<PAGE>
PAGE 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 28 (File No. 2-86637) X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 29 (File No. 811-3848) X
------ ---
IDS EXTRA INCOME FUND, INC.
IDS Tower 10,
Minneapolis, Minnesota 55440-0010
Leslie L. Ogg - 901 Marquette Ave. So., Suite 2810,
Minneapolis, MN 55402-3268
(612) 330-9283
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check
appropriate box)
immediately upon filing pursuant to paragraph (b)
X on July 30, 1997 pursuant to paragraph (b)
60 days after filing, pursuant to paragraph (a)(1) on (date) pursuant to
paragraph (a)(1) 75 days after filing pursuant to paragraph (a)(2) on
(date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has registered an indefinite number or amount of securities under the
Securities Act of 1933 pursuant to Section 24f-2 of the Investment Company Act
of 1940. Registrant's Rule 24f-2 Notice for its most recent fiscal year ended
May 31, 1997, was filed on or about July 28, 1997.
IDS Extra Income Fund, a series of the Registrant, has adopted a master/feeder
operating structure. This Post-Effective Amendment includes a signature page for
Income Trust, the master fund.
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PAGE 2
Cross reference sheet showing the location in its prospectus and the Statement
of Additional Information of the information called for by the items enumerated
in Parts A and B of Form N-1A.
Negative answers omitted from prospectus are so indicated.
PART A PART B
<TABLE>
<CAPTION>
Section Section in
Item No. in Prospectus Item No. Statement of Additional Information
<S> <C> <C> <C>
1 Cover page of prospectus 10 Cover page of SAI
2(a) Sales charge and Fund expenses 11 Table of Contents
(b) The Fund in brief
(c) The Fund in brief 12 NA
3(a) Financial highlights 13(a) Additional Investment Policies; all
(b) NA appendices except Dollar-Cost Averaging
(c) Performance (b) Additional Investment Policies
(d) Financial highlights (c) Additional Investment Policies
(d) Security Transactions
4(a) The Fund in brief; Investment policies and
risks; How the Fund is organized 14(a) Board members and officers of the Fund;**
(b) Investment policies and risks Board members and officers
(c) Investment policies and risks (b) Board members and Officers
(c) Board members and Officers
5(a) Board members and officers; Board members
and officers of the Fund (listing) 15(a) NA
(b)(i) Investment manager; (b) NA
About American Express Financial (c) Board members and Officers
Corporation -- General Information
(b)(ii) Investment manager 16(a)(i) How the Fund is organized; About American
(b)(iii) Investment manager Express Financial Corporation**
(c) Portfolio manager (a)(ii) Agreements: Investment Management Services
(d) Administrator and transfer agent Agreement, Plan and Supplemental
(e) Administrator and transfer agent Agreement of Distribution
(f) Distributor (a)(iii) Agreements: Investment Management Services Agreement
(g) Investment manager; (b) Agreements: Investment Management Services Agreement
About American Express Financial (c) NA
Corporation -- General Information (d) Agreements: Administrative Services
Agreement, Shareholder Service Agreement
5A(a) * (e) NA
(b) * (f) Agreements: Distribution Agreement
(g) NA
6(a) Shares; Voting rights (h) Custodian; Independent Auditors
(b) NA (i) Agreements: Transfer Agency Agreement; Custodian
(c) NA
(d) Voting rights 17(a) Security Transactions
(e) Cover page; Special shareholder services (b) Brokerage Commissions Paid to Brokers Affiliated
(f) Dividends and capital gain distributions; with American Express Financial Corporation
Reinvestments (c) Security Transactions
(g) Taxes (d) Security Transactions
(h) Alternative sales arrangements; Special (e) Security Transactions
considerations regarding master/feeder
structure 18(a) Shares; Voting rights**
(b) NA
7(a) Distributor
(b) Valuing Fund shares 19(a) Investing in the Fund
(c) How to purchase, exchange or redeem shares (b) Valuing Fund Shares; Investing in the Fund
(d) How to purchase shares (c) NA
(e) NA
(f) Distributor 20 Taxes
8(a) How to redeem shares 21(a) Agreements: Distribution Agreement
(b) NA (b) Agreements: Distribution Agreement
(c) How to purchase shares: Three ways to invest (c) NA
(d) How to purchase, exchange or redeem shares:
Redemption policies -- "Important..." 22(a) Performance Information (for money market
funds only)
9 None (b) Performance Information (for all funds except
money market funds)
23 Financial Statements
</TABLE>
*Designates information is located in annual report.
**Designates location in prospectus.
<PAGE>
PAGE 3
IDS Extra Income Fund
Prospectus
July 30, 1997
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 managed by American Express
Financial Corporation and 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 sections
entitled "Investment policies and risks" and "Facts about investments and their
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 web site
(http://www.sec.gov). The SAI is incorporated herein by reference. For a free
copy, contact American Express Shareholder Service.
Like all mutual fund shares, 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.
Please note that the Fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goals
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN
55440-0534
800-862-7919
TTY: 800-846-4852
Web site address: http://www.americanexpress.com/advisors
<PAGE>
PAGE 4
Table of contents
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 and Portfolio are 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 5
The Fund in brief
Goals
IDS Extra Income Fund (the Fund) seeks to provide shareholders with high current
income as its primary goal and, as its secondary goal, capital growth. It does
so by investing all of its assets in High Yield Portfolio (the Portfolio) of
Income Trust (the Trust) rather than by directly investing in and managing its
own portfolio of securities. 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. The 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 that 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. For further information, refer to the later section in
the prospectus titled "Investment policies and risks."
Structure of the Fund
This Fund uses what is commonly known as a master/feeder structure. This means
that the Fund (the feeder fund) invests all of its assets in the Portfolio (the
master fund). The Portfolio invests in and manages the securities and has the
same goals 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
<PAGE>
PAGE 6
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 $149
billion in assets for the IDS MUTUAL FUND GROUP. 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 the Fund since 1985 and serves as
portfolio manager of the Portfolio. He also is portfolio manager of IDS Life
Income Advantage Fund.
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.
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 (as a percentage 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*** 0.35% 0.36% 0.28%
Total**** 0.92% 1.68% 0.85%
*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.
<PAGE>
PAGE 7
***Other expenses include an administrative services fee, a shareholder services
fee, a transfer agency fee and other nonadvisory 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. AEFC 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, approximately
$14,400 in year one and $7,100 in year two. These additional costs may be more
than offset in subsequent years if the assets being managed increase.
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 $ 98 $158
Class B $67 $93 $111 $179**
Class B* $17 $53 $ 91 $179**
Class Y $ 9 $27 $ 47 $105
*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 8
Performance
Financial highlights
IDS Extra Income Fund, Inc.
<TABLE>
<CAPTION>
Fiscal period ended May 31,
Per share income and capital changes(a)
Class A
1997 1996(b) 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $ 4.34 $ 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 .39 .28 .39 .43 .47 .44 .42 .46 .53 .53 .53
Net gains (losses) .06 .20 .13 (.42) .16 .52 .24 (1.01) (.20) (.27) (.12)
(both realized
and unrealized)
Total from investment .45 .48 .52 .01 .63 .96 .66 (.55) .33 .26 .41
operations
Less distributions:
Dividends from net (.40) (.29) (.39) (.43) (.43) (.44) (.41) (.44) (.54) (.53) (.53)
investment income
Distributions from -- -- -- -- -- -- -- -- -- -- (.10)
realized gains
Total distributions (.40) (.29) (.39) (.43) (.43) (.44) (.41) (.44) (.54) (.53) (.63)
Net asset value, $ 4.39 $ 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
1997 1996(b) 1995 1994 1993 1992 1991 1990 1989 1988 1987
Net assets, end of $2,582 $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 .92% .94%(d) .87% .79% .81% .83% .88% .84% .82% .81% .82%
average daily net assets(e)
Ratio of net income to 9.01% 8.90%(d) 9.93% 9.85% 10.03% 11.13% 12.45% 12.28% 11.67% 11.38% 10.34%
average daily net assets
Portfolio turnover rate 92% 61% 70% 74% 70% 89% 88% 88% 102% 105% 87%
(excluding short-term
securities)
Total return(c) 10.9% 11.7% 14.2% (0.2%) 15.8% 26.9% 21.2% (12.5%) 7.4% 5.8% 8.3%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) The Fund's fiscal year-end was changed from Aug. 31 to May 31, effective 1996.
(c) Total return does not reflect payment of a sales charge.
(d) Adjusted to an annual basis.
(e) Effective fiscal year 1996, the expense ratio is based on total expenses of
the Fund before reduction of earnings credits on cash balances.
</TABLE>
<PAGE>
PAGE 9
<TABLE>
<CAPTION>
Per share income and capital changes(a)
Class B Class Y
1997 1996(e) 1995(b) 1997 1996(e) 1995(b)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 4.34 $ 4.15 $ 3.93 $ 4.34 $ 4.15 $ 3.93
beginning of period
Income from investment operations:
Net investment income .36 .25 .18 .40 .28 .20
Net gains (losses) .06 .20 .21 .06 .20 .21
(both realized
and unrealized)
Total from investment .42 .45 .39 .46 .48 .41
operations
Less distributions:
Dividends from net (.37) (.26) (.17) (.41) (.29) (.19)
investment income
Net asset value, $ 4.39 $ 4.34 $ 4.15 $ 4.39 $ 4.34 $ 4.15
end of period
Ratios/supplemental data
Class B Class Y
1997 1996(e) 1995(b) 1997 1996(e) 1995(b)
Net assets, end of $ 613 $ 270 $ 76 $ -- $ -- $ 2
period (in millions)
Ratio of expenses to 1.68% 1.70%(d) 1.72%(d) .85% .76%(d) .78%(d)
average daily net assets(f)
Ratio of net income to 8.18% 8.34%(d) 9.51%(d) 8.68% 8.24%(d) 10.19%(d)
average daily net assets
Portfolio turnover rate 92% 61% 70% 92% 61% 70%
(excluding short-term
securities)
Total return(c) 10.1% 11.1% 9.9% 11.1% 11.8% 10.4%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was March 20, 1995.
(c) Total return does not reflect payment of a sales charge.
(d) Adjusted to an annual basis.
(e) The Fund's fiscal year-end was changed from Aug. 31 to May 31, effective 1996.
(f) Effective fiscal year 1996, the expense ratio is based on total expenses of
the Fund before reduction of earnings credits on cash balances.
</TABLE>
The information in these tables has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of the Fund are contained in the Fund's annual
report which, if not included with this prospectus, may be obtained without
charge.
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.
<PAGE>
PAGE 10
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, 1997
Purchase 1 year Since 5 years 10 years
made ago inception* ago ago
Extra Income:
Class A + 5.37% --% +10.10% + 9.26%
Class B + 6.07% +12.95% --% --%
Class Y +11.05% +15.52% --% --%
Lehman
Aggregate
Bond Index + 8.32% + 8.39%** + 7.16% + 8.84%
*Inception date was March 20, 1995.
**Measurement period started April 1, 1995.
Cumulative total returns as of May 31, 1997
Purchase 1 year Since 5 years 10 years
made ago inception* ago ago
Extra Income:
Class A + 5.37% --% +61.91% +142.84%
Class B + 6.07% +30.73% --% --%
Class Y +11.05% +37.35% --% --%
Lehman
Aggregate
Bond Index + 8.32% +19.08%** +41.28% +133.25%
*Inception date was March 20, 1995.
**Measurement period started April 1, 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.
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
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PAGE 11
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 an unmanaged index made up of a 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, 1997, was 7.45% for Class A, 7.08% for
Class B and 7.94% 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.
Investment policies and risks
The policies described below apply both to the Fund and the Portfolio. The
Portfolio invests primarily in debt securities below investment grade issued by
U.S. and foreign corporations. Most of these will be rated BBB, BB, or B by
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.
<PAGE>
PAGE 12
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 the
issuing 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 investment manager believes it is advantageous to do so.
Bond ratings and holdings for fiscal 1997
<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>
0.96% AAA Highest quality 0.30%
0.02 AA High quality --
0.07 A Upper medium grade --
1.00 BBB Medium grade 0.05
23.95 BB Moderately speculative 0.79
52.52 B Speculative 2.09
4.36 CCC Highly speculative 3.65
0.17 CC Poor quality --
0.02 C Lowest quality --
-- D In default --
11.68 Unrated Unrated securities 4.80
</TABLE>
(See the Appendix to this prospectus describing corporate bond ratings for
further information.)
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,
convertible securities trade more like common stock.
<PAGE>
PAGE 13
Preferred stocks: If a company earns a profit, it generally must pay its
preferred stockholders a dividend at a pre-established rate.
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 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
<PAGE>
PAGE 14
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.
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. Securities and 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.
