<PAGE>
PAGE 1
1996 Annual Report
IDS Extra Income Fund
(prospectus enclosed)
(Icon of) Coins
The primary goal of IDS Extra Income Fund, Inc. is to provide high
current income. Capital growth is a secondary goal.
(This annual report includes a prospectus that describes in detail
the Fund's objective, investment policies, risks, sales charges,
fees and other matters of interest. Please read the prospectus
carefully before you invest or send money.)
AMERICAN
EXPRESS
Financial
Advisors
Distributed by American Express Financial Advisors Inc.
<PAGE>
PAGE 2
(Icon of) Coins
Bonds with something extra
Bonds aren't necessarily conservative securities strictly for
people willing to settle for modest returns. High-yield corporate
bonds, for example, are actually quite aggressive investments,
offering high potential returns to investors willing to take more
risk.
These are the bonds that Extra Income Fund invests in. High-yield
bonds are issued by a wide range of companies - from well-
established ones that might be experiencing financial difficulty to
new, rapidly growing ones that have yet to build a credit history.
Importantly, the Fund spreads its investments among many bonds
representing many types of businesses. This helps to reduce the
investment risk for shareholders.<PAGE>
PAGE 3
Contents
(Icon of) One open book inside of another.
The purpose of this annual report is to tell investors how the Fund
performed.
The prospectus, which is bound into the middle of this annual
report, describes the Fund in detail.
1996 annual report
From the president 4
From the portfolio manager 4
Ten largest holdings 6
Making the most of the Fund 7
Long-term performance 8
Independent auditors' report 9
Financial statements 10
Notes to financial statements 13
Investments in securities 22
IDS mutual funds 35
Federal income tax information 38
1996 prospectus
The Fund in brief 3p
Goals 3p
Investment policies and risks 3p
Structure of the Fund 4p
Manager and distributor 4p
Portfolio manager 4p
Alternative purchase arrangements 4p
Sales charge and Fund expenses 5p
Performance 7p
Financial highlights 7p
Total returns 9p
Yield 10p
Investment policies and risks 11p
Facts about investments and their risks 11p
Valuing Fund shares 16p
How to purchase, exchange or redeem shares 17p
Alternative purchase arrangements 17p
How to purchase shares 19p
How to exchange shares 22p
How to redeem shares 22p
Reductions and waivers of the sales charge 27p
Special shareholder services 31p
Services 31p
Quick telephone reference 31p
Distributions and taxes 32p
Dividend and capital gain distributions 32p
Reinvestments 33p<PAGE>
PAGE 4
Taxes 33p
How to determine the correct TIN 35p
How the Fund is organized 36p
Shares 36p
Voting rights 36p
Shareholder meetings 36p
Special considerations regarding
master/feeder structure 37p
Board members and officers 39p
Investment manager 41p
Administrator and Transfer Agent 41p
Distributor 42p
About American Express Financial Corporation 43p
General information 43p
Appendices 44p
Description of corporate bond ratings 44p
Descriptions of derivative instruments 46p
<PAGE>
PAGE 5
To our shareholders
(Photo of William Pearce)
Williarm R. Pearce
President of the Fund
(Photo of Jack Utter)
Jack Utter
Portfolio manager
From the president
If you're an experienced investor, you know that 1995 was an
unusually strong year for the U.S. financial markets. Perhaps just
as important, you also know that history shows that bull markets
don't last forever. Though they're often unpredictable, declines -
whether they're brief or long-lasting, moderate or substantial -
are always a possibility.
That fact reinforces the need for investors to review periodically
their long-term goals and assets whether their investment program
remains on track to achieving them. Your quarterly investment
statements are one part of that monitoring process. The other is a
meeting with your American Express financial advisor. That becomes
even more important if there's a major change in your financial
situatiion or in the financial markets.
(signature)
William R. Pearce
From the portfolio manager
A largely positive environment for high-yield bonds prevailed
during the past fiscal period, thanks to the favorable forces of
moderage economic growth, a low rate of inflation and, for part of
the nine months, declining long-term interest rates. Taking good
advantage of the conditions, IDS Extra Income Fund provided
investors with a total return of 11.7% on Class A shares for the
September 1995 through May 1996 period.
Shaking off early concerns about recession, the economy continued
to move more slowly forward during the period, while inflation
remained low. Those factors bolstered the spirits of fixed-income
investors, who became increasingly attracted the relatively
generous real (minus inflation) returns offered by high-yield
bonds. The trend was reflected by strong cash flows into high-
yield mutual funds throughout the nine months. As is always the
case, the increased buying drove up bond prices and, consequently,
the net asset value of mutual funds such as this one.
<PAGE>
PAGE 6
The Fed lends a hand
The market found further support in the form of two reductions in
short-term interest rates by the Federal Reserve, which were taken
by investors as an indication that inflation was remaining well
under control. Long-term rates followed suit, declining through
the end of 1995 and providing a boost to bond prices. Also working
in the bond market's favor, at least last fall, was the possibility
of an agreement between Congress and the Clinton administration to
balance the federal budget.
In that environment, I made only one noteworthy change to the
portfolio. After enjoying strong performance from bonds of
paper/packaging companies, I reduced our holdings in that sector
because of weakening business conditions in that industry. More
important to Fund performance, I maintained a substantial exposure
to bonds of gaming, telecommunications and media companies, which
continued to perform very well. On the other hand, I continued to
hold relatively few bonds in the retailing and industrial cyclical
(steel and chemicals, for example) sectors. This proved to be an
appropriate strategy, as those issues were relatively poor
performers during the nine months.
Outlook OK, but repeat performance unlikely
Looking to the new fiscal year, I remain basically optimistic about
prospects for the bond market and high-yield securities, but I
don't expect a repeat of the market's spectacular 1995 performance.
While the outlook for important fundamentals such as economic
growth and inflation continues to be favorable, long-term interest
rates nevertheless rose early in 1996 and, while I expect them to
move lower before year-end, a substantial decline seems unlikely.
Moreover, because of potential uncertainty surrounding the
presidential election, the market may have another reason to become
unsettled at times. Still, barring any major negative events, I
think the positive market fundamentals will ultimately prevail.
(signature)
Jack Utter
Class A
9-month performance
(all figures per share)
Net asset value (NAV)
May 31, 1996 $ 4.34
Aug. 31, 1995 $ 4.15
Increase $ 0.19
Distributions
Sept. 1, 1995 - May 31, 1996
From Income $ 0.29
From capital gains $ --
Total distributions $ 0.29
Total return* + 11.7%**<PAGE>
PAGE 7
Class B
9-month performance
(All figures per share)
Net asset value (NAV)
May 31, 1996 $ 4.34
Aug. 31, 1995 $ 4.15
Increase $ 0.19
Distributions
Sept. 1, 1995 - May 31, 1996
From Income $ 0.26
From capital gains $ --
Total distributions $ 0.26
Total return* + 11.1%**
Class Y
9-month performance
(all figures per share)
Net asset value (NAV)
May 31, 1996 $ 4.34
Aug. 31, 1995 $ 4.15
Increase $ 0.19
Distributions
Sept. 1, 1995 - May 31, 1996
From income $ 0.29
From capital gains $ --
Total distributions $ 0.29
Total return* +11.8%**
* The prospectus discusses the effect of sales charges, if any, on
the various classes.
** The total return is a hypothetical investment in the Fund with
all distributions reinvested.<PAGE>
PAGE 8
<TABLE>
<CAPTION>
The Fund's ten largest holdings
(Pie chart)
The ten holdings here make up 11.87% of the Fund's total net assets.
_____________________________________________________________________________________
Percent Value
(of Fund's net assets) (as of May 31, 1996)
_____________________________________________________________________________________
<S> <C> <C>
Trump Atlantic City Funding 1.57% $37,829,906
11.25% 1st Mtge 2006
Echostar Satellite Broadcasting 1.37 32,988,375
Zero Coupon 2000
Gaylord Container 1.22 29,540,000
12.75% Sr Sub Disc Deb 2005
Adelphia Communications 1.21 29,246,306
9.50% Pay-in-kind 2004
Plitt Theatres 1.17 28,337,375
10.875% 2004
Cablevision Systems 1.16 28,037,947
11.125% Pay-in-kind
Alliance Entertainment 1.08 26,193,750
11.25% Sr Sub Nts 2005
Intermedia Communications of Florida 1.06 25,536,875
13.50% Sr Nts 2005
Revlon Worldwide 1.02 24,712,500
Zero Coupon Sr Disc Nts 1998
Specialty Equipment 1.01 24,348,500
11.375% Sr Sub Nts 2003
</TABLE>
<PAGE>
PAGE 9
Making the most of the Fund
Average annual total return
(as of May 31, 1996)
1 year 5 year 10 years or
since inception
Class A +9.80% +13.81% +8.94%
Class B* +10.12% --% +12.44%
Class Y* +15.72% --% +19.04%
* Inception date was March 20, 1995.
The performance of Class B and Class Y will vary from the
performance of Class A based on differences in sales charges and
fees.
Your investment and return values fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
Figures for Class A and Class B reflect the effect of the maximum
5% sales charge. This was a period of widely fluctuation security
prices. Past performance is no guarantee of future results.
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost
averaging - a time-tested strategy that can make market
fluctuations work for you. To dollar-cost average, simply invest a
fixed amount of money regularly. You'll automatically buy more
shares when the Fund's share price is low, fewer shares when it is
high.
This does not ensure a profit or avoid a loss if the market
declines. But, if you can continue to invest regularly through
changing market conditions, it can be an effective way to
accumulate shares to meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
(footnotes to table) By investing an equal number of dollars each
month...
(arrow in table pointing to April) you automatically buy more
shares when the per share market price is low.<PAGE>
PAGE 10
(arrow in table pointing to September) and fewer shares when the
per share market price is high.
You have paid an average price of only $17.91 per share over the 10
months, while the average market price actually was $18.10.
<PAGE>
PAGE 11
The Fund's long term performance
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's investments do
well
o you receive capital gains when the gains on investments sold
by the Fund exceed losses
o you receive income when the Fund's stock dividends, interest
and short-term gains exceed its expenses.
All three make up your total return. And you potentially can
increase your investment if, like most investors, you reinvest your
dividends and capital gain distributions to buy additional shares
of the Fund or another fund.
<TABLE><CAPTION>
How your $10,000 has grown in IDS Extra Income Fund
<S> <C> <C>
$23,562
$20,000 Extra Income
Fund
Lehman Aggregate Class A
Bond Index
$9,500
'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96
</TABLE>
(the following two paragraphs appear in the margin next to the
graph:)
Assumes: *Holding period from 6/1/86 to 5/31/96.
*Returns do not reflect taxes payable on distributions.
*Reinvestment of all income and capital gain distributions
for the Fund, with a value of $15,868. Also see
"Performance" in the Fund's current prospectus.
The Lehman Aggregate Bond Index is made up of a representative list
of government and corporate bonds as well as asset-backed
securities and mortgage-backed securities. The index is frequently
used as a general measure of bond market performance. However, the
securities used to create the index may not be representative of
the bonds held in Extra Income Fund.
Average annual total return
(as of May 31, 1996)
1 year 5 years 10 years or
since inception
Class A + 9.80% + 13.81% + 8.94%
Class B* + 10.12% --% + 12.44%
Class Y* + 15.72% --% + 19.04%
*Inception date was March 20, 1995.<PAGE>
PAGE 12
On the graph above you can see how the Fund's total return compared
to a widely cited performance measure, the Lehman Aggregate Bond
Index. In comparing Extra Income Fund with this index, you should
take into account the fact that the Fund's performance reflects the
maximum sales charge of 5%, while such charges are not reflected in
the performance of the index. If you were actually to buy either
individual bonds or bond mutual funds, any sales charges that you
pay would reduce your total return as well.
Your investment and return values fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
Average annual total return figures reflect the deduction of the
maximum 5% sales charge, if any. This was a period of widely
fluctuating security prices. Past performance is no guarantee of
future results.
<PAGE>
PAGE 13
Independent auditors' report
The board and shareholders
IDS Extra Income Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments in securities,
of IDS Extra Income Fund, Inc. as of May 31, 1996, and the related
statements of operations and changes in net assets, and the
financial highlights for the nine months then ended and the
statement of changes in net assets for the year ended August 31,
1995 and the financial highlights for each of the years in the
nine-year period ended August 31, 1995. These financial statements
and the financial highlights are the responsibility of fund
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and the financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Investment securities held in custody are
confirmed to us by the custodian. As to securities purchased and
sold but not received or delivered and securities on loan, we
request confirmations from brokers, and where replies are not
received, we carry out other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of IDS
Extra Income Fund, Inc. at May 31, 1996, and the results of its
operations and changes in its net assets for the nine months then
ended and the changes in its net assets for the year ended August
31, 1995, and the financial highlights for the periods stated in
the first paragraph above, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 5, 1996
<PAGE>
PAGE 14
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
IDS Extra Income Fund, Inc.
May 31, 1996
_____________________________________________________________________________________________________________
Assets
_____________________________________________________________________________________________________________
<S> <C>
Investments in securities, at value (Note 1):
Investments in securities of unaffiliated issuers
(identified cost $2,305,677,559) $2,387,373,389
Investments in securities of affiliated issuers
(identified cost $30,962,600) 26,687,448
Cash in bank on demand deposit 4,370,148
Dividends and accrued interest receivable 48,040,917
Receivable for investment securities sold 31,022,257
U.S. government securities held as collateral (Note 5) 1,006,887
_____________________________________________________________________________________________________________
Total assets 2,498,501,046
_____________________________________________________________________________________________________________
Liabilities
_____________________________________________________________________________________________________________
Dividends payable to shareholders 1,982,497
Payable for investment securities purchased 78,797,268
Payable upon return of securities loaned (Note 5) 2,006,887
Accrued investment management services fee 37,601
Accrued distribution fee 5,475
Accrued service fee 11,522
Accrued transfer agency fee 6,171
Accrued administrative services fee 3,043
Other accrued expenses 432,119
_____________________________________________________________________________________________________________
Total liabilities 83,282,583
_____________________________________________________________________________________________________________
Net assets applicable to outstanding capital stock $2,415,218,463
_____________________________________________________________________________________________________________
Represented by
_____________________________________________________________________________________________________________
Capital stock -- authorized 10,000,000,000 shares of $.01 par value $ 5,564,019
Additional paid-in capital 2,578,603,209
Undistributed net investment income 6,778,069
Accumulated net realized loss (Notes 1 and 8) (253,147,512)
Unrealized appreciation of investments 77,420,678
_____________________________________________________________________________________________________________
Total -- representing net assets applicable to outstanding capital stock $2,415,218,463
_____________________________________________________________________________________________________________
Net assets applicable to outstanding shares: Class A $2,145,455,185
Class B $ 269,754,238
Class Y $ 9,040
Net asset value per share of outstanding capital stock: Class A shares 494,251,079 $4.34
Class B shares 62,148,719 $4.34
Class Y shares 2,082 $4.34
See accompanying notes to financial statements.
<PAGE>
PAGE 15
Financial statements
Statement of operations
IDS Extra Income Fund, Inc.
Nine months ended May 31, 1996
_____________________________________________________________________________________________________________
Investment income
_____________________________________________________________________________________________________________
<S> <C>
Income:
Interest $150,747,464
Dividends 7,042,024
_____________________________________________________________________________________________________________
Total income 157,789,488
_____________________________________________________________________________________________________________
Expenses (Note 2):
Investment management services fee 9,170,111
Distribution fee -- Class B 907,154
Transfer agency fee 1,538,421
Incremental transfer agency fee -- Class B 8,608
Service fee
Class A 2,552,021
Class B 211,334
Administrative services fee 749,696
Compensation of board members 37,776
Compensation of officers 15,052
Custodian fees 129,746
Postage 254,139
Registration fees 267,428
Reports to shareholders 26,235
Audit fees 36,500
Administrative 10,141
Other 42,853
_____________________________________________________________________________________________________________
Total expenses 15,957,215
Earnings credits on cash balances (Note 2) (77,789)
_____________________________________________________________________________________________________________
Total net expenses 15,879,426
_____________________________________________________________________________________________________________
Investment income -- net 141,910,062
_____________________________________________________________________________________________________________
Realized and unrealized gain -- net
_____________________________________________________________________________________________________________
Net realized gain on security transactions (Note 3) 30,517,451
Net realized gain on sale of affiliated security 69,732
Net change in unrealized appreciation or depreciation of investments 63,851,546
_____________________________________________________________________________________________________________
Net gain on investments 94,438,729
_____________________________________________________________________________________________________________
Net increase in net assets resulting from operations $236,348,791
_____________________________________________________________________________________________________________
See accompanying notes to financial statements.
<PAGE>
PAGE 16
Financial statements
Statements of changes in net assets
IDS Extra Income Fund, Inc.
_____________________________________________________________________________________________________________
Operations and distributions May 31, 1996 Aug. 31, 1995
_____________________________________________________________________________________________________________
<S> <C> <C>
Nine months ended Year ended
Investment income -- net $141,910,062 $164,956,308
Net realized gain (loss) on investments and foreign currency 30,587,183 (94,618,530)
Net change in unrealized appreciation or depreciation of investments 63,851,546 154,638,498
_____________________________________________________________________________________________________________
Net increase in net assets resulting from operations 236,348,791 224,976,276
_____________________________________________________________________________________________________________
Distributions to shareholders from:
Net investment income
Class A (131,968,668) (163,086,676)
Class B (10,053,530) (1,285,639)
Class Y (35,126) (64,716)
_____________________________________________________________________________________________________________
Total distributions (142,057,324) (164,437,031)
_____________________________________________________________________________________________________________
Capital share transactions (Note 6)
_____________________________________________________________________________________________________________
Proceeds from sales
Class A shares (Note 2) 409,958,480 386,116,539
Class B shares 211,284,632 76,560,620
Class Y shares 281,250 2,243,811
Reinvestment of distributions at net asset value
Class A shares 88,685,134 105,087,318
Class B shares 8,360,841 977,944
Class Y shares 26,891 60,615
Payments for redemptions
Class A shares (262,062,635) (354,557,559)
Class B shares (Note 2) (33,183,891) (2,378,996)
Class Y shares (1,890,774) (807,210)
_____________________________________________________________________________________________________________
Increase in net assets from capital share transactions 421,459,928 213,303,082
_____________________________________________________________________________________________________________
Total increase in net assets 515,751,395 273,842,327
Net assets at beginning of period 1,899,467,068 1,625,624,741
_____________________________________________________________________________________________________________
Net assets at end of period
(including undistributed net investment income of
$6,778,069 and $7,554,854) $2,415,218,463 $1,899,467,068
_____________________________________________________________________________________________________________
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PAGE 17
Notes to financial statements
IDS Extra Income Fund, Inc.
___________________________________________________________________
1. Summary of significant accounting policies
The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company.
The Fund invests primarily, and may invest all of its assets, in
long-term corporate bonds in the lower-rating categories, commonly
known as junk bonds. The Fund offers Class A, Class B and Class Y
shares. Class A shares are sold with a front-end sales charge.
Class B shares may be subject to a contingent deferred sales charge
and such shares automatically convert to Class A after eight years.
Class Y shares have no sales charge and are offered only to
qualifying institutional investors.
All classes of shares have identical voting, dividend, liquidation
and other rights, and the same terms and conditions, except that
the level of distribution fee, transfer agency fee and service fee
(class specific expenses) differs among classes. Income, expenses
(other than class specific expenses) and realized and unrealized
gains or losses on investments are allocated to each class of
shares based upon its relative net assets.
Significant accounting policies followed by the Fund are summarized
below:
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from
those estimates.
<PAGE>
PAGE 18
Valuation of securities
All securities are valued at the close of each business day.
Securities traded on national securities exchanges or included in
national market systems are valued at the last quoted sales price;
securities for which market quotations are not readily available,
including illiquid securities, are valued at fair value according
to methods selected in good faith by the board. Determination of
fair value involves, among other things, reference to market
indexes, matrixes and data from independent brokers. Short-term
securities maturing in more than 60 days from the valuation date
are valued at the market price or approximate market value based on
current interest rates; those maturing in 60 days or less are
valued at amortized cost.
Option transactions
In order to produce incremental earnings, protect gains, and
facilitate buying and selling of securities for investment
purposes, the Fund may buy or write options traded on any U.S. or
foreign exchange or in the over-the-counter market where the
completion of the obligation is dependent upon the credit standing
of the other party. The Fund also may buy and sell put and call
options and write covered call options on portfolio securities and
may write cash-secured put options. The risk in writing a call
option is that the Fund gives up the opportunity of profit if the
market price of the security increases. The risk in writing a put
option is that the Fund may incur a loss if the market price of the
security decreases and the option is exercised. The risk in buying
an option is that the Fund pays a premium whether or not the option
is exercised. The Fund also has the additional risk of not being
able to enter into a closing transaction if a liquid secondary
market does not exist.
<PAGE>
PAGE 19
Option contracts are valued daily at the closing prices on their
primary exchanges and unrealized appreciation or depreciation is
recorded. The Fund will realize a gain or loss upon expiration or
closing of the option transaction. When options on debt securities
or futures are exercised, the Fund will realize a gain or loss.
When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or
the cost of a security for a purchased put or call option is
adjusted by the amount of premium received or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the
market, the Fund may buy and sell interest rate futures contracts
traded on any U.S. or foreign exchange. The Fund also may buy or
write put and call options on these futures contracts. Risks of
entering into futures contracts and related options include the
possibility that there may be an illiquid market and that a change
in the value of the contract or option may not correlate with
changes in the value of the underlying securities.
Upon entering into a futures contract, the Fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the Fund each
day. The variation margin payments are equal to the daily changes
in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the
contract is closed or expires.
<PAGE>
PAGE 20
Foreign currency translations and foreign currency contracts
Securities and other assets and liabilities denominated in foreign
currencies are translated daily into U.S. dollars at the closing
rate of exchange. Foreign currency amounts related to the purchase
or sale of securities and income and expenses are translated at the
exchange rate on the transaction date. The effect of changes in
foreign exchange rates on realized and unrealized security gains or
losses is reflected as a component of such gains or losses. In the
statement of operations, net realized gains or losses from foreign
currency transactions may arise from sales of foreign currency,
closed forward contracts, exchange gains or losses realized between
the trade date and settlement dates on securities transactions, and
other translation gains or losses on dividends, interest income and
foreign withholding taxes.
The Fund may enter into forward foreign currency exchange contracts
for operational purposes and to protect against adverse exchange
rate fluctuation. The net U.S. dollar value of foreign currency
underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined
using foreign currency exchange rates from an independent pricing
service. The Fund is subject to the credit risk that the other
party will not complete the obligations of the contract.
<PAGE>
PAGE 21
Federal taxes
Since the Fund's policy is to comply with all sections of the
Internal Revenue Code applicable to regulated investment companies
and to distribute all of its taxable income to shareholders, no
provision for income or excise taxes is required.
Net investment income (loss) and net realized gains (losses) may
differ for financial statement and tax purposes primarily because
of the deferral of losses on certain futures contracts, the
recognition of certain foreign currency gains (losses) as ordinary
income (loss) for tax purposes and losses deferred due to "wash
sale" transactions. The character of distributions made during the
year from net investment income or net realized gains may differ
from their ultimate characterization for federal income tax
purposes. Also, due to the timing of dividend distributions, the
fiscal year in which amounts are distributed may differ from the
year that the income or realized gains (losses) were recorded by
the Fund.
On the statement of assets and liabilities, as a result of
permanent book-to-tax differences, undistributed net investment
income has been decrease by $629,523 resulting in a net
reclassification adjustment to decrease accumulated net realized
loss by $629,523.
Dividends to shareholders
Dividends from net investment income, declared daily and payable
monthly, are reinvested in additional shares of the Fund at net
asset value or payable in cash. Capital gains, when available, are
distributed along with the last income dividend of the calendar
year.
<PAGE>
PAGE 22
Other
Security transactions are accounted for on the date securities are
purchased or sold. Dividend income is recognized on the ex-dividend
date. For U.S. dollar denominated bonds, interest income includes
level-yield amortization of premium and discount. For foreign
bonds, except for original issue discount, the Fund does not
amortize premium and discount. Interest income, including
level-yield amortization of premium and discount, is accrued daily.
__________________________________________________________________
2. Expenses and sales charges
Effective March 20, 1995, the Fund entered into agreements with
American Express Financial Corporation (AEFC) for managing its
portfolio, providing administrative services and serving as
transfer agent as follows: Under its Investment Management Services
Agreement, AEFC determines which securities will be purchased, held
or sold. The management fee is a percentage of the Fund's average
daily net assets in reducing percentages from 0.59% to 0.465%
annually.
