<PAGE>
PAGE 1
IDS Global Bond Fund
Prospectus
Dec. 30, 1996
The goal of IDS Global Bond Fund, a part of IDS Global Series,
Inc., is a high total return through income and growth of capital.
The Fund seeks to achieve its goal by investing all of its assets
in World Income Portfolio of World Trust. The Portfolio is a
separate investment company managed by American Express Financial
Corporation that has the same goal as the Fund. This arrangement
is commonly known as a master/feeder structure.
This prospectus contains facts that can help you decide if the Fund
is the right investment for you. Read it before you invest and
keep it for future reference.
Additional facts about the Fund are in a Statement of Additional
Information (SAI), filed with the Securities and Exchange
Commission (SEC) and available for reference, along with other
related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI is incorporated here by reference.
For a free copy, contact American Express Shareholder Service.
Like all mutual fund shares, these securities have not been
approved or disapproved by the Securities and Exchange Commission
or any state securities commission, nor has the Securities and
Exchange Commission or any state securities commission passed upon
the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
Please note that 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
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN
55440-0534
612-671-3733
TTY: 800-846-4852
<PAGE>
PAGE 2
Table of contents
The Fund in brief
Goal
Investment policies and risks
Structure of the Fund
Manager and distributor
Portfolio manager
Alternative purchase arrangements
Sales charge and Fund expenses
Performance
Financial highlights
Total returns
Yield
Investment policies and risks
Facts about investments and their risks
Valuing Fund shares
How to purchase, exchange or redeem shares
Alternative purchase arrangements
How to purchase shares
How to exchange shares
How to redeem shares
Reductions and waivers of the sales charge
Special shareholder services
Services
Quick telephone reference
Distributions and taxes
Dividend and capital gain distributions
Reinvestments
Taxes
How to determine the correct TIN
How the Fund and Portfolio are organized
Shares
Voting rights
Shareholder meetings
Special considerations regarding master/feeder structure
Board members and officers
Investment manager
Administrator and transfer agent
Distributor
About American Express Financial Corporation
General information
Appendices
Description of corporate bond ratings
Descriptions of derivative instruments
<PAGE>
PAGE 3
The Fund in brief
Goal
IDS Global Bond Fund (the Fund) seeks to provide shareholders with
high total return through income and growth of capital. It does so
by investing all of its assets in World Income Portfolio (the
Portfolio) of World Trust (the Trust). Both the Fund and the
Portfolio are non-diversified investment companies that have the
same goal. Because any investment involves risk, achieving this
goal cannot be guaranteed. The goal can be changed only by holders
of a majority of outstanding securities.
The Fund may withdraw its assets from the Portfolio at any time if
the board determines that it is in the best interests of the Fund
to do so. In that event, the Fund would consider what action
should be taken, including whether to retain an investment advisor
to manage the Fund's assets directly or to reinvest all of the
Fund's assets in another pooled investment entity.
Investment policies and risks
Both the Fund and Portfolio have the same investment policies.
Accordingly, the Portfolio invests primarily in debt securities of
U.S. and foreign issuers. The Portfolio also may invest in common
and preferred stocks, derivative instruments and money market
instruments.
Risks arising from investments in foreign securities include
fluctuations in currency exchange rates, adverse political and
economic developments and lack of comparable regulatory
requirements applicable to U.S. companies. Non-diversified mutual
funds may have more market risk than funds that have broader
diversification. You should invest in the Fund only if you are
willing to assume such risks.
Structure of the Fund
This Fund uses what is commonly known as a master/feeder structure.
This means it is a feeder fund that invests all of its assets in
the Portfolio that is its master fund. The Portfolio actually
invests in and manages the securities and has the same goal and
investment policies as the Fund. This structure is described in
more detail in the section captioned "Special considerations
regarding master/feeder structure." Here is an illustration of the
structure:
Investors buy
shares in the Fund
The Fund invests
in the Portfolio
The Portfolio invests
in securities, such
as stocks or bonds
<PAGE>
PAGE 4
Manager and distributor
The Portfolio is managed by American Express Financial Corporation
(AEFC), a provider of financial services since 1894. AEFC
currently manages more than $55 billion in assets for the IDS
MUTUAL FUND GROUP. Shares of the Fund are sold through American
Express Financial Advisors Inc., a wholly owned subsidiary of AEFC.
Portfolio manager
Ray Goodner joined AEFC in 1977 and serves as vice president and
senior portfolio manager. He has managed the assets of the Fund
since 1989 and serves as portfolio manager of the Portfolio. He
also serves as portfolio manager of Quality Income Portfolio and
IDS Life Global Yield Fund.
Alternative purchase arrangements
The Fund offers its shares in three classes. Class A shares are
subject to a sales charge at the time of purchase. Class B shares
are subject to a contingent deferred sales charge (CDSC) on
redemptions made within six years of purchase and an annual
distribution (12b-1) fee. Class Y shares are sold without a sales
charge to qualifying institutional investors.
Sales charge and Fund expenses
Shareholder transaction expenses are incurred directly by an
investor on the purchase or redemption of Fund shares. Fund
operating expenses are paid out of Fund assets for each class of
shares and include expenses charged by both the Fund and the
Portfolio. Operating expenses are reflected in the Fund's daily
share price and dividends, and are not charged directly to
shareholder accounts.
Shareholder transaction expenses
Class A Class B Class Y
Maximum sales charge on purchases*
(as a percentage of offering price).......5% 0% 0%
Maximum deferred sales charge
imposed on redemptions (as a
percentage of original purchase price)....0% 5% 0%
Annual Fund and allocated Portfolio operating expenses
(as a percentage of average daily net assets):
Class A Class B Class Y
Management fee** 0.75% 0.75% 0.75%
12b-1 fee 0.00% 0.75% 0.00%
Other expenses*** 0.45% 0.46% 0.26%
Total**** 1.20% 1.96% 1.01%
*This charge may be reduced depending on your total investments in
IDS funds. See "Reductions of the sales charge."
**The management fee is paid by the Trust on behalf of the
Portfolio.
<PAGE>
PAGE 5
***Other expenses include an administrative services fee, a
shareholder services fee for Class A and Class B, a transfer agency
fee and other non-advisory expenses.
****The Fund changed to a master/feeder structure on May 13, 1996.
The board considered whether the aggregate expenses of the Fund and
the Portfolio would be more or less than if the Fund invested
directly in the type of securities being held by the Portfolio.
AEFC has agreed to pay the small additional costs required to use a
master/feeder structure to manage the investment portfolio during
the first year of its operation and half of such costs in the
second year, approximately $8,000 in year one and $3,800 in year
two. These additional costs may be more than offset in subsequent
years if the assets being managed increase.
Example: Suppose for each year for the next 10 years, Fund
expenses are as above and annual return is 5%. If you sold your
shares at the end of the following years, for each $1,000 invested,
you would pay total expenses of:
1 year 3 years 5 years 10 years
Class A $62 $86 $113 $189
Class B $70 $102 $126 $209**
Class B* $20 $62 $106 $209**
Class Y $10 $32 $56 $124
*Assuming Class B shares are not redeemed at the end of the period.
**Based on conversion of Class B shares to Class A shares after
eight years.
This example does not represent actual expenses, past or future.
Actual expenses may be higher or lower than those shown. Because
Class B pays annual distribution (12b-1) fees, long-term
shareholders of Class B may indirectly pay an equivalent of more
than a 6.25% sales charge, the maximum permitted by the National
Association of Securities Dealers.
Performance
Financial highlights
<TABLE><CAPTION>
Fiscal period ended Oct. 31,
Per share income and capital changes*
Class A
1996 1995 1994 1993 1992 1991 1990 1989**
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.11 $5.76 $6.27 $5.91 $5.58 $5.46 $5.22 $5.00
Income from investment operations:
Net investment income .38 .35 .36 .26 .33 .50 .40 .12
Net gains (losses)
(both realized and unrealized) .18 .41 (.45) .62 .47 .12 .27 .22
Total from investment operations .56 .76 (.09) .88 .80 .62 .67 .34
Less distributions:
Dividends from net investment income (.39) (.33) (.35) (.27) (.30) (.50) (.40) (.12)
Distributions from realized gains -- (.02) (.07) (.10) (.06) -- (.03) --
Excess distributions of realized gains -- (.06) -- (.15) (.11) -- -- --<PAGE>
PAGE 6
Total distributions (.39) (.41) (.42) (.52) (.47) (.50) (.43) (.12)
Net asset value,
end of period $6.28 $6.11 $5.76 $6.27 $5.91 $5.58 $5.46 $5.22
Ratios/supplemental data
Class A
1996 1995 1994 1993 1992 1991 1990 1989**
Net assets, end of
period (in millions) $689 $548 $466 $255 $91 $50 $28 $11
Ratio of expenses to
average daily net assets*** 1.20% 1.25% 1.26% 1.31% 1.39% 1.34% 1.73%## 1.00%#
Ratio of net income to
average daily net assets 5.72% 6.15% 5.56% 5.11% 6.50% 7.15% 10.60%## 7.04%#+
Portfolio turnover rate (excluding short-term
securities) for the underlying Portfolio 49% 92% 64% 90% 160% 123% 130% 91%
Total return++ 8.9% 13.6% (1.5%) 15.8% 14.8% 11.9% 13.3% 6.7%
*For a share outstanding throughout the period. Rounded to the nearest cent.
**Inception date. Period from March 20, 1989 to Oct. 31, 1989.
***Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits
on cash balances.
+Adjusted to an annual basis.
++Total return does not reflect payment of a sales charge.
#During the period from March 20, 1989 to Oct. 31, 1989, AEFC reimbursed the Fund for expenses in excess of 1% of daily
net assets. Has AEFC not done so, the ratio of expenses and ratio of net investment income would have been 1.77% and 5.77%,
respectively.
##For the nine months ended July 31, 1990, AEFC voluntarily reimbursed the Fund for a portion of its expenses. Had AEFC not
done so, the ratio of expenses and ratio of net investment income would have been 1.87% and 10.46%, respectively. <PAGE>
PAGE 7
Performance
Financial highlights
Fiscal period ended Oct. 31,
Per share income and capital changes*
Class B Class Y
1996 1995** 1996 1995**
Net asset value,
beginning of period $6.11 $5.74 $6.11 $5.74
Income from investment operations:
Net investment income .33 .24 .29 .27
Net gains on securities (both
realized and unrealized) .18 .41 .20 .41
Total from investment operations .51 .65 .49 .68
Less distributions:
Dividends from net investment income (.34) (.24) (.30) (.27)
Excess distributions of
realized gains -- (.04) -- (.04)
Total distributions (.34) (.28) (.30) (.31)
Net asset value,
end of period $6.28 $6.11 $6.30 $6.11
Ratios/supplemental data
Class B Class Y
1996 1995** 1996# 1995**
Net assets, end of
period (in millions) $141 $37 $-- $2
Ratio of expenses to
average daily net assets*** 1.96% 2.05%+ 1.01% 1.10%+
Ratio of net income to
average daily net assets 4.96% 5.88%+ 6.06% 6.68%+
Portfolio turnover rate (excluding short-term 49% 92% 49% 92%
securities) for the underlying portfolio
Total Return++ 8.1% 11.5% 7.3% 12.0%
*For a share outstanding throughout the period. Rounded to the nearest cent.
**Inception date was March 20, 1995 for Class B and Class Y.
***Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before
reduction of earnings credits on cash balances.
+Adjusted to an annual basis.
++Total return does not reflect payment of a sales charge.
#Periods from Nov. 1, 1995 to Nov. 20, 1995 and from Dec. 4, 1995 to Oct 31, 1996 . From
Nov. 20, 1995 to Dec. 4, 1995 there were no Class Y shares outstanding.
</TABLE>
The information in these tables has been audited by KPMG Peat
Marwick LLP, independent auditors. The independent auditors'
report and additional information about the performance of the Fund
are contained in the Fund's annual report which, if not included
with this prospectus, may be obtained without charge.
Total returns
Total return is the sum of all of your returns for a given period,
assuming you reinvest all distributions. It is calculated by
taking the total value of shares you own at the end of the period
(including shares acquired by reinvestment), less the price of
shares you purchased at the beginning of the period.<PAGE>
PAGE 8
Average annual total return is the annually compounded rate of
return over a given time period (usually two or more years). It is
the total return for the period converted to an equivalent annual
figure.
Average annual total returns as of Oct. 31, 1996
Purchase 1 year 5 years Since
made ago ago inception
Global Bond:
Class A* +3.50% +9.00% +10.09%
Class B** +4.14% --% +9.75%
Class Y** +9.20% --% +13.24%
Salomon Brothers
Global Govt. Bond
Composite Index +5.36% +9.91% +10.17%#
Lipper Global
Income Fund
Index +11.74% +7.83% +8.92%#
*Inception date was April 1, 1989.
**Inception date was March 20, 1995.
#Measurement period started April 1, 1989.
