SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 34 (File No. 2-89288) [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 36 (File No. 811-3956) [X]
IDS STRATEGY FUND, INC.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Leslie L. Ogg - 901 S. Marquette Avenue, 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 May 28, 1999 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.
<PAGE>
IDS
Equity Value
Fund
PROSPECTUS
May 28, 1999
IDS Equity Value Fund seeks to provide shareholders with growth of capital and
income.
Please note that this 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 goal
Like all mutual funds, the Securities and Exchange Commission
has not approved or disapproved these securities or passed upon the adequacy of
this prospectus. Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 5p
Past Performance 6p
Fees and Expenses 8p
Management 9p
Buying and Selling Shares 9p
Valuing Fund Shares 9p
Investment Options 10p
Purchasing Shares 11p
Sales Charges 14p
Exchanging/Selling Shares 18p
Distributions and Taxes 23p
Personalized Shareholder
Information 25p
About the Company 26p
Quick Telephone Reference 28p
Financial Highlights 29p
<PAGE>
FUND INFORMATION KEY
Goal and Investment Strategy
The Fund's particular investment goal and the strategies it intends
to use in pursuing its goal.
Risks
The major risk factors associated with the Fund.
Fees and Expenses
The overall costs incurred by an investor in the Fund, including
sales charges and annual expenses.
Management
The individual or group designated by the investment manager to
handle the Fund's day-to-day management.
Financial Highlights
Tables showing the Fund's financial performance.
IDS EQUITY VALUE FUND
The Fund
GOAL
IDS Equity Value Fund (the Fund) seeks to provide shareholders with growth of
capital and income. Because any investment involves risk, achieving this goal
cannot be guaranteed.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in equity securities. Under normal
market conditions, the Fund will invest at least 65% of its net assets in equity
securities that provide income, offer the opportunity for long-term capital
appreciation, or both. The Fund's investment philosophy is rooted in the belief
that a disciplined, systematic, value-orientated approach to investing in larger
companies provides investors with the best opportunity for long-term growth of
capital.
The selection of common stocks is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, American Express Financial Corporation (AEFC),
the Fund's investment manager, chooses equity investments by:
o Determining specific industry weightings within the following sectors:
-- Consumer cyclical -- Energy -- Consumer stable -- Technology --
Financial -- Industrial
o Identifying companies with: -- dividend-paying stock -- effective
management, -- competitive market position, -- financial strength,
and -- potential for long-term growth.
o Selecting companies that are undervalued based on a variety of measures, such
as price-earnings ratio, price/book ratio, current and projected earnings,
current and projected dividends, and historic price levels.
<PAGE>
In evaluating whether to sell a security, AEFC considers, among other
factors, whether:
-- the security is overvalued,
-- the security has reached AEFC's price objective,
-- the company has met AEFC's earnings and/or growth expectations,
and
-- the company or the security continues to meet the other standards
described above.
Although not a primary investment strategy, the Fund also may invest in foreign
securities, convertible securities, debt obligations (rated B or higher),
derivative instruments (such as options and futures contracts), money market
securities, and other instruments.
During weak or declining markets or when growth opportunities are unavailable,
the Fund may invest more of its assets in money market securities or commercial
paper. Although the Fund primarily will invest in these securities to avoid
losses, this type of investing also could reduce the benefit from any
improvement in the market. During these times, AEFC may make frequent securities
trades that could result in increased fees, expenses, and taxes. The Fund is not
managed with respect to tax-efficiency.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
<PAGE>
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Sector/Concentration Risk
Style Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Style Risk
The Fund purchases stocks it believes are undervalued, but have potential for
long-term growth and dividend income. These stocks may trade at a discount to
the market. Growth cannot be guaranteed and the markets may not be willing to
reevaluate out-of-favor stocks.
<PAGE>
PAST PERFORMANCE
The following bar chart and table indicate the risks and variability of
investing in the Fund by showing:
o how the Fund's performance has varied for each full calendar year shown on
the chart below, and
o how the Fund's average annual total returns compare to other recognized
indexes.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
Class B Performance (based on calendar years)
During the period shown in the bar chart, the highest return for a calendar
quarter was +16.16% (quarter ending December 1998) and the lowest return for a
calendar quarter was -14.48% (quarter ending September 1990).
The 5% sales charge applicable to Class B shares of the Fund is not reflected in
the bar chart; if reflected, returns would be lower than those shown. The
performance of Class A and Class Y may vary from that shown above because of
differences in sales charges and fees.
The Fund's year to date return as of March 31, 1999 was +2.63%.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Dec. 31, 1998)
<S> <C> <C> <C> <C>
1 year Since inception (A&Y) 5 years 10 years (B)
=================================================================================================
Equity Value:
Class A +3.86% +18.51%a -- --
Class B +4.69% -- +14.53% +14.31%
Class Y +9.39% +20.32%a -- --
S&P 500 Index +28.57% +27.45%b +24.01% +18.29%
Lipper Growth &
=================================================================================================
Income Fund Index +13.58% +22.10%b +17.83% +15.54%
a Inception date was March 20, 1995.
b Measurement period started April 1, 1995.
</TABLE>
This table shows total returns from hypothetical investments in Class A, Class B
and Class Y shares of the Fund. These returns are compared to the indexes shown
for the same periods. The performance of Classes A, B and Y vary because of
differences in sales charges and fees. Past performance for Class Y for the
periods prior to March 20, 1995 may be calculated based on the performance of
Class B, adjusted to reflect differences in sales charges, although not for
other differences in expenses.
For purposes of this calculation we assumed:
o a sales charge of 5% for Class A shares,
o sales at the end of the period and deduction of the applicable
contingent deferred sales charge (CDSC) for Class B shares,
o no sales charge for Class Y shares, and
o no adjustments for taxes paid by an investor on the reinvested
income and capital gains.
S&P 500 Index, an unmanaged list of common stocks, is frequently used as a
general measure of market performance. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage commissions
or other fees.
Lipper Growth & Income Fund Index, an unmanaged index published by Lipper
Analytical Services, Inc., includes 30 funds that are generally similar to the
Fund, although some funds in the index may have somewhat different investment
policies or objectives.
<PAGE>
FEES AND EXPENSES
<TABLE>
<CAPTION>
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
<S> <C> <C> <C>
===========================================================================================================================
Shareholder Fees (fees paid directly from your investment)
Class A Class B Class Y
Maximum sales charge (load) imposed on purchasesa
- --------------------------------------------------------------------------------------------------------------------------
(as a percentage of offering price) 5% none none
Maximum deferred sales charge (load) imposed on sales
(as a percentage of offering price at time of purchase) none 5% none
==========================================================================================================================
Annual Fund operating expenses (expenses that are deducted from Fund assets) As
a percentage of average daily net assets:Class A Class B Class Y
==========================================================================================================================
Management fees 0.49% 0.49% 0.49%
Distribution (12b-1) fees 0.00% 0.75% 0.00%
Other expensesb 0.40% 0.41% 0.30%
Total 0.89% 1.65% 0.79%
</TABLE>
a This charge may be reduced depending on your total investments in IDS
funds. See "Sales Charges."
b Other expenses include an administrative services fee, a shareholder services
fee, a transfer agency fee and other nonadvisory expenses. Effective Feb. 1,
1999, the transfer agency fee for Class A and Class B increased to $19 and $20
per shareholder account, respectively. Effective April 1, 1999, the transfer
agency fee for Class Y increased to $17 per shareholder account. The percentages
above reflect these increases in transfer agency fees.
<PAGE>
<TABLE>
<CAPTION>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you hold your shares until the end of the
years shown, your costs would be:
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
=====================================================================================================
Class Aa $586 $770 $ 969 $1,545
Class Bb $668 $921 $1,098 $1,756d
Class Bc $168 $521 $ 898 $1,756d
=====================================================================================================
Class Y $ 81 $253 $ 440 $ 982
</TABLE>
a Includes a 5% sales charge.
b Assumes you sold your Class B shares at the end of the period and incurred the
applicable CDSC.
c Assumes you did not sell your Class B shares at the end of
the period.
d Based on conversion of Class B shares to Class A shares in the
ninth year of ownership.
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
Kurt Winters, senior portfolio manager, joined AEFC in 1987. He has managed this
Fund since December 1997. Kurt is responsible for overall investment management,
including the determination of the sectors in which the Fund will invest. A team
of research professionals makes investment decisions within those sectors. From
1992 to 1995, he managed IDS Life Series Fund, Managed Portfolio. He was
appointed to manage IDS Discovery Fund in 1995. He also manages IDS Progressive
Fund, Balanced Portfolio and Equity Income Portfolio.
Buying and Selling Shares
VALUING FUND SHARES
The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B and Class Y, it is the NAV.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Standard Time (CST), each business day (any day the New York
Stock Exchange is open).
<PAGE>
The Fund's investments are valued based on market value, or where market
quotations are not readily available, on methods selected in good faith by the
board. Because the Fund invests in securities that are listed on foreign stock
exchanges that trade on weekends or other days when the Fund does not price its
shares, the value of the Fund's underlying investments may change on days when
you could not buy or sell shares of the Fund. Please see the SAI for further
information.
<TABLE>
<CAPTION>
INVESTMENT OPTIONS
1. Class A shares are sold to the public with a sales charge at the time of
purchase.
2. Class B shares are sold to the public with a CDSC and an annual distribution
(12b-1) fee.
3. Class Y shares are sold to qualifying institutional investors without a sales
charge or distribution fee. Please see the SAI for information on eligibility
to purchase Class Y shares.
<S> <C>
Investment options summary:
Class A Maximum sales charge of 5%
Initial sales charge waived or reduced for certain
purchases
No annual distribution fee
Service fee of 0.175% of average daily net assets
Lower annual expenses than Class B shares
- -----------------------------------------------------------------------------------------------------------------
Class B No initial sales charge
CDSC on shares sold in the first six years (maximum of 5%
in first year, reduced to 0% after year six)
CDSC waived in certain circumstances
Shares convert to Class A in ninth year of ownership
Annual distribution fee of 0.75% of average daily net
assets*
Service fee of 0.175% of average daily net assets
Higher annual expenses than Class A shares
- --------------------------------------------------------------------------------------------------------------------
Class Y No initial sales charge
No annual distribution fee
Service fee of 0.10% of average daily net assets
Available only to certain qualifying institutional investors
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 that allows it to pay distribution fees for the sale of Class B shares.
Because these fees are paid out of the Fund's assets on an on-going basis,
long-term shareholders of Class B shares may end up paying more than the 6.25%
sales charge permitted by the National Association of Securities Dealers.
<PAGE>
Should you purchase Class A or Class B shares?
If your investments in IDS funds total $250,000 or more, Class A shares may be
the better option. If you qualify for a waiver of the sales charge, Class A
shares will be the best option.
If you invest less than $250,000, consider how long you plan to hold your
shares. Class B shares have an additional annual distribution fee of 0.75% and a
CDSC for six years. To help you determine what is best for you, consult your
financial advisor.
Class B shares convert to Class A shares in the ninth calendar year of
ownership. 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.
PURCHASING SHARES
If you do not have a mutual fund account, you need to establish one. 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.
When you purchase shares for a new or existing account, your order will be
priced at the next NAV calculated after your order is accepted by the Fund. If
your application does not specify which class of shares you are purchasing, we
will assume you are investing in Class A shares.
Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.
If you do not provide the correct TIN, 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, and
o criminal penalties for falsifying information.
You also could be subject to backup withholding if the IRS requires us to do so
or if you failed to report required interest or dividends on your tax return.
<PAGE>
<TABLE>
<CAPTION>
How to determine the correct TIN
<S> <C>
For this type of account: Use the Social Security or Employer Identification number of:
Individual or joint account The individual or one of the individuals listed on the joint 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 trust or estate The legal entity (not the 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 tax-exempt organization The organization
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For details on TIN requirements, ask your financial advisor or contact your
local American Express Financial Advisors office for federal Form W-9, "Request
for Taxpayer Identification Number and Certification."
Three ways to invest
==============================================================================
1 By mail:
Once your account has been established, send your check with the
account number on it to:
American Express Financial Advisors Inc.
P.O. Box 74
Minneapolis, MN 55440-0074
Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $300
Qualified accounts: none
If your account balance falls below $300, you will be asked to increase it to
$300 or establish a scheduled investment plan. If you do not do so within 30
days, your shares can be sold and the proceeds mailed to you.
<PAGE>
2 By scheduled investment plan:
Contact your financial advisor to set up one of the following scheduled plans:
o automatic payroll deduction,
o bank authorization,
o direct deposit of Social Security check, or
o other plan approved by the Fund.
Minimum amounts
Initial investment: $100
Additional investments: $50/mo. for qualified accounts; $100/mo. for
nonqualified accounts
Account balances: none (on active plans of monthly payments)
If your account falls below $2,000, you must make payments at least monthly.
============================================================================
3 By wire or electronic funds transfer:
If you have an established account, you may wire money to:
Norwest Bank Minnesota
Routing Transit No. 091000019
Give these instructions:
Credit American Express Financial Advisors Account #0000030015 for personal
account # (your account number) for (your name). Please remember that you need
to provide all 10 digits.
If this information is not included, the order may be rejected, and all money
received by the Fund, less any costs the Fund or American Express Client Service
Corporation (AECSC) incurs, will be returned promptly.
Minimum amounts
Each wire investment: $1,000
If you are in a wrap fee program sponsored by AEFA and your balance falls below
the required program minimum or your program is terminated, your shares will be
sold and the proceeds will be mailed to you.
<PAGE>
SALES CHARGES
Class A -- initial sales charge alternative
When you purchase Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:
=============================================================================
Total investment Sales charge as percentage of:a
Public offering priceb Net amount 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
a To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, you must total the amounts of all increments that apply.
b Offering price includes a 5% sales charge.
The sales charge on Class A shares may be lower than 5%, depending on the total
amount:
o you now are investing in this Fund,
o you have previously invested in this Fund, or
o you and your primary household group are investing or have invested in other
funds in the IDS MUTUAL FUND GROUP that have 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.) IDS Tax-Free Money Fund and Class A shares of
IDS Cash Management Fund do not have sales charges.
Other Class A sales charge policies:
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 group, may be added
together to reduce sales charges for all shares purchased through that plan,
and
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, please see the SAI.
<PAGE>
Waivers of the sales charge for Class A shares
Sales charges do not apply to:
o current or retired board members, officers or employees of the Fund or AEFC
or its subsidiaries, their spouses, and unmarried children under 21.
o current or retired American Express financial advisors, their spouses, and
unmarried children under 21.
o 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 shares sold that were
sponsored by the financial advisor's previous broker-dealer, and (3) the
proceeds are the result of a sale of an equal or greater value where a sales
load was assessed.
o qualified employee benefit plans using a daily transfer recordkeeping system
offering participants daily access to funds of the IDS MUTUAL FUND GROUP.
Eligibility must be determined in advance by AEFA. For assistance, please
contact your financial advisor. (Participants in certain qualified plans
where the initial sales charge is waived may be subject to a deferred sales
charge of up to 4%.)
o shareholders who have at least $1 million invested in funds of the IDS MUTUAL
FUND GROUP. If the investment is sold in the first year after purchase, a
CDSC of 1% will be charged. The CDSC will be waived only in the circumstances
described for waivers for Class B shares.
o purchases made within 30 days after a sale of shares (up to the amount sold):
-- of a product distributed by AEFA in a qualified plan subject to a
deferred sales charge, or
-- in a qualified plan or account where American Express Trust Company has a
recordkeeping, trustee, investment management, or investment
servicing relationship.
<PAGE>
Send the Fund a written request along with your payment, indicating the
date and the amount of the sale.
o purchases made:
-- with dividend or capital gain distributions from this Fund or from the
same class of another fund in the IDS MUTUAL FUND GROUP that has a
sales charge,
-- through or under a wrap fee product sponsored by AEFA,
-- within the University of Texas System ORP,
-- within a segregated separate account offered by Nationwide Life Insurance
Company or Nationwide Life and Annuity Insurance Company,
-- within the University of Massachusetts After-Tax Savings Program,
-- with the proceeds from IDS Life Real Estate Variable Annuity surrenders,
or
-- through or under a subsidiary of AEFC offering Personal Trust Services'
Asset-Based pricing alternative.
Class B -- contingent deferred sales charge (CDSC) alternative
A CDSC is based on the sale amount and the number of calendar years -- including
the year of purchase -- between purchase and sale. The following table shows how
CDSC percentages on sales decline after a purchase:
If the sale is made during the: The CDSC percentage rate 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 selling causes the value of your investment in Class B
shares to fall below the cost of the shares you have purchased during the last
six years including the current year, the CDSC is based on the lower of the cost
of those shares purchased or market value.
<PAGE>
Example:
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 dividends
and capital gain distributions. You could sell up to $2,000 worth of shares
without paying a CDSC ($12,000 current value less $10,000 purchase amount). If
you sold $2,500 worth of shares, the CDSC would apply to the $500 representing
part of your original purchase price. The CDSC rate would be 4% because the sale
was made during the second year after the purchase.
Because the CDSC is imposed only on sales that reduce your total purchase
payments, you never have to pay a CDSC on any amount that represents
appreciation in the value of your shares, income earned by your shares or
capital gains. In addition, the CDSC rate on your sale will be based on your
oldest purchase payment. The CDSC on the next amount sold will be based on the
next oldest purchase payment.
The CDSC on Class B shares will be waived on sales of shares:
o in the event of the shareholder's death,
o held in trust for an employee benefit plan, or
o held in IRAs or certain qualified plans if American Express Trust Company is
the 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 sale is part of a
transfer to an IRA or qualified plan in a product distributed by AEFA,
or a custodian-to-custodian transfer to a product not distributed by
AEFA, the CDSC will not be waived) OR
-- selling under an approved substantially equal periodic payment
arrangement.
<PAGE>
EXCHANGING/SELLING SHARES
Exchanges
You can exchange your Fund shares at no charge for shares of the same class of
any other publicly offered fund in the IDS MUTUAL FUND GROUP. Exchanges into IDS
Tax-Free Money Fund may only be made from Class A shares. For complete
information on the other funds, including fees and expenses, read that fund's
prospectus carefully. Your exchange will be priced at the next NAV calculated
after it is accepted by that fund.
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.
Other exchange policies:
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 AECSC receives written approval from the secured party.
AECSC 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. Selling Shares You can sell your shares at any time. AECSC
will mail payment within seven days after accepting your request.
When you sell shares, the amount you receive may be more or less than the amount
you invested. Your sale price will be the next NAV calculated after your request
is accepted by the Fund, minus any applicable CDSC.
<PAGE>
You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If
you reinvest in Class A, you will purchase the new shares at NAV 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 request within 30
days of the date your sale request was received and include your account number.
This privilege may be limited or withdrawn at any time and may have
tax consequences.
Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.
The Fund reserves the right to redeem in kind.
Important: If you request a sale 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 payment is made.
(Payment may be made earlier if your bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)
For more details and a description of other sales policies, please see the SAI.
<PAGE>
Two ways to request an exchange or sale of shares
========================================================================
1 By letter:
Include in your letter:
o the name of the fund(s),
o the class of shares to be exchanged or sold,
o your mutual fund account number(s) (for exchanges, both funds must
be registered in the same ownership),
o your TIN,
o the dollar amount or number of shares you want to exchange or sell,
o signature(s) of all registered account owners,
o for sales, indicate how you want your money delivered to you, and
o any paper certificates of shares you hold.
Regular mail:
American Express Client Service Corporation
Attn: Transactions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Client Service Corporation
Attn: Transactions
733 Marquette Ave.
Minneapolis, MN 55402
<PAGE>
2 By telephone:
American Express Financial Advisors
Telephone Transaction Service
800-437-3133
o The Fund and AECSC will use reasonable procedures to confirm authenticity
of telephone exchange or sale requests.
o Telephone exchange and sale privileges automatically apply to all accounts
except custodial, corporate or qualified retirement accounts. You may
request that these privileges NOT apply by writing AECSC. Each registered
owner must sign the request.
o Acting on your instructions, your financial advisor may conduct telephone
transactions on your behalf.
o Telephone privileges may be modified or discontinued at any time.
Minimum sale amount: $100 Maximum sale amount: $50,000
<PAGE>
Three ways to receive payment when you sell shares
=========================================================================
1 By regular or express mail:
o Mailed to the address on record.
o Payable to names listed on the account.
NOTE: The express mail delivery charges you pay
will vary depending on the courier you select.
=========================================================================
2 By wire or electronic funds transfer:
o Minimum wire: $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 AECSC.
=========================================================================
3 By scheduled payout plan:
o Minimum payment: $50.
o Contact your financial advisor or AECSC
to set up regular payments 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.
<PAGE>
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTION
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Net short-term capital gains are included in net investment income.
Long-term capital gains are realized when a security is held for more than one
year. The Fund offsets any net realized capital gains by any available capital
loss carryovers. Net realized long-term capital gains, if any, are distributed
by the end of the calendar year as capital gain distributions.
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
o you request distributions in cash, or
o you direct the Fund to invest your distributions in the same class of any
publicly offered fund in the IDS MUTUAL FUND GROUP for which you have
previously opened an account.
We reinvest the distributions for you at the next calculated NAV after the
distribution is paid.
If you choose cash distributions, you will receive cash only for distributions
declared after your request has been processed.
<PAGE>
TAXES
Distributions are subject to federal income tax and may be subject to state and
local taxes in the year they are declared. You must report distributions on your
tax returns, even if they are reinvested in additional shares.
Income received by the Fund may be subject to foreign tax and withholding. Tax
conventions between certain countries and the U.S. may reduce or eliminate these
taxes. You may be entitled to claim foreign tax credits or deductions subject to
provisions and limitations of the Internal Revenue Code.
If you buy shares shortly before a distribution you will pay taxes on money
earned by the Fund before you were a shareholder. You pay the full
pre-distribution price for the shares, then receive a portion of your investment
back as a distribution, which is taxable.
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held for more
than one year). If you sell shares for less than their cost, the difference is a
capital loss. If you buy Class A shares of this or another fund in the IDS
MUTUAL FUND GROUP and within 91 days exchange into this Fund, you may not
include the sales charge in your calculation of tax gain or loss on the sale of
the first fund you purchased. The sales charge may be included in the
calculation of your tax gain or loss on a subsequent sale.
Selling shares held in an IRA or qualified retirement account may subject you to
federal taxes, penalties and reporting requirements. Please consult your tax
advisor.
Important: This information is a brief and selective summary of some of the tax
rules that apply to this Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
<PAGE>
Personalized Shareholder Information
To help you track and evaluate the performance of your investments, AECSC
provides these individualized reports:
QUARTERLY STATEMENTS
List your holdings and transactions during the previous three months, as well as
individualized return information.
YEARLY TAX STATEMENTS
Feature average-cost-basis reporting of capital gains or losses if you sell your
shares, along with distribution information to simplify tax calculations.
PERSONALIZED MUTUAL FUND PROGRESS REPORTS
Detail returns on your initial investment and cash-flow activity in your
account. This report calculates a total return reflecting your individual
history in owning Fund shares and is available from your financial advisor.
<PAGE>
About the Company
BUSINESS STRUCTURE
* The Fund pays AEFC a fee for managing its assets. Under the Investment
Management Services Agreement, the fee for the most recent fiscal year was 0.49%
of its average daily net assets. Under the Agreement, the Fund also pays taxes,
brokerage commissions and nonadvisory expenses.
<PAGE>
Shareholders
Your American Express financial advisor and other servicing agents
May receive a fee for their sales efforts and ongoing service.
Transfer Agent:
American Express Client Service Corporation
Maintains shareholder accounts and records for the Fund; receives a fee
based on the number of accounts it services.
Administrative Services Agent:
American Express Financial Corporation
Provides administrative and accounting services for the Fund; receives
a fee based on assets.
The Fund
Distributor and Shareholder Services Agent:
American Express Financial Advisors
Markets and distributes shares;
receives portion of sales charge or CDSC and distribuion fee.
Also provides a variety of ongoing shareholder services.
Investment Manager:
American Express Financial Corporation
Manages the Fund's investments and receives a fee based on average
daily net assets.*
Custodian:
American Express Trust Company
Provides safekeeping of assets; receives a fee that varies based on
the number of securities held.
<PAGE>
AMERICAN EXPRESS FINANCIAL CORPORATION
AEFC has been a provider of financial services since 1894. Its family of
companies offers not only mutual funds but also insurance, annuities, investment
certificates and a broad range of financial management services.
In addition to managing assets of more than $87 billion for all funds in the IDS
MUTUAL FUND GROUP, AEFC manages investments for itself and its subsidiaries, IDS
Certificate Company and IDS Life Insurance Company. Total assets under
management as of the end of the most recent fiscal year were more than $219
billion.
AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,200 advisors.
AEFC, located at IDS Tower 10, Minneapolis, MN 55440-0010, is a wholly-owned
subsidiary of American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New York, NY
10285.
YEAR 2000
The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after Jan. 1, 2000.
While Year 2000-related computer problems could have a negative effect on the
Fund, AEFC is working to avoid such problems and to obtain assurances from
service providers that they are taking similar steps. The companies or
governments in which the Fund invests also may be adversely affected by Year
2000 issues.
<PAGE>
Quick Telephone Reference
AMERICAN EXPRESS FINANCIAL ADVISORS TELEPHONE TRANSACTION SERVICE
Sales and exchanges, dividend payments or reinvestments and automatic payment
arrangements: 800-437-3133
AMERICAN EXPRESS CLIENT SERVICE CORPORATION
Fund performance, fund prices, account values, recent account transactions and
account inquiries: 800-862-7919
TTY SERVICE
For the hearing impaired: 800-846-4852
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Fiscal period ended March 31,
<S> <C> <C> <C> <C> <C>
=========================================================================================
Per share income and capital changesa
Class B
1999 1998 1997 1996 1995
Net asset value, beginning of period $12.85 $11.63 $11.07 $9.21 $9.17
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .07 .21 .21 .18 .19
Net gains (losses) (both realized and
unrealized) (.06) 3.30 1.69 2.12 .47
- -----------------------------------------------------------------------------------------
Total from investment operations .01 3.51 1.90 2.30 .66
Less distributions:
Dividends from net investment income (.08) (.20) (.22) (.16) (.19)
Distributions from realized gains (1.45) (2.09) (1.12) (.28) (.43)
- ------------------------------------------------------------------------------------------
Total distributions (1.53) (2.29) (1.34) (.44) (.62)
Net asset value, end of period $11.33 $12.85 $11.63 $11.07 $9.21
===========================================================================================
Ratios/supplemental data
Class B
1999 1998 1997 1996 1995
Net assets, end of period (in millions) $1,663 $1,922 $1,509 $1,296 $1,304
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average daily
net assetsb 1.62% 1.61% 1.64% 1.69% 1.61%
Ratio of net investment income (loss)
to average daily net assets .65% 1.69% 1.83% 1.71% 2.10%
Portfolio turnover rate
(excluding short-term securities) 106% 95% 60% 54% 85%
Total returnc .54% 32.61% 17.55% 25.20% 7.69%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
c Total return does not reflect payment of a sales charge.
<PAGE>
Fiscal period ended March 31,
======================================================================================================================
Per share income and capital changesa
Class A Class Y
1999 1998 1997 1996 1995b 1999 1998 1997 1996 1995b
Net asset value,
- ---------------------------------------------------------------------------------------------------------------------
beginning of period $12.85 $11.62 $11.06 $9.21 $9.10 $12.87 $11.64 $11.07 $9.21 $9.23
Income from investment operations:
Net investment income (loss) .17 .32 .29 .21 .01 .18 .34 .32 .26 --
Net gains (losses) (both
- ----------------------------------------------------------------------------------------------------------------------
realized and unrealized) (.08) 3.30 1.70 2.16 .15 (.08) 3.29 1.70 2.14 .03
Total from investment operations .09 3.62 1.99 2.37 .16 .10 3.63 2.02 2.40 .03
Less distributions:
==========================================================================================================================
Dividends from net
investment income (.17) (.30) (.31) (.24) (.05) (.18) (.31) (.33) (.26) (.05)
Distributions from realized gains (1.45) (2.09) (1.12) (.28) -- (1.45) (2.09) (1.12) (.28) --
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (1.62) (2.39) (1.43) (.52) (.05) (1.63) (2.40) (1.45) (.54) (.05)
Net asset value, end of period $11.32 $12.85 $11.62 $11.06 $9.21 $11.34 $12.87 $11.64 $11.07 $9.21
==============================================================================================================================
Ratios/supplemental data
Class A Class Y
1999 1998 1997 1996 1995b 1999 1998 1997 1996 1995b
Net assets, end of period
- ------------------------------------------------------------------------------------------------------------------------------
(in millions) $906 $835 $426 $332 $6 $1 $1 $-- $-- $--
Ratio of expenses to average
- ------------------------------------------------------------------------------------------------------------------------------
daily net assetsc .87% .85% .89% .90% .91%d .78% .76% .71% .75% --%e
Ratio of net investment income
(loss) to average daily net assets 1.39% 2.43% 2.60% 2.74% 2.43%d 1.49% 2.10% 2.78% 2.73% --%e
Portfolio turnover rate
- -----------------------------------------------------------------------------------------------------------------------------
(excluding short-term securities) 106% 95% 60% 54% 85% 106% 95% 60% 54% 85%
Total returnf 1.31% 33.62% 18.45% 26.10% 1.80% 1.40% 33.76% 18.67% 26.40% .31%
a For a share outstanding throughout the period. Rounded to the nearest cent. b
Inception date was March 20, 1995.
c Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
d Adjusted to an annual basis.
e Ratios of expenses and net investment income to average daily net assets is
not presented for Class Y as only 2 shares were outstanding during the period.
f Total return does not reflect payment of a sales charge.
