such foreign currency (thereby increasing the
cost of such security), a Fund may purchase call options on the foreign
currency. The purchase of such options could offset, at least partially, the
effects of the adverse movements of the exchange rates. Alternatively, a Fund
could write a put option on the currency and, if the exchange rates move as
anticipated, the option would expire unexercised.
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A Fund's successful use of currency exchange options on foreign currencies
depends upon the subadviser's ability to predict the direction of the currency
exchange markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally. For
instance, if the currency being hedged has moved in a favorable direction, the
corresponding appreciation of the Fund's securities denominated in such
currency would be partially offset by the premiums paid on the options.
Further, if the currency exchange rate does not change, the Fund's net income
would be less than if the Fund had not hedged since there are costs associated
with options.
The use of these options is subject to various additional risks. The
correlation between movements in the price of options and the price of the
currencies being hedged is imperfect. The use of these instruments will hedge
only the currency risks associated with investments in foreign securities, not
market risks. A Fund's ability to establish and maintain positions will depend
on market liquidity. The ability of a Fund to close out an option depends upon
a liquid secondary market. There is no assurance that liquid secondary markets
will exist for any particular option at any particular time.
FUTURES CONTRACTS
Each Fund may enter into futures contracts and options thereon under certain
limitations described below. In general, (1) the Global High-Yield Bond Fund,
the International Equity Fund, the Emerging Opportunities Fund, and the Core
Equity Fund may buy and sell stock index futures contracts traded on a
commodities exchange or board of trade and options thereon; (2) any Fund other
than the Emerging Opportunities and the Core Equity Funds may buy and sell
futures contracts on interest bearing securities (such as U.S. Treasury Bonds,
U.S. Treasury Notes, 3-month U.S. Treasury Bills, and GNMA certificates) or
interest rate indices and options thereon; and (3) any Fund may buy and sell
futures contracts on foreign currencies or groups of foreign currencies and
options thereon. The Funds use these instruments as a hedge against or to
minimize adverse principal fluctuations or as an efficient means of adjusting
their exposure to the market. The Funds do not use futures contracts or options
thereon for speculation. Each Fund limits its use of futures contracts and
options thereon so that no more than 5% of the Fund's total assets will be
committed to initial margin deposits or premiums on options. Furthermore,
immediately after entering into such contracts or purchasing such options, no
more than 30% of a Fund's total assets may be represented by such contracts and
options (other than futures contracts and options thereon relating to money
market instruments, such as Eurodollar futures and related options). These
contracts and
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options entail certain risks, including (but not limited to) the following: (1)
no assurance that futures contracts transactions can be offset at favorable
prices; (2) possible reduction of the Fund's total return due to the use of
hedging; (3) possible reduction in value of both the securities hedged and the
hedging instrument; (4) possible lack of liquidity due to daily limits on price
fluctuation or other factors; (5) an imperfect correlation between price
movements in the contract and in the securities being hedged; and (6) potential
losses in excess of the amount invested in the futures contracts themselves.
STOCK INDEX FUTURES CONTRACTS
To the extent permitted by applicable regulations, the Global High-Yield Bond
Fund, the International Equity Fund, the Emerging Opportunities Fund, and the
Core Equity Fund may buy and sell for hedging purposes stock index futures
contracts traded on a commodities exchange or board of trade. A stock index
futures contract is an agreement in which the seller of the contract agrees to
deliver to the buyer an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. When the
futures contract is entered into, each party deposits with a broker or in a
segregated custodial account approximately 5% of the contract amount, called
the "initial margin." Subsequent payments to and from the broker, called
"variation margin," will be made on a daily basis as the price of the
underlying stock index fluctuates, making the long and short positions in the
futures contracts more or less valuable, a process known as "marking to the
market."
A Fund may sell stock index futures to hedge against a decline in the value of
equity securities it holds. A Fund may also buy stock index futures to hedge
against a rise in the value of equity securities it intends to acquire. To the
extent permitted by federal regulations, a Fund may also engage in other types
of hedging transactions in stock index futures that are economically
appropriate for the reduction of risks inherent in the ongoing management of
the Fund's equity securities.
A Fund's successful use of stock index futures contracts depends upon the
subadviser's ability to predict the direction of the market and is subject to
various additional risks. The correlation between movement in the price of the
stock index future and the price of the securities being hedged is imperfect
and the risk from imperfect correlation increases as the composition of the
Fund's securities portfolio diverges from the composition of the relevant
index. In addition, the ability of a Fund to close out a futures position
depends on a liquid
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secondary market. There is no assurance that liquid secondary markets will
exist for any particular stock index futures contract at any particular time.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
investment companies registered under the Investment Company Act of 1940 are
excluded from regulation as commodity pools or commodity pool operators if
their use of futures is limited in certain specified ways. The Funds will use
futures in a manner consistent with the terms of this exclusion.
INTEREST RATE FUTURES CONTRACTS
To the extent permitted by applicable regulations, the Funds (other than the
Emerging Opportunities and the Core Equity Funds) may buy and sell for hedging
purposes futures contracts on interest bearing securities (such as U.S.
Treasury Bonds, U.S. Treasury Notes, 3-month U.S. Treasury Bills, and GNMA
certificates) or interest rate indices. Futures contracts on interest bearing
securities and interest rate indices are referred to collectively as "interest
rate futures contracts." The portfolios will engage in transactions in only
those futures contracts that are traded on a commodities exchange or board of
trade.
A Fund may sell an interest rate futures contract to hedge against a decline in
the market value of debt securities it owns. A Fund may purchase an interest
rate futures contract to hedge against an anticipated increase in the value of
debt securities it intends to acquire. To the extent permitted by applicable
federal regulations, a Fund may also engage in other types of transactions in
interest rate futures contracts that are economically appropriate for the
reduction of risks inherent in the ongoing management of its fixed-income
portfolio.
A Fund's successful use of interest rate futures contracts depends upon the
subadviser's ability to predict interest rate movements. Further, because
there are a limited number of types of interest rate futures contracts, it is
likely that the interest rate futures contracts available to a Fund will not
exactly match the debt securities the Fund intends to hedge or acquire. To
compensate for differences in historical volatility between securities a Fund
intends to hedge or acquire and the interest rate futures contracts available
to it, a Fund could purchase or sell futures contracts with a greater or lesser
value than the securities it wished to hedge or intended to purchase. Interest
rate futures contracts are subject to the same risks regarding closing
transactions and the CFTC limits as described in STOCK INDEX FUTURES CONTRACTS
on page 18.
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FOREIGN CURRENCY FUTURES CONTRACTS
To the extent permitted by applicable regulations, a Fund may buy and sell for
hedging purposes futures contracts on foreign currencies or groups of foreign
currencies. A Fund will engage in transactions in only those futures contracts
and options thereon that are traded on a commodities exchange or a board of
trade. See STOCK INDEX FUTURES CONTRACTS on page 18 for a general description
of futures contracts. A Fund intends to engage in transactions involving
futures contracts as a hedge against changes in the value of the currencies in
which they hold investments or in which they expect to pay expenses or pay for
future purchases. To the extent permitted by federal regulations, a Fund may
also engage in such transactions when they are economically appropriate for the
reduction of risks inherent in portfolio management.
The use of these futures contracts is subject to risks similar to those
involved in the use of options on foreign currencies and the use of any futures
contract. A Fund's successful use of foreign currency futures contracts
depends upon the subadviser's ability to predict the direction of currency
exchange markets and political conditions. In addition, the correlation
between movements in the price of futures contracts and the price of currencies
being hedged is imperfect, and there is no assurance that liquid markets will
exist for any particular futures contract at any particular time. Those risks
are discussed more fully under OPTIONS ON FOREIGN CURRENCIES on page 16 and
STOCK INDEX FUTURES CONTRACTS on page 18.