Cumulative total returns as of Oct. 31, 1996
Purchase 1 year 5 years Since
made ago ago inception
Global Bond:
Class A* +3.50% +53.93% +108.12%
Class B** +4.14% --% +16.37%
Class Y** +9.20% --% +22.30%
Salomon Brothers
Global Govt. Bond
Composite Index +5.36% +60.41% +108.88%#
Lipper Global
Income Fund
Index +11.74% +45.78% +91.40%#
*Inception date was April 1, 1989.
**Inception date was March 20, 1995.
#Measurement period started April 1, 1989.
These examples show total returns from hypothetical investments in
Class A, Class B and Class Y shares of the Fund. These returns are
compared to those of popular indexes for the same periods. The
performance of Class B and Class Y will vary from the performance
of Class A based on differences in sales charges and fees. March
20, 1995 was the inception date for Class B and Class Y. Past
performance for Class Y for the periods prior to March 20, 1995 may
be calculated based on the performance of Class A, adjusted to
reflect differences in sales charges although not for other
differences in expenses.
<PAGE>
PAGE 9
For purposes of calculation, information about the Fund assumes:
o a sales charge of 5% for Class A shares
o redemption at the end of the period and deduction of the
applicable contingent deferred sales charge for Class B shares
o no sales charge for Class Y shares
o no adjustments for taxes an investor may have paid on the
reinvested income and capital gains
o a period of widely fluctuating securities prices. Returns
shown should not be considered a representation of the Fund's
future performance.
Salomon Brothers Global Government Bond Composite Index is an
unmanaged index made up of a representative list of government
bonds of 17 countries throughout the world. The index is a general
measure of government bond performance. Performance is expressed
in the U.S. dollar as well as the currencies of governments making
up the index. The bonds included in the index may not be the same
as those in the Fund. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage
commissions or other fees.
Lipper Global 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.
Yield
Yield is the net investment income earned per share for a specified
time period, divided by the offering price at the end of the
period. The Fund's annualized yield for the 30-day period ended
Oct. 31, 1996, was 5.53% for Class A, 5.06% for Class B and 6.24%
for Class Y. The Fund calculates this 30-day annualized yield by
dividing:
o net investment income per share deemed earned during a 30-day
period by
o the public offering price per share on the last day of the
period, and
o converting the result to a yearly equivalent figure.
This yield calculation does not include any contingent deferred
sales charge, ranging from 5% to 0% on Class B shares, which would
reduce the yield quoted.
The Fund's yield varies from day to day, mainly because share
values and offering prices (which are calculated daily) vary in
response to changes in interest rates. Net investment income
normally changes much less in the short run. Thus, when interest
rates rise and share values fall, yield tends to rise. When
interest rates fall, yield tends to follow.
Past yields should not be considered an indicator of future yields.
<PAGE>
PAGE 10
Investment policies and risks
The policies described below apply both to the Fund and the
Portfolio. The Portfolio invests primarily in debt securities of
U.S. and foreign issuers so under normal market conditions at least
80% of the Portfolio's net assets will be investment-grade
corporate or government debt securities including money market
instruments of issuers located in at least three different
countries.
The Portfolio also invests in debt securities below investment
grade, convertible securities, common stocks and derivative
instruments.
The various types of investments the portfolio manager uses to
achieve investment performance are described in more detail in the
next section and in the SAI.
Facts about investments and their risks
Debt securities: The price of bonds generally falls as interest
rates increase, and rises as interest rates decrease. The price of
bonds also fluctuates if the credit rating is upgraded or
downgraded.
The price of bonds below investment grade may react more to the
ability of the issuing company to pay interest and principal when
due than to changes in interest rates. They have greater price
fluctuations, are more likely to experience a default, and
sometimes are referred to as junk bonds. Reduced market liquidity
for these bonds may occasionally make it more difficult to value
them. In valuing bonds, the Portfolio relies both on independent
rating agencies and the investment manager's credit analysis. The
Portfolio may not purchase securities rated lower than B by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Corporation
(S&P). Securities that are subsequently downgraded in quality may
continue to be held by the Portfolio and will be sold only when the
investment manager believes it is advantageous to do so.
Bond ratings and holdings for fiscal 1996
<TABLE><CAPTION>
Percent of
S&P Rating Protection of net assets in
Percent of (or Moody's principal and unrated securities
net assets equivalent) interest assessed by AEFC
<S> <C> <C> <C>
40.90% AAA Highest quality 0.36%
10.96 AA High quality --
5.94 A Upper medium grade --
4.58 BBB Medium grade --
8.85 BB Moderately speculative --
2.01 B Speculative --
-- CCC Highly speculative --
-- CC Poor quality --
-- C Lowest quality --
-- D In default --
1.10 Unrated Unrated securities 0.74
</TABLE>
The table above excludes money market instruments, which are
considered investment grade securities.
<PAGE>
PAGE 11
(See the Appendix to this prospectus describing corporate bond
ratings for further information.)
Debt securities sold at a deep discount: Some bonds are sold at
deep discounts because they do not pay interest until maturity.
They include zero coupon bonds and PIK (pay-in-kind) bonds. To
comply with tax laws, the Portfolio has to recognize a computed
amount of interest income and pay dividends to shareholders even
though no cash has been received. In some instances, the Portfolio
may have to sell securities to have sufficient cash to pay the
dividends.
Convertible securities: These securities generally are preferred
stocks or bonds that can be exchanged for other securities, usually
common stock, at prestated prices. When the trading price of the
common stock makes the exchange likely, convertible securities
trade more like common stock.
Common stocks: Stock prices are subject to market fluctuations.
Stocks of foreign companies may be subject to abrupt or erratic
price movements. While many of the Portfolio's investments are in
established companies having adequate financial reserves, some
investments involve substantial risk and may be considered
speculative.
Foreign investments: Securities of foreign companies and
governments may be traded in the United States, but often they are
traded only on foreign markets. Frequently, there is less
information about foreign companies and less government supervision
of foreign markets. Foreign investments are subject to currency
fluctuations and political and economic risks of the countries in
which the investments are made, including the possibility of
seizure or nationalization of companies, imposition of withholding
taxes on income, establishment of exchange controls or adoption of
other restrictions that might affect an investment adversely. If
an investment is made in a foreign market, the local currency may
be purchased using a forward contract in which the price of the
foreign currency in U.S. dollars is established on the date the
trade is made, but delivery of the currency is not made until the
securities are received. As long as the Portfolio holds foreign
currencies or securities valued in foreign currencies, the value of
those assets will be affected by changes in the value of the
currencies relative to the U.S. dollar. Because of the limited
trading volume in some foreign markets, efforts to buy or sell a
security may change the price of the security, and it may be
difficult to complete the transaction. The limited liquidity and
price fluctuations in emerging markets could make investments in
developing countries more volatile. In addition, the Portfolio may
have limited legal recourse in the event a sovereign government is
unwilling or unable to pay its debt.
Diversification: Since the Portfolio is a non-diversified mutual
fund, it may concentrate its investments in securities of fewer
issuers than would a diversified fund. Accordingly, the Portfolio
may have more risk than mutual funds that have broader
diversification.
<PAGE>
PAGE 12
Derivative instruments: The portfolio manager may use derivative
instruments in addition to securities to achieve investment
performance. Derivative instruments include futures, options and
forward contracts. Such instruments may be used to maintain cash
reserves while remaining fully invested, to offset anticipated
declines in values of investments, to facilitate trading, to reduce
transaction costs or to pursue higher investment returns.
Derivative instruments are characterized by requiring little or no
initial payment and a daily change in price based on or derived
from a security, a currency, a group of securities or currencies,
or an index. A number of strategies or combination of instruments
can be used to achieve the desired investment performance
characteristics. A small change in the value of the underlying
security, currency or index will cause a sizable gain or loss in
the price of the derivative instrument. Derivative instruments
allow the portfolio manager to change the investment performance
characteristics very quickly and at lower costs. Risks include
losses of premiums, rapid changes in prices, defaults by other
parties and inability to close such instruments. The Portfolio
will use derivative instruments only to achieve the same investment
performance characteristics it could achieve by directly holding
those securities and currencies permitted under the investment
policies. The Portfolio will designate cash or appropriate liquid
assets to cover its portfolio obligations. No more than 5% of the
Portfolio's net assets can be used at any one time for good faith
deposits on futures and premiums for options on futures that do not
offset existing investment positions. This does not, however,
limit the portion of the Portfolio's assets at risk to 5%. The
Portfolio is not limited as to the percentage of its assets that
may be invested in permissible investments, including derivatives,
except as otherwise explicitly provided in this prospectus or the
SAI. For descriptions of these and other types of derivative
instruments, see the Appendix to this prospectus and the SAI.
Securities and other instruments that are illiquid: A security or
other instrument is illiquid if it cannot be sold quickly in the
normal course of business. Some investments cannot be resold to
the U.S. public because of their terms or government regulations.
Securities and instruments, however, can be sold in private sales,
and many may be sold to other institutions and qualified buyers or
on foreign markets. The portfolio manager will follow guidelines
established by the board and consider relevant factors such as the
nature of the security and the number of likely buyers when
determining whether a security is illiquid. No more than 10% of
the Portfolio's net assets will be held in securities and other
instruments that are illiquid.
Money market instruments: Short-term debt securities rated in the
top two grades or the equivalent are used to meet daily cash needs
and at various times to hold assets until better investment
opportunities arise. Generally, less than 25% of the Portfolio's
total assets are in these money market instruments. However, for
temporary defensive purposes these investments could exceed that
amount for a limited period of time.
The investment policies described above may be changed by the
boards.<PAGE>
PAGE 13
Lending portfolio securities: The Portfolio may lend its
securities to earn income so long as borrowers provide collateral
equal to the market value of the loans. The risks are that
borrowers will not provide collateral when required or return
securities when due. Unless a majority of the outstanding voting
securities approve otherwise, loans may not exceed 30% of the
Portfolio's net assets.
Valuing Fund shares
The public offering price is the net asset value (NAV) adjusted for
the sales charge for Class A. It is the NAV for Class B and Class
Y.
The NAV is the value of a single Fund share. The NAV usually
changes daily, and is calculated at the close of business, normally
3 p.m. Central time, each business day (any day the New York Stock
Exchange is open). (NAV generally declines as interest rates
increase and rises as interest rates decline.)
To establish the net assets, all securities held by the Portfolio
are valued as of the close of each business day. In valuing
assets:
o Securities (except bonds) and assets with available market
values are valued on that basis.
o Securities maturing in 60 days or less are valued at amortized
cost.
o Bonds and assets without readily available market values are
valued according to methods selected in good faith by the
board.
o Assets and liabilities denominated in foreign currencies are
translated daily into U.S. dollars at a rate of exchange set
as near to the close of the day as practicable.
How to purchase, exchange or redeem shares
Alternative purchase arrangements
The Fund offers three different classes of shares - Class A, Class
B and Class Y. The primary differences among the classes are in
the sales charge structures and in their ongoing expenses. These
differences are summarized in the table below. You may choose the
class that best suits your circumstances and objectives.
<TABLE><CAPTION>
Sales charge and
distribution
(12b-1) fee Service fee Other information
<S> <C> <C> <C>
Class A Maximum initial 0.175% of average Initial sales charge
sales charge of daily net assets waived or reduced
5%; no 12b-1 fee for certain purchases
<PAGE>
PAGE 14
Class B No initial sales 0.175% of average Shares convert to
charge; maximum CDSC daily net assets Class A after eight
of 5% declines to 0% years; CDSC waived in
after six years; 12b-1 certain circumstances
fee of 0.75% of average
daily net assets
Class Y None None Available only to
certain qualifying
institutional
investors
</TABLE>
Conversion of Class B shares to Class A shares - Eight calendar
years after Class B shares are purchased, Class B shares will
convert to Class A shares and will no longer be subject to a
distribution fee. The conversion will be on the basis of relative
net asset values of the two classes, without the imposition of any
sales charge. Class B shares purchased through reinvested
dividends and distributions will convert to Class A shares in the
same pro rata portion as other Class B shares.
Considerations in determining whether to purchase Class A or Class
B shares - You should consider the information below in determining
whether to purchase Class A or Class B shares. The distribution
fee (included in "Ongoing expenses") and sales charges are
structured so that you will have approximately the same total
return at the end of eight years regardless of which class you
chose.
Sales charges on purchase or redemption
If you purchase Class A If you purchase Class B
shares shares
o You will not have all o All of your money is
of your purchase price invested in shares of
invested. Part of your stock. However, you will
purchase price will go pay a sales charge if you
to pay the sales charge. redeem your shares within
You will not pay a sales six years of purchase.
charge when you redeem
your shares.
o You will be able to o No reductions of the
take advantage of sales charge are
reductions in the sales available for large
charge. purchases.
If your investments in IDS funds that are subject to a sales charge
total $250,000 or more, you are better off paying the reduced sales
charge in Class A than paying the higher fees in Class B. If you
qualify for a waiver of the sales charge, you should purchase Class
A shares.
<PAGE>
PAGE 15
Ongoing expenses
If you purchase Class A If you purchase Class B
shares shares
o Your shares will have o The distribution and
a lower expense ratio transfer agency fees for
than Class B shares Class B will cause your
because Class A does not shares to have a higher
pay a distribution fee expense ratio and to pay
and the transfer agency lower dividends than fee
for Class A is lower Class A shares. After
than the fee for Class B. eight years, Class B
As a result, Class A shares shares will convert to
will pay higher dividends Class A shares and you
than Class B shares. will no longer be
subject to higher fees.