The information in these tables has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of the Fund are contained in the Fund's annual
report which, if not included with this prospectus, may be obtained without
charge.
</TABLE>
<PAGE>
This Fund, along with the other funds in the IDS MUTUAL FUND GROUP, is
distributed by American Express Financial Advisors Inc. and can be found
under the "Amer Express" banner in most mutual fund quotations.
Additional information about the Fund and its investments is available in the
Fund's SAI, annual and semiannual reports to shareholders. In the Fund's annual
report, you will find a discussion of market conditions and investment
strategies that significantly affected the Fund during its last fiscal year. The
SAI is incorporated by reference in this prospectus. For a free copy of the SAI,
the annual report or the semiannual report contact American Express Client
Service Corporation.
American Express Client Service Corporation
P.O. Box 534, Minneapolis, MN 55440-0534
800-862-7919 TTY: 800-846-4852
Web site address:
http://www.americanexpress.com/advisors
You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-800-SEC-0330). Reports and other information about the Fund are available on
the Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained by writing and paying a duplicating fee to the Public Reference
Section of the Commission, Washington, D.C. 20549-6009.
Investment Company Act File #811-3956
TICKER SYMBOL
Class A: IEVAX Class B: INEGX Class Y: N/A
S-6382-99 G (5/99)
<PAGE>
IDS Strategy Aggressive Fund
PROSPECTUS
May 28, 1999
IDS Strategy Aggressive Fund seeks to provide shareholders with long-term growth
of capital.
Please note that this 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 goal
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 5p
Past Performance 6p
Fees and Expenses 8p
Management 9p
Buying and Selling Shares 9p
Valuing Fund Shares 9p
Investment Options 10p
Purchasing Shares 11p
Sales Charges 14p
Exchanging/Selling Shares 18p
Distributions and Taxes 23p
Personalized Shareholder
Information 25p
About the Company 26p
Quick Telephone Reference 28p
Financial Highlights 29p
<PAGE>
FUND INFORMATION KEY
(icon of magnifying glass) Goal and Investment Strategy
The Fund's particular investment goal and the
strategies it intends to use in pursuing
its goal.
(icon of die) Risks
The major risk factors associated with the Fund.
(icon of checkbook) Fees and Expenses
The overall costs incurred by an investor in
the Fund, including sales charges and annual
expenses.
(icon of folder) Management
The individual or group designated by the
investment manager to handle the Fund's
day-to-day management.
(icon of stack of dollar bills) Financial Highlights
Tables showing the Fund's financial performance.
<PAGE>
The Fund
GOAL
IDS Strategy Aggressive Fund (the Fund) seeks to provide shareholders with
long-term growth of capital. Because any investment involves risk, achieving
this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund primarily invests in securities of growth companies. Under normal
market conditions, at least 65% of the Fund's total assets are invested in
equity securities.
The selection of common stocks is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, American Express Financial Corporation (AEFC),
the Fund's investment manager, chooses equity investments by:
o Considering opportunities and risks within growing industries and
new technologies.
o Selecting companies that AEFC believes have aggressive growth prospects.
o Identifying small and medium companies with:
-- effective management,
-- financial strength, and
-- competitive market position.
<PAGE>
In evaluating whether to sell a security, AEFC considers, among other
factors, whether:
- -- the security is overvalued relative to other potential investments,
- -- the security has reached AEFC's price objective,
- -- the company's characteristics change,
- -- the company has met AEFC's earnings and/or growth expectations,
- -- political, economic, or other events could affect the company's performance,
- -- AEFC wishes to minimize potential losses (i.e., in a market down-turn),
- -- AEFC wishes to lock-in profits,
- -- AEFC identifies a more attractive opportunity, and
- -- the company or the security continues to meet the other standards described
above.
Although not a primary investment strategy, the Fund also may invest in foreign
securities, money market securities, debt obligations (rated B or higher),
derivative instruments (such as options and futures contracts), convertible
securities, and other instruments.
During weak or declining markets or when growth opportunities are unavailable,
the Fund may invest more of its assets in money market securities or debt
obligations. Although the Fund primarily will invest in these securities to
avoid losses, this type of investing also could reduce the benefit from any
improvement in the market. During these times, AEFC may make frequent securities
trades that could result in increased fees, expenses, and taxes.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
<PAGE>
RISKS
This Fund is designed for investors with above-average risk tolerance. Please
remember that with any mutual fund investment you may lose money. Principal
risks associated with an investment in the Fund include:
Market Risk
Style Risk
Small Company Risk
Issuer Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Style Risk
AEFC purchases growth stocks based on the expectation that the companies will
have strong growth in earnings. The price paid often reflects an expected rate
of growth. If that growth fails to occur, the price of the stock may decline
quickly.
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
<PAGE>
PAST PERFORMANCE
The following bar chart and table indicate the risks and variability of
investing in the Fund by showing : o how the Fund's performance has varied for
each full calendar year shown on the chart below, and o how the Fund's average
annual total returns compare to other recognized indexes.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
Class B Performance (based on calendar years)
- -------------------------------------------------------------------------------
+32.74 -0.66 +51.08 -0.99 +7.99 -6.87 +35.03 +18.19 +14.70 +18.37
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was +22.26% (quarter ending December 1998) and the lowest return for a
calendar quarter was -20.59% (quarter ending September 1990). The 5% sales
charge applicable to Class B shares of the Fund is not reflected in the bar
chart; if reflected, returns would be lower than those shown. The performance of
Class A and Class Y may vary from that shown above because of differences in
sales charges and fees. The Fund's year to date return as of March 31, 1999 was
+0.44%.
<PAGE>
<TABLE>
<CAPTION>
IDS STRATEGY AGGRESSIVE FUND
Average Annual Total Returns (as of Dec. 31, 1998)
1 year Since inception (A&Y) 5 years 10 years (B)
========================================================================================
Strategy Aggressive:
========================================================================================
<S> <C> <C> <C> <C>
Class A +13.31% +20.05%a -- --
Class B +14.37% -- +14.95% +15.70%
Class Y +19.34% +21.81%a -- --
S&P 500 Index +28.57% +27.45%b +24.01% +18.29%
Russell Midcap
Growth Index +17.86% +21.12%b +17.34% +17.30%
</TABLE>
a Inception date was March 20, 1995.
b Measurement period started April 1, 1995.
This table shows total returns from hypothetical investments in Class A, Class B
and Class Y shares of the Fund. These returns are compared to the indexes shown
for the same periods. The performance of Classes A, B and Y vary because of
differences in sales charges and fees. Past performance for Class Y for the
periods prior to March 20, 1995 may be calculated based on the performance of
Class B, adjusted to reflect differences in sales charges, although not for
other differences in expenses.
For purposes of this calculation we assumed:
o a sales charge of 5% for Class A shares,
o sales at the end of the period and deduction of the applicable contingent
deferred sales charge (CDSC) for Class B shares,
o no sales charge for Class Y shares, and
o no adjustments for taxes paid by an investor on the reinvested income and
capital gains.
S&P 500 Index, an unmanaged list of common stocks, is frequently used as a
general measure of market performance. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage commissions
or other fees.
Russell Midcap Growth Index, an unmanaged list of common stocks, measures the
performance of the 800 smallest companies in the Russell 1000 Index,
representing 35% of the total market capitalization of the Russell 1000 Index.
<PAGE>
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
Class A Class B Class Y
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchasesa
(as a percentage of offering price) 5% none none
Maximum deferred sales charge (load) imposed on sales
(as a percentage of offering price at time of purchase) none 5% none
</TABLE>
<TABLE>
<CAPTION>
Annual Fund operating expenses (expenses that are deducted from Fund assets) As
a percentage of average daily net assets:
<S> <C> <C> <C>
Class A Class B Class Y
===================================================================================================
Management fees 0.59% 0.59% 0.59%
Distribution (12b-1) fees 0.00% 0.75% 0.00%
Other expensesb 0.46% 0.47% 0.35%
===================================================================================================
Total 1.05% 1.81% 0.94%
</TABLE>
a This charge may be reduced depending on your total investments in IDS funds.
See "Sales Charges."
b Other expenses include an administrative services fee, a shareholder
services fee, a transfer agency fee and other nonadvisory expenses.
Effective Feb. 1, 1999, the transfer agency fee for Class A and Class B
increased to $19 and $20 per shareholder account, respectively. Effective April
1, 1999, the transfer agency fee for Class Y increased to $17 per shareholder
account. The percentages above reflect these increases in transfer agency fees.
<PAGE>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you hold your shares until the end of the
years shown, your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
===================================================================================================
<S> <C> <C> <C> <C>
Class Aa $602 $818 $1,051 $1,723
Class Bb $684 $970 $1,181 $1,931d
Class Bc $184 $570 $981 $1,931d
===================================================================================================
Class Y $96 $300 $521 $1,159
</TABLE>
a Includes a 5% sales charge.
b Assumes you sold your Class B shares at the end of the period and incurred the
applicable CDSC.
c Assumes you did not sell your Class B shares at the end of the period.
d Based on conversion of Class B shares to Class A shares in the
ninth year of ownership. This example does not represent actual expenses, past
or future. Actual expenses may be higher or lower than those shown.
MANAGEMENT
Louis Giglio, portfolio manager, joined AEFC in January 1994 as a senior equity
analyst. He has managed this Fund since April 1998. He also serves as portfolio
manager of World Technologies Portfolio and IDS Life Series Fund, Equity
Portfolio. Prior to joining AEFC he had eight years of experience as a financial
analyst with Bear, Stearns & Co. Inc. covering the microcomputer software and
computer services industries.
Jake Hurwitz and Kent Kelly began managing a portion of the Fund in January
1999. Jake and Kent also manage the equity portion of Total Return Portfolio.
Previously, Jake served as senior vice president at Travelers Investment
Management Company, an affiliate of Smith Barney Asset Management. Previously,
Kent was chief executive officer of Travelers Investment Management Company.
Buying and Selling Shares
VALUING FUND SHARES
The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B and Class Y, it is the NAV.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Standard Time (CST), each business day (any day the New York
Stock Exchange is open).
The Fund's investments are valued based on market value, or where market
quotations are not readily available, on methods selected in good faith by the
board. Because the Fund invests in securities that are listed on foreign stock
exchanges that trade on weekends or other days when the Fund does not price its
shares, the value of the Fund's underlying investments may change on days when
you could not buy or sell shares of the Fund. Please see the SAI for further
information.
<PAGE>
INVESTMENT OPTIONS
1. Class A shares are sold to the public with a sales charge at the time of
purchase.
2. Class B shares are sold to the public with a CDSC and an annual distribution
(12b-1) fee.
3. Class Y shares are sold to qualifying institutional investors without a sales
charge or distribution fee. Please see the SAI for information on eligibility to
purchase Class Y shares.
================================================================================
Investment options summary:
Class A Maximum sales charge of 5%
Initial sales charge waived or reduced for certain
purchases No annual distribution fee Service fee of 0.175%
of average daily net assets Lower annual expenses than
Class B shares
- --------------------------------------------------------------------------------
Class B No initial sales charge
CDSC on shares sold in the first six years (maximum
of 5% in first year, reduced to 0% after year six)
CDSC waived in certain circumstances
Shares convert to Class A in ninth year of ownership
Annual distribution fee of 0.75% of average daily net
assets* Service fee of 0.175% of average daily net assets
Higher annual expenses than Class A shares
- --------------------------------------------------------------------------------
Class Y No initial sales charge
No annual distribution fee
Service fee of 0.10% of average daily net assets
Available only to certain qualifying institutional
investors
- --------------------------------------------------------------------------------
* The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 that allows it to pay distribution fees for the sale of Class B shares.
Because these fees are paid out of the Fund's assets on an on-going basis,
long-term shareholders of Class B shares may end up paying more than the 6.25%
sales charge permitted by the National Association of Securities Dealers.
<PAGE>
Should you purchase Class A or Class B shares?
If your investments in IDS funds total $250,000 or more, Class A shares may be
the better option. If you qualify for a waiver of the sales charge, Class A
shares will be the best option.
If you invest less than $250,000, consider how long you plan to hold your
shares. Class B shares have an additional annual distribution fee of 0.75% and a
CDSC for six years. To help you determine what is best for you, consult your
financial advisor.
Class B shares convert to Class A shares in the ninth calendar year of
ownership. 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.
PURCHASING SHARES
If you do not have a mutual fund account, you need to establish one. 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.
When you purchase shares for a new or existing account, your order will be
priced at the next NAV calculated after your order is accepted by the Fund. If
your application does not specify which class of shares you are purchasing, we
will assume you are investing in Class A shares.
Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.
If you do not provide the correct TIN, 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, and
o criminal penalties for falsifying information.
You also could be subject to backup withholding if the IRS requires us to do so
or if you failed to report required interest or dividends on your tax return.
<PAGE>
<TABLE>
<CAPTION>
How to determine the correct TIN
<S> <C>
For this type of account: Use the Social Security or Employer Identification number of:
Individual or joint account The individual or one of the individuals listed on the joint 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 trust or estate The legal entity (not the 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 tax-exempt organization The organization
</TABLE>
For details on TIN requirements, ask your financial advisor or contact your
local American Express Financial Advisors office for federal Form W-9, "Request
for Taxpayer Identification Number and Certification."
Three ways to invest
1 By mail:
Once your account has been established, send your check with the
account number on it to:
American Express Financial Advisors Inc.
P.O. Box 74
Minneapolis, MN 55440-0074
Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $300
Qualified accounts: none
If your account balance falls below $300, you will be asked to increase it to
$300 or establish a scheduled investment plan. If you do not do so within 30
days, your shares can be sold and the proceeds mailed to you.
<PAGE>
2 By scheduled investment plan:
Contact your financial advisor to set up one of the following scheduled plans:
o automatic payroll deduction,
o bank authorization,
o direct deposit of Social Security check, or
o other plan approved by the Fund.
Minimum amounts
Initial investment: $100
Additional investments: $50/mo. for qualified accounts; $100/mo. for
nonqualified accounts
Account balances: none (on active plans of monthly payments)
If your account falls below $2,000, you must make payments at least monthly.
3 By wire or electronic funds transfer: If you have an established account, you
may wire money to:
Norwest Bank Minnesota
Routing Transit No. 091000019
Give these instructions:
Credit American Express Financial Advisors Account #0000030015 for personal
account # (your account number) for (your name). Please remember that you need
to provide all 10 digits.
If this information is not included, the order may be rejected, and all money
received by the Fund, less any costs the Fund or American Express Client Service
Corporation (AECSC) incurs, will be returned promptly.
Minimum amounts
Each wire investment: $1,000
If you are in a wrap fee program sponsored by AEFA and your balance falls below
the required program minimum or your program is terminated, your shares will be
sold and the proceeds will be mailed to you.
<PAGE>
SALES CHARGES
Class A -- initial sales charge alternative
When you purchase Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:
Total investment Sales charge as percentage of:a
Public offering priceb Net amount 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
a To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, you must total the amounts of all increments that apply.
b Offering price includes a 5% sales charge.
The sales charge on Class A shares may be lower than 5%, depending on the total
amount:
o you now are investing in this Fund,
o you have previously invested in this Fund, or
o you and your primary household group are investing or have invested in other
funds in the IDS MUTUAL FUND GROUP that have 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.) IDS Tax-Free Money Fund and Class A
shares of IDS Cash Management Fund do not have sales charges.
Other Class A sales charge policies:
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 group, may be added together
to reduce sales charges for all shares purchased through that plan, and
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,
please see the SAI.
<PAGE>
Waivers of the sales charge for Class A shares
Sales charges do not apply to:
o current or retired board members, officers or employees of the Fund or AEFC
or its subsidiaries, their spouses, and unmarried children under 21.
o current or retired American Express financial advisors, their spouses, and
unmarried children under 21.
o 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 shares sold
that were sponsored by the financial advisor's previous broker-dealer,
and (3) the proceeds are the result of a sale of an equal or greater value
where a sales load was assessed.
o qualified employee benefit plans using a daily transfer recordkeeping system
offering participants daily access to funds of the IDS MUTUAL FUND GROUP.
Eligibility must be determined in advance by AEFA. For assistance, please
contact your financial advisor. (Participants in certain qualified plans
where the initial sales charge is waived may be subject to a deferred sales
charge of up to 4%.)
o shareholders who have at least $1 million invested in funds of the IDS MUTUAL
FUND GROUP. If the investment is sold in the first year after purchase, a
CDSC of 1% will be charged. The CDSC will be waived only in the circumstances
described for waivers for Class B shares.
o purchases made within 30 days after a sale of shares (up to the amount sold):
-- of a product distributed by AEFA in a qualified plan subject to a
deferred sales charge, or
-- in a qualified plan or account where American Express Trust Company
has a recordkeeping, trustee, investment management, or investment
servicing relationship.
<PAGE>
Send the Fund a written request along with your payment, indicating the date and
the amount of the sale.
o purchases made:
-- with dividend or capital gain distributions from this Fund or from the
same class of another fund in the IDS MUTUAL FUND GROUP that has a sales
charge,
-- through or under a wrap fee product sponsored by AEFA,
-- within the University of Texas System ORP,
-- within a segregated separate account offered by Nationwide Life
Insurance Company or Nationwide Life and Annuity Insurance Company,
-- within the University of Massachusetts After-Tax Savings Program,
-- with the proceeds from IDS Life Real Estate Variable Annuity
surrenders, or
-- through or under a subsidiary of AEFC offering Personal Trust Services'
Asset-Based pricing alternative.
Class B -- contingent deferred sales charge (CDSC) alternative
A CDSC is based on the sale amount and the number of calendar years -- including
the year of purchase -- between purchase and sale. The following table shows how
CDSC percentages on sales decline after a purchase:
If the sale is made during the: The CDSC percentage rate 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 selling causes the value of your investment in Class B
shares to fall below the cost of the shares you have purchased during the last
six years including the current year, the CDSC is based on the lower of the cost
of those shares purchased or market value.
<PAGE>
Example:
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 dividends
and capital gain distributions. You could sell up to $2,000 worth of shares
without paying a CDSC ($12,000 current value less $10,000 purchase amount). If
you sold $2,500 worth of shares, the CDSC would apply to the $500 representing
part of your original purchase price. The CDSC rate would be 4% because the sale
was made during the second year after the purchase.
Because the CDSC is imposed only on sales that reduce your total purchase
payments, you never have to pay a CDSC on any amount that represents
appreciation in the value of your shares, income earned by your shares or
capital gains. In addition, the CDSC rate on your sale will be based on your
oldest purchase payment. The CDSC on the next amount sold will be based on the
next oldest purchase payment.
The CDSC on Class B shares will be waived on sales of shares:
o in the event of the shareholder's death,
o held in trust for an employee benefit plan, or
o held in IRAs or certain qualified plans if American Express Trust Company
is the custodian, such as Keogh plans, tax-sheltered custodial accounts or
corporate pension plans, provided that the shareholder is:
-- at least 591/2 years old AND
-- taking a retirement distribution (if the sale is part of a transfer to an
IRA or qualified plan in a product distributed by AEFA, or a
custodian-to-custodian transfer to a product not distributed by AEFA,
the CDSC will not be waived) OR
-- selling under an approved substantially equal periodic payment arrangement.
<PAGE>
EXCHANGING/SELLING SHARES
Exchanges
You can exchange your Fund shares at no charge for shares of the same class of
any other publicly offered fund in the IDS MUTUAL FUND GROUP. Exchanges into IDS
Tax-Free Money Fund may only be made from Class A shares. For complete
information on the other funds, including fees and expenses, read that fund's
prospectus carefully. Your exchange will be priced at the next NAV calculated
after it is accepted by that fund.
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.
Other exchange policies:
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 AECSC receives written approval from the secured party.
AECSC 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.
Selling Shares
You can sell your shares at any time. AECSC will mail payment within seven days
after accepting your request.
When you sell shares, the amount you receive may be more or less than the amount
you invested. Your sale price will be the next NAV calculated after your request
is accepted by the Fund, minus any applicable CDSC.
<PAGE>
You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If you
reinvest in Class A, you will purchase the new shares at NAV 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 request within 30 days of the date your sale
request was received and include your account number. This privilege may be
limited or withdrawn at any time and may have tax consequences.
Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.
The Fund reserves the right to redeem in kind.
Important: If you request a sale 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 payment is made.
(Payment may be made earlier if your bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)
For more details and a description of other sales policies, please see the SAI.
<PAGE>
Two ways to request an exchange or sale of shares
1 By letter:
Include in your letter:
o the name of the fund(s),
o the class of shares to be exchanged or sold,
o your mutual fund account number(s) (for exchanges, both funds must be
registered in the same ownership),
o your TIN,
o the dollar amount or number of shares you want to exchange or sell,
o signature(s) of all registered account owners,
o for sales, indicate how you want your money delivered to you, and
o any paper certificates of shares you hold.
Regular mail:
American Express Client Service Corporation
Attn: Transactions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Client Service Corporation
Attn: Transactions
733 Marquette Ave.
Minneapolis, MN 55402
<PAGE>
2 By telephone:
American Express Financial Advisors
Telephone Transaction Service
800-437-3133
o The Fund and AECSC will use reasonable procedures to confirm authenticity of
telephone exchange or sale requests.
o Telephone exchange and sale privileges automatically apply to all accounts
except custodial, corporate or qualified retirement accounts. You may request
that these privileges NOT apply by writing AECSC. Each registered owner must
sign the request.
o Acting on your instructions, your financial advisor may conduct telephone
transactions on your behalf.
o Telephone privileges may be modified or discontinued at any time.
Minimum sale amount: $100 Maximum sale amount: $50,000
<PAGE>
Three ways to receive payment when you sell shares
1 By regular or express mail:
o Mailed to the address on record.
o Payable to names listed on the account.
NOTE: The express mail delivery charges you pay will vary depending on
the courier you select.
2 By wire or electronic funds transfer:
o Minimum wire: $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 AECSC.
3 By scheduled payout plan:
o Minimum payment: $50.
o Contact your financial advisor or AECSC to set up regular payments 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.
<PAGE>
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTION
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Net short-term capital gains are included in net investment income.
Long-term capital gains are realized when a security is held for more than one
year. The Fund offsets any net realized capital gains by any available capital
loss carryovers. Net realized long-term capital gains, if any, are distributed
by the end of the calendar year as capital gain distributions.
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless: o you request
distributions in cash, or o you direct the Fund to invest your distributions in
the same class of any publicly offered fund in the IDS MUTUAL FUND GROUP for
which you have previously opened an account.
We reinvest the distributions for you at the next calculated NAV after the
distribution is paid.
If you choose cash distributions, you will receive cash only for distributions
declared after your request has been processed.
<PAGE>
TAXES
Distributions are subject to federal income tax and may be subject to state and
local taxes in the year they are declared. You must report distributions on your
tax returns, even if they are reinvested in additional shares.
Income received by the Fund may be subject to foreign tax and withholding. Tax
conventions between certain countries and the U.S. may reduce or eliminate these
taxes. You may be entitled to claim foreign tax credits or deductions subject to
provisions and limitations of the Internal Revenue Code.
If you buy shares shortly before a distribution you will pay taxes on money
earned by the Fund before you were a shareholder. You pay the full
pre-distribution price for the shares, then receive a portion of your investment
back as a distribution, which is taxable.
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held for more
than one year). If you sell shares for less than their cost, the difference is a
capital loss. If you buy Class A shares of this or another fund in the IDS
MUTUAL FUND GROUP and within 91 days exchange into this Fund, you may not
include the sales charge in your calculation of tax gain or loss on the sale of
the first fund you purchased. The sales charge may be included in the
calculation of your tax gain or loss on a subsequent sale.
Selling shares held in an IRA or qualified retirement account may subject you to
federal taxes, penalties and reporting requirements. Please consult your tax
advisor.
Important: This information is a brief and selective summary of some of the tax
rules that apply to this Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
<PAGE>
Personalized Shareholder Information
To help you track and evaluate the performance of your investments, AECSC
provides these individualized reports:
QUARTERLY STATEMENTS
List your holdings and transactions during the previous three months, as well as
individualized return information.
YEARLY TAX STATEMENTS
Feature average-cost-basis reporting of capital gains or losses if you sell your
shares, along with distribution information to simplify tax calculations.
PERSONALIZED MUTUAL FUND PROGRESS REPORTS
Detail returns on your initial investment and cash-flow activity in your
account. This report calculates a total return reflecting your individual
history in owning Fund shares and is available from your financial advisor.
<PAGE>
About the Company
<TABLE>
<CAPTION>
BUSINESS STRUCTURE
<S> <C> <C> <C>
Shareholders
Your American
Express financial
advisor and other
servicing agents
May receive a fee
for their sales
efforts and ongoing
service.
Transfer Agent: Administrative Distributor and
American Express Services Agent: Shareholder
Client Service American Express Services Agent:
Corporation Financial American Express
Corporation Financial Advisors
Maintains shareholder
accounts and records Provides <- -> Markets and
for the Fund; administrative and distributes shares;
receives a fee based accounting services receives portion of
on the number of for the Fund; sales charge or
accounts it services. receives a fee CDSC and
based on assets. The Fund distribution fee.
Also provides a
variety of ongoing
shareholder
services.
Investment Manager: Custodian:
American Express American Express
Financial Trust Company
Corporation
Provides
Manages the Fund's safekeeping of
investments and assets; receives a
receives a fee fee that varies
based on average based on the number
daily net assets.* of securities held.
* The Fund pays AEFC a fee for managing its assets. Under the Investment
Management Services Agreement, the fee for the most recent fiscal year was .59%
of its average daily net assets. Under the Agreement, the Fund also pays taxes,
brokerage commissions and nonadvisory expenses.
</TABLE>
AMERICAN EXPRESS FINANCIAL CORPORATION
AEFC has been a provider of financial services since 1894. Its family of
companies offers not only mutual funds but also insurance, annuities, investment
certificates and a broad range of financial management services.
In addition to managing assets of more than $87 billion for all funds in the IDS
MUTUAL FUND GROUP, AEFC manages investments for itself and its subsidiaries, IDS
Certificate Company and IDS Life Insurance Company. Total assets under
management as of the end of the most recent fiscal year were more than $219
billion.
AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,200 advisors.
AEFC, located at IDS Tower 10, Minneapolis, MN 55440-0010, is a wholly-owned
subsidiary of American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New York, NY
10285.
YEAR 2000
The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after Jan. 1, 2000.
While Year 2000-related computer problems could have a negative effect on the
Fund, AEFC is working to avoid such problems and to obtain assurances from
service providers that they are taking similar steps. The companies or
governments in which the Fund invests also may be adversely affected by Year
2000 issues.
<PAGE>
Quick Telephone Reference
AMERICAN EXPRESS FINANCIAL ADVISORS TELEPHONE TRANSACTION SERVICE
Sales and exchanges, dividend payments or reinvestments and automatic payment
arrangements: 800-437-3133
AMERICAN EXPRESS CLIENT SERVICE CORPORATION
Fund performance, fund prices, account values, recent account transactions
and account inquiries: 800-862-7919
TTY SERVICE
For the hearing impaired: 800-846-4852
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal period ended March 31,
===================================================================================================
Per share income and capital changesa
Class B
===================================================================================================
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $21.48 $18.04 $18.83 $14.90 $14.39
- ---------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.27) (.18) (.18) (.18) (.05)
Net gains (losses) (both realized and unrealized) 1.10 7.57 .52 5.21 .71
- ---------------------------------------------------------------------------------------------------
Total from investment operations .83 7.39 .34 5.03 .66
- ---------------------------------------------------------------------------------------------------
Less distributions:
Distributions from realized gains (.26) (3.95) (1.13) (1.10) (.15)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $22.05 $21.48 $18.04 $18.83 $14.90
===================================================================================================
Ratios/supplemental data
Class B
1999 1998 1997 1996 1995
Net assets, end of period (in millions) $806 $892 $737 $710 $776
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assetsb 1.78% 1.77% 1.80% 1.85% 1.80%
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets (1.25%) (1.21%) (.91%) (.77%) (.41%)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 98% 95% 80% 101% 111%
- ---------------------------------------------------------------------------------------------------
Total returnc 3.88% 45.08% 1.22% 34.10% 4.68%
- ---------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
c Total return does not reflect payment of a sales charge.