Under an Administrative Services Agreement, the Fund pays AEFC for
administration and accounting services at a percentage of the
Fund's average daily net assets in reducing percentages from 0.05%
to 0.025% annually.
Under a separate Transfer Agency Agreement, AEFC maintains
shareholder accounts and records. The Fund pays AEFC an annual fee
per shareholder account for this service as follows:
o Class A $15.50
o Class B $16.50
o Class Y $15.50
Also effective March 20, 1995, the Fund entered into agreements
with American Express Financial Advisors Inc. for distribution and
shareholder servicing-related services as follows: Under a Plan and
Agreement of Distribution, the Fund pays a distribution fee at an
annual rate of 0.75% of the Fund's average daily net assets
attributable to Class B shares for distribution-related services.
<PAGE>
PAGE 23
Under a Shareholder Service Agreement, the Fund pays a fee for
service provided to shareholders by financial advisors and other
servicing agents. The fee is calculated at a rate of 0.175% of the
Fund's average daily net assets attributable to Class A and Class B
shares.
AEFC will assume and pay any expenses (except taxes and brokerage
commissions) that exceed the most restrictive applicable state
expense limitation.
Sales charges by American Express Financial Advisors Inc. for
distributing Fund shares were $8,627,557 for Class A and $87,595
for Class B for the period ended May 31, 1996.
During the period ended May 31, 1996, the Fund's custodian and
transfer agency fees were reduced by $77,789 as a result of
earnings credits from overnight-cash balances.
Prior to April 30, 1996, the Fund had a retirement plan for its
independent board members. The plan was terminated April 30, 1996.
The retirement plan expense amounted to $14,979 for the period. The
total liability for the plan is $86,231, which will be paid out at
some future date.
___________________________________________________________________
3. Securities transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $1,670,881,472 and
$1,255,528,927, respectively, for the fiscal period ended May 31,
1996. Realized gains and losses are determined on an identified
cost basis.
<PAGE>
PAGE 24
___________________________________________________________________
4. Change of Fund's fiscal year
The By-Laws of the Fund were amended on Jan. 10 - 11, 1996,
changing its fiscal year-end from Aug. 31 to May 31, effective
1996.
___________________________________________________________________
5. Lending of portfolio securities
At May 31, 1996, securities valued at $1,853,700 were on loan to
brokers. For collateral, the Fund received $1,000,000 in cash and
U.S. government securities valued at $1,006,887. Income from
securities lending amounted to $126,108 for the fiscal period ended
May 31, 1996. The risks to the Fund of securities lending are that
the borrower may not provide additional collateral when required or
return the securities when due.
6. Capital share transactions
Transactions in shares of capital stock for the periods indicated
are as follows:
<TABLE>
<CAPTION>
Nine months ended May 31, 1996
Class A Class B Class Y
<S> <C> <C> <C>
_____________________________________________________________________
Sold 96,295,627 49,606,436 67,241
Issued for reinvested 20,843,375 1,956,298 6,442
distributions
Redeemed (61,588,802) (7,759,632) (453,087)
_____________________________________________________________________
Net increase (decrease) 55,550,200 43,803,102 (379,404)
______________________________________________________________________
Year ended Aug. 31, 1995
Class A Class B* Class Y*
_____________________________________________________________________
Sold 97,298,897 18,688,995 565,786
Issued for reinvested 26,443,241 236,714 14,823
distributions
Redeemed (89,533,246) (580,092) (199,123)
_____________________________________________________________________
Net increase 34,208,892 18,345,617 381,486
_____________________________________________________________________
*Inception date was March 20, 1995.
</TABLE>
<PAGE>
PAGE 25
7. Illiquid securities
At May 31, 1996, investments in securities included issues that are
illiquid. The Fund currently limits investments in illiquid
securities to 10% of the net assets, at market value, at the time
of purchase. The aggregate value of such securities at May 31, 1996
was $51,322,481 representing 2.1% of net assets. Pursuant to
guidelines adopted by the Fund's board, certain unregistered
securities are determined to be liquid and are not included within
the 10% limitation specified above.
___________________________________________________________________
8. Capital loss carryover
For federal income tax purposes, the Fund had a capital loss
carryover of $257,355,361 at May 31, 1996, that will expire in 1999
through 2004 if not offset by subsequent capital gains. It is
unlikely the board will authorize a distribution of any net
realized capital gains until the available capital loss carryover
has been offset or expires.
___________________________________________________________________
9. Subsequent event
The Fund invested its assets in a master portfolio, called the High
Yield Portfolio, on June 10, 1996. The portfolio is a separate
investment company, but has the same goals and investment policies
as the Fund. Additional information on investment policies may be
found in the prospectus and Statement of Additional Information
(SAI).
___________________________________________________________________
10. Financial highlights
"Financial highlights" showing per share data and selected
information is presented on pages 7 and 8 of the prospectus.
<PAGE>
PAGE 26
<TABLE>
<CAPTION>
Investments in securities (Percentages represent value of
IDS Extra Income Fund, Inc. investments compared to net assets)
May 31, 1996
Investments in securities of unaffiliated issuers
_____________________________________________________________________________________________________________________________
Bonds (88.0%)
_____________________________________________________________________________________________________________________________
Issuer Coupon Maturity Principal Value(a)
rate year amount
_____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities (1.0%)
Federal Home Loan Mtge Corp 6.875% 2017 $ 6,696 (b) $ 6,822
Inverse Floater 7.26 2024 9,865,946 (l) 7,374,696
8.72 2023 4,407,829 (l) 3,374,855
Merrill Lynch Mtge Investors 8.29 2021 9,717,850 (c) 8,598,779
Resolution Trust 8.00 2026 6,438,924 5,070,653
______________
Total 24,425,805
_____________________________________________________________________________________________________________________________
Financial (3.1%)
Banks and savings & loans (0.4%)
First Nationwide Bank
Sr Nts 12.50 2003 10,250,000 (c) 10,660,000
_____________________________________________________________________________________________________________________________
Financial services (1.0%)
Homeside
Sr Nts 11.25 2003 6,375,000 (c) 6,534,375
Malan Realty Investors REIT
Cv Sub Deb 9.50 2004 2,750,000 2,530,000
Olympic Financial
Sr Nts 13.00 2000 14,500,000 15,895,625
______________
Total 24,960,000
_____________________________________________________________________________________________________________________________
Insurance (1.7%)
Americo Life
Sr Sub Nts 9.25 2005 15,000,000 14,587,500
Life Partners
Sr Sub Nts 12.75 2002 10,000,000 10,925,000
Reliance Group Holdings
Sr Sub Deb 9.75 2003 15,000,000 15,300,000
_____________
Total 40,812,500
_____________________________________________________________________________________________________________________________
Industrial (71.2%)
Aerospace & defense (1.9%)
Alliant Techsystems
Sr Sub Nts 11.75 2003 9,250,000 (c) 10,059,375
Sequa 9.625 1999 3,000,000 3,067,500
Sr Sub Nts 9.375 2003 20,750,000 20,698,125
TransDigm
Sr Secured Nts 13.00 2000 14,030,000 (e) 12,837,450
______________
Total 46,662,450
_____________________________________________________________________________________________________________________________
Automotive & related (0.7%)
Harvard Inds
Sr Nts 12.00 2004 7,000,000 6,982,500
Penda
Sr Nts 10.75 2004 12,000,000 10,890,000
______________
Total 17,872,500
_____________________________________________________________________________________________________________________________
Building materials & construction (1.7%)
American Standard
Zero Coupon Sr Sub Disc Deb 10.46 1998 15,000,000 (g) 12,900,000
Peters (JM)
Sr Nts 12.75 2002 10,500,000 9,948,750
<PAGE>
PAGE 27
Schuller Intl Group
Sr Nts 10.875 2004 12,000,000 13,020,000
Southdown
Sr Sub Nts 10.00 2006 4,700,000 (c) 4,741,125
______________
Total 40,609,875
_____________________________________________________________________________________________________________________________
Communications equipment & services (8.1%)
American Communication Services
Zero Coupon 14.64 2000 10,000,000 (c,g) 5,625,000
Celcaribe
Zero Coupon 10.42 1998 3,800,000 (c,g) 3,914,000
Zero Coupon 13.44 1998 7,350,000 (g) 5,806,500
Cencall Communications
Zero Coupon Sr Nts 10.09 1999 8,000,000 (g) 4,980,000
Comcast Cellular
Zero Coupon Series A 11.73 2000 33,000,000 (f) 23,182,500
Zero Coupon Series B 7.08 2000 10,000,000 (f) 7,025,000
Geotek Communications
Cv 12.00 2001 5,000,000 (e) 7,575,000
Zero Coupon 17.41 2000 26,250,000 (g) 16,143,750
GST Telecommunications
Zero Coupon 12.01 2000 20,880,000 (c,g) 13,154,400
Horizon Cellular
Zero Coupon 10.28 1997 16,000,000 (g) 14,320,000
Intermedia Communications of Florida
Sr Nts 13.50 2005 22,750,000 (c) 25,536,875
Nextlink Communications
Sr Nts 12.50 2006 15,000,000 (c) 15,225,000
Pagemart Nationwide
Zero Coupon Sr Nts 15.80 2000 23,000,000 (c,g) 15,180,000
Peoples Telephone
Sr Nts 12.25 2002 7,000,000 6,720,000
Pronet
Sr Sub Nts 10.875 2006 6,100,000 6,100,000
Western Wireless
Sr Sub Nts 10.50 2006 5,000,000 5,037,500
Winstar Communications
Zero Coupon 14.50 2000 30,000,000 (c,g) 18,800,000
______________
Total 194,325,525
_____________________________________________________________________________________________________________________________
Computers & office equipment (1.9%)
Anacomp -- 1997 727 (e) 727
Dictaphone
Sr Sub Nts 11.75 2005 14,500,000 14,028,750
Softkey
Cv Sr Nts 5.50 2000 2,500,000 (c) 2,168,750
Unisys
Sr Nts 10.625 1999 3,500,000 3,561,250
Sr Nts 12.00 2003 8,000,000 (c) 8,260,000
Credit Sensitive Nts 15.00 1997 15,600,000 (j) 16,653,000
______________
Total 44,672,477
_____________________________________________________________________________________________________________________________
Energy (1.6%)
Chesapeake Energy 12.00 2001 7,000,000 7,560,000
Harcor Energy
Sr Nts 14.875 2002 5,000,000 (c) 5,300,000
Petroleum Heat & Power
Sub Deb 9.375 2006 10,000,000 9,550,000
<PAGE>
PAGE 28
TransTexas Gas
Sr Secured Nts 11.50 2002 10,000,000 9,750,000
United Meridian
Sr Sub Nts 10.375 2005 5,800,000 6,003,000
______________
Total 38,163,000
_____________________________________________________________________________________________________________________________
Food (1.1%)
Chiquita Brands Intl
Sr Nts 9.625 2004 8,500,000 8,415,000
Specialty Foods 11.25 2003 19,000,000 (c) 15,200,000
Twin Laboratories
Sr Sub Nts 10.25 2006 4,000,000 (c) 4,060,000
______________
Total 27,675,000
_____________________________________________________________________________________________________________________________
Health care (2.4%)
Dade Intl
Sr Sub Nts 11.125 2006 5,850,000 (c) 6,054,750
Magellan Health Services
Sr Sub Nts Cl A 11.25 2004 12,500,000 (c) 13,750,000
Merit Behavioral 11.50 2005 5,500,000 (c) 5,788,750
Tenet Healthcare
Sr Sub Nts 10.125 2005 20,000,000 21,350,000
Total Renal Care
Zero Coupon 15.46 1997 10,388,000 (g) 10,232,180
______________
Total 57,175,680
_____________________________________________________________________________________________________________________________
Industrial equipment & services (2.3%)
ACF Inds 11.60 2000 3,020,000 3,027,550
Borg-Warner Security
Sr Sub Nts 9.125 2003 10,000,000 9,337,500
Envirodyne Inds
Sr Nts 12.00 2000 7,000,000 7,210,000
Interlake
Sr Sub Deb 12.125 2002 11,000,000 10,945,000
Specialty Equipment
Sr Sub Nts 11.375 2003 23,300,000 24,348,500
______________
Total 54,868,550
_____________________________________________________________________________________________________________________________
Leisure time & entertainment (12.8%)
Alliance Entertainment
Sr Sub Nts 11.25 2005 27,500,000 (c) 26,193,750
Bally's Health & Tennis
Sr Sub Nts 13.00 2003 5,000,000 4,350,000
Bally's Park Place Funding
1st Mtge Nts 9.25 2004 11,000,000 11,110,000
Cinemark (USA)
Sr Sub Nts 12.00 2002 7,500,000 8,156,250
Coast Hotels & Casino
1st Mtge 13.00 2002 19,800,000 (c) 21,111,750
Cobblestone Golf Group
Sr Nts 11.50 2003 4,550,000 (c) 4,618,250
Cobblestone Holdings
Zero Coupon Units 13.50 2004 10,250,000 (c,f) 3,766,875
Grand Casinos
1st Mtge 10.125 2003 15,000,000 15,450,000
Hollywood Casino
Sr Nts 12.75 2003 12,800,000 12,608,000
<PAGE>
PAGE 29
IHF Holdings
Zero Coupon Sr Disc Nts 13.44 1999 15,000,000 (g) 10,425,000
Lady Luck Gaming
1st Mtge 11.875 2001 5,000,000 4,968,750
Marvel Holdings
Zero Coupon 13.57 1998 15,150,000 (f) 12,006,375
Marvel Parent Holdings
Zero Coupon Sr Nts 14.82 1998 7,100,000 (f) 5,626,750
MGM Grand Hotel Finance 11.75 1999 10,000,000 10,612,500
12.00 2002 14,000,000 15,400,000
Mohegan Tribal Gaming
Sr Nts 13.50 2002 13,400,000 (c) 16,750,000
Plitt Theatres 10.875 2004 27,850,000 28,337,375
Resorts Intl
Mtge Nts 11.00 2003 8,000,000 8,320,000
Showboat Marina
1st Mtge 13.50 2003 5,000,000 (c) 5,400,000
Trump Atlantic City Funding
1st Mtge 11.25 2006 37,225,000 37,829,906
Trump Castle Funding
Mtge Nts 11.75 2003 19,711,250 19,809,806
Trump Holdings
Sr Nts 15.50 2005 10,000,000 11,650,000
United Artists 11.50 2002 6,000,000 (c) 6,345,000
United Artists Theatres
Pass Thru Certs 9.30 2015 10,000,000 (c) 9,500,000
______________
Total 310,346,337
_____________________________________________________________________________________________________________________________
Media (11.2%)
Ackerley Communications
Sr Secured Nts 10.75 2003 13,500,000 (c) 14,107,500
Adelphia Communications
Pay-in-kind 9.50 2004 33,093,415 (n) 29,246,306
Sr Deb 11.875 2004 5,000,000 5,050,000
American Telecasting
Zero Coupon 16.69 1999 9,606,320 (g) 6,916,550
Zero Coupon Sr Disc Nts 12.14 2000 10,000,000 (e,g) 6,325,000
Bell & Howell
Zero Coupon 11.08 2000 21,750,000 (g) 14,898,750
Big Flower Press
Sr Sub Nts 10.75 2003 4,673,000 (c) 4,708,048
CAI Wireless Systems
Sr Nts 12.25 2002 11,250,000 11,896,875
Continental Cablevision
Sr Sub Deb 11.00 2007 6,800,000 7,616,000
CS Wireless Systems
Zero Coupon 11.375 2001 3,250,000 (c,g) 6,857,500
Echostar Satellite Broadcasting
Zero Coupon 13.13 2000 49,700,000 (c,g) 32,988,375
Grupo Televisa
Sr Nts 11.875 2006 4,500,000 (c) 4,601,250
Zero Coupon 13.25 2001 18,000,000 (c,g) 9,720,000
Heritage Media Services
Sr Sub Nts 8.75 2006 5,000,000 4,762,500
Outdoor Systems
Sr Nts 10.75 2003 11,000,000 11,330,000
Paramount Communications
Sub Deb 7.00 2003 15,000,000 13,790,850
<PAGE>
PAGE 30
Paxson Communications
Sr Sub Nts 11.625 2002 12,000,000 (c) 12,720,000
Pegasus Media & Communications
Cl B 12.50 2005 7,500,000 (c) 8,025,000
People's Choice TV
Zero Coupon 13.12 2000 23,500,000 (g) 14,276,250
Scandinavian Broadcasting
Cv Sub Deb 7.25 2005 4,000,000 4,340,000
United Intl Holdings
Zero Coupon Disc Nts 11.99 1999 12,500,000 (f) 8,156,250
Universal Outdoor
Sr Nts 11.00 2003 13,000,000 13,325,000
Zero Coupon 12.34 1999 12,934,000 (g) 9,538,825
Viacom
Sub Deb 8.00 2006 8,000,000 7,440,000
Wireless One
Units 13.00 2003 7,750,000 8,253,750
______________
Total 270,890,579
_____________________________________________________________________________________________________________________________
Metals (2.5%)
Bar Technologies
Units 13.50 2001 10,000,000 (c) 10,050,000
Carbide/Graphite Group
Sr Nts 11.50 2003 9,091,000 9,886,463
EnviroSource
Sr Nts 9.75 2003 18,750,000 17,109,375
NS Group
Units 13.50 2003 14,000,000 (m) 13,440,000
Republic Engineered Steel
1st Mtge 9.875 2001 10,000,000 9,150,000
_____________
Total 59,635,838
_____________________________________________________________________________________________________________________________
Multi-industry conglomerates (3.9%)
Communications & Power Inds
Sr Sub Nts 12.00 2005 10,000,000 (c) 10,575,000
G-I Holdings
Sr Nts 10.00 2006 22,214,220 22,408,594
Zero Coupon Sr Nts 9.55 1998 29,484,000 (f) 23,808,330
Saul (BF) REIT
Sr Nts 11.625 2002 9,300,000 (c) 9,579,000
Talley Inds
Zero Coupon Sr Disc Deb 11.80 1998 24,000,000 (g) 18,690,000
Talley Mfg & Technology
Sr Nts 10.75 2003 8,500,000 8,606,250
_____________
Total 93,667,174
_____________________________________________________________________________________________________________________________
Paper & packaging (4.9%)
Florida Coast Paper 12.75 2003 10,000,000 (c) 10,275,000
Gaylord Container
Sr Sub Disc Deb 12.75 2005 28,000,000 29,540,000
Plastic Container
Sr Secured Nts 10.75 2001 14,200,000 14,448,500
Silgan
Sr Sub Nts 11.75 2002 7,500,000 7,950,000
Zero Coupon 13.25 1996 20,000,000 (g) 19,850,000
<PAGE>
PAGE 31
Stone Container
Sr Nts 12.625 1998 4,500,000 4,786,875
Sweetheart Cup
Sr Sub Nts 10.50 2003 13,500,000 13,500,000
Warren (SD)
Sr Nts 12.00 2004 16,500,000 (c) 17,325,000
______________
Total 117,675,375
_____________________________________________________________________________________________________________________________
Restaurants & lodging (1.1%)
Flagstar
Sr Nts 10.875 2002 10,000,000 8,925,000
Sr Sub Deb 11.25 2004 10,000,000 7,200,000
Hammons (John Q) Hotels
1st Mtge 8.875 2004 12,000,000 11,460,000
______________
Total 27,585,000
_____________________________________________________________________________________________________________________________
Retail (7.9%)
Apparel Retail
Zero Coupon 12.21 1998 14,500,000 (c,g) 11,455,000
Dairy Mart Convenience Stores
Sr Sub Nts 10.25 2004 20,700,000 19,302,750
Di Giorgio
Sr Nts 12.00 2003 16,000,000 15,080,000
Dr Structured Finance
Pass Thru Certs 8.55 2019 10,000,000 8,400,000
Hill Stores
Sr Nts 12.50 2003 5,250,000 (c) 5,368,125
Jitney-Jungle Stores
Sr Nts 12.00 2006 15,000,000 15,525,000
Kash n' Karry Food Stores
Pay-in-kind 11.50 2003 17,501,290 (n) 17,588,796
Musicland Group
Sr Sub Nts 9.00 2003 20,375,000 13,855,000
Parisian
Sr Sub Nts 9.875 2003 2,150,000 2,053,250
Pathmark Stores
Zero Coupon Jr Sub Nts 12.83 1999 13,500,000 (g) 8,572,500
Penn Traffic
Sr Sub Nts 9.625 2005 26,000,000 21,970,000
Pueblo Xtra Intl
Sr Nts 9.50 2003 19,140,000 17,273,850
Ralphs Grocery
Sr Nts 10.45 2004 10,000,000 9,675,000
Specialty Retailers 10.00 2000 2,000,000 1,972,500
Sr Sub Nts 11.00 2003 6,750,000 6,716,250
Stater Brothers Holdings
Sr Nt 11.00 2001 14,500,000 15,152,500
______________
Total 189,960,521
_____________________________________________________________________________________________________________________________
Soaps & cosmetics (1.3%)
Coty
Sr Sub Nts 10.25 2005 7,000,000 7,332,500
Revlon Worldwide
Zero Coupon Sr Disc Nts 11.50 1998 30,000,000 (c,f) 24,712,500
______________
Total 32,045,000
<PAGE>
PAGE 32
_____________________________________________________________________________________________________________________________
Textiles & apparel (1.3%)
CMI Inds
Sr Sub Nts 9.50 2003 5,000,000 4,262,500
Dominion Textiles
Sr Nts 8.875 2003 5,000,000 4,912,500
Hat Brand Holdings
Zero Coupon -- 2002 5,000,000 (d,e,f) 3,500,000
Hosiery Corp of America 13.75 2002 9,993,175 10,692,697
US Leather
Sr Nts 10.25 2003 10,000,000 8,400,000
___________
Total 31,767,697
_____________________________________________________________________________________________________________________________
Miscellaneous (2.6%)
Adams Outdoor Advertising 10.75 2006 10,700,000 (c) 10,887,250
Benedek Communications
Zero Coupon 13.25 2001 9,500,000 (c,g) 4,987,500
Darling-Delaware
Sr Sub Nts 11.00 2000 9,932,000 9,857,510
ECM Funding LP 11.92 2002 2,735,472 (e,j) 3,009,019
KinderCare Learning Centers
Sr Nts 10.375 2001 6,000,000 6,232,500
Norcal Waste Systems
Sr Nts 12.50 2005 20,300,000 (c,j) 21,441,875
SC Intl
Sr Sub Nts 13.00 2005 6,000,000 6,465,000
______________
Total 62,880,654
_____________________________________________________________________________________________________________________________
Transportation (0.8%)
Braniff
Sr Reset Nts -- 1999 5,000,000 (d,e,h,j) --
GPA Delaware 8.75 1998 10,000,000 (d) 10,047,600
Trans Ocean Container 12.25 2004 8,750,000 9,034,375
______________
Total 19,081,975
_____________________________________________________________________________________________________________________________
Utilities (3.1%)
Electric (2.0%)
California Energy
Ltd Resource Sr Secured Nts 9.875 2003 7,000,000 7,140,000
First Palo Verde Funding 10.15 2016 6,150,000 6,426,750
Midland Funding II 11.75 2005 5,000,000 5,281,250
13.25 2006 12,500,000 13,812,500
Niagara Mohawk Power
1st Mtge 9.75 2005 9,000,000 8,868,510
Texas-New Mexico Power
Secured Deb 10.75 2003 7,000,000 7,385,000
______________
Total 48,914,010
_____________________________________________________________________________________________________________________________
Telephone (1.1%)
Millicom Intl Cellular
Zero Coupon 13.50 2000 28,125,000 (c,g) 15,117,187
Mobil Telecommunications Technology
Sr Nts 13.50 2002 10,000,000 10,475,000
______________
Total 25,592,187
<PAGE>
PAGE 33
_____________________________________________________________________________________________________________________________
Foreign (8.8%)
Asian Pulp & Paper
(U.S. Dollar) 11.75 2005 6,600,000 6,864,000
Banco Nacional de Comercio Exterior
(U.S. Dollar) 7.25 2004 14,300,000 11,583,000
Cable Systems
(U.S. Dollar) 10.75 1999 2,716,120 (e) 2,688,959
Caguas Humacas
(U.S. Dollar) 10.50 1998 10,528,492 (e) 10,265,280
Clearnet Communications
(U.S. Dollar) Zero Coupon 11.56 2000 10,800,000 (g) 6,750,000
Dom's Telecable
(U.S. Dollar) 10.50 1996 1,617,555 (e) 1,601,379
Doman Inds
(U.S. Dollar) 8.75 2004 10,500,000 9,660,000
Fresh Delmonte
(U.S. Dollar) 10.00 2003 22,000,000 20,790,000
Gulf Canada Resources
(U.S. Dollar) 9.25 2004 13,500,000 13,500,000
Imexsa Export Trust
(U.S. Dollar) 10.125 2003 10,000,000 9,987,500
Intl Cabletel
(U.S. Dollar) Zero Coupon 15.25 2001 31,000,000 (c,g) 18,367,500
Repap New Brunswick
(U.S. Dollar) Sr Nts 10.625 2005 15,000,000 13,987,500
Republic of Brazil
(U.S. Dollar) 6.875 2012 6,500,000 (j) 4,257,500
Rogers Cablesystems
(U.S. Dollar) Sr Secured Nts 9.625 2002 5,000,000 4,987,500
Rogers Cantel
(U.S. Dollar) Sr Sub Nts 11.125 2002 10,000,000 10,650,000
Tarkett Intl
(U.S. Dollar) 9.00 2002 10,000,000 (c) 10,387,500
Telewest
(U.S. Dollar) Zero Coupon 11.00 2000 20,000,000 (g) 12,000,000
Tjiwi Kimia
(U.S. Dollar) 13.25 2001 10,000,000 11,125,000
United Mexican States
(U.S. Dollar) 11.50 2026 6,669,000 6,167,758
Venezuela
(U.S. Dollar) Front Loaded Interest Reduction 6.81 2007 16,000,000 11,330,000
Viridian
(U.S. Dollar) 9.75 2003 3,500,000 3,657,500
(U.S. Dollar) 10.50 2014 10,000,000 10,937,500
______________
Total 211,545,376
_____________________________________________________________________________________________________________________________
Total bonds
(Cost: $2,047,998,654) $2,124,471,085
_____________________________________________________________________________________________________________________________
Stocks and other (8.5%)
_____________________________________________________________________________________________________________________________
Issuer Shares Value(a)
_____________________________________________________________________________________________________________________________
American Communication Services
Warrants 15,200 (c) 1,672,000
American Telecasting
Warrants 85,225 383,513
<PAGE>
PAGE 34
Benedek Broadcasting
Units Preferred 7,000 7,000,000
Berg Electronics
Common 90,121 (c,d) 2,331,881
Cablevision Systems
11.125% Pay-in-kind 289,051 (c,n) 28,037,947
11.75% Preferred Cv 106,134 (c) 10,666,467
Calenergy Capital Trust
6.25% Cv Preferred 60,000 (c) 3,330,000
Celcaribe
Common 1,195,110 (c,d) 1,876,323
Cherokee
Warrants 44,107 3,867
Chevy Chase Savings
13% Preferred 180,000 5,445,000
Communications & Power Inds
14% Preferred 51,595 (c,d) 5,231,733
Warrants 3,500 (c) 366,625
Crown Packaging
Warrants 10,000 70,000
Dairy Mart Convenience Stores
Warrants 311,333 414,073
Dr. Pepper Bottling Holdings
Common 100,000 (d) 550,000
Earthwatch
12% Preferred 700,000 (c) 7,000,000
Echostar Satellite Broadcasting
Common 100,000 (d) 3,450,000
El Paso Electric
11.40% Pay-in-kind 30,000 (c,n) 3,030,000
First Nationwide Bank
