<PAGE>
Retirement Annuity Mutual Funds
Prospectus/October 30, 1997
This prospectus describes nine Funds that receive payments from the variable
accounts of your variable annuity contract. Each of these Funds has different
investment objectives and policies.
IDS Life Capital Resource Fund is a stock fund.
IDS Life Special Income Fund is a bond fund.
IDS Life Managed Fund is a managed fund.
IDS Life Moneyshare Fund is a money market fund. An investment in Moneyshare
Fund is neither insured nor guaranteed by the U.S. government and there can be
no assurance that the Fund will be able to maintain a stable net asset value of
$1 per share.
IDS Life International Equity Fund is an international stock fund.
IDS Life Aggressive Growth Fund is a stock fund investing primarily in common
stocks of small-and medium-size companies.
IDS Life Growth Dimensions Fund is a stock fund.
IDS Life Global Yield Fund is a bond fund.
IDS Life Income Advantage Fund is a bond fund.
This prospectus contains facts that can help you decide if the Funds are the
right investment for you. Read this along with your variable annuity prospectus
before you invest and keep both prospectuses for future reference.
Additional facts about the Funds are in a Statement of Additional Information
(SAI), filed with the Securities and Exchange Commission (SEC) and available for
reference, along with other related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI, dated October 30, 1997, is incorporated here by
reference. For a free copy, contact Retirement Annuity Mutual Funds at the
address below.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the SEC or any
state securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
IDS Life Insurance Company (IDS Life) is not a bank or financial institution,
and the securities it offers are not deposits or obligations of, or guaranteed
or endorsed by, any bank or financial institution, nor are they insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
<PAGE>
IDS Life Investment Series, Inc.
IDS Life Capital Resource Fund
IDS Life International Equity Fund
IDS Life Aggressive Growth Fund
IDS Life Growth Dimensions Fund
IDS Life Special Income Fund, Inc.
IDS Life Special Income Fund
IDS Life Global Yield Fund
IDS Life Income Advantage Fund
IDS Life Moneyshare Fund, Inc.
IDS Life Managed Fund, Inc.
Retirement Annuity Mutual Funds
IDS Tower 10
Minneapolis, MN 55440-0010
[612-671-3733]
[800-437-0602]
[TTY: 800-285-8846]
[800-422-3542]
[800-333-3437]
<PAGE>
Table of contents
The Funds in brief
Goals and types of Fund investments
Manager and distributor
Variable accounts
Sales charge and expenses
Sales charge
Expenses
Performance
Financial highlights
Total returns
Yield calculation
Key terms
Investment policies and risks
Facts about investments and their risks
Alternative investment options
Valuing assets
How to invest, transfer or redeem shares
How to invest
How to transfer among variable accounts
Redeeming shares
Distributions and taxes
Dividend and capital gain distributions
Taxes
How the Funds are organized
Shares
Voting rights
Shareholder meetings
Portfolio managers
Directors and officers
Investment manager
Administrative services agreement
Investment advisory agreements
About American Express Financial Corporation
General information
<PAGE>
The Funds in brief
Goals and types of Fund investments
Capital Resource Fund's goal is capital appreciation and it invests primarily in
U.S. common stocks.
Special Income Fund's goal is to provide a high level of current income while
conserving the value of the investment for the longest period of time. It
invests primarily in investment-grade bonds.
Managed Fund's goal is maximum total investment return through a combination of
capital growth and current income. It invests primarily in stocks, convertible
securities, bonds and money market instruments.
Moneyshare Fund's goal is to provide maximum current income consistent with
liquidity and conservation of capital. It invests in money market securities.
International Equity Fund's goal is capital appreciation and it invests
primarily in common stocks of foreign issuers.
Aggressive Growth Fund's goal is capital appreciation and it invests primarily
in common stocks of small- and medium-size companies.
Growth Dimensions Fund's goal is long-term growth of capital and it invests
primarily in common stocks of U.S. and foreign companies showing potential for
significant growth.
Global Yield Fund's goal is high total return through income and growth of
capital, and it invests primarily in debt securities of U.S. and foreign
issuers.
Income Advantage Fund's goal is to provide high current income as its primary
goal and capital growth as its secondary goal and it invests primarily in
long-term, high-yielding, high risk debt securities below investment grade
issued by U.S. and foreign corporations.
Because any investment involves risk, achieving these goals cannot be
guaranteed. Only the contract owners can change the goals. See "Voting rights."
Manager and distributor
The Funds are managed by IDS Life, a subsidiary of American Express Financial
Corporation (AEFC). AEFC has an agreement with IDS Life to furnish investment
advice for the Funds managed by IDS Life.
<PAGE>
Variable accounts
You may not buy (nor will you own) shares of the Fund directly. You invest by
buying a variable annuity and allocating your purchase payments among the
variable accounts that invest in the Funds.
Sales charge and expenses
Sales charge
There is no sales charge for the sale or redemption of fund shares, but there
may be charges associated with your redemption (surrender or withdrawal) of your
annuity contract. Any charges that apply to the variable accounts and your
annuity contract are described in the variable annuity prospectus.
Expenses
The Funds pay IDS Life a fee for managing their investment portfolios. The Funds
pay AEFC for administrative and accounting services. The Funds also pay certain
nonadvisory expenses. See "Investment manager" and "Administrative services
agreement" under "How the Funds are organized."
<PAGE>
Performance
Financial highlights
Capital Resource Fund
Financial highlights
Fiscal year ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning $25.57 $24.42 $23.43 $24.58 $23.90 $23.15 $17.54 $20.17 $15.06 $17.71
of period
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
Income from investment
operations: .16 .30 .29 .29 .23 .21 .40 .52 .39 .31
Net investment income (loss)
Net gains (losses) on
securities (both realized 6.45 1.22 3.70 1.56 1.89 1.75 6.61 (2.06) 5.38 (2.54)
and unrealized)
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
Total from investment
operations 6.61 1.52 3.99 1.85 2.12 1.96 7.01 (1.54) 5.77 (2.23)
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
Less distributions:
Dividends from net (.15) (.29) (.29) (.29) (.23) (.21) (.40) (.52) (.39) (.31)
investment income
Distributions from realized (4.05) (.07) (2.71) (2.71) (1.21) (1.00) (1.00) (.57) (.27) (.11)
gains
Excess distributions from
net (.01) (.01) -- -- -- -- -- -- -- --
investment income
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
Total distributions (4.21) (.37) (3.00) (3.00) (1.44) (1.21) (1.40) (1.09) (.66) (.42)
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
Net asset value, end of $27.97 $25.57 $24.42 $23.43 $24.58 $23.90 $23.15 $17.54 $20.17 $15.06
period
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets (end of period)
(in millions) $4,867 $4,372 $3,845 $2,899 $2,308 $1,681 $1,191 $702 $660 $454
Ratio of expenses to
average .67% .68% .69% .68% .68% .70% .70% .70% .73% .69%
daily net assets
Ratio of net income (loss)
to average daily net assets .61% 1.15% 1.22% 1.20% .94% .91% 1.94% 2.69% 2.22% 2.01%
Portfolio turnover rate
(excluding short-term 110% 131% 88% 85% 65% 63% 74% 82% 42% 111%
securities)
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
Total returnb 28.47% 6.15% 17.18% 7.61% 8.87% 8.54% 40.68% (7.79%) 38.72% (12.59%)
Average brokerage $.0492 $.0565 -- -- -- -- -- -- -- --
commission ratec
- ----------------------------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- ----------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
c Effective fiscal year 1996, the Fund is required to disclose an average
brokerage commission rate per share for security trades on which commissions
are charges. The comparability of this information may be affected by the fact
that commission rates per share vary significantly among foreign countries.
</TABLE>
<PAGE>
Special Income Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of $11.54 $11.58 $11.05 $12.08 $11.26 $10.72 $10.10 $11.11 $10.88 $11.09
period
- ----------------------------------- -------- --------- -------- ---------- ------- -------- -------- -------- ------- --------
Income from investment operations:
Net investment income (loss) .85 .88 .88 .84 .85 .90 .97 .99 1.03 1.03
Net gains (losses) on securities
(both realized and unrealized) .52 (.07) .56 (.99) .82 .54 .62 (1.01) .23 (.21)
- ----------------------------------- -------- --------- -------- ---------- ------- -------- -------- -------- ------- --------
Total from investment operations 1.37 .81 1.44 (.15) 1.67 1.44 1.59 (.02) (1.26) .82
- ----------------------------------- -------- --------- -------- ---------- ------- -------- -------- -------- ------- --------
Less distributions:
Dividends from net investment (.84) (.85) (.87) (.85) (.85) (.90) (.97) (.99) (1.03) (1.03)
income
Distributions from realized gains (.07) -- (.02) (.02) -- -- -- -- -- --
Excess distributions from net
investment income (.01) -- (.02) (.01) -- -- -- -- -- --
- ----------------------------------- -------- --------- -------- ---------- ------- -------- -------- -------- ------- --------
Total distributions (.92) (.85) (.91) (.88) (.85) (.90) (.97) (.99) (1.03) (1.03)
- ----------------------------------- -------- --------- -------- ---------- ------- -------- -------- -------- ------- --------
Net asset value, end of period $11.99 $11.54 $11.58 $11.05 $12.08 $11.26 $10.72 $10.10 $11.11 $10.88
- ----------------------------------- -------- --------- -------- ---------- ------- -------- -------- -------- ------- --------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets, end of period
(in millions) $1,923 $1,912 $1,703 $1,559 $1,551 $1,136 $800 $641 $565 $428
Ratio of expenses to average
daily net assets .68% .68% .68% .67% .69% .71% .70% .71% .73% .69%
Ratio of net income to average
daily net assets 7.18% 7.47% 8.08% 7.20% 7.41% 8.22% 9.31% 9.42% 9.37% 9.45%
Portfolio turnover rate (excluding
short-term securities) 73% 56% 56% 57% 77% 92% 97% 118% 132% 169%
- ----------------------------------- -------- --------- -------- ---------- ------- -------- -------- -------- ------- --------
Total returnb 12.24% 7.08% 13.75% (1.30)% 15.47% 13.96% 16.54% (.12)% 12.19% 7.76%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
</TABLE>
<PAGE>
Managed Fund
Financial highlights
Fiscal year ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $16.00 $14.85 $13.65 $14.32 $13.08 $12.59 $10.93 $12.08 $9.87 $11.34
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
Income from investment operations:
Net investment income .46 .46 .40 .47 .49 .56 .58 .65 .48 .42
Net gains (losses) on securities
(both realized and unrealized) 3.93 1.15 1.20 (.26) 1.60 .95 2.11 (.67) 2.25 (1.47)
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
Total from investment operations 4.39 1.61 1.60 .21 2.09 1.51 2.69 (.02) 2.73 (1.05)
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
Less distributions:
Dividends from net investment (.45) (.46) (.40) (.47) (.49) (.56) (.58) (.65) (.48) (.42)
income
Distributions from realized gains (1.06) -- -- (.41) (.36) (.46) (.45) (.48) (.04) --
Excess Distributions from
net investment income (.01) -- -- -- -- -- -- -- -- --
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
Total distributions (1.52) (.46) (.40) (.88) (.85) (1.02) (1.03) (1.13) (.52) (.42)
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
Net asset value, end of period $18.87 $16.00 $14.85 $13.65 $14.32 $13.08 $12.59 $10.93 $12.08 $9.87
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets, end of period
(in millions) $4,445 $3,482 $3,044 $2,499 $1,858 $1,169 $810 $545 $462 $381
Ratio of expenses to average
daily net assets .64% .65% .68% .68% .69% .71% .70% .71% .73% .69%
Ratio of net income (loss) to
average daily net assets 2.65% 2.94% 2.96% 3.46% 3.70% 4.35% 4.86% 5.42% 5.06% 4.42%
Portfolio turnover rate (excluding
short-term securities)
72% 85% 72% 79% 58% 50% 52% 37% 69% 62%
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
Total returnb 28.54% 10.95% 11.94% 1.51% 16.33% 12.14% 25.24% (.23)% 28.47% (9.06)%
Average brokerage commission ratec $.0334 $.0606 -- -- -- -- -- -- -- --
- ----------------------------------- -------- -------- -------- ------- -------- ------- -------- -------- -------- ---------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
c Effective fiscal year 1996, the Fund is required to disclose an average
brokerage commission rate per share for
security trades on which commissions are charges. The comparability of
this information may be affected by the fact that commission rates per
share vary significantly among foreign countries.
</TABLE>
<PAGE>
Moneyshare Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
period
- ----------------------------------- -------- ------- ------- -------- ------- -------- ------- ------- ------- --------
Income from investment operations:
Net investment income (loss) .05 .05 .05 .03 .03 .04 .07 .08 .09 .07
- ----------------------------------- -------- ------- ------- -------- ------- -------- ------- ------- ------- --------
Less distributions:
Dividends from net investment (.05) (.05) (.05) (.03) (.03) (.04) (.07) (.08) (.09) (.07)
income
- ----------------------------------- -------- ------- ------- -------- ------- -------- ------- ------- ------- --------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------- -------- ------- ------- -------- ------- -------- ------- ------- ------- --------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets, end of period
(in millions) $421 $288 $227 $179 $180 $246 $285 $274 $160 $102
Ratio of expenses to average
daily net assets .57% .56% .59% .57% .60% .60% .57% .62% .54% .58%
Ratio of net income (loss) to
average daily net assets 4.97% 5.02% 5.23% 3.12% 2.67% 3.93% 6.55% 7.85% 8.68% 6.77%
- ----------------------------------- -------- ------- ------- -------- ------- -------- ------- ------- ------- --------
Total returnb 5.06% 5.16% 5.27% 3.15% 2.73% 3.98% 6.77% 8.18% 8.99% 7.01%
- ----------------------------------- -------- ------- ------- -------- ------- -------- ------- ------- ------- --------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
</TABLE>
<PAGE>
International Equity Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992b
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of $13.30 $12.55 $12.91 $11.60 $10.01 $10.00
period
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income (loss) .18 .20 .17 .14 .15 .05
Net gains (losses) on securities
(both realized and unrealized 1.06 1.01 (.37) 1.61 1.81 .01
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total from investment operations 1.24 1.21 (.20) 1.75 1.96 .06
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Less distributions:
Dividends from net investment (.17) (.44) (.16) (.08) (.15) (.05)
income
Distributions from realized gains (.28) (.02) -- (.29) (.22) --
Excess distributions from -- -- -- (.07) -- --
realized gains
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total distributions (.45) (.46) (.16) (.44) (.37) (.05)
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of period $14.09 $13.30 $12.55 $12.91 $11.60 $10.01
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992b
Net assets, end of period
(in millions) $2,105 $1,874 $1,442 $1,111 $291 $39
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Ratio of expenses to average
daily net assets .97% .96% 1.03% .98% 1.10% 1.57%c
Ratio of net income (loss) to
average daily net assets 1.30% 1.28% 1.56% 1.09% 1.37% .93%c
Portfolio turnover rate (excluding
short-term securities) 91% 58% 38% 51% 62% 22%
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total returnd 9.34% 9.64% (1.77%) 15.11% 19.76% .55%
Average brokerage commission ratee $.0187 $.0186 -- -- -- --
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Commencement of operations. Period from Jan. 13, 1992 to Aug. 31, 1992.
c Adjusted to an annual basis.
d Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
e Effective fiscal year 1996, the Fund is required to disclose an average
brokerage commission rate per share for security trades on which commissions
are charges. The comparability of this information may be affected by the
fact that commission rates per share vary significantly among foreign countries.
</TABLE>
<PAGE>
Aggressive Growth Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE><CAPTION>
1997 1996 1995 1994 1993 1992b
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of $16.04 $14.44 $11.46 $11.68 $9.00 $10.00
period
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income (loss) .08 .10 .08 .01 .02 .02
Net gains (losses) on securities
(both realized and unrealized) 2.84 1.60 2.98 (.22) 2.68 (1.00)
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total from investment operations 2.92 1.70 3.06 (.21) 2.70 (.98)
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Less distributions:
Dividends from net investment (.08) (.10) (.08) (.01) (.02) (.02)
income
Distributions from realized gains (1.71) -- -- -- -- --
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (1.79) (.10) (.08) (.01) (.02) (.02)
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of period $17.17 $16.04 $14.44 $11.46 $11.68 $9.00
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992b
Net assets, end of period
(in millions) $2,427 $1,941 $1,412 $763 $299 $57
Ratio of expenses to average .
daily net assets .68% .69% .70% .69% .75% .98%c
Ratio of net income to average
daily net assets .47% .65% .72% .14% .28% .21%c
Portfolio turnover rate (excluding
short-term securities) 218% 189% 116% 59% 55% 28%
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total returnd 18.60% 11.82% 26.80% (1.77)% 29.98% (9.76)%
Average brokerage commission ratee $.0430 $.0531 -- -- -- --
- ----------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Commencement of operations. Period from Jan. 13, 1992 to Aug. 31, 1992.
c Adjusted to an annual basis.
d Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
e Effective fiscal year 1996, the Fund is required to disclose an average
brokerage commission rate per share for security trades on which commissions
are charges. The comparability of this information may be affected by the
fact that commission rates per share vary significantly among foreign countries.
</TABLE>
<PAGE>
Growth Dimensions Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
1997 1996b
Net asset value, beginning of period $9.94 $10.00
- ----------------------------------------- -------- -----------
Income from investment operations:
Net investment income .10 .03
Net gains (losses) on securities
(both realized and unrealized) 3.01 (.06)
- ----------------------------------------- -------- -----------
Total from investment operations 3.11 (.03)
- ----------------------------------------- -------- -----------
Less distributions:
Dividends from net investment income (.10) (.03)
- ----------------------------------------- -------- -----------
Net asset value, end of period $12.95 $9.94
- ----------------------------------------- -------- -----------
Ratios/supplemental data
1997 1996b
Net assets, end of period (in millions) $1,307 $171
- ----------------------------------------- -------- -----------
Ratio of expenses to average
daily net assets .72% 1.04%c
Ratio of net income (loss) to average
daily net assets 1.04% 1.69%c
Portfolio turnover rate (excluding
short-term securities) 29% 4%
- ----------------------------------------- -------- -----------
Total returnd 31.35% (.22)%
Average brokerage commission ratee $.0321 $.0559
- ----------------------------------------- -------- -----------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Commencement of operations. Period from May 1, 1996 to Aug. 31, 1996.
c Adjusted to an annual basis.
d Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
e Effective fiscal year 1996, the Fund is required to disclose an average
brokerage commission rate per share for security trades on which commissions
are charges. The comparability of this information may be affected by the
fact that commission rates per share vary significantly among foreign
countries.
<PAGE>
Global Yield Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
1997 1996b
Net asset value, beginning of period $10.08 $10.00
- ----------------------------------------- -------- -----------
Income from investment operations:
Net investment income (loss) .51 .12
Net gains on securities
(both realized and unrealized) .14 .07
- ----------------------------------------- -------- -----------
Total from investment operations .65 .19
- ----------------------------------------- -------- -----------
Less distributions:
Dividends from net investment income (.41) (.11)
- ----------------------------------------- -------- -----------
Net asset value, end of period $10.32 $10.08
- ----------------------------------------- -------- -----------
Ratios/supplemental data
1997 1996b
Net assets, end of period (in millions) $119 $21
- ----------------------------------------- -------- -----------
Ratio of expenses to average
daily net assets .97% 1.77%c
Ratio of net income to average
daily net assets 5.66% 4.96%c
Portfolio turnover rate (excluding
short-term securities) 36% 4%
- ----------------------------------------- -------- -----------
Total returnd 6.47% 1.95%
- ----------------------------------------- -------- -----------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Commencement of operations. Period from May 1, 1996 to Aug. 31, 1996.
c Adjusted to an annual basis.
d Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
<PAGE>
Income Advantage Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
1997 1996b
Net asset value, beginning of period $9.77 $10.00
- ----------------------------------------- -------- -----------
Income from investment operations:
Net investment income (loss) .88 .18
Net gains (losses) on securities
(both realized and unrealized) .62 (.23)
- ----------------------------------------- -------- -----------
Total from investment operations 1.50 (.05)
- ----------------------------------------- -------- -----------
Less distributions:
Dividends from net investment income (.88) (.18)
- ----------------------------------------- -------- -----------
Net asset value, end of period $10.39 $9.77
- ----------------------------------------- -------- -----------
Ratios/supplemental data
1997 1996b
Net assets, end of period (in millions) $320 $49
- ----------------------------------------- -------- -----------
Ratio of expenses to average
daily net assets .69% 1.53%c
Ratio of net income to average
daily net assets 8.88% 8.14%c
Portfolio turnover rate (excluding
short-term securities) 104% 22%
- ----------------------------------------- -------- -----------
Total returnd 16.78% (.48)%
- ----------------------------------------- -------- -----------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Commencement of operations. Period from May 1, 1996 to Aug. 31, 1996.
c Adjusted to an annual basis.
d Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
The information in these tables has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of the Funds is contained in the Fund's annual
report which, if not included with this prospectus, may be obtained without
charge.
Total returns
Average annual total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- ------------
Capital Resource Fund +28.47% +13.36% +12.32%
S&P 500 +40.63% +19.73% +13.86%
<PAGE>
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- ------------
Capital Resource Fund +28.47% + 87.21% +219.62%
S&P 500 +40.63% +146.03% +266.31%
Average annual total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- ------------
Special Income Fund +12.24% +9.28% +9.59%
Lehman Aggregate Bond
Index +10.01% +6.80% +9.05%
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- ------------
Special Income Fund +12.24% +55.81% +149.87%
Lehman Aggregate Bond
Index +10.01% +38.92% +137.89%
Average annual total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- ------------
Managed Fund +28.54% +13.51% +11.93%
S&P 500 +40.63% +19.73% +13.86%
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- ------------
Managed Fund +28.54% + 88.52% +208.61%
S&P 500 +40.63% +146.03% +266.31%
Average annual total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
International
Equity Fund + 9.34% +10.22% + 9.12%
Morgan Stanley
Capital International
World Index +22.84% +14.98% +12.88%*
<PAGE>
Cumulative total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
International
Equity Fund + 9.34% + 62.68% +63.58%
Morgan Stanley
Capital International
World Index +22.84% +100.93% +97.13%*
Average annual total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
Aggressive Growth Fund +18.60% +16.51% +12.45%
S&P 500 +40.63% +19.73% +18.08%*
Cumulative total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
Aggressive Growth Fund +18.60% +114.71% + 93.75%
S&P 500 +40.63% +146.03% +153.88%*
Average annual total returns as of Aug. 31, 1997
Purchase 1 year Since inception
made ago May 1, 1996
- --------------------------- ----------------- ---------------------------------
Growth Dimensions +31.35% +22.47%
S&P 500 +40.63% +28.81%
Lipper Growth Fund Index +34.46% +22.62%
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year Since inception
made ago May 1, 1996
- --------------------------- ----------------- ---------------------------------
Growth Dimensions +31.35% +31.06%
S&P 500 +40.63% +41.32%
Lipper Growth Fund Index +34.46% +31.97%
<PAGE>
Average annual total returns as of Aug. 31, 1997
Purchase 1 year Since inception
made ago May 1, 1996
- --------------------------- ----------------- --------------------------------
Global Yield +6.47% +6.34%
Salomon Brothers Global
Govt. Bond Composite Index +0.68% +2.86%
Lipper Global
Income Fund Index +7.66% +8.16%
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year Since inception
made ago May 1, 1996
- --------------------------- ----------------- ---------------------------------
Global Yield +6.47% + 8.55%
Salomon Brothers Global
Govt. Bond Composite Index +0.68% + 3.85%
Lipper Global
Income Fund Index +7.66% +11.13%
Average annual total returns as of Aug. 31, 1997
Purchase 1 year Since inception
made ago May 1, 1996
- --------------------------- ----------------- ---------------------------------
Income Advantage +16.78% +11.92%
Lehman Aggregate Bond
Index +10.01% + 8.34%
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year Since inception
made ago May 1, 1996
- --------------------------- ----------------- ---------------------------------
Income Advantage +16.78% +16.22%
Lehman Aggregate Bond
Index +10.01% +11.39%
* Measurement period began Jan. 31, 1992
These examples show total returns from hypothetical investments in each Fund.
These returns are compared to those of popular indexes for the same periods. The
results do not reflect the expenses that apply to the variable accounts or the
annuity contract. Inclusion of these charges would reduce total return for all
periods shown.
<PAGE>
For purposes of calculation, information about each Fund assumes the deduction
of applicable fund expenses, makes no adjustments for taxes that may have been
paid on the reinvested income and capital gains and covers a period of widely
fluctuating securities prices. Returns shown should not be considered a
representation of the Fund's future performance.
Each Fund's investments may be different from those in the indexes. The indexes
reflect reinvestment of all distributions and changes in market prices, but
exclude brokerage commissions or other fees.
Standard & Poor's 500 Stock Index (S&P 500), an unmanaged list of common stocks,
is frequently used as a general measure of market performance. The index
reflects reinvestment of all distributions and changes in market prices, but
excludes brokerage commissions or other fees.
The Morgan Stanley Capital International World Index, compiled from a composite
of securities listed on the markets of North America, Europe, Australasia and
the Far East is widely recognized by investors as the measurement index for
portfolios that invest in the major markets of the world.
Lehman Aggregate Bond Index is made up of an unmanaged representative list of
government and corporate bonds as well as asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. However, the securities used to create the index may not be
representative of the bonds held in Special Income or Income Advantage Funds.
The index reflects reinvestment of all distributions and changes in market
prices, but excludes brokerage commissions or other fees.
Lipper Growth Fund Index, an unmanaged index published by Lipper Analytical
Services, Inc., includes 30 funds that are generally similar to Growth
Dimensions Fund, although some funds in the index may have somewhat different
investment policies or objectives.
Salomon Brothers Global Government Bond Composite Index is a representative list
of government bonds of 17 countries throughout the world. The index is a general
measure of government bond performance.
Performance is expressed in the U.S. dollar as well as the currencies of
governments making up the index. The bonds included in the index may not be the
same as those in the Global Yield Fund.
Lipper Global Income Fund Index, an unmanaged index published by Lipper
Analytical Services, Inc., includes 30 funds that are generally similar to
Global Yield Fund, although some funds in the index may have somewhat different
investment policies or objectives.
<PAGE>
Yield calculation
Special Income, Global Yield and Income Advantage Funds may calculate a 30-day
annualized yield by dividing:
o net investment income per share deemed earned during a 30-day period by
o the net asset value per share on the last day of the period, and
o converting the result to a yearly equivalent figure.
This yield calculation does not include any annuity charges or contingent
deferred sales charges, which would reduce the yield quoted.
A fund's yield varies from day to day, mainly because share values and net asset
values (which are calculated daily) vary in response to changes in interest
rates. Net investment income normally changes much less in the short run. Thus,
when interest rates rise and share values fall, yield tends to rise.
When interest rates fall, yield tends to follow.
Moneyshare Fund calculates annualized simple and compound yields based on a
seven-day period.
Past yields should not be considered an indicator of future yields.
Key terms
Average annual total return - The annually compounded rate of return over a
given time period (usually two or more years) -- total return for the period
converted to an equivalent annual figure.
Capital gains or losses - Increase or decrease in value of the securities the
funds hold. Gains are realized when securities that have increased in value are
sold. A fund also may have unrealized gains or losses when securities increase
or decrease in value but are not sold.
Close of business - Normally 3 p.m. Central time each business day (any day the
New York Stock Exchange is open).
Distributions - Payments to the variable accounts of two types: investment
income (dividends) and realized net long-term capital gains (capital gains
distributions).
Investment income - Dividends and interest earned on securities held by the
funds.
<PAGE>
Net asset value (NAV) - Value of a single fund share. It is the total market
value of all of a fund's investments and other assets, less any liabilities,
divided by the number of shares outstanding.
The NAV is the price the variable account receives when it sells shares. It
usually changes from day to day and is calculated at the close of business. For
Special Income, Global Yield and Income Advantage Funds, NAV generally declines
as interest rates increase and rises as interest rates decline.
Total return - Sum of all returns for a given period, assuming reinvestment of
all distributions. Calculated by taking the total value of shares at the end of
the period (including shares acquired by reinvestment), less the price of shares
purchased at the beginning of the period.
Variable accounts - The separate accounts or subaccounts, each of which invests
in shares of one of the funds.
Yield - Net investment income earned per share for a specified time period,
divided by the net asset value at the end of the period.
Investment policies and risks
Capital Resource Fund - Under normal market conditions, Capital Resource Fund
invests primarily in U.S. common stocks and other securities convertible into
common stock. The portfolio manager selects investments believed to have
potential for capital growth.
The Fund also may invest in preferred stocks, bonds, debt securities, foreign
securities, money market instruments and derivative instruments.
Special Income Fund - Under normal market conditions, Special Income Fund
invests primarily in debt securities. At least 50% of its net assets are
invested in corporate bonds of the four highest ratings, in other corporate
bonds the investment manager believes have the same investment qualities and in
government bonds.
The Fund also may invest in corporate bonds with lower ratings, convertible
securities, preferred stocks, derivative instruments, money market instruments
and foreign bonds.
Managed Fund - Under normal market conditions, Managed Fund invests at least 50%
of its total assets in common stocks. The Fund also invests in preferred stocks,
convertible securities, warrants, bonds and money market instruments.
Ordinarily, investments other than common stock would constitute 50% or less of
the Fund's portfolio. However, under unusual market conditions, the Fund may
invest any portion
<PAGE>
of its assets in securities other than common stocks. This allows the investment
manager flexibility to best achieve the Fund's goal. This might occur, for
example, when interest rates are high but are expected to decline significantly.
The Fund also may invest in derivative instruments and foreign securities.
Moneyshare Fund - Under normal market conditions, Moneyshare Fund invests
primarily in high-quality, short-term, debt securities and other money market
instruments denominated in U.S. dollars. The Fund intends to maintain a constant
net asset value of $1 per share, although there is no assurance it will be able
to do so. The Fund will not purchase any security with a remaining maturity of
more than 13 months and will maintain a dollar-weighted average portfolio
maturity of 90 days or less. The Fund also may invest in foreign securities. For
a description of money market securities, see Appendix C in the SAI.
International Equity Fund - Under normal market conditions, International Equity
Fund invests at least 65% of its total assets in foreign equity securities
having a potential for superior growth. Superior means fund performance better
than the Morgan Stanley Capital International World Index.
The Fund's investments will be primarily in common stocks and securities
convertible into common stocks of foreign issuers. However, if the investment
manager believes they have more potential for capital growth, the Fund may
invest in bonds issued or guaranteed either by countries that are members of the
Organization for Economic Cooperation and Development (OECD) or by international
agencies such as the World Bank or the European Investment Bank. These bonds
will not be purchased unless, in the judgment of the investment manager, they
are comparable in quality to bonds rated AA by Standard & Poor's Corporation
(S&P).
The percentage of fund assets invested in particular countries or regions of the
world will change according to their political stability and economic condition.
Ordinarily, the Fund will invest in companies domiciled in at least three
foreign countries.
Normally, investments in U.S. issuers will constitute less than 20% of the
Fund's portfolio. However, as a temporary measure, the Fund may invest any
portion of its assets in securities of U.S. issuers that appear to have greater
potential for superior growth than foreign securities. U.S. investments would
include common stocks, convertible securities and corporate and government
bonds.
The bonds must bear one of the four highest ratings given by Moody's Investors
Service, Inc. (Moody's) or S&P or must be of comparable quality. The Fund also
may invest in money market instruments and derivative instruments. No more than
5% of the Fund's total assets may be invested in options on individual
securities.
<PAGE>
Aggressive Growth Fund - Under normal market conditions, Aggressive Growth Fund
invests primarily in common stocks of U.S. and foreign companies that are small-
and medium-size growth companies. Many of these companies emphasize
technological innovation or productivity improvements.
The Fund invests in warrants to purchase common stock, debt securities or in
securities of large, well-established companies when the portfolio manager
believes those investments offer the best opportunity for capital growth. The
Fund also may invest in foreign securities, derivative instruments and money
market instruments.
Growth Dimensions Fund - Under normal market conditions, Growth Dimensions Fund
invests primarily in common stocks of U.S. and foreign corporations showing
potential for significant growth. These companies usually operate in areas where
dynamic economic and technological changes are occurring. They also may exhibit
excellence in technology, marketing or management. Other investments include
debt securities, preferred stocks, derivative instruments and money market
instruments.
Global Yield Fund - Global Yield Fund invests primarily in debt securities of
U.S. and foreign issuers. Under normal market conditions, at least 80% of the
Fund's net assets will be investment-grade corporate or government debt
securities including money market instruments of issuers located in at least
three different countries.
The Fund also invests in debt securities below investment grade, convertible
securities, common stocks and derivative instruments. The Fund may not purchase
securities rated lower than B by Moody's or S&P.
Since the Fund is a non-diversified mutual fund, it may concentrate its
investments in securities of fewer issuers than would a diversified fund.
Accordingly, the Fund may have more risk than funds that have broader
diversification.
Income Advantage Fund - Under normal market conditions, Income Advantage Fund
invests primarily in debt securities below investment grade issued by U.S. and
foreign corporations. Most of these will be rated BBB, BB or B by S&P or Moody's
equivalent. However, the Fund may invest in debt securities with lower ratings,
including those in default. Other investments include investment-grade bonds,
convertible securities, stocks, derivative instruments and money market
instruments. The Fund may invest up to 10% of its total assets in common stocks,
preferred stocks that do not pay dividends and warrants to purchase common
stocks.
The various types of investments the portfolio managers use to achieve
investment performance are described in more detail in the next section and in
the SAI.
<PAGE>
Facts about investments and their risks
Common stocks: Stock prices are subject to market fluctuations. Stocks of
smaller or foreign companies or stocks of companies experiencing significant
growth and operating in areas of financial and technological change may be
subject to more abrupt or erratic price movements than stocks of larger,
established companies or the stock market as a whole. Also, small companies
often have limited product lines, smaller markets or fewer financial resources.
Therefore, some of the securities in which a fund invests involve substantial
risk and may be considered speculative.
Preferred stocks: If a company earns a profit, it generally must pay its
preferred stockholders a dividend at a pre-established rate.
Convertible securities: These securities generally are preferred stocks or bonds
that can be exchanged for other securities, usually common stock, at prestated
prices. When the trading price of the common stock makes the exchange likely,
the convertible securities trade more like common stock.
Debt securities: The price of an investment grade bond fluctuates as interest
rates change or if its credit rating is upgraded or downgraded.
Debt securities below investment grade: The price of these bonds may react more
to the ability of a company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations, are more likely
to experience a default and sometimes are referred to as "junk bonds." Reduced
market liquidity for these bonds may occasionally make it more difficult to
value them. In valuing bonds, a fund relies both on independent rating agencies
and the investment manager's credit analysis.
Securities that are subsequently downgraded in quality may continue to be held
and will be sold only when the fund's investment manager believes it is
advantageous to do so.
<PAGE>
Bond ratings and holdings for fiscal year ended Aug. 31, 1997
For Special Income Fund
<TABLE>
<CAPTION>
Percent of
net assets
in unrated
S&P Rating Protection of securities
Percent of (or Moody's principal and assessed by
net assets equivalent) interest AEFC
<S> <C> <C> <C>
29.76% AAA Highest quality 0.79%
3.78 AA High quality --
11.28 A Upper medium grade 0.02
13.32 BBB Medium grade 0.10
15.43 BB Moderately speculative 1.04
9.36 B Speculative 0.92
0.74 CCC Highly speculative 0.17
-- CC Poor quality --
0.01 C Lowest quality --
-- D In default --
4.91 Unrated Unrated securities 1.87
Bond ratings and holdings for fiscal year ended Aug. 31, 1997
For Managed Fund
Percent of
net assets
in unrated
S&P Rating Protection of securities
Percent of (or Moody's principal and assessed by
net assets equivalent) interest AEFC
12.77% AAA Highest quality 0.08%
1.20 AA High quality --
3.62 A Upper medium grade --
4.45 BBB Medium grade 0.03
3.53 BB Moderately speculative 0.03
2.20 B Speculative 0.13
0.10 CCC Highly speculative 0.07
-- CC Poor quality --
-- C Lowest quality --
-- D In default --
2.16 Unrated Unrated securities 1.82
</TABLE>
<PAGE>
Bond ratings and holdings for fiscal year ended Aug. 31, 1997
For Global Yield Fund
<TABLE><CAPTION>
Percent of
net assets
in unrated
S&P Rating Protection of securities
Percent of (or Moody's principal and assessed by
net assets equivalent) interest AEFC
<S> <C> <C> <C>
54.30% AAA Highest quality 0.64%
4.73 AA High quality --
2.65 A Upper medium grade 0.09
3.43 BBB Medium grade --
12.08 BB Moderately speculative --
0.57 B Speculative --
-- CCC Highly speculative --
-- CC Poor quality --
-- C Lowest quality --
-- D In default --
1.88 Unrated Unrated securities 1.15
Bond ratings and holdings for fiscal year ended Aug. 31, 1997
For Income Advantage Fund
Percent of
net assets
in unrated
S&P Rating Protection of securities
Percent of (or Moody's principal and assessed by
net assets equivalent) interest AEFC
0.73% AAA Highest quality 0.08%
0.03 AA High quality --
-- A Upper medium grade --
0.71 BBB Medium grade --
18.16 BB Moderately speculative 0.36
58.59 B Speculative 1.71
5.45 CCC Highly speculative 2.16
0.15 CC Poor quality --
-- C Lowest quality --
-- D In default --
9.83 Unrated Unrated securities 5.52
</TABLE>
(See Appendix to the SAI for further information regarding ratings.)
Debt securities sold at a deep discount: Some bonds are sold at deep discounts
because they do not pay interest until maturity. They include zero coupon bonds
and PIK (pay-in-kind) bonds. To comply with tax laws, a fund has to recognize a
computed amount of interest income and pay dividends to shareholders even though
no cash has been received. In some instances, a fund may have to sell securities
to have sufficient cash to pay the dividends.
Mortgage-backed securities: All Funds except Moneyshare may invest in U.S.
government securities representing part ownership of pools of mortgage loans. A
pool, or group, of mortgage loans issued by such lenders as mortgage bankers,
commercial banks and savings and loan associations, is assembled and mortgage
pass-through certificates are offered to investors through securities dealers.
<PAGE>
In pass-through certificates, both principal and interest payments, including
prepayments, are passed through to the holder of the certificate. Prepayments on
underlying mortgages result in a loss of anticipated interest, and the actual
yield (or total return) to the Fund, which is influenced by both stated interest
rates and market conditions, may be different than the quoted yield on the
certificates.