<PAGE>
Fiscal period ended March 31,
Per share income and capital changesa
<TABLE>
<CAPTION>
Class A Class Y
1999 1998 1997 1996 1995b 1999 1998 1997 1996 1995b
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $22.12 $18.34 $18.99 $14.91 $14.87 $22.22 $18.40 $19.16 $14.89 $15.19
Income from investment operations:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.10) (.03) (.03) -- .01 (.10) -- -- .03 --
Net gains (losses) (both
realized and unrealized) 1.12 7.76 .51 5.18 .03 1.14 7.77 .37 5.34 (.30)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.02 7.73 .48 5.18 .04 1.04 7.77 .37 5.37 (.30)
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Distributions from realized gains (.26) (3.95) (1.13) (1.10) -- (.26) (3.95) (1.13) (1.10) --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $22.88 $22.12 $18.34 $18.99 $14.91 $23.00 $22.22 $18.40 $19.16 $14.89
===================================================================================================
Ratios/supplemental data
Class A Class Y
1999 1998 1997 1996 1995b 1999 1998 1997 1996 1995b
Net assets, end of period
(in millions) $608 $548 $386 $348 $7 $-- $-- $-- $-- $--
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average daily net assetsc 1.02% 1.01% 1.04% 1.07% 1.18%d .92% .88% .85% .92% --%f
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) to average daily net assets (.48%) (.45%) (.15%) --% 1.26%d (.40%) (.35%) .03% .12% --%f
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding
short-term securities) 98% 95% 80% 101% 111% 98% 95% 80% 101% 111%
- ------------------------------------------------------------------------------------------------------------------------------
Total returne 4.68% 46.18% 2.00% 35.10% .04% 4.74% 46.34% 2.18% 35.30% (1.99%)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
d Adjusted to an annual basis.
e Total return does not reflect payment of a sales charge.
f Ratios of expenses and net investment income to average net daily assets is
not presented for Class Y as only one share was outstanding during the period.
The information in these tables has been audited by KMPG 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.
<PAGE>
This Fund, along with the other funds in the IDS MUTUAL FUND GROUP, is
distributed by American Express Financial Advisors Inc. and can be found under
the "Amer Express" banner in most mutual fund quotations.
Additional information about the Fund and its investments is available in the
Fund's SAI, annual and semiannual reports to shareholders. In the Fund's annual
report, you will find a discussion of market conditions and investment
strategies that significantly affected the Fund during its last fiscal year. The
SAI is incorporated by reference in this prospectus. For a free copy of the SAI,
the annual report or the semiannual report contact American Express Client
Service Corporation.
American Express Client Service Corporation
P.O. Box 534, Minneapolis, MN 55440-0534
800-862-7919 TTY: 800-846-4852
Web site address:
http://www.americanexpress.com/advisors
You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-800-SEC-0330). Reports and other information about the Fund are available on
the Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained by writing and paying a duplicating fee to the Public Reference
Section of the Commission, Washington, D.C. 20549-6009.
Investment Company Act File #811-3956
TICKER SYMBOL
Class A: ISAAX Class B: INAGX Class Y: N/A
S-6381-99 G (5/99)
<PAGE>
IDS STRATEGY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS EQUITY VALUE FUND (the Fund)
May 28, 1999
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
most recent Annual Report to shareholders (Annual Report) that 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 or by calling
800-862-7919.
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 are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.
<PAGE>
TABLE OF CONTENTS
Mutual Fund Checklist.............................................p. 3
Fundamental Investment Policies...................................p. 5
Investment Strategies and Types of Investments....................p. 7
Information Regarding Risks and Investment Strategies.............p. 9
Security Transactions.............................................p. 32
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation............................p. 34
Performance Information...........................................p. 35
Valuing Fund Shares...............................................p. 36
Investing in the Fund.............................................p. 37
Selling Shares....................................................p. 40
Pay-out Plans.....................................................p. 41
Taxes.............................................................p. 42
Agreements........................................................p. 44
Organizational Information........................................p. 46
Board Members and Officers........................................p. 49
Compensation for Board Members....................................p. 52
Independent Auditors..............................................p. 52
Appendix: Description of Ratings.................................p. 53
<PAGE>
MUTUAL FUND CHECKLIST
- --------------------------------------------------------------------------------
|X|
Mutual funds are NOT guaranteed or insured by any
bank or government agency. You can lose money.
|X|
Mutual funds ALWAYS carry investment risks. Some
types carry more risk than others.
|X|
A higher rate of return typically involves a
higher risk of loss.
|X|
Past performance is not a reliable indicator of
future performance.
|X|
ALL mutual funds have costs that lower
investment return.
|X|
You can buy some mutual funds by contacting them
directly. Others, like this one, are sold mainly
through brokers, banks, financial planners, or
insurance agents. If you buy through these
financial professionals, you generally will pay a
sales charge.
|X|
Shop around. Compare a mutual fund with others of
the same type before you buy.
OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:
Develop a Financial Plan
Have a plan - even a simple plan can help you take control of your financial
future. Review your plan with your advisor at least once a year or more
frequently if your circumstances change.
Dollar-Cost Averaging
An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.
<PAGE>
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)
Diversify
Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
Understand Your Investment
Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
- --------------------------------------------------------------------------------
Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
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.
The policies below are fundamental policies that apply to the Fund 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 will not:
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o 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.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
o Purchase securities of an issuer if the board members and officers of the
Fund and of 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 and of AEFC who own more than 0.5% of an issuer's securities
are added together, and if in total they own more than 5%, the Fund will
not purchase securities of that issuer.
o Lend Fund securities in excess of 30% of its net assets.
<PAGE>
o Issue senior securities, except to the extent that borrowing from banks and
using options, foreign currency forward contracts or future contracts (as
discussed elsewhere in the SAI) may be deemed to constitute issuing a
senior security.
o Concentrate in any one industry. According to the present interpretation by
the Securities and Exchange Commission (SEC), this means no more than 25%
of the Fund's total assets, based on current market value at the time of
purchase, can be invested in any one industry.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It also lists certain percentage
guidelines that are generally followed by the Fund's investment manager. This
table is intended to show the breadth of investments that the investment manager
may make on behalf of the Fund. For a description of principal risks, please see
the prospectus. Notwithstanding the Fund's ability to utilize these strategies
and techniques, the investment manager is not obligated to use them at any
particular time. For example, even though the investment manager is authorized
to adopt temporary defensive positions and is authorized to attempt to hedge
against certain types of risk, these practices are left to the investment
manager's sole discretion.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- --------------------------
Investment strategies & types of investments: IDS Equity Value
Allowable for the Fund?
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
<S> <C>
Agency and Government Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Borrowing yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Cash/Money Market Instruments yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Collateralized Bond Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Commercial Paper yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Common Stock yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Convertible Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Corporate Bonds yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Debt Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Depositary Receipts yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Derivative Instruments yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Foreign Currency Transactions yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Foreign Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
High-Yield (High-Risk) Securities (Junk Bonds) yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Illiquid and Restricted Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Indexed Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Inverse Floaters no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Investment Companies yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Lending of Portfolio Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Loan Participations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Mortgage- and Asset-Backed Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Mortgage Dollar Rolls no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Municipal Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Preferred Stock yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Real Estate Investment Trusts yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Repurchase Agreements yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Reverse Repurchase Agreements yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Short Sales no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Sovereign Debt yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Structured Products yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Variable- or Floating-Rate Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Warrants yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
When-Issued Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes
- ---------------------------------------------------------------------------------- --------------------------
</TABLE>
<PAGE>
The following are guidelines that may be changed by the board at any time:
o Under normal market conditions, 65% of the Fund's total assets will be
invested in equity securities.
o The Fund may not invest in debt securities rated lower than B (or in
unrated bonds of comparable quality). Securities that are subsequently
downgraded in quality may continue to be held and will be sold only when
the investment manager believes it is advantageous to do so.
o The Fund will not invest more than 5% of its net assets in bonds rated BB
or B, or in unrated bonds of equivalent quality.
o The Fund may invest up to 25% of its total assets in foreign investments.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not invest more than 10% of its total assets in the
securities of investment companies.
o The Fund will not invest in a company to control or manage it.
o The Fund will not buy on margin or sell securities short, except the Fund
may make margin payments in connection with transactions in futures
contracts.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to purchase securities on a when-issued basis.
o 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.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds 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 and are more
likely to experience a default.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
<PAGE>
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall).
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
<PAGE>
Reinvestment Risk
The risk that an investor will not be able to reinvest their income or principal
at the same rate as it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of a common stock is generally determined by corporate earnings, type
of products or services offered, projected growth rates, experience of
management, liquidity, and general market conditions for the markets on which
the stock trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
<PAGE>
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (i) have higher yields than common stocks
but lower yields than comparable non-convertible securities, (ii) are less
subject to fluctuation in value than the underlying stock since they have fixed
income characteristics, and (iii) provide the potential for capital appreciation
if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
<PAGE>
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities 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. 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 involve the risks of other investments in foreign
securities. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
<PAGE>
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend on (or "derive" from) the value of one or more other assets,
such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or 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. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable gain or loss in the price of the
derivative instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees to sell the security at the set price when the buyer wants to
exercise the option, no matter what the market price of the security is at that
time. A person who buys a put option has the right to sell a security at a set
price for the length of the contract. A person who writes a put option agrees to
buy the security at the set price if the purchaser wants to exercise the option,
no matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained 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.
When an option is purchased, the buyer 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 sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
<PAGE>
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, 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
ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a buyer
(holding the "long" position) and a seller (holding the "short" position) for an
asset with delivery deferred until a future date. The buyer agrees to pay a
fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day an
investor 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 market. Futures contracts may
be based on various securities, securities indices (such as the S & P 500
Index), foreign currencies and other financial instruments and indices.
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 (some futures are settled in cash), 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 a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, 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.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these 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. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities traded
on national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
<PAGE>
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred by entering into futures contracts and losses on underlying
securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund 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 also may limit the
Fund's ability to engage in futures contracts and related options transactions.
For example, at the close of each quarter of the Fund's taxable year, at least
50% of the value of its assets must consist of cash, government securities and
other securities, subject to certain diversification requirements.
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.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
Other Risks of Derivatives.
Derivatives are risky investments.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
<PAGE>
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of the Fund's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, the Fund may incur costs in connection with
conversions between various currencies. Currency exchange rates may fluctuate
significantly over short periods of time causing the Fund's NAV to fluctuate.
Currency exchange rates are generally determined by the forces of supply and
demand in the foreign exchange markets, actual or anticipated changes in
interest rates, and other complex factors. Currency exchange rates also can be
affected by the intervention of U.S. or foreign governments or central banks, or
the failure to intervene, or by currency controls or political developments.
Spot Rates and Derivative Instruments. The Fund conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts) as a hedge against fluctuations in future foreign exchange
rates. (See also Derivative Instruments). These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Because foreign currency transactions
occurring in the interbank market might involve substantially larger amounts
than those involved in the use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market for the underlying foreign
currencies at prices that are less favorable than for round lots.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment in dollars. By entering into
a forward contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between different
currencies from the date the security is purchased or sold to the date on which
payment is made or received or when the dividend or interest is actually
received.
<PAGE>
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may change in relationship
to another currency. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since the future
value of securities in foreign currencies more than likely will change between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency.
The Fund will designate cash or securities in an amount equal to the value of
the Fund's total assets committed to consummating forward contracts entered into
under the second circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a daily basis so
that the value of the cash or securities will equal the amount of the Fund's
commitments on such contracts.
At maturity of a forward contract, the Fund 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 Fund retains the security and engages in an offsetting transaction, the
Fund will incur a gain or loss (as described below) to the extent there has been
movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline between the date the Fund enters
into a forward contract for selling foreign currency and the date it enters into
an offsetting contract for purchasing the foreign currency, the Fund will
realize a gain to the extent 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 Fund will suffer a loss to the extent the price of the
currency it has agreed to buy exceeds the price of the currency it has agreed to
sell.
It is impossible to forecast what the market value of securities will be at the
expiration of a contract. Accordingly, it may be necessary for the Fund to buy
additional foreign currency on the spot market (and bear the expense of that
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's 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 forward contracts
tend to minimize the risk of loss due to a decline in value of hedged currency,
they tend to limit any potential gain that might result should the value of such
currency increase.
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
<PAGE>
Options on Foreign Currencies. The Fund may buy 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 the diminutions in the value of securities, the Fund
may buy options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell the currency for a fixed amount in
dollars and will offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted.
As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put options, 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 Fund would be required to buy or sell
the underlying currency at a loss that may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the 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 Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
<PAGE>
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 that purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The Fund may enter into currency
futures contracts to sell currencies. It also may buy put options and write
covered call options on currency futures. Currency futures contracts are similar
to currency forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size and delivery
date. Most currency futures call for payment of delivery in U.S. dollars. The
Fund may use currency futures for the same purposes as currency forward
contracts, subject to Commodity Futures Trading Commission (CFTC) 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 value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Fund's investments
denominated in that currency over time.
The Fund will hold securities or other options or futures positions whose values
are expected to offset its obligations. The Fund will not enter into an option
or futures position that exposes the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient to cover its
potential obligations.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities and Domestic Companies with Foreign Operations
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and
<PAGE>
no return is earned on them. The inability of an investor to make intended
security purchases due to such problems could cause the investor to miss
attractive investment opportunities. Payment for securities without delivery may
be required in certain foreign markets and, when participating in new issues,
some foreign countries require payment to be made in advance of issuance (at the
time of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates; the fluctuation
of the euro relative to non-euro currencies during the transaction period from
January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax
or labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other EU countries
such as the United Kingdom, Denmark, and Greece into the euro and the admission
of other non-EU countries such as Poland, Latvia, and Lithuania as members of
the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
<PAGE>
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
<PAGE>
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 and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
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. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, an investor will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
<PAGE>
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities. The cash
flows and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs 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.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
<PAGE>
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, or possessions of the United States (including the District of
Columbia). The interest on these obligations is generally exempt from federal
income tax. Municipal obligations are generally classified as either "general
obligations" or "revenue obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
<PAGE>
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
<PAGE>
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement, thereby, determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price on the replacement date. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased prior to the scheduled
delivery date, the investor loses the opportunity to participate in the gain.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
<PAGE>
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
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. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
<PAGE>
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
SECURITY TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund'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 the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions.
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness, and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.
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.
The Fund's securities may be 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 with respect to the Fund and the other funds and trusts in the
IDS MUTUAL FUND GROUP for which it acts as investment manager.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business, and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software, or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management, and trading
functions and other services to the extent permitted under an interpretation by
the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits AEFC, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Fund to pay a
<PAGE>
commission in excess of the amount another broker might have charged. AEFC has
advised the Fund that 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 represented 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 will 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.
Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by AEFC or
any of its subsidiaries. When the Fund buys or sells the same security as
another portfolio, fund, or account, AEFC carries out the purchase or sale in a
way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency, and research services.
The Fund paid total brokerage commissions of $5,315,453 for fiscal year ended
March 31, 1999, $4,585,954 for fiscal year 1998, and $2,303,338 for fiscal year
1997. Substantially all firms through whom transactions were executed provide
research services.
In fiscal year 1999, transactions amounting to $18,863,000, on which $15,432 in
commissions were imputed or paid, were specifically directed to firms in
exchange for research services.
As of the end of the most recent fiscal year, the Fund held securities of its
regular brokers or dealers or of the parent of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities as
presented below:
Value of Securities
Name of Issuer owned at End of Fiscal Year
-------------- ---------------------------
Bank of America $72,390,624
Chase Manhattan 36,997,188
Fleet Financial Group 22,010,625
Merrill Lynch 1,398,667
Morgan Stanley 30,980,625
<PAGE>
The portfolio turnover rate was 106% in the most recent fiscal year, and 95% in
the year before. Higher turnover rates may result in higher brokerage expenses.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS
FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Affiliates of American Express Company (of which AEFC is a wholly-owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund 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 Fund will
receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar brokerage and other services
for the Fund and (ii) the affiliate charges the Fund commission rates consistent
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
Information about brokerage commissions paid by the Fund for the last three
fiscal years to brokers affiliated with AEFC is contained in the following
table:
<TABLE>
<CAPTION>
As of the end of Fiscal Year,
1999 1998 1997
------------------------------------------------ --------------- --------------
Percent of
--------------- --------------- -------------- Aggregate --------------- --------------
Dollar Amount
of
Aggregate Percent of Transactions Aggregate Aggregate
Dollar amount Aggregate Involving Dollar Amount Dollar Amount
Broker Nature of of Commissions Brokerage Payment of of Commissions of
Affiliation Paid to Broker Commissions Commissions Paid to Broker Commissions
Paid to Broker
<S> <C> <C> <C> <C> <C> <C>
American Wholly-owned $38,916 0.73% 1.98% $5,643 $18,845
Enterprise subsidiary of
Investment AEFC
Services, Inc.
</TABLE>
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, 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)
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, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund
Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman
Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA
Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger
Investment Companies Service.
<PAGE>
VALUING FUND SHARES
- --------------------------------------------------------------------------------
The value of an individual share for each class is determined by using the net
asset value (NAV) before shareholder transactions for the day. On the first
business day following the end of the fiscal year, the computation looked like
this:
<TABLE>
<CAPTION>
Net assets Shares
before outstanding at Net asset value
shareholder the end of of one share
transactions previous day
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Class A $907,156,493 divided by 80,066,769 equals $11.33
Class B 1,664,874,638 146,814,342 11.34
Class Y 1,002,625 88,337 11.35
</TABLE>
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
o Securities 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.
o 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.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o 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.
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
o 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.
<PAGE>
o Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SALES CHARGE
Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the NAV. For Class A, the public offering price for an
investment of less than $50,000, made on the first business day following the
end of the fiscal year, was determined by dividing the NAV of one share, $11.33,
by 0.95 (1.00-0.05 for a maximum 5% sales charge) for a public offering price of
$11.93. The sales charge is paid to American Express Financial Advisors Inc.
(AEFA) by the person buying the shares.
Class A - Calculation of the Sales Charge
<TABLE>
<CAPTION>
Sales charges are determined as follows:
Within each
increment, sales
charge as a
percentage of:
------------------------------------------------------------
Public Net
Amount of Investment Offering Price Amount Invested
- -------------------- -------------- ---------------
<S> <C> <C>
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
</TABLE>
Sales charges on an investment greater than $50,000 and less than $1,000,000 are
calculated for each increment separately and then totaled. The resulting total
sales charge, expressed as a percentage of the public offering price and of the
net amount invested, will vary depending on the proportion of the investment at
different sales charge levels.
For example, compare an investment of $60,000 with an investment of $85,000. The
$60,000 investment is composed of $50,000 that incurs a sales charge of $2,500
(5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x
$10,000). The total sales charge of $2,950 is 4.92% of the public offering price
and 5.17% of the net amount invested.
In the case of the $85,000 investment, the first $50,000 also incurs a sales
charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575
(4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public
offering price and 5.04% of the net amount invested.
<PAGE>
The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
<TABLE>
<CAPTION>
On total
investment, sales
charge as a
percentage of:
------------------------------------------------------------
Public Net
Offering Price Amount Invested
Amount of investment ranges from:
- ----------------------------------------------
<S> <C> <C>
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
</TABLE>
The initial sales charge is waived for certain qualified plans. Participants in
these qualified plans may be subject to a deferred sales charge on certain
redemptions. The Fund will waive the deferred sales charge on certain
redemptions 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
Your total investments in the Fund determine your sales charges. 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.
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 a LOI may be used to reach the $1 million
total, excluding IDS Cash Management Fund and IDS 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 will just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
<PAGE>
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 institutions must have at least $10 million in funds of the IDS
MUTUAL FUND GROUP.
o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.
* Eligibility must be determined in advance by AEFA. To do so, contact your
financial advisor.
SYSTEMATIC INVESTMENT PROGRAMS
After you make your initial investment of $100 or more, you must make additional
payments of $100 or more on at least a monthly basis until your balance reaches
$2,000. 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.
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:
o 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;
o 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); and
<PAGE>
o Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA
or UTMA accounts with identical ownership.
The Fund's investment goal is 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.
REJECTION OF BUSINESS
The Fund reserves the right to reject any business, in its sole discretion.
SELLING SHARES
- --------------------------------------------------------------------------------
You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.
During an emergency, the board can suspend the computation of NAV, 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:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or
o The SEC, under the provisions of the 1940 Act, 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 this
SAI. Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.
<PAGE>
PAY-OUT PLANS
- --------------------------------------------------------------------------------
You can use any of several pay-out plans to redeem your investment in regular
installments. If you redeem Class B shares you may be subject to a contingent
deferred sales charge as discussed in the prospectus. While the plans differ on
how the pay-out is figured, they all are based on the redemption of your
investment. Net investment income dividends and any capital gain distributions
will automatically be reinvested, unless you elect to receive them in cash. If
you are redeeming a tax-qualified plan account for which American Express Trust
Company acts as custodian, you can elect to 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. 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 will have to send in
a separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed for each
payment and that amount will be sent to you. The length of time these payments
continue is based on the number of shares in your account.
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares is necessary
to make the payment will be redeemed in regular installments until the account
is closed.
Plan #4: Redemption of a percentage of net asset value
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.
<PAGE>
TAXES
- --------------------------------------------------------------------------------
If you buy shares in the Fund and then exchange into another fund, it is
considered a redemption 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.
For example:
You purchase 100 shares of one fund having a public offering price of $10.00 per
share. With a sales load of 5%, you pay $50.00 in sales load. With a NAV of
$9.50 per share, the value of your investment is $950.00. Within 91 days of
purchasing that fund, you decide to exchange out of that fund, now at a NAV of
$11.00 per share, up from the original NAV of $9.50, and purchase into a second
fund, at a NAV of $15.00 per share. The value of your investment is now
$1,100.00 ($11.00 x 100 shares). You cannot use the $50.00 paid as a sales load
when calculating your tax gain or loss in the sale of the first fund shares. So
instead of having $100.00 gain ($1,100.00 - $1,000.00), you have a $150.00 gain
($1,100.00 - $950.00). You can include the $50.00 sales load in the calculation
of your tax gain or loss when you sell shares in the second fund.
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 redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5% ($100) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as dividend income
for federal income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities. For
the most recent fiscal year, 100% of the Fund's net investment income dividends
qualified for the corporate deduction.
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 50% or more
of the average value of its assets consists of assets that produce or could
produce passive income.
<PAGE>
Income earned by the Fund may have had foreign taxes imposed and withheld on it
in foreign countries. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes. If more than 50% of the Fund's total assets at
the close of its fiscal year consists of securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
under which shareholders of the Fund would be required to include their pro rata
portions of foreign taxes withheld by foreign countries as gross income in their
federal income tax returns. These pro rata portions of foreign taxes withheld
may be taken as a credit or deduction in computing federal income taxes. If the
election is filed, the Fund will report to its shareholders the per share amount
of such foreign taxes withheld and the amount of foreign tax credit or deduction
available for federal income tax purposes.
Capital gain distributions, if any, received by corporate shareholders should be
treated as long-term capital gains regardless of how long they owned their
shares. Capital gain distributions, if any, received by individuals should be
treated as long-term if held for more than one year. Short-term capital gains
earned by the Fund are paid to shareholders as part of their ordinary income
dividend and are taxable. A special 28% rate on capital gains applies to sales
of precious metals owned directly by the Fund. A special 25% rate on capital
gains may apply to investments in REITs.
Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable
to fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gains or losses. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income. If the Fund incurs a
loss, a portion of the dividends distributed to shareholders may be considered a
return of capital.
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.
For purposes of the excise tax distributions, "section 988" ordinary gains and
losses are distributable based on an Oct. 31 year end. This is an exception to
the general rule that ordinary income is paid based on a calendar year end.
If a mutual fund is the holder of record of any share of stock on the record
date for any dividend payable with respect to such stock, such dividend shall be
included in gross income by the Fund as of the later of (1) the date such share
became ex-dividend or (2) the date the Fund acquired such share. Because the
dividends on some foreign equity investments may be received some time after the
stock goes ex-dividend, and in certain rare cases may never be received by the
Fund, this rule may cause the Fund to take into income dividend income that it
has not received and pay such income to its shareholders. To the extent that the
dividend is never received, the Fund will take a loss at the time that a
determination is made that the dividend will not be received.
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.
<PAGE>
AGREEMENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, AEFC,
subject to the policies set by the board, provides investment management
services.
For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $0.50 0.530%
Next 0.50 0.505
Next 1.00 0.480
Next 1.00 0.455
Next 3.00 0.430
Over 6.00 0.400
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.488% 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.
The management fee is paid monthly. Under the agreement, the total amount paid
was $12,637,927for fiscal year 1999, $11,485,241 for fiscal year 1998, and
$8,882,479 for fiscal year 1997.
Under the agreement, the Fund 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;
postage of confirmations except purchase confirmations; consultants' fees;
compensation of board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the board.
Under the agreement, nonadvisory expenses, net of earnings credits, paid by the
Fund were $819,257 for fiscal year 1999, $277,438 for fiscal year 1998, and
$429,531 for fiscal year 1997.
<PAGE>
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 $0.50 0.040%
Next 0.50 0.035
Next 1.00 0.030
Next 1.00 0.025
Next 3.00 0.020
Over 6.00 0.020
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.032% 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 $857,508 for fiscal year 1999, $786,903 for
fiscal year 1998, and $616,197 for fiscal year 1997.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC'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, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A is $19.00 per year, for Class B is $20.00 per year and for Class Y is
$17.00 per year. The fees paid to AECSC may be changed by the board without
shareholder approval.
DISTRIBUTION AGREEMENT
AEFA is the Fund's principal underwriter (distributor). The Fund's shares are
offered on a continuous basis.
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to AEFA daily. These charges amounted to $3,108,571 for fiscal
year 1999. After paying commissions to personal financial advisors, and other
expenses, the amount retained was $(503,225). The amounts were $3,903,621 and
$(1,423,211) for fiscal year 1998, and $1,850,163 and $(1,255,823) for fiscal
year 1997.
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.
<PAGE>
PLAN AND AGREEMENT OF DISTRIBUTION
For Class B shares, to help AEFA defray the cost of distribution and servicing,
not covered by the sales charges received under the Distribution Agreement, the
Fund and AEFA entered into a Plan and Agreement of Distribution (Plan). These
costs cover almost all aspects of distributing the Fund's shares.
These costs do not include compensation to the sales force. A substantial
portion of the costs are not specifically identified to any one fund in the IDS
MUTUAL FUND GROUP. Under the Plan, AEFA is paid a fee up to actual expenses
incurred 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 AEFA. 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. 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 most recent fiscal year, under the agreement, the Fund paid
fees of $12,819,898. The fee is not allocated to any one service (such as
advertising, payments to underwriters, or other uses). However, a significant
portion of the fee is generally used for sales and promotional expenses.
Custodian Agreement
The Fund's securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, through a
custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depository systems as allowed by federal law. For its
services, the Fund pays the custodian a maintenance charge and a charge per
transaction in addition to reimbursing the custodian's out-of-pocket expenses.
The custodian has entered into a sub-custodian arrangement with the Morgan
Stanley Trust Company (Morgan Stanley), One Pierrepont Plaza, Eighth Floor,
Brooklyn, NY 11201-2775. As part of this arrangement, securities purchased
outside the United States are maintained in the custody of various foreign
branches of Morgan Stanley or in other financial institutions as permitted by
law and by the Fund's sub-custodian agreement.
ORGANIZATIONAL INFORMATION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company. The Fund headquarters are
at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.
SHARES
The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.
<PAGE>
VOTING RIGHTS
As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
<PAGE>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED FUNDS IN THE IDS MUTUAL FUND GROUP
<TABLE>
<CAPTION>
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
IDS Bond Fund, Inc. 6/27/74, Corporation NV/MN 8/31 Yes
6/31/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Discovery Fund, Inc. 4/29/81, Corporation NV/MN 7/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Equity Select Fund, Inc. 3/18/57, Corporation NV/MN 11/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Series, Inc. 10/28/88 Corporation MN 10/31
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Emerging Markets Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Balanced Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Bond Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Growth Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Innovations Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Growth Fund, Inc. 5/21/70, Corporation NV/MN 7/31
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Growth Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Research Opportunities Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Investment Series, Inc. 1/18/40, Corporation NV/MN 9/30
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Diversified Equity Income Yes
Fund
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Mutual Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Managed Retirement Fund, Inc. 10/9/84 Corporation MN 9/30
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Managed Allocation Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Blue Chip Advantage Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Small Company Index Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Money Market Series, Inc. 8/22/75, Corporation NV/MN 7/31
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Cash Management Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS New Dimensions Fund, Inc. 2/20/68, Corporation NV/MN 7/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Progressive Fund, Inc. 4/23/68, Corporation NV/MN 9/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Selective Fund, Inc. 2/10/45, Corporation NV/MN 5/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Stock Fund, Inc. 2/10/45, Corporation NV/MN 9/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Strategy Fund, Inc. 1/24/84 Corporation MN 3/31
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
AXP Small Cap Advantage Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Strategy Aggressive Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Equity Value Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Tax-Exempt Bond Fund, Inc. 9/30/76, Corporation NV/MN 11/31
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Tax-Exempt Bond Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Intermediate Tax-Exempt Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Tax-Free Money Fund, Inc. 2/29/80, Corporation NV/MN 12/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS California Tax-Exempt Trust 4/7/86 Business MA 6/30
Trust**
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS California Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30
Trust**
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Insured Tax-Exempt Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Massachusetts Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Michigan Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Minnesota Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS New York Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Ohio Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
</TABLE>
* Date merged into a Minnesota corporation incorporated on 4/7/86.
** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.
<PAGE>
BOARD MEMBERS AND OFFICERS
- --------------------------------------------------------------------------------
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 48 IDS and IDS Life funds (except for William H. Dudley, who does
not serve on the nine IDS Life fund boards).
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and Chief executive officer of the Fund. Chairman: Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
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, and Union
Pacific Resources.
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of AEFC.
David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
<PAGE>
Heinz F. Hutter+
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired 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. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).
William R. Pearce
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
R11 Weyerhauser World Timberfund, L.P. (develops timber resources). Retired vice
chairman of the board, Cargill, Incorporated (commodity merchants and
processors). Former chairman: Board Services Corporation.
Alan K. Simpson'+
Born in 1931
1201 Sunshine Ave.
Cody, WY
Director of the Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, PacifiCorp (electric power) and Biogen (bio-pharmaceuticals).
Edson W. Spencer
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Retired 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 of AEFC.
<PAGE>
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
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging), 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. Carlson, who is chairman of the board and Mr. Thomas, who is
president, the Fund's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.
Officers who also are officers and 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.
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.
<PAGE>
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice president - investment accounting of AEFC. Treasurer for the Fund.
COMPENSATION FOR BOARD MEMBERS
- --------------------------------------------------------------------------------
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 28 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
Total cash compensation from the
--------------------------------- ---------------------------------
Board member Aggregate IDS MUTUAL FUND GROUP and
compensation from the Fund Preferred Master Trust Group
<S> <C> <C>
H. Brewster Atwater, Jr. $2,400 $111,900
- --------------------------------------
Lynne V. Cheney 2,182 96,900
- --------------------------------------
Heinz F. Hutter 2,225 101,400
- --------------------------------------
Anne P. Jones 2,421 110,900
- --------------------------------------
Alan K. Simpson 2,157 95,400
- --------------------------------------
Edson W. Spencer 2,192 99,400
- --------------------------------------
Wheelock Whitney 2,075 92,400
- --------------------------------------
C. Angus Wurtele 2,492 117,400
- --------------------------------------
</TABLE>
As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The financial statements contained in the Annual Report 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.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
<PAGE>
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
<PAGE>
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
<PAGE>
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond and preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt or preferred issue in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds and preferred stock carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and/or dividends
and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A Bonds and preferred stock considered to be investment grade
and of high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt or preferred
securities with higher ratings.
BBB Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to
pay interest or dividends and repay principal is considered to
be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact
on these securities and, therefore, impair timely payment. The
likelihood that the ratings of these bonds or preferred stock
will fall below investment grade is higher than for securities
with higher ratings.
Fitch speculative grade bond or preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings (BB to C) represent Fitch's assessment of the likelihood of timely
payment of principal and interest or dividends in accordance with the terms of
obligation for issues not in default. For defaulted bonds or preferred stock,
the rating (DDD to D) is an assessment of the ultimate recovery value through
reorganization or liquidation.
<PAGE>
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer or possible recovery value in
bankruptcy, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's future financial strength.
Bonds or preferred stock that have the same rating are of similar but not
necessarily identical credit quality since the rating categories cannot fully
reflect the differences in the degrees of credit risk.
BB Bonds or preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay
principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its
debt service requirements.
B Bonds or preferred stock are considered highly speculative.
While bonds in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the
issue.
CCC Bonds or preferred stock have certain identifiable
characteristics that if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business
and economic environment.
CC Bonds or preferred stock are minimally protected. Default in
payment of interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is
imminent.
DDD,
DD,
and D Bonds are in default on interest and/or principal payments
or preferred stock dividends are suspended. Such securities
are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization
of the obligor. DDD represents the highest potential for
recovery of these securities and D represents the lowest
potential for recovery.
<PAGE>
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
that may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security (e.g. first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary). Ratings of BBB- and higher fall within the definition
of investment grade securities, as defined by bank and insurance supervisory
authorities. Structured finance issues, including real estate, asset-backed and
mortgage-backed financings, use this same rating scale with minor modification
in the definitions. Thus, an investor can compare the credit quality of
investment alternatives across industries and structural types. A "Cash Flow
Rating" (as noted for specific ratings) addresses the likelihood that aggregate
principal and interest will equal or exceed the rated amount under appropriate
stress conditions.
<TABLE>
<CAPTION>
Rating Scale Definition
-------------------------- --------------------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
-------------------------- --------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
-------------------------- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
-------------------------- --------------------------------------------------------------------------------
BBB+ Below-average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
-------------------------- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due. Present
BB or prospective financial protection factors fluctuate according to industry
BB- conditions or company fortunes. Overall quality may move up or down frequently
within this category.
-------------------------- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions, and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating grade.
-------------------------- --------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty exists as to
timely payment of principal, interest, or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and or with unfavorable company developments.
-------------------------- --------------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
-------------------------- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
IBCA Long-Term Debt Ratings
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk
substantially.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk, albeit not very significantly.
A Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic, or financial conditions
may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic,
or financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic, or financial conditions.
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic, or financial conditions.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic, or financial conditions.
CC Obligations that are highly speculative or that have a high risk
of default.
C Obligations that are currently in default.
Notes: "+" or "-" may be appended to a rating below AAA to denote relative
status within major rating categories. Ratings of BB and below are assigned
where it is considered that speculative characteristics are present.
<PAGE>
Thomson Bank Watch Long-Term Debt Ratings
Investment Grade
AAA(LC-AAA) Indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA(LC-AA) Indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental
risk compared to issues rated in the highest category.
A(LC-A) Indicates the ability to repay principal and
interest is strong. Issues rated A could be more
vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
BBB(LC-BBB) The lowest investment-grade category: indicates
an acceptable capacity to repay principal and interest.
BBB issues are more vulnerable to adverse developments
(both internal and external) than obligations with higher
ratings.
Non-Investment Grade - may be speculative in the likelihood of timely repayment
of principal and interest.
BB(LC-BB) While not investment grade, the BB rating suggests
that the likelihood of default is considerably less than
for lower-rated issues. However, there are significant
uncertainties that could affect the ability to adequately
service debt obligations.
B(LC-B) Issues rated B show higher degree of uncertainty
and therefore greater likelihood of default than
higher-rated issues. Adverse developments could negatively
affect the payment of interest and principal on a timely
basis.
CCC(LC-CCC) Issues rated CCC clearly have a high likelihood
of default, with little capacity to address further
adverse changes in financial circumstances.
CC(LC-CC) CC is applied to issues that are subordinate to
other obligations rated CCC and are afforded less
protection in the event of bankruptcy or reorganization.
D(LC-D) Default.
<PAGE>
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
<PAGE>
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
<PAGE>
Fitch Investors Service, Inc. Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the
margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
<PAGE>
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps' short-term ratings are consistent with the rating criteria used
by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, banker's
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper also is rated according to this scale.
Emphasis is placed on liquidity, which is defined as not only cash from
operations but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and
or access to alternative sources of funds, is
outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in
debt service. Operating factors and market access
may be subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or
interest payments.
<PAGE>
Thomson BankWatch (TBW) Short-Term Ratings
The TBW Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. TBW
Short-Term Ratings are intended to assess the likelihood of untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW- I.
TBW-3 The lowest investment-grade category; indicates that while
the obligation is more susceptible to adverse developments
(both internal and external) than those with higher
ratings, the capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA Short-Term Ratings
IBCA Short-Term Ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
Short-Term Ratings relate to debt that has a maturity of less than one year.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit
feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
<PAGE>
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
IDS STRATEGY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS STRATEGY AGGRESSIVE FUND (the Fund)
May 28, 1999
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
most recent Annual Report to shareholders (Annual Report) that 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 or by calling
800-862-7919.
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 are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.
<PAGE>
TABLE OF CONTENTS
Mutual Fund Checklist..................................................p. 3
Fundamental Investment Policies........................................p. 5
Investment Strategies and Types of Investments.........................p. 7
Information Regarding Risks and Investment Strategies..................p. 9
Security Transactions..................................................p. 33
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation.................................p. 34
Performance Information................................................p. 36
Valuing Fund Shares....................................................p. 37
Investing in the Fund..................................................p. 38
Selling Shares.........................................................p. 41
Pay-out Plans..........................................................p. 42
Taxes...................................................................p.43
Agreements..............................................................p.45
Organizational Information..............................................p.47
Board Members and Officers..............................................p.49
Compensation for Board Members..........................................p.52
Independent Auditors....................................................p.52
Appendix: Description of Ratings.......................................p.53
<PAGE>
MUTUAL FUND CHECKLIST
- -------------------------------------------------------------------------------
|X|
Mutual funds are NOT guaranteed or insured by any
bank or government agency. You can lose money.
|X|
Mutual funds ALWAYS carry investment risks. Some
types carry more risk than others.
|X|
A higher rate of return typically involves a
higher risk of loss.
|X|
Past performance is not a reliable indicator of
future performance.
|X|
ALL mutual funds have costs that lower
investment return.
|X|
You can buy some mutual funds by contacting them
directly. Others, like this one, are sold mainly
through brokers, banks, financial planners, or
insurance agents. If you buy through these
financial professionals, you generally will pay a
sales charge.
|X|
Shop around. Compare a mutual fund with others of
the same type before you buy.
OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:
Develop a Financial Plan
Have a plan - even a simple plan can help you take control of your financial
future. Review your plan with your advisor at least once a year or more
frequently if your circumstances change.
Dollar-Cost Averaging
An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.
<PAGE>
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)
Diversify
Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
Understand Your Investment
Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
- --------------------------------------------------------------------------------
Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
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.
The policies below are fundamental policies that apply to the Fund 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 will not:
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o 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.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
o Purchase securities of an issuer if the board members and officers of the
Fund and of 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 and of AEFC who own more than 0.5% of an issuer's securities
are added together, and if in total they own more than 5%, the Fund will
not purchase securities of that issuer.
<PAGE>
o Lend Fund securities in excess of 30% of its net assets.
o Issue senior securities, except to the extent that borrowing from banks and
using options, foreign currency forward contracts or future contracts (as
discussed elsewhere in the SAI) may be deemed to constitute issuing a
senior security.
o Concentrate in any one industry. According to the present interpretation by
the Securities and Exchange Commission (SEC), this means no more than 25%
of the Fund's total assets, based on current market value at the time of
purchase, can be invested in any one industry.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It also lists certain percentage
guidelines that are generally followed by the Fund's investment manager. This
table is intended to show the breadth of investments that the investment manager
may make on behalf of the Fund. For a description of principal risks, please see
the prospectus. Notwithstanding the Fund's ability to utilize these strategies
and techniques, the investment manager is not obligated to use them at any
particular time. For example, even though the investment manager is authorized
to adopt temporary defensive positions and is authorized to attempt to hedge
against certain types of risk, these practices are left to the investment
manager's sole discretion.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- --------------------------
Investment strategies & types of investments: IDS Strategy Aggressive
Allowable for the Fund?
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
<S> <C>
Agency and Government Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Borrowing yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Cash/Money Market Instruments yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Collateralized Bond Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Commercial Paper yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Common Stock yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Convertible Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Corporate Bonds yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Debt Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Depositary Receipts yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Derivative Instruments yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Foreign Currency Transactions yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Foreign Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
High-Yield (High-Risk) Securities (Junk Bonds) yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Illiquid and Restricted Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Indexed Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Inverse Floaters no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Investment Companies yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Lending of Portfolio Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Loan Participations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Mortgage- and Asset-Backed Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Mortgage Dollar Rolls no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Municipal Obligations yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Preferred Stock yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Real Estate Investment Trusts yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Repurchase Agreements yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Reverse Repurchase Agreements yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Short Sales no
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Sovereign Debt yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Structured Products yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Variable- or Floating-Rate Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Warrants yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
When-Issued Securities yes
- ---------------------------------------------------------------------------------- --------------------------
- ---------------------------------------------------------------------------------- --------------------------
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes
- ---------------------------------------------------------------------------------- --------------------------
</TABLE>
<PAGE>
The following are guidelines that may be changed by the board at any time:
o Under normal market conditions, 65% of the Fund's total assets will be
invested in equity securities.
o The Fund may not invest in debt securities rated lower than B. Securities
that are subsequently downgraded in quality may continue to be held and
will be sold only when the investment manager believes it is advantageous
to do so.
o The Fund will not invest more than 5% of its net assets in bonds rated BB
or B, or in unrated bonds of equivalent quality.
o The Fund may invest up to 25% of its total assets in foreign investments.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell securities short, except the Fund
may make margin payments in connection with transactions in futures
contracts.
o The Fund will not invest more than 10% of its total assets in the
securities of investment companies.
o The Fund will not invest in a company to control or manage it.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to purchase debt securities on a when-issued
basis.
o 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.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds 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 and are more
likely to experience a default.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
<PAGE>
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall).
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
<PAGE>
Reinvestment Risk
The risk that an investor will not be able to reinvest their income or principal
at the same rate as it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of a common stock is generally determined by corporate earnings, type
of products or services offered, projected growth rates, experience of
management, liquidity, and general market conditions for the markets on which
the stock trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
<PAGE>
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (i) have higher yields than common stocks
but lower yields than comparable non-convertible securities, (ii) are less
subject to fluctuation in value than the underlying stock since they have fixed
income characteristics, and (iii) provide the potential for capital appreciation
if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
<PAGE>
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities 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. 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 involve the risks of other investments in foreign
securities. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
<PAGE>
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend on (or "derive" from) the value of one or more other assets,
such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or 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. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable gain or loss in the price of the
derivative instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees to sell the security at the set price when the buyer wants to
exercise the option, no matter what the market price of the security is at that
time. A person who buys a put option has the right to sell a security at a set
price for the length of the contract. A person who writes a put option agrees to
buy the security at the set price if the purchaser wants to exercise the option,
no matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained 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.
When an option is purchased, the buyer 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 sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
<PAGE>
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, 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
ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a buyer
(holding the "long" position) and a seller (holding the "short" position) for an
asset with delivery deferred until a future date. The buyer agrees to pay a
fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day an
investor 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 market.
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 (some futures are settled in cash), 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 a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, 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.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these 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. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities traded
on national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
<PAGE>
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred by entering into futures contracts and losses on underlying
securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund 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 also may limit the
Fund's ability to engage in futures contracts and related options transactions.
For example, at the close of each quarter of the Fund's taxable year, at least
50% of the value of its assets must consist of cash, government securities and
other securities, subject to certain diversification requirements.
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.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
Other Risks of Derivatives.
Derivatives are risky investments.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
<PAGE>
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of the Fund's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, the Fund may incur costs in connection with
conversions between various currencies. Currency exchange rates may fluctuate
significantly over short periods of time causing the Fund's NAV to fluctuate.
Currency exchange rates are generally determined by the forces of supply and
demand in the foreign exchange markets, actual or anticipated changes in
interest rates, and other complex factors. Currency exchange rates also can be
affected by the intervention of U.S. or foreign governments or central banks, or
the failure to intervene, or by currency controls or political developments.
Spot Rates and Derivative Instruments. The Fund conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts) as a hedge against fluctuations in future foreign exchange
rates. (See also Derivative Instruments). These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Because foreign currency transactions
occurring in the interbank market might involve substantially larger amounts
than those involved in the use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market for the underlying foreign
currencies at prices that are less favorable than for round lots.
<PAGE>
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment in dollars. By entering into
a forward contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between different
currencies from the date the security is purchased or sold to the date on which
payment is made or received or when the dividend or interest is actually
received.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may change in relationship
to another currency. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since the future
value of securities in foreign currencies more than likely will change between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency.
The Fund will designate cash or securities in an amount equal to the value of
the Fund's total assets committed to consummating forward contracts entered into
under the second circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a daily basis so
that the value of the cash or securities will equal the amount of the Fund's
commitments on such contracts.
At maturity of a forward contract, the Fund 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 Fund retains the security and engages in an offsetting transaction, the
Fund will incur a gain or loss (as described below) to the extent there has been
movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline between the date the Fund enters
into a forward contract for selling foreign currency and the date it enters into
an offsetting contract for purchasing the foreign currency, the Fund will
realize a gain to the extent 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 Fund will suffer a loss to the extent the price of the
currency it has agreed to buy exceeds the price of the currency it has agreed to
sell.
It is impossible to forecast what the market value of securities will be at the
expiration of a contract. Accordingly, it may be necessary for the Fund to buy
additional foreign currency on the spot market (and bear the expense of that
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's 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 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>
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Fund may buy 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 the diminutions in the value of securities, the Fund
may buy options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell the currency for a fixed amount in
dollars and will offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted.
As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put options, 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 Fund would be required to buy or sell
the underlying currency at a loss that may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
<PAGE>
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 Fund 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 that purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The Fund may enter into currency
futures contracts to sell currencies. It also may buy put options and write
covered call options on currency futures. Currency futures contracts are similar
to currency forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size and delivery
date. Most currency futures call for payment of delivery in U.S. dollars. The
Fund may use currency futures for the same purposes as currency forward
contracts, subject to Commodity Futures Trading Commission (CFTC) 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 value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Fund's investments
denominated in that currency over time.
The Fund will hold securities or other options or futures positions whose values
are expected to offset its obligations. The Fund will not enter into an option
or futures position that exposes the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient to cover its
potential obligations.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
<PAGE>
Foreign Securities and Domestic Companies with Foreign Operations
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor to miss attractive
investment opportunities. Payment for securities without delivery may be
required in certain foreign markets and, when participating in new issues, some
foreign countries require payment to be made in advance of issuance (at the time
of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates; the fluctuation
of the euro relative to non-euro currencies during the transaction period from
January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax
or labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other EU countries
such as the United Kingdom, Denmark, and Greece into the euro and the admission
of other non-EU countries such as Poland, Latvia, and Lithuania as members of
the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
<PAGE>
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
<PAGE>
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
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 and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
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. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
<PAGE>
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, an investor will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. 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
<PAGE>
(including prepayments) on the underlying mortgage loans or mortgage-backed
securities. A rapid rate of principal payments may adversely affect the yield to
maturity of IOs. A slow rate of principal payments may adversely affect the
yield to maturity of POs. If prepayments of principal are greater than
anticipated, an investor in IOs 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.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
<PAGE>
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, or possessions of the United States (including the District of
Columbia). The interest on these obligations is generally exempt from federal
income tax. Municipal obligations are generally classified as either "general
obligations" or "revenue obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
<PAGE>
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement, thereby, determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price on the replacement date. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased prior to the scheduled
delivery date, the investor loses the opportunity to participate in the gain.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
<PAGE>
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
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. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
<PAGE>
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
<PAGE>
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
SECURITY TRANSACTIONS
- -------------------------------------------------------------------------------
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund'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 the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions,
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness, and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.
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.
The Fund's securities may be 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 with respect to the Fund and the other funds and trusts in the
IDS MUTUAL FUND GROUP for which it acts as investment manager.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business, and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software, or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management, and trading
functions and other services to the extent permitted under an interpretation by
the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits AEFC, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Fund to pay a commission in excess of the amount another
broker might have charged. AEFC has advised the Fund that 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 represented 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 will 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.
Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by AEFC or
any of its subsidiaries. When the Fund buys or sells the same security as
another portfolio, fund, or account, AEFC carries out the purchase or sale in a
way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency, and research services.
The Fund paid total brokerage commissions of $1,941,089 for fiscal year ended
March 31, 1999 $2,039,258 for fiscal year 1998, and $1,675,148 for fiscal year
1997. Substantially all firms through whom transactions were executed provide
research services.
In fiscal year 1998, transactions amounting to $18,863,000, on which $15,432 in
commissions were imputed or paid, were specifically directed to firms in
exchange for research services.
As of the end of the most recent fiscal year, the Fund held securities of its
regular brokers or dealers or of the parent of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities as
presented below:
Value of Securities
Name of Issuer owned at End of Fiscal Year
Fleet Funding $7,471,708
Jefferies Group 569,250
Legg Mason 734,388
Salomon Smith Barney 3,000,000
The portfolio turnover rate was 98% in the most recent fiscal year, and 95% in
the year before.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS
FINANCIAL CORPORATION
- -------------------------------------------------------------------------------
Affiliates of American Express Company (of which AEFC is a wholly-owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund 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 Fund will
receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar brokerage and other services
for the Fund and (ii) the affiliate charges the Fund commission rates consistent
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
Information about brokerage commissions paid by the Fund for the last three
fiscal years to brokers affiliated with AEFC is contained in the following
table:
<TABLE>
<CAPTION>
As of the end of Fiscal Year,
1999 1998 1997
------------------------------------------------ --------------- --------------
Percent of
--------------- --------------- -------------- Aggregate --------------- --------------
Dollar Amount
of Aggregate
Aggregate Percent of Transactions Aggregate Dollar Amount
Dollar amount Aggregate Involving Dollar Amount of
Broker Nature of of Commissions Brokerage Payment of of Commissions Commissions
Affiliation Paid to Broker Commissions Commissions Paid to Broker Paid to Broker
<S> <C> <C> <C> <C> <C> <C>
American Wholly-owned $87,020 4.48% 5.19% $7,404 $132
Enterprise subsidiary of
Investment AEFC
Services Inc.
</TABLE>
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, 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)
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, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund
Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman
Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA
Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger
Investment Companies Service.
<PAGE>
VALUING FUND SHARES
- --------------------------------------------------------------------------------
The value of an individual share for each class is determined by using the net
asset value (NAV) before shareholder transactions for the day. On the first
business day following the end of the fiscal year, the computation looked like
this:
<TABLE>
<CAPTION>
Net assets Shares
before outstanding at Net asset value
shareholder the end of of one share
transactions previous day
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Class A $612,491,720 divided by 26,583,842 equals $23.04
Class B 812,104,949 36,581,304 22.20
Class Y 2,199 95 23.15
</TABLE>
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
o Securities 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.
o 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.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o 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.
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
o 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.
<PAGE>
o Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SALES CHARGE
Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the NAV. For Class A, the public offering price for an
investment of less than $50,000, made on the first business day following the
end of the fiscal year, was determined by dividing the NAV of one share, $23.04,
by 0.95 (1.00-0.05 for a maximum 5% sales charge) for a public offering price of
$24.25. The sales charge is paid to American Express Financial Advisors Inc.
(AEFA) by the person buying the shares.
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
<TABLE>
<CAPTION>
Within each
increment, sales
charge as a
percentage of:
------------------------------------------------------------
Public Net
Amount of Investment Offering Price Amount Invested
- -------------------- -------------- ---------------
<S> <C> <C>
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
</TABLE>
Sales charges on an investment greater than $50,000 and less than $1,000,000 are
calculated for each increment separately and then totaled. The resulting total
sales charge, expressed as a percentage of the public offering price and of the
net amount invested, will vary depending on the proportion of the investment at
different sales charge levels.
For example, compare an investment of $60,000 with an investment of $85,000. The
$60,000 investment is composed of $50,000 that incurs a sales charge of $2,500
(5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x
$10,000). The total sales charge of $2,950 is 4.92% of the public offering price
and 5.17% of the net amount invested.
In the case of the $85,000 investment, the first $50,000 also incurs a sales
charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575
(4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public
offering price and 5.04% of the net amount invested.
<PAGE>
The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
<TABLE>
<CAPTION>
On total
investment, sales
charge as a
percentage of:
------------------------------------------------------------
Public Net
Offering Price Amount Invested
Amount of investment ranges from:
- ----------------------------------------------
<S> <C> <C>
First $ 50,000 5.00% 5.26%
- ----------------------------------------------
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
- ----------------------------------------------
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
- ----------------------------------------------
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
- ----------------------------------------------
$1,000,000 or more 0.00 0.00
</TABLE>
The initial sales charge is waived for certain qualified plans. Participants in
these qualified plans may be subject to a deferred sales charge on certain
redemptions. The Fund will waive the deferred sales charge on certain
redemptions 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
Your total investments in the Fund determine your sales charges. 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.
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 a LOI may be used to reach the $1 million
total, excluding IDS Cash Management Fund and IDS 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 will just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
<PAGE>
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 institutions must have at least $10 million in funds of the IDS
MUTUAL FUND GROUP.
o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.
* Eligibility must be determined in advance by AEFA. To do so, contact your
financial advisor.
SYSTEMATIC INVESTMENT PROGRAMS
After you make your initial investment of $100 or more, you must make additional
payments of $100 or more on at least a monthly basis until your balance reaches
$2,000. 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.
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:
o 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;
o 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); and
<PAGE>
o Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA
or UTMA accounts with identical ownership.
The Fund's investment goal is 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.
REJECTION OF BUSINESS
The Fund reserves the right to reject any business, in its sole discretion.
SELLING SHARES
- --------------------------------------------------------------------------------
You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.
During an emergency, the board can suspend the computation of NAV, 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:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of
its net assets, or
o The SEC, under the provisions of the 1940 Act, 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 this
SAI. Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.
<PAGE>
PAY-OUT PLANS
- --------------------------------------------------------------------------------
You can use any of several pay-out plans to redeem your investment in regular
installments. If you redeem Class B shares you may be subject to a contingent
deferred sales charge as discussed in the prospectus. While the plans differ on
how the pay-out is figured, they all are based on the redemption of your
investment. Net investment income dividends and any capital gain distributions
will automatically be reinvested, unless you elect to receive them in cash. If
you are redeeming a tax-qualified plan account for which American Express Trust
Company acts as custodian, you can elect to 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. 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 will have to send in
a separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed for each
payment and that amount will be sent to you. The length of time these payments
continue is based on the number of shares in your account.
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares is necessary
to make the payment will be redeemed in regular installments until the account
is closed.
Plan #4: Redemption of a percentage of net asset value
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.
<PAGE>
TAXES
- --------------------------------------------------------------------------------
If you buy shares in the Fund and then exchange into another fund, it is
considered a redemption 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.
For example:
You purchase 100 shares of one fund having a public offering price of $10.00 per
share. With a sales load of 5%, you pay $50.00 in sales load. With a NAV of
$9.50 per share, the value of your investment is $950.00. Within 91 days of
purchasing that fund, you decide to exchange out of that fund, now at a NAV of
$11.00 per share, up from the original NAV of $9.50, and purchase into a second
fund, at a NAV of $15.00 per share. The value of your investment is now
$1,100.00 ($11.00 x 100 shares). You cannot use the $50.00 paid as a sales load
when calculating your tax gain or loss in the sale of the first fund shares. So
instead of having $100.00 gain ($1,100.00 - $1,000.00), you have a $150.00 gain
($1,100.00 - $950.00). You can include the $50.00 sales load in the calculation
of your tax gain or loss when you sell shares in the second fund.
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 redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5% ($100) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as dividend income
for federal income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities.
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 50% or more
of the average value of its assets consists of assets that produce or could
produce passive income.
<PAGE>
Income earned by the Fund may have had foreign taxes imposed and withheld on it
in foreign countries. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes. If more than 50% of the Fund's total assets at
the close of its fiscal year consists of securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
under which shareholders of the Fund would be required to include their pro rata
portions of foreign taxes withheld by foreign countries as gross income in their
federal income tax returns. These pro rata portions of foreign taxes withheld
may be taken as a credit or deduction in computing federal income taxes. If the
election is filed, the Fund will report to its shareholders the per share amount
of such foreign taxes withheld and the amount of foreign tax credit or deduction
available for federal income tax purposes.
Capital gain distributions, if any, received by corporate shareholders should be
treated as long-term capital gains regardless of how long they owned their
shares. Capital gain distributions, if any, received by individuals should be
treated as long-term if held for more than one year. Short-term capital gains
earned by the Fund are paid to shareholders as part of their ordinary income
dividend and are taxable. A special 28% rate on capital gains applies to sales
of precious metals owned directly by the Fund. A special 25% rate on capital
gains may apply to investments in REITs.
Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable
to fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gains or losses. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income. If the Fund incurs a
loss, a portion of the dividends distributed to shareholders may be considered a
return of capital.
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.
For purposes of the excise tax distributions, "section 988" ordinary gains and
losses are distributable based on an Oct. 31 year end. This is an exception to
the general rule that ordinary income is paid based on a calendar year end.