OPTIONS ON FUTURES CONTRACTS
The Funds may, to the extent permitted by applicable regulations, enter into
certain transactions involving options on futures contracts. An option on a
futures contract gives the purchaser or holder the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
price at any time during the option exercise period. The writer of the option
is required upon exercise to assume an offsetting futures position (a short
position if the option is a call and a long position if the option is a put).
Upon exercise of the option, the assumption of offsetting futures positions by
the writer and holder of the option will be accomplished by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise
price of the option on the futures contract. As an alternative to exercise,
the holder or writer of an option may terminate a position by selling or
purchasing an option of the same series. There is no guarantee that such
closing transactions
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can be effected. The Funds intend to utilize options on futures contracts for
the same purposes that they intend to use the underlying futures contracts.
Options on futures contracts are subject to risks similar to those described
above with respect to options and futures contracts. There is also the risk of
imperfect correlation between the option and the underlying futures contract.
If there were no liquid secondary market for a particular option on a futures
contract, a Fund might have to exercise an option it held in order to realize
any profit and might continue to be obligated under an option it had written
until the option expired or was exercised. If a Fund were unable to close out
an option it had written on a futures contract, it would continue to be
required to maintain initial margin and make variation margin payments with
respect to the option position until the option expired or was exercised
against the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To facilitate the purchase and sale of foreign securities and to manage foreign
exchange risk, each of the Funds 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.
The Funds may enter into forward foreign currency exchange contracts in several
circumstances. When a Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when a Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the Fund will be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the date
on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received. As discussed in the prospectus, the Global High-Yield Bond Fund may
also enter into forward foreign currency exchange contracts for investment
purposes. The
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other Funds will use forward foreign currency exchange contracts strictly for
hedging purposes and to facilitate the purchase and sale of foreign securities.
Additionally, when a subadviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract for a fixed amount of dollars, to sell
the amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the
value of those securities between the date on which the forward contract is
entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. No Fund other than the Global
High-Yield Bond Fund will enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate a Fund to deliver an amount of foreign currency in excess of the value
of the securities or other assets denominated in that currency held by the
Fund. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the Manager believes
that it is important that the subadvisers have the flexibility to enter into
such forward contracts when it is determined that the best interests of the
Funds will thereby be served. A Fund will place cash or liquid, high-grade
equity or debt securities into a segregated account in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts. If the value of the securities in the
segregated account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will equal the
amount of the Fund's commitments with respect to such contracts.
The Funds generally will not enter into a forward contract with a term of
greater than 1 year. At the maturity of a forward contract, a Fund may either
sell the portfolio security and make delivery of the foreign currency or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for a Fund to purchase additional foreign currency on the
spot market (and bear the expense of such
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purchase) if the market value of the security is less than the amount of
foreign currency that the Fund is obligated to deliver and if a decision is
made to sell the security and make delivery of the foreign currency.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Funds' dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Funds are not
required to enter into such transactions with regard to their foreign
currency-denominated securities. It also should be realized that this method
of protecting the value of the portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities which are unrelated to exchange rates. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any potential gain
which might result should the value of such currency increase.
Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend physically to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
the Fund desire to resell that currency to the dealer.
SHORT SALES AGAINST THE BOX
The Global High-Yield Bond Fund, the International Equity Fund, the Emerging
Opportunities Fund, and the Core Equity Fund may make short sales of securities
or maintain a short position, provided that at all times when a short position
is open the Fund owns an equal amount of such securities or securities
convertible into or exchangeable, with or without
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payment of any further consideration, for an equal amount of the securities of
the same issuer as the securities sold short (a "short sale against the box");
provided, that if further consideration is required in connection with the
conversion or exchange, cash or U.S. government securities in an amount equal
to such consideration must be put in a segregated account.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Funds may purchase securities on a when-issued or delayed delivery basis
(i.e., when delivery and payment take place later than the normal settlement
period after the date of the transaction). A Fund will make commitments for
when-issued transactions only with the intention of actually acquiring the
securities and, to facilitate such acquisitions, the Fund will maintain in a
segregated account cash, U.S. government securities or other high-grade debt
obligations having a value equal to or greater than such commitments. On
delivery dates for such transactions, the Fund will meet its obligations from
maturities or sales of the securities held in the segregated account and/or
from then available cash flow. If the Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition it could, as with the
disposition of any other Fund security, incur a gain or loss due to market
fluctuations. No when-issued commitments will be made if, as a result, more
than 15% of the Fund's net assets would be so committed.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may, as a fundamental
policy, lend securities with a value of up to 33% of its total assets to
unaffiliated broker-dealers or institutional investors. Any such loan will be
continuously secured by collateral at least equal to the value of the security
loaned. Although the risks of lending portfolio securities are believed to be
slight, as with other extensions of secured credit, such lending could result
in delays in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower
fail financially. Loans will only be made to firms deemed to be of good
standing and will not be made unless the consideration to be earned from such
loans would justify the risk.
TEMPORARY DEFENSIVE POSITIONS
As discussed in the prospectus, each Fund may, at times, adopt a temporary
defensive position. In such instances, the Fund may invest a greater proportion
of its assets than normal
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in money market instruments, which are described below, and in investment-grade
short-term debt instruments.
MONEY MARKET INSTRUMENTS
Bank Obligations. Bank obligations include certificates of deposit, bankers'
acceptances, and time deposits of domestic banks, foreign branches of U.S.
banks, U.S. branches of foreign banks, foreign offices of foreign banks,
savings and loan associations, or savings banks. Certificates of deposit are
certificates evidencing the indebtedness of a bank to repay funds deposited
with it for a definite period of time (usually from 14 days to 1 year).
Bankers' acceptances are credit instruments evidencing the obligation of a bank
to pay a draft which has been drawn on it by a customer. These instruments
reflect the obligation both of the bank and of the drawer to pay the face
amount of the instrument upon maturity. Time deposits are non-negotiable
deposits in a bank for a fixed period of time. Certificates of deposit include
both Eurodollar certificates of deposit, which are traded in the
over-the-counter market, and Eurodollar time deposits, for which there is
generally not a market. Eurodollars are dollars deposited in banks outside the
United States.
Commercial Paper. Commercial paper is a high-quality short-term promissory
note of a large corporation issued to finance its current obligations. The
Funds may invest in commercial paper which at the time of the investment is (1)
rated in the two highest categories by Moody's (Prime-1 and Prime-2) or by S&P
(A-1 and A-2), or (2) unrated but determined by the subadviser to be of
comparable quality.
Repurchase Agreements. When a Fund purchases money market securities, it may
on occasion enter into a repurchase agreement with the seller wherein the
seller and the buyer agree at the time of sale to a repurchase of the security
at a mutually agreed upon time and price. The period of maturity is usually
quite short, possibly overnight or a few days, although it may extend over a
number of months. The resale price is in excess of the purchase price,
reflecting an agreed upon market rate effective for the period of time the
Fund's money is invested in the security, and is not related to the coupon rate
of the purchase security. Repurchase agreements may be considered loans of
money to the seller of the underlying security, which are collateralized by the
securities underlying the repurchase agreement. A Fund will not enter into
repurchase agreements unless the agreement is fully collateralized (i.e., the
value of the securities is, and during the entire term of the agreement
remains, at least equal to the amount of the loan including interest). The Fund
will take possession of the
25
<PAGE> 26
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
securities underlying the agreement and will value them daily to assure that
this condition is met. In the event that a seller defaults on a repurchase
agreement, the Fund may incur loss in the market value of the collateral, as
well as disposition costs; and, if a party with whom the Fund has entered into
a repurchase agreement becomes involved in a bankruptcy proceeding, the Fund's
ability to realize on the collateral may be limited or delayed and a loss may
be incurred if the collateral securing the repurchase agreement declines in
value during the bankruptcy proceeding.
