IVY HIGH YIELD FUND
series of
IVY FUND
Via Mizner Financial Plaza, Suite 300
700 South Federal Highway
Boca Raton, Florida 33432
STATEMENT OF ADDITIONAL INFORMATION
April 6, 1998
_________________________________________________________________
Ivy Fund (the "Trust") is an open-end management investment
company that currently consists of eighteen fully managed
portfolios, each of which (except for Ivy South America Fund) is
diversified. This Statement of Additional Information ("SAI")
relates to Class A, Class B, Class C and Class I shares of Ivy
High Yield Fund (the "Fund"). The other seventeen portfolios of
the Trust are described in separate prospectuses and statements
of additional information.
This SAI is not a prospectus and should be read in
conjunction with the prospectus for the Fund dated April 6, 1998
(the "Prospectus"), which may be obtained upon request and
without charge from the Trust at the Distributor's address and
telephone number listed below. The Fund also offers Advisor
Class shares, which are offered only to investors through a
separate prospectus and statement of additional information that
may be obtained from the Distributor.
INVESTMENT MANAGER
Ivy Management, Inc. ("IMI")
Via Mizner Financial Plaza, Suite 300
700 South Federal Highway
Boca Raton, Florida 33432
Telephone: (800) 777-6472
DISTRIBUTOR
Ivy Mackenzie Distributors, Inc.
Via Mizner Financial Plaza, Suite 300
700 South Federal Highway
Boca Raton, Florida 33432
Telephone: (800) 456-5111
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TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . 1
DEVELOPMENT OF THE HIGH YIELD BOND MARKET . . . . . . 1
HIGH YIELD BONDS-PORTFOLIO DIVERSIFICATION. . . . . . . . 1
HIGH YIELD/HIGH RISK SECURITIES . . . . . . . . . . . . . 2
U.S. GOVERNMENT SECURITIES. . . . . . . . . . . . . . . . 3
COMMERCIAL PAPER. . . . . . . . . . . . . . . . . . . . . 4
CONVERTIBLE SECURITIES. . . . . . . . . . . . . . . . . . 4
REPURCHASE AGREEMENTS . . . . . . . . . . . . . . . . . . 5
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS . . . . 5
FOREIGN SECURITIES. . . . . . . . . . . . . . . . . . . . 6
FOREIGN CURRENCIES. . . . . . . . . . . . . . . . . . . . 7
FORWARD FOREIGN CURRENCY CONTRACTS. . . . . . . . . . . . 8
DEBT SECURITIES, IN GENERAL . . . . . . . . . . . . . . . 8
INTERNATIONAL BOND MARKETS. . . . . . . . . . . . . . . . 9
SMALL COMPANIES . . . . . . . . . . . . . . . . . . . . . 9
WHEN-ISSUED PURCHASES AND FIRM COMMITMENT AGREEMENTS. . . 9
ZERO COUPON BONDS . . . . . . . . . . . . . . . . . . . . 10
ILLIQUID SECURITIES . . . . . . . . . . . . . . . . . . . 11
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. . . . 12
GENERAL. . . . . . . . . . . . . . . . . . . . . . . 12
INTEREST RATE FUTURES CONTRACTS. . . . . . . . . . . 13
OPTIONS ON INTEREST RATE FUTURES CONTRACTS . . . . . 14
FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS . . . . . . . . . . . . . . . . . . . . 14
RISKS ASSOCIATED WITH FUTURES AND RELATED OPTIONS. . 15
COMBINED TRANSACTIONS. . . . . . . . . . . . . . . . 16
BORROWING . . . . . . . . . . . . . . . . . . . . . . . . 16
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . 17
ADDITIONAL RESTRICTIONS. . . . . . . . . . . . . . . . . . . . 18
ADDITIONAL RIGHTS AND PRIVILEGES . . . . . . . . . . . . . . . 19
AUTOMATIC INVESTMENT METHOD . . . . . . . . . . . . . . . 20
EXCHANGE OF SHARES. . . . . . . . . . . . . . . . . . . . 20
INITIAL SALES CHARGE SHARES. . . . . . . . . . . . . 20
CONTINGENT DEFERRED SALES CHARGE
SHARES CLASS A. . . . . . . . . . . . . . . . . 20
CLASS B. . . . . . . . . . . . . . . . . . . . . . . 21
CLASS C. . . . . . . . . . . . . . . . . . . . . . . 21
CLASS I. . . . . . . . . . . . . . . . . . . . . . . 22
ALL CLASSES. . . . . . . . . . . . . . . . . . . . . 22
LETTER OF INTENT. . . . . . . . . . . . . . . . . . . . . 22
RETIREMENT PLANS. . . . . . . . . . . . . . . . . . . . . 23
INDIVIDUAL RETIREMENT ACCOUNTS . . . . . . . . . . . 23
ROTH IRAS. . . . . . . . . . . . . . . . . . . . . . 25
QUALIFIED PLANS. . . . . . . . . . . . . . . . . . . 25
DEFERRED COMPENSATION FOR PUBLIC SCHOOLS AND
CHARITABLE ORGANIZATIONS ("403(B)(7)
ACCOUNT") . . . . . . . . . . . . . . . . . . . 26
SIMPLIFIED EMPLOYEE PENSION ("SEP") IRAS . . . . . . 27
SIMPLE PLANS . . . . . . . . . . . . . . . . . . . . 27
REINVESTMENT PRIVILEGE. . . . . . . . . . . . . . . . . . 27
RIGHTS OF ACCUMULATION. . . . . . . . . . . . . . . . . . 27
SYSTEMATIC WITHDRAWAL PLAN. . . . . . . . . . . . . . . . 28
GROUP SYSTEMATIC INVESTMENT PROGRAM . . . . . . . . . . . 29
BROKERAGE ALLOCATION . . . . . . . . . . . . . . . . . . . . . 30
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . 32
PERSONAL INVESTMENTS BY EMPLOYEES OF IMI. . . . . . . . . 36
COMPENSATION TABLE . . . . . . . . . . . . . . . . . . . . . . 37
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . 39
BUSINESS MANAGEMENT AND INVESTMENT ADVISORY SERVICES. . . 39
DISTRIBUTION SERVICES . . . . . . . . . . . . . . . . . . 41
RULE 18F-3 PLAN. . . . . . . . . . . . . . . . . . . 41
RULE 12B-1 DISTRIBUTION PLANS. . . . . . . . . . . . 42
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . 43
FUND ACCOUNTING SERVICES. . . . . . . . . . . . . . . . . 44
TRANSFER AGENT AND DIVIDEND PAYING AGENT. . . . . . . . . 44
ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . 44
AUDITORS. . . . . . . . . . . . . . . . . . . . . . . . . 44
CAPITALIZATION AND VOTING RIGHTS . . . . . . . . . . . . . . . 45
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . 46
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . 48
REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 48
CONVERSION OF CLASS B SHARES . . . . . . . . . . . . . . . . . 49
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD
CONTRACTS. . . . . . . . . . . . . . . . . . . . . . 51
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR
LOSSES . . . . . . . . . . . . . . . . . . . . . . . 52
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES. . . . 52
DEBT SECURITIES ACQUIRED AT A DISCOUNT. . . . . . . . . . 53
DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . 54
DISPOSITION OF SHARES . . . . . . . . . . . . . . . . . . 54
FOREIGN WITHHOLDING TAXES . . . . . . . . . . . . . . . . 55
BACKUP WITHHOLDING. . . . . . . . . . . . . . . . . . . . 56
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . 56
YIELD. . . . . . . . . . . . . . . . . . . . . . . . 57
AVERAGE ANNUAL TOTAL RETURN. . . . . . . . . . . . . 57
CUMULATIVE TOTAL RETURN. . . . . . . . . . . . . . . 58
OTHER QUOTATIONS, COMPARISONS AND GENERAL
INFORMATION . . . . . . . . . . . . . . . . . . 58
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 59
APPENDIX A
DESCRIPTION OF STANDARD & POOR'S CORPORATION ("S&P")
AND MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
CORPORATE BOND AND COMMERCIAL PAPER RATINGS . . . . . . . 60
APPENDIX B
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 25,
1998 AND REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . 63
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund has its own investment objectives and policies,
which are described in the Prospectus under the captions
"Investment Objectives and Policies" and "Risk Factors and
Investment Techniques." Additional information regarding the
characteristics and risks associated with the Fund's investment
techniques is set forth below.
DEVELOPMENT OF THE HIGH YIELD BOND MARKET
Over the course of this decade, the market for higher
yielding domestic debt securities has changed dramatically. U.S.
high yield bonds now total over $350 billion, about a quarter of
the entire U.S. corporate bond market.
In the early 1970s high yield bonds emerged as a way for new
companies, companies with troubled credit histories, or any
company without access to more traditional financing to raise
capital. The category grew and changed from a small, illiquid
market for special circumstances, to a larger, more liquid market
offering an alternative way to raise capital to companies of
every size and structure.
As the economy strengthened throughout the 1980s, some
companies began to replace more and more of the equity in their
capital structure with high yield debt. In the late 1980s, many
companies had little equity supporting the outstanding debt.
Those who had anticipated continuing growth and increasing cash
flows to contribute to debt service found that as the economy
slowed, they were unable to pay their creditors. This led to
defaults and the high yield bond market nearly collapsed under
the weight of several factors including a recession, the
bankruptcy of a major high yield bond underwriter, and the forced
withdrawal of thrifts from this market.
Expanding companies are now turning to the high yield bond
market for financing real growth. The average quality of the
overall high yield bond category has improved. There are many
opportunities to buy the debt of growing companies or companies
that may not yet have the track record necessary to utilize more
traditional sources of financing. The conditions of these
borrowing companies can improve over time, and as the quality of
the debt improves, the prospect for price appreciation adds to
the return from income.
HIGH YIELD BONDS-PORTFOLIO DIVERSIFICATION
The benefits of investing in high yield debt securities
include the potential for superior yields and also portfolio
diversification which may result in enhanced total returns with
the potential for reduced overall portfolio risk.
High yield bonds show a relatively low correlation with both
stocks and investment-grade bonds. Due to this low correlation,
high yield bonds offer diversification benefits to both equity
and income portfolios.
HIGH YIELD/HIGH RISK SECURITIES
The Fund invests in debt securities rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's"), or BB or lower by
Standard & Poor's Corporation ("S&P") and comparable unrated
securities. Securities rated lower than Baa or BBB (and
comparable unrated securities) are commonly referred to as "high
yield" or "junk" bonds and are considered to be predominantly
speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The lower the ratings of
corporate debt securities, the more their risks render them like
equity securities. Below investment-grade securities (rated Ba
or below by Moody's and BB or below by S&P) or unrated securities
of equivalent quality in which the Fund may invest carry a high
degree of risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve
greater volatility of price and risk of principal and income, and
may be less liquid, than securities in the higher rating
categories and are considered speculative. (See Appendix A for a
more complete description of the ratings assigned by Moody's and
S&P and their respective characteristics.)
While IMI may refer to ratings issued by established credit
rating agencies, it is not IMI's policy to rely exclusively on
such ratings, but rather to supplement such ratings with its own
independent and ongoing review of credit quality. The Fund's
achievement of its investment objectives may, to the extent of
its investment in low-rated debt securities, be more dependent
upon IMI's credit analysis than would be the case if the Fund was
investing in higher quality bonds. Should the rating of a
portfolio security be downgraded, IMI will determine whether it
is in the Fund's best interest to retain or dispose of the
security.
Economic downturns may disrupt the high yield market and
impair the ability of issuers to repay principal and interest.
Also, an increase in interest rates would likely have an adverse
impact on the value of such obligations. During an economic
downturn or period of rising interest rates, highly leveraged
issuers may experience financial stress which could adversely
affect their ability to service their principal and interest
payment obligations. Prices and yields of high yield securities
will fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely
affect the Fund's net asset value. In addition, investments in
high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative and
may be subject to greater fluctuations in value due to changes in
interest rates.
The trading market for high yield securities may be thin to
the extent that there is no established retail secondary market
or because of a decline in the value of such securities. A thin
trading market may limit the ability of the Fund to accurately
value high yield securities in the Fund's portfolio, could
adversely affect the price at which the Fund could sell such
securities, and cause large fluctuations in the daily net asset
value of the Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of low-rated debt securities,
especially in a thinly traded market. When secondary markets for
high yield securities become relatively less liquid, it may be
more difficult to value the securities, requiring additional
research and elements of judgment. These securities may also
involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties.
Credit quality in the high yield securities market can
change suddenly and unexpectedly, and even recently issued credit
ratings may not fully reflect the actual risks posed by a
particular high-yield security. For these reasons, it is the
policy of IMI not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such
ratings with its own independent and on-going review of credit
quality. The achievement of the Fund's investment objectives by
investment in such securities may be more dependent on IMI's
credit analysis than is the case for higher quality bonds.
Should the rating of a portfolio security be downgraded, IMI will
determine whether it is in the best interest of the Fund to
retain or dispose of such security.
Prices for high yield securities may be affected by
legislative and regulatory developments. For example, federal
rules require savings and loan institutions to gradually reduce
their holdings of this type of security. Also, Congress has from
time to time considered legislation which would restrict or
eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such
legislation may significantly depress the prices of outstanding
securities of this type.
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities.
Securities guaranteed by the U.S. Government include: (1) direct
obligations of the U.S. Treasury (such as Treasury bills, notes,
and bonds) and (2) Federal agency obligations guaranteed as to
principal and interest by the U.S. Treasury (such as GNMA
certificates, which are mortgage-backed securities). When such
securities are held to maturity, the payment of principal and
interest is unconditionally guaranteed by the U.S. Government,
and thus they are of the highest possible credit quality. U.S.
Government securities that are not held to maturity are subject
to variations in market value due to fluctuations in interest
rates.
Mortgage-backed securities are securities representing part
ownership of a pool of mortgage loans. For example, GNMA
certificates are such securities in which the timely payment of
principal and interest is guaranteed by the full faith and credit
of the U.S. Government. Although the mortgage loans in the pool
will have maturities of up to 30 years, the actual average life
of the loans typically will be substantially less because the
mortgages will be subject to principal amortization and may be
prepaid prior to maturity. Prepayment rates vary widely and may
be affected by changes in market interest rates. In periods of
falling interest rates, the rate of prepayment tends to increase,
thereby shortening the actual average life of the security.
Conversely, rising interest rates tend to decrease the rate of
prepayments, thereby lengthening the actual average life of the
security (and increasing the security's price volatility).
Accordingly, it is not possible to predict accurately the average
life of a particular pool. Reinvestment of prepayment may occur
at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to
reinvest prepayments of principal at current rates, mortgage-
backed securities can be less effective than typical bonds of
similar maturities at "locking in" yields during periods of
declining interest rates and may involve significantly greater
price and yield volatility than traditional debt securities.
Such securities may appreciate or decline in market value during
periods of declining or rising interest rates, respectively.
Securities issued by U.S. Government instrumentalities and
certain federal agencies are neither direct obligations of nor
guaranteed by the U.S. Treasury; however, they involve Federal
sponsorship in one way or another. Some are backed by specific
types of collateral, some are supported by the issuer's right to
borrow from the Treasury, some are supported by the discretionary
authority of the Treasury to purchase certain obligations of the
issuer, others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and
instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home
Loan Banks, Federal National Mortgage Association, Federal Home
Loan Mortgage Association, and Student Loan Marketing
Association.
COMMERCIAL PAPER
Commercial paper represents short-term unsecured promissory
notes issued in bearer form by bank holding companies,
corporations and finance companies. The Fund's investments are
not limited to a particular Moody's or S&P rating category. The
lower an issuer's rating, however, the greater the perceived risk
of its inability for repayment. An issuer's rating depends on
its ability to repay its short-term obligations as measured by
factors such as market position, capitalization characteristics,
earnings and profitability levels, and access to sources of
alternate liquidity.
CONVERTIBLE SECURITIES
Because convertible securities can be converted into equity
securities, their values will normally vary in some proportion
with those of the underlying equity securities. Convertible
securities usually provide a higher yield than the underlying
equity, however, so that the price decline of a convertible
security may sometimes be less substantial than that of the
underlying equity security.
The Fund may invest in convertible securities, such as
corporate bonds, notes, debentures and other securities that may
be converted into common stock. Investments in convertible
securities can provide income through interest and dividend
payments as well as an opportunity for capital appreciation by
virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest
include dividend-paying preferred stock that may be converted or
exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any
particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate
distributions or scheduled changes in the exchange ratio.
Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both
debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the
market value of convertible securities typically changes as the
market value of the underlying common stock changes, and,
therefore, also tends to follow movements in the general market
for equity securities. When the market price of the underlying
common stock increases, the price of a convertible security tends
to rise as a reflection of the value of the underlying common
stock, although typically not as much as the price of the
underlying common stock. While no securities investments are
without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same
issuer.
As debt securities, convertible securities are investments
which provide for a stream of income. Of course, like all debt
securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may
default on their obligations. Convertible securities generally
offer lower yields than non-convertible securities of similar
quality because of their conversion or exchange features.
Convertible securities generally are subordinated to other
similar but non-convertible securities of the same issuer,
although convertible bonds, as corporate debt obligations, are
senior in right of payment to all equity securities, and
convertible preferred stock is senior to common stock, of the
same issuer. However, convertible bonds and convertible
preferred stock typically have lower coupon rates than similar
non-convertible securities. Convertible securities may be issued
as fixed income obligations that pay current income.
REPURCHASE AGREEMENTS
Repurchase agreements are contracts under which the Fund
buys a money market instrument and obtains a simultaneous
commitment from the seller to repurchase the instrument at a
specified time and at an agreed-upon yield. Under guidelines
approved by the Board, the Fund is permitted to enter into
repurchase agreements only if the repurchase agreements are at
least fully collateralized with U.S. Government securities or
other securities that IMI has approved for use as collateral for
repurchase agreements and the collateral must be marked-to-market
daily. The Fund will enter into repurchase agreements only with
banks and broker-dealers deemed to be creditworthy by IMI under
the above-referenced guidelines. In the unlikely event of
failure of the executing bank or broker-dealer, the Fund could
experience some delay in obtaining direct ownership of the
underlying collateral and might incur a loss if the value of the
security should decline, as well as costs in disposing of the
security.
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS
Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank (meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument at
maturity). In addition to investing in certificates of deposit
and bankers' acceptances, the Fund may invest in time deposits in
banks or savings and loan associations. Time deposits are
generally similar to certificates of deposit, but are
uncertificated. The Fund's investments in certificates of
deposit, time deposits, and bankers' acceptances are limited to
obligations of (i) banks having total assets in excess of $1
billion, (ii) U.S. banks which do not meet the $1 billion asset
requirement, if the principal amount of such obligation is fully
insured by the Federal Deposit Insurance Corporation (the
"FDIC"), (iii) savings and loan associations which have total
assets in excess of $1 billion and which are members of the FDIC,
and (iv) foreign banks if the obligation is, in IMI's opinion, of
an investment quality comparable to other debt securities which
may be purchased by the Fund. The Fund's investments in
certificates of deposit of savings associations are limited to
obligations of Federal and state-chartered institutions whose
total assets exceed $1 billion and whose deposits are insured by
the FDIC.
FOREIGN SECURITIES
Investors should recognize that investing in foreign
securities involves certain special considerations, including
those set forth below and in the Fund's Prospectus, which are not
typically associated with investing in United States securities
and which may affect the Fund's performance favorably or
unfavorably.
The risks of investing in foreign securities are likely to
be intensified in the case of investments in issuers domiciled or
doing substantial business in countries with emerging or
developing economies ("emerging markets"). For example,
countries with emerging markets may have relatively unstable
governments and therefore be susceptible to sudden adverse
government action (such as nationalization of businesses,
restrictions on foreign ownership or prohibitions against
repatriation of assets). Security prices in emerging markets can
also be significantly more volatile than in the more developed
nations of the world, and communications between the U.S. and
emerging market countries may be unreliable, increasing the risk
of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Delayed settlements could
cause the Fund to miss attractive investment opportunities or
impair its ability to dispose of portfolio securities, resulting
in a loss if the value of the securities subsequently declines.
In addition, many emerging markets have experienced and continue
to experience especially high rates of inflation. In certain
countries, inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate
environment and sharply eroding the value of outstanding
financial assets in those countries.
In recent years, many emerging market countries around the
world have undergone political changes that have reduced
government's role in economic and personal affairs and have
stimulated investment and growth. In order for these emerging
economies to continue to expand and develop industry,
infrastructure and currency reserves, continued influx of capital
is essential. Historically, there is a strong direct correlation
between economic growth and stock market returns. While this is
no guarantee of future performance, IMI believes that investment
opportunities (particularly in the energy, environmental
services, natural resources, basic materials, power,
telecommunications and transportation industries) may result
within the evolving economies of emerging market countries from
which the Fund and its shareholders will benefit. IMI believes
that similar investment opportunities will be created for
companies involved in providing consumer goods and services
(e.g., food, beverages, autos, housing, tourism and leisure and
merchandising).
Foreign stock markets have different clearance and
settlement procedures and in certain markets there have been
times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no
return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. The
inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to
subsequent declines in the value of the portfolio security or, if
the Fund has entered into a contract to sell the security, in
possible liability to the purchaser. Fixed commissions on some
foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although IMI will endeavor to
achieve the most favorable net results on the Fund's portfolio
transactions. Further, the Fund may encounter difficulties or be
unable to pursue legal remedies and obtain judgment in foreign
courts. It may be more difficult for the Fund's agents to keep
currently informed about corporate actions such as stock
dividends or other matters which may affect the prices of
portfolio securities. Communications between the United States
and foreign countries may be less reliable than within the United
States, thus increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio
securities. Moreover, individual foreign economies may differ
favorably or unfavorably from the United States economy in such
respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of
payments position. IMI seeks to mitigate the risks to the Fund
associated with the foregoing considerations through investment
variation and continuous professional management.
FOREIGN CURRENCIES
Investment in foreign securities usually will involve
currencies of foreign countries. Moreover, the Fund may
temporarily hold funds in bank deposits in foreign currencies
during the completion of investment programs and may purchase
forward foreign currency contracts. Because of these factors,
the value of the assets of the Fund as measured in U.S. dollars
may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the
Fund may incur costs in connection with conversions between
various currencies. Although the Fund's Custodian values the
Fund's assets daily in terms of U.S. dollars, the Fund does not
intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Fund will do so from time to time,
and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to
purchase or sell foreign currencies.
The Fund's share price will reflect the movements of both
the different stock and bond markets in which it is invested and
of the currencies in which the investments are denominated; the
strength or weakness of the U.S. dollar against foreign
currencies may account for part of the Fund's investment
performance. U.S. and foreign securities markets do not always
move in step with each other, and the total returns from
different markets may vary significantly.
FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of
future foreign exchange rates in the purchase and sale of
securities, but not for speculative purposes. A forward foreign
currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These
contracts may be bought or sold to protect the Fund against a
possible loss resulting from an adverse change in the relation-
ship between foreign currencies and the U.S. dollar. Although
such contracts are intended to minimize the risk of loss due to a
decline in the value of the hedged currencies, at the same time,
they tend to limit any potential gain that might result should
the value of such currencies increase.
The Fund will not enter into forward contracts or maintain a
net exposure to such contracts where the consummation of the
contract would obligate the Fund to deliver an amount of currency
in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. Further, the Fund
generally will not enter into a forward contract with a term of
greater than one year.
The Fund will hold cash or liquid securities in a segregated
account with its Custodian in an amount equal (on a daily marked-
to-market basis) to the amount of the commitments under these
contracts. At the maturity of a forward contract, the Fund may
either accept or make delivery of the currency specified in the
contract, or, prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting
contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a
party to the original forward contract.
DEBT SECURITIES, IN GENERAL
Investment in debt securities involves both interest rate
and credit risk. Generally, the value of debt instruments rises
and falls inversely with fluctuations in interest rates. As
interest rates decline, the value of debt securities generally
increases. Conversely, rising interest rates tend to cause the
value of debt securities to decrease. Bonds with longer
maturities generally are more volatile than bonds with shorter
maturities. The market value of debt securities also varies
according to the relative financial condition of the issuer. In
general, lower-quality bonds offer higher yields due to the
increased risk that the issuer will be unable to meet its
obligations on interest or principal payments at the time called
for by the debt instrument.
INTERNATIONAL BOND MARKETS
The U.S. dollar-denominated bond market now represents less
than one half of the world's developed bond markets. As a
result, opportunities for investment in international bond
markets have become more significant. The liquidity of
international bond markets has improved as the number of
investors participating in these markets has increased.
Additionally, many international bond markets have become more
attractive for foreign investors due to the reduction of barriers
of entry to foreign investors by deregulation and by reduction of
withholding taxes.
Concurrent with the opening of foreign markets, restrictions
on international capital flows have been reduced or eliminated,
thereby enabling investment funds to seek the highest expected
returns. As a result, the market conditions of one nation
influence the market conditions of other countries through the
flow of international capital.
Returns from international bond markets often differ from
those generated by U.S. bond markets. The variations in returns
are, in part, the result of fluctuating foreign currency exchange
rates and changes in foreign interest rates as compared with U.S.
interest rates. At times, higher investment returns may be
provided by international bonds than from U.S. bonds. For
example, international bonds may provide higher current income
and/or greater capital appreciation than U.S. bonds due to
fluctuation in foreign currencies relative to the U.S. dollar.
Of course, at any time, the opposite may also be true.
SMALL COMPANIES
Investing in smaller company stocks involves certain special
considerations and risks that are not usually associated with
investing in larger, more established companies. For example,
the securities of small or new companies may be subject to more
abrupt or erratic market movements because they tend to be thinly
traded and are subject to a greater degree to changes in the
issuer's earnings and prospects. Small companies also tend to
have limited product lines, markets or financial resources.
Transaction costs associated with trading in smaller company
stocks may be higher than those of larger companies.
WHEN-ISSUED PURCHASES AND FIRM COMMITMENT AGREEMENTS
When the Fund purchases new issues of securities on a when-
issued basis, the Fund's Custodian will establish a segregated
account for the Fund consisting of cash or liquid securities
equal to the amount of the commitment. If the value of
securities in the account should decline, additional cash or
securities will be placed in the account so that the market value
of the account will equal the amount of such commitments by the
Fund on a daily basis.
Securities purchased on a when-issued basis and the
securities held in the Fund's portfolio are subject to changes in
market value based upon various factors including changes in the
level of market interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates,
i.e., they will appreciate in value when market interest rates
decline and decrease in value when market interest rates rise.
For this reason, placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net
assets. That is, to the extent that the Fund remains
substantially fully invested in securities at the same time that
it has committed to purchase securities on a when-issued basis,
there will be greater fluctuations in its net assets than if it
had set aside cash to satisfy its purchase commitment.
Upon the settlement date of the when-issued securities, the
Fund ordinarily will meet its obligation to purchase the
securities from available cash flow, use of the cash (or
liquidation of securities) held in the segregated account or sale
of other securities. Although it would not normally expect to do
so, the Fund also may meet its obligation from the sale of the
when-issued securities themselves (which may have a current
market value greater or less than the Fund's payment obligation).
The sale of securities to meet such obligations carries with it a
greater potential for the realization of capital gains.
The Fund may also enter into firm commitment agreements for
the purchase of securities at an agreed-upon price on a specified
future date. During the time that the Fund is obligated to
purchase such securities, it will maintain in a segregated
account with its Custodian cash or liquid securities of an
aggregate value sufficient to make payment for the securities.
ZERO COUPON BONDS
The Fund may purchase zero coupon bonds. Zero coupon bonds
are debt obligations issued without any requirement for the
periodic payment of interest. Zero coupon bonds are issued at a
significant discount from face value. The discount approximates
the total amount of interest the bonds would accrue and compound
over the period until maturity at a rate of interest reflecting
the market rate at the time of issuance. The Fund, if it holds
zero coupon bonds in its portfolio, however, would recognize
income currently for Federal income tax purposes in the amount of
the unpaid, accrued interest and generally would be required to
distribute dividends representing such income to shareholders
currently, even though funds representing such income would not
have been received by the Fund. Cash to pay dividends
representing unpaid, accrued interest may be obtained from sales
proceeds of portfolio securities and Fund shares and from loan
proceeds. The potential sale of portfolio securities to pay cash
distributions from income earned on zero coupon bonds may result
in the Fund being forced to sell portfolio securities at a time
when the Fund might otherwise choose not to sell these securities
and when the Fund might incur a capital loss on such sales.
Because interest on zero coupon obligations is not distributed to
the Fund on a current basis but is in effect compounded, the
value of the securities of this type is subject to greater
fluctuations in response to changing interest rates than the
value of debt obligations which distribute income regularly.
ILLIQUID SECURITIES
The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open
market, the securities so purchased are often "restricted
securities" or "not readily marketable," i.e., securities which
cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the
availability of an exemption from registration (such as Rule
144A) or because they are subject to other legal or contractual
delays in or restrictions on resale. This investment practice,
therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid
securities (including repurchase agreements of more than seven
days duration, certain restricted securities, and other
securities which are not readily marketable) may not constitute,
at the time of purchase, more than 15% of the value of the Fund's
net assets. The Trust's Board of Trustees has approved
guidelines for use by IMI in determining whether a security is
illiquid.
Generally speaking, restricted securities may be sold (i)
only to qualified institutional buyers; (ii) in a privately
negotiated transaction to a limited number of purchasers; (iii)
in limited quantities after they have been held for a specified
period of time and other conditions are met pursuant to an
exemption from registration; or (iv) in a public offering for
which a registration statement is in effect under the 1933 Act.
Issuers of restricted securities may not be subject to the
disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If
adverse market conditions were to develop during the period
between the Fund's decision to sell a restricted or illiquid
security and the point at which the Fund is permitted or able to
sell such security, the Fund might obtain a price less favorable
than the price that prevailed when it decided to sell. Where a
registration statement is required for the resale of restricted
securities, the Fund may be required to bear all or part of the
registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling
restricted securities to the public and, in such event, the Fund
may be liable to purchasers of such securities if the
registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will
continue to be liquid, IMI will monitor such restricted
securities subject to the supervision of the Board of Trustees.
Among the factors IMI may consider in reaching liquidity
decisions relating to Rule 144A securities are: (1) the
frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to
make a market in the security; and (4) the nature of the security
and the nature of the market for the security (i.e., the time
needed to dispose of the security, the method of soliciting
offers, and the mechanics of the transfer).
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The Fund may enter into futures contracts and
options on futures contracts for hedging purposes. A futures
contract provides for the future sale by one party and purchase
by another party of a specified quantity of a commodity at a
specified price and time. When a purchase or sale of a futures
contract is made by the Fund, the Fund is required to deposit
with its Custodian (or broker, if legally permitted) a specified
amount of cash or U.S. Government securities ("initial margin").
The margin required for a futures contract is set by the exchange
on which the contract is traded and may be modified during the
term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract
which is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied. A
futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal
to the daily change in value of the futures contract. This
process is known as "marking to market." Variation margin does
not represent a borrowing or loan by the Fund but is instead a
settlement between the Fund and the broker of the amount one
would owe the other if the futures contract expired. In
computing daily net asset value, the Fund will mark-to-market its
open futures position.
The Fund is also required to deposit and maintain margin
with respect to put and call options on futures contracts written
by it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking
delivery of the underlying securities, generally these
obligations are closed out prior to delivery of offsetting
purchases or sales of matching futures contracts (same exchange,
underlying security or index, and delivery month). If an
offsetting purchase price is less than the original sale price,
the Fund generally realizes a capital gain, or if it is more, the
Fund generally realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price,
the Fund generally realizes a capital gain, or if it is less, the
Fund generally realizes a capital loss. The transaction costs
must also be included in these calculations.
When purchasing a futures contract, the Fund will maintain
with its Custodian in a segregated account (and mark-to-market on
a daily basis) cash or liquid securities that, when added to the
amounts deposited with a futures commission merchant ("FCM") as
margin, are equal to the market value of the futures contract.
Alternatively, the Fund may "cover" its position by purchasing a
put option on the same futures contract with a strike price as
high as or higher than the price of the contract held by the
Fund.
When selling a futures contact, the Fund will maintain with
its Custodian in a segregated account (and mark-to-market on a
daily basis) cash or liquid securities that, when added to the
amounts deposited with an FCM as margin, are equal to the market
value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to
that of the index on which the futures contract is based), or by
holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the
contract written by that Fund (or at a higher price if the
difference is maintained in liquid assets with the Fund's
Custodian).
When selling a call option on a futures contract, the Fund
will maintain with its Custodian in a segregated account (and
mark-to-market on a daily basis) cash or liquid securities that,
when added to the amounts deposited with an FCM as margin, equal
the total market value of the futures contract underlying the
call option. Alternatively, the Fund may cover its position by
entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by
owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase
the same futures contract at a price not higher than the strike
price of the call option sold by that Fund.
When selling a put option on a futures contract, the Fund
will maintain with its Custodian in a segregated account (and
mark-to-market on a daily basis) cash or liquid securities that
equal the purchase price of the futures contract less any margin
on deposit. Alternatively, the Fund may cover the position
either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to
sell the same futures contract so long as the strike price of the
purchased put option is the same or higher than the strike price
of the put option sold by the Fund.
INTEREST RATE FUTURES CONTRACTS. The Fund may engage in
interest rate futures contracts transactions for hedging purposes
only. An interest rate futures contract is an agreement between
parties to buy or sell a specified debt security at a set price
on a future date. The financial instruments that underlie
interest rate futures contracts include long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA certificates, and three-month
U.S. Treasury bills. In the case of futures contracts traded on
U.S. exchanges, the exchange itself or an affiliated clearing
corporation assumes the opposite side of each transaction (i.e.,
as buyer or seller). A futures contract may be satisfied or
closed out by delivery or purchase, as the case may be in the
cash financial instrument or by payment of the change in the cash
value of the index. Frequently, using futures to effect a
particular strategy instead of using the underlying or related
security will result in lower transaction costs being incurred.