You should consider how long you plan to hold your shares and
whether the accumulated higher fees and CDSC on Class B shares
prior to conversion would be less than the initial sales charge on
Class A shares. Also consider to what extent the difference would
be offset by the lower expenses on Class A shares. To help you in
this analysis, the example in the "Sales charge and Fund expenses"
section of the prospectus illustrates the charges applicable to
each class of shares.
Class Y shares - Class Y shares are offered to certain
institutional investors. Class Y shares are sold without a front-
end sales charge or a CDSC and are not subject to either a service
fee or a distribution fee. The following investors are eligible to
purchase Class Y shares:
o Qualified employee benefit plans* if the plan:
- uses a daily transfer recordkeeping service offering
participants daily access to IDS funds and has
- at least $10 million in plan assets or
- 500 or more participants; or
- does not use daily transfer recordkeeping and has
- at least $3 million invested in funds of the IDS MUTUAL FUND
GROUP or
- 500 or more participants.
o Trust companies or similar institutions, and charitable
organizations that meet the definition in Section 501(c)(3) of
the Internal Revenue Code.* These must have at least $10
million invested in funds of the IDS MUTUAL FUND GROUP.
o Nonqualified deferred compensation plans* whose participants are
included in a qualified employee benefit plan described above.
* Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
<PAGE>
PAGE 16
How to purchase shares
If you're investing in this Fund for the first time, you'll need to
set up an account. Your financial advisor will help you fill out
and submit an application. Once your account is set up, you can
choose among several convenient ways to invest.
Important: When opening an account, you must provide AEFC with
your correct Taxpayer Identification Number (Social Security or
Employer Identification number). See "Distributions and taxes."
When you purchase shares for a new or existing account, the price
you pay per share is determined at the close of business on the day
your investment is received and accepted at the Minneapolis
headquarters.
Purchase policies:
o Investments must be received and accepted in the Minneapolis
headquarters on a business day before 3 p.m. Central time to be
included in your account that day and to receive that day's
share price. Otherwise your purchase will be processed the next
business day and you will pay the next day's share price.
o The minimums allowed for investment may change from time to
time.
o Wire orders can be accepted only on days when your bank, AEFC,
the Fund and Norwest Bank Minneapolis are open for business.
o Wire purchases are completed when wired payment is received and
the Fund accepts the purchase.
o AEFC and the Fund are not responsible for any delays that occur
in wiring funds, including delays in processing by the bank.
o You must pay any fee the bank charges for wiring.
o The Fund reserves the right to reject any application for any
reason.
o If your application does not specify which class of shares you
are purchasing, it will be assumed that you are investing in
Class A shares.
<TABLE><CAPTION>
Three ways to invest
1
<S> <C> <C>
By regular account Send your check and application Minimum amounts
(or your name and account number Initial investment: $2,000
if you have an established account) Additional
to: investments: $ 100
American Express Financial Advisors Inc. Account balances: $ 300*
P.O. Box 74 Qualified retirement
Minneapolis, MN 55440-0074 accounts: none
Your financial advisor will help
you with this process.
<PAGE>
PAGE 17
2
By scheduled Contact your financial advisor Minimum amounts
investment plan to set up one of the following Initial investment: $100
scheduled plans: Additional
investments: $100/mo.
o automatic payroll deduction Account balances: none
(on active plans of
o bank authorization monthly payments)
o direct deposit of
Social Security check
o other plan approved by the Fund
3
By wire If you have an established account, If this information is not
you may wire money to: included, the order may be
rejected and all money
Norwest Bank Minneapolis received by the Fund, less
Routing No. 091000019 any costs the Fund or AEFC
Minneapolis, MN incurs, will be returned
Attn: Domestic Wire Dept. promptly.
Give these instructions: Minimum amounts
Credit IDS Account #00-30-015 Each wire investment: $1,000
for personal account # (your
account number) for (your name).
*If your account balance falls below $300, you will be asked in writing to bring it up to $300 or establish a scheduled investment
plan. If you don't do so within 30 days, your shares can be redeemed and the proceeds mailed to you.
</TABLE>
How to exchange shares
You can exchange your shares of the Fund at no charge for shares of
the same class of any other publicly offered fund in the IDS MUTUAL
FUND GROUP available in your state. Exchanges into IDS Tax-Free
Money Fund must be made from Class A shares. For complete
information, including fees and expenses, read the prospectus
carefully before exchanging into a new fund.
If your exchange request arrives at the Minneapolis headquarters
before the close of business, your shares will be redeemed at the
net asset value set for that day. The proceeds will be used to
purchase new fund shares the same day. Otherwise, your exchange
will take place the next business day at that day's net asset
value.
For tax purposes, an exchange represents a redemption and purchase
and may result in a gain or loss. However, you cannot create a tax
loss (or reduce a taxable gain) by exchanging from the Fund within
91 days of your purchase. For further explanation, see the SAI.
How to redeem shares
You can redeem your shares at any time. American Express
Shareholder Service will mail payment within seven days after
receiving your request.
When you redeem shares, the amount you receive may be more or less
than the amount you invested. Your shares will be redeemed at net
asset value, minus any applicable sales charge, at the close of
business on the day your request is accepted at the Minneapolis
headquarters. If your request arrives after the close of business,
<PAGE>
PAGE 18
the price per share will be the net asset value, minus any
applicable sales charge, at the close of business on the next
business day.
A redemption is a taxable transaction. If your proceeds from your
redemption are more or less than the cost of your shares, you will
have a gain or loss, which can affect your tax liability.
Redeeming shares held in an IRA or qualified retirement account may
subject you to certain federal taxes, penalties and reporting
requirements. Consult your tax advisor.
<TABLE><CAPTION>
Two ways to request an exchange or redemption of shares
1
<S> <C>
By letter Include in your letter:
o the name of the fund(s)
o the class of shares to be exchanged or redeemed
o your account number(s) (for exchanges, both funds must be registered in the same
ownership)
o your Taxpayer Identification Number (TIN)
o the dollar amount or number of shares you want to exchange or redeem
o signature of all registered account owners
o for redemptions, indicate how you want your money delivered to you
o any paper certificates of shares you hold
Regular mail:
American Express Shareholder Service
Attn: Redemptions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Shareholder Service
Attn: Redemptions
733 Marquette Ave.
Minneapolis, MN 55402
2
By phone
American Express Telephone o The Fund and AEFC will honor any telephone exchange or redemption request believed to be
Transaction Service: authentic and will use reasonable procedures to confirm that they are. This includes
800-437-3133 or asking identifying questions and tape recording calls. If reasonable
612-671-3800 procedures are not followed, the Fund or AEFC will be liable for any loss resulting from
fraudulent requests.
o Phone exchange and redemption privileges automatically apply to all accounts except
custodial, corporate or qualified retirement accounts unless you request these privileges
NOT apply by writing American Express Shareholder Service. Each registered owner must sign
the request.
o AEFC answers phone requests promptly, but you may experience delays when call volume is
high. If you are unable to get through, use mail procedure as an alternative.
o Acting on your instructions, your financial advisor may conduct telephone transactions on
your behalf.
o Phone privileges may be modified or discontinued at any time.
Minimum amount
Redemption: $100
Maximum amount
Redemption: $50,000
</TABLE>
Exchange policies:
o You may make up to three exchanges within any 30-day period,
with each limited to $300,000. These limits do not apply to
scheduled exchange programs and certain employee benefit plans or
other arrangements through which one shareholder represents the
interests of several. Exceptions may be allowed with pre-approval
of the Fund.<PAGE>
PAGE 19
o Exchanges must be made into the same class of shares of the new
fund.
o If your exchange creates a new account, it must satisfy the
minimum investment amount for new purchases.
o Once we receive your exchange request, you cannot cancel it.
o Shares of the new fund may not be used on the same day for
another exchange.
o If your shares are pledged as collateral, the exchange will be
delayed until written approval is obtained from the secured party.
o AEFC and the Fund reserve the right to reject any exchange,
limit the amount, or modify or discontinue the exchange privilege,
to prevent abuse or adverse effects on the Fund and its
shareholders. For example, if exchanges are too numerous or too
large, they may disrupt the Fund's investment strategies or
increase its costs.
Redemption policies:
o A "change of mind" option allows you to change your mind after
requesting a redemption and to use all or part of the proceeds to
purchase new shares in the same account from which you redeemed.
If you reinvest in Class A, you will purchase the new shares at net
asset value rather than the offering price on the date of a new
purchase. If you reinvest in Class B, any CDSC you paid on the
amount you are reinvesting also will be reinvested. To take
advantage of this option, send a written request within 30 days of
the date your redemption request was received. Include your
account number and mention this option. This privilege may be
limited or withdrawn at any time, and it may have tax consequences.
o A telephone redemption request will not be allowed within 30
days of a phoned-in address change.
Important: If you request a redemption of shares you recently
purchased by a check or money order that is not guaranteed, the
Fund will wait for your check to clear. It may take up to 10 days
from the date of purchase before a check is mailed to you. (A
check may be mailed earlier if your bank provides evidence
satisfactory to the Fund and AEFC that your check has cleared.)
<TABLE><CAPTION>
Three ways to receive payment when you redeem shares
1
<S> <C>
By regular or express mail o Mailed to the address on record.
o Payable to names listed on the account.
NOTE: The express mail delivery charges
you pay will vary depending on the
courier you select.
2
By wire o Minimum wire redemption: $1,000.
o Request that money be wired to your bank.
o Bank account must be in the same
ownership as the IDS fund account.
<PAGE>
PAGE 20
NOTE: Pre-authorization required. For
instructions, contact your financial
advisor or American Express Shareholder Service.
3
By scheduled payout plan o Minimum payment: $50.
o Contact your financial advisor or American Express
Shareholder Service to set up regular
payments to you on a monthly, bimonthly,
quarterly, semiannual or annual basis.
o Purchasing new shares while under a payout
plan may be disadvantageous because of
the sales charges.
</TABLE>
Reductions and waivers of the sales charge
Class A - initial sales charge alternative
On purchases of Class A shares, you pay a 5% sales charge on the
first $50,000 of your total investment and less on investments
after the first $50,000:
Total investment Sales charge as a
percent of:*
Public Net
offering amount
price invested
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
* To calculate the actual sales charge on an investment greater
than $50,000 and less than $1,000,000, amounts for each applicable
increment must be totaled. See the SAI.
Reductions of the sales charge on Class A shares
Your sales charge may be reduced, depending on the totals of:
o the amount you are investing in this Fund now,
o the amount of your existing investment in this Fund, if any, and
o the amount you and your primary household group are investing or
have in other funds in the IDS MUTUAL FUND GROUP that carry a sales
charge. (The primary household group consists of accounts in any
ownership for spouses or domestic partners and their unmarried
children under 21. Domestic partners are individuals who maintain
a shared primary residence and have joint property or other
insurable interests.)
Other policies that affect your sales charge:
o IDS Tax-Free Money Fund and Class A shares of IDS Cash
Management Fund do not carry sales charges. However, you may count
investments in these funds if you acquired shares in them by
exchanging shares from IDS funds that carry sales charges.<PAGE>
PAGE 21
o IRA purchases or other employee benefit plan purchases made
through a payroll deduction plan or through a plan sponsored by an
employer, association of employers, employee organization or other
similar entity, may be added together to reduce sales charges for
all shares purchased through that plan.
o If you intend to invest $1 million over a period of 13 months,
you can reduce the sales charges in Class A by filing a letter of
intent.
For more details, see the SAI.
Waivers of the sales charge for Class A shares
Sales charges do not apply to:
o Current or retired board members, officers or employees of the
Fund or AEFC or its subsidiaries, their spouses and unmarried
children under 21.
o Current or retired American Express financial advisors, their
spouses and unmarried children under 21.
o Qualified employee benefit plans* using a daily transfer
recordkeeping system offering participants daily access to IDS
funds.
(Participants in certain qualified plans for which the initial
sales charge is waived may be subject to a deferred sales charge of
up to 4% on certain redemptions. For more information, see the
SAI.)
o Shareholders who have at least $1 million invested in funds of
the IDS MUTUAL FUND GROUP. If the investment is redeemed in the
first year after purchase, a CDSC of 1% will be charged on the
redemption.
o Purchases made within 30 days after a redemption of shares (up
to the amount redeemed):
- of a product distributed by American Express Financial
Advisors in a qualified plan subject to a deferred sales
charge or
- in a qualified plan where American Express Trust Company has a
recordkeeping, trustee, investment management or investment
servicing relationship.
Send the Fund a written request along with your payment, indicating
the amount of the redemption and the date on which it occurred.
o Purchases made with dividend or capital gain distributions from
another fund in the IDS MUTUAL FUND GROUP that has a sales charge.
o Purchases made through American Express Strategic Portfolio
Service (total amount of all investments made in the Strategic
Portfolio Service must be at least $50,000).
<PAGE>
PAGE 22
o Purchases made under the University of Texas System ORP.
*Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
Class B - contingent deferred sales charge alternative
Where a CDSC is imposed on a redemption, it is based on the amount
of the redemption and the number of calendar years, including the
year of purchase, between purchase and redemption. The following
table shows the declining scale of percentages that apply to
redemptions during each year after a purchase:
If a redemption is The percentage rate
made during the for the CDSC is:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are redeeming reduces the current net asset value
of your investment in Class B shares below the total dollar amount
of all your purchase payments during the last six years (including
the year in which your redemption is made), the CDSC is based on
the lower of the redeemed purchase payments or market value.
The following example illustrates how the CDSC is applied. Assume
you had invested $10,000 in Class B shares and that your investment
had appreciated in value to $12,000 after 15 months, including
reinvested dividend and capital gain distributions. You could
redeem any amount up to $2,000 without paying a CDSC ($12,000
current value less $10,000 purchase amount). If you redeemed
$2,500, the CDSC would apply only to the $500 that represented part
of your original purchase price. The CDSC rate would be 4% because
a redemption after 15 months would take place during the second
year after purchase.
Because the CDSC is imposed only on redemptions that reduce the
total of your purchase payments, you never have to pay a CDSC on
any amount you redeem that represents appreciation in the value of
your shares, income earned by your shares or capital gains. In
addition, when determining the rate of any CDSC, your redemption
will be made from the oldest purchase payment you made. Of course,
once a purchase payment is considered to have been redeemed, the
next amount redeemed is the next oldest purchase payment. By
redeeming the oldest purchase payments first, lower CDSCs are
imposed than would otherwise be the case.
Waivers of the contingent deferred sales charge
The CDSC on Class B shares will be waived on redemptions of shares:
o In the event of the shareholder's death,
o Purchased by any board member, officer or employee of a fund or
<PAGE>
PAGE 23
AEFC or its subsidiaries,
o Held in a trusteed employee benefit plan,
o Held in IRAs or certain qualified plans for which American
Express Trust Company acts as custodian, such as Keogh plans, tax-
sheltered custodial accounts or corporate pension plans, provided
that the shareholder is:
- at least 59-1/2 years old, and
- taking a retirement distribution (if the redemption is part
of a transfer to an IRA or qualified plan in a product
distributed by American Express Financial Advisors, or a
custodian-to-custodian transfer to a product not distributed
by American Express Financial Advisors, the CDSC will not be
waived), or
- redeeming under an approved substantially equal periodic
payment arrangement.
For investors in Class A shares who have over $1 million invested
in one year, the 1% CDSC on redemption of those shares will be
waived in the same circumstances described for Class B.
Special shareholder services
Services
To help you track and evaluate the performance of your investments,
AEFC provides these services:
Quarterly statements listing all of your holdings and transactions
during the previous three months.
Yearly tax statements featuring average-cost-basis reporting of
capital gains or losses if you redeem your shares along with
distribution information which simplifies tax calculations.
A personalized mutual fund progress report detailing returns on
your initial investment and cash-flow activity in your account. It
calculates a total return to reflect your individual history in
owning Fund shares. This report is available from your financial
advisor.
Quick telephone reference
American Express Telephone Transaction Service
Redemptions and exchanges, dividend payments or reinvestments and
automatic payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
American Express Shareholder Service
Fund performance, objectives and account inquiries
612-671-3733
TTY Service
For the hearing impaired
800-846-4852
<PAGE>
PAGE 24
American Express Infoline
Automated account information (TouchToneR phones only), including
current Fund prices and performance, account values and recent
account transactions
National/Minnesota: 800-272-4445
Mpls./St. Paul area: 671-1630
Distributions and taxes
As a shareholder you are entitled to your share of the Fund's net
income and any net gains realized on its investments. The Fund
distributes dividends and capital gain distributions to qualify as
a regulated investment company and to avoid paying corporate income
and excise taxes. Dividend and capital gain distributions will
have tax consequences you should know about.
Dividend and capital gain distributions
The Portfolio allocates investment income from dividends and net
realized capital gains or losses, if any, to the Fund. The Fund
deducts direct and allocated expenses from the investment income.
The Fund's net investment income is distributed to you at the end
of each calendar quarter as dividends. Short-term capital gains
are distributed at the end of the calendar year and are included in
net investment income. Long-term capital gains are realized
whenever a security held for more than one year is sold for a
higher price. The Fund will offset any net realized capital gains
by any available capital loss carryovers. Net realized long-term
capital gains, if any, are distributed at the end of the calendar
year as capital gain distributions. Before they're distributed,
both net investment income and net long-term capital gains are
included in the value of each share. After they're distributed,
the value of each share drops by the per-share amount of the
distribution. (If your distributions are reinvested, the total
value of your holdings will not change.)
Dividends for each class will be calculated at the same time, in
the same manner and will be the same amount prior to deduction of
expenses. Expenses attributable solely to a class of shares will
be paid exclusively by that class.
Reinvestments
Dividends and capital gain distributions are automatically
reinvested in additional shares in the same class of the Fund,
unless:
o you request the Fund in writing or by phone to pay
distributions to you in cash, or
o you direct the Fund to invest your distributions in any
publicly available IDS fund for which you've previously opened
an account. You pay no sales charge on shares purchased
through reinvestment from this Fund into any IDS fund.
The reinvestment price is the net asset value at close of business
on the day the distribution is paid. (Your quarterly statement <PAGE>
PAGE 25
will confirm the amount invested and the number of shares
purchased.)
If you choose cash distributions, you will receive only those
declared after your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash
distributions, we will reinvest the checks into your account at the
then-current net asset value and make future distributions in the
form of additional shares.
Taxes
The Fund has received a Private Letter Ruling from the Internal
Revenue Service stating that, for purposes of the Internal Revenue
Code, the Fund will be regarded as directly holding its allocable
share of the income and gain realized by the Portfolio.
Distributions are subject to federal income tax and also may be
subject to state and local taxes. Distributions are taxable in the
year the Fund declares them regardless of whether you take them in
cash or reinvest them.
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 such taxes. You may be entitled to
claim foreign tax credits or deductions subject to provisions and
limitations of the Internal Revenue Code. The Fund will notify you
if such credit or deduction is available.
Each January, you will receive a tax statement showing the kinds
and total amount of all distributions you received during the
previous year. You must report distributions on your tax returns,
even if they are reinvested in additional shares.
Buying a dividend creates a tax liability. This means buying
shares shortly before a capital gain distribution. You pay the
full pre-distribution price for the shares, then receive a portion
of your investment back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain.
If you sell shares for more than their cost, the difference is a
capital gain. Your gain may be either short term (for shares held
for one year or less) or long term (for shares held for more than
one year).
Your Taxpayer Identification Number (TIN) is important. As with
any financial account you open, you must list your current and
correct Taxpayer Identification Number (TIN) -- either your Social
Security or Employer Identification number. The TIN must be
certified under penalties of perjury on your application when you
open an account at AEFC.
If you don't provide the TIN, or the TIN you report is incorrect,
you could be subject to backup withholding of 31% of taxable
distributions and proceeds from certain sales and exchanges. You
also could be subject to further penalties, such as:<PAGE>
PAGE 26
o a $50 penalty for each failure to supply your correct TIN
o a civil penalty of $500 if you make a false statement that
results in no backup withholding
o criminal penalties for falsifying information
You also could be subject to backup withholding because you failed
to report interest or dividends on your tax return as required.
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification number
of:
Individual or joint account The individual or individuals
listed on the account
Custodian account of a minor The minor
(Uniform Gifts/Transfers to
Minors Act)
A living trust The grantor-trustee (the person
who puts the money into the
trust)
An irrevocable trust, pension The legal entity (not the
trust or estate personal representative or
trustee, unless no legal entity
is designated in the account
title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or The organization
tax-exempt organization
For details on TIN requirements, ask your financial advisor or
local American Express Financial Advisors office for federal Form
W-9, "Request for Taxpayer Identification Number and
Certification."
Important: This information is a brief and selective summary of
certain federal tax rules that apply to this Fund. Tax matters are
highly individual and complex, and you should consult a qualified
tax advisor about your personal situation.
How the Fund and Portfolio are organized
Shares
IDS Global Series, Inc. currently is composed of five funds, each
issuing its own series of capital stock: IDS Emerging Markets Fund,
IDS Global Balanced Fund, IDS Global Bond Fund, IDS Global Growth
Fund and IDS Innovations Fund. Each fund is owned by its <PAGE>
PAGE 27
shareholders. Each fund issues shares in three classes - Class
A, Class B and Class Y. Each class has different sales
arrangements and bears different expenses. Each class represents
interests in the assets of a fund. Par value is one cent per
share. Both full and fractional shares can be issued.
The shares of each fund making up IDS Global Series, Inc. represent
an interest in that fund's assets only (and profits or losses),
and, in the event of liquidation, each share of a fund would have
the same rights to dividends and assets as every other share of
that fund.
Voting rights
As a shareholder, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each
share you own. Shares of the Fund have cumulative voting rights.
Each class has exclusive voting rights with respect to the
provisions of the Fund's distribution plan that pertain to a
particular class and other matters for which separate class voting
is appropriate under applicable law.
Shareholder meetings
The Fund does not hold annual shareholder meetings. However, the
board members may call meetings at their discretion, or on demand
by holders of 10% or more of the outstanding shares, to elect or
remove board members.
Special considerations regarding master/feeder structure
The Fund pursues its goal by investing its assets in a master fund
called the Portfolio. This means that the Fund does not invest
directly in securities; rather the Portfolio invests in and manages
its portfolio of securities. The Portfolio is a separate
investment company but it has the same goal and investment policies
as the Fund. The goal and investment policies of the Portfolio are
described under the captions "Investment policies and risks" and
"Facts about investments and their risks." Additional information
on investment policies may be found in the SAI.
Board considerations: The board considered the advantages and
disadvantages of investing the Fund's assets in the Portfolio. The
board believes that the master/feeder structure can be in the best
interest of the Fund and its shareholders since it offers the
opportunity for economies of scale. The Fund may redeem all of its
assets from the Portfolio at any time. Should the board determine
that it is in the best interest of the Fund and its shareholders to
terminate its investment in the Portfolio, it would consider hiring
an investment advisor to manage the Fund's assets, or other
appropriate options. The Fund would terminate its investments if
the Portfolio changed its goals, investment policies or
restrictions without the same change being approved by the Fund.
Other feeders: The Portfolio sells securities to other affiliated
mutual funds and may sell securities to non-affiliated investment
companies and institutional accounts (known as feeders). These <PAGE>
PAGE 28
feeders buy the Portfolio's securities on the same terms and
conditions as the Fund and pay their proportionate share of the
Portfolio's expenses. However, their operating costs and sales
charges are different from those of the Fund. Therefore, the
investment returns for other feeders are different from the returns
of the Fund. Information about other feeders may be obtained by
calling American Express Financial Advisors at 1-800-AXP-SERV.
Each feeder that invests in the Portfolio is different and
activities of its investors may adversely affect all other feeders,
including the Fund. For example, if one feeder decides to
terminate its investment in the Portfolio, the Portfolio may elect
to redeem in cash or in kind. If cash is used, the Portfolio will
incur brokerage, taxes and other costs in selling securities to
raise the cash. This may result in less investment diversification
if entire investment positions are sold, and it also may result in
less liquidity among the remaining assets. If in-kind distribution
is made, a smaller pool of assets remains that may affect brokerage
rates and investment options. In both cases, expenses may rise
since there are fewer assets to cover the costs of managing those
assets.
Shareholder meetings: Whenever the Portfolio proposes to change a
fundamental investment policy or to take any other actions
requiring approval of its security holders, the Fund must hold a
shareholder meeting. The Fund will vote for or against the
Portfolio's proposals in proportion to the vote it receives for or
against the same proposals from its shareholders.
Board members and officers
Shareholders elect a board that oversees the operations of the Fund
and chooses its officers. Its officers are responsible for day-to-
day business decisions based on policies set by the board. The
board has named an executive committee that has authority to act on
its behalf between meetings. The board members serve on the boards
of all 47 funds in the IDS MUTUAL FUND GROUP, except for Mr. Dudley
Mr. Dudley is a board member of all IDS funds, except the nine life
funds. The board members also serve as members of the board of the
Trust which manages the investments of the Fund and other accounts.
Should any conflict of interest arise between the interests of the
shareholders of the Fund and those of the other accounts, the board
will follow written procedures to address the conflict.
Board members and officers of the Fund
President and interested board member
William R. Pearce
President of all funds in the IDS MUTUAL FUND GROUP.
Independent board members
H. Brewster Atwater, Jr.
Former chairman and chief executive officer, General Mills, Inc.
<PAGE>
PAGE 29
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public
Policy Research.
Robert F. Froehlke
Former president of all funds in the IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Melvin R. Laird
Senior counsellor for national and international affairs, The
Reader's Digest Association, Inc.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
Interested board members who are officers and/or employees of AEFC
William H. Dudley
Executive vice president, AEFC.
David R. Hubers
President and chief executive officer, AEFC.
John R. Thomas
Senior vice president, AEFC.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Vice president of all funds in the IDS MUTUAL FUND GROUP.