The investment policies described above may be changed by the boards.
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 the Portfolio's net
assets.
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.
<PAGE>
PAGE 15
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
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 0.10% of average Available only to
daily net assets certain qualifying
institutional
investors
</TABLE>
Conversion of Class B shares to Class A shares - During the ninth calendar year
of owning your Class B shares, Class B shares will convert to Class A shares and
will no longer be subject to a distribution fee. Class B shares that convert to
Class A shares are not subject to a sales charge or distribution fee. Class B
shares purchased through reinvested dividends and distributions also will
convert to Class A shares in the same proportion as the other Class B shares.
This means more of your money will be put to work for you.
<PAGE>
PAGE 16
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 distribution fee (included in "Ongoing expenses")
and sales charges 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 you
than Class B shares. will no longer be
subject to higher fees.
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
<PAGE>
PAGE 17
this analysis, the example in the "Sales charge and Fund expenses" section of
the prospectus illustrates the charges applicable to each class of shares.
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 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 are 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.
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.
<PAGE>
PAGE 18
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.
Three ways to invest
<TABLE>
<CAPTION>
1
<S> <C> <C>
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 each payment
o automatic payroll deduction Account balances: none
(on active plans of
o bank authorization monthly payments)
o direct deposit of If account balance is below
Social Security check $2,000, frequency of payments
must be at least monthly.
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).
</TABLE>
*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.
<PAGE>
PAGE 19
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 on any other fund, including fees and expenses,
read that fund's prospectus carefully.
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 use the sales charge imposed on
the purchase of Class A shares to create or increase 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.
Two ways to request an exchange or redemption of shares
<TABLE>
<CAPTION>
1
<S> <C>
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 pape certificates of shares you hold
</TABLE>
<PAGE>
PAGE 20
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
2
By phone
American Express Financial o The Fund and AEFC will honor any telephone exchange
Advisors Telephon Transaction or redemption request believed to be
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
612-671-3800 or procedures are not 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>
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 21
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 account 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.)
Three ways to receive payment when you redeem shares
<TABLE>
<CAPTION>
1
<S> <C>
By regular or express mail o Mailed to the address on record
o Payable to names listed on the account
NOTE: You will be charged a fee if you
request express mail delivery.
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>
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:
<PAGE>
PAGE 22
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.
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.
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:
<PAGE>
PAGE 23
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 Investors who have a business relationship with a newly associated financial
advisor who joined AEFA from another investment firm provided that (1) the
purchase is made within six months of the advisor's appointment date with AEFA,
(2) the purchase is made with proceeds of a redemption of shares that were
sponsored by the financial advisor's previous broker-dealer, and (3) the
proceeds must be the result of a redemption of an equal or greater value where a
sales load was previously assessed.
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. The CDSC will be waived only in
the circumstances described for waivers for Class B shares.
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 the same class
of another fund in the IDS MUTUAL FUND GROUP that has a sales charge.
o Purchases made through or under a "wrap fee" product sponsored by American
Express Financial Advisors Inc. (total amount of all investments must be
$50,000); the University of Texas System ORP; or a segregated separate account
offered by Nationwide Life Insurance Company or Nationwide Life and Annuity
Insurance Company.
o Purchases made with the proceeds from IDS Life Real Estate Variable Annuity
surrenders through December 31, 1997.
*Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
<PAGE>
PAGE 24
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.
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
<PAGE>
PAGE 25
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.
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 Financial Advisors 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
TTY Service
For the hearing impaired
800-846-4852
American Express Financial Advisors Easy Access Line Automated account
information (TouchToneR phones only), including current Fund prices and
performance, account values and recent account transactions 800-862-7919
<PAGE>
PAGE 26
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
The Portfolio allocates investment income from dividends and interest and net
realized capital gains or losses, if any, to the Fund. The Fund deducts direct
and allocated expenses from the investment income. The Fund's net investment
income 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. The Fund will
offset any net realized capital gains by any available capital loss carryovers.
Net realized long-term capital gains, if any, are distributed at the end of the
calendar year as capital gain distributions. Before they are distributed, both
net investment income and net long-term capital gains are included in the value
of each share. After they are distributed, the value of each share drops by the
per-share amount of the distribution. (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.
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 the same class of
another publicly available IDS fund for which you've previously opened
an account.
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.
<PAGE>
PAGE 27
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.
Buying a dividend creates a tax liability. This means buying shares shortly
before a net investment income or 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.
<PAGE>
PAGE 28
<TABLE>
<CAPTION>
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification number
of:
<S> <C>
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
</TABLE>
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.
How the Fund and Portfolio are organized
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.
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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.
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.
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
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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.
Shareholder meetings: Whenever the Portfolio proposes to change a fundamental
investment policy or to take any other action requiring approval of its security
holders, the Fund will 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. Board members and
officers serve 47 IDS and IDS Life funds and 15 Master Trust portfolios, except
for William H. Dudley, who does not serve the nine IDS Life funds. The board
members also serve as members of the board of the 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.
Board members and officers of the Fund
President and interested board member
William R. Pearce
Chairman of the board, Board Services Corporation (provides administrative
services to boards including the boards of the IDS and IDS Life funds and Master
Trust portfolios).
Independent board members
H. Brewster Atwater, Jr.
Former chairman and chief executive officer, General Mills, Inc.
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public
Policy Research.
Robert F. Froehlke
Former president of all funds in the IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
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PAGE 31
Anne P. Jones
Attorney and telecommunications consultant.
Melvin R. Laird
Senior counsellor for national and international affairs, The Reader's Digest
Association, Inc.
Alan K. Simpson
Former United States senator for Wyoming.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
Interested board members who are officers and/or employees of AEFC
William H. Dudley
Senior advisor to the chief executive officer, 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
Senior vice president, AEFC. Vice president - Investments for the Fund.
Melinda S. Urion
Senior vice president and chief financial officer, AEFC. Treasurer for the Fund.
Other officer
Leslie L. Ogg
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the Fund.
Refer to the SAI for the board members' and officers' biographies.
Investment manager
The Portfolio pays AEFC for managing its assets. The Fund pays its proportionate
share of the fee. Under the Investment Management Services Agreement, AEFC is
paid a fee for these services based on The average daily net assets of the
Portfolio, as follows:
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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 year ended May 31, 1997, the Portfolio paid AEFC a total
investment management fee of 0.57% of its average daily net assets. Under the
Agreement, the Portfolio 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 agreement, the Administrative Services Agreement, has
a declining annual rate beginning at 0.05% and decreasing to 0.025% as assets
increase. The second agreement, 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
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 fee) 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 average daily net assets for Class A
and Class B and 0.10% for Class Y.
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Total expenses paid by the Fund's Class A shares for the fiscal year ended May
31, 1997, were 0.92% of its average daily net assets. Expenses for Class B and
Class Y were 1.68% and 0.85%, respectively.
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 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,
1997, were more than $149 billion.
American Express Financial Advisors serves individuals and businesses through
its nationwide network of more than 178 offices and more than 8,599 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 AEFC.
The Portfolio may pay brokerage commissions to broker-dealer affiliates of AEFC.
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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.
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.
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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 or 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.
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.
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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.
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STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS EXTRA INCOME FUND
July 30, 1997
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, 1997, and it is to be used with the prospectus dated
July 30, 1997, and the Annual Report for the fiscal year ended May 31, 1997.
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TABLE OF CONTENTS
Goals and Investment Policies....................See Prospectus
Additional Investment Policies...............................p.3
Security Transactions........................................p.7
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation.......................p.9
Performance Information......................................p.10
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
Organizational Information...................................p.23
Board Members and Officers...................................p.24
Compensation for Board Members...............................p.27
Independent Auditors.........................................p.29
Financial Statements..........................See Annual Report
Prospectus...................................................p.29
Appendix A: Foreign Currency Transactions...................p.30
Appendix B: Options and Interest Rate Futures Contracts.....p.35
Appendix C: Mortgage-Backed Securities......................p.41
Appendix D: Dollar-Cost Averaging...........................p.42
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ADDITIONAL INVESTMENT POLICIES
The Fund pursues its goals by investing all of its assets in High Yield
Portfolio (the "Portfolio") of 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 policies 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, respectively, 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 policies 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.
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.
These are investment policies in addition to those presented in the prospectus.
The policies below are fundamental policies that apply to both 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.
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'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 financial instruments (such as 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 Portfolio's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio receives the
market price in cash, U.S. government securities, letters of credit or such
other collateral as may be permitted by regulatory agencies and approved by the
board. If the market price of the loaned securities goes up, the 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 policy, collateral arrangements for margin
deposits on futures contracts are not deemed to be a pledge of assets.
'Invest more than 10% of its total assets in securities of
investment companies.
'Invest in exploration or development programs, such as oil, gas or
mineral leases.
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PAGE 42
'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 of American Express Financial Corporation (AEFC) hold more
than a certain percentage of the issuer's outstanding securities. If the
holdings of all board members and officers of the Fund, the Portfolio and 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.
'Invest more than 10% of its net assets in securities and other instruments that
are illiquid. For purposes of this policy illiquid securities include some
privately placed securities, public securities and Rule 144A securities that for
one reason or another may no longer have a readily available market, loans and
loan participations, repurchase agreements with maturities greater than seven
days, non-negotiable fixed-time deposits and over-the-counter options.
'In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities. The investment manager, under
guidelines established by the board, will consider any relevant factors
including the frequency of trades, the number of dealers willing to purchase or
sell the security and the nature of marketplace trades.
'In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board, will evaluate
relevant factors such as the issuer and the size and nature of its commercial
paper programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and settlement procedures
for the paper.
Loans, loan participations and interests in securitized loan pools are interests
in amounts owed by a corporate, governmental or other borrower to a lender or
consortium of lenders (typically banks, insurance companies, investment banks,
government agencies or international agencies). Loans involve a risk of loss in
case of default or insolvency of the borrower and may offer less legal
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PAGE 43
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.
The portfolio may invest in foreign securities that are traded in the form of
American Depositary Receipts (ADRs). ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities of
foreign issuers. European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs) are receipts typically issued by foreign banks or trust
companies, evidencing ownership of underlying securities issued by either a
foreign or U.S. issuer. Generally Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary Receipts also
involve the risks of other investments in foreign securities.
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.
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SECURITY TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's and 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 accounts
for which it acts as investment advisor.
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.
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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 Fund 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.
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 Fund 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.
<PAGE>
PAGE 46
The Portfolio paid total brokerage commissions of $90,680 for the fiscal year
ended May 31, 1997, $12,092 for the fiscal period ended May 31, 1996, and
$40,448 for the fiscal year ended Aug. 31, 1995. 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 Portfolio.
As of the fiscal year ended May 31, 1997, the Portfolio 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
Merrill Lynch $8,751,958
The portfolio turnover rate was 92% in the fiscal year ended May 31, 1997, and
61% in fiscal period ended May 31, 1996.
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.
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.
<PAGE>
PAGE 47
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)
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
<PAGE>
PAGE 48
dividends
d = the maximum offering price per share on the last
day of the period
The Fund's annualized yield was 7.45% for Class A, 7.08% for Class B and 7.94%
for Class Y for the 30-day period ended May 31, 1997.
The Fund's yield, calculated as described above according to the formula
prescribed by the SEC, is a hypothetical return based on market value yield to
maturity for the 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 9.03% for Class A, 8.74% for Class B and 9.61%
for Class Y for the 30-day period ended May 31, 1997.
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, Morningstar, Mutual Fund Forecaster,
Newsweek, The New York Times, Personal Investor, Stanger Report, Sylvia Porter's
Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal
and Wiesenberger Investment Companies Service.
VALUING 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 2, 1997, the
first business day following the end of the fiscal year, 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>
Class A $2,583,927,234 divided by 588,058,087 equals $4.394
Class B 613,745,200 139,709,811 4.393
Class Y 129,024 29,377 4.392
</TABLE>
<PAGE>
PAGE 49
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.
'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
Portfolio'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
<PAGE>
PAGE 50
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 Exchange, AEFC and the Fund will be closed on the following
holidays: New Year's Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
INVESTING IN THE 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 plus 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 2, 1997, was determined by dividing
the net asset value of one share, $4.394, by 0.95 (1.00-0.05 for a maximum 5%
sales charge) for a public offering price of $4.63. The sales charge is paid to
American Express Financial Advisors by the person buying the shares.
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
Within each increment,
sales charge as a
percentage of:
Public Net
Amount of Investment Offering Price Amount Invested
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
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.
<PAGE>
PAGE 51
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 the net 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.
On total investment, sales
charge as a percentage of
Public Net
Offering Price Amount Invested
Amount of Investment ranges from:
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
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
<PAGE>
PAGE 52
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.
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.