The Fund may sell interest rate futures contracts in order
to hedge its portfolio securities whose value may be sensitive to
changes in interest rates. In addition, the Fund could purchase
and sell these futures contracts in order to hedge its holdings
in certain common stocks (such as utilities, banks and savings
and loans) whose value may be sensitive to changes in interest
rates. The Fund could sell interest rate futures contracts in
anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might
otherwise result. When the Fund is not fully invested in
securities, it could purchase interest rate futures in order to
gain rapid market exposure that may in part or entirely offset
increases in the cost of securities that it intends to purchase.
As such purchases are made, an equivalent amount of interest rate
futures contracts will be terminated by offsetting sales. In a
substantial majority of these transactions, the Fund would
purchase such securities upon termination of the futures position
whether the futures position results from the purchase of an
interest rate futures contract or the purchase of a call option
on an interest rate futures contract, but under unusual market
conditions, a futures position may be terminated without the
corresponding purchase of securities.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS. For hedging
purposes, the Fund may also purchase and write put and call
options on interest rate futures contracts which are traded on a
U.S. exchange or board of trade and sell or purchase such options
to terminate an existing position. Options on interest rate
futures give the purchaser the right (but not the obligation), in
return for the premium paid, to assume a position in an interest
rate futures contract at a specified exercise price at a time
during the period of the option.
Transactions in options on interest rate futures would
enable the Fund to hedge against the possibility that
fluctuations in interest rates and other factors may result in a
general decline in prices of debt securities owned by the Fund.
Assuming that any decline in the securities being hedged is
accomplished by a rise in interest rates, the purchase of put
options and sale of call options on the futures contracts may
generate gains which can partially offset any decline in the
value of the Fund's portfolio securities which have been hedged.
However, if after the Fund purchases or sells an option on a
futures contract, the value of the securities being hedged moves
in the opposite direction from that contemplated, the Fund may
experience losses in the form of premiums on such options which
would partially offset gains the Fund would have.
FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. The
Fund may engage in foreign currency futures contracts and related
options transactions for hedging purposes. A foreign currency
futures contract provides for the future sale by one party and
purchase by another party of a specified quantity of a foreign
currency at a specified price and time.
An option on a foreign currency futures contract gives the
holder the right, in return for the premium paid, to assume a
long position (call) or short position (put) in a futures
contract at a specified exercise price at any time during the
period of the option. Upon the exercise of a call option, the
holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a
put option, the opposite is true.
The Fund may purchase call and put options on foreign
currencies as a hedge against changes in the value of the U.S.
dollar (or another currency) in relation to a foreign currency in
which portfolio securities of the Fund may be denominated. A
call option on a foreign currency gives the buyer the right to
buy, and a put option the right to sell, a certain amount of
foreign currency at a specified price during a fixed period of
time. The Fund may invest in options on foreign currency which
are either listed on a domestic securities exchange or traded on
a recognized foreign exchange.
In those situations where foreign currency options may not
be readily purchased (or where such options may be deemed
illiquid) in the currency in which the hedge is desired, the
hedge may be obtained by purchasing an option on a "surrogate"
currency, i.e., a currency where there is tangible evidence of a
direct correlation in the trading value of the two currencies. A
surrogate currency's exchange rate movements parallel that of the
primary currency. Surrogate currencies are used to hedge an
illiquid currency risk, when no liquid hedge instruments exist in
world currency markets for the primary currency.
The Fund will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign
exchange, board of trade, or similar entity or quoted on an
automated quotation system. The Fund will not enter into a
futures contract or purchase an option thereon if, immediately
thereafter, the aggregate initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open
futures option positions, less the amount by which any such
positions are "in-the-money," would exceed 5% of the liquidation
value of the Fund's portfolio (or the Fund's net asset value),
after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into. A call
option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A
put option is "in the money" if the exercise price exceeds the
value of the futures contract that is the subject of the option.
For additional information about margin deposits required with
respect to futures contracts and options thereon, see "Futures
Contracts and Options on Futures Contracts."
RISKS ASSOCIATED WITH FUTURES AND RELATED OPTIONS. There
are several risks associated with the use of futures contracts
and futures options as hedging techniques. A purchase or sale of
a futures contract may result in losses in excess of the amount
invested in the futures contract. There can be no guarantee that
there will be a correlation between price movements in the
hedging vehicle and in the Fund's portfolio securities being
hedged. In addition, there are significant differences between
the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as variations in
speculative market demand for futures and futures options on
securities, including technical influences in futures trading and
futures options, and differences between the financial
instruments being hedged and the instruments underlying the
standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of
issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may
work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial
losses.
There can be no assurance that a liquid market will exist at
a time when the Fund seeks to close out a futures or a futures
option position, and the Fund would remain obligated to meet
margin requirements until the position is closed. In addition,
there can be no assurance that an active secondary market will
continue to exist.
Currency futures contracts and options thereon may be traded
on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the United States; may not
involve a clearing mechanism and related guarantees; and are
subject to the risk of governmental actions affecting trading in,
or the prices of, foreign securities. The value of such position
also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) lesser availability
than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during non-business
hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lesser trading
volume.
COMBINED TRANSACTIONS. The Fund may enter into multiple
transactions, including multiple options transactions, multiple
futures transactions, multiple currency transactions (including
forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency
and interest rate transactions ("component" transactions),
instead of a single transaction, as part of a single or combined
strategy when, in the opinion of IMI, it is in the best interests
of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its
component transactions. Although combined transactions are
normally entered into based on IMI's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the
combination will instead increase such risks or hinder
achievement of the management objective.
The requirements for qualification as a regulated investment
company also may limit the extent to which the Fund may enter
into futures, options or forward contracts. See "Taxation."
BORROWING
Borrowing may exaggerate the effect on the Fund's net asset
value of any increase or decrease in the value of the Fund's
portfolio securities. Money borrowed will be subject to interest
costs (which may include commitment fees and/or the cost of
maintaining minimum average balances). Although the principal of
the Fund's borrowings will be fixed, the Fund's assets may change
in value during the time a borrowing is outstanding, thus
increasing exposure to capital risk. All borrowings will be
repaid before any additional investments are made.
INVESTMENT RESTRICTIONS
The Fund's investment objectives as set forth in the
Prospectus under "Investment Objectives and Policies," together
with the investment restrictions set forth below, are fundamental
policies of the Fund and may not be changed with respect to the
Fund without the approval of a majority of the outstanding voting
shares of the Fund. Under these restrictions, the Fund may not:
(i) Invest in real estate, real estate mortgage loans,
commodities, commodity futures contracts or interests
in oil, gas and/or mineral exploration or development
programs, although the Fund may purchase and sell
(a) securities which are secured by real estate,
(b) securities of issuers which invest or deal in
real estate, and (c) futures contracts and related
options;
(ii) Make investments in securities for the purpose of
exercising control over or management of the issuer;
(iii) Participate on a joint or a joint and several basis
in any trading account in securities. The "bunching"
of orders of the Fund--or of the Fund and of other
accounts under the investment management of the
persons rendering investment advice to the Fund--for
the sale or purchase of portfolio securities shall
not be considered participation in a joint securities
trading account;
(iv) Purchase securities on margin, except such short-term
credits as are necessary for the clearance of
transactions; the deposit or payment by the Fund of
initial or variation margin in connection with
futures contracts or related options transactions is
not considered the purchase of a security on margin;
(v) Make loans, except that this restriction shall not
prohibit (a) the purchase and holding of a portion of
an issue of publicly distributed debt securities,
(b) the lending of the Fund's portfolio securities in
accordance with applicable guidelines established by
the SEC and any guidelines established by the Trust's
Trustees, or (c) the entry into repurchase agreements
with banks or broker-dealers;
(vi) Borrow amounts in excess of 20% of its total assets,
taken at the lower of cost or market value, and then
only from banks as a temporary measure for
extraordinary or emergency purposes or except in
connection with reverse repurchase agreements,
provided that the Fund maintains net asset coverage
of at least 300% for all borrowings;
(vii) Mortgage, pledge, hypothecate or in any manner
transfer, as security for indebtedness, any
securities owned or held by the Fund (except as may
be necessary in connection with permitted borrowings
and then not in excess of 20% of the Fund's total
assets); provided, however, this does not prohibit
escrow, collateral or margin arrangements in
connection with its use of options, short sales,
futures contracts and options on future contracts;
(viii) Purchase the securities of issuers conducting their
principal business activities in the same industry
if immediately after such purchase the value of the
Fund's investments in such industry would exceed 25%
of the value of the total assets of the Fund;
(ix) Act as an underwriter of securities, except to the
extent that, in connection with the sale of
securities, it may be deemed to be an underwriter
under applicable securities laws;
(x) Make short sales of securities or maintain a short
position;
(xi) Issue senior securities, except as appropriate to
evidence indebtedness which it is permitted to incur,
and except to the extent that shares of the separate
classes or series of the Trust may be deemed to be
senior securities; provided that collateral
arrangements with respect to currency-related
contracts, futures contracts, options or other
permitted investments, including deposits of initial
and variation margin, are not considered to be the
issuance of senior securities for purposes of this
restriction; or
(xii) Purchase securities of any one issuer (except U.S.
Government securities) if as a result more than 5% of
the Fund's total assets would be invested in such
issuer or the Fund would own or hold more than 10% of
the outstanding voting securities of that issuer;
provided, however, that up to 25% of the value of the
Fund's total assets may be invested without regard to
these limitations.
ADDITIONAL RESTRICTIONS
The Fund has adopted the following additional restrictions,
which are not fundamental and which may be changed without
shareholder approval, to the extent permitted by applicable law,
regulation or regulatory policy.
Under these restrictions, the Fund may not:
(i) purchase or sell real estate limited partnership
interests;
(ii) purchase or sell interests in oil, gas and mineral
leases (other than securities of companies that
invest in or sponsor such programs);
(iii) invest more than 15% of its net assets taken at
market value at the time of the investment in
"illiquid securities;" illiquid securities may
include securities subject to legal or contractual
restrictions on resale (including private
placements), repurchase agreements maturing in more
than seven days, certain options traded over the
counter that the Fund has purchased, securities being
used to cover certain options that the Fund has
written, securities for which market quotations are
not readily available, or other securities which
legally or in IMI's opinion, subject to the Board's
supervision, may be deemed illiquid, but shall not
include any instrument that, due to the existence of
a trading market or to other factors, is liquid; or
(iv) purchase securities of other investment companies,
except in connection with a merger, consolidation or
sale of assets, and except that the Fund may purchase
shares of other investment companies subject to such
restrictions as may be imposed by the Investment
Company Act of 1940, as amended (the "1940 Act") and
rules thereunder.
Whenever an investment objective, policy or restriction set
forth in the Prospectus or this SAI states a maximum percentage
of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage
limitation or standard shall, unless otherwise indicated, apply
to the Fund only at the time a transaction is entered into.
Accordingly, if a percentage limitation is adhered to at the time
of investment, a later increase or decrease in the percentage
which results from circumstances not involving any affirmative
action by the Fund, such as a change in market conditions or a
change in the Fund's asset level or other circumstances beyond
the Fund's control, will not be considered a violation.
ADDITIONAL RIGHTS AND PRIVILEGES
The Trust offers and (except as noted below) bears the cost
of providing to investors the following rights and privileges.
The Trust reserves the right to amend or terminate any one or
more of these rights and privileges. Notice of amendments to or
terminations of rights and privileges will be provided to
shareholders in accordance with applicable law.
Certain of the rights and privileges described below refer
to funds, other than the Fund, whose shares are also distributed
by Ivy Mackenzie Distributors, Inc. ("IMDI"). These funds are:
Ivy Asia Pacific Fund, Ivy Bond Fund, Ivy Canada Fund, Ivy China
Region Fund, Ivy US Emerging Growth Fund, Ivy Global Fund, Ivy
Global Natural Resources Fund, Ivy Global Science & Technology
Fund, Ivy Growth Fund, Ivy Growth with Income Fund, Ivy
International Fund, Ivy International Fund II, Ivy International
Small Companies Fund, Ivy South America Fund, Ivy Developing
Nations Fund, Ivy Pan-Europe Fund, and Ivy Money Market Fund (the
other seventeen series of the Trust). (Effective April 18, 1997,
Ivy International Fund suspended the offer of its shares to new
investors.) Shareholders should obtain a current prospectus
before exercising any right or privilege that may relate to these
funds.
AUTOMATIC INVESTMENT METHOD
The Automatic Investment Method, which enables a Fund
shareholder to have specified amounts automatically drawn each
month from his or her bank for investment in Fund shares, is
available for all classes of shares, except Class I. The minimum
initial and subsequent investment under this method is $50 per
month (except in the case of a tax qualified retirement plan for
which the minimum initial and subsequent investment is $25 per
month). A shareholder may terminate the Automatic Investment
Method at any time upon delivery to Ivy Mackenzie Services Corp.
("IMSC") of telephone instructions or written notice. See
"Automatic Investment Method" in the Prospectus. To begin the
plan, complete Sections 6A and 7B of the Account Application.
EXCHANGE OF SHARES
As described in the Prospectus, shareholders of the Fund
have an exchange privilege with certain other Ivy funds (except
Ivy International Fund unless they have an existing Ivy
International Fund account). Before effecting an exchange,
shareholders of the Fund should obtain and read the currently
effective prospectus for the Ivy fund into which the exchange is
to be made.
INITIAL SALES CHARGE SHARES. Class A shareholders may
exchange their Class A shares ("outstanding Class A shares") for
Class A shares of another Ivy fund ("new Class A Shares") on the
basis of the relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge
previously paid on the outstanding Class A shares and the sales
charge payable at the time of the exchange on the new Class A
shares. (The additional sales charge will be waived for Class A
shares that have been invested for a period of 12 months or
longer.) Class A shareholders may also exchange their shares for
shares of Ivy Money Market Fund (no initial sales charge will be
assessed at the time of such an exchange).
CONTINGENT DEFERRED SALES CHARGE SHARES. CLASS A: Class A
shareholders may exchange their Class A shares that are subject
to a contingent deferred sales charge ("CDSC"), as described in
the Prospectus ("outstanding Class A shares"), for Class A shares
of another Ivy fund ("new Class A shares") on the basis of the
relative net asset value per Class A share, without the payment
of any CDSC that would otherwise be due upon the redemption of
the outstanding Class A shares. Class A shareholders of the Fund
exercising the exchange privilege will continue to be subject to
the Fund's CDSC period following an exchange if such period is
longer than the CDSC period, if any, applicable to the new
Class A shares.
For purposes of computing the CDSC that may be payable upon
the redemption of the new Class A shares, the holding period of
the outstanding Class A shares is "tacked" onto the holding
period of the new Class A shares.
CLASS B: Class B shareholders may exchange their Class B
shares ("outstanding Class B shares") for Class B shares of
another Ivy fund ("new Class B shares") on the basis of the
relative net asset value per Class B share, without the payment
of any CDSC that would otherwise be due upon the redemption of
the outstanding Class B shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to
the Fund's CDSC schedule (or period) following an exchange if
such schedule is higher (or such period is longer) than the CDSC
schedule (or period) applicable to the new Class B shares.
Class B shares of the Fund acquired through an exchange of
Class B shares of another Ivy fund will be subject to the Fund's
CDSC schedule (or period) if such schedule is higher (or such
period is longer) than the CDSC schedule (or period) applicable
to the Ivy fund from which the exchange was made.
For purposes of both the conversion feature and computing
the CDSC that may be payable upon the redemption of the new
Class B shares (prior to conversion), the holding period of the
outstanding Class B shares is "tacked" onto the holding period of
the new Class B shares.
The following CDSC table applies to Class B shares of Ivy
Asia Pacific Fund, Ivy Bond Fund, Ivy Canada Fund, Ivy China
Region Fund, Ivy US Emerging Growth Fund, Ivy Global Fund, Ivy
Global Natural Resources Fund, Ivy Global Science & Technology
Fund, Ivy Growth Fund, Ivy Growth with Income Fund, Ivy High
Yield Fund, Ivy International Fund, Ivy International Fund II,
Ivy International Small Companies Fund, Ivy South America Fund,
Ivy Developing Nations Fund and Ivy Pan-Europe Fund:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
DOLLAR AMOUNT SUBJECT TO
YEAR SINCE PURCHASE CHARGE
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
CLASS C: Class C shareholders may exchange their Class C
shares ("outstanding Class C shares") for Class C shares of
another Ivy fund ("new Class C shares") on the basis of the
relative net asset value per Class C share, without the payment
of any CDSC that would otherwise be due upon redemption. (Class
C shares are subject to a CDSC of 1% if redeemed within one year
of the date of purchase.)
CLASS I: Subject to the restrictions set forth in the
following paragraph, Class I shareholders may exchange their
outstanding Class I shares for Class I shares of another Ivy fund
on the basis of the relative net asset value per Class I share.
ALL CLASSES: The minimum value of shares which may be
exchanged into an Ivy fund in which shares are not already held
is $1,000 ($5,000,000 in the case of Class I shares of Ivy Global
Science & Technology Fund, Ivy International Fund, Ivy
International Fund II and Ivy International Small Companies Fund
(generally referred to herein as the "Class I Funds"), and
$250,000 in the case of Ivy High Yield Fund and Ivy Bond Fund).
No exchange out of the Fund (other than by a complete exchange of
all Fund shares) may be made if it would reduce the shareholder's
interest in the Fund to less than $1,000 ($250,000 in the case of
Class I shares of the Fund).
Each exchange will be made on the basis of the relative net
asset values per share of each fund of Ivy Fund next computed
following receipt by IMSC of telephone instructions by IMSC or a
properly executed request. Exchanges, whether written or
telephonic, must be received by IMSC by the close of regular
trading on the New York Stock Exchange, Inc. (the "Exchange")
(normally 4:00 p.m., eastern time) to receive the price computed
on the day of receipt. Exchange requests received after that
time will receive the price next determined following receipt of
the request. The exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice to the
extent required by applicable law. See "Redemptions."
An exchange of shares between any of the Ivy funds will
result in a taxable gain or loss. Generally, this will be a
capital gain or loss (long-term or short-term, depending on the
holding period of the shares) in the amount of the difference
between the net asset value of the shares surrendered and the
shareholder's tax basis for those shares. However, in certain
circumstances, shareholders will be ineligible to take sales
charges into account in computing taxable gain or loss on an
exchange. See "Taxation."
With limited exceptions, gain realized by a tax-deferred
retirement plan will not be taxable to the plan and will not be
taxed to the participant until distribution. Each investor
should consult his or her tax adviser regarding the tax
consequences of an exchange transaction.
LETTER OF INTENT
Reduced sales charges apply to initial investments in
Class A shares of the Fund made pursuant to a non-binding Letter
of Intent. A Letter of Intent may be submitted by an individual,
his or her spouse and children under the age of 21, or a trustee
or other fiduciary of a single trust estate or single fiduciary
account. See the Account Application in the Prospectus. Any
investor may submit a Letter of Intent stating that he or she
will invest, over a period of 13 months, at least $50,000 in
Class A shares of the Fund. A Letter of Intent may be submitted
at the time of an initial purchase of Class A shares of the Fund
or within 90 days of the initial purchase, in which case the
Letter of Intent will be back dated. A shareholder may include,
as an accumulation credit, the value (at the applicable offering
price) of all Class A shares of Ivy Asia Pacific Fund, Ivy China
Region Fund, Ivy Canada Fund, Ivy South America Fund, Ivy
International Fund, Ivy International Fund II, Ivy Pan-Europe
Fund, Ivy Global Fund, Ivy Global Natural Resources Fund, Ivy
Global Science & Technology Fund, Ivy Growth Fund, Ivy Growth
with Income Fund, Ivy US Emerging Growth Fund, Ivy High Yield
Fund, Ivy International Small Companies Fund, Ivy Developing
Nations Fund and Ivy Bond Fund (and shares that have been
exchanged into Ivy Money Market Fund from any of the other funds
in the Ivy funds) held of record by him or her as of the date of
his or her Letter of Intent. During the term of the Letter of
Intent, the Transfer Agent will hold Class A shares representing
5% of the indicated amount (less any accumulation credit value)
in escrow. The escrowed Class A shares will be released when the
full indicated amount has been purchased. If the full indicated
amount is not purchased during the term of the Letter of Intent,
the investor is required to pay IMDI an amount equal to the
difference between the dollar amount of sales charge that he or
she has paid and that which he or she would have paid on his or
her aggregate purchases if the total of such purchases had been
made at a single time. Such payment will be made by an automatic
liquidation of Class A shares in the escrow account. A Letter of
Intent does not obligate the investor to buy or the Trust to sell
the indicated amount of Class A shares, and the investor should
read carefully all the provisions of such letter before signing.
RETIREMENT PLANS
Shares may be purchased in connection with several types of
tax-deferred retirement plans. Shares of more than one fund
distributed by IMDI may be purchased in a single application
establishing a single plan account, and shares held in such an
account may be exchanged among the funds of Ivy Fund in
accordance with the terms of the applicable plan and the exchange
privilege available to all shareholders. Initial and subsequent
purchase payments in connection with tax-deferred retirement
plans must be at least $25 per participant.
The following fees will be charged to individual shareholder
accounts as described in the retirement prototype plan document:
Retirement Plan New Account Fee no fee
Retirement Plan Annual Maintenance Fee $10.00 per account
For shareholders whose retirement accounts are diversified across
several funds of Ivy Fund, the annual maintenance fee will be
limited to not more than $20.
The following discussion describes the tax treatment of
certain tax-deferred retirement plans under current Federal
income tax law. State income tax consequences may vary. An
individual considering the establishment of a retirement plan
should consult with an attorney and/or an accountant with respect
to the terms and tax aspects of the plan.
INDIVIDUAL RETIREMENT ACCOUNTS: Shares of the Trust may be
used as a funding medium for an Individual Retirement Account
("IRA"). Eligible individuals may establish an IRA by adopting a
model custodial account available from IMSC, who may impose a
charge for establishing the account. Individuals should consult
their tax advisers before investing IRA assets in an Ivy fund if
that fund primarily distributes exempt-interest dividends.
An individual who has not reached age 70-1/2 and who
receives compensation or earned income is eligible to contribute
to an IRA, whether or not he or she is an active participant in a
retirement plan. An individual who receives a distribution from
another IRA, a qualified retirement plan, a qualified annuity
plan or a tax-sheltered annuity or custodial account ("403(b)
plan") that qualifies for "rollover" treatment is also eligible
to establish an IRA by rolling over the distribution either
directly or within 60 days after its receipt. Tax advice should
be obtained in connection with planning a rollover contribution
to an IRA.
In general, an eligible individual may contribute up to the
lesser of $2,000 or 100% of his or her compensation or earned
income to an IRA each year. If a husband and wife are both
employed, and both are under age 70-1/2, each may set up his or
her own IRA within these limits. If both earn at least $2,000
per year, the maximum potential contribution is $4,000 per year
for both. For years after 1996, the result is similar even if
one spouse has no earned income; if the joint earned income of
the spouses is at least $4,000, a contribution of up to $2,000
may be made to each spouse's IRA. Rollover contributions are not
subject to these limits.
An individual may deduct his or her annual contributions to
an IRA in computing his or her Federal income tax within the
limits described above, provided he or she (or his or her spouse,
if they file a joint Federal income tax return) is not an active
participant in a qualified retirement plan (such as a qualified
corporate, sole proprietorship, or partnership pension, profit
sharing, 401(k) or stock bonus plan), qualified annuity plan,
403(b) plan, simplified employee pension, or governmental plan.
If he or she (or his or her spouse) is an active participant,
whether the individual's contribution to an IRA is fully
deductible, partially deductible or not deductible depends on
(i) adjusted gross income and (ii) whether it is the individual
or the individual's spouse who is an active participant, in the
case of married individuals filing jointly. Contributions may be
made up to the maximum permissible amount even if they are not
deductible. Rollover contributions are not includible in income
for Federal income tax purposes and therefore are not deductible
from it.
Generally, earnings on an IRA are not subject to current
Federal income tax until distributed. Distributions attributable
to tax-deductible contributions and to IRA earnings are taxed as
ordinary income. Distributions of non-deductible contributions
are not subject to Federal income tax. In general, distributions
from an IRA to an individual before he or she reaches age 59-1/2
are subject to a nondeductible penalty tax equal to 10% of the
taxable amount of the distribution. The 10% penalty tax does not
apply to amounts withdrawn from an IRA after the individual
reaches age 59-1/2, becomes disabled or dies, or if withdrawn in
the form of substantially equal payments over the life or life
expectancy of the individual and his or her designated benefi-
ciary, if any, or rolled over into another IRA, amounts withdrawn
and used to pay for deductible medical expenses, amounts
withdrawn by certain unemployed individuals not in excess of
amounts paid for certain health insurance premiums, amounts used
to pay certain qualified higher education expenses, and amounts
used within 120 days of the date the distribution is received to
pay for certain first-time homebuyer expenses. Distributions
must begin to be withdrawn not later than April 1 of the calendar
year following the calendar year in which the individual reaches
age 70-1/2. Failure to take certain minimum required distribu-
tions will result in the imposition of a 50% non-deductible
penalty tax.
ROTH IRAS: Shares of the Trust also may be used as a
funding medium for a Roth Individual Retirement Account ("Roth
IRA"). A Roth IRA is similar in numerous ways to the regular
(traditional) IRA, described above. Some of the primary
differences are as follows.
A single individual earning below $95,000 can contribute up
to $2,000 per year to a Roth IRA. The maximum contribution
amount diminishes and gradually falls to zero for single filers
with adjusted gross incomes ranging from $95,000 to $110,000.
Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA).
The maximum contribution amount for married couples filing
jointly phases out from $150,000 to $160,000. An individual
whose adjusted gross income exceeds the maximum phase-out amount
cannot contribute to a Roth IRA.
An eligible individual can contribute money to a traditional
IRA and a Roth IRA as long as the total contribution to all IRAs
does not exceed $2,000. Contributions to a Roth IRA are not
deductible. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained
age 70 1/2.
No distributions are required to be taken prior to the death
of the original account holder. If a Roth IRA has been
established for a minimum of five years, distributions can be
taken tax-free after reaching age 59 1/2, for a first-time home
purchase ($10,000 maximum, one time use), or upon death or
disability. All other distributions from a Roth IRA are taxable
and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical
expenses, the purchase of health insurance for an unemployed
individual and education expenses.
An individual with an income of less than $100,000 (who is
not married filing separately) can roll his or her existing IRA
into a Roth IRA. However, the individual must pay taxes on the
taxable amount in his or her traditional IRA. Individuals who
complete the rollover in 1998 will be allowed to spread the tax
payments over a four-year period. After 1998, all taxes on such
a rollover will have to be paid in the tax year in which the
rollover is made.
QUALIFIED PLANS: For those self-employed individuals who
wish to purchase shares of one or more of the funds of Ivy Fund
through a qualified retirement plan, a Custodial Agreement and a
Retirement Plan are available from IMSC. The Retirement Plan may
be adopted as a profit sharing plan or a money purchase pension
plan. A profit sharing plan permits an annual contribution to be
made in an amount determined each year by the self-employed
individual within certain limits prescribed by law. A money
purchase pension plan requires annual contributions at the level
specified in the Custodial Agreement. There is no set-up fee for
qualified plans and the annual maintenance fee is $20.00 per
account.
In general, if a self-employed individual has any common law
employees, employees who have met certain minimum age and service
requirements must be covered by the Retirement Plan. A self-
employed individual generally must contribute the same percentage
of income for common law employees as for himself or herself.
A self-employed individual may contribute up to the lesser
of $30,000 or 25% of compensation or earned income to a money
purchase pension plan or to a combination profit sharing and
money purchase pension plan arrangement each year on behalf of
each participant. To be deductible, total contributions to a
profit sharing plan generally may not exceed 15% of the total
compensation or earned income of all participants in the plan,
and total contributions to a combination money purchase-profit
sharing arrangement generally may not exceed 25% of the total
compensation or earned income of all participants. The amount of
compensation or earned income of any one participant that may be
included in computing the deduction is limited (generally to
$150,000 for benefits accruing in plan years beginning after
1993, with annual inflation adjustments). A self-employed
individual's contributions to a retirement plan on his or her own
behalf must be deducted in computing his or her earned income.
Corporate employers may also adopt the Custodial Agreement
and Retirement Plan for the benefit of their eligible employees.
Similar contribution and deduction rules apply to corporate
employers.
Distributions from the Retirement Plan generally are made
after a participant's separation from service. A 10% penalty tax
generally applies to distributions to an individual before he or
she reaches age 59-1/2, unless the individual (1) has reached age
55 and separated from service; (2) dies; (3) becomes disabled;
(4) uses the withdrawal to pay tax-deductible medical expenses;
(5) takes the withdrawal as part of a series of substantially
equal payments over his or her life expectancy or the joint life
expectancy of himself or herself and a designated beneficiary; or
(6) rolls over the distribution.
The Transfer Agent will arrange for Investors Bank & Trust
to furnish custodial services to the employer and any
participating employees.
DEFERRED COMPENSATION FOR PUBLIC SCHOOLS AND CHARITABLE
ORGANIZATIONS ("403(B)(7) ACCOUNT"): Section 403(b)(7) of the
Internal Revenue Code of 1986, as amended (the "Code"), permits
public school systems and certain charitable organizations to use
mutual fund shares held in a custodial account to fund deferred
compensation arrangements with their employees. A custodial
account agreement is available for those employers whose
employees wish to purchase shares of the Trust in conjunction
with such an arrangement. The special application for a
403(b)(7) Account is available from IMSC.
Distributions from the 403(b)(7) Account may be made only
following death, disability, separation from service, attainment
of age 59-1/2, or incurring a financial hardship. A 10% penalty
tax generally applies to distributions to an individual before he
or she reaches age 59-1/2, unless the individual (1) has reached
age 55 and separated from service; (2) dies or becomes disabled;
(3) uses the withdrawal to pay tax-deductible medical expenses;
(4) takes the withdrawal as part of a series of substantially
equal payments over his or her life expectancy or the joint life
expectancy of himself or herself and a designated beneficiary; or
(5) rolls over the distribution. There is no set-up fee for
403(b)(7) Accounts and the annual maintenance fee is $20.00 per
account.
SIMPLIFIED EMPLOYEE PENSION ("SEP") IRAS: An employer may
deduct contributions to a SEP up to the lesser of $30,000 or 15%
of compensation. SEP accounts generally are subject to all rules
applicable to IRA accounts, except the deduction limits, and are
subject to certain employee participation requirements. No new
salary reduction SEPs ("SARSEPs") may be established after 1996,
but existing SARSEPs may continue to be maintained, and non-
salary reduction SEPs may continue to be established as well as
maintained after 1996.
SIMPLE PLANS: An employer may establish a SIMPLE IRA or a
SIMPLE 401(k) for years after 1996. An employee can make pre-tax
salary reduction contributions to a SIMPLE Plan, up to $6,000 a
year. Subject to certain limits, the employer will either match
a portion of employee contributions, or will make a contribution
equal to 2% of each employee's compensation without regard to the
amount the employee contributes. An employer cannot maintain a
SIMPLE Plan for its employees if any contributions or benefits
are credited to those employees under any other qualified
retirement plan maintained by the employer.
REINVESTMENT PRIVILEGE
Shareholders who have redeemed Class A shares of the Fund
may reinvest all or a part of the proceeds of the redemption back
into Class A shares of the Fund at net asset value (without a
sales charge) within 60 days from the date of redemption. This
privilege may be exercised only once. The reinvestment will be
made at the net asset value next determined after receipt by IMSC
of the reinvestment order accompanied by the funds to be
reinvested. No compensation will be paid to any sales personnel
or dealer in connection with the transaction.
Any redemption is a taxable event. A loss realized on a
redemption generally may be disallowed for tax purposes if the
reinvestment privilege is exercised within 30 days after the
redemption. In certain circumstances, shareholders will be
ineligible to take sales charges into account in computing
taxable gain or loss on a redemption if the reinvestment
privilege is exercised. See "Taxation."
RIGHTS OF ACCUMULATION
A scale of reduced sales charges applies to any investment
of $100,000 or more in Class A shares of the Fund. See "Initial
Sales Charge Alternative -- Class A Shares" in the Prospectus.
The reduced sales charge is applicable to investments made at one
time by an individual, his or her spouse and children under the
age of 21, or a trustee or other fiduciary of a single trust
estate or single fiduciary account (including a pension, profit
sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Code). Rights of
Accumulation is also applicable to current purchases of all of
the funds of Ivy Fund (except Ivy Money Market Fund) by any of
the persons enumerated above, where the aggregate quantity of
Class A shares of Ivy Asia Pacific Fund, Ivy Bond Fund, Ivy
Canada Fund, Ivy China Region Fund, Ivy US Emerging Growth Fund,
Ivy Global Fund, Ivy Global Natural Resources Fund, Ivy Global
Science & Technology Fund, Ivy Growth Fund, Ivy Growth with
Income Fund, Ivy International Fund, Ivy High Yield Fund, Ivy
International Small Companies Fund, Ivy South America Fund, Ivy
Developing Nations Fund, Ivy International Fund II and Ivy Pan-
Europe Fund (and shares that have been exchanged into Ivy Money
Market Fund from any of the other funds in the Ivy funds) and of
any other investment company distributed by IMDI, previously
purchased or acquired and currently owned, determined at the
higher of current offering price or amount invested, plus the
Class A shares being purchased, amounts to $50,000 or more for
Ivy Asia Pacific Fund, Ivy Canada Fund, Ivy China Region Fund,
Ivy US Emerging Growth Fund, Ivy Global Fund, Ivy Global Natural
Resources Fund, Ivy Global Science & Technology Fund, Ivy Growth
Fund, Ivy Growth with Income Fund, Ivy International Fund, Ivy
International Small Companies Fund, Ivy South America Fund, Ivy
Developing Nations Fund, Ivy International Fund II, Ivy Pan-
Europe Fund; or $100,000 or more for Ivy Bond Fund or Ivy High
Yield Fund.