Melinda S. Urion
Treasurer of all funds in the IDS MUTUAL FUND GROUP.
Other officer
Leslie L. Ogg
Vice president, general counsel and secretary of all funds in the
IDS MUTUAL FUND GROUP.
Refer to the SAI for the board members' and officers' biographies.
Investment manager
The Portfolio pays AEFC for managing its assets. The Fund pays its
proportionate share of the fee. Under the Investment Management
Services Agreement that became effective March 20, 1995, AEFC is <PAGE>
PAGE 30
paid a fee for these services based on the average daily net assets
of the Portfolio, as follows:
Assets Annual rate
(billions) at each asset level
First $0.25 0.770%
Next 0.25 0.745
Next 0.25 0.720
Next 0.25 0.695
Over 1.0 0.670
For the fiscal period ended Oct. 31, 1996, the Portfolio paid AEFC
a total investment management fee of 0.75% of its average daily net
assets. Under the Agreement, the Portfolio also pays taxes,
brokerage commissions and nonadvisory expenses.
Administrator and transfer agent
The Fund pays AEFC for shareholder accounting and transfer agent
services under two agreements. The first agreement, the
Administrative Services Agreement, has a declining annual rate
beginning at 0.06% and decreasing to 0.04% as assets increase. The
second agreement, the Transfer Agency Agreement, has an annual fee
per shareholder account as follows:
o Class A $15.50
o Class B $16.50
o Class Y $15.50
Distributor
The Fund has an exclusive distribution agreement with American
Express Financial Advisors, a wholly owned subsidiary of AEFC.
Financial advisors representing American Express Financial Advisors
provide information to investors about individual investment
programs, the Fund and its operations, new account applications,
and exchange and redemption requests. The cost of these services
is paid partially by the Fund's sales charges.
Persons who buy Class A shares pay a sales charge at the time of
purchase. Persons who buy Class B shares are subject to a
contingent deferred sales charge on a redemption in the first six
years and pay an asset-based sales charge (also known as a 12b-1
plan) of 0.75% of the Fund's average daily net assets. Class Y
shares are sold without a sales charge and without an asset-based
sales charge.
Financial advisors may receive different compensation for selling
Class A, Class B and Class Y shares. Portions of the sales charge
also may be paid to securities dealers who have sold the Fund's
shares or to banks and other financial institutions. The amounts
of those payments range from 0.8% to 4% of the Fund's offering
price depending on the monthly sales volume.
Under a Shareholder Service Agreement, the Fund also pays a fee for
service provided to shareholders by financial advisors and other <PAGE>
PAGE 31
servicing agents. The fee is calculated at a rate of 0.175% of the
Fund's average daily net assets attributable to Class A and Class B
shares.
Total expenses paid by the Fund's Class A shares for the fiscal
year ended Oct. 31, 1996, were 1.20% of its average daily net
assets. Expenses for Class B and Class Y were 1.96% and 1.01%,
respectively.
Total fees and expenses (excluding taxes and brokerage commissions)
cannot exceed the most restrictive applicable state expense
limitation.
The expense ratio of the Fund and Portfolio may be higher than that
of a fund investing exclusively in domestic securities because the
expenses of the Fund and Portfolio, such as the investment
management fee and the custodial costs, are higher. The expense
ratio generally is not higher, however, than that of funds with
similar investment goals and policies.
About American Express Financial Corporation
General information
The AEFC family of companies offers not only mutual funds but also
insurance, annuities, investment certificates and a broad range of
financial management services.
Besides managing investments for all publicly offered funds in the
IDS MUTUAL FUND GROUP, AEFC also manages investments for itself and
its subsidiaries, IDS Certificate Company and IDS Life Insurance
Company. Total assets under management on Oct. 31, 1996 were more
than $145 billion.
American Express Financial Advisors serves individuals and
businesses through its nationwide network of more than 175 offices
and more than 7,900 advisors.
Other AEFC subsidiaries provide investment management and related
services for pension, profit sharing, employee savings and
endowment funds of businesses and institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is
a wholly owned subsidiary of American Express Company (American
Express), a financial services company with headquarters at
American Express Tower, World Financial Center, New York, NY 10285.
The Portfolio may pay brokerage commissions to broker-dealer
affiliates of AEFC.
<PAGE>
PAGE 32
Appendix A
Description of corporate bond ratings
Bond ratings concern the quality of the issuing corporation. They
are not an opinion of the market value of the security. Such
ratings are opinions on whether the principal and interest will be
repaid when due. A security's rating may change, which could
affect its price. Ratings by Moody's Investors Service, Inc. are
Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Ratings by Standard &
Poor's Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D.
The following is a compilation of the two agencies' rating
descriptions. For further information, see the SAI.
Aaa/AAA - Judged to be of the best quality and carry the smallest
degree of investment risk. Interest and principal are secure.
Aa/AA - Judged to be high-grade although margins of protection for
interest and principal may not be quite as good as Aaa or AAA rated
securities.
A - Considered upper-medium grade. Protection for interest and
principal is deemed adequate but may be susceptible to future
impairment.
Baa/BBB - Considered medium-grade obligations. Protection for
interest and principal is adequate over the short-term; however,
these obligations may have certain speculative characteristics.
Ba/BB - Considered to have speculative elements. The protection of
interest and principal payments may be very moderate.
B - Lack characteristics of more desirable investments. There may
be small assurance over any long period of time of the payment of
interest and principal.
Caa/CCC - Are of poor standing. Such issues may be in default or
there may be risk with respect to principal or interest.
Ca/CC - Represent obligations that are highly speculative. Such
issues are often in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These
securities have major risk exposures to default.
D - Are in payment default. The D rating is used when interest
payments or principal payments are not made on the due date.
Non-rated securities will be considered for investment when they
possess a risk comparable to that of rated securities consistent
with the Portfolio's objectives and policies. When assessing the
risk involved in each non-rated security, the Portfolio will
consider the financial condition of the issuer or the protection
afforded by the terms of the security.
<PAGE>
PAGE 33
Definitions of zero-coupon and pay-in-kind securities
A zero-coupon security is a security that is sold at a deep
discount from its face value and makes no periodic interest
payments. The buyer of such a security receives a rate of return
by gradual appreciation of the security, which is redeemed at face
value on the maturity date.
A pay-in-kind security is a security in which the issuer has the
option to make interest payments in cash or in additional
securities. The securities issued as interest usually have the
same terms, including maturity date, as the pay-in-kind securities.
<PAGE>
PAGE 34
Appendix B
Descriptions of derivative instruments
What follows are brief descriptions of derivative instruments the
Portfolio may use. At various times the Portfolio may use some or
all of these instruments and is not limited to these instruments.
It may use other similar types of instruments if they are
consistent with the Portfolio's investment goal and policies. For
more information on these instruments, see the SAI.
Options and futures contracts. An option is an agreement to buy or
sell an instrument at a set price during a certain period of time.
A futures contract is an agreement to buy or sell an instrument for
a set price on a future date. The Portfolio may buy or sell
options and futures contracts to manage its exposure to changing
interest rates, security prices and currency exchange rates.
Options and futures may be used to hedge the Portfolio's
investments against price fluctuations or to increase market
exposure.
Asset-backed and mortgage-backed securities. Asset-backed
securities include interests in pools of assets such as motor
vehicle installment sale contracts, installment loan contracts,
leases on various types of real and personal property, receivables
from revolving credit (credit card) agreements or other categories
of receivables. Mortgage-backed securities include collateralized
mortgage obligations and stripped mortgage-backed securities.
Interest and principal payments depend on payment of the underlying
loans or mortgages. The value of these securities may also be
affected by changes in interest rates, the market's perception of
the issuers and the creditworthiness of the parties involved. The
non-mortgage related asset-backed securities do not have the
benefit of a security interest in the related collateral. Stripped
mortgage-backed securities include interest only (IO) and principal
only (PO) securities. Cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments on the
underlying mortgage loans or mortgage-backed securities.
Indexed securities. The value of indexed securities is linked to
currencies, interest rates, commodities, indexes or other financial
indicators. Most indexed securities are short- to intermediate-
term fixed income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile
than the underlying instrument itself.
Inverse floaters. Inverse floaters are created by underwriters
using the interest payment on securities. A portion of the
interest received is paid to holders of instruments based on
current interest rates for short-term securities. The remainder,
minus a servicing fee, is paid to holders of inverse floaters. As
interest rates go down, the holders of the inverse floaters receive
more income and an increase in the price for the inverse floaters.
As interest rates go up, the holders of the inverse floaters
receive less income and a decrease in the price for the inverse
floaters.<PAGE>
PAGE 35
Structured products. Structured products are over-the-counter
financial instruments created specifically to meet the needs of one
or a small number of investors. The instrument may consist of a
warrant, an option or a forward contract embedded in a note or any
of a wide variety of debt, equity and/or currency combinations.
Risks of structured products include the inability to close such
instruments, rapid changes in the market and defaults by other
parties.
<PAGE>
PAGE 36
IDS GLOBAL SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS GLOBAL BOND FUND
Dec. 30, 1996
This Statement of Additional Information (SAI) is not a prospectus.
It should be read together with the prospectus and the financial
statements contained in the Annual Report which may be obtained
from your American Express financial advisor or by writing to
American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534.
This SAI is dated Dec. 30, 1996, and it is to be used with the
prospectus dated Dec. 30, 1996, and the Annual Report for the
fiscal year ended Oct. 31, 1996.
<PAGE>
PAGE 37
TABLE OF CONTENTS
Goal and Investment Policies......................See Prospectus
Additional Investment Policies................................p. 3
Security Transactions.........................................p. 7
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation........................p. 9
Performance Information.......................................p. 10
Valuing Fund Shares...........................................p. 12
Investing in the Fund.........................................p. 13
Redeeming Shares..............................................p. 17
Pay-out Plans.................................................p. 18
Taxes.........................................................p. 19
Agreements....................................................p. 21
Organizational Information....................................p. 25
Board Members and Officers....................................p. 25
Compensation for the Fund Board Members.......................p. 28
Compensation for the Portfolio Board Members..................p. 29
Custodian.....................................................p. 29
Independent Auditors..........................................p. 30
Financial Statements..............................See Annual Report
Prospectus....................................................p. 30
Appendix A: Foreign Currency Transactions....................p. 31
Appendix B: Options and Futures Contracts....................p. 36
Appendix C: Mortgage-Backed Securities.......................p. 43
Appendix D: Dollar-Cost Averaging............................p. 44
<PAGE>
PAGE 38
ADDITIONAL INVESTMENT POLICIES
The Fund pursues its goal by investing all of its assets in World
Income Portfolio (the "Portfolio") of the World Trust (the
"Trust"), a separate investment company, rather than by directly
investing in and managing its own portfolio of securities. The
Portfolio has the same investment objectives, policies and
restrictions as the Fund.
Fundamental investment policies adopted by the Fund or Portfolio
cannot be changed without the approval of a majority of the
outstanding voting securities of the Fund or Portfolio, as defined
in the Investment Company Act of 1940. Whenever the Fund is
requested to vote on a change in the investment policies of the
corresponding Portfolio, the Fund will hold a meeting of Fund
shareholders and will cast the Fund's vote as instructed by the
shareholders.
Notwithstanding any of the Fund's other investment policies, the
Fund may invest its assets in an open-end management investment
company having substantially the same investment objectives,
policies and restrictions as the Fund for the purpose of having
those assets managed as part of a combined pool.
These are investment policies in addition to those presented in the
prospectus. The policies below are fundamental policies of the
Fund and the Portfolio and may be changed only with shareholder
approval. Unless holders of a majority of the outstanding voting
securities agree to make the change, the Fund and the Portfolio
will not:
'Act as an underwriter (sell securities for others). However,
under the securities laws, the Portfolio may be deemed to be an
underwriter when it purchases securities directly from the issuer
and later resells them.
'Make cash loans if the total commitment amount exceeds 5% of the
Portfolio's total assets.
'Borrow money or property, except as a temporary measure for
extraordinary or emergency purposes, in an amount not exceeding
one-third of the market value of its total assets (including
borrowings) less liabilities (other than borrowings) immediately
after the borrowing. The Portfolio has not borrowed in the past
and has no present intention to borrow.
'Concentrate in any one industry. According to the present
interpretation by the Securities and Exchange Commission (SEC),
this means no more than 25% of the Portfolio's total assets, based
on current market value at time of purchase, can be invested in any
one industry.
'Purchase more than 10% of the outstanding voting securities of an
issuer.
<PAGE>
PAGE 39
'Buy or sell real estate, unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent
the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the
real estate business or real estate investment trusts. For
purposes of this policy, real estate includes real estate limited
partnerships.
'Buy or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, except this shall not
prevent the Portfolio from buying or selling options and futures
contracts or from investing in securities or other instruments
backed by, or whose value is derived from, physical commodities.
'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.
'Purchase securities of an issuer if the board members and officers
of the Fund, the Portfolio 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, the Portfolio and
AEFC who own more than 0.5% of an issuer's securities are added
together, and if in total they own more than 5%, the Portfolio will
not purchase securities of that issuer.