Foreign investments: Securities of foreign companies and governments may be
traded in the United States, but often they are traded only on foreign markets.
Frequently, there is less information about foreign companies and less
government supervision of foreign markets. Foreign investments are subject to
political and economic risks of the countries in which the investments are made
including the possibility of seizure or nationalization of companies, imposition
of withholding taxes on income, establishment of exchange controls or adoption
of other restrictions that might affect an investment adversely. If an
investment is made in a foreign market, the local currency may be purchased
using a forward contract in which the price of the foreign currency in U.S.
dollars is established on the date the trade is made, but delivery of the
currency is not made until the securities are received. As long as the fund
holds foreign currencies or securities valued in foreign currencies, the price
of a fund share will be affected by changes in the value of the currencies
relative to the U.S. dollar. Because of the limited trading volume in some
foreign markets, efforts to buy or sell a security may change the price of the
security and it may be difficult to complete the transaction. Each Fund, except
International Equity and Global Yield Funds may invest up to 25% (Growth
Dimensions may invest up to 30%) of its total assets at the time of purchase in
securities of foreign issuers.
The Fund may invest in foreign securities that are traded in the form of
American Depositary Receipts (ADRs). ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities of
foreign issuers. European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs) are receipts typically issued by foreign banks or trust
companies, evidencing ownership of underlying securities issued by either a
foreign or U.S. issuer. Generally Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary Receipts also
involve the risks of other investments in foreign securities.
Derivative instruments: For all Funds except Moneyshare, the portfolio managers
may use derivative instruments in addition to securities to achieve investment
performance. Derivative instruments include futures, options and forward
contracts. Such instruments may be used to maintain cash reserves while
remaining fully invested, to offset anticipated declines in values of
investments, to facilitate trading, to reduce transaction costs or to pursue
higher investment returns. Derivative instruments are characterized by requiring
little or no initial payment and a daily change in price based on or derived
from a security, a currency, a group of securities or currencies or an index. A
number of strategies or combination of instruments can be used to achieve the
desired investment performance characteristics. A small change in the value of
the underlying security, currency or index will cause a sizable gain or loss in
the price of the derivative instrument. Derivative instruments allow a portfolio
manager to change the investment performance characteristics very quickly and at
lower costs. Risks include losses of premiums, rapid changes in prices, defaults
by other parties and inability to close such instruments. A fund will use
derivative instruments only to achieve the same investment
<PAGE>
performance characteristics it could achieve by directly holding those
securities and currencies permitted under the investment policies. The Fund's
custodian will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's obligations to the extent such obligations are not covered. No more
than 5% of each Fund's net assets can be used at any one time for good faith
deposits on futures and premiums for options on futures that do not offset
existing investment positions. For further information, see the options and
futures appendixes in the SAI.
Securities and derivative instruments that are illiquid: Illiquid means the
security or derivative instrument cannot be sold quickly in the normal course of
business. Some investments cannot be resold to the U.S. public because of their
terms or government regulations. All securities and derivative instruments,
however, can be sold in private sales, and many may be sold to other
institutions and qualified buyers or on foreign markets. Each portfolio manager
will follow guidelines established by the board of directors and consider
relevant factors such as the nature of the security and the number of likely
buyers when determining whether a security is illiquid. No more than 10% of each
Fund's net assets (zero for Moneyshare) will be held in securities and
derivative instruments that are illiquid.
Money market instruments: For all Funds except Moneyshare, short-term debt
securities rated in the top two grades are used to meet daily cash needs and at
various times to hold assets until better investment opportunities arise.
Generally, less than 25% of each of Capital Resource, International Equity,
Aggressive Growth, Special Income, Managed, Growth Dimensions, Global Yield and
Income Advantage Fund's total assets are in these money market instruments.
However, for temporary defensive purposes these investments could exceed that
amount for a limited period of time.
The investment policies described above may be changed by the board of
directors.
Lending portfolio securities: Each Fund may lend its securities to earn income
so long as borrowers provide collateral equal to the market value of the loans.
The risks are that borrowers will not provide collateral when required or return
securities when due. Unless a majority of the outstanding voting securities
approve otherwise, loans may not exceed 30% of a Fund's net assets.
Alternative investment options
In the future, the board of the Funds may determine for operating efficiencies
to use a master/feeder structure. Under that structure, the Fund's investment
portfolio would be managed by another investment company with the same goal as
the Fund, rather than investing directly in a portfolio of securities.
<PAGE>
Valuing assets
Moneyshare Fund's securities are valued at amortized cost. In valuing assets of
Capital Resource, International Equity, Aggressive Growth, Special Income,
Managed, Growth Dimensions, Global Yield and Income Advantage Funds:
o Securities (except bonds) and assets with available market values are valued
on that basis.
o Securities maturing in 60 days or less are valued at amortized cost.
o Bonds are valued according to methods selected by the board.
o Assets without readily available market values are valued according to
methods selected in good faith by the board.
o Assets and liabilities denominated in foreign currencies are translated
daily into U.S. dollars at a rate of exchange set as near to the close of
the day as practicable.
How to invest, transfer or redeem shares
How to invest
You may invest in the Funds only by buying a variable annuity contract. For
further information concerning maximum and minimum payments and submitting and
acceptance of your application, see your annuity prospectus.
How to transfer among variable accounts
You can transfer all or part of your value in a variable account to one or more
of the other variable accounts with different investment objectives. Please
refer to your variable annuity prospectus for more information about transfers.
Redeeming shares
The Funds will buy (redeem) any shares presented by the variable accounts.
Surrender or withdrawal details are described in your variable annuity
prospectus.
Payment generally will be mailed within seven days of the redemption request.
The amount may be more or less than the amount invested. Shares will be redeemed
at net asset value at the close of business on the day the request is accepted
at the Minneapolis office. If the request arrives after the close of business,
the price per share will be the net asset value at the close of business on the
next business day.
Distributions and taxes
The Funds distribute to shareholders (the variable accounts) net investment
income and net capital gains. They do so to qualify as regulated investment
companies and to avoid paying corporate income and excise taxes.
<PAGE>
Dividend and capital gain distributions
Capital Resource, International Equity, Aggressive Growth, Managed and Growth
Dimensions Funds distribute their net investment income (dividends and interest
earned on securities held by the Fund, less operating expenses) to shareholders
(the variable accounts) at the end of each calendar quarter. For Special Income,
Moneyshare, Global Yield and Income Advantage Funds, net investment income is
distributed monthly. Net realized capital gains, if any, from selling securities
are distributed at the end of the calendar year. Before they are distributed,
both net investment income and net capital gains are included in the value of
each share. After they are distributed, the value of each share drops by the
per-share amount of the distribution. (Since the distributions are reinvested,
the total value of the holdings will not change.) The reinvestment price is the
net asset value at close of business on the day the distribution is paid.
Taxes
The Internal Revenue Service has issued final regulations relating to the
diversification requirements under section 817(h) of the Internal Revenue Code.
Each Fund intends to comply with these requirements.
Federal income taxation of variable accounts, life insurance companies and
annuities is discussed in your annuity prospectus.
Income received by International Equity and Global Yield Funds may be subject to
foreign tax and withholding. Tax conventions between certain countries and the
United States may reduce or eliminate those taxes.
How the Funds are organized
IDS Life Investment Series, Inc., formerly known as IDS Life Capital Resource
Fund, Inc., is a series mutual fund. It has four series of stock representing
four separate, diversified funds - Capital Resource, International Equity,
Aggressive Growth and Growth Dimensions Funds. IDS Life Investment Series, Inc.
was incorporated in Nevada on April 27, 1981, but changed its state of
incorporation to Minnesota on June 13, 1986. IDS Life Special Income Fund, Inc.
is a series mutual fund. It has three series of stock representing two separate,
diversified funds - Special Income and Income Advantage Funds and one separate
non-diversified fund - Global Yield Fund. IDS Life Special Income Fund, Inc. and
IDS Life Moneyshare Fund, Inc. were originally incorporated in Nevada on April
27, 1981, but changed their state of incorporation to Minnesota on June 13,
1986. IDS Life Managed Fund, Inc. was incorporated in Minnesota on March 5,
1985.
Each Fund is an open-end investment company or series of an open-end investment
company registered under the Investment Company Act of 1940, as amended. The
headquarters of the Funds is IDS Tower 10, Minneapolis, MN 55440-0010. The Funds
are part of the IDS MUTUAL FUND GROUP, a family of funds that began in 1940.
Shares
A fund is owned by the variable accounts, its shareholders. All shares issued by
each Fund are of the same class -- capital stock. Par value is 1 cent per share
($.001 for Managed Fund). Both full and fractional shares can be issued.
<PAGE>
Voting rights
For a discussion of the rights of annuity contract owners concerning the voting
of shares held by the variable accounts, please see your annuity prospectus. All
shares have equal voting rights. In any matter requiring the vote of
shareholders (the fund's management and fundamental policies), IDS Life and its
affiliates will ask for instructions from the person with voting rights. The
number of votes you have is in proportion to the amount you have allocated to
each variable account. Your instructions will be weighted in the same proportion
and IDS Life and its affiliates will vote them that way. We will vote those
shares for which we do not receive instructions, and those shares for which we
have voting rights, in the same proportion as the shares for which we have
received instructions.
Shareholder meetings
The Funds do not hold annual shareholder meetings. However, the directors may
call meetings at their discretion, or on demand by holders of 10% or more of the
outstanding shares, to elect or remove directors. Meetings of the shareholders
also may be called on demand by the holders of 3% or more of the outstanding
shares of each Fund if no meeting has been held during the preceding 15 months.
Portfolio managers
Capital Resource Fund
Joe Barsky joined AEFC in 1979 and serves as senior portfolio manager. He served
as portfolio manager of IDS Equity Select Fund from 1983 to 1997. He also serves
as vice president and senior portfolio manager of IDS Equity Advisors, a
division of IDS Advisory Group, Inc.
Special Income Fund
Steve Merrell joined AEFC in 1988 as a quantitative investment analyst. He
became portfolio manager of this Fund in January 1995. From 1990 to 1991, Steve
worked for JP Morgan Futures, Inc. marketing futures-based investment
strategies. He rejoined AEFC in 1991 as a portfolio manager. He has served as
debt securities specialist for the assets of Total Return Portfolio and its
predecessor fund since December 1995.
Managed Fund
Alfred A. Henderson joined AEFC in 1996 and serves as senior portfolio manager.
From 1995-1996 he was a portfolio manager at Montgomery Asset Management. From
1992-1995 he was a senior portfolio manager at Husic Capital Management. Prior
to that he was vice president and portfolio manager at Alliance Capital
Management Corporation.
Deb Pederson joined AEFC in 1986 and serves as portfolio manager. She has
managed the fixed income portfolio of this Fund since January 1994. She also
manages the fixed income portfolio of IDS Life Series Fund, Inc. - Managed
Portfolio and the low grade invested assets of IDS Life, IDS Life Insurance
Company of New York and American Enterprise Life Insurance Company.
<PAGE>
Moneyshare Fund
Terry Fettig joined AEFC in 1986. He serves as portfolio manager for this Fund,
IDS Cash Management Fund, IDS Intermediate Tax-Exempt Fund, IDS Life Money
Market Portfolio and IDS Tax-Free Money Fund. From 1986 to 1992 he was a fixed
income securities analyst. From 1992 to 1993 he was an associate portfolio
manager.
International Equity Fund
Peter Lamaison joined AEFC in 1984 and began serving as portfolio manager of
this fund in September 1997. In addition, he is chief investment officer of IDS
International Inc. and chairman of IDS Fund Management Ltd., both based in
London.
Aggressive Growth Fund
Marty Hurwitz joined AEFC in 1987 and serves as portfolio manager. He was
appointed to manage this Fund in January 1995. He has managed IDS Life Series
Fund, Inc. - Equity Portfolio since July 1993 and also manages accounts for IDS
Advisory Portfolio Management Group.
Growth Dimensions Fund
Gordon Fines joined AEFC in 1981 and serves as portfolio manager of this Fund
and has served as vice president and senior portfolio manager of Growth Trends
Portfolio and its predecessor fund since 1991. Mr. Fines also leads the Growth
Team for AEFC. From 1985 to 1991, he was portfolio manager of IDS Managed
Retirement Fund.
Global Yield Fund
Ray Goodner joined AEFC in 1977 and serves as portfolio manager of this Fund and
as vice president and senior portfolio manager of World Income Portfolio. He
began his career in portfolio management in 1980. He has managed the assets of
World Income Portfolio and its predecessor fund since 1989. Since 1985 he also
has served as portfolio manager of Quality Income Portfolio and its predecessor
fund.
Income Advantage Fund
Jack Utter joined AEFC in 1962 and serves as senior portfolio manager. He also
has managed the assets of High Yield Portfolio and its predecessor fund since
1985.
Directors and officers
Shareholders elect a board who oversee the operations of the Funds and choose
its officers. Its officers are responsible for day-to-day business decisions
based on policies set by the board. The board has named an executive committee
that has authority to act on its behalf between meetings. The directors also
serve on the boards of all of the other funds in the IDS MUTUAL FUND GROUP. On
Aug. 31, 1997, the Fund's directors and officers did not own any shares of the
Funds.
<PAGE>
Independent board members and officers
Chairman of the Board
William R. Pearce*
Chairman of the board, Board Services Corporation (provides administrative
services to boards including the boards of the IDS and IDS Life funds and Master
Trust portfolios).
H. Brewster Atwater, Jr.
Former chairman and chief executive officer, General Mills, Inc.
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public Policy Research.
Robert F. Froehlke
Former president of all funds in the IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Alan K. Simpson
Former United States senator for Wyoming.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
Officer
Vice president, general counsel and secretary
Leslie L. Ogg*
Presidentt, treasurer and corporate secretary of Board Services Corporation.
Board members and officers associated with AEFC
President
John R. Thomas*
Senior vice president, AEFC.
David R. Hubers*
President and chief executive officer, AEFC.
<PAGE>
James A. Mitchell*
Executive vice president, AEFC.
Officers associated with AEFC
Vice president
Peter J. Anderson*
Senior vice president, AEFC.
Treasurer
Melinda S. Urion*
Senior vice president and chief financial officer, AEFC.
Refer to the SAI for the directors' and officers' biographies.
* Interested persons as defined by the Investment Company Act of 1940.
Investment manager
Each Fund pays IDS Life for managing its portfolio and serving as transfer
agent.
Under its Investment Management Services Agreement, IDS Life determines which
securities will be purchased, held or sold (subject to the direction and control
of the Fund's board of directors). Under the current agreement, the Funds pay
IDS Life a fee for these services based on the average daily net assets of each
Fund, as follows:
Capital Resource Fund
Assets Annual rate at
(billions) each asset level
First $1 0.630%
Next $1 0.615
Next $1 0.600
Next $3 0.585
Over $6 0.570
Special Income Fund
Assets Annual rate at
(billions) each asset level
First $1 0.610%
Next $1 0.595
Next $1 0.580
Next $3 0.565
Next $3 0.550
Over $9 0.535
<PAGE>
Managed Fund
Assets Annual rate at
(billions) each asset level
First $0.5 0.630%
Next $0.5 0.615
Next $ 1 0.600
Next $ 1 0.585
Next $ 3 0.570
Over $ 6 0.550
Moneyshare Fund
Assets Annual rate at
(billions) each asset level
First $ 1 0.510%
Next $0.5 0.493
Next $0.5 0.475
Next $0.5 0.458
Over $2.5 0.440
International Equity Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.870%
Next $0.25 0.855
Next $0.25 0.840
Next $0.25 0.825
Next $ 1 0.810
Over $ 2 0.795
Aggressive Growth Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.650%
Next $0.25 0.635
Next $0.25 0.620
Next $0.25 0.605
Next $ 1 0.590
Over $ 2 0.575
Growth Dimensions Fund
Assets Annual rate at
(billions) each asset level
First $1 0.630%
Next $1 0.615
Next $1 0.600
Next $3 0.585
Over $6 0.570
<PAGE>
Global Yield Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.840%
Next $0.25 0.825
Next $0.25 0.810
Next $0.25 0.795
Over $ 1 0.780
Income Advantage Fund
Assets Annual rate at
(billions) each asset level
First $1 0.620%
Next $1 0.605%
Next $1 0.590%
Next $3 0.575%
Next $3 0.560%
Over $9 0.545%
For the fiscal year ended Aug. 31, 1997, Capital Resource Fund paid IDS Life a
total investment management fee of 0.60% of its average daily net assets.
Special Income Fund paid 0.60%, Managed Fund paid 0.59%, Moneyshare Fund paid
0.51%, International Equity Fund paid 0.83%, Aggressive Growth Fund paid 0.61%,
Growth Dimensions Fund paid 0.63%, Global Yield Fund paid 0.84% and Income
Advantage Fund paid 0.62%. Under this Agreement, each Fund also pays taxes,
brokerage commissions and nonadvisory expenses. Total fees and expenses for
fiscal year 1997 were 0.67% for Capital Resource Fund, 0.68% for Special Income
Fund, 0.64% for Managed Fund, 0.57% for Moneyshare Fund, 0.97% for International
Equity Fund, 0.68% for Aggressive Growth Fund, 0.72% for Growth Dimensions Fund,
0.97% for Global Yield Fund and 0.69% for Income Advantage Fund.
Administrative Services Agreement
Under an Administrative Services Agreement, each Fund pays AEFC for
administration and accounting services as follows:
Capital Resource Fund
Assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Over $6 0.030
<PAGE>
Special Income Fund
Assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Next $3 0.030
Over $9 0.025
Managed Fund
Assets Annual rate at
(billions) each asset level
First $0.5 0.040
Next $0.5 0.035
Next $ 1 0.030
Next $ 1 0.025
Next $ 3 0.020
Over $ 6 0.020
Moneyshare Fund
Assets Annual rate at
(billions) each asset level
First $ 1 0.030%
Next $0.5 0.027
Next $0.5 0.025
Next $0.5 0.022
Over $2.5 0.020
International Equity Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $ 1 0.040
Over $ 2 0.035
<PAGE>
Aggressive Growth Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $ 1 0.040
Over $ 2 0.035
Growth Dimensions Fund
Assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Over $6 0.030
Global Yield Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Over $ 1 0.040
Income Advantage Fund
Assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Next $3 0.030
Over $9 0.025
Investment advisory agreements
IDS Life and AEFC have an Investment Advisory Agreement under which AEFC
executes purchases and sales and negotiates brokerage as directed by IDS Life.
For its services, IDS Life pays AEFC a fee based on a percentage of each Fund's
average daily net assets for the year. This fee is equal to 0.35% for
International Equity Fund and 0.25% for each remaining fund.
<PAGE>
AEFC has a Sub-investment Advisory Agreement with American Express Asset
International Inc. (International), a wholly-owned subsidiary of AEFC.
International's principal place of business is located at IDS Tower 10,
Minneapolis, MN 55440-0010, while it also conducts investment advisory business
in London, England. International has had assets under management since 1981.
International determines the securities that will be purchased, held or sold and
executes purchases and sales for International Equity Fund as directed by AEFC.
For its services, AEFC pays International a fee equal on an annual basis to
0.50% of International Equity Fund's average daily net assets.
About American Express Financial Corporation
General information
The AEFC family of companies offers not only mutual funds but also insurance,
annuities, investment certificates and a broad range of financial management
services.
Besides managing investments for all publicly offered funds in the IDS MUTUAL
FUND GROUP, AEFC also manages investments for itself and its subsidiaries, IDS
Certificate Company and IDS Life. Total assets under management on Aug. 31, 1997
were more than $165 billion.
IDS Life is a stock life insurance company organized in 1957 under the laws of
the State of Minnesota and located at IDS Tower 10, Minneapolis, MN 55440-0010.
IDS Life conducts a conventional life insurance business in the District of
Columbia and all states except New York.
Other AEFC subsidiaries provide investment management and related services for
pension, profit sharing, employee savings and endowment funds of businesses and
institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a wholly
owned subsidiary of American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New York, NY
10285. The Funds may pay brokerage commissions to broker-dealer affiliates of
American Express and AEFC.
Retirement Annuity Mutual Funds
IDS Tower 10
Minneapolis, MN
55440-0010
Managed by IDS Life Insurance Company
<PAGE>
Retirement Annuity Mutual Funds
Prospectus/October 30, 1997
This prospectus describes six Funds that receive payments from the variable
accounts of your variable annuity contract. Each of these Funds has different
investment objectives and policies.
IDS Life Capital Resource Fund is a stock fund.
IDS Life Special Income Fund is a bond fund.
IDS Life Managed Fund is a managed fund.
IDS Life Moneyshare Fund is a money market fund. An investment in Moneyshare
Fund is neither insured nor guaranteed by the U.S. government and there can be
no assurance that the Fund will be able to maintain a stable net asset value of
$1 per share.
IDS Life International Equity Fund is an international stock fund.
IDS Life Aggressive Growth Fund is a stock fund investing primarily in common
stocks of small-and medium-size companies.
This prospectus contains facts that can help you decide if the Funds are the
right investment for you. Read this along with your variable annuity prospectus
before you invest and keep both prospectuses for future reference.
Additional facts about the Funds are in a Statement of Additional Information
(SAI), filed with the Securities and Exchange Commission (SEC) and available for
reference, along with other related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI, dated October 30, 1997, is incorporated here by
reference. For a free copy, contact Retirement Annuity Mutual Funds at the
address below.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the SEC or any
state securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
IDS Life Insurance Company (IDS Life) is not a bank or financial institution,
and the securities it offers are not deposits or obligations of, or guaranteed
or endorsed by, any bank or financial institution, nor are they insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
IDS Life Investment Series, Inc.
IDS Life Capital Resource Fund
IDS Life International Equity Fund
IDS Life Aggressive Growth Fund
<PAGE>
IDS Life Special Income Fund, Inc.
IDS Life Moneyshare Fund, Inc.
IDS Life Managed Fund, Inc.
Retirement Annuity Mutual Funds
IDS Tower 10
Minneapolis, MN 55440-0010
800-633-4003
TTY: 800-285-8846
<PAGE>
Table of contents
The Funds in brief
Goals and types of Fund investments
Manager and distributor
Variable accounts
Sales charge and expenses
Sales charge
Expenses
Performance
Financial highlights
Total returns
Yield calculation
Key terms
Investment policies and risks
Facts about investments and their risks
Alternative investment options
Valuing assets
How to invest, transfer or redeem shares
How to invest
How to transfer among variable accounts
Redeeming shares
Distributions and taxes
Dividend and capital gain distributions
Taxes
How the Funds are organized
Shares
Voting rights
Shareholder meetings
Portfolio managers
Directors and officers
Investment manager
Administrative services agreement
Investment advisory agreements
About American Express Financial Corporation
General information
<PAGE>
The Funds in brief
Goals and types of Fund investments
Capital Resource Fund's goal is capital appreciation and it invests primarily in
U.S. common stocks.
Special Income Fund's goal is to provide a high level of current income while
conserving the value of the investment for the longest period of time. It
invests primarily in investment-grade bonds.
Managed Fund's goal is maximum total investment return through a combination of
capital growth and current income. It invests primarily in stocks, convertible
securities, bonds and money market instruments.
Moneyshare Fund's goal is to provide maximum current income consistent with
liquidity and conservation of capital. It invests in money market securities.
International Equity Fund's goal is capital appreciation and it invests
primarily in common stocks of foreign issuers.
Aggressive Growth Fund's goal is capital appreciation and it invests primarily
in common stocks of small- and medium-size companies.
Because any investment involves risk, achieving these goals cannot be
guaranteed. Only the contract owners can change the goals. See "Voting rights."
Manager and distributor
The Funds are managed by IDS Life, a subsidiary of American Express Financial
Corporation (AEFC). AEFC has an agreement with IDS Life to furnish investment
advice for the Funds managed by IDS Life.
Variable accounts
You may not buy (nor will you own) shares of the Fund directly. You invest by
buying a variable annuity and allocating your purchase payments among the
variable accounts that invest in the Funds.
Sales charge and expenses
Sales charge
There is no sales charge for the sale or redemption of fund shares, but there
may be charges associated with your redemption (surrender or withdrawal) of your
annuity contract. Any charges that apply to the variable accounts and your
annuity contract are described in the variable annuity prospectus.
<PAGE>
Expenses
The Funds pay IDS Life a fee for managing their investment portfolios. The Funds
pay AEFC for administrative and accounting services. The Funds also pay certain
nonadvisory expenses. See "Investment manager" and "Administrative services
agreement" under "How the Funds are organized."
Performance
Financial highlights
Capital Resource Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $25.57 $24.42 $23.43 $24.58 $23.90 $23.15 $17.54 $20.17 $15.06 $17.71
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Income from investment
operations:
Net investment (loss) .16 .30 .29 .29 .23 .21 .40 .52 .39 .31
Net gains (losses) on
securities (both 6.45 1.22 3.70 1.56 1.89 1.75 6.61 (2.06) 5.38 (2.54)
realized and unrealized)
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Total from investment
operations 6.61 1.52 3.99 1.85 2.12 1.96 7.01 (1.54) 5.77 (2.23)
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Less distributions:
Dividends from net
investment income (.15) (.29) (.29) (.29) (.23) (.21) (.40) (.52) (.39) (.31)
Distributions from
realized gains (4.05) (.07) (2.71) (2.71) (1.21) (1.00) (1.00) (.57) (.27) (.11)
Excess distributions
from net investment (.01) (.01) -- -- -- -- -- -- -- --
income
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Total distributions (4.21) (.37) (3.00) (3.00) (1.44) (1.21) (1.40) (1.09) (.66) (.42)
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Net asset value, end of $27.97 $25.57 $24.42 $23.43 $24.58 $23.90 $23.15 $17.54 $20.17 $15.06
period
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets (end of
period) 4,867 $4,372 $3,845 $2,899 $2,308 $1,681 $1,191 $702 $660 $454
(in millions)
Ratio of expenses to
average daily net assets .67% .68% .69% .68% .68% .70% .70% .70% .73% .69%
Ratio of net income to
average daily net assets .61% 1.15% 1.22% 1.20% .94% .91% 1.94% 2.69% 2.22% 2.01%
Portfolio turnover rate
(excluding short-term
securities) 110% 131% 88% 85% 65% 63% 74% 82% 42% 111%
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Total returnb 28.47% 6.15% 17.18% 7.61% 8.87% 8.54% 40.68% (7.79%) 38.72% (12.59%)
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
Average brokerage
commission ratec $.0492 $0.0565 -- -- -- -- -- -- -- --
- ------------------------- ------- ------- -------- ------- ------- ------- ------- -------- ------- --------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Total return does not reflect payment of the expenses that apply to the variable accounts or any
annuity charges.
c Effective fiscal year 1996, the Fund is required to disclose an average brokerage commission rate
per share for security trades on which commissions are charged. The comparability of this information may be
affected by the fact that commission rates per share vary significantly among foreign
countries.
</TABLE>
<PAGE>
Special Income Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $11.54 $11.58 $11.05 $12.08 $11.26 $10.72 $10.10 $11.11 $10.88 $11.09
- -------------------------- ------- ------- ------- -------- ------- ------- -------- ------ -------- -------
Income from investment
operations:
Net investment income .85 .88 .88 .84 .85 .90 .97 .99 1.03 1.03
(loss)
Net gains (losses) on
securities (both .52 (.07) .56 (.99) .82 .54 .62 (1.01) .23 (.21)
realized and unrealized)
- -------------------------- ------- ------- ------- -------- ------- ------- -------- ------ -------- -------
Total from investment 1.37 .81 1.44 (.15) 1.67 1.44 1.59 (.02) (1.26) .82
operations
- -------------------------- ------- ------- ------- -------- ------- ------- -------- ------ -------- -------
Less distributions:
Dividends from net
investment income (.84) (.85) (.87) (.85) (.85) (.90) (.97) (.99) (1.03) (1.03)
Distributions from
realized gains (.07) -- (.02) (.02) -- -- -- -- -- --
Excess distributions
from net investment (.01) -- (.02) (.01) -- -- -- -- -- --
income
- -------------------------- ------- ------- ------- -------- ------- ------- -------- ------ -------- -------
Total distributions (.92) (.85) (.91) (.88) (.85) (.90) (.97) (.99) (1.03) (1.03)
- -------------------------- ------- ------- ------- -------- ------- ------- -------- ------ -------- -------
Net asset value, end of $11.99 $11.54 $11.58 $11.05 $12.08 $11.26 $10.72 $10.10 $11.11 $10.88
period
- -------------------------- ------- ------- ------- -------- ------- ------- -------- ------ -------- -------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets' end of period
(in millions) $1.923 $1,912 $1,703 $1,559 $1,551 $1,136 $800 $641 $565 $428
Ratio of expenses to
average daily net assets .68% .68% .68% .67% .69% .71% .70% .71% .73% .69%
Ratio of net income to
average daily net assets 7.18% 7.47% 8.08% 7.20% 7.41% 8.22% 9.31% 9.42% 9.37% 9.45%
Portfolio turnover rate
(excluding short-term 73% 56% 56% 57% 77% 92% 97% 118% 132% 169%
securities)
- -------------------------- ------- ------- ------- -------- ------- ------- -------- ------ -------- -------
Total returnb 12.24% 7.08% 13.75% (1.30)% 15.47% 13.96% 16.54% (.12)% 12.19% 7.76%
a For a share outstanding throughout the period. Rounded to the nearest cent
b Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
</TABLE>
<PAGE>
Managed Fund
Financial highlights
Fiscal year ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $16.00 $14.85 $13.65 $14.32 $13.08 $12.59 $10.93 $12.08 $9.87 $11.34
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
Income from investment
operations:
Net investment income .46 .46 .40 .47 .49 .56 .58 .65 .48 .42
(loss)
Net gains (losses) on
securities (both 3.93 1.15 1.20 (.26) 1.60 .95 2.11 (.67) 2.25 (1.47)
realized and unrealized)
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
Total from investment
operations 4.39 1.61 1.60 .21 2.09 1.51 2.69 (.02) 2.73 (1.05)
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
Less distributions:
Dividends from net
investment income (.45) (.46) (.40) (.47) (.49) (.56) (.58) (.65) (.48) (.42)
Distributions from
realized gains (1.06) -- -- (.41) (.36) (.46) (.45) (.48) (.04) --
Excess Distributions
from net investment (.01)
income
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
Total distributions (1.52) (.46) (.40) (.88) (.85) (1.02) (1.03) (1.13) (.52) (.42)
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
Net asset value, end of $18.87 $16.00 $14.85 $13.65 $14.32 $13.08 $12.59 $10.93 $12.08 $9.87
period
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets, end of
period $4,445 $3,482 $3,044 $2,499 $1,858 $1,169 $810 $545 $462 $381
(in millions)
Ratio of expenses to
average daily net assets .64% .65% .68% .68% .69% .71% .70% .71% .73% .69%
Ratio of net income
(loss) to average daily 2.65% 2.94% 2.96% 3.46% 3.70% 4.35% 4.86% 5.42% 5.06% 4.42%
net assets
Portfolio turnover rate
(excluding short-term
securities) 72% 85% 72% 79% 58% 50% 52% 37% 69% 62%
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
Total returnb 28.54% 10.95% 11.94% 1.51% 16.33% 12.14% 25.24% (.23)% 28.47% (9.06)%
Average brokerage
commission ratec $.0334 $.0606 -- -- -- -- -- -- -- --
- ------------------------- ------- -------- ------- -------- ------- ------- -------- ------ -------- -------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
c Effective fiscal year 1996, the Fund is required to disclose an average brokerage commission rate per share for
security trades on which commissions are charged. The comparability of this information may be
affected by the fact that commission rates per share vary significantly among foreign
countries.
</TABLE>
<PAGE>
Moneyshare Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------- ------- ------- -------- ------- ------- -------- ------- ------- ------- --------
Income from investment
operations:
Net investment income .05 .05 .03 .03 .04 .07 .08 .09 .07
(loss)
- ------------------------- ------- ------- -------- ------- ------- -------- ------- ------- ------- --------
Less distributions:
Dividends from net
investment income (.05) (.05) (.05) (.03) (.03) (.04) (.07) (.08) (.09) (.07)
- ------------------------- ------- ------- -------- ------- ------- -------- ------- ------- ------- --------
Net asset value, end of $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
period
- ------------------------- ------- ------- -------- ------- ------- -------- ------- ------- ------- --------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets' end of
period $4.21 $288 $227 $179 $180 $246 $285 $274 $160 $102
(in millions)
Ratio of expenses to
average daily net assets .57% .56% .59% .57% .60% .60% .57% .62% .54% .58%
Ratio of net income
(loss) to average daily 4.97% 5.02% 5.23% 3.12% 2.67% 3.93% 6.55% 7.85% 8.68% 6.77%
net assets
- ------------------------- ------- ------- -------- ------- ------- -------- ------- ------- ------- --------
Total returnb 5.06% 5.16% 5.27% 3.15% 2.73% 3.98% 6.77% 8.18% 8.99% 7.01%
- ------------------------- ------- ------- -------- ------- ------- -------- ------- ------- ------- --------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Total return does not reflect payment of the expenses that apply to the variable accounts or any
annuity charges.
</TABLE>
<PAGE>
International Equity Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992b
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning $13.30 $12.55 $12.91 $11.60 $10.01 $10.00
of period
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Income from investment
operations: .18 .20 .17 .14 .15 .05
Net investment income (loss)
Net gains (losses) on
securities (both realized 1.06 1.01 (.37) 1.61 1.81 .01
and unrealized)
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from investment 1.24 1.21 (.20) 1.75 1.96 .06
operations
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Less distributions:
Dividends from net (.17) (.44) (.16) (.08) (.15) (.05)
investment income
Distributions from realized (.28) (.02) -- (.29) (.22) --
gains
Excess distributions from
realized gains -- -- -- (.07) -- --
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total distributions (.45) (.46) (.16) (.44) (.37) (.05)
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of $14.09 $13.30 $12.55 $12.91 $11.60 $10.01
period
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992b
Net assets, end of period
(in millions) $2,105 $1,874 $1,442 $1,111 $291 $39
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Ratio of expenses to average
daily net assets .97% .96% 1.03% .98% 1.10% 1.57%c
Ratio of net income (loss)
to average 1.30% 1.28% 1.56% 1.09% 1.37% .93%c
daily net assets
Portfolio turnover rate
(excluding short-term 91% 58% 38% 51% 62% 22%
securities)
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total returnd 9.34% 9.64% (1.77%) 15.11% 19.76% .55%
Average brokerage commission $.0187 $0.0186 -- -- -- --
ratee
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Commencement of operations. Period from Jan. 13, 1992 to Aug. 31, 1992.
c Adjusted to an annual basis.
d Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
e Effective fiscal year 1996, the Fund is required to disclose an average brokerage commission rate
per share for security trades on which commissions are charged. The comparability of this information may be
affected by the fact that commission rates per share vary significantly among foreign
countries.
</TABLE>
<PAGE>
Aggressive Growth Fund
Financial highlights
Fiscal period ended Aug. 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992b
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning $16.04 $14.44 $11.46 $11.68 $9.00 $10.00
of period
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Income from investment
operations: .08 .10 .08 .01 .02 .02
Net investment income(loss)
Net gains (losses) on
securities 2.84 1.60 2.98 (.22) 2.68 (1.00)
(both realized and
unrealized)
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from investment 2.92 1.70 3.06 (.21) 2.70 (.98)
operations
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Less distributions:
Dividends from net (.08) (.10) (.08) (.01) (.02) (.02)
investment income
Distribution from realized (1.71) -- -- -- -- --
gains
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total distributions (1.79) -- -- -- -- --
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of $17.17 $16.04 $14.44 $11.46 $11.68 $9.00
period
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Ratios/supplemental data
1997 1996 1995 1994 1993 1992b
Net assets, end of period
(in millions) $2,427 $1,941 $1,412 $763 $299 $57
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Ratio of expenses to average
daily net assets .68% .69% .70% .69% .75% .98%c
Ratio of net income (loss)
to average daily net assets .47% .65% .72% .14% .28% .21%c
Portfolio turnover rate
(excluding short-term 218% 189% 116% 59% 55% 28%
securities)
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total returnd 18.60% 11.82% 26.80% (1.77)% 29.98% (9.76)%
Average brokerage commission $.0430 $.0531 -- -- -- --
ratee
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Commencement of operations. Period from Jan. 13, 1992 to Aug. 31, 1992.
c Adjusted to an annual basis.
d Total return does not reflect payment of the expenses that apply to the
variable accounts or any annuity charges.
e Effective fiscal year 1996, the Fund is required to disclose an average brokerage commission rate
per share for security trades on which commissions are charged. The comparability of this information may be
affected by the fact that commission rates per share vary significantly among foreign
countries.
</TABLE>
The information in these tables has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of the Funds is contained in the Fund's annual
report which, if not included with this prospectus, may be obtained without
charge.
<PAGE>
Total returns
Average annual total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- -------------
Capital Resource Fund +28.47% +13.36% +12.32%
S&P 500 +40.63% +19.73% +13.86%
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- -------------
Capital Resource Fund +28.47% +87.21% +219.62%
S&P 500 +40.63% +146.03% +266.31%
Average annual total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- -------------
Special Income Fund +12.24% +9.28% +9.59%
Lehman Aggregate Bond +10.01% +6.80% +9.05%
Index
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- -------------
Special Income Fund +12.24% +55.81% +149.87%
Lehman Aggregate Bond +10.01% +38.92% +137.89%
Index
Average annual total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- -------------
Managed Fund +28.54% +13.51% +11.93%
S&P 500 +40.63% +19.73% +13.86%
Cumulative total returns as of Aug. 31, 1997
Purchase 1 year 5 years 10 years
made ago ago ago
- --------------------------- ----------------- -------------------- -------------
Managed Fund +28.54% +88.52% +208.61%
S&P 500 +40.63% +146.03% +266.31%
<PAGE>
Average annual total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
International
Equity Fund +9.34% +10.22% +9.12%
Morgan Stanley
Capital International
World Index +22.84% +14.98% +12.87%*
Cumulative total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
International
Equity Fund +9.34% +62.68% +63.58%
Morgan Stanley
Capital International
World Index +22.84% +100.93% +97.13%*
Average annual total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
Aggressive Growth Fund +18.60% +16.51% +12.45%
S&P 500 +40.63% +19.73% +18.08%*
Cumulative total returns as of Aug. 31, 1997
Since
Purchase 1 year 5 years inception
made ago ago Jan. 13, 1992
- --------------------------- ----------------- -------------------- -------------
Aggressive Growth Fund +18.60% +114.71% +93.75%
S&P 500 +40.63% +146.03% +153.88%*
* Measurement period started Jan. 31, 1992.