11.50% Preferred 166,500 18,315,000
Foodmaker
Warrants 7,000 154,000
Gaylord Container
Common 437,500 (d) 3,910,156
Warrants 562,500 4,992,187
Geotek Communications
Warrants 872,500 5,671,250
Harcor Energy
Warrants 110,000 (c) 297,000
Harvard Inds
Pay-in-Kind 14.25% Preferred 438,224 (n) 11,448,602
Hat Brand Holdings
Warrants 90,345 (e) --
Hemmeter Enterprises
Warrants 36,000 (c,e) 58,500
Hosiery Corp of America
Warrants 10,000 (c) 50,000
Houlihan's Restaurant
Warrants 5,886 30,166
IFINT Diversified Holdings
Common 42,418 (e) 1,018,032
<PAGE>
PAGE 35
Intermedia Communications
Warrants 22,750 (d) 1,023,750
K-III Communications
10% Preferred 75,000 (c) 6,975,000
Pay-in-Kind Sr Exchangeable 115,695 (n) 11,685,216
Kelley Oil & Gas
$2.625 Cv Preferred 100,000 2,050,000
Lady Luck Gaming
Common 200,000 (d) 653,125
MFS Communications
Common 2,264 (d) 78,674
Natl Health Investors
8.50% Cv Preferred 60,000 1,833,750
Nextel Communications
Warrants 18,902 189
Pagemart
Common 50,750 (c,d) 475,781
Panamsat
Common 150,000 (d) 4,237,500
Pay-in-kind 12.75% Cv Preferred 11,312 (n) 12,618,536
Pantry Pride
14.875% Preferred 100,000 10,000,000
Pegasus Media Communications
Common 750 (d) 450,000
Pullman
Common 273,141 (d) 2,321,699
Reliance Group Holdings
Warrants 277,791 581,625
Riggs Natl
Series B Preferred 72,825 2,039,100
Southdown
Warrants 50,000 (e) 418,750
Specialty Foods Acquisition
Common 300,000 (d) 150,000
Station Casinos
7% Cv Preferred 50,000 2,968,750
Supermarket General
Pay-in-kind Cv 275,000 (n) 6,875,000
Time Warner
Pay-in-kind Preferred 8,750 (c,n) 8,706,250
TransDigm
Warrants 11,195 (e) 1,533,671
Triangle Wire & Cable
Common 548,889 (d,e) 548,889
Webcraft Technology
Common 32,502 (d,e) 325
Wireless One
Common 25,000 (d) 462,500
Warrants 23,250 162,750
_____________________________________________________________________________________________________________________________
Total stocks and other
(Cost: $200,431,753) $ 205,655,152
<PAGE>
PAGE 36
_____________________________________________________________________________________________________________________________
Short-term securities (2.4%)
_____________________________________________________________________________________________________________________________
Issuer Annualized Amount Value(a)
yield on payable at
date of maturity
purchase
_____________________________________________________________________________________________________________________________
U.S. government agency (0.3%)
Federal Home Loan Mtge Corp Disc Nts
06-20-96 5.22% $4,000,000 $ 3,989,022
06-20-96 5.24 2,000,000 1,994,490
______________
Total 5,983,512
_____________________________________________________________________________________________________________________________
Commercial paper (2.1%)
Albertson's
06-27-96 5.29 6,000,000 5,977,163
BellSouth Telephone
06-05-96 5.31 4,500,000 4,497,360
Commerzbank US Finance
06-17-96 5.30 2,900,000 2,893,195
Dean Witter, Discover & Co
06-24-96 5.30 2,500,000 2,491,567
06-25-96 5.30 5,600,000 5,580,288
Fleet Funding
07-01-96 5.31 3,800,000 (i) 3,783,280
General Electric Capital
07-08-96 5.30 3,100,000 3,083,209
Met Life
06-03-96 5.30 7,300,000 7,297,859
Mobil Australia Finance
06-12-96 5.32 3,600,000 (i) 3,594,170
Reed Elsevier
06-21-96 5.30 4,800,000 (i) 4,785,920
Sandoz
07-11-96 5.30 2,800,000 2,783,604
USL Capital
06-07-96 5.33 4,500,000 4,496,025
______________
Total 51,263,640
_____________________________________________________________________________________________________________________________
Total short-term securities
(Cost: $57,247,152) $ 57,247,152
_____________________________________________________________________________________________________________________________
Total investments in securities of unaffiliated issuers
(Cost: $2,305,677,559) $2,387,373,389
_____________________________________________________________________________________________________________________________
Investments in securities of affiliated issuers (k)
_____________________________________________________________________________________________________________________________
Common stocks (1.1%)
_____________________________________________________________________________________________________________________________
Issuer Shares Value(a)
_____________________________________________________________________________________________________________________________
Envirodyne Inds 727,116 (d) $ 3,453,801
Kash n' Karry Food Stores 822,430 (d) 23,233,647
_____________________________________________________________________________________________________________________________
Total investments in securities of affiliated issuers
(Cost: $30,962,600) $ 26,687,448
_____________________________________________________________________________________________________________________________
Total investments in securities
(Cost: $2,336,640,159)(o) $2,414,060,837
<PAGE>
PAGE 37
_____________________________________________________________________________________________________________________________
Notes to investments in securities
_____________________________________________________________________________________________________________________________
(a) Securities are valued by procedures described in Note 1 to the financial statements.
(b) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate
on May 31, 1996.
(c) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as
amended. This security has been determined to be liquid under guidelines established by the board.
(d) Presently non-income producing. For long-term debt securities, item identified is in default as to payment of
interest and/or principal.
(e) Identifies issues considered to be illiquid (see Note 7 to the financial statements). Information concerning such
security holdings at May 31, 1996 is as follows:
Security Acquisition Cost
dates
_____________________________________________________________________________________________
American Telecasting
Zero Coupon Sr Disc Nts 01-25-96 thru 03-08-96 $ 6,488,125
Anacomp
1997 03-21-96 727
Braniff
Sr Reset Nts 04-03-89 4,550,000
Cable Systems
(U.S. Dollar) 02-09-96 2,716,120
Caguas Humacas
(U.S. Dollar) 02-05-96 10,141,781
Dom's Telecable
(U.S. Dollar) 02-05-96 1,558,142
ECM Funding LP 04-03-89 3,030,092
Geotek Communications
Cv 03-04-96 5,000,000
Hat Brand Holdings
Warrants 09-03-92 --
Zero Coupon 2002 09-03-92 5,000,000
Hemmeter Enterprises
Warrants 06-21-95 120,000
IFINT Diversified Holdings
Common 08-18-94 35,493
Southdown
Warrants 10-30-91 150,000
TransDigm
Sr Secured Nts 09-29-93 thru 04-24-96 12,722,817
Warrants 09-29-93 thru 04-24-96 1,027,809
Triangle Wire & Cable
Common 01-13-92 13,000,117
Webcraft Technology
Common 12-22-86 16,874
<PAGE>
PAGE 38
IDS Extra Income Fund, Inc.
May 31, 1996
Notes to investments in securities
(f) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition.
(g) For those zero coupon bonds that become coupon paying at a future date, the interest rate disclosed represents the
annualized effective yield from the date of acquisition to interest reset date disclosed.
(h) Presently negligible market value.
(i) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited
investors." This security has been determined to be liquid under guidelines established by the board.
(j) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the
effective rate on May 31, 1996.
(k) Investments representing 5% or more of the outstanding voting securities of the issuer.
(l) Inverse floaters represent securities that pay interest at a rate that increases (decreases) in the same magnitude as, or
in a multiple of, a decline (increase) in the LIBOR (London InterBank Offering Rate) Index. Interest rate disclosed is the
rate in effect on May 31, 1996. Inverse floaters in the aggregate represent 0.4% of the Fund's net assets as of May 31,
1996.
(m) Security is partially or fully on loan. See note 5 to the financial statements.
(n) Pay-in-kind securities are securities in which the issuer has the option to make interest payments in cash or in additional
securities. These securities issued as interest usually have the same terms, including maturity date, as the pay-in-kind
securities.
(o) At May 31, 1996, the cost of securities for federal income tax purposes was $2,332,432,310 and the
aggregate gross unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $130,421,535
Unrealized depreciation (48,793,608)
___________________________________________________________________________________________
Net unrealized appreciation $81,628,527
___________________________________________________________________________________________
</TABLE>
<PAGE>
PAGE 39
IDS mutual funds
Cash equivalent investments
These money market funds have three main goals: conservation of
capital, constant liquidity and the highest possible current income
consistent with these objectives. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial
paper, bankers' acceptances, certificates of deposits (CDs) and
other bank securities.
(icon of) piggy bank
IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and
local governments to seek high current income exempt from federal
income taxes.
(icon of) shield with piggy bank enclosed
Income investments
The funds in this group invest their assets primarily in corporate
bonds or government securities to seek interest income. Secondary
objective is capital growth. Risk varies by bond quality.
IDS Global Bond Fund
Invests primarily in debt securities of U.S. and foreign issuers to
seek high total return through income and growth of capital.
(icon of) globe
IDS Extra Income Fund
Invests mainly in long-term, high-yielding corporate fixed-income
securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
(icon of) coins
IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher
rated, lower risk bond categories, or the equivalent, and in
government bonds.
(icon of) greek column
IDS Selective Fund
Invests in high-quality corporate bonds and other highly rated debt
instruments including government securities and short-term<PAGE>
PAGE 40
investments. Seeks current income and preservation of capital.
(icon of) skyline
IDS Federal Income Fund
Invests primarily in securities issued or guaranteed as to the
timely payment of principal and interest by the U.S. government,
its agencies and instrumentalities. Seeks a high level of current
income and safety of principal consistent with its type of
investments.
(icon of) shield with eagle head enclosed
<PAGE>
PAGE 41
Tax-exempt income investments
These funds provide tax-free income by investing in municipal
bonds. The income is generally free from federal income tax. Risk
varies by bond quality.
IDS High Yield Tax-Exempt Fund
Invests primarily in medium- and lower-quality municipal bonds and
notes. Lower-quality securities generally involve greater risk of
principal and income.
(icon of) shield with basket of apples enclosed
IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to
provide income to residents of each respective state that is exempt
from federal, state and local income taxes. (New York is the only
state that is exempt at the local level.)
(icon of) shield with U.S. enclosed
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government
units, with at least 75% in the four highest rated, lowest risk
bond categories.
(icon of) shield with Greek column enclosed
IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to
the timely payment of principal and interest. The insurance
feature minimizes credit risk of the fund but does not guarantee
the market value of the fund's shares.
(icon of) shield with star enclosed
Growth and income investments
These funds focus on securities of medium to large, well-
established companies that offer long-term growth of capital and
reasonable income from dividends and interest. Moderate risk.
IDS International Fund
Invests primarily in common stocks of foreign companies that offer
potential for superior growth. The fund may invest up to 20% of
its assets in the U.S. market.
(icon of) three flags
IDS Managed Retirement Fund
<PAGE>
PAGE 42
Invests in U.S. equity securities, U.S. and foreign debt
securities, foreign equity securities and money market instruments.
The fund provides diversification among these major investment
categories and has a target mix that represents the way the fund's
investments will be allocated over the long term.
(icon of) bird in a nest
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks,
higher-yielding equities and bonds. Seeks growth of capital and
income.
(icon of) three pine trees
IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities
purchased are those recommended by our research analysts as the
best from each industry represented on the index. Offers potential
for long-term growth as well as dividend income.
(icon of) ribbon
IDS Stock Fund
Invests in common stock of companies representing many sectors of
the economy. Seeks current income and growth of capital.
(icon of) building with columns
IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential
for growth of capital and income.
(icon of) three growing flowers
<PAGE>
PAGE 43
IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek
high current income and growth of income and capital with reduced
volatility.
(icon of) light bulb
IDS Diversified Equity Income Fund
Invests primarily in high-yielding common stocks to seek high
current income and, secondarily, to benefit from the growth
potential offered by stock investments.
(icon of) two puzzle pieces
IDS Mutual
Invests in a balance between common stocks and senior securities
(preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
(icon of) scale of justice
Growth investments
Funds in this group seek capital growth, primarily from common
stocks. They are high risk mutual funds with a potential for high
reward.
IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies
emphasizing technological innovation and productivity enhancement.
Buys and holds larger growth-oriented stocks.
(icon of) ship
IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected
for their potential for above-average growth. Above-average means
that their growth potential is better, in the opinion of the
portfolio's investment manager, than the Standard & Poor's
Corporation (S&P) 500 Stock Index.
(icon of) chess piece
IDS Growth Fund
Invests primarily in companies that have above-average potential
for long-term growth as a result of new management, marketing
opportunities or technological superiority.
(icon of) trees
IDS Global Growth Fund<PAGE>
PAGE 44
Invests in stocks of companies throughout the world that are
positioned to meet market needs in a changing world economy. These
companies offer above-average potential for long-term growth.
(icon of) world
IDS New Dimensions Fund
Invests primarily in companies with significant growth potential
due to superiority in technology, marketing or management. The
fund frequently changes its industry mix.
(icon of) dimension
IDS Progressive Fund
Invests primarily in undervalued common stocks. The fund holds
stocks for the long term with the goal of capital growth.
(icon of) shooting star
Specialty growth investment
This fund aggressively seeks capital growth as a hedge against
inflation.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic
companies that explore for, mine and process or distribute gold and
other precious metals. This is the most aggressive and most
speculative IDS mutual fund.
(icon of) cart of precious gems
For more complete information about any of these funds, including
charges and expenses, you can obtain a prospectus by contacting
your financial advisor or writing to American Express Shareholder
Service, P.O. Box 534, Minneapolis, MN 55440-0534. Read it
carefully before you invest or send money.
<PAGE>
PAGE 45
Federal income tax information
IDS Extra Income Fund, Inc.
_____________________________________________________
The Fund is required by the Internal Revenue Code of
1986 to tell its shareholders about the tax treatment
of the dividends it pays during its fiscal year. Some
of the dividends listed below were reported to you on
a Form 1099-DIV, Dividends and Distributions,
last January. Dividends paid to you since the end of
last year will be reported to you on a tax statement
sent next January. Shareholders should consult a tax
advisor on how to report distributions for state and
local purposes.
IDS Extra Income Fund, Inc.
Fiscal period ended May 31, 1996
Class A
Income distributions
taxable as dividend income, 4.98% qualifying for
deduction by corporations.
Payable date Per share
Sept. 27, 1995 $0.03272
Oct. 27, 1995 0.03253
Nov. 28, 1995 0.03090
Dec. 28, 1995 0.03067
Jan. 26, 1996 0.02966
Feb. 28, 1996 0.03129
March 28, 1996 0.03110
April 29, 1996 0.03110
May 29, 1996 0.03735
Total distributions $0.28732
<PAGE>
PAGE 46
Class B
Income distributions
taxable as dividend income, 4.98% qualifying for
deduction by corporations.
Payable date Per share
Sept. 27, 1995 $0.02998
Oct. 27, 1995 0.02995
Nov. 28, 1995 0.02815
Dec. 28, 1995 0.02808
Jan. 26, 1996 0.02713
Feb. 28, 1996 0.02837
March 28, 1996 0.02851
April 29, 1996 0.02843
May 29, 1996 0.03450
Total distributions $0.26310
Class Y
Income distributions
taxable as dividend income, 4.98% qualifying for
deduction by corporations.
Payable date Per share
Sept. 27, 1995 $0.03335
Oct. 27, 1995 0.03312
Nov. 28, 1995 0.03153
Dec. 28, 1995 0.02963
Jan. 26, 1996 0.03024
Feb. 28, 1996 0.03197
March 28, 1996 0.03166
April 29, 1996 0.03171
May 29, 1996 0.03799
Total distributions $0.29120
<PAGE>
PAGE 47
Quick telephone reference
American Express Telephone Transaction Service
Redemptions and exchanges, dividend payments or reinvestments and
automatic payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
American Express Shareholder Service
Fund performance, objectives and account inquiries
612-671-3733
TTY Service
For the hearing impaired
800-846-4852
American Express Infoline
Automated account information (TouchToneR phones only), including
current fund prices and performance, account values and recent
account transactions
National/Minnesota: 800-272-4445
Mpls./St. Paul area: 671-1630
AMERICAN
EXPRESS
Financial
Advisors
IDS Extra Income Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
PAGE 48
IDS Extra Income Fund
Prospectus
July 30, 1996
The primary goal of IDS Extra Income Fund, Inc. is to provide high
current income. Capital growth is a secondary goal.
The Fund seeks to achieve its goals by investing all of its assets
in High Yield Portfolio of Income Trust. The Portfolio is a
separate investment company managed by American Express Financial
Corporation that has the same goals as the Fund. This arrangement
is commonly known as a master/feeder structure.
The Portfolio invests primarily, and may invest all of its assets,
in long-term corporate bonds in the lower-rating categories,
commonly known as junk bonds. These securities generally have
greater price fluctuations than higher-rated securities and are
more likely to experience a default. Investors should carefully
consider these risks before investing. See the prospectus section
entitled "Investment policies and risks."
This prospectus contains facts that can help you decide if the Fund
is the right investment for you. Read it before you invest and
keep it for future reference.
Additional facts about the Fund are in a Statement of Additional
Information (SAI), filed with the Securities and Exchange
Commission (SEC) and available for reference, along with other
related materials, on the SEC Internet Website
(http://www.sec.gov). The SAI, dated July 30, 1996, is
incorporated here by reference. For a free copy, contact American
Express Shareholder Service.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENTS IN THE FUND INVOLVE
INVESTMENT RISK INCLUDING POSSIBLE LOSS OF PRINCIPAL.
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN
55440-0534
612-671-3733
TTY: 800-846-4852
<PAGE>
PAGE 49
The Fund in brief
Goals
Investment policies and risks
Structure of the Fund
Manager and distributor
Portfolio manager
Alternative purchase arrangements
Sales charge and Fund expenses
Performance
Financial highlights
Total returns
Yield
Investment policies and risks
Facts about investments and their risks
Valuing Fund shares
How to purchase, exchange or redeem shares
Alternative purchase arrangements
How to purchase shares
How to exchange shares
How to redeem shares
Reductions and waivers of the sales charge
Special shareholder services
Services
Quick telephone reference
Distributions and taxes
Dividend and capital gain distributions
Reinvestments
Taxes
How to determine the correct TIN
How the Fund is organized
Shares
Voting rights
Shareholder meetings
Special considerations regarding master/feeder structure
Board members and officers
Investment manager
Administrator and transfer agent
Distributor
About American Express Financial Corporation
General information
Appendices
Description of corporate bond ratings
Descriptions of derivative instruments
<PAGE>
PAGE 50
The Fund in brief
Goals
IDS Extra Income Fund (the Fund) seeks to provide shareholders with
current income as its primary goal and capital growth as its
secondary goal. It does so by investing all of its assets in High
Yield Portfolio (the Portfolio) of Income Trust (the Trust). Both
the Fund and the Portfolio are diversified investment companies
that have the same goals. Because any investment involves risk,
achieving these goals cannot be guaranteed. Goals can be changed
only by holders of a majority of outstanding securities.
The Fund may withdraw its assets from the Portfolio at any time if
the board determines that it is in the best interests of the Fund
to do so. In such event, the Fund would consider what action
should be taken, including whether to retain an investment advisor
to manage the Fund's assets directly or to reinvest all of the
Fund's assets in another pooled investment entity.
Investment policies and risks
Both the Fund and the Portfolio have the same investment policies.
Accordingly, the Portfolio invests primarily in long-term, high-
yielding, high risk debt securities below investment grade issued
by U.S. and foreign corporations. These securities are commonly
known as junk bonds. They generally involve greater volatility of
price and risk of principal and income than higher rated
securities.
The Portfolio also invests in government securities, investment-
grade bonds, convertible securities, common and preferred stocks,
derivative instruments and money market instruments. Investment
policies may be changed by the boards.
<PAGE>
PAGE 51
Structure of the Fund
This Fund uses what is commonly known as a master/feeder structure.
This means that it is a feeder fund that invests all of its assets
in the Portfolio which is its master fund. The Portfolio actually
invests in and manages the securities and has the same goal and
investment policies as the Fund. This structure is described in
more detail in the section captioned "Special considerations
regarding master/feeder structure". Here is an illustration of the
structure:
Investors
buy shares in the Fund
The Fund
invests in the Portfolio
The Portfolio invests in securities,
such as stocks or bonds
Manager and distributor
The Portfolio is managed by American Express Financial Corporation
(AEFC), a provider of financial services since 1894. AEFC
currently manages more than $52 billion in assets. Shares of the
Fund are sold through American Express Financial Advisors Inc., a
wholly owned subsidiary of AEFC.
Portfolio manager
Jack Utter joined AEFC in 1962 and serves as vice president and
senior portfolio manager. He has managed the assets of this Fund
since 1985 and serves as portfolio manager of the Portfolio. He
also became portfolio manager of IDS Life Income Advantage Fund in
1996.
Alternative purchase arrangements
The Fund offers its shares in three classes. Class A shares are
subject to a sales charge at the time of purchase. Class B shares
are subject to a contingent deferred sales charge (CDSC) on
redemptions made within six years of purchase and an annual
distribution (12b-1) fee. Class Y shares are sold without a sales
charge to qualifying institutional investors.
<PAGE>
PAGE 52
Sales charge and Fund expenses
Shareholder transaction expenses are incurred directly by an
investor on the purchase or redemption of Fund shares. Fund
operating expenses are paid out of Fund assets for each class of
shares and include expenses charged by both the Fund and the
Portfolio. Operating expenses are reflected in the Fund's daily
share price and dividends, and are not charged directly to
shareholder accounts.