At the time an investment takes place, IMSC must be notified
by the investor or his or her dealer that the investment
qualifies for the reduced sales charge on the basis of previous
investments. The reduced sales charge is subject to confirmation
of the investor's holdings through a check of the particular
fund's records.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder (except shareholders with accounts in Class I
of the Class I Funds) may establish a Systematic Withdrawal Plan
(a "Withdrawal Plan"), by telephone instructions or by delivery
to IMSC of a written election to have his or her shares withdrawn
periodically, accompanied by a surrender to IMSC of all share
certificates then outstanding in such shareholder's name,
properly endorsed by the shareholder. To be eligible to elect a
Withdrawal Plan, a shareholder must have at least $5,000 in his
or her account. A Withdrawal Plan may not be established if the
investor is currently participating in the Automatic Investment
Method. A Withdrawal Plan may involve the depletion of a
shareholder's principal, depending on the amount withdrawn.
A redemption under a Withdrawal Plan is a taxable event.
Shareholders contemplating participating in a Withdrawal Plan
should consult their tax advisers.
Additional investments made by investors participating in a
Withdrawal Plan must equal at least $1,000 each while the
Withdrawal Plan is in effect. Making additional purchases while
a Withdrawal Plan is in effect may be disadvantageous to the
investor because of applicable initial sales charges or CDSCs.
An investor may terminate his or her participation in the
Withdrawal Plan at any time by delivering written notice to IMSC.
If all shares held by the investor are liquidated at any time,
participation in the Withdrawal Plan will terminate
automatically. The Trust or IMSC may terminate the Withdrawal
Plan option at any time after reasonable notice to shareholders.
GROUP SYSTEMATIC INVESTMENT PROGRAM
Shares may be purchased in connection with investment
programs established by employee or other groups using systematic
payroll deductions or other systematic payment arrangements. The
Trust does not itself organize, offer or administer any such
programs. However, it may, depending upon the size of the
program, waive the minimum initial and additional investment
requirements for purchases by individuals in conjunction with
programs organized and offered by others. Unless shares of the
Fund are purchased in conjunction with IRAs (see "How to Buy
Shares" in the Prospectus), such group systematic investment
programs are not entitled to special tax benefits under the Code.
The Trust reserves the right to refuse purchases at any time or
suspend the offering of shares in connection with group
systematic investment programs, and to restrict the offering of
shareholder privileges, such as check writing, simplified
redemptions and other optional privileges, as described in the
Prospectus, to shareholders using group systematic investment
programs.
With respect to each shareholder account established on or
after September 15, 1972 under a group systematic investment
program, the Trust and IMI each currently charge a maintenance
fee of $3.00 (or portion thereof) for each twelve-month period
(or portion thereof) that the account is maintained. The Trust
may collect such fee (and any fees due to IMI) through a
deduction from distributions to the shareholders involved or by
causing on the date the fee is assessed a redemption in each such
shareholder account sufficient to pay such fee. The Trust
reserves the right to change these fees from time to time without
advance notice.
Class A shares of the Fund are made available to Merrill
Lynch Daily K Plan (the "Plan") participants at NAV without an
initial sales charge if:
(i) the Plan is recordkept on a daily valuation basis by
Merrill Lynch and, on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has
$3 million or more in assets invested in broker/dealer funds
not advised or managed by Merrill Lynch Asset Management,
L.P. ("MLAM") that are made available pursuant to a Service
Agreement between Merrill Lynch and the fund's principal
underwriter or distributor and in funds advised or managed
by MLAM (collectively, the "Applicable Investments");
(ii) the Plan is recordkept on a daily valuation basis by an
independent recordkeeper whose services are provided through
a contract or alliance arrangement with Merrill Lynch, and
on the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement, the Plan has $3 million or
more in assets, excluding money market funds, invested in
Applicable Investments; or
(iii) the Plan has 500 or more eligible employees, as
determined by Merrill Lynch plan conversion manager, on the
date the Plan Sponsor signs the Merrill Lynch Recordkeeping
Service Agreement.
Alternatively, Class B shares of the Fund are made available
to Plan participants at NAV without a CDSC if the Plan conforms
with the requirements for eligibility set forth in (i) through
(iii) above but either does not meet the $3 million asset
threshold or does not have 500 or more eligible employees.
Plans recordkept on a daily basis by Merrill Lynch or an
independent recordkeeper under a contract with Merrill Lynch that
are currently investing in Class B shares of the Fund convert to
Class A shares once the Plan has reached $5 million invested in
Applicable Investments, or 10 years after the date of the initial
purchase by a participant under the Plan--the Plan will receive a
Plan level share conversion.
BROKERAGE ALLOCATION
Subject to the overall supervision of the President and the
Board, IMI places orders for the purchase and sale of the Fund's
portfolio securities. All portfolio transactions are effected at
the best price and execution obtainable. Purchases and sales of
debt securities are usually principal transactions, and,
therefore, brokerage commissions are usually not required to be
paid by the Fund for such purchases and sales (although the price
paid generally includes undisclosed compensation to the dealer).
The prices paid to underwriters of newly-issued securities
usually include a concession paid by the issuer to the
underwriter, and purchases of after-market securities from
dealers normally reflect the spread between the bid and asked
prices. In connection with OTC transactions, IMI attempts to
deal directly with the principal market makers, except in those
circumstances where IMI believes that a better price and
execution are available elsewhere.
IMI selects broker-dealers to execute transactions and
evaluates the reasonableness of commissions on the basis of
quality, quantity, and the nature of the firms' professional
services. Commissions to be charged and the rendering of
investment services, including statistical, research, and
counseling services by brokerage firms, are factors to be
considered in the placing of brokerage business. The types of
research services provided by brokers may include general
economic and industry data, and information on securities of
specific companies. Research services furnished by brokers
through whom the Trust effects securities transactions may be
used by IMI in servicing all of its accounts. In addition, not
all of these services may be used by IMI in connection with the
services it provides to a particular Fund or the Trust. IMI may
consider sales of shares of Ivy funds as a factor in the
selection of broker-dealers and may select broker-dealers who
provide it with research services. IMI will not, however,
execute brokerage transactions other than at the best price and
execution.
As of the date of this SAI, the Fund had not paid any
brokerage commissions.
The Fund may, under some circumstances, accept securities in
lieu of cash as payment for Fund shares. The Fund will accept
securities only to increase its holdings in a portfolio security
or to take a new portfolio position in a security that IMI deems
to be a desirable investment for the Fund. While no minimum has
been established, it is expected that the Fund will not accept
securities having an aggregate value of less than $1 million.
The Trust may reject in whole or in part any or all offers to pay
for Fund shares with securities and may discontinue accepting
securities as payment for Fund shares at any time without notice.
The Trust will value accepted securities in the manner and at the
same time provided for valuing portfolio securities of the Fund,
and Fund shares will be sold for net asset value determined at
the same time the accepted securities are valued. The Trust will
only accept securities delivered in proper form and will not
accept securities subject to legal restrictions on transfer. The
acceptance of securities by the Trust must comply with the
applicable laws of certain states.
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Trust, their
business addresses and principal occupations during the past five
years are:
POSITION
WITH THE BUSINESS AFFILIATIONS
NAME, ADDRESS, AGE TRUST AND PRINCIPAL OCCUPATIONS
John S. Anderegg, Jr. Trustee Chairman, Dynamics Research
60 Concord Street Corp. (instruments and
Wilmington, MA 01887 controls); Director, Burr-
Age: 74 Brown Corp. (operational
amplifiers); Director,
Metritage Incorporated
(level measuring
instruments); Trustee of
Mackenzie Series Trust
(1992-1998).
Paul H. Broyhill Trustee Chairman, BMC Fund, Inc.
800 Hickory Blvd. (1983-present); Chairman,
Golfview Park-Box 500 Broyhill Family Foundation,
Lenoir, NC 28645 Inc. (1983-Present);
Age: 74 Chairman and President,
Broyhill Investments, Inc.
(1983-present); Chairman,
Broyhill Timber Resources
(1983-present); Management
of a personal portfolio of
fixed-income and equity
investments (1983-present);
Trustee of Mackenzie Series
Trust (1988-1998); Director
of The Mackenzie Funds Inc.
(1988-1995).
Stanley Channick Trustee President and Chief
11 Bala Avenue Executive Officer, The
Bala Cynwyd, PA 19004 Whitestone Corporation
Age: 75 (insurance agency);
Chairman, Scott Management
Company (administrative
services for insurance
companies); President, The
Channick Group (consultants
to insurance companies and
national trade
associations); Trustee of
Mackenzie Series Trust
(1994-1998); Director of
The Mackenzie Funds Inc.
(1994-1995).
Frank W. DeFriece, Jr. Trustee Director, Manager and Vice
The Landmark Centre President, Director and
113 Landmark Lane, Fund Manager, Massengill-
Suite B DeFriece Foundation
Bristol, TN 37620-2285 (charitable organization)
Age: 77 (1950-present); Trustee and
Vice Chairman, East
Tennessee Public
Communications Corp. (WSJK-
TV) (1984-present); Trustee
of Mackenzie Series Trust
(1985-1998); Director of
The Mackenzie Funds Inc.
(1987-1995).
Roy J. Glauber Trustee Mallinckrodt Professor of
Lyman Laboratory Physics, Harvard
of Physics University (1974-present);
Harvard University Trustee of Mackenzie Series
Cambridge, MA 02138 Trust (1994-1997).
Age: 72
Michael G. Landry Trustee President, Chief Executive
700 South Federal Hwy. and Officer and Director of
Suite 300 Chairman Mackenzie Investment
Raton, FL 33432 Management Inc. (1987-
Age: 51 present); President,
[*Deemed to be an Director and Chairman of
"interested person" Ivy Management Inc. (1992-
of the Trust, as present); Chairman and
defined under the Director of Ivy Mackenzie
1940 Act.] Services Corp.(1993-
present); Chairman and
Director of Ivy Mackenzie
Distributors, Inc. (1994-
present); Director and
President of Ivy Mackenzie
Distributors, Inc. (1993-
1994); Director and
President of The Mackenzie
Funds Inc. (1987-1995);
Trustee of Mackenzie Series
Trust (1987-1998);
President of Mackenzie
Series Trust (1987-1996);
Chairman of Mackenzie
Series Trust (1996-
1998).
Joseph G. Rosenthal Trustee Chartered Accountant
110 Jardin Drive (1958-present); Trustee of
Unit #12 Mackenzie Series Trust
Concord, Ontario Canada (1985-1998); Director of
L4K 2T7 The Mackenzie Funds Inc.
Age: 63 (1987-1995).
Richard N. Silverman Trustee Director, Newton-Wellesley
18 Bonnybrook Road Hospital; Director, Beth
Waban, MA 02168 Israel Hospital; Director,
Age: 74 Boston Ballet; Director,
Boston Children's Museum;
Director, Brimmer and May
School.
J. Brendan Swan Trustee President, Airspray
4701 North Federal Hwy. International, Inc.;
Suite 465 Joint Managing Director,
Pompano Beach, FL 33064 Airspray International
Age: 67 B.V. (an environmentally
sensitive packaging
company); Director of
Polyglass LTD.; Director,
The Mackenzie Funds Inc.
(1992-1995); Trustee of
Mackenzie Series Trust
(1992-1998).
Keith J. Carlson Trustee Senior Vice President of
700 South Federal Hwy. and Mackenzie Investment
Suite 300 President Management, Inc. (1996
Boca Raton, FL 33432 -present); Senior Vice
Age: 41 President and Director of
[*Deemed to be an Mackenzie Investment
"interested person" Management, Inc. (1994
of the Trust, as -1996); Senior Vice
defined under the President and Treasurer of
1940 Act.] Mackenzie Investment
Management, Inc. (1989-
1994); Senior Vice
President and Director of
Ivy Management Inc. (1994-
present); Senior Vice
President, Treasurer and
Director of Ivy Management
Inc. (1992-1994); Vice
President of The Mackenzie
Funds Inc. (1987-1995);
Senior Vice President and
Director, Ivy Mackenzie
Services Corp. (1996-
present); President and
Director of Ivy Mackenzie
Services Corp. (1993-1996);
Trustee and President of
Mackenzie Series Trust
(1996-1998); Vice President
of Mackenzie Series Trust
(1994-1998); Treasurer of
Mackenzie Series Trust
(1985-1994); President,
Chief Executive Officer and
Director of Ivy Mackenzie
Distributors, Inc. (1994-
present); Executive Vice
President and Director of
Ivy Mackenzie Distributors,
Inc. (1993-1994).
C. William Ferris Secretary/ Senior Vice President,
700 South Federal Hwy. Treasurer Chief Financial Officer
Suite 300 and Secretary/Treasurer
Boca Raton, FL 33432 of Mackenzie Investment
Age: 53 Management Inc. (1995-
present); Senior Vice
President, Finance and
Administration/Compliance
Officer of Mackenzie
Investment Management Inc.
(1989-1994); Senior Vice
President, Secretary/
Treasurer and Clerk of Ivy
Management Inc. (1994-
present); Vice President,
Finance/Administration and
Compliance Officer of Ivy
Management Inc. (1992-
1994); Senior Vice
President, Secretary/
Treasurer and Director of
Ivy Mackenzie Distributors,
Inc. (1994-present);
Secretary/Treasurer and
Director of Ivy Mackenzie
Distributors, Inc. (1993-
1994); President and
Director of Ivy Mackenzie
Services Corp. (1996-
present); Secretary/
Treasurer and Director of
Ivy Mackenzie Services
Corp. (1993-1996);
Secretary/Treasurer of The
Mackenzie Funds Inc. (1993-
1995); Secretary/Treasurer
of Mackenzie Series Trust
(1994-1998).
James W. Broadfoot Vice Executive Vice President,
700 South Federal Hwy. President Ivy Management Inc. (1996-
Suite 300 present); Senior Vice
Boca Raton, FL 33432 President, Ivy Management,
Age: 56 Inc. (1992-1996); Director
and Senior Vice President,
Mackenzie Investment
Management Inc. (1995-
present); Senior Vice
President, Mackenzie
Investment Management Inc.
(1990-1995).
As of the date of this SAI, the Officers and Trustees of the
Trust as a group owned no Fund shares.
PERSONAL INVESTMENTS BY EMPLOYEES OF IMI
Employees of IMI are permitted to make personal securities
transactions, subject to the requirements and restrictions set
forth in IMI's Code of Ethics. The Code of Ethics is designed to
identify and address certain conflicts of interest between
personal investment activities and the interests of investment
advisory clients such as the Fund. Among other things, the Code
of Ethics, which generally complies with standards recommended by
the Investment Company Institute's Advisory Group on Personal
Investing, prohibits certain types of transactions absent prior
approval, applies to portfolio managers, traders, research
analysts and others involved in the investment advisory process,
and imposes time periods during which personal transactions may
not be made in certain securities, and requires the submission of
duplicate broker confirmations and monthly reporting of
securities transactions. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular
circumstances after review by appropriate personnel.
<PAGE>
COMPENSATION TABLE
IVY FUND
(FISCAL YEAR ENDED DECEMBER 31, 1997)
TOTAL
PENSION OR COMPENSA-
RETIREMENT TION FROM
BENEFITS ESTIMATED TRUST AND
AGGREGATE ACCRUED AS ANNUAL FUND COM-
COMPENSA- PART OF BENEFITS PLEX PAID
NAME, TION FUND UPON TO
POSITION FROM TRUST EXPENSES RETIREMENT TRUSTEES
[*]
John S. $13,722 N/A N/A $15,000
Anderegg, Jr.
(Trustee)
Paul H. $13,722 N/A N/A $15,000
Broyhill
(Trustee)
Keith J. $0 N/A N/A $0
Carlson
(Trustee and
President)
Stanley $13,722 N/A N/A $15,000
Channick
(Trustee)
Frank W. $13,722 N/A N/A $15,000
DeFriece, Jr.
(Trustee)
Roy J. $13,722 N/A N/A $15,000
Glauber
(Trustee)
Michael G. $0 N/A N/A $0
Landry
(Trustee and
Chairman of
the Board)
Joseph G. $13,722 N/A N/A $15,000
Rosenthal
(Trustee)
Richard N. $13,722 N/A N/A $15,000
Silverman
(Trustee)
J. Brendan $13,722 N/A N/A $15,000
Swan
(Trustee)
C. William $0 N/A N/A $0
Ferris
(Secretary/Treasurer)
[*] During the year ended December 31, 1997, the fund complex
consisted of the Trust, which had 17 funds at year end, and
Mackenzie Series Trust, an open-end, management investment
company comprised of 4 funds that were reorganized into
series
of unaffiliated investment companies on September 5, 1997.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
BUSINESS MANAGEMENT AND INVESTMENT ADVISORY SERVICES
IMI provides business management and investment advisory
services to the Fund pursuant to a Business Management and
Investment Advisory Agreement (the "Agreement"), which was last
approved by the Board on September 13, 1997. The Agreement was
approved by the sole shareholder of the Fund on March 25, 1998.
Prior to shareholder approval, the Agreement was approved by the
Board (including a majority of the Trustees who are neither
"interested persons," as defined in the 1940 Act, of the Trust
nor
have any direct or indirect financial interest in the operation
of
the distribution plan or in any related agreement (the
"Independent
Trustees")) on February 7, 1998 with respect to the Fund.
IMI is a wholly owned subsidiary of MIMI. MIMI, a Delaware
corporation, has approximately 10% of its outstanding common
stock
listed for trading on the Toronto Stock Exchange ("TSE"). MIMI
is a
subsidiary of Mackenzie Financial Corporation ("MFC"), 150 Bloor
Street West, Toronto, Ontario, Canada, a public corporation
organized under the laws of Ontario and registered in Ontario as
a
mutual fund dealer whose shares are listed for trading on the
TSE.
MFC provides investment advisory services to certain of the Ivy
funds.
IMI currently acts as manager and investment adviser to the
following additional investment companies registered under the
1940
Act: Ivy China Region Fund, Ivy Global Fund, Ivy International
Fund, Ivy South America Fund, Ivy Developing Nations Fund, Ivy
Global Science & Technology Fund, Ivy International Small
Companies
Fund, Ivy International Fund II, Ivy Asia Pacific Fund, Ivy Pan-
Europe Fund, Ivy Growth Fund, Ivy US Emerging Growth Fund, Ivy
Growth with Income Fund, Ivy Bond Fund and Ivy Money Market Fund.
The Agreement obligates IMI to make investments for the
accounts of the Fund in accordance with its best judgment and
within
the investment objectives and restrictions set forth in the
Prospectus, the 1940 Act and the provisions of the Code relating
to
regulated investment companies, subject to policy decisions
adopted
by the Board. IMI also determines the securities to be purchased
or
sold by the Fund and places orders with brokers or dealers who
deal
in such securities.
Under the Agreement, IMI also provides certain business
management services. IMI is obligated to (1) coordinate with the
Fund's Custodian and monitor the services it provides to the
Fund;
(2) coordinate with and monitor any other third parties
furnishing
services to the Fund; (3) provide the Fund with necessary office
space, telephones and other communications facilities as are
adequate for the Fund's needs; (4) provide the services of
individuals competent to perform administrative and clerical
functions that are not performed by employees or other agents
engaged by the Fund or by IMI acting in some other capacity
pursuant
to a separate agreement or arrangements with the Fund; (5)
maintain
or supervise the maintenance by third parties of such books and
records of the Trust as may be required by applicable Federal or
state law; (6) authorize and permit IMI's directors, officers and
employees who may be elected or appointed as trustees or officers
of
the Trust to serve in such capacities; and (7) take such other
action with respect to the Trust, after approval by the Trust as
may
be required by applicable law, including without limitation the
rules and regulations of the Securities and Exchange Commission
(the
"SEC") and of state securities commissions and other regulatory
agencies.
The Fund pays IMI a monthly fee for providing business
management and investment advisory services at an annual rate of
0.75% of its average net assets.
Advisory fee information is not available for the Fund as of
the date of this SAI.
Under the Agreement, the Trust pays the following expenses:
(1)
the fees and expenses of the Trust's Independent Trustees; (2)
the
salaries and expenses of any of the Trust's officers or employees
who are not affiliated with IMI; (3) interest expenses; (4) taxes
and governmental fees, including any original issue taxes or
transfer taxes applicable to the sale or delivery of shares or
certificates therefor; (5) brokerage commissions and other
expenses
incurred in acquiring or disposing of portfolio securities; (6)
the
expenses of registering and qualifying shares for sale with the
SEC
and with various state securities commissions; (7) accounting and
legal costs; (8) insurance premiums; (9) fees and expenses of the
Trust's Custodian and Transfer Agent and any related services;
(10)
expenses of obtaining quotations of portfolio securities and of
pricing shares; (11) expenses of maintaining the Trust's legal
existence and of shareholders' meetings; (12) expenses of
preparation and distribution to existing shareholders of periodic
reports, proxy materials and prospectuses; and (13) fees and
expenses of membership in industry organizations.
IMI currently limits the Fund's total operating expenses
(excluding Rule 12b-1 fees, interest, taxes, brokerage
commissions,
litigation, class-specific expenses, indemnification expenses,
and
extraordinary expenses) to an annual rate of 0.85% of the Fund's
average net assets, which may lower the Fund's expenses and
increase
its yield. The Fund's expense limitation may be terminated or
revised at any time, at which time its expenses may increase and
its
yield may be reduced.
The initial term of the Agreement between IMI and the Fund,
which commenced on March 25, 1998, will run for a period of two
years from the date of commencement. The Agreement will continue
in
effect with respect to the Fund from year to year, or for more
than
the initial period, as the case may be, only so long as the
continuance is specifically approved at least annually (i) by the
vote of a majority of the Independent Trustees and (ii) either
(a)
by the vote of a majority of the outstanding voting securities
(as
defined in the 1940 Act) of the Fund or (b) by the vote of a
majority of the entire Board. If the question of continuance of
the
Agreement (or adoption of any new agreement) is presented to
shareholders, continuance (or adoption) shall be effected only if
approved by the affirmative vote of a majority of the outstanding
voting securities of the Fund. See "Capitalization and Voting
Rights."
The Agreement may be terminated with respect to the Fund at
any
time, without payment of any penalty, by the vote of a majority
of
the Board, or by a vote of a majority of the outstanding voting
securities of the Fund, on 60 days' written notice to IMI, or by
IMI
on 60 days' written notice to the Trust. The Agreement shall
terminate automatically in the event of its assignment.
DISTRIBUTION SERVICES
IMDI, a wholly owned subsidiary of MIMI, serves as the
exclusive distributor of Ivy Fund's shares pursuant to an Amended
and Restated Distribution Agreement with the Trust dated October
23,
1991, as amended from time to time (the "Distribution
Agreement").
The Distribution Agreement was last approved by the Board on
September 13, 1997. At a meeting held on February 7, 1998, the
Board approved the Distribution Agreement on behalf of the Fund.
IMDI distributes shares of the Fund through broker-dealers who
are
members of the National Association of Securities Dealers, Inc.
and
who have executed dealer agreements with IMDI. IMDI distributes
shares of the Fund on a continuous basis, but reserves the right
to
suspend or discontinue distribution on that basis. IMDI is not
obligated to sell any specific amount of Fund shares.
Pursuant to the Distribution Agreement, IMDI is entitled to
deduct a commission on all Class A Fund shares sold equal to the
difference, if any, between the public offering price, as set
forth
in the Fund's then-current prospectus, and the net asset value on
which such price is based. Out of that commission, IMDI may
reallow
to dealers such concession as IMDI may determine from time to
time.
In addition, IMDI is entitled to deduct a CDSC on the redemption
of
Class A shares sold without an initial sales charge and Class B
and
Class C shares in accordance with, and in the manner set forth
in,
the Prospectus.
Under the Distribution Agreement, the Fund bears, among
other
expenses, the expenses of registering and qualifying its shares
for
sale under Federal and state securities laws and preparing and
distributing to existing shareholders periodic reports, proxy
materials and prospectuses.
As of the date of this SAI, IMDI had not received any
payments
under the Distribution Agreement with respect to the Fund.
The Distribution Agreement will continue in effect for
successive one-year periods, provided that such continuance is
specifically approved at least annually by the vote of a majority
of
the Independent Trustees, cast in person at a meeting called for
that purpose and by the vote of either a majority of the entire
Board or a majority of the outstanding voting securities of the
Fund. The Distribution Agreement may be terminated with respect
to
the Fund at any time, without payment of any penalty, by IMDI on
60
days' written notice to the Fund or by the Fund by vote of either
a
majority of the outstanding voting securities of the Fund or a
majority of the Independent Trustees on 60 days' written notice
to
IMDI. The Distribution Agreement shall terminate automatically
in
the event of its assignment.
RULE 18F-3 PLAN. On February 23, 1995, the SEC adopted Rule
18f-3 under the 1940 Act, which permits a registered open-end
investment company to issue multiple classes of shares in
accordance
with a written plan approved by the investment company's board of
directors/trustees and filed with the SEC. At a meeting held on
February 7, 1998, the Board adopted the Rule 18f-3 plan on behalf
of
the Fund. The key features of the Rule 18f-3 plan are as
follows:
(i) shares of each class of the Fund represent an equal pro rata
interest in the Fund and generally have identical voting,
dividend,
liquidation, and other rights, preferences, powers, restrictions,
limitations, qualifications, terms and conditions, except that
each
class bears certain class-specific expenses and has separate
voting
rights on certain matters that relate solely to that class or in
which the interests of shareholders of one class differ from the
interests of shareholders of another class; (ii) subject to
certain
limitations described in the Prospectus, shares of a particular
class of the Fund may be exchanged for shares of the same class
of
another Ivy fund; and (iii) the Fund's Class B shares will
convert
automatically into Class A shares of the Fund after a period of
eight years, based on the relative net asset value of such shares
at
the time of conversion.
RULE 12B-1 DISTRIBUTION PLANS. The Trust has adopted on
behalf
of the Fund, in accordance with Rule 12b-1 under the 1940 Act,
separate Rule 12b-1 distribution plans pertaining to the Fund's
Class A, Class B and Class C shares (each, a "Plan"). In
adopting
each Plan, a majority of the Independent Trustees concluded in
accordance with the requirements of Rule 12b-1 that there is a
reasonable likelihood that each Plan will benefit the Fund and
its
shareholders. The Trustees of the Trust believe that the Plans
should result in greater sales and/or fewer redemptions of the
Fund's shares, although it is impossible to know for certain the
level of sales and redemptions of the Fund's shares in the
absence
of a Plan or under an alternative distribution arrangement.
Under each Plan, the Fund pays IMDI a service fee, accrued
daily and paid monthly, at the annual rate of up to 0.25% of the
average daily net assets attributable to its Class A, Class B or
Class C shares, as the case may be. The services for which
service
fees may be paid include, among other things, advising clients or
customers regarding the purchase, sale or retention of shares of
the
Fund, answering routine inquiries concerning the Fund and
assisting
shareholders in changing options or enrolling in specific plans.
Pursuant to each Plan, service fee payments made out of or
charged
against the assets attributable to the Fund's Class A, Class B or
Class C shares must be in reimbursement for services rendered for
or
on behalf of the affected class. The expenses not reimbursed in
any
one month may be reimbursed in a subsequent month. The Class A
Plan
does not provide for the payment of interest or carrying charges
as
distribution expenses.
Under the Fund's Class B and Class C Plans, the Fund also
pays
IMDI a distribution fee, accrued daily and paid monthly, at the
annual rate of 0.75% of the average daily net assets attributable
to
its Class B or Class C shares. IMDI may reallow to dealers all
or a
portion of the service and distribution fees as IMDI may
determine
from time to time. The distribution fee compensates IMDI for
expenses incurred in connection with activities primarily
intended
to result in the sale of the Fund's Class B or Class C shares,
including the printing of prospectuses and reports for persons
other
than existing shareholders and the preparation, printing and
distribution of sales literature and advertising materials.
Pursuant to each Class B and Class C Plan, IMDI may include
interest, carrying or other finance charges in its calculation of
distribution expenses, if not prohibited from doing so pursuant
to
an order of or a regulation adopted by the SEC.
Among other things, each Plan provides that (1) IMDI will
submit to the Board at least quarterly, and the Trustees will
review, written reports regarding all amounts expended under the
Plan and the purposes for which such expenditures were made;
(2) each Plan will continue in effect only so long as such
continuance is approved at least annually, and any material
amendment thereto is approved, by the votes of a majority of the
Board, including the Independent Trustees, cast in person at a
meeting called for that purpose; (3) payments by the Fund under
each
Plan shall not be materially increased without the affirmative
vote
of the holders of a majority of the outstanding shares of the
relevant class; and (4) while each Plan is in effect, the
selection
and nomination of Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust shall be committed to the
discretion of the Trustees who are not "interested persons" of
the
Trust.
IMDI may make payments for distribution assistance and for
administrative and accounting services from resources that may
include the management fees paid by the Fund. IMDI also may make
payments (such as the service fee payments described above) to
unaffiliated broker-dealers for services rendered in the
distribution of the Fund's shares. To qualify for such payments,
shares may be subject to a minimum holding period. However, no
such
payments will be made to any dealer or broker if at the end of
each
year the amount of shares held does not exceed a minimum amount.
The minimum holding period and minimum level of holdings will be
determined from time to time by IMDI.
A report of the amount expended pursuant to each Plan, and
the
purposes for which such expenditures were incurred, must be made
to
the Board for its review at least quarterly.
As of the date of this SAI, no payments had been made under
the Plans with respect to the Fund.
Each Plan may be amended at any time with respect to the
class
of shares of the Fund to which the Plan relates by vote of the
Trustees, including a majority of the Independent Trustees, cast
in
person at a meeting called for the purpose of considering such
amendment. Each Plan may be terminated at any time with respect
to
the class of shares of the Fund to which the Plan relates,
without
payment of any penalty, by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting
securities of that class.
If the Distribution Agreement or the Distribution Plans are
terminated (or not renewed) with respect to any of the Ivy funds
(or
class of shares thereof), each may continue in effect with
respect
to any other fund (or Class of shares thereof) as to which they
have
not been terminated (or have been renewed).
CUSTODIAN
Pursuant to a Custodian Agreement with the Trust, Brown
Brothers Harriman & Co. (the "Custodian"), a private bank and
member
of the principal securities exchanges, located at 40 Water
Street,
Boston, Massachusetts 02109, maintains custody of the assets of
the
Fund held in the United States. Rules adopted under the 1940 Act
permit the Trust to maintain its foreign securities and cash in
the
custody of certain eligible foreign banks and securities
depositories. Pursuant to those rules, the Custodian has entered
into subcustodial agreements for the holding of the Fund's
foreign
securities. The Custodian may receive, as partial payment for
its
services to the Fund, a portion of the Trust's brokerage
business,
subject to its ability to provide best price and execution.
FUND ACCOUNTING SERVICES
Pursuant to a Fund Accounting Services Agreement, MIMI
provides
certain accounting and pricing services for the Fund. As
compensation for those services, the Fund pays MIMI a monthly fee
plus out-of-pocket expenses as incurred. The monthly fee is
based
upon the net assets of the Fund at the preceding month end at the
following rates: $1,250 when net assets are $10 million and
under;
$2,500 when net assets are over $10 million to $40 million;
$5,000
when net assets are over $40 million to $75 million; and $6,500
when
net assets are over $75 million.
As of the date of this SAI, no payments had been made with
respect to the provision of these services for the Fund.
TRANSFER AGENT AND DIVIDEND PAYING AGENT
Pursuant to a Transfer Agency and Shareholder Service
Agreement, IMSC, a wholly owned subsidiary of MIMI, is the
transfer
agent for the Fund. The Fund (except with respect to its Class I
shares) pays a monthly fee at an annual rate of $20.00 for each
open
Class A, Class B and Class C account. The Fund pays $10.25 per
open
Class I account. In addition, the Fund pays a monthly fee at an
annual rate of $4.48 per account that is closed plus certain
out-of-
pocket expenses. As of the date of this SAI, no payments had
been
made by the Fund for transfer agency services. Certain broker-
dealers that maintain shareholder accounts with the Fund through
an
omnibus account provide transfer agent and other
shareholder-related
services that would otherwise be provided by IMSC if the
individual
accounts that comprise the omnibus account were opened by their
beneficial owners directly. IMSC pays such broker-dealers a per
account fee for each open account within the omnibus account, or
a
fixed rate (e.g., .10%) fee, based on the average daily net asset
value of the omnibus account (or a combination thereof).
ADMINISTRATOR
Pursuant to an Administrative Services Agreement, MIMI
provides
certain administrative services to the Fund. As compensation for
these services, the Fund (except with respect to its Class I
shares)
pays MIMI a monthly fee at the annual rate of .10% of the Fund's
average daily net assets. The Fund pays MIMI a monthly fee at
the
annual rate of .01% of its average daily net assets for Class I.
As
of the date of this SAI, no payments had been made by the Fund
under
the Administrative Services Agreement.
Outside of providing administrative services to the Trust,
as
described above, MIMI may also act on behalf of IMDI in paying
commissions to broker-dealers with respect to sales of Class B
and
Class C shares of the Fund.
AUDITORS
Coopers & Lybrand L.L.P., independent certified public
accountants, has been selected as auditors for the Trust. The
audit
services performed by Coopers & Lybrand L.L.P. include audits of
the
annual financial statements of each of the funds of the Trust.
Other services provided principally relate to filings with the
SEC
and the preparation of the funds' tax returns.
CAPITALIZATION AND VOTING RIGHTS
The capitalization of the Trust consists of an unlimited
number
of shares of beneficial interest (no par value per share). When
issued, shares of each class of the Fund are fully paid, non-
assessable, redeemable and fully transferable. No class of
shares
of the Fund has preemptive rights or subscription rights.