<PAGE>
PAGE 53
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.
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 the same class of another fund in the IDS MUTUAL FUND GROUP 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).
<PAGE>
PAGE 54
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 that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.
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 Portfolio
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 the 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
<PAGE>
PAGE 55
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
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 American Express Shareholder Service,
P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial
Advisors Telephone Transaction Service at 800-437-3133 (National/Minnesota) or
612-671-3800 (Mpls./St. Paul). 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.
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PAGE 56
Plan #4: Redemption of a percentage of net asset value
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
$243,565,780 at May 31, 1997, that will expire as follows:
1999 2000 2003 2004 2006
---- ---- ---- ---- ----
$147,294,029 $28,359,344 $20,159,025 $44,959,106 $2,794,276
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
<PAGE>
PAGE 57
that portion of the Fund's dividend that is attributable to dividends the Fund
received from domestic (U.S.) securities. For the fiscal year ended May 31,
1997, 7.38% of the Fund's net investment income dividends qualified for the
corporate deduction. 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, 1997, the daily rate applied to the Portfolio's net assets was equal
to 0.562% 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.
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PAGE 58
The management fee is paid monthly. Under the agreement, the total amount paid
was $15,766,458 for the fiscal year ended May 31, 1997, $9,170,111 for fiscal
period ended May 31, 1996, and $9,856,787 for fiscal year ended Aug. 31, 1995.
Under the agreement, 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, Portfolio 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. Under the agreement,
nonadvisory expenses paid by the Fund and Portfolio were $1,055,243 for the
fiscal year ended May 31, 1997, $742,081 for fiscal period May 31, 1996, and
$761,716 for fiscal year Aug.
31, 1995.
In this section, prior to June 10, 1996, the fees and expenses described were
paid directly by the Fund. After that date, the management fees were paid by the
Portfolio.
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, 1997, the daily rate applied to the Fund's net assets was equal to
0.044% 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 $1,262,010 for the fiscal year ended May 31, 1997.
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
<PAGE>
PAGE 59
and dividing by the number of days in the year. The rate for Class 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 $2,567,439 for the fiscal
year ended May 31, 1997.
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 $14,475,323 for the fiscal year ended May 31, 1997. After paying
commissions to personal financial advisors, and other expenses, the amount
retained was $(1,927,778). The amounts were $8,715,152 and $(652,292) for fiscal
period May 31, 1996, and $7,922,313 and $1,398,718 for fiscal year Aug. 31,
1995.
Additional information about commissions and compensation for the fiscal year
ended May 31, 1997 is contained in the following table:
(1) (2) (3) (4) (5)
Net Compensation
Name of Underwriting on Redemption
Principal Discounts and and Brokerage Other
Underwriter Commissions Repurchases Commissions Compensation
AEFC None None None $3,222,779*
American
Express
Financial
Advisors $14,475,323 None None None
*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 average
daily net assets for Class A and Class B and 0.10% for Class Y.
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
<PAGE>
PAGE 60
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.
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 year ended May 31, 1997, under the
agreement, the Fund paid fees of $3,222,779.
Custodian Agreement
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.
Total fees and expenses
The Fund paid total fees and nonadvisory expenses of $28,664,539 for the fiscal
year ended May 31, 1997.
ORGANIZATIONAL INFORMATION
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.
<PAGE>
PAGE 61
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 47 IDS and IDS Life funds (except for William H. Dudley, who does
not serve on the nine IDS Life fund boards.)
All shares have cumulative voting rights with respect to the election of board
members.
H. Brewster Atwater, Jr.
Born in 1931
4900 IDS Tower
Minneapolis, MN
Former chairman and chief executive officer, General Mills, Inc.
Director, Merck & Co., Inc. and Darden Restaurants, Inc.
Lynne V. Cheney'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of
the Humanities. Director, The Reader's Digest Association Inc.,
Lockheed-Martin, Union Pacific Resources, and FPL Group, Inc.
(holding company for Florida Power and Light).
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer, 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.
<PAGE>
PAGE 62
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law
firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
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. Former nine-term U.S. Congressman, U.S. Secretary of Defense
and Presidential Counsellor. Director, 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
Chairman of the board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former
Assistant Republican Leader, U.S. Senate. Director, PacifiCorp
(electric power).
<PAGE>
PAGE 63
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman
of the board and chief executive officer, Honeywell Inc. Director,
Boise Cascade Corporation (forest products). Member of
International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of AEFC.
Wheelock Whitney+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company
(air cleaners & mufflers) and
General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer 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:
<PAGE>
PAGE 64
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the Fund.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.
Melinda S. Urion
Born in 1953
IDS Tower 10
Minneapolis, MN
Director, senior vice president and chief financial officer of AEFC. Director,
executive vice president and controller of IDS Life Insurance Company. Treasurer
for the Fund.
COMPENSATION FOR FUND BOARD MEMBERS
Members of the board who are not officers of the Fund or AEFC receive an annual
fee of $600, and the chair of the Contracts Committee receives an additional
$86. Board members receive a $50 per day attendance fee for board meetings. The
attendance fee for meetings of the Contracts and Investment Review Committees is
$50; for meetings of the Audit Committee and Personnel Committee $25 and for
traveling from out-of-state $6. Expenses for attending meetings are reimbursed.
During the fiscal year ended May 31, 1997, the members of the board, for
attending up to 31 meetings, received the following compensation:
<PAGE>
PAGE 65
<TABLE>
<CAPTION>
Compensation Table
Pension or Estimated Total cash compensation
Aggregate Retirement annual from the IDS MUTUAL FUND
compensation benefits accrued benefit upon GROUP and the Preferred
Board member from the Fund as Fund expenses retirement Master Trust Group
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $ 873 $0 $0 $ 61,900
(part of year)
Lynne V. Cheney 1,355 0 0 92,800
Robert F. Froehlke 1,496 0 0 100,600
Heinz F. Hutter 1,449 0 0 97,800
Anne P. Jones 1,617 0 0 108,500
Melvin R. Laird 1,383 0 0 94,600
Alan K. Simpson 599 0 0 42,100
(part of year)
Edson W. Spencer 1,853 0 0 121,400
Wheelock Whitney 1,591 0 0 106,000
C. Angus Wurtele 1,534 0 0 102,700
</TABLE>
On May 31, 1997, the Fund's board members and officers as a group owned less
than 1% of the outstanding shares. During the fiscal year ended May 31, 1997, no
board member or officer earned more than $60,000 from this Fund. All board
members and officers as a group earned $19,489 from this Fund.
COMPENSATION FOR PORTFOLIO BOARD MEMBERS
Members of the board who are not officers of the Portfolio or of the Advisor
receive an annual fee of $1,200 for High Yield Portfolio. They also receive
attendance and other fees. These fees include for each day in attendance at
meetings of the board, $50; for meetings of the Contracts and Investment Review
Committees, $50; meetings of the Audit and Personnel Committees, $25; for
traveling from out-of-state, $14; and as chair of Contracts Committee, $86.
Expenses for attending meetings are reimbursed.
During the fiscal year ended May 31, 1997, the members of the board, for
attending up to 31 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
for High Yield Portfolio
Pension or Estimated Total cash
Aggregate Retirement annual compensation from
compensation benefits benefit the REFERRED MASTER
from the accrued as upon TRUST GROUP and IDS
Board member Portfolio Portfolio expenses retirement MUTUAL FUND GROUP
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $1,347 $0 $0 $ 61,900
(part of year)
Lynne V. Cheney 1,920 0 0 92,800
Robert F. Froehlke 2,038 0 0 100,600
Heinz F. Hutter 1,991 0 0 97,800
Anne P. Jones 2,198 0 0 108,500
Melvin R. Laird 1,948 0 0 94,600
Alan K. Simpson 964 0 0 42,100
(part of year)
Edson W. Spencer 2,394 0 0 121,400
Wheelock Whitney 2,133 0 0 106,000
C. Angus Wurtele 2,076 0 0 102,700
</TABLE>
During the fiscal year ended May 31, 1997, no board member or officer earned
more than $60,000 from the High Yield Portfolio. All board members and officers
as a group earned $11,103 from High Yield Portfolio.
<PAGE>
PAGE 66
INDEPENDENT AUDITORS
The Fund's and corresponding Portfolio's financial statements contained in the
Annual Report to shareholders for the fiscal year ended May 31, 1997, 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 Annual Report to shareholders for the fiscal year ended May 31,
1997, 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, 1997, is hereby
incorporated in this SAI by reference.
<PAGE>
PAGE 67
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 contracts or maintain a net
exposure to such contracts when consummating the contracts would obligate the
Portfolio to deliver
<PAGE>
PAGE 68
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.
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.
<PAGE>
PAGE 69
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.
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.
<PAGE>
PAGE 70
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 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
<PAGE>
PAGE 71
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.
<PAGE>
PAGE 72
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.
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
<PAGE>
PAGE 73
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 Fund'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.
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
<PAGE>
PAGE 74
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. 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
<PAGE>
PAGE 75
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 Fund 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.
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 Fund.
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.
<PAGE>
PAGE 76
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.
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 Fund's taxable
year, at least 50% of the value of its assets must consist of cash, government
securities
<PAGE>
PAGE 77
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>
PAGE 78
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.
<PAGE>
PAGE 79
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 technique 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 on a regular basis through changing market conditions,
including times when the price of their shares falls or the market declines, 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>
Independent auditors' report
The board and shareholders
IDS Extra Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
IDS Extra Income Fund, Inc. as of May 31, 1997, and the related statement
of operations for the year then ended and the statements of changes in net
assets for the year ended May 31, 1997 and the nine months ended May 31,
1996, and the financial highlights for the year ended May 31, 1997, the
nine months ended May 31, 1996 and each of the years in the nine-year
period ended Aug. 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. 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, 1997, and the results of its operations, changes in its
net assets 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 3, 1997
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
IDS Extra Income Fund, Inc.
May 31, 1997
Assets
<S> <C>
Investment in High Yield Portfolio (Note 1) $3,198,086,722
- --------------
Total assets 3,198,086,722
-------------
Liabilities
Dividends payable to shareholders 1,602,097
Accrued distribution fee 12,488
Accrued service fee 15,213
Accrued transfer agency fee 8,016
Accrued administrative services fee 3,865
Other accrued expenses 377,246
-------
Total liabilities 2,018,925
---------
Net assets applicable to outstanding capital stock $3,196,067,797
==============
Represented by
Capital stock-- authorized 10,000,000,000 shares of $.01 par value (Note 1) $ 7,277,973
Additional paid-in capital 3,323,286,093
Undistributed net investment income 1,431,092
Accumulated net realized loss (Notes 1 and 4) (244,457,392)
Unrealized appreciation of investments 108,530,031
-----------
Total-- representing net assets applicable to outstanding capital stock $3,196,067,797
==============
Net assets applicable to outstanding shares: Class A $2,582,451,662
Class B $ 613,487,177
Class Y $ 128,958
Net asset value per share of outstanding capital stock: Class A shares 588,058,087 $ 4.39
Class B shares 139,709,811 $ 4.39
Class Y shares 29,377 $ 4.39
See accompanying notes to financial statements.
<PAGE>
<CAPTION>
Statement of operations
IDS Extra Income Fund, Inc.
Year ended May 31, 1997
Investment Income
June 1, 1996 to June 10, 1996 to Total
June 9, 1996 May 31, 1997
(Notes 1 and 5)
Income:
<S> <C> <C> <C>
Dividends $ -- $ 18,176,854 $ 18,176,854
Interest 4,402,114 252,448,754 256,850,868
--------- ----------- -----------
Total Income 4,402,114 270,625,608 275,027,722
--------- ----------- -----------
Expenses (Note 2):
Investment management services fee 263,749 -- 263,749
Distribution fee-- Class B 38,787 3,183,992 3,222,779
Transfer agency fee 42,993 2,495,018 2,538,011
Incremental transfer agency fee-- Class B 363 29,065 29,428
Service fee
Class A 71,775 3,972,881 4,044,656
Class B 9,050 740,265 749,315
Class Y -- 6 6
Administrative services fees and expenses 21,343 1,240,667 1,262,010
Compensation of board members 280 11,719 11,999
Compensation of officers 245 7,245 7,490
Custodian fees 1,862 -- 1,862
Postage 3,640 354,162 357,802
Registration fees 7,502 481,362 488,864
Reports to shareholders 140 142,420 142,560
Audit fees 280 10,220 10,500
Other 560 5,292 5,852
--- ----- -----
Total expenses 462,569 12,674,314 13,136,883
Earnings credits on cash balances (Notes 2 and 5) (1,015) (97,689) (98,704)
- - ------ ------- -------
461,554 12,576,625 13,038,179
Expenses, including investment management services fee
allocated from High Yield Portfolio -- 15,626,360 15,626,360
------- ---------- ----------
Total net expenses 461,554 28,202,985 28,664,539
------- ---------- ----------
Investment income-- net 3,940,560 242,422,623 246,363,183
--------- ----------- -----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on security transactions (3,230,469) 11,913,694 8,683,225
Net change in unrealized appreciation or
depreciation of investments (11,353,071) 42,462,424 31,109,353
----------- ---------- ----------
Net gain (loss) on investments (14,583,540) 54,376,118 39,792,578
----------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations $(10,642,980) $296,798,741 $286,155,761
============ ============ ============
See accompanying notes to financial statements.