If a mutual fund is the holder of record of any share of stock on the record
date for any dividend payable with respect to such stock, such dividend shall be
included in gross income by the Fund as of the later of (1) the date such share
became ex-dividend or (2) the date the Fund acquired such share. Because the
dividends on some foreign equity investments may be received some time after the
stock goes ex-dividend, and in certain rare cases may never be received by the
Fund, this rule may cause the Fund to take into income dividend income that it
has not received and pay such income to its shareholders. To the extent that the
dividend is never received, the Fund will take a loss at the time that a
determination is made that the dividend will not be received.
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.
<PAGE>
AGREEMENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, AEFC,
subject to the policies set by the board, provides investment management
services.
For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $1.0 0.600%
Next 1.0 0.575
Next 1.0 0.550
Next 3.0 0.525
Over 6.0 0.500
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.593% 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.
The management fee is paid monthly. Under the agreement, the total amount paid
was $7,929,636 for fiscal year 1999, $7,578,435 for fiscal year 1998, and
$7,247,884 for fiscal year 1997.
Under the agreement, the Fund 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;
postage of confirmations except purchase confirmations; consultants' fees;
compensation of board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the board.
Under the agreement, nonadvisory expenses, net of earnings credits, paid by the
Fund were $500,330 for fiscal year 1999, $54,545 for fiscal year 1998, and
$384,043 for fiscal year 1997.
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
Over 6.0 0.030
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.049% 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 $669,837 for fiscal year 1999, $642,964 for
fiscal year 1998, and $603,995 for fiscal year 1997.
<PAGE>
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC'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, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A is $19.00 per year, for Class B is $20.00 per year and for Class Y is
$17.00 per year. The fees paid to AECSC may be changed by the board without
shareholder approval.
DISTRIBUTION AGREEMENT
AEFA is the Fund's principal underwriter (distributor). The Fund's shares are
offered on a continuous basis.
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to AEFA daily. These charges amounted to $1,456,622 for fiscal
year 1999. After paying commissions to personal financial advisors, and other
expenses, the amount retained was $(211,668). The amounts were $952,105 and
$(294,562) for fiscal year 1998, and $1,630,480 and $(899,019) for fiscal year
1997.
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 AEFA defray the cost of distribution and servicing,
not covered by the sales charges received under the Distribution Agreement, the
Fund and AEFA entered into a Plan and Agreement of Distribution (Plan). These
costs cover almost all aspects of distributing the Fund's shares.
These costs do not include compensation to the sales force. A substantial
portion of the costs are not specifically identified to any one fund in the IDS
MUTUAL FUND GROUP. Under the Plan, AEFA is paid a fee up to actual expenses
incurred 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 AEFA. 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. 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
<PAGE>
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 most recent fiscal year, under the agreement, the
Fund paid fees of $5,907,637. The fee is not allocated to any one service (such
as advertising, payments to underwriters, or other uses). However, a significant
portion of the fee is generally used for sales and promotional expenses.
Custodian Agreement
The Fund's securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, through a
custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depository systems as allowed by federal law. For its
services, the Fund pays the custodian a maintenance charge and a charge per
transaction in addition to reimbursing the custodian's out-of-pocket expenses.
The custodian has entered into a sub-custodian arrangement with the Morgan
Stanley Trust Company (Morgan Stanley), One Pierrepont Plaza, Eighth Floor,
Brooklyn, NY 11201-2775. As part of this arrangement, securities purchased
outside the United States are maintained in the custody of various foreign
branches of Morgan Stanley or in other financial institutions as permitted by
law and by the Fund's sub-custodian agreement.
ORGANIZATIONAL INFORMATION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company. The Fund headquarters are
at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.
SHARES
The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.
VOTING RIGHTS
As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
<PAGE>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED FUNDS IN THE IDS MUTUAL FUND GROUP
<TABLE>
<CAPTION>
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
IDS Bond Fund, Inc. 6/27/74, Corporation NV/MN 8/31 Yes
6/31/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Discovery Fund, Inc. 4/29/81, Corporation NV/MN 7/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Equity Select Fund, Inc. 3/18/57, Corporation NV/MN 11/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Series, Inc. 10/28/88 Corporation MN 10/31
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Emerging Markets Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Balanced Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Bond Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Global Growth Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Innovations Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Growth Fund, Inc. 5/21/70, Corporation NV/MN 7/31
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Growth Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Research Opportunities Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Investment Series, Inc. 1/18/40, Corporation NV/MN 9/30
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Diversified Equity Income Yes
Fund
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Mutual Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Managed Retirement Fund, Inc. 10/9/84 Corporation MN 9/30
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Managed Allocation Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Blue Chip Advantage Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Small Company Index Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Money Market Series, Inc. 8/22/75, Corporation NV/MN 7/31
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Cash Management Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS New Dimensions Fund, Inc. 2/20/68, Corporation NV/MN 7/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Progressive Fund, Inc. 4/23/68, Corporation NV/MN 9/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Selective Fund, Inc. 2/10/45, Corporation NV/MN 5/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Stock Fund, Inc. 2/10/45, Corporation NV/MN 9/30 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Strategy Fund, Inc. 1/24/84 Corporation MN 3/31
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
AXP Small Cap Advantage Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Strategy Aggressive Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Equity Value Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Tax-Exempt Bond Fund, Inc. 9/30/76, Corporation NV/MN 11/31
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Tax-Exempt Bond Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Intermediate Tax-Exempt Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Tax-Free Money Fund, Inc. 2/29/80, Corporation NV/MN 12/31 Yes
6/13/86*
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS California Tax-Exempt Trust 4/7/86 Business MA 6/30
Trust**
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS California Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30
Trust**
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Insured Tax-Exempt Fund Yes
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Massachusetts Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Michigan Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Minnesota Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS New York Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
IDS Ohio Tax-Exempt Fund No
- -------------------------------------- ---------------- --------------- ------------- ----------- -----------
</TABLE>
* Date merged into a Minnesota corporation incorporated on 4/7/86.
** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.
<PAGE>
BOARD MEMBERS AND OFFICERS
- --------------------------------------------------------------------------------
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
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).
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and Chief executive officer of the Fund. Chairman: Board Services
Corporation (provides administrative services to boards). Former Governor
of Minnesota.
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, and Union
Pacific Resources.
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of AEFC.
David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
<PAGE>
Heinz F. Hutter+
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired 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. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).
William R. Pearce
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
R11 Weyerhauser World Timberfund, L.P. (develops timber resources). Retired vice
chairman of the board, Cargill, Incorporated (commodity merchants and
processors). Former chairman: Board Services Corporation.
Alan K. Simpson'+
Born in 1931
1201 Sunshine Ave.
Cody, WY
Director of the Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, PacifiCorp (electric power) and Biogen (bio-pharmaceuticals).
Edson W. Spencer
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Retired 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 of AEFC.
<PAGE>
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
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging), 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 chairman of the board and Mr. Thomas, who is
president, the Fund's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.
Officers who also are officers and 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.
<PAGE>
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice president - investment accounting of AEFC. Treasurer for the Fund.
COMPENSATION FOR BOARD MEMBERS
- --------------------------------------------------------------------------------
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 28 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
Total cash
--------------------------------- ---------------------------------
compensation from the
IDS MUTUAL FUND GROUP and
Board member Aggregate Preferred
compensation from the Fund ---------------------------------
Master Trust Group
<S> <C> <C>
H. Brewster Atwater, Jr. $1,700 $111,900
- --------------------------------------
Lynne V. Cheney 1,440 96,900
- --------------------------------------
Heinz F. Hutter 1,525 101,400
- --------------------------------------
Anne P. Jones 1,672 110,900
- --------------------------------------
Alan K. Simpson 1,415 95,400
- --------------------------------------
Edson W. Spencer 1,492 99,400
- --------------------------------------
Wheelock Whitney 1,375 92,400
- --------------------------------------
C. Angus Wurtele 1,792 117,400
</TABLE>
As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The financial statements contained in the Annual Report 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.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
<PAGE>
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
<PAGE>
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond and preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt or preferred issue in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds and preferred stock carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
<PAGE>
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and/or dividends
and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A Bonds and preferred stock considered to be investment grade
and of high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt or preferred
securities with higher ratings.
BBB Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to
pay interest or dividends and repay principal is considered to
be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact
on these securities and, therefore, impair timely payment. The
likelihood that the ratings of these bonds or preferred stock
will fall below investment grade is higher than for securities
with higher ratings.
Fitch speculative grade bond or preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings (BB to C) represent Fitch's assessment of the likelihood of timely
payment of principal and interest or dividends in accordance with the terms of
obligation for issues not in default. For defaulted bonds or preferred stock,
the rating (DDD to D) is an assessment of the ultimate recovery value through
reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer or possible recovery value in
bankruptcy, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's future financial strength.
Bonds or preferred stock that have the same rating are of similar but not
necessarily identical credit quality since the rating categories cannot fully
reflect the differences in the degrees of credit risk.
BB Bonds or preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay
principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its
debt service requirements.
B Bonds or preferred stock are considered highly speculative.
While bonds in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the
issue.
<PAGE>
CCC Bonds or preferred stock have certain identifiable
characteristics that if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business
and economic environment.
CC Bonds or preferred stock are minimally protected. Default in
payment of interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is
imminent.
DDD,
DD,
and D Bonds are in default on interest and/or principal payments
or preferred stock dividends are suspended. Such securities
are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization
of the obligor. DDD represents the highest potential for
recovery of these securities and D represents the lowest
potential for recovery.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
that may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security (e.g. first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary). Ratings of BBB- and higher fall within the definition
of investment grade securities, as defined by bank and insurance supervisory
authorities. Structured finance issues, including real estate, asset-backed and
mortgage-backed financings, use this same rating scale with minor modification
in the definitions. Thus, an investor can compare the credit quality of
investment alternatives across industries and structural types. A "Cash Flow
Rating" (as noted for specific ratings) addresses the likelihood that aggregate
principal and interest will equal or exceed the rated amount under appropriate
stress conditions.
<PAGE>
<TABLE>
<CAPTION>
Rating Scale Definition
-------------------------- --------------------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
-------------------------- --------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
-------------------------- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
-------------------------- --------------------------------------------------------------------------------
BBB+ Below-average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
-------------------------- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due. Present
BB or prospective financial protection factors fluctuate according to industry
BB- conditions or company fortunes. Overall quality may move up or down frequently
within this category.
-------------------------- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions, and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a
higher or lower rating grade.
-------------------------- --------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest, or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/industry
conditions, and or with unfavorable company developments.
-------------------------- --------------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
-------------------------- --------------------------------------------------------------------------------
</TABLE>
IBCA Long-Term Debt Ratings
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk
substantially.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk, albeit not very significantly.
<PAGE>
A Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic, or financial conditions
may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic,
or financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic, or financial conditions.
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic, or financial conditions.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic, or financial conditions.
CC Obligations that are highly speculative or that have a high risk
of default.
C Obligations that are currently in default.
Notes: "+" or "-" may be appended to a rating below AAA to denote relative
status within major rating categories. Ratings of BB and below are assigned
where it is considered that speculative characteristics are present.
Thomson Bank Watch Long-Term Debt Ratings
Investment Grade
AAA(LC-AAA) Indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA(LC-AA) Indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental
risk compared to issues rated in the highest category.
A(LC-A) Indicates the ability to repay principal and
interest is strong. Issues rated A could be more
vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
BBB(LC-BBB) The lowest investment-grade category: indicates
an acceptable capacity to repay principal and interest.
BBB issues are more vulnerable to adverse developments
(both internal and external) than obligations with higher
ratings.
Non-Investment Grade - may be speculative in the likelihood of timely repayment
of principal and interest.
BB(LC-BB) While not investment grade, the BB rating suggests
that the likelihood of default is considerably less than
for lower-rated issues. However, there are significant
uncertainties that could affect the ability to adequately
service debt obligations.
<PAGE>
B(LC-B) Issues rated B show higher degree of uncertainty
and therefore greater likelihood of default than
higher-rated issues. Adverse developments could negatively
affect the payment of interest and principal on a timely
basis.
CCC(LC-CCC) Issues rated CCC clearly have a high likelihood
of default, with little capacity to address further
adverse changes in financial circumstances.
CC(LC-CC) CC is applied to issues that are subordinate to
other obligations rated CCC and are afforded less
protection in the event of bankruptcy or reorganization.
D(LC-D) Default.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
<PAGE>
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch Investors Service, Inc. Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
<PAGE>
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the
margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps' short-term ratings are consistent with the rating criteria used
by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, banker's
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper also is rated according to this scale.
Emphasis is placed on liquidity, which is defined as not only cash from
operations but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and
or access to alternative sources of funds, is
outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
<PAGE>
D-1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in
debt service. Operating factors and market access
may be subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or
interest payments.
Thomson BankWatch (TBW) Short-Term Ratings
The TBW Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. TBW
Short-Term Ratings are intended to assess the likelihood of untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW- I.
TBW-3 The lowest investment-grade category; indicates that while
the obligation is more susceptible to adverse developments
(both internal and external) than those with higher
ratings, the capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
<PAGE>
IBCA Short-Term Ratings
IBCA Short-Term Ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
Short-Term Ratings relate to debt that has a maturity of less than one year.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit
feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
IDS STRATEGY FUND, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of IDS Equity Value Fund (a series of
IDS Strategy Fund, Inc.) as of March 31, 1999, and the related statement of
operations for the year then ended and the statements of changes in net assets
for each of the years in the two-year period ended March 31, 1999, and the
financial highlights for the each of the years in the five-year period ended
March 31, 1999. These financial statements and the financial highlights are the
responsibility of fund management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IDS Equity Value Fund at March
31, 1999, 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
May 7, 1999
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statement of assets and liabilities
IDS Equity Value Fund
March 31, 1999
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $2,270,977,666) $2,540,583,027
Dividends and accrued interest receivable 3,065,846
Receivable for investment securities sold 54,568,152
----------
Total assets 2,598,217,025
-------------
Liabilities
Disbursements in excess of cash on demand deposit 3,167,741
Payable for investment securities purchased 24,528,957
Accrued investment management services fee 35,093
Accrued distribution fee 34,863
Accrued service fee 12,564
Accrued transfer agency fee 11,220
Accrued administrative services fee 2,276
Other accrued expenses 257,855
Total liabilities 28,050,569
----------
Net assets applicable to outstanding capital stock $2,570,166,456
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 2,269,694
Additional paid-in capital 2,215,810,484
Undistributed net investment income 105,270
Accumulated net realized gain (loss) 84,202,350
Unrealized appreciation (depreciation) on investments and on
translation of assets and liabilities in foreign currencies (Note 5) 267,778,658
-----------
Total -- representing net assets applicable to outstanding capital stock $2,570,166,456
==============
Net assets applicable to outstanding shares: Class A $ 906,343,220
Class B $1,662,821,481
Class Y $ 1,001,755
Net asset value per share of outstanding capital stock: Class A shares 80,066,769 $ 11.32
Class B shares 146,814,342 $ 11.33
Class Y shares 88,337 $ 11.34
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
IDS Equity Value Fund
Year ended March 31, 1999
Investment income
Income:
<S> <C>
Dividends $ 51,487,093
Interest 7,156,685
Less foreign taxes withheld (184,525)
--------
Total income 58,459,253
----------
Expenses (Note 2):
Investment management services fee 12,637,927
Distribution fee-- Class B 12,819,898
Transfer agency fee 3,254,281
Incremental transfer agency fee
Class A 52,506
Class B 215,949
Service fee
Class A 1,510,735
Class B 2,962,665
Class Y 1,022
Administrative services fees and expenses 857,508
Compensation of board members 18,143
Custodian fees 200,933
Postage 507,528
Registration fees 60,225
Report to shareholders 122,366
Audit fees 22,000
Other 24,657
------
Total expenses 35,268,343
Earnings credits on cash balances (Note 2) (136,595)
--------
Total net expenses 35,131,748
----------
Investment income (loss) -- net 23,327,505
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 188,046,228
Financial futures contracts (Note 5) 3,617,549
Foreign currency transactions (6,652)
------
Net realized gain (loss) on investments 191,657,125
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (204,057,052)
------------
Net gain (loss) on investments and foreign currencies (12,399,927)
-----------
Net increase (decrease) in net assets resulting from operations $ 10,927,578
==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
IDS Equity Value Fund
Year ended March 31, 1999 1998
Operations and distributions
<S> <C> <C>
Investment income (loss) -- net $ 23,327,505 $ 44,149,201
Net realized gain (loss) on investments 191,657,125 422,193,012
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (204,057,052) 194,604,248
------------ -----------
Net increase (decrease) in net assets resulting from operations 10,927,578 660,946,461
---------- -----------
Distributions to shareholders from:
Net investment income
Class A (12,310,555) (14,592,544)
Class B (11,307,259) (25,394,091)
Class Y (15,124) (8,643)
Net realized gain
Class A (107,623,088) (109,070,518)
Class B (198,266,117) (262,181,189)
Class Y (111,691) (105,799)
-------- --------
Total distributions (329,633,834) (411,352,784)
------------ ------------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 248,611,084 313,592,254
Class B shares 168,801,454 228,336,652
Class Y shares 720,248 1,662,004
Reinvestment of distributions at net asset value
Class A shares 116,065,296 119,771,945
Class B shares 207,563,067 285,215,356
Class Y shares 126,815 114,442
Payments for redemptions
Class A shares (185,591,426) (79,284,928)
Class B shares (Note 2) (424,291,934) (295,082,643)
Class Y shares (764,363) (706,679)
-------- --------
Increase (decrease) in net assets from capital share transactions 131,240,241 573,618,403
----------- -----------
Total increase (decrease) in net assets (187,466,015) 823,212,080
Net assets at beginning of year 2,757,632,471 1,934,420,391
------------- -------------
Net assets at end of year $2,570,166,456 $2,757,632,471
============== ==============
Undistributed net investment income $ 105,270 $ 2,423,991
-------------- --------------
</TABLE>
<PAGE>
Notes to Financial Statements
IDS Equity Value Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of IDS Strategy Fund, Inc. and is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. The Fund has 10 billion authorized shares of
capital stock. The Fund invests primarily in common stocks that are selected for
their above-average growth potential.
The Fund offers Class A, Class B and Class Y shares.
o Class A shares, are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year of
ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The 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.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
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. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. 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
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and write options traded
on any U.S. or foreign exchange or in the over-the-counter market where
completing the obligation depends upon the credit standing of the other party.
The Fund also may buy and sell put and call options and write covered call
options on portfolio securities as well as write cash-secured put options. The
risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Fund may incur a loss if the market price of the security
decreases and the option is exercised. The risk in buying an option is that the
Fund pays a premium whether or not the option is exercised. The Fund also has
the additional risk of being unable 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 Fund will
realize a gain or loss when the option transaction expires or closes. 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
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts traded on any U.S. or foreign exchange. The
Fund 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 of an illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation
margin payments are equal to the daily changes in the contract value and are
recorded as unrealized gains and losses. The Fund recognizes a realized gain or
loss when the contract is closed or expires.
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,
if any, may arise from sales of foreign currency, closed forward contracts,
exchange gains or losses realized between the trade date and settlement date on
securities transactions, and other translation gains or losses on dividends,
interest income and foreign withholding taxes.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete its contract obligations.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute all of its
taxable income to shareholders. No provision for income or excise taxes is thus
required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred 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
$2,013,288 and accumulated net realized gain has been increased by $2,013,288.
Dividends to shareholders
Dividends from net investment income, declared and paid each calendar quarter,
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.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date and interest income,
including level-yield amortization of premium and discount, is accrued daily.
2. EXPENSES AND SALES CHARGES
The Fund entered into agreements with American Express Financial Corporation
(AEFC) for managing its portfolio and providing administrative services. Under
an Investment Management Services Agreement, AEFC determines which securities
will be purchased, held or sold. The management fee is a percentage of the
Fund's average daily net assets in reducing percentages from 0.53% to 0.4%
annually.
Under an 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 0.04% to 0.02% 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, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19
o Class B $20
o Class Y $15
Under terms of a prior agreement that ended Jan. 31, 1999, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $15 for Class A
and $16 for Class B. Effective April 1, 1999, the annual rate per shareholder
account will change to $17 for Class Y.
The Fund entered into agreements with American Express Financial Advisors Inc.
for distribution and shareholder 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
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 $2,247,657 for Class A and $860,914 for Class B
for the year ended March 31, 1999. The Fund also pays custodian fees to American
Express Trust Company, an affiliate of AEFC.
During the year ended March 31, 1999, the Fund's custodian and transfer agency
fees were reduced by $136,595 as a result of earnings credits from overnight
cash balances.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $2,607,198,519 and $2,588,253,451, respectively, for the
year ended March 31, 1999. Realized gains and losses are determined on an
identified cost basis.
Brokerage commissions paid to brokers affiliated with AEFC were $38,916 for the
year ended March 31, 1999.
Income from securities lending amounted to $49,966 for the year ended March 31,
1999. The risks to the Fund of securities lending are that the borrower may not
provide additional collateral when required or return the securities when due.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended March 31, 1999
Class A Class B Class Y
Sold 20,474,893 14,222,376 60,749
Issued for reinvested distributions 10,613,636 19,001,797 11,558
Redeemed (15,998,122) (35,900,422) (66,377)
----------- ----------- -------
Net increase (decrease) 15,090,407 (2,676,249) 5,930
Year ended March 31, 1998
Class A Class B Class Y
Sold 24,247,788 17,906,145 126,503
Issued for reinvested distributions 10,301,681 24,578,884 9,895
Redeemed (6,191,307) (22,768,273) (54,137)
---------- ----------- -------
Net increase (decrease) 28,358,162 19,716,756 82,261
5. STOCK INDEX FUTURES CONTRACTS
As of March 31, 1999, investments in securities included securities valued at
$17,261,875 that were pledged as collateral to cover initial margin deposits on
265 open purchase contracts. The market value of the open purchase contracts as
of March 31, 1999 was $85,681,125 with a net unrealized loss of $1,823,466. See
"Summary of significant accounting policies."
6. OPTIONS CONTRACTS WRITTEN
Contracts and premium amounts associated with options contracts written are as
follows:
Year ended March 31, 1999
Calls
Contracts Premium
Balance March 31, 1998 871 $573,794
Exercised (871) (573,794)
---- --------
Balance March 31, 1999 -- $ --
7. BANK BORROWINGS
The Fund entered into a revolving credit agreement with U.S. Bank, N.A., whereby
the Fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The Fund must have asset coverage for
borrowings not to exceed the aggregate of 333% of advances equal to or less than
five business days plus 367% of advances over five business days. The agreement,
which enables the Fund to participate with other IDS Funds, permits borrowings
up to $200 million, collectively. Interest is charged to each Fund based on its
borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the
Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90
days after such loan is executed. The Fund also pays a commitment fee equal to
its pro rata share of the amount of the credit facility at a rate of 0.05% per
annum. The Fund had no borrowings outstanding during the year ended March 31,
1999.
8. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
is presented on pages 29 and 30 of the prospectus.
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
IDS Equity Value Fund
March 31, 1999
(Percentages represent value of investments compared to net assets)
Common stocks (93.0%)
Issuer Shares Value(a)
Aerospace & defense (2.3%)
<S> <C> <C>
AlliedSignal 690,000 $33,939,375
Rockwell Intl 590,000 25,038,125
Total 58,977,500
Automotive & related (4.9%)
Delphi Automotive Systems 1,400,000(b) 24,850,000
Ford Motor 741,600 42,085,800
General Motors 445,000 38,659,375
TRW 472,000 21,476,000
Total 127,071,175
Banks and savings & loans (11.8%)
Bank of New York 865,000 31,085,938
Bank One 980,000 53,961,249
BankAmerica 1,025,000 72,390,624
Chase Manhattan 455,000 36,997,188
Fleet Financial Group 585,000 22,010,625
Mellon Bank 285,000 20,056,875
Washington Mutual 710,000 29,021,250
Wells Fargo 1,040,000 36,465,000
Total 301,988,749
Building materials & construction (1.2%)
American Standard 890,000(b) 30,593,750
Chemicals (3.0%)
Air Products & Chemicals 650,000 22,262,500
Dow Chemical 130,000 12,114,375
Du Pont (EI) de Nemours 720,000 41,805,000
Total 76,181,875
Communications equipment & services (1.3%)
Northern Telecom 537,400(c) 33,385,975
Computers & office equipment (6.9%)
3Com 902,200(b) 21,032,538
BMC Software 370,000(b) 13,713,125
Compaq Computer 830,000 26,300,624
Electronic Data Systems 390,000 18,988,125
First Data 465,600 19,904,400
Hewlett-Packard 195,000(e) 13,223,438
Intl Business Machines 265,000(e) 46,971,249
Wang Laboratories 882,400(b) 17,317,100
Total 177,450,599
Electronics (1.7%)
Applied Materials 375,000(b) 23,132,813
Texas Instruments 200,000 19,850,000
Total 42,982,813
Energy (9.8%)
Chevron 600,000 53,062,500
Mobil 655,000 57,639,999
Royal Dutch Petroleum 655,000(c) 34,060,000
Texaco 850,000 48,237,500
Tosco 1,330,000 33,000,625
Unocal 735,000 27,057,188
Total 253,057,812
Financial services (6.8%)
Associates First Capital Cl A 575,000 25,875,000
Citigroup 1,204,500 76,937,438
Fannie Mae 235,000 16,273,750
Franchise Finance Corp of America 86,400 1,819,800
MBNA 1,000,000 23,875,000
Morgan Stanley, Dean Witter, Discover & Co 310,000 30,980,625
Total 175,761,613
Food (2.2%)
Bestfoods 390,000 18,330,000
General Mills 255,000 19,268,438
Sara Lee 745,000 18,438,750
Total 56,037,188
Health care (4.1%)
American Home Products 290,000 18,922,500
Amgen 305,000(b) 22,836,875
Baxter Intl 290,000 19,140,000
Boston Scientific 655,000(b) 26,568,438
Warner-Lambert 282,300 18,684,731
Total 106,152,544
Health care services (0.7%)
McKesson HBOC 290,000 19,140,000
Household products (1.3%)
Procter & Gamble 350,000 34,278,125
Industrial equipment & services (3.2%)
Browning-Ferris Inds 735,000 28,343,438
Illinois Tool Works 485,000 30,009,375
Parker-Hannifin 720,000 24,660,000
Total 83,012,813
Insurance (6.6%)
American General 405,700 28,601,850
American Intl Group 621,000 74,908,125
Lincoln Natl 395,000 39,055,625
Marsh & McLennan 365,000 27,078,438
Total 169,644,038
Leisure time & entertainment (1.2%)
Disney (Walt) 790,000 24,588,750
Mattel 271,400 6,751,075
Total 31,339,825
Multi-industry conglomerates (1.0%)
Emerson Electric 260,000 13,763,750
Xerox 235,000 12,543,125
Total 26,306,875
Paper & packaging (1.8%)
Intl Paper 570,000 24,046,875
Tenneco 750,000 20,953,125
Total 45,000,000
Retail (7.2%)
American Stores 1,800,000 59,399,999
Costco Companies 460,000(b) 42,118,750
Dayton Hudson 805,000 53,633,125
TJX Companies 875,000 29,750,000
Total 184,901,874
Transportation (2.5%)
Burlington Northern Santa Fe 970,000 31,888,750
Union Pacific 589,000 31,474,688
Total 63,363,438
Utilities -- electric (5.9%)
Carolina Power & Light 465,000 17,582,813
CMS Energy 620,000 24,838,750
Duke Energy 457,000 24,963,625
Edison Intl 690,000 15,352,500
New Century Energies 590,000 20,096,875
Northern States Power 325,000 7,535,938
PECO Energy 570,000 26,362,499
Texas Utilities 340,000 14,173,750
Total 150,906,750
Utilities -- gas (1.0%)
Coastal 795,000 26,235,000
Utilities -- telephone (4.6%)
Ameritech 610,000 35,303,750
AT&T 190,000 15,164,375
BellSouth 530,000 21,233,125
SBC Communications 460,000 21,677,500
U S WEST Communications Group 430,000 23,676,875
Total 117,055,625
Total common stocks
(Cost: $2,138,717,930) $2,390,825,956
Preferred stock (1.9%)
Houston Inds 412,500(f) 49,706,250
7.00% Cv ACES
Total preferred stock
(Cost: $32,208,915) $49,706,250
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (3.9%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agency (1.7%)
Federal Home Loan Mtge Corp Disc Nts
<S> <C> <C> <C>
04-12-99 4.80% $10,500,000 $10,484,664
05-06-99 4.80 3,300,000 3,284,696
05-14-99 4.80 10,800,000 10,738,467
05-17-99 4.77 20,400,000 20,276,444
Total 44,784,271
Commercial paper (2.2%)
Ameritech Capital Funding
05-06-99 4.87 4,000,000(d) 3,981,139
BBV Finance (Delaware)
04-19-99 4.87 10,500,000 10,474,537
Ciesco LP
04-09-99 4.85 3,400,000 3,396,351
04-13-99 4.87 9,200,000 9,185,126
05-04-99 4.87 2,300,000 2,289,796
Clorox
04-27-99 4.85 4,200,000 4,185,349
Dresdner US Finance
04-13-99 4.88 5,800,000 5,790,604
Duke Energy
04-22-99 4.85 6,700,000 6,681,123
GTE Funding
04-06-99 4.89 2,500,000 2,498,309
Merrill Lynch
04-08-99 4.90 1,400,000 1,398,667
Paccar Financial
04-20-99 4.85 500,000 498,725
Pfizer
04-21-99 4.86 4,900,000(d) 4,886,824
Total 55,266,550
Total short-term securities
(Cost: $100,050,821) $100,050,821
Total investments in securities
(Cost: $2,270,977,666)(g) $2,540,583,027
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) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of March 31, 1999,
the value of foreign securities represented 2.62% of net assets.