Reverse Repurchase Agreements. The Funds may enter into reverse repurchase
agreements with banks, which agreements have the characteristics of borrowing
and involve the sale of securities held by a Fund with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a
rate of interest paid for the use of the money for the period. Generally, the
effect of such a transaction is that the Fund can recover all or most of the
cash invested in the securities involved during the term of the reverse
repurchase agreement, while in many cases it will be able to keep some of the
interest income associated with those securities. Such transactions are only
advantageous if the Fund has an opportunity to earn a greater rate of interest
on the cash derived from the transaction than the interest cost of obtaining
that cash. The Fund may be unable to realize a return from the use of the
proceeds equal to or greater than the interest required to be paid.
Opportunities to achieve this advantage may not always be available, and the
Funds intend only to use the reverse repurchase technique when it appears to be
to their advantage to do so. The use of reverse repurchase agreements may
magnify any increase or decrease in the value of a Fund's securities. The Fund
will maintain in a separate account securities of the Fund that have a value
equal to or greater than the Fund's commitments under reverse repurchase
agreements. The value of the securities subject to reverse purchase agreements
will not exceed 10% of the value of the Fund's total assets.
RATINGS OF DEBT SECURITIES
Investment-grade bonds are debt securities that have been rated investment
grade by a nationally recognized statistical rating organization ("NRSRO"),
e.g., corporate debt rated at least Baa by Moody's Investors Service, Inc.
("Moody's") or at least BBB by Standard & Poor's Corporation ("S&P") at the
time of purchase. Investment-grade bonds also include unrated debt securities
that a Fund's subadviser determines to be of comparable quality. High-yield
debt (also know as "junk bonds") are, in contrast, generally rated below
investment grade by NRSROs -- for example, ratings of Ba or lower by Moody's or
of BB or lower by
26
<PAGE> 27
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
S&P. High-yield debt also includes unrated debt securities that a Fund's
subadvisers determines to be of comparable quality.
A description of Moody's and S&P's ratings follows.
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.
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.
27
<PAGE> 28
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
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 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.
28
<PAGE> 29
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
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 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.
29
<PAGE> 30
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
RATINGS OF COMMERCIAL PAPER
Moody's Investors Service, Inc.
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-1 (or supporting institutions) are considered to have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 (or supporting institutions) are considered to have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Standard & Poor's Corporation
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Capacity for timely
payment on commercial paper rated A-2 is strong, but the relative degree of
safety is not as high as for issues designated A-1.
30
<PAGE> 31
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
INVESTMENT RESTRICTIONS
Certain investment restrictions are fundamental to the operations of American
Odyssey Funds, Inc. and may not be changed without the approval of the holders
of a majority of the outstanding shares of the affected Fund, or if it is less,
67% of the shares represented at a meeting of shareholders at which the holders
of 50% or more of the shares are represented.
As a result of these restrictions, none of the Funds will:
1. Buy or sell real estate and mortgages, although the Funds may buy and
sell securities that are secured by real estate and securities of real
estate investment trusts and of other issuers that engage in real
estate operations.
2. Buy or sell commodities or commodity contracts, except that the Funds
may purchase and sell futures contracts and related options.
3. Buy or sell the securities of other investment companies, except by
purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of the Fund's
total assets (taken at current value) would be invested in such
securities, or except as part of a merger, consolidation or other
acquisition.
4. Acquire securities for the purpose of exercising control or management
of any company except in connection with a merger, consolidation,
acquisition, or reorganization.
5. 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.
31
<PAGE> 32
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
6. Purchase securities on margin or otherwise borrow money or issue
senior securities except that a Fund may enter into reverse repurchase
agreements and purchase securities on a when-issued or a delayed
delivery basis. A Fund may also obtain such short-term credit as it
needs for the clearance of securities transactions and may borrow from
a bank as a temporary measure to facilitate redemptions (but not for
leveraging or investment) or to exercise an option, provided that the
amount borrowed does not exceed 5% of the value of the Fund's total
assets (including the amount owed as a result of the borrowing) at the
time the borrowing is made. Investment securities will not be
purchased while borrowings are outstanding. Interest paid on
borrowings will not be available for investment. Collateral
arrangements entered into by a Fund with respect to futures contracts
and related options and the writing of options are not deemed to be
the issuance of a senior security or the purchase of a security on
margin.
7. Enter into reverse repurchase agreements if, as a result, the Fund's
obligations with respect to reverse repurchase agreements would exceed
10% of the Fund's net assets (defined to mean total assets at market
value less liabilities other than reverse repurchase agreements).
8. Pledge or mortgage assets, except that not more than 10% of the value
of any Fund may be pledged (taken at the time the pledge is made) to
secure borrowings made in accordance with item 6 above and that a Fund
may enter into reverse repurchase agreements in accordance with item 7
above. Collateral arrangements entered into by a Fund with respect to
futures contracts and related options and the writing of options are
not deemed to be the pledge of assets.
9. 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 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.
32
<PAGE> 33
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
10. Underwrite the securities of other issuers, except where the Fund may
be deemed to be an underwriter for purposes of certain federal
securities laws in connection with the disposition of Fund securities
and with loans that a Fund may make pursuant to item 9 above.
11. Make an investment unless, when considering all its other investments,
75% of the value of a Fund's assets would consist of cash, cash items,
obligations of the United States government, its agencies or
instrumentalities, and other securities. For purposes of this
restriction, "other securities" are limited for each issuer to not
more than 5% of the value of a Fund's assets and to not more than 10%
of the issuer's outstanding voting securities held by American Odyssey
Funds, Inc. as a whole. Some uncertainty exists as to whether
certain of the types of bank obligations in which a Fund may invest,
such as certificates of deposit and bankers' acceptances, should be
classified as "cash items" rather than "other securities" for purposes
of this restriction, which is a diversification requirement under the
1940 Act. Interpreting most bank obligations as "other securities"
limits the amount a Fund may invest in the obligations of any one bank
to 5% of its total assets. If there is an authoritative decision that
any of these obligations are not "securities" for purposes of this
diversification test, this limitation would not apply to the purchase
of such obligations.
12. Purchase securities of a company in any industry if, as a result of
the purchase, a Fund's holdings of securities issued by companies in
that industry would exceed 25% of the value of the Fund, except that
this restriction does not apply to purchases of obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities
or issued by domestic banks. For purposes of this restriction, neither
finance companies as a group nor utility companies as a group are
considered to be a single industry and will be grouped instead
according to their services; for example, gas, electric, and telephone
utilities will each be considered a separate industry.
13. 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
33
<PAGE> 34
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
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.
The following restrictions are nonfundamental investment policies, which means
that the Board of Directors may change them 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.
Neither the Long-Term Bond Fund nor the Intermediate-Term Bond Fund
will invest more than 7.5% of total assets in debt securities from
emerging markets.
No Fund will purchase an issuer's securities if, as a result of that
investment, the Funds together would own more than 5% of the
outstanding voting securities of the issuer.
34
<PAGE> 35
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
MANAGEMENT OF THE FUNDS
THE COMPANY
American Odyssey Funds, Inc. (the "Company") was organized as a Maryland
corporation in December 1992. It is registered under the Investment Company Act
of 1940, as amended ("1940 Act") as an open-end diversified management
investment company, commonly known as a "mutual fund." It is currently made up
of six different "series" or Funds. Each Fund is, for investment purposes, a
separate investment fund, and each issues a separate class of capital stock:
(1) American Odyssey Core Equity Fund Stock; (2) American Odyssey Emerging
Opportunities Fund Stock; (3) American Odyssey International Equity Fund Stock;
(4) American Odyssey Long-Term Bond Fund Stock; (5) American Odyssey
Intermediate-Term Bond Fund Stock; and (6) American Odyssey Global High-Yield
Bond Fund Stock. Each share of capital stock issued with respect to a Fund has
a pro-rata interest in the assets of that Fund and has no interest in the
assets of any other Fund. Each Fund bears its own liabilities and also its
proportionate share of the general liabilities of the Company.