<PAGE>
<CAPTION>
Statements of changes in net assets
IDS Extra Income Fund, Inc.
Operations and distributions May 31, 1997 May 31, 1996
Year Nine months
ended ended
<S> <C> <C>
Investment income-- net $ 246,363,183 $ 141,910,062
Net realized gain on investments 8,683,225 30,587,183
Net change in unrealized appreciation or
depreciation of investments 31,109,353 63,851,546
---------- ----------
Net increase in net assets resulting from operations 286,155,761 236,348,791
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (215,602,233) (131,968,668)
Class B (36,099,715) (10,053,530)
Class Y (1,317) (35,126)
------ -------
Total distributions (251,703,265) (142,057,324)
------------ ------------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 752,439,394 409,958,480
Class B shares 423,508,478 211,284,632
Class Y shares 125,331 281,250
Reinvestment of distributions at net asset value
Class A shares 147,052,512 88,685,134
Class B shares 30,338,648 8,360,841
Class Y shares 1,317 26,891
Payments for redemptions
Class A shares (490,907,479) (262,062,635)
Class B shares (Note 2) (116,153,166) (33,183,891)
Class Y shares (8,197) (1,890,774)
------ ----------
Increase in net assets from capital share transactions 746,396,838 421,459,928
----------- -----------
Total increase in net assets 780,849,334 515,751,395
Net assets at beginning of period 2,415,218,463 1,899,467,068
------------- -------------
Net assets at end of period
(including undistributed net investment
income of $1,431,092 and $6,778,069) $3,196,067,797 $2,415,218,463
============== ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
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 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.
Investment in High Yield Portfolio
Effective June 10, 1996, the Fund began investing all of its assets in the
High Yield Portfolio (the Portfolio), a series of Income Trust, an
open-end investment company that has the same objectives as the Fund. This
was accomplished by transferring the Fund's assets to the Portfolio in
return for a proportionate ownership interest in the Portfolio. The
Portfolio invests primarily in long-term corporate bonds in the
lower-rating categories, commonly known as junk bonds.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at value that is equal to
the Fund's proportionate ownership interest in the net assets of the
Portfolio. The percentage of the Portfolio owned by the Fund at May 31,
1997 was 99.97%. Valuation of securities held by the Portfolio is
discussed in Note 1 of the Portfolio's "Notes to financial statements,"
which are included elsewhere in this report.
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.
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 the shareholders, no provision for
income or excise taxes is required.
Net investment income (loss) and net realized gains (losses) allocated
from the Portfolio 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
decreased by $6,895 and accumulated net realized loss has been decreased
by $6,895.
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.
2
Expenses and
sales charges
In addition to the expenses allocated from the Portfolio, the Fund accrues
its own expenses as follows:
Effective March 20, 1995, the Fund entered into agreements with American
Express Financial Corporation (AEFC) for providing administrative services
and serving as transfer agent.
Under its Administrative Services Agreement, the Fund pays AEFC a fee 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. Additional administrative service expenses paid by the Fund are
office expenses, consultants' fees and compensation of officers and
employees. Under this agreement, the Fund also pays taxes, audit and
certain legal fees, registration fees for shares, compensation of board
members, corporate filing fees, and any other expenses properly payable by
the Fund and approved by the board.
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. 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.
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 and 0.10% of the Fund's
average daily net assets attributable to Class Y shares.
Sales charges received by American Express Financial Advisors, Inc. for
distributing Fund shares were $14,153,678 for Class A and $321,645 for
Class B for the year ended May 31, 1997.
During the period from June 10, 1996 to May 31, 1997 the Fund's transfer
agency fees were reduced by $97,689 as a result of earnings credits from
overnight cash balances.
3
Capital share
transactions
Transactions in shares of capital stock for the periods indicated are as
follows:
Year ended May 31, 1997
Class A Class B Class Y
Sold 172,870,021 97,289,537 28,878
Issued for reinvested 33,783,196 6,963,319 302
distributions
Redeemed (112,846,209) (26,691,764) (1,885)
------------ ----------- ------
Net increase 93,807,008 77,561,092 27,295
========== ========== ======
Nine months ended May 31, 1996
Class A Class B Class Y
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)
========== ========== ========
4
Capital loss
carryover
For federal income tax purposes, the Fund had a capital loss carryover of
$243,565,780 at May 31, 1997, that if not offset by subsequent capital
gains, will expire in 1999 through 2006. It is unlikely the board will
authorize a distribution of any net realized gains until the available
capital loss carryover has been offset or expires.
5
Pre-conversion
to Master
Prior to transferring its securities to High Yield Portfolio on June 10,
1996, various transactions took place as stated below.
Expenses and sales charges
Prior to the conversion on June 10, 1996, the Fund paid an investment
management fee to AEFC. Subsequent to the conversion, the investment
management fee is assessed at the Portfolio level. (See the footnotes to
the Portfolio financial statements for the terms of the investment
management agreement which remain unchanged.)
During the period from June 1, 1996 to June 9, 1996, the Fund's custodian
fees were reduced by $1,015 as a result of earnings credits from overnight
cash balances.
Securities transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $36,119,723 and $57,658,250,
respectively, for the period from June 1, 1996 to June 9, 1996. Realized
gains and losses were determined on an identified cost basis.
Income from securities lending amounted to $546 for the period from June
1, 1996 to June 9, 1996.
6
Change of Fund's
fiscal year
The By-Laws of the Fund were amended on Jan. 10, 1996, changing its fiscal
year-end from Aug. 31, to May 31, effective 1996.
7
Financial
highlights
"Financial highlights" showing per share data and selected information is
presented on pages 7 and 8 of the prospectus.
<PAGE>
Independent auditors' report
The board of trustees and unitholders Income Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of High Yield
Portfolio (a series of Income Trust) as of May 31, 1997, and the related
statements of operations and changes in net assets for the period from
June 10, 1996 (commencement of operations) to May 31, 1997. These
financial statements are the responsibility of portfolio management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements 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, 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 audit provides 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 High Yield Portfolio
at May 31, 1997, and the results of its operations and the changes in its
net assets for the period from June 10, 1996 (commencement of operations)
to May 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 3, 1997
<PAGE>
<TABLE>
Financial statements
Statement of assets and liabilities
High Yield Portfolio
May 31, 1997
Assets
<S> <C>
Investments in securities, at value (Note 1)
(identified cost $3,070,000,308) $3,178,553,781
Dividends and accrued interest receivable 67,487,609
Receivable for investment securities sold 24,792,925
----------
Total assets 3,270,834,315
-------------
Liabilities
Disbursements in excess of cash on demand deposit 886,187
Payable for investment securities purchased 70,789,519
Accrued investment management services fee 49,248
Other accrued expenses 44,987
------
Total liabilities 71,769,941
----------
Net assets $3,199,064,374
==============
See accompanying notes to financial statements.
<PAGE>
Statement of operations
High Yield Portfolio
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Investment income
Income:
Dividends $ 18,180,667
Interest 252,458,755
-----------
Total income 270,639,422
-----------
Expenses (Note 2):
Investment management services fee 15,502,709
Compensation of board members 11,103
Custodian fees 119,564
Audit fees 30,500
Administrative service fees and expenses 28,165
Other 3,134
-----
Total expenses 15,695,175
Earnings credits on cash balances (Note 2) (65,448)
- -------
Total net expenses 15,629,727
----------
Investment income -- net 255,009,695
-----------
Realized and unrealized gain -- net
Net realized gain on security transactions
(including loss of $6,609,151 on sale of affiliated issuers) (Note 3) 11,905,305
Net change in unrealized appreciation or depreciation of investments 42,485,867
----------
Net gain on investments 54,391,172
----------
Net increase in net assets resulting from operations $309,400,867
============
See accompanying notes to financial statements.
<PAGE>
Statement of changes in net assets
High Yield Portfolio
For the period from June 10, 1996
(commencement of operations) to May 31, 1997
Operations
Investment income-- net $ 255,009,695
Net realized gain on investments 11,905,305
Net change in unrealized appreciation or depreciation of investments 42,485,867
----------
Net increase in net assets resulting from operations 309,400,867
-----------
Net contributions 2,889,633,507
-------------
Total increase in net assets 3,199,034,374
Net assets at beginning of period (Note 1) 30,000
- ------
Net assets at end of period $3,199,064,374
==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to financial statements
High Yield Portfolio
1
Summary of
significant
accounting policies
The High Yield Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. High
Yield Portfolio invests primarily in long-term corporate bonds in the
lower-rating categories, commonly known as junk bonds. The Declaration of
Trust permits the Trustees to issue non-transferable interests in the
Portfolio. On April 15, 1996, American Express Financial Corporation
(AEFC) contributed $30,000 to the Portfolio. Operations did not formally
commence until June 10, 1996, at which time, an existing fund transferred
its assets to the Portfolio in return for an ownership percentage of the
Portfolio.
Significant accounting polices followed by the Portfolio 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.
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 Portfolio
may buy and 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 Portfolio 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 Portfolio gives up the opportunity of
profit if the market price of the security increases. The risk in writing
a put option is that the Portfolio 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 Portfolio pays a premium whether or not the option is
exercised. The Portfolio also has the additional risk of not being able to
enter into a closing transaction if a liquid secondary market does not
exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The
Portfolio will realize a gain or loss upon expiration or closing of the
option transaction. When an option is 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 Portfolio may buy and sell financial futures contracts traded on any
U.S. or foreign exchange. The Portfolio also may buy and 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 Portfolio 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 Portfolio 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 Portfolio recognizes a
realized gain or loss when the contract is closed or expires.
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 Portfolio 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 Portfolio and the resulting unrealized
appreciation or depreciation are determined using foreign currency
exchange rates from an independent pricing service. The Portfolio is
subject to the credit risk that the other party will not complete the
obligations of the contract.
Illiquid securities
Investments in securities include issues that are illiquid. The Portfolio
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, 1997 was $76,061,799 representing 2.38% of the
net assets. Pursuant to guidelines adopted by the board, certain
unregistered securities are determined to be liquid and are not included
within the 10% limitation specified above.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the
Portfolio on a forward-commitment or when-issued basis can take place one
month or more after the transaction date. During this period, such
securities are subject to market fluctuations, and they may affect the
Portfolio's net assets the same as owned securities. The Portfolio
designates cash or liquid high-grade debt securities at least equal to the
amount of its commitment. As of May 31, 1997, the Portfolio had entered
into outstanding when-issued or forward commitments of $9,800,000.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership
and each investor in the Portfolio is treated as the owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. Accordingly, as a
"pass-through" entity, the Portfolio does not pay any income dividends or
capital gain distributions.
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
Fees and
expenses
The Trust, on behalf of the Portfolio, has entered into an Investment
Management Services Agreement with American Express Financial Corporation
(AEFC) for managing its portfolio. Under this agreement, AEFC determines
which securities will be purchased, held or sold. The management fee is a
percentage of the Portfolio's average daily net assets in reducing
percentages from 0.59% to 0.465% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain
legal fees, fidelity bond premiums, registration fees for units, office
expenses, consultants' fees, compensation of trustees, corporate filing
fees, expenses incurred in connection with lending securities of the
Portfolio, and any other expenses properly payable by the Trust or
Portfolio and approved by the board.
During the period from June 10, 1996 to May 31, 1997, the Portfolio's
custodian fees were reduced by $65,448 as a result of earnings credits
from overnight cash balances.
Pursuant to a Placement Agency Agreement, American Express Financial
Advisors Inc. acts as placement agent of the units of the Trust.
3
Securities
transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $3,114,014,271 and $2,406,649,102,
respectively, for the period from June 10, 1996 to May 31, 1997. For the
same period, the portfolio turnover rate was 92%. Realized gains and
losses are determined on an identified cost basis.