'Lend Portfolio securities in excess of 30% of its net assets. The
current policy of the Portfolio's board is to make these loans,
either long- or short-term, to broker-dealers. In making loans,
the Portfolio gets the market price in cash, U.S. government
securities, letters of credit or such other collateral as may be
permitted by regulatory agencies and approved by the board. If the
market price of the loaned securities goes up, the Portfolio will
get additional collateral on a daily basis. The risks are that the
borrower may not provide additional collateral when required or
return the securities when due. During the existence of the loan,
the Portfolio receives cash payments equivalent to all interest or
other distributions paid on the loaned securities. A loan will not
be made unless the investment manager believes the opportunity for
additional income outweighs the risks.
'Issue senior securities, except to the extent that borrowing from
banks and using options, foreign currency forward contracts or
future contracts (as discussed elsewhere in the Portfolio's
prospectus and SAI) may be deemed to constitute issuing a senior
security.
Unless changed by the board, the Fund and the Portfolio will not:
'Buy on margin or sell short, but it may make margin payments in
connection with transactions in futures contracts.
'Pledge or mortgage its assets beyond 15% of total assets. If the
Portfolio were ever to do so, valuation of the pledged or mortgaged
assets would be based on market values. For purposes of this <PAGE>
PAGE 40
restriction, collateral arrangements for margin deposits on futures
contracts are not deemed to be a pledge of assets.
'Invest more than 5% of its total assets in securities of domestic
or foreign companies, including any predecessors, that have a
record of less than three years continuous operations.
'Invest more than 10% of its total assets in securities of
investment companies. Under one state's law, the Portfolio is
limited to investments in the open market where no commission or
profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or when the purchase is part of
a plan or merger, consolidation, reorganization or acquisition.
The Portfolio has no current intention to invest in securities of
other investment companies.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or
mineral leases.
'Invest more than 5% of its net assets in warrants. Under one
state's law no more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York or American Stock
Exchange.
'Invest more than 10% of its net assets in securities and
derivative instruments that are illiquid. For purposes of this
policy illiquid securities include some privately placed
securities, public securities and Rule 144A securities that for one
reason or another may no longer have a readily available market,
loans and loan participations, repurchase agreements with
maturities greater than seven days, non-negotiable fixed-time
deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are
unregistered securities offered to qualified institutional buyers,
and interest-only and principal-only fixed mortgage-backed
securities (IOs and POs) issued by the U.S. government or its
agencies and instrumentalities, the investment manager, under
guidelines established by the board, will consider any relevant
factors including the frequency of trades, the number of dealers
willing to purchase or sell the security and the nature of
marketplace trades.
In determining the liquidity of commercial paper issued in
transactions not involving a public offering under Section 4(2) of
the Securities Act of 1933, the investment manager, under
guidelines established by the board, will evaluate relevant factors
such as the issuer and the size and nature of its commercial paper
programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and
settlement procedures for the paper.
<PAGE>
PAGE 41
Loans, loan participations and interests in securitized loan pools
are interests in amounts owed by a corporate, governmental or other
borrower to a lender or consortium of lenders (typically banks,
insurance companies, investment banks, government agencies or
international agencies). Loans involve a risk of loss in case of
default or insolvency of the borrower and may offer less legal
protection to the Portfolio in the event of fraud or
misrepresentation. In addition, loan participations involve a risk
of insolvency of the lender or other financial intermediary.
The Portfolio may make contracts to purchase securities for a fixed
price at a future date beyond normal settlement time (when-issued
securities or forward commitments). Under normal market
conditions, the Portfolio does not intend to commit more than 5% of
its total assets to these practices. The Portfolio does not pay
for the securities or receive dividends or interest on them until
the contractual settlement date. The Portfolio will designate cash
or liquid high-grade debt securities at least equal in value to its
commitments to purchase the securities. When-issued securities or
forward commitments are subject to market fluctuations and they may
affect the Portfolio's total assets the same as owned securities.
The Portfolio may maintain a portion of its assets in cash and
cash-equivalent investments. The cash-equivalent investments the
Portfolio may use are short-term U.S. and Canadian government
securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances and letters of credit of
banks or savings and loan associations having capital, surplus and
undivided profits (as of the date of its most recently published
annual financial statements) in excess of $100 million (or the
equivalent in the instance of a foreign branch of a U.S. bank) at
the date of investment. The Portfolio also may purchase short-term
notes and obligations (rated in the top two classifications by
Moody's Investors Service, Inc. (Moody's) or Standard & Poor's
Corporation (S&P) or the equivalent) of U.S. and foreign banks and
corporations and may use repurchase agreements with broker-dealers
registered under the Securities Exchange Act of 1934 and with
commercial banks. A risk of a repurchase agreement is that if the
seller seeks the protection of the bankruptcy laws, the Portfolio's
ability to liquidate the security involved could be impaired. As a
temporary investment, during periods of weak or declining market
values for the securities in which the Portfolio invests, any
portion of its assets may be converted to cash (in foreign
currencies or U.S. dollars) or to the kinds of short-term debt
securities discussed in this paragraph.
For a discussion about foreign currency transactions, see Appendix
A. For a discussion on options and futures contracts, see Appendix
B. For a discussion on mortgage-backed securities, see Appendix C.
<PAGE>
PAGE 42
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. AEFC carefully monitors compliance with its Code of
Ethics.
On occasion, it may be desirable to compensate a broker for
research services or for brokerage services by paying a commission
that might not otherwise be charged or a commission in excess of
the amount another broker might charge. The board has adopted a
policy authorizing AEFC to do so to the extent authorized by law,
if AEFC determines, in good faith, that such commission is
reasonable in relation to the value of the brokerage or research
services provided by a broker or dealer, viewed either in the light
of that transaction or AEFC's overall responsibilities to the funds
in the IDS MUTUAL FUND GROUP and other funds for which it acts as
investment advisor.
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, <PAGE>
PAGE 43
three procedures have been authorized. One procedure permits AEFC
to direct an order to buy or sell a security traded on a national
securities exchange to a specific broker for research services it
has provided. The second procedure permits AEFC, in order to
obtain research, to direct an order on an agency basis to buy or
sell a security traded in the over-the-counter market to a firm
that does not make a market in that security. The commission paid
generally includes compensation for research services. The third
procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Portfolio to pay a commission in excess of
the amount another broker might have charged. AEFC has advised the
Portfolio it is necessary to do business with a number of brokerage
firms on a continuing basis to obtain such services as the handling
of large orders, the willingness of a broker to risk its own money
by taking a position in a security, and the specialized handling of
a particular group of securities that only certain brokers may be
able to offer. As a result of this arrangement, some portfolio
transactions may not be effected at the lowest commission, but AEFC
believes it may obtain better overall execution. AEFC has assured
the Portfolio that under all three procedures the amount of
commission paid will be reasonable and competitive in relation to
the value of the brokerage services performed or research provided.
All other transactions shall be placed on the basis of obtaining
the best available price and the most favorable execution. In so
doing, if in the professional opinion of the person responsible for
selecting the broker or dealer, several firms can execute the
transaction on the same basis, consideration will be given by such
person to those firms offering research services. Such services
may be used by AEFC in providing advice to all the funds in the IDS
MUTUAL FUND GROUP even though it is not possible to relate the
benefits to any particular fund or account.
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 Portfolio
buys or sells the same security as another portfolio, fund or
account, AEFC carries out the purchase or sale in a way the
Portfolio agrees in advance is fair. Although sharing in large
transactions may adversely affect the price or volume purchased or
sold by the Portfolio, the Portfolio hopes to gain an overall
advantage in execution. AEFC has assured the Portfolio it will
continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC makes a comprehensive review of the
broker-dealers and the overall reasonableness of their commissions.
The review evaluates execution, operational efficiency and research
services.
The Portfolio paid total brokerage commissions of $1,884 for the
fiscal year ended Oct. 31, 1996, $11,918 for fiscal year 1995, and
$46,364 for fiscal year 1994. Substantially all firms through whom
transactions were executed provide research services.
<PAGE>
PAGE 44
No transactions were directed to brokers because of research
services they provided to the Fund.
As of the fiscal year ended Oct. 31, 1996, the Fund held securities
of its regular brokers or dealers or of the parent of those brokers
or dealers that derived more than 15% of gross revenue from
securities-related activities as presented below:
Value of Securities
Owned at End of
Name of Issuer Fiscal Year
Dean Witter $4,298,104
First Chicago 4,997,083
The portfolio turnover rate was 49% in the fiscal year ended Oct.
31, 1996, and 92% in fiscal year 1995.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN
EXPRESS FINANCIAL CORPORATION
Affiliates of American Express Company (American Express) (of which
AEFC is a wholly owned subsidiary) may engage in brokerage and
other securities transactions on behalf of the Portfolio according
to procedures adopted by the Portfolio's board and to the extent
consistent with applicable provisions of the federal securities
laws. AEFC will use an American Express affiliate only if (i) AEFC
determines that the Portfolio will receive prices and executions at
least as favorable as those offered by qualified independent
brokers performing similar brokerage and other services for the
Portfolio and (ii) the affiliate charges the Portfolio commission
rates consistent with those the affiliate charges comparable
unaffiliated customers in similar transactions and if such use is
consistent with terms of the Investment Management Services
Agreement.
AEFC may direct brokerage to compensate an affiliate. AEFC will
receive research on South Africa from New Africa Advisors, a
wholly-owned subsidiary of Sloan Financial Group. AEFC owns 100%
of IDS Capital Holdings Inc. which in turn owns 40% of Sloan
Financial Group. New Africa Advisors will send research to AEFC
and in turn AEFC will direct trades to a particular broker. The
broker will have an agreement to pay New Africa Advisors. All
transactions will be on a best execution basis. Compensation
received will be reasonable for the services rendered.<PAGE>
PAGE 45
Information about brokerage commissions paid by the Portfolio for
the last three fiscal years to brokers affiliated with AEFC is
contained in the following table:
<TABLE><CAPTION>
For the Fiscal Year Ended Oct. 31
1996 1995 1994
Aggregate Percent of Aggregate Aggregate
Dollar Aggregate Dollar Dollar Dollar
Amount of Percent of Amount of Amount of Amount of
Nature Commissions Aggregate Transactions Commissions Commissions
of Paid to Brokerage Involving Payment Paid to Paid to
Broker Affiliation Broker Commissions of Commissions Broker Broker
<S> <C> <C> <C> <C> <C> <C>
Lehman
Brothers, Inc. (1) None None None None $ 360
American
Enterprise
Investment
Services Inc. (2) None None None None 7,465
</TABLE>
(1) Under common control with AEFC as a subsidiary of American
Express until May 31, 1994.
(2) Wholly owned subsidiary of AEFC.
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past
performance. Average annual total return and current yield
quotations used by the Fund are based on standardized methods of
computing performance as required by the SEC. An explanation of
the methods used by the Fund to compute performance follows below.
Average annual total return
The Fund may calculate average annual total return for a class for
certain periods by finding the average annual compounded rates of
return over the period that would equate the initial amount
invested to the ending redeemable value, according to the following
formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
Aggregate total return
The Fund may calculate aggregate total return for a class for
certain periods representing the cumulative change in the value of
an investment in the Fund over a specified period of time according
to the following formula:<PAGE>
PAGE 46
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
Annualized yield
The Fund may calculate an annualized yield for a class by dividing
the net investment income per share deemed earned during a period
by the net asset value per share on the last day of the period and
annualizing the results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period
The Fund's annualized yield was 5.53% for Class A, 5.06% for Class
B and 6.24% for Class Y for the 30-day period ended Oct. 31, 1996.
The Fund's yield, calculated as described above according to the
formula prescribed by the SEC, is a hypothetical return based on
market value yield to maturity for the Fund's securities. It is
not necessarily indicative of the amount which was or may be paid
to the Fund's shareholders. Actual amounts paid to Fund
shareholders are reflected in the distribution yield.
Distribution yield
Distribution yield is calculated according to the following
formula:
D divided by POP F equals DY
30 30
where: D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor
DY = distribution yield
The Fund's distribution yield was 5.03% for Class A, 4.52% for
Class B and 5.47% for Class Y for the 30-day period ended Oct. 31,
1996.<PAGE>
PAGE 47
In its sales material and other communications, the Fund may quote,
compare or refer to rankings, yields or returns as published by
independent statistical services or publishers and publications
such as The Bank Rate Monitor National Index, Barron's, Business
Week, Donoghue's Money Market Fund Report, Financial Services Week,
Financial Times, Financial World, Forbes, Fortune, Global Investor,
Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance, Lipper Analytical Services, Money, Morningstar, Mutual
Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S.
News and World Report, The Wall Street Journal and Wiesenberger
Investment Companies Service.