The shares of the Funds have equal voting rights, except that certain issues
will be voted on separately by the shareholders of each Fund. Pursuant to
current SEC requirements and staff interpretations, insurance companies will
vote Fund shares held in registered separate accounts in accordance with voting
instructions received from variable contract owners or payees having the right
to give such instructions. Fund shares for which contract owners or payees are
entitled to give voting instructions, but as to which no voting instructions
are received, and shares owned by an insurance company in its general and
unregistered separate accounts, will be voted in proportion to the shares for
which voting instructions have been received by that company. Under state
insurance law and federal regulations, there are certain circumstances under
which the insurance companies may disregard such voting instructions. If voting
instructions are ever ignored, the insurance companies will so advise contract
owners in the next semiannual report. The Company currently does not intend to
hold annual meetings of shareholders unless required to do so under applicable
law.
The Company 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 the Company's legal counsel and
independent accountants; (5) brokerage commissions incurred in connection with
fund transactions; (6) all taxes and charges of governmental agencies; (7) the
35
<PAGE> 36
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
reimbursement of organizational expenses; and (8) expenses of printing and
mailing prospectuses and other expenses related to shareholder communications.
Prior to May 1, 1998, the American Odyssey Global High-Yield Bond Fund was
named the American Odyssey Short-Term Bond Fund and had a different investment
objective, investment policies, investment program, investment portfolio,
subadviser, and asset base.
DIRECTORS AND OFFICERS
The affairs of the Company are managed under the direction of its Board of
Directors. The Company utilizes a Manager/Subadviser structure for advisory
services. The Directors decide upon matters of general policy and review the
actions of the Company's investment manager and subadvisers. Pursuant to an
order issued by the Securities and Exchange Commission, the Company's Board of
Directors may change or add subadvisers, or amend existing subadvisory
agreements in certain respects, without shareholder approval. For further
information, see INVESTMENT ADVISERS, page 39.
The Company's Directors and principal officers, their business addresses, and
principal occupations for the past five years are set forth in the following
table.
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH PRINCIPAL OCCUPATION
AND AGE THE COMPANY DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert C. Dughi* Chairman of the Chairman of the Board and Chief
Two Tower Center Board Executive Officer, The Copeland
East Brunswick, NJ Companies. Also: Chairman of the
08816 Board and President of Copeland
Age: 52 Financial Services, Inc. ("CFS") and
the Manager.+
Linda Walker Bynoe Director President and Chief Operating Officer,
875 N. Michigan Avenue Telemat, Ltd. (consulting).
Suite 2505
Chicago, IL
60611
Age: 47
</TABLE>
36
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AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH PRINCIPAL OCCUPATION
AND AGE THE COMPANY DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jane DiRenzo Pigott Director Partner, Environmental Law Department,
35 West Wacker Drive Winston & Strawn (law firm). Prior to
Suite 4000 May 1993, Partner and Chairperson of
Chicago, IL Environmental Law Dept., Katten Muchin
60601 & Zavis (law firm).
Age: 42
John G. Beam, Jr. Director Chairman of the Board, Acordia of
501 South 2nd Street Kentucky, Inc. (insurance). Prior to
Louisville, KY 1998, Chairman of the Board, Harris &
40202 Harris of Kentucky, Inc. (insurance).
Age: 52
Nicholas D. Yatrakis Director Physician in private practice
1 Wedgewood Way
Scotch Plains, NJ
07076
Age: 52
William A. Arnold Senior Vice President Senior Vice President, Chief Financial
Two Tower Center and Treasurer Officer, and Treasurer, The Copeland
East Brunswick, NJ Companies. Also: Senior Vice
08816 President, Chief Financial Officer and
Age: 36 Treasurer of CFS and the Manager.#
Prior to January 1998, Vice President
and Asst. Financial Officer, The
Travelers Insurance Company.
Paul S. Feinberg President Senior Vice President and General
Two Tower Center Counsel, The Copeland Companies.
East Brunswick, NJ Also: Senior Vice President and
08816 General Counsel of CFS and the
Age: 57 Manager.+
</TABLE>
37
<PAGE> 38
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH PRINCIPAL OCCUPATION
AND AGE THE COMPANY DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Steven I. Weinstein Director Deputy General Counsel, Foster Wheeler
Perryville Corporate Park Corporation; President and Director,
Clinton, NJ Foster Wheeler Real Estate Development
08809 Corporation.
Age: 53
Mark E. Freemyer Vice President Vice President, The Copeland
Two Tower Center Companies. Also: Vice President of
East Brunswick, NJ CFS and the Manager.+ Prior to
08816 February 1995, Vice President, Kidder,
Age: 42 Peabody & Co., Incorporated.
Lori M. Renzulli Secretary Assistant Counsel, The Copeland
Two Tower Center Companies. Prior to January 1998,
East Brunswick, NJ Legal Assistant, The Copeland
08816 Companies.+
Age: 33
</TABLE>
* Indicates Directors who are "interested persons" (as defined in the 1940 Act)
by virtue of their affiliation with the Company.
+ Indicates positions held with affiliated persons or principal underwriters
of the Company.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
TOTAL COMPENSATION FROM AOF AND
AGGREGATE COMPENSATION FROM AOF FUND COMPLEX PAID TO DIRECTORS
NAME OF DIRECTOR
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert C. Dughi $0 $0
- -----------------------------------------------------------------------------------------------------
Kent A. Kelley $0 $0
- -----------------------------------------------------------------------------------------------------
Linda Walker Bynoe $19,500 $19,500
- -----------------------------------------------------------------------------------------------------
Steven I. Weinstein $19,500 $19,500
- -----------------------------------------------------------------------------------------------------
Jane DiRenzo Pigott $18,000 $18,000
- -----------------------------------------------------------------------------------------------------
Mark M. Skinner $0 $0
- -----------------------------------------------------------------------------------------------------
John G. Beam, Jr. $19,500 $19,500
- -----------------------------------------------------------------------------------------------------
Nicholas D. Yatrakis $19,500 $19,500
- -----------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
Directors do not receive any form of deferred or retirement benefits. None of
the compensated directors are members of a board of any mutual fund other than
American Odyssey Funds, Inc.
As of May 1, 1999, the directors and officers owned in the aggregate less than
1% of the outstanding shares of each Fund.
INVESTMENT ADVISERS
STRUCTURE
The Company utilizes a Manager/Subadviser structure for advisory services.
American Odyssey Funds Management, Inc. (the "Manager") serves as the overall
investment adviser to the Company. The subadvisers perform the actual
day-to-day management of the Funds. The Manager monitors the performance of
the subadvisers and will recommend changes to the Board of Directors if
warranted. For those Funds with more than one subadviser (currently, only the
Emerging Opportunities Fund), the Manager allocates the Fund's assets between
or among the Fund's subadvisers.
The Company has obtained an order from the Securities and Exchange Commission
that permits the Board of Directors to change subadvisers, hire additional
subadvisers, or amend existing subadvisory agreements without shareholder
approval. The new or amended subadvisory agreements may have different fee
structures or rates than the current agreements, subject to the following
maximum annual rates expressed as a percentage of average daily net assets:
Global High-Yield Bond Fund, 0.525%; International Equity Fund, 0.55%; Emerging
Opportunities Fund, 0.80%; Core Equity Fund, 0.45%; Long-Term Bond Fund, 0.35%;
and Intermediate-Term Bond Fund, 0.35%. These fees are in addition to the fee
paid to the Manager, which is equal to an annual rate of 0.25% of each Fund's
average daily net assets. The Board of Directors will approve a Fund's new or
amended subadvisory agreement only if the Board determines that doing so is in
the best interests of the Fund and its shareholders. In particular, the Board
will not approve a new or amended subadvisory agreement that pays a subadvisory
fee within these maximums but higher than the Fund currently pays unless the
Board determines that the new or amended subadvisory agreement is in the best
interest of the Fund and its shareholders. Any subadvisory agreement that
would pay a subadvisory fee higher than these maximum rates would require
shareholder approval in addition to the Board's approval.