These examples show total returns from hypothetical investments in each Fund.
These returns are compared to those of popular indexes for the same periods. The
results do not reflect the expenses that apply to the variable accounts or the
annuity contract. Inclusion of these charges would reduce total return for all
periods shown.
For purposes of calculation, information about each Fund assumes the deduction
of applicable fund expenses, makes no adjustments for taxes that may have been
paid on the reinvested income and capital gains and covers a period of widely
fluctuating securities prices. Returns shown should not be considered a
representation of the Fund's future performance.
<PAGE>
Each Fund's investments may be different from those in the indexes. The indexes
reflect reinvestment of all distributions and changes in market prices, but
exclude brokerage commissions or other fees.
Standard & Poor's 500 Stock Index (S&P 500), an unmanaged list of common stocks,
is frequently used as a general measure of market performance. The index
reflects reinvestment of all distributions and changes in market prices, but
excludes brokerage commissions or other fees.
The Morgan Stanley Capital International World Index, compiled from a composite
of securities listed on the markets of North America, Europe, Australasia and
the Far East is widely recognized by investors as the measurement index for
portfolios that invest in the major markets of the world.
Lehman Aggregate Bond Index is made up of an unmanaged representative list of
government and corporate bonds as well as asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. However, the securities used to create the index may not be
representative of the bonds held in Special Income or Income Advantage Funds.
The index reflects reinvestment of all distributions and changes in market
prices, but excludes brokerage commissions or other fees.
Yield calculation
Special Income Fund may calculate a 30-day annualized yield by dividing:
o net investment income per share deemed earned during a 30-day period by
o the net asset value per share on the last day of the period, and
o converting the result to a yearly equivalent figure.
This yield calculation does not include any annuity charges or contingent
deferred sales charges, which would reduce the yield quoted.
A fund's yield varies from day to day, mainly because share values and net asset
values (which are calculated daily) vary in response to changes in interest
rates. Net investment income normally changes much less in the short run. Thus,
when interest rates rise and share values fall, yield tends to rise.
When interest rates fall, yield tends to follow.
Moneyshare Fund calculates annualized simple and compound yields based on a
seven-day period.
Past yields should not be considered an indicator of future yields.
Key terms
Average annual total return - The annually compounded rate of return over a
given time period (usually two or more years) -- total return for the period
converted to an equivalent annual figure.
<PAGE>
Capital gains or losses - Increase or decrease in value of the securities the
funds hold. Gains are realized when securities that have increased in value are
sold. A fund also may have unrealized gains or losses when securities increase
or decrease in value but are not sold.
Close of business - Normally 3 p.m. Central time each business day (any day the
New York Stock Exchange is open).
Distributions - Payments to the variable accounts of two types: investment
income (dividends) and realized net long-term capital gains (capital gains
distributions).
Investment income - Dividends and interest earned on securities held by the
funds.
Net asset value (NAV) - Value of a single fund share. It is the total market
value of all of a fund's investments and other assets, less any liabilities,
divided by the number of shares outstanding.
The NAV is the price the variable account receives when it sells shares. It
usually changes from day to day and is calculated at the close of business. For
Special Income, Global Yield and Income Advantage funds, NAV generally declines
as interest rates increase and rises as interest rates decline.
Total return - Sum of all returns for a given period, assuming reinvestment of
all distributions. Calculated by taking the total value of shares at the end of
the period (including shares acquired by reinvestment), less the price of shares
purchased at the beginning of the period.
Variable accounts - The separate accounts or subaccounts, each of which invests
in shares of one of the funds.
Yield - Net investment income earned per share for a specified time period,
divided by the net asset value at the end of the period.
Investment policies and risks
Capital Resource Fund - Under normal market conditions, Capital Resource Fund
invests primarily in U.S. common stocks and other securities convertible into
common stock. The portfolio manager selects investments believed to have
potential for capital growth.
The Fund also may invest in preferred stocks, bonds, debt securities, foreign
securities, money market instruments and derivative instruments.
Special Income Fund - Under normal market conditions, Special Income Fund
invests primarily in debt securities. At least 50% of its net assets are
invested in corporate bonds of the four highest ratings, in other corporate
bonds the investment manager believes have the same investment qualities and in
government bonds.
The Fund also may invest in corporate bonds with lower ratings, convertible
securities, preferred stocks, derivative instruments, money market instruments
and foreign bonds.
<PAGE>
Managed Fund - Under normal market conditions, Managed Fund invests at least 50%
of its total assets in common stocks. The Fund also invests in preferred stocks,
convertible securities, warrants, bonds and money market instruments.
Ordinarily, investments other than common stock would constitute 50% or less of
the Fund's portfolio. However, under unusual market conditions, the Fund may
invest any portion of its assets in securities other than common stocks. This
allows the investment manager flexibility to best achieve the Fund's goal. This
might occur, for example, when interest rates are high but are expected to
decline significantly.
The Fund also may invest in derivative instruments and foreign securities.
Moneyshare Fund - Under normal market conditions, Moneyshare Fund invests
primarily in high-quality, short-term, debt securities and other money market
instruments denominated in U.S. dollars. The Fund intends to maintain a constant
net asset value of $1 per share, although there is no assurance it will be able
to do so. The Fund will not purchase any security with a remaining maturity of
more than 13 months and will maintain a dollar-weighted average portfolio
maturity of 90 days or less. The Fund also may invest in foreign securities. For
a description of money market securities, see Appendix C in the SAI.
International Equity Fund - Under normal market conditions, International Equity
Fund invests at least 65% of its total assets in foreign equity securities
having a potential for superior growth. Superior means fund performance better
than the Morgan Stanley Capital International World Index.
The Fund's investments will be primarily in common stocks and securities
convertible into common stocks of foreign issuers. However, if the investment
manager believes they have more potential for capital growth, the Fund may
invest in bonds issued or guaranteed either by countries that are members of the
Organization for Economic Cooperation and Development (OECD) or by international
agencies such as the World Bank or the European Investment Bank. These bonds
will not be purchased unless, in the judgment of the investment manager, they
are comparable in quality to bonds rated AA by Standard & Poor's Corporation
(S&P).
The percentage of fund assets invested in particular countries or regions of the
world will change according to their political stability and economic condition.
Ordinarily, the Fund will invest in companies domiciled in at least three
foreign countries.
Normally, investments in U.S. issuers will constitute less than 20% of the
Fund's portfolio. However, as a temporary measure, the Fund may invest any
portion of its assets in securities of U.S. issuers that appear to have greater
potential for superior growth than foreign securities. U.S. investments would
include common stocks, convertible securities and corporate and government
bonds.
The bonds must bear one of the four highest ratings given by Moody's Investors
Service, Inc. (Moody's) or S&P or must be of comparable quality. The Fund also
may invest in money market instruments and derivative instruments. No more than
5% of the Fund's total assets may be invested in options on individual
securities.
<PAGE>
Aggressive Growth Fund - Under normal market conditions, Aggressive Growth Fund
invests primarily in common stocks of U.S. and foreign companies that are small-
and medium-size growth companies. Many of these companies emphasize
technological innovation or productivity improvements.
The Fund invests in warrants to purchase common stock, debt securities or in
securities of large, well-established companies when the portfolio manager
believes those investments offer the best opportunity for capital growth. The
Fund also may invest in foreign securities, derivative instruments and money
market instruments.
The various types of investments the portfolio managers use to achieve
investment performance are described in more detail in the next section and in
the SAI.
Facts about investments and their risks
Common stocks: Stock prices are subject to market fluctuations. Stocks of
smaller or foreign companies or stocks of companies experiencing significant
growth and operating in areas of financial and technological change may be
subject to more abrupt or erratic price movements than stocks of larger,
established companies or the stock market as a whole. Also, small companies
often have limited product lines, smaller markets or fewer financial resources.
Therefore, some of the securities in which a fund invests involve substantial
risk and may be considered speculative.
Preferred stocks: If a company earns a profit, it generally must pay its
preferred stockholders a dividend at a pre-established rate.
Convertible securities: These securities generally are preferred stocks or bonds
that can be exchanged for other securities, usually common stock, at prestated
prices. When the trading price of the common stock makes the exchange likely,
the convertible securities trade more like common stock.
Debt securities: The price of an investment grade bond fluctuates as interest
rates change or if its credit rating is upgraded or downgraded.
Debt securities below investment grade: The price of these bonds may react more
to the ability of a company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations, are more likely
to experience a default and sometimes are referred to as "junk bonds." Reduced
market liquidity for these bonds may occasionally make it more difficult to
value them. In valuing bonds, a fund relies both on independent rating agencies
and the investment manager's credit analysis.
Securities that are subsequently downgraded in quality may continue to be held
and will be sold only when the fund's investment manager believes it is
advantageous to do so.
<PAGE>
<TABLE><CAPTION>
Bond ratings and holdings for fiscal year ended Aug. 31, 1997
For Special Income Fund
Percent of
net assets
in unrated
S&P Rating Protection of securities
Percent of (or Moody's principal and assessed by
net assets equivalent) interest AEFC
<S> <C> <C> <C>
29.76% AAA Highest quality 0.79%
3.78 AA High quality --
11.28 A Upper medium grade 0.02
13.32 BBB Medium grade 0.10
15.43 BB Moderately speculative 1.04
9.36 B Speculative 0.92
0.74 CCC Highly speculative 0.17
-- CC Poor quality --
0.01 C Lowest quality --
-- D In default --
4.91 Unrated Unrated securities 1.87
Bond ratings and holdings for fiscal year ended Aug. 31, 1997
For Managed Fund
Percent of
net assets
in unrated
S&P Rating Protection of securities
Percent of (or Moody's principal and assessed by
net assets equivalent) interest AEFC
12.77% AAA Highest quality 0.08%
1.20 AA High quality --
3.62 A Upper medium grade --
4.45 BBB Medium grade 0.03
3.53 BB Moderately speculative 0.03
2.20 B Speculative 0.13
0.10 CCC Highly speculative 0.07
-- CC Poor quality --
-- C Lowest quality --
-- D In default --
2.16 Unrated Unrated securities 1.82
</TABLE>
(See Appendix to the SAI for further information regarding ratings.)
Debt securities sold at a deep discount: Some bonds are sold at deep discounts
because they do not pay interest until maturity. They include zero coupon bonds
and PIK (pay-in-kind) bonds. To comply with tax laws, a fund has to recognize a
computed amount of interest income and pay dividends to shareholders even though
no cash has been received. In some instances, a fund may have to sell securities
to have sufficient cash to pay the dividends.
Mortgage-backed securities: All Funds except Moneyshare may invest in U.S.
government securities representing part ownership of pools of mortgage loans. A
pool, or group, of mortgage loans issued by such lenders as mortgage bankers,
commercial banks and savings and loan associations, is assembled and mortgage
pass-through certificates are offered to investors through securities dealers.
<PAGE>
In pass-through certificates, both principal and interest payments, including
prepayments, are passed through to the holder of the certificate. Prepayments on
underlying mortgages result in a loss of anticipated interest, and the actual
yield (or total return) to the Fund, which is influenced by both stated interest
rates and market conditions, may be different than the quoted yield on the
certificates.
Foreign investments: Securities of foreign companies and governments may be
traded in the United States, but often they are traded only on foreign markets.
Frequently, there is less information about foreign companies and less
government supervision of foreign markets. Foreign investments are subject to
political and economic risks of the countries in which the investments are made
including the possibility of seizure or nationalization of companies, imposition
of withholding taxes on income, establishment of exchange controls or adoption
of other restrictions that might affect an investment adversely. If an
investment is made in a foreign market, the local currency may be purchased
using a forward contract in which the price of the foreign currency in U.S.
dollars is established on the date the trade is made, but delivery of the
currency is not made until the securities are received. As long as the fund
holds foreign currencies or securities valued in foreign currencies, the price
of a fund share will be affected by changes in the value of the currencies
relative to the U.S. dollar. Because of the limited trading volume in some
foreign markets, efforts to buy or sell a security may change the price of the
security and it may be difficult to complete the transaction. Each Fund, except
International Equity Fund may invest up to 25% of its total assets at the time
of purchase in securities of foreign issuers.
The Fund may invest in foreign securities that are traded in the form of
American Depositary Receipts (ADRs). ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities of
foreign issuers. European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs) are receipts typically issued by foreign banks or trust
companies, evidencing ownership of underlying securities issued by either a
foreign or U.S. issuer. Generally Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary Receipts also
involve the risks of other investments in foreign securities.
Derivative instruments: For all Funds except Moneyshare, the portfolio managers
may use derivative instruments in addition to securities to achieve investment
performance. Derivative instruments include futures, options and forward
contracts. Such instruments may be used to maintain cash reserves while
remaining fully invested, to offset anticipated declines in values of
investments, to facilitate trading, to reduce transaction costs or to pursue
higher investment returns. Derivative instruments are characterized by requiring
little or no initial payment and a daily change in price based on or derived
from a security, a currency, a group of securities or currencies or an index. A
number of strategies or combination of instruments can be used to achieve the
desired investment performance characteristics. A small change in the value of
the underlying security, currency or index will cause a sizable gain or loss in
the price of the derivative instrument. Derivative instruments allow a portfolio
manager to change the investment performance characteristics very quickly and at
lower costs. Risks include losses of premiums, rapid changes in prices, defaults
by other parties and inability to close such instruments. A fund will use
derivative instruments only to achieve the same investment performance
characteristics it could achieve by directly holding those securities and
<PAGE>
currencies permitted under the investment policies. The Fund's custodian will
maintain, in a segregated account, cash or liquid high-grade debt securities
that are marked to market daily and are at least equal in value to the Fund's
obligations to the extent such obligations are not covered. No more than 5% of
each Fund's net assets can be used at any one time for good faith deposits on
futures and premiums for options on futures that do not offset existing
investment positions. For further information, see the options and futures
appendixes in the SAI.
Securities and derivative instruments that are illiquid: Illiquid means the
security or derivative instrument cannot be sold quickly in the normal course of
business. Some investments cannot be resold to the U.S. public because of their
terms or government regulations. All securities and derivative instruments,
however, can be sold in private sales, and many may be sold to other
institutions and qualified buyers or on foreign markets. Each portfolio manager
will follow guidelines established by the board of directors and consider
relevant factors such as the nature of the security and the number of likely
buyers when determining whether a security is illiquid. No more than 10% of each
Fund's net assets (zero for Moneyshare) will be held in securities and
derivative instruments that are illiquid.
Money market instruments: For all Funds except Moneyshare, short-term debt
securities rated in the top two grades are used to meet daily cash needs and at
various times to hold assets until better investment opportunities arise.
Generally, less than 25% of each of Capital Resource, International Equity,
Aggressive Growth, Special Income and Managed Fund's total assets are in these
money market instruments. However, for temporary defensive purposes these
investments could exceed that amount for a limited period of time.
The investment policies described above may be changed by the board of
directors.
Lending portfolio securities: Each Fund may lend its securities to earn income
so long as borrowers provide collateral equal to the market value of the loans.
The risks are that borrowers will not provide collateral when required or return
securities when due. Unless a majority of the outstanding voting securities
approve otherwise, loans may not exceed 30% of a Fund's net assets.
Alternative investment options
In the future, the board of the Funds may determine for operating efficiencies
to use a master/feeder structure. Under that structure, the Fund's investment
portfolio would be managed by another investment company with the same goal as
the Fund, rather than investing directly in a portfolio of securities.
Valuing assets
Moneyshare Fund's securities are valued at amortized cost. In valuing assets of
Capital Resource, International Equity, Aggressive Growth, Special Income and
Managed Funds:
o Securities (except bonds) and assets with available market values are valued
on that basis.
o Securities maturing in 60 days or less are valued at amortized cost.
<PAGE>
o Bonds are valued according to methods selected by the board.
o Assets without readily available market values are valued according to
methods selected in good faith by the board.
o Assets and liabilities denominated in foreign currencies are translated
daily into U.S. dollars at a rate of exchange set as near to the close of
the day as practicable.
How to invest, transfer or redeem shares
How to invest
You may invest in the Funds only by buying a variable annuity contract. For
further information concerning maximum and minimum payments and submitting and
acceptance of your application, see your annuity prospectus.
How to transfer among variable accounts
You can transfer all or part of your value in a variable account to one or more
of the other variable accounts with different investment objectives. Please
refer to your variable annuity prospectus for more information about transfers.
Redeeming shares
The Funds will buy (redeem) any shares presented by the variable accounts.
Surrender or withdrawal details are described in your variable annuity
prospectus.
Payment generally will be mailed within seven days of the redemption request.
The amount may be more or less than the amount invested. Shares will be redeemed
at net asset value at the close of business on the day the request is accepted
at the Minneapolis office. If the request arrives after the close of business,
the price per share will be the net asset value at the close of business on the
next business day.
Distributions and taxes
The Funds distribute to shareholders (the variable accounts) net investment
income and net capital gains. They do so to qualify as regulated investment
companies and to avoid paying corporate income and excise taxes.
Dividend and capital gain distributions
Capital Resource, International Equity, Aggressive Growth and Managed Funds
distribute their net investment income (dividends and interest earned on
securities held by the Fund, less operating expenses) to shareholders (the
variable accounts) at the end of each calendar quarter. For Special Income and
Moneyshare Funds, net investment income is distributed monthly. Net realized
capital gains, if any, from selling securities are distributed at the end of the
calendar year. Before they are distributed, both net investment income and net
capital gains are included in the value of each share. After they are
distributed, the value of each share drops by the per-share amount of the
distribution. (Since the distributions are reinvested, the total value of the
holdings will not change.) The reinvestment price is the net asset value at
close of business on the day the distribution is paid.
<PAGE>
Taxes
The Internal Revenue Service has issued final regulations relating to the
diversification requirements under section 817(h) of the Internal Revenue Code.
Each Fund intends to comply with these requirements.
Federal income taxation of variable accounts, life insurance companies and
annuities is discussed in your annuity prospectus.
Income received by International Equity Fund may be subject to foreign tax and
withholding. Tax conventions between certain countries and the United States may
reduce or eliminate those taxes.
How the Funds are organized
IDS Life Investment Series, Inc., formerly known as IDS Life Capital Resource
Fund, Inc., is a series mutual fund. It has three series of stock representing
three separate, diversified funds - Capital Resource, International Equity and
Aggressive Growth Funds. IDS Life Investment Series, Inc. was incorporated in
Nevada on April 27, 1981, but changed its state of incorporation to Minnesota on
June 13, 1986. IDS Life Special Income Fund, Inc. and IDS Life Moneyshare Fund
Inc. were originally incorporated in Nevada on April 27, 1981, but changed their
state of incorporation to Minnesota on June 13, 1986. IDS Life Managed Fund,
Inc. was incorporated in Minnesota on March 5, 1985.
Each Fund is an open-end investment company or series of an open-end investment
company registered under the Investment Company Act of 1940, as amended. The
headquarters of the Funds is IDS Tower 10, Minneapolis, MN 55440-0010. The Funds
are part of the IDS MUTUAL FUND GROUP, a family of funds that began in 1940.
Shares
A fund is owned by the variable accounts, its shareholders. All shares issued by
each Fund are of the same class -- capital stock. Par value is 1 cent per share
($.001 for Managed Fund). Both full and fractional shares can be issued.
Voting rights
For a discussion of the rights of annuity contract owners concerning the voting
of shares held by the variable accounts, please see your annuity prospectus. All
shares have equal voting rights. In any matter requiring the vote of
shareholders (the fund's management and fundamental policies), IDS Life and its
affiliates will ask for instructions from the person with voting rights. The
number of votes you have is in proportion to the amount you have allocated to
each variable account. Your instructions will be weighted in the same proportion
and IDS Life and its affiliates will vote them that way. We will vote those
shares for which we do not receive instructions, and those shares for which we
have voting rights, in the same proportion as the shares for which we have
received instructions.
<PAGE>
Shareholder meetings
The Funds do not hold annual shareholder meetings. However, the directors may
call meetings at their discretion, or on demand by holders of 10% or more of the
outstanding shares, to elect or remove directors. Meetings of the shareholders
also may be called on demand by the holders of 3% or more of the outstanding
shares of each Fund if no meeting has been held during the preceding 15 months.
Portfolio managers
Capital Resource Fund
Joe Barsky joined AEFC in 1979 and serves as senior portfolio manager. He served
as portfolio manager of IDS Equity Select Fund from 1983 to 1997. He also serves
as vice president and senior portfolio manager of IDS Equity Advisors, a
division of IDS Advisory Group, Inc.
Special Income Fund
Steve Merrell joined AEFC in 1988 as a quantitative investment analyst. He
became portfolio manager of this Fund in January 1995. From 1990 to 1991, Steve
worked for JP Morgan Futures, Inc. marketing futures-based investment
strategies. He rejoined AEFC in 1991 as a portfolio manager. He has served as
debt securities specialist for the assets of Total Return Portfolio and its
predecessor fund since December 1995.
Managed Fund
Alfred A. Henderson joined AEFC in 1996 and serves as senior portfolio manager.
From 1995-1996 he was a portfolio manager at Montgomery Asset Management. From
1992-1995 he was a senior portfolio manager at Husic Capital Management. Prior
to that he was vice president and portfolio manager at Alliance Capital
Management Corporation.
Deb Pederson joined AEFC in 1986 and serves as portfolio manager. She has
managed the fixed income portfolio of this Fund since January 1994. She also
manages the fixed income portfolio of IDS Life Series Fund, Inc. - Managed
Portfolio and the low grade invested assets of IDS Life, IDS Life Insurance
Company of New York and American Enterprise Life Insurance Company.
Moneyshare Fund
Terry Fettig joined AEFC in 1986. He serves as portfolio manager for this Fund,
IDS Cash Management Fund, IDS Intermediate Tax-Exempt Fund, IDS Life Money
Market Portfolio and IDS Tax-Free Money Fund. From 1986 to 1992 he was a fixed
income securities analyst. From 1992 to 1993 he was an associate portfolio
manager.
International Equity Fund
Peter Lamaison joined AEFC in 1981 and serves as president and chief executive
officer of IDS International, Inc. and senior portfolio manager. He has managed
this Fund since 1992. He also serves as portfolio manager of IDS International
Fund.
<PAGE>
Aggressive Growth Fund
Marty Hurwitz joined AEFC in 1987 and serves as portfolio manager. He was
appointed to manage this Fund in January 1995. He has managed IDS Life Series
Fund, Inc. - Equity Portfolio since July 1993 and also manages accounts for IDS
Advisory Portfolio Management Group.
Directors and officers
Shareholders elect a board who oversee the operations of the Funds and choose
its officers. Its officers are responsible for day-to-day business decisions
based on policies set by the board. The board has named an executive committee
that has authority to act on its behalf between meetings. The directors also
serve on the boards of all of the other funds in the IDS MUTUAL FUND GROUP. On
Aug. 31, 1997, the Fund's directors and officers did not own any shares of the
Funds.
Independent board Members and officers
Chairman of the Board
William R. Pearce*
Chairman of the board, Board Services Corporation (provides administrative
services to boards including the boards of the IDS and IDS Life funds and Master
Trust portfolios).
H. Brewster Atwater, Jr.
Former chairman and chief executive officer, General Mills, Inc.
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public Policy Research.
Robert F. Froehlke
Former president of all funds in the IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Alan K. Simpson
Former United States senator for Wyoming.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
<PAGE>
Officer
Vice President, general counsel and secretary
Leslie L. Ogg
President, treasurer and corporate secretary of Board Services Corporation.
Board members and officers associated with AEFC
President
John R. Thomas*
Senior vice president, AEFC.
David R. Hubers*
President and chief executive officer, AEFC.
James A. Mitchell*
Executive vice president, AEFC.
Officers associated with AEFC
Vice President
Peter J. Anderson*
Senior vice president, AEFC.
Treasurer
Melinda S. Urion*
Senior vice president and chief financial officer, AEFC.
Refer to the SAI for the directors' and officers' biographies.
*Interested persons as defined by the Investment Company Act of 1940.
Investment manager
Each Fund pays IDS Life for managing its portfolio and serving as transfer
agent.
Under its Investment Management Services Agreement, IDS Life determines which
securities will be purchased, held or sold (subject to the direction and control
of the Fund's board of directors). Under the current agreement, the Funds pay
IDS Life a fee for these services based on the average daily net assets of each
Fund, as follows:
<PAGE>
Capital Resource Fund
Assets Annual rate at
(billions) each asset level
First $1 0.630%
Next $1 0.615
Next $1 0.600
Next $3 0.585
Over $6 0.570
Special Income Fund
Assets Annual rate at
(billions) each asset level
First $ 1 0.610%
Next $1 0.595
Next $1 0.580
Next $3 0.565
Next $3 0.550
Over $9 0.535
Managed Fund
Assets Annual rate at
(billions) each asset level
First $0.5 0.630%
Next $0.5 0.615
Next $ 1 0.600
Next $ 1 0.585
Next $ 3 0.570
Over $ 6 0.550
Moneyshare Fund
Assets Annual rate at
(billions) each asset level
First $ 1 0.510%
Next $0.5 0.493
Next $0.5 0.475
Next $0.5 0.458
Over $2.5 0.440
International Equity Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.870%
Next $0.25 0.855
Next $0.25 0.840
Next $0.25 0.825
Next $ 1 0.810
Over $ 2 0.795
<PAGE>
Aggressive Growth Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.650%
Next $0.25 0.635
Next $0.25 0.620
Next $0.25 0.605
Next $ 1 0.590
Over $ 2 0.575
For the fiscal year ended Aug. 31, 1997, Capital Resource Fund paid IDS Life a
total investment management fee of 0.60% of its average daily net assets.
Special Income Fund paid 0.60%, Managed Fund paid 0.59%, Moneyshare Fund paid
0.51%, International Equity Fund paid 0.83% and Aggressive Growth Fund paid
0.61%. Under this Agreement, each Fund also pays taxes, brokerage commissions
and nonadvisory expenses. Total fees and expenses for fiscal year 1997 were
0.67% for Capital Resource Fund, 0.68% for Special Income Fund, 0.64% for
Managed Fund, 0.57% for Moneyshare Fund, 0.97% for International Equity Fund and
0.68% for Aggressive Growth Fund.
Administrative Services Agreement
Under an Administrative Services Agreement, each Fund pays AEFC for
administration and accounting services as follows:
Capital Resource Fund
Assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Over $6 0.030
Special Income Fund
Assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Next $3 0.030
Over $9 0.025
<PAGE>
Managed Fund
Assets Annual rate at
(billions) each asset level
First $0.5 0.040
Next $0.5 0.035
Next $ 1 0.030
Next $ 1 0.025
Next $ 3 0.020
Over $ 6 0.020
Moneyshare Fund
Assets Annual rate at
(billions) each asset level
First $ 1 0.030%
Next $0.5 0.027
Next $0.5 0.025
Next $0.5 0.022
Over $2.5 0.020
International Equity Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $ 1 0.040
Over $ 2 0.035
Aggressive Growth Fund
Assets Annual rate at
(billions) each asset level
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $ 1 0.040
Over $ 2 0.035
Investment advisory agreements
IDS Life and AEFC have an Investment Advisory Agreement under which AEFC
executes purchases and sales and negotiates brokerage as directed by IDS Life.
For its services, IDS Life pays AEFC a fee based on a percentage of each Fund's
average daily net assets for the year. This fee is equal to 0.35% for
International Equity Fund and 0.25% for each remaining fund.
<PAGE>
AEFC has a Sub-investment Advisory Agreement with American Express Asset
International Inc. (International), a wholly owned subsidiary of AEFC.
International's principal place of business is located at IDS Tower 10,
Minneapolis, MN 55440-0010, while it also conducts investment advisory business
in London, England. International has had assets under management since 1981.
International determines the securities that will be purchased, held or sold and
executes purchases and sales for International Equity Fund as directed by AEFC.
For its services, AEFC pays International a fee equal on an annual basis to
0.50% of International Equity Fund's average daily net assets.
About American Express Financial Corporation
General information
The AEFC family of companies offers not only mutual funds but also insurance,
annuities, investment certificates and a broad range of financial management
services.
Besides managing investments for all publicly offered funds in the IDS MUTUAL
FUND GROUP, AEFC also manages investments for itself and its subsidiaries, IDS
Certificate Company and IDS Life. Total assets under management on Aug. 31, 1997
were more than $165 billion.
IDS Life is a stock life insurance company organized in 1957 under the laws of
the State of Minnesota and located at IDS Tower 10, Minneapolis, MN 55440-0010.
IDS Life conducts a conventional life insurance business in the District of
Columbia and all states except New York.
Other AEFC subsidiaries provide investment management and related services for
pension, profit sharing, employee savings and endowment funds of businesses and
institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a wholly
owned subsidiary of American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New York, NY
10285. The Funds may pay brokerage commissions to broker-dealer affiliates of
American Express and AEFC.
Retirement Annuity Mutual Funds
IDS Tower 10
Minneapolis, MN
55440-0010
Managed by IDS Life Insurance Company
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS Life Investment Series, Inc.
IDS Life Capital Resource Fund
IDS Life International Equity Fund
IDS Life Aggressive Growth Fund
IDS Life Growth Dimensions Fund
IDS Life Special Income Fund, Inc.
IDS Life Special Income Fund
IDS Life Global Yield Fund
IDS Life Income Advantage Fund
IDS Life Moneyshare Fund, Inc.
IDS Life Managed Fund, Inc.
Oct. 30, 1997
This Statement of Additional Information (SAI), is not a prospectus. It should
be read together with the Funds' prospectus and the financial statements
contained in the Funds' Annual Report which, if not included with your
prospectus, may be obtained without charge.
This SAI is dated Oct. 30, 1997, and it is to be used with the Funds' prospectus
dated Oct. 30, 1997. It is also to be used with the Funds' Annual Report for the
fiscal year ended Aug. 31, 1997.
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
[(612) 671-3733]
[(800) 437-0602]
[(800) 422-3542]
[(800) 333-3437]
<PAGE>
TABLE OF CONTENTS
Goals and Investment Policies See Prospectus
Additional Investment Policies p. 4
Portfolio Transactions p. 27
Brokerage Commissions Paid to Brokers
Affiliated with IDS Life p. 31
Performance Information p. 32
Valuing Each Fund's Shares p. 35
Investing in the Funds p. 38
Redeeming Shares p. 38
Capital Loss Carryover p. 39
Taxes p. 39
Agreements with IDS Life and American Express Financial
Corporation p. 39
Directors and Officers p. 47
Custodian p. 54
Independent Auditors p. 54
Financial Statements See Annual Report and p. 54
Prospectus p. 54
Appendix A: Description of Corporate Bond Ratings and
Additional Information on Investment Policies
for Investments of Capital Resource, Special
Income, Global Yield and Income Advantage
Funds p. 55
Appendix B: Foreign Currency Transactions for Investments
of all funds except Moneyshare p. 57
Appendix C: Description of Money Market Securities p. 61
Appendix D: Options and Stock Index Futures Contracts for
Investments of Capital Resource, International
Equity, Aggressive Growth, Managed, Growth
Dimensions and Global Yield Funds p. 63
<PAGE>
Appendix E: Options and Interest Rate Futures Contracts
for Investments of Special Income, Managed,
Global Yield and Income Advantage Funds p. 69
Appendix F: Mortgage-backed securities and Additional
Information on Investment Policies for all
Funds except Moneyshare. p. 74
Appendix G: Dollar-Cost Averaging p. 77
<PAGE>
ADDITIONAL INVESTMENT POLICIES
In addition to the investment goals and policies presented in the prospectus,
each Fund has the investment policies stated below.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Capital Resource agree to
a change, Capital Resource will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the Fund,
American Express Financial Corporation (AEFC) and IDS Life Insurance Company
(IDS Life) hold more than a certain percentage of the issuer's outstanding
securities. If the holdings of all officers and directors of the Fund, AEFC and
IDS Life who own more than 0.5% of an issuer's securities are added together,
and if in total they own more than 5%, the Fund will not purchase securities of
that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
Securities and Exchange Commission (SEC), this means no more than 25% of a
Fund's total assets, based on current market value at time of purchase, can be
invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
<PAGE>
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make cash loans if the total commitment amount exceeds 5% of the fund's total
assets.
Unless changed by the board of directors, Capital Resource will not:
'Buy on margin or sell short, except the Fund may enter into stock index futures
contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan
<PAGE>
associations having capital, surplus and undivided profits (as of the date of
its most recently published annual financial statements) in excess of $100
million (or the equivalent in the instance of a foreign branch of a U.S. bank)
at the date of investment. Any cash-equivalent investments in foreign securities
will be subject to that Fund's limitations on foreign investments. The Fund may
use repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial U.S. banks. A risk of a repurchase
agreement is that if the seller seeks the protection of the bankruptcy laws, the
Fund's ability to liquidate the security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of International Equity
agree to a change, International Equity will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the
<PAGE>
opportunity for additional income outweighs the risks. During the existence of
the loan, the Fund receives cash payments equivalent to all interest or other
distributions paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make a loan of any part of its assets to AEFC, to its directors and officers or
to its own directors and officers.
'Issue senior securities, except to the extent that borrowing from banks,
lending its securities, or entering into repurchase agreements or options or
futures contracts may be deemed to constitute issuing a senior security.
Unless changed by the board of directors, International Equity will not:
'Buy on margin or sell short, except the Fund may enter into stock index futures
contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 5% of its net assets in securities of domestic or foreign
companies, including any predecessors, that have a record of less than three
years continuous operations.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this policy, collateral arrangements for margin deposits
on a futures contract are not deemed to be a pledge of assets.
'Invest more than 5% of its net assets in warrants.
<PAGE>
'Invest in securities of investment companies except by purchase in the open
market where the dealer's or sponsor's profit is the regular commission. If any
such investment is ever made, not more than 10% of the Fund's net assets, at
market, will be so invested.
To the extent the Fund were to make such investments, the shareholders may be
subject to duplicate advisory, administrative and distribution fees.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. On a day-to-day basis, the Fund also may maintain a portion of its
assets in currencies of countries other than the United States, Canada and the
United Kingdom. As a temporary investment, during periods of weak or declining
market values for the securities the Fund invests in, any portion of its assets
may be converted to cash (in foreign currencies or U.S. dollars) or to
short-term debt securities. The Fund may purchase short-term U.S. and Canadian
government securities. The Fund may invest in short-term obligations of the U.S.
government (and its agencies and instrumentalities) and of the Canadian and
United Kingdom governments. The Fund may purchase short-term corporate notes and
obligations rated in the top two classifications by Moody's and S&P or the
equivalent. The Fund also may purchase high grade notes and obligations of U.S.
banks (including their branches located outside of the United States and U.S.
branches of foreign banks). The Fund may invest in bank obligations including
negotiable certificates of deposit (CDs), non-negotiable fixed-time deposits,
bankers' acceptances and letters of credit of banks or savings and loan
associations having capital, surplus and undivided profits (as of the date of
its most recently published annual financial statements) in excess of $100
million (or the equivalent in the instance of a foreign branch of a U.S. bank)
at the date of investment. Any cash-equivalent investments in foreign securities
will be subject to that Fund's limitations on foreign investments. The Fund may
use repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial U.S. banks. A risk of a repurchase
agreement is that if the seller seeks the protection of the bankruptcy laws, the
Fund's ability to liquidate the security involved could be impaired.
<PAGE>
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
Fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Aggressive Growth agree
to a change, Aggressive Growth will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
<PAGE>
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make a loan of any part of its assets to AEFC, to its directors and officers or
to its own directors and officers.
Unless changed by the board of directors, Aggressive Growth will not:
'Buy on margin or sell short, except the Fund may enter into stock index futures
contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its total assets in securities of domestic or foreign
companies, including any predecessors, that have a record of less than three
years continuous operations.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this policy, collateral arrangements for margin deposits
on a futures contract are not deemed to be a pledge of assets.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies
<PAGE>
and instrumentalities, the investment manager, under guidelines established by
the board of directors, will consider any relevant factors including the
frequency of trades, the number of dealers willing to purchase or sell the
security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
Fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Special Income agree to a
change, Special Income will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
<PAGE>
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
Unless changed by the board of directors, Special Income will not:
'Buy on margin or sell short, except the Fund may enter into interest rate
futures contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
<PAGE>
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participations, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
Loans, loan participations and interests in securitized loan pools are interests
in amounts owed by a corporate, governmental or other borrower to a lender or
consortium of lenders (typically banks, insurance companies, investment banks,
government agencies or international agencies). Loans involve a risk of loss if
the borrower defaults or becomes insolvent and may offer less legal protection
to the fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lender or other financial
intermediary.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired.
<PAGE>
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Moneyshare agree to a
change, Moneyshare will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities.
'Buy on margin or sell short.
'Invest in a company to control or manage it.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
<PAGE>
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Purchase common stocks, preferred stocks, warrants, other equity securities,
corporate bonds or debentures, state bonds, municipal bonds, or industrial
revenue bonds. 'Make cash loans. However, the Fund does make short-term
investments which it may have an agreement with the seller to reacquire (See
Appendix C).
'Invest in an investment company beyond 5% of its total assets taken at market
and then only on the open market where the dealer's or sponsor's profit is
limited to the regular commission. However, the Fund will not purchase or retain
the securities of other open-end investment companies.
'Buy or sell real estate, commodities or commodity contracts.
'Intentionally invest more than 25% of the Fund's assets taken at market value
in any particular industry, except with respect to investing in U.S. government
or agency securities and bank obligations. Investments are varied according to
what is judged advantageous under different economic conditions.
Unless changed by the board of directors, Moneyshare will not:
'Invest in securities that are not readily marketable (whether or not
registration or the filing of a notification under the Securities Act of 1933,
or the taking of similar action under other securities laws relating to the sale
of securities is required).
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired. The security acquired by the Fund in a
repurchase agreement can be any security the Fund can purchase directly and it
may have a maturity of more than 13 months.
The Fund may invest in commercial paper rated in the highest rating category by
at least two nationally recognized statistical rating organizations (or by one,
if only one rating is assigned) and in unrated paper determined by the board of
directors to be of comparable quality. The Fund also may invest up to 5% of its
assets in commercial paper receiving the second highest rating or in unrated
paper determined to be of comparable quality.
<PAGE>
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Managed agree to a
change, Managed will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
<PAGE>
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Make a loan of any part of its assets to AEFC, to its directors and officers or
to its own directors and officers.
'Issue senior securities, except to the extent that borrowing from banks,
lending its securities, or entering into repurchase agreements or options or
futures contracts may be deemed to constitute issuing a senior security.
Unless changed by the board of directors, Managed will not:
'Buy on margin or sell short, except it may enter into stock index futures and
interest rate futures contracts.