The Amended and Restated Declaration of Trust permits the
Trustees to create separate series or portfolios and to divide
any
series or portfolio into one or more classes. The Trustees have
authorized eighteen series, each of which represents a fund. The
Trustees have further authorized the issuance of Class A, Class
B,
and Class C shares for Ivy International Fund and Ivy Money
Market
Fund and Class A, Class B, Class C and Advisor Class shares for
Ivy
Asia Pacific Fund, Ivy Bond Fund, Ivy Canada Fund, Ivy China
Region
Fund, Ivy US Emerging Growth Fund (formerly Ivy Emerging Growth
Fund), Ivy Global Fund, Ivy Global Natural Resources Fund, Ivy
Global Science & Technology Fund, Ivy Growth Fund, Ivy Growth
with
Income Fund, Ivy International Fund II, Ivy High Yield Fund
(formerly Ivy International Bond Fund), Ivy South America Fund
(formerly Ivy Latin America Strategy Fund), Ivy Money Market
Fund,
Ivy Developing Nations Fund (formerly Ivy New Century Fund) and
Ivy
Pan-Europe Fund, as well as Class I shares for Ivy Bond Fund, Ivy
Global Science & Technology Fund, Ivy International Fund II, Ivy
International Fund, Ivy High Yield Fund and Ivy International
Small
Companies Fund.
Shareholders have the right to vote for the election of
Trustees of the Trust and on any and all matters on which they
may
be entitled to vote by law or by the provisions of the Trust's
By-
Laws. The Trust is not required to hold a regular annual meeting
of
shareholders, and it does not intend to do so. Shares of each
class
of the Fund entitle their holders to one vote per share (with
proportionate voting for fractional shares). Shareholders of the
Fund are entitled to vote alone on matters that only affect the
Fund. All classes of shares of the Fund will vote together,
except
with respect to the distribution plan applicable to the Fund's
Class A, Class B or Class C shares or when a class vote is
required
by the 1940 Act. On matters relating to all funds of the Trust,
but
affecting the funds differently, separate votes by the
shareholders
of each fund are required. Approval of an investment advisory
agreement and a change in fundamental policies would be regarded
as
matters requiring separate voting by the shareholders of each
fund
of the Trust. If the Trustees determine that a matter does not
affect the interests of a fund, then the shareholders of that
fund
will not be entitled to vote on that matter. Matters that affect
the Trust in general, such as ratification of the selection of
independent public accountants, will be voted upon collectively
by
the shareholders of all funds of the Trust.
As used in this SAI and the Prospectus, the phrase "majority
vote of the outstanding shares" of the Fund means the vote of the
lesser of: (1) 67% of the shares of the Fund (or of the Trust)
present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy; or (2) more
than 50% of the outstanding shares of the Fund (or of the Trust).
With respect to the submission to shareholder vote of a
matter
requiring separate voting by the Fund, the matter shall have been
effectively acted upon with respect to the Fund if a majority of
the
outstanding voting securities of the Fund votes for the approval
of
the matter, notwithstanding that: (1) the matter has not been
approved by a majority of the outstanding voting securities of
any
other fund of the Trust; or (2) the matter has not been approved
by
a majority of the outstanding voting securities of the Trust.
The Amended and Restated Declaration of Trust provides that
the
holders of not less than two-thirds of the outstanding shares of
the
Trust may remove a person serving as trustee either by
declaration
in writing or at a meeting called for such purpose. The Trustees
are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to
do
so by the holders of not less than 10% of the outstanding shares
of
the Trust. Shareholders will be assisted in communicating with
other shareholders in connection with the removal of a Trustee as
if
Section 26(c) of the Act were applicable.
The Trust's shares do not have cumulative voting rights and
accordingly the holders of more than 50% of the outstanding
shares
could elect the entire Board, in which case the holders of the
remaining shares would not be able to elect any Trustees.
As of the the date of this SAI, there were no Fund shares
outstanding other than those issued to the sole shareholder.
Under Massachusetts law, the Trust's shareholders could,
under
certain circumstances, be held personally liable for the
obligations
of the Trust. However, the Amended and Restated Declaration of
Trust disclaims liability of the shareholders, Trustees or
officers
of the Trust for acts or obligations of the Trust, which are
binding
only on the assets and property of the Trust, and requires that
notice of the disclaimer be given in each contract or obligation
entered into or executed by the Trust or its Trustees. The
Amended
and Restated Declaration of Trust provides for indemnification
out
of Fund property for all loss and expense of any shareholder of
the
Fund held personally liable for the obligations of the Fund. The
risk of a shareholder of the Trust incurring financial loss on
account of shareholder liability is limited to circumstances in
which the Trust itself would be unable to meet its obligations
and,
thus, should be considered remote. No series of the Trust is
liable
for the obligations of any other series of the Trust.
NET ASSET VALUE
The share price, or value, for the separate classes of
shares
of the Fund is called the net asset value per share. The net
asset
value per share of the Fund is computed by dividing the value of
the
assets of the Fund, less its liabilities, by the number of shares
of
the Fund outstanding. For purposes of determining the aggregate
net
assets of the Fund, cash and receivables will be valued at their
realizable amounts. A security listed or traded on a recognized
stock exchange or The Nasdaq Stock Market Inc. ("Nasdaq") is
valued
at its last sale price on the principal exchange on which the
security is traded. The value of a foreign security is
determined
in its national currency as of the normal close of trading on the
foreign exchange on which it is traded or as of the close of
regular
trading on the Exchange, if that is earlier, and that value is
then
converted into its U.S. dollar equivalent at the foreign exchange
rate in effect at noon, eastern time, on the day the value of the
foreign security is determined. If no sale is reported at that
time, the average between the current bid and asked price is
used.
All other securities for which OTC market quotations are readily
available are valued at the average between the current bid and
asked price. Interest will be recorded as accrued. Securities
and
other assets for which market prices are not readily available
are
valued at fair value as determined by IMI and approved in good
faith
by the Board. Money market instruments of the Fund are valued at
amortized cost, which approximates money market value.
The Fund's liabilities are allocated between its classes.
The
total of such liabilities allocated to a class plus that class's
distribution fee and any other expenses specially allocated to
that
class are then deducted from the class's proportionate interest
in
the Fund's assets, and the resulting amount for each class is
divided by the number of shares of that class outstanding to
produce
the net asset value per share.
Portfolio securities are valued and net asset value per
share
is determined as of the close of regular trading on the Exchange
(normally 4:00 p.m., eastern time), every Monday through Friday
(exclusive of national business holidays). The Trust's offices
will
be closed, and net asset value will not be calculated, on the
following national business holidays: New Year's Day, Martin
Luther
King, Jr.'s Birthday, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
On
those days when either or both of the Fund's Custodian or the
Exchange close early as a result of such day being a partial
holiday
or otherwise, the Trust reserves the right to advance the time on
that day by which purchase and redemption requests must be
received.
When the Fund writes an option, an amount equal to the
premium
received by the Fund is included in the Fund's Statement of
Assets
and Liabilities as an asset and as an equivalent liability. The
amount of the liability will be subsequently marked-to-market
daily
to reflect the current market value of the option written. The
current market value of a written option is the last sale on the
principal exchange on which such option is traded or, in the
absence
of a sale, the last offering price.
The premium paid by the Fund for the purchase of a call or a
put option will be deducted from its assets and an equal amount
will
be included in the asset section of the Fund's Statement of
Assets
and Liabilities as an investment and subsequently adjusted to the
current market value of the option. For example, if the current
market value of the option exceeds the premium paid, the excess
would be unrealized appreciation and, conversely, if the premium
exceeds the current market value, such excess would be unrealized
depreciation. The current market value of a purchased option
will
be the last sale price on the principal exchange on which the
option
is traded or, in the absence of a sale, the last bid price. If
the
Fund exercises a call option which it has purchased, the cost of
the
security which the Fund purchased upon exercise will be increased
by
the premium originally paid.
Valuation of below investment-grade debt securities may be
supplied by a pricing agent; if valuations are not available
through
a pricing agent, such valuations may be supplied through a broker
or
otherwise as determined in good faith by the Board of Trustees.
The sale of shares of the Fund will be suspended during any
period when the determination of its net asset value is suspended
pursuant to rules or orders of the SEC and may be suspended by
the
Board whenever in its judgment it is in the best interest of the
Fund to do so.
PORTFOLIO TURNOVER
The Fund purchases securities that are believed by IMI to
have
above average potential for capital appreciation. Common stocks
are
disposed of in situations where it is believed that potential for
such appreciation has lessened or that other common stocks have a
greater potential. Therefore, the Fund may purchase and sell
securities without regard to the length of time the security is
to
be, or has been, held. A change in securities held by the Fund
is
known as "portfolio turnover" and may involve the payment by the
Fund of dealer markup or underwriting commission and other
transaction costs on the sale of securities, as well as on the
reinvestment of the proceeds in other securities. The Fund's
portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the most recently
completed fiscal year by the monthly average of the value of the
portfolio securities owned by the Fund during that year. For
purposes of determining the Fund's portfolio turnover rate, all
securities whose maturities at the time of acquisition were one
year
or less are excluded. It is estimated that the portfolio
turnover
rate for the Fund's initial fiscal year will not exceed 100%.
REDEMPTIONS
Shares of the Fund are redeemed at their net asset value
next
determined after a proper redemption request has been received by
IMSC, less any applicable CDSC.
Unless a shareholder requests that the proceeds of any
redemption be wired to his or her bank account, payment for
shares
tendered for redemption is made by check within seven days after
tender in proper form, except that the Trust reserves the right
to
suspend the right of redemption or to postpone the date of
payment
upon redemption beyond seven days, (i) for any period during
which
the Exchange is closed (other than customary weekend and holiday
closings) or during which trading on the Exchange is restricted,
(ii) for any period during which an emergency exists as
determined
by the SEC as a result of which disposal of securities owned by
the
Fund is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net
assets, or (iii) for such other periods as the SEC may by order
permit for the protection of shareholders of the Fund.
Under unusual circumstances, when the Board deems it in the
best interest of the Fund's shareholders, the Fund may make
payment
for shares repurchased or redeemed in whole or in part in
securities
of the Fund taken at current values. If any such redemption in
kind
is to be made, the Fund may make an election pursuant to Rule
18f-1
under the 1940 Act. This will require the Fund to redeem with
cash
at a shareholder's election in any case where the redemption
involves less than $250,000 (or 1% of the Fund's net asset value
at
the beginning of each 90-day period during which such redemptions
are in effect, if that amount is less than $250,000). Should
payment be made in securities, the redeeming shareholder may
incur
brokerage costs in converting such securities to cash.
The Trust may redeem those accounts of shareholders who have
maintained an investment, including sales charges paid, of less
than
$1,000 in the Fund for a period of more than 12 months. All
accounts below that minimum will be redeemed simultaneously when
MIMI deems it advisable. The $1,000 balance will be determined
by
actual dollar amounts invested by the shareholder, unaffected by
market fluctuations. The Trust will notify any such shareholder
by
certified mail of its intention to redeem such account, and the
shareholder shall have 60 days from the date of such letter to
invest such additional sums as shall raise the value of such
account
above that minimum. Should the shareholder fail to forward such
sum
within 60 days of the date of the Trust's letter of notification,
the Trust will redeem the shares held in such account and
transmit
the redemption in value thereof to the shareholder. However,
those
shareholders who are investing pursuant to the Automatic
Investment
Method will not be redeemed automatically unless they have ceased
making payments pursuant to the plan for a period of at least six
consecutive months, and these shareholders will be given six
months'
notice by the Trust before such redemption. Shareholders in a
qualified retirement, pension or profit sharing plan who wish to
avoid tax consequences must "rollover" any sum so redeemed into
another qualified plan within 60 days. The Trustees of the Trust
may change the minimum account size.
If a shareholder has given authorization for telephonic
redemption privilege, shares can be redeemed and proceeds sent by
Federal wire to a single previously designated bank account.
Delivery of the proceeds of a wire redemption request of $250,000
or
more may be delayed by the Fund for up to seven days if deemed
appropriate under then-current market conditions. The Trust
reserves the right to change this minimum or to terminate the
telephonic redemption privilege without prior notice. The Trust
cannot be responsible for the efficiency of the Federal wire
system
of the shareholder's dealer of record or bank. The shareholder
is
responsible for any charges by the shareholder's bank.
The Fund employs reasonable procedures that require personal
identification prior to acting on redemption or exchange
instructions communicated by telephone to confirm that such
instructions are genuine. In the absence of such instructions,
the
Fund may be liable for any losses due to unauthorized or
fraudulent
telephone instructions.
CONVERSION OF CLASS B SHARES
As described in the Prospectus, Class B shares of the Fund
will
automatically convert to Class A shares of the Fund, based on the
relative net asset values per share of the two classes, no later
than the month following the eighth anniversary of the initial
issuance of such Class B shares of the Fund occurs. For the
purpose
of calculating the holding period required for conversion of
Class B
shares, the date of initial issuance shall mean: (1) the date on
which such Class B shares were issued, or (2) for Class B shares
obtained through an exchange, or a series of exchanges, (subject
to
the exchange privileges for Class B shares) the date on which the
original Class B shares were issued. For purposes of conversion
of
Class B shares, Class B shares purchased through the reinvestment
of
dividends and capital gain distributions paid in respect of Class
B
shares will be held in a separate sub-account. Each time any
Class B shares in the shareholder's regular account (other than
those shares in the sub-account) convert to Class A shares, a pro
rata portion of the Class B shares in the sub-account will also
convert to Class A shares. The portion will be determined by the
ratio that the shareholder's Class B shares converting to Class A
shares bears to the shareholder's total Class B shares not
acquired
through the reinvestment of dividends and capital gain
distributions.
TAXATION
The following is a general discussion of certain tax rules
thought to be applicable with respect to the Fund. It is merely
a
summary and is not an exhaustive discussion of all possible
situations or of all potentially applicable taxes. Accordingly,
shareholders and prospective shareholders should consult a
competent
tax adviser about the tax consequences to them of investing in
the
Fund.
The Fund intends to be taxed as a regulated investment
company
under Subchapter M of the Code. Accordingly, the Fund must,
among
other things, (a) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to
certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such
stock, securities or currencies; and (b) diversify its holdings
so
that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Fund's assets is represented by cash, U.S.
Government securities, the securities of other regulated
investment
companies and other securities, with such other securities
limited,
in respect of any one issuer, to an amount not greater than 5% of
the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of
the
value of its total assets is invested in the securities of any
one
issuer (other than U.S. Government securities and the securities
of
other regulated investment companies).
As a regulated investment company, the Fund generally will
not
be subject to U.S. Federal income tax on its income and gains
that
it distributes to shareholders, if at least 90% of its investment
company taxable income (which includes, among other items,
dividends, interest and the excess of any short-term capital
gains
over long-term capital losses) for the taxable year is
distributed.
The Fund intends to distribute all such income.
Amounts not distributed on a timely basis in accordance with
a
calendar year distribution requirement are subject to a
nondeductible 4% excise tax at the Fund level. To avoid the tax,
the Fund must distribute during each calendar year (1) at least
98%
of its ordinary income (not taking into account any capital gains
or
losses) for the calendar year, (2) at least 98% of its capital
gains
in excess of its capital losses (adjusted for certain ordinary
losses) for a one-year period generally ending on October 31 of
the
calendar year, and (3) all ordinary income and capital gains for
previous years that were not distributed during such years. To
avoid application of the excise tax, the Fund intends to make
distributions in accordance with the calendar year distribution
requirements. A distribution will be treated as paid on December
31
of the current calendar year if it is declared by the Fund in
October, November or December of the year with a record date in
such
a month and paid by the Fund during January of the following
year.
Such distributions will be taxable to shareholders in the
calendar
year the distributions are declared, rather than the calendar
year
in which the distributions are received.
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS
The taxation of equity options and OTC options on debt
securities is governed by Code section 1234. Pursuant to Code
section 1234, the premium received by the Fund for selling a put
or
call option is not included in income at the time of receipt. If
the option expires, the premium is short-term capital gain to the
Fund. If the Fund enters into a closing transaction, the
difference
between the amount paid to close out its position and the premium
received is short-term capital gain or loss. If a call option
written by the Fund is exercised, thereby requiring the Fund to
sell
the underlying security, the premium will increase the amount
realized upon the sale of such security and any resulting gain or
loss will be a capital gain or loss, and will be long-term or
short-
term depending upon the holding period of the security. With
respect to a put or call option that is purchased by the Fund, if
the option is sold, any resulting gain or loss will be a capital
gain or loss, and will be long-term or short-term, depending upon
the holding period of the option. If the option expires, the
resulting loss is a capital loss and is long-term or short-term,
depending upon the holding period of the option. If the option
is
exercised, the cost of the option, in the case of a call option,
is
added to the basis of the purchased security and, in the case of
a
put option, reduces the amount realized on the underlying
security
in determining gain or loss.
Some of the options, futures and foreign currency forward
contracts in which the Fund may invest may be "section 1256
contracts." Gains (or losses) on these contracts generally are
considered to be 60% long-term and 40% short-term capital gains
or
losses; however, as described below, foreign currency gains or
losses arising from certain section 1256 contracts are ordinary
in
character. Also, section 1256 contracts held by the Fund at the
end
of each taxable year (and on certain other dates prescribed in
the
Code) are "marked-to-market" with the result that unrealized
gains
or losses are treated as though they were realized.
The transactions in options, futures and forward contracts
undertaken by the Fund may result in "straddles" for Federal
income
tax purposes. The straddle rules may affect the character of
gains
or losses realized by the Fund. In addition, losses realized by
the
Fund on positions that are part of a straddle may be deferred
under
the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the consequences of
such
transactions to the Fund are not entirely clear. The straddle
rules
may increase the amount of short-term capital gain realized by
the
Fund, which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available
under
the Code which are applicable to straddles. If the Fund makes
any
of the elections, the amount, character and timing of the
recognition of gains or losses from the affected straddle
positions
will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions,
the amount which must be distributed to shareholders as ordinary
income or long-term capital gain may be increased or decreased
substantially as compared to a fund that did not engage in such
transactions.
Notwithstanding any of the foregoing, the Fund may recognize
gain (but not loss) from a constructive sale of certain
"appreciated
financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward
contract
transaction with respect to the appreciated position or
substantially identical property. Appreciated financial
positions
subject to this constructive sale treatment are interests
(including
options, futures and forward contracts and short sales) in stock,
partnership interests, certain actively traded trust instruments
and
certain debt instruments. Constructive sale treatment of
appreciated financial positions does not apply to certain
transactions closed in the 90-day period ending with the 30th day
after the close of the Fund's taxable year, if certain conditions
are met.
The diversification requirements applicable to the Fund's
assets may limit the extent to which the Fund will be able to
engage
in transactions in options, futures and forward contracts.
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES
Gains or losses attributable to fluctuations in exchange
rates
which occur between the time the Fund accrues receivables or
liabilities denominated in a foreign currency and the time the
Fund
actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt
securities denominated in a foreign currency and certain options,
futures and forward contracts, gains or losses attributable to
fluctuations in the value of the foreign currency between the
date
of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These
gains
and losses, referred to under the Code as "section 988" gains or
losses, increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to its
shareholders as ordinary income.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in shares of foreign corporations which
may
be classified under the Code as passive foreign investment
companies
("PFICs"). In general, a foreign corporation is classified as a
PFIC if at least one-half of its assets constitute
investment-type
assets, or 75% or more of its gross income is investment-type
income. If the Fund receives a so-called "excess distribution"
with
respect to PFIC stock, the Fund itself may be subject to a tax on
a
portion of the excess distribution, whether or not the
corresponding
income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having
been realized ratably over the period during which a Fund held
the
PFIC shares. The Fund itself will be subject to tax on the
portion,
if any, of an excess distribution that is so allocated to prior
Fund
taxable years and an interest factor will be added to the tax, as
if
the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions
are characterized as ordinary income even though, absent
application
of the PFIC rules, certain excess distributions might have been
classified as capital gain.
The Fund may be eligible to elect alternative tax treatment
with respect to PFIC shares. The Fund may elect to mark to
market
its PFIC shares, resulting in the shares being treated as sold at
fair market value on the last business day of each taxable year.
Any resulting gain would be reported as ordinary income; any
resulting loss and any loss from an actual disposition of the
shares
would be reported as ordinary loss to the extent of any net gains
reported in prior years. Under another election that currently
is
available in some circumstances, the Fund generally would be
required to include in its gross income its share of the earnings
of
a PFIC on a current basis, regardless of whether distributions
are
received from the PFIC in a given year.
DEBT SECURITIES ACQUIRED AT A DISCOUNT
Some of the debt securities (with a fixed maturity date of
more
than one year from the date of issuance) that may be acquired by
the
Fund may be treated as debt securities that are issued originally
at
a discount. Generally, the amount of the original issue discount
("OID") is treated as interest income and is included in income
over
the term of the debt security, even though payment of that amount
is
not received until a later time, usually when the debt security
matures.
If the Fund invests in certain high yield original issue
discount obligations issued by corporations, a portion of the
original issue discount accruing on the obligation may be
eligible
for the deduction for dividends received by corporations. In
such
event, dividends of investment company taxable income received
from
the Fund by its corporate shareholders, to the extent
attributable
to such portion of accrued original issue discount, may be
eligible
for this deduction for dividends received by corporations if so
designated by the Fund in a written notice to shareholders.
Some of the debt securities (with a fixed maturity date of
more
than one year from the date of issuance) that may be acquired by
the
Fund in the secondary market may be treated as having market
discount. Generally, gain recognized on the disposition of, and
any
partial payment of principal on, a debt security having market
discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount"
on
such debt security. In addition, the deduction of any interest
expenses attributable to debt securities having market discount
may
be deferred. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections
applicable to debt securities having market discount, which could
affect the character and timing of recognition of income.
Some debt securities (with a fixed maturity date of one year
or
less from the date of issuance) that may be acquired by the Fund
may
be treated as having acquisition discount, or OID in the case of
certain types of debt securities. Generally, the Fund will be
required to include the acquisition discount, or OID, in income
over
the term of the debt security, even though payment of that amount
is
not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections
applicable
to debt securities having acquisition discount, or OID, which
could
affect the character and timing of recognition of income.
The Fund generally will be required to distribute dividends
to
shareholders representing discount on debt securities that is
currently includible in income, even though cash representing
such
income may not have been received by the Fund. Cash to pay such
dividends may be obtained from sales proceeds of securities held
by
the Fund.
DISTRIBUTIONS
Distributions of investment company taxable income are
taxable
to a U.S. shareholder as ordinary income, whether paid in cash or
shares. Dividends paid by the Fund to a corporate shareholder,
to
the extent such dividends are attributable to dividends received
from U.S. corporations by the Fund, may qualify for the dividends
received deduction. However, the revised alternative minimum tax
applicable to corporations may reduce the value of the dividends
received deduction. Distributions of net capital gains (the
excess
of net long-term capital gains over net short-term capital
losses),
if any, designated by the Fund as capital gain dividends, are
taxable to individual shareholders at a maximum 20% to 28%
capital
gains rate (depending on the Fund's holding period for the assets
giving rise to the gain), whether paid in cash or in shares, and
regardless of how long the shareholder has held the Fund's
shares;
such distributions are not eligible for the dividends received
deduction. Shareholders receiving distributions in the form of
newly issued shares will have a cost basis in each share received
equal to the net asset value of a share of the Fund on the
distribution date. A distribution of an amount in excess of the
Fund's current and accumulated earnings and profits will be
treated
by a shareholder as a return of capital which is applied against
and
reduces the shareholder's basis in his or her shares. To the
extent
that the amount of any such distribution exceeds the
shareholder's
basis in his or her shares, the excess will be treated by the
shareholder as gain from a sale or exchange of the shares.
Shareholders will be notified annually as to the U.S. Federal tax
status of distributions and shareholders receiving distributions
in
the form of newly issued shares will receive a report as to the
net
asset value of the shares received.
If the net asset value of shares is reduced below a
shareholder's cost as a result of a distribution by the Fund,
such
distribution generally will be taxable even though it represents
a
return of invested capital. Shareholders should be careful to
consider the tax implications of buying shares just prior to a
distribution. The price of shares purchased at this time may
reflect the amount of the forthcoming distribution. Those
purchasing just prior to a distribution will receive a
distribution
which generally will be taxable to them.
DISPOSITION OF SHARES
Upon a redemption, sale or exchange of his or her shares, a
shareholder will realize a taxable gain or loss depending upon
his
or her basis in the shares. Such gain or loss will be treated as
capital gain or loss if the shares are capital assets in the
shareholder's hands and, if so, may be eligible for reduced
federal
tax rates, depending upon the shareholder's holding period for
the
shares. Any loss realized on a redemption sale or exchange will
be
disallowed to the extent the shares disposed of are replaced
(including through reinvestment of dividends) within a period of
61
days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares
acquired
will be adjusted to reflect the disallowed loss. Any loss
realized
by a shareholder on the sale of Fund shares held by the
shareholder
for six-months or less will be treated for tax purposes as a
long-
term capital loss to the extent of any distributions of capital
gain
dividends received or treated as having been received by the
shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take
all
or portion of their sales loads into account for purposes of
determining the amount of gain or loss realized on the
disposition
of their shares. This prohibition generally applies where (1)
the
shareholder incurs a sales load in acquiring the shares of the
Fund,
(2) the shares are disposed of before the 91st day after the date
on
which they were acquired, and (3) the shareholder subsequently
acquires shares in the Fund or another regulated investment
company
and the otherwise applicable sales charge is reduced under a
"reinvestment right" received upon the initial purchase of Fund
shares. The term "reinvestment right" means any right to acquire
shares of one or more regulated investment companies without the
payment of a sales load or with the payment of a reduced sales
charge. Sales charges affected by this rule are treated as if
they
were incurred with respect to the shares acquired under the
reinvestment right. This provision may be applied to successive
acquisitions of Fund shares.
FOREIGN WITHHOLDING TAXES
Income received by the Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by
that country.
If more than 50% of the value of the Fund's total assets at
the
close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible and may elect to "pass-
through" to the Fund's shareholders the amount of foreign income
and
similar taxes paid by the Fund. Pursuant to this election, a
shareholder will be required to include in gross income (in
addition
to taxable dividends actually received) his or her pro rata share
of
the foreign income and similar taxes paid by the Fund, and will
be
entitled either to deduct his or her pro rata share of foreign
income and similar taxes in computing his or her taxable income
or
to use it as a foreign tax credit against his or her U.S. Federal
income taxes, subject to limitations. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize
deductions. Foreign taxes generally may not be deducted by a
shareholder that is an individual in computing the alternative
minimum tax. Each shareholder will be notified within 60 days
after
the close of the Fund's taxable year whether the foreign taxes
paid
by the Fund will "pass-through" for that year and, if so, such
notification will designate (1) the shareholder's portion of the
foreign taxes paid to each such country and (2) the portion of
the
dividend which represents income derived from sources within each
such country.
Generally, except in the case of certain electing individual
taxpayers who have limited creditable foreign taxes and no
foreign
source income other than passive investment-type income, a credit
for foreign taxes is subject to the limitation that it may not
exceed the shareholder's U.S. tax attributable to his or her
total
foreign source taxable income. For this purpose, if the Fund
makes
the election described in the preceding paragraph, the source of
the
Fund's income flows through to its shareholders. With respect to
the Fund, gains from the sale of securities generally will be
treated as derived from U.S. sources and section 988 gains will
be
treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to
foreign source passive income, including foreign source passive
income received from the Fund. In addition, the foreign tax
credit
may offset only 90% of the revised alternative minimum tax
imposed
on corporations and individuals. Furthermore, the foreign tax
credit is eliminated with respect to foreign taxes withheld on
dividends if the dividend-paying shares or the shares of the Fund
are held by the Fund or the shareholder, as the case may be, for
less than 16 days (46 days in the case of preferred shares)
during
the 30-day period (90-day period for preferred shares) beginning
15
days (45 days for preferred shares) before the shares become ex-
dividend.
The foregoing is only a general description of the foreign
tax
credit under current law. Because application of the credit
depends
on the particular circumstances of each shareholder, shareholders
are advised to consult their own tax advisers.
BACKUP WITHHOLDING
The Fund will be required to report to the Internal Revenue
Service ("IRS") all taxable distributions as well as gross
proceeds
from the redemption of the Fund's shares, except in the case of
certain exempt shareholders. All such distributions and proceeds
will be subject to withholding of Federal income tax at a rate of
31% ("backup withholding") in the case of non-exempt shareholders
if
(1) the shareholder fails to furnish the Fund with and to certify
the shareholder's correct taxpayer identification number or
social
security number, (2) the IRS notifies the shareholder or the Fund
that the shareholder has failed to report properly certain
interest
and dividend income to the IRS and to respond to notices to that
effect, or (3) when required to do so, the shareholder fails to
certify that he or she is not subject to backup withholding. If
the
withholding provisions are applicable, any such distributions or
proceeds, whether reinvested in additional shares or taken in
cash,
will be reduced by the amounts required to be withheld.
Distributions may also be subject to additional state, local
and foreign taxes depending on each shareholder's particular
situation. Non-U.S. shareholders may be subject to U.S. tax
rules
that differ significantly from those summarized above. This
discussion does not purport to deal with all of the tax
consequences
applicable to the Fund or shareholders. Shareholders are advised
to
consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
Performance information for the classes of shares of the Fund may
be
compared, in reports and promotional literature, to: (i) the S&P
500 Index, the Dow Jones Industrial Average ("DJIA"), or other
unmanaged indices so that investors may compare the Fund's
results
with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general;
(ii) other groups of mutual funds tracked by Lipper Analytical
Services, a widely used independent research firm that ranks
mutual
funds by overall performance, investment objectives and assets,
or
tracked by other services, companies, publications or other
criteria; and (iii) the Consumer Price Index (measure for
inflation)
to assess the real rate of return from an investment in the Fund.
Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions or administrative and
management
costs and expenses. Performance rankings are based on historical
information and are not intended to indicate future performance.
In addition, the Trust may, from time to time, include the
yield, the average annual total return and the cumulative total
return of shares of the Fund in advertisements, promotional
literature or reports to shareholders or prospective investors.
YIELD. Quotations of yield for a specific class of shares
of
the Fund will be based on all investment income attributable to
that
class earned during a particular 30-day (or one month) period
(including dividends and interest), less expenses attributable to
that class accrued during the period ("net investment income"),
and
will be computed by dividing the net investment income per share
of
that class earned during the period by the maximum offering price
per share (in the case of Class A shares) or the net asset value
per
share (in the case of Class B, Class C and Class I shares) on the
last day of the period, according to the following formula:
YIELD = 2[({(a-b)/cd} + 1){superscript 6}-1]
Where: a = dividends and interest earned during the
period attributable to a specific class
of
shares,
b = expenses accrued for the period
attributable to that class (net of
reimbursements),
c = the average daily number of shares of
that
class outstanding during the period that
were entitled to receive dividends, and
d = the maximum offering price per share (in
the case of Class A shares) or the net
asset value per share (in the case of
Class B shares, Class C shares and Class
I
shares) on the last day of the period.
AVERAGE ANNUAL TOTAL RETURN. Quotations of standardized
average annual total return ("Standardized Return") for a
specific
class of shares of the Fund will be expressed in terms of the
average annual compounded rate of return that would cause a
hypothetical investment in that class of the Fund made on the
first
day of a designated period to equal the ending redeemable value
("ERV") of such hypothetical investment on the last day of the
designated period, according to the following formula:
P(1 + T){superscript n} = ERV
Where: P = a hypothetical initial payment of $1,000 to
purchase shares of a specific class
T = the average annual total return of shares of
that class
n = the number of years
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
For purposes of the above computation for the Fund, it is
assumed that all dividends and capital gains distributions made
by
the Fund are reinvested at net asset value in additional Fund
shares
during the designated period. Standardized Return quotations for
the Fund do not take into account any required payments for
Federal
or state income taxes. Standardized Return quotations are
determined to the nearest 1/100 of 1%.
The Fund may, from time to time, include in advertisements,
promotional literature or reports to shareholders or prospective
investors total return data that are not calculated according to
the
formula set forth above ("Non-Standardized Return").
CUMULATIVE TOTAL RETURN. Cumulative total return is the
cumulative rate of return on a hypothetical initial investment of
$1,000 in a specific class of shares of the Fund for a specified
period. Cumulative total return quotations reflect changes in
the
price of the Fund's shares and assume that all dividends and
capital
gains distributions during the period were reinvested in Fund
shares. Cumulative total return is calculated by computing the
cumulative rates of return of a hypothetical investment in a
specific class of shares of the Fund over such periods, according
to
the following formula (cumulative total return is then expressed
as
a percentage):
C = (ERV/P) - 1
Where: C = cumulative total return
P = a hypothetical initial investment of $1,000
to
purchase shares of a specific class
ERV = ending redeemable value: ERV is the value,
at
the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
OTHER QUOTATIONS, COMPARISONS AND GENERAL INFORMATION. The
foregoing computation methods are prescribed for advertising and
other communications subject to SEC Rule 482. Communications not
subject to this rule may contain a number of different measures
of
performance, computation methods and assumptions, including but
not
limited to: historical total returns; results of actual or
hypothetical investments; changes in dividends, distributions or
share values; or any graphic illustration of such data. These
data
may cover any period of the Trust's existence and may or may not
include the impact of sales charges, taxes or other factors.
Performance quotations for the Fund will vary from time to
time
depending on market conditions, the composition of the Fund's
portfolio and operating expenses of the Fund. These factors and
possible differences in the methods used in calculating
performance
quotations should be considered when comparing performance
information regarding the Fund's shares with information
published
for other investment companies and other investment vehicles.
Performance quotations should also be considered relative to
changes
in the value of the Fund's shares and the risks associated with
the
Fund's investment objectives and policies. At any time in the
future, performance quotations may be higher or lower than past
performance quotations and there can be no assurance that any
historical performance quotation will continue in the future.