39
<PAGE> 40
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
In the event the Board of Directors approves the hiring of a new subadviser for
a Fund without shareholder approval, the Company will, within ninety days of
the effective date of the subadvisory agreement, send all of that Fund's
shareholders an informational statement informing them of the changes. The
statement will include information about any changes caused by the addition of
the new subadviser, including any applicable changes in fees.
Pursuant to the order obtained from the Securities and Exchange Commission
granting the Board of Directors authority to enter into subadvisory agreements
without shareholder approval, the Company and the Manager have agreed to comply
with the following conditions:
1. Before any Fund may rely on the order requested in the
application, the operation of the Fund in the manner described in the
application will be approved by a majority vote of persons having
voting rights with respect to the Fund or, in the case of a new Fund
whose prospectus contains the disclosure contemplated by condition 2
below, by the sole initial shareholder(s) before offering shares of
such Fund to the public.
2. Any Fund relying on the requested relief will disclose in its
prospectus the existence, substance, and effect of any order granted
pursuant to the application. In addition, any such Fund will hold
itself out to the public as employing the "manager/subadviser"
structure described in the application. The prospectus will
prominently disclose that the Manager has ultimate responsibility to
oversee the subadvisers and recommend their hiring, termination, and
replacement.
3. The Manager will provide management and administrative services to
the Company and, subject to the review and approval by the Board,
will: (i) set each Fund's overall investment strategies; (ii)
evaluate, select, and recommend subadvisers to manage all or part of a
Fund's assets; (iii) allocate and, when appropriate, reallocate each
Fund's assets among subadvisers; (iv) monitor and evaluate subadviser
performance; and (v) oversee subadviser compliance with the applicable
Fund's investment objective, policies and restrictions.
4. A majority of the Board will be persons who are not "interested
persons" (as defined in section 2(a)(19) of the Investment Company Act
of 1940, as amended) of the Company ("Independent Directors"), and the
nomination of new or additional
40
<PAGE> 41
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
Independent Directors will be placed within the discretion of the then
existing Independent Directors.
5. The Company will not enter into a subadvisory agreement with any
subadviser that is an "affiliated person" of the Fund (as defined in
section 2(a)(3) of the Investment Company Act of 1940, as amended)
("Affiliated Subadviser") other than by reason of serving as
subadviser to one or more Funds without such subadvisory agreement,
including the compensation to be paid thereunder, being approved by
the persons having voting rights with respect to the applicable Fund.
6. When a subadviser change is proposed for a Fund with an Affiliated
Subadviser, the Board, including a majority of the Independent
Directors, will make a separate finding, reflected in the Board
minutes, that such change is in the best interests of the applicable
Fund and persons having voting rights with respect to that Fund and
that such change does not involve a conflict of interest from which
the Manager or the Affiliated Subadviser derives an inappropriate
advantage.
7. No director, trustee, or officer of the Company or the Manager
will own directly or indirectly (other than through a pooled
investment vehicle that is not controlled by any such director,
trustee or officer) any interest in a subadviser except for ownership
of (i) interests in the Manager or any entity that controls, is
controlled by, or is under common control with the Manager, or (ii)
less than 1% of the outstanding securities of any class of equity or
debt of a publicly-traded company that is either a subadviser or an
entity that controls, is controlled by, or is under common control
with a subadviser.
8. Within 90 days of the hiring of any new subadviser, the Manager
will furnish persons having voting rights with respect to the
appropriate Fund with all information about the new subadviser or
subadvisory agreement that would be included in a proxy statement.
Such information will include any changes caused by the addition of
the new subadviser. To meet this condition, the Manager will provide
persons having voting rights with an information statement meeting the
requirements of Regulation 14C, Schedule 14C, and Item 22 of Schedule
14A under the Securities Exchange Act of 1934.
41
<PAGE> 42
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
CONTROL
The Manager is a wholly-owned subsidiary of The Copeland Companies (Holding
Company), which is a wholly-owned subsidiary of The Plaza Corporation, which is
a wholly-owned subsidiary of The Travelers Insurance Company, which is a
wholly-owned subsidiary of The Travelers Insurance Group Inc., which is a
wholly-owned subsidiary of PFS Services, Inc., which is a wholly-owned
subsidiary of Associated Madison Companies, Inc., which is a wholly-owned
subsidiary of Citigroup, Inc., a publicly-owned corporation.
Credit Suisse Asset Management, the Global High-Yield Bond Fund's subadviser,
is a wholly-owned subsidiary of Credit Suisse Capital Corp, which is a
wholly-owned subsidiary of Credit Suisse Investment Corp., which is a
wholly-owned subsidiary of Credit Suisse Group, a publicly-traded Swiss
corporation.
Bank of Ireland Asset Management (U.S.) Limited, subadviser to the
International Equity Fund, is a wholly-owned subsidiary of Bank of Ireland
Asset Management Limited, which is a wholly-owned subsidiary of Investment Bank
of Ireland Limited, which is a wholly-owned subsidiary of Bank of Ireland
Group.
Chartwell Investment Partners, one of the two subadvisers to the Emerging
Opportunities Fund, is a limited partnership, the general partner for which is
Chartwell G.P., Inc.
Equinox Capital Management, LLC, the Core Equity Fund's subadviser, is a
limited liability company.
SG Cowen Securities Corporation, one of the two subadvisers to Emerging
Opportunities Fund, is a wholly-owned subsidiary of Societe Generale, an
international commercial and investment bank headquartered in France.
Western Asset Management Company, the Long-Term Bond Fund's subadviser, is a
wholly-owned subsidiary of Legg Mason, Inc.
Travelers Asset Management International Corporation, the Intermediate-Bond
Fund's subadviser, is a wholly-owned subsidiary of The Plaza Corporation, which
is a wholly-owned subsidiary of The Travelers Insurance Company, which is a
wholly-owned subsidiary of The Travelers Insurance Group Inc., which is a
wholly-owned subsidiary of PFS Services, Inc., which is a wholly-owned
subsidiary of Associated Madison Companies, Inc., which is a wholly-owned
subsidiary of Citigroup, Inc., a publicly-owned corporation.
42
<PAGE> 43
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
FEES
Each Fund pays the Manager a fee for its services that is computed daily and
paid monthly at an annual rate of 0.25% of the Fund's average net assets. Each
Fund pays its respective subadviser(s) directly, at the rates described below.
Prior to May 1, 1998, the Manager paid each of the subadvisers out of the fees
it received from the Funds. The Manager's fees (prior to any adjustment for
the expense limitation agreement) at that time were equal to an annual rate of
the amount the Manager paid each subadviser plus 0.25% of each Fund's average
daily net assets. Thus, prior to May 1, 1998, the Manager's net fee for each
Fund, after paying the subadviser(s) for that Fund, but prior to any adjustment
for the expense limitation agreement, was 0.25% of that Fund's average net
assets.
Each Fund pays its subadviser (or, for any Fund with more than one subadviser,
each of its subadvisers) a fee that is computed daily and paid monthly at the
annual rates specified below based on the value of the Fund's average daily net
assets allocated to that subadviser. Thus, for a Fund with one subadviser, the
subadviser's fee is based upon the average daily net assets of the entire Fund;
for a Fund with more than one subadviser, the subadviser's fee is based upon
the average daily net assets actually allocated to that subadviser.