'Invest in a company to control or manage it.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its total assets in securities of domestic or foreign
companies, including any predecessors, that have a record of less than three
years continuous operations.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this restriction, collateral arrangements for margin
deposits on futures contracts are not deemed to be a pledge of assets.
'Invest more than 5% of its net assets in warrants.
'Invest in a company if its investments would result in the total holdings of
all the funds in the IDS MUTUAL FUND GROUP being in excess of 15% of that
company's issued shares.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participations, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
<PAGE>
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
Loans, loan participations and interests in securitized loan pools are interests
in amounts owed by a corporate, governmental or other borrower to a lender or
consortium of lenders (typically banks, insurance companies, investment banks,
government agencies or international agencies). Loans involve a risk of loss if
the borrower defaults or becomes insolvent and may offer less legal protection
to the fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lender or other financial
intermediary.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
Fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Growth Dimensions agree
to a change, Growth Dimensions will not:
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
<PAGE>
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
its total assets (including borrowings) less liabilities (other than borrowings)
immediately after the borrowing. The Fund has no present intention to borrow.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Concentrate in any one industry. According to the present interpretation by the
Securities and Exchange Commission (SEC), this means no more than 25% of the
Fund's total assets, based on current market value at time of purchase, can be
invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Invest more than 5% of its total assets in securities of any one company,
government or political subdivision thereof, except the limitation will not
apply to investments in securities issued by the U.S. government, its agencies
or instrumentalities, and except that up to 25% of the Fund's total assets may
be invested without regard to this 5% limitation.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited partnerships.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Make a loan of any part of its assets to AEFC, to the directors and officers of
AEFC or to its own directors and officers.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all directors and officers of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Lend portfolio securities in excess of 30% of its net assets. The current
policy of the Fund's board is to make these loans, either long- or short-term,
to broker-dealers. In making such loans, the Fund receives the market price in
cash, U.S. government securities, letters of credit or such other collateral as
may be permitted by regulatory agencies and approved by the board. If the market
price of the loaned securities goes up, the Fund will get additional collateral
on a daily basis. The risks are that the borrower may not provide additional
collateral when required or return the securities when due. During the existence
of the loan, the Fund receives cash payments equivalent to all interest or other
distributions paid on the loaned securities. A loan will not be made unless the
investment manager believes the opportunity for additional income outweighs the
risks.
<PAGE>
Unless changed by the board of directors, Growth Dimensions, will not:
'Buy on margin or sell short, but the Fund may make margin payments in
connection with transactions in stock index futures contracts.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For the purpose of this policy, collateral arrangements for margin
deposits on a futures contract are not deemed to be a pledge of assets.
'Invest more than 5% of its total assets in securities of companies, including
any predecessors, that have a record of less than three years continuous
operations.
'Invest more than 10% of its assets in securities of investment companies.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of its net assets in securities and derivative instruments
that are illiquid. For purposes of this policy illiquid securities include some
privately placed securities, public securities and Rule 144A securities that for
one reason or another may no longer have a readily available market, repurchase
agreements with maturities greater than seven days, non-negotiable fixed-time
deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board, will consider any relevant factors
including the frequency of trades, the number of dealers willing to purchase or
sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board, will evaluate
relevant factors such as the issuer and the size and nature of its commercial
paper programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and settlement procedures
for the paper.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). Under normal market conditions, the Fund does not intend to commit
more than 5% of its total assets to these practices. The Fund does not pay for
the securities or receive dividends or interest on them until the contractual
settlement date. The Fund's custodian will maintain, in a segregated account,
cash or liquid high-grade debt securities that are marked to market daily and
are at least equal in value to the Fund's commitments to purchase the
securities. When-issued securities or forward commitments are subject to market
fluctuations and they may affect the Fund's total assets the same as owned
securities.
<PAGE>
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The cash-equivalent investments the fund may use are short-term
U.S. and Canadian government securities and negotiable certificates of deposit,
non-negotiable fixed-time deposits, bankers' acceptances and letters of credit
of banks or savings and loan associations having capital, surplus and undivided
profits (as of the date of its most recently published annual financial
statements) in excess of $100 million (or the equivalent in the instance of a
foreign branch of a U.S. bank) at the date of investment. Any cash-equivalent
investments in foreign securities will be subject to the limitations on foreign
investments described in the prospectus. The Fund also may purchase short-term
corporate notes and obligations rated in the top two classifications by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Corporation (S&P) or the
equivalent and may use repurchase agreements with broker-dealers registered
under the Securities Exchange Act of 1934 and with commercial banks. A risk of a
repurchase agreement is that if the seller seeks the protection of the
bankruptcy laws, the Fund's ability to liquidate the security involved could be
impaired.
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
Unless a holder of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Global Yield agree to
change, Global Yield will not:
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
its total assets (including borrowings) less liabilities (other than borrowings)
immediately after the borrowing. The Fund has no present intention to borrow.
'Concentrate in any one industry. According to the present interpretation by the
Securities and Exchange Commission (SEC), this means no more than 25% of the
Fund's total assets, based on current market value at time of purchase, can be
invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited partnerships.
<PAGE>
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Make a loan of any part of its assets to American Express Financial Corporation
(AEFC), to the directors and officers of AEFC or to its own directors and
officers.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all directors and officers of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Lend portfolio securities in excess of 30% of its net assets. The current
policy of the Fund's board is to make these loans, either long- or short-term,
to broker-dealers. In making such loans, the Fund receives the market price in
cash, U.S. government securities, letters of credit or such other collateral as
may be permitted by regulatory agencies and approved by the board. If the market
price of the loaned securities goes up, the Fund will get additional collateral
on a daily basis. The risks are that the borrower may not provide additional
collateral when required or return the securities when due. During the existence
of the loan, the Fund receives cash payments equivalent to all interest or other
distributions paid on the loaned securities. A loan will not be made unless the
investment manager believes the opportunity for additional income outweighs the
risks.
'Issue senior securities, except to the extent that borrowing from banks and
using options, foreign currency forward contracts or future contracts (as
discussed elsewhere in the Fund's prospectus and SAI) may be deemed to
constitute issuing a senior security.
Unless changed by the board of directors, Global Yield, will not:
'Buy on margin or sell short, but the Fund may make margin payments in
connection with transactions in futures contracts.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this policy, collateral arrangements for margin deposits
on a futures contract are not deemed to be a pledge of assets.
'Invest more than 5% of its total assets in securities of domestic or foreign
companies, including any predecessors, that have a record of less than three
years continuous operations.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 5% of its net assets in warrants.
<PAGE>
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participations, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board, will consider any relevant factors
including the frequency of trades, the number of dealers willing to purchase or
sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board, will evaluate
relevant factors such as the issuer and the size and nature of its commercial
paper programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and settlement procedures
for the paper.
Loans, loan participations and interests in securitized loan pools are interests
in amounts owed by a corporate, governmental or other borrower to a lender or
consortium of lenders (typically banks, insurance companies, investment banks,
government agencies or international agencies). Loans involve a risk of loss in
case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In addition,
loan participations involve a risk of insolvency of the lender or other
financial intermediary.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). Under normal market conditions, the Fund does not intend to commit
more than 5% of its total assets to these practices. The Fund does not pay for
the securities or receive dividends or interest on them until the contractual
settlement date. The Fund's custodian will maintain, in a segregated account,
cash or liquid high-grade debt securities that are marked to market daily and
are at least equal in value to the Fund's commitments to purchase the
securities. When-issued securities or forward commitments are subject to market
fluctuations and they may affect the Fund's total assets the same as owned
securities.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The cash-equivalent investments the Fund may use are short-term
U.S. and Canadian government securities and negotiable certificates of deposit,
non-negotiable fixed-time deposits, bankers' acceptances and letters of credit
of banks or savings and loan associations having capital, surplus and undivided
profits (as of the date of its most recently published annual financial
statements) in excess of $100 million (or the equivalent in the instance of a
foreign branch of a U.S. bank) at the date of investment. The Fund also may
purchase short-term notes and obligations (rated in the top two classifications
by Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Corporation
(S&P) or the equivalent) of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. A risk of a repurchase agreement
is
<PAGE>
that if the seller seeks the protection of the bankruptcy laws, the Fund's
ability to liquidate the security involved could be impaired. As a temporary
investment, during periods of weak or declining market values for the securities
in which the Fund invests, any portion of its assets may be converted to cash
(in foreign currencies or U.S. dollars) or to the kinds of short-term debt
securities discussed in this paragraph.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Income Advantage agree to
change, Income Advantage will not:
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
its total assets (including borrowings) less liabilities (other than borrowings)
immediately after the borrowing. The Fund has no present intention to borrow.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Invest more than 5% of its total assets in securities of any one company,
government or political subdivision thereof, except the limitation will not
apply to investments in securities issued by the U.S. government, its agencies
or instrumentalities, and except that up to 25% of the Fund's total assets may
be invested without regard to this 5% limitation.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited partnerships.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Lend portfolio securities in excess of 30% of its net assets. The current
policy of the Fund's board of directors (the "board") is to make these loans,
either long- or short-term, to broker-dealers. In making such loans, the Fund
gets the market price in cash, U.S. government securities, letters of credit or
such other collateral as may be permitted by regulatory agencies and approved by
the board. If the market price of the loaned securities goes up, the Fund will
get additional collateral on a daily basis. The risks are that the borrower may
not provide additional collateral when required or return the securities when
due. During the existence of the loan, the Fund receives cash payments
equivalent to all interest or other distributions paid on the loaned securities.
A loan will not be made unless the investment manager believes the opportunity
for additional income outweighs the risks.
<PAGE>
'Issue senior securities, except this restriction shall not be deemed to
prohibit the Fund from borrowing from banks, using options or futures contracts,
lending its securities or entering into repurchase agreements.
'Concentrate in any one industry. According to the present interpretation by the
Securities and Exchange Commission (SEC), this means no more than 25% of the
Fund's total assets, based on current market value at the time of purchase, can
be invested in any one industry.
Unless changed by the board of directors, Income Advantage, will not:
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this policy, collateral arrangements for margin deposits
on a futures contract are not deemed to be a pledge of assets.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 5% of its total assets in securities of companies, including
any predecessors, that have a record of less than three years continuous
operations.
'Invest in a company to control or manage it.
'Buy on margin or sell short, except the Fund may enter into interest rate
future contracts.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all directors and officers of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the fund will not
purchase securities of that issuer.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participation, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options.
'In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities. The investment manager, under
guidelines established by the board, will consider any relevant factors
including the frequency of trades, the number of dealers willing to purchase or
sell the security and the nature of marketplace trades.
'In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such
<PAGE>
as the issuer and the size and nature of its commercial paper programs, the
willingness and ability of the issuer or dealer to repurchase the paper, and the
nature of the clearance and settlement procedures for the paper.
Loans, loan participation and interests in securitized loan pools are interests
in amounts owed by a corporate, governmental or other borrower to a lender or
consortium of lenders (typically banks, insurance companies, investment banks,
government agencies or international agencies). Loans involve a risk of loss in
case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In addition,
loan participation involve a risk of insolvency of the lender or other financial
intermediary.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). Under normal market conditions, the Fund does not intend to commit
more than 5% of its total assets to these practices. The Fund does not pay for
the securities or receive dividends or interest on them until the contractual
settlement date. The Fund's custodian will maintain, in a segregated account,
cash or liquid high-grade debt securities that are marked to market daily and
are at least equal in value to the Fund's commitments to purchase the
securities. When-issued securities or forward commitments are subject to market
fluctuations and they may affect the Fund's total assets the same as owned
securities.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The cash-equivalent investments the Fund may use are short-term
U.S. and Canadian government securities and negotiable certificates of deposit,
non-negotiable fixed-time deposits, bankers' acceptances and letters of credit
of banks or savings and loan associations having capital, surplus and undivided
profits (as of the date of its most recently published annual financial
statements) in excess of $100 million (or the equivalent in the instance of a
foreign branch of a U.S. bank) at the date of investment. Any cash-equivalent
investments in foreign securities will be subject to the limitations on foreign
investments described in the prospectus. The Fund also may purchase short-term
corporate notes and obligations rated in the top two classifications by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Corporation (S&P) or the
equivalent and may use repurchase agreements with broker-dealers registered
under the Securities Exchange Act of 1934 and with commercial banks. A risk of a
repurchase agreement is that if the seller seeks the protection of the
bankruptcy laws, the Fund's ability to liquidate the security involved could be
impaired.
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
For a discussion on corporate bond ratings and additional information on
investment policies, see Appendix A. For a discussion on foreign currency
transactions, see Appendix B. For a discussion on money market securities, see
Appendix C. For a discussion on options and stock index futures contracts, see
Appendix D. For a discussion on options and interest rate futures contracts, see
Appendix E. For a discussion on dollar-cost averaging, see Appendix F.
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies set by the board of directors, AEFC, IDS International, Inc.
(International) and IDS Life are authorized to determine, consistent with the
Funds' investment goals and policies, which securities will be purchased, held
or sold. In determining where buy and sell orders are to be placed, AEFC,
International and IDS Life have been directed to use their best efforts to
obtain the best available price and the most favorable execution except where
otherwise authorized by the board of directors. IDS Life intends to direct AEFC
and International to execute trades and negotiate commissions on its behalf.
These services are covered by the Investment Advisory Agreement between AEFC and
IDS Life and the Sub-Investment Advisory Agreement between AEFC and
International. When AEFC and International act on IDS Life's behalf for the
Funds, they follow the rules described here for IDS Life.
AEFC has a strict Code of Ethics that prohibits its affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for any fund or trust for which it
acts as investment manager. AEFC carefully monitors compliance with its Code of
Ethics.
On occasion, it may be desirable for Capital Resource, International Equity,
Aggressive Growth, Special Income, Managed, Growth Dimensions, Global Yield or
Income Advantage funds to compensate a broker for research services or for
brokerage services by paying a commission that might not otherwise be charged or
a commission in excess of the amount another broker might charge. The boards of
directors have adopted a policy authorizing IDS Life to do so to the extent
authorized by law, if IDS Life determines, in good faith, that such commission
is reasonable in relation to the value of the brokerage or research services
provided by a broker or dealer, viewed either in the light of that transaction
or IDS Life's, AEFC's or International's overall responsibilities to the funds
in the IDS MUTUAL FUND GROUP.
Research provided by brokers supplements AEFC's and International's own research
activities. Research services include economic data on, and analysis of: the
U.S. economy and specific industries within the economy; information about
specific companies, including earning estimates; purchase recommendations for
stocks and bonds; portfolio strategy services; political, economic, business and
industry trend assessments; historical statistical information; market data
services providing information on specific issues and prices; and technical
analysis of various aspects of the securities markets, including technical
charts. Research services may take the form of written reports, computer
software or personal contact by telephone or at seminars or other meetings. AEFC
has obtained, and in the future may obtain, computer hardware from brokers,
including but not limited to personal computers that will be used exclusively
for investment decision-making purposes, which includes the research, portfolio
management and trading functions and such other services to the extent permitted
under an interpretation by the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, IDS Life must follow
procedures authorized by the board of directors. To date, three procedures have
been authorized. One procedure permits IDS Life to direct an order to buy or
sell a security traded on a national securities exchange to a specific broker
for research services it has provided. The second procedure permits IDS Life, in
order to obtain research, to direct an order on an agency basis to buy or sell a
security traded in the over-the-counter market to a firm
<PAGE>
that does not make a market in the security. The commission paid generally
includes compensation for research services. The third procedure permits IDS
Life, in order to obtain research and brokerage services, to cause each fund to
pay a commission in excess of the amount another broker might have charged.
IDS Life has advised the Funds that it is necessary to do business with a number
of brokerage firms on a continuing basis to obtain such services as: handling of
large orders; willingness of a broker to risk its own money by taking a position
in a security; and specialized handling of a particular group of securities that
only certain brokers may be able to offer. As a result of this arrangement, some
portfolio transactions may not be effected at the lowest commission, but IDS
Life believes it may obtain better overall execution. IDS Life has assured the
Funds that under all three procedures the amount of commission paid will be
reasonable and competitive in relation to the value of the brokerage services
performed or research provided.
All other transactions shall be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if, in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by IDS Life, AEFC and International in
providing advice to all the funds in the IDS MUTUAL FUND GROUP and other
accounts advised by IDS Life, AEFC and International, even though it is not
possible to relate the benefits to any particular fund or account.
Normally, the securities of Special Income and Moneyshare Funds are traded on a
principal rather than an agency basis. In other words, AEFC will trade directly
with the issuer or with a dealer who buys or sells for its own account, rather
than acting on behalf of another client. AEFC does not pay the dealer
commissions. Instead, the dealer's profit, if any, is the difference, or spread,
between the dealer's purchase and sale price for the security.
Each investment decision made for each fund is made independently from any
decision made for another fund in the IDS MUTUAL FUND GROUP or other account
advised by AEFC or any AEFC subsidiary.
When a fund buys or sells the same security as another fund or account, AEFC or
International carries out the purchase or sale in a way the fund agrees in
advance is fair. Although sharing in large transactions may adversely affect the
price or volume purchased or sold by a fund, the fund hopes to gain an overall
advantage in execution. AEFC and International have assured the Funds they will
continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC and International make a comprehensive review of the
broker-dealers and the overall reasonableness of their commissions. The review
evaluates execution, operational efficiency and research services.
The Funds have paid the following brokerage commissions:
<TABLE><CAPTION>
Fiscal year Capital International Aggressive Special Growth Income
ended Aug. 31, Resource Equity Growth Income Managed Dimensions Advantage
- ---------------- ----------- ------------ ------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 7,692,690 2,466,949 2,171,645 34,918 3,072,774 -- --
1996 13,416,430 3,551,512 5,313,285 23,608 3,683,714 124,863 --
1997 9,778,626 6,013,492 7,958,360 168,718 3,490,303 657,014 1,668
</TABLE>
<PAGE>
Transactions amounting to $196,046,000, $82,868,000 and $96,952,000 with related
commissions of $345,738, $147,390 and $120,222 were directed to brokers by
Capital Resource, Aggressive Growth and Managed Funds, respectively, because of
research services received for the fiscal year ended Aug. 31, 1997.
Capital Resource Fund's acquisition during the fiscal year ended Aug. 31, 1997,
of securities of its regular brokers or dealers or of the parents of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities is presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Bank of America $14,510,291
First Chicago 6,978,282
Merrill Lynch 8,349,859
Morgan Stanley 50,059,625
Travelers Group 60,325,000
Aggressive Growth Fund's acquisition during the fiscal year ended Aug. 31, 1997,
of securities of its regular brokers or dealers or of the parents of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities is presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Bank of America $10,336,119
Merrill Lynch 6,162,991
Charles Schwab 16,975,000
Special Income Fund's acquisition during the fiscal year ended Aug. 31, 1997, of
securities of its regular brokers or dealers or of the parents of those brokers
or dealers that derived more than 15% of gross revenue from securities-related
activities is presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Goldman Sachs $ 8,067,825
J. P. Morgan 12,991,300
Morgan Stanley 8,241,669
Salomon Brothers 5,054,450
Moneyshare Fund's acquisition during the fiscal year ended Aug. 31, 1997, of
securities of its regular brokers or dealers or of the parents of those brokers
or dealers that derived more than 15% of gross revenue from securities-related
activities is presented below:
<PAGE>
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Bank of America $21,111,291
First Chicago 6,978,282
Goldman Sachs 19,450,863
Merrill Lynch 19,175,447
J. P. Morgan 1,999,458
Morgan Stanley 24,933,626
Managed Fund's acquisition during the fiscal year ended Aug. 31, 1997, of
securities of its regular brokers or dealers or of the parents of those brokers
or dealers that derived more than 15% of gross revenue from securities-related
activities is presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Bank of America $ 3,594,809
Goldman Sachs 3,884,508
J. P. Morgan 4,847,500
Morgan Stanley 67,943,525
Salomon Brothers 3,905,000
Travelers Group 103,325,000
Growth Dimensions Fund's acquisition during the fiscal year ended Aug. 31, 1997
of securities of its regular brokers or dealers or of the parents of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities is presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Bank of America $ 6,436,462
Morgan Stanley 20,552,613
Travelers Group 19,234,150
International Equity Fund's acquisition during the fiscal year ended Aug. 31,
1997 of securities of its regular brokers or dealers or of the parents of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities is presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Bank of America $13,503,843
Morgan Stanley 19,063,711
Nations Bank 7,531,326
Credit Suisse First Boston 31,161,934
<PAGE>
Global Yield Fund's acquisition during the fiscal year ended Aug. 31, 1997 of
securities of its regular brokers or dealers or of the parents of those brokers
or dealers that derived more than 15% of gross revenue from securities-related
activities is presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Lehman Brothers $1,171,832
J. P. Morgan 969,500
Income Advantage Fund did not acquire securities of its regular brokers or
dealers or of the parents of those brokers or dealers that derived more than 15%
of gross revenue from securities-related activities during the fiscal year ended
Aug. 31, 1997.
The portfolio turnover rate for Capital Resource Fund was 110% in fiscal year
ended Aug. 31, 1997 and 131% in fiscal year ended Aug. 31, 1996. The portfolio
turnover rate for Managed Fund was 72% in fiscal year ended Aug. 31, 1997 and
85% in fiscal year ended Aug. 31, 1996.
The portfolio turnover rate for International Equity Fund was 91% in fiscal year
ended Aug. 31, 1997 and 58% in fiscal year ended Aug. 31, 1996. The portfolio
turnover rate for Aggressive Growth Fund was 218% in fiscal year ended Aug. 31,
1997 and 189% in fiscal year ended Aug. 31, 1996.
The portfolio turnover rate for Special Income Fund was 73% in fiscal year ended
Aug. 31, 1997 and 56% in fiscal year ended Aug. 31, 1996. The portfolio turnover
rate for Growth Dimensions Fund was 29% in fiscal year ended Aug. 31, 1997 and
4% in fiscal year ended Aug. 31, 1996.
The portfolio turnover rate for Global Yield fund was 36% in fiscal year ended
Aug. 31, 1997 and 4% in fiscal year ended Aug. 31, 1996. The portfolio turnover
rate for Income Advantage Fund was 104% in fiscal year ended Aug. 31, 1997 and
22% in fiscal year ended Aug. 31, 1996.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH IDS LIFE
Affiliates of American Express Company (American Express) (of which IDS Life is
a wholly owned indirect subsidiary) may engage in brokerage and other securities
transactions on behalf of Capital Resource, International Equity, Aggressive
Growth, Special Income, Managed, Growth Dimensions, Global Yield and Income
Advantage funds in accordance with procedures adopted by the Funds' boards of
directors and to the extent consistent with applicable provisions of the federal
securities laws. IDS Life will use an American Express affiliate only if (i) IDS
Life determines that a fund will receive prices and executions at least as
favorable as those offered by qualified independent brokers performing similar
brokerage and other services for the Fund and (ii) the affiliate charges the
Fund commission rates consistent with those the affiliate charges comparable
unaffiliated customers in similar transactions and if such use is consistent
with terms of the Investment Management Services Agreement.
AEFC may direct brokerage to compensate an affiliate. AEFC will receive research
on South Africa from New Africa Advisors, a wholly-owned subsidiary of Sloan
Financial Group. AEFC owns 100% of IDS Capital Holdings Inc. which in turn owns
40% of
<PAGE>
Sloan Financial Group. New Africa Advisors will send research to AEFC and in
turn American Express Financial Corporation will direct trades to a particular
broker. The broker will have an agreement to pay New Africa Advisors. All
transactions will be on a best execution basis. Compensation received will be
reasonable for the services rendered.
No brokerage commissions were paid by Moneyshare Fund to brokers affiliated with
IDS Life for the fiscal year ended Aug. 31, 1997.
Information about brokerage commissions paid by the Funds to American Enterprise
Investment Services, Inc., a wholly-owned subsidiary of AEFC, for the last three
fiscal years are contained in the following table:
For the Fiscal Year Ended Aug. 31,
<TABLE>
<CAPTION>
1997 1996 1995
Percentage of
Aggregate
Aggregate Dollar Percent of Dollar Amount Aggregate Aggregate
Amount of Aggregate of Transactions Dollar Amount Dollar Amount
Commissions Paid Brokerage Involving of Commissions of Commissions
Fund to Broker Commissions Payment of Paid to Broker Paid to Broker
Commissions
Capital
<S> <C> <C> <C> <C> <C>
Resource $817,190 8.36% 15.58% $841,159 $829,258
International
Equity. None None None None None
Aggressive
Growth 183,327 2.31 3.89 245,269 222,443
Special Income None None None None None
Managed 227,619 6.64 8.05 76,269 131,456
Growth
Dimensions 20,404 3.15 2.84 212 None
Global Yield None None None None None
Income
Advantage None None None None None
</TABLE>
PERFORMANCE INFORMATION
Each Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations used by a fund are
based on standardized methods of computing performance as required by the SEC.
An explanation of these and any other methods used by each Fund to compute
performance follows below.
Average annual total return
Each Fund may calculate average annual total return for certain periods by
finding the average annual compounded rates of return over the period that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
<PAGE>
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
Aggregate total return
Each Fund may calculate aggregate total return for certain periods representing
the cumulative change in the value of an investment in a fund over a specified
period of time according to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the end
of the period (or fractional portion thereof)
Annualized yield and Distribution yield
Special Income, Global Yield and Income Advantage Funds may calculate an
annualized yield by dividing the net investment income per share deemed earned
during a 30-day period by the public offering price per share (including the
maximum sales charge) on the last day of the period and annualizing the results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period
Special Income Fund's annualized yield was 6.76%, Global Yield Fund's was 3.04%
and Income Advantage Fund's was 8.63% for the 30-day period ended Aug. 31, 1997.
<PAGE>
The Fund's yield, calculated as described above according to the formula
prescribed by the SEC, is a hypothetical return based on market value yield to
maturity for the Fund's securities. It is not necessarily indicative of the
amount which was or may be paid to the contract owners. Actual amounts paid to
contract owners are reflected in the distribution yield.
Distribution yield is calculated according to the following formula:
D x F = DY
NAV 30
where: D = sum of dividends for 30 day period
NAV = beginning of period net asset value
F = annualizing factor
DY = distribution yield
Special Income Fund's distribution yield was 7.23%, Global Yield Fund's was
3.19% and Income Advantage Fund's was 9.30% for the 30-day period ended Aug. 31,
1997.
Moneyshare Fund calculates annualized simple and compound yields based on a
seven-day period.
The simple yield is calculated by determining the net change in the value of a
hypothetical account having a balance of one share at the beginning of the
seven-day period, dividing the net change in account value by the value of the
account at the beginning of the period to obtain the return for the period, and
multiplying that return by 365/7 to obtain an annualized figure. The value of
the hypothetical account includes the amount of any declared dividends, the
value of any shares purchased with any dividend paid during the period and any
dividends declared for such shares. The Fund's yield does not include any
realized or unrealized gains or losses.
Moneyshare Fund calculates its compound yield according to the following
formula:
Compound Yield = (return for seven day period + 1) 365/7 - 1
Moneyshare Fund's simple annualized yield was 5.11% and its compound yield was
5.24% for the seven days ended Aug. 31, 1997, the last business day of the
Fund's fiscal year. The Fund's simple yield was 5.11% and the compound yield was
5.24% for the seven days ended Sept. 30, 1997.
Yield, or rate of return, on Moneyshare Fund shares may fluctuate daily and does
not provide a basis for determining future yields. However, it may be used as
one element in assessing how the Fund is meeting its goal. When comparing an
investment in the Fund with savings accounts and similar investment
alternatives, you must consider that such alternatives often provide an agreed
to or guaranteed fixed yield for a stated period of time, whereas the fund's
yield fluctuates. In comparing the yield of one money market fund to another,
you should consider each fund's investment policies, including the types of
investments permitted.
<PAGE>
REMEMBER THAT THESE YIELDS ARE THE RETURN TO THE SHAREHOLDER (THE VARIABLE
ACCOUNTS), NOT TO THE VARIABLE ANNUITY CONTRACT OWNER. SEE YOUR ANNUITY
PROSPECTUS FOR A DISCUSSION OF THE DIFFERENCES.
In sales material and other communications, the Funds may quote, compare or
refer to rankings, yields or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund
Forecaster, Newsweek, The New York Times, Personal Investor, Stanger Report,
Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The
Wall Street Journal and Wiesenberger Investment Companies Service.
VALUING EACH FUND'S SHARES
On Aug. 31, 1997, the computation of the value of an individual share looked
like this:
<TABLE>
<CAPTION>
Capital Resource Fund
Net asset value
Net assets Shares outstanding of one share
<S> <C> <C> <C> <C>
$4,866,591,077 divided by 173,988,176 = $27.97
International Equity Fund
Net asset value
Net assets Shares outstanding of one share
$2,104,975,232 divided by 149,447,811 = $14.09
Aggressive Growth Fund
Net asset value
Net assets Shares outstanding of one share
$2,427,427,425 divided by 141,403,480 = $17.17
Special Income Fund
Net asset value
Net assets Shares outstanding of one share
$1,923,317,614 divided by 160,398,174 = $11.99
Managed Fund
Net asset value
Net assets Shares outstanding of one share
$4,444,602,312 divided by 235,535,537 = $18.87
Growth Dimensions Fund
Net asset value
Net assets Shares outstanding of one share
$1,306,826,984 divided by 100,887,023 = $12.95
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Global Yield Fund
Net asset value
Net assets Shares outstanding of one share
<S> <C> <C> <C> <C>
$119,177,723 divided by 11,553,714 = $10.32
Income Advantage Fund
Net asset value
Net assets Shares outstanding of one share
$320,317,296 divided by 30,819,905 = $10.39
</TABLE>
Capital Resource, International Equity, Aggressive Growth, Special Income,
Managed, Growth Dimensions, Global Yield and Income Advantage Funds' portfolio
securities are valued as follows as of the close of business of the New York
Stock Exchange:
'Securities, except bonds other than convertibles, traded on a securities
exchange for which a last-quoted sales price is readily available are valued at
the last-quoted sales price on the exchange where such security is primarily
traded.
'Securities traded on a securities exchange for which a last-quoted sales price
is not readily available are valued at the mean of the closing bid and asked
prices, looking first to the bid and asked prices on the exchange where the
security is primarily traded and if none exists, to the over-the-counter market.
'Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
'Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities traded
over-the-counter but not included in the NASDAQ National Market System, are
valued at the mean of the closing bid and asked prices.
'Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
'Foreign securities traded outside the United States are generally valued as of
the time their trading is complete which is usually different from the close of
the New York Stock Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the New York Stock Exchange that will not be reflected in the
computation of a fund's net asset value. If events materially affecting the
value of such securities occur during such period, these securities will be
valued at their fair value according to procedures decided upon in good faith by
the funds' boards of directors.
'Short-term securities maturing more than 60 days from the valuation date are
valued at the readily available market price or approximate market value based
on current interest rates. Short-term securities maturing in 60 days or less
that originally had maturities of more than 60 days at acquisition date are
valued at amortized cost using the market value on the 61st day before maturity.
Short-term securities maturing in 60 days or less at acquisition date are valued
at amortized cost. Amortized cost is an approximation of
<PAGE>
market value determined by systematically increasing the carrying value of a
security if acquired at a discount, or reducing the carrying value if acquired
at a premium, so that the carrying value is equal to maturity value on the
maturity date.
'Securities without a readily available market price, bonds other than
convertibles and other assets are valued at fair value as determined in good
faith by the boards of directors. The boards of directors are responsible for
selecting methods they believe provide fair value. When possible, bonds are
valued by a pricing service independent from a fund. If a valuation of a bond is
not available from a pricing service, the bond will be valued by a dealer
knowledgeable about the bond if such a dealer is available.
Moneyshare Fund intends to use its best efforts to maintain a constant net asset
value of $1 per share although there is no assurance it will be able to do so.
Accordingly, the Fund uses the amortized cost method in valuing its portfolio.
Short-term securities maturing in 60 days or less are valued at amortized cost.
Amortized cost is an approximation of market value determined by systematically
increasing the carrying value of a security if acquired at a discount, or
reducing the carrying value if acquired at a premium, so that the carrying value
is equal to maturity value on the maturity date. It does not take into
consideration unrealized capital gains or losses. All of the securities in the
Fund's portfolio will be valued at their amortized cost.
In addition, Moneyshare Fund must abide by certain conditions. It must only
invest in securities of high quality which present minimal credit risks as
determined by the board of directors. This means that the rated commercial paper
in the Fund's portfolio will be issues that have been rated in the highest
rating category by at least two nationally recognized statistical rating
organizations (or by one if only one rating is assigned) and in unrated paper
determined by the Fund's board of directors to be comparable. The fund must also
purchase securities with original or remaining maturities of 13 months or less,
and maintain a dollar-weighted average portfolio maturity of 90 days or less. In
addition, the board of directors must establish procedures designed to stabilize
the Fund's price per share for purposes of sales and redemptions at $1 to the
extent that it is reasonably possible to do so. These procedures include review
of the Fund's portfolio securities by the Board, at intervals deemed appropriate
by it, to determine whether the Fund's net asset value per share computed by
using the available market quotations deviates from a share value of $1 as
computed using the amortized cost method. The board must consider any deviation
that appears, and if it exceeds 0.5%, it must determine what action, if any,
needs to be taken. If the board determines that a deviation exists that may
result in a material dilution of the holdings of the variable accounts or
investors, or in other unfair consequences for such people, it must undertake
remedial action that it deems necessary and appropriate. Such action may include
withholding dividends, calculating net asset value per share for purposes of
sales and redemptions in kind, and selling portfolio securities before maturity
in order to realize capital gain or loss or to shorten average portfolio
maturity.
In other words, while the amortized cost method provides certainty and
consistency in portfolio valuation, it may, from time to time, result in
valuations of portfolio securities that are either somewhat higher or lower than
the prices at which the securities could be sold. This means that during times
of declining interest rates, the yield on Moneyshare Fund's shares may be higher
than if valuations of portfolio securities were made based on actual market
prices and estimates of market prices. Accordingly, if use of the amortized cost
method were to result in a lower portfolio value at a given time, a prospective
<PAGE>
investor in the Fund would be able to obtain a somewhat higher yield than if
portfolio valuation were based on actual market values. The Variable Accounts,
on the other hand, would receive a somewhat lower yield than they would
otherwise receive. The opposite would happen during a period of rising interest
rates.
The Exchange, AEFC, IDS Life and the Funds will be closed on the following
holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
INVESTING IN THE FUNDS
You cannot buy shares of the Funds directly. The only way you can invest in the
Funds at the current time is by buying an annuity contract and directing the
allocation of part or all of your net purchase payment to the variable accounts,
which will invest in shares of Capital Resource, International Equity,
Aggressive Growth, Special Income, Moneyshare, Managed, Growth Dimensions,
Global Yield or Income Advantage funds. Please read the Funds' prospectus along
with your annuity prospectus for further information.
Sales Charges and Surrender or Withdrawal Charges
The Funds do not assess sales charges, either when they sell or when they redeem
securities. The surrender or withdrawal charges that may be assessed under your
annuity contract are described in your annuity prospectus, as are the other
charges that apply to your annuity contract and to the variable accounts.
REDEEMING SHARES
The Funds will redeem any shares presented by a shareholder (variable account)
for redemption. The variable accounts' policies on when or whether to buy or
redeem fund shares are described in your annuity prospectus.
During an emergency, the boards of directors can suspend the computation of net
asset value, stop accepting payments for purchase of shares or suspend the duty
of the Funds to redeem shares for more than 7 days. Such emergency situations
would occur if:
'The New York Stock Exchange closes for reasons other than the usual weekend and
holiday closings or trading on the Exchange is restricted,
'Disposal of a Fund's securities is not reasonably practicable or it is not
reasonably practicable for the Fund to determine the fair value of its net
assets, or
'The Securities and Exchange Commission, under the provisions of the Investment
Company Act of 1940, as amended, declares a period of emergency to exist.
Should a Fund stop selling shares, the directors may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all contract owners.
Shares of the Fund may not be held by persons who are residents of, or domiciled
in, Brazil. The Fund reserves the right to redeem accounts of shareholders who
establish residence or domicile in Brazil.
<PAGE>
CAPITAL LOSS CARRYOVER
For federal income tax purposes, Growth Dimensions Fund had capital loss
carryover at Aug. 31, 1997 of $11,186,489 which, if not offset by subsequent
capital gains, will expire in 2004 to 2006. It is unlikely the board of
directors will authorize a distribution of any net realized capital gain for
these Funds until the capital loss carryover has been offset or expires except
as required by IRS rules.
TAXES
International Equity Fund may be subject to U.S. taxes resulting from holdings
in a passive foreign investment company (PFIC). A foreign corporation is a PFIC
when 75% or more of its gross income for the taxable year is passive income or
if 50% or more of the average value of its assets consists of assets that
produce or could produce passive income.
AGREEMENTS WITH IDS LIFE AND AMERICAN EXPRESS FINANCIAL CORPORATION
Investment Management Services Agreement
Each Fund has an Investment Management Services Agreement with IDS Life. The
Funds have retained IDS Life to, among other things, counsel and advise the
Funds and their directors in connection with the formulation of investment
programs designed to accomplish the Funds' investment objectives, and to
determine, consistent with the Funds' investment objectives and policies, which
securities in IDS Life's discretion shall be purchased, held or sold, subject
always to the direction and control of the boards of directors.
The Funds do not maintain their own research departments or record-keeping
services. These services are provided by IDS Life under the Investment
Management Services Agreement.
The Agreement provides that, in addition to paying its own management fee,
brokerage costs and certain taxes, each Fund pays IDS Life an amount equal to
the cost of certain expenses incurred and paid by IDS Life in connection with
the Fund's operations.