Shareholder transaction expenses
Class A Class B Class Y
Maximum sales charge on purchases*
(as a percentage of offering price).......5% 0% 0%
Maximum deferred sales charge
imposed on redemptions (as a
percentage of original purchase price)....0% 5% 0%
Annual Fund and allocated Portfolio operating expenses+
(% of average daily net assets):
Class A Class B Class Y
Management fee** 0.57% 0.57% 0.57%
12b-1 fee 0.00% 0.75% 0.00%
Other expenses*** 0.37% 0.38% 0.19%
Total**** 0.94% 1.70% 0.76%
*This charge may be reduced depending on your total investments in
IDS funds. See "Reductions of the sales charge."
**The management fee is paid by the Trust on behalf of the
Portfolio.
***Other expenses include an administrative services fee, a
shareholder services fee for Class A and Class B, a transfer agency
fee and other non-advisory expenses.
****The Fund changed to a master/feeder structure on June 10, 1996.
The Board considered whether the aggregate expenses of the Fund and
the Portfolio would be more or less than if the Fund invested
directly in the type of securities being held by the Portfolio.
American Express Financial Corporation has agreed to pay the small
additional costs required to use a master/feeder structure to
manage the investment portfolio during the first year of its
operation and half of such costs in the second year. These
additional costs may be more than offset in subsequent years if the
assets being managed increase.
+Expenses are based on actual annualized expenses for the period
from Sept. 1, 1995 to May 31, 1996.
<PAGE>
PAGE 53
Example: Suppose for each year for the next 10 years, Fund
expenses are as above and annual return is 5%. If you sold your
shares at the end of the following years, for each $1,000 invested,
you would pay total expenses of:
1 year 3 years 5 years 10 years
Class A $ 59 $ 78 $ 99 $ 160
Class B $ 67 $ 94 $112 $ 181 **
Class B* $ 17 $ 54 $ 92 $ 181 **
Class Y $ 8 $ 24 $ 42 $ 95
*Assuming Class B shares are not redeemed at the end of the period.
**Based on conversion of Class B shares to Class A shares after
eight years.
This example does not represent actual expenses, past or future.
Actual expenses may be higher or lower than those shown. Because
Class B pays annual distribution (12b-1) fees, long-term
shareholders of Class B may indirectly pay an equivalent of more
than a 6.25% sales charge, the maximum permitted by the National
Association of Securities Dealers.
<PAGE>
PAGE 54
Performance
Financial highlights
<TABLE>
<CAPTION>
IDS Extra Income Fund, Inc.
Performance
Financial highlights
Fiscal period ended May 31,
Per share income and capital changes*
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996** 1995 1994 1993 1992 1991 1990 1989 1988 1987
Net asset value, $4.15 $4.02 $4.44 $4.24 $3.72 $3.47 $4.46 $4.67 $4.94 $5.16
beginning of period
Income from investment operations:
Net investment income .28 .39 .43 .47 .44 .42 .46 .53 .53 .53
Net gains (losses) .20 .13 (.42) .16 .52 .24 (1.01) (.20) (.27) (.12)
(both realized
and unrealized)
Total from investment .48 .52 .01 .63 .96 .66 (.55) .33 .26 .41
operations
Less distributions:
Dividends from net (.29) (.39) (.43) (.43) (.44) (.41) (.44) (.54) (.53) (.53)
investment income
Distributions from -- -- -- -- -- -- -- -- -- (.10)
realized gains
Total distributions (.29) (.39) (.43) (.43) (.44) (.41) (.44) (.54) (.53) (.63)
Net asset value, $4.34 $4.15 $4.02 $4.44 $4.24 $3.72 $3.47 $4.46 $4.67 $4.94
end of period
Ratios/supplemental data
Class A
1996** 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net assets, end of $2,145 $1,822 $1,626 $1,547 $1,304 $990 $931 $1,302 $1,186 $1,110
period (in millions)
Ratio of expenses to .94%+ .87% .79% .81% .83% .88% .84% .82% .81% .82%
average daily net assets
Ratio of net income 8.90%+ 9.93% 9.85% 10.03% 11.13% 12.45% 12.28% 11.67% 11.38% 10.34%
to average
daily net assets
Portfolio turnover rate 61% 70% 74% 70% 89% 88% 88% 102% 105% 87%
(excluding short-term
securities)
Total return++ 11.7% 14.2% (0.2%) 15.8% 26.9% 21.2% (12.5%) 7.4% 5.8% 8.3%
*For a share outstanding throughout the period. Rounded to the nearest cent.
**The Fund's fiscal year-end changed from Aug. 31 to May 31, effective 1996.
+Adjusted to an annual basis.
++Total return does not reflect payment of a sales charge.
/TABLE
<PAGE>
PAGE 55
IDS Extra Income Fund, Inc.
<TABLE><CAPTION>
Fiscal period ended May 31,
Per share income and capital changes*
Class B Class Y
<S> <C> <C> <C> <C>
1996++ 1995** 1996++ 1995**
Net asset value, $4.15 $3.93 $4.15 $3.93
beginning of period
Income from investment operations:
Net investment income .25 .18 .28 .20
Net gains .20 .21 .20 .21
(both realized
and unrealized)
Total from investment .45 .39 .48 .41
operations
Less distributions:
Dividends from net (.26) (.17) (.29) (.19)
investment income
Net asset value, $4.34 $4.15 $4.34 $4.15
end of period
Ratios/supplemental data
Class B Class Y
1996++ 1995** 1996++ 1995**
Net assets, end of $270 $76 -- $2
period (in millions)
Ratio of expenses to 1.70%+ 1.72%+ .76%+ .78%+
average daily net assets
Ratio of net income 8.34%+ 9.51%+ 8.24%+ 10.19%+
to average
daily net assets
Portfolio turnover rate 61% 70% 61% 70%
(excluding short-term
securities)
Total return*** 11.1% 9.9% 11.8% 10.4%
*For a share outstanding throughout the period. Rounded to the nearest cent.
**Inception date was March 20, 1995 for Class B and Class Y.
***Total return does not reflect payment of a sales charge.
+Adjusted to an annual basis.
++The Fund's fiscal year-end was changed from Aug. 31 to May 31, effective 1996.
The information in these tables has been audited by KPMG Peat Marwick LLP, independent
auditors. The independent auditors' report and additional information about the performance
of the Fund are contained in the Fund's annual report which, if not included with this
prospectus, may be obtained without charge.
</TABLE>
<PAGE>
PAGE 56
Total returns
Total return is the sum of all of your returns for a given period,
assuming you reinvest all distributions. It is calculated by
taking the total value of shares you own at the end of the period
(including shares acquired by reinvestment), less the price of
shares you purchased at the beginning of the period. Average
annual total return is the annually compounded rate of return over
a given time period (usually two or more years). It is the total
return for the period converted to an equivalent annual figure.
Average annual total returns as of May 31, 1996
Purchase 1 year 5 years 10 years or
made ago ago since inception
Extra Income:
Class A + 9.80% +13.81% + 8.94%
Class B* +10.12% --% +12.44%
Class Y* +15.72% --% +19.04%
Lehman
Aggregate
Bond Index + 3.76% + 7.89% + 8.65%
*Inception date was March 20, 1995.
Cumulative total returns as of May 31, 1996
Purchase 1 year 5 years 10 years or
made ago ago since inception
Extra Income:
Class A + 9.80% +90.94% +135.44%
Class B* +10.12% --% 15.24%
Class Y* +15.72% --% 22.55%
Lehman
Aggregate
Bond Index + 3.76% +46.25% +129.42%
*Inception date was March 20, 1995.
These examples show total returns from hypothetical investments in
Class A, Class B and Class Y shares of the Fund. These returns are
compared to those of a popular index for the same periods. The
performance of Class B and Class Y will vary from the performance
of Class A based on differences in sales charges and fees. March
20, 1995 was the inception date for Class B and Class Y. Past
performance for Class Y for the periods prior to March 20, 1995 may
be calculated based on the performance of Class A, adjusted to
reflect differences in sales charges although not for other
differences in expenses.
<PAGE>
PAGE 57
For purposes of calculation, information about the Fund assumes:
o a sales charge of 5% for Class A shares
o redemption at the end of the period and deduction
of the applicable contingent deferred sales charge
for Class B shares
o no sales charge for Class Y shares
o no adjustments for taxes an investor may have paid
on the reinvested income and capital gains
o a period of widely fluctuating securities prices.
Returns shown should not be considered a
representation of the Fund's future performance.
Lehman Aggregate Bond Index is made up of an unmanaged,
representative list of government and corporate bonds as well as
asset-backed and mortgage-backed securities. The index is
frequently used as a general measure of bond market performance.
However, the securities used to create the index may not be
representative of the bonds held in the Fund. The index reflects
reinvestment of all distributions and changes in market prices, but
excludes brokerage commissions or other fees.
Yield
Yield is the net investment income earned per share for a specified
time period, divided by the offering price at the end of the
period. The Fund's annualized yield for the 30-day period ended
May 31, 1996, was 7.91% for Class A, 7.57% for Class B and 8.54%
for Class Y. The Fund calculates this 30-day annualized yield by
dividing:
o net investment income per share deemed earned
during a 30-day period by
o the public offering price per share on the last day
of the period, and
o converting the result to a yearly equivalent
figure.
This yield calculation does not include any contingent deferred
sales charge, ranging from 5% to 0% on Class B shares, which would
reduce the yield quoted.
The Fund's yield varies from day to day, mainly because share
values and offering prices (which are calculated daily) vary in
response to changes in interest rates. Net investment income
normally changes much less in the short run. Thus, when interest
rates rise and share values fall, yield tends to rise. When
interest rates fall, yield tends to follow.
Past yields should not be considered an indicator of future yields.
<PAGE>
PAGE 58
Investment policies and risks
The Fund and the Portfolio have the same investment policies.
These policies may be changed by the boards. The Portfolio
primarily invests in debt securities below investment grade issued
by U.S. and foreign corporations. Most of these will be rated BBB,
BB, or B by Standard & Poor's Corporation (S&P) or the Moody's
Investors Service, Inc. (Moody's) equivalent. However,the
Portfolio may invest in debt securities with lower ratings,
including those in default. Other investments include investment-
grade bonds, convertible securities, stocks, derivative instruments
and money market instruments.
The various types of investments the portfolio manager uses to
achieve investment performance are described in more detail in the
next section and in the SAI.
Facts about investments and their risks
Debt securities: The price of bonds generally falls as interest
rates increase, and rises as interest rates decrease. The price of
bonds also fluctuates if the credit rating is upgraded or
downgraded.
The price of bonds below investment grade may react more to the
ability of a company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations,
are more likely to experience a default, and sometimes are referred
to as junk bonds. Reduced market liquidity for these bonds may
occasionally make it more difficult to value them. In valuing
bonds, the Portfolio relies both on independent rating agencies and
the investment manager's credit analysis. Securities that are
subsequently downgraded in quality may continue to be held by the
Portfolio and will be sold only when the Portfolio's investment
manager believes it is advantageous to do so.
<PAGE>
PAGE 59
Bond ratings and holdings for the fiscal period ending May 31, 1996
<TABLE><CAPTION>
Percent of
S&P Rating Protection of net assets in
Percent of (or Moody's principal and unrated securities
net assets equivalent) interest assessed by AEFC
<S> <C> <C> <C>
1.28% AAA Highest quality -- %
0.27 AA High quality --
0.02 A Upper medium grade --
0.38 BBB Medium grade 0.19
23.24 BB Moderately speculative 0.30
52.97 B Speculative 2.49
6.40 CCC Highly speculative 3.39
0.52 CC Poor quality --
0.19 C Lowest quality --
__ D In default --
8.36 Unrated Unrated securities 1.99
(See Appendix to this prospectus describing corporate bond ratings
for further information.)
</TABLE>
Debt securities sold at a deep discount: Some bonds are sold at
deep discounts because they do not pay interest until maturity.
They include zero coupon bonds and PIK (pay-in-kind) bonds. To
comply with tax laws, the Portfolio has to recognize a computed
amount of interest income and pay dividends to shareholders even
though no cash has been received. In some instances, the Portfolio
may have to sell securities to have sufficient cash to pay the
dividends.
Convertible securities: These securities generally are preferred
stocks or bonds that can be exchanged for other securities, usually
common stock, at prestated prices. When the trading price of the
common stock makes the exchange likely, the convertible securities
trade more like common stock.
Preferred stocks: If a company earns a profit, it generally must
pay its preferred stockholders a dividend at a pre-established
rate.
<PAGE>
PAGE 60
Common stocks: Stock prices are subject to market fluctuations.
Stocks of smaller companies may be subject to more abrupt or
erratic price movements than stocks of larger, established
companies or the stock market as a whole. The Portfolio may invest
up to 10% of its total assets in common stocks, preferred stocks
that do not pay dividends and warrants to purchase common stocks.
Foreign investments: Securities of foreign companies and
governments may be traded in the United States, but often they are
traded only on foreign markets. Frequently, there is less
information about foreign companies and less government supervision
of foreign markets. Foreign investments are subject to political
and economic risks of the countries in which the investments are
made, including the possibility of seizure or nationalization of
companies, imposition of withholding taxes on income, establishment
of exchange controls or adoption of other restrictions that might
affect an investment adversely. If an investment is made in a
foreign market, the local currency may be purchased using a forward
contract in which the price of the foreign currency in U.S. dollars
is established on the date the trade is made, but delivery of the
currency is not made until the securities are received. As long as
the Portfolio holds foreign currencies or securities valued in
foreign currencies, the value of those assets will be affected by
changes in the value of the currencies relative to the U.S. dollar.
Because of the limited trading volume in some foreign markets,
efforts to buy or sell a security may change the price of the
security, and it may be difficult to complete the transaction. The
Portfolio may invest up to 25% of its total assets in foreign
investments.
Derivative instruments: The portfolio manager may use derivative
instruments in addition to securities to achieve investment
performance. Derivative instruments include futures, options and
forward contracts. Such instruments may be used to maintain cash
reserves while remaining fully invested, to offset anticipated
declines in values of investments, to facilitate trading, to reduce
transaction costs or to pursue higher investment returns.
Derivative instruments are characterized by<PAGE>
PAGE 61
requiring little or no initial payment and a daily change in price
based on or derived from a security, a currency, a group of
securities or currencies, or an index. A number of strategies or
combination of instruments can be used to achieve the desired
investment performance characteristics. A small change in the
value of the underlying security, currency or index will cause a
sizable gain or loss in the price of the derivative instrument.
Derivative instruments allow the portfolio manager to change the
investment performance
characteristics very quickly and at lower costs. Risks include
losses of premiums, rapid changes in prices, defaults by other
parties and inability to close such instruments. The Portfolio
will use derivative instruments only to achieve the same investment
performance characteristics it could achieve by directly holding
those securities and currencies permitted under the investment
policies. The Portfolio will designate cash or appropriate liquid
assets to cover its portfolio obligations. No more than 5% of the
Portfolio's net assets can be used at any one time for good faith
deposits on futures and premiums for options on futures that do not
offset existing investment positions. This does not, however,
limit the portion of the Portfolio's assets at risk to 5%. The
Portfolio is not limited as to the percentage of its assets that
may be invested in permissible investments, including derivatives,
except as otherwise explicitly provided in this prospectus or the
SAI. For descriptions of these and other types of derivative
instruments, see the Appendix to this prospectus and the SAI.
<PAGE>
PAGE 62
Securities and other instruments that are illiquid: A security or
other instrument is illiquid if it cannot be sold quickly in the
normal course of business. Some investments cannot be resold to
the U.S. public because of their terms or government regulations.
All securities and other instruments, however, can be sold in
private sales, and many may be sold to other institutions and
qualified buyers or on foreign markets. The portfolio manager will
follow guidelines established by the board and consider relevant
factors such as the nature of the security and the number of likely
buyers when determining whether a security is illiquid. No more
than 10% of the Portfolio's net assets will be held in securities
and other instruments that are illiquid.
Money market instruments: Short-term debt securities rated in the
top two grades or the equivalent are used to meet daily cash needs
and at various times to hold assets until better investment
opportunities arise. Generally less than 25% of the Portfolio's
total assets are in these money market instruments. However, for
temporary defensive purposes these investments could exceed that
amount for a limited period of time.
Lending portfolio securities: The Portfolio may lend its
securities to earn income so long as borrowers provide collateral
equal to the market value of the loans. The risks are that
borrowers will not provide collateral when required or return
securities when due. Unless a majority of the outstanding voting
securities approve otherwise, loans may not exceed 30% of net
assets.
<PAGE>
PAGE 63
Valuing Fund shares
The public offering price is the net asset value (NAV) adjusted for
the sales charge for Class A. It is the NAV for Class B and Class
Y.
The NAV is the value of a single Fund share. The NAV usually
changes daily, and is calculated at the close of business, normally
3 p.m. Central time, each business day (any day the New York Stock
Exchange is open). NAV generally declines as interest rates
increase and rises as interest rates decline.
To establish the net assets, all securities held by the Portfolio
are valued as of the close of each business day. In valuing
assets:
o Securities (except bonds) and assets with available
market values are valued on that basis.
o Securities maturing in 60 days or less are valued
at amortized cost.
o Bonds and assets without readily available market
values are valued according to methods selected in
good faith by the board.
<PAGE>
PAGE 64
How to purchase, exchange or redeem shares
Alternative purchase arrangements
The Fund offers three different classes of shares - Class A, Class
B and Class Y. The primary differences among the classes are in
the sales charge structures and in their ongoing expenses. These
differences are summarized in the table below. You may choose the
class that best suits your circumstances and objectives.
<TABLE><CAPTION>
Sales charge and
distribution
(12b-1) fee Service fee Other information
<S> <C> <C> <C>
Class A Maximum initial 0.175% of average Initial sales charge
sales charge of daily net assets waived or reduced
5%; no 12b-1 fee for certain purchases
Class B No initial sales 0.175% of average Shares convert to
charge; maximum CDSC daily net assets Class A after eight
of 5% declines to 0% years; CDSC waived in
after six years; 12b-1 certain circumstances
fee of 0.75% of average
daily net assets
Class Y None None Available only to
certain qualifying
institutional
investors
</TABLE>
Conversion of Class B shares to Class A shares - Eight calendar
years after Class B shares are originally purchased, Class B shares
will convert to Class A shares and will no longer be subject to a
distribution fee. The conversion will be on the basis of relative
net asset values of the two classes, without the imposition of any
sales charge. Class B shares purchased through reinvested
dividends and distributions will convert to Class A shares in a pro
rata portion as the Class B shares purchased other than through
reinvestment.
<PAGE>
PAGE 65
Considerations in determining whether to purchase Class A or Class
B shares - You should consider the information below in determining
whether to purchase Class A or Class B shares. The sales charges
and distribution fee (included in "Ongoing expenses") are
structured so that you will have approximately the same total
return at the end of eight years regardless of which class you
chose.
Sales charges on purchase or redemption
If you purchase Class A If you purchase Class B
shares shares
o You will not have all o All of your money is
of your purchase price invested in shares of
invested. Part of your stock. However, you will
purchase price will go pay a sales charge if you
to pay the sales charge. redeem your shares within
You will not pay a sales six years of purchase.
charge when you redeem
your shares.
o You will be able to o No reductions of the
take advantage of sales charge are
reductions in the sales available for large
charge. purchases.
If your investments in IDS funds that are subject to a sales charge
total $250,000 or more, you are better off paying the reduced sales
charge in Class A than paying the higher fees in Class B. If you
qualify for a waiver of the sales charge, you should purchase Class
A shares.
Ongoing expenses
If you purchase Class A If you purchase Class B
shares shares
o Your shares will have o The distribution and
a lower expense ratio transfer agency fees for
than Class B shares Class B will cause your
because Class A does not shares to have a higher
pay a distribution fee expense ratio and to pay
and the transfer agency lower dividends than
fee for Class A is lower Class A shares. After
than the fee for Class B. eight years, Class B
As a result, Class A shares shares will convert to
will pay higher dividends Class A shares and will
than Class B shares. no longer be subject to
higher fees.
<PAGE>
PAGE 66
You should consider how long you plan to hold your shares and
whether the accumulated higher fees and CDSC on Class B shares
prior to conversion would be less than the initial sales charge on
Class A shares. Also consider to what extent the difference would
be offset by the lower expenses on Class A shares. To help you in
this analysis, the example in the "Sales charge and Fund expenses"
section of the prospectus illustrates the charges applicable to
each class of shares.
<PAGE>
PAGE 67
Class Y shares - Class Y shares are offered to certain
institutional investors. Class Y shares are sold without a front-
end sales charge or a CDSC and are not subject to either a service
fee or a distribution fee. The following investors are eligible to
purchase Class Y shares:
o Qualified employee benefit plans* if the plan:
- uses a daily transfer recordkeeping service
offering participants daily access to IDS funds and
has
- at least $10 million in plan assets or
- 500 or more participants; or
- does not use daily transfer recordkeeping and has
- at least $3 million invested in funds of the IDS
MUTUAL FUND GROUP or
- 500 or more participants.
o Trust companies or similar institutions, and
charitable organizations that meet the definition
in Section 501(c)(3) of the Internal Revenue Code.*
These must have at least $10 million invested in
funds of the IDS MUTUAL FUND GROUP.
o Nonqualified deferred compensation plans* whose
participants are included in a qualified employee
benefit plan described above.
* Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
How to purchase shares
If you're investing in this Fund for the first time, you'll need to
set up an account. Your financial advisor will help you fill out
and submit an application. Once your account is set up, you can
choose among several convenient ways to invest.
Important: When opening an account, you must provide AEFC with
your correct Taxpayer Identification Number (Social Security or
Employer Identification number). See "Distributions and taxes."
When you purchase shares for a new or existing account, the price
you pay per share is determined at the close of business on the day
your investment is received and accepted at the Minneapolis
headquarters.
<PAGE>
PAGE 68
Purchase policies:
o Investments must be received and accepted in the
Minneapolis headquarters on a business day before 3
p.m. Central time to be included in your account
that day and to receive that day's share price.
Otherwise, your purchase will be processed the next
business day and you will pay the next day's share
price.
o The minimums allowed for investment may change from
time to time.
o Wire orders can be accepted only on days when your
bank, AEFC, the Fund and Norwest Bank Minneapolis
are open for business.
o Wire purchases are completed when wired payment is
received and the Fund accepts the purchase.
o AEFC and the Fund are not responsible for any
delays that occur in wiring funds, including delays
in processing by the bank.
o You must pay any fee the bank charges for wiring.
o The Fund reserves the right to reject any
application for any reason.
o If your application does not specify which class of
shares you are purchasing, it will be assumed that
you are investing in Class A shares.
<PAGE>
PAGE 69
<TABLE><CAPTION>
Three ways to invest
<S> <C> <C>
1
By regular account Send your check and application Minimum amounts
(or your name and account number Initial investment: $2,000
if you have an established account) Additional
to: investments: $ 100
American Express Financial Advisors Inc. Account balances: $ 300*
P.O. Box 74 Qualified retirement
Minneapolis, MN 55440-0074 accounts: none
Your financial advisor will help
you with this process.
2
By scheduled Contact your financial advisor Minimum amounts
investment plan to set up one of the following Initial investment: $100
scheduled plans: Additional
investments: $100/mo.
o automatic payroll deduction Account balances: none
(on active plans of
o bank authorization monthly payments)
o direct deposit of
Social Security check
o other plan approved by the Fund
3
By wire If you have an established account, If this information is not
you may wire money to: included, the order may be
rejected and all money
Norwest Bank Minneapolis received by the Fund, less
Routing No. 091000019 any costs the Fund or AEFC
Minneapolis, MN incurs, will be returned
Attn: Domestic Wire Dept. promptly.
Give these instructions: Minimum amounts
Credit IDS Account #00-30-015 Each wire investment: $1,000
for personal account # (your
account number) for (your name).
*If your account balance falls below $300, you will be asked in writing to bring it up to $300 or establish a scheduled
investment plan. If you don't do so within 30 days, your shares can be redeemed and the proceeds mailed to you.
/TABLE
<PAGE>
PAGE 70
How to exchange shares
You can exchange your shares of the Fund at no charge for shares of
the same class of any other publicly offered fund in the IDS MUTUAL
FUND GROUP available in your state. Exchanges into IDS Tax-Free
Money Fund must be made from Class A shares. For complete
information, including fees and expenses, read the prospectus
carefully before exchanging into a new fund.
If your exchange request arrives at the Minneapolis headquarters
before the close of business, your shares will be redeemed at the
net asset value set for that day. The proceeds will be used to
purchase new fund shares the same day. Otherwise, your exchange
will take place the next business day at that day's net asset
value.