Income from securities lending amounted to $31,770 for the period from
June 10, 1996 to May 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
Investments in securities
High Yield Portfolio
May 31, 1997
(Percentages represent value of
investments compared to net assets)
Bonds (88.3%)
<S> <C> <C> <C> <C>
Issuer Coupon Maturity Principal Value(a)
rate year amount
Mortgage-backed securities (0.4%)
Federal Home Loan Mtge Corp 7.625% 2017 $ 5,668(b) $ 5,906
Inverse Floater 7.93 2023 4,407,829(k) 3,328,705
Merrill Lynch Mtge Investors 7.98 2021 8,919,193 8,751,958
Total 12,086,569
Aerospace & defense (1.9%)
Alliant Techsystems
Sr Sub Nts 11.75 2003 9,250,000 10,221,250
K&F Inds
Sr Sub Nts 10.375 2004 4,900,000 5,169,500
L-3 Communications
Sr Sub Nts 10.375 2007 5,145,000(c) 5,415,113
Sequa 9.625 1999 3,000,000 3,090,000
Sr Sub Nts 9.375 2003 20,750,000 21,139,062
TransDigm
Sr Secured Nts 13.10 2000 14,030,000(e) 15,029,637
Total 60,064,562
Banks and savings & loans (0.8%)
First Nationwide Bank
Sr Sub Nts 10.625 2003 11,000,000 11,935,000
Greenpoint Capital Trust 9.10 2027 5,000,000(c) 4,992,900
Wilshire Financial Services 13.00 2004 10,000,000 9,950,000
Total 26,877,900
Beverages & tobacco (0.5%)
Stroh Brewery
Sr Sub Nts 11.10 2006 14,887,000 15,538,306
Building materials & construction (1.0%)
Foamex-JPS
Zero Coupon Sr Disc Nts Series B 5.36 1999 10,000,000(g) 8,825,000
Johns Manville Intl
Sr Nts 10.875 2004 15,000,000 16,668,750
Southdown
Sr Sub Nts 10.00 2006 4,700,000 5,029,000
Total 30,522,750
Chemicals (0.8%)
ISP Holdings
Sr Nts 9.75 2002 22,215,000 23,325,750
NL Inds
Sr Nts 11.75 2003 2,000,000 2,205,000
Total 25,530,750
Communications equipment & services (12.9%)
CCPR Services 10.00 2007 18,850,000(c) 18,567,250
Celcaribe
Zero Coupon 10.42 1998 3,800,000(c,g) 4,902,000
Zero Coupon 13.44 1998 7,350,000(g) 6,357,750
Cencall Communications
Zero Coupon Sr Nts 20.74 1999 26,500,000(g) 20,206,250
Comcast Cellular
Sr Nts 9.50 2007 20,000,000(c) 20,050,000
Communications & Power Inds
Sr Sub Nts 12.00 % 2005 $10,000,000 $ 11,000,000
Geotek Communications
Cv 12.00 2001 4,630,000(e) 3,935,500
Zero Coupon 17.41 2000 23,250,000(g) 14,647,500
Globalstar
with Warrants 11.375 2004 13,500,000(c) 13,635,000
GST Equipment Funding
Sr Nts 13.25 2007 6,750,000(c) 6,986,250
GST Telecommunications
Zero Coupon Cv 5.81 2000 2,320,000(g) 1,415,200
Impsat 12.125 2003 10,000,000 10,600,000
Intermedia Communications of Florida
Sr Nts 13.50 2005 15,000,000 16,950,000
Intl Wireless Communication
Zero Coupon Sr Nts 14.00 2001 14,750,000(f) 7,965,000
ITC Deltacom
Sr Nts 11.00 2007 8,550,000(c) 8,721,000
Metrocall
Sr Sub Nts 10.375 2007 9,500,000 8,550,000
Nextlink Communications
Sr Nts 12.50 2006 15,000,000 15,843,750
Norcal Waste Systems 13.25 2005 20,300,000 22,736,000
Omnipoint
Sr Nts 11.625 2006 15,000,000 13,275,000
Sr Nts Series A 11.625 2006 2,000,000 1,770,000
Optel
with Common Stock 13.00 2005 15,000,000(c) 14,400,000
Outsourcing Solutions
Sr Sub Nts 11.00 2006 5,500,000(c) 5,885,000
Pagemart Nationwide
Zero Coupon Sr Nts 15.80 2000 23,000,000(g) 16,330,000
Peoples Telephone
Sr Nts 12.25 2002 7,000,000 7,437,500
Phonetel Technologies
Sr Nts 12.00 2006 16,500,000 16,541,250
Pierce Leahy
Sr Sub Nts 11.125 2006 8,750,000(c) 9,625,000
Pricellular Wireless
Zero Coupon Sr Disc Nts 10.85 1998 18,250,000(g) 17,246,250
Sr Nts 10.75 2004 6,500,000 6,841,250
Pronet
Sr Sub Nts 11.875 2005 12,600,000 12,127,500
RSL Communications
with Warrants 12.25 2001 9,500,000 9,808,750
SC Intl Services
Sr Sub Nts 13.00 2005 21,500,000 24,402,500
Teleport Communications
Zero Coupon Sr Nts 11.12 2001 22,000,000(g) 15,482,500
Unifi Communications
with Warrants 14.00 2004 10,000,000(c) 9,850,000
Winstar Communications
Zero Coupon Sr Sub Disc 14.50 2000 10,000,000(c,g) 5,950,000
Winstar Equipment 12.50 2004 13,500,000(c) 13,196,250
Total 413,237,200
Computers & office equipment (1.3%)
Anacomp
Sr Sub Nts 10.875 2004 13,000,000(c) 13,195,000
Softkey Intl
Cv 5.50 % 2000 $ 2,500,000 $ 1,837,500
Unisys
Sr Nts 11.75 2004 15,500,000 16,701,250
Sr Nts 12.00 2003 8,000,000 8,620,000
Total 40,353,750
Electronics (0.9%)
Advanced Micro Devices
Sr Nts 11.00 2003 26,750,000 29,826,250
Energy (4.0%)
Bellwether Exploration
Sr Sub Nts 10.875 2007 9,000,000 9,540,000
Chesapeake Energy
Sr Nts 8.50 2012 5,500,000(c) 5,390,000
Costilla Energy
Sr Nts 10.25 2006 10,000,000 10,350,000
Empire Gas
Sr Nts 7.00 2004 11,350,000(i) 10,186,625
Energy Corp of America
Sr Sub Nts 9.50 2007 9,000,000(c) 9,045,000
Forcenergy
Sr Sub Nts 8.50 2007 4,500,000(c) 4,381,875
Sr Sub Nts 9.50 2006 5,000,000 5,162,500
Harcor Energy
Sr Nts Series B 14.875 2002 10,615,000 12,738,000
HS Resources
Sr Sub Nts 9.25 2006 4,250,000 4,228,750
Sr Sub Nts 9.875 2003 9,700,000 9,845,500
Statia Terminals
1st Mtge 11.75 2003 8,050,000 8,613,500
Transamerican Refining 16.50 2002 9,700,000(c,i) 10,767,000
Zero Coupon 1st Mtge 8.35 1998 9,250,000(c,g) 9,134,375
Transtexas Gas
Sr Nts 11.50 2002 15,000,000 16,725,000
Total 126,108,125
Energy equipment & services (0.6%)
Noble Drilling
Sr Nts 9.125 2006 6,500,000 6,987,500
Pride Petroleum Services
Sr Nts 9.375 2007 6,600,000 6,847,500
Veritas DGC
Sr Nts 9.75 2003 5,500,000 5,720,000
Total 19,555,000
Financial services (1.8%)
Arcadia Financial
with Warrants 11.50 2007 21,000,000 20,895,000
GPA Delaware 8.75 1998 10,000,000 10,150,000
Gemini 13.50 2001 13,500,000(e,i) 13,500,000
Homeside
Sr Nts 11.25 2003 9,247,000 10,657,167
Malan Realty Investors REIT
Cv Sub Deb 9.50 2004 1,040,000 1,075,100
Total 56,277,267
Food (1.9%)
Chiquita Brands Intl 9.625 2004 8,500,000 8,840,000
Gorges/Quik to Fix Food
Sr Sub Nts Series B 11.50 2006 14,250,000 14,820,000
MBW Foods
Sr Sub Nts 9.875 2007 6,000,000(c) 6,060,000
Pilgrim's Pride
Sr Sub Nts 10.875 2003 3,970,000 4,138,725
Specialty Foods
Sr Nts 10.25 2001 26,500,000 25,572,500
Total 59,431,225
Furniture & appliances (0.2%)
Lifestyle Furnishings 10.875 2006 6,500,000 7,020,000
Health care (0.4%)
Dade Intl
Sr Sub Nts 11.125 2006 5,850,000 6,522,750
Maxxim Medical
Sr Sub Nts 10.50 2006 6,600,000 6,880,500
Total 13,403,250
Health care services (3.1%)
Integrated Health
Sr Sub Nts 9.50 2007 4,000,000(c) 4,120,000
Magellan Health Services
Sr Sub Nts Cl A 11.25 2004 13,500,000 15,018,750
Merit Behavioral 11.50 2005 9,376,000 10,137,800
Paracelsus Healthcare
Sr Sub Nts 10.00 2006 22,000,000 21,835,000
Regency Health Services 12.25 2003 5,000,000 5,400,000
Tenet Healthcare
Sr Sub Nts 8.625 2007 20,000,000 20,263,400
Sr Sub Nts 10.125 2005 20,000,000 21,850,000
Total 98,624,950
Household products (1.5%)
Coty
Sr Sub Nts 10.25 2005 7,000,000 7,455,000
Rayovac
Sr Sub Nts 10.25 2006 7,175,000 7,533,750
Revlon Worldwide
Zero Coupon Sr Disc Nts 11.52 2001 20,000,000(c,f) 13,500,000
Syratech
Sr Nts 11.00 2007 7,500,000 7,968,750
Twin Laboratories 10.25 2006 12,250,000 12,770,625
Total 49,228,125
Industrial equipment & services (2.8%)
ACF Inds 11.60 2000 1,460,000 1,458,175
Borg-Warner Security
Sr Sub Nts 9.125 2003 10,000,000 9,962,500
Sr Sub Nts 9.625 2007 6,600,000(c) 6,600,000
Clark Materials Handling
Sr Nts 10.75 2006 6,500,000 6,873,750
Continental Global Group
Sr Nts 11.00 2007 5,500,000(c) 5,692,500
Goss Graphic Systems
Sr Sub Nts 12.00 2006 10,000,000 10,825,000
Molten Metal Tehcnology
Cv Sub Nts 5.50 2006 1,500,000(c) 652,500
Motors and Gears
Sr Nts 10.75 2006 11,000,000 11,398,750
Prime Succession
Sr Sub Nts 10.75 2004 10,000,000 10,825,000
Specialty Equipment
Sr Sub Nts 11.375 2003 23,300,000 25,076,625
Total 89,364,800
Insurance (1.8%)
Americo Life
Sr Sub Nts 9.25 2005 15,000,000 15,000,000
Integon Capital 10.75 2027 10,000,000(c) 9,975,000
Life Partners
Sr Sub Nts 12.75 2002 10,000,000 10,550,000
Reliance Group Holdings 9.75 2003 15,000,000 15,712,500
Zurich Capital 8.38 2037 7,500,000(c) 7,618,725
Total 58,856,225
Leisure time & entertainment (7.5%)
Affinity Group
Sr Nts 11.00 2007 9,000,000(c) 9,427,500
Alliance Gaming
Sr Nts 12.875 2003 13,850,000 15,200,375
AMC Entertainment
Sr Sub Nts 9.50 2009 4,500,000(c) 4,590,000
Boomtown
1st Mtge 11.50 2003 10,000,000 10,825,000
Coast Hotels & Casino
1st Mtge 13.00 2002 19,800,000 22,077,000
Cobblestone Holdings
Zero Coupon Sr Nts 11.69 1999 7,350,000(f) 3,270,750
Coleman Escrow-1
Zero Coupon Sr Disc Nts 11.12 2001 12,500,000(c,f) 8,125,000
Coleman Escrow-2
Zero Coupon Sr Disc Nts 12.87 2001 5,750,000(c,f) 3,493,125
Icon Fitness
Zero Coupon Sr Disc Nts 14.00 2001 15,000,000(g) 7,875,000
Icon Health & Fitness
Sr Sub Nts 13.00 2002 2,500,000 2,787,500
Lady Luck Gaming
1st Mtge 11.875 2001 2,500,000 2,512,500
Lodgenet Entertainment
Sr Nts with Rights 10.25 2006 15,000,000 15,018,750
Plitt Theatres 10.875 2004 27,850,000 29,033,625
PRT Funding
Sr Nts 11.625 2004 8,000,000 6,160,000
Stratosphere
1st Mtge 8.68 2002 14,250,000(d) 11,613,750
Trump Atlantic City Funding
1st Mtge 11.25 2006 26,945,000 26,406,100
Trump Holdings
Sr Nts 15.50 2005 28,050,000 32,047,125
United Artists
Sr Nts 11.50 2002 6,000,000 6,292,500
United Artists Theatre
Pass Thru Certificates 9.30 2015 13,764,068 12,834,993
Waterford Gaming
Sr Nts 12.75 2003 10,000,000(c) 11,000,000
Total 240,590,593
Media (10.0%)
Ackerley Communications
Sr Secured Nts 10.75 2003 13,500,000 14,377,500
Adams Outdoor Advertising
Sr Nts 10.75 2006 15,300,000 16,371,000
Adelphia Communications
Pay-in-Kind 9.50 2004 26,311,956(l) 24,075,440
Sr Deb 11.875 2004 5,000,000 5,262,500
American Telecasting
Zero Coupon 8.66 1999 10,000,000(g) 3,050,000
Zero Coupon Sr Disc Nts 7.72 2000 10,000,000(g) 3,050,000
Benedek Broadcasting
Sr Nts 11.875 2005 2,500,000 2,750,000