For its services, IDS Life is paid a fee based on the following schedules:
Capital Resource
assets Annual rate at
(billions) each asset level
First $1 0.063%
Next $1 0.615
Next $1 0.600
Next $3 0.585
Over $6 0.570
<PAGE>
International Equity
assets Annual rate at
(billions) each asset level
First $0.25 0.870%
Next $0.25 0.855
Next $0.25 0.840
Next $0.25 0.825
Next $1 0.810
Over $2 0.795
Aggressive Growth
assets Annual rate at
(billions) each asset level
First $0.25 0.650%
Next $0.25 0.635
Next $0.25 0.620
Next $0.25 0.605
Next $1 0.590
Over $2 0.575
Special Income
assets Annual rate at
(billions) each asset level
First $1 0.610%
Next $1 0.595
Next $1 0.580
Next $3 0.565
Next $3 0.550
Over $9 0.535
Moneyshare
assets Annual rate at
(billions) each asset level
First $1 0.510%
Next $0.5 0.493
Next $0.5 0.475
Next $0.5 0.458
Over $2.5 0.440
<PAGE>
Managed
assets Annual rate at
(billions) each asset level
First $0.5 0.630%
Next $0.5 0.615
Next $1 0.600
Next $1 0.585
Next $3 0.570
Over $6 0.550
Growth Dimensions
assets Annual rate at
(billions) each asset level
First $1 0.630%
Next $1 0.615
Next $1 0.600
Next $3 0.585
Over $9 0.570
Global Yield
assets Annual rate at
(billions) each asset level
First $.25 0.840%
Next $.25 0.825
Next $.25 0.810
Next $.25 0.795
Over $1 0.780
Income Advantage
assets Annual rate at
(billions) each asset level
First $1 0.620%
Next $1 0.605
Next $1 0.590
Next $3 0.575
Next $3 0.560
Over $9 0.545
On Aug. 31, 1997, the daily rate applied to the Fund's assets on an annual
basis, was 0.603% for Capital Resource, 0.827% for International Equity, 0.603%
for Aggressive Growth, 0.603% for Special Income, 0.510% for Moneyshare, 0.592%
for Managed, 0.626% for Growth Dimensions, 0.811% for Global Yield and 0.620%
for Income Advantage. The fee is calculated for each calendar day on the basis
of net assets as of the close of business two business days prior to the day for
which the calculation is made.
<PAGE>
The management fee is paid monthly. Under the prior and current agreements, the
total amount paid for Capital Resource was $27,562,075 for the fiscal year ended
Aug. 31, 1997, $26,046,720 for the fiscal year ended 1996, and $20,450,401 for
the fiscal year 1995.
Under the prior and current agreements, the total amount paid for International
Equity was $16,844,405 for the fiscal year ended Aug. 31, 1997, $13,990,974 for
the fiscal year ended 1996, and $10,869,439 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Aggressive
Growth was $13,049,949 for the fiscal year ended Aug. 31, 1997, $10,459,512 for
the fiscal year ended 1996, and $6,579,414 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Special Income
was $11,582,416 for the fiscal year ended Aug. 31, 1997, $11,311,856 for the
fiscal year ended 1996 and $9,542,823 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Moneyshare was
$1,845,243 for the fiscal year ended Aug. 31, 1997, $1,283,789 for the fiscal
year ended 1996, and $1,041,050 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Managed was
$23,778,006 for the fiscal year ended Aug. 31, 1997, $19,987,805 for the fiscal
year ended 1996, and $16,720,930 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Growth
Dimensions was $4,581,562 for the fiscal year ended Aug. 31, 1997, and $153,340
for the fiscal year ended 1996.
Under the prior and current agreements, the total amount paid for Global Yield
was $576,997 for the fiscal year ended Aug. 31, 1997, and $26,039 for the fiscal
year ended 1996.
Under the prior and current agreements, the total amount paid for Income
Advantage was $1,070,942 for the fiscal year ended Aug. 31, 1997, and $44,245
for the fiscal year ended 1996.
Under the current Agreement, the expenses of IDS Life that each Fund has agreed
to reimburse are: taxes, brokerage commissions, custodian fees and expenses,
audit expenses, cost of items sent to contract owners, postage, fees and
expenses paid to directors who are not officers or employees of IDS Life or AEFC
fees and expenses of attorneys, costs of fidelity and surety bonds, SEC
registration fees, expenses of preparing prospectuses and of printing and
distributing prospectuses to existing contract owners, losses due to theft or
other wrong doing or due to liabilities not covered by bond or agreement,
expenses incurred in connection with lending portfolio securities of the funds
and expenses properly payable by the funds, approved by the boards of directors.
All other expenses are borne by IDS Life.
<PAGE>
Under a current and prior agreement:
Capital Resource paid nonadvisory expenses of $1,216,304 for the fiscal year
ended Aug. 31, 1997, $1,237,584 for the fiscal year ended 1996, and $1,289,211
for the fiscal year 1995.
International Equity paid nonadvisory expenses of $1,971,367 for the fiscal year
ended Aug. 31, 1997, $1,439,851 for the fiscal year ended 1996, and $1,758,233
for the fiscal year 1995.
Aggressive Growth paid nonadvisory expenses of $595,678 for the fiscal year
ended Aug. 31, 1997, $555,212 for the fiscal year ended 1996, and $397,865 for
the fiscal year 1995.
Special Income paid nonadvisory expenses of $470,062 for the fiscal year ended
Aug. 31, 1997, $534,757 for the fiscal year ended 1996, and $527,883 for the
fiscal year 1995.
Moneyshare paid nonadvisory expenses of $112,930 for the fiscal year ended Aug.
31, 1997, $134,008 for the fiscal year ended 1996, and $68,790 for the fiscal
year 1995.
Managed paid nonadvisory expenses of $781,442 for the fiscal year ended Aug. 31,
1997, $857,900 for the fiscal year ended 1996, and $1,006,486 for the fiscal
year 1995.
Growth Dimensions paid nonadvisory expenses of $311,923 for the fiscal year
ended Aug. 31, 1997, and $88,000 for the fiscal year ended 1996.
Global Yield paid nonadvisory expenses of $53,806 for the fiscal year ended Aug.
31, 1997, and $26,994 for the fiscal year ended 1996.
Income Advantage paid nonadvisory expenses of $29,848 for the fiscal year ended
Aug. 31, 1997, and $61,600 for the fiscal year ended 1996.
Administrative Services Agreement
The Funds have an Administrative Services Agreement with AEFC. Under this
agreement, the Funds pay AEFC for providing administration and accounting
services. The fee is calculated as follows:
Capital Resource
assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Over $6 0.030
<PAGE>
International Equity
assets Annual rate at
(billions) each asset level
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $1 0.040
Over $2 0.035
Aggressive Growth
assets Annual rate at
(billions) each asset level
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $1 0.040
Over $2 0.035
Special Income
assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Next $3 0.030
Over $9 0.025
Moneyshare
assets Annual rate at
(billions) each asset level
First $1 0.030%
Next $0.5 0.027
Next $0.5 0.025
Next $0.5 0.022
Over $2.5 0.020
<PAGE>
Managed
assets Annual rate at
(billions) each asset level
First $0.5 0.040%
Next $0.5 0.035
Next $1 0.030
Next $1 0.025
Next $3 0.020
Over $6 0.020
Growth Dimensions
assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Over $6 0.030
Global Yield
assets Annual rate at
(billions) each asset level
First $.25 0.060%
Next $.25 0.055
Next $.25 0.050
Next $.25 0.045
Over $1 0.040
Income Advantage
assets Annual rate at
(billions) each asset level
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Next $3 0.030
Over $9 0.025
On Aug. 31, 1997, the daily rate applied to Capital Resource was equal to 0.041%
on an annual basis.
On Aug. 31, 1997, the daily rate applied to International Equity was equal to
0.046% on an annual basis.
On Aug. 31, 1997, the daily rate applied to Aggressive Growth was equal to
0.044% on an annual basis.
<PAGE>
On Aug. 31, 1997, the daily rate applied to Special Income was equal to 0.048%
on an annual basis.
On Aug. 31, 1997, the daily rate applied to Moneyshare was equal to 0.030% on an
annual basis.
On Aug. 31, 1997, the daily rate applied to Managed was equal to 0.027% on an
annual basis.
On Aug. 31, 1997 the daily rate applied to Growth Dimensions was equal to 0.049%
on an annual basis.
On Aug. 31, 1997 the daily rate applied to Global Yield was equal to 0.050% on
an annual basis.
On Aug. 31, 1997 the daily rate applied to Income Advantage was equal to 0.050%
on an annual basis.
Investment Advisory Agreements
IDS Life and AEFC have an Investment Advisory Agreement under which AEFC
executes purchases and sales and negotiates brokerage as directed by IDS Life.
For its services, IDS Life pays AEFC a fee based on a percentage of each Fund's
average daily net assets for the year. This fee is equal to 0.35% for
International Equity Fund and 0.25% for each remaining fund.
AEFC has a Sub-Investment Advisory Agreement with American Express Asset
International Inc. under which AEFC pays American Express Asset International
Inc. a fee equal on an annual basis to 0.50% of International Equity Fund's
daily net assets for providing investment advice for the Fund.
For the fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $11,405,895 for its
services in connection with Capital Resource Fund. For fiscal year 1996, the
amount was $10,767,468 and for fiscal year 1995 it was $8,118,175.
For the fiscal period ended Aug. 31, 1997, IDS Life paid AEFC $7,127,500 for its
services in connection with International Equity Fund. For fiscal year 1996, the
amount was $5,895,097 and for fiscal year 1995 it was $4,947,617.
For the fiscal period ended Aug. 31, 1997, IDS Life paid AEFC $5,385,048 for its
services in connection with Aggressive Growth Fund. For fiscal year 1996, the
amount was $4,281,869 and for fiscal year 1995 it was $2,589,057.
For the fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $4,808,246 for its
services in connection with Special Income Fund. For fiscal year 1996, the
amount was $4,698,757 and for fiscal year 1995 it was $3,806,813.
For the fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $907,423 for its
services in connection with Moneyshare Fund. For fiscal year 1996, the amount
was $621,885 and for fiscal year 1995 it was $494,845.
<PAGE>
For the fiscal year end Aug. 31, 1997, IDS Life paid AEFC $10,013,842 for its
services in connection with Managed Fund. For fiscal year 1996, the amount was
$8,355,352 and for fiscal year 1995 it was $6,674,716.
For fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $1,821,928 for its
services in connection with Growth Dimensions Fund. For fiscal year 1996, the
amount was $61,016.
For fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $172,596 for its
services in connection with Global Yield Fund. For fiscal year 1996, the amount
was $7,771.
For fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $431,464 for its
services in connection with Income Advantage Fund. For fiscal year 1996, the
amount was $17,890.
Information concerning other funds advised by IDS Life or AEFC is contained in
the prospectus.
DIRECTORS AND OFFICERS
The following is a list of the Fund's directors. They serve 15 Master Trust
Portfolios and 47 IDS and IDS Life funds. All shares have cumulative voting
rights when voting on the election of directors.
H. Brewster Atwater, Jr.
Born in 1931.
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
Lynne V. Cheney'
Born in 1941.
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources and FPL Group, Inc. (holding company for Florida Power and Light).
Robert F. Froehlke+
Born in 1922.
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP. Director, the ICI
Mutual Insurance Co., Institute for Defense Analyses, Marshall Erdman and
Associates, Inc. (architectural engineering) and Public Oversight Board of the
American Institute of Certified Public Accountants.
<PAGE>
David R. Hubers+**
Born in 1943.
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC. Previously, senior vice
president, finance and chief financial officer of AEFC.
Heinz F. Hutter+'
Born in 1929.
P.O. Box 5724
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935.
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor Electronics,
Inc.
James A. Mitchell**
Born in 1941.
2900 IDS Tower
Minneapolis, MN
Executive Vice President, AEFC. Director, chairman of the board and chief
executive officer, IDS Life.
William R. Pearce+*
Born in 1927.
901 S. Marquette Ave.
Minneapolis, MN
Chairman of the board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
Alan K. Simpson'
Born in 1931.
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, Pacific Corp. (electric power).
<PAGE>
Edson W. Spencer+
Born in 1926.
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation
(forest products). Member of International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937.
2900 IDS Tower
Minneapolis, MN
Senior vice president AEFC.
Wheelock Whitney+
Born in 1926.
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934.
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company
(air cleaners & mufflers) and General Mills, Inc.
(consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer of the funds.
** Interested person by reason of being an officer, director, employee and/or
shareholder of AEFC or American Express.
The board also has appointed officers who are responsible for day-to-day
business decisions based on policies it has established.
In addition to Mr. Pearce, who is chairman, and Mr. Thomas, who is president,
the fund's other officer is:
Leslie L. Ogg
Born in 1938.
901 S. Marquette Ave.
Minneapolis, MN
<PAGE>
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the Funds.
Officers who also are officers and/or employees of AEFC:
Peter J. Anderson
Born in 1942.
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the Funds.
Melinda S. Urion
Born in 1953.
IDS Tower 10
Minneapolis, MN
Director, senior vice president and chief financial officer of AEFC. Director,
Executive vice president and controller of IDS Life Insurance Company. Treasurer
for the Funds.
Members of the board who are not officers of the Fund or of AEFC receive an
annual fee of $3,200 for IDS Life Capital Resource Fund, $1,500 for IDS Life
International Equity Fund and IDS Life Aggressive Growth Fund, $1,400 for IDS
Life Special Income Fund, $200 for IDS Life Moneyshare Fund, $2,600 for IDS Life
Managed Fund and $100 for IDS Life Growth Dimensions Fund, IDS Life Global Yield
Fund and IDS Life Income Advantage Fund. The Chair of the Contracts Committee
receives an additional $90. Board Members receive a $50 per day attendance fee
for board meetings. The attendance fee for meetings of the Contracts and
Investment Review Committee is $50; for meetings of the Audit Committee and
Personnel Committee $25 and for traveling from out-of-state $8. Expenses for
attending meetings are reimbursed.
The Fund pays no fees or expenses to board members until the assets of the Fund
reach $20 million.
During the fiscal year that ended Aug. 31, 1997, the members of the board, for
attending up to 32 meetings, received the following compensation, in total, from
all funds in the IDS MUTUAL FUND GROUP.
<PAGE>
Life Capital Resource
<TABLE>
<CAPTION>
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $3,331 $0 $0 $ 83,100
(part of year) 4,097 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 4,131 0 0 103,800
Heinz F. Hutter 4,166 0 0 105,500
Anne P. Jones 4,383 0 0 110,800
Melvin R. Laird 4,113 0 0 97,800
Alan K. Simpson 2,670 0 0 62,400
(part of year)
Edson W. Spencer 4,527 0 0 127,000
Wheelock Whitney 4,216 0 0 108,700
C. Angus Wurtele 4,241 0 0 109,900
Life International Equity
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
H. Brewster Atwater, $1,965 $0 $0 $83,100
Jr.
(part of year) 2,330 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 2,427 0 0 103,800
Heinz F. Hutter 2,462 0 0 105,500
Anne P. Jones 2,585 0 0 110,800
Melvin R. Laird 2,346 0 0 97,800
Alan K. Simpson 1,524 0 0 62,400
(part of year)
Edson W. Spencer 2,824 0 0 127,000
Wheelock Whitney 2,512 0 0 108,700
C. Angus Wurtele 2,537 0 0 109,900
Life Aggressive Growth
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
H. Brewster Atwater, $1,965 $0 $0 $83,100
Jr.
(part of year) 2,317 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 2,415 0 0 103,800
Heinz F. Hutter 2,450 0 0 105,500
Anne P. Jones 2,572 0 0 110,800
Melvin R. Laird 2,333 0 0 97,800
Alan K. Simpson 1,524 0 0 62,400
(part of year)
Edson W. Spencer 2,811 0 0 127,000
Wheelock Whitney 2,500 0 0 108,700
C. Angus Wurtele 2,525 0 0 109,900
</TABLE>
<PAGE>
Life Special Income
<TABLE>
<CAPTION>
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $1,881 $0 $0 $83,100
(part of year) 2,246 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 2,347 0 0 103,800
Heinz F. Hutter 2,382 0 0 105,500
Anne P. Jones 2,498 0 0 110,800
Melvin R. Laird 2,262 0 0 97,800
Alan K. Simpson 1,453 0 0 62,400
(part of year)
Edson W. Spencer 2,743 0 0 127,000
Wheelock Whitney 2,432 0 0 108,700
C. Angus Wurtele 2,457 0 0 109,900
Life Moneyshare
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
H. Brewster Atwater, $ 869 $0 $0 $83,100
Jr.
(part of year) 953 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 1,102 0 0 103,800
Heinz F. Hutter 1,137 0 0 105,500
Anne P. Jones 1,182 0 0 110,800
Melvin R. Laird 969 0 0 97,800
Alan K. Simpson 593 0 0 62,400
(part of year)
Edson W. Spencer 1,498 0 0 127,000
Wheelock Whitney 1,187 0 0 108,700
C. Angus Wurtele 1,212 0 0 109,900
Life Managed
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
H. Brewster Atwater, $2,757 $0 $0 $83,100
Jr.
(part of year) 3,383 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 3,445 0 0 103,800
Heinz F. Hutter 3,480 0 0 105,500
Anne P. Jones 3,655 0 0 110,800
Melvin R. Laird 3,399 0 0 97,800
Alan K. Simpson 2,169 0 0 62,400
(part of year)
Edson W. Spencer 3,841 0 0 127,000
Wheelock Whitney 3,530 0 0 108,700
C. Angus Wurtele 3,555 0 0 109,900
</TABLE>
<PAGE>
Growth Dimensions
<TABLE>
<CAPTION>
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $784 $0 $0 $83,100
(part of year) 839 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 993 0 0 103,800
Heinz F. Hutter 1,018 0 0 105,500
Anne P. Jones 1,066 0 0 110,800
Melvin R. Laird 856 0 0 97,800
Alan K. Simpson 522 0 0 62,400
(part of year)
Edson W. Spencer 1,379 0 0 127,000
Wheelock Whitney 1,068 0 0 108,700
C. Angus Wurtele 1,093 0 0 109,900
Global Yield
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
H. Brewster Atwater, $784 $0 $0 $83,100
Jr.
(part of year) 839 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 993 0 0 103,800
Heinz F. Hutter 1,018 0 0 105,500
Anne P. Jones 1,066 0 0 110,800
Melvin R. Laird 856 0 0 97,800
Alan K. Simpson 522 0 0 62,400
(part of year)
Edson W. Spencer 1,379 0 0 127,000
Wheelock Whitney 1,068 0 0 108,700
C. Angus Wurtele 1,093 0 0 109,900
Income Advantage
Board compensation
Pension or Total Cash
Aggregate Retirement benefits Estimated annual compensation from
Board member compensation from accrued as fund benefit on the IDS MUTUAL FUND
the fund expenses* retirement GROUP
- -------------------------------------------------------------------------------------------------------------
H. Brewster Atwater, $784 $0 $0 $83,100
Jr.
(part of year) 839 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 993 0 0 103,800
Heinz F. Hutter 1,018 0 0 105,500
Anne P. Jones 1,066 0 0 110,800
Melvin R. Laird 856 0 0 97,800
Alan K. Simpson 522 0 0 62,400
(part of year)
Edson W. Spencer 1,379 0 0 127,000
Wheelock Whitney 1,068 0 0 108,700
C. Angus Wurtele 1,093 0 0 109,900
On Aug. 31, 1997, the Fund's directors and officers as a group owned less than 1% of the outstanding
shares.
</TABLE>
<PAGE>
*The Fund had a retirement plan for its independent board members. The plan was
terminated April 30, 1996.
CUSTODIAN
The Funds' securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN, 55402-2307, through
a custodian agreement. The custodian is permitted to deposit some or all of its
securities with sub-custodians or in central depository systems as allowed by
federal law.
INDEPENDENT AUDITORS
The Funds' financial statements contained in their Annual Report, as of and for
the year ended Aug. 31, 1997, are audited by independent auditors, KPMG Peat
Marwick LLP, 4200 Norwest Center, 90 S. Seventh St., Minneapolis, MN 55402-3900.
IDS Life has agreed that it will send a copy of this report and the Semiannual
Report to every annuity contract owner having an interest in the funds. The
independent auditors also provide other accounting and tax-related services as
requested by the Funds.
FINANCIAL STATEMENTS
The Independent Auditors' Report and Financial Statements, including Notes to
the Financial Statements and the Schedule of Investments in Securities,
contained in the 1997 Annual Report to the shareholders of Capital Resource,
International Equity, Aggressive Growth, Special Income, Moneyshare, Managed,
Growth Dimensions, Global Yield and Income Advantage Funds, pursuant to Section
30(d) of the Investment Company Act of 1940, as amended, are hereby incorporated
in this Statement of Additional Information by reference. No other portion of
the Annual Report, however, is incorporated by reference.
PROSPECTUS
The prospectus dated Oct. 30, 1997, is hereby incorporated in this Statement of
Additional Information by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS AND ADDITIONAL INFORMATION ON INVESTMENT
POLICIES FOR INVESTMENTS OF CAPITAL RESOURCE, SPECIAL INCOME, GLOBAL YIELD AND
INCOME ADVANTAGE FUNDS
Bond ratings concern the quality of the issuing corporation. They are not an
opinion of the market value of the security. Such ratings are opinions on
whether the principal and interest will be repaid when due. A security's rating
may change which could affect its price. Ratings by Moody's Investors Service,
Inc. are Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C and D. Ratings by Standard & Poor's
Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D.
Aaa/AAA - Judged to be of the best quality and carry the smallest degree of
investment risk. Interest and principal are secure.
Aa/AA - Judged to be high-grade although margins of protection for interest and
principal may not be quite as good as Aaa or AAA rated securities.
A - Considered upper-medium grade. Protection for interest and principal is
deemed adequate but may be susceptible to future impairment.
Baa/BBB - Considered medium-grade obligations. Protection for interest and
principal is adequate over the short-term; however, these obligations may have
certain speculative characteristics.
Ba/BB - Considered to have speculative elements. The protection of interest and
principal payments may be very moderate.
B - Lack characteristics of the desirable investments. There may be small
assurance over any long period of time of the payment of interest and principal.
Caa/CCC - Are of poor standing. Such issues may be in default or there may be
risk with respect to principal or interest.
Ca/CC - Represent obligations that are highly speculative. Such issues are often
in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These securities have
major risk exposures to default.
D - Are in payment default. The D rating is used when interest payments or
principal payments are not made on the due date.
Non-rated securities will be considered for investment when they possess a risk
comparable to that of rated securities consistent with the Fund's objectives and
policies. When assessing the risk involved in each non-rated security, the Fund
will consider the financial condition of the issuer or the protection afforded
by the terms of the security.
<PAGE>
Definitions of Zero-Coupon and Pay-In-Kind Securities
A zero-coupon security is a security that is sold at a deep discount from its
face value and makes no periodic interest payments. The buyer of such a security
receives a rate of return by gradual appreciation of the security, which is
redeemed at face value on the maturity date.
A pay-in-kind security is a security in which the issuer has the option to make
interest payments in cash or in additional securities. The securities issued as
interest usually have the same terms, including maturity date, as the
pay-in-kind securities.
<PAGE>
APPENDIX B
FOREIGN CURRENCY TRANSACTIONS FOR INVESTMENTS OF ALL FUNDS EXCEPT MONEYSHARE
Since investments in foreign companies usually involve currencies of foreign
countries, and since the Fund may hold cash and cash-equivalent investments in
foreign currencies, the value of the Fund's assets as measured in U.S. dollars
may be affected favorably or unfavorably by changes in currency exchange rates
and exchange control regulations. Also, the Fund may incur costs in connection
with conversions between various currencies.
Spot Rates and Forward Contracts. The Fund conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts) as a hedge against fluctuations in future foreign exchange
rates. A forward contract involves an obligation to buy or sell a specific
currency at a future date, which may be any fixed number of days from the
contract date, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements. No commissions are charged at any stage
for trades.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment in dollars. By entering into
a forward contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between different
currencies from the date the security is purchased or sold to the date on which
payment is made or received or when the dividend or interest is actually
received.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may suffer a substantial
decline against another currency. It may enter into a forward contract to sell,
for a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency. The precise matching of forward contract amounts and the value
of securities involved generally will not be possible since the future value of
such securities in foreign currencies more than likely will change between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency.
The Fund will designate cash or securities in an amount equal to the value of
the Fund's total assets committed to consummating forward contracts entered into
under the second circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a daily basis so
that the value of the cash or securities will equal the amount of the Fund's
commitments on such contracts.
<PAGE>
At maturity of a forward contract, the Fund may either sell the portfolio
security and make delivery of the foreign currency or 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
buy, on the same maturity date, the same amount of foreign currency.
If the 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 there has been movement in forward contract prices. If the Fund engages
in an offsetting transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices decline between the
date the Fund enters into a forward contract for selling foreign currency and
the date it enters into an offsetting contract for purchasing the foreign
currency, the fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to buy.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to buy exceeds the price of the currency it
has agreed to sell.
It is impossible to forecast what the market value of portfolio securities will
be at the expiration of a contract. Accordingly, it may be necessary for the
Fund to buy additional foreign currency on the spot market (and bear the expense
of such purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange that can be achieved at some point in time. Although such
forward contracts tend to minimize the risk of loss due to a decline in value of
hedged currency, they tend to limit any potential gain that might result should
the value of such currency increase.
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Fund may buy put and write covered call
options on foreign currencies for hedging purposes. For example, a decline in
the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may buy put options
on the foreign currency. If the value of the currency does decline, the Fund
will have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
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As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options which
would require it to forego a portion or all of the benefits of advantageous
changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates,
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the diminution in value of portfolio securities will be
fully or partially offset by the amount of the premium received.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to buy or sell
the underlying currency at a loss which may not be offset by the amount of the
premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise have
been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting the fund to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
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The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in certain foreign countries
for the purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options
The Fund may enter into currency futures contracts to sell currencies. It also
may buy put and write covered call options on currency futures. Currency futures
contracts are similar to currency forward contracts, except that they are traded
on exchanges (and have margin requirements) and are standardized as to contract
size and delivery date. Most currency futures call for payment of delivery in
U.S. dollars. The Fund may use currency futures for the same purposes as
currency forward contracts, subject to CFTC limitations, including the
limitation on the percentage of assets that may be used, described in the
prospectus. All futures contracts are aggregated for purposes of the percentage
limitations. Global Yield and Income Advantage funds may enter into currency
futures contracts to buy currencies.
Currency futures and options on futures values can be expected to correlate with
exchange rates, but will not reflect other factors that may affect the values of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Fund's investments
denominated in that currency over time.
The Fund will not use leverage in its options and futures strategies. The Fund
will hold securities or other options or futures positions whose values are
expected to offset its obligations. The Fund will not enter into an option or
futures position that exposes the fund to an obligation to another party unless
it owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient to cover its
potential obligations.
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APPENDIX C
DESCRIPTION OF MONEY MARKET SECURITIES
Certificates of Deposit -- A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited, plus interest, on the date
specified on the certificate.
Time Deposit -- A time deposit is a non-negotiable deposit in a bank for a fixed
period of time.
Bankers' Acceptances -- A bankers' acceptance arises from a short-term credit
arrangement designed to enable businesses to obtain funds to finance commercial
transactions. It is a time draft drawn on a bank by an exporter or an importer
to obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date.
Commercial Paper -- Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from one day to nine
months.
Commercial paper rated A by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are better than the industry average.
Long-term senior debt rating is "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowances made for unusual circumstances. Typically, the
issuer's industry is well established, the issuer has a strong position within
its industry and the reliability and quality of management is unquestioned.
Issuers rated A are further rated by use of numbers 1, 2 and 3 to denote
relative strength within this highest classification.
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Services Inc. Issuers rated Prime are further rated by use of numbers
1, 2 and 3 to denote relative strength within this highest classification. Among
the factors considered by Moody's in assigning ratings for an issuer are the
following: (1) management; (2) economic evaluation of the industry and an
appraisal of speculative type risks which may be inherent in certain areas; (3)
competition and customer acceptance of products; (4) liquidity; (5) amount and
quality of long-term debt; (6) ten year earnings trends; (7) financial strength
of a parent company and the relationships which exist with the issuer; and (8)
recognition by management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such obligations.
Letters of Credit -- A letter of credit is a short-term note issued in bearer
form with a bank letter of credit which provides that the bank pay to the bearer
the amount of the note upon presentation.
U.S. Treasury Bills -- Treasury bills are issued with maturities of any period
up to one year. Three-month and six-month bills are currently offered by the
Treasury on 13-week and 26-week cycles respectively and are auctioned each week
by the Treasury. Treasury bills are issued in book entry form and are sold only
on a discount basis, i.e. the
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difference between the purchase price and the maturity value constitutes
interest income for the investor. If they are sold before maturity, a portion of
the income received may be a short-term capital gain.
U.S. Government Agency Securities -- Federal agency securities are debt
obligations which principally result from lending programs of the U.S.
government. Housing and agriculture have traditionally been the principal
beneficiaries of Federal credit programs, and agencies involved in providing
credit to agriculture and housing account for the bulk of the outstanding agency
securities.
Repurchase Agreements -- A repurchase agreement involves the acquisition of
securities by the Portfolio, with the concurrent agreement by a bank (or
securities dealer if permitted by law or regulation), to reacquire the
securities at the portfolio's cost, plus interest, within a specified time. The
Portfolio thereby receives a fixed rate of return on this investment, one that
is insulated from market and rate fluctuations during the holding period. In
these transactions, the securities acquired by the Portfolio have a total value
equal to or in excess of the value of the repurchase agreement and are held by
the Portfolio's custodian until required. Pursuant to guidelines established by
the Fund's board of directors, the creditworthiness of the other party to the
transaction is considered and the value of those securities held as collateral
is monitored to ensure that such value is maintained at the required level.
If AEFC becomes aware that a security owned by a Fund is downgraded below the
second highest rating, AEFC will either sell the security or recommend to the
Fund's board of directors why it should not be sold.
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APPENDIX D
OPTIONS AND STOCK INDEX FUTURES CONTRACTS FOR INVESTMENTS OF CAPITAL RESOURCE,
INTERNATIONAL EQUITY, AGGRESSIVE GROWTH, MANAGED, GROWTH DIMENSIONS AND GLOBAL
YIELD FUNDS
Capital Resource, International Equity, Aggressive Growth, Managed, Growth
Dimensions and Global Yield funds may buy or write options traded on any U.S. or
foreign exchange or in the over-the-counter market. The Fund may enter into
stock index futures contracts traded on any U.S. or foreign exchange. The Fund
also may buy or write put and call options on these futures and on stock
indexes. Options in the over-the-counter market will be purchased only when the
investment manager believes a liquid secondary market exists for the options and
only from dealers and institutions the investment manager believes present a
minimal credit risk. Some options are exercisable only on a specific date. In
that case, or if a liquid secondary market does not exist, the Fund could be
required to buy or sell securities at disadvantageous prices, thereby incurring
losses. Managed and Global Yield Funds also may enter into interest rate futures
contracts - see Appendix E.
OPTIONS. An option is a contract. A person who buys a call option for a security
has the right to buy the security at a set price for the length of the contract.
A person who sells a call option is called a writer. The writer of a call option
agrees to sell the security at the set price when the buyer wants to exercise
the option, no matter what the market price of the security is at that time. A
person who buys a put option has the right to sell a security at a set price for
the length of the contract. A person who writes a put option agrees to buy the
security at the set price if the purchaser wants to exercise the option, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition, the
buyer generally pays a broker a commission. The writer receives a premium, less
another commission, at the time the option is written. The cash received is
retained by the writer whether or not the option is exercised. A writer of a
call option may have to sell the security for a below-market price if the market
price rises above the exercise price. A writer of a put option may have to pay
an above-market price for the security if its market price decreases below the
exercise price. The risk of the writer is potentially unlimited, unless the
option is covered.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options and futures contracts may benefit a fund and its shareholders by
improving the fund's liquidity and by helping to stabilize the value of its net
assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. They also may
be used for investment. Options are used as a trading technique to take
advantage of any disparity between the price of the underlying security in the
securities market and its price on the options market. It is anticipated the
trading technique will be utilized only to effect a transaction when the price
of the security plus the option price will be as good or better than the price
at which the security could be bought or sold directly. When the option is
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purchased, a fund pays a premium and a commission. It then pays a second
commission on the purchase or sale of the underlying security when the option is
exercised. For record keeping and tax purposes, the price obtained on the
purchase of the underlying security will be the combination of the exercise
price, the premium and both commissions. When using options as a trading
technique, commissions on the option will be set as if only the underlying
securities were traded.
Put and call options also may be held by a fund for investment purposes. Options
permit a fund to experience the change in the value of a security with a
relatively small initial cash investment. The risk a fund assumes when it buys
an option is the loss of the premium. To be beneficial to a fund, the price of
the underlying security must change within the time set by the option contract.
Furthermore, the change must be sufficient to cover the premium paid, the
commissions paid both in the acquisition of the option and in a closing
transaction or in the exercise of the option and subsequent sale (in the case of
a call) or purchase (in the case of a put) of the underlying security. Even
then, the price change in the underlying security does not ensure a profit since
prices in the option market may not reflect such a change.
Writing covered options. Each Fund will write covered options when it feels it
is appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on the basis of
investment considerations consistent with each Fund's goal.
'All options written by a Fund will be covered. For covered call options, if a
decision is made to sell the security, each Fund will attempt to terminate the
option contract through a closing purchase transaction.
'Each Fund will deal only in standard option contracts traded on national
securities exchanges or those that may be quoted on NASDAQ (a system of price
quotations developed by the National Association of Securities Dealers, Inc.)
'Each Fund will write options only as permitted under applicable laws or
regulations, such as those that limit the amount of total assets subject to the
options. Some regulations also affect the Custodian. When a covered option is
written, the Custodian segregates the underlying securities, and issues a
receipt. There are certain rules regarding banks issuing such receipts that may
restrict the amount of covered call options written. Furthermore, each fund is
limited to pledging not more than 15% of the cost of its total assets.
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains. Since each Fund is taxed as a regulated
investment company under the Internal Revenue Code, any gains on options and
other securities held less than three months must be limited to less than 30% of
its annual gross income.
If a covered call option is exercised, the security is sold by the Fund. The
premium received upon writing the option is added to the proceeds received from
the sale of the security. The Fund will recognize a capital gain or loss based
upon the difference between the proceeds and the security's basis. Premiums
received from writing outstanding options are included as a deferred credit in
the Statement of Assets and Liabilities and adjusted daily to the current market
value.
<PAGE>
Options on many securities are listed on options exchanges. If a Fund writes
listed options, it will follow the rules of the options exchange. The Custodian
will segregate the underlying securities and issue a receipt. There are certain
rules regarding issuing such receipts that may restrict the amount of covered
call options written. Further the Funds are limited to pledging not more than
15% of the cost of their total assets. Options are valued at the close of the
New York Stock Exchange. An option listed on a national exchange or NASDAQ will
be valued at the last-quoted sales price or, if such a price is not readily
available, at the mean of the last bid and asked prices.
STOCK INDEX FUTURES CONTRACTS. Stock index futures contracts are commodity
contracts listed on commodity exchanges. They currently include contracts on the
Standard & Poor's 500 Stock Index (S&P 500 Index) and other broad stock market
indexes such as the New York Stock Exchange Composite Stock Index and the Value
Line Composite Stock Index, as well as narrower sub-indexes such as the S&P 100
Energy Stock Index and the New York Stock Exchange Utilities Stock Index. A
stock index assigns relative values to common stocks included in the index and
the index fluctuates with the value of the common stocks so included.
A futures contract is a legal agreement between a buyer or seller and the
clearinghouse of a futures exchange in which the parties agree to make a cash
settlement on a specified future date in an amount determined by the stock index
on the last trading day of the contract. The amount is a specified dollar amount
(usually $100 or $500) multiplied by the difference between the index value on
the last trading day and the value on the day the contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks, most of
which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those stocks. In the case of S&P
500 Index futures contracts, the specified multiple is $500. Thus, if the value
of the S&P 500 Index were 150, the value of one contract would be $75,000 (150 x
$500). Unlike other futures contracts, a stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract. For
example, excluding any transaction costs, if a fund enters into one futures
contract to buy the S&P 500 Index at a specified future date at a contract value
of 150 and the S&P 500 Index is at 154 on that future date, the fund will gain
$500 x (154-150) or $2,000. If the fund enters into one futures contract to sell
the S&P 500 Index at a specified future date at a contract value of 150 and the
S&P 500 Index is at 152 on that future date, the fund will lose $500 x (152-150)
or $1,000.
Unlike the purchase or sale of an equity security, no price would be paid or
received by the Fund upon entering into stock index futures contracts. However,
the Fund would be required to deposit with its custodian, in a segregated
account in the name of the futures broker, an amount of cash or U.S. Treasury
bills equal to approximately 5% of the contract value. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions in that futures contract
margin does not involve borrowing funds by the Fund to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good-faith
deposit on the contract that is returned to the fund upon termination of the
contract, assuming all contractual obligations have been satisfied.
<PAGE>
Subsequent payments, called variation margin, to and from the broker would be
made on a daily basis as the price of the underlying stock index fluctuates,
making the long and short positions in the contract more or less valuable, a
process known as marking to market. For example, when a fund enters into a
contract in which it benefits from a rise in the value of an index and the price
of the underlying stock index has risen, the fund will receive from the broker a
variation margin payment equal to that increase in value. Conversely, if the
price of the underlying stock index declines, the fund would be required to make
a variation margin payment to the broker equal to the decline in value.
How These Funds Would Use Stock Index Futures Contracts. The Funds intend to use
stock index futures contracts and related options for hedging and not for
speculation. Hedging permits a fund to gain rapid exposure to or protect itself
from changes in the market. For example, a fund may find itself with a high cash
position at the beginning of a market rally. Conventional procedures of
purchasing a number of individual issues entail the lapse of time and the
possibility of missing a significant market movement. By using futures
contracts, the Fund can obtain immediate exposure to the market and benefit from
the beginning stages of a rally. The buying program can then proceed and once it
is completed (or as it proceeds), the contracts can be closed. Conversely, in
the early stages of a market decline, market exposure can be promptly offset by
entering into stock index futures contracts to sell units of an index and
individual stocks can be sold over a longer period under cover of the resulting
short contract position.
A Fund may enter into contracts with respect to any stock index or sub-index. To
hedge the Fund's portfolio successfully, however, the fund must enter into
contracts with respect to indexes or sub-indexes whose movements will have a
significant correlation with movements in the prices of the Fund's individual
portfolio securities.
Special Risks of Transactions in Stock Index Futures Contracts.
1. Liquidity. Each Fund may elect to close some or all of its contracts prior to
expiration. The purpose of making such a move would be to reduce or eliminate
the hedge position held by the fund. The Fund may close its positions by taking
opposite positions. Final determinations of variation margin are then made,
additional cash as required is paid by or to the Fund, and the Fund realizes a
gain or a loss.
Positions in stock index futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. For
example, futures contracts transactions can currently be entered into with
respect to the S&P 500 Stock Index on the Chicago Mercantile Exchange, the New
York Stock Exchange Composite Stock Index on the New York Futures Exchange and
the Value Line Composite Stock Index on the Kansas City Board of Trade.