The Fund may also cite endorsements or use for comparison
their
performance rankings and listings reported in such newspapers or
business or consumer publications as, among others: AAII
Journal,
Barron's, Boston Business Journal, Boston Globe, Boston Herald,
Business Week, Consumer's Digest, Consumer Guide Publications,
Changing Times, Financial Planning, Financial World, Forbes,
Fortune, Growth Fund Guide, Houston Post, Institutional Investor,
International Fund Monitor, Investor's Daily, Los Angeles Times,
Medical Economics, Miami Herald, Money Mutual Fund Forecaster,
Mutual Fund Letter, Mutual Fund Source Book, Mutual Fund Values,
National Underwriter, Nelson's Directory of Investment Managers,
New
York Times, Newsweek, No Load Fund Investor, No Load Fund* X,
Oakland Tribune, Pension World, Pensions and Investment Age,
Personal Investor, Rugg and Steele, Time, U.S. News and World
Report, USA Today, The Wall Street Journal, and Washington Post.
FINANCIAL STATEMENTS
The Fund's Statement of Assets and Liabilities as of March
25,
1998 and the Notes thereto are attached hereto as Appendix B.
<PAGE>
APPENDIX A
DESCRIPTION OF STANDARD & POOR'S CORPORATION ("S&P") AND
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
[From "Moody's Bond Record," November 1994 Issue (Moody's
Investors
Service, New York, 1994), and "Standard & Poor's Municipal
Ratings
Handbook," October 1997 Issue (McGraw Hill, New York, 1997).]
MOODY'S:
(a) CORPORATE BONDS. Bonds rated Aaa by Moody's are judged by
Moody's to be of the best quality, carrying the smallest degree
of
investment risk. Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues. Bonds rated Aa are judged by
Moody's to be of high quality by all standards. Aa bonds are
rated
lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuations of protective
elements
may be of greater amplitude, or there may be other elements
present
which make the long-term risks appear somewhat larger than those
applicable to Aaa securities. Bonds which are rated A by Moody's
possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to
impairment
sometime in the future.
Bonds rated Baa by Moody's are considered medium-grade
obligations,
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Such
bonds lack outstanding investment characteristics and in fact
have
speculative characteristics as well. Bonds which are rated Ba
are
judged to have speculative elements; their future cannot be
considered well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or
maintenance of other terms of the contract over any long period
of
time may be small.
Bonds which are rated Caa are of poor standing. Such issues may
be
in default or there may be present elements of danger with
respect
to principal or interest. Bonds which are rated Ca represent
obligations which are speculative in a high degree. Such issues
are
often in default or have other marked shortcomings. Bonds which
are
rated C are the lowest rated class of bonds and issues so rated
can
be regarded as having extremely poor prospects of ever attaining
any
real investment standing.
(b) COMMERCIAL PAPER. The Prime rating is the highest
commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following:
(1)
evaluation of the management of the issuer; (2) economic
evaluation
of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas;
(3)
evaluation of the issuer's products in relation to competition
and
customer acceptance; (4) liquidity; (5) amount and quality of
long-
term debt; (6) trend of earnings over a period of ten years; (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.
Issuers within this Prime category may be given ratings 1, 2 or
3,
depending on the relative strengths of these factors. The
designation of Prime-1 indicates the highest quality repayment
capacity of the rated issue. Issuers rated Prime-2 are deemed to
have a strong ability for repayment while issuers voted Prime-3
are
deemed to have an acceptable ability for repayment. Issuers
rated
Not Prime do not fall within any of the Prime rating categories.
S&P:
(a) CORPORATE BONDS. An S&P corporate debt rating is a
current assessment of the creditworthiness of an obligor with
respect to a specific obligation. The ratings are based on
current
information furnished by the issuer or obtained by S&P from other
sources it considers reliable. The ratings described below may
be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
Debt rated AA is judged by S&P to have a very strong capacity to
pay
interest and repay principal and differs from the highest rated
issues only in small degree. Debt rated A by S&P has a strong
capacity to pay interest and repay principal, although it is
somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated
categories.
Debt rated BBB by S&P is regarded by S&P as having an
adequate
capacity to pay interest and repay principal. Although such
bonds
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal than debt
in
higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having
predominately speculative characteristics with respect to
capacity
to pay interest and repay principal. BB indicates the least
degree
of speculation and C the highest. While such debt will likely
have
some quality and protective characteristics, these are outweighed
by
large uncertainties or exposures to adverse conditions. Debt
rated
BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing
uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest
and
principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BBB- rating. Debt rated B has a greater vulnerability to default
but currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual
or
implied BB or BB- rating. Debt rated CCC has a currently
identifiable vulnerability to default, and is dependent upon
favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the
event
of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to
senior
debt that is assigned an actual or implied B or B- rating. The
rating CC typically is applied to debt subordinated to senior
debt
which is assigned an actual or implied CCC debt rating. The
rating
C typically is applied to debt subordinated to senior debt which
is
assigned an actual or implied CCC- debt rating. The C rating may
be
used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
The rating CI is reserved for income bonds on which no
interest
is being paid. Debt rated D is in payment default. The D rating
category is used when interest payments or principal payments are
not made on the date due, even if the applicable grace period has
not expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used upon
the
filing of a bankruptcy petition if debt service payments are
jeopardized.
(b) COMMERCIAL PAPER. An S&P commercial paper rating is a
current assessment of the likelihood of timely payment of debt
considered short-term in the relevant market.
The commercial paper rating A-1 by S&P indicates that the
degree of safety regarding timely payment is strong. Those
issues
determined to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation. For commercial paper
with
an A-2 rating, the capacity for timely payment on issues is
satisfactory, but not as high as for issues designated A-1.
Issues
rated A-3 have adequate capacity for timely payment, but are more
vulnerable to the adverse effects of changes in circumstances
than
obligations carrying higher designations.
Issues rated B are regarded as having only speculative
capacity
for timely payment. The C rating is assigned to short-term debt
obligations with a doubtful capacity for payment. Debt rated D
is
in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even
if
the applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period.
<PAGE>
APPENDIX B
STATEMENT OF ASSETS AND LIABILITIES
AS OF MARCH 25, 1998
AND REPORT OF INDEPENDENT ACCOUNTANTS
IVY HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 25, 1998
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . $ 50
Deferred organization expenses . . . . . . . 64,772
Prepaid blue sky fees. . . . . . . . . . . . 47,500
---------
Total Assets. . . . . . . . . . . . . . . 112,322
---------
LIABILITIES
Due to affiliate . . . . . . . . . . . . . . 112,272
---------
NET ASSETS . . . . . . . . . . . . . . . . . . $ 50
========
CLASS A:
Net asset value and
redemption price per share
($10 / 1 share outstanding) . . . . . . . $ 10.00
=========
Maximum offering price
per share
($10.00 x 100 / 95.25)* . . . . . . . . . $ 10.61
=========
CLASS B:
Net asset value and
offering price per share
($10 / 1 share outstanding)** . . . . . . $ 10.00
=========
CLASS C:
Net asset value and
offering price per share
($10 / 1 share outstanding)***. . . . . . $ 10.00
=========
CLASS I:
Net asset value, offering and
redemption price per share
($10 / 1 share outstanding) . . . . . . . $ 10.00
=========
ADVISOR CLASS:
Net asset value, offering and
redemption price per share
($10 / 1 share outstanding) . . . . . . . $ 10.00
=========
<PAGE>
NET ASSETS CONSISTS OF:
Capital paid-in. . . . . . . . . . . . . . . $ 50
=========
* On sales of more than $100,000 the offering price is
reduced.
** Redemption price per share is equal to the net asset value
per share less any applicable contingent deferred sales
charge, up to a maximum of 5%.
*** Redemption price per share is equal to the net asset value
per
share less any applicable contingent deferred sales charge,
up
to a maximum of 1%.
(See Notes to Financial Statement)
<PAGE>
IVY HIGH YIELD FUND
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
MARCH 25, 1998
1. ORGANIZATION: Ivy High Yield Fund is a diversified series of
shares of Ivy Fund. The shares of beneficial interest are
assigned
no par value and an unlimited number of shares of Class A, Class
B,
Class C, Class I and Advisor Class are authorized. Ivy Fund was
organized as a Massachusetts business trust under a Declaration
of
Trust dated December 21, 1983 and is registered under the
Investment
Company Act of 1940, as amended, as an open-end management
investment company.
The Fund will commence operations on April 6, 1998. As of the
date
of this report, operations have been limited to organizational
matters and the issuance of initial shares to Mackenzie
Investment
Management Inc. (MIMI).
2. ORGANIZATION COSTS AND PREPAID BLUE SKY FEES: Organization
expenses are being amortized over a five year period from April
6,
1998, the commencement date of operations. Blue sky fees are
being
amortized over a one year period from April 6, 1998. Such
organizational expenses and blue sky fees have been paid by MIMI
and
will be reimbursed by the Fund.
3. TRANSACTIONS WITH AFFILIATES: Ivy Management, Inc. (IMI), a
wholly owned subsidiary of MIMI, is the Manager and Investment
Adviser of the Fund. Currently, IMI voluntarily limits the
Fund's
total operating expenses (excluding taxes, 12b-1 fees, brokerage
commissions, interest, litigation and indemnification expenses,
and
any other extraordinary expenses) to an annual rate of .85% of
its
average net assets.
MIMI provides certain administrative, accounting and pricing
services for the Fund.
Ivy Mackenzie Distributors, Inc. (IMDI), a wholly owned
subsidiary
of MIMI, is the underwriter and distributor of the Fund's shares,
and as such, purchases shares from the Fund at net asset value to
settle orders from investment dealers.
Ivy Mackenzie Services Corp. (IMSC), a wholly owned subsidiary
of
MIMI, is the transfer and shareholder servicing agent for the
Fund.
Officers of Ivy Fund are officers and/or employees of MIMI, IMI,
IMDI and IMSC. Such individuals are not compensated by the Fund
for
services in their capacity as officers of Ivy Fund. Trustees of
Ivy
Fund who are not affiliated with MIMI or IMI receive compensation
from the Fund.
<PAGE>
[Coopers & Lybrand letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Ivy High Yield Fund (the "Fund"):
We have audited the accompanying Statement of Assets and
Liabilities
of the Fund as of March 25, 1998. This financial statement is
the
responsibility of the Fund's management. Our responsibility is
to
express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the
Statement of Assets and Liabilities is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the Statement
of
Assets and Liabilities. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
Statement of Assets and Liabilities. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above
presents
fairly, in all material respects, the financial position of the
Fund
as of March 25, 1998, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Fort Lauderdale, Florida
March 25, 1998
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IVY HIGH YIELD FUND
series of
IVY FUND
Via Mizner Financial Plaza, Suite 300
700 South Federal Highway
Boca Raton, Florida 33432
STATEMENT OF ADDITIONAL INFORMATION
ADVISOR CLASS SHARES
April 6, 1998
_________________________________________________________________
Ivy Fund (the "Trust") is an open-end management investment
company that currently consists of eighteen fully managed
portfolios, each of which (except for Ivy South America Fund) is
diversified. This Statement of Additional Information ("SAI")
relates to the Advisor Class shares of Ivy High Yield Fund (the
"Fund"). The other seventeen portfolios of the Trust are
described in separate prospectuses and statements of additional
information.
This SAI is not a prospectus and should be read in
conjunction with the prospectus for the Fund dated April 6, 1998
(the "Prospectus"), which may be obtained upon request and
without charge from the Trust at the Distributor's address and
telephone number listed below. Advisor Class shares are only
offered to certain investors (see the Prospectus). The Fund also
offers Class A, Class B, Class C and Class I shares, which are
described in a separate prospectus and statement of additional
information that may be obtained from the Distributor.
INVESTMENT MANAGER
Ivy Management, Inc. ("IMI")
Via Mizner Financial Plaza, Suite 300
700 South Federal Highway
Boca Raton, Florida 33432
Telephone: (800) 777-6472
DISTRIBUTOR
Ivy Mackenzie Distributors, Inc.
Via Mizner Financial Plaza, Suite 300
700 South Federal Highway
Boca Raton, Florida 33432
Telephone: (800) 456-5111
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TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . 1
DEVELOPMENT OF THE HIGH YIELD BOND MARKET . . . . . . . . 1
HIGH YIELD BONDS-PORTFOLIO DIVERSIFICATION. . . . . . . . 1
HIGH YIELD/HIGH RISK SECURITIES . . . . . . . . . . . . . 2
U.S. GOVERNMENT SECURITIES. . . . . . . . . . . . . . . . 3
COMMERCIAL PAPER. . . . . . . . . . . . . . . . . . . . . 4
CONVERTIBLE SECURITIES. . . . . . . . . . . . . . . . . . 4
REPURCHASE AGREEMENTS . . . . . . . . . . . . . . . . . . 5
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS . . . . 5
FOREIGN SECURITIES. . . . . . . . . . . . . . . . . . . . 6
FOREIGN CURRENCIES. . . . . . . . . . . . . . . . . . . . 7
FORWARD FOREIGN CURRENCY CONTRACTS. . . . . . . . . . . . 8
DEBT SECURITIES, IN GENERAL . . . . . . . . . . . . . . . 8
INTERNATIONAL BOND MARKETS. . . . . . . . . . . . . . . . 9
SMALL COMPANIES . . . . . . . . . . . . . . . . . . . . . 9
WHEN-ISSUED PURCHASES AND FIRM COMMITMENT AGREEMENTS. . . 9
ZERO COUPON BONDS . . . . . . . . . . . . . . . . . . . . 11
ILLIQUID SECURITIES . . . . . . . . . . . . . . . . . . . 11
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. . . . 12
GENERAL. . . . . . . . . . . . . . . . . . . . . . . 12
INTEREST RATE FUTURES CONTRACTS. . . . . . . . . . . 13
OPTIONS ON INTEREST RATE FUTURES CONTRACTS . . . . . 14
FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS . . . . . . . . . . . . . . . . . . . . 14
RISKS ASSOCIATED WITH FUTURES AND RELATED OPTIONS. . 15
COMBINED TRANSACTIONS. . . . . . . . . . . . . . . . 16
BORROWING . . . . . . . . . . . . . . . . . . . . . . . . 17
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . 17
ADDITIONAL RESTRICTIONS. . . . . . . . . . . . . . . . . . . . 19
ADDITIONAL RIGHTS AND PRIVILEGES . . . . . . . . . . . . . . . 20
AUTOMATIC INVESTMENT METHOD . . . . . . . . . . . . . . . 20
EXCHANGE OF SHARES. . . . . . . . . . . . . . . . . . . . 20
RETIREMENT PLANS. . . . . . . . . . . . . . . . . . . . . 21
INDIVIDUAL RETIREMENT ACCOUNTS . . . . . . . . . . . 22
ROTH IRAS. . . . . . . . . . . . . . . . . . . . . . 23
QUALIFIED PLANS. . . . . . . . . . . . . . . . . . . 24
DEFERRED COMPENSATION FOR PUBLIC SCHOOLS AND
CHARITABLE ORGANIZATIONS ("403(B)(7)
ACCOUNT") . . . . . . . . . . . . . . . . . . . 24
SIMPLIFIED EMPLOYEE PENSION ("SEP") IRAS . . . . . . 25
SIMPLE PLANS . . . . . . . . . . . . . . . . . . . . 25
SYSTEMATIC WITHDRAWAL PLAN. . . . . . . . . . . . . . . . 25
GROUP SYSTEMATIC INVESTMENT PROGRAM . . . . . . . . . . . 26
BROKERAGE ALLOCATION . . . . . . . . . . . . . . . . . . . . . 26
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . 28
PERSONAL INVESTMENTS BY EMPLOYEES OF IMI. . . . . . . . . 32
COMPENSATION TABLE . . . . . . . . . . . . . . . . . . . . . . 33
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . 35
BUSINESS MANAGEMENT AND INVESTMENT ADVISORY SERVICES. . . 35
DISTRIBUTION SERVICES . . . . . . . . . . . . . . . . . . 37
RULE 18F-3 PLAN. . . . . . . . . . . . . . . . . . . 38
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . 38
FUND ACCOUNTING SERVICES. . . . . . . . . . . . . . . . . 38
TRANSFER AGENT AND DIVIDEND PAYING AGENT. . . . . . . . . 39
ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . 39
AUDITORS. . . . . . . . . . . . . . . . . . . . . . . . . 39
CAPITALIZATION AND VOTING RIGHTS . . . . . . . . . . . . . . . 39
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . 41
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . 42
REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 43
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD
CONTRACTS. . . . . . . . . . . . . . . . . . . . . . 45
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR
LOSSES . . . . . . . . . . . . . . . . . . . . . . . 47
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES. . . . 47
DEBT SECURITIES ACQUIRED AT A DISCOUNT. . . . . . . . . . 47
DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . 48
DISPOSITION OF SHARES . . . . . . . . . . . . . . . . . . 49
FOREIGN WITHHOLDING TAXES . . . . . . . . . . . . . . . . 50
BACKUP WITHHOLDING. . . . . . . . . . . . . . . . . . . . 51
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . 51
YIELD. . . . . . . . . . . . . . . . . . . . . . . . 52
AVERAGE ANNUAL TOTAL RETURN. . . . . . . . . . . . . 52
CUMULATIVE TOTAL RETURN. . . . . . . . . . . . . . . 53
OTHER QUOTATIONS, COMPARISONS AND GENERAL
INFORMATION . . . . . . . . . . . . . . . . . . 53
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 54
APPENDIX A
DESCRIPTION OF STANDARD & POOR'S CORPORATION ("S&P")
AND MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
CORPORATE BOND AND COMMERCIAL PAPER RATINGS . . . . . . . 55
APPENDIX B
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 25,
1998 AND REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . 58
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INVESTMENT OBJECTIVES AND POLICIES
The Fund has its own investment objectives and policies,
which are described in the Prospectus under the captions
"Investment Objectives and Policies" and "Risk Factors and
Investment Techniques." Additional information regarding the
characteristics and risks associated with the Fund's investment
techniques is set forth below.
DEVELOPMENT OF THE HIGH YIELD BOND MARKET
Over the course of this decade, the market for higher
yielding domestic debt securities has changed dramatically. U.S.
high yield bonds now total over $350 billion, about a quarter of
the entire U.S. corporate bond market.
In the early 1970s high yield bonds emerged as a way for new
companies, companies with troubled credit histories, or any
company without access to more traditional financing to raise
capital. The category grew and changed from a small, illiquid
market for special circumstances, to a larger, more liquid market
offering an alternative way to raise capital to companies of
every size and structure.
As the economy strengthened throughout the 1980s, some
companies began to replace more and more of the equity in their
capital structure with high yield debt. In the late 1980s, many
companies had little equity supporting the outstanding debt.
Those who had anticipated continuing growth and increasing cash
flows to contribute to debt service found that as the economy
slowed, they were unable to pay their creditors. This led to
defaults and the high yield bond market nearly collapsed under
the weight of several factors including a recession, the
bankruptcy of a major high yield bond underwriter, and the forced
withdrawal of thrifts from this market.
Expanding companies are now turning to the high yield bond
market for financing real growth. The average quality of the
overall high yield bond category has improved. There are many
opportunities to buy the debt of growing companies or companies
that may not yet have the track record necessary to utilize more
traditional sources of financing. The conditions of these
borrowing companies can improve over time, and as the quality of
the debt improves, the prospect for price appreciation adds to
the return from income.
HIGH YIELD BONDS-PORTFOLIO DIVERSIFICATION
The benefits of investing in high yield debt securities
include the potential for superior yields and also portfolio
diversification which may result in enhanced total returns with
the potential for reduced overall portfolio risk.
High yield bonds show a relatively low correlation with both
stocks and investment-grade bonds. Due to this low correlation,
high yield bonds offer diversification benefits to both equity
and income portfolios.
HIGH YIELD/HIGH RISK SECURITIES
The Fund invests in debt securities rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's") or BB or lower by
Standard & Poor's Corporation ("S&P") and comparable unrated
securities. Securities rated lower than Baa or BBB (and
comparable unrated securities) are commonly referred to as "high
yield" or "junk" bonds and are considered to be predominantly
speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The lower the ratings of
corporate debt securities, the more their risks render them like
equity securities. Below investment-grade securities (rated Ba
or below by Moody's and BB or below by S&P) or unrated securities
of equivalent quality in which the Fund may invest carry a high
degree of risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve
greater volatility of price and risk of principal and income, and
may be less liquid, than securities in the higher rating
categories and are considered speculative. (See Appendix A for a
more complete description of the ratings assigned by Moody's and
S&P and their respective characteristics.)
While IMI may refer to ratings issued by established credit
rating agencies, it is not IMI's policy to rely exclusively on
such ratings, but rather to supplement such ratings with its own
independent and ongoing review of credit quality. The Fund's
achievement of its investment objectives may, to the extent of
its investment in low-rated debt securities, be more dependent
upon IMI's credit analysis than would be the case if the Fund was
investing in higher quality bonds. Should the rating of a
portfolio security be downgraded, IMI will determine whether it
is in the Fund's best interest to retain or dispose of the
security.
Economic downturns may disrupt the high yield market and
impair the ability of issuers to repay principal and interest.
Also, an increase in interest rates would likely have an adverse
impact on the value of such obligations. During an economic
downturn or period of rising interest rates, highly leveraged
issuers may experience financial stress which could adversely
affect their ability to service their principal and interest
payment obligations. Prices and yields of high yield securities
will fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely
affect the Fund's net asset value. In addition, investments in
high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative and
may be subject to greater fluctuations in value due to changes in
interest rates.
The trading market for high yield securities may be thin to
the extent that there is no established retail secondary market
or because of a decline in the value of such securities. A thin
trading market may limit the ability of the Fund to accurately
value high yield securities in the Fund's portfolio, could
adversely affect the price at which the Fund could sell such
securities, and cause large fluctuations in the daily net asset
value of the Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of low-rated debt securities,
especially in a thinly traded market. When secondary markets for
high yield securities become relatively less liquid, it may be
more difficult to value the securities, requiring additional
research and elements of judgment. These securities may also
involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties.
Credit quality in the high yield securities market can
change suddenly and unexpectedly, and even recently issued credit
ratings may not fully reflect the actual risks posed by a
particular high-yield security. For these reasons, it is the
policy of IMI not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such
ratings with its own independent and on-going review of credit
quality. The achievement of the Fund's investment objectives by
investment in such securities may be more dependent on IMI's
credit analysis than is the case for higher quality bonds.
Should the rating of a portfolio security be downgraded, IMI will
determine whether it is in the best interest of the Fund to
retain or dispose of such security.
Prices for high yield securities may be affected by
legislative and regulatory developments. For example, federal
rules require savings and loan institutions to gradually reduce
their holdings of this type of security. Also, Congress has from
time to time considered legislation which would restrict or
eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such
legislation may significantly depress the prices of outstanding
securities of this type.
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities.
Securities guaranteed by the U.S. Government include: (1) direct
obligations of the U.S. Treasury (such as Treasury bills, notes,
and bonds) and (2) Federal agency obligations guaranteed as to
principal and interest by the U.S. Treasury (such as GNMA
certificates, which are mortgage-backed securities). When such
securities are held to maturity, the payment of principal and
interest is unconditionally guaranteed by the U.S. Government,
and thus they are of the highest possible credit quality. U.S.
Government securities that are not held to maturity are subject
to variations in market value due to fluctuations in interest
rates.
Mortgage-backed securities are securities representing part
ownership of a pool of mortgage loans. For example, GNMA
certificates are such securities in which the timely payment of
principal and interest is guaranteed by the full faith and credit
of the U.S. Government. Although the mortgage loans in the pool
will have maturities of up to 30 years, the actual average life
of the loans typically will be substantially less because the
mortgages will be subject to principal amortization and may be
prepaid prior to maturity. Prepayment rates vary widely and may
be affected by changes in market interest rates. In periods of
falling interest rates, the rate of prepayment tends to increase,
thereby shortening the actual average life of the security.
Conversely, rising interest rates tend to decrease the rate of
prepayments, thereby lengthening the actual average life of the
security (and increasing the security's price volatility).
Accordingly, it is not possible to predict accurately the average
life of a particular pool. Reinvestment of prepayment may occur
at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to
reinvest prepayments of principal at current rates, mortgage-
backed securities can be less effective than typical bonds of
similar maturities at "locking in" yields during periods of
declining interest rates and may involve significantly greater
price and yield volatility than traditional debt securities.
Such securities may appreciate or decline in market value during
periods of declining or rising interest rates, respectively.
Securities issued by U.S. Government instrumentalities and
certain federal agencies are neither direct obligations of nor
guaranteed by the U.S. Treasury; however, they involve Federal
sponsorship in one way or another. Some are backed by specific
types of collateral, some are supported by the issuer's right to
borrow from the Treasury, some are supported by the discretionary
authority of the Treasury to purchase certain obligations of the
issuer, others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and
instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home
Loan Banks, Federal National Mortgage Association, Federal Home
Loan Mortgage Association, and Student Loan Marketing
Association.
COMMERCIAL PAPER
Commercial paper represents short-term unsecured promissory
notes issued in bearer form by bank holding companies,
corporations and finance companies. The Fund's investments are
not limited to a particular Moody's or S&P rating category. The
lower an issuer's rating, however, the greater the perceived risk
of its inability for repayment. An issuer's rating depends on
its ability to repay its short-term obligations as measured by
factors such as market position, capitalization characteristics,
earnings and profitability levels, and access to sources of
alternate liquidity.
CONVERTIBLE SECURITIES
Because convertible securities can be converted into equity
securities, their values will normally vary in some proportion
with those of the underlying equity securities. Convertible
securities usually provide a higher yield than the underlying
equity, however, so that the price decline of a convertible
security may sometimes be less substantial than that of the
underlying equity security.
The Fund may invest in convertible securities, such as
corporate bonds, notes, debentures and other securities that may
be converted into common stock. Investments in convertible
securities can provide income through interest and dividend
payments as well as an opportunity for capital appreciation by
virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest
include dividend-paying preferred stock that may be converted or
exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any
particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate
distributions or scheduled changes in the exchange ratio.
Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both
debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the
market value of convertible securities typically changes as the
market value of the underlying common stock changes, and,
therefore, also tends to follow movements in the general market
for equity securities. When the market price of the underlying
common stock increases, the price of a convertible security tends
to rise as a reflection of the value of the underlying common
stock, although typically not as much as the price of the
underlying common stock. While no securities investments are
without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same
issuer.
As debt securities, convertible securities are investments
which provide for a stream of income. Of course, like all debt
securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may
default on their obligations. Convertible securities generally
offer lower yields than non-convertible securities of similar
quality because of their conversion or exchange features.
Convertible securities generally are subordinated to other
similar but non-convertible securities of the same issuer,
although convertible bonds, as corporate debt obligations, are
senior in right of payment to all equity securities, and
convertible preferred stock is senior to common stock, of the
same issuer. However, convertible bonds and convertible
preferred stock typically have lower coupon rates than similar
non-convertible securities. Convertible securities may be issued
as fixed income obligations that pay current income.
REPURCHASE AGREEMENTS
Repurchase agreements are contracts under which the Fund
buys a money market instrument and obtains a simultaneous
commitment from the seller to repurchase the instrument at a
specified time and at an agreed-upon yield. Under guidelines
approved by the Board, the Fund is permitted to enter into
repurchase agreements only if the repurchase agreements are at
least fully collateralized with U.S. Government securities or
other securities that IMI has approved for use as collateral for
repurchase agreements and the collateral must be marked-to-market
daily. The Fund will enter into repurchase agreements only with
banks and broker-dealers deemed to be creditworthy by IMI under
the above-referenced guidelines. In the unlikely event of
failure of the executing bank or broker-dealer, the Fund could
experience some delay in obtaining direct ownership of the
underlying collateral and might incur a loss if the value of the
security should decline, as well as costs in disposing of the
security.
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS
Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank (meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument at
maturity). In addition to investing in certificates of deposit
and bankers' acceptances, the Fund may invest in time deposits in
banks or savings and loan associations. Time deposits are
generally similar to certificates of deposit, but are
uncertificated. The Fund's investments in certificates of
deposit, time deposits, and bankers' acceptances are limited to
obligations of (i) banks having total assets in excess of $1
billion, (ii) U.S. banks which do not meet the $1 billion asset
requirement, if the principal amount of such obligation is fully
insured by the Federal Deposit Insurance Corporation (the
"FDIC"), (iii) savings and loan associations which have total
assets in excess of $1 billion and which are members of the FDIC,
and (iv) foreign banks if the obligation is, in IMI's opinion, of
an investment quality comparable to other debt securities which
may be purchased by the Fund. The Fund's investments in
certificates of deposit of savings associations are limited to
obligations of Federal and state-chartered institutions whose
total assets exceed $1 billion and whose deposits are insured by
the FDIC.
FOREIGN SECURITIES
Investors should recognize that investing in foreign
securities involves certain special considerations, including
those set forth below and in the Fund's Prospectus, which are not
typically associated with investing in United States securities
and which may affect the Fund's performance favorably or
unfavorably.
The risks of investing in foreign securities are likely to
be intensified in the case of investments in issuers domiciled or
doing substantial business in countries with emerging or
developing economies ("emerging markets"). For example,
countries with emerging markets may have relatively unstable
governments and therefore be susceptible to sudden adverse
government action (such as nationalization of businesses,
restrictions on foreign ownership or prohibitions against
repatriation of assets). Security prices in emerging markets can
also be significantly more volatile than in the more developed
nations of the world, and communications between the U.S. and
emerging market countries may be unreliable, increasing the risk
of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Delayed settlements could
cause the Fund to miss attractive investment opportunities or
impair its ability to dispose of portfolio securities, resulting
in a loss if the value of the securities subsequently declines.
In addition, many emerging markets have experienced and continue
to experience especially high rates of inflation. In certain
countries, inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate
environment and sharply eroding the value of outstanding
financial assets in those countries.
In recent years, many emerging market countries around the
world have undergone political changes that have reduced
government's role in economic and personal affairs and have
stimulated investment and growth. In order for these emerging
economies to continue to expand and develop industry,
infrastructure and currency reserves, continued influx of capital
is essential. Historically, there is a strong direct correlation
between economic growth and stock market returns. While this is
no guarantee of future performance, IMI believes that investment
opportunities (particularly in the energy, environmental
services, natural resources, basic materials, power,
telecommunications and transportation industries) may result
within the evolving economies of emerging market countries from
which the Fund and its shareholders will benefit. IMI believes
that similar investment opportunities will be created for
companies involved in providing consumer goods and services
(e.g., food, beverages, autos, housing, tourism and leisure and
merchandising).
Foreign stock markets have different clearance and
settlement procedures and in certain markets there have been
times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no
return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. The
inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to
subsequent declines in the value of the portfolio security or, if
the Fund has entered into a contract to sell the security, in
possible liability to the purchaser. Fixed commissions on some
foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although IMI will endeavor to
achieve the most favorable net results on the Fund's portfolio
transactions. Further, the Fund may encounter difficulties or be
unable to pursue legal remedies and obtain judgment in foreign
courts. It may be more difficult for the Fund's agents to keep
currently informed about corporate actions such as stock
dividends or other matters which may affect the prices of
portfolio securities. Communications between the United States
and foreign countries may be less reliable than within the United
States, thus increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio
securities. Moreover, individual foreign economies may differ
favorably or unfavorably from the United States economy in such
respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of
payments position. IMI seeks to mitigate the risks to the Fund
associated with the foregoing considerations through investment
variation and continuous professional management.
FOREIGN CURRENCIES
Investment in foreign securities usually will involve
currencies of foreign countries. Moreover, the Fund may
temporarily hold funds in bank deposits in foreign currencies
during the completion of investment programs and may purchase
forward foreign currency contracts. Because of these factors,
the value of the assets of the Fund as measured in U.S. dollars
may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the
Fund may incur costs in connection with conversions between
various currencies. Although the Fund's Custodian values the
Fund's assets daily in terms of U.S. dollars, the Fund does not
intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Fund will do so from time to time,
and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to
purchase or sell foreign currencies.
The Fund's share price will reflect the movements of both
the different stock and bond markets in which it is invested and
of the currencies in which the investments are denominated; the
strength or weakness of the U.S. dollar against foreign
currencies may account for part of the Fund's investment
performance. U.S. and foreign securities markets do not always
move in step with each other, and the total returns from
different markets may vary significantly.
FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of
future foreign exchange rates in the purchase and sale of
securities, but not for speculative purposes. A forward foreign
currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These
contracts may be bought or sold to protect the Fund against a
possible loss resulting from an adverse change in the relation-
ship between foreign currencies and the U.S. dollar. Although
such contracts are intended to minimize the risk of loss due to a
decline in the value of the hedged currencies, at the same time,
they tend to limit any potential gain that might result should
the value of such currencies increase.
The Fund will not enter into forward contracts or maintain a
net exposure to such contracts where the consummation of the
contract would obligate the Fund to deliver an amount of currency
in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. Further, the Fund
generally will not enter into a forward contract with a term of
greater than one year.
The Fund will hold cash or liquid securities in a segregated
account with its Custodian in an amount equal (on a daily marked-
to-market basis) to the amount of the commitments under these
contracts. At the maturity of a forward contract, the Fund may
either accept or make delivery of the currency specified in the
contract, or, prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting
contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a
party to the original forward contract.
DEBT SECURITIES, IN GENERAL
Investment in debt securities involves both interest rate
and credit risk. Generally, the value of debt instruments rises
and falls inversely with fluctuations in interest rates. As
interest rates decline, the value of debt securities generally
increases. Conversely, rising interest rates tend to cause the
value of debt securities to decrease. Bonds with longer
maturities generally are more volatile than bonds with shorter
maturities. The market value of debt securities also varies
according to the relative financial condition of the issuer. In
general, lower-quality bonds offer higher yields due to the
increased risk that the issuer will be unable to meet its
obligations on interest or principal payments at the time called
for by the debt instrument.
INTERNATIONAL BOND MARKETS
The U.S. dollar-denominated bond market now represents less
than one half of the world's developed bond markets. As a
result, opportunities for investment in international bond
markets have become more significant. The liquidity of
international bond markets has improved as the number of
investors participating in these markets has increased.
Additionally, many international bond markets have become more
attractive for foreign investors due to the reduction of barriers
of entry to foreign investors by deregulation and by reduction of
withholding taxes.