Benedek Communications
Zero Coupon Sr Disc Nts 13.25 2001 9,500,000(g) 5,462,500
CS Wireless Systems
Zero Coupon with Warrants 12.79 2001 11,500,000(g) 2,875,000
Echostar Satellite Broadcasting 8.25 2001 14,250,000 13,680,000
Zero Coupon 12.84 2000 30,500,000(g) 20,892,500
Heritage Media Services
Sr Sub Nts 8.75 2006 19,300,000 19,927,250
Jacor Communications 9.75 2006 19,000,000 19,855,000
Lamar Advertising 9.625 2006 4,000,000 4,090,000
Lenfest Communications
Sr Nts 8.375 2005 15,850,000 15,453,750
Neodata Services
Sr Nts 12.00 2003 10,234,000 10,950,380
Outdoor Systems 11.81 2007 9,800,000(e,n) 9,800,000
Sr Nts 9.375 2006 10,000,000 10,087,500
Paxson Communications
Sr Sub Nts 11.625 2002 7,000,000 7,525,000
Pegasus Media & Communications
Cl B 12.50 2005 11,150,000 12,209,250
People's Choice TV
Zero Coupon with Warrants 13.25 2000 25,500,000(g) 9,307,500
Petersen Publishing
Sr Sub Nts 11.125 2006 6,500,000 7,166,250
Spanish Broadcasting
Sr Nts with Rights 11.00 2004 3,150,000(c) 3,291,750
Sr Nts 7.50 2002 4,000,000 4,360,000
TKR Cable
Deb 10.50 2007 9,525,000 10,449,401
United Intl Holdings
Zero Coupon Disc Nts 11.55 1999 15,000,000(f) 11,400,000
Zero Coupon Disc Nts 12.00 1999 7,600,000(f) 5,776,000
Universal Outdoor
Sr Sub Nts 9.75 2006 20,000,000 20,700,000
Viacom Intl
Sub Deb 8.00 2006 8,000,000 7,780,000
Sub Deb 7.00 2003 15,000,000 14,080,400
Wireless One
with Warrants 13.00 2003 5,000,000 3,150,000
Total 319,205,871
Metals (3.0%)
Bar Technologies 13.50 2001 10,000,000(c) 9,700,000
Carbide/Graphite Group
Sr Nts 11.50 2003 9,091,000 9,909,190
EnviroSource
Sr Nts 9.75 2003 21,510,000 20,864,700
Maxxam Group Holdings
Sr Nts Series B 12.00 2003 12,000,000 12,390,000
Zero Coupon Sr Disc Nts 7.00 1998 2,600,000(g) 2,392,000
NS Group 13.50 2003 14,000,000 16,030,000
Ryerson Tull 9.125 2006 9,000,000 9,405,000
WCI Steel
Sr Nts 10.00 2004 15,500,000 16,081,250
Total 96,772,140
Multi-industry conglomerates (1.8%)
Poindexter (JB) 12.50 2004 9,250,000 9,226,875
Jordan Inds
Sr Nts 10.375 2003 19,370,000 19,466,850
Zero Coupon Sr Sub Debs 11.75 2002 17,692,251(c,g) 9,996,122
Tally Mfg & Technology
Sr Nts 10.75 2003 18,500,000 19,332,500
Total 58,022,347
Paper & packaging (5.5%)
BPC Holding
Sr Nts Pay-in-Kind 12.50 2006 9,750,000(l) 10,456,875
Bway
Sr Sub Nts 10.25 2007 5,500,000(c) 5,843,750
Crown Paper
Sr Sub Nts 11.00 2005 15,000,000 15,075,000
Florida Coast Paper
1st Mtge 12.75 2003 13,800,000 14,007,000
Gaylord Container
Sr Sub Disc Deb 12.75 2005 28,000,000 30,730,000
Repap Wisconsin
Sr Nts 9.25 2002 10,000,000 10,050,000
Sr Nts 9.875 2006 10,000,000 9,850,000
Riverwood Intl 10.875 2008 15,000,000 14,925,000
Silgan
Sr Sub Nts 11.75 2002 10,350,000(c) 10,996,875
Stone Container
1st Mtge 10.75 2002 20,000,000 21,000,000
Sr Nts 12.625 1998 4,500,000 4,725,000
Sweetheart Cup
Sr Sub Nts 10.50 2003 10,000,000 10,075,000
Warren (SD)
Sr Nts 12.00 2004 16,500,000 18,397,500
Total 176,132,000
Restaurants & lodging (0.8%)
Hammons (John Q) Hotels
1st Mtge 8.875 2004 12,000,000 12,060,000
Prime Hospitality
Sr Sub Nts 9.75 2007 11,900,000 12,286,750
Total 24,346,750
Retail (5.3%)
Dairy Mart Convenience Stores
Sr Sub Nts Series A 10.25 2004 18,700,000 18,232,500
Sr Sub Nts Series B 10.25 2004 6,250,000 6,093,750
Di Giorgio
Sr Nts 12.00 2003 16,000,000 17,120,000
Finlay Enterprises
Zero Coupon Debs 6.01 1998 15,500,000(g) 14,763,750
Food-4-Less
Sr Sub Debs Pay-in-Kind 13.625 2007 10,000,000(l) 11,700,000
Zero Coupon Debs 8.66 2000 5,000,000(g) 3,850,000
Grand Union
Sr Nts 12.00 2004 11,000,000 8,580,000
Jitney-Jungle Stores
Sr Nts 12.00 2006 10,000,000 11,100,000
Pathmark Stores
Sub Nts 11.625 2002 8,000,000 7,980,000
Zero Coupon Sub Nts 10.75 1999 12,500,000(g) 8,093,750
Penn Traffic
Sr Nts 8.625 2003 10,000,000 8,300,000
Pueblo Xtra Intl
Sr Nts 9.50 2003 16,210,000(c) 15,602,125
Ralphs Grocery
Sr Nts 10.45 2004 10,000,000 10,962,500
Specialty Retailers 11.00 2003 6,750,000 7,357,500
Stater Brothers Holdings 11.00 2001 14,500,000 15,732,500
White Rose Foods
Zero Coupon 12.75 1998 5,000,000(f) 4,450,000
Total 169,918,375
Textiles & apparel (0.8%)
Anvil Knitwear
Sr Nts 10.875 2007 14,000,000(c) 14,035,000
Hat Brand Holdings 12.625 2002 5,000,000(d,e) 1,500,000
Hosiery Corp of America 13.75 2002 10,000,000 10,950,000
Total 26,485,000
Utilities -- electric (1.9%)
California Energy
Sr Nts 9.50 2006 8,000,000 8,460,000
Sr Secured Nts 9.875 2003 9,000,000 9,562,500
First Palo Verde Funding 10.15 2016 3,193,000 3,444,449
Midland Funding II 11.75 2005 5,000,000 5,675,000
13.25 2006 12,500,000 15,125,000
Niagara Mohawk Power
1st Mtge 9.75 2005 9,000,000 9,737,820
Texas-New Mexico Power
Secured Deb 10.75 2003 7,000,000 7,612,500
Total 59,617,269
Miscellaneous (0.6%)
Darling-Delaware
Sr Sub Nts 11.00 2000 9,932,000 9,907,170
ECM Funding 11.92 2002 2,029,428(e) 2,232,371
XCL
with Warrants 13.50 2004 8,000,000(c) 8,000,000
Total 20,139,541
Foreign (12.5%)
APP Intl Finance
(U.S. Dollar) 11.75 2005 4,500,000 4,871,250
Australis Holdings
(U.S. Dollar) Zero Coupon
with Warrants 14.99 2000 13,400,000(g) 8,442,000
Australis Media
(U.S. Dollar) Zero Coupon
with Warrants 14.92 2000 12,750,000(g) 7,936,875
Cable Systems
(U.S. Dollar) 10.75 1999 2,399,136(e) 2,393,138
CEI Citicorp Holdings
(U.S. Dollar) 8.50 2002 3,000,000(c) 2,996,250
(Argentine Peso) 11.25 2007 5,000,000(c) 4,837,500
Cia Latino Americana
(U.S. Dollar) 11.625 2004 3,500,000(c) 3,622,500
City of Moscow
(U.S. Dollar) 9.50 2000 10,000,000(c) 10,050,000
Colt Telecommunications Group
(U.S. Dollar) Zero Coupon 12.00 2006 8,500,000(g) 5,440,000
DGS Intl Finance
(U.S. Dollar) 10.00 2007 7,500,000(c) 7,593,750
Doman Inds
(U.S. Dollar) 8.75 2004 10,500,000 10,027,500
Dominion Textiles
(U.S. Dollar) Sr Nts 8.875 2003 5,000,000 5,125,000
Fresh Del Monte Produce
(U.S. Dollar) 10.00 2003 22,000,000 22,440,000
FSW Intl
(U.S. Dollar) Sr Nts 12.50 2006 6,000,000 6,015,000
Globo Communicacoes
(U.S. Dollar) 10.50 2006 4,250,000(c) 4,425,312
Govt of Algeria
(U.S. Dollar) 7.06 2006 5,750,000 4,930,625
Grupo Industrial Durango
(U.S. Dollar) 12.625 2003 5,000,000 5,587,500
Grupo Televisa
(U.S. Dollar) Sr Nts 11.875 2006 3,250,000 3,656,250
(U.S. Dollar) Zero Coupon Sr Nts 13.25 2001 12,500,000(g) 8,796,875
Guangdong Enterprises
(U.S. Dollar) Sr Nts 8.875 2007 3,600,000(c) 3,626,928
Gulf Canada Resources
(U.S. Dollar) 9.25 2004 13,500,000 14,124,375
Hyundai Semiconductor
(U.S. Dollar) 8.625 2007 15,000,000(c) 14,954,250
Imexsa Export Trust
(U.S. Dollar) 10.125 2003 10,000,000(c) 10,475,000
Intl Cabletel
(U.S. Dollar) Zero Coupon 11.48 2001 40,000,000(g) 27,250,000
Ionica
(U.S. Dollar) Zero Coupon 14.99 2002 25,500,000(g) 13,068,750
MDC Communications
(U.S. Dollar) Sr Sub Nts 10.50 2006 12,100,000 12,826,000
Newsquest Capital
(U.S. Dollar) Sr Sub Nts 11.00 2006 5,000,000 5,387,500
(U.S. Dollar) Series B 11.00 2006 7,750,000 8,350,625
Philippine Long Distance Telephone
(U.S. Dollar) 7.85 2007 7,500,000(c) 7,196,250
(U.S. Dollar) 8.35 2017 7,500,000(c) 7,020,375
PLD Telekom
(U.S. Dollar) Zero Coupon
with Warrants 14.42 2001 4,000,000(g) 3,450,000
Polysindo Intl Fin
(U.S. Dollar) 11.375 2006 7,500,000 8,212,500
Repap New Brunswick
(U.S. Dollar) Sr Nts 9.875 2000 25,450,000 25,513,625
(U.S. Dollar) Sr Nts 10.625 2005 10,000,000 9,450,000
Rogers Cablesystems
(U.S. Dollar) Sr Secured Nts 9.625 2002 9,000,000 9,382,500
Rogers Cantel
(U.S. Dollar) Sr Sub Nts 11.125 2002 10,000,000 10,425,000
Scandinavian Broadcasting
Cv Sub Deb 7.25 2005 2,430,000 2,262,938
Stone Container
(U.S. Dollar) 11.50 2006 6,000,000(c) 6,090,000
Tarkett Intl
(U.S. Dollar) 9.00 2002 10,000,000 10,275,000
Telewest
(U.S. Dollar) Zero Coupon 11.00 2000 20,000,000(g) 13,950,000
Tjiwi Kimia
(U.S. Dollar) 13.25 2001 7,000,000 7,962,500
Transport Maritima Mex
(U.S. Dollar) Sr Nts 10.00 2006 7,600,000 7,533,500
Veninfotel
(U.S. Dollar) Cv Pay-in-Kind 10.00 2002 8,000,000(e,l) 8,140,000
Veritas Holdings
(U.S. Dollar) 9.625 2003 23,470,000(c) 24,056,750
Total 400,171,691
Total bonds
(Cost: $2,720,481,951) $2,823,308,581
Common stocks & other (8.1%)(j)
Issuer Shares Value(a)
Advanced Micro Devices
Common 100,000(d) $ 4,000,000
Alliance Gaming
15% Pay-in-Kind Preferred 79,558(c,l) 8,134,806
American Communication Services
Warrants 17,200 516,000
American Radio Systems
11.375% Pay-in-Kind Preferred 92,133(l) 9,789,131
American Telecasting
Warrants 85,225 10,653
APP Intl Finance
12% Preferred 10,000 10,000,000
Australis Holdings
Warrants 13,400 402
Bar Technologies
Warrants 10,000 400,000
Benedek Communications
15% Preferred 70,000(d) 7,280,000
Warrants 70,000 140,000
Cablevision Systems
11.125% Pay-in-Kind Preferred 322,572(l) 30,402,411
11.75% Pay-in-Kind Preferred 119,203(l) 11,652,093
Celcaribe
Common 1,195,110(d) 2,390,220
Clearnet Communications
Warrants 35,640 106,920
Communications & Power Inds
14% Preferred 63,375(d) 6,982,234
Common 3,500 525,000
Crown Packaging
Warrants 10,000 1,250
CS Wireless Systems
Common 3,163(m) --
Dairy Mart Convenience Stores
Warrants 311,333(e) 622,666
Earthwatch
12% Preferred Cv 700,000(c) 7,000,000
First Nationwide Bank
11.5% Preferred 166,500 18,710,437
Foodmaker
Warrants 7,000 283,500
Gaylord Container
Common 437,500(c,d) 3,582,031
Warrants 562,500 4,570,312
Geotek Communications
Warrants 872,500 872,500
Globalstar Telecommunications
Common 80,000 2,260,000
GPA Financial
8% Preferred Cv 48,026(e) 4,862,633
HarCor Energy
Common 100,000(d) 606,250
Warrants 110,000 330,000
Hat Brand Holdings
Warrants 90,346(m) --
Hemmeter Enterprises
Warrants 36,000(m) --
Hosiery Corp of America
Warrants 10,000 70,000
Houlihan's Restaurant