Although the Funds intend to enter into futures contracts only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a liquid secondary market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures contract position, and in the event of adverse price movements, the
Fund would have to make daily cash payments of variation margin. Such price
movements, however, will be offset all or in part by the price movements of the
securities subject to the hedge. Of course, there is no guarantee the price of
the securities will correlate with the price movements in the futures contract
and thus provide an offset to losses on a futures contract.
<PAGE>
2. Hedging Risks. There are several risks in using stock index futures contracts
as a hedging device. One risk arises because the prices of futures contracts may
not correlate perfectly with movements in the underlying stock index due to
certain market distortions. First, all participants in the futures market are
subject to initial margin and variation margin requirements. Rather than making
additional variation margin payments, investors may close the contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, the margin requirements in the futures market
are lower than margin requirements in the securities market, and as a result the
futures market may attract more speculators than does the securities market.
Increased participation by speculators in the futures market also may cause
temporary price distortions. Because of price distortion in the futures market
and because of imperfect correlation between movements in stock indexes and
movements in prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a short
period.
Another risk arises because of imperfect correlation between movements in the
value of the stock index futures contracts and movements in the value of
securities subject to the hedge. If this occurred, a fund could lose money on
the contracts and also experience a decline in the value of its portfolio
securities. While this could occur, the investment manager believes that over
time the value of the Fund's portfolio will tend to move in the same direction
as the market indexes and will attempt to reduce this risk, to the extent
possible, by entering into futures contracts on indexes whose movements it
believes will have a significant correlation with movements in the value of the
fund's portfolio securities sought to be hedged. It is also possible that if the
Fund has hedged against a decline in the value of the stocks held in its
portfolio and stock prices increase instead, the Fund will lose part or all of
the benefit of the increased value of its stock which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Options on stock index futures
contracts are similar to options on stock except that options on futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a stock index futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. If the option is
closed instead of exercised, the holder of the option receives an amount that
represents the amount by which the market price of the contract 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. If the option does not appreciate in value prior
to the exercise date, the fund will suffer a loss of the premium paid.
OPTIONS ON STOCK INDEXES. Options on stock indexes are securities traded on
national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level. Such options would be used in the same manner
as options on futures contracts.
SPECIAL RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND
OPTIONS ON STOCK INDEXES. As with options on stocks, the holder of an option on
a stock index futures contract or on a stock index
<PAGE>
may terminate a position by selling an option covering the same contract or
index and having the same exercise price and expiration date. The ability to
establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. The funds will not
purchase options unless the market for such options has developed sufficiently,
so that the risks in connection with options are not greater than the risks in
connection with stock index futures contracts transactions themselves. Compared
to using futures contracts, purchasing options involves less risk to the funds
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). There may be circumstances, however, when using an option
would result in a greater loss to a fund than using a futures contract, such as
when there is no movement in the level of the stock index.
TAX TREATMENT. As permitted under federal income tax laws, each Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred by entering into futures contracts and losses on underlying
securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and stock indexes is currently unclear, although the Funds'
tax advisers currently believe marking to market is not required. Depending on
developments, a fund may seek Internal Revenue Service (IRS) rulings clarifying
questions concerning such treatment. Certain provisions of the Internal Revenue
Code may also limit a fund's ability to engage in futures contracts and related
options transactions. For example, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its assets must consist of cash,
government securities and other securities, subject to certain diversification
requirements. Less than 30% of its gross income must be derived from sales of
securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements. In order to avoid realizing a gain within the
three-month period, a fund may be required to defer closing out a contract
beyond the time when it might otherwise be advantageous to do so. The fund also
may be restricted in purchasing put options for the purpose of hedging
underlying securities because of applying the short sale holding period rules
with respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
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APPENDIX E
OPTIONS AND INTEREST RATE FUTURES CONTRACTS FOR INVESTMENTS OF SPECIAL INCOME,
MANAGED, GLOBAL YIELD AND INCOME ADVANTAGE FUNDS
The Funds may buy or write options traded on any U.S. or foreign exchange or in
the over-the-counter market. The Fund may enter into interest rate futures
contracts traded on any U.S. or foreign exchange. The Fund also may buy or write
put and call options on these futures. Options in the over-the-counter market
will be purchased only when the investment manager believes a liquid secondary
market exists for the options and only from dealers and institutions the
investment manager believes present a minimal credit risk. Some options are
exercisable only on a specific date. In that case, or if a liquid secondary
market does not exist, the fund could be required to buy or sell securities at
disadvantageous prices, thereby incurring losses. Managed and Global Yield Funds
also may enter into stock index futures contracts - see Appendix D.
OPTIONS. An option is a contract. A person who buys a call option for a security
has the right to buy the security at a set price for the length of the contract.
A person who sells a call option is called a writer. The writer of a call option
agrees to sell the security at the set price when the buyer wants to exercise
the option, no matter what the market price of the security is at that time. A
person who buys a put option has the right to sell a stock at a set price for
the length of the contract. A person who writes a put option agrees to buy the
security at the set price if the purchaser wants to exercise the option, no
matter what the market value of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash (in the case of a put) that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In addition the
buyer generally pays a broker a commission. The writer receives a premium, less
another commission, at the time the option is written. The cash received is
retained by the writer whether or not the option is exercised. A writer of a
call option may have to sell the security for a below-market price if the market
price rises above the exercise price. A writer of a put option may have to pay
an above-market price for the security if its market price decreases below the
exercise price.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options and futures contracts may benefit a fund and its shareholders by
improving the fund's liquidity and by helping to stabilize the value of its net
assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. They also may
be used for investment. Options are used as a trading technique to take
advantage of any disparity between the price of the underlying security in the
securities market and its price on the options market. It is anticipated the
trading technique will be utilized only to effect a transaction when the price
of the security plus the option price will be as good or better than the price
at which the security could be bought or sold directly. When the option is
purchased, the fund pays a premium and a commission. It then pays a second
commission on the purchase or sale of the underlying security when the option is
exercised. For record keeping and tax purposes, the price obtained on the
purchase of the
<PAGE>
underlying security will be the combination of the exercise price, the premium
and both commissions. When using options as a trading technique, commissions on
the option will be set as if only the underlying securities were traded.
Put and call options also may be held by a fund for investment purposes. Options
permit the fund to experience the change in the value of a security with a
relatively small initial cash investment. The risk the fund assumes when it buys
an option is the loss of the premium. To be beneficial to the fund, the price of
the underlying security must change within the time set by the option contract.
Furthermore, the change must be sufficient to cover the premium paid, the
commissions paid both in the acquisition of the option and in a closing
transaction or in the exercise of the option and sale (in the case of a call) or
purchase (in the case of a put) of the underlying security. Even then the price
change in the underlying security does not ensure a profit since prices in the
option market may not reflect such a change.
Writing covered options. A fund will write covered options when it feels it is
appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on the basis of
investment considerations consistent with the fund's goal.
'All options written by the fund will be covered. For covered call options if a
decision is made to sell the security, the fund will attempt to terminate the
option contract through a closing purchase transaction.
'The fund will write options only as permitted under applicable laws or
regulations, such as those that limit the amount of total assets subject to the
options.
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains. Since a fund is taxed as a regulated
investment company under the Internal Revenue Code, any gains on options and
other securities held less than three months must be limited to less than 30% of
its annual gross income.
If a covered call option is exercised, the security is sold by the fund. The
fund will recognize a capital gain or loss based upon the difference between the
proceeds and the security's basis.
Options on many securities are listed on options exchanges. If a fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange or NASDAQ will be valued at the last-quoted sales price or, if
such a price is not readily available, at the mean of the last bid and asked
prices.
FUTURES CONTRACTS. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. They have been established
by boards of trade which have been designated contract markets by the Commodity
Futures Trading Commission (CFTC). Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange, and the boards of
trade, through their clearing corporations, guarantee performance of the
contracts. Currently, there are futures contracts based on such debt securities
as long-term U.S. Treasury bonds, Treasury notes, GNMA modified pass-through
mortgage-backed securities, three-month
<PAGE>
U.S. Treasury bills and bank certificates of deposit. While futures contracts
based on debt securities do provide for the delivery and acceptance of
securities, such deliveries and acceptances are very seldom made. Generally, the
futures contract is terminated by entering into an offsetting transaction. An
offsetting transaction for a futures contract sale is effected by the fund
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and same delivery date. If the price in
the sale exceeds the price in the offsetting purchase, the fund immediately is
paid the difference and realizes a gain. If the offsetting purchase price
exceeds the sale price, the fund pays the difference and realizes a loss.
Similarly, closing out a futures contract purchase is effected by the fund
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the fund realizes a gain, and if the offsetting sale price is
less than the purchase price, the fund realizes a loss. At the time a futures
contract is made, a good-faith deposit called initial margin is set up within a
segregated account at the fund's custodian bank. The initial margin deposit is
approximately 1.5% of a contract's face value. Daily thereafter, the futures
contract is valued and the payment of variation margin is required so that each
day the fund would pay out cash in an amount equal to any decline in the
contract's value or receive cash equal to any increase. At the time a futures
contract is closed out, a nominal commission is paid, which is generally lower
than the commission on a comparable transaction in the cash markets.
The purpose of a futures contract, in the case of a portfolio holding long-term
debt securities, is to gain the benefit of changes in interest rates without
actually buying or selling long-term debt securities. For example, if a fund
owned long-term bonds and interest rates were expected to increase, it might
enter into futures contracts to sell securities which would have much the same
effect as selling some of the long-term bonds it owned. Futures contracts are
based on types of debt securities referred to above, which have historically
reacted to an increase or decline in interest rates in a fashion similar to the
debt securities the fund owns. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of the fund's
futures contracts would increase at approximately the same rate, thereby keeping
the net asset value of the fund from declining as much as it otherwise would
have. If, on the other hand, the fund held cash reserves and interest rates were
expected to decline, the fund might enter into interest rate futures contracts
for the purchase of securities. If short-term rates were higher than long-term
rates, the ability to continue holding these cash reserves would have a very
beneficial impact on the fund's earnings. Even if short-term rates were not
higher, the fund would still benefit from the income earned by holding these
short-term investments. At the same time, by entering into futures contracts for
the purchase of securities, the fund could take advantage of the anticipated
rise in the value of long-term bonds without actually buying them until the
market had stabilized. At that time, the futures contracts could be liquidated
and the fund's cash reserves could then be used to buy long-term bonds on the
cash market. The fund could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase or by buying bonds with long maturities and selling
bonds with short maturities when interest rates are expected to decline. But by
using futures contracts as an investment tool, given the greater liquidity in
the futures market than in the cash market, it might be possible to accomplish
the same result more easily and more quickly. Successful use of futures
contracts depends on the investment manager's ability to predict the future
direction of interest rates. If the investment manager's prediction is
incorrect, the fund would have been better off had it not entered into futures
contracts.
<PAGE>
OPTIONS ON FUTURES CONTRACTS. Options give the holder a right to buy or sell
futures contracts in the future. Unlike a futures contract, which requires the
parties to the contract to buy and sell a security on a set date, an option on a
futures contract merely entitles its holder to decide on or before a future date
(within nine months of the date of issue) whether to enter into such a contract.
If the holder decides not to enter into the contract, all that is lost is the
amount (premium) paid for the option. Furthermore, because the value of the
option is fixed at the point of sale, there are no daily payments of cash to
reflect the change in the value of the underlying contract. However, since an
option gives the buyer the right to enter into a contract at a set price for a
fixed period of time, its value does change daily and that change is reflected
in the net asset value of the fund.
Risks. There are risks in engaging in each of the management tools described
above. The risk a fund assumes when it buys an option is the loss of the premium
paid for the option. Purchasing options also limits the use of monies that might
otherwise be available for long-term investments.
The risk involved in writing options on futures contracts the fund owns, or on
securities held in its portfolio, is that there could be an increase in the
market value of such contracts or securities. If that occurred, the option would
be exercised and the asset sold at a lower price than the cash market price. To
some extent, the risk of not realizing a gain could be reduced by entering into
a closing transaction. The fund could enter into a closing transaction by
purchasing an option with the same terms as the one it had previously sold. The
cost to close the option and terminate the fund's obligation, however, might be
more or less than the premium received when it originally wrote the option.
Furthermore, the fund might not be able to close the option because of
insufficient activity in the options market.
A risk in employing futures contracts to protect against the price volatility of
portfolio securities is that the prices of securities subject to futures
contracts may not correlate perfectly with the behavior of the cash prices of
the fund's portfolio securities. The correlation may be distorted because the
futures market is dominated by short-term traders seeking to profit from the
difference between a contract or security price and their cost of borrowed
funds. Such distortions are generally minor and would diminish as the contract
approached maturity.
Another risk is that the fund's investment manager could be incorrect in
anticipating as to the direction or extent of various interest rate movements or
the time span within which the movements take place. For example, if the fund
sold futures contracts for the sale of securities in anticipation of an increase
in interest rates, and interest rates declined instead, the fund would lose
money on the sale.
TAX TREATMENT. As permitted under federal income tax laws, each fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the fund being required to defer recognizing
losses incurred by entering into futures contracts and losses on underlying
securities identified as being hedged against. Federal income tax treatment of
gains or losses from transactions in options on futures contracts and indexes is
currently unclear, although the funds' tax advisers currently believe marking to
market is not required. Depending on developments, a fund may seek Internal
Revenue Service (IRS) rulings clarifying questions concerning such treatment.
Certain provisions of the Internal Revenue Code may also limit a fund's ability
to engage
<PAGE>
in futures contracts and related options transactions. For example, at the close
of each quarter of the fund's taxable year, at least 50% of the value of its
assets must consist of cash, government securities and other securities, subject
to certain diversification requirements. Less than 30% of its gross income must
be derived from sales of securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements. In order to avoid realizing a gain within the
three-month period, a fund may be required to defer closing out a contract
beyond the time when it might otherwise be advantageous to do so. The fund also
may be restricted in purchasing put options for the purpose of hedging
underlying securities because of applying the short sale holding period rules
with respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
<PAGE>
APPENDIX F
MORTGAGE-BACKED SECURITIES AND ADDITIONAL INFORMATION ON INVESTMENT POLICIES FOR
ALL FUNDS EXCEPT MONEYSHARE
GNMA Certificates
The Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. GNMA certificates are mortgage-backed securities of the modified
pass-through type, which means that both interest and principal payments
(including prepayments) are passed through monthly to the holder of the
certificate. Each certificate evidences an interest in a specific pool of
mortgage loans insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The National
Housing Act provides that the full faith and credit of the United States is
pledged to the timely payment of principal and interest by GNMA of amounts due
on these certificates. GNMA is empowered to borrow without limitation from the
U.S. Treasury, if necessary, to make such payments.
Underlying Mortgages of the Pool. Pools consist of whole mortgage loans or
participation in loans. The majority of these loans are made to purchasers of
1-4 member family homes. The terms and characteristics of the mortgage
instruments generally are uniform within a pool but may vary among pools. For
example, in addition to fixed-rate fixed-term mortgages, the Fund may purchase
pools of variable rate mortgages, growing equity mortgages, graduated payment
mortgages and other types.
All servicers apply standards for qualification to local lending institutions
which originate mortgages for the pools. Servicers also establish credit
standards and underwriting criteria for individual mortgages included in the
pools. In addition, many mortgages included in pools are insured through private
mortgage insurance companies.
Average Life of GNMA Certificates. The average life of GNMA certificates varies
with the maturities of the underlying mortgage instruments which have maximum
maturities of 30 years. The average life is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities as the
result of prepayments or refinancing of such mortgages. Such prepayments are
passed through to the registered holder with the regular monthly payments of
principal and interest.
As prepayment rates vary widely, it is not possible to accurately predict the
average life of a particular pool. It is customary in the mortgage industry in
quoting yields on a pool of 30-year mortgages to compute the yield as if the
pool were a single loan that is amortized according to a 30-year schedule and
that is prepaid in full at the end of the 12th year. For this reason, it is
standard practice to treat GNMA certificates as 30-year mortgage-backed
securities which prepay fully in the 12th year.
Calculation of Yields. Yields on pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption.
Actual pre-payment experience may cause the yield to differ from the assumed
average life yield. When mortgage rates drop, pre-payments will increase, thus
reducing the yield. Reinvestment of pre-payments may occur at higher or lower
interest rates than the
<PAGE>
original investment, thus affecting the yield of a fund. The compounding effect
from reinvestments of monthly payments received by the fund will increase the
yield to shareholders compared to bonds that pay interest semi-annually. The
yield also may be affected if the certificate was issued at a premium or
discount, rather than at par. This also applies after issuance to certificates
trading in the secondary market at a premium or discount.
"When-Issued" GNMA Certificates. Some U.S. government securities may be
purchased on a "when-issued" basis, which means that it may take as long as 45
days after the purchase before the securities are delivered to the fund. Payment
and interest terms, however, are fixed at the time the purchaser enters into the
commitment. However, the yield on a comparable GNMA certificate when the
transaction is consummated may vary from the yield on the GNMA certificate at
the time that the when-issued transaction was made. A fund does not pay for the
securities or start earning interest on them until the contractual settlement
date. When-issued securities are subject to market fluctuations and they may
affect the fund's gross assets the same as owned securities.
Market for GNMA Certificates. Since the inception of the GNMA mortgage-backed
securities program in 1970, the amount of GNMA certificates outstanding has
grown rapidly. The size of the market and the active participation in the
secondary market by securities dealers and many types of investors make the GNMA
certificates a highly liquid instrument. Prices of GNMA certificates are readily
available from securities dealers and depend on, among other things, the level
of market interest rates, the certificate's coupon rate and the prepayment
experience of the pool of mortgages underlying each certificate.
Stripped mortgage-backed securities. Generally, there are two classes of
stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO).
IOs entitle the holder to receive distributions consisting of all or a portion
of the interest on the underlying pool of mortgage loans or mortgage-backed
securities. POs entitle the holder to receive distributions consisting of all or
a portion of the principal of the underlying pool of mortgage loans or
mortgage-backed securities. The cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments (including repayments) on
the underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs. A slow
rate of principal payments may adversely affect the yield to maturity of POs. If
prepayments of principal are greater than anticipated, an investor may incur
substantial losses. If prepayments of principal are slower than anticipated, the
yield on a PO will be affected more severely than would be the case with a
traditional mortgage-backed security.
Managed, Special Income, Global Yield and Income Advantage Funds may invest in
securities called "inverse floaters". Inverse floaters are created by
underwriters using the interest payments on securities. A portion of the
interest received is paid to holders of instruments based on current interest
rates for short-term securities. What is left over, less a servicing fee, is
paid to holders of the inverse floaters. As interest rates go down, the holders
of the inverse floaters receive more income and an increase in the price for the
inverse floaters. As interest rates go up, the holders of the inverse floaters
receive less income and a decrease in the price for the inverse floaters.
<PAGE>
All Funds except Moneyshare may purchase some securities in advance of when they
are issued. Price and rate of interest are set on the date the commitments are
given but no payment is made or interest earned until the date the securities
are issued, usually within two months, but other terms may be negotiated. The
commitment requires the Fund to buy the security when it is issued so the
commitment is valued daily the same way as owning a security would be valued.
The Fund's custodian will maintain, in a segregated account, cash or liquid
high-grade debt securities that are marked to market daily and are at least
equal in value to the Fund's commitments to purchase the securities. The Fund
may sell the commitment just like it can sell a security. Frequently, the Fund
has the opportunity to sell the commitment back to the institution that plans to
issue the security and at the same time enter into a new commitment to purchase
a when-issued security in the future. For rolling its commitment forward, the
Fund realizes a gain or loss on the sale of the current commitment or receives a
fee for entering into the new commitment.
Managed, Special Income, Growth Dimensions, Global Yield and Income Advantage
Funds may purchase mortgage-backed security (MBS) put spread options and write
covered MBS call spread options. MBS spread options are based upon the changes
in the price spread between a specified mortgage-backed security and a
like-duration Treasury security. MBS spread options are traded in the OTC market
and are of short duration, typically one to two months. The portfolio would buy
or sell covered MBS call spread options in situations where mortgage-backed
securities are expected to under perform like-duration Treasury securities.
<PAGE>
APPENDIX G
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that eliminates random buy
and sell decisions. One such system is dollar-cost averaging. Dollar-cost
averaging involves building a portfolio through the investment of fixed amounts
of money on a regular basis regardless of the unit value or market condition.
This may enable an investor to smooth out the effects of the volatility of the
financial markets. By using this strategy, more units will be purchased when the
price is low and less when the price is high. As the accompanying chart
illustrates, dollar-cost averaging tends to keep the average price paid for the
units lower than the average price of units purchased, although there is no
guarantee.
While this technique does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many contract owners who
can continue investing through changing market conditions, including times when
the price of their units falls or the market declines, to accumulate units to
meet long term goals.
Dollar-cost averaging
- ------------ ------------------------ -----------------------
Regular Market Value of an Accumulation
Investment Accumulation Unit Units Acquired
- ------------ ------------------------ -----------------------
$100 $ 6 16.7
100 4 25.0
100 4 25.0
100 6 16.7
100 5 20.0
$500 $ 25 103.4
Average market price of an accumulation unit over 5 periods:
$5 ($25 divided by 5).
The average price you paid for each accumulation unit:
$4.84 ($500 divided by 103.4).
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS Life Investment Series, Inc.
IDS Life Capital Resource Fund
IDS Life International Equity Fund
IDS Life Aggressive Growth Fund
IDS Life Special Income Fund, Inc.
IDS Life Special Income Fund
IDS Life Moneyshare Fund, Inc.
IDS Life Managed Fund, Inc.
Oct. 30, 1997
This Statement of Additional Information (SAI), is not a prospectus. It should
be read together with the Funds' prospectus and the financial statements
contained in the Funds' Annual Report which, if not included with your
prospectus, may be obtained without charge.
This SAI is dated Oct. 30, 1997, and it is to be used with the Funds' prospectus
dated Oct. 30, 1997. It is also to be used with the Funds' Annual Report for the
fiscal year ended Aug. 31, 1997.
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
800-633-4003
<PAGE>
TABLE OF CONTENTS
Goals and Investment Policies See Prospectus
Additional Investment Policies p. 4
Portfolio Transactions p. 18
Brokerage Commissions Paid to Brokers
Affiliated with IDS Life p. 22
Performance Information p. 23
Valuing Each Fund's Shares p. 26
Investing in the Funds p. 28
Redeeming Shares p. 29
Taxes p. 29
Agreements with IDS Life and American Express Financial
Corporation p. 29
Directors and Officers p. 35
Custodian p. 40
Independent Auditors p. 41
Financial Statements See Annual Report and p. 41
Prospectus p. 41
Appendix A: Description of Corporate Bond Ratings and
Additional Information on Investment Policies
for Investments of Capital Resource and Special
Income Funds p. 42
Appendix B: Foreign Currency Transactions for Investments
of all Funds except Moneyshare p. 44
Appendix C: Description of Money Market Securities p. 48
Appendix D: Options and Stock Index Futures Contracts for
Investments of Capital Resource, International
Equity, Aggressive Growth and Managed Funds p. 50
Appendix E: Options and Interest Rate Futures Contracts for
Investments of Special Income and Managed Funds p. 56
<PAGE>
Appendix F: Mortgage-backed securities and Additional
Information on Investment Policies for all
Funds except Moneyshare p. 61
Appendix G: Dollar-Cost Averaging p. 64
<PAGE>
ADDITIONAL INVESTMENT POLICIES
In addition to the investment goals and policies presented in the prospectus,
each Fund has the investment policies stated below.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Capital Resource agree to
a change, Capital Resource will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the Fund,
American Express Financial Corporation (AEFC) and IDS Life Insurance Company
(IDS Life) hold more than a certain percentage of the issuer's outstanding
securities. If the holdings of all officers and directors of the Fund, AEFC and
IDS Life who own more than 0.5% of an issuer's securities are added together,
and if in total they own more than 5%, the Fund will not purchase securities of
that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
Securities and Exchange Commission (SEC), this means no more than 25% of a
Fund's total assets, based on current market value at time of purchase, can be
invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
<PAGE>
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make cash loans if the total commitment amount exceeds 5% of the fund's total
assets.
Unless changed by the board of directors, Capital Resource will not:
'Buy on margin or sell short, except the Fund may enter into stock index futures
contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
programs.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most
<PAGE>
recently published annual financial statements) in excess of $100 million (or
the equivalent in the instance of a foreign branch of a U.S. bank) at the date
of investment. Any cash-equivalent investments in foreign securities will be
subject to that Fund's limitations on foreign investments. The Fund may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial U.S. banks. A risk of a repurchase
agreement is that if the seller seeks the protection of the bankruptcy laws, the
Fund's ability to liquidate the security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of International Equity
agree to a change, International Equity will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
<PAGE>
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make a loan of any part of its assets to AEFC, to its directors and officers or
to its own directors and officers.
'Issue senior securities, except to the extent that borrowing from banks,
lending its securities, or entering into repurchase agreements or options or
futures contracts may be deemed to constitute issuing a senior security.
Unless changed by the board of directors, International Equity will not:
'Buy on margin or sell short, except the Fund may enter into stock index futures
contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
programs.
'Invest more than 5% of its net assets in securities of domestic or foreign
companies, including any predecessors, that have a record of less than three
years continuous operations.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this policy, collateral arrangements for margin deposits
on a futures contract are not deemed to be a pledge of assets.
'Invest more than 5% of its net assets in warrants.
'Invest in securities of investment companies except by purchase in the open
market where the dealer's or sponsor's profit is the regular commission. If any
such investment is ever made, not more than 10% of the Fund's net assets, at
market, will be so invested.
<PAGE>
To the extent the Fund were to make such investments, the shareholders may be
subject to duplicate advisory, administrative and distribution fees.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. On a day-to-day basis, the Fund also may maintain a portion of its
assets in currencies of countries other than the United States, Canada and the
United Kingdom. As a temporary investment, during periods of weak or declining
market values for the securities the Fund invests in, any portion of its assets
may be converted to cash (in foreign currencies or U.S. dollars) or to
short-term debt securities. The Fund may purchase short-term U.S. and Canadian
government securities. The Fund may invest in short-term obligations of the U.S.
government (and its agencies and instrumentalities) and of the Canadian and
United Kingdom governments. The Fund may purchase short-term corporate notes and
obligations rated in the top two classifications by Moody's and S&P or the
equivalent. The Fund also may purchase high grade notes and obligations of U.S.
banks (including their branches located outside of the United States and U.S.
branches of foreign banks). The Fund may invest in bank obligations including
negotiable certificates of deposit (CDs), non-negotiable fixed-time deposits,
bankers' acceptances and letters of credit of banks or savings and loan
associations having capital, surplus and undivided profits (as of the date of
its most recently published annual financial statements) in excess of $100
million (or the equivalent in the instance of a foreign branch of a U.S. bank)
at the date of investment. Any cash-equivalent investments in foreign securities
will be subject to that Fund's limitations on foreign investments. The Fund may
use repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial U.S. banks. A risk of a repurchase
agreement is that if the seller seeks the protection of the bankruptcy laws, the
Fund's ability to liquidate the security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account,
<PAGE>
cash or liquid high-grade debt securities that are marked to market daily and
are at least equal in value to the Fund's commitments to purchase the
securities. When-issued securities or forward commitments are subject to market
fluctuations and they may affect the Fund's total assets the same as owned
securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Aggressive Growth agree
to a change, Aggressive Growth will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
<PAGE>
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make a loan of any part of its assets to AEFC, to its directors and officers or
to its own directors and officers.
Unless changed by the board of directors, Aggressive Growth will not:
'Buy on margin or sell short, except the Fund may enter into stock index futures
contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
programs.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its total assets in securities of domestic or foreign
companies, including any predecessors, that have a record of less than three
years continuous operations.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this policy, collateral arrangements for margin deposits
on a futures contract are not deemed to be a pledge of assets.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, repurchase agreements with maturities greater than seven days,
non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
<PAGE>
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
Fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Special Income agree to a
change, Special Income will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
'Purchase securities of an issuer if the directors and officers of the fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings)
<PAGE>
immediately after the borrowing. The Fund will not purchase additional portfolio
securities at any time borrowing for temporary purposes exceeds 5%. The Fund has
not borrowed in the past and has no present intention to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
Unless changed by the board of directors, Special Income will not:
'Buy on margin or sell short, except the Fund may enter into interest rate
futures contracts.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
programs.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its net assets in warrants.
<PAGE>
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participations, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
Loans, loan participations and interests in securitized loan pools are interests
in amounts owed by a corporate, governmental or other borrower to a lender or
consortium of lenders (typically banks, insurance companies, investment banks,
government agencies or international agencies). Loans involve a risk of loss if
the borrower defaults or becomes insolvent and may offer less legal protection
to the fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lender or other financial
intermediary.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least
<PAGE>
equal in value to the fund's commitments to purchase the securities. When-issued
securities or forward commitments are subject to market fluctuations and they
may affect the fund's total assets the same as owned securities.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Moneyshare agree to a
change, Moneyshare will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities.
'Buy on margin or sell short.
'Invest in a company to control or manage it.
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Invest in exploration or development programs, such as oil, gas or mineral
programs.
'Purchase common stocks, preferred stocks, warrants, other equity securities,
corporate bonds or debentures, state bonds, municipal bonds, or industrial
revenue bonds. 'Make cash loans. However, the Fund does make short-term
investments which it may have an agreement with the seller to reacquire (See
Appendix C).
<PAGE>
'Invest in an investment company beyond 5% of its total assets taken at market
and then only on the open market where the dealer's or sponsor's profit is
limited to the regular commission. However, the Fund will not purchase or retain
the securities of other open-end investment companies.
'Buy or sell real estate, commodities or commodity contracts.
'Intentionally invest more than 25% of the Fund's assets taken at market value
in any particular industry, except with respect to investing in U.S. government
or agency securities and bank obligations. Investments are varied according to
what is judged advantageous under different economic conditions.
Unless changed by the board of directors, Moneyshare will not:
'Invest in securities that are not readily marketable (whether or not
registration or the filing of a notification under the Securities Act of 1933,
or the taking of similar action under other securities laws relating to the sale
of securities is required).
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired. The security acquired by the Fund in a
repurchase agreement can be any security the Fund can purchase directly and it
may have a maturity of more than 13 months.
The Fund may invest in commercial paper rated in the highest rating category by
at least two nationally recognized statistical rating organizations (or by one,
if only one rating is assigned) and in unrated paper determined by the board of
directors to be of comparable quality. The Fund also may invest up to 5% of its
assets in commercial paper receiving the second highest rating or in unrated
paper determined to be of comparable quality.
Unless the holders of a majority of the outstanding shares (as defined in the
section entitled "Voting rights" of the prospectus) of Managed agree to a
change, Managed will not:
'Invest more than 5% of its total assets, at market value, in securities of any
one company, government or political subdivision thereof, except the limitation
will not apply to investments in securities issued by the U.S. government, its
agencies or instrumentalities. Up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation.
<PAGE>
'Purchase securities of an issuer if the directors and officers of the Fund,
AEFC and IDS Life hold more than a certain percentage of the issuer's
outstanding securities. If the holdings of all officers and directors of the
Fund, AEFC and IDS Life who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the Fund will not
purchase securities of that issuer.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
the Fund's total assets (including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Fund will not purchase
additional portfolio securities at any time borrowing for temporary purposes
exceeds 5%. The Fund has not borrowed in the past and has no present intention
to borrow.
'Lend portfolio securities in excess of 30% of the Fund's net assets, at market
value. The current policy of the Fund's board of directors is to make these
loans, either long- or short-term, to broker-dealers. In making such loans, the
Fund receives the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory agencies and
approved by the board of directors. If the market price of the loaned securities
goes up, the Fund will get additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral when required or return
the securities when due. A loan will not be made unless the opportunity for
additional income outweighs the risks. During the existence of the loan, the
Fund receives cash payments equivalent to all interest or other distributions
paid on the loaned securities.
'Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it purchases
securities directly from the issuer and later resells them. It may be considered
an underwriter under securities laws when it sells restricted securities.
'Concentrate in any one industry. According to the present interpretation by the
SEC, this means no more than 25% of a Fund's total assets, based on current
market value at time of purchase, can be invested in any one industry.
'Purchase more than 10% of the outstanding voting securities of an issuer.
'Buy or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund from
buying or selling options and futures contracts or from investing in securities
or other instruments backed by, or whose value is derived from, physical
commodities.
'Buy or sell real estate, unless acquired as a result of ownership of securities
or other instruments, except this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or securities of companies
engaged in the real estate business.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets. 'Make a loan of any part of its assets to AEFC, to its directors and
officers or to its own directors and officers.
<PAGE>
'Issue senior securities, except to the extent that borrowing from banks,
lending its securities, or entering into repurchase agreements or options or
futures contracts may be deemed to constitute issuing a senior security.
Unless changed by the board of directors, Managed will not:
'Buy on margin or sell short, except it may enter into stock index futures and
interest rate futures contracts.
'Invest in a company to control or manage it.
'Invest more than 10% of its total assets in securities of investment companies.
'Invest more than 5% of its total assets in securities of domestic or foreign
companies, including any predecessors, that have a record of less than three
years continuous operations.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this restriction, collateral arrangements for margin
deposits on futures contracts are not deemed to be a pledge of assets.
'Invest more than 5% of its net assets in warrants.
'Invest in a company if its investments would result in the total holdings of
all the funds in the IDS MUTUAL FUND GROUP being in excess of 15% of that
company's issued shares.
'Invest more than 10% of the Fund's net assets in securities and derivative
instruments that are illiquid. For purposes of this policy, illiquid securities
include some privately placed securities, public securities and Rule 144A
securities that for one reason or another may no longer have a readily available
market, loans and loan participations, repurchase agreements with maturities
greater than seven days, non-negotiable fixed-time deposits and over-the-counter
options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board of directors, will consider any relevant
factors including the frequency of trades, the number of dealers willing to
purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board of directors,
will evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
<PAGE>
Loans, loan participations and interests in securitized loan pools are interests
in amounts owed by a corporate, governmental or other borrower to a lender or
consortium of lenders (typically banks, insurance companies, investment banks,
government agencies or international agencies). Loans involve a risk of loss if
the borrower defaults or becomes insolvent and may offer less legal protection
to the fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lender or other financial
intermediary.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The Fund may purchase short-term U.S. and Canadian government
securities. The Fund may purchase short-term corporate notes and obligations
rated in the top two classifications by Moody's and S&P or the equivalent. The
Fund may invest in bank obligations including negotiable certificates of deposit
(CDs), non-negotiable fixed-time deposits, bankers' acceptances and letters of
credit of banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published annual
financial statements) in excess of $100 million (or the equivalent in the
instance of a foreign branch of a U.S. bank) at the date of investment. Any
cash-equivalent investments in foreign securities will be subject to that Fund's
limitations on foreign investments. The Fund may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial U.S. banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). A Fund does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Fund's custodian
will maintain, in a segregated account, cash or liquid high-grade debt
securities that are marked to market daily and are at least equal in value to
the Fund's commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may affect the
Fund's total assets the same as owned securities.
For a discussion on corporate bond ratings and additional information on
investment policies, see Appendix A. For a discussion on foreign currency
transactions, see Appendix B. For a discussion on money market securities, see
Appendix C. For a discussion on options and stock index futures contracts, see
Appendix D. For a discussion on options and interest rate futures contracts, see
Appendix E. For a discussion on dollar-cost averaging, see Appendix F.
PORTFOLIO TRANSACTIONS
Subject to policies set by the board of directors, AEFC, IDS International, Inc.
(International) and IDS Life are authorized to determine, consistent with the
Funds' investment goals and policies, which securities will be purchased, held
or sold. In determining where buy and sell orders are to be placed, AEFC,
International and IDS Life have been directed to use their best efforts to
obtain the best available price and the most favorable execution except where
otherwise authorized by the board of directors. IDS Life intends to direct AEFC
and International to execute trades and negotiate commissions on its behalf.
These services are covered by the Investment Advisory
<PAGE>
Agreement between AEFC and IDS Life and the Sub-Investment Advisory Agreement
between AEFC and International. When AEFC and International act on IDS Life's
behalf for the Funds, they follow the rules described here for IDS Life.
AEFC has a strict Code of Ethics that prohibits its affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for any fund or trust for which it
acts as investment manager. AEFC carefully monitors compliance with its Code of
Ethics.
On occasion, it may be desirable for Capital Resource, International Equity,
Aggressive Growth, Special Income or Managed Funds to compensate a broker for
research services or for brokerage services by paying a commission that might
not otherwise be charged or a commission in excess of the amount another broker
might charge. The boards of directors have adopted a policy authorizing IDS Life
to do so to the extent authorized by law, if IDS Life determines, in good faith,
that such commission is reasonable in relation to the value of the brokerage or
research services provided by a broker or dealer, viewed either in the light of
that transaction or IDS Life's, AEFC's or International's overall
responsibilities to the funds in the IDS MUTUAL FUND GROUP.
Research provided by brokers supplements AEFC's and International's own research
activities. Research services include economic data on, and analysis of: the
U.S. economy and specific industries within the economy; information about
specific companies, including earning estimates; purchase recommendations for
stocks and bonds; portfolio strategy services; political, economic, business and
industry trend assessments; historical statistical information; market data
services providing information on specific issues and prices; and technical
analysis of various aspects of the securities markets, including technical
charts. Research services may take the form of written reports, computer
software or personal contact by telephone or at seminars or other meetings. AEFC
has obtained, and in the future may obtain, computer hardware from brokers,
including but not limited to personal computers that will be used exclusively
for investment decision-making purposes, which includes the research, portfolio
management and trading functions and such other services to the extent permitted
under an interpretation by the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, IDS Life must follow
procedures authorized by the board of directors. To date, three procedures have
been authorized. One procedure permits IDS Life to direct an order to buy or
sell a security traded on a national securities exchange to a specific broker
for research services it has provided. The second procedure permits IDS Life, in
order to obtain research, to direct an order on an agency basis to buy or sell a
security traded in the over-the-counter market to a firm that does not make a
market in the security. The commission paid generally includes compensation for
research services. The third procedure permits IDS Life, in order to obtain
research and brokerage services, to cause each fund to pay a commission in
excess of the amount another broker might have charged.
IDS Life has advised the Funds that it is necessary to do business with a number
of brokerage firms on a continuing basis to obtain such services as: handling of
large orders; willingness of a broker to risk its own money by taking a position
in a security; and specialized handling of a particular group of securities that
only certain brokers may be able to offer. As a result of this arrangement, some
portfolio transactions may not be effected at the lowest commission, but IDS
Life believes it may obtain better overall
<PAGE>
execution. IDS Life has assured the Funds that under all three procedures the
amount of commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
All other transactions shall be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if, in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by IDS Life, AEFC and International in
providing advice to all the funds in the IDS MUTUAL FUND GROUP and other
accounts advised by IDS Life, AEFC and International, even though it is not
possible to relate the benefits to any particular fund or account.