(d) 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.
(e) Partially pledged as initial margin deposit on the following open stock
index futures purchase contracts (see Note 5 to the financial statements):
Type of security Contracts
S&P 500 Index, June 1999 265
(f) ACES (Automatically Convertible Equity Securities) are structured as
convertible preferred securities. Investors receive an enhanced yield but based
upon a specific formula, potential appreciation is limited. ACESpay dividends,
have voting rights, are noncallable for at least three years and upon maturity,
convert into shares of common stock.
(g) At March 31, 1999, the cost of securities for federal income tax purpose was
$2,271,944,692 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $352,459,889
Unrealized depreciation (83,821,554)
-----------
Net unrealized appreciation $268,638,335
<PAGE>
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
IDS STRATEGY FUND, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of IDS Strategy Aggressive Fund (a
series of IDS Strategy Fund, Inc.) as of March 31, 1999, and the related
statement of operations for the year then ended, and the statements of changes
in net assets for each of the years in the two-year period ended March 31, 1999,
and the financial highlights for each of the years in the five-year period ended
March 31, 1999. These financial statements and the financial highlights are the
responsibility of fund management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered,
and securities on loan, we request confirmations from brokers, and where replies
are not received, we carry out other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IDS Strategy Aggressive Fund at
March 31, 1999, 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
May 7, 1999
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statement of assets and liabilities
IDS Strategy Aggressive Fund
March 31, 1999
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $984,803,886) $1,448,840,185
Dividends and accrued interest receivable 216,443
Receivable for investment securities sold 10,776,559
----------
Total assets 1,459,833,187
-------------
Liabilities
Disbursements in excess of cash on demand deposit 1,213,535
Payable upon return of securities loaned (Note 5) 20,782,600
Payable for investment securities purchased 19,825,063
Accrued investment management services fee 22,932
Accrued distribution fee 16,522
Accrued service fee 6,771
Accrued transfer agency fee 7,460
Accrued administrative services fee 1,878
Options contracts written, at value (premium received $3,238,317) (Note 6) 3,048,438
Other accrued expenses 93,685
------
Total liabilities 45,018,884
----------
Net assets applicable to outstanding capital stock $1,414,814,303
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 631,652
Additional paid-in capital 783,542,122
Accumulated net realized gain (loss) 166,468,592
Unrealized appreciation (depreciation) on investments and on
translation of assets and liabilities in foreign currencies 464,171,937
-----------
Total -- representing net assets applicable to outstanding capital stock $1,414,814,303
==============
Net assets applicable to outstanding shares: Class A $ 608,331,881
Class B $ 806,480,237
Class Y $ 2,185
Net asset value per share of outstanding capital stock: Class A shares 26,583,842 $ 22.88
Class B shares 36,581,304 $ 22.05
Class Y shares 95 $ 23.00
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
IDS Strategy Aggressive Fund
Year ended March 31, 1999
Investment income
Income:
<S> <C>
Dividends $ 2,975,768
Interest 4,096,575
Less foreign taxes withheld (6,574)
------
Total income 7,065,769
---------
Expenses (Note 2):
Investment management services fee 7,929,636
Distribution fee-- Class B 5,907,637
Transfer agency fee 2,080,665
Incremental transfer agency fee
Class A 38,302
Class B 130,689
Service fee
Class A 944,997
Class B 1,363,433
Class Y 3
Administrative services fees and expenses 669,837
Compensation of board members 12,410
Custodian fees 132,730
Postage 277,339
Registration fees 40,553
Reports to shareholders 70,612
Audit fees 21,000
Other 23,909
------
Total expenses 19,643,752
Earnings credits on cash balances (Note 2) (78,223)
-------
Total net expenses 19,565,529
----------
Investment income (loss) -- net (12,499,760)
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 162,237,124
Financial futures contracts (Note 7) 1,315,831
Options contracts written (Note 6) 2,980,918
---------
Net realized gain (loss) on investments 166,533,873
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (97,819,819)
-----------
Net gain (loss) on investments and foreign currencies 68,714,054
----------
Net increase (decrease) in net assets resulting from operations $ 56,214,294
=============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
IDS Strategy Aggressive Fund
Year ended March 31, 1999 1998
Operations and distributions
<S> <C> <C>
Investment income (loss) -- net $ (12,499,760) $ (11,803,234)
Net realized gain (loss) on investments 166,533,873 154,471,744
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (97,819,819) 336,920,376
----------- -----------
Net increase (decrease) in net assets resulting from operations 56,214,294 479,588,886
---------- -----------
Distributions to shareholders from:
Net realized gains
Class A (6,770,133) (83,874,202)
Class B (9,563,427) (140,309,083)
Class Y (24) (307)
--- ----
Total distributions (16,333,584) (224,183,592)
----------- ------------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 434,063,764 340,431,367
Class B shares 73,615,271 66,677,585
Reinvestment of distributions at net asset value
Class A shares 6,621,726 82,381,141
Class B shares 9,498,315 139,598,839
Class Y shares 24 307
Payments for redemptions
Class A shares (398,421,152) (355,498,254)
Class B shares (Note 2) (190,453,897) (211,275,232)
------------ ------------
Increase (decrease) in net assets from capital share transactions (65,075,949) 62,315,753
----------- ----------
Total increase (decrease) in net assets (25,195,239) 317,721,047
Net assets at beginning of year 1,440,009,542 1,122,288,495
------------- -------------
Net assets at end of year $1,414,814,303 $1,440,009,542
============== ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
IDS Strategy Aggressive Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of IDS Strategy Fund, Inc. and is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. The Fund has 10 billion authorized shares of
capital stock. The Fund invests primarily in common stocks that are selected for
their above-average growth potential.
The Fund offers Class A, Class B and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year of
ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The 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.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
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. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. 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
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and write options traded
on any U.S. or foreign exchange or in the over-the-counter market where
completing the obligation depends upon the credit standing of the other party.
The Fund also may buy and sell put and call options and write covered call
options on portfolio securities as well as write cash-secured put options. The
risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Fund may incur a loss if the market price of the security
decreases and the option is exercised. The risk in buying an option is that the
Fund pays a premium whether or not the option is exercised. The Fund also has
the additional risk of being unable 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 Fund will
realize a gain or loss when the option transaction expires or closes. 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
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts traded on any U.S. or foreign exchange. The
Fund 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 of an illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.
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,
if any, may arise from sales of foreign currency, closed forward contracts,
exchange gains or losses realized between the trade date and settlement date on
securities transactions, and other translation gains or losses on dividends,
interest income and foreign withholding taxes.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete its contract obligations.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute all of its
taxable income to shareholders. No provision for income or excise taxes is thus
required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred 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 increased by
$12,499,760 and accumulated net realized gain has been decreased by $4,667,430
resulting in a net reclassification adjustment to decrease paid-in capital by
$7,832,330.
Dividends to shareholders
An annual dividend declared and paid by the end of the calendar year from net
investment income, when available, is reinvested in additional shares of the
Fund at net asset value or payable in cash. Capital gains, when available, are
distributed along with the income dividend.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date and interest income,
including level-yield amortization of premium and discount, is accrued daily.
2. EXPENSES AND SALES CHARGES
The Fund entered into agreements with American Express Financial Corporation
(AEFC) for managing its portfolio and providing administrative services. Under
an Investment Management Services Agreement, AEFC determines which securities
will be purchased, held or sold. The management fee is a percentage of the
Fund's average daily net assets in reducing percentages from 0.6% to 0.5%
annually.
Under an 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 0.03% 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, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19
o Class B $20
o Class Y $15
Under terms of a prior agreement that ended Jan. 31, 1999, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $15 for Class A
and $16 for Class B. Effective April 1, 1999, the annual rate per shareholder
account will change to $17 for Class Y.
The Fund entered into agreements with American Express Financial Advisors Inc.
for distribution and shareholder 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
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 $1,038,429 for Class A and $418,193 for Class B
for the year ended March 31, 1999. The Fund also pays custodian fees to American
Express Trust Company, an affiliate of AEFC.
During the year ended March 31, 1999, the Fund's custodian and transfer agency
fees were reduced by $78,223 as a result of earnings credits from overnight cash
balances.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $1,250,991,514 and $1,378,626,993, respectively, for the
year ended March 31, 1999. Realized gains and losses are determined on an
identified cost basis.
Brokerage commissions paid to brokers affiliated with AEFC were $87,020 for the
year ended March 31, 1999.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended March 31, 1999
Class A Class B Class Y
Sold 19,926,335 3,601,446 --
Issued for reinvested distributions 305,808 454,317 1
Redeemed (18,410,711) (9,005,077) --
----------- ---------- ----
Net increase (decrease) 1,821,432 (4,949,314) 1
Year ended March 31, 1998
Class A Class B Class Y
Sold 16,117,055 3,275,267 --
Issued for reinvested distributions 4,427,898 7,710,962 16
Redeemed (16,805,791) (10,293,611) --
----------- ----------- ----
Net increase (decrease) 3,739,162 692,618 16
5. LENDING OF PORTFOLIO SECURITIES
As of March 31, 1999, securities valued at $23,574,510 were on loan to brokers.
For collateral, the Fund received $20,782,600 in cash. Income from securities
lending amounted to $206,195 for the year ended March 31, 1999. The risks to the
Fund of securities lending are that the borrower may not provide additional
collateral when required or return the securities when due.
6. OPTIONS CONTRACTS WRITTEN
Contracts and premium amounts associated with options contracts written are as
follows:
Year ended March 31, 1999
Puts Calls
Contracts Premium Contracts Premium
Balance March 31, 1998 -- $ -- -- $ --
Opened 8,150 3,304,829 31,537 12,015,292
Closed (2,700) (1,555,112) (2,200) (1,639,750)
Expired (500) (235,992) (6,687) (2,099,761)
Exercised -- -- (17,450) (6,551,189)
----- ------ ------- ---------
Balance March 31, 1999 4,950 $1,513,725 5,200 $1,724,592
See "Summary of significant accounting policies."
7. STOCK INDEX FUTURES CONTRACTS
Investments in securities as of March 31, 1999, included securities valued at
$6,000,000 that were pledged as collateral to cover initial margin deposits on
11 open purchase contracts. The market value of the open purchase contracts as
of March 31, 1999 was $3,556,575 with a net unrealized loss of $54,241. See
"Summary of significant accounting policies."
8. BANK BORROWINGS
The Fund entered into a revolving credit agreement with U.S. Bank, N.A., whereby
the Fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The Fund must have asset coverage for
borrowings not to exceed the aggregate of 333% of advances equal to or less than
five business days plus 367% of advances over five business days. The agreement,
which enables the Fund to participate with other IDS Funds, permits borrowings
up to $200 million, collectively. Interest is charged to each Fund based on its
borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the
Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90
days after such loan is executed. The Fund also pays a commitment fee equal to
its pro rata share of the amount of the credit facility at a rate of 0.05% per
annum. The Fund had no borrowings outstanding during the year ended March 31,
1999.
9. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
is presented on pages 29 and 30 of the prospectus.
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
IDS Strategy Aggressive Fund
March 31, 1999
(Percentages represent value of investments compared to net assets)
Common stocks (94.6%)
Issuer Shares Value(a)
Aerospace & defense (0.1%)
<S> <C> <C>
Alliant Techsystems 9,600(b) $745,800
Airlines (0.5%)
Amtran 14,700(b) 279,300
Comair Holdings 10,050 237,431
SkyWest 211,800 6,115,725
Total 6,632,456
Automotive & related (0.1%)
Gentex 51,000(b) 1,099,688
O'Reilly Automotive 12,100(b) 541,475
SPS Technologies 7,800(b) 306,150
Total 1,947,313
Banks and savings & loans (1.7%)
Centura Banks 107,200 6,237,700
Commerce Bancorp 11,000 453,750
Cullen/Frost Bankers 23,900 1,145,706
First Financial Holdings 18,100 325,800
FirstMerit 40,600 1,045,450
Flagstar Bancorp 10,700 283,550
Gold Banc 22,400 333,200
Golden State Bancorp 121,700(b) 2,707,825
Hamilton Bancorp 13,200(b) 341,550
HUBCO 12,000 402,750
NBT Bancorp 9,500 198,313
Old Natl Bancorp 7,400 338,088
Queens County Bancorp 13,200 356,400
Republic Bancorp 27,600 358,800
Southwest Bancorp of Texas 28,300(b) 348,444
Sterling Bancshares 24,600 255,225
U.S. Trust 13,800 1,023,788
UnionBanCal 200,000 6,812,499
UST 24,300 530,803
Total 23,499,641
Beverages & tobacco (--%)
Beringer Wine Estates Holdings Cl B 6,800(b) 247,350
Building materials & construction (0.8%)
Centex Construction Products 13,500 469,969
Dycom Inds 24,000(b) 1,044,000
Elcor 10,500 369,469
Martin Marietta Materials 158,300 9,032,993
NCI Building Systems 14,400(b) 338,400
Tredegar Inds 13,000 402,188
Total 11,657,019
Chemicals (0.1%)
MacDermid 12,300 417,431
Spartech 19,400 400,125
Tetra Tech 16,300(b) 343,319
Total 1,160,875
Communications equipment & services (13.6%)
Acxiom 28,100(b) 744,650
America Online 240,000(b) 35,039,999
American Management Systems 18,300(b) 624,488
CMGI 100,000(b) 18,306,250
CommScope 25,800(b) 540,188
Concentric Network 190,000(b) 14,202,500
Critical Path 51,900(b) 3,996,300
CSG Systems Intl 200,000(b) 7,887,500
Fair Isaac & Co 12,700 470,694
Fiserv 205,800(b) 11,036,025
InfoSpace.com 80,000(b) 7,085,000
MindSpring Enterprises 1,800(b) 154,913
Natl Data 16,200 680,400
Network Solutions Cl A 140,000(b) 14,805,000
Oak Inds 8,900(b) 282,575
Orbital Sciences 20,100(b) 569,081
Plantronics 9,500(b) 594,344
Sterling Commerce 1,100,000(b) 33,824,999
Tellabs 250,000(b) 24,437,500
Yahoo! 100,000(b) 16,837,500
Total 192,119,906
Computers & office equipment (25.0%)
Ascend Communications 200,000(b) 16,737,500
Avid Technology 11,100(b) 193,556
BISYS Group 9,700(b) 545,625
BMC Software 700,000(b,g) 25,943,750
Ciber 346,800(b) 6,654,225
Cisco Systems 836,325(b) 91,629,857
Cognex 24,500(b) 580,344
Complete Business Solutions 10,800(b) 211,950
Compuware 500,000(b) 11,937,500
EMC 65,000(b) 8,303,750
FactSet Research Systems 14,300 618,475
FlashNet Communications 38,200(b,f) 1,570,975
Great Plains Software 9,700(b) 375,269
Henry (Jack) & Associates 19,700 723,975
HNC Software 14,500(b) 474,875
Informix 450,000(b) 3,318,750
Insight Enterprises 13,500(b) 334,125
Inter-Tel 13,500 210,094
Intuit 200,000(b) 20,350,000
Legato Systems 350,000(b) 18,068,750
Macromedia 25,300(b) 1,146,406
Maxtor 1,075,000(b) 7,592,188
MedQuist 24,300(b) 729,000
Mercury Interactive 15,400(b) 548,625
Metzler Group 325,000(b) 10,196,875
Natl Computer Systems 6,000 147,000
Network Associates 1,200,000(b) 36,824,999
New Era of Networks 4,900(b) 331,975
Peregrine Systems 125,000(b) $4,203,125
Profit Recovery Group Intl 309,800(b) 12,237,100
Progress Software 17,300(b) 590,363
Qualix Group 50,000(b) 362,500
Rational Software 315,000(b) 8,445,938
Read-Rite 32,100(b) 211,659
Sanmina 33,300(b) 2,122,875
Software AG Systems 355,000(b) 2,973,125
SunGard Data Systems 400,000(b,e) 16,000,000
Symantec 17,700(b) 299,794
VeriSign 210,000(b) 32,339,999
Whittman-Hart 313,000(b) 6,729,500
Xircom 19,500(b) 489,938
Xylan 13,000(b) 478,563
Total 353,784,892
Electronics (6.7%)
Actel 19,700(b) 323,819
AFC Cable Systems 9,900(b) 294,525
Altera 100,000(b) 5,950,000
Burr-Brown 15,200(b) 357,200
C-Cube Microsystems 23,500(b) 465,594
Conexant Systems 200,000(b) 5,537,500
Dionex 25,500(b) 962,625
Etec Systems 3,400(b) 100,088
Flextronics Intl 200,000(b) 10,200,000
Helix Technology 24,000 369,000
Jabil Circuit 298,800(b) 12,101,399
KLA-Tencor 200,000(b) 9,712,500
Level One Communications 6,500(b) 316,063
Micrel 10,100(b) 505,631
Novellus Systems 193,900(b) 10,688,738
Plexus 16,300(b) 454,363
Sawtek 12,900(b) 435,375
Teradyne 225,000(b) 12,276,562
Uniphase 200,000(b) 23,024,999
Vitesse Semiconductor 5,500(b) 278,438
Total 94,354,419
Energy (--%)
Frontier Oil 50,100 250,500
Newfield Exploration 16,400(b) 371,050
Total 621,550
Energy equipment & services (--%)
Marine Drilling 38,200(b) 420,200
Financial services (4.6%)
Capital One Financial 75,000 11,325,000
CMAC Investment 17,100 666,900
CNB Bancshares 7,100 285,775
Financial Federal 12,500 237,500
Jefferies Group 12,000 569,250
Knight/Trimark Group Cl A 600,000(b) 40,200,000
Legg Mason 21,800 734,388
Mutual Risk Management 258,300(c) 9,879,975
SEI Investments 6,700 619,750
Total 64,518,538
Food (0.6%)
Delta & Pine Land 11,700 359,775
Earthgrains 14,300 317,281
Pilgrim's Pride Cl B 13,100 215,331
Smithfield Foods 10,300(b) 233,681
U.S. Foodservice 150,000(b) 6,975,000
United Natural Foods 11,700(b) 273,488
Total 8,374,556
Furniture & appliances (0.2%)
Briggs & Stratton 8,900 438,881
Ethan Allen Interiors 10,000 415,625
Mohawk Inds 45,300(b) 1,359,000
Total 2,213,506
Health care (5.8%)
Ballard Medical Products 19,700 480,188
Barr Laboratories 13,900(b) 423,950
Biomatrix 5,500(b,f) 429,000
Genzyme (General Division) 150,000(b) 7,565,625
Guidant 200,000(b) 12,100,000
IDEC Pharmaceuticals 7,200(b) 369,900
IDEXX Laboratories 28,300(b) 677,431
Jones Pharma 15,500 538,625
Life Technologies 8,100 312,356
Liposome 21,600(b) 290,250
MedImmune 31,400(b) 1,858,488
Medtronic 300,000 21,524,999
Millennium Pharmaceuticals 12,500(b) 390,625
OEC Medical Systems 10,400(b) 239,200
Safeskin 18,200(b) 135,363
Techne 12,500(b) 360,938
VISX 166,700(b,g) 17,930,668
Watson Pharmaceuticals 362,200(b,g) 15,982,075
Total 81,609,681
Health care services (6.3%)
Cardinal Health 150,000 9,900,000
Curative Health Services 11,100(b) 127,650
Express Scripts Cl A 18,300(b) 1,572,656
Hanger Orthopedic Group 12,200(b) 164,700
Health Management Associates Cl A 441,300(b,g) 5,378,344
McKesson HBOC 500,000 32,999,999
Orthodontic Centers of America 26,200(b) 412,650
Owens & Minor 19,200 194,400
PAREXEL Intl 200,000(b) 4,137,500
Patterson Dental 27,600(b) 1,193,700
Pediatrix Medical Group 17,900(b,f) 503,438
Pharmaceutical Product Development 156,400(b) 5,249,175
PSS World Medical 16,200(b) 142,763
Quintiles Transnational 350,000(b,g) 13,212,499
Renal Care Group 27,700(b) 543,613
Res-Care 14,600(b,f) 329,413
Sunrise Assisted Living 275,000(b,f) 12,529,688
Universal Health Services Cl B 14,400(b) 622,800
Total 89,214,988
Household products (0.1%)
Chattem 9,700 303,125
Josten's 16,600 352,750
Scotts Cl A 9,800(b) 366,275
Total 1,022,150
Industrial equipment & services (0.2%)
Applied Power Cl A 29,600 806,599
Astec Inds 12,400(b) 382,850
Blount Intl Cl A 11,800 340,725
G & K Services Cl A 4,200 193,988
JLG Inds 24,100 328,363
Manitowoc 15,400 644,875
Terex 11,600(b) 279,850
Total 2,977,250
Insurance (0.3%)
American Bankers Insurance Group 12,700 660,400
Fidelity Natl Financial 27,400 411,000
First American Financial 51,400 812,763
Gallagher (Arthur J) 20,300 933,799
Hooper Holmes 25,800 403,125
Reinsurance Group of America 8,250 351,141
Triad Guaranty 21,300(b) 288,881
Total 3,861,109
Leisure time & entertainment (0.7%)
Acclaim Entertainment 30,300(b) 270,806
Anchor Gaming 6,800(b) 297,500
Harrah's Entertainment 150,000(b) 2,859,375
Mirage Resorts 75,000(b) 1,593,750
Polaris Inds 13,500 428,625
Ticketmaster Online-Citysearch Cl B 150,000(b) 5,043,750
Total 10,493,806
Media (8.3%)
Adelphia Communications Cl A 140,000(b) 8,820,000
ADVO 12,100(b) 233,681
Cablevision Systems Cl A 125,000(b) 9,265,625
Catalina Marketing 5,800(b) 498,075
Clear Channel Communications 200,000(b) 13,412,500
Consolidated Graphics 12,300(b) 710,325
HA-LO Inds 17,250(b) 212,391
Lee Enterprises 11,700 339,300
Metro Networks 4,000(b) 220,000
Outdoor Systems 900,000(b) 26,999,999
TeleWest Communications 2,680,000(b,c) 11,682,388
True North Communications 13,900 390,938
Univision Communications Cl A 850,000(b) 42,499,999
Valassis Communications 25,600(b) 1,324,800
Westwood One 18,700(b) 532,950
Ziff-Davis - ZDNet 35,000(b) 1,260,000
Total 118,402,971
Metals (0.1%)
Mueller Inds 20,300(b) 454,213
Stillwater Mining 24,900(b) 656,737
Total 1,110,950
Miscellaneous (0.1%)
Champion Enterprises 16,000(b) 310,000
John Nuveen Cl A 9,400 393,625
Philadelphia Suburban 1,900 43,106
Total 746,731
Multi-industry conglomerates (3.9%)
ACNielsen 150,000(b) 4,068,750
Bell & Howell 10,600(b) 310,713
Brady (WH) Cl A 15,300 320,344
DeVry 38,800(b) 1,125,200
Education Management 14,000(b) 430,500
Electronics for Imaging 162,700(b) 6,345,300
Lason 10,800(b) 607,500
Mettler-Toledo Intl 14,300(b) 353,925
NCO Group 8,900(b) 329,300
Personnel Group of America 26,800(b) 192,625
Pre-Paid Legal Services 11,700(b) 286,650
Robert Half Intl 350,000(b,g) 11,484,375
Sylvan Learning Systems 11,800(b) 323,025
Tyco Intl 400,000(c) 28,699,999
Total 54,878,206
Paper & packaging (--%)
Caraustar Inds 16,700 384,100
Shorewood Packaging 12,600(b) 247,275
Total 631,375
Restaurants & lodging (0.7%)
CEC Entertainment 10,500(b) 376,688
Foodmaker 30,400(b) 775,200
Papa John's Intl 210,000(b) 9,266,250
Total 10,418,138
Retail (7.2%)
99 Cents Only Stores 23,800(b) 1,010,013
AnnTaylor Stores 150,000(b) 6,628,125
Bed Bath & Beyond 75,000(b) 2,737,500
CDW Computer Centers 3,400(b) 234,600
Circuit City Stores 100,000 7,662,500
Egghead.com 600,000(b) 10,912,500
Family Dollar Stores 266,600 6,131,800
Fossil 8,900(b) 265,331
Kohl's 295,500(b) 20,943,562
Linens `N Things 12,500(b) 567,188
Men's Wearhouse 30,500(b) 880,688
Regis 31,350 834,694
Rite Aid 366,520 9,163,000
Tiffany & Co 300,000 22,424,999
TJX Companies 300,000 10,200,000
Trans World Entertainment 21,500(b) 236,500
Williams-Sonoma 20,300(b) 573,475
Total 101,406,475
Textiles & apparel (1.3%)
Abercrombie & Fitch 150,000(b) 13,800,000
Oshkosh B'Gosh Cl A 27,300 482,869
Tommy Hilfiger 50,000(b) 3,443,750
Total 17,726,619
Transportation (0.7%)
Atlas Air 8,550(b) 246,347
Expeditors Intl of Washington 9,400 507,600
Kansas City Southern Inds 150,000 8,550,000
Swift Transportation 12,200(b) 315,675
Total 9,619,622
Utilities -- telephone (5.0%)
Brightpoint 18,600(b) 109,856
Cincinnati Bell 200,000 4,487,500
Colt Telecom Group ADR 300,000(b,f) 21,543,750
Energis 425,000(b,c) 11,520,645
Intermedia Communications 300,000(b,f) 7,987,500
Omnipoint 550,000(b,f) 7,940,625
RCN 150,000(b) 5,034,375
WinStar Communications 350,000(b,f) 12,720,313
Total 71,344,564
Total common stocks
(Cost: $873,048,234) $1,337,762,656
</TABLE>
<PAGE>
Options purchased (--%)
Issuer Shares Exercise Expiration Value(a)
price date
Calls
Altera 50,000 $65 Sept. 1999 $409,375
Maxtor 150,000 10 April 1999 18,750
Network Associates 50,000 50 Jan. 2000 171,875
Rite Aid 80,000 40 July 1999 32,500
Total options purchased
(Cost: $1,305,900) $632,500
Short-term securities (7.8%)(g)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agency (5.3%)
Federal Home Loan Mtge Corp Disc Nts
04-06-99 4.82% $1,900,000 $1,898,733
04-19-99 4.80 2,800,000 2,793,308
04-23-99 4.80 8,800,000 8,774,294
04-27-99 4.79 9,900,000 9,865,895
04-30-99 4.77 11,200,000 11,157,144
05-14-99 4.77 9,300,000 9,247,346
05-14-99 4.82 13,400,000 13,319,275
05-18-99 4.77 14,500,000 14,410,270
05-25-99 4.79 4,000,000 3,971,440
Total 75,437,705
Commercial paper (2.5%)
BBV Finance (Delaware)
05-19-99 4.86 4,700,000 4,669,228
BMW US Capital
04-22-99 4.86 6,000,000 5,983,060
Ciesco LP
04-13-99 4.87 1,800,000 1,797,090
Corporate Receivables
04-01-99 5.05 6,400,000(d) 6,400,000
Fleet Funding
04-29-99 4.87 7,500,000(d) 7,471,708
Glaxo Wellcome
04-12-99 4.88 1,300,000(d) 1,298,070
Pfizer
04-21-99 4.86 4,400,000(d) 4,388,168
Salomon Smith Barney
04-01-99 4.86 3,000,000 3,000,000
Total 35,007,324
Total short-term securities
(Cost: $110,449,752) $110,445,029
Total investments in securities
(Cost: $984,803,886)(h) $1,448,840,185
<PAGE>
<TABLE>
<CAPTION>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of March 31, 1999,
the value of foreign securities represented 4.37% of net assets.
(d) 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.
(e) Partially pledged as initial margin deposit on the following open stock
index futures purchase contracts (see Note 7 to the financial statements):
Type of security Contracts
S&P 500 Index, June 1999 11
(f) Security is partially or fully on loan. See Note 5 to the financial
statements.