VALUING FUND SHARES
The value of an individual share for each class is determined by
using the net asset value before shareholder transactions for the
day. On Nov. 1, 1996, the first business day following the end of
the fiscal year, the computation looked like this:
<TABLE><CAPTION>
Net assets before Shares outstanding Net asset value
shareholder transactions at end of previous day of one share
<S> <C> <C> <C> <C> <C>
Class A $689,735,460 divided by 109,655,876 equals $6.29
Class B 141,346,125 22,471,562 6.29
Class Y 1,063 169 6.29
</TABLE>
In determining net assets before shareholder transactions, the
Portfolio's securities are valued as follows as of the close of
business of the New York Stock Exchange (the Exchange):
'Securities, except bonds other than convertibles, traded on a
securities exchange for which a last-quoted sales price is readily
available are valued at the last-quoted sales price on the exchange
where such security is primarily traded.
'Securities traded on a securities exchange for which a last-quoted
sales price is not readily available are valued at the mean of the
closing bid and asked prices, looking first to the bid and asked
prices on the exchange where the security is primarily traded and,
if none exist, to the over-the-counter market.
'Securities included in the NASDAQ National Market System are
valued at the last-quoted sales price in this market.
'Securities included in the NASDAQ National Market System for which
a last-quoted sales price is not readily available, and other
securities traded over-the-counter but not included in the NASDAQ
National Market System are valued at the mean of the closing bid
and asked prices.
'Futures and options traded on major exchanges are valued at the
last-quoted sales price on their primary exchange.
'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 <PAGE>
PAGE 48
quoted in foreign currencies are translated into U.S. dollars at
the current rate of exchange. Occasionally, events affecting the
value of such securities may occur between such times and the close
of the Exchange that will not be reflected in the computation of
the Fund's net asset value. If events materially affecting the
value of such securities occur during such period, these securities
will be valued at their fair value according to procedures decided
upon in good faith by the board.
'Short-term securities maturing more than 60 days from the
valuation date are valued at the readily available market price or
approximate market value based on current interest rates. Short-
term securities maturing in 60 days or less that originally had
maturities of more than 60 days at acquisition date are valued at
amortized cost using the market value on the 61st day before
maturity. Short-term securities maturing in 60 days or less at
acquisition date are valued at amortized cost. Amortized cost is
an approximation of market value determined by systematically
increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium,
so that the carrying value is equal to maturity value on the
maturity date.
'Securities without a readily available market price, bonds other
than convertibles and other assets are valued at fair value as
determined in good faith by the board. The board is responsible
for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from
the Portfolio. If a valuation of a bond is not available from a
pricing service, the bond will be valued by a dealer knowledgeable
about the bond if such a dealer is available.
The Exchange, AEFC and the Fund will be closed on the following
holidays: New Year's Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
INVESTING IN THE FUND
Sales Charge
Shares of the Fund are sold at the public offering price determined
at the close of business on the day an application is accepted.
The public offering price is the net asset value of one share plus
a sales charge, if applicable. For Class B and Class Y, there is
no initial sales charge so the public offering price is the same as
the net asset value. For Class A, the public offering price for an
investment of less than $50,000, made Nov. 1, 1996, was determined
by dividing the net asset value of one share, $6.29, by 0.95 (1.00-
0.05 for a maximum 5% sales charge) for a public offering price of
$6.62. The sales charge is paid to American Express Financial
Advisors by the person buying the shares.
<PAGE>
PAGE 49
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
Within each increment,
sales charge as a
percentage of:
Public Net
Amount of Investment Offering Price Amount Invested
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
Sales charges on an investment greater than $50,000 and less than
$1,000,000 are calculated for each increment separately and then
totaled. The resulting total sales charge, expressed as a
percentage of the public offering price and of the net amount
invested, will vary depending on the proportion of the investment
at different sales charge levels.
For example, compare an investment of $60,000 with an investment of
$85,000. The $60,000 investment is composed of $50,000 that incurs
a sales charge of $2,500 (5.0% x $50,000) and $10,000 that incurs a
sales charge of $450 (4.5% x $10,000). The total sales charge of
$2,950 is 4.92% of the public offering price and 5.17% of the net
amount invested.
In the case of the $85,000 investment, the first $50,000 also
incurs a sales charge of $2,500 (5.0% x $50,000) and $35,000 incurs
a sales charge of $1,575 (4.5% x $35,000). The total sales charge
of $4,075 is 4.79% of the public offering price and 5.04% of the
net amount invested.
The following table shows the range of sales charges as a
percentage of the public offering price and of the net amount
invested on total investments at each applicable level.
On total investment, sales
charge as a percentage of
Public Net
Offering Price Amount Invested
Amount of Investment ranges from:
First $ 50,000 5.00% 5.26%
More than 50,000 to 100,000 5.00-4.50 5.26-4.71
More than 100,000 to 500,000 4.50-3.80 4.71-3.95
More than 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
The initial sales charge is waived for certain qualified plans that
meet the requirements described in the prospectus. Participants in
these qualified plans may be subject to a deferred sales charge on <PAGE>
PAGE 50
certain redemptions. The deferred sales charge on certain
redemptions will be waived if the redemption is a result of a
participant's death, disability, retirement, attaining age 59 1/2,
loans or hardship withdrawals. The deferred sales charge varies
depending on the number of participants in the qualified plan and
total plan assets as follows:
Deferred Sales Charge
Number of Participants
Total Plan Assets 1-99 100 or more
Less than $1 million 4% 0%
$1 million or more 0% 0%
_________________________________________________________
Class A - Reducing the Sales Charge
Sales charges are based on the total amount of your investments in
the Fund. The amount of all prior investments plus any new
purchase is referred to as your "total amount invested." For
example, suppose you have made an investment of $20,000 and later
decide to invest $40,000 more. Your total amount invested would be
$60,000. As a result, $10,000 of your $40,000 investment qualifies
for the lower 4.5% sales charge that applies to investments of more
than $50,000 and up to $100,000.
The total amount invested includes any shares held in the Fund in
the name of a member of your primary household group. (The primary
household group consists of accounts in any ownership for spouses
or domestic partners and their unmarried children under 21.
Domestic partners are individuals who maintain a shared primary
residence and have joint property or other insurable interests.
For instance, if your spouse already has invested $20,000 and you
want to invest $40,000, your total amount invested will be $60,000
and therefore you will pay the lower charge of 4.5% on $10,000 of
the $40,000.
Until a spouse remarries, the sales charge is waived for spouses
and unmarried children under 21 of deceased board members, officers
or employees of the Fund or AEFC or its subsidiaries and deceased
advisors.
The total amount invested also includes any investment you or your
immediate family already have in the other publicly offered funds
in the IDS MUTUAL FUND GROUP where the investment is subject to a
sales charge. For example, suppose you already have an investment
of $30,000 in another IDS Fund. If you invest $40,000 more in this
Fund, your total amount invested in the funds will be $70,000 and
therefore $20,000 of your $40,000 investment will incur a 4.5%
sales charge.
<PAGE>
PAGE 51
Finally, Individual Retirement Account (IRA) purchases, or other
employee benefit plan purchases made through a payroll deduction
plan or through a plan sponsored by an employer, association of
employers, employee organization or other similar entity, may be
added together to reduce sales charges for shares purchased through
that plan.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you
can reduce the sales charges in Class A by filing a LOI. The
agreement can start at any time and will remain in effect for 13
months. Your investment will be charged normal sales charges until
you have invested $1 million. At that time, your account will be
credited with the sales charges previously paid. Class A
investments made prior to signing an LOI may be used to reach the
$1 million total, excluding Cash Management Fund and Tax-Free Money
Fund. However, we will not adjust for sales charges on investments
made prior to the signing of the LOI. If you do not invest $1
million by the end of 13 months, there is no penalty, you'll just
miss out on the sales charge adjustment. A LOI is not an option
(absolute right) to buy shares.
Here's an example. You file a LOI to invest $1 million and make an
investment of $100,000 at that time. You pay the normal 5% sales
charge on the first $50,000 and 4.5% sales charge on the next
$50,000 of this investment. Let's say you make a second investment
of $900,000 (bringing the total up to $1 million) one month before
the 13-month period is up. On the date that you bring your total
to $1 million, AEFC makes an adjustment to your account. The
adjustment is made by crediting your account with additional
shares, in an amount equivalent to the sales charge previously
paid.
Systematic Investment Programs
After you make your initial investment of $2,000 or more, you can
arrange to make additional payments of $100 or more on a regular
basis. These minimums do not apply to all systematic investment
programs. You decide how often to make payments - monthly,
quarterly, or semiannually. You are not obligated to make any
payments. You can omit payments or discontinue the investment
program altogether. The Fund also can change the program or end it
at any time. If there is no obligation, why do it? Putting money
aside is an important part of financial planning. With a
systematic investment program, you have a goal to work for.
How does this work? Your regular investment amount will purchase
more shares when the net asset value per share decreases, and fewer
shares when the net asset value per share increases. Each purchase
is a separate transaction. After each purchase your new shares
will be added to your account. Shares bought through these
programs are exactly the same as any other fund shares. They can
be bought and sold at any time. A systematic investment program is
not an option or an absolute right to buy shares.<PAGE>
PAGE 52
The systematic investment program itself cannot ensure a profit,
nor can it protect against a loss in a declining market. If you
decide to discontinue the program and redeem your shares when their
net asset value is less than what you paid for them, you will incur
a loss.
For a discussion on dollar-cost averaging, see Appendix D.
Automatic Directed Dividends
Dividends, including capital gain distributions, paid by another
fund in the IDS MUTUAL FUND GROUP subject to a sales charge, may be
used to automatically purchase shares in the same class of this
Fund without paying a sales charge. Dividends may be directed to
existing accounts only. Dividends declared by a fund are exchanged
to this Fund the following day. Dividends can be exchanged into
one fund but cannot be split to make purchases in two or more
funds. Automatic directed dividends are available between accounts
of any ownership except:
Between a non-custodial account and an IRA, or 401(k) plan account
or other qualified retirement account of which American Express
Trust Company acts as custodian;
Between two American Express Trust Company custodial accounts with
different owners (for example, you may not exchange dividends from
your IRA to the IRA of your spouse);
Between different kinds of custodial accounts with the same
ownership (for example, you may not exchange dividends from your
IRA to your 401(k) plan account, although you may exchange
dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the
Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors
Act (UTMA) only into other UGMA or UTMA accounts with identical
ownership.
The Fund's investment goal is described in its prospectus along
with other information, including fees and expense ratios. Before
exchanging dividends into another fund, you should read its
prospectus. You will receive a confirmation that the automatic
directed dividend service has been set up for your account.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an
explanation of redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net
asset value, stop accepting payments for purchase of shares or
suspend the duty of the Fund to redeem shares for more than seven
days. Such emergency situations would occur if:
<PAGE>
PAGE 53
'The Exchange closes for reasons other than the usual weekend and
holiday closings or trading on the Exchange is restricted, or
'Disposal of the Portfolio's securities is not reasonably
practicable or it is not reasonably practicable for the Fund to
determine the fair value of its net assets, or
'The SEC, under the provisions of the Investment Company Act of
1940 (the 1940 Act), as amended, declares a period of emergency to
exist.
Should the Fund stop selling shares, the board may make a deduction
from the value of the assets held by the Fund to cover the cost of
future liquidations of the assets so as to distribute fairly these
costs among all shareholders.
The Fund has elected to be governed by Rule 18f-1 under the 1940
Act, which obligates the Fund to redeem shares in cash, with
respect to any one shareholder during any 90-day period, up to
lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of the period. Although redemptions in excess of this
limitation would normally be paid in cash, the Fund reserves the
right to make these payments in whole or in part in securities or
other assets in case of an emergency, or if the payment of a
redemption in cash would be detrimental to the existing
shareholders of the Fund as determined by the board. In these
circumstances, the securities distributed would be valued as set
forth in the prospectus. Should the Fund distribute securities, a
shareholder may incur brokerage fees or other transaction costs in
converting the securities to cash.
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment
in regular installments. If you redeem Class B shares you may be
subject to a contingent deferred sales charge as discussed in the
prospectus. While the plans differ on how the pay-out is figured,
they all are based on the redemption of your investment. Net
investment income dividends and any capital gain distributions will
automatically be reinvested, unless you elect to receive them in
cash. If you are redeeming a tax-qualified plan account for which
American Express Trust Company acts as custodian, you can elect to
receive your dividends and other distributions in cash when
permitted by law. If you redeem an IRA or a qualified retirement
account, certain restrictions, federal tax penalties and special
federal income tax reporting requirements may apply. You should
consult your tax advisor about this complex area of the tax law.
Applications for a systematic investment in a class of the Fund
subject to a sales charge normally will not be accepted while a
pay-out plan for any of those funds is in effect. Occasional
investments, however, may be accepted.
To start any of these plans, please write or call American Express
Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534, <PAGE>
PAGE 54
612-671-3733. Your authorization must be received in the
Minneapolis headquarters at least five days before the date you
want your payments to begin. The initial payment must be at least
$50. Payments will be made on a monthly, bimonthly, quarterly,
semiannual or annual basis. Your choice is effective until you
change or cancel it.
The following pay-out plans are designed to take care of the needs
of most shareholders in a way AEFC can handle efficiently and at a
reasonable cost. If you need a more irregular schedule of
payments, it may be necessary for you to make a series of
individual redemptions, in which case you'll have to send in a
separate redemption request for each pay-out. The Fund reserves
the right to change or stop any pay-out plan and to stop making
such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be
redeemed at regular intervals during the time period you choose.