Normally, the securities of Special Income and Moneyshare Funds are traded on a
principal rather than an agency basis. In other words, AEFC will trade directly
with the issuer or with a dealer who buys or sells for its own account, rather
than acting on behalf of another client. AEFC does not pay the dealer
commissions. Instead, the dealer's profit, if any, is the difference, or spread,
between the dealer's purchase and sale price for the security.
Each investment decision made for each fund is made independently from any
decision made for another fund in the IDS MUTUAL FUND GROUP or other account
advised by AEFC or any AEFC subsidiary.
When a fund buys or sells the same security as another fund or account, AEFC or
International carries out the purchase or sale in a way the fund agrees in
advance is fair. Although sharing in large transactions may adversely affect the
price or volume purchased or sold by a fund, the fund hopes to gain an overall
advantage in execution. AEFC and International have assured the Funds they will
continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC and International make a comprehensive review of the
broker-dealers and the overall reasonableness of their commissions. The review
evaluates execution, operational efficiency and research services.
The Funds have paid the following brokerage commissions:
<TABLE>
<CAPTION>
Fiscal year Capital International Aggressive Special
ended Aug. 31, Resource Equity Growth Income Managed
- --------------------- ---------------- ----------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1995 7,692,690 2,466,949 2,171,645 34,918 3,072,774
1996 13,416,430 3,551,512 5,313,285 23,608 3,683,714
1997 9,778,626 6,013,492 7,958,360 168,718 3,490,303
</TABLE>
Transactions amounting to $196,046,000, $82,868,000 and $96,952,000 with related
commissions of $345,738, $147,390 and $120,222 were directed to brokers by
Capital Resource, Aggressive Growth and Managed Funds, respectively, because of
research services received for the fiscal year ended Aug. 31, 1997.
<PAGE>
Capital Resource Fund's acquisition during the fiscal year ended Aug. 31, 1997,
of securities of its regular brokers or dealers or of the parents of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities is presented below:
Value of Securities Owned at End
Name of Issuer of Fiscal Year
- -------------------------- --------------------------
Bank of America $14,510,291
First Chicago 6,978,282
Merrill Lynch 8,349,859
Morgan Stanley 50,059,625
Travelers Group 60,325,000
International Equity Fund's acquisition during the fiscal year ended Aug. 31,
1997 of securities of its regular brokers or dealers or of the parents of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities is presented below:
Value of Securities Owned at End
Name of Issuer of Fiscal Year
- -------------------------- --------------------------------
Bank of America $13,503,843
Morgan Stanley 19,063,711
Nations Bank 7,531,326
Credit Suisse First Boston 31,161,934
Aggressive Growth Fund's acquisition during the fiscal year ended Aug. 31, 1997,
of securities of its regular brokers or dealers or of the parents of those
brokers or dealers that derived more than 15% of gross revenue from
securities-related activities is presented below:
Value of Securities Owned at End
Name of Issuer of Fiscal Year
- -------------------------- --------------------------------
Bank of America $10,336,119
Merrill Lynch 6,162,991
Charles Schwab 16,975,000
Special Income Fund's acquisition during the fiscal year ended Aug. 31, 1997, of
securities of its regular brokers or dealers or of the parents of those brokers
or dealers that derived more than 15% of gross revenue from securities-related
activities is presented below:
Value of Securities Owned at End
Name of Issuer of Fiscal Year
- -------------------------- --------------------------------
J. P. Morgan $12,991,300
Goldman Sachs 8,067,825
Morgan Stanley 8,241,669
Salomon Brothers 5,054,450
<PAGE>
Moneyshare Fund's acquisition during the fiscal year ended Aug. 31, 1997, of
securities of its regular brokers or dealers or of the parents of those brokers
or dealers that derived more than 15% of gross revenue from securities-related
activities is presented below:
<PAGE>
Value of Securities Owned at End
Name of Issuer of Fiscal Year
- -------------------------- --------------------------------
Bank of America $21,111,291
First Chicago 4,864,001
Goldman Sachs 19,450,863
Merrill Lynch 19,175,447
J. P. Morgan 1,999,458
Morgan Stanley 24,933,626
Managed Fund's acquisition during the fiscal year ended Aug. 31, 1997, of
securities of its regular brokers or dealers or of the parents of those brokers
or dealers that derived more than 15% of gross revenue from securities-related
activities is presented below:
Value of Securities Owned at End
Name of Issuer of Fiscal Year
- -------------------------- --------------------------------
Bank of America $3,594,809
Goldman Sachs 3,884,508
J. P. Morgan 4,847,500
Morgan Stanley 67,943,525
Solomon Brothers 3,905,000
Travelers Group 103,325,000
The portfolio turnover rate for Capital Resource Fund was 110% in fiscal year
ended Aug. 31, 1997 and 131% in fiscal year ended Aug. 31, 1996. The portfolio
turnover rate for Managed Fund was 72% in fiscal year ended Aug. 31, 1997 and
85% in fiscal year ended Aug. 31, 1996.
The portfolio turnover rate for International Equity Fund was 91% in fiscal year
ended Aug. 31, 1997 and 58% in fiscal year ended Aug. 31, 1996. The portfolio
turnover rate for Aggressive Growth Fund was 218% in fiscal year ended Aug. 31,
1997 and 189% in fiscal year ended Aug. 31, 1996.
The Portfolio turnover rate for Special Income was 73% in fiscal year ended Aug.
31, 1997 and 56% in fiscal year ended Aug. 31, 1996.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH IDS LIFE
Affiliates of American Express Company (American Express) (of which IDS Life is
a wholly owned indirect subsidiary) may engage in brokerage and other securities
transactions on behalf of Capital Resource, International Equity, Aggressive
Growth, Special Income and Managed Funds in accordance with procedures adopted
by the Funds' boards of directors and to the extent consistent with applicable
provisions of the federal securities laws. IDS Life will use an American Express
affiliate only if (i) IDS Life determines that a fund will receive prices and
executions at least as favorable as those offered by qualified independent
brokers performing similar brokerage and other services for the Fund and (ii)
the affiliate charges the Fund commission rates consistent
<PAGE>
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
AEFC may direct brokerage to compensate an affiliate. AEFC will receive research
on South Africa from New Africa Advisors, a wholly-owned subsidiary of Sloan
Financial Group. AEFC owns 100% of IDS Capital Holdings Inc. which in turn owns
40% of Sloan Financial Group. New Africa Advisors will send research to AEFC and
in turn American Express Financial Corporation will direct trades to a
particular broker. The broker will have an agreement to pay New Africa Advisors.
All transactions will be on a best execution basis. Compensation received will
be reasonable for the services rendered.
No brokerage commissions were paid by Moneyshare Fund to brokers affiliated with
IDS Life for the fiscal year ended Aug. 31, 1997.
Information about brokerage commissions paid by the Funds to American Enterprise
Investment Services, Inc., a wholly-owned subsidiary of AEFC, for the last three
fiscal years is contained in the following table:
For the Fiscal Year Ended Aug. 31,
<TABLE>
<CAPTION>
1997 1996 1995
Percentage of
Aggregate
Aggregate Dollar Percent of Dollar Amount Aggregate Aggregate
Amount of Aggregate of Transactions Dollar Amount Dollar Amount
Commissions Paid Brokerage Involving of Commissions of Commissions
Fund to Broker Commissions Payment of Paid to Broker Paid to Broker
Commissions
<S> <C> <C> <C> <C> <C>
Capital $817,190 8.36% 15.58% $841,159 $829,258
Resource
International None None None None None
Equity.
Aggressive 183,327 2.31 3.89 245,269 222,443
Growth
Special Income None None None None None
Managed 227,619 6.64 8.05 76,269 131,456
</TABLE>
PERFORMANCE INFORMATION
Each Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations used by a fund are
based on standardized methods of computing performance as required by the SEC.
An explanation of these and any other methods used by each Fund to compute
performance follows below.
<PAGE>
Average annual total return
Each Fund may calculate average annual total return for certain periods by
finding the average annual compounded rates of return over the period that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the end of the period
(or fractional portion thereof)
Aggregate total return
Each Fund may calculate aggregate total return for certain periods representing
the cumulative change in the value of an investment in a fund over a specified
period of time according to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
Annualized yield and Distribution yield
Special Income Fund may calculate an annualized yield by dividing the net
investment income per share deemed earned during a 30-day period by the public
offering price per share (including the maximum sales charge) on the last day of
the period and annualizing the results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
The Fund's annualized yield was 6.76% for the 30-day period ended Aug. 31, 1997.
The Fund's yield, calculated as described above according to the formula
prescribed by the SEC, is a hypothetical return based on market value yield to
maturity for the Fund's securities. It is not necessarily indicative of the
amount which was or may be paid to the contract owners. Actual amounts paid to
contract owners are reflected in the distribution yield.
<PAGE>
Distribution yield is calculated according to the following formula:
D x F = DY
NAV 30
where: D = sum of dividends for 30 day period
NAV = beginning of period net asset value
F = annualizing factor
DY = distribution yield
The Fund's distribution yield was 7.23% for the 30-day period ended Aug. 31,
1997.
Moneyshare Fund calculates annualized simple and compound yields based on a
seven-day period.
The simple yield is calculated by determining the net change in the value of a
hypothetical account having a balance of one share at the beginning of the
seven-day period, dividing the net change in account value by the value of the
account at the beginning of the period to obtain the return for the period, and
multiplying that return by 365/7 to obtain an annualized figure. The value of
the hypothetical account includes the amount of any declared dividends, the
value of any shares purchased with any dividend paid during the period and any
dividends declared for such shares. The Fund's yield does not include any
realized or unrealized gains or losses.
Moneyshare Fund calculates its compound yield according to the following
formula:
Compound Yield = (return for seven day period + 1) 365/7 - 1
Moneyshare Fund's simple annualized yield was 5.11% and its compound yield was
5.24% for the seven days ended Aug. 31, 1997, the last business day of the
Fund's fiscal year. The Fund's simple yield was 5.11% and the compound yield was
5.24% for the seven days ended Sept. 30, 1997.
Yield, or rate of return, on Moneyshare Fund shares may fluctuate daily and does
not provide a basis for determining future yields. However, it may be used as
one element in assessing how the Fund is meeting its goal. When comparing an
investment in the Fund with savings accounts and similar investment
alternatives, you must consider that such alternatives often provide an agreed
to or guaranteed fixed yield for a stated period of time, whereas the fund's
yield fluctuates. In comparing the yield of one money market fund to another,
you should consider each fund's investment policies, including the types of
investments permitted.
REMEMBER THAT THESE YIELDS ARE THE RETURN TO THE SHAREHOLDER (THE VARIABLE
ACCOUNTS), NOT TO THE VARIABLE ANNUITY CONTRACT OWNER. SEE YOUR ANNUITY
PROSPECTUS FOR A DISCUSSION OF THE DIFFERENCES.
In sales material and other communications, the Funds may quote, compare or
refer to rankings, yields or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Morningstar,
Market Fund Report,
<PAGE>
Financial Services Week, Financial Times, Financial World, Forbes, Fortune,
Global Investor, Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster,
Newsweek, The New York Times, Personal Investor, Stanger Report, Sylvia Porter's
Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal
and Wiesenberger Investment Companies Service.
VALUING EACH FUND'S SHARES
On Aug. 31, 1997, the computation of the value of an individual share looked
like this:
Capital Resource Fund
<TABLE>
<CAPTION>
Net assets Shares outstanding Net asset value of one share
<S> <C> <C> <C> <C>
$4,866,591,077 divided by 173,988,176 = $27.97
International Equity Fund
Net assets Shares outstanding Net asset value of one share
$2,104,975,232 divided by 149,447,811 = $14.09
Aggressive Growth Fund
Net assets Shares outstanding Net asset value of one share
$2,427,427,425 divided by 141,403,480 = $17.17
Special Income Fund
Net assets Shares outstanding Net asset value of one share
$1,923,317,614 divided by 160,398,174 = $11.99
Managed Fund
Net assets Shares outstanding Net asset value of one share
$4,444,602,312 divided by 235,535,537 = $18.87
</TABLE>
Capital Resource, International Equity, Aggressive Growth, Special Income and
Managed Funds' portfolio securities are valued as follows as of the close of
business of the New York Stock Exchange:
'Securities, except bonds other than convertibles, traded on a securities
exchange for which a last-quoted sales price is readily available are valued at
the last-quoted sales price on the exchange where such security is primarily
traded.
'Securities traded on a securities exchange for which a last-quoted sales price
is not readily available are valued at the mean of the closing bid and asked
prices, looking first to the bid and asked prices on the exchange where the
security is primarily traded and if none exists, to the over-the-counter market.
'Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
<PAGE>
'Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities traded
over-the-counter but not included in the NASDAQ National Market System, are
valued at the mean of the closing bid and asked prices.
'Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
'Foreign securities traded outside the United States are generally valued as of
the time their trading is complete which is usually different from the close of
the New York Stock Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the New York Stock Exchange that will not be reflected in the
computation of a fund's net asset value. If events materially affecting the
value of such securities occur during such period, these securities will be
valued at their fair value according to procedures decided upon in good faith by
the funds' boards of directors.
'Short-term securities maturing more than 60 days from the valuation date are
valued at the readily available market price or approximate market value based
on current interest rates. Short-term securities maturing in 60 days or less
that originally had maturities of more than 60 days at acquisition date are
valued at amortized cost using the market value on the 61st day before maturity.
Short-term securities maturing in 60 days or less at acquisition date are valued
at amortized cost. Amortized cost is an approximation of market value determined
by systematically increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium, so that the
carrying value is equal to maturity value on the maturity date.
'Securities without a readily available market price, bonds other than
convertibles and other assets are valued at fair value as determined in good
faith by the boards of directors. The boards of directors are responsible for
selecting methods they believe provide fair value. When possible, bonds are
valued by a pricing service independent from a fund. If a valuation of a bond is
not available from a pricing service, the bond will be valued by a dealer
knowledgeable about the bond if such a dealer is available.
Moneyshare Fund intends to use its best efforts to maintain a constant net asset
value of $1 per share although there is no assurance it will be able to do so.
Accordingly, the Fund uses the amortized cost method in valuing its portfolio.
Short-term securities maturing in 60 days or less are valued at amortized cost.
Amortized cost is an approximation of market value determined by systematically
increasing the carrying value of a security if acquired at a discount, or
reducing the carrying value if acquired at a premium, so that the carrying value
is equal to maturity value on the maturity date. It does not take into
consideration unrealized capital gains or losses. All of the securities in the
Fund's portfolio will be valued at their amortized cost.
In addition, Moneyshare Fund must abide by certain conditions. It must only
invest in securities of high quality which present minimal credit risks as
determined by the board of directors. This means that the rated commercial paper
in the Fund's portfolio will be issues that have been rated in the highest
rating category by at least two nationally recognized statistical rating
organizations (or by one if only one rating is assigned) and in unrated paper
determined by the Fund's board of directors to be comparable. The fund
<PAGE>
must also purchase securities with original or remaining maturities of 13 months
or less, and maintain a dollar-weighted average portfolio maturity of 90 days or
less. In addition, the board of directors must establish procedures designed to
stabilize the Fund's price per share for purposes of sales and redemptions at $1
to the extent that it is reasonably possible to do so. These procedures include
review of the Fund's portfolio securities by the Board, at intervals deemed
appropriate by it, to determine whether the Fund's net asset value per share
computed by using the available market quotations deviates from a share value of
$1 as computed using the amortized cost method. The board must consider any
deviation that appears, and if it exceeds 0.5%, it must determine what action,
if any, needs to be taken. If the board determines that a deviation exists that
may result in a material dilution of the holdings of the variable accounts or
investors, or in other unfair consequences for such people, it must undertake
remedial action that it deems necessary and appropriate. Such action may include
withholding dividends, calculating net asset value per share for purposes of
sales and redemptions in kind, and selling portfolio securities before maturity
in order to realize capital gain or loss or to shorten average portfolio
maturity.
In other words, while the amortized cost method provides certainty and
consistency in portfolio valuation, it may, from time to time, result in
valuations of portfolio securities that are either somewhat higher or lower than
the prices at which the securities could be sold. This means that during times
of declining interest rates, the yield on Moneyshare Fund's shares may be higher
than if valuations of portfolio securities were made based on actual market
prices and estimates of market prices. Accordingly, if use of the amortized cost
method were to result in a lower portfolio value at a given time, a prospective
investor in the Fund would be able to obtain a somewhat higher yield than if
portfolio valuation were based on actual market values. The Variable Accounts,
on the other hand, would receive a somewhat lower yield than they would
otherwise receive. The opposite would happen during a period of rising interest
rates.
The Exchange, AEFC, IDS Life and the Funds will be closed on the following
holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
INVESTING IN THE FUNDS
You cannot buy shares of the Funds directly. The only way you can invest in the
Funds at the current time is by buying an annuity contract and directing the
allocation of part or all of your net purchase payment to the variable accounts,
which will invest in shares of Capital Resource, International Equity,
Aggressive Growth, Special Income, Moneyshare or Managed Funds. Please read the
Funds' prospectus along with your annuity prospectus for further information.
Sales Charges and Surrender or Withdrawal Charges
The Funds do not assess sales charges, either when they sell or when they redeem
securities. The surrender or withdrawal charges that may be assessed under your
annuity contract are described in your annuity prospectus, as are the other
charges that apply to your annuity contract and to the variable accounts.
Shares of the Fund may not be held by persons who are residents of, or domiciled
in, Brazil. The Fund reserves the right to redeem accounts of shareholders who
establish residence or domicile in Brazil.
<PAGE>
REDEEMING SHARES
The Funds will redeem any shares presented by a shareholder (variable account)
for redemption. The variable accounts' policies on when or whether to buy or
redeem fund shares are described in your annuity prospectus.
During an emergency, the boards of directors can suspend the computation of net
asset value, stop accepting payments for purchase of shares or suspend the duty
of the Funds to redeem shares for more than 7 days. Such emergency situations
would occur if:
'The New York Stock Exchange closes for reasons other than the usual weekend and
holiday closings or trading on the Exchange is restricted,
'Disposal of a Fund's securities is not reasonably practicable or it is not
reasonably practicable for the Fund to determine the fair value of its net
assets, or
'The Securities and Exchange Commission, under the provisions of the Investment
Company Act of 1940, as amended, declares a period of emergency to exist.
Should a Fund stop selling shares, the directors may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all contract owners.
TAXES
International Equity Fund may be subject to U.S. taxes resulting from holdings
in a passive foreign investment company (PFIC). A foreign corporation is a PFIC
when 75% or more of its gross income for the taxable year is passive income or
if 50% or more of the average value of its assets consists of assets that
produce or could produce passive income.
AGREEMENTS WITH IDS LIFE AND AMERICAN EXPRESS FINANCIAL CORPORATION
Investment Management Services Agreement
Each Fund has an Investment Management Services Agreement with IDS Life. The
Funds have retained IDS Life to, among other things, counsel and advise the
Funds and their directors in connection with the formulation of investment
programs designed to accomplish the Funds' investment objectives, and to
determine, consistent with the Funds' investment objectives and policies, which
securities in IDS Life's discretion shall be purchased, held or sold, subject
always to the direction and control of the boards of directors. The Funds do not
maintain their own research departments or record-keeping services. These
services are provided by IDS Life under the Investment Management Services
Agreement.
The Agreement provides that, in addition to paying its own management fee,
brokerage costs and certain taxes, each Fund pays IDS Life an amount equal to
the cost of certain expenses incurred and paid by IDS Life in connection with
the Fund's operations.
<PAGE>
For its services, IDS Life is paid a fee based on the following schedules:
Capital Resource
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $1 0.630%
Next $1 0.615
Next $1 0.600
Next $3 0.585
Over $6 0.570
International Equity
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $0.25 0.870%
Next $0.25 0.855
Next $0.25 0.840
Next $0.25 0.825
Next $1 0.810
Next $2 0.795
Aggressive Growth
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $0.25 0.650%
Next $0.25 0.635
Next $0.25 0.620
Next $0.25 0.605
Next $1 0.590
Over $2 0.575
Special Income
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $1 0.610%
Next $1 0.595
Next $1 0.580
Next $3 0.565
Next $3 0.550
Over $9 0.535
<PAGE>
Moneyshare
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $1 0.510%
Next $0.5 0.493
Next $0.5 0.475
Next $0.5 0.458
Over $2.5 0.440
Managed
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $0.5 0.630%
Next $0.5 0.615
Next $1 0.600
Next $1 0.585
Next $3 0.570
Over $6 0.550
On Aug. 31, 1997 the daily rate applied to the Fund's assets on an annual basis,
was 0.603% for Capital Resource, 0.827% for International Equity, 0.603% for
Aggressive Growth, 0.603% for Special Income, 0.510% for Moneyshare and 0.592%
for Managed. The fee is calculated for each calendar day on the basis of net
assets as of the close of business two business days prior to the day for which
the calculation is made.
The management fee is paid monthly. Under the prior and current agreements, the
total amount paid for Capital Resource was $27,562,075 for the fiscal year ended
Aug. 31, 1997, $26,046,720 for the fiscal year ended 1996 and $20,450,401 for
the fiscal year 1995.
Under the prior and current agreements, the total amount paid for International
Equity was $16,844,405 for the fiscal year ended Aug. 31, 1997, $13,990,974 for
the fiscal year ended 1996, $10,869,439 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Aggressive
Growth was $13,049,949 for the fiscal year ended Aug. 31, 1997, $10,459,512 for
the fiscal year ended 1996, and $6,579,414 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Special Income
was $11,582,416 for the fiscal year ended Aug. 31, 1997, $11,311,856 for the
fiscal year ended 1996, and $9,542,823 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Moneyshare was
$1,845,243 for the fiscal year ended Aug. 31, 1997, $1,283,789 for the fiscal
year ended 1996, and $1,041,050 for the fiscal year 1995.
Under the prior and current agreements, the total amount paid for Managed was
$23,778,006 for the fiscal year ended Aug. 31, 1997, $19,987,805 for the fiscal
year ended 1996, and $16,720,930 for the fiscal year 1995.
<PAGE>
Under the current Agreement, the expenses of IDS Life that each Fund has agreed
to reimburse are: taxes, brokerage commissions, custodian fees and expenses,
audit expenses, cost of items sent to contract owners, postage, fees and
expenses paid to directors who are not officers or employees of IDS Life or AEFC
fees and expenses of attorneys, costs of fidelity and surety bonds, SEC
registration fees, expenses of preparing prospectuses and of printing and
distributing prospectuses to existing contract owners, losses due to theft or
other wrong doing or due to liabilities not covered by bond or agreement,
expenses incurred in connection with lending portfolio securities of the funds
and expenses properly payable by the funds, approved by the boards of directors.
All other expenses are borne by IDS Life.
Under a current and prior agreement:
Capital Resource paid nonadvisory expenses of $1,216,304 for the fiscal year
ended Aug. 31, 1997, 1,237,584 for the fiscal year ended 1996, and $1,289,211
for the fiscal year 1995.
International Equity paid nonadvisory expenses of $1,971,367 for the fiscal year
ended Aug. 31, 1997, $1,439,851 for the fiscal year ended 1996, and $1,758,233
for the fiscal year 1995.
Aggressive Growth paid nonadvisory expenses of $595,678 for the fiscal year
ended Aug. 31, 1997, $555,212 for the fiscal year ended 1996, and $397,865 for
the fiscal year 1995.
Special Income paid nonadvisory expenses of $470,062 for the fiscal year ended
Aug. 31, 1997, $534,757 for the fiscal year ended 1996, and $527,883 for the
fiscal year 1995.
Moneyshare paid nonadvisory expenses of $112,930 for the fiscal year ended Aug.
31, 1997, $134,008 for the fiscal year ended 1996, and $68,790 for the fiscal
year 1995.
Managed paid nonadvisory expenses of $781,442 for the fiscal year ended Aug. 31,
1997, $857,900 for the fiscal year ended 1996, and $1,006,486 for the fiscal
year 1995.
Administrative Services Agreement
The Funds have an Administrative Services Agreement with AEFC. Under this
agreement, the Funds pay AEFC for providing administration and accounting
services. The fee is calculated as follows:
Capital Resource
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Over $6 0.030
<PAGE>
International Equity
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $1 0.040
Over $2 0.035
Aggressive Growth
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $0.25 0.060%
Next $0.25 0.055
Next $0.25 0.050
Next $0.25 0.045
Next $1 0.040
Over $2 0.035
Special Income
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Next $3 0.030
Over $9 0.025
Moneyshare
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $1 0.030%
Next $0.5 0.027
Next $0.5 0.025
Next $0.5 0.022
Over $2.5 0.020
<PAGE>
Managed
assets Annual rate at
(billions) each asset level
- ----------------- ---------------------
First $0.5 0.040%
Next $0.5 0.035
Next $1 0.030
Next $1 0.025
Next $3 0.020
Over $6 0.020
On Aug. 31, 1997, the daily rate applied to Capital Resource was equal to 0.041%
on an annual basis.
On Aug. 31, 1997, the daily rate applied to International Equity was equal to
0.046% on an annual basis.
On Aug. 31, 1997, the daily rate applied to Aggressive Growth was equal to
0.044% on an annual basis.
On Aug. 31, 1997, the daily rate applied to Special Income was equal to 0.048%
on an annual basis.
On Aug. 31, 1997, the daily rate applied to Moneyshare was equal to 0.030% on an
annual basis.
On Aug. 31, 1997, the daily rate applied to Managed was equal to 0.027% on an
annual basis.
Investment Advisory Agreements
IDS Life and AEFC have an Investment Advisory Agreement under which AEFC
executes purchases and sales and negotiates brokerage as directed by IDS Life.
For its services, IDS Life pays AEFC a fee based on a percentage of each Fund's
average daily net assets for the year. This fee is equal to 0.35% for
International Equity Fund and 0.25% for each remaining fund.
AEFC has a Sub-Investment Advisory Agreement with American Express Asset
International Inc. under which AEFC pays American Express Asset International
Inc. a fee equal on an annual basis to 0.50% of International Equity Fund's
daily net assets for providing investment advice for the Fund.
For the fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $11,405,895 for its
services in connection with Capital Resource Fund. For fiscal year 1996, the
amount was $10,767,468 and for fiscal year 1995 it was $8,118,175.
For the fiscal period ended Aug. 31, 1997, IDS Life paid AEFC $7,127,500 for its
services in connection with International Equity Fund. For fiscal year 1996, the
amount was $5,895,097 and for fiscal year 1995 it was $4,947,617.
<PAGE>
For the fiscal period ended Aug. 31, 1997, IDS Life paid AEFC $5,385,048 for its
services in connection with Aggressive Growth Fund. For fiscal year 1996, the
amount was $4,281,869 and for fiscal year 1995 it was $2,589,057.
For the fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $4,808,246 for its
services in connection with Special Income Fund. For fiscal year 1996, the
amount was $4,698,757 and for fiscal year 1995 it was $3,806,813.
For the fiscal year ended Aug. 31, 1997, IDS Life paid AEFC $907,423 for its
services in connection with Moneyshare Fund. For fiscal year 1996, the amount
was $621,885 and for the fiscal year 1995 it was $494,845.
For the fiscal year end Aug. 31, 1997, IDS Life paid AEFC $10,013,842 for its
services in connection with Managed Fund. For fiscal year 1996, the amount was
$8,355,352, and for the fiscal year 1995 it was $6,674,716.
Information concerning other funds advised by IDS Life or AEFC is contained in
the prospectus.
DIRECTORS AND OFFICERS
The following is a list of the Fund's directors. They serve 15 Master Trust
Portfolios and 47 IDS and IDS Life funds. All shares have cumulative voting
rights when voting on the election of directors.
H. Brewster Atwater, Jr.
Born in 1931.
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc.
Director, Merck & Co., Inc. and Darden Restaurants, Inc.
Lynne V. Cheney'
Born in 1941.
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources and FPL Group, Inc. (holding company for Florida Power and Light) and
the Interpublic Group of Companies, Inc. (advertising).
<PAGE>
Robert F. Froehlke+
Born in 1922.
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP. Director, the ICI
Mutual Insurance Co., Institute for Defense Analyses, Marshall Erdman and
Associates, Inc. (architectural engineering) and Public Oversight Board of the
American Institute of Certified Public Accountants.
David R. Hubers+**
Born in 1943.
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC. Previously, senior vice
president, finance and chief financial officer of AEFC.
Heinz F. Hutter+'
Born in 1929.
P.O. Box 5724
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935.
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor Electronics,
Inc.
James A. Mitchell**
Born in 1941.
2900 IDS Tower
Minneapolis, MN
Executive Vice President, AEFC. Director, chairman of the board and chief
executive officer, IDS Life.
William R. Pearce+*
Born in 1927.
901 S. Marquette Ave.
Minneapolis, MN
Chairman of the Board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
<PAGE>
Alan K. Simpson'
Born in 1931.
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, Pacific Corp. (electric power).
Edson W. Spencer+
Born in 1926.
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation
(forest products). Member of International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937.
2900 IDS Tower
Minneapolis, MN
Senior vice president AEFC.
Wheelock Whitney+
Born in 1926.
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934.
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company
(air cleaners & mufflers) and General Mills, Inc.
(consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer of the funds.
**Interested person by reason of being an officer, director, employee and/or
shareholder of AEFC or American Express.
<PAGE>
The board also has appointed officers who are responsible for day-to-day
business decisions based on policies it has established.
In addition to Mr. Pearce, who is chairman, and Mr. Thomas, who is president,
the fund's other officers are:
Leslie L. Ogg
Born in 1938.
901 S. Marquette Ave.
Minneapolis, MN
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the funds.
Peter J. Anderson
Born in 1942.
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the funds.
Melinda S. Urion
Born in 1953.
IDS Tower 10
Minneapolis, MN
Director, senior vice president and chief financial officer of AEFC. Director,
Executive vice president and controller of IDS Life Insurance Company. Treasurer
for the Funds.
Members of the board who are not officers of the Fund or of AEFC receive an
annual fee of $3,200 for IDS Life Capital Resource Fund, $1,500 for IDS Life
International Equity Fund and IDS Life Aggressive Growth Fund, $1,400 for IDS
Life Special Income Fund, $200 for IDS Life Moneyshare Fund and $2,600 for IDS
Life Managed Fund and the Chair of the Contracts Committee receives an
additional $90. Board members receive a $50 per day attendance fee for board
meetings. The attendance fee for meetings of the Contracts and Investment Review
Committee is $50; for meetings of the Audit Committee and Personnel Committee
$25 and for traveling from out-of-state $8. Expenses for attending meetings are
reimbursed.
During the fiscal year that ended Aug. 31, 1997, the members of the board, for
attending up to 32 meetings, received the following compensation, in total, from
all funds in the IDS MUTUAL FUND GROUP.
<PAGE>
Life Capital Resource
<TABLE>
<CAPTION>
Board Compensation
Pension or Estimated Total Cash
Aggregate Retirement annual compensation
compensation benefits accrued benefit on from the IDS
Board member from the fund as Fund expenses* retirement MUTUAL FUND GROUP
- ---------------------- ---------------- ---------------------- -------------------- -------------------------
<S> <C> <C> <C> <C>
H. Brewster Atwater, $3,331 $0 $0 $ 83,100
Jr.
(part of year) 4 ,097 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 4,131 0 0 103,800
Heinz F. Hutter 4,166 0 0 105,500
Anne P. Jones 4,383 0 0 110,800
Melvin R. Laird 4,113 0 0 97,800
Alan K. Simpson 2,670 0 0 62,400
(part of year)
Edson W. Spencer 4,527 0 0 127,000
Wheelock Whitney 4,216 0 0 108,700
C. Angus Wurtele 4,241 0 0 109,900
Life International Equity
Board Compensation
Pension or Estimated Total Cash
Aggregate Retirement annual compensation
compensation benefits accrued benefit on from the IDS
Board member from the fund as Fund expenses* retirement MUTUAL FUND GROUP
- ---------------------- ---------------- ---------------------- -------------------- -------------------------
H. Brewster Atwater, $1,965 $0 $0 $ 83,100
Jr.
(part of year) 2,330 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 2,427 0 0 103,800
Heinz F. Hutter 2,462 0 0 105,500
Anne P. Jones 2,585 0 0 110,800
Melvin R. Laird 2,346 0 0 97,800
Alan K. Simpson 1,524 0 0 62,400
(part of year)
Edson W. Spencer 2,824 0 0 127,000
Wheelock Whitney 2,512 0 0 108,700
C. Angus Wurtele 2,537 0 0 109,900
Life Aggressive Growth
Board Compensation
Pension or Estimated Total Cash
Aggregate Retirement annual compensation
compensation benefits accrued benefit on from the IDS
Board member from the fund as Fund expenses* retirement MUTUAL FUND GROUP
- ---------------------- ---------------- ---------------------- -------------------- -------------------------
H. Brewster Atwater, $1,965 $0 $0 $ 83,100
Jr.
(part of year) 2,317 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 2,415 0 0 103,800
Heinz F. Hutter 2,450 0 0 105,500
Anne P. Jones 2,572 0 0 110,800
Melvin R. Laird 2,333 0 0 97,800
Alan K. Simpson 1,524 0 0 62,400
(part of year)
Edson W. Spencer 2,811 0 0 127,000
Wheelock Whitney 2,500 0 0 108,700
C. Angus Wurtele 2,525 0 0 109,900
</TABLE>
<PAGE>
Life Special Income
<TABLE>
<CAPTION>
Board Compensation
Pension or Estimated Total Cash
Aggregate Retirement annual compensation
compensation benefits accrued benefit on from the IDS
Board member from the fund as Fund expenses* retirement MUTUAL FUND GROUP
- ---------------------- ---------------- ---------------------- -------------------- -------------------------
<S> <C> <C> <C> <C>
H. Brewster Atwater, $1,881 $0 $0 $ 83,100
Jr.
(part of year) 2,246 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 2,347 0 0 103,800
Heinz F. Hutter 2,382 0 0 105,500
Anne P. Jones 2,498 0 0 110,800
Melvin R. Laird 2,262 0 0 97,800
Alan K. Simpson 1,453 0 0 62,400
(part of year)
Edson W. Spencer 2,743 0 0 127,000
Wheelock Whitney 2,432 0 0 108,700
C. Angus Wurtele 2,457 0 0 109,900
Life Moneyshare
Board Compensation
Pension or Estimated Total Cash
Aggregate Retirement annual compensation
compensation benefits accrued benefit on from the IDS
Board member from the fund as Fund expenses* retirement MUTUAL FUND GROUP
- ---------------------- ---------------- ---------------------- -------------------- -------------------------
H. Brewster Atwater, $ 869 $0 $0 $ 83,100
Jr.
(part of year) 953 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 1,102 0 0 103,800
Heinz F. Hutter 1,137 0 0 105,500
Anne P. Jones 1,182 0 0 110,800
Melvin R. Laird 969 0 0 97,800
Alan K. Simpson 593 0 0 62,400
(part of year)
Edson W. Spencer 1,498 0 0 127,000
Wheelock Whitney 1,187 0 0 108,700
C. Angus Wurtele 1,212 0 0 109,900
Life Managed
Board Compensation
Pension or Estimated Total Cash
Aggregate Retirement annual compensation
compensation benefits accrued benefit on from the IDS
Board member from the fund as Fund expenses* retirement MUTUAL FUND GROUP
- ---------------------- ---------------- ---------------------- -------------------- -------------------------
H. Brewster Atwater, $2,757 $0 $0 $ 83,100
Jr.
(part of year) 3,383 0 0 96,600
Lynne V. Cheney
Robert F. Froehlke 3,445 0 0 103,800
Heinz F. Hutter 3,480 0 0 105,500
Anne P. Jones 3,655 0 0 110,800
Melvin R. Laird 3,399 0 0 97,800
Alan K. Simpson 2,169 0 0 62,400
(part of year)
Edson W. Spencer 3,841 0 0 127,000
Wheelock Whitney 3,530 0 0 108,700
C. Angus Wurtele 3,555 0 0 109,900
</TABLE>
<PAGE>
On Aug. 31, 1997, the Fund's directors and officers as a group owned less than
1% of the outstanding shares.
*The Fund had a retirement plan for its independent board members. The plan was
terminated April 30, 1996.
CUSTODIAN
The Funds' securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN, 55402-2307, through
a custodian agreement. The custodian is permitted to deposit some or all of its
securities with sub-custodians or in central depository systems as allowed by
federal law.
INDEPENDENT AUDITORS
The Funds' financial statements contained in their Annual Report, as of and for
the year ended Aug. 31, 1997, are audited by independent auditors, KPMG Peat
Marwick LLP, 4200 Norwest Center, 90 S. Seventh St., Minneapolis, MN 55402-3900.
IDS Life has agreed that it will send a copy of this report and the Semiannual
Report to every annuity contract owner having an interest in the funds. The
independent auditors also provide other accounting and tax-related services as
requested by the Funds.
FINANCIAL STATEMENTS
The Independent Auditors' Report and Financial Statements, including Notes to
the Financial Statements and the Schedule of Investments in Securities,
contained in the 1997 Annual Report to the shareholders of Capital Resource,
International Equity, Aggressive Growth, Special Income, Moneyshare and Managed
Funds, pursuant to Section 30(d) of the Investment Company Act of 1940, as
amended, are hereby incorporated in this Statement of Additional Information by
reference. No other portion of the Annual Report, however, is incorporated by
reference.
PROSPECTUS
The prospectus dated Oct. 30, 1997, is hereby incorporated in this Statement of
Additional Information by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS AND ADDITIONAL INFORMATION ON INVESTMENT
POLICIES FOR INVESTMENTS OF CAPITAL RESOURCE AND SPECIAL INCOME FUNDS
Bond ratings concern the quality of the issuing corporation. They are not an
opinion of the market value of the security. Such ratings are opinions on
whether the principal and interest will be repaid when due. A security's rating
may change which could affect its price. Ratings by Moody's Investors Service,
Inc. are Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C and D. Ratings by Standard & Poor's
Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D.
Aaa/AAA - Judged to be of the best quality and carry the smallest degree of
investment risk. Interest and principal are secure.
Aa/AA - Judged to be high-grade although margins of protection for interest and
principal may not be quite as good as Aaa or AAA rated securities.
A - Considered upper-medium grade. Protection for interest and principal is
deemed adequate but may be susceptible to future impairment.
Baa/BBB - Considered medium-grade obligations. Protection for interest and
principal is adequate over the short-term; however, these obligations may have
certain speculative characteristics.