(g) At March 31, 1999, securities valued at $27,393,125 were held to cover open
call options written as follows:
Issuer Shares Exercise Expiration Value(a)
price date
<S> <C> <C> <C> <C>
BMC Software 60,000 $50 April 1999 $5,625
Health Management Associates C1 A 100,000 15 April 1999 12,500
Quintiles Transnational 50,000 55 April 1999 6,250
Robert Half Intl 100,000 35 April 1999 62,500
VISX 150,000 100 April 1999 1,603,125
Watson Pharmaceuticals 60,000 50 May 1999 112,500
Total $1,802,500
At March 31, 1999, cash or short-term securities were designated to cover open
put options written as follows:
Issuer Shares Exercise Expiration Value(a)
price date
BMC Software 60,000 $40 April 1999 $228,750
99 Cents Only Stores 60,000 40 April 1999 56,250
Quintiles Transnational 150,000 40 April 1999 525,000
Rite Aid 150,000 22 April 1999 56,250
RF Micro 75,000 80 May 1999 379,688
Total $1,245,938
(h) At March 31, 1999, the cost of securities for federal income tax purposes
was $984,978,997 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $505,429,873
Unrealized depreciation (41,568,685)
-----------
Net unrealized appreciation $463,861,188
</TABLE>
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation as amended Nov. 14, 1991, filed as Exhibit 1
to Registrant's Post-Effective Amendment No. 18 to Registration
Statement No. 2-89288 are incorporated by reference.
(b) By-laws as amended January 12, 1989, filed electronically as Exhibit 2
to Registrant's Post-Effective Amendment No. 11 to Registration
Statement No. 2-89288 are incorporated by reference.
(c) Stock Certificate filed as Exhibit 4 to Post-Effective Amendment No. 3
to Registration Statement No. 2-89288 is incorporated by reference.
(d)(1) Investment Management Services Agreement between Registrant on
behalf of IDS Strategy Aggressive Fund and IDS Equity Value Fund and
American Express Financial Corporation, dated March 20, 1995, filed
electronically as Exhibit 5 to Registrant's Post-Effective Amendment
No. 25 to Registration Statement No. 2-89288 is incorporated by
reference.
(d)(2) Investment Management Services Agreement between Registrant on
behalf of AXP Small Cap Advantage Fund and American Express Financial
Corporation, dated April 8, 1999, filed electronically herewith.
(d)(3) Investment Sub-advisory Agreement between American Express Financial
Corporation and Kenwood Capital Management LLC, dated April 7, 1999,
filed electronically as Exhibit (d)(3) to Registrant's Post-Effective
Amendment No. 33 to Registration Statement No. 2-89288 is incorporated
by reference.
(e) Distribution Agreement between Registrant on behalf of IDS Strategy
Aggressive Fund, IDS Equity Value Fund and AXP Small Cap Advantage Fund
and American Express Financial Advisors Inc. dated April 7, 1999, filed
electronically as Exhibit (e) to Registrant's Post-Effective Amendment
No. 33 to Registration Statement No. 2-89288 is incorporated by
reference.
(f) 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.
(g)(1) Custodian Agreement between Registrant and American Express Trust
Company, dated March 20, 1995, filed electronically as Exhibit 8(a) to
Registrant's Post-Effective Amendment No. 25 to Registration Statement
No. 2-89288 is incorporated by reference.
(g)(2) Custody Agreement between Morgan Stanley Trust Company and IDS Bank
and Trust dated May, 1993, filed electronically as Exhibit 8(b) to
Registrant's Post-Effective Amendment No. 26 to Registration Statement
No. 2-89288 is incorporated by reference.
(g)(3) Custodian Agreement Amendment between IDS International Fund, Inc.
and American Express Trust Company, dated October 9, 1997, filed
electronically on or about December 23, 1997 as Exhibit 8(c) to IDS
International Fund, Inc.'s Post-Effective Amendment No. 26 to
Registration Statement No. 2-92309, is incorporated by reference.
Registrant's Custodian Agreement Amendment differs from the one
incorporated by reference only by the fact that Registrant is one
executing party.
(g)(4) Custodian Agreement dated May 13, 1999, between American Express
Trust Company and The Bank of New York is incorporated by reference to
IDS Precious Metals Fund, Inc. Post-Effective Amendment No. 33, File
No. 2-93745 filed on or about May 21, 1999.
(h)(1) Administrative Services Agreement between Registrant on behalf of
IDS Strategy Aggressive Fund and IDS Equity Value Fund and American
Express Financial Corporation, dated March 20, 1995, filed
electronically as Exhibit 9(d) to Registrant's Post-Effective
Amendment No. 25 to Registration Statement No. 2-89288 is incorporated
by reference.
<PAGE>
(h)(2) Administrative Services Agreement between Registrant on behalf of
AXP Small Cap Advantage Fund and American Express Financial
Corporation dated April 7, 1999, filed electronically as Exhibit
(h)(2) to Registrant's Post-Effective Amendment No. 33 to Registration
Statement No. 2-89288 is incorporated by reference.
(h)(3) License Agreement between the Registrant and IDS Financial
Corporation dated January 25, 1988, filed electronically as Exhibit
9(b) to Registrant's Post-Effective Amendment No. 11 to Registration
Statement No. 2-89288 is incorporated by reference.
(h)(4) Shareholder Service Agreement between Registrant on behalf of IDS
Strategy Aggressive Fund and IDS Equity Value Fund and American
Express Financial Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 9(c) to Registrant's Post-Effective
Amendment No. 25 to Registration Statement No. 2-89288 is incorporated
by reference.
(h)(5) 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, 1997 as Exhibit 9(e) to IDS
Precious Metals Fund, Inc.'s Post-Effective Amendment No. 30 to
Registration Statement No. 2-93745, is incorporated 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.
(h)(6) Transfer Agency Agreement between Registrant and American Express
Client Service Corporation, dated Feb. 1, 1999 filed electronically as
Exhibit (h)(5) to Registrants Post-Effective Amendment No. 32 filed on
or about March 18, 1999 is incorporated by reference.
(i) Opinion and Consent of Counsel as to the legality of the securities
being registered is filed electronically herewith.
(j) Independent Auditors' Consent is filed electronically herewith.
(k) Omitted Financial Statements: None.
(l) Initial Capital Agreements: Not Applicable.
(m)(1) Plan and Agreement of Distribution between Registrant on behalf of IDS
Strategy Aggressive Fund and IDS Equity Value Fund and American Express
Financial Advisors Inc., dated March 20, 1995, filed electronically as
Exhibit 15 to Registrant's Post-Effective Amendment No. 25 to
Registration Statement No. 2-89288 is incorporated by reference.
(m)(2) Plan and Agreement of Distribution between Registrant on behalf of
AXP Small Cap Advantage Fund and American Express Financial Advisors
Inc. dated April 7, 1999, filed electronically as Exhibit (m)(2) to
Registrant's Post-Effective Amendment No. 33 to Registration Statement
No. 2-89288 is incorporated by reference.
(n) Financial Data Schedules are filed electronically herewith.
(o) Rule 18f-3 Plan, dated April 1999, is incorporated by reference
to IDS Precious Metals Fund, Inc. Post-Effective Amendment No. 33, to
Registration Statement No. 2-93745 filed on or about May 24, 1999.
<PAGE>
(p)(1) Directors' Power of Attorney dated Jan. 14, 1999 is incorporated by
reference to Exhibit (p)(1) to Registrant's Post-Effective Amendment
No. 31 filed on or about Jan. 22, 1999.
(p)(2) Officers' Power of Attorney dated March 1, 1999 is incorporated by
reference to Exhibit (p)(2) to Registrant's Post-Effective Amendment
No. 32 filed on or about March 18, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant
None.
Item 25. 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, 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>
<TABLE>
<CAPTION>
Item 26. Business and Other Connections of Investment Adviser (American Express Financial
Corporation)
Directors and officers of American Express Financial Corporation who are
directors and/or officers of one or more other companies:
<S> <C> <C> <C>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Name and Title Other company(s) Address Title within other
company(s)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ronald G. Abrahamson, American Express Client IDS Tower 10 Director and Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
Public Employee Payment Director and Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President
Senior Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Peter J. Anderson, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President
American Express Asset Director and Chairman of
Management Group Inc. the Board
American Express Asset Director, Chairman of the
Management International, Board and Executive Vice
Inc. President
American Express Financial Senior Vice President
Advisors Inc.
IDS Capital Holdings Inc. Director and President
IDS Futures Corporation Director
NCM Capital Management 2 Mutual Plaza Director
Group, Inc. 501 Willard Street
Durham, NC 27701
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ward D. Armstrong, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
American Express Trust Director and Chairman of
Company the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John M. Baker, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Trust Senior Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Joseph M. Barsky III, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Timothy V. Bechtold, American Centurion Life IDS Tower 10 Director and President
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Life Insurance Company Executive Vice President
IDS Life Insurance Company P.O. Box 5144 Director and President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John C. Boeder, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas W. Brewers, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Karl J. Breyer, American Express Financial IDS Tower 10 Senior Vice President
Director, Corporate Senior Advisors Inc. Minneapolis, MN 55440
Vice President
American Express Financial Director
Advisors Japan Inc.
American Express Minnesota Director
Foundation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Cynthia M. Carlson, American Enterprise IDS Tower 10 Director, President and
Vice President Investment Services Inc. Minneapolis, MN 55440 Chief Executive Officer
American Express Financial Vice President
Advisors Inc.
American Express Service Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and
Senior Vice President and Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer
Chief Marketing Officer
IDS Life Insurance Company Executive Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James E. Choat, American Centurion Life IDS Tower 10 Executive Vice President
Director and Senior Vice Assurance Company Minneapolis, MN 55440
President
American Enterprise Life Director, President and
Insurance Company Chief Executive Officer
American Express Financial Senior Vice President
Advisors Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
IDS Life Insurance Company P.O. Box 5144 Executive Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Kenneth J. Ciak, AMEX Assurance Company IDS Tower 10 Director and President
Vice President and General Minneapolis, MN 55440
Manager
American Express Financial Vice President and General
Advisors Inc. Manager
IDS Property Casualty 1 WEG Blvd. Director and President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paul A. Connolly, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Colleen Curran, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Service Vice President and Chief
Corporation Legal Counsel
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Luz Maria Davis American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas K. Dunning, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Gordon L. Eid, American Express Financial IDS Tower 10 Senior Vice President,
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Counsel and Chief
President, General Counsel Compliance Officer
and Chief Compliance Officer
American Express Financial Vice President and Chief
Advisors Japan Inc. Compliance Officer
American Express Insurance Director and Vice President
Agency of Arizona Inc.
American Express Insurance Director and Vice President
Agency of Idaho Inc.
American Express Insurance Director and Vice President
Agency of Nevada Inc.
American Express Insurance Director and Vice President
Agency of Oregon Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Director and Vice President
Alabama Inc.
IDS Insurance Agency of Director and Vice President
Arkansas Inc.
IDS Insurance Agency of Director and Vice President
Massachusetts Inc.
IDS Insurance Agency of Director and Vice President
New Mexico Inc.
IDS Insurance Agency of Director and Vice President
North Carolina Inc.
IDS Insurance Agency of Director and Vice President
Ohio Inc.
IDS Insurance Agency of Director and Vice President
Wyoming Inc.
IDS Real Estate Services, Vice President
Inc.
Investors Syndicate Director
Development Corp.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Robert M. Elconin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Gordon M. Fines, American Express Asset IDS Tower 10 Senior Vice President and
Vice President Management Group Inc. Minneapolis, MN 55440 Chief Investment Officer
American Express Financial Vice President
Advisors Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas L. Forsberg, American Centurion Life IDS Tower 10 Director
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
American Express Financial Director, President and
Advisors Japan Inc. Chief Executive Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and
Vice President and Corporate Insurance Company Minneapolis, MN 55440 Controller
Controller
American Express Financial Vice President and
Advisors Inc. Corporate Controller
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Harvey Golub, American Express Company American Express Tower Chairman and Chief
Director World Financial Center Executive Officer
New York, NY 10285
American Express Travel Chairman and Chief
Related Services Company, Executive Officer
Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
David A. Hammer, American Express Financial IDS Tower 10 Vice President and
Vice President and Marketing Advisors Inc. Minneapolis, MN 55440 Marketing Controller
Controller
IDS Plan Services of Director and Vice President
California, Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Centurion Life Vice President
Assurance Company
American Enterprise Life Vice President
Insurance Company
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and Vice
Insurance Company President
IDS Certificate Company Vice President
IDS Life Insurance Company Vice President
IDS Life Series Fund, Inc. Vice President
IDS Life Variable Annuity Vice President
Funds A and B
Investors Syndicate Director and Vice
Development Corp. President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
IDS Property Casualty 1 WEG Blvd. Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Scott A. Hawkinson, American Express Financial IDS Tower 10 Vice President and
Vice President and Controller Advisors Inc. Minneapolis, MN 55440 Controller
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Janis K. Heaney, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James G. Hirsh, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Darryl G. Horsman, American Express Trust IDS Tower 10 Director and President
Vice President Company Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer
Vice President and Corporate Minneapolis, MN 55440 and Assistant Secretary
Treasurer
American Centurion Life Vice President and
Assurance Company Treasurer
American Enterprise Vice President and
Investment Services Inc. Treasurer
American Enterprise Life Vice President and
Insurance Company Treasurer
American Express Asset Vice President and
Management Group Inc. Treasurer
American Express Asset Vice President and
Management International Treasurer
Inc.
American Express Client Vice President and
Service Corporation Treasurer
American Express Vice President and
Corporation Treasurer
American Express Financial Vice President and
Advisors Inc. Treasurer
American Express Financial Vice President and
Advisors Japan Inc. Treasurer
American Express Insurance Vice President and
Agency of Arizona Inc. Treasurer
American Express Insurance Vice President and
Agency of Idaho Inc. Treasurer
American Express Insurance Vice President and
Agency of Nevada Inc. Treasurer
American Express Insurance Vice President and
Agency of Oregon Inc. Treasurer
American Express Minnesota Vice President and
Foundation Treasurer
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Kentucky Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Maryland Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Pennsylvania Inc.
American Partners Life Vice President and
Insurance Company Treasurer
IDS Cable Corporation Director, Vice President
and Treasurer
IDS Cable II Corporation Director, Vice President
and Treasurer
IDS Capital Holdings Inc. Vice President, Treasurer
and Assistant Secretary
IDS Certificate Company Vice President and
Treasurer
IDS Insurance Agency of Vice President and
Alabama Inc. Treasurer
IDS Insurance Agency of Vice President and
Arkansas Inc. Treasurer
IDS Insurance Agency of Vice President and
Massachusetts Inc. Treasurer
IDS Insurance Agency of Vice President and
New Mexico Inc. Treasurer
IDS Insurance Agency of Vice President and
North Carolina Inc. Treasurer
IDS Insurance Agency of Vice President and
Ohio Inc. Treasurer
IDS Insurance Agency of Vice President and
Wyoming Inc. Treasurer
IDS Life Insurance Company Vice President, Treasurer
and Assistant Secretary
IDS Life Insurance Company P.O. Box 5144 Vice President and
of New York Albany, NY 12205 Treasurer
IDS Life Series Fund Inc. Vice President and
Treasurer
IDS Life Variable Annuity Vice President and
Funds A & B Treasurer
IDS Management Corporation Director, Vice President
and Treasurer
IDS Partnership Services Vice President and
Corporation Treasurer
IDS Plan Services of Vice President and
California, Inc. Treasurer
IDS Real Estate Services, Vice President and
Inc. Treasurer
IDS Realty Corporation Vice President and
Treasurer
IDS Sales Support Inc. Vice President and
Treasurer
Investors Syndicate Vice President and
Development Corp. Treasurer
IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer
Insurance Company DePere, WI 54115 and Assistant Secretary
Public Employee Payment Vice President and
Company Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
David R. Hubers, AMEX Assurance Company IDS Tower 10 Director
Director, President and Chief Minneapolis, MN 55440
Executive Officer
American Express Financial Chairman, President and
Advisors Inc. Chief Executive Officer
American Express Service Director and President
Corporation
IDS Certificate Company Director
IDS Life Insurance Company Director
IDS Plan Services of Director and President
California, Inc.
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Martin G. Hurwitz, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James M. Jensen, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
IDS Life Series Fund, Inc. Director
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Marietta L. Johns, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Nancy E. Jones, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ora J. Kaine, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Linda B. Keene, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
G. Michael Kennedy, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Susan D. Kinder, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director
Director and Senior Vice Minneapolis, MN 55440
President
American Centurion Life Director and Chairman of
Assurance Company the Board
American Enterprise Life Director and Chairman of
Insurance Company the Board
American Express Director and President
Corporation
American Express Financial Senior Vice President
Advisors Inc.
American Express Insurance Director and President
Agency of Arizona Inc.
American Express Insurance Director and President
Agency of Idaho Inc.
American Express Insurance Director and President
Agency of Nevada Inc.
American Express Insurance Director and President
Agency of Oregon Inc.
American Express Property Director and President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and President
Casualty Insurance Agency
of Pennsylvania Inc.
American Express Service Vice President
Corporation
American Partners Life Director and Chairman of
Insurance Company the Board
IDS Certificate Company Director and Chairman of
the Board
IDS Insurance Agency of Director and President
Alabama Inc.
IDS Insurance Agency of Director and President
Arkansas Inc.
IDS Insurance Agency of Director and President
Massachusetts Inc.
IDS Insurance Agency of Director and President
New Mexico Inc.
IDS Insurance Agency of Director and President
North Carolina Inc.
IDS Insurance Agency of Director and President
Ohio Inc.
IDS Insurance Agency of Director and President
Wyoming Inc.
IDS Life Insurance Company Director and President
IDS Life Series Fund, Inc. Director and President
IDS Life Variable Annuity Manager, Chairman of the
Funds A and B Board and President
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
IDS Life Insurance Company P.O. Box 5144 Director and Chairman of
of New York Albany, NY 12205 the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
John M. Knight American Express Financial IDS Tower 10 Vice President
Advisors Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Director and Executive
Vice President
IDS Life Series Fund, Inc. Vice President and Chief
Actuary
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Claire Kolmodin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Steve C. Kumagai, American Express Financial IDS Tower 10 Director and Senior Vice
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President
President
Kurt A Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lori J. Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief
Vice President and Chief U.S. Advisors Inc. Minneapolis, MN 55440 U.S. Economist
Economist
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Peter A. Lefferts, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Trust Director
Company
IDS Plan Services of Director
California, Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas A. Lennick, American Express Financial IDS Tower 10 Director and Executive
Director and Executive Vice Advisors Inc. Minneapolis, MN 55440 Vice President
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jonathan S. Linen, IDS Tower 10
Director Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mary J. Malevich, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Fred A. Mandell, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Sarah A. Mealey, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President
Vice President Insurance Company Minneapolis, MN 55440
American Express Director
Corporation
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and President
Insurance Company
IDS Certificate Company Director and President
IDS Life Insurance Company Director and Executive
Vice President
Investors Syndicate Director, Chairman of the
Development Corporation Board and President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James A. Mitchell, AMEX Assurance Company IDS Tower 10 Director
Director and Executive Vice Minneapolis, MN 55440
President
American Enterprise Director
Investment Services Inc.
American Express Financial Executive Vice President
Advisors Inc.
American Express Service Director and Senior Vice
Corporation President
American Express Tax and Director
Business Services Inc.
IDS Certificate Company Director
IDS Life Insurance Company Director, Chairman of the
Board and Chief Executive
Officer
IDS Plan Services of Director
California, Inc.
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
William P. Miller, Advisory Capital IDS Tower 10 Vice President
Vice President and Senior Strategies Group Inc. Minneapolis, MN 55440
Portfolio Manager
American Express Asset Senior Vice President and
Management Group Inc. Chief Investment Officer
American Express Financial Vice President and Senior
Advisors Inc. Portfolio Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Pamela J. Moret, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Trust Vice President
Company
IDS Life Insurance Company Executive Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Barry J. Murphy, American Express Client IDS Tower 10 Director and President
Director and Senior Vice Service Corporation Minneapolis, MN 55440
President
American Express Financial Senior Vice President
Advisors Inc.
IDS Life Insurance Company Director and Executive
Vice President
Mary Owens Neal, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael J. O'Keefe, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James R. Palmer, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Carla P. Pavone, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President
Senior Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Susan B. Plimpton, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ronald W. Powell, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
IDS Cable Corporation Vice President and
Assistant Secretary
IDS Cable II Corporation Vice President and
Assistant Secretary
IDS Management Corporation Vice President and
Assistant Secretary
IDS Partnership Services Vice President and
Corporation Assistant Secretary
IDS Plan Services of Vice President and
California, Inc. Assistant Secretary
IDS Realty Corporation Vice President and
Assistant Secretary
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James M. Punch, American Express Financial IDS Tower 10 Vice President and Project
Vice President and Project Advisors Inc. Minneapolis, MN 55440 Manager
Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Senior Vice President and
Senior Vice President Management Group Inc. Minneapolis, MN 55440 Senior Portfolio Manager
American Express Financial Senior Vice President
Advisors Inc.
Rollyn C. Renstrom, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
ReBecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President
Senior Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Stephen W. Roszell, Advisory Capital IDS Tower 10 Director
Senior Vice President Strategies Group Inc. Minneapolis, MN 55440
American Express Asset Director, President and
Management Group Inc. Chief Executive Officer
American Express Asset Director
Management International,
Inc.
American Express Asset Director
Management Ltd.
American Express Financial Senior Vice President
Advisors Inc.
American Express Trust Director
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Erven A. Samsel, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Stuart A. Sedlacek, AMEX Assurance Company IDS Tower 10 Director
Senior Vice President and Minneapolis, MN 55440
Chief Financial Officer
American Enterprise Life Executive Vice President
Insurance Company
American Express Financial Senior Vice President and
Advisors Inc. Chief Financial Officer
American Express Trust Director
Company
American Partners Life Director and Vice President
Insurance Agency
IDS Certificate Company Director and President
IDS Life Insurance Company Executive Vice President
and Controller
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Donald K. Shanks, AMEX Assurance Company IDS Tower 10 Senior Vice President
Vice President Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Property Casualty 1 WEG Blvd. Senior Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
F. Dale Simmons, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Centurion Life Vice President
Assurance Company
American Enterprise Life Vice President
Insurance
American Express Financial Vice President
Advisors Inc.
American Partners Life Vice President
Insurance Company
IDS Certificate Company Vice President
IDS Life Insurance Company Vice President
IDS Partnership Services Director and Vice President
Corporation
IDS Real Estate Services Chairman of the Board and
Inc. President
IDS Realty Corporation Director and Vice President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Bridget Sperl, American Express Client IDS Tower 10 Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lisa A. Steffes, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President,
Vice President and Assistant Insurance Company Minneapolis, MN 55440 General Counsel and
General Counsel Secretary
American Express Director, Vice President
Corporation and Secretary
American Express Financial Vice President and
Advisors Inc. Assistant General Counsel
American Partners Life Director, Vice President,
Insurance Company General Counsel and
Secretary
IDS Life Insurance Company Vice President, General
Counsel and Secretary
IDS Life Series Fund Inc. General Counsel and
Assistant Secretary
IDS Life Variable Annuity General Counsel and
Funds A & B Assistant Secretary
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James J. Strauss, American Express Financial IDS Tower 10 Vice President
Vice President and General Advisors Inc. Minneapolis, MN 55440
Auditor
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey J. Stremcha, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Barbara Stroup Stewart, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Wesley W. Wadman, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440
American Express Asset Director and Senior Vice
Management International, President
Inc.
American Express Asset Director and Vice Chairman
Management Ltd.
American Express Financial Vice President
Advisors Inc.
IDS Fund Management Limited Director and Vice Chairman
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Norman Weaver Jr., American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Arizona Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael L. Weiner, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Capital Holdings Inc. Vice President
IDS Futures Brokerage Group Vice President
IDS Futures Corporation Vice President, Treasurer
and Secretary
IDS Sales Support Inc. Director, Vice President
and Assistant Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lawrence J. Welte, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffry F. Welter, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Edwin M. Wistrand, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Financial Vice President and Chief
Advisors Japan Inc. Legal Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440 and Senior Portfolio
Manager
American Express Financial Vice President
Advisors Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Michael R. Woodward, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
Item 27. Principal Underwriters.
(a) American Express Financial Advisors acts as principal underwriter for the following investment
companies:
IDS Bond Fund, Inc.; IDS California Tax-Exempt Trust; IDS Discovery Fund, Inc.; IDS Equity
Select Fund, Inc.; IDS Extra Income Fund, Inc.; IDS Federal Income Fund, Inc.; IDS Global
Series, Inc.; IDS Growth Fund, Inc.; IDS High Yield Tax-Exempt Fund, Inc.; IDS International
Fund, Inc.; IDS Investment Series, Inc.; IDS Managed Retirement Fund, Inc.; IDS Market
Advantage Series, Inc.; IDS Money Market Series, Inc.; IDS New Dimensions Fund, Inc.; IDS
Precious Metals Fund, Inc.; IDS Progressive Fund, Inc.; IDS Selective Fund, Inc.; IDS Special
Tax-Exempt Series Trust; IDS Stock Fund, Inc.; IDS Strategy Fund, Inc.; IDS Tax-Exempt Bond
Fund, Inc.; IDS Tax-Free Money Fund, Inc.; IDS Utilities Income Fund, Inc., Growth Trust;
Growth and Income Trust; Income Trust, Tax-Free Income Trust, World Trust and IDS Certificate
Company.
(b) As to each director, officer or partner of the principal underwriter:
<S> <C> <C>
Name and Principal Business Address Position and Offices with Offices with Registrant
Underwriter
- ---------------------------------------------- ---------------------------------- ----------------------------
Ronald G. Abrahamson Vice President-Service Quality None
IDS Tower 10 and Reengineering
Minneapolis, MN 55440
Douglas A. Alger Senior Vice President-Human None
IDS Tower 10 Resources
Minneapolis, MN 55440
Peter J. Anderson Senior Vice President-Investment Vice President-Investments
IDS Tower 10 Operations
Minneapolis, MN 55440
Ward D. Armstrong Vice President-American Express None
IDS Tower 10 Retirement Services
Minneapolis, MN 55440
John M. Baker Vice President-Plan Sponsor None
IDS Tower 10 Services
Minneapolis, MN 55440
Joseph M. Barsky III Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Timothy V. Bechtold Vice President-Risk Management None
IDS Tower 10 Products
Minneapolis, MN 55440
John D. Begley Group Vice President-Ohio/Indiana None
Suite 100
7760 Olentangy River Rd.
Columbus, OH 43235
Brent L. Bisson Group Vice President-Los Angeles None
Suite 900, E. Westside Twr Metro
11835 West Olympic Blvd.
Los Angeles, CA 90064
John C. Boeder Vice President-Nonproprietary None
IDS Tower 10 Products
Minneapolis, MN 55440
Walter K. Booker Group Vice President-New Jersey None
Suite 200, 3500 Market Street
Camp Hill, NJ 17011
Bruce J. Bordelon Group Vice President-Gulf States None
Galleria One Suite 1900
Galleria Blvd.
Metairie, LA 70001
Charles R. Branch Group Vice President-Northwest None
Suite 200
West 111 North River Dr.