For tax purposes, an exchange represents a redemption and purchase
and may result in a gain or loss. However, you cannot create a tax
loss (or reduce a taxable gain) by exchanging from the Fund within
91 days of your purchase. For further explanation, see the SAI.
How to redeem shares
You can redeem your shares at any time. American Express
Shareholder Service will mail payment within seven days after
receiving your request.
When you redeem shares, the amount you receive may be more or less
than the amount you invested. Your shares will be redeemed at net
asset value, minus any applicable sales charge, at the close of
business on the day your request is accepted at the Minneapolis
headquarters. If your request arrives after the close of business,
the price per share will be the net asset value, minus any
applicable sales charge, at the close of business on the next
business day.
A redemption is a taxable transaction. If your proceeds from your
redemption are more or less than the cost of your shares, you will
have a gain or loss, which can affect your tax liability.
Redeeming shares held in an IRA or qualified retirement account may
subject you to certain federal taxes, penalties and reporting
requirements. Consult your tax advisor.
<PAGE>
PAGE 71
<TABLE><CAPTION>
Two ways to request an exchange or redemption of shares'
<S> <C>
1
By letter Include in your letter:
o the name of the fund(s)
o the class of shares to be exchanged or redeemed
o your account number(s) (for exchanges, both funds must be registered in the same ownership)
o your Taxpayer Identification Number (TIN)
o the dollar amount or number of shares you want to exchange or redeem
o signature of all registered account owners
o for redemptions, indicate how you want your money delivered to you
o any paper certificates of shares you hold
Regular mail:
American Express Shareholder Service
Attn: Redemptions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Shareholder Service
Attn: Redemptions
733 Marquette Ave.
Minneapolis, MN 55402
2
By phone
American Express Telephone o The Fund and AEFC will honor any telephone exchange or redemption request believed to be
Transaction Service: authentic and will use reasonable procedures to confirm that they are. This includes
800-437-3133 or asking identifying questions and tape recording calls. If reasonable procedures are not
612-671-3800 followed, the Fund or AEFC will be liable for any loss resulting from fraudulent requests.
o Phone exchange and redemption privileges automatically apply to all accounts except custodial,
corporate or qualified retirement accounts unless you request these privileges NOT apply by
writing American Express Shareholder Service. Each registered owner must sign the request.
o AEFC answers phone requests promptly, but you may experience delays when call volume is high.
If you are unable to get through, use mail procedure as an alternative.
o Acting on your instructions, your financial advisor may conduct telephone transactions on your
behalf.
o Phone privileges may be modified or discontinued at any time.
Minimum amount
Redemption: $100
Maximum amount
Redemption: $50,000
/TABLE
<PAGE>
PAGE 72
Exchange policies:
o You may make up to three exchanges within any 30-
day period, with each limited to $300,000. These
limits do not apply to scheduled exchange programs
and certain employee benefit plans or other
arrangements through which one shareholder
represents the interests of several. Exceptions
may be allowed with pre-approval of the Fund.
o Exchanges must be made into the same class of
shares of the new fund.
o If your exchange creates a new account, it must
satisfy the minimum investment amount for new
purchases.
o Once we receive your exchange request, you cannot
cancel it.
o Shares of the new fund may not be used on the same
day for another exchange.
o If your shares are pledged as collateral, the
exchange will be delayed until written approval is
obtained from the secured party.
o AEFC and the Fund reserve the right to reject any
exchange, limit the amount, or modify or
discontinue the exchange privilege, to prevent
abuse or adverse effects on the Fund and its
shareholders. For example, if exchanges are too
numerous or too large, they may disrupt the Fund's
investment strategies or increase its costs.
<PAGE>
PAGE 73
Redemption policies:
o A "change of mind" option allows you to change your
mind after requesting a redemption and to use all
or part of the proceeds to purchase new shares in
the same class from which you redeemed. If you
reinvest in Class A, you will purchase the new
shares at net asset value rather than the offering
price on the date of a new purchase. If you
reinvest in Class B, any CDSC you paid on the
amount you are reinvesting also will be reinvested.
To take advantage of this option, send a written
request within 30 days of the date your redemption
request was received. Include your account number
and mention this option. This privilege may be
limited or withdrawn at any time, and it may have
tax consequences.
o A telephone redemption request will not be allowed
within 30 days of a phoned-in address change.
Important: If you request a redemption of shares you recently
purchased by a check or money order that is not guaranteed, the
Fund will wait for your check to clear. It may take up to 10 days
from the date of purchase before a check is mailed to you. (A
check may be mailed earlier if your bank provides evidence
satisfactory to the Fund and AEFC that your check has cleared.)
<PAGE>
PAGE 74
<TABLE><CAPTION>
Three ways to receive payment when you redeem shares
<S> <C>
1
By regular or express mail o Mailed to the address on record.
o Payable to names listed on the account.
NOTE: The express mail delivery charges
you pay will vary depending on the
courier you select.
2
By wire o Minimum wire redemption: $1,000.
o Request that money be wired to your bank.
o Bank account must be in the same
ownership as the IDS fund account.
NOTE: Pre-authorization required. For
instructions, contact your financial
advisor or American Express Shareholder Service.
3
By scheduled payout plan o Minimum payment: $50.
o Contact your financial advisor or American Express
Shareholder Service to set up regular
payments to you on a monthly, bimonthly,
quarterly, semiannual or annual basis.
o Purchasing new shares while under a payout
plan may be disadvantageous because of
the sales charges.
/TABLE
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Reductions and waivers of the sales charge
Class A - initial sales charge alternative
On purchases of Class A shares, you pay a 5% sales charge on the
first $50,000 of your total investment and less on investments
after the first $50,000:
Total investment Sales charge as a
percent of:*
Public Net
offering amount
price invested
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
* To calculate the actual sales charge on an investment greater
than $50,000 and less than $1,000,000, amounts for each applicable
increment must be totaled. See the SAI.
Reductions of the sales charge on Class A shares
Your sales charge may be reduced, depending on the totals of:
o the amount you are investing in this Fund now,
o the amount of your existing investment in this
Fund, if any, and
o the amount you and your primary household group are
investing or have in other funds in the IDS MUTUAL
FUND GROUP that carry a sales charge (The primary
household group consists of accounts in any
ownership for spouses or domestic partners and
their unmarried children under 21. Domestic
partners are individuals who maintain a shared
primary residence and have joint property or other
insurable interests.)
Other policies that affect your sales charge:
o IDS Tax-Free Money Fund and Class A shares of IDS
Cash Management Fund do not carry sales charges.
However, you may count investments in these funds
if you acquired shares in them by exchanging shares
from IDS funds that carry sales charges.
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PAGE 76
o IRA purchases or other employee benefit plan
purchases made through a payroll deduction plan or
through a plan sponsored by an employer,
association of employers, employee organization or
other similar entity, may be added together to
reduce sales charges for all shares purchased
through that plan.
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PAGE 77
o If you intend to invest $1 million over a period of
13 months, you can reduce the sales charges in
Class A by filing a letter of intent.
For more details, see the SAI.
Waivers of the sales charge for Class A shares
Sales charges do not apply to:
o Current or retired board members, officers or employees of the
Fund or AEFC or its subsidiaries, their spouses and unmarried
children under 21.
o Current or retired American Express financial advisors, their
spouses and unmarried children under 21.
o Qualified employee benefit plans* using a daily transfer
recordkeeping system offering participants daily access to IDS
funds.
(Participants in certain qualified plans for which the initial
sales charge is waived may be subject to a deferred sales charge of
up to 4% on certain redemptions. For more information, see the
SAI.)
o Shareholders who have at least $1 million invested in funds of
the IDS MUTUAL FUND GROUP. If the investment is redeemed in the
first year after purchase, a CDSC of 1% will be charged on the
redemption.
o Purchases made within 30 days after a redemption of shares (up
to the amount redeemed):
- of a product distributed by American Express
Financial Advisors in a qualified plan subject to a
deferred sales charge or
- in a qualified plan where American Express Trust
Company has a recordkeeping, trustee, investment
management or investment servicing relationship.
Send the Fund a written request along with your payment, indicating
the amount of the redemption and the date on which it occurred.
o Purchases made with dividend or capital gain distributions from
another fund in the IDS MUTUAL FUND GROUP that has a sales charge.
o Purchases made through American Express Strategic Portfolio
Service (total amount of all investments made in the Strategic
Portfolio Service must be at least $50,000).
o Purchases made under the University of Texas System ORP.
*Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
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PAGE 78
Class B - contingent deferred sales charge alternative
Where a CDSC is imposed on a redemption, it is based on the amount
of the redemption and the number of calendar years, including the
year of purchase, between purchase and redemption. The following
table shows the declining scale of percentages that apply to
redemptions during each year after a purchase:
If a redemption is The percentage rate
made during the for the CDSC is:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are redeeming reduces the current net asset value
of your investment in Class B shares below the total dollar amount
of all your purchase payments during the last six years (including
the year in which your redemption is made), the CDSC is based on
the lower of the redeemed purchase payments or market value.
The following example illustrates how the CDSC is applied. Assume
you had invested $10,000 in Class B shares and that your investment
had appreciated in value to $12,000 after 15 months, including
reinvested dividend and capital gain distributions. You could
redeem any amount up to $2,000 without paying a CDSC ($12,000
current value less $10,000 purchase amount). If you redeemed
$2,500, the CDSC would apply only to the $500 that represented part
of your original purchase price. The CDSC rate would be 4% because
a redemption after 15 months would take place during the second
year after purchase.
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PAGE 79
Because the CDSC is imposed only on redemptions that reduce the
total of your purchase payments, you never have to pay a CDSC on
any amount you redeem that represents appreciation in the value of
your shares, income earned by your shares or capital gains. In
addition, when determining the rate of any CDSC, your redemption
will be made from the oldest purchase payment you made. Of course,
once a purchase payment is considered to have been redeemed, the
next amount redeemed is the next oldest purchase payment. By
redeeming the oldest purchase payments first, lower CDSCs are
imposed than would otherwise be the case.
Waivers of the contingent deferred sales charge
The CDSC on Class B shares will be waived on redemptions of shares:
o In the event of the shareholder's death,
o Purchased by any board member, officer or employee of a fund or
AEFC or its subsidiaries,
o Held in a trusteed employee benefit plan,
o Held in IRAs or certain qualified plans for which American
Express Trust Company acts as custodian, such as Keogh plans, tax-
sheltered custodial accounts or corporate pension plans, provided
that the shareholder is:
- at least 59-1/2 years old, and
- taking a retirement distribution (if the
redemption is part of a transfer to an IRA or
qualified plan in a product distributed by American
Express Financial Advisors, or a custodian-to-
custodian transfer to a product not distributed
by American Express Financial Advisors, the CDSC
will not be waived), or
- redeeming under an approved substantially equal
periodic payment arrangement.
For investors in Class A shares who have over $1 million invested
in one year, the 1% CDSC on redemption of those shares will be
waived in the same circumstances described for Class B.
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Special shareholder services
Services
To help you track and evaluate the performance of your investments,
AEFC provides these services:
Quarterly statements listing all of your holdings and transactions
during the previous three months.
Yearly tax statements featuring average-cost-basis reporting of
capital gains or losses if you redeem your shares along with
distribution information - which simplifies tax calculations.
A personalized mutual fund progress report detailing returns on
your initial investment and cash-flow activity in your account. It
calculates a total return to reflect your individual history in
owning Fund shares. This report is available from your financial
advisor.
Quick telephone reference
American Express Telephone Transaction Service
Redemptions and exchanges, dividend payments or reinvestments and
automatic payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
American Express Shareholder Service
Fund performance, objectives and account inquiries
612-671-3733
TTY Service
For the hearing impaired
800-846-4852
American Express Infoline
Automated account information (TouchToneR phones only), including
current Fund prices and performance, account values and recent
account transactions
National/Minnesota: 800-272-4445
Mpls./St. Paul area: 671-1630
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PAGE 81
Distributions and taxes
As a shareholder you are entitled to your share of the Fund's net
income and any net gains realized on its investments. The Fund
distributes dividends and capital gain distributions to qualify as
a regulated investment company and to avoid paying corporate income
and excise taxes. Dividend and capital gain distributions will
have tax consequences you should know about.
Dividend and capital gain distributions
Investment income is allocated to the Fund by the Portfolio, less
direct and allocated expenses. The Fund's net realized capital
gains or losses, if any, consist of the net realized capital gains
or losses allocated to the Fund from the Portfolio.
The Fund's net investment income from dividends and interest is
distributed to you monthly as dividends. Short-term capital gains
are distributed at the end of the calendar year and are included in
net investment income. Long-term capital gains are realized
whenever a security held for more than one year is sold for a
higher price than was paid for it. Net realized long-term capital
gains, if any, are distributed at the end of the calendar year as
capital gain distributions.
Before they're distributed, net long-term capital gains are
included in the value of each share. After they're distributed,
the value of each share drops by the per-share amount of the
distribution. (If your distributions are reinvested, the total
value of your holdings will not change.)
Dividends for each class will be calculated at the same time, in
the same manner and will be the same amount prior to deduction of
expenses. Expenses attributable solely to a class of shares will
be paid exclusively by that class. Class B shareholders will
receive lower per share dividends than Class A and Class Y
shareholders because expenses for Class B are higher than for Class
A or Class Y. Class A shareholders will receive lower per share
dividends than Class Y shareholders because expenses for Class A
are higher than for Class Y.
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PAGE 82
Reinvestments
Dividends and capital gain distributions are automatically
reinvested in additional shares in the same class of the Fund,
unless:
o you request the Fund in writing or by phone to pay
distributions to you in cash, or
o you direct the Fund to invest your distributions in
any publicly available IDS fund for which you've
previously opened an account. You pay no sales
charge on shares purchased through reinvestment
from this Fund into any IDS fund.
The reinvestment price is the net asset value at close of business
on the day the distribution is paid. (Your quarterly statement
will confirm the amount invested and the number of shares
purchased.)
If you choose cash distributions, you will receive only those
declared after your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash
distributions, we will reinvest the checks into your account at the
then-current net asset value and make future distributions in the
form of additional shares.
Taxes
The Fund has received a Private Letter Ruling from the Internal
Revenue Service stating that, for purposes of the Internal Revenue
Code, the Fund will be regarded as directly holding its allocable
share of the income and gain realized by the Portfolio.
Distributions are subject to federal income tax and also may be
subject to state and local taxes. Distributions are taxable in the
year the Fund declares them regardless of whether you take them in
cash or reinvest them.
Each January, you will receive a tax statement showing the kinds
and total amount of all distributions you received during the
previous year. You must report distributions on your tax returns,
even if they are reinvested in additional shares.
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PAGE 83
Buying a dividend creates a tax liability. This means buying
shares shortly before a capital gain distribution. You pay the
full pre-distribution price for the shares, then receive a portion
of your investment back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain.
If you sell shares for more than their cost, the difference is a
capital gain. Your gain may be either short term (for shares held
for one year or less) or long term (for shares held for more than
one year).
Your Taxpayer Identification Number (TIN) is important. As with
any financial account you open, you must list your current and
correct Taxpayer Identification Number (TIN) -- either your Social
Security or Employer Identification number. The TIN must be
certified under penalties of perjury on your application when you
open an account at AEFC.
If you don't provide the TIN, or the TIN you report is incorrect,
you could be subject to backup withholding of 31% of taxable
distributions and proceeds from certain sales and exchanges. You
also could be subject to further penalties, such as:
o a $50 penalty for each failure to supply your
correct TIN
o a civil penalty of $500 if you make a false
statement that results in no backup withholding
o criminal penalties for falsifying information
You also could be subject to backup withholding because you failed
to report interest or dividends on your tax return as required.
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PAGE 84
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification number
of:
Individual or joint account The individual or individuals
listed on the account
Custodian account of a minor The minor
(Uniform Gifts/Transfers to
Minors Act)
A living trust The grantor-trustee (the person
who puts the money into the
trust)
An irrevocable trust, pension The legal entity (not the
trust or estate personal representative or
trustee, unless no legal entity
is designated in the account
title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or The organization
tax-exempt organization
For details on TIN requirements, ask your financial advisor or
local American Express Financial Advisors office for federal Form
W-9, "Request for Taxpayer Identification Number and
Certification."
Important: This information is a brief and selective summary of
certain federal tax rules that apply to this Fund. Tax matters are
highly individual and complex, and you should consult a qualified
tax advisor about your personal situation.
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PAGE 85
How the Fund is organized
The Fund is a diversified, open-end management investment company,
as defined in the Investment Company Act of 1940. It was
incorporated on Aug. 17, 1983 in Minnesota. The Fund headquarters
are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-
3268.
Shares
The Fund is owned by its shareholders. The Fund issues shares in
three classes - Class A, Class B and Class Y. Each class has
different sales arrangements and bears different expenses. Each
class represents interests in the assets of the Fund. Par value is
one cent per share. Both full and fractional shares can be issued.
The Fund no longer issues stock certificates.
Voting rights
As a shareholder, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each
share you own. Shares of the Fund have cumulative voting rights.
Each class has exclusive voting rights with respect to the
provisions of the Fund's distribution plan that pertain to a
particular class and other matters for which separate class voting
is appropriate under applicable law.
Shareholder meetings
The Fund does not hold annual shareholder meetings. However, the
board members may call meetings at their discretion, or on demand
by holders of 10% or more of the outstanding shares, to elect or
remove board members.
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Special considerations regarding master/feeder structure
The Fund pursues its goals by investing its assets in a master fund
called the Portfolio. This means that the Fund does not invest
directly in securities; rather the Portfolio invests in and manages
its portfolio of securities. The Portfolio is a separate
investment company, but it has the same goals and investment
policies as the Fund. The goals and investment policies of the
Portfolio are described under the captions "Investment policies and
risks" and "Facts about investments and their risks." Additional
information on investment policies may be found in the SAI.
Board considerations: The board considered the advantages and
disadvantages of investing the Fund's assets in the Portfolio. The
board believes that the master/feeder structure can be in the best
interest of the Fund and its shareholders since it offers the
opportunity for economies of scale. The Fund may redeem all of its
assets from the Portfolio at any time. Should the board determine
that it is in the best interest of the Fund and its shareholders to
terminate its investment in the Portfolio, it would consider hiring
an investment advisor to manage the Fund's assets, or other
appropriate options. The Fund would terminate its investment if
the Portfolio changed its goals, investment policies or
restrictions without the same change being approved by the Fund.
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Other feeders: The Portfolio sells securities to other affiliated
mutual funds and may sell securities to non-affiliated investment
companies and institutional accounts (known as feeders). These
feeders buy the Portfolio's securities on the same terms and
conditions as the Fund and pay their proportionate share of the
Portfolio's expenses. However, their operating costs and sales
charges are different from those of the Fund. Therefore, the
investment returns for other feeders are different from the returns
of the Fund. Information about other feeders may be obtained by
calling American Express Financial Advisors at 1-800-AXP-SERV.
Each feeder that invests in the Portfolio is different and
activities of its investors may adversely affect all other feeders,
including the Fund. For example, if one feeder decides to
terminate its investment in the Portfolio, the Portfolio may elect
to redeem in cash or in kind. If cash is used, the Portfolio will
incur brokerage, taxes and other costs in selling securities to
raise the cash. This may result in less investment diversification
if entire investment positions are sold, and it also may result in
less liquidity among the remaining assets. If in-kind distribution
is made, a smaller pool of assets remains that may affect brokerage
rates and investment options. In both cases, expenses may rise
since there are fewer assets to cover the costs of managing those
assets.
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PAGE 88
Shareholder meetings: Whenever the Portfolio proposes to change a
fundamental investment policy or to take any other actions
requiring approval of its security holders, the Fund must hold a
shareholder meeting. The Fund will vote for or against the
Portfolio's proposals in proportion to the vote it receives for or
against the same proposals from its shareholders.
Board members and officers
Shareholders elect a board that oversees the operations of the Fund
and chooses its officers. Its officers are responsible for day-to-
day business decisions based on policies set by the board. The
board has named an executive committee that has authority to act on
its behalf between meetings. The board members serve on the boards
of all 41 of the funds in the IDS MUTUAL FUND GROUP, except for Mr.
Dudley, who is a board member of all 32 publicly offered funds.
The members of the Board also serve as members of the Board of the
Income Trust which manages the investments of the Fund and other
accounts. Should any conflict of interest arise between the
interests of the shareholders of the Fund and those of the other
accounts, the Board will follow written procedures to address the
conflict.
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PAGE 89
Board members and officers of the Fund
President and interested board member
William R. Pearce
President of all funds in the IDS MUTUAL FUND GROUP.
Independent board members
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public
Policy Research.
Robert F. Froehlke
Former president of all funds in the IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Melvin R. Laird
Senior counsellor for national and international affairs, The
Reader's Digest Association, Inc.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
Interested board members who are officers and/or employees of AEFC
William H. Dudley
Executive vice president, AEFC.
David R. Hubers
President and chief executive officer, AEFC.
John R. Thomas
Senior vice president, AEFC.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Vice president of all funds in the IDS MUTUAL FUND GROUP.
Melinda S. Urion
Treasurer of all funds in the IDS MUTUAL FUND GROUP.
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PAGE 90
Other officer
Leslie L. Ogg
Vice president, general counsel and secretary of all funds in the
IDS MUTUAL FUND GROUP.
Refer to the SAI for the board members' and officers' biographies.
<PAGE>
PAGE 91
Investment manager
The Portfolio pays AEFC for managing its assets. The Fund pays its
proportionate share of the fees. Under the Investment Management
Services Agreement that became effective March 20, 1995 and was
assumed by the Portfolio on June 10, 1996, AEFC is paid a fee for
these services based on the average daily net assets of the
Portfolio, as follows:
Assets Annual rate
(billions) at each asset level
First $1.0 0.590%
Next 1.0 0.565
Next 1.0 0.540
Next 3.0 0.515
Next 3.0 0.490
Over 9.0 0.465
For the fiscal period ended May 31, 1996, the Fund paid AEFC a
total investment management fee of 0.57% of its average daily net
assets. Under the Agreement, the Fund also pays taxes, brokerage
commissions and nonadvisory expenses.
Administrator and Transfer Agent
The Fund pays AEFC for shareholder accounting and transfer agent
services under two agreements. The first, the Administrative
Service Agreement, has a declining annual rate beginning at 0.05%
and decreasing to 0.025% as assets increase. The second, the
Transfer Agency Agreement, has an annual fee per shareholder
account as follows:
o Class A $15.50
o Class B $16.50
o Class Y $15.50
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Distributor
The Fund has an exclusive distribution agreement with American
Express Financial Advisors, a wholly owned subsidiary of AEFC.
Financial advisors representing American Express Financial Advisors
provide information to investors about individual investment
programs, the Fund and its operations, new account applications,
and exchange and redemption requests. The cost of these services
is paid partially by the Fund's sales charges.
Persons who buy Class A shares pay a sales charge at the time of
purchase. Persons who buy Class B shares are subject to a
contingent deferred sales charge on a redemption in the first six
years and pay an asset-based sales charge (also known as a 12b-1
plan) of 0.75% of the Fund's average daily net assets. Class Y
shares are sold without a sales charge and without an asset-based
sales charge.
Financial advisors may receive different compensation for selling
Class A, Class B and Class Y shares. Portions of the sales charge
also may be paid to securities dealers who have sold the Fund's
shares or to banks and other financial institutions. The amounts
of those payments range from 0.8% to 4% of the Fund's offering
price depending on the monthly sales volume.
Under a Shareholder Service Agreement, the Fund also pays a fee for
service provided to shareholders by financial advisors and other
servicing agents. The fee is calculated at a rate of 0.175% of the
Fund's average daily net assets attributable to Class A and Class B
shares.
Total expenses paid by the Fund's Class A shares for the fiscal
period ended May 31, 1996, were 0.94% of its average daily net
assets. Expenses for Class B and Class Y were 1.70% and 0.76%,
respectively.
Total fees and expenses (excluding taxes and brokerage commissions)
cannot exceed the most restrictive applicable state expense
limitation.
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PAGE 93
About American Express Financial Corporation
General information
The AEFC family of companies offers not only mutual funds but also
insurance, annuities, investment certificates and a broad range of
financial management services.
Besides managing investments for all publicly offered funds in the
IDS MUTUAL FUND GROUP, AEFC also manages investments for itself and
its subsidiaries, IDS Certificate Company and IDS Life Insurance
Company. Total assets under management on May 31, 1996 were more
than $137 billion.
American Express Financial Advisors serves individuals and
businesses through its nationwide network of more than 175 offices
and more than 7,800 advisors.