<TABLE>
<CAPTION>
FUND & SUBADVISER SUBADVISER'S FEE
----------------- ----------------
<S> <C>
Global High-Yield Bond Fund
- Credit Suisse Asset Management 0.425% of assets
International Equity Fund
- Bank of Ireland Asset Management (U.S.) 0.45% for first $50 million in assets, plus
Limited 0.40% for next $50 million in assets, plus
0.30% for assets over $100 million
Emerging Opportunities Fund
- SG Cowen Asset Management 0.50% for first $50 million in assets, plus
0.45% for next $50 million in assets, plus
0.40% for assets over $100 million
- Chartwell Investment Partners 0.70% for first $50 million in assets, plus
0.50% for next $50 million in assets, plus
0.45% for assets over $100 million
Core Equity Fund
- Equinox Capital Management, LLC 0.35% for first $100 million in assets, plus
0.30% for assets over $100 million
Long-Term Bond Fund
- Western Asset Management Company 0.25% for first $250 million in assets, plus
0.15% for assets over $250 million
</TABLE>
43
<PAGE> 44
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
<TABLE>
<S> <C>
Intermediate-Term Bond Fund
- Travelers Asset Management International 0.25% for first $100 million in assets, plus
Corporation 0.20% for next $100 million in assets, plus
0.15% for assets over $200 million
</TABLE>
For the years 1996 and 1997, the Short-Term Bond Fund paid the Manager fees of
$113,867 and $161,395 respectively. In 1996 and 1997, the Fund also paid the
Manager $21,289 and $42,792 respectively, as a repayment of expenses previously
reimbursed under an expense limitation agreement. For the period January 1
through April 30, 1998, the Fund paid the Manager $99,599. On May 1, 1998, the
Fund became the Global High-Yield Bond Fund and adopted a different fee
structure. For the period May 1, 1998 through December 31, 1998, the Fund paid
the Manager and Credit Suisse Asset Management fees of $130,425 and $221,908
respectively.
For the years 1996, 1997, and 1998, the International Equity Fund paid the
Manager fees of $823,891, $1,320,135, $984,501 respectively. In 1998, the Fund
paid Bank of Ireland Asset Management (U.S.) Limited fees of $650,495.
For the years 1996, 1997, and 1998, the Emerging Opportunities Fund paid the
Manager fees of $1,169,885, $1,405,303, and $1,019,925 respectively. In 1998,
the Fund paid SG Cowen Asset Management and Chartwell Investment Partners fees
of $372,679 and $499,065 respectively.
For the years 1996, 1997, and 1998, the Core Equity Fund paid the Manager fees
of $1,362,267, $2,022,000, and $1,598,522 respectively. In 1998, the Fund paid
Equinox Capital Management, LLC fees of $954,481.
For the years 1996, 1997, and 1998, the Long-Term Bond Fund paid the Manager
fees of $718,488, $945,274, and $785,689 respectively. In 1998, the Fund paid
Western Asset Management Company fees of $412,024.
For the years 1996 and 1997, the Intermediate-Term Bond Fund paid the Manager
fees of $442,594 and $493,298 respectively. In 1998, the Fund paid the Manager
and Travelers Asset Management International Corporation, an affiliate of the
Manager, aggregate fees of $589,370.
The expense limitation agreement is no longer in effect for any of the Funds.
Each Fund has repaid the Manager for all expenses previously reimbursed.
44
<PAGE> 45
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
For more information regarding investment advisers, see MANAGEMENT OF THE FUNDS
in the prospectus.
OTHER SERVICE PROVIDERS
Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 02116 is the
custodian of the assets and is also the accounting services agent for the Funds
of the Company. In that capacity various personnel at Investors Bank & Trust
Company provide custodial and accounting services to, and keeps the accounts
and records of, the Company. The Company pays a monthly fee based upon the
total assets of the Funds at the end of the month at an annual rate of between
0.04% and 0.08% plus reimbursement of out-of-pocket expenses for obtaining
information from pricing services and securities transaction charges. For both
U.S. and non-U.S. assets, the annual rate is 0.08% for assets up to $250
million, 0.06% for assets over $250 million and up to $500 million, and 0.04%
for assets over $500 million. For non-U.S. assets, the Company paid additional
custodial expenses at annual rates of 0.04% and 0.13%, based upon the country.
For the years 1996, 1997, and 1998, the Company paid $671,232, $864,106, and
$1,012,853 respectively to Investors Bank & Trust Company as custodian and
accounting services agent. Investors Bank and Trust Company also assists the
Manager in providing certain administrative services for the Company. For this
assistance, the Manager (not the Company) paid Investors Bank & Trust Company a
fee of $116,550 in 1996, $236,026 in 1997, and $294,071 in 1998.
American Odyssey Funds Management, Inc. (the "Manager"), Two Tower Center, P.O.
Box 1063, East Brunswick, NJ 08816-1063, serves as transfer agent and dividend
disbursing agent for the Company. The Company does not pay a separate fee for
this service; rather, it reimburses the Manager for reasonable out-of-pocket
expenses incurred in connection with providing the service. The Manager also
provides accounting services to and keeps the accounts and records of the
Company, other than those maintained by the custodian. It or an affiliated
company pays the salaries and expenses of all of its and the Company's
personnel except for fees and expenses of the non-interested directors. It or
an affiliated company provides necessary office space, staff assistance to the
Board, and all expenses incurred in connection with managing the ordinary
course of the Company's business, other than the fees and expenses that are
paid directly by the Company.
Beginning in 1999, KPMG Peat Marwick LLP, 99 High Street, Boston, MA
02110-2371, serves as the Company's independent accountants, providing audit
services. For 1998 and for
45
<PAGE> 46
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
previous years, PricewaterhouseCoopers LLP, One Post Office Square, Boston, MA
02109, and one of its predecessors served as independent public accountant for
the Company.
CFBDS, Inc., 21 Milk Street, Boston, Massachusetts 02109, serves as principal
underwriter of the shares of the Company.
BARRA Rogers Casey, Inc. ("RogersCasey"), 1 Parklands Drive, Darien, CT 06820,
assists the Manager in monitoring the performance of the subadvisers and
comparing that performance to that of other investment managers. For this
assistance, the Manager (not the Company) paid RogersCasey a fee of
approximately $135,000 in 1996, $140,000 in 1997, and $147,000 in 1998.
PORTFOLIO TRANSACTIONS
A subadviser may employ an affiliated broker to execute brokerage transactions
on behalf of the Fund as long as the commissions are reasonable and fair
compared to the commissions received by other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time. The Funds may not
engage in any transaction in which a subadviser or its affiliates act as
principal, including over-the-counter purchases and negotiated trades in which
such party acts as a principal.
Each Fund's subadviser is responsible for the selection of brokers and dealers
to effect that Fund's transactions and the negotiation of brokerage
commissions, if any. Transactions on a stock exchange in equity securities
will be executed primarily through brokers who will receive a commission paid
by the Fund. Fixed income securities, as well as securities traded in the
over-the-counter market, on the other hand, will not normally involve any
brokerage commissions. The securities are generally traded on a "net" basis
with the dealer acting as principal for its own account without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed priced
that includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain of these
securities may be purchased directly from an issuer, in which case neither
commissions nor discounts are paid.
In purchasing and selling a Fund's portfolio securities, it is the subadvisers'
policy to seek quality execution at the most favorable prices through
responsible broker-dealers and, in the
46
<PAGE> 47
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
case of agency transactions, at competitive commission rates. In selecting
broker-dealers to execute a Fund's portfolio transactions, the subadviser will
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 the brokerage and research services they provide to the
subadviser or the Fund.
Notwithstanding the above, under certain conditions, the Funds are authorized
to pay higher brokerage commissions in return for brokerage and research
services, although they have no current arrangement to do so. The subadvisers
may cause a Fund to pay a broker-dealer who furnishes brokerage and/or research
services a commission or price for executing a transaction that is in excess of
the commission or price another broker would have received for executing the
transaction if it is determined that such commission or price is reasonable in
relation to the value of the brokerage and/or research services which have been
provided. In some cases, research services are generated by third parties, but
are provided to the subadviser or through broker-dealers.
The subadvisers may receive a wide range of research services from
broker-dealers, including information on securities markets, the economy,
individual companies, statistical information, accounting and tax law
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services are received primarily in the form of
written reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to each investment
adviser's own research efforts and, when utilized, are subject to internal
analysis before being incorporated into the investment process.