Ba/BB - Considered to have speculative elements. The protection of interest and
principal payments may be very moderate.
B - Lack characteristics of the desirable investments. There may be small
assurance over any long period of time of the payment of interest and principal.
Caa/CCC - Are of poor standing. Such issues may be in default or there may be
risk with respect to principal or interest.
Ca/CC - Represent obligations that are highly speculative. Such issues are often
in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These securities have
major risk exposures to default.
D - Are in payment default. The D rating is used when interest payments or
principal payments are not made on the due date.
Non-rated securities will be considered for investment when they possess a risk
comparable to that of rated securities consistent with the Fund's objectives and
policies. When assessing the risk involved in each non-rated security, the Fund
will consider the financial condition of the issuer or the protection afforded
by the terms of the security.
<PAGE>
Definitions of Zero-Coupon and Pay-In-Kind Securities
A zero-coupon security is a security that is sold at a deep discount from its
face value and makes no periodic interest payments. The buyer of such a security
receives a rate of return by gradual appreciation of the security, which is
redeemed at face value on the maturity date.
A pay-in-kind security is a security in which the issuer has the option to make
interest payments in cash or in additional securities. The securities issued as
interest usually have the same terms, including maturity date, as the
pay-in-kind securities.
<PAGE>
APPENDIX B
FOREIGN CURRENCY TRANSACTIONS FOR INVESTMENTS OF ALL FUNDS EXCEPT MONEYSHARE
Since investments in foreign companies usually involve currencies of foreign
countries, and since the Fund may hold cash and cash-equivalent investments in
foreign currencies, the value of the Fund's assets as measured in U.S. dollars
may be affected favorably or unfavorably by changes in currency exchange rates
and exchange control regulations. Also, the Fund may incur costs in connection
with conversions between various currencies.
Spot Rates and Forward Contracts. The Fund conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts) as a hedge against fluctuations in future foreign exchange
rates. A forward contract involves an obligation to buy or sell a specific
currency at a future date, which may be any fixed number of days from the
contract date, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements. No commissions are charged at any stage
for trades.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment in dollars. By entering into
a forward contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between different
currencies from the date the security is purchased or sold to the date on which
payment is made or received or when the dividend or interest is actually
received.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may suffer a substantial
decline against another currency. It may enter into a forward contract to sell,
for a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency. The precise matching of forward contract amounts and the value
of securities involved generally will not be possible since the future value of
such securities in foreign currencies more than likely will change between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency.
The Fund will designate cash or securities in an amount equal to the value of
the Fund's total assets committed to consummating forward contracts entered into
under the second circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a daily basis so
that the value of the cash or securities will equal the amount of the Fund's
commitments on such contracts.
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At maturity of a forward contract, the Fund may either sell the portfolio
security and make delivery of the foreign currency or 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
buy, on the same maturity date, the same amount of foreign currency.
If the 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 there has been movement in forward contract prices. If the Fund engages
in an offsetting transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices decline between the
date the Fund enters into a forward contract for selling foreign currency and
the date it enters into an offsetting contract for purchasing the foreign
currency, the fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to buy.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to buy exceeds the price of the currency it
has agreed to sell.
It is impossible to forecast what the market value of portfolio securities will
be at the expiration of a contract. Accordingly, it may be necessary for the
Fund to buy additional foreign currency on the spot market (and bear the expense
of such purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange that can be achieved at some point in time. Although such
forward contracts tend to minimize the risk of loss due to a decline in value of
hedged currency, they tend to limit any potential gain that might result should
the value of such currency increase.
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Fund may buy put and write covered call
options on foreign currencies for hedging purposes. For example, a decline in
the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may buy put options
on the foreign currency. If the value of the currency does decline, the Fund
will have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
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As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options which
would require it to forego a portion or all of the benefits of advantageous
changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates,
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the diminution in value of portfolio securities will be
fully or partially offset by the amount of the premium received.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to buy or sell
the underlying currency at a loss which may not be offset by the amount of the
premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise have
been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting the fund to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
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The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in certain foreign countries
for the purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options
The Fund may enter into currency futures contracts to sell currencies. It also
may buy put and write covered call options on currency futures. Currency futures
contracts are similar to currency forward contracts, except that they are traded
on exchanges (and have margin requirements) and are standardized as to contract
size and delivery date. Most currency futures call for payment of delivery in
U.S. dollars. The Fund may use currency futures for the same purposes as
currency forward contracts, subject to CFTC limitations, including the
limitation on the percentage of assets that may be used, described in the
prospectus. All futures contracts are aggregated for purposes of the percentage
limitations.
Currency futures and options on futures values can be expected to correlate with
exchange rates, but will not reflect other factors that may affect the values of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Fund's investments
denominated in that currency over time.
The Fund will not use leverage in its options and futures strategies. The Fund
will hold securities or other options or futures positions whose values are
expected to offset its obligations. The Fund will not enter into an option or
futures position that exposes the fund to an obligation to another party unless
it owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient to cover its
potential obligations.
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APPENDIX C
DESCRIPTION OF MONEY MARKET SECURITIES
Certificates of Deposit -- A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited, plus interest, on the date
specified on the certificate.
Time Deposit -- A time deposit is a non-negotiable deposit in a bank for a fixed
period of time.
Bankers' Acceptances -- A bankers' acceptance arises from a short-term credit
arrangement designed to enable businesses to obtain funds to finance commercial
transactions. It is a time draft drawn on a bank by an exporter or an importer
to obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date.
Commercial Paper -- Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from one day to nine
months.
Commercial paper rated A by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are better than the industry average.
Long-term senior debt rating is "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowances made for unusual circumstances. Typically, the
issuer's industry is well established, the issuer has a strong position within
its industry and the reliability and quality of management is unquestioned.
Issuers rated A are further rated by use of numbers 1, 2 and 3 to denote
relative strength within this highest classification.
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Services Inc. Issuers rated Prime are further rated by use of numbers
1, 2 and 3 to denote relative strength within this highest classification. Among
the factors considered by Moody's in assigning ratings for an issuer are the
following: (1) management; (2) economic evaluation of the industry and an
appraisal of speculative type risks which may be inherent in certain areas; (3)
competition and customer acceptance of products; (4) liquidity; (5) amount and
quality of long-term debt; (6) ten year earnings trends; (7) financial strength
of a parent company and the relationships which exist with the issuer; and (8)
recognition by management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such obligations.
Letters of Credit -- A letter of credit is a short-term note issued in bearer
form with a bank letter of credit which provides that the bank pay to the bearer
the amount of the note upon presentation.
U.S. Treasury Bills -- Treasury bills are issued with maturities of any period
up to one year. Three-month and six-month bills are currently offered by the
Treasury on 13-week and 26-week cycles respectively and are auctioned each week
by the Treasury. Treasury bills are issued in book entry form and are sold only
on a discount basis, i.e. the
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difference between the purchase price and the maturity value constitutes
interest income for the investor. If they are sold before maturity, a portion of
the income received may be a short-term capital gain.
U.S. Government Agency Securities -- Federal agency securities are debt
obligations which principally result from lending programs of the U.S.
government. Housing and agriculture have traditionally been the principal
beneficiaries of Federal credit programs, and agencies involved in providing
credit to agriculture and housing account for the bulk of the outstanding agency
securities.
Repurchase Agreements -- A repurchase agreement involves the acquisition of
securities by the Portfolio, with the concurrent agreement by a bank (or
securities dealer if permitted by law or regulation), to reacquire the
securities at the portfolio's cost, plus interest, within a specified time. The
Portfolio thereby receives a fixed rate of return on this investment, one that
is insulated from market and rate fluctuations during the holding period. In
these transactions, the securities acquired by the Portfolio have a total value
equal to or in excess of the value of the repurchase agreement and are held by
the Portfolio's custodian until required. Pursuant to guidelines established by
the Fund's board of directors, the creditworthiness of the other party to the
transaction is considered and the value of those securities held as collateral
is monitored to ensure that such value is maintained at the required level.
If AEFC becomes aware that a security owned by a Fund is downgraded below the
second highest rating, AEFC will either sell the security or recommend to the
Fund's board of directors why it should not be sold.
<PAGE>
APPENDIX D
OPTIONS AND STOCK INDEX FUTURES CONTRACTS FOR INVESTMENTS OF CAPITAL RESOURCE,
INTERNATIONAL EQUITY, AGGRESSIVE GROWTH AND MANAGED FUNDS
Capital Resource, International Equity, Aggressive Growth and Managed Funds may
buy or write options traded on any U.S. or foreign exchange or in the
over-the-counter market. The fund may enter into stock index futures contracts
traded on any U.S. or foreign exchange. The Fund also may buy or write put and
call options on these futures and on stock indexes. Options in the
over-the-counter market will be purchased only when the investment manager
believes a liquid secondary market exists for the options and only from dealers
and institutions the investment manager believes present a minimal credit risk.
Some options are exercisable only on a specific date. In that case, or if a
liquid secondary market does not exist, the Fund could be required to buy or
sell securities at disadvantageous prices, thereby incurring losses. Managed
Fund also may enter into interest rate futures contracts - see Appendix E.
OPTIONS. An option is a contract. A person who buys a call option for a security
has the right to buy the security at a set price for the length of the contract.
A person who sells a call option is called a writer. The writer of a call option
agrees to sell the security at the set price when the buyer wants to exercise
the option, no matter what the market price of the security is at that time. A
person who buys a put option has the right to sell a security at a set price for
the length of the contract. A person who writes a put option agrees to buy the
security at the set price if the purchaser wants to exercise the option, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition, the
buyer generally pays a broker a commission. The writer receives a premium, less
another commission, at the time the option is written. The cash received is
retained by the writer whether or not the option is exercised. A writer of a
call option may have to sell the security for a below-market price if the market
price rises above the exercise price. A writer of a put option may have to pay
an above-market price for the security if its market price decreases below the
exercise price. The risk of the writer is potentially unlimited, unless the
option is covered.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options and futures contracts may benefit a fund and its shareholders by
improving the fund's liquidity and by helping to stabilize the value of its net
assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. They also may
be used for investment. Options are used as a trading technique to take
advantage of any disparity between the price of the underlying security in the
securities market and its price on the options market. It is anticipated the
trading technique will be utilized only to effect a transaction when the price
of the security plus the option price will be as good or better than the price
at which the security could be bought or sold directly. When the option is
purchased, a fund pays a premium and a commission. It then pays a second
commission on the purchase or sale of the underlying security when the option is
exercised. For record
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keeping and tax purposes, the price obtained on the purchase of the underlying
security will be the combination of the exercise price, the premium and both
commissions. When using options as a trading technique, commissions on the
option will be set as if only the underlying securities were traded.
Put and call options also may be held by a fund for investment purposes. Options
permit a fund to experience the change in the value of a security with a
relatively small initial cash investment. The risk a fund assumes when it buys
an option is the loss of the premium. To be beneficial to a fund, the price of
the underlying security must change within the time set by the option contract.
Furthermore, the change must be sufficient to cover the premium paid, the
commissions paid both in the acquisition of the option and in a closing
transaction or in the exercise of the option and subsequent sale (in the case of
a call) or purchase (in the case of a put) of the underlying security. Even
then, the price change in the underlying security does not ensure a profit since
prices in the option market may not reflect such a change.
Writing covered options. Each Fund will write covered options when it feels it
is appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on the basis of
investment considerations consistent with each fund's goal.
'All options written by a fund will be covered. For covered call options, if a
decision is made to sell the security, each fund will attempt to terminate the
option contract through a closing purchase transaction.
'Each Fund will deal only in standard option contracts traded on national
securities exchanges or those that may be quoted on NASDAQ (a system of price
quotations developed by the National Association of Securities Dealers, Inc.)
'Each Fund will write options only as permitted under applicable laws or
regulations, such as those that limit the amount of total assets subject to the
options. Some regulations also affect the Custodian. When a covered option is
written, the Custodian segregates the underlying securities, and issues a
receipt. There are certain rules regarding banks issuing such receipts that may
restrict the amount of covered call options written. Furthermore, each fund is
limited to pledging not more than 15% of the cost of its total assets.
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains. Since each Fund is taxed as a regulated
investment company under the Internal Revenue Code, any gains on options and
other securities held less than three months must be limited to less than 30% of
its annual gross income.
If a covered call option is exercised, the security is sold by the Fund. The
premium received upon writing the option is added to the proceeds received from
the sale of the security. The Fund will recognize a capital gain or loss based
upon the difference between the proceeds and the security's basis. Premiums
received from writing outstanding options are included as a deferred credit in
the Statement of Assets and Liabilities and adjusted daily to the current market
value.
Options on many securities are listed on options exchanges. If a Fund writes
listed options, it will follow the rules of the options exchange. The Custodian
will segregate the underlying securities and issue a receipt. There are certain
rules regarding issuing such
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receipts that may restrict the amount of covered call options written. Further
the Funds are limited to pledging not more than 15% of the cost of their total
assets. Options are valued at the close of the New York Stock Exchange. An
option listed on a national exchange or NASDAQ will be valued at the last-quoted
sales price or, if such a price is not readily available, at the mean of the
last bid and asked prices.
STOCK INDEX FUTURES CONTRACTS. Stock index futures contracts are commodity
contracts listed on commodity exchanges. They currently include contracts on the
Standard & Poor's 500 Stock Index (S&P 500 Index) and other broad stock market
indexes such as the New York Stock Exchange Composite Stock Index and the Value
Line Composite Stock Index, as well as narrower sub-indexes such as the S&P 100
Energy Stock Index and the New York Stock Exchange Utilities Stock Index. A
stock index assigns relative values to common stocks included in the index and
the index fluctuates with the value of the common stocks so included.
A futures contract is a legal agreement between a buyer or seller and the
clearinghouse of a futures exchange in which the parties agree to make a cash
settlement on a specified future date in an amount determined by the stock index
on the last trading day of the contract. The amount is a specified dollar amount
(usually $100 or $500) multiplied by the difference between the index value on
the last trading day and the value on the day the contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks, most of
which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those stocks. In the case of S&P
500 Index futures contracts, the specified multiple is $500. Thus, if the value
of the S&P 500 Index were 150, the value of one contract would be $75,000 (150 x
$500). Unlike other futures contracts, a stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract. For
example, excluding any transaction costs, if a fund enters into one futures
contract to buy the S&P 500 Index at a specified future date at a contract value
of 150 and the S&P 500 Index is at 154 on that future date, the fund will gain
$500 x (154-150) or $2,000. If the fund enters into one futures contract to sell
the S&P 500 Index at a specified future date at a contract value of 150 and the
S&P 500 Index is at 152 on that future date, the fund will lose $500 x (152-150)
or $1,000.
Unlike the purchase or sale of an equity security, no price would be paid or
received by the Fund upon entering into stock index futures contracts. However,
the Fund would be required to deposit with its custodian, in a segregated
account in the name of the futures broker, an amount of cash or U.S. Treasury
bills equal to approximately 5% of the contract value. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions in that futures contract
margin does not involve borrowing funds by the Fund to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good-faith
deposit on the contract that is returned to the fund upon termination of the
contract, assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker would be
made on a daily basis as the price of the underlying stock index fluctuates,
making the long and short positions in the contract more or less valuable, a
process known as marking to market. For example, when a fund enters into a
contract in which it benefits from a rise in
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the value of an index and the price of the underlying stock index has risen, the
fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, if the price of the underlying stock index
declines, the fund would be required to make a variation margin payment to the
broker equal to the decline in value.
How These Funds Would Use Stock Index Futures Contracts. The Funds intend to use
stock index futures contracts and related options for hedging and not for
speculation. Hedging permits a fund to gain rapid exposure to or protect itself
from changes in the market. For example, a fund may find itself with a high cash
position at the beginning of a market rally. Conventional procedures of
purchasing a number of individual issues entail the lapse of time and the
possibility of missing a significant market movement. By using futures
contracts, the Fund can obtain immediate exposure to the market and benefit from
the beginning stages of a rally. The buying program can then proceed and once it
is completed (or as it proceeds), the contracts can be closed. Conversely, in
the early stages of a market decline, market exposure can be promptly offset by
entering into stock index futures contracts to sell units of an index and
individual stocks can be sold over a longer period under cover of the resulting
short contract position.
A Fund may enter into contracts with respect to any stock index or sub-index. To
hedge the Fund's portfolio successfully, however, the fund must enter into
contracts with respect to indexes or sub-indexes whose movements will have a
significant correlation with movements in the prices of the Fund's individual
portfolio securities.
Special Risks of Transactions in Stock Index Futures Contracts.
1. Liquidity. Each Fund may elect to close some or all of its contracts prior to
expiration. The purpose of making such a move would be to reduce or eliminate
the hedge position held by the fund. The Fund may close its positions by taking
opposite positions. Final determinations of variation margin are then made,
additional cash as required is paid by or to the Fund, and the Fund realizes a
gain or a loss.
Positions in stock index futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. For
example, futures contracts transactions can currently be entered into with
respect to the S&P 500 Stock Index on the Chicago Mercantile Exchange, the New
York Stock Exchange Composite Stock Index on the New York Futures Exchange and
the Value Line Composite Stock Index on the Kansas City Board of Trade.
Although the Funds intend to enter into futures contracts only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a liquid secondary market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures contract position, and in the event of adverse price movements, the
Fund would have to make daily cash payments of variation margin. Such price
movements, however, will be offset all or in part by the price movements of the
securities subject to the hedge. Of course, there is no guarantee the price of
the securities will correlate with the price movements in the futures contract
and thus provide an offset to losses on a futures contract.
2. Hedging Risks. There are several risks in using stock index futures contracts
as a hedging device. One risk arises because the prices of futures contracts may
not correlate perfectly with movements in the underlying stock index due to
certain market distortions. First, all participants in the futures market are
subject to initial margin and variation
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margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the index and futures markets. Second,
the margin requirements in the futures market are lower than margin requirements
in the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market also may cause temporary price distortions.
Because of price distortion in the futures market and because of imperfect
correlation between movements in stock indexes and movements in prices of
futures contracts, even a correct forecast of general market trends may not
result in a successful hedging transaction over a short period.
Another risk arises because of imperfect correlation between movements in the
value of the stock index futures contracts and movements in the value of
securities subject to the hedge. If this occurred, a fund could lose money on
the contracts and also experience a decline in the value of its portfolio
securities. While this could occur, the investment manager believes that over
time the value of the Fund's portfolio will tend to move in the same direction
as the market indexes and will attempt to reduce this risk, to the extent
possible, by entering into futures contracts on indexes whose movements it
believes will have a significant correlation with movements in the value of the
fund's portfolio securities sought to be hedged. It is also possible that if the
Fund has hedged against a decline in the value of the stocks held in its
portfolio and stock prices increase instead, the Fund will lose part or all of
the benefit of the increased value of its stock which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Options on stock index futures
contracts are similar to options on stock except that options on futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a stock index futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. If the option is
closed instead of exercised, the holder of the option receives an amount that
represents the amount by which the market price of the contract 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. If the option does not appreciate in value prior
to the exercise date, the fund will suffer a loss of the premium paid.
OPTIONS ON STOCK INDEXES. Options on stock indexes are securities traded on
national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level. Such options would be used in the same manner
as options on futures contracts.
SPECIAL RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND
OPTIONS ON STOCK INDEXES. As with options on stocks, the holder of an option on
a stock index futures contract or on a stock index may terminate a position by
selling an option covering the same contract or index and having the same
exercise price and expiration date. The ability to establish and close out
positions on such options will be subject to the development and maintenance of
a liquid secondary market. The funds will not purchase options unless the market
for such options
<PAGE>
has developed sufficiently, so that the risks in connection with options are not
greater than the risks in connection with stock index futures contracts
transactions themselves. Compared to using futures contracts, purchasing options
involves less risk to the funds because the maximum amount at risk is the
premium paid for the options (plus transaction costs). There may be
circumstances, however, when using an option would result in a greater loss to a
fund than using a futures contract, such as when there is no movement in the
level of the stock index.
TAX TREATMENT. As permitted under federal income tax laws, each Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred by entering into futures contracts and losses on underlying
securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and stock indexes is currently unclear, although the Funds'
tax advisers currently believe marking to market is not required. Depending on
developments, a fund may seek Internal Revenue Service (IRS) rulings clarifying
questions concerning such treatment. Certain provisions of the Internal Revenue
Code may also limit a fund's ability to engage in futures contracts and related
options transactions. For example, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its assets must consist of cash,
government securities and other securities, subject to certain diversification
requirements. Less than 30% of its gross income must be derived from sales of
securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements. In order to avoid realizing a gain within the
three-month period, a fund may be required to defer closing out a contract
beyond the time when it might otherwise be advantageous to do so. The fund also
may be restricted in purchasing put options for the purpose of hedging
underlying securities because of applying the short sale holding period rules
with respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
<PAGE>
APPENDIX E
OPTIONS AND INTEREST RATE FUTURES CONTRACTS FOR INVESTMENTS OF SPECIAL INCOME
AND MANAGED FUNDS
The Funds may buy or write options traded on any U.S. or foreign exchange or in
the over-the-counter market. The Fund may enter into interest rate futures
contracts traded on any U.S. or foreign exchange. The Fund also may buy or write
put and call options on these futures. Options in the over-the-counter market
will be purchased only when the investment manager believes a liquid secondary
market exists for the options and only from dealers and institutions the
investment manager believes present a minimal credit risk. Some options are
exercisable only on a specific date. In that case, or if a liquid secondary
market does not exist, the fund could be required to buy or sell securities at
disadvantageous prices, thereby incurring losses. Managed Fund also may enter
into stock index futures contracts - see Appendix D.
OPTIONS. An option is a contract. A person who buys a call option for a security
has the right to buy the security at a set price for the length of the contract.
A person who sells a call option is called a writer. The writer of a call option
agrees to sell the security at the set price when the buyer wants to exercise
the option, no matter what the market price of the security is at that time. A
person who buys a put option has the right to sell a stock at a set price for
the length of the contract. A person who writes a put option agrees to buy the
security at the set price if the purchaser wants to exercise the option, no
matter what the market value of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash (in the case of a put) that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In addition the
buyer generally pays a broker a commission. The writer receives a premium, less
another commission, at the time the option is written. The cash received is
retained by the writer whether or not the option is exercised. A writer of a
call option may have to sell the security for a below-market price if the market
price rises above the exercise price. A writer of a put option may have to pay
an above-market price for the security if its market price decreases below the
exercise price.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options and futures contracts may benefit a fund and its shareholders by
improving the fund's liquidity and by helping to stabilize the value of its net
assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. They also may
be used for investment. Options are used as a trading technique to take
advantage of any disparity between the price of the underlying security in the
securities market and its price on the options market. It is anticipated the
trading technique will be utilized only to effect a transaction when the price
of the security plus the option price will be as good or better than the price
at which the security could be bought or sold directly. When the option is
purchased, the fund pays a premium and a commission. It then pays a second
commission on the purchase or sale of the underlying security when the option is
exercised. For record keeping and tax purposes, the price obtained on the
purchase of the underlying security
<PAGE>
will be the combination of the exercise price, the premium and both commissions.
When using options as a trading technique, commissions on the option will be set
as if only the underlying securities were traded.
Put and call options also may be held by a fund for investment purposes. Options
permit the fund to experience the change in the value of a security with a
relatively small initial cash investment. The risk the fund assumes when it buys
an option is the loss of the premium. To be beneficial to the fund, the price of
the underlying security must change within the time set by the option contract.
Furthermore, the change must be sufficient to cover the premium paid, the
commissions paid both in the acquisition of the option and in a closing
transaction or in the exercise of the option and sale (in the case of a call) or
purchase (in the case of a put) of the underlying security. Even then the price
change in the underlying security does not ensure a profit since prices in the
option market may not reflect such a change.
Writing covered options. A fund will write covered options when it feels it is
appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on the basis of
investment considerations consistent with the fund's goal.
'All options written by the fund will be covered. For covered call options if a
decision is made to sell the security, the fund will attempt to terminate the
option contract through a closing purchase transaction.
'The fund will write options only as permitted under applicable laws or
regulations, such as those that limit the amount of total assets subject to the
options.
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains. Since a fund is taxed as a regulated
investment company under the Internal Revenue Code, any gains on options and
other securities held less than three months must be limited to less than 30% of
its annual gross income.
If a covered call option is exercised, the security is sold by the fund. The
fund will recognize a capital gain or loss based upon the difference between the
proceeds and the security's basis.
Options on many securities are listed on options exchanges. If a fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange or NASDAQ will be valued at the last-quoted sales price or, if
such a price is not readily available, at the mean of the last bid and asked
prices.
FUTURES CONTRACTS. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. They have been established
by boards of trade which have been designated contract markets by the Commodity
Futures Trading Commission (CFTC). Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange, and the boards of
trade, through their clearing corporations, guarantee performance of the
contracts. Currently, there are futures contracts based on such debt securities
as long-term U.S. Treasury bonds, Treasury notes, GNMA modified pass-through
mortgage-backed securities, three-month U.S. Treasury bills and bank
certificates of deposit. While futures contracts based on debt
<PAGE>
securities do provide for the delivery and acceptance of securities, such
deliveries and acceptances are very seldom made. Generally, the futures contract
is terminated by entering into an offsetting transaction. An offsetting
transaction for a futures contract sale is effected by the fund entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and same delivery date. If the price in the sale exceeds
the price in the offsetting purchase, the fund immediately is paid the
difference and realizes a gain. If the offsetting purchase price exceeds the
sale price, the fund pays the difference and realizes a loss. Similarly, closing
out a futures contract purchase is effected by the fund entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the fund
realizes a gain, and if the offsetting sale price is less than the purchase
price, the fund realizes a loss. At the time a futures contract is made, a
good-faith deposit called initial margin is set up within a segregated account
at the fund's custodian bank. The initial margin deposit is approximately 1.5%
of a contract's face value. Daily thereafter, the futures contract is valued and
the payment of variation margin is required so that each day the fund would pay
out cash in an amount equal to any decline in the contract's value or receive
cash equal to any increase. At the time a futures contract is closed out, a
nominal commission is paid, which is generally lower than the commission on a
comparable transaction in the cash markets.
The purpose of a futures contract, in the case of a portfolio holding long-term
debt securities, is to gain the benefit of changes in interest rates without
actually buying or selling long-term debt securities. For example, if a fund
owned long-term bonds and interest rates were expected to increase, it might
enter into futures contracts to sell securities which would have much the same
effect as selling some of the long-term bonds it owned. Futures contracts are
based on types of debt securities referred to above, which have historically
reacted to an increase or decline in interest rates in a fashion similar to the
debt securities the fund owns. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of the fund's
futures contracts would increase at approximately the same rate, thereby keeping
the net asset value of the fund from declining as much as it otherwise would
have. If, on the other hand, the fund held cash reserves and interest rates were
expected to decline, the fund might enter into interest rate futures contracts
for the purchase of securities. If short-term rates were higher than long-term
rates, the ability to continue holding these cash reserves would have a very
beneficial impact on the fund's earnings. Even if short-term rates were not
higher, the fund would still benefit from the income earned by holding these
short-term investments. At the same time, by entering into futures contracts for
the purchase of securities, the fund could take advantage of the anticipated
rise in the value of long-term bonds without actually buying them until the
market had stabilized. At that time, the futures contracts could be liquidated
and the fund's cash reserves could then be used to buy long-term bonds on the
cash market. The fund could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase or by buying bonds with long maturities and selling
bonds with short maturities when interest rates are expected to decline. But by
using futures contracts as an investment tool, given the greater liquidity in
the futures market than in the cash market, it might be possible to accomplish
the same result more easily and more quickly. Successful use of futures
contracts depends on the investment manager's ability to predict the future
direction of interest rates. If the investment manager's prediction is
incorrect, the fund would have been better off had it not entered into futures
contracts.
<PAGE>
OPTIONS ON FUTURES CONTRACTS. Options give the holder a right to buy or sell
futures contracts in the future. Unlike a futures contract, which requires the
parties to the contract to buy and sell a security on a set date, an option on a
futures contract merely entitles its holder to decide on or before a future date
(within nine months of the date of issue) whether to enter into such a contract.
If the holder decides not to enter into the contract, all that is lost is the
amount (premium) paid for the option. Furthermore, because the value of the
option is fixed at the point of sale, there are no daily payments of cash to
reflect the change in the value of the underlying contract. However, since an
option gives the buyer the right to enter into a contract at a set price for a
fixed period of time, its value does change daily and that change is reflected
in the net asset value of the fund.
Risks. There are risks in engaging in each of the management tools described
above. The risk a fund assumes when it buys an option is the loss of the premium
paid for the option. Purchasing options also limits the use of monies that might
otherwise be available for long-term investments.
The risk involved in writing options on futures contracts the fund owns, or on
securities held in its portfolio, is that there could be an increase in the
market value of such contracts or securities. If that occurred, the option would
be exercised and the asset sold at a lower price than the cash market price. To
some extent, the risk of not realizing a gain could be reduced by entering into
a closing transaction. The fund could enter into a closing transaction by
purchasing an option with the same terms as the one it had previously sold. The
cost to close the option and terminate the fund's obligation, however, might be
more or less than the premium received when it originally wrote the option.
Furthermore, the fund might not be able to close the option because of
insufficient activity in the options market.
A risk in employing futures contracts to protect against the price volatility of
portfolio securities is that the prices of securities subject to futures
contracts may not correlate perfectly with the behavior of the cash prices of
the fund's portfolio securities. The correlation may be distorted because the
futures market is dominated by short-term traders seeking to profit from the
difference between a contract or security price and their cost of borrowed
funds. Such distortions are generally minor and would diminish as the contract
approached maturity.
Another risk is that the fund's investment manager could be incorrect in
anticipating as to the direction or extent of various interest rate movements or
the time span within which the movements take place. For example, if the fund
sold futures contracts for the sale of securities in anticipation of an increase
in interest rates, and interest rates declined instead, the fund would lose
money on the sale.
TAX TREATMENT. As permitted under federal income tax laws, each fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the fund being required to defer recognizing
losses incurred by entering into futures contracts and losses on underlying
securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes is currently unclear, although the funds' tax
advisers currently believe marking to market is not required. Depending on
developments, a fund may seek Internal Revenue Service (IRS) rulings clarifying
questions concerning such treatment.
<PAGE>
Certain provisions of the Internal Revenue Code may also limit a fund's ability
to engage in futures contracts and related options transactions. For example, at
the close of each quarter of the fund's taxable year, at least 50% of the value
of its assets must consist of cash, government securities and other securities,
subject to certain diversification requirements. Less than 30% of its gross
income must be derived from sales of securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements. In order to avoid realizing a gain within the
three-month period, a fund may be required to defer closing out a contract
beyond the time when it might otherwise be advantageous to do so. The fund also
may be restricted in purchasing put options for the purpose of hedging
underlying securities because of applying the short sale holding period rules
with respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
<PAGE>
APPENDIX F
MORTGAGE-BACKED SECURITIES AND ADDITIONAL INFORMATION ON INVESTMENT POLICIES FOR
ALL FUNDS EXCEPT MONEYSHARE
GNMA Certificates
The Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. GNMA certificates are mortgage-backed securities of the modified
pass-through type, which means that both interest and principal payments
(including prepayments) are passed through monthly to the holder of the
certificate. Each certificate evidences an interest in a specific pool of
mortgage loans insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The National
Housing Act provides that the full faith and credit of the United States is
pledged to the timely payment of principal and interest by GNMA of amounts due
on these certificates. GNMA is empowered to borrow without limitation from the
U.S. Treasury, if necessary, to make such payments.
Underlying Mortgages of the Pool. Pools consist of whole mortgage loans or
participations in loans. The majority of these loans are made to purchasers of
1-4 member family homes. The terms and characteristics of the mortgage
instruments generally are uniform within a pool but may vary among pools. For
example, in addition to fixed-rate fixed-term mortgages, the Fund may purchase
pools of variable rate mortgages, growing equity mortgages, graduated payment
mortgages and other types.
All servicers apply standards for qualification to local lending institutions
which originate mortgages for the pools. Servicers also establish credit
standards and underwriting criteria for individual mortgages included in the
pools. In addition, many mortgages included in pools are insured through private
mortgage insurance companies.
Average Life of GNMA Certificates. The average life of GNMA certificates varies
with the maturities of the underlying mortgage instruments which have maximum
maturities of 30 years. The average life is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities as the
result of prepayments or refinancing of such mortgages. Such prepayments are
passed through to the registered holder with the regular monthly payments of
principal and interest.
As prepayment rates vary widely, it is not possible to accurately predict the
average life of a particular pool. It is customary in the mortgage industry in
quoting yields on a pool of 30-year mortgages to compute the yield as if the
pool were a single loan that is amortized according to a 30-year schedule and
that is prepaid in full at the end of the 12th year. For this reason, it is
standard practice to treat GNMA certificates as 30-year mortgage-backed
securities which prepay fully in the 12th year.
Calculation of Yields. Yields on pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption.
Actual pre-payment experience may cause the yield to differ from the assumed
average life yield. When mortgage rates drop, pre-payments will increase, thus
reducing the yield. Reinvestment of pre-payments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of a fund.
The compounding effect from
<PAGE>
reinvestments of monthly payments received by the fund will increase the yield
to shareholders compared to bonds that pay interest semi-annually. The yield
also may be affected if the certificate was issued at a premium or discount,
rather than at par. This also applies after issuance to certificates trading in
the secondary market at a premium or discount.
"When-Issued" GNMA Certificates. Some U.S. government securities may be
purchased on a "when-issued" basis, which means that it may take as long as 45
days after the purchase before the securities are delivered to the fund. Payment
and interest terms, however, are fixed at the time the purchaser enters into the
commitment. However, the yield on a comparable GNMA certificate when the
transaction is consummated may vary from the yield on the GNMA certificate at
the time that the when-issued transaction was made. A fund does not pay for the
securities or start earning interest on them until the contractual settlement
date. When-issued securities are subject to market fluctuations and they may
affect the fund's gross assets the same as owned securities.
Market for GNMA Certificates. Since the inception of the GNMA mortgage-backed
securities program in 1970, the amount of GNMA certificates outstanding has
grown rapidly. The size of the market and the active participation in the
secondary market by securities dealers and many types of investors make the GNMA
certificates a highly liquid instrument. Prices of GNMA certificates are readily
available from securities dealers and depend on, among other things, the level
of market interest rates, the certificate's coupon rate and the prepayment
experience of the pool of mortgages underlying each certificate.
Stripped mortgage-backed securities. Generally, there are two classes of
stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO).
IOs entitle the holder to receive distributions consisting of all or a portion
of the interest on the underlying pool of mortgage loans or mortgage-backed
securities. POs entitle the holder to receive distributions consisting of all or
a portion of the principal of the underlying pool of mortgage loans or
mortgage-backed securities. The cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments (including prepayments) on
the underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs. A slow
rate of principal payments may adversely affect the yield to maturity of POs. If
prepayments of principal are greater than anticipated, an investor may incur
substantial losses. If prepayments of principal are slower than anticipated, the
yield on a PO will be affected more severely than would be the case with a
traditional mortgage-backed security.
Managed and Special Income Funds may invest in securities called "inverse
floaters". Inverse floaters are created by underwriters using the interest
payments on securities. A portion of the interest received is paid to holders of
instruments based on current interest rates for short-term securities. What is
left over, less a servicing fee, is paid to holders of the inverse floaters. As
interest rates go down, the holders of the inverse floaters receive more income
and an increase in the price for the inverse floaters. As interest rates go up,
the holders of the inverse floaters receive less income and a decrease in the
price for the inverse floaters.
All Funds except Moneyshare may purchase some securities in advance of when they
are issued. Price and rate of interest are set on the date the commitments are
given but no payment is made or interest earned until the date the securities
are issued, usually within two months, but other terms may be negotiated. The
commitment requires the Fund to
<PAGE>
buy the security when it is issued so the commitment is valued daily the same
way as owning a security would be valued. The Fund's custodian will maintain, in
a segregated account, cash or liquid high-grade debt securities that are marked
to market daily and are at least equal in value to the Fund's commitments to
purchase the securities. The Fund may sell the commitment just like it can sell
a security. Frequently, the Fund has the opportunity to sell the commitment back
to the institution that plans to issue the security and at the same time enter
into a new commitment to purchase a when-issued security in the future. For
rolling its commitment forward, the portfolio realizes a gain or loss on the
sale of the current commitment or receives a fee for entering into the new
commitment.
Managed and Special Income Funds may purchase mortgage-backed security (MBS) put
spread options and write covered MBS call spread options. MBS spread options are
based upon the changes in the price spread between a specified mortgage-backed
security and a like-duration Treasury security. MBS spread options are traded in
the OTC market and are of short duration, typically one to two months. The
portfolio would buy or sell covered MBS call spread options in situations where
mortgage-backed securities are expected to under perform like-duration Treasury
securities.
<PAGE>
APPENDIX G
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that eliminates random buy
and sell decisions. One such system is dollar-cost averaging. Dollar-cost
averaging involves building a portfolio through the investment of fixed amounts
of money on a regular basis regardless of the unit value or market condition.
This may enable an investor to smooth out the effects of the volatility of the
financial markets. By using this strategy, more units will be purchased when the
price is low and less when the price is high. As the accompanying chart
illustrates, dollar-cost averaging tends to keep the average price paid for the
units lower than the average price of units purchased, although there is no
guarantee.
While this technique does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many contract owners who
can continue investing through changing market conditions including times when
the price of their units falls or the market declines, to accumulate units to
meet long term goals.
Dollar-cost averaging
Regular Market Value of an Accumulation
Investment Accumulation Unit Units Acquired
$100 $ 6 16.7
100 4 25.0
100 4 25.0
100 6 16.7
100 5 20.0
$500 $25 103.4
Average market price of an accumulation unit over 5 periods:
$5 ($25 divided by 5).
The average price you paid for each accumulation unit:
$4.84 ($500 divided by 103.4).
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) Headings. 1) The headings in the
prospectus are placed
in blue strip at the top
of the page.
2) There are charts throughout 2) Each chart is described
the prospectus. in a heading.
3) Footnotes for charts. 3) The footnotes for each
chart are typed below
the description of the
chart.
4) The page numbers in the 4) The first prospectus begins
electronic document do not on page 3 in the electronic
correspond to the prospectus document, and page 1 in the
sent to the shareholders. prospectus sent to the
shareholders. The prospectus
ends on page 44 in the electronic
document, and page 47 in the
one sent to the shareholders.
5) Financial highlights 5) Some of the figures in some
tables. of the highlights tables
have been adjusted.