Other AEFC subsidiaries provide investment management and related
services for pension, profit sharing, employee savings and
endowment funds of businesses and institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is
a wholly owned subsidiary of American Express Company (American
Express), a financial services company with headquarters at
American Express Tower, World Financial Center, New York, NY 10285.
The Fund may pay brokerage commissions to broker-dealer affiliates
of American Express and AEFC.<PAGE>
PAGE 94
Appendix A
Description of corporate bond ratings
Bond ratings concern the quality of the issuing corporation. They
are not an opinion of the market value of the security. Such
ratings are opinions on whether the principal and interest will be
repaid when due. A security's rating may change, which could
affect its price. Ratings by Moody's Investors Service, Inc. are
Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Ratings by Standard &
Poor's Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D.
The following is a compilation of the two agencies' rating
descriptions. For further information, see the SAI.
Aaa/AAA - Judged to be of the best quality and carry the smallest
degree of investment risk. Interest and principal are secure.
Aa/AA - Judged to be high-grade although margins of protection for
interest and principal may not be quite as good as Aaa or AAA rated
securities.
A - Considered upper-medium grade. Protection for interest and
principal is deemed adequate but may be susceptible to future
impairment.
Baa/BBB - Considered medium-grade obligations. Protection for
interest and principal is adequate over the short-term; however,
these obligations may have certain speculative characteristics.
Ba/BB - Considered to have speculative elements. The protection of
interest and principal payments may be very moderate.
B - Lack characteristics of more desirable investments. There may
be small assurance over any long period of time of the payment of
interest and principal.
Caa/CCC - Are of poor standing. Such issues may be in default or
there may be risk with respect to principal or interest.
Ca/CC - Represent obligations that are highly speculative. Such
issues are often in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These
securities have major risk exposures to default.
D - Are in payment default. The D rating is used when interest
payments or principal payments are not made on the due date.
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PAGE 95
Non-rated securities will be considered for investment when they
possess a risk comparable to that of rated securities consistent
with the Portfolio's objectives and policies. When assessing the
risk involved in each non-rated security, the Portfolio will
consider the financial condition of the issuer or the protection
afforded by the terms of the security.
Definitions of zero-coupon and pay-in-kind securities
A zero-coupon security is a security that is sold at a deep
discount from its face value and makes no periodic interest
payments. The buyer of such a security receives a rate of return
by gradual appreciation of the security, which is redeemed at face
value on the maturity date.
A pay-in-kind security is a security in which the issuer has the
option to make interest payments in cash or in additional
securities. The securities issued as interest usually have the
same terms, including maturity date, as the pay-in-kind securities.
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Appendix B
Descriptions of derivative instruments
What follows are brief descriptions of derivative instruments the
Portfolio may use. At various times the Portfolio may use some or
all of these instruments and is not limited to these instruments.
It may use other similar types of instruments if they are
consistent with the Portfolio's investment goal and policies. For
more information on these instruments, see the SAI.
Options and futures contracts. An option is an agreement to buy or
sell an instrument at a set price during a certain period of time.
A futures contract is an agreement to buy and sell an instrument
for a set price on a future date. The Portfolio may buy and sell
options and futures contracts to manage its exposure to changing
interest rates, security prices and currency exchange rates.
Options and futures may be used to hedge the Portfolio's
investments against price fluctuations or to increase market
exposure.
Asset-backed and mortgage-backed securities. Asset-backed
securities include interests in pools of assets such as motor
vehicle installment sale contracts, installment loan contracts,
leases on various types of real and personal property, receivables
from revolving credit (credit card) agreements or other categories
of receivables. Mortgage-backed securities include collateralized
mortgage obligations and stripped mortgage-backed securities.
Interest and principal payments depend on payment of the underlying
loans or mortgages. The value of these securities may also be
affected by changes in interest rates, the market's perception of
the issuers and the creditworthiness of the parties involved. The
non-mortgage related asset-backed securities do not have the
benefit of a security interest in the related collateral. Stripped
mortgage-backed securities include interest only (IO) and principal
only (PO) securities. Cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments on the
underlying mortgage loans or mortgage-backed securities.
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Indexed securities. The value of indexed securities is linked to
currencies, interest rates, commodities, indexes or other financial
indicators. Most indexed securities are short- to intermediate-
term fixed income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile
than the underlying instrument itself.
Inverse floaters. Inverse floaters are created by underwriters
using the interest payment on securities. A portion of the
interest received is paid to holders of instruments based on
current interest rates for short-term securities. The remainder,
minus a servicing fee, is paid to holders of inverse floaters. As
interest rates go down, the holders of the inverse floaters receive
more income and an increase in the price for the inverse floaters.
As interest rates go up, the holders of the inverse floaters
receive less income and a decrease in the price for the inverse
floaters.
Structured products. Structured products are over-the-counter
financial instruments created specifically to meet the needs of one
or a small number of investors. The instrument may consist of a
warrant, an option or a forward contract embedded in a note or any
of a wide variety of debt, equity and/or currency combinations.
Risks of structured products include the inability to close such
instruments, rapid changes in the market and defaults by other
parties.
<PAGE>
PAGE 98
IDS Extra Income Fund
IDS Tower 10
Minneapolis, MN 55440-0010
Distributed by
American Express
Financial Advisors Inc.<PAGE>
PAGE 99
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS EXTRA INCOME FUND
July 30, 1996
This Statement of Additional Information (SAI) is not a prospectus.
It should be read together with the prospectus and the financial
statements contained in the Annual Report which may be obtained
from your American Express financial advisor or by writing to
American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534.
This SAI is dated July 30, 1996, and it is to be used with the
prospectus dated July 30, 1996, and the Annual Report for the
fiscal period ended May 31, 1996.
<PAGE>
PAGE 100
TABLE OF CONTENTS
Goals and Investment Policies......................See Prospectus
Additional Investment Policies................................p. 3
Security Transactions.........................................p. 6
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation........................p. 9
Performance Information.......................................p. 9
Valuing Fund Shares...........................................p. 11
Investing in the Fund.........................................p. 13
Redeeming Shares..............................................p. 17
Pay-out Plans.................................................p. 17
Capital Loss Carryover........................................p. 19
Taxes.........................................................p. 19
Agreements....................................................p. 20
Board Members and Officers....................................p. 23
Custodian.....................................................p. 27
Independent Auditors..........................................p. 27
Financial Statements..............................See Annual Report
Prospectus....................................................p. 28
Appendix A: Foreign Currency Transactions....................p. 29
Appendix B: Options and Interest Rate Futures Contracts......p. 34
Appendix C: Mortgage-Backed Securities.......................p. 40
Appendix D: Dollar-Cost Averaging............................p. 41
<PAGE>
PAGE 101
ADDITIONAL INVESTMENT POLICIES
The Fund pursues its goals by investing all of its assets in High
Yield Portfolio (the "Portfolio") of the Income Trust (the
"Trust"), a separate investment company, rather than by directly
investing in and managing its own portfolio of securities. The
Portfolio has the same investment objectives, policies and
restrictions as the Fund.
Fundamental investment restrictions adopted by the Fund or
Portfolio cannot be changed without the approval of a majority of
the outstanding voting securities of the Fund or Portfolio, as
defined in the Investment Company Act of 1940 (the 1940 Act).
Whenever the Fund is requested to vote on a change in the
investment restrictions of the corresponding Portfolio, the Fund
will hold a meeting of Fund shareholders and will cast the Fund's
vote as instructed by the shareholders.
These are investment policies in addition to those presented in the
prospectus. The policies below are fundamental policies of the
Fund and the Portfolio and may be changed only with shareholder
approval. Unless holders of a majority of the outstanding voting
securities agree to make the change, the Fund and Portfolio will
not:
'Act as an underwriter (sell securities for others). However,
under the securities laws, the Portfolio may be deemed to be an
underwriter when it purchases securities directly from the issuer
and later resells them.
'Borrow money or property, except as a temporary measure for
extraordinary or emergency purposes, in an amount not exceeding
one-third of the market value of its total assets (including
borrowings) less liabilities (other than borrowings) immediately
after the borrowing. The Portfolio has not borrowed in the past
and has no present intention to borrow.
'Make cash loans if the total commitment amount exceeds 5% of the
Portfolio's total assets.
'Purchase more than 10% of the outstanding voting securities of an
issuer.
'Invest more than 5% of its total assets in securities of any one
company, government or political subdivision thereof, except the
limitation will not apply to investments in securities issued by
the U.S. government, its agencies or instrumentalities, and except
that up to 25% of the Portfolio's total assets may be invested
without regard to this 5% limitation.
<PAGE>
PAGE 102
'Buy or sell real estate, unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent
the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the
real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited
partnerships.
'Buy or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, except this shall not
prevent the Portfolio from buying or selling options and futures
contracts or from investing in securities or other instruments
backed by, or whose value is derived from, physical commodities.
'Lend Portfolio securities in excess of 30% of its net assets. The
current policy of the board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio gets
the market price in cash, U.S. government securities, letters of
credit or such other collateral as may be permitted by regulatory
agencies and approved by the board. If the market price of the
loaned securities goes up, the Portfolio will get additional
collateral on a daily basis. The risks are that the borrower may
not provide additional collateral when required or return the
securities when due. During the existence of the loan, the
Portfolio receives cash payments equivalent to all interest or
other distributions paid on the loaned securities. A loan will not
be made unless the investment manager believes the opportunity for
additional income outweighs the risks.
'Issue senior securities, except this restriction shall not be
deemed to prohibit the Portfolio from borrowing from banks, using
options or futures contracts, lending its securities or entering
into repurchase agreements.
'Concentrate in any one industry. According to the present
interpretation by the Securities and Exchange Commission (SEC),
this means no more than 25% of the Portfolio's total assets, based
on current market value at the time of purchase, can be invested in
any one industry.
Unless changed by the board, the Fund and Portfolio will not:
'Pledge or mortgage its assets beyond 15% of total assets. If the
Portfolio were ever to do so, valuation of the pledged or mortgaged
assets would be based on market values. For purposes of this
restriction, collateral arrangements for margin deposits on futures
contracts are not deemed to be a pledge of assets.
<PAGE>
PAGE 103
'Invest more than 10% of its total assets in securities of
investment companies. Under one states's law, the Portfolio is
limited to investments in the open market where no commission or
profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or when the purchase is part of
a plan or merger, consolidation, reorganization or acquisition.
The Portfolio has no current intention to invest in securities of
other investment companies.
'Invest in exploration or development programs, such as oil, gas or
mineral leases.
'Invest more than 5% of its total assets in securities of
companies, including any predecessors, that have a record of less
than three years continuous operations.
'Invest in a company to control or manage it.
'Buy on margin or sell short, except they may enter into interest
rate future contracts.
'Purchase securities of an issuer if the board members and officers
of the Fund, the Portfolio and American Express Financial
Corporation (AEFC) hold more than a certain percentage of the
issuer's outstanding securities. The holdings of all board members
and officers of the Fund, the Portfolio and of AEFC who own more
than 0.5% of an issuer's securities are added together, and if in
total they own more than 5%, the Portfolio will not purchase
securities of that issuer.
'Invest more than 5% of its net assets in warrants. Under one
state's law no more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York or American Stock
Exchange.
'Invest more than 10% of its net assets in securities and
derivative instruments that are illiquid. For purposes of this
policy, illiquid securities include some privately placed
securities, public securities and Rule 144A securities that for one
reason or another may no longer have a readily available market,
loans and loan participations, repurchase agreements with
maturities greater than seven days, non-negotiable fixed-time
deposits and over-the-counter options.
'In determining the liquidity of Rule 144A securities, which are
unregistered securities offered to qualified institutional buyers,
and interest-only and principal-only fixed mortgage-backed
securities (IOs and POs) issued by the U.S. government or its
agencies and instrumentalities. The investment manager, under
guidelines established by the board, will consider any relevant
factors including the frequency of trades, the number of dealers
willing to purchase or sell the security and the nature of
marketplace trades.
<PAGE>
PAGE 104
'In determining the liquidity of commercial paper issued in
transactions not involving a public offering under Section 4(2) of
the Securities Act of 1933, the investment manager, under
guidelines established by the board, will evaluate relevant factors
such as the issuer and the size and nature of its commercial paper
programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and
settlement procedures for the paper.
Loans, loan participations and interests in securitized loan pools
are interests in amounts owed by a corporate, governmental or other
borrower to a lender or consortium of lenders (typically banks,
insurance companies, investment banks, government agencies or
international agencies). Loans involve a risk of loss in case of
default or insolvency of the borrower and may offer less legal
protection to the Portfolio in the event of fraud or
misrepresentation. In addition, loan participations involve a risk
of insolvency of the lender or other financial intermediary.
The Portfolio may make contracts to purchase securities for a fixed
price at a future date beyond normal settlement time (when-issued
securities or forward commitments). Under normal market
conditions, the Portfolio does not intend to commit more than 5% of
its total assets to these practices. The Portfolio does not pay
for the securities or receive dividends or interest on them until
the contractual settlement date. The Portfolio will designate cash
or liquid high-grade debt securities at least equal in value to its
commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may
affect the Portfolio's total assets the same as owned securities.
The Portfolio may maintain a portion of its assets in cash and
cash-equivalent investments. The cash-equivalent investments the
Portfolio may use are short-term U.S. and Canadian government
securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances and letters of credit of
banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published
annual financial statements) in excess of $100 million (or the
equivalent in the instance of a foreign branch of a U.S. bank) at
the date of investment. Any cash-equivalent investments in foreign
securities will be subject to the limitations on foreign
investments described in the prospectus. The Portfolio also may
purchase short-term corporate notes and obligations rated in the
top two classifications by Moody's Investors Service, Inc.
(Moody's) or Standard & Poor's Corporation (S&P) or the equivalent
and may use repurchase agreements with broker-dealers registered
under the Securities Exchange Act of 1934 and with commercial
banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Portfolio's
ability to liquidate the security involved could be impaired.
<PAGE>
PAGE 105
Notwithstanding any of the Fund's other investment policies, the
Fund may invest its assets in an open-end management investment
company having substantially the same investment objectives,
policies and restrictions as the Fund for the purpose of having
those assets managed as part of a combined pool.
For a discussion about foreign currency transactions, see Appendix
A. For a discussion on options and interest rate futures contracts
see Appendix B. For a discussion on mortgage-backed securities,
see Appendix C.
SECURITY TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to
determine, consistent with the Portfolio's investment goal and
policies, which securities will be purchased, held or sold. In
determining where the buy and sell orders are to be placed, AEFC
has been directed to use its best efforts to obtain the best
available price and most favorable execution except where otherwise
authorized by the board.
AEFC has a strict Code of Ethics that prohibits its affiliated
personnel from engaging in personal investment activities that
compete with or attempt to take advantage of planned portfolio
transactions for any fund or trust for which it acts as investment
manager. AEFC carefully monitors compliance with its Code of
Ethics.
Normally, the Portfolio's securities are traded on a principal
rather than an agency basis. In other words, AEFC will trade
directly with the issuer or with a dealer who buys or sells for its
own account, rather than acting on behalf of another client. AEFC
does not pay the dealer commissions. Instead, the dealer's profit,
if any, is the difference, or spread, between the dealer's purchase
and sale price for the security.
On occasion, it may be desirable to compensate a broker for
research services or for brokerage services by paying a commission
that might not otherwise be charged or a commission in excess of
the amount another broker might charge. The board has adopted a
policy authorizing AEFC to do so to the extent authorized by law,
if AEFC determines, in good faith, that such commission is
reasonable in relation to the value of the brokerage or research
services provided by a broker or dealer, viewed either in the light
of that transaction or AEFC's overall responsibilities to the funds
in the IDS MUTUAL FUND GROUP and other funds for which it acts as
investment advisor.
<PAGE>
PAGE 106
Research provided by brokers supplements AEFC's own research
activities. Such services include economic data on, and analysis
of, U.S. and foreign economies; information on specific industries;
information about specific companies, including earnings estimates;
purchase recommendations for stocks and bonds; portfolio strategy
services; political, economic, business and industry trend
assessments; historical statistical information; market data
services providing information on specific issues and prices; and
technical analysis of various aspects of the securities markets,
including technical charts. Research services may take the form of
written reports, computer software or personal contact by telephone
or at seminars or other meetings. AEFC has obtained, and in the
future may obtain, computer hardware from brokers, including but
not limited to personal computers that will be used exclusively for
investment decision-making purposes, which include the research,
portfolio management and trading functions and other services to
the extent permitted under an interpretation by the SEC.
When paying a commission that might not otherwise be charged or a
commission in excess of the amount another broker might charge,
AEFC must follow procedures authorized by the board. To date,
three procedures have been authorized. One procedure permits AEFC
to direct an order to buy or sell a security traded on a national
securities exchange to a specific broker for research services it
has provided. The second procedure permits AEFC, in order to
obtain research, to direct an order on an agency basis to buy or
sell a security traded in the over-the-counter market to a firm
that does not make a market in that security. The commission paid
generally includes compensation for research services. The third
procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Portfolio to pay a commission in excess of
the amount another broker might have charged. AEFC has advised the
Portfolio it is necessary to do business with a number of brokerage
firms on a continuing basis to obtain such services as the handling
of large orders, the willingness of a broker to risk its own money
by taking a position in a security, and the specialized handling of
a particular group of securities that only certain brokers may be
able to offer. As a result of this arrangement, some portfolio
transactions may not be effected at the lowest commission, but AEFC
believes it may obtain better overall execution. AEFC has assured
the Portfolio that under all three procedures the amount of
commission paid will be reasonable and competitive in relation to
the value of the brokerage services performed or research provided.
All other transactions shall be placed on the basis of obtaining
the best available price and the most favorable execution. In so
doing, if in the professional opinion of the person responsible for
selecting the broker or dealer, several firms can execute the
transaction on the same basis, consideration will be given by such
person to those firms offering research services. Such services
may be used by AEFC in providing advice to all the funds in the IDS
MUTUAL FUND GROUP even though it is not possible to relate the
benefits to any particular fund or account.
<PAGE>
PAGE 107
Each investment decision made for the Portfolio is made
independently from any decision made for another portfolio, fund or
other account advised by AEFC or any of its subsidiaries. When the
Portfolio buys or sells the same security as another portfolio,
fund or account, AEFC carries out the purchase or sale in a way the
Portfolio agrees in advance is fair. Although sharing in large
transactions may adversely affect the price or volume purchased or
sold by the Portfolio, the Portfolio hopes to gain an overall
advantage in execution. AEFC has assured the Portfolio it will
continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC makes a comprehensive review of the
broker-dealers and the overall reasonableness of their commissions.
The review evaluates execution, operational efficiency and research
services.
The Fund paid total brokerage commissions of $12,092 for the fiscal
period ended May 31, 1996, $40,448 for the fiscal year ended Aug.
31, 1995, and $145,758 for the fiscal year ended Aug. 31, 1994.
Substantially all firms through whom transactions were executed
provide research services.
No transactions were directed to brokers because of research
services they provided to the Fund.As of the fiscal period ended
May 31, 1996, the Fund held securities of its regular brokers or
dealers or of the parent of those brokers or dealers that derived
more than 15% of gross revenue from securities-related activities
as presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Dean Witter $8,071,855
Merrill Lynch 8,598,779
The portfolio turnover rate was 61% in the fiscal period ended May
31, 1996, and 74% in the fiscal year ended Aug. 31, 1995.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN
EXPRESS FINANCIAL CORPORATION
Affiliates of American Express Company (American Express) (of which
AEFC is a wholly owned subsidiary) may engage in brokerage and
other securities transactions on behalf of the Portfolio according
to procedures adopted by the board and to the extent consistent
with applicable provisions of the federal securities laws. AEFC
will use an American Express affiliate only if (i) AEFC determines
that the Portfolio will receive prices and executions at least as
favorable as those offered by qualified independent brokers
performing similar brokerage and other services for the Portfolio
and (ii) the affiliate charges the Portfolio commission rates
consistent with those the affiliate charges comparable unaffiliated
customers in similar transactions and if such use is consistent
with terms of the Investment Management Services Agreement.<PAGE>
PAGE 108
AEFC may direct brokerage to compensate an affiliate. AEFC will
receive research on South Africa from New Africa Advisors, a
wholly-owned subsidiary of Sloan Financial Group. AEFC owns 100%
of IDS Capital Holdings Inc. which in turn owns 40% of Sloan
Financial Group. New Africa Advisors will send research to AEFC
and in turn AEFC will direct trades to a particular broker. The
broker will have an agreement to pay New Africa Advisors. All
transactions will be on a best execution basis. Compensation
received will be reasonable for the services rendered.
No brokerage commissions were paid to brokers affiliated with AEFC
for the three most recent fiscal years.
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past
performance. Average annual total return and current yield
quotations used by the Fund are based on standardized methods of
computing performance as required by the SEC. An explanation of
the methods used by the Fund to compute performance follows below.
Average annual total return
The Fund may calculate average annual total return for a class for
certain periods by finding the average annual compounded rates of
return over the period that would equate the initial amount
invested to the ending redeemable value, according to the following
formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
Aggregate total return
The Fund may calculate aggregate total return for a class for
certain periods representing the cumulative change in the value of
an investment in the Fund over a specified period of time according
to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
<PAGE>
PAGE 109
Annualized yield
The Fund may calculate an annualized yield for a class by dividing
the net investment income per share deemed earned during a period
by the net asset value per share on the last day of the period and
annualizing the results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period
The Fund's annualized yield was 7.91% for Class A, 7.57% for Class
B and 8.54% for Class Y for the 30-day period ended May 31,
1996.The Fund's yield, calculated as described above according to
the formula prescribed by the SEC, is a hypothetical return based
on market value yield to maturity for the Portfolio's securities.
It is not necessarily indicative of the amount which was or may be
paid to the Fund's shareholders. Actual amounts paid to Fund
shareholders are reflected in the distribution yield.
Distribution yield
Distribution yield is calculated according to the following
formula:
D divided by POP F equals DY
30 30
where: D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor
DY = distribution yield
The Fund's distribution yield was 9.64% for Class A, 9.38% for
Class B and 10.32% for Class Y for the 30-day period ended May 31,
1996.
<PAGE>
PAGE 110
In its sales material and other communications, the Fund may quote,
compare or refer to rankings, yields or returns as published by
independent statistical services or publishers and publications
such as The Bank Rate Monitor National Index, Barron's, Business
Week, Donoghue's Money Market Fund Report, Financial Services Week,
Financial Times, Financial World, Forbes, Fortune, Global Investor,
Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance, Lipper Analytical Services, Money, Mutual Fund Forecaster,
Newsweek, The New York Times, Personal Investor, Stanger Report,
Sylvia Porter's Personal Finance, USA Today, U.S. News and World
Report, The Wall Street Journal and Wiesenberger Investment
Companies Service.
VALUING FUND SHARES
The value of an individual share for each class is determined by
using the net asset value before shareholder transactions for the
day. On June 3, 1996, the first business day following the end of
the fiscal period, the computation looked like this:
<TABLE><CAPTION>
Net assets before Shares outstanding Net asset value
shareholder transactions at end of previous day of one share
<S> <C> <C> <C> <C> <C>
Class A $2,140,107,172 divided by 494,251,079 equals $4.33
Class B 269,103,953 62,148,719 4.33
Class Y 9,015 2,082 4.33
</TABLE>
In determining net assets before shareholder transactions, the
Portfolio's securities are valued as follows as of the close of
business of the New York Stock Exchange (the Exchange):
'Securities, except bonds other than convertibles, traded on a
securities exchange for which a last-quoted sales price is readily
available are valued at the last-quoted sales price on the exchange
where such security is primarily traded.
'Securities traded on a securities exchange for which a last-quoted
sales price is not readily available are valued at the mean of the
closing bid and asked prices, looking first to the bid and asked
prices on the exchange where the security is primarily traded and,
if none exist, to the over-the-counter market.
'Securities included in the NASDAQ National Market System are
valued at the last-quoted sales price in this market.
'Securities included in the NASDAQ National Market System for which
a last-quoted sales price is not readily available, and other
securities traded over-the-counter but not included in the NASDAQ
National Market System are valued at the mean of the closing bid
and asked prices.
'Futures and options traded on major exchanges are valued at the
last-quoted sales price on their primary exchange.
<PAGE>
PAGE 111
'Foreign securities traded outside the United States are generally
valued as of the time their trading is complete, which is usually
different from the close of the Exchange. Foreign securities
quoted in foreign currencies are translated into U.S. dollars at
the current rate of exchange. Occasionally, events affecting the
value of such securities may occur between such times and the close
of the Exchange that will not be reflected in the computation of
the Fund's net asset value. If events materially affecting the
value of such securities occur during such period, these securities
will be valued at their fair value according to procedures decided
upon in good faith by the board.