Warrants 5,886 30,136
IFINT Diversified Holdings
Common 42,418(e) 678,688
Intermedia Communications
13.5% Pay-in-Kind Preferred 90,000(c,l) 9,360,000
Warrants 22,750 625,625
Intl Wireless Communication
Warrants 14,750 148
Jitney-Jungle Stores
15% Preferred 85,000 11,687,500
K-III Communications
10% Preferred 1(l) 86
Lady Luck Gaming
Common 200,000(d) 375,000
National Australia Bank
7.875% Preferred 220,000 5,940,000
Nextel Communications
Warrants 18,902 189
Ocwen Asset Investment
Common 95,000(d) 1,721,875
Pagemart Nationwide
Common 50,750(d) 203,000
Panamsat
12.75% Pay-in-Kind Preferred 11(d,l) 13,750
Pantry Pride
14.875% Preferred 100,000 10,262,500
Paxson Communications
12.5% Pay-in-Kind Preferred 106,940(l) 10,426,650
Pegasus Communications
Common 16,923(d) 175,576
12.75% Preferred 42,000 4,116,000
Riggs Natl
Series B Preferred 72,825 2,057,306
SDW Holdings
15% Preferred 274,350(d,e) 9,739,425
Sinclair Capital
11.625% Preferred 140,000(c) 14,700,000
Silgan Holdings
13.25% Pay-in-Kind Preferred 5,502(l) 5,914,650
Specialty Foods Acquisition
Common 300,000(d) 112,500
Supermarket General
$3.52 Pay-in-Kind Cv Preferred 275,000(d,l) 6,600,000
Time Warner
10.25% Pay-in-Kind Preferred 15,042(l) 16,583,805
TransDigm
Warrants 11,195(e) 3,078,527
Triangle Wire & Cable
Common 548,889(d,e) 548,889
Warren (SD)
14% Preferred 200,000(d) 8,000,000
Webcraft Technology
Common 32,502(d,e) 325
Wireless One
Common 25,000(d) 73,438
Warrants 23,250 23,250
Total common stocks & other
(Cost: $253,423,099) $259,150,287
Short-term securities (3.0%)
Issuer Annualized Amount Value(a)
yield on payable at
date of maturity
purchase
Commercial paper (2.8%)
Ameritech Capital Funding
06-19-97 5.57% $ 6,500,000(h) $ 6,480,995
07-18-97 5.57 600,000(h) 595,576
ABB Treasury Center USA
06-16-97 5.57 5,200,000(h) 5,187,173
Avco Financial Services
06-17-97 5.56 6,000,000 5,984,303
Bell Atlantic
06-05-97 5.53 6,600,000 6,594,949
Cargill Global
06-16-97 5.60 1,900,000(h) 1,894,969
Ciesco LP
06-16-97 5.55 5,500,000(h) 5,486,507
Commerzbank U.S. Finance
06-09-97 5.55 13,000,000 12,981,963
Duke Power
06-12-97 5.54 3,400,000 3,393,744
Gateway Fuel
06-13-97 5.56 3,300,000 3,293,410
General Electric Capital
06-18-97 5.60 5,100,000 5,085,822
Kredietbank North America Finance
06-20-97 5.58 6,000,000 5,981,500
Metlife Funding
06-04-97 5.53 2,700,000 2,698,347
Novartis Finance
06-16-97 5.56 7,000,000 6,982,764
06-18-97 5.55 5,500,000 5,484,792
UBS Finance (Delaware)
06-13-97 5.56 4,200,000 4,191,598
06-23-97 5.54 4,800,000 4,783,072
Unilever Capital
06-03-97 5.56 1,000,000(h) 999,540
Total 88,101,024
Letter of credit (0.2%)
Federal Home Loan Bank-
Western Financial Services
06-05-97 5.50 8,000,000 7,993,889
Total short-term securities
(Cost: $96,095,258) $ 96,094,913
Total investment in securities
(Cost: $3,070,000,308)(o) $3,178,553,781
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
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, 1997.
(c) Represents a security sold under Rule 144A, which is exempt from
registration under the Secruities Act of 1933, as amended. This security has
been determined to be liquid under guidelines established by the board.
(d) 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 1 to the financial
statements). Information concerning such security holdings at May 31, 1997 is as
follows:
Security Acquisition Cost
dates
Cable Systems
(U.S. Dollar) 02-02-96 $ 2,340,305
Dairy Mart Convenience Stores
Warrants 11-28-95 thru 10-27-96 239,401
ECM Funding 04-13-92 2,029,428
Gemini 11-01-96 13,500,000
Geotek Communications
Cv 03-04-96 4,630,000
GPA Financial
8% Preferred Cv 12-23-96 4,774,987
Hat Brand Holdings
Zero Coupon 2002 09-03-96 5,000,000
IFINT Diversified Holdings
Common 08-18-94 --
Outdoor Systems 05-02-97 9,800,000
SDW Holding
15% Preferred 03-04-97 thru 03-11-97 9,776,925
TransDigm
Sr Secured Nts 09-29-93 thru 04-24-96 13,095,679
Warrants 09-29-93 thru 04-24-96 1,027,805
Triangle Wire & Cable
Common 01-13-92 13,000,117
Veninfotel
(U.S. Dollar) Cv Pay-in-Kind 03-05-97 8,000,000
Webcraft Technology
Common 12-22-86 16,875
*Represents a security sold under Rule 144A, which is exempt from registration
under the Securities Act of 1933, as amended.
(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) 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.
(i) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31, 1997.
(j) Transactions with companies that were affiliates (investments representing
5% or more of the outstanding voting securities of the issuer) during the year
ended May 31, 1997 are:
Issuer Beginning Purchase Sales Ending Dividend
cost cost cost cost income
Kash n` Karry Food Stores $19,815,725 $-- $19,815,725 $-- $--
Envirodyne Inds 11,146,875 -- 11,146,875 -- --
Total $30,962,600 $-- $30,962,600 $-- $--
(k) 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, 1997. Inverse floaters in the
aggregate represent 0.1% of the Portfolio's net assets as of May 31, 1997.
(l) Pay-in-kind securities are securities in which the issuer has the options to
make interest or dividend payments in cash or in additional securities. These
securities issued as interest or dividends, usually have the same terms,
including maturity date, as the pay-in-kind securities.
(m) Negligible market value.
(n) At May 31, 1997, the cost of securities purchased, including interest
purchased, on a when-issued basis was $9,800,000.
(o) At May 31, 1997, the cost of securities for federal income tax purpose was
$3,069,825,743 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation........................................$161,231,407
Unrealized depreciation.........................................(52,503,369)
-----------
Net unrealized appreciation....................................$108,728,038
============
<PAGE>
PAGE 80
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS:
List of financial statements filed as part of this Post- Effective
Amendment to the Registration Statement:
For the Fund:
- Independent auditors' report dated July 3, 1997 - Statement of assets
and liabilities, May 31, 1997 - Statement of operations, year ended May
31, 1997 - Statements of changes in net assets, May 31, 1996 and May
31, 1997
- Notes to financial statements
For the Portfolio:
- Independent auditors' report dated July 3, 1997 - Statement of assets and
liabilities, May 31, 1997 - Statement of operations for the period from
June 10, 1996
(commencement of operations) to May 31, 1997
- Statement of changes in net assets for the period from June
10, 1996 (commencement of operations) to May 31, 1997 - Notes to
financial statements - Investments in securities, May 31, 1997
(b) EXHIBITS:
1. Copy of Articles of Incorporation, as amended Nov. 14, 1991,
filed as Exhibit No. 1 to Post-Effective Amendment No. 17 to
Registration Statement No. 2-86637, is incorporated herein by
reference.
2. Copy of Amended By-laws, dated Jan. 10, 1996, filed
electronically as Exhibit No. 2 to Post-Effective Amendment
No. 27 to Registration Statement No. 2-86637, is incorporated
herein by reference.
3. Not Applicable.
4. Form of Stock certificate for common stock, filed as Exhibit
No. 4 to Registrant's Post-Effective Amendment No. 4, is
incorporated herein by reference.
5. Form of Investment Management and Services Agreement between
Registrant and American Express Financial Corporation, dated
March 20, 1995, filed electronically as Exhibit 5 to
Registrant's Post-Effective Amendment No. 23 to Registration
Statement No. 2-86637, is incorporated herein by reference.
The Agreement was assumed by the Portfolio when the Fund
adopted the master/feeder structure.
6. Form of Distribution Agreement between Registrant and American
Express Financial Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 6 to Registrant's Post-Effective
<PAGE>
PAGE 81
Amendment No. 23 to Registration Statement No. 2-86637, is
incorporated herein by reference.
7. All employees are eligible to participate in a profit sharing plan.
Entry into the plan is Jan. 1 or July 1. The Registrant contributes each
year an amount up to 15 percent of their annual salaries, the maximum
deductible amount permitted under Section 404(a) of the Internal Revenue
Code.
8(a). Form of Custodian Agreement between Registrant and First
National Bank of Minneapolis, dated July 23, 1986,
refiled electronically as Exhibit 8(a) to Registrant's
Post-Effective Amendment No. 27 to Registration Statement
No. 2-86637, is incorporated herein by reference.
8(b). Copy of addendum to the Custodian Agreement, dated July
23, 1986 between IDS Extra Income Fund, Inc. and First
Bank National Association executed on June 10, 1996,
filed electronically as Exhibit 8(b) to Post-Effective
Amendment No. 27 to Registration Statement No. 2-86637,
is incorporated herein by reference.
9(a). Form of Transfer Agency Agreement between Registrant and
American Express Financial Corporation, dated March 20,
1995, filed electronically as Exhibit 9(a) to
Registrant's Post-Effective Amendment No. 23 to
Registration Statement No. 2-86637, is incorporated
herein by reference.
9(b). Copy of License Agreement dated Jan. 25, 1988, between
Registrant and IDS Financial Corporation, filed as
Exhibit 9(c) to Post-Effective Amendment No. 15 to
Registration Statement No. 2-86637, is incorporated
herein by reference.
9(c). Form of Shareholder Service Agreement between Registrant
and American Express Financial Advisors Inc., dated March
20, 1995, filed electronically as Exhibit 9(c) to
Registrant's Post-Effective Amendment No. 23 to
Registration Statement No. 2-86637, is incorporated
herein by reference.