Spokane, WA 99201
Douglas W. Brewers Vice President-Sales Support None
IDS Tower 10
Minneapolis, MN 55440
Karl J. Breyer Corporate Senior Vice President None
IDS Tower 10
Minneapolis, MN 55440
Cynthia M. Carlson Vice President-American Express None
IDS Tower 10 Securities Services
Minneapolis, MN 55440
Mark W. Carter Senior Vice President and Chief None
IDS Tower 10 Marketing Officer
Minneapolis, MN 55440
James E. Choat Senior Vice None
IDS Tower 10 President-Institutional Products
Minneapolis, MN 55440 Group
Kenneth J. Ciak Vice President and General None
IDS Property Casualty Manager-IDS Property Casualty
1400 Lombardi Avenue
Green Bay, WI 54304
Paul A. Connolly Vice President-Advisor Staffing, None
IDS Tower 10 Training and Support
Minneapolis, MN 55440
Henry J. Cormier Group Vice President-Connecticut None
Commerce Center One
333 East River Drive
East Hartford, CT 06108
John M. Crawford Group Vice President-Arkansas/ None
Suite 200 Springfield/Memphis
10800 Financial Ctr Pkwy
Little Rock, AR 72211
Kevin F. Crowe Group Vice None
Suite 312 President-Carolinas/Eastern
7300 Carmel Executive Pk Georgia
Charlotte, NC 28226
Colleen Curran Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Luz Maria Davis Vice President-Communications None
IDS Tower 10
Minneapolis, MN 55440
Scott M. DiGiammarino Group Vice None
Suite 500, 8045 Leesburg Pike President-Washington/Baltimore
Vienna, VA 22182
Bradford L. Drew Group Vice President-Eastern None
Two Datran Center Florida
Penthouse One B
9130 S. Dadeland Blvd.
Miami, FL 33156
Douglas K. Dunning Vice President-Assured Assets None
IDS Tower 10 Product Development and
Minneapolis, MN 55440 Management
James P. Egge Group Vice President-Western None
4305 South Louise, Suite 202 Iowa, Nebraska, Dakotas
Sioux Falls, SD 57103
Gordon L. Eid Senior Vice President, General None
IDS Tower 10 Counsel and Chief Compliance
Minneapolis, MN 55440 Officer
Robert M. Elconin Vice President-Government None
IDS Tower 10 Relations
Minneapolis, MN 55440
Phillip W. Evans Group Vice President-Rocky None
Suite 600 Mountain
6985 Union Park Center
Midvale, UT 84047-4177
Gordon M. Fines Vice President-Mutual Fund None
IDS Tower 10 Equity Investments
Minneapolis, MN 55440
Douglas L. Forsberg Vice President-Institutional None
IDS Tower 10 Products Group
Minneapolis, MN 55440
Jeffrey P. Fox Vice President and Corporate None
IDS Tower 10 Controller
Minneapolis, MN 55440
William P. Fritz Group Vice President-Gateway None
Suite 160
12855 Flushing Meadows Dr
St. Louis, MO 63131
Carl W. Gans Group Vice President-Twin City None
8500 Tower Suite 1770 Metro
8500 Normandale Lake Blvd.
Bloomington, MN 55437
David A. Hammer Vice President and Marketing None
IDS Tower 10 Controller
Minneapolis, MN 55440
Teresa A. Hanratty Group Vice President-Northern None
Suites 6&7 New England
169 South River Road
Bedford, NH 03110
Robert L. Harden Group Vice President-Boston Metro None
Two Constitution Plaza
Boston, MA 02129
Lorraine R. Hart Vice President-Insurance None
IDS Tower 10 Investments
Minneapolis, MN 55440
Scott A. Hawkinson Vice President and None
IDS Tower 10 Controller-Private Client Group
Minneapolis, MN 55440
Brian M. Heath Group Vice President-North Texas None
Suite 150
801 E. Campbell Road
Richardson, TX 75081
Janis K. Heaney Vice President-Incentive None
IDS Tower 10 Management
Minneapolis, MN 55440
James G. Hirsh Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Jon E. Hjelm Group Vice President-Rhode None
319 Southbridge Street Island/Central-Western
Auburn, MA 01501 Massachusetts
David J. Hockenberry Group Vice President-Tennessee None
30 Burton Hills Blvd. Valley
Suite 175
Nashville, TN 37215
Jeffrey S. Horton Vice President and Treasurer None
IDS Tower 10
Minneapolis, MN 55440
David R. Hubers Chairman, President and Chief Board member
IDS Tower 10 Executive Officer
Minneapolis, MN 55440
Martin G. Hurwitz Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
James M. Jensen Vice President-Insurance Product None
IDS Tower 10 Development and Management
Minneapolis, MN 55440
Marietta L. Johns Senior Vice President-Field None
IDS Tower 10 Management
Minneapolis, MN 55440
Nancy E. Jones Vice President-Business None
IDS Tower 10 Development
Minneapolis, MN 55440
Ora J. Kaine Vice President-Financial None
IDS Tower 10 Advisory Services
Minneapolis, MN 55440
Linda B. Keene Vice President-Market Development None
IDS Tower 10
Minneapolis, MN 55440
G. Michael Kennedy Vice President-Investment None
IDS Tower 10 Services and Investment Research
Minneapolis, MN 55440
Susan D. Kinder Senior Vice None
IDS Tower 10 President-Distribution Services
Minneapolis, MN 55440
Richard W. Kling Senior Vice President-Products None
IDS Tower 10
Minneapolis, MN 55440
John M. Knight Vice President-Investment Treasurer
IDS Tower 10 Accounting
Minneapolis, MN 55440
Paul F. Kolkman Vice President-Actuarial Finance None
IDS Tower 10
Minneapolis, MN 55440
Claire Kolmodin Vice President-Service Quality None
IDS Tower 10
Minneapolis, MN 55440
David S. Kreager Group Vice President-Greater None
Suite 108 Michigan
Trestle Bridge V
5136 Lovers Lane
Kalamazoo, MI 49002
Steven C. Kumagai Director and Senior Vice None
IDS Tower 10 President-Field Management and
Minneapolis, MN 55440 Business Systems
Mitre Kutanovski Group Vice President-Chicago None
Suite 680 Metro
8585 Broadway
Merrillville, IN 48410
Kurt A. Larson Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Lori J. Larson Vice President-Brokerage and None
IDS Tower 10 Direct Services
Minneapolis, MN 55440
Daniel E. Laufenberg Vice President and Chief U.S. None
IDS Tower 10 Economist
Minneapolis, MN 55440
Peter A. Lefferts Senior Vice President-Corporate None
IDS Tower 10 Strategy and Development
Minneapolis, MN 55440
Douglas A. Lennick Director and Executive Vice None
IDS Tower 10 President-Private Client Group
Minneapolis, MN 55440
Mary J. Malevich Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Fred A. Mandell Vice President-Field Marketing None
IDS Tower 10 Readiness
Minneapolis, MN 55440
Daniel E. Martin Group Vice President-Pittsburgh None
Suite 650 Metro
5700 Corporate Drive
Pittsburgh, PA 15237
Sarah A. Mealey Vice President-Mutual Funds None
IDS Tower 10
Minneapolis, MN 55440
Paula R. Meyer Vice President-Assured Assets None
IDS Tower 10
Minneapolis, MN 55440
William P. Miller Vice President and Senior None
IDS Tower 10 Portfolio Manager
Minneapolis, MN 55440
James A. Mitchell Executive Vice None
IDS Tower 10 President-Marketing and Products
Minneapolis, MN 55440
Pamela J. Moret Vice President-Variable Assets None
IDS Tower 10
Minneapolis, MN 55440
Alan D. Morgenstern Group Vice President-Central None
Suite 200 California/Western Nevada
3500 Market Street
Camp Hill, NJ 17011
Barry J. Murphy Senior Vice President-Client None
IDS Tower 10 Service
Minneapolis, MN 55440
Mary Owens Neal Vice President-Mature Market None
IDS Tower 10 Segment
Minneapolis, MN 55440
Thomas V. Nicolosi Group Vice President-New York None
Suite 220 Metro Area
500 Mamaroneck Avenue
Harrison, NY 10528
Michael J. O'Keefe Vice President-Advisory Business None
IDS Tower 10 Systems
Minneapolis, MN 55440
James R. Palmer Vice President-Taxes None
IDS Tower 10
Minneapolis, MN 55440
Marc A. Parker Group Vice None
10200 SW Greenburg Road President-Portland/Eugene
Suite 110
Portland, OR 97223
Carla P. Pavone Vice President-Compensation and None
IDS Tower 10 Field Administration
Minneapolis, MN 55440
Thomas P. Perrine Senior Vice President-Group None
IDS Tower 10 Relationship Leader/American
Minneapolis, MN 55440 Express Technologies Financial
Services
Susan B. Plimpton Vice President-Marketing Services None
IDS Tower 10
Minneapolis, MN 55440
Larry M. Post Group Vice None
One Tower Bridge President-Philadelphia Metro
100 Front Street 8th Fl
West Conshohocken, PA 19428
Ronald W. Powell Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Diana R. Prost Group Vice None
3030 N.W. Expressway President-Kansas/Oklahoma
Suite 900
Oklahoma City, OK 73112
James M. Punch Vice President and Project None
IDS Tower 10 Manager-Platform I Value Enhanced
Minneapolis, MN 55440
Frederick C. Quirsfeld Senior Vice President-Fixed Vice President - Fixed
IDS Tower 10 Income Income Investments
Minneapolis, MN 55440
Rollyn C. Renstrom Vice President-Corporate None
IDS Tower 10 Planning and Analysis
Minneapolis, MN 55440
R. Daniel Richardson III Group Vice President-Southern None
Suite 800 Texas
Arboretum Plaza One
9442 Capital of Texas Hwy N.
Austin, TX 78759
ReBecca K. Roloff Senior Vice President-Field None
IDS Tower 10 Management and Financial
Minneapolis, MN 55440 Advisory Service
Stephen W. Roszell Senior Vice None
IDS Tower 10 President-Institutional
Minneapolis, MN 55440
Max G. Roth Group Vice None
Suite 201 S IDS Ctr President-Wisconsin/Upper
1400 Lombardi Avenue Michigan
Green Bay, WI 54304
Erven A. Samsel Senior Vice President-Field None
45 Braintree Hill Park Management
Suite 402
Braintree, MA 02184
Russell L. Scalfano Group Vice None
Suite 201 President-Illinois/Indiana/Kentucky
101 Plaza East Blvd.
Evansville, IN 47715
William G. Scholz Group Vice President-Arizona/Las None
Suite 205 Vegas
7333 E Doubletree Ranch Rd
Scottsdale, AZ 85258
Stuart A. Sedlacek Senior Vice President and Chief None
IDS Tower 10 Financial Officer
Minneapolis, MN 55440
Donald K. Shanks Vice President-Property Casualty None
IDS Tower 10
Minneapolis, MN 55440
F. Dale Simmons Vice President-Senior Portfolio None
IDS Tower 10 Manager, Insurance Investments
Minneapolis, MN 55440
Judy P. Skoglund Vice President-Quality and None
IDS Tower 10 Service Support
Minneapolis, MN 55440
James B. Solberg Group Vice President-Eastern None
466 Westdale Mall Iowa Area
Cedar Rapids, IA 52404
Bridget Sperl Vice President-Geographic None
IDS Tower 10 Service Teams
Minneapolis, MN 55440
Paul J. Stanislaw Group Vice President-Southern None
Suite 1100 California
Two Park Plaza
Irvine, CA 92714
Lisa A. Steffes Vice President-Cardmember None
IDS Tower 10 Initiatives
Minneapolis, MN 55440
Lois A. Stilwell Group Vice President-Outstate None
Suite 433 Minnesota Area/ North
9900 East Bren Road Dakota/Western Wisconsin
Minnetonka, MN 55343
William A. Stoltzmann Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
James J. Strauss Vice President and General None
IDS Tower 10 Auditor
Minneapolis, MN 55440
Jeffrey J. Stremcha Vice President-Information None
IDS Tower 10 Resource Management/ISD
Minneapolis, MN 55440
Barbara Stroup Stewart Vice President-Channel None
IDS Tower 10 Development
Minneapolis, MN 55440
Craig P. Taucher Group Vice None
Suite 150 President-Orlando/Jacksonville
4190 Belfort Road
Jacksonville, FL 32216
Neil G. Taylor Group Vice None
Suite 425 President-Seattle/Tacoma/Hawaii
101 Elliott Avenue West
Seattle, WA 98119
John R. Thomas Senior Vice President Board Member
IDS Tower 10
Minneapolis, MN 55440
Peter S. Velardi Group Vice None
Suite 180 President-Atlanta/Birmingham
1200 Ashwood Parkway
Atlanta, GA 30338
Charles F. Wachendorfer Group Vice President-Detroit None
8115 East Jefferson Avenue Metro
Detroit, MI 48214
Wesley W. Wadman Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Donald F. Weaver Group Vice President-Greater None
3500 Market Street, Suite 200 Pennsylvania
Camp Hill, PA 17011
Norman Weaver Jr. Senior Vice President-Field None
1010 Main St. Suite 2B Management
Huntington Beach, CA 92648
Michael L. Weiner Vice President-Tax Research and None
IDS Tower 10 Audit
Minneapolis, MN 55440
Lawrence J. Welte Vice President-Investment None
IDS Tower 10 Administration
Minneapolis, MN 55440
Jeffry M. Welter Vice President-Equity and Fixed None
IDS Tower 10 Income Trading
Minneapolis, MN 55440
Thomas L. White Group Vice President-Cleveland None
Suite 200 Metro
28601 Chagrin Blvd.
Woodmere, OH 44122
Eric S. Williams Group Vice President-Virginia None
Suite 250
3951 Westerre Parkway
Richmond, VA 23233
William J. Williams Group Vice President-Western None
Two North Tamiami Trail Florida
Suite 702
Sarasota, FL 34236
Edwin M. Wistrand Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Michael D. Wolf Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Michael R. Woodward Senior Vice President-Field None
32 Ellicott St Management
Suite 100
Batavia, NY 14020
</TABLE>
Item 27(c). Not applicable.
Item 28. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant, IDS Strategy Fund, Inc., 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 the State of Minnesota
on the 26th day of May, 1999.
IDS STRATEGY FUND INC.
By /s/ Arne H. Carlson**
Arne H. Carlson, Chief Executive Officer
By /s/ John M. Knight**
John M. Knight, Treasurer
Pursuant to the requirements of the Securities Act, this Amendment to its
Registration Statement has been signed below by the following persons in the
capacities indicated on the 26th day of May, 1999.
Signature Capacity
/s/ Arne H. Carlson* Chairman of the Board
Arne H. Carlson
/s/ H. Brewster Atwater, Jr.* Director
H. Brewster Atwater, Jr.
/s/ Lynne V. Cheney* Director
Lynne V. Cheney
/s/ William H. Dudley* Director
William H. Dudley
/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/ William R. Pearce* Director
William R. Pearce
/s/ Alan K. Simpson* Director
Alan K. Simpson
/s/ Edson W. Spencer* Director
Edson W. Spencer
<PAGE>
/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 Jan. 14, 1999 filed
electronically as Exhibit (p)(1) to Registrant's Post-Effective Amendment No.
31, by:
- --------------------------
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney dated March 1, 1999, filed
electronically as Exhibit (p)(2) to Registrant's Post-Effective Amendment No.
32, by:
- --------------------------
Leslie L. Ogg
<PAGE>
CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 34
TO REGISTRATION STATEMENT NO. 2-89288
This post-effective amendment comprises the following papers and documents:
The facing sheet.
Part A.
The prospectus for IDS Equity Value Fund
The prospectus for IDS Strategy Aggressive Fund
Part B.
Statement of Additional Information for IDS Equity Value Fund
Statement of Additional Information for IDS Strategy Aggressive Fund
Part C.
Other information.
The signatures.
IDS Strategy Fund, Inc.
File No. 2-89288/811-3956
EXHIBIT INDEX
Exhibit (d)(2) Investment Management Services Agreement between Registrant
on behalf of AXP Small Cap Advantage Fund and American
Express Financial Corporation, dated April 8, 1999.
Exhibit (i) Opinion and Consent of Counsel as to the legality of the
securities being registered
Exhibit (j) Independent Auditors' Consent
Exhibit (n) Financial Data Schedules
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AGREEMENT made the 8th day of April, 1999, by and between IDS Strategy
Fund, Inc. (the "Corporation") and American Express Financial Corporation, a
Delaware corporation.
Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES
(1) The Corporation hereby retains American Express Financial
Corporation, and American Express Financial Corporation hereby agrees, for the
period of this Agreement and under the terms and conditions hereinafter set
forth, to furnish the Corporation continuously with suggested investment
planning; to determine, consistent with the Fund's investment objectives and
policies, which securities in American Express Financial Corporation's
discretion shall be purchased, held or sold and to execute or cause the
execution of purchase or sell orders; to prepare and make available to the Fund
all necessary research and statistical data in connection therewith; to furnish
all other services of whatever nature required in connection with the management
of the Fund as provided under this Agreement; and to pay such expenses as may
be provided for in Part Three; subject always to the direction and control of
the Board of Directors (the "Board"), the Executive Committee and the authorized
officers of the Corporation. American Express Financial Corporation agrees to
maintain an adequate organization of competent persons to provide the services
and to perform the functions herein mentioned. American Express Financial
Corporation agrees to meet with any persons at such times as the Board deems
appropriate for the purpose of reviewing American Express Financial
Corporation's performance under this Agreement.
(2) American Express Financial Corporation agrees that the investment
planning and investment decisions will be in accordance with general investment
policies of the Fund as disclosed to American Express Financial Corporation from
time to time by the Fund and as set forth in its prospectus and registration
statement filed with the United States Securities and Exchange Commission (the
"SEC").
(3) American Express Financial Corporation agrees that it will maintain
all required records, memoranda, instructions or authorizations relating to the
acquisition or disposition of securities for the Fund.
(4) The Corporation agrees that it will furnish to American Express
Financial Corporation any information that the latter may reasonably request
with respect to the services performed or to be performed by American Express
Financial Corporation under this Agreement.
(5) American Express Financial Corporation is authorized to select the
brokers or dealers that will execute the purchases and sales of portfolio
securities for the Fund and is directed to use its best efforts to obtain the
best available price and most favorable execution, except as prescribed herein.
Subject to prior authorization by the Board of appropriate policies and
procedures, and subject to termination at any time by the Board, American
Express Financial Corporation may also be authorized to effect individual
securities transactions at commission rates in excess of the minimum commission
rates available, to the extent authorized by law, if American Express Financial
Corporation determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or American Express Financial Corporation's overall responsibilities
with respect to the Fund and other funds for which it acts as investment
adviser.
(6) It is understood and agreed that in furnishing the Fund with the
services as herein provided, neither American Express Financial Corporation, nor
any officer, director or agent thereof shall be held liable to the Fund or its
creditors or shareholders for errors of judgment or for anything except willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
reckless disregard of its obligations and duties under the terms of this
Agreement. It is further understood and agreed that American Express Financial
Corporation may rely upon information furnished to it reasonably believed to be
accurate and reliable.
<PAGE>
Part Two: COMPENSATION TO INVESTMENT MANAGER
(1) The Fund agrees to pay to American Express Financial Corporation,
and American Express Financial Corporation covenants and agrees to accept from
the Fund in full payment for the services furnished, a fee composed of an asset
charge and a performance incentive adjustment.
(a) The asset charge
(i) The asset charge for each calendar day of each year shall be equal
to the total of 1/365th (1/366th in each leap year) of the amount computed in
accordance with paragraph (ii) below. The computation shall be made for each day
on the basis of net assets as of the close of business of the full business day
two (2) business days prior to the day for which the computation is being made.
In the case of the suspension of the computation of net asset value, the asset
charge for each day during such suspension shall be computed as of the close of
business on the last full business day on which the net assets were computed.
Net assets as of the close of a full business day shall include all transactions
in shares of the Fund recorded on the books of the Fund for that day.
(ii) The asset charge shall be based on the net assets of the Fund as
set forth in the following table.
Asset Charge
Assets Annual Rate At Each
(Billions) Asset Level
First $0.25 0.740%
Next 0.25 0.715
Next 0.25 0.690
Next 0.25 0.665
Next 1.00 0.640
Over 2.00 0.615
(b) The performance incentive adjustment
(i) The performance incentive adjustment, determined monthly, shall be
computed by measuring the percentage point difference between the performance of
one Class A share of the Fund and the performance of the Lipper Small Cap Fund
Index (the "Index"). The performance of one Class A share of the Fund shall be
measured by computing the percentage difference, carried to two decimal places,
between the opening net asset value of one share of the Fund and the closing net
asset value of such share as of the last business day of the period selected for
comparison, adjusted for dividends or capital gain distributions treated as
reinvested at the end of the month during which the distribution was made but
without adjustment for expenses related to a particular class of shares. The
performance of the Index will then be established by measuring the percentage
difference, carried to two decimal places, between the beginning and ending
Index for the comparison period, with dividends or capital gain distributions on
the securities which comprise the Index being treated as reinvested at the end
of the month during which the distribution was made.
(ii) In computing the adjustment, one percentage point shall be
deducted from the difference, as determined in (b)(i) above. The result shall be
converted to a decimal value (e.g., 2.38% to 0.0238), multiplied by .01 and then
multiplied by the Fund's average net assets for the comparison period. This
product next shall be divided by 12 to put the adjustment on a monthly basis.
Where the performance of the Fund exceeds the Index, the amount so determined
shall be an increase in fees as computed under paragraph (a). Where Fund
performance is exceeded by the Index, the amount so determined shall be a
decrease in such fees. The percentage point difference between the performance
of the Fund and that of the Index, as determined above, is limited to a maximum
of 0.0008 per year.
(iii) The 12 month comparison period will roll over with each
succeeding month, so that it always equals 12 months, ending with the month for
which the performance adjustment is being computed.
(iv) If the Index ceases to be published for a period of more than 90
days, changes in any material respect or otherwise becomes impracticable to use
for purposes of the adjustment, no adjustment will be made under this paragraph
(b) until such time as the Board approves a substitute index.
<PAGE>
(2) The fee shall be paid on a monthly basis and, in the event of the
termination of this Agreement, the fee accrued shall be prorated on the basis of
the number of days that this Agreement is in effect during the month with
respect to which such payment is made.
(3) The fee provided for hereunder shall be paid in cash by the Fund to
American Express Financial Corporation within five business days after the last
day of each month.
Part Three: ALLOCATION OF EXPENSES
(1) The Corporation agrees to pay:
(a) Fees payable to American Express Financial Corporation for its
services under the terms of this Agreement.
(b) Taxes.
(c) Brokerage commissions and charges in connection with the purchase
and sale of assets.
(d) Custodian fees and charges.
(e) Fees and charges of its independent certified public accountants
for services the Funds request.
(f) Premium on the bond required by Rule 17g-1 under the Investment
Company Act of 1940.
(g) Fees and expenses of attorneys (i) it employs in matters not
involving the assertion of a claim by a third party against the Corporation, its
directors and officers, (ii) it employs in conjunction with a claim asserted by
the Board against American Express Financial Corporation, except that American
Express Financial Corporation shall reimburse the Corporation for such fees and
expenses if it is ultimately determined by a court of competent jurisdiction, or
American Express Financial Corporation agrees, that it is liable in whole or in
part to the Corporation, and (iii) it employs to assert a claim against a third
party.
(h) Fees paid for the qualification and registration for public sale of
the securities of the Fund under the laws of the United States and of the
several states in which such securities shall be offered for sale.
(i) Fees of consultants employed by the Fund.
(j) Directors, officers and employees expenses which shall include
fees, salaries, memberships, dues, travel, seminars, pension, profit sharing,
and all other benefits paid to or provided for directors, officers and
employees, directors and officers liability insurance, errors and omissions
liability insurance, worker's compensation insurance and other expenses
applicable to the directors, officers and employees, except the Corporation will
not pay any fees or expenses of any person who is an officer or employee of
American Express Financial Corporation or its affiliates.
(k) Filing fees and charges incurred by the Corporation in connection
with filing any amendment to its articles of incorporation, or incurred in
filing any other document with the State of Minnesota or its political
subdivisions.
(l) Organizational expenses of the Corporation.
(m) Expenses incurred in connection with lending portfolio securities
of the Fund.
(n) Expenses properly payable by the Fund, approved by the Board.
<PAGE>
(2) American Express Financial Corporation agrees to pay all expenses
associated with the services it provides under the terms of this Agreement.
Further, American Express Financial Corporation agrees that if, at the end of
any month, the expenses of the Fund under this Agreement and any other agreement
between the Fund and American Express Financial Corporation, but excluding those
expenses set forth in (1)(b) and (1)(c) of this Part Three, exceed the most
restrictive applicable state expenses limitation, the Fund shall not pay those
expenses set forth in (1)(a) and (d) through (n) of this Part Three to the
extent necessary to keep the Fund's expenses from exceeding the limitation, it
being understood that American Express Financial Corporation will assume all
unpaid expenses and bill the Fund for them in subsequent months but in no event
can the accumulation of unpaid expenses or billing be carried past the end of
the Fund's fiscal year.
Part Four: MISCELLANEOUS
(1) American Express Financial Corporation shall be deemed to be an
independent contractor and, except as expressly provided or authorized in this
Agreement, shall have no authority to act for or represent the Fund.
(2) A "full business day" shall be as defined in the By-laws.
(3) The Fund recognizes that American Express Financial Corporation now
renders and may continue to render investment advice and other services to other
investment companies and persons which may or may not have investment policies
and investments similar to those of the Fund and that American Express Financial
Corporation manages its own investments and/or those of its subsidiaries.
American Express Financial Corporation shall be free to render such investment
advice and other services and the Fund hereby consents thereto.
(4) Neither this Agreement nor any transaction had pursuant hereto
shall be invalidated or in any way affected by the fact that directors,
officers, agents and/or shareholders of the Fund are or may be interested in
American Express Financial Corporation or any successor or assignee thereof, as
directors, officers, stockholders or otherwise; that directors, officers,
stockholders or agents of American Express Financial Corporation are or may be
interested in the Fund as directors, officers, shareholders, or otherwise; or
that American Express Financial Corporation or any successor or assignee, is or
may be interested in the Fund as shareholder or otherwise, provided, however,
that neither American Express Financial Corporation, nor any officer, director
or employee thereof or of the Fund, shall sell to or buy from the Fund any
property or security other than shares issued by the Fund, except in accordance
with applicable regulations or orders of the SEC.
(5) Any notice under this Agreement shall be given in writing,
addressed, and delivered, or mailed postpaid, to the party to this Agreement
entitled to receive such, at such party's principal place of business in
Minneapolis, Minnesota, or to such other address as either party may designate
in writing mailed to the other.
(6) American Express Financial Corporation agrees that no officer,
director or employee of American Express Financial Corporation will deal for or
on behalf of the Funds with himself as principal or agent, or with any
corporation or partnership in which he may have a financial interest, except
that this shall not prohibit:
(a) Officers, directors or employees of American Express Financial
Corporation from having a financial interest in the Fund or in American Express
Financial Corporation.
(b) The purchase of securities for the Fund, or the sale of securities
owned by the Fund, through a security broker or dealer, one or more of whose
partners, officers, directors or employees is an officer, director or employee
of American Express Financial Corporation, provided such transactions are
handled in the capacity of broker only and provided commissions charged do not
exceed customary brokerage charges for such services.
(c) Transactions with the Fund by a broker-dealer affiliate of American
Express Financial Corporation as may be allowed by rule or order of the SEC and
if made pursuant to procedures adopted by the Board.
<PAGE>
(7) American Express Financial Corporation agrees that, except as
herein otherwise expressly provided or as may be permitted consistent with the
use of a broker-dealer affiliate of American Express Financial Corporation under
applicable provisions of the federal securities laws, neither it nor any of its
officers, directors or employees shall at any time during the period of this
Agreement, make, accept or receive, directly or indirectly, any fees, profits or
emoluments of any character in connection with the purchase or sale of
securities (except shares issued by the Fund) or other assets by or for the
Fund.
Part Five: RENEWAL AND TERMINATION
(1) This Agreement shall continue in effect until April 6, 2001, or
until a new agreement is approved by a vote of the majority of the outstanding
shares of the Fund and by vote of the Fund's Board, including the vote required
by (b) of this paragraph, and if no new agreement is so approved, this Agreement
shall continue from year to year thereafter unless and until terminated by
either party as hereinafter provided, except that such continuance shall be
specifically approved at least annually (a) by the Board or by a vote of the
majority of the outstanding shares of the Fund and (b) by the vote of a majority
of the directors who are not parties to this Agreement or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. As used in this paragraph, the term "interested person" shall
have the same meaning as set forth in the Investment Company Act of 1940, as
amended (the "1940 Act").
(2) This Agreement may be terminated by either the Fund or American
Express Financial Corporation at any time by giving the other party 60 days'
written notice of such intention to terminate, provided that any termination
shall be made without the payment of any penalty, and provided further that
termination may be effected either by the Board or by a vote of the majority of
the outstanding voting shares of the Fund. The vote of the majority of the
outstanding voting shares of the Fund for the purpose of this Part Five shall be
the vote at a shareholders' regular meeting, or a special meeting duly called
for the purpose, of 67% or more of the Fund's shares present at such meeting if
the holders of more than 50% of the outstanding voting shares are present or
represented by proxy, or more than 50% of the outstanding voting shares of the
Fund, whichever is less.
(3) This Agreement shall terminate in the event of its assignment, the
term "assignment" for this purpose having the same meaning as set forth in the
1940 Act.
IN WITNESS THEREOF, the parties hereto have executed the foregoing
Agreement as of the day and year first above written.
IDS STRATEGY FUND, INC.
AXP Small Cap Advantage Fund
By /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
AMERICAN EXPRESS FINANCIAL CORPORATION
By /s/ Pamela J. Moret
Pamela J. Moret
Vice President
May 26, 1999
IDS Strategy Fund, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Gentlemen:
I have examined the Articles of Incorporation and the By-Laws of IDS Strategy
Fund, Inc. (the Company) and all necessary certificates, permits, minute books,
documents and records of the Company, and the applicable statutes of the State
of Minnesota, and it is my opinion that the shares sold in accordance with
applicable federal and state securities laws will be legally issued, fully paid,
and nonassessable.
This opinion may be used in connection with the Post-Effective Amendment.
Sincerely,
Leslie L. Ogg
Attorney at Law
901 S. Marquette Ave., Suite 2810
Minneapolis, Minnesota 55402-3268
Independent auditors' consent
The board and shareholders IDS Strategy Fund, Inc.
IDS Equity Value Fund
IDS Strategy Aggressive Fund
We consent to the use of our reports 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
May , 1999
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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