'Short-term securities maturing more than 60 days from the
valuation date are valued at the readily available market price or
approximate market value based on current interest rates. Short-
term securities maturing in 60 days or less that originally had
maturities of more than 60 days at acquisition date are valued at
amortized cost using the market value on the 61st day before
maturity. Short-term securities maturing in 60 days or less at
acquisition date are valued at amortized cost. Amortized cost is
an approximation of market value determined by systematically
increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium,
so that the carrying value is equal to maturity value on the
maturity date.
'Securities without a readily available market price, bonds other
than convertibles and other assets are valued at fair value as
determined in good faith by the board. The board is responsible
for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from
the Portfolio. If a valuation of a bond is not available from a
pricing service, the bond will be valued by a dealer knowledgeable
about the bond if such a dealer is available.
The New York Stock Exchange, AEFC and the Fund will be closed on
the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
INVESTING IN THE FUND
Sales Charge
Shares of the Fund are sold at the public offering price determined
at the close of business on the day an application is accepted.
The public offering price is the net asset value of one share
adjusted for a sales charge, if applicable. For Class B and Class
Y, there is no initial sales charge so the public offering price is
the same as the net asset value. For Class A, the public offering
price for an investment of less than $50,000, made June 3, 1996,
was determined by dividing the net asset value of one share, $4.33,
by 0.95 (1.00-0.05 for a maximum 5% sales charge) for a public
offering price of $4.56. The sales charge is paid to American
Express Financial Advisors by the person buying the shares.<PAGE>
PAGE 112
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
<TABLE><CAPTION>
Within each increment,
sales charge as a
percentage of:
Public Net
Amount of Investment Offering Price Amount Invested
<S> <C> <C>
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
</TABLE>
Sales charges on an investment greater than $50,000 and less than
$1,000,000 are calculated for each increment separately and then
totaled. The resulting total sales charge, expressed as a
percentage of the public offering price and of the net amount
invested, will vary depending on the proportion of the investment
at different sales charge levels.
For example, compare an investment of $60,000 with an investment of
$85,000. The $60,000 investment is composed of $50,000 that incurs
a sales charge of $2,500 (5.0% x $50,000) and $10,000 that incurs a
sales charge of $450 (4.5% x $10,000). The total sales charge of
$2,950 is 4.92% of the public offering price and 5.17% of the net
amount invested.
In the case of the $85,000 investment, the first $50,000 also
incurs a sales charge of $2,500 (5.0% x $50,000) and $35,000 incurs
a sales charge of $1,575 (4.5% x $35,000). The total sales charge
of $4,075 is 4.79% of the public offering price and 5.04% of thenet
amount invested.
The following table shows the range of sales charges as a
percentage of the public offering price and of the net amount
invested on total investments at each applicable level.
<TABLE><CAPTION>
On total investment, sales
charge as a percentage of
Public Net
Offering Price Amount Invested
Amount of Investment ranges from:
<S> <C> <C>
First $ 50,000 5.00% 5.26%
More than 50,000 to 100,000 5.00-4.50 5.26-4.71
More than 100,000 to 500,000 4.50-3.80 4.71-3.95
More than 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
/TABLE
<PAGE>
PAGE 113
The initial sales charge is waived for certain qualified plans that
meet the requirements described in the prospectus. Participants in
these qualified plans may be subject to a deferred sales charge on
certain redemptions. The deferred sales charge on certain
redemptions will be waived if the redemption is a result of a
participant's death, disability, retirement, attaining age 59 1/2,
loans or hardship withdrawals. The deferred sales charge varies
depending on the number of participants in the qualified plan and
total plan assets as follows:
Deferred Sales Charge
Number of Participants
Total Plan Assets 1-99 100 or more
Less than $1 million 4% 0%
$1 million or more 0% 0%
_________________________________________________________
Class A - Reducing the Sales Charge
Sales charges are based on the total amount of your investments in
the Fund. The amount of all prior investments plus any new
purchase is referred to as your "total amount invested." For
example, suppose you have made an investment of $20,000 and later
decide to invest $40,000 more. Your total amount invested would be
$60,000. As a result, $10,000 of your $40,000 investment qualifies
for the lower 4.5% sales charge that applies to investments of more
than $50,000 and up to $100,000.
The total amount invested includes any shares held in the Fund in
the name of a member of your primary household group. The primary
household group consists of accounts in any ownership for spouses
or domestic partners and their unmarried children under 21.
Domestic partners are individuals who maintain a shared primary
residence and have joint property or other insurable interests.
For instance, if your spouse already has invested $20,000 and you
want to invest $40,000, your total amount invested will be $60,000
and therefore you will pay the lower charge of 4.5% on $10,000 of
the $40,000.
Until a spouse remarries, the sales charge is waived for spouses
and unmarried children under 21 of deceased board members, officers
or employees of the Fund or AEFC or its subsidiaries and deceased
advisors.
<PAGE>
PAGE 114
The total amount invested also includes any investment you or your
immediate family already have in the other publicly offered funds
in the IDS MUTUAL FUND GROUP where the investment is subject to a
sales charge. For example, suppose you already have an investment
of $30,000 in another IDS Fund. If you invest $40,000 more in this
Fund, your total amount invested in the funds will be $70,000 and
therefore $20,000 of your $40,000 investment will incur a 4.5%
sales charge.
Finally, Individual Retirement Account (IRA) purchases, or other
employee benefit plan purchases made through a payroll deduction
plan or through a plan sponsored by an employer, association of
employers, employee organization or other similar entity, may be
added together to reduce sales charges for shares purchased through
that plan.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you
can reduce the sales charges in Class A by filing a LOI. The
agreement can start at any time and will remain in effect for 13
months. Your investment will be charged normal sales charges until
you have invested $1 million. At that time, your account will be
credited with the sales charges previously paid. Class A
investments made prior to signing an LOI may be used to reach the
$1 million total, excluding Cash Management Fund and Tax-Free Money
Fund. However, we will not adjust for sales charges on investments
made prior to the signing of the LOI. If you do not invest $1
million by the end of 13 months, there is no penalty, you'll just
miss out on the sales charge adjustment. A LOI is not an option
(absolute right) to buy shares.
Here's an example. You file a LOI to invest $1 million and make an
investment of $100,000 at that time. You pay the normal 5% sales
charge on the first $50,000 and 4.5% sales charge on the next
$50,000 of this investment. Let's say you make a second investment
of $900,000 (bringing the total up to $1 million) one month before
the 13-month period is up. On the date that you bring your total
to $1 million, AEFC makes an adjustment to your account. The
adjustment is made by crediting your account with additional
shares, in an amount equivalent to the sales charge previously
paid.
Systematic Investment Programs
After you make your initial investment of $2,000 or more, you can
arrange to make additional payments of $100 or more on a regular
basis. These minimums do not apply to all systematic investment
programs. You decide how often to make payments - monthly,
quarterly, or semiannually. You are not obligated to make any
payments. You can omit payments or discontinue the investment
program altogether. The Fund also can change the program or end it
at any time. If there is no obligation, why do it? Putting money
aside is an important part of financial planning. With a
systematic investment program, you have a goal to work for.<PAGE>
PAGE 115
How does this work? Your regular investment amount will purchase
more shares when the net asset value per share decreases, and fewer
shares when the net asset value per share increases. Each purchase
is a separate transaction. After each purchase your new shares
will be added to your account. Shares bought through these
programs are exactly the same as any other fund shares. They can
be bought and sold at any time. A systematic investment program is
not an option or an absolute right to buy shares.
The systematic investment program itself cannot ensure a profit,
nor can it protect against a loss in a declining market. If you
decide to discontinue the program and redeem your shares when their
net asset value is less than what you paid for them, you will incur
a loss.
For a discussion on dollar-cost averaging, see Appendix D.
Automatic Directed Dividends
Dividends, including capital gain distributions, paid by another
fund in the IDS MUTUAL FUND GROUP subject to a sales charge, may be
used to automatically purchase shares in the same class of this
Fund without paying a sales charge. Dividends may be directed to
existing accounts only. Dividends declared by a fund are exchanged
to this Fund the following day. Dividends can be exchanged into
one fund but cannot be split to make purchases in two or more
funds. Automatic directed dividends are available between accounts
of any ownership except:
Between a non-custodial account and an IRA, or 401(k) plan account
or other qualified retirement account of which American Express
Trust Company acts as custodian;
Between two American Express Trust Company custodial accounts with
different owners (for example, you may not exchange dividends from
your IRA to the IRA of your spouse);
Between different kinds of custodial accounts with the same
ownership (for example, you may not exchange dividends from your
IRA to your 401(k) plan account, although you may exchange
dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the
Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors
Act (UTMA) only into other UGMA or UTMA accounts with identical
ownership.
The Fund's investment goals are described in its prospectus along
with other information, including fees and expense ratios. Before
exchanging dividends into another fund, you should read its
prospectus. You will receive a confirmation that the automatic
directed dividend service has been set up for your account.
<PAGE>
PAGE 116
REDEEMING SHARES
You have a right to redeem your shares at any time. For an
explanation of redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net
asset value, stop accepting payments for purchase of shares or
suspend the duty of the Fund to redeem shares for more than seven
days. Such emergency situations would occur if:
'The Exchange closes for reasons other than the usual weekend and
holiday closings or trading on the Exchange is restricted, or
'Disposal of the Portfolio's securities is not reasonably
practicable or it is not reasonably practicable for the Fund to
determine the fair value of its net assets, or
'The SEC, under the provisions of the 1940 Act, as amended,
declares a period of emergency to exist.
Should the Fund stop selling shares, the board may make a deduction
from the value of the assets held by the Fund to cover the cost of
future liquidations of the assets so as to distribute fairly these
costs among all shareholders.
The Fund has elected to be governed by Rule 18f-1 under the 1940
Act, which obligates the Fund to redeem shares in cash, with
respect to any one shareholder during any 90-day period, up to
lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of the period. Although redemptions in excess of this
limitation would normally be paid in cash, the Fund reserves the
right to make these payments in whole or in part in securities or
other assets in case of an emergency, or if the payment of a
redemption in cash would be detrimental to the existing
shareholders of the Fund as determined by the board. In these
circumstances, the securities distributed would be valued as set
forth in the prospectus. Should the Fund distribute securities, a
shareholder may incur brokerage fees or other transaction costs in
converting the securities to cash.
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment
in regular installments. If you redeem Class B shares you may be
subject to a contingent deferred sales charge as discussed in the
prospectus. While the plans differ on how the pay-out is figured,
they all are based on the redemption of your investment. Net
investment income dividends and any capital gain distributions will
automatically be reinvested, unless you elect to receive them in
cash. If you are redeeming a tax-qualified plan account for which
American Express Trust Company acts as custodian, you can elect to <PAGE>
PAGE 117
receive your dividends and other distributions in cash when
permitted by law. If you redeem an IRA or a qualified retirement
account, certain restrictions, federal tax penalties and special
federal income tax reporting requirements may apply. You should
consult your tax advisor about this complex area of the tax law.
Applications for a systematic investment in a class of the Fund
subject to a sales charge normally will not be accepted while a
pay-out plan for any of those funds is in effect. Occasional
investments, however, may be accepted.
To start any of these plans, please write or call American Express
Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534,
612-671-3733. Your authorization must be received in the
Minneapolis headquarters at least five days before the date you
want your payments to begin. The initial payment must be at least
$50. Payments will be made on a monthly, bimonthly, quarterly,
semiannual or annual basis. Your choice is effective until you
change or cancel it.
The following pay-out plans are designed to take care of the needs
of most shareholders in a way AEFC can handle efficiently and at a
reasonable cost. If you need a more irregular schedule of
payments, it may be necessary for you to make a series of
individual redemptions, in which case you'll have to send in a
separate redemption request for each pay-out. The Fund reserves
the right to change or stop any pay-out plan and to stop making
such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be
redeemed at regular intervals during the time period you choose.
This plan is designed to end in complete redemption of all shares
in your account by the end of the fixed period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed
for each payment and that amount will be sent to you. The length
of time these payments continue is based on the number of shares in
your account.
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares
is necessary to make the payment will be redeemed in regular
installments until the account is closed.Plan #4: Redemption of a
percentage of net asset value
<PAGE>
PAGE 118
Payments are made based on a fixed percentage of the net asset
value of the shares in the account computed on the day of each
payment. Percentages range from 0.25% to 0.75%. For example, if
you are on this plan and arrange to take 0.5% each month, you will
get $50 if the value of your account is $10,000 on the payment
date.
CAPITAL LOSS CARRYOVER
For federal income tax purposes, the Fund had capital loss
carryover of $257,355,361 at May 31, 1996, that will expire as
follows:
1999 2000 2003 2004
$163,877,886 $28,359,344 $20,159,025 $44,959,106
It is unlikely that the board will authorize a distribution of any
net realized capital gains until the available capital loss
carryover has been offset or has expired.
TAXES
If you buy shares in the Fund and then exchange into another fund,
it is considered a sale and subsequent purchase of shares. Under
the tax laws, if this exchange is done within 91 days, any sales
charge waived on Class A shares on a subsequent purchase of shares
applies to the new shares acquired in the exchange. Therefore, you
cannot create a tax loss or reduce a tax gain attributable to the
sales charge when exchanging shares within 91 days.
Retirement Accounts
If you have a nonqualified investment in the Fund and you wish to
move part or all of those shares to an IRA or qualified retirement
account in the Fund, you can do so without paying a sales charge.
However, this type of exchange is considered a sale of shares and
may result in a gain or loss for tax purposes. In addition, this
type of exchange may result in an excess contribution under IRA or
qualified plan regulations if the amount exchanged plus the amount
of the initial sales charge applied to the amount exchanged exceeds
annual contribution limitations. For example: If you were to
exchange $2,000 in Class A shares from a nonqualified account to an
IRA without considering the 5% ($100) initial sales charge
applicable to that $2,000, you may be deemed to have exceeded
current IRA annual contribution limitations. You should consult
your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as
dividend income for federal income tax purposes. Corporate
shareholders are generally entitled to a deduction equal to 70% of
that portion of the Fund's dividend that is attributable to
dividends the Fund received from domestic (U.S.) securities. For
the fiscal period ended May 31, 1996, 4.98% of the Fund's net
investment income dividends qualified for the corporate deduction.<PAGE>
PAGE 119
Capital gain distributions received by individual and corporate
shareholders, if any, should be treated as long-term capital gains
regardless of how long they owned their shares. Short-term capital
gains earned by the Fund are paid to shareholders as part of their
ordinary income dividend and are taxable.
Under federal tax law, by the end of a calendar year the Fund must
declare and pay dividends representing 98% of ordinary income for
that calendar year and 98% of net capital gains (both long-term and
short-term) for the 12-month period ending Oct. 31 of that calendar
year. The Fund is subject to an excise tax equal to 4% of the
excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with
federal tax law and avoid any excise tax.
The Fund may be subject to U.S. taxes resulting from holdings in a
passive foreign investment company (PFIC). A foreign corporation
is a PFIC when 75% or more of its gross income for the taxable year
is passive income or if 50% or more of the average value of its
assets consists of assets that produce or could produce passive
income.
This is a brief summary that relates to federal income taxation
only. Shareholders should consult their tax advisor as to the
application of federal, state and local income tax laws to Fund
distributions.
AGREEMENTS
Investment Management Services Agreement
The Trust, on behalf of the Portfolio, has an Investment Management
Services Agreement with AEFC. For its services, AEFC is paid a fee
based on the following schedule:
Assets Annual rate at
(billions) each asset level
First $1.0 0.590%
Next 1.0 0.565
Next 1.0 0.540
Next 3.0 0.515
Next 3.0 0.490
Over 9.0 0.465
On May 31, 1996, the daily rate applied to the Fund's net assets
was equal to 0.571% on an annual basis. The fee is calculated for
each calendar day on the basis of net assets as of the close of
business two business days prior to the day for which the
calculation is made.
<PAGE>
PAGE 120
The management fee is paid monthly. The total amount paid was
$9,170,111 for the fiscal period ended May 31, 1996, $9,856,787 for
the fiscal year ended Aug. 31, 1995, and $10,075,839 for the fiscal
year ended Aug. 31, 1994.
The Portfolio also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and
certain legal fees; fidelity bond premiums; registration fees for
shares; office expenses; consultants' fees; compensation of board
members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with
lending securities of the Portfolio; and expenses properly payable
by the Portfolio, approved by the board. The Fund paid nonadvisory
expenses of $742,081 for the fiscal period ended May 31, 1996,
$761,716 for the fiscal year ended Aug. 31, 1995, and $765,283 for
the fiscal year ended Aug. 31, 1994.
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under
this agreement, the Fund pays AEFC for providing administration and
accounting services. The fee is calculated as follows:
Assets Annual rate
(billions) each asset level
First $1.0 0.050%
Next 1.0 0.045
Next 1.0 0.040
Next 3.0 0.035
Next 3.0 0.030
Over 9.0 0.025
On May 31, 1996, the daily rate applied to the Fund's net assets
was equal to 0.046% on an annual basis. The fee is calculated for
each calendar day on the basis of net assets as of the close of
business two business days prior to the day for which the
calculation is made. Under the agreement, the Fund paid fees of
$749,696 for the fiscal period ended May 31, 1996.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with AEFC. This agreement
governs AEFC's responsibility for administering and/or performing
transfer agent functions, for acting as service agent in connection
with dividend and distribution functions and for performing
shareholder account administration agent functions in connection
with the issuance, exchange and redemption or repurchase of the
Fund's shares. Under the agreement, AEFC will earn a fee from the
Fund determined by multiplying the number of shareholder accounts
at the end of the day by a rate determined for each class per year
and dividing by the number of days in the year. The rate for Class
<PAGE>
PAGE 121
A and Class Y is $15.50 per year and for Class B is $16.50 per
year. The fees paid to AEFC may be changed from time to time upon
agreement of the parties without shareholder approval. Under the
agreement, the Fund paid fees of $1,547,029 for the fiscal period
ended May 31, 1996.Distribution Agreement
Under a Distribution Agreement, sales charges deducted for
distributing Fund shares are paid to American Express Financial
Advisors daily. These charges amounted to $8,715,152 for the
fiscal period ended May 31, 1996. Commissions paid to personal
financial advisors totaled $9,367,444. The amounts were $7,922,313
and $6,523,595 for the fiscal year ended Aug. 31, 1995, and
$14,976,206 and $9,772,761 for the fiscal year ended Aug. 31, 1994.
Additional information about commissions and compensation for the
fiscal period ended May 31, 1996, is contained in the following
table:
<TABLE><CAPTION>
(1) (2) (3) (4) (5)
Net Compensation
Name of Underwriting on Redemption
Principal Discounts and and Brokerage Other
Underwriter Commissions Repurchases Commissions Compensation
<S> <C> <C> <C> <C>
AEFC None None None $907,154*
American
Express
Financial
Advisors $8,715,152 None None None
</TABLE>
*Distribution fees paid pursuant to the Plan and Agreement of
Distribution.
Shareholder Service Agreement
The Fund pays a fee for service provided to shareholders by
financial advisors and other servicing agents. The fee is
calculated at a rate of 0.175% of the Fund's average daily net
assets attributable to Class A and Class B shares.
Plan and Agreement of Distribution
For Class B shares, to help American Express Financial Advisors
defray the cost of distribution and servicing, not covered by the
sales charges received under the Distribution Agreement, the Fund
and American Express Financial Advisors entered into a Plan and
Agreement of Distribution (Plan). These costs cover almost all
aspects of distributing the Fund's shares except compensation to
the sales force. A substantial portion of the costs are not
specifically identified to any one fund in the IDS MUTUAL FUND
GROUP. Under the Plan, American Express Financial Advisors is paid
a fee at an annual rate of 0.75% of the Fund's average daily net
assets attributable to Class B shares.<PAGE>
PAGE 122
The Plan must be approved annually by the board, including a
majority of the disinterested board members, if it is to continue
for more than a year. At least quarterly, the board must review
written reports concerning the amounts expended under the Plan and
the purposes for which such expenditures were made. The Plan and
any agreement related to it may be terminated at any time by vote
of a majority of board members who are not interested persons of
the Fund and have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan, or
by vote of a majority of the outstanding voting securities of the
Fund's Class B shares or by American Express Financial Advisors.
The Plan (or any agreement related to it) will terminate in the
event of its assignment, as that term is defined in the 1940 Act,
as amended. The Plan may not be amended to increase the amount to
be spent for distribution without shareholder approval, and all
material amendments to the Plan must be approved by a majority of
the board members, including a majority of the board members who
are not interested persons of the Fund and who do not have a
financial interest in the operation of the Plan or any agreement
related to it. The selection and nomination of disinterested board
members is the responsibility of the other disinterested board
members. No board member who is not an interested person, has any
direct or indirect financial interest in the operation of the Plan
or any related agreement. For the fiscal period ended May 31,
1996, the Fund paid fees of $907,154.
Total fees and expenses
Total combined fees and nonadvisory expenses of both the Fund and
the Portfolio cannot exceed the most restrictive applicable state
limitation. Currently, the most restrictive applicable state
expense limitation, subject to exclusion of certain expenses, is
2.5% of the first $30 million of the Fund's average daily net
assets, 2% of the next $70 million and 1.5% of average daily net
assets over $100 million, on an annual basis. At the end of each
month, if the fees and expenses of the Fund exceed this limitation
for the Fund's fiscal year in progress, AEFC will assume all
expenses in excess of the limitation. AEFC then may bill the Fund
for such expenses in subsequent months up to the end of that fiscal
year, but not after that date. No interest charges are assessed by
AEFC for expenses it assumes. The Fund paid total fees and
nonadvisory expenses of $15,879,426 for the fiscal period ended May
31, 1996.
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members and officers
who, except for Mr. Dudley, are also board members and officers of
all other funds in the IDS MUTUAL FUND GROUP. Mr. Dudley is a
board member of the 32 publicly offered funds. The board members
and officers are also board members and officers of all five trusts
in the Preferred Master Trust Group. All shares have cumulative
voting rights with respect to the election of board members.
<PAGE>
PAGE 123
Lynne V. Cheney'
Born in 1941.
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of
the Humanities. Director, The Reader's Digest Association Inc.,
Lockheed-Martin, the Interpublic Group of Companies, Inc.
(advertising), and FPL Group, Inc. (holding company for Florida
Power and Light).
William H. Dudley**
Born in 1932.
2900 IDS Tower
Minneapolis, MN
Executive vice president and director of AEFC.
Robert F. Froehlke+
Born in 1922.
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP.
Director, the ICI Mutual Insurance Co., Institute for Defense
Analyses, Marshall Erdman and Associates, Inc. (architectural
engineering) and Public Oversight Board of the American Institute
of Certified Public Accountants.
David R. Hubers+**
Born in 1943.
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
Previously, senior vice president, finance and chief financial
officer of AEFC.
Heinz F. Hutter+'
Born in 1929.
P.O. Box 5724
Minneapolis, MN
President and chief operating officer, Cargill, Incorporated
(commodity merchants and processors) from February 1991 to
September 1994. Executive vice president from 1981 to February
1991.
<PAGE>
PAGE 124
Anne P. Jones
Born in 1935.
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law
firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
Melvin R. Laird
Born in 1922.
Reader's Digest Association, Inc.
1730 Rhode Island Ave., N.W.
Washington, D.C.
Senior counsellor for national and international affairs, The
Reader's Digest Association, Inc. Chairman of the board, COMSAT
Corporation, former nine-term congressman, secretary of defense and
presidential counsellor. Director, Martin Marietta Corp.,
Metropolitan Life Insurance Co., The Reader's Digest Association,
Inc., Science Applications International Corp., Wallace Reader's
Digest Funds and Public Oversight Board (SEC Practice Section,
American Institute of Certified Public Accountants).
William R. Pearce+*
Born in 1927.
901 S. Marquette Ave.
Minneapolis, MN
President of all funds in the IDS MUTUAL FUND GROUP since June
1993. Former vice chairman of the board, Cargill, Incorporated
(commodity merchants and processors).
Edson W. Spencer+
Born in 1926.
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Chairman of the
board, Mayo Foundation (healthcare). Former chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise
Cascade Corporation (forest products) and CBS Inc. Member of
International Advisory Councils, Robert Bosch (Germany) and NEC
(Japan).
John R. Thomas**
Born in 1937.
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of AEFC.
<PAGE>
PAGE 125
Wheelock Whitney+
Born in 1926.
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).C.
Angus Wurtele'
Born in 1934.
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board, The Valspar Corporation (paints). Director,
Bemis Corporation (packaging), Donaldson Company (air cleaners &
mufflers) and General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer and employee of
the Fund.