9(d). Form of Administrative Services Agreement between
Registrant and American Express Financial Corporation,
dated March 20, 1995, filed electronically as Exhibit
9(d) to Registrant's Post-Effective Amendment No. 23 to
Registration Statement No. 2-86637, is incorporated
herein by reference.
9(e). Copy of Agreement and Declaration of Unitholders made
June 10, 1996 by IDS Extra Income Fund, Inc. and
Strategist Income Fund, Inc., filed electronically as
Exhibit 9(e) to Post-Effective Amendment No. 27 to
Registration Statement No. 2-86637, is incorporated
herein by reference.
<PAGE>
PAGE 82
9(f). Copy of Class Y Shareholder Service Agreement between IDS
Precious Metals Fund, Inc. and American Express Financial
Advisors Inc., dated May 9, 1997, filed electronically on
or about May 27, as Exhibit 9(e) to IDS Precious Metals
Fund, Inc.'s Amendment No. 30 to Registration Statement
No. 2-93745, is incorporated herein by reference.
Registrant's Class Y shareholder Service Agreement
differs from the one incorporated by reference only by
the fact that Registrant is one executing party.
10. Opinion and consent of counsel as to the legality of the
securities being registered is filed with Registrant's most
recent 24f-2 Notice.
11. Independent Auditors' Consent, is filed electronically
herewith.
12. None.
13. Not applicable.
14. Forms of Keogh, IRA and other retirement plans, filed as
Exhibits 14(a) through 14(n) to IDS Growth Fund, Inc., Post-
Effective Amendment No. 34 to Registration Statement No. 2-
38355 on Sept. 8, 1986, are incorporated herein by reference.
15. Form of Plan and Agreement of Distribution between Registrant
and American Express Financial Advisors Inc., dated March 20,
1995, filed electronically as Exhibit 15 to Registrant's Post-
Effective Amendment No. 23 to Registration Statement No. 2-
86637, is incorporated herein by reference.
16. Copy of schedule for computation of each performance quotation
provided in the Registration Statement in response to Item
22(b), filed as Exhibit 16 to Registrant's Post-Effective
Amendment No. 18 to Registration Statement No. 2-86637, is
incorporated herein by reference.
17. Financial Data Schedules, are filed electronically herewith.
18. Copy of plan pursuant to Rule 18f-3 Under the 1940 Act, filed
as Exhibit 18 to Registrant's Post-Effective Amendment No. 24
to Registration Statement No. 2-86637, is incorporated herein
by reference.
19(a). Directors' Power of Attorney, dated January 8, 1997, to
sign Amendments to this Registration Statement is, filed
electronically herewith.
19(b). Officers' Power of Attorney, dated Nov. 1, 1995, to sign
Amendments to this Registration Statement, filed
electronically as Exhibit 19(b) to Registrant's Post-
Effective Amendment No. 27, is incorporated herein by
reference.
19(c). Trustees Power of Attorney dated January 8, 1997, is
filed electronically herewith.
<PAGE>
PAGE 83
19(d). Officers' Power of Attorney dated April 11, 1996, filed
electronically as Exhibit 19(d) to Registrant's Post-
Effective Amendment No. 27, is incorporated herein by
reference.
Item 25. Persons Controlled by or Under Common Control with
Registrant:
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Holders as of
Title of Class July 15, 1997
Capital Stock
Class A 147,638
Class B 43,786
Class Y 101
Item 27. Indemnification
The Articles of Incorporation of the registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that she or he is or was a director, officer, employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Fund may purchase
liability insurance and advance legal expenses, all to the fullest extent
permitted by the laws of the State of Minnesota, as now existing or hereafter
amended. The By-laws of the registrant provide that present or former directors
or officers of the Fund made or threatened to be made a party to or involved
(including as a witness) in an actual or threatened action, suit or proceeding
shall be indemnified by the Fund to the full extent authorized by the Minnesota
Business Corporation Act, all as more fully set forth in the By-laws filed as an
exhibit to this registration statement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent,
<PAGE>
PAGE 84
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the directors, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.
<PAGE>
PAGE 85
<PAGE>
PAGE 1
<PAGE>
Item 29(c). Not applicable.
Item 30. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of
the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
PAGE 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, IDS Extra Income Fund, Inc., certifies that
it meets the requirements for the effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis and State of Minnesota on the 28th day of July, 1997.
IDS EXTRA INCOME FUND, INC.
By /s/ Melinda S. Urion
Melinda S. Urion, Treasurer
By /s/ William R. Pearce**
William R. Pearce, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following persons in the
capacities indicated on the 28th day of July, 1997.
Signature Capacity
/s/ William R. Pearce** President, Principal
William R. Pearce Executive officer and
Director
/s/ H. Brewster Atwater, Jr. Director
H. Brewster Atwater, Jr.
/s/ Leslie L. Ogg** Vice President,
Leslie L. Ogg General Counsel and
Secretary
/s/ Lynne V. Cheney* Director
Lynne V. Cheney
/s/ William H. Dudley* Director
William H. Dudley
/s/ Robert F. Froehlke* Director
Robert F. Froehlke
<PAGE>
PAGE 87
Signature Capacity
/s/ David R. Hubers* Director
David R. Hubers
/s/ Heinz F. Hutter* Director
Heinz F. Hutter
/s/ Anne P. Jones* Director
Anne P. Jones
/s/ Melvin R. Laird* Director
Melvin R. Laird
/s/ Alan K. Simpson Director
Alan K. Simpson
/s/ Edson W. Spencer* Director
Edson W. Spencer
/s/ John R. Thomas* Director
John R. Thomas
/s/ Wheelock Whitney* Director
Wheelock Whitney
/s/ C. Angus Wurtele* Director
C. Angus Wurtele
*Signed pursuant to Directors' Power of Attorney dated January 8, 1997, to sign
Amendments to this Registration Statement filed electronically herewith as
Exhibit 19(a), by:
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney dated Nov. 1,
1995, to sign Amendments to this Registration Statement filed
electronically as Exhibit 17(b) to Registrant's Post-Effective
Amendment No. 27 to Registration Statement No. 2-86637, by:
Leslie L. Ogg
<PAGE>
PAGE 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, INCOME TRUST consents to the filing of this Amendment to
the Registration Statement signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis and State of Minnesota on the 28th
day of July, 1997.
INCOME TRUST
By /s/ Melinda S. Urion
Melinda S. Urion
Treasurer
By /s/ William R. Pearce**
William R. Pearce
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following persons in the
capacities indicated on the 28th day of July, 1997.
Signature Capacity
/s/ William R. Pearce** Trustee
William R. Pearce
/s/ H. Brewster Atwater, Jr. Trustee
H. Brewster Atwater, Jr.
/s/ Lynne V. Cheney* Trustee
Lynne V. Cheney
/s/ William H. Dudley* Trustee
William H. Dudley
/s/ Robert F. Froehlke* Trustee
Robert F. Froehlke
/s/ David R. Hubers* Trustee
David R. Hubers
/s/ Heinz F. Hutter* Trustee
Heinz F. Hutter
<PAGE>
PAGE 89
Signature Capacity
/s/ Anne P. Jones* Trustee
Anne P. Jones
/s/ Melvin R. Laird* Trustee
Melvin R. Laird
/s/ Alan K. Simpson Trustee
Alan K. Simpson
/s/ Trustee
Edson W. Spencer
/s/ John R. Thomas* Trustee
John R. Thomas
/s/ Trustee
Wheelock Whitney
/s/ C. Angus Wurtele* Trustee
C. Angus Wurtele
*Signed pursuant to Trustees Power of Attorney dated January 8, 1997, filed
electronically herewith as Exhibit 19(c), by:
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney dated April 11,
1996, filed electronically as Exhibit 19(d) to Registrant's Post-
Effective Amendment No. 27, by:
Leslie L. Ogg
<PAGE>
PAGE 90
CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 28
TO REGISTRATION STATEMENT No. 2-86637
This Post-Effective Amendment comprises the following papers and documents:
The facing sheet.
Cross reference sheet.
Part A.
The prospectus.
Part B.
Statement of Additional Information.
Financial Statements.
Part C.
Other information.
Exhibits.
The signatures.
PAGE 1
IDS Extra Income Fund, Inc.
Exhibit 11: Independent Auditors' Consent.
Exhibit 17: Financial Data Schedules
Exhibit 19(a): Directors' Power of Attorney, dated January 8, 1997.
Exhibit 19(c): Trustees Power of Attorney dated January 8, 1997.
<PAGE>
PAGE 1
Independent auditors' consent
- -------------------------------------------------------------------
The board and shareholders
IDS Extra Income Fund, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "Financial highlights" in Part A and
"INDEPENDENT AUDITORS" in Part B of the Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 28, 1997
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<NAME> IDS EXTRA INCOME FUND CLASS A
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<PER-SHARE-NII> .36
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<PAGE>
PAGE 1
DIRECTORS/TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as directors and trustees of the below listed
open-end, diversified investment companies that previously have filed
registration statements and amendments thereto pursuant to the requirements of
the Securities Act of 1933 and the Investment Company Act of 1940 with the
Securities and Exchange Commission:
1933 Act 1940 Act
Reg. Number Reg. Number
IDS Bond Fund, Inc. 2-51586 811-2503
IDS California Tax-Exempt Trust 33-5103 811-4646
IDS Discovery Fund, Inc. 2-72174 811-3178
IDS Equity Select Fund, Inc. 2-13188 811-772
IDS Extra Income Fund, Inc. 2-86637 811-3848
IDS Federal Income Fund, Inc. 2-96512 811-4260
IDS Global Series, Inc. 33-25824 811-5696
IDS Growth Fund, Inc. 2-38355 811-2111
IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
IDS International Fund, Inc. 2-92309 811-4075
IDS Investment Series, Inc. 2-11328 811-54
IDS Managed Retirement Fund, Inc. 2-93801 811-4133
IDS Market Advantage Series, Inc. 33-30770 811-5897
IDS Money Market Series, Inc. 2-54516 811-2591
IDS New Dimensions Fund, Inc. 2-28529 811-1629
IDS Precious Metals Fund, Inc. 2-93745 811-4132
IDS Progressive Fund, Inc. 2-30059 811-1714
IDS Selective Fund, Inc. 2-10700 811-499
IDS Special Tax-Exempt Series Trust 33-5102 811-4647
IDS Stock Fund, Inc. 2-11358 811-498
IDS Strategy Fund, Inc. 2-89288 811-3956
IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686
IDS Tax-Free Money Fund, Inc. 2-66868 811-3003
IDS Utilities Income Fund, Inc. 33-20872 811-5522
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either
one of them, as her or his attorney-in-fact and agent, to sign for her or him in
her or his name, place and stead any and all further amendments to said
registration statements filed pursuant to said Acts and any rules and
regulations thereunder, and to file such amendments with all exhibits thereto
and other documents in
<PAGE>
PAGE 2
connection therewith with the Securities and Exchange Commission, granting to
either of them the full power and authority to do and perform each and every act
required and necessary to be done in connection therewith.
Dated the 8th day of January, 1997.
/s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird
H. Brewster Atwater, Jr. Melvin R. Laird
/s/ Lynne V. Cheney /s/ William R. Pearce
Lynne V. Cheney William R. Pearce
/s/ William H. Dudley /s/ Alan K. Simpson
William H. Dudley Alan K. Simpson
/s/ Robert F. Froehlke /s/ Edson W. Spencer
Robert F. Froehlke Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
Anne P. Jones C. Angus Wurtele
<PAGE>
PAGE 1
TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as trustees of the below listed open-end,
diversified investment companies that previously have filed registration
statements and amendments thereto pursuant to the requirements of the Investment
Company Act of 1940 with the Securities and Exchange Commission:
1940 Act
Reg. Number
Growth Trust 811-07395
Growth and Income Trust 811-07393
Income Trust 811-07307
Tax-Free Income Trust 811-07397
World Trust 811-07399
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either
one of them, as her or his attorney-in-fact and agent, to sign for her or him in
her or his name, place and stead any and all further amendments to said
registration statements filed pursuant to said Act and any rules and regulations
thereunder, and to file such amendments with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting to either of them the full power and authority to do and perform each
and every act required and necessary to be done in connection therewith.
Dated the 8th day of January, 1997.
/s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird
H. Brewster Atwater, Jr. Melvin R. Laird
/s/ Lynne V. Cheney /s/ William R. Pearce
Lynne V. Cheney William R. Pearce
/s/ William H. Dudley /s/ Alan K. Simpson
William H. Dudley Alan K. Simpson
/s/ Robert F. Froehlke /s/ Edson W. Spencer
Robert F. Froehlke Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
Anne P. Jones C. Angus Wurtele