Concurrent with the opening of foreign markets, restrictions
on international capital flows have been reduced or eliminated,
thereby enabling investment funds to seek the highest expected
returns. As a result, the market conditions of one nation
influence the market conditions of other countries through the
flow of international capital.
Returns from international bond markets often differ from
those generated by U.S. bond markets. The variations in returns
are, in part, the result of fluctuating foreign currency exchange
rates and changes in foreign interest rates as compared with U.S.
interest rates. At times, higher investment returns may be
provided by international bonds than from U.S. bonds. For
example, international bonds may provide higher current income
and/or greater capital appreciation than U.S. bonds due to
fluctuation in foreign currencies relative to the U.S. dollar.
Of course, at any time, the opposite may also be true.
SMALL COMPANIES
Investing in smaller company stocks involves certain special
considerations and risks that are not usually associated with
investing in larger, more established companies. For example,
the securities of small or new companies may be subject to more
abrupt or erratic market movements because they tend to be thinly
traded and are subject to a greater degree to changes in the
issuer's earnings and prospects. Small companies also tend to
have limited product lines, markets or financial resources.
Transaction costs associated with trading in smaller company
stocks may be higher than those of larger companies.
WHEN-ISSUED PURCHASES AND FIRM COMMITMENT AGREEMENTS
When the Fund purchases new issues of securities on a when-
issued basis, the Fund's Custodian will establish a segregated
account for the Fund consisting of cash or liquid securities
equal to the amount of the commitment. If the value of
securities in the account should decline, additional cash or
securities will be placed in the account so that the market value
of the account will equal the amount of such commitments by the
Fund on a daily basis.
Securities purchased on a when-issued basis and the
securities held in the Fund's portfolio are subject to changes in
market value based upon various factors including changes in the
level of market interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates,
i.e., they will appreciate in value when market interest rates
decline and decrease in value when market interest rates rise.
For this reason, placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net
assets. That is, to the extent that the Fund remains
substantially fully invested in securities at the same time that
it has committed to purchase securities on a when-issued basis,
there will be greater fluctuations in its net assets than if it
had set aside cash to satisfy its purchase commitment.
Upon the settlement date of the when-issued securities, the
Fund ordinarily will meet its obligation to purchase the
securities from available cash flow, use of the cash (or
liquidation of securities) held in the segregated account or sale
of other securities. Although it would not normally expect to do
so, the Fund also may meet its obligation from the sale of the
when-issued securities themselves (which may have a current
market value greater or less than the Fund's payment obligation).
The sale of securities to meet such obligations carries with it a
greater potential for the realization of capital gains.
The Fund may also enter into firm commitment agreements for
the purchase of securities at an agreed-upon price on a specified
future date. During the time that the Fund is obligated to
purchase such securities, it will maintain in a segregated
account with its Custodian cash or liquid securities of an
aggregate value sufficient to make payment for the securities.
are debt obligations issued without any requirement for the
periodic payment of interest. Zero coupon bonds are issued at a
significant discount from face value. The discount approximates
the total amount of interest the bonds would accrue and compound
over the period until maturity at a rate of interest reflecting
the market rate at the time of issuance. The Fund, if it holds
zero coupon bonds in its portfolio, however, would recognize
income currently for Federal income tax purposes in the amount of
the unpaid, accrued interest and generally would be required to
distribute dividends representing such income to shareholders
currently, even though funds representing such income would not
have been received by the Fund. Cash to pay dividends
representing unpaid, accrued interest may be obtained from sales
proceeds of portfolio securities and Fund shares and from loan
proceeds. The potential sale of portfolio securities to pay cash
distributions from income earned on zero coupon bonds may result
in the Fund being forced to sell portfolio securities at a time
when the Fund might otherwise choose not to sell these securities
and when the Fund might incur a capital loss on such sales.
Because interest on zero coupon obligations is not distributed to
the Fund on a current basis but is in effect compounded, the
value of the securities of this type is subject to greater
fluctuations in response to changing interest rates than the
value of debt obligations which distribute income regularly.
ZERO COUPON BONDS
The Fund may purchase zero coupon bonds. Zero coupon bonds
are debt obligations issued without any requirement for the
periodic payment of interest. Zero coupon bonds are issued at a
significant discount from face value. The discount approximates
the total amount of interest the bonds would accrue and compound
over the period until maturity at a rate of interest reflecting
the market rate at the time of issuance. The Fund, if it holds
zero coupon bonds in its portfolio, however, would recognize
income currently for Federal income tax purposes in the amount of
the unpaid, accrued interest and generally would be required to
distribute dividends representing such income to shareholders
currently, even though funds representing such income would not
have been received by the Fund. Cash to pay dividends
representing unpaid, accrued interest may be obtained from sales
proceeds of portfolio securities and Fund shares and from loan
proceeds. The potential sale of portfolio securities to pay cash
distributions from income earned on zero coupon bonds may result
in the Fund being forced to sell portfolio securities at a time
when the Fund might otherwise choose not to sell these securities
and when the Fund might incur a capital loss on such sales.
Because interest on zero coupon obligations is not distributed to
the Fund on a current basis but is in effect compounded, the
value of the securities of this type is subject to greater
fluctuations in response to changing interest rates than the
value of debt obligations which distribute income regularly.
ILLIQUID SECURITIES
The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open
market, the securities so purchased are often "restricted
securities" or "not readily marketable," i.e., securities which
cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the
availability of an exemption from registration (such as Rule
144A) or because they are subject to other legal or contractual
delays in or restrictions on resale. This investment practice,
therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid
securities (including repurchase agreements of more than seven
days duration, certain restricted securities, and other
securities which are not readily marketable) may not constitute,
at the time of purchase, more than 15% of the value of the Fund's
net assets. The Trust's Board of Trustees has approved
guidelines for use by IMI in determining whether a security is
illiquid.
Generally speaking, restricted securities may be sold (i)
only to qualified institutional buyers; (ii) in a privately
negotiated transaction to a limited number of purchasers; (iii)
in limited quantities after they have been held for a specified
period of time and other conditions are met pursuant to an
exemption from registration; or (iv) in a public offering for
which a registration statement is in effect under the 1933 Act.
Issuers of restricted securities may not be subject to the
disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If
adverse market conditions were to develop during the period
between the Fund's decision to sell a restricted or illiquid
security and the point at which the Fund is permitted or able to
sell such security, the Fund might obtain a price less favorable
than the price that prevailed when it decided to sell. Where a
registration statement is required for the resale of restricted
securities, the Fund may be required to bear all or part of the
registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling
restricted securities to the public and, in such event, the Fund
may be liable to purchasers of such securities if the
registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will
continue to be liquid, IMI will monitor such restricted
securities subject to the supervision of the Board of Trustees.
Among the factors IMI may consider in reaching liquidity
decisions relating to Rule 144A securities are: (1) the
frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to
make a market in the security; and (4) the nature of the security
and the nature of the market for the security (i.e., the time
needed to dispose of the security, the method of soliciting
offers, and the mechanics of the transfer).
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The Fund may enter into futures contracts and
options on futures contracts for hedging purposes. A futures
contract provides for the future sale by one party and purchase
by another party of a specified quantity of a commodity at a
specified price and time. When a purchase or sale of a futures
contract is made by the Fund, the Fund is required to deposit
with its Custodian (or broker, if legally permitted) a specified
amount of cash or U.S. Government securities ("initial margin").
The margin required for a futures contract is set by the exchange
on which the contract is traded and may be modified during the
term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract
which is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied. A
futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal
to the daily change in value of the futures contract. This
process is known as "marking to market." Variation margin does
not represent a borrowing or loan by the Fund but is instead a
settlement between the Fund and the broker of the amount one
would owe the other if the futures contract expired. In
computing daily net asset value, the Fund will mark-to-market its
open futures position.
The Fund is also required to deposit and maintain margin
with respect to put and call options on futures contracts written
by it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking
delivery of the underlying securities, generally these
obligations are closed out prior to delivery of offsetting
purchases or sales of matching futures contracts (same exchange,
underlying security or index, and delivery month). If an
offsetting purchase price is less than the original sale price,
the Fund generally realizes a capital gain, or if it is more, the
Fund generally realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price,
the Fund generally realizes a capital gain, or if it is less, the
Fund generally realizes a capital loss. The transaction costs
must also be included in these calculations.
When purchasing a futures contract, the Fund will maintain
with its Custodian in a segregated account (and mark-to-market on
a daily basis) cash or liquid securities that, when added to the
amounts deposited with a futures commission merchant ("FCM") as
margin, are equal to the market value of the futures contract.
Alternatively, the Fund may "cover" its position by purchasing a
put option on the same futures contract with a strike price as
high as or higher than the price of the contract held by the
Fund.
When selling a futures contact, the Fund will maintain with
its Custodian in a segregated account (and mark-to-market on a
daily basis) cash or liquid securities that, when added to the
amounts deposited with an FCM as margin, are equal to the market
value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to
that of the index on which the futures contract is based), or by
holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the
contract written by that Fund (or at a higher price if the
difference is maintained in liquid assets with the Fund's
Custodian).
When selling a call option on a futures contract, the Fund
will maintain with its Custodian in a segregated account (and
mark-to-market on a daily basis) cash or liquid securities that,
when added to the amounts deposited with an FCM as margin, equal
the total market value of the futures contract underlying the
call option. Alternatively, the Fund may cover its position by
entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by
owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase
the same futures contract at a price not higher than the strike
price of the call option sold by that Fund.
When selling a put option on a futures contract, the Fund
will maintain with its Custodian in a segregated account (and
mark-to-market on a daily basis) cash or liquid securities that
equal the purchase price of the futures contract less any margin
on deposit. Alternatively, the Fund may cover the position
either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to
sell the same futures contract so long as the strike price of the
purchased put option is the same or higher than the strike price
of the put option sold by the Fund.
INTEREST RATE FUTURES CONTRACTS. The Fund may engage in
interest rate futures contracts transactions for hedging purposes
only. An interest rate futures contract is an agreement between
parties to buy or sell a specified debt security at a set price
on a future date. The financial instruments that underlie
interest rate futures contracts include long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA certificates, and three-month
U.S. Treasury bills. In the case of futures contracts traded on
U.S. exchanges, the exchange itself or an affiliated clearing
corporation assumes the opposite side of each transaction (i.e.,
as buyer or seller). A futures contract may be satisfied or
closed out by delivery or purchase, as the case may be in the
cash financial instrument or by payment of the change in the cash
value of the index. Frequently, using futures to effect a
particular strategy instead of using the underlying or related
security will result in lower transaction costs being incurred.
The Fund may sell interest rate futures contracts in order
to hedge its portfolio securities whose value may be sensitive to
changes in interest rates. In addition, the Fund could purchase
and sell these futures contracts in order to hedge its holdings
in certain common stocks (such as utilities, banks and savings
and loans) whose value may be sensitive to changes in interest
rates. The Fund could sell interest rate futures contracts in
anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might
otherwise result. When the Fund is not fully invested in
securities, it could purchase interest rate futures in order to
gain rapid market exposure that may in part or entirely offset
increases in the cost of securities that it intends to purchase.
As such purchases are made, an equivalent amount of interest rate
futures contracts will be terminated by offsetting sales. In a
substantial majority of these transactions, the Fund would
purchase such securities upon termination of the futures position
whether the futures position results from the purchase of an
interest rate futures contract or the purchase of a call option
on an interest rate futures contract, but under unusual market
conditions, a futures position may be terminated without the
corresponding purchase of securities.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS. For hedging
purposes, the Fund may also purchase and write put and call
options on interest rate futures contracts which are traded on a
U.S. exchange or board of trade and sell or purchase such options
to terminate an existing position. Options on interest rate
futures give the purchaser the right (but not the obligation), in
return for the premium paid, to assume a position in an interest
rate futures contract at a specified exercise price at a time
during the period of the option.
Transactions in options on interest rate futures would
enable the Fund to hedge against the possibility that
fluctuations in interest rates and other factors may result in a
general decline in prices of debt securities owned by the Fund.
Assuming that any decline in the securities being hedged is
accomplished by a rise in interest rates, the purchase of put
options and sale of call options on the futures contracts may
generate gains which can partially offset any decline in the
value of the Fund's portfolio securities which have been hedged.
However, if after the Fund purchases or sells an option on a
futures contract, the value of the securities being hedged moves
in the opposite direction from that contemplated, the Fund may
experience losses in the form of premiums on such options which
would partially offset gains the Fund would have.
FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. The
Fund may engage in foreign currency futures contracts and related
options transactions for hedging purposes. A foreign currency
futures contract provides for the future sale by one party and
purchase by another party of a specified quantity of a foreign
currency at a specified price and time.
An option on a foreign currency futures contract gives the
holder the right, in return for the premium paid, to assume a
long position (call) or short position (put) in a futures
contract at a specified exercise price at any time during the
period of the option. Upon the exercise of a call option, the
holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a
put option, the opposite is true.
The Fund may purchase call and put options on foreign
currencies as a hedge against changes in the value of the U.S.
dollar (or another currency) in relation to a foreign currency in
which portfolio securities of the Fund may be denominated. A
call option on a foreign currency gives the buyer the right to
buy, and a put option the right to sell, a certain amount of
foreign currency at a specified price during a fixed period of
time. The Fund may invest in options on foreign currency which
are either listed on a domestic securities exchange or traded on
a recognized foreign exchange.
In those situations where foreign currency options may not
be readily purchased (or where such options may be deemed
illiquid) in the currency in which the hedge is desired, the
hedge may be obtained by purchasing an option on a "surrogate"
currency, i.e., a currency where there is tangible evidence of a
direct correlation in the trading value of the two currencies. A
surrogate currency's exchange rate movements parallel that of the
primary currency. Surrogate currencies are used to hedge an
illiquid currency risk, when no liquid hedge instruments exist in
world currency markets for the primary currency.
The Fund will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign
exchange, board of trade, or similar entity or quoted on an
automated quotation system. The Fund will not enter into a
futures contract or purchase an option thereon if, immediately
thereafter, the aggregate initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open
futures option positions, less the amount by which any such
positions are "in-the-money," would exceed 5% of the liquidation
value of the Fund's portfolio (or the Fund's net asset value),
after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into. A call
option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A
put option is "in the money" if the exercise price exceeds the
value of the futures contract that is the subject of the option.
For additional information about margin deposits required with
respect to futures contracts and options thereon, see "Futures
Contracts and Options on Futures Contracts."
RISKS ASSOCIATED WITH FUTURES AND RELATED OPTIONS. There
are several risks associated with the use of futures contracts
and futures options as hedging techniques. A purchase or sale of
a futures contract may result in losses in excess of the amount
invested in the futures contract. There can be no guarantee that
there will be a correlation between price movements in the
hedging vehicle and in the Fund's portfolio securities being
hedged. In addition, there are significant differences between
the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as variations in
speculative market demand for futures and futures options on
securities, including technical influences in futures trading and
futures options, and differences between the financial
instruments being hedged and the instruments underlying the
standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of
issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may
work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial
losses.
There can be no assurance that a liquid market will exist at
a time when the Fund seeks to close out a futures or a futures
option position, and the Fund would remain obligated to meet
margin requirements until the position is closed. In addition,
there can be no assurance that an active secondary market will
continue to exist.
Currency futures contracts and options thereon may be traded
on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the United States; may not
involve a clearing mechanism and related guarantees; and are
subject to the risk of governmental actions affecting trading in,
or the prices of, foreign securities. The value of such position
also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) lesser availability
than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during non-business
hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lesser trading
volume.
COMBINED TRANSACTIONS. The Fund may enter into multiple
transactions, including multiple options transactions, multiple
futures transactions, multiple currency transactions (including
forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency
and interest rate transactions ("component" transactions),
instead of a single transaction, as part of a single or combined
strategy when, in the opinion of IMI, it is in the best interests
of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its
component transactions. Although combined transactions are
normally entered into based on IMI's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the
combination will instead increase such risks or hinder
achievement of the management objective.
The requirements for qualification as a regulated investment
company also may limit the extent to which the Fund may enter
into futures, options or forward contracts. See "Taxation."
BORROWING
Borrowing may exaggerate the effect on the Fund's net asset
value of any increase or decrease in the value of the Fund's
portfolio securities. Money borrowed will be subject to interest
costs (which may include commitment fees and/or the cost of
maintaining minimum average balances). Although the principal of
the Fund's borrowings will be fixed, the Fund's assets may change
in value during the time a borrowing is outstanding, thus
increasing exposure to capital risk. All borrowings will be
repaid before any additional investments are made.
INVESTMENT RESTRICTIONS
The Fund's investment objectives as set forth in the
Prospectus under "Investment Objectives and Policies," together
with the investment restrictions set forth below, are fundamental
policies of the Fund and may not be changed with respect to the
Fund without the approval of a majority of the outstanding voting
shares of the Fund. Under these restrictions, the Fund may not:
(i) Invest in real estate, real estate mortgage loans,
commodities, commodity futures contracts or interests
in oil, gas and/or mineral exploration or development
programs, although the Fund may purchase and sell
(a) securities which are secured by real estate,
(b) securities of issuers which invest or deal in
real estate, and (c) futures contracts and related
options;
(ii) Make investments in securities for the purpose of
exercising control over or management of the issuer;
(iii) Participate on a joint or a joint and several basis
in any trading account in securities. The "bunching"
of orders of the Fund--or of the Fund and of other
accounts under the investment management of the
persons rendering investment advice to the Fund--for
the sale or purchase of portfolio securities shall
not be considered participation in a joint securities
trading account;
(iv) Purchase securities on margin, except such short-term
credits as are necessary for the clearance of
transactions; the deposit or payment by the Fund of
initial or variation margin in connection with
futures contracts or related options transactions is
not considered the purchase of a security on margin;
(v) Make loans, except that this restriction shall not
prohibit (a) the purchase and holding of a portion of
an issue of publicly distributed debt securities,
(b) the lending of the Fund's portfolio securities in
accordance with applicable guidelines established by
the SEC and any guidelines established by the Trust's
Trustees, or (c) the entry into repurchase agreements
with banks or broker-dealers;
(vi) Borrow amounts in excess of 20% of its total assets,
taken at the lower of cost or market value, and then
only from banks as a temporary measure for
extraordinary or emergency purposes or except in
connection with reverse repurchase agreements,
provided that the Fund maintains net asset coverage
of at least 300% for all borrowings;
(vii) Mortgage, pledge, hypothecate or in any manner
transfer, as security for indebtedness, any
securities owned or held by the Fund (except as may
be necessary in connection with permitted borrowings
and then not in excess of 20% of the Fund's total
assets); provided, however, this does not prohibit
escrow, collateral or margin arrangements in
connection with its use of options, short sales,
futures contracts and options on future contracts;
(viii) Purchase the securities of issuers conducting their
principal business activities in the same industry
if immediately after such purchase the value of the
Fund's investments in such industry would exceed 25%
of the value of the total assets of the Fund;
(ix) Act as an underwriter of securities, except to the
extent that, in connection with the sale of
securities, it may be deemed to be an underwriter
under applicable securities laws;
(x) Make short sales of securities or maintain a short
position;
(xi) Issue senior securities, except as appropriate to
evidence indebtedness which it is permitted to incur,
and except to the extent that shares of the separate
classes or series of the Trust may be deemed to be
senior securities; provided that collateral
arrangements with respect to currency-related
contracts, futures contracts, options or other
permitted investments, including deposits of initial
and variation margin, are not considered to be the
issuance of senior securities for purposes of this
restriction; or
(xii) Purchase securities of any one issuer (except U.S.
Government securities) if as a result more than 5% of
the Fund's total assets would be invested in such
issuer or the Fund would own or hold more than 10% of
the outstanding voting securities of that issuer;
provided, however, that up to 25% of the value of the
Fund's total assets may be invested without regard to
these limitations.
ADDITIONAL RESTRICTIONS
The Fund has adopted the following additional restrictions,
which are not fundamental and which may be changed without
shareholder approval, to the extent permitted by applicable law,
regulation or regulatory policy.
Under these restrictions, the Fund may not:
(i) purchase or sell real estate limited partnership
interests;
(ii) purchase or sell interests in oil, gas and mineral
leases (other than securities of companies that
invest in or sponsor such programs);
(iii) invest more than 15% of its net assets taken at
market value at the time of the investment in
"illiquid securities;" illiquid securities may
include securities subject to legal or contractual
restrictions on resale (including private
placements), repurchase agreements maturing in more
than seven days, certain options traded over the
counter that the Fund has purchased, securities being
used to cover certain options that the Fund has
written, securities for which market quotations are
not readily available, or other securities which
legally or in IMI's opinion, subject to the Board's
supervision, may be deemed illiquid, but shall not
include any instrument that, due to the existence of
a trading market or to other factors, is liquid; or
(iv) purchase securities of other investment companies,
except in connection with a merger, consolidation or
sale of assets, and except that the Fund may purchase
shares of other investment companies subject to such
restrictions as may be imposed by the Investment
Company Act of 1940, as amended (the "1940 Act") and
rules thereunder.
Whenever an investment objective, policy or restriction set
forth in the Prospectus or this SAI states a maximum percentage
of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage
limitation or standard shall, unless otherwise indicated, apply
to the Fund only at the time a transaction is entered into.
Accordingly, if a percentage limitation is adhered to at the time
of investment, a later increase or decrease in the percentage
which results from circumstances not involving any affirmative
action by the Fund, such as a change in market conditions or a
change in the Fund's asset level or other circumstances beyond
the Fund's control, will not be considered a violation.
ADDITIONAL RIGHTS AND PRIVILEGES
The Trust offers and (except as noted below) bears the cost
of providing to investors the following rights and privileges.
The Trust reserves the right to amend or terminate any one or
more of these rights and privileges. Notice of amendments to or
terminations of rights and privileges will be provided to
shareholders in accordance with applicable law.
Certain of the rights and privileges described below refer
to funds, other than the Fund, whose shares are also distributed
by Ivy Mackenzie Distributors, Inc. ("IMDI"). These funds are:
Ivy Asia Pacific Fund, Ivy Bond Fund, Ivy Canada Fund, Ivy China
Region Fund, Ivy US Emerging Growth Fund, Ivy Global Fund, Ivy
Global Natural Resources Fund, Ivy Global Science & Technology
Fund, Ivy Growth Fund, Ivy Growth with Income Fund, Ivy
International Fund, Ivy International Fund II, Ivy International
Small Companies Fund, Ivy South America Fund, Ivy Developing
Nations Fund, Ivy Pan-Europe Fund, and Ivy Money Market Fund (the
other seventeen series of the Trust). (Effective April 18, 1997,
Ivy International Fund suspended the offer of its shares to new
investors.) Shareholders should obtain a current prospectus
before exercising any right or privilege that may relate to these
funds.
AUTOMATIC INVESTMENT METHOD
The Automatic Investment Method, which enables a Fund
shareholder to have specified amounts automatically drawn each
month from his or her bank for investment in Fund shares, is
available for all classes of shares, except Class I. The minimum
initial and subsequent investment under this method is $250 per
month (except in the case of a tax qualified retirement plan for
which the minimum initial and subsequent investment is $25 per
month). A shareholder may terminate the Automatic Investment
Method at any time upon delivery to Ivy Mackenzie Services Corp.
("IMSC") of telephone instructions or written notice from the
shareholder. See "Automatic Investment Method" in the
Prospectus. To begin the plan, complete Sections 6A and 7B of
the Account Application.
EXCHANGE OF SHARES
As described in the Prospectus, Advisor Class shareholders
of the Fund have an exchange privilege with certain other Ivy
funds (except Ivy International Fund). Before effecting an
exchange, shareholders should obtain and read the currently
effective prospectus for the Ivy fund into which the exchange is
to be made.
Advisor Class shareholders may exchange their outstanding
Advisor Class shares for Advisor Class shares of another Ivy fund
on the basis of the relative net asset value per Advisor Class
share. The minimum amount of Advisor Class shares that may be
exchanged into an Ivy fund in which shares are not already held
is $10,000. No exchange out of the Fund (other than by a
complete exchange of all Fund shares) may be made if it would
reduce the shareholder's interest in the Advisor Class shares of
the Fund to less than $10,000. Exchanges are available only in
states where the exchange can legally be made.
Each exchange will be made on the basis of the relative net
asset values per share of each fund of Ivy Fund next computed
following receipt by IMSC of telephone instructions by IMSC or a
properly executed request. Exchanges, whether written or
telephonic, must be received by IMSC by the close of regular
trading on the New York Stock Exchange, Inc. (the "Exchange")
(normally 4:00 p.m., eastern time) to receive the price computed
on the day of receipt. Exchange requests received after that
time will receive the price next determined following receipt of
the request. The exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice to the
extent required by applicable law. See "Redemptions."
An exchange of shares between any of the Ivy funds will
result in a taxable gain or loss. Generally, this will be a
capital gain or loss (long-term or short-term, depending on the
holding period of the shares) in the amount of the difference
between the net asset value of the shares surrendered and the
shareholder's tax basis for those shares. However, in certain
circumstances, shareholders will be ineligible to take sales
charges into account in computing taxable gain or loss on an
exchange. See "Taxation."
With limited exceptions, gain realized by a tax-deferred
retirement plan will not be taxable to the plan and will not be
taxed to the participant until distribution. Each investor
should consult his or her tax adviser regarding the tax
consequences of an exchange transaction.
RETIREMENT PLANS
Shares may be purchased in connection with several types of
tax-deferred retirement plans. Shares of more than one fund
distributed by IMDI may be purchased in a single application
establishing a single plan account, and shares held in such an
account may be exchanged among the funds of Ivy Fund in
accordance with the terms of the applicable plan and the exchange
privilege available to all shareholders. Initial and subsequent
purchase payments in connection with tax-deferred retirement
plans must be at least $25 per participant.
The following fees will be charged to individual shareholder
accounts as described in the retirement prototype plan document:
Retirement Plan New Account Fee no fee
Retirement Plan Annual Maintenance Fee $10.00 per account
For shareholders whose retirement accounts are diversified across
several funds of Ivy Fund, the annual maintenance fee will be
limited to not more than $20.
The following discussion describes the tax treatment of
certain tax-deferred retirement plans under current Federal
income tax law. State income tax consequences may vary. An
individual considering the establishment of a retirement plan
should consult with an attorney and/or an accountant with respect
to the terms and tax aspects of the plan.
INDIVIDUAL RETIREMENT ACCOUNTS: Shares of the Trust may be
used as a funding medium for an Individual Retirement Account
("IRA"). Eligible individuals may establish an IRA by adopting a
model custodial account available from IMSC, who may impose a
charge for establishing the account. Individuals should consult
their tax advisers before investing IRA assets in an Ivy fund if
that fund primarily distributes exempt-interest dividends.
An individual who has not reached age 70-1/2 and who
receives compensation or earned income is eligible to contribute
to an IRA, whether or not he or she is an active participant in a
retirement plan. An individual who receives a distribution from
another IRA, a qualified retirement plan, a qualified annuity
plan or a tax-sheltered annuity or custodial account ("403(b)
plan") that qualifies for "rollover" treatment is also eligible
to establish an IRA by rolling over the distribution either
directly or within 60 days after its receipt. Tax advice should
be obtained in connection with planning a rollover contribution
to an IRA.
In general, an eligible individual may contribute up to the
lesser of $2,000 or 100% of his or her compensation or earned
income to an IRA each year. If a husband and wife are both
employed, and both are under age 70-1/2, each may set up his or
her own IRA within these limits. If both earn at least $2,000
per year, the maximum potential contribution is $4,000 per year
for both. For years after 1996, the result is similar even if
one spouse has no earned income; if the joint earned income of
the spouses is at least $4,000, a contribution of up to $2,000
may be made to each spouse's IRA. Rollover contributions are not
subject to these limits.
An individual may deduct his or her annual contributions to
an IRA in computing his or her Federal income tax within the
limits described above, provided he or she (or his or her spouse,
if they file a joint Federal income tax return) is not an active
participant in a qualified retirement plan (such as a qualified
corporate, sole proprietorship, or partnership pension, profit
sharing, 401(k) or stock bonus plan), qualified annuity plan,
403(b) plan, simplified employee pension, or governmental plan.
If he or she (or his or her spouse) is an active participant,
whether the individual's contribution to an IRA is fully
deductible, partially deductible or not deductible depends on
(i) adjusted gross income and (ii) whether it is the individual
or the individual's spouse who is an active participant, in the
case of married individuals filing jointly. Contributions may be
made up to the maximum permissible amount even if they are not
deductible. Rollover contributions are not includible in income
for Federal income tax purposes and therefore are not deductible
from it.
Generally, earnings on an IRA are not subject to current
Federal income tax until distributed. Distributions attributable
to tax-deductible contributions and to IRA earnings are taxed as
ordinary income. Distributions of non-deductible contributions
are not subject to Federal income tax. In general, distributions
from an IRA to an individual before he or she reaches age 59-1/2
are subject to a nondeductible penalty tax equal to 10% of the
taxable amount of the distribution. The 10% penalty tax does not
apply to amounts withdrawn from an IRA after the individual
reaches age 59-1/2, becomes disabled or dies, or if withdrawn in
the form of substantially equal payments over the life or life
expectancy of the individual and his or her designated benefi-
ciary, if any, or rolled over into another IRA, amounts withdrawn
and used to pay for deductible medical expenses, amounts
withdrawn by certain unemployed individuals not in excess of
amounts paid for certain health insurance premiums, amounts used
to pay certain qualified higher education expenses, and amounts
used within 120 days of the date the distribution is received to
pay for certain first-time homebuyer expenses. Distributions
must begin to be withdrawn not later than April 1 of the calendar
year following the calendar year in which the individual reaches
age 70-1/2. Failure to take certain minimum required distribu-
tions will result in the imposition of a 50% non-deductible
penalty tax.
ROTH IRAS: Shares of the Trust also may be used as a
funding medium for a Roth Individual Retirement Account ("Roth
IRA"). A Roth IRA is similar in numerous ways to the regular
(traditional) IRA, described above. Some of the primary
differences are as follows.
A single individual earning below $95,000 can contribute up
to $2,000 per year to a Roth IRA. The maximum contribution
amount diminishes and gradually falls to zero for single filers
with adjusted gross incomes ranging from $95,000 to $110,000.
Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA).
The maximum contribution amount for married couples filing
jointly phases out from $150,000 to $160,000. An individual
whose adjusted gross income exceeds the maximum phase-out amount
cannot contribute to a Roth IRA.
An eligible individual can contribute money to a traditional
IRA and a Roth IRA as long as the total contribution to all IRAs
does not exceed $2,000. Contributions to a Roth IRA are not
deductible. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained
age 70 1/2.
No distributions are required to be taken prior to the death
of the original account holder. If a Roth IRA has been
established for a minimum of five years, distributions can be
taken tax-free after reaching age 59 1/2, for a first-time home
purchase ($10,000 maximum, one time use), or upon death or
disability. All other distributions from a Roth IRA are taxable
and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical
expenses, the purchase of health insurance for an unemployed
individual and education expenses.
An individual with an income of less than $100,000 (who is
not married filing separately) can roll his or her existing IRA
into a Roth IRA. However, the individual must pay taxes on the
taxable amount in his or her traditional IRA. Individuals who
complete the rollover in 1998 will be allowed to spread the tax
payments over a four-year period. After 1998, all taxes on such
a rollover will have to be paid in the tax year in which the
rollover is made.
QUALIFIED PLANS: For those self-employed individuals who
wish to purchase shares of one or more of the funds of Ivy Fund
through a qualified retirement plan, a Custodial Agreement and a
Retirement Plan are available from IMSC. The Retirement Plan may
be adopted as a profit sharing plan or a money purchase pension
plan. A profit sharing plan permits an annual contribution to be
made in an amount determined each year by the self-employed
individual within certain limits prescribed by law. A money
purchase pension plan requires annual contributions at the level
specified in the Custodial Agreement. There is no set-up fee for
qualified plans and the annual maintenance fee is $20.00 per
account.
In general, if a self-employed individual has any common law
employees, employees who have met certain minimum age and service
requirements must be covered by the Retirement Plan. A self-
employed individual generally must contribute the same percentage
of income for common law employees as for himself or herself.
A self-employed individual may contribute up to the lesser
of $30,000 or 25% of compensation or earned income to a money
purchase pension plan or to a combination profit sharing and
money purchase pension plan arrangement each year on behalf of
each participant. To be deductible, total contributions to a
profit sharing plan generally may not exceed 15% of the total
compensation or earned income of all participants in the plan,
and total contributions to a combination money purchase-profit
sharing arrangement generally may not exceed 25% of the total
compensation or earned income of all participants. The amount of
compensation or earned income of any one participant that may be
included in computing the deduction is limited (generally to
$150,000 for benefits accruing in plan years beginning after
1993, with annual inflation adjustments). A self-employed
individual's contributions to a retirement plan on his or her own
behalf must be deducted in computing his or her earned income.
Corporate employers may also adopt the Custodial Agreement
and Retirement Plan for the benefit of their eligible employees.
Similar contribution and deduction rules apply to corporate
employers.
Distributions from the Retirement Plan generally are made
after a participant's separation from service. A 10% penalty tax
generally applies to distributions to an individual before he or
she reaches age 59-1/2, unless the individual (1) has reached age
55 and separated from service; (2) dies; (3) becomes disabled;
(4) uses the withdrawal to pay tax-deductible medical expenses;
(5) takes the withdrawal as part of a series of substantially
equal payments over his or her life expectancy or the joint life
expectancy of himself or herself and a designated beneficiary; or
(6) rolls over the distribution.
The Transfer Agent will arrange for Investors Bank & Trust
to furnish custodial services to the employer and any
participating employees.