In allocating brokerage for the Funds, the subadvisers may annually assess the
contribution of the brokerage and research services provided by broker-dealers,
and allocate a portion of the brokerage business of its clients on the basis of
these assessments. In addition, broker-dealers sometimes suggest a level of
business they would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any firm may be
less than the suggested allocations, but can exceed the suggestions because
total brokerage is allocated on the basis of all the considerations described
above. In no instance is a broker-dealer excluded from receiving business
because it has not been identified as providing research services.
47
<PAGE> 48
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
The subadvisers cannot readily determine the extent to which net prices or
commission rates charged by broker-dealers reflect the value of their research
services. However, net prices and commissions are periodically reviewed to
determine whether they are reasonable in relation to the services provided. In
some instances, the subadvisers receive research services they might otherwise
have had to perform for themselves. The research services provided by
broker-dealers can be useful to the subadvisers, in serving the Funds, as well
as to their other clients.
A subadviser may employ an affiliated broker to execute brokerage transactions
on behalf of the Fund as long as the commissions are reasonable and fair
compared to the commissions received by other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time. The Funds may not
engage in any transaction in which a subadviser or its affiliates act as
principal, including over-the-counter purchases and negotiated trades in which
such party acts as a principal.
On occasion, an investment opportunity may be appropriate for more than one
entity for which a subadviser serves as investment manager or adviser. On
those occasions, one entity will not be favored over another and allocations of
investments among them will be made in an impartial manner believed to be
equitable to each entity involved. The allocations will be based on each
entities investment objectives and its current cash and investment positions.
The subadvisers may enter into certain commission recapture arrangements with
broker-dealers. Under these arrangements, the broker-dealer agrees to return a
portion of the brokerage commission for the benefit of the fund, either in the
form of a cash refund or by payment of a fund expense such as custodial
expenses. Subadvisers will execute trades under such arrangements only when it
is consistent with the policy to seek best execution.
The following charts provide the aggregate amount of brokerage commissions paid
by each Fund during the last three years.
48
<PAGE> 49
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
GLOBAL HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
% of Dollars of
% Paid to Brokers Transactions through
Year Total Commissions Providing Research Brokers Providing
- ---- ----------------- ------------------ Research
--------
<S> <C> <C> <C>
1996 $0 0% 0%
1997 $0 0% 0%
1998 $0 0% 0%
</TABLE>
Prior to May 1, 1998, the Global High-Yield Bond Fund was named the Short-Term
Bond Fund had a substantially different investment objective and investment
program. Information about commissions paid by the Short-Term Bond Fund is
unlikely to be helpful to investors and potential investors in the Global
High-Yield Bond Fund. For more information, see CONVERSION OF SHORT-TERM BOND
FUND TO GLOBAL HIGH-YIELD BOND FUND in the prospectus. In connection with the
conversion, the Fund purchased a new portfolio of securities, and for that
reason, 1998 commissions differed materially from the amounts paid during the
two preceding years.
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
% of Dollars of
% Paid to Brokers Transactions through
Year Total Commissions Providing Research Brokers Providing
- ---- ----------------- ------------------ ----------
Research
--------
<S> <C> <C> <C>
1996 $249,106 0% 0%
1997 $214,573 0% 0%
1998 $226,902 0% 0%
</TABLE>
Commissions in the amount of $2,228 in 1998 were paid to Salomon Smith Barney,
Inc., an affiliate of the Manager. In 1998, the Fund paid 0.98% of its
aggregate brokerage commissions to that broker for 0.87% of aggregate dollar
amount of transactions involving the payment of commissions.
49
<PAGE> 50
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
EMERGING OPPORTUNITIES FUND
<TABLE>
<CAPTION>
% of Dollars of
% Paid to Brokers Transactions through
Year Total Commissions Providing Research Brokers Providing
- ---- ----------------- ------------------ Research
--------
<S> <C> <C> <C>
1996 $90,013 60% 60%
1997 $585,591 94% 94%
1998 $810,386 76% 73%
</TABLE>
Commissions in the amount of $273 in 1996 were paid to The Robinson-Humphrey
Company, Inc., an affiliate of the Manager. In 1998, the Fund did not pay any
commissions to that broker. Commissions in the amount of $810 in 1998 were
paid to Smith Barney Inc., an affiliate of the Manager. In 1998, the Fund paid
0.10% of its aggregate brokerage commissions to that broker for 0.13% of
aggregate dollar amount of transactions involving the payment of commissions.
CORE EQUITY FUND
<TABLE>
<CAPTION>
% of Dollars of
% Paid to Brokers Transactions through
Year Total Commissions Providing Research Brokers Providing
- ---- ----------------- ------------------ Research
--------
<S> <C> <C> <C>
1996 $333,930 63% 63%
1997 $414,992 50% 50%
1998 $548,482 49% 49%
</TABLE>
Commissions in the amount of $186 in 1996 were paid to Smith Barney Inc., an
affiliate of the Manager. In 1998, the Fund did not pay any commissions to
that broker.
50
<PAGE> 51
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
LONG-TERM BOND FUND
<TABLE>
<CAPTION>
% of Dollars of
% Paid to Brokers Transactions through
Year Total Commissions Providing Research Brokers Providing
- ---- ----------------- ------------------ Research
--------
<S> <C> <C> <C>
1996 $66,218 0% 0%
1997 $94,185 0% 0%
1998 $122,145 0% 0%
</TABLE>
INTERMEDIATE-TERM BOND FUND
<TABLE>
<CAPTION>
% of Dollars of
% Paid to Brokers Transactions through
Year Total Commission Providing Research Brokers Providing
- ---- ---------------- ------------------ Research
--------
<S> <C> <C> <C>
1996 $0 0% 0%
1997 $0 0% 0%
1998 $0 0% 0%
</TABLE>
During 1998, the Funds acquired securities of its following regular
broker-dealers: Morgan Stanley, Dean Witter and Co. As of December 31, 1998,
that holding was worth approximately $13,669,204.
The annual portfolio turnover rate for the Global High-Yield Bond Fund,
International Equity, Emerging Opportunities, and Core Equity Funds are
expected to be less than 100%. The annual portfolio turnover rate for the
Long-Term Bond and Intermediate-Term Bond Funds are expected to be more than
100%. For a listing of last year's portfolio turnover rates for all of the
Funds, see FINANCIAL HIGHLIGHTS in the prospectus.
NET ASSET VALUE OF SHARES
The Company sells and redeems shares of each Fund at its net asset value next
determined after receipt of the purchase or redemption order. There is no sales
charge or sales load on the purchase or redemption of shares.
51
<PAGE> 52
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
The net asset value of the shares of each Fund is determined once daily, as of
4:15 p.m. New York City time, on each day during which the New York Stock
Exchange ("NYSE") is open for business. The NYSE is open for business Monday
through Friday except for the days on which the following holidays are
observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net
asset value per share of each Fund is computed by adding the sum of the value
of the securities held by that Fund plus any cash or other assets it holds,
subtracting all its liabilities, and dividing the result by the total number of
shares outstanding of that Fund at such time. Expenses, including the
investment management fee, are accrued daily.
Equity securities for which the primary market is on an exchange are generally
valued at the last sale price on such exchange as of the close of the NYSE
(which is currently 4:00 p.m. New York City time) or, in the absence of
recorded sales, at the mean between the most recently quoted bid and asked
prices. NASDAQ National Market System equity securities are valued at the last
sale price or, if there was no sale on such day, at the mean between the most
recently quoted bid and asked prices. Other over-the-counter equity securities
are valued at the mean between the most recently quoted bid and asked prices.
Convertible debt securities that are actively traded in the over-the-counter,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at the mean between the most recently quoted bid
and asked prices.