**Interested person by reason of being an officer, board member,
employee and/or shareholder of AEFC or American Express.
The board also has appointed officers who are responsible for day-
to-day business decisions based on policies it has established.
In addition to Mr. Pearce, who is president, the Fund's other
officers are:
Leslie L. Ogg
Born in 1938.
901 S. Marquette Ave.
Minneapolis, MN
Vice president, general counsel and secretary of all funds in the
IDS MUTUAL FUND GROUP.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Born in 1942.
IDS Tower 10
Minneapolis, MN
Vice president-investments of all funds in the IDS MUTUAL FUND
GROUP. Director and senior vice president-investments of AEFC.
Melinda S. Urion
Born in 1953.
IDS Tower 10
Minneapolis, MN
<PAGE>
PAGE 126
Treasurer of all funds in the IDS MUTUAL FUND GROUP. Director,
senior vice president and chief financial officer of AEFC.
Director and executive vice president and controller of IDS Life
Insurance Company.
Members of the board who are not officers of the Fund or of AEFC
receive an annual fee of $2,000. They also receive attendance and
other fees, the cost of which the Fund shares with the other funds
in the IDS MUTUAL FUND GROUP. These fees include attendance of
meetings of the Board, $1,000; meetings of the Contracts Committee,
$750; meetings of the Audit, Executive or Investment Review
Committees, $500; meetings of the Personnel Committee, $300; out-
of-state, $500; and Chair of the Contracts Committee, $5,000.
Expenses for attending those meetings are also reimbursed.
During the fiscal period ended May 31, 1996, the members of the
board, for attending up to 24 meetings, received the following
compensation:
<TABLE><CAPTION>
Compensation Table
Pension or Estimated
Aggregate Retirement annual Total cash
compensation benefits benefit compensation
from the accrued as upon from the IDS
Board member Fund Fund expenses* retirement MUTUAL FUND GROUP
<S> <C> <C> <C> <C>
Lynne V. Cheney $2,257 $ 924 $1,000 $69,800
Robert F. Froehlke 2,243 3,417 1,000 69,300
Heinz F. Hutter 2,270 1,495 483 70,300
Anne P. Jones 2,283 849 1,000 70,800
Donald M. Kendall 2,031 2,078 1,000 62,500
(Part of Year)
Melvin R. Laird 2,330 1,930 1,000 72,600
Lewis W. Lehr 2,090 799 975 64,800
(Part of Year)
Edson W. Spencer 2,375 438 533 74,300
Wheelock Whitney 2,263 1,468 1,000 70,000
C. Angus Wurtele 2,191 1,581 992 67,300
</TABLE>
On May 31, 1996, the Fund's board members and officers as a group
owned less than 1% of the outstanding shares. During the fiscal
period ended May 31, 1996, no board member or officer earned more
than $60,000 from this Fund. All board members and officers as a
group earned $52,828, including $14,979 of retirement plan
benefits, from this Fund.
*The Fund had a retirement plan for its independent board members.
The plan terminated April 30, 1996.
CUSTODIAN
The Trust's securities and cash are held by First Bank National
Association, 180 E. Fifth St., St. Paul, MN 55101-1631, through a
custodian agreement. The Fund also retains the custodian pursuant
to a custodian agreement. The custodian is permitted to deposit
some or all of its securities in central depository systems as
allowed by federal law. For its services, the Portfolio pays the
custodian a maintenance charge and a charge per transaction in
addition to reimbursing the custodian's out-of-pocket expenses.<PAGE>
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INDEPENDENT AUDITORS
The financial statements contained in the Annual Report to
shareholders for the fiscal period ended May 31, 1996, were audited
by independent auditors, KPMG Peat Marwick LLP, 4200 Norwest
Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The
independent auditors also provide other accounting and tax-related
services as requested by the Fund.FINANCIAL STATEMENTS
The Independent Auditors' Report and the Financial Statements,
including Notes to the Financial Statements and the Schedule of
Investments in Securities, contained in the 1996 Annual Report to
shareholders, pursuant to Section 30(d) of the Investment Company
Act of 1940, as amended, are hereby incorporated in this SAI by
reference. No other portion of the Annual Report, however, is
incorporated by reference.
PROSPECTUS
The prospectus for IDS Extra Income Fund dated July 30, 1996, is
hereby incorporated in this SAI by reference.
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APPENDIX A
FOREIGN CURRENCY TRANSACTIONS
Since investments in foreign countries usually involve currencies
of foreign countries, and since the Portfolio may hold cash and
cash-equivalent investments in foreign currencies, the value of the
Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, the Portfolio may incur costs
in connection with conversions between various currencies.
Spot Rates and Forward Contracts. The Portfolio conducts its
foreign currency exchange transactions either at the spot (cash)
rate prevailing in the foreign currency exchange market or by
entering into forward currency exchange contracts (forward
contracts) as a hedge against fluctuations in future foreign
exchange rates. A forward contract involves an obligation to buy
or sell a specific currency at a future date, which may be any
fixed number of days from the contract date, at a price set at the
time of the contract. These contracts are traded in the interbank
market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract
generally has no deposit requirements. No commissions are charged
at any stage for trades.
The Portfolio may enter into forward contracts to settle a security
transaction or handle dividend and interest collection. When the
Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency or has been notified of
a dividend or interest payment, it may desire to lock in the price
of the security or the amount of the payment in dollars. By
entering into a forward contract, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse
change in the relationship between different currencies from the
date the security is purchased or sold to the date on which payment
is made or received or when the dividend or interest is actually
received.
The Portfolio also may enter into forward contracts when management
of the Portfolio believes the currency of a particular foreign
country may suffer a substantial decline against another currency.
It may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of
some or all of the Portfolio's securities denominated in such
foreign currency. The precise matching of forward contract amounts
and the value of securities involved generally will not be possible
since the future value of such securities in foreign currencies
more than likely will change between the date the forward contract
is entered into and the date it matures. The projection of short-
term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly
uncertain. The Portfolio will not enter into such forward<PAGE>
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contracts or maintain a net exposure to such contracts when
consummating the contracts would obligate the Portfolio to deliver
an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that
currency.
The Portfolio will designate cash or securities in an amount equal
to the value of the Portfolio's total assets committed to
consummating forward contracts entered into under the second
circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a
daily basis so that the value of the cash or securities will equal
the amount of the Portfolio's commitments on such contracts.
At maturity of a forward contract, the Portfolio may either sell
the security and make delivery of the foreign currency or retain
the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an offsetting contract with the
same currency trader obligating it to buy, on the same maturity
date, the same amount of foreign currency.
If the Portfolio retains the security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss (as
described below) to the extent there has been movement in forward
contract prices. If the Portfolio engages in an offsetting
transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline
between the date the Portfolio enters into a forward contract for
selling foreign currency and the date it enters into an offsetting
contract for purchasing the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to
buy. Should forward prices increase, the Portfolio will suffer a
loss to the extent the price of the currency it has agreed to buy
exceeds the price of the currency it has agreed to sell.
It is impossible to forecast what the market value of securities
will be at the expiration of a contract. Accordingly, it may be
necessary for the Portfolio to buy additional foreign currency on
the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and a decision is
made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received on the sale of the
portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver.
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The Portfolio's dealing in forward contracts will be limited to the
transactions described above. This method of protecting the value
of the Portfolio's securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange that
can be achieved at some point in time. Although such forward
contracts tend to minimize the risk of loss due to a decline in
value of hedged currency, they tend to limit any potential gain
that might result should the value of such currency increase.
Although the Portfolio values its assets each business day in terms
of U.S. dollars, it does not intend to convert its foreign
currencies into U.S. dollars on a daily basis. It will do so from
time to time, and shareholders should be aware of currency
conversion costs. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the
difference (spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Portfolio may buy put and write
covered call options on foreign currencies for hedging purposes.
For example, a decline in the dollar value of a foreign currency in
which securities are denominated will reduce the dollar value of
such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in
the value of securities, the Portfolio may buy put options on the
foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have
resulted.
As in the case of other types of options, however, the benefit to
the Portfolio derived from purchases of foreign currency options
will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do
not move in the direction or to the extent anticipated, the
Portfolio could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
The Portfolio may write options on foreign currencies for the same
types of hedging purposes. For example, when the Portfolio
anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it could,
instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will
most likely not be exercised and the diminution in value of
securities will be fully or partially offset by the amount of the
premium received.
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As in the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and
the Portfolio would be required to buy or sell the underlying
currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the
Portfolio also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable
movements on exchange rates.
All options written on foreign currencies will be covered. An
option written on foreign currencies is covered if the Portfolio
holds currency sufficient to cover the option or has an absolute
and immediate right to acquire that currency without additional
cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An
option writer could lose amounts substantially in excess of its
initial investments, due to the margin and collateral requirements
associated with such positions.
Options on foreign currencies are traded through financial
institutions acting as market-makers, although foreign currency
options also are traded on certain national securities exchanges,
such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. In an over-the-
counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there
are no daily price fluctuation limits, and adverse market movements
could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this
entire amount could be lost.
Foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options
Clearing Corporation (OCC), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting the Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of availability of a liquid
secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature
of the foreign currency market, possible intervention by
governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign <PAGE>
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currencies involve certain risks not presented by the over-the-
counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has
established banking relationships in certain foreign countries for
the purpose. As a result, the OCC may, if it determines that
foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would
result in undue burdens on OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The Portfolio may
enter into currency futures contracts to sell currencies. It also
may buy put options and write covered call options on currency
futures. Currency futures contracts are similar to currency
forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size
and delivery date. Most currency futures call for payment of
delivery in U.S. dollars. The Portfolio may use currency futures
for the same purposes as currency forward contracts, subject to
Commodity Futures Trading Commission (CFTC) limitations. All
futures contracts are aggregated for purposes of the percentage
limitations.
Currency futures and options on futures values can be expected to
correlate with exchange rates, but will not reflect other factors
that may affect the values of the Portfolio's investments. A
currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect the Portfolio
against price decline if the issuer's creditworthiness
deteriorates. Because the value of the Portfolio's investments
denominated in foreign currency will change in response to many
factors other than exchange rates, it may not be possible to match
the amount of a forward contract to the value of the Portfolio's
investments denominated in that currency over time.
The Portfolio will hold securities or other options or futures
positions whose values are expected to offset its obligations. The
Portfolio will not enter into an option or futures position that
exposes the Portfolio to an obligation to another party unless it
owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient
to cover its potential obligations.
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APPENDIX B
OPTIONS AND INTEREST RATE FUTURES CONTRACTS
The Portfolio may buy or write options traded on any U.S. or
foreign exchange or in the over-the-counter market. The Portfolio
may enter into interest rate futures contracts traded on any U.S.
or foreign exchange. The Portfolio also may buy or write put and
call options on these futures. Options in the over-the-counter
market will be purchased only when the investment manager believes
a liquid secondary market exists for the options and only from
dealers and institutions the investment manager believes present a
minimal credit risk. Some options are exercisable only on a
specific date. In that case, or if a liquid secondary market does
not exist, the Portfolio could be required to buy or sell
securities at disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option
for a security has the right to buy the security at a set price for
the length of the contract. A person who sells a call option is
called a writer. The writer of a call option agrees to sell the
security at the set price when the buyer wants to exercise the
option, no matter what the market price of the security is at that
time. A person who buys a put option has the right to sell a
security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price
if the purchaser wants to exercise the option, no matter what the
market price of the security is at that time. An option is covered
if the writer owns the security (in the case of a call) or sets
aside the cash (in the case of a put) that would be required upon
exercise.
The price paid by the buyer for an option is called a premium. In
addition the buyer generally pays a broker a commission. The
writer receives a premium, less a commission, at the time the
option is written. The cash received is retained by the writer
whether or not the option is exercised. A writer of a call option
may have to sell the security for a below-market price if the
market price rises above the exercise price. A writer of a put
option may have to pay an above-market price for the security if
its market price decreases below the exercise price.
Options can be used to produce incremental earnings, protect gains
and facilitate buying and selling securities for investment
purposes. The use of options and futures contracts may benefit the
Portfolio and its shareholders by improving the Portfolio's
liquidity and by helping to stabilize the value of its net assets.
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Buying options. Put and call options may be used as a trading
technique to facilitate buying and selling securities for
investment reasons. Options are used as a trading technique to
take advantage of any disparity between the price of the underlying
security in the securities market and its price on the options
market. It is anticipated the trading technique will be utilized
only to effect a transaction when the price of the security plus
the option price will be as good or better than the price at which
the security could be bought or sold directly. When the option is
purchased, the Portfolio pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying
security when the option is exercised. For record-keeping and tax
purposes, the price obtained on the purchase of the underlying
security will be the combination of the exercise price, the premium
and both commissions. When using options as a trading technique,
commissions on the option will be set as if only the underlying
securities were traded.
Put and call options also may be held by the Portfolio for
investment purposes. Options permit the Portfolio to experience
the change in the value of a security with a relatively small
initial cash investment. The risk the Portfolio assumes when it
buys an option is the loss of the premium. To be beneficial to the
Portfolio, the price of the underlying security must change within
the time set by the option contract. Furthermore, the change must
be sufficient to cover the premium paid, the commissions paid both
in the acquisition of the option and in a closing transaction or in
the exercise of the option and subsequent sale (in the case of a
call) or purchase (in the case of a put) of the underlying
security. Even then the price change in the underlying security
does not ensure a profit since prices in the option market may not
reflect such a change.
Writing covered options. The Portfolio will write covered options
when it feels it is appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on
the basis of investment considerations consistent with the
Portfolio's goal.
'All options written by the Portfolio will be covered. For covered
call options if a decision is made to sell the security, the
Portfolio will attempt to terminate the option contract through a
closing purchase transaction.
'The Portfolio will write options only as permitted under federal
or state laws or regulations, such as those that limit the amount
of total assets subject to the options. While no limit has been
set by the Portfolio, it will conform to the requirements of those
states. For example, California limits the writing of options to
50% of the assets of a fund.
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Net premiums on call options closed or premiums on expired call
options are treated as short-term capital gains. Since the
Portfolio is taxed as a regulated investment company under the
Internal Revenue Code, any gains on options and other securities
held less than three months must be limited to less than 30% of its
annual gross income.
If a covered call option is exercised, the security is sold by the
Portfolio. The Portfolio will recognize a capital gain or loss
based upon the difference between the proceeds and the security's
basis.
Options on many securities are listed on options exchanges. If the
Portfolio writes listed options, it will follow the rules of the
options exchange. Options are valued at the close of the New York
Stock Exchange. An option listed on a national exchange, Chicago
Board Options Exchange (CBOE) or NASDAQ will be valued at the last-
quoted sales price or, if such a price is not readily available, at
the mean of the last bid and asked prices.
FUTURES CONTRACTS. A futures contract is an agreement between two
parties to buy and sell a security for a set price on a future
date. They have been established by boards of trade which have
been designated contracts markets by the Commodity Futures Trading
Commission (CFTC). Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange, and
the boards of trade, through their clearing corporations, guarantee
performance of the contracts. Currently, there are futures
contracts based on such debt securities as long-term U.S. Treasury
bonds, Treasury notes, GNMA modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills and bank certificates
of deposit. While futures contracts based on debt securities do
provide for the delivery and acceptance of securities, such
deliveries and acceptances are very seldom made. Generally, the
futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction for a futures contract sale
is effected by the Portfolio entering into a futures contract
purchase for the same aggregate amount of the specific type of
financial instrument and same delivery date. If the price in the
sale exceeds the price in the offsetting purchase, the Portfolio
immediately is paid the difference and realizes a gain. If the
offsetting purchase price exceeds the sale price, the Portfolio
pays the difference and realizes a loss. Similarly, closing out a
futures contract purchase is effected by the Portfolio entering
into a futures contract sale. If the offsetting sale price exceeds
the purchase price, the Portfolio realizes a gain, and if the
offsetting sale price is less than the purchase price, the
Portfolio realizes a loss. At the time a futures contract is made,
a good-faith deposit called initial margin is set up within a
segregated account at the Portfolio's custodian bank. The initial
margin deposit is approximately 1.5% of a contract's face value. <PAGE>
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Daily thereafter, the futures contract is valued and the payment of
variation margin is required so that each day the Portfolio would
pay out cash in an amount equal to any decline in the contract's
value or receive cash equal to any increase. At the time a futures
contract is closed out, a nominal commission is paid, which is
generally lower than the commission on a comparable transaction in
the cash markets.
The purpose of a futures contract, in the case of a portfolio
holding long-term debt securities, is to gain the benefit of
changes in interest rates without actually buying or selling long-
term debt securities. For example, if the Portfolio owned long-
term bonds and interest rates were expected to increase, it might
enter into futures contracts to sell securities which would have
much the same effect as selling some of the long-term bonds it
owned.
Futures contracts are based on types of debt securities referred to
above, which have historically reacted to an increase or decline in
interest rates in a fashion similar to the debt securities the
Portfolio owns. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of
the Portfolio's futures contracts would increase at approximately
the same rate, thereby keeping the net asset value of the Portfolio
from declining as much as it otherwise would have. If, on the
other hand, the Portfolio held cash reserves and interest rates
were expected to decline, the Portfolio might enter into interest
rate futures contracts for the purchase of securities. If short-
term rates were higher than long-term rates, the ability to
continue holding these cash reserves would have a very beneficial
impact on the Portfolio's earnings. Even if short-term rates were
not higher, the Portfolio would still benefit from the income
earned by holding these short-term investments. At the same time,
by entering into futures contracts for the purchase of securities,
the Portfolio could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the
market had stabilized. At that time, the futures contracts could
be liquidated and the Portfolio's cash reserves could then be used
to buy long-term bonds on the cash market. The Portfolio could
accomplish similar results by selling bonds with long maturities
and investing in bonds with short maturities when interest rates
are expected to increase or by buying bonds with long maturities
and selling bonds with short maturities when interest rates are
expected to decline. But by using futures contracts as an
investment tool, given the greater liquidity in the futures market
than in the cash market, it might be possible to accomplish the
same result more easily and more quickly. Successful use of
futures contracts depends on the investment manager's ability to
predict the future direction of interest rates. If the investment
manager's prediction is incorrect, the Portfolio would have been
better off had it not entered into futures contracts.
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OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give
the holder a right to buy or sell futures contracts in the future.
Unlike a futures contract, which requires the parties to the
contract to buy and sell a security on a set date, an option on a
futures contract merely entitles its holder to decide on or before
a future date (within nine months of the date of issue) whether to
enter into such a contract. If the holder decides not to enter
into the contract, all that is lost is the amount (premium) paid
for the option. Furthermore, because the value of the option is
fixed at the point of sale, there are no daily payments of cash to
reflect the change in the value of the underlying contract.
However, since an option gives the buyer the right to enter into a
contract at a set price for a fixed period of time, its value does
change daily and that change is reflected in the net asset value of
the Portfolio.
RISKS. There are risks in engaging in each of the management tools
described above. The risk the Portfolio assumes when it buys an
option is the loss of the premium paid for the option. Purchasing
options also limits the use of monies that might otherwise be
available for long-term investments.
The risk involved in writing options on futures contracts the
Portfolio owns, or on securities held in its portfolio, is that
there could be an increase in the market value of such contracts or
securities.
If that occurred, the option would be exercised and the asset sold
at a lower price than the cash market price. To some extent, the
risk of not realizing a gain could be reduced by entering into a
closing transaction. The Portfolio could enter into a closing
transaction by purchasing an option with the same terms as the one
it had previously sold. The cost to close the option and terminate
the Portfolio's obligation, however, might be more or less than the
premium received when it originally wrote the option. Furthermore,
the Portfolio might not be able to close the option because of
insufficient activity in the options market.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities
subject to futures contracts may not correlate perfectly with the
behavior of the cash prices of the Portfolio's securities. The
correlation may be distorted because the futures market is
dominated by short-term traders seeking to profit from the
difference between a contract or security price and their cost of
borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
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Another risk is that the Portfolio's investment manager could be
incorrect in anticipating as to the direction or extent of various
interest rate movements or the time span within which the movements
take place. For example, if the Portfolio sold futures contracts
for the sale of securities in anticipation of an increase in
interest rates, and interest rates declined instead, the Portfolio
would lose money on the sale.
TAX TREATMENT. As permitted under federal income tax laws, the
Portfolio intends to identify futures contracts as mixed straddles
and not mark them to market, that is, not treat them as having been
sold at the end of the year at market value. Such an election may
result in the Portfolio being required to defer recognizing losses
incurred by entering into futures contracts and losses on
underlying securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions
in options on futures contracts and indexes will depend on whether
such option is a section 1256 contract . If the option is a non-
equity option, the Portfolio will either make a 1256(d) election
and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term
and 60% long-term. Certain provisions of the Internal Revenue Code
may also limit the Portfolio's ability to engage in futures
contracts and related options transactions. For example, at the
close of each quarter of the Portfolio's taxable year, at least 50%
of the value of its assets must consist of cash, government
securities and other securities, subject to certain diversification
requirements. Less than 30% of its gross income must be derived
from sales of securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a
security for purposes of the 50%-of-assets test and that its issuer
is the issuer of the underlying security, not the writer of the
option, for purposes of the diversification requirements. In order
to avoid realizing a gain within the three-month period, the
Portfolio may be required to defer closing out a contract beyond
the time when it might otherwise be advantageous to do so. The
Portfolio also may be restricted in purchasing put options for the
purpose of hedging underlying securities because of applying the
short sale holding period rules with respect to such underlying
securities.
Accounting for futures contracts will be according to generally
accepted accounting principles. Initial margin deposits will be
recognized as assets due from a broker (the Portfolio's agent in
acquiring the futures position). During the period the futures
contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a
daily basis to reflect the market value of the contract at the end
of each day's trading. Variation margin payments will be made or
received depending upon whether gains or losses are incurred. All
contracts and options will be valued at the last-quoted sales price
on their primary exchange.<PAGE>
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APPENDIX C
MORTGAGE-BACKED SECURITIES
A mortgage pass-through certificate is one that represents an
interest in a pool, or group, of mortgage loans assembled by the
Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association
(FNMA) or non-governmental entities. In pass-through certificates,
both principal and interest payments, including prepayments, are
passed through to the holder of the certificate. Prepayments on
underlying mortgages result in a loss of anticipated interest, and
the actual yield (or total return) to the Portfolio, which is
influenced by both stated interest rates and market conditions, may
be different than the quoted yield on certificates. Some U.S.
government securities may be purchased on a when-issued basis,
which means that it may take as long as 45 days after the purchase
before the securities are delivered to the Portfolio.
Stripped Mortgage-Backed Securities. The Portfolio may invest in
stripped mortgage-backed securities. Generally, there are two
classes of stripped mortgage-backed securities: Interest Only (IO)
and Principal Only (PO). IOs entitle the holder to receive
distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities.
POs entitle the holder to receive distributions consisting of all
or a portion of the principal of the underlying pool of mortgage
loans or mortgage-backed securities. The cash flows and yields on
IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments
may adversely affect the yield to maturity of IOs. A slow rate of
principal payments may adversely affect the yield to maturity of
POs. On an IO, if prepayments of principal are greater than
anticipated, an investor may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on
a PO will be affected more severely than would be the case with a
traditional mortgage-backed security.
Mortgage-Backed Security Spread Options. The Portfolio may
purchase mortgage-backed security (MBS) put spread options and
write covered MBS call spread options. MBS spread options are
based upon the changes in the price spread between a specified
mortgage-backed security and a like-duration Treasury security.
MBS spread options are traded in the OTC market and are of short
duration, typically one to two months. The Portfolio would buy or
sell covered MBS call spread options in situations where mortgage-
backed securities are expected to underperform like-duration
Treasury securities.
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APPENDIX D
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is
dollar-cost averaging. Dollar-cost averaging involves building a
portfolio through the investment of fixed amounts of money on a
regular basis regardless of the price or market condition. This
may enable an investor to smooth out the effects of the volatility
of the financial markets. By using this strategy, more shares will
be purchased when the price is low and less when the price is high.
As the accompanying chart illustrates, dollar-cost averaging tends
to keep the average price paid for the shares lower than the
average market price of shares purchased, although there is no
guarantee.
While this does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many
shareholders who can continue investing through changing market
conditions to accumulate shares in a fund to meet long-term goals.
Dollar-cost averaging
___________________________________________________________________
Regular Market Price Shares
Investment of a Share Acquired
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
$500 $25.00 103.4
Average market price of a share over 5 periods:
$5.00 ($25.00 divided by 5).
The average price you paid for each share:
$4.84 ($500 divided by 103.4).
<PAGE>
PAGE 141
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report and
prospectus are placed
in a blue strip at the
top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report and prospectus. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