DEFERRED COMPENSATION FOR PUBLIC SCHOOLS AND CHARITABLE
ORGANIZATIONS ("403(B)(7) ACCOUNT"): Section 403(b)(7) of the
Internal Revenue Code of 1986, as amended (the "Code"), permits
public school systems and certain charitable organizations to use
mutual fund shares held in a custodial account to fund deferred
compensation arrangements with their employees. A custodial
account agreement is available for those employers whose
employees wish to purchase shares of the Trust in conjunction
with such an arrangement. The special application for a
403(b)(7) Account is available from IMSC.
Distributions from the 403(b)(7) Account may be made only
following death, disability, separation from service, attainment
of age 59-1/2, or incurring a financial hardship. A 10% penalty
tax generally applies to distributions to an individual before he
or she reaches age 59-1/2, unless the individual (1) has reached
age 55 and separated from service; (2) dies or becomes disabled;
(3) uses the withdrawal to pay tax-deductible medical expenses;
(4) takes the withdrawal as part of a series of substantially
equal payments over his or her life expectancy or the joint life
expectancy of himself or herself and a designated beneficiary; or
(5) rolls over the distribution. There is no set-up fee for
403(b)(7) Accounts and the annual maintenance fee is $20.00 per
account.
SIMPLIFIED EMPLOYEE PENSION ("SEP") IRAS: An employer may
deduct contributions to a SEP up to the lesser of $30,000 or 15%
of compensation. SEP accounts generally are subject to all rules
applicable to IRA accounts, except the deduction limits, and are
subject to certain employee participation requirements. No new
salary reduction SEPs ("SARSEPs") may be established after 1996,
but existing SARSEPs may continue to be maintained, and non-
salary reduction SEPs may continue to be established as well as
maintained after 1996.
SIMPLE PLANS: An employer may establish a SIMPLE IRA or a
SIMPLE 401(k) for years after 1996. An employee can make pre-tax
salary reduction contributions to a SIMPLE Plan, up to $6,000 a
year. Subject to certain limits, the employer will either match
a portion of employee contributions, or will make a contribution
equal to 2% of each employee's compensation without regard to the
amount the employee contributes. An employer cannot maintain a
SIMPLE Plan for its employees if any contributions or benefits
are credited to those employees under any other qualified
retirement plan maintained by the employer.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan (a
"Withdrawal Plan"), by telephone instructions or by delivery to
IMSC of a written election to have his or her shares withdrawn
periodically, accompanied by a surrender to IMSC of all share
certificates then outstanding in such shareholder's name,
properly endorsed by the shareholder. To be eligible to elect a
Withdrawal Plan, a shareholder must continually maintain an
account balance of at least $10,000 in his or her account. A
Withdrawal Plan may not be established if the investor is
currently participating in the Automatic Investment Method.
Additional investments made by investors participating in a
Withdrawal Plan must equal at least $250 each while the
Withdrawal Plan is in effect. A Withdrawal Plan may not be
established if the investor is currently participating in the
Automatic Investment Method. A Withdrawal Plan may involve the
depletion of a shareholder's principal, depending on the amount
withdrawn.
A redemption under a Withdrawal Plan is a taxable event.
Shareholders contemplating participating in a Withdrawal Plan
should consult their tax advisers.
An investor may terminate his or her participation in the
Withdrawal Plan at any time by delivering written notice to IMSC.
If all shares held by the investor are liquidated at any time,
participation in the Withdrawal Plan will terminate
automatically. The Trust or IMSC may terminate the Withdrawal
Plan option at any time after reasonable notice to shareholders.
GROUP SYSTEMATIC INVESTMENT PROGRAM
Shares may be purchased in connection with investment
programs established by employee or other groups using systematic
payroll deductions or other systematic payment arrangements. The
Trust does not itself organize, offer or administer any such
programs. However, it may, depending upon the size of the
program, waive the minimum initial and additional investment
requirements for purchases by individuals in conjunction with
programs organized and offered by others. Unless shares of the
Fund are purchased in conjunction with IRAs (see "How to Buy
Shares" in the Prospectus), such group systematic investment
programs are not entitled to special tax benefits under the Code.
The Trust reserves the right to refuse purchases at any time or
suspend the offering of shares in connection with group
systematic investment programs, and to restrict the offering of
shareholder privileges, such as check writing, simplified
redemptions and other optional privileges, as described in the
Prospectus, to shareholders using group systematic investment
programs.
With respect to each shareholder account established on or
after September 15, 1972 under a group systematic investment
program, the Trust and IMI each currently charge a maintenance
fee of $3.00 (or portion thereof) for each twelve-month period
(or portion thereof) that the account is maintained. The Trust
may collect such fee (and any fees due to IMI) through a
deduction from distributions to the shareholders involved or by
causing on the date the fee is assessed a redemption in each such
shareholder account sufficient to pay such fee. The Trust
reserves the right to change these fees from time to time without
advance notice.
BROKERAGE ALLOCATION
Subject to the overall supervision of the President and the
Board, IMI places orders for the purchase and sale of the Fund's
portfolio securities. All portfolio transactions are effected at
the best price and execution obtainable. Purchases and sales of
debt securities are usually principal transactions, and,
therefore, brokerage commissions are usually not required to be
paid by the Fund for such purchases and sales (although the price
paid generally includes undisclosed compensation to the dealer).
The prices paid to underwriters of newly-issued securities
usually include a concession paid by the issuer to the
underwriter, and purchases of after-market securities from
dealers normally reflect the spread between the bid and asked
prices. In connection with OTC transactions, IMI attempts to
deal directly with the principal market makers, except in those
circumstances where IMI believes that a better price and
execution are available elsewhere.
IMI selects broker-dealers to execute transactions and
evaluates the reasonableness of commissions on the basis of
quality, quantity, and the nature of the firms' professional
services. Commissions to be charged and the rendering of
investment services, including statistical, research, and
counseling services by brokerage firms, are factors to be
considered in the placing of brokerage business. The types of
research services provided by brokers may include general
economic and industry data, and information on securities of
specific companies. Research services furnished by brokers
through whom the Trust effects securities transactions may be
used by IMI in servicing all of its accounts. In addition, not
all of these services may be used by IMI in connection with the
services it provides to a particular Fund or the Trust. IMI may
consider sales of shares of Ivy funds as a factor in the
selection of broker-dealers and may select broker-dealers who
provide it with research services. IMI will not, however,
execute brokerage transactions other than at the best price and
execution.
As of the date of this SAI, the Fund had not paid any
brokerage commissions.
The Fund may, under some circumstances, accept securities in
lieu of cash as payment for Fund shares. The Fund will accept
securities only to increase its holdings in a portfolio security
or to take a new portfolio position in a security that IMI deems
to be a desirable investment for the Fund. While no minimum has
been established, it is expected that the Fund will not accept
securities having an aggregate value of less than $1 million.
The Trust may reject in whole or in part any or all offers to pay
for Fund shares with securities and may discontinue accepting
securities as payment for Fund shares at any time without notice.
The Trust will value accepted securities in the manner and at the
same time provided for valuing portfolio securities of the Fund,
and Fund shares will be sold for net asset value determined at
the same time the accepted securities are valued. The Trust will
only accept securities delivered in proper form and will not
accept securities subject to legal restrictions on transfer. The
acceptance of securities by the Trust must comply with the
applicable laws of certain states.
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Trust, their
business addresses and principal occupations during the past five
years are:
POSITION
WITH THE BUSINESS AFFILIATIONS
NAME, ADDRESS, AGE TRUST AND PRINCIPAL OCCUPATIONS
John S. Anderegg, Jr. Trustee Chairman, Dynamics Research
60 Concord Street Corp. (instruments and
Wilmington, MA 01887 controls); Director, Burr-
Age: 74 Brown Corp. (operational
amplifiers); Director,
Metritage Incorporated
(level measuring
instruments); Trustee of
Mackenzie Series Trust
(1992-1998).
Paul H. Broyhill Trustee Chairman, BMC Fund, Inc.
800 Hickory Blvd. (1983-present); Chairman,
Golfview Park-Box 500 Broyhill Family Foundation,
Lenoir, NC 28645 Inc. (1983-Present);
Age: 74 Chairman and President,
Broyhill Investments, Inc.
(1983-present); Chairman,
Broyhill Timber Resources
(1983-present); Management
of a personal portfolio of
fixed-income and equity
investments (1983-present);
Trustee of Mackenzie Series
Trust (1988-1998); Director
of The Mackenzie Funds Inc.
(1988-1995).
Stanley Channick Trustee President and Chief
11 Bala Avenue Executive Officer, The
Bala Cynwyd, PA 19004 Whitestone Corporation
Age: 75 (insurance agency);
Chairman, Scott Management
Company (administrative
services for insurance
companies); President, The
Channick Group (consultants
to insurance companies and
national trade
associations); Trustee of
Mackenzie Series Trust
(1994-1998); Director of
The Mackenzie Funds Inc.
(1994-1995).
Frank W. DeFriece, Jr. Trustee Director, Manager and Vice
The Landmark Centre President, Director and
113 Landmark Lane, Fund Manager, Massengill-
Suite B DeFriece Foundation
Bristol, TN 37620-2285 (charitable organization)
Age: 77 (1950-present); Trustee and
Vice Chairman, East
Tennessee Public
Communications Corp. (WSJK-
TV) (1984-present); Trustee
of Mackenzie Series Trust
(1985-1998); Director of
The Mackenzie Funds Inc.
(1987-1995).
Roy J. Glauber Trustee Mallinckrodt Professor of
Lyman Laboratory Physics, Harvard
of Physics University (1974-present);
Harvard University Trustee of Mackenzie Series
Cambridge, MA 02138 Trust (1994-1998).
Age: 72
Michael G. Landry Trustee President, Chief Executive
700 South Federal Hwy. and Officer and Director of
Suite 300 Chairman Mackenzie Investment
Raton, FL 33432 Management Inc. (1987-
Age: 51 present); President,
[*Deemed to be an Director and Chairman of
"interested person" Ivy Management Inc. (1992-
of the Trust, as present); Chairman and
defined under the Director of Ivy Mackenzie
1940 Act.] Services Corp.(1993-
present); Chairman and
Director of Ivy Mackenzie
Distributors, Inc. (1994-
present); Director and
President of Ivy Mackenzie
Distributors, Inc. (1993-
1994); Director and
President of The Mackenzie
Funds Inc. (1987-1995);
Trustee of Mackenzie Series
Trust (1987-1998);
President of Mackenzie
Series Trust (1987-1996);
Chairman of Mackenzie
Series Trust (1996-
1998).
Joseph G. Rosenthal Trustee Chartered Accountant
110 Jardin Drive (1958-present); Trustee of
Unit #12 Mackenzie Series Trust
Concord, Ontario Canada (1985-1998); Director of
L4K 2T7 The Mackenzie Funds Inc.
Age: 63 (1987-1995).
Richard N. Silverman Trustee Director, Newton-Wellesley
18 Bonnybrook Road Hospital; Director, Beth
Waban, MA 02168 Israel Hospital; Director,
Age: 74 Boston Ballet; Director,
Boston Children's Museum;
Director, Brimmer and May
School.
J. Brendan Swan Trustee President, Airspray
4701 North Federal Hwy. International, Inc.;
Suite 465 Joint Managing Director,
Pompano Beach, FL 33064 Airspray International
Age: 67 B.V. (an environmentally
sensitive packaging
company); Director of
Polyglass LTD.; Director,
The Mackenzie Funds Inc.
(1992-1995); Trustee of
Mackenzie Series Trust
(1992-1998).
Keith J. Carlson Trustee Senior Vice President of
700 South Federal Hwy. and Mackenzie Investment
Suite 300 President Management, Inc. (1996
Boca Raton, FL 33432 -present); Senior Vice
Age: 41 President and Director of
[*Deemed to be an Mackenzie Investment
"interested person" Management, Inc. (1994
of the Trust, as -1996); Senior Vice
defined under the President and Treasurer of
1940 Act.] Mackenzie Investment
Management, Inc. (1989-
1994); Senior Vice
President and Director of
Ivy Management Inc. (1994-
present); Senior Vice
President, Treasurer and
Director of Ivy Management
Inc. (1992-1994); Vice
President of The Mackenzie
Funds Inc. (1987-1995);
Senior Vice President and
Director, Ivy Mackenzie
Services Corp. (1996-
present); President and
Director of Ivy Mackenzie
Services Corp. (1993-1996);
Trustee and President of
Mackenzie Series Trust
(1996-1998); Vice President
of Mackenzie Series Trust
(1994-1996); Treasurer of
Mackenzie Series Trust
(1985-1994); President,
Chief Executive Officer and
Director of Ivy Mackenzie
Distributors, Inc. (1994-
present); Executive Vice
President and Director of
Ivy Mackenzie Distributors,
Inc. (1993-1994).
C. William Ferris Secretary/ Senior Vice President,
700 South Federal Hwy. Treasurer Chief Financial Officer
Suite 300 and Secretary/Treasurer
Boca Raton, FL 33432 of Mackenzie Investment
Age: 53 Management Inc. (1995-
present); Senior Vice
President, Finance and
Administration/Compliance
Officer of Mackenzie
Investment Management Inc.
(1989-1994); Senior Vice
President, Secretary/
Treasurer and Clerk of Ivy
Management Inc. (1994-
present); Vice President,
Finance/Administration and
Compliance Officer of Ivy
Management Inc. (1992-
1994); Senior Vice
President, Secretary/
Treasurer and Director of
Ivy Mackenzie Distributors,
Inc. (1994-present);
Secretary/Treasurer and
Director of Ivy Mackenzie
Distributors, Inc. (1993-
1994); President and
Director of Ivy Mackenzie
Services Corp. (1996-
present); Secretary/
Treasurer and Director of
Ivy Mackenzie Services
Corp. (1993-1996);
Secretary/Treasurer of The
Mackenzie Funds Inc. (1993-
1995); Secretary/Treasurer
of Mackenzie Series Trust
(1994-1998).
James W. Broadfoot Vice Executive Vice President,
700 South Federal Hwy. President Ivy Management Inc. (1996-
Suite 300 present); Senior Vice
Boca Raton, FL 33432 President, Ivy Management,
Age: 56 Inc. (1992-1996); Director
and Senior Vice President,
Mackenzie Investment
Management Inc. (1995-
present); Senior Vice
President, Mackenzie
Investment Management Inc.
(1990-1995).
As of the date of this SAI, the Officers and Trustees of the
Trust as a group owned no Fund shares.
PERSONAL INVESTMENTS BY EMPLOYEES OF IMI
Employees of IMI are permitted to make personal securities
transactions, subject to the requirements and restrictions set
forth in IMI's Code of Ethics. The Code of Ethics is designed to
identify and address certain conflicts of interest between
personal investment activities and the interests of investment
advisory clients such as the Fund. Among other things, the Code
of Ethics, which generally complies with standards recommended by
the Investment Company Institute's Advisory Group on Personal
Investing, prohibits certain types of transactions absent prior
approval, applies to portfolio managers, traders, research
analysts and others involved in the investment advisory process,
and imposes time periods during which personal transactions may
not be made in certain securities, and requires the submission of
duplicate broker confirmations and monthly reporting of
securities transactions. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular
circumstances after review by appropriate personnel.
<PAGE>
COMPENSATION TABLE
IVY FUND
(FISCAL YEAR ENDED DECEMBER 31, 1997)
TOTAL
PENSION OR COMPENSA-
RETIREMENT TION FROM
BENEFITS ESTIMATED TRUST AND
AGGREGATE ACCRUED AS ANNUAL FUND COM-
COMPENSA- PART OF BENEFITS PLEX PAID
NAME, TION FUND UPON TO
POSITION FROM TRUST EXPENSES RETIREMENT
TRUSTEES[*]
John S. $13,722 N/A N/A $15,000
Anderegg, Jr.
(Trustee)
Paul H. $13,722 N/A N/A $15,000
Broyhill
(Trustee)
Keith J. $0 N/A N/A $0
Carlson
(Trustee and
President)
Stanley $13,722 N/A N/A $15,000
Channick
(Trustee)
Frank W. $13,722 N/A N/A $15,000
DeFriece, Jr.
(Trustee)
Roy J. $13,722 N/A N/A $15,000
Glauber
(Trustee)
Michael G. $0 N/A N/A $0
Landry
(Trustee and
Chairman of
the Board)
Joseph G. $13,722 N/A N/A $15,000
Rosenthal
(Trustee)
Richard N. $13,722 N/A N/A $15,000
Silverman
(Trustee)
J. Brendan $13,722 N/A N/A $15,000
Swan
(Trustee)
C. William $0 N/A N/A $0
Ferris
(Secretary/Treasurer)
[*] During the year ended December 31, 1997, the fund complex
consisted of the Trust, which had 17 funds at year end, and
Mackenzie Series Trust, an open-end, management investment
company comprised of 4 funds that were reorganized into
series of unaffiliated investment companies on September 5,
1997.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
BUSINESS MANAGEMENT AND INVESTMENT ADVISORY SERVICES
IMI provides business management and investment advisory
services to the Fund pursuant to a Business Management and
Investment Advisory Agreement (the "Agreement"), which was last
approved by the Board on September 13, 1997. The Agreement was
approved by the sole shareholder of the Fund on March 25, 1998.
Prior to shareholder approval, the Agreement was approved by the
Board (including a majority of the Trustees who are neither
"interested persons," as defined in the 1940 Act, of the Trust
nor have any direct or indirect financial interest in the
operation of the distribution plan or in any related agreement
(the "Independent Trustees")) on February 7, 1998 with respect to
the Fund.
IMI is a wholly owned subsidiary of MIMI. MIMI, a Delaware
corporation, has approximately 10% of its outstanding common
stock listed for trading on the Toronto Stock Exchange ("TSE").
MIMI is a subsidiary of Mackenzie Financial Corporation ("MFC"),
150 Bloor Street West, Toronto, Ontario, Canada, a public
corporation organized under the laws of Ontario and registered in
Ontario as a mutual fund dealer whose shares are listed for
trading on the TSE. MFC provides investment advisory services to
certain of the Ivy funds.
IMI currently acts as manager and investment adviser to the
following additional investment companies registered under the
1940 Act: Ivy China Region Fund, Ivy Global Fund, Ivy
International Fund, Ivy South America Fund, Ivy Developing
Nations Fund, Ivy Global Science & Technology Fund, Ivy
International Small Companies Fund, Ivy International Fund II,
Ivy Asia Pacific Fund, Ivy Pan-Europe Fund, Ivy Growth Fund, Ivy
US Emerging Growth Fund, Ivy Growth with Income Fund, Ivy Bond
Fund and Ivy Money Market Fund.
The Agreement obligates IMI to make investments for the
accounts of the Fund in accordance with its best judgment and
within the investment objectives and restrictions set forth in
the Prospectus, the 1940 Act and the provisions of the Code
relating to regulated investment companies, subject to policy
decisions adopted by the Board. IMI also determines the
securities to be purchased or sold by the Fund and places orders
with brokers or dealers who deal in such securities.
Under the Agreement, IMI also provides certain business
management services. IMI is obligated to (1) coordinate with the
Fund's Custodian and monitor the services it provides to the
Fund; (2) coordinate with and monitor any other third parties
furnishing services to the Fund; (3) provide the Fund with
necessary office space, telephones and other communications
facilities as are adequate for the Fund's needs; (4) provide the
services of individuals competent to perform administrative and
clerical functions that are not performed by employees or other
agents engaged by the Fund or by IMI acting in some other
capacity pursuant to a separate agreement or arrangements with
the Fund; (5) maintain or supervise the maintenance by third
parties of such books and records of the Trust as may be required
by applicable Federal or state law; (6) authorize and permit
IMI's directors, officers and employees who may be elected or
appointed as trustees or officers of the Trust to serve in such
capacities; and (7) take such other action with respect to the
Trust, after approval by the Trust as may be required by
applicable law, including without limitation the rules and
regulations of the Securities and Exchange Commission (the "SEC")
and of state securities commissions and other regulatory
agencies.
The Fund pays IMI a monthly fee for providing business
management and investment advisory services at an annual rate of
0.75% of its average net assets.
Advisory fee information is not available for the Fund as of
the date of this SAI.
Under the Agreement, the Trust pays the following expenses:
(1) the fees and expenses of the Trust's Independent Trustees;
(2) the salaries and expenses of any of the Trust's officers or
employees who are not affiliated with IMI; (3) interest expenses;
(4) taxes and governmental fees, including any original issue
taxes or transfer taxes applicable to the sale or delivery of
shares or certificates therefor; (5) brokerage commissions and
other expenses incurred in acquiring or disposing of portfolio
securities; (6) the expenses of registering and qualifying shares
for sale with the SEC and with various state securities
commissions; (7) accounting and legal costs; (8) insurance
premiums; (9) fees and expenses of the Trust's Custodian and
Transfer Agent and any related services; (10) expenses of
obtaining quotations of portfolio securities and of pricing
shares; (11) expenses of maintaining the Trust's legal existence
and of shareholders' meetings; (12) expenses of preparation and
distribution to existing shareholders of periodic reports, proxy
materials and prospectuses; and (13) fees and expenses of
membership in industry organizations.
IMI currently limits the Fund's total operating expenses
(excluding Rule 12b-1 fees, interest, taxes, brokerage
commissions, litigation, class-specific expenses, indemnification
expenses, and extraordinary expenses) to an annual rate of 0.85%
of the Fund's average net assets, which may lower the Fund's
expenses and increase its yield. The Fund's expense limitation
may be terminated or revised at any time, at which time its
expenses may increase and its yield may be reduced.
The initial term of the Agreement between IMI and the Fund,
which commenced on March 25, 1998, will run for a period of two
years from the date of commencement. The Agreement will continue
in effect with respect to the Fund from year to year, or for more
than the initial period, as the case may be, only so long as the
continuance is specifically approved at least annually (i) by the
vote of a majority of the Independent Trustees and (ii) either
(a) by the vote of a majority of the outstanding voting securi-
ties (as defined in the 1940 Act) of the Fund or (b) by the vote
of a majority of the entire Board. If the question of
continuance of the Agreement (or adoption of any new agreement)
is presented to shareholders, continuance (or adoption) shall be
effected only if approved by the affirmative vote of a majority
of the outstanding voting securities of the Fund. See
"Capitalization and Voting Rights."
The Agreement may be terminated with respect to the Fund at
any time, without payment of any penalty, by the vote of a
majority of the Board, or by a vote of a majority of the
outstanding voting securities of the Fund, on 60 days' written
notice to IMI, or by IMI on 60 days' written notice to the Trust.
The Agreement shall terminate automatically in the event of its
assignment.
DISTRIBUTION SERVICES
IMDI, a wholly owned subsidiary of MIMI, serves as the
exclusive distributor of Ivy Fund's shares pursuant to an Amended
and Restated Distribution Agreement with the Trust dated October
23, 1991, as amended from time to time (the "Distribution
Agreement"). The Distribution Agreement was last approved by the
Board on September 13, 1997. At a meeting held on February 7,
1998, the Board approved the Distribution Agreement on behalf of
the Fund. IMDI distributes shares of the Fund through broker-
dealers who are members of the National Association of Securities
Dealers, Inc. and who have executed dealer agreements with IMDI.
IMDI distributes shares of the Fund on a continuous basis, but
reserves the right to suspend or discontinue distribution on that
basis. IMDI is not obligated to sell any specific amount of Fund
shares.
Under the Distribution Agreement, the Fund bears, among
other expenses, the expenses of registering and qualifying its
shares for sale under Federal and state securities laws and
preparing and distributing to existing shareholders periodic
reports, proxy materials and prospectuses.
As of the date of this SAI, IMDI had not received any
payments under the Distribution Agreement with respect to the
Fund.
The Distribution Agreement will continue in effect for
successive one-year periods, provided that such continuance is
specifically approved at least annually by the vote of a majority
of the Independent Trustees, cast in person at a meeting called
for that purpose and by the vote of either a majority of the
entire Board or a majority of the outstanding voting securities
of the Fund. The Distribution Agreement may be terminated with
respect to the Fund at any time, without payment of any penalty,
by IMDI on 60 days' written notice to the Fund or by the Fund by
vote of either a majority of the outstanding voting securities of
the Fund or a majority of the Independent Trustees on 60 days'
written notice to IMDI. The Distribution Agreement shall
terminate automatically in the event of its assignment.
IMDI may make payments for distribution assistance and for
administrative and accounting services from resources that may
include the management fees paid by the Fund. IMDI also may make
payments to unaffiliated broker-dealers for services rendered in
the distribution of the Fund's shares. To qualify for such
payments, shares may be subject to a minimum holding period.
However, no such payments will be made to any dealer or broker if
at the end of each year the amount of shares held does not exceed
a minimum amount. The minimum holding period and minimum level
of holdings will be determined from time to time by IMDI.
If the Distribution Agreement is terminated (or not renewed)
with respect to any of the Ivy funds (or class of shares
thereof), each may continue in effect with respect to any other
fund (or Class of shares thereof) as to which it has not been
terminated (or have been renewed).
RULE 18F-3 PLAN. On February 23, 1995, the SEC adopted Rule
18f-3 under the 1940 Act, which permits a registered open-end
investment company to issue multiple classes of shares in
accordance with a written plan approved by the investment
company's board of directors/trustees and filed with the SEC. At
a meeting held on February 7, 1998, the Board adopted the Rule
18f-3 plan on behalf of the Fund. The key features of the Rule
18f-3 plan are as follows: (i) shares of each class of the Fund
represent an equal pro rata interest in the Fund and generally
have identical voting, dividend, liquidation, and other rights,
preferences, powers, restrictions, limitations, qualifications,
terms and conditions, except that each class bears certain class-
specific expenses and has separate voting rights on certain
matters that relate solely to that class or in which the
interests of shareholders of one class differ from the interests
of shareholders of another class; (ii) subject to certain
limitations described in the Prospectus, shares of a particular
class of the Fund may be exchanged for shares of the same class
of another Ivy fund; and (iii) the Fund's Class B shares will
convert automatically into Class A shares of the Fund after a
period of eight years, based on the relative net asset value of
such shares at the time of conversion.
CUSTODIAN
Pursuant to a Custodian Agreement with the Trust, Brown
Brothers Harriman & Co. (the "Custodian"), a private bank and
member of the principal securities exchanges, located at 40 Water
Street, Boston, Massachusetts 02109, maintains custody of the
assets of the Fund held in the United States. Rules adopted
under the 1940 Act permit the Trust to maintain its foreign
securities and cash in the custody of certain eligible foreign
banks and securities depositories. Pursuant to those rules, the
Custodian has entered into subcustodial agreements for the
holding of the Fund's foreign securities. The Custodian may
receive, as partial payment for its services to the Fund, a
portion of the Trust's brokerage business, subject to its ability
to provide best price and execution.
FUND ACCOUNTING SERVICES
Pursuant to a Fund Accounting Services Agreement, MIMI
provides certain accounting and pricing services for the Fund.
As compensation for those services, the Fund pays MIMI a monthly
fee plus out-of-pocket expenses as incurred. The monthly fee is
based upon the net assets of the Fund at the preceding month end
at the following rates: $1,250 when net assets are $10 million
and under; $2,500 when net assets are over $10 million to $40
million; $5,000 when net assets are over $40 million to $75
million; and $6,500 when net assets are over $75 million.
As of the date of this SAI, no payments had been made with
respect to the provision of these services for the Fund.
TRANSFER AGENT AND DIVIDEND PAYING AGENT
Pursuant to a Transfer Agency and Shareholder Service
Agreement, IMSC, a wholly owned subsidiary of MIMI, is the
transfer agent for the Fund. For these services, the Fund pays a
monthly fee at an annual rate of $20.00 for each open Advisor
Class account. In addition, the Fund pays a monthly fee at an
annual rate of $4.48 per account that is closed plus certain out-
of-pocket expenses. As of the date of this SAI, no payments had
been made by the Fund for transfer agency services. Certain
broker-dealers that maintain shareholder accounts with the Fund
through an omnibus account provide transfer agent and other
shareholder-related services that would otherwise be provided by
IMSC if the individual accounts that comprise the omnibus account
were opened by their beneficial owners directly. IMSC pays such
broker-dealers a per account fee for each open account within the
omnibus account, or a fixed rate (e.g., .10%) fee, based on the
average daily net asset value of the omnibus account (or a
combination thereof).
ADMINISTRATOR
Pursuant to an Administrative Services Agreement, MIMI
provides certain administrative services to the Fund. As
compensation for these services, the Fund (except with respect to
its Class I shares) pays MIMI a monthly fee at the annual rate of
.10% of the average daily net assets of its Advisor Class shares.
As of the date of this SAI, no payments had been made by the Fund
under the Administrative Services Agreement.
AUDITORS
Coopers & Lybrand L.L.P., independent certified public
accountants, has been selected as auditors for the Trust. The
audit services performed by Coopers & Lybrand L.L.P. include
audits of the annual financial statements of each of the funds of
the Trust. Other services provided principally relate to filings
with the SEC and the preparation of the funds' tax returns.
CAPITALIZATION AND VOTING RIGHTS
The capitalization of the Trust consists of an unlimited
number of shares of beneficial interest (no par value per share).
When issued, shares of each class of the Fund are fully paid,
non-assessable, redeemable and fully transferable. No class of
shares of the Fund has preemptive rights or subscription rights.
The Amended and Restated Declaration of Trust permits the
Trustees to create separate series or portfolios and to divide
any series or portfolio into one or more classes. The Trustees
have authorized eighteen series, each of which represents a fund.
The Trustees have further authorized the issuance of Class A,
Class B, and Class C shares for Ivy International Fund and Ivy
Money Market Fund and Class A, Class B, Class C and Advisor Class
shares for Ivy Asia Pacific Fund, Ivy Bond Fund, Ivy Canada Fund,
Ivy China Region Fund, Ivy US Emerging Growth Fund (formerly Ivy
Emerging Growth Fund), Ivy Global Fund, Ivy Global Natural
Resources Fund, Ivy Global Science & Technology Fund, Ivy Growth
Fund, Ivy Growth with Income Fund, Ivy International Fund II, Ivy
High Yield Fund (formerly Ivy International Bond Fund), Ivy South
America Fund (formerly Ivy Latin America Strategy Fund), Ivy
Money Market Fund, Ivy Developing Nations Fund (formerly Ivy New
Century Fund) and Ivy Pan-Europe Fund, as well as Class I shares
for Ivy Bond Fund, Ivy Global Science & Technology Fund, Ivy
International Fund II, Ivy International Fund, Ivy High Yield
Fund and Ivy International Small Companies Fund.
Shareholders have the right to vote for the election of
Trustees of the Trust and on any and all matters on which they
may be entitled to vote by law or by the provisions of the
Trust's By-Laws. The Trust is not required to hold a regular
annual meeting of shareholders, and it does not intend to do so.
Shares of each class of the Fund entitle their holders to one
vote per share (with proportionate voting for fractional shares).
Shareholders of the Fund are entitled to vote alone on matters
that only affect the Fund. All classes of shares of the Fund
will vote together, except with respect to the distribution plan
applicable to the Fund's Class A, Class B or Class C shares or
when a class vote is required by the 1940 Act. On matters
relating to all funds of the Trust, but affecting the funds
differently, separate votes by the shareholders of each fund are
required. Approval of an investment advisory agreement and a
change in fundamental policies would be regarded as matters
requiring separate voting by the shareholders of each fund of the
Trust. If the Trustees determine that a matter does not affect
the interests of a fund, then the shareholders of that fund will
not be entitled to vote on that matter. Matters that affect the
Trust in general, such as ratification of the selection of
independent public accountants, will be voted upon collectively
by the shareholders of all funds of the Trust.
As used in this SAI and the Prospectus, the phrase "majority
vote of the outstanding shares" of the Fund means the vote of the
lesser of: (1) 67% of the shares of the Fund (or of the Trust)
present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy; or (2) more
than 50% of the outstanding shares of the Fund (or of the Trust).
With respect to the submission to shareholder vote of a
matter requiring separate voting by the Fund, the matter shall
have been effectively acted upon with respect to the Fund if a
majority of the outstanding voting securities of the Fund votes
for the approval of the matter, notwithstanding that: (1) the
matter has not been approved by a majority of the outstanding
voting securities of any other fund of the Trust; or (2) the
matter has not been approved by a majority of the outstanding
voting securities of the Trust.
The Amended and Restated Declaration of Trust provides that
the holders of not less than two-thirds of the outstanding shares
of the Trust may remove a person serving as trustee either by
declaration in writing or at a meeting called for such purpose.
The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee if
requested in writing to do so by the holders of not less than 10%
of the outstanding shares of the Trust. Shareholders will be
assisted in communicating with other shareholders in connection
with the removal of a Trustee as if Section 26(c) of the Act were
applicable.
The Trust's shares do not have cumulative voting rights and
accordingly the holders of more than 50% of the outstanding
shares could elect the entire Board, in which case the holders of
the remaining shares would not be able to elect any Trustees.
As of the date of this SAI, there were no Fund shares
outstanding other than those issued to the sole shareholder.
Under Massachusetts law, the Trust's shareholders could,
under certain circumstances, be held personally liable for the
obligations of the Trust. However, the Amended and Restated
Declaration of Trust disclaims liability of the shareholders,
Trustees or officers of the Trust for acts or obligations of the
Trust, which are binding only on the assets and property of the
Trust, and requires that notice of the disclaimer be given in
each contract or obligation entered into or executed by the Trust
or its Trustees. The Amended and Restated Declaration of Trust
provides for indemnification out of Fund property for all loss
and expense of any shareholder of the Fund held personally liable
for the obligations of the Fund. The risk of a shareholder of
the Trust incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations and, thus, should be
considered remote. No series of the Trust is liable for the
obligations of any other series of the Trust.
NET ASSET VALUE
The share price, or value, for the separate classes of
shares of the Fund is called the net asset value per share. The
net asset value per share of the Fund is computed by dividing the
value of the assets of the Fund, less its liabilities, by the
number of shares of the Fund outstanding. For purposes of
determining the aggregate net assets of the Fund, cash and
receivables will be valued at their realizable amounts. A
security listed or traded on a recognized stock exchange or The
Nasdaq Stock Market Inc. ("Nasdaq") is valued at its last sale
price on the principal exchange on which the security is traded.