Debt obligations (other than those with remaining maturities of less than 60
days) are valued utilizing an independent pricing service to determine
valuations for normal institutional size trading units of securities. The
pricing service considers such factors as security prices, yields, maturities,
call features, ratings, and developments relating to specific securities. Debt
obligations with remaining maturities of less than 60 days will be valued at
amortized cost, which approximates market value. This means that each
obligation will be valued initially at its purchase price (or its market value
as of the 60th day prior to maturity) and thereafter by amortizing any discount
or premium uniformly to maturity, unless this method does not represent fair
market value. In such cases, the security will be valued at its fair value as
determined by the Manager and/or the subadvisers under the direction of the
Board of Directors of the Company.
Options traded on national securities exchanges are valued at their last sale
price as of the close of option trading on such exchanges (which is currently
4:10 p.m. New York City time). Futures contracts are marked to market daily,
and options thereon are valued at their last sale
52
<PAGE> 53
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
price, as of the close of the applicable commodities exchanges (which is
currently 4:15 p.m. New York City time). Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents at the current rate
obtained by a recognized bank or dealer. Forward contracts are valued at the
current cost of covering or offsetting such contracts.
Securities or assets for which market quotations are not readily available will
be valued at fair value as determined by the Manager and/or the subadvisers
under the direction of the Board of Directors of the Company.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
government securities, and money market instruments, is substantially completed
each day at various times prior to the close of the NYSE. The value of any
such securities are determined as of such times for purposes of computing a
Fund's net asset value. Foreign currency exchange rates are also generally
determined prior to the close of the NYSE. If an extraordinary event occurs
after the close of an exchange on which that security is traded, the security
will be valued at fair value as determined in good faith by the applicable
subadviser under procedures established by and under the general supervision of
the Company's Board of Directors.
PERFORMANCE INFORMATION
The Funds may quote their performance in various ways. All performance
information supplied by the Funds is historical and is not intended to indicate
future performance. A Fund's share prices, yields, and total returns fluctuate
in response to market conditions and other factors, and the value of Fund
shares when redeemed may be more or less than their original cost.
Performance information for a Fund includes the effect of deducting that Fund's
expenses, but does not include charges and expenses attributable to any
particular insurance product. For that reason, if you have purchased a
variable contract that offers the American Odyssey Funds as an investment
option, you should not compare the Funds' performance information with funds
that offer their shares directly to the public because the performance figures
provided by the American Odyssey Funds do not reflect charges of the insurance
company issuing the variable contract. You should therefore consult your
contract prospectus to learn more about those charges.
53
<PAGE> 54
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
Yields quoted in advertising are computed by dividing that Fund's interest and
dividend income for a given 30-day period, net of expenses, by the average
number of shares entitled to receive dividends during the period, dividing this
figure by the Fund's net asset value per share at the end of the period and
annualizing the result (assuming compounding of income) in order to arrive at
an annual percentage rate. Income is calculated for purposes of yield
quotations in accordance with standardized methods applicable to all stock and
bond funds. Dividends for equity investments are treated as if they were
accrued on a daily basis, solely for the purposes of yield calculations. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.
Income calculated for the purpose of determining the Funds' yields differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the semi-annual compounding assumed in
yield calculations, the yields quoted for the Funds may differ from the income
the Funds paid over the same period or the rate of income reported in the
Funds' financial statements.
Total returns quoted in advertising reflect all aspects of a Fund's return,
including the effect of reinvesting dividends and capital gain distributions,
and any change in the Fund's net asset value per share (NAV) over the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in the Fund over a
stated period, and then calculating the annually compounded percentage rate
that would have produced the same result if the rate of growth or decline in
value had been constant over the period. For example, a total return of 100%
over ten years would require an average annual return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a Fund's performance is
not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual year-to-year
performance.
In addition to average annual total returns, the Funds may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, and/or a series of redemptions,
over any time period. Total returns may be broken down into their
54
<PAGE> 55
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns, yield and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
The Funds' average annual total returns were as follows for the
respective periods ending December 31, 1998:
<TABLE>
<CAPTION>
Life of Fund
1 Year 5 Year (since 5/17/93)
------ ------ ---------------
<S> <C> <C> <C>
Global High-Yield Bond Fund (1) -3.76% 3.26% 3.42%
International Equity Fund 14.91% 10.25% 12.88%
Emerging Opportunities Fund -8.65% 6.50% 7.56%
Core Equity Fund 15.54% 20.76% 19.05%
Long-Term Bond Fund 9.04% 7.37% 8.48%
Intermediate-Term Bond Fund 8.48% 6.25% 6.44%
</TABLE>
(1) Prior to May 1, 1998, the Global High-Yield Bond Fund was named the
Short-Term Bond Fund and had a substantially different investment
objective and investment program. Information about the Short-Term
Bond Fund is unlikely to be helpful to investors and potential
investors in the Global High-Yield Bond Fund. See CONVERSION OF
SHORT-TERM BOND FUND TO GLOBAL HIGH-YIELD BOND FUND in the prospectus.
TAXES
The Funds intend to qualify as regulated investment companies under Subchapter
M of the Internal Revenue Code (the "Code"). Under the relevant provisions,
the Funds are not subject to federal income tax on the part of their net
ordinary income and net realized capital gains that they distribute. They
intend to distribute as dividends substantially all their net investment
income, if any. They also declare and distribute annually all their net
realized capital gains. Such dividends and distributions are automatically
reinvested in additional shares of the Funds. If the Fund does not qualify
under Subchapter M, it will be subject to federal income tax.
55
<PAGE> 56
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
Section 817(h) of the Internal Revenue Code requires that assets underlying
variable life insurance and variable annuity contracts must meet certain
diversification requirements if the contracts are to qualify as life insurance
and annuity contracts. The diversification requirements ordinarily must be met
within 1 year after contract owner funds are first allocated to the particular
Fund, and within 30 days after the end of each calendar quarter thereafter. In
order to meet the diversification requirements set forth in Treasury
Regulations issued pursuant to Section 817(h), each Fund must meet one of two
alternative tests. Under the first test, no more than 55% of the Fund's assets
can be invested in any one investment; no more than 70% of the assets can be
invested in any two investments; no more than 80% of the assets can be invested
in any three investments; and no more than 90% can be invested in any four
investments. Under the second test, the Fund must meet the tax law
diversification requirements for a regulated investment company and no more
than 55% of the value of the Fund's assets can be invested in cash, cash items,
government securities, and securities of other regulated investments.
For purposes of determining whether a variable account is adequately
diversified, each United States government agency or instrumentality is treated
as a separate issuer for purposes of determining whether a Fund is adequately
diversified. The Company's compliance with the diversification requirements
will generally limit the amount of assets that may be invested in federally
insured certificates of deposit and all types of securities issued or
guaranteed by each United States government agency or instrumentality.
The International Equity Fund may be required to pay withholding or other taxes
to foreign governments. If so, the taxes will reduce the Fund's dividends.
Foreign tax withholding from dividends and interest (if any) is typically set
at a rate between 10% and 15% if there is a treaty with the foreign government
which addresses this issue. If no such treaty exists, the foreign tax
withholding would be 30%. While contract owners will thus bear the cost of
foreign tax withholding, they will not be able to claim a foreign tax credit or
deduction for foreign taxes paid by the Fund.
OWNERSHIP OF SHARES
At December 31, 1998, Travelers Universal Annuity Fund U was the holder of
record of 97.03% of the Global High-Yield Bond Fund, 97.31% of the
International Equity Fund,
56
<PAGE> 57
AMERICAN ODYSSEY FUNDS, INC.
Statement of Additional Information
97.30% of the Emerging Opportunities Fund, 97.10% of the Core Equity Fund,
97.30% of the Long-Term Bond Fund, and 97.35% of the Intermediate-Term Bond
Fund. The address for Travelers Fund U is One Tower Square, Hartford, CT
06183.
FINANCIAL STATEMENTS
The Company's financial statements and financial highlights for the fiscal year
ended December 31, 1998, and report of the auditor appear in the Company's
Annual Report and are incorporated herein by reference.
57