The value of a foreign security is determined in its national
currency as of the normal close of trading on the foreign
exchange on which it is traded or as of the close of regular
trading on the Exchange, if that is earlier, and that value is
then converted into its U.S. dollar equivalent at the foreign
exchange rate in effect at noon, eastern time, on the day the
value of the foreign security is determined. If no sale is
reported at that time, the average between the current bid and
asked price is used. All other securities for which OTC market
quotations are readily available are valued at the average
between the current bid and asked price. Interest will be
recorded as accrued. Securities and other assets for which
market prices are not readily available are valued at fair value
as determined by IMI and approved in good faith by the Board.
Money market instruments of the Fund are valued at amortized
cost, which approximates money market value.
The Fund's liabilities are allocated between its classes.
The total of such liabilities allocated to a class plus that
class's distribution fee and any other expenses specially
allocated to that class are then deducted from the class's
proportionate interest in the Fund's assets, and the resulting
amount for each class is divided by the number of shares of that
class outstanding to produce the net asset value per share.
Portfolio securities are valued and net asset value per
share is determined as of the close of regular trading on the
Exchange (normally 4:00 p.m., eastern time), every Monday through
Friday (exclusive of national business holidays). The Trust's
offices will be closed, and net asset value will not be
calculated, on the following national business holidays: New
Year's Day, Martin Luther King, Jr.'s Birthday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. On those days when either or
both of the Fund's Custodian or the Exchange close early as a
result of such day being a partial holiday or otherwise, the
Trust reserves the right to advance the time on that day by which
purchase and redemption requests must be received.
When the Fund writes an option, an amount equal to the
premium received by the Fund is included in the Fund's Statement
of Assets and Liabilities as an asset and as an equivalent
liability. The amount of the liability will be subsequently
marked-to-market daily to reflect the current market value of the
option written. The current market value of a written option is
the last sale on the principal exchange on which such option is
traded or, in the absence of a sale, the last offering price.
The premium paid by the Fund for the purchase of a call or a
put option will be deducted from its assets and an equal amount
will be included in the asset section of the Fund's Statement of
Assets and Liabilities as an investment and subsequently adjusted
to the current market value of the option. For example, if the
current market value of the option exceeds the premium paid, the
excess would be unrealized appreciation and, conversely, if the
premium exceeds the current market value, such excess would be
unrealized depreciation. The current market value of a purchased
option will be the last sale price on the principal exchange on
which the option is traded or, in the absence of a sale, the last
bid price. If the Fund exercises a call option which it has
purchased, the cost of the security which the Fund purchased upon
exercise will be increased by the premium originally paid.
Valuations of below investment-grade securities may be
supplied by a pricing agent; if valuations are not available
through a pricing agent, such valuations may be supplied through
a broker or otherwise as determined in good faith by the Board of
Trustees.
The sale of shares of the Fund will be suspended during any
period when the determination of its net asset value is suspended
pursuant to rules or orders of the SEC and may be suspended by
the Board whenever in its judgment it is in the best interest of
the Fund to do so.
PORTFOLIO TURNOVER
The Fund purchases securities that are believed by IMI to
have above average potential for capital appreciation. Common
stocks are disposed of in situations where it is believed that
potential for such appreciation has lessened or that other common
stocks have a greater potential. Therefore, the Fund may
purchase and sell securities without regard to the length of time
the security is to be, or has been, held. A change in securities
held by the Fund is known as "portfolio turnover" and may involve
the payment by the Fund of dealer markup or underwriting
commission and other transaction costs on the sale of securities,
as well as on the reinvestment of the proceeds in other
securities. The Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities
for the most recently completed fiscal year by the monthly
average of the value of the portfolio securities owned by the
Fund during that year. For purposes of determining the Fund's
portfolio turnover rate, all securities whose maturities at the
time of acquisition were one year or less are excluded. It is
estimated that the portfolio turnover rate for the Fund's initial
fiscal year will not exceed 100%.
REDEMPTIONS
Shares of the Fund are redeemed at their net asset value
next determined after a proper redemption request has been
received by IMSC, less any applicable CDSC.
Unless a shareholder requests that the proceeds of any
redemption be wired to his or her bank account, payment for
shares tendered for redemption is made by check within seven days
after tender in proper form, except that the Trust reserves the
right to suspend the right of redemption or to postpone the date
of payment upon redemption beyond seven days, (i) for any period
during which the Exchange is closed (other than customary weekend
and holiday closings) or during which trading on the Exchange is
restricted, (ii) for any period during which an emergency exists
as determined by the SEC as a result of which disposal of
securities owned by the Fund is not reasonably practicable or it
is not reasonably practicable for the Fund to fairly determine
the value of its net assets, or (iii) for such other periods as
the SEC may by order permit for the protection of shareholders of
the Fund.
Under unusual circumstances, when the Board deems it in the
best interest of the Fund's shareholders, the Fund may make
payment for shares repurchased or redeemed in whole or in part in
securities of the Fund taken at current values. If any such
redemption in kind is to be made, the Fund may make an election
pursuant to Rule 18f-1 under the 1940 Act. This will require the
Fund to redeem with cash at a shareholder's election in any case
where the redemption involves less than $250,000 (or 1% of the
Fund's net asset value at the beginning of each 90-day period
during which such redemptions are in effect, if that amount is
less than $250,000). Should payment be made in securities, the
redeeming shareholder may incur brokerage costs in converting
such securities to cash.
The Trust may redeem those Advisor Class accounts of
shareholders who have maintained an investment, including sales
charges paid, of less than $10,000 in the Fund for a period of
more than 12 months. All Advisor Class accounts below that
minimum will be redeemed simultaneously when MIMI deems it
advisable. The $10,000 balance will be determined by actual
dollar amounts invested by the shareholder, unaffected by market
fluctuations. The Trust will notify any such shareholder by
certified mail of its intention to redeem such account, and the
shareholder shall have 60 days from the date of such letter to
invest such additional sums as shall raise the value of such
account above that minimum. Should the shareholder fail to
forward such sum within 60 days of the date of the Trust's letter
of notification, the Trust will redeem the shares held in such
account and transmit the redemption in value thereof to the
shareholder. However, those shareholders who are investing
pursuant to the Automatic Investment Method will not be redeemed
automatically unless they have ceased making payments pursuant to
the plan for a period of at least six consecutive months, and
these shareholders will be given six months' notice by the Trust
before such redemption. Shareholders in a qualified retirement,
pension or profit sharing plan who wish to avoid tax consequences
must "rollover" any sum so redeemed into another qualified plan
within 60 days. The Trustees of the Trust may change the minimum
account size.
If a shareholder has given authorization for telephonic
redemption privilege, shares can be redeemed and proceeds sent by
Federal wire to a single previously designated bank account.
Delivery of the proceeds of a wire redemption request of $250,000
or more may be delayed by the Fund for up to seven days if deemed
appropriate under then-current market conditions. The Trust
reserves the right to change this minimum or to terminate the
telephonic redemption privilege without prior notice. The Trust
cannot be responsible for the efficiency of the Federal wire
system of the shareholder's dealer of record or bank. The
shareholder is responsible for any charges by the shareholder's
bank.
The Fund employs reasonable procedures that require personal
identification prior to acting on redemption or exchange
instructions communicated by telephone to confirm that such
instructions are genuine. In the absence of such instructions,
the Fund may be liable for any losses due to unauthorized or
fraudulent telephone instructions.
TAXATION
The following is a general discussion of certain tax rules
thought to be applicable with respect to the Fund. It is merely
a summary and is not an exhaustive discussion of all possible
situations or of all potentially applicable taxes. Accordingly,
shareholders and prospective shareholders should consult a
competent tax adviser about the tax consequences to them of
investing in the Fund.
The Fund intends to be taxed as a regulated investment
company under Subchapter M of the Code. Accordingly, the Fund
must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale
or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business of investing
in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least
50% of the market value of the Fund's assets is represented by
cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such
other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other
than U.S. Government securities and the securities of other
regulated investment companies).
As a regulated investment company, the Fund generally will
not be subject to U.S. Federal income tax on its income and gains
that it distributes to shareholders, if at least 90% of its
investment company taxable income (which includes, among other
items, dividends, interest and the excess of any short-term
capital gains over long-term capital losses) for the taxable year
is distributed. The Fund intends to distribute all such income.
Amounts not distributed on a timely basis in accordance with
a calendar year distribution requirement are subject to a
nondeductible 4% excise tax at the Fund level. To avoid the tax,
the Fund must distribute during each calendar year (1) at least
98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending
on October 31 of the calendar year, and (3) all ordinary income
and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, the
Fund intends to make distributions in accordance with the
calendar year distribution requirements. A distribution will be
treated as paid on December 31 of the current calendar year if it
is declared by the Fund in October, November or December of the
year with a record date in such a month and paid by the Fund
during January of the following year. Such distributions will be
taxable to shareholders in the calendar year the distributions
are declared, rather than the calendar year in which the
distributions are received.
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS
The taxation of equity options and OTC options on debt
securities is governed by Code section 1234. Pursuant to Code
section 1234, the premium received by the Fund for selling a put
or call option is not included in income at the time of receipt.
If the option expires, the premium is short-term capital gain to
the Fund. If the Fund enters into a closing transaction, the
difference between the amount paid to close out its position and
the premium received is short-term capital gain or loss. If a
call option written by the Fund is exercised, thereby requiring
the Fund to sell the underlying security, the premium will
increase the amount realized upon the sale of such security and
any resulting gain or loss will be a capital gain or loss, and
will be long-term or short-term depending upon the holding period
of the security. With respect to a put or call option that is
purchased by the Fund, if the option is sold, any resulting gain
or loss will be a capital gain or loss, and will be long-term or
short-term, depending upon the holding period of the option. If
the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the
option. If the option is exercised, the cost of the option, in
the case of a call option, is added to the basis of the purchased
security and, in the case of a put option, reduces the amount
realized on the underlying security in determining gain or loss.
Some of the options, futures and foreign currency forward
contracts in which the Fund may invest may be "section 1256
contracts." Gains (or losses) on these contracts generally are
considered to be 60% long-term and 40% short-term capital gains
or losses; however, as described below, foreign currency gains or
losses arising from certain section 1256 contracts are ordinary
in character. Also, section 1256 contracts held by the Fund at
the end of each taxable year (and on certain other dates
prescribed in the Code) are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were
realized.
The transactions in options, futures and forward contracts
undertaken by the Fund may result in "straddles" for Federal
income tax purposes. The straddle rules may affect the character
of gains or losses realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may
be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable
year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund
are not entirely clear. The straddle rules may increase the
amount of short-term capital gain realized by the Fund, which is
taxed as ordinary income when distributed to shareholders.
The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund
makes any of the elections, the amount, character and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to shareholders
as ordinary income or long-term capital gain may be increased or
decreased substantially as compared to a fund that did not engage
in such transactions.
Notwithstanding any of the foregoing, the Fund may recognize
gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short
sale, offsetting notional principal contract, futures or forward
contract transaction with respect to the appreciated position or
substantially identical property. Appreciated financial
positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and
short sales) in stock, partnership interests, certain actively
traded trust instruments and certain debt instruments.
Constructive sale treatment of appreciated financial positions
does not apply to certain transactions closed in the 90-day
period ending with the 30th day after the close of the Fund's
taxable year, if certain conditions are met.
The diversification requirements applicable to the Fund's
assets may limit the extent to which the Fund will be able to
engage in transactions in options, futures and forward contracts.
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES
Gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues receivables
or liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt
securities denominated in a foreign currency and certain options,
futures and forward contracts, gains or losses attributable to
fluctuations in the value of the foreign currency between the
date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988"
gains or losses, increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to
its shareholders as ordinary income.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in shares of foreign corporations which
may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is
classified as a PFIC if at least one-half of its assets
constitute investment-type assets, or 75% or more of its gross
income is investment-type income. If the Fund receives a so-
called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of the excess
distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the
PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which a Fund held the
PFIC shares. The Fund itself will be subject to tax on the
portion, if any, of an excess distribution that is so allocated
to prior Fund taxable years and an interest factor will be added
to the tax, as if the tax had been payable in such prior taxable
years. Certain distributions from a PFIC as well as gain from
the sale of PFIC shares are treated as excess distributions.
Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess
distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment
with respect to PFIC shares. The Fund may elect to mark to
market its PFIC shares, resulting in the shares being treated as
sold at fair market value on the last business day of each
taxable year. Any resulting gain would be reported as ordinary
income; any resulting loss and any loss from an actual
disposition of the shares would be reported as ordinary loss to
the extent of any net gains reported in prior years. Under
another election that currently is available in some
circumstances, the Fund generally would be required to include in
its gross income its share of the earnings of a PFIC on a current
basis, regardless of whether distributions are received from the
PFIC in a given year.
DEBT SECURITIES ACQUIRED AT A DISCOUNT
Some of the debt securities (with a fixed maturity date of
more than one year from the date of issuance) that may be
acquired by the Fund may be treated as debt securities that are
issued originally at a discount. Generally, the amount of the
original issue discount ("OID") is treated as interest income and
is included in income over the term of the debt security, even
though payment of that amount is not received until a later time,
usually when the debt security matures.
If the Fund invests in certain high yield original issue
discount obligations issued by corporations, a portion of the
original issue discount accruing on the obligation may be
eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company
taxable income received from the Fund by its corporate
shareholders, to the extent attributable to such portion of
accrued original issue discount, may be eligible for this
deduction for dividends received by corporations if so designated
by the Fund in a written notice to shareholders.
Some of the debt securities (with a fixed maturity date of
more than one year from the date of issuance) that may be
acquired by the Fund in the secondary market may be treated as
having market discount. Generally, gain recognized on the
disposition of, and any partial payment of principal on, a debt
security having market discount is treated as ordinary income to
the extent the gain, or principal payment, does not exceed the
"accrued market discount" on such debt security. In addition,
the deduction of any interest expenses attributable to debt
securities having market discount may be deferred. Market
discount generally accrues in equal daily installments. The Fund
may make one or more of the elections applicable to debt
securities having market discount, which could affect the
character and timing of recognition of income.
Some debt securities (with a fixed maturity date of one year
or less from the date of issuance) that may be acquired by the
Fund may be treated as having acquisition discount, or OID in the
case of certain types of debt securities. Generally, the Fund
will be required to include the acquisition discount, or OID, in
income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the
debt security matures. The Fund may make one or more of the
elections applicable to debt securities having acquisition
discount, or OID, which could affect the character and timing of
recognition of income.
The Fund generally will be required to distribute dividends
to shareholders representing discount on debt securities that is
currently includible in income, even though cash representing
such income may not have been received by the Fund. Cash to pay
such dividends may be obtained from sales proceeds of securities
held by the Fund.
DISTRIBUTIONS
Distributions of investment company taxable income are
taxable to a U.S. shareholder as ordinary income, whether paid in
cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to
dividends received from U.S. corporations by the Fund, may
qualify for the dividends received deduction. However, the
revised alternative minimum tax applicable to corporations may
reduce the value of the dividends received deduction.
Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any,
designated by the Fund as capital gain dividends, are taxable to
individual shareholders at a maximum 20% to 28% capital gains
rate (depending on the Fund's holding period for the assets
giving rise to the gain), whether paid in cash or in shares, and
regardless of how long the shareholder has held the Fund's
shares; such distributions are not eligible for the dividends
received deduction. Shareholders receiving distributions in the
form of newly issued shares will have a cost basis in each share
received equal to the net asset value of a share of the Fund on
the distribution date. A distribution of an amount in excess of
the Fund's current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied
against and reduces the shareholder's basis in his or her shares.
To the extent that the amount of any such distribution exceeds
the shareholder's basis in his or her shares, the excess will be
treated by the shareholder as gain from a sale or exchange of the
shares. Shareholders will be notified annually as to the U.S.
Federal tax status of distributions and shareholders receiving
distributions in the form of newly issued shares will receive a
report as to the net asset value of the shares received.
If the net asset value of shares is reduced below a
shareholder's cost as a result of a distribution by the Fund,
such distribution generally will be taxable even though it
represents a return of invested capital. Shareholders should be
careful to consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at this
time may reflect the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a
distribution which generally will be taxable to them.
DISPOSITION OF SHARES
Upon a redemption, sale or exchange of his or her shares, a
shareholder will realize a taxable gain or loss depending upon
his or her basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets
in the shareholder's hands and, if so, may be eligible for
reduced federal tax rates, depending upon the shareholder's
holding period for the shares. Any loss realized on a redemption
sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a shareholder
on the sale of Fund shares held by the shareholder for six-months
or less will be treated for tax purposes as a long-term capital
loss to the extent of any distributions of capital gain dividends
received or treated as having been received by the shareholder
with respect to such shares.
In some cases, shareholders will not be permitted to take
all or portion of their sales loads into account for purposes of
determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies
where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the
91st day after the date on which they were acquired, and (3) the
shareholder subsequently acquires shares in the Fund or another
regulated investment company and the otherwise applicable sales
charge is reduced under a "reinvestment right" received upon the
initial purchase of Fund shares. The term "reinvestment right"
means any right to acquire shares of one or more regulated
investment companies without the payment of a sales load or with
the payment of a reduced sales charge. Sales charges affected by
this rule are treated as if they were incurred with respect to
the shares acquired under the reinvestment right. This provision
may be applied to successive acquisitions of Fund shares.
FOREIGN WITHHOLDING TAXES
Income received by the Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by
that country.
If more than 50% of the value of the Fund's total assets at
the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible and may elect to "pass-
through" to the Fund's shareholders the amount of foreign income
and similar taxes paid by the Fund. Pursuant to this election, a
shareholder will be required to include in gross income (in
addition to taxable dividends actually received) his or her pro
rata share of the foreign income and similar taxes paid by the
Fund, and will be entitled either to deduct his or her pro rata
share of foreign income and similar taxes in computing his or her
taxable income or to use it as a foreign tax credit against his
or her U.S. Federal income taxes, subject to limitations. No
deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Foreign taxes generally may not be
deducted by a shareholder that is an individual in computing the
alternative minimum tax. Each shareholder will be notified
within 60 days after the close of the Fund's taxable year whether
the foreign taxes paid by the Fund will "pass-through" for that
year and, if so, such notification will designate (1) the
shareholder's portion of the foreign taxes paid to each such
country and (2) the portion of the dividend which represents
income derived from sources within each such country.
Generally, except in the case of certain electing individual
taxpayers who have limited creditable foreign taxes and no
foreign source income other than passive investment-type income,
a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or
her total foreign source taxable income. For this purpose, if
the Fund makes the election described in the preceding paragraph,
the source of the Fund's income flows through to its
shareholders. With respect to the Fund, gains from the sale of
securities generally will be treated as derived from U.S. sources
and section 988 gains will be treated as ordinary income derived
from U.S. sources. The limitation on the foreign tax credit is
applied separately to foreign source passive income, including
foreign source passive income received from the Fund. In
addition, the foreign tax credit may offset only 90% of the
revised alternative minimum tax imposed on corporations and
individuals. Furthermore, the foreign tax credit is eliminated
with respect to foreign taxes withheld on dividends if the
dividend-paying shares or the shares of the Fund are held by the
Fund or the shareholder, as the case may be, for less than 16
days (46 days in the case of preferred shares) during the 30-day
period (90-day period for preferred shares) beginning 15 days (45
days for preferred shares) before the shares become ex-dividend.
The foregoing is only a general description of the foreign
tax credit under current law. Because application of the credit
depends on the particular circumstances of each shareholder,
shareholders are advised to consult their own tax advisers.
BACKUP WITHHOLDING
The Fund will be required to report to the Internal Revenue
Service ("IRS") all taxable distributions as well as gross
proceeds from the redemption of the Fund's shares, except in the
case of certain exempt shareholders. All such distributions and
proceeds will be subject to withholding of Federal income tax at
a rate of 31% ("backup withholding") in the case of non-exempt
shareholders if (1) the shareholder fails to furnish the Fund
with and to certify the shareholder's correct taxpayer
identification number or social security number, (2) the IRS
notifies the shareholder or the Fund that the shareholder has
failed to report properly certain interest and dividend income to
the IRS and to respond to notices to that effect, or (3) when
required to do so, the shareholder fails to certify that he or
she is not subject to backup withholding. If the withholding
provisions are applicable, any such distributions or proceeds,
whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld.
Distributions may also be subject to additional state, local
and foreign taxes depending on each shareholder's particular
situation. Non-U.S. shareholders may be subject to U.S. tax
rules that differ significantly from those summarized above.
This discussion does not purport to deal with all of the tax
consequences applicable to the Fund or shareholders.
Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an
investment in the Fund.
PERFORMANCE INFORMATION
Performance information for the classes of shares of the
Fund may be compared, in reports and promotional literature, to:
(i) the S&P 500 Index, the Dow Jones Industrial Average ("DJIA"),
or other unmanaged indices so that investors may compare the
Fund's results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, a widely used independent research
firm that ranks mutual funds by overall performance, investment
objectives and assets, or tracked by other services, companies,
publications or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return
from an investment in the Fund. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions
or administrative and management costs and expenses. Performance
rankings are based on historical information and are not intended
to indicate future performance.
In addition, the Trust may, from time to time, include the
yield, the average annual total return and the cumulative total
return of shares of the Fund in advertisements, promotional
literature or reports to shareholders or prospective investors.
YIELD. Quotations of yield for Adviser Class shares of the
Fund will be based on all investment income attributable to that
Class earned during a particular 30-day (or one month) period
(including dividends and interest), less expenses attributable to
that Class accrued during the period ("net investment income"),
and will be computed by dividing the net investment income per
share of that Class earned during the period by the net asset
value per share on the last day of the period, according to the
following formula:
YIELD = 2[({(a-b)/cd} + 1){superscript 6}-1]
Where: a = dividends and interest earned during the
period attributable to Advisor Class
shares,
b = expenses accrued for the period
attributable to that Class (net of
reimbursements),
c = the average daily number of shares of
that Class outstanding during the period
that were entitled to receive dividends,
and
d = the net asset value per share on the
last day of the period.
AVERAGE ANNUAL TOTAL RETURN. Quotations of standardized
average annual total return ("Standardized Return") for Adviser
Class shares of the Fund will be expressed in terms of the
average annual compounded rate of return that would cause a
hypothetical investment in that Class made on the first day of a
designated period to equal the ending redeemable value ("ERV") of
such hypothetical investment on the last day of the designated
period, according to the following formula:
P(1 + T){superscript n} = ERV
Where: P = a hypothetical initial payment of $1,000 to
purchase Adviser Class shares
T = the average annual total return of Adviser
Class shares
n = the number of years
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
For purposes of the above computation for Advisor Class
shares of the Fund, it is assumed that all dividends and capital
gains distributions made by the Fund are reinvested at net asset
value in additional Advisor Class shares of the Fund during the
designated period. Standardized Return quotations for the Fund
do not take into account any required payments for Federal or
state income taxes. Standardized Return quotations are
determined to the nearest 1/100 of 1%.
The Fund may, from time to time, include in advertisements,
promotional literature or reports to shareholders or prospective
investors total return data that are not calculated according to
the formula set forth above ("Non-Standardized Return").
CUMULATIVE TOTAL RETURN. Cumulative total return is the
cumulative rate of return on a hypothetical initial investment of
$1,000 in Advisor Class shares of the Fund for a specified
period. Cumulative total return quotations reflect changes in
the price of the Fund's Advisor Class shares and assume that all
dividends and capital gains distributions during the period were
reinvested in Advisor Class shares of the Fund. Cumulative total
return is calculated by computing the cumulative rates of return
of a hypothetical investment in Advisor Class shares of the Fund
over such periods, according to the following formula (cumulative
total return is then expressed as a percentage):
C = (ERV/P) - 1
Where: C = cumulative total return
P = a hypothetical initial investment of $1,000
to purchase Advisor Class shares
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
OTHER QUOTATIONS, COMPARISONS AND GENERAL INFORMATION. The
foregoing computation methods are prescribed for advertising and
other communications subject to SEC Rule 482. Communications not
subject to this rule may contain a number of different measures
of performance, computation methods and assumptions, including
but not limited to: historical total returns; results of actual
or hypothetical investments; changes in dividends, distributions
or share values; or any graphic illustration of such data. These
data may cover any period of the Trust's existence and may or may
not include the impact of sales charges, taxes or other factors.
Performance quotations for the Fund will vary from time to
time depending on market conditions, the composition of the
Fund's portfolio and operating expenses of the Fund. These
factors and possible differences in the methods used in
calculating performance quotations should be considered when
comparing performance information regarding the Fund's shares
with information published for other investment companies and
other investment vehicles. Performance quotations should also be
considered relative to changes in the value of the Fund's shares
and the risks associated with the Fund's investment objectives
and policies. At any time in the future, performance quotations
may be higher or lower than past performance quotations and there
can be no assurance that any historical performance quotation
will continue in the future.
The Fund may also cite endorsements or use for comparison
their performance rankings and listings reported in such
newspapers or business or consumer publications as, among others:
AAII Journal, Barron's, Boston Business Journal, Boston Globe,
Boston Herald, Business Week, Consumer's Digest, Consumer Guide
Publications, Changing Times, Financial Planning, Financial
World, Forbes, Fortune, Growth Fund Guide, Houston Post,
Institutional Investor, International Fund Monitor, Investor's
Daily, Los Angeles Times, Medical Economics, Miami Herald, Money
Mutual Fund Forecaster, Mutual Fund Letter, Mutual Fund Source
Book, Mutual Fund Values, National Underwriter, Nelson's
Directory of Investment Managers, New York Times, Newsweek, No
Load Fund Investor, No Load Fund* X, Oakland Tribune, Pension
World, Pensions and Investment Age, Personal Investor, Rugg and
Steele, Time, U.S. News and World Report, USA Today, The Wall
Street Journal, and Washington Post.
FINANCIAL STATEMENTS
The Fund's Statement of Assets and Liabilities as of
March 25, 1998 and the Notes thereto are attached hereto as
Appendix B.
<PAGE>
APPENDIX A
DESCRIPTION OF STANDARD & POOR'S CORPORATION ("S&P") AND
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
[From "Moody's Bond Record," November 1994 Issue (Moody's
Investors Service, New York, 1994), and "Standard & Poor's
Municipal Ratings Handbook," October 1997 Issue (McGraw Hill, New
York, 1997).]
MOODY'S:
(a) CORPORATE BONDS. Bonds rated Aaa by Moody's are judged by
Moody's to be of the best quality, carrying the smallest degree
of investment risk. Interest payments are protected by a large
or exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds rated Aa are
judged by Moody's to be of high quality by all standards. Aa
bonds are rated lower than Aaa bonds because margins of
protection may not be as large as those of Aaa bonds, or
fluctuations of protective elements may be of greater amplitude,
or there may be other elements present which make the long-term
risks appear somewhat larger than those applicable to Aaa
securities. Bonds which are rated A by Moody's possess many
favorable investment attributes and are to be considered as upper
medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Bonds rated Baa by Moody's are considered medium-grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered well-assured. Often
the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class. Bonds which are rated B generally lack
characteristics of the desirable investment. Assurance of
interest and principal payments of or maintenance of other terms
of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest. Bonds which are rated Ca
represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class
of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
(b) COMMERCIAL PAPER. The Prime rating is the highest
commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity;
(5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (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. Issuers within this Prime
category may be given ratings 1, 2 or 3, depending on the
relative strengths of these factors. The designation of Prime-1
indicates the highest quality repayment capacity of the rated
issue. Issuers rated Prime-2 are deemed to have a strong ability
for repayment while issuers rated Prime-3 are deemed to have an
acceptable ability for repayment. Issuers rated Not Prime do not
fall within any of the Prime rating categories.
S&P:
(a) CORPORATE BONDS. An S&P corporate debt rating is a
current assessment of the creditworthiness of an obligor with
respect to a specific obligation. The ratings are based on
current information furnished by the issuer or obtained by S&P
from other sources it considers reliable. The ratings described
below may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
Debt rated AA is judged by S&P to have a very strong capacity to
pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A by S&P has a
strong capacity to pay interest and repay principal, although it
is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated
categories.
Debt rated BBB by S&P is regarded by S&P as having an
adequate capacity to pay interest and repay principal. Although
such bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay
principal than debt in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having
predominately speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or exposures to
adverse conditions. Debt rated BB has less near-term
vulnerability to default than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BBB- rating. Debt rated B has a greater vulnerability to default
but currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating. Debt rated CCC has a currently
identifiable vulnerability to default, and is dependent upon
favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it
is not likely to have the capacity to pay interest and repay
principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt
subordinated to senior debt which is assigned an actual or
implied CCC debt rating. The rating C typically is applied to
debt subordinated to senior debt which is assigned an actual or
implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt
service payments are continued.
The rating CI is reserved for income bonds on which no
interest is being paid. Debt rated D is in payment default. The
D rating category is used when interest payments or principal
payments are not made on the date due, even if the applicable
grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
(b) COMMERCIAL PAPER. An S&P commercial paper rating is a
current assessment of the likelihood of timely payment of debt
considered short-term in the relevant market.
The commercial paper rating A-1 by S&P indicates that the
degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
For commercial paper with an A-2 rating, the capacity for timely
payment on issues is satisfactory, but not as high as for issues
designated A-1. Issues rated A-3 have adequate capacity for
timely payment, but are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying higher
designations.
Issues rated B are regarded as having only speculative
capacity for timely payment. The C rating is assigned to short-
term debt obligations with a doubtful capacity for payment. Debt
rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the
date due, even if the applicable grace period has not expired,
unless S&P believes such payments will be made during such grace
period.
<PAGE>
APPENDIX B
STATEMENT OF ASSETS AND LIABILITIES
AS OF MARCH 25, 1998
AND REPORT OF INDEPENDENT ACCOUNTANTS
IVY HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 25, 1998
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . $ 50
Deferred organization expenses . . . . . . . 64,772
Prepaid blue sky fees. . . . . . . . . . . . 47,500
---------
Total Assets. . . . . . . . . . . . . . . 112,322
---------
LIABILITIES
Due to affiliate . . . . . . . . . . . . . . 112,272
---------
NET ASSETS . . . . . . . . . . . . . . . . . . $ 50
========
CLASS A:
Net asset value and
redemption price per share
($10 / 1 share outstanding) . . . . . . . $ 10.00
=========
Maximum offering price
per share
($10.00 x 100 / 95.25)* . . . . . . . . . $ 10.61
=========
CLASS B:
Net asset value and
offering price per share
($10 / 1 share outstanding)** . . . . . . $ 10.00
=========
CLASS C:
Net asset value and
offering price per share
($10 / 1 share outstanding)***. . . . . . $ 10.00
=========
CLASS I:
Net asset value, offering and
redemption price per share
($10 / 1 share outstanding) . . . . . . . $ 10.00
=========
ADVISOR CLASS:
Net asset value, offering and
redemption price per share
($10 / 1 share outstanding) . . . . . . . $ 10.00
=========
<PAGE>
NET ASSETS CONSISTS OF:
Capital paid-in. . . . . . . . . . . . . . . $ 50
=========
* On sales of more than $100,000 the offering price is
reduced.
** Redemption price per share is equal to the net asset
value per share less any applicable contingent deferred
sales charge, up to a maximum of 5%.
*** Redemption price per share is equal to the net asset value
per share less any applicable contingent deferred sales
charge, up to a maximum of 1%.
(See Notes to Financial Statement)
<PAGE>
IVY HIGH YIELD FUND
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
MARCH 25, 1998
1.ORGANIZATION: Ivy High Yield Fund is a diversified series of
shares of Ivy Fund. The shares of beneficial interest are
assigned no par value and an unlimited number of shares of Class
A, Class B, Class C, Class I and Advisor Class are authorized.
Ivy Fund was organized as a Massachusetts business trust under a
Declaration of Trust dated December 21, 1983 and is registered
under the Investment Company Act of 1940, as amended, as an open-
end management investment company.
The Fund will commence operations on April 6, 1998. As of the
date of this report, operations have been limited to
organizational matters and the issuance of initial shares to
Mackenzie Investment Management Inc. (MIMI).
2.ORGANIZATION COSTS AND PREPAID BLUE SKY FEES: Organization
expenses are being amortized over a five year period from April
6, 1998, the commencement date of operations. Blue sky fees are
being amortized over a one year period from April 6, 1998. Such
organizational expenses and blue sky fees have been paid by MIMI
and will be reimbursed by the Fund.
3.TRANSACTIONS WITH AFFILIATES: Ivy Management, Inc. (IMI), a
wholly owned subsidiary of MIMI, is the Manager and Investment
Adviser of the Fund. Currently, IMI voluntarily limits the
Fund's total operating expenses (excluding taxes, 12b-1 fees,
brokerage commissions, interest, litigation and indemnification
expenses, and any other extraordinary expenses) to an annual rate
of .85% of its average net assets.
MIMI provides certain administrative, accounting and pricing
services for the Fund.
Ivy Mackenzie Distributors, Inc. (IMDI), a wholly owned
subsidiary of MIMI, is the underwriter and distributor of the
Fund's shares, and as such, purchases shares from the Fund at net
asset value to settle orders from investment dealers.
Ivy Mackenzie Services Corp. (IMSC), a wholly owned subsidiary
of MIMI, is the transfer and shareholder servicing agent for the
Fund.
Officers of Ivy Fund are officers and/or employees of MIMI, IMI,
IMDI and IMSC. Such individuals are not compensated by the Fund
for services in their capacity as officers of Ivy Fund. Trustees
of Ivy Fund who are not affiliated with MIMI or IMI receive
compensation from the Fund.
<PAGE>
[Coopers & Lybrand letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Ivy High Yield Fund (the "Fund"):
We have audited the accompanying Statement of Assets and
Liabilities of the Fund as of March 25, 1998. This financial
statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the Statement of Assets and Liabilities is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the Statement
of Assets and Liabilities. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
Statement of Assets and Liabilities. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the financial position
of the Fund as of March 25, 1998, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Fort Lauderdale, Florida
March 25, 1998