This plan is designed to end in complete redemption of all shares
in your account by the end of the fixed period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed
for each payment and that amount will be sent to you. The length
of time these payments continue is based on the number of shares in
your account.
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares
is necessary to make the payment will be redeemed in regular
installments until the account is closed.
Plan #4: Redemption of a percentage of net asset value
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.
TAXES
If you buy shares in the Fund and then exchange into another fund,
it is considered a sale and subsequent purchase of shares. Under
the tax laws, if this exchange is done within 91 days, any sales
charge waived on Class A shares on a subsequent purchase of shares
applies to the new shares acquired in the exchange. Therefore, you
cannot create a tax loss or reduce a tax gain attributable to the
sales charge when exchanging shares within 91 days.
<PAGE>
PAGE 55
Retirement Accounts
If you have a nonqualified investment in the Fund and you wish to
move part or all of those shares to an IRA or qualified retirement
account in the Fund, you can do so without paying a sales charge.
However, this type of exchange is considered a sale of shares and
may result in a gain or loss for tax purposes. In addition, this
type of exchange may result in an excess contribution under IRA or
qualified plan regulations if the amount exchanged plus the amount
of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were
to exchange $2,000 in Class A shares from a nonqualified account to
an IRA without considering the 5% ($100) initial sales charge
applicable to that $2,000, you may be deemed to have exceeded
current IRA annual contribution limitations. You should consult
your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as
dividend income for federal income tax purposes. Corporate
shareholders are generally entitled to a deduction equal to 70% of
that portion of the Fund's dividend that is attributable to
dividends the Fund received from domestic (U.S.) securities. For
the fiscal year ended Oct. 31, 1996, none of the Fund's net
investment income dividends qualified for the corporate deduction.
The exclusion for dividends received by individuals is no longer
available.
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.
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 United States 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 received by individual and corporate
shareholders, if any, should be treated as long-term capital gains
regardless of how long they owned their shares. Short-term capital
gains earned by the Fund are paid to shareholders as part of their
ordinary income dividend and are taxable.<PAGE>
PAGE 56
Under the Internal Revenue Code of 1986 (the Code), gains or losses
attributable to fluctuations in exchange rates which 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.
This is a brief summary that relates to federal income taxation
only. Shareholders should consult their tax advisor as to the
application of federal, state and local income tax laws to Fund
distributions.
AGREEMENTS
Investment Management Services Agreement
The Trust, on behalf of the Portfolio, has an Investment Management
Services Agreement with AEFC. For its services, AEFC is paid a fee
based on the following schedule:
Assets Annual rate at
(billions) each asset level
First $0.25 0.770%
Next 0.25 0.745
Next 0.25 0.720
Next 0.25 0.695
Over 1.0 0.670
On Oct. 31, 1996, the daily rate applied to the Portfolio's net
assets was equal to 0.740% on an annual basis. The fee is <PAGE>
PAGE 57
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 $5,290,110 for the fiscal year ended Oct. 31, 1996,
$3,930,646 for fiscal year 1995, and $3,414,109 for fiscal year
1994.
Under the agreement, the Portfolio also pays taxes, brokerage
commissions and nonadvisory expenses, which include custodian fees;
audit and certain legal fees; fidelity bond premiums; registration
fees for shares; office expenses; 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 of the Portfolio; and expenses properly payable
by the Portfolio, approved by the board. Under the agreement, the
nonadvisory expenses paid by the Fund and the Portfolio were
$619,623 for the fiscal year ended Oct. 31, 1996, $632,116 for
fiscal year 1995, and $641,964 for fiscal year 1994.
In this section prior to May 13, 1996, the fees and expenses
described were paid directly by the Fund. After that date, the
management fees were paid by the Portfolio.
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under
this agreement, the Fund pays AEFC for providing administration and
accounting services. The fee is calculated as follows:
Assets Annual rate
(billions) each asset level
First $0.25 0.060%
Next 0.25 0.055
Next 0.25 0.050
Next 0.25 0.045
Over 1.0 0.040
On Oct. 31, 1996, the daily rate applied to the Fund's net assets
was equal to 0.054% 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
$390,216 for the fiscal year ended Oct. 31, 1996.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with AEFC. This agreement
governs AEFC's responsibility for administering and/or performing
transfer agent functions, for acting as service agent in connection
with dividend and distribution functions and for performing
shareholder account administration agent functions in connection <PAGE>
PAGE 58
with the issuance, exchange and redemption or repurchase of the
Fund's shares. Under the agreement, AEFC will earn a fee from the
Fund determined by multiplying the number of shareholder accounts
at the end of the day by a rate determined for each class per year
and dividing by the number of days in the year. The rate for Class
A and Class Y is $15.50 per year and for Class B is $16.50 per
year. The fees paid to AEFC may be changed from time to time upon
agreement of the parties without shareholder approval. Under the
agreement, the Fund paid fees of $1,005,794 for the fiscal year
ended Oct. 31, 1996.
Distribution Agreement
Under a Distribution Agreement, sales charges deducted for
distributing Fund shares are paid to American Express Financial
Advisors daily. These charges amounted to $3,631,422 for the
fiscal year ended Oct. 31, 1996. After paying commissions to
personal financial advisors, and other expenses, the amount
retained was $-221,637. The amounts were $2,844,025 and $436,482
for fiscal year 1995, and $8,125,263 and $2,870,520 for fiscal year
1994.
Additional information about commissions and compensation for the
fiscal year ended Oct. 31, 1996, is contained in the following
table:
<TABLE><CAPTION>
(1) (2) (3) (4) (5)
Net Compensation
Name of Underwriting on Redemption
Principal Discounts and and Brokerage Other
Underwriter Commissions Repurchases Commissions Compensation
<S> <C> <C> <C> <C>
AEFC None None None $655,522*
American
Express
Financial
Advisors $3,631,422 None None None
*Distribution fees paid pursuant to the Plan and Agreement of
Distribution.
</TABLE>
Shareholder Service Agreement
The Fund pays a fee for service provided to shareholders by
financial advisors and other servicing agents. The fee is
calculated at a rate of 0.175% of the Fund's average daily net
assets attributable to Class A and Class B shares.
Plan and Agreement of Distribution
For Class B shares, to help American Express Financial Advisors
defray the cost of distribution and servicing, not covered by the
sales charges received under the Distribution Agreement, the Fund
and American Express Financial Advisors entered into a Plan and
<PAGE>
PAGE 59
Agreement of Distribution (Plan). These costs cover almost all
aspects of distributing the Fund's shares except compensation to
the sales force. A substantial portion of the costs are not
specifically identified to any one fund in the IDS MUTUAL FUND
GROUP. Under the Plan, American Express Financial Advisors is paid
a fee at an annual rate of 0.75% of the Fund's average daily net
assets attributable to Class B shares.
The Plan must be approved annually by the board, including a
majority of the disinterested board members, if it is to continue
for more than a year. At least quarterly, the board must review
written reports concerning the amounts expended under the Plan and
the purposes for which such expenditures were made. The Plan and
any agreement related to it may be terminated at any time by vote
of a majority of board members who are not interested persons of
the Fund and have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan, or
by vote of a majority of the outstanding voting securities of the
Fund's Class B shares or by American Express Financial Advisors.
The Plan (or any agreement related to it) will terminate in the
event of its assignment, as that term is defined in the 1940 Act,
as amended. The Plan may not be amended to increase the amount to
be spent for distribution without shareholder approval, and all
material amendments to the Plan must be approved by a majority of
the board members, including a majority of the board members who
are not interested persons of the Fund and who do not have a
financial interest in the operation of the Plan or any agreement
related to it. The selection and nomination of disinterested board
members is the responsibility of the other disinterested board
members. No board member who is not an interested person, has any
direct or indirect financial interest in the operation of the Plan
or any related agreement. For the fiscal year ended Oct. 31, 1996,
under the agreement, the Fund paid fees of $655,522.
Total fees and expenses
Total combined fees and nonadvisory expenses of both the Fund and
the Portfolio cannot exceed the most restrictive applicable state
limitation. Currently, the most restrictive applicable state
expense limitation, subject to exclusion of certain expenses, is
2.5% of the first $30 million of the Fund's average daily net
assets, 2% of the next $70 million and 1.5% of average daily net
assets over $100 million, on an annual basis. At the end of each
month, if the fees and expenses of the Fund exceed this limitation
for the Fund's fiscal year in progress, AEFC will assume all
expenses in excess of the limitation. AEFC then may bill the Fund
for such expenses in subsequent months up to the end of that fiscal
year, but not after that date. No interest charges are assessed by
AEFC for expenses it assumes. The Fund paid total fees and
nonadvisory expenses of $9,186,190 for the fiscal year ended Oct.
31, 1996.
<PAGE>
PAGE 60
ORGANIZATIONAL INFORMATION
IDS Global Series, Inc., of which IDS Global Bond Fund is a part,
is an open-end management company, as defined in the Investment
Company Act of 1940. It was incorporated on Oct. 28, 1988 in
Minnesota. The Fund headquarters are at 901 S. Marquette Ave.,
Suite 2810, Minneapolis, MN 55402-3268.
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members who, except for
Mr. Dudley, are also board members and officers of all other funds
in the IDS MUTUAL FUND GROUP. Mr. Dudley is a board member of the
47 publicly offered funds. The board members and officers also are
board members and officers of all five trusts in the Preferred
Master Trust Group. All shares have cumulative voting rights with
respect to the election of board members.
H. Brewster Atwater, Jr.
Born in 1931
4900 IDS Tower
Minneapolis, MN
Former chairman and chief executive officer, General Mills, Inc.
Director, Merck & Co., Inc. and Darden Restaurants, Inc.
Lynne V. Cheney'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of
the Humanities. Director, The Reader's Digest Association Inc.,
Lockheed-Martin, the Interpublic Group of Companies, Inc.
(advertising), and FPL Group, Inc. (holding company for Florida
Power and Light).
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Executive vice president and director of AEFC.
Robert F. Froehlke+
Born in 1922
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP.
Director, the ICI Mutual Insurance Co., Institute for Defense <PAGE>
PAGE 61
Analyses, Marshall Erdman and Associates, Inc. (architectural
engineering) and Public Oversight Board of the American Institute
of Certified Public Accountants.
David R. Hubers+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
Previously, senior vice president, finance and chief financial
officer of AEFC.
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated
(commodity merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law
firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
Melvin R. Laird
Born in 1922
Reader's Digest Association, Inc.
1730 Rhode Island Ave., N.W.
Washington, D.C.
Senior counsellor for national and international affairs, The
Reader's Digest Association, Inc. Former nine-term congressman,
secretary of defense and presidential counsellor. Director, Martin
Marietta Corp., Metropolitan Life Insurance Co., The Reader's
Digest Association, Inc., Science Applications International Corp.,
Wallace Reader's Digest Funds and Public Oversight Board (SEC
Practice Section, American Institute of Certified Public
Accountants).
William R. Pearce+*
Born in 1927
901 S. Marquette Ave.
Minneapolis, MN
President of all funds in the IDS MUTUAL FUND GROUP since June
1993. Former vice chairman of the board, Cargill, Incorporated
(commodity merchants and processors).
<PAGE>
PAGE 62
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman
of the board and chief executive officer, Honeywell Inc. Director,
Boise Cascade Corporation (forest products). Member of
International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of AEFC.
Wheelock Whitney+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The
Valspar Corporation (paints). Director, Bemis Corporation
(packaging), Donaldson Company (air cleaners & mufflers) and
General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer and employee of
the Fund.
**Interested person by reason of being an officer, board member,
employee and/or shareholder of AEFC or American Express.
The board also has appointed officers who are responsible for day-
to-day business decisions based on policies it has established.
In addition to Mr. Pearce, who is president, the Fund's other
officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN<PAGE>
PAGE 63
Vice president, general counsel and secretary of all funds in the
IDS MUTUAL FUND GROUP.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN
Vice president-investments of all funds in the IDS MUTUAL FUND
GROUP. Director and senior vice president-investments of AEFC.
Melinda S. Urion
Born in 1953
IDS Tower 10
Minneapolis, MN
Treasurer of all funds in the IDS MUTUAL FUND GROUP. Director,
senior vice president and chief financial officer of AEFC.
Director and executive vice president and controller of IDS Life
Insurance Company.
COMPENSATION FOR THE FUND BOARD MEMBERS
Members of the board who are not officers of the Fund or of AEFC
receive an annual fee of $100 and the chair of the Contracts
Committee receives an additional $90. Board members receive a $50
per day attendance fee for board meetings. The attendance fee for
meetings of the contracts and Investment Review Committee is $50;
for meetings of the Audit Committee and Personnel Committee $25 and
for traveling out-of-state $8. Expenses for attending meetings are
reimbursed.
During the fiscal year ended Oct. 31, 1996, the members of the
board, for attending up to 25 meetings, received the following
compensation:
<TABLE><CAPTION>
Compensation Table
Pension or Estimated Total cash
Aggregate Retirement annual compensation
compensation benefits benefit from the IDS MUTUAL
from the accrued as upon FUND GROUP and the Preferred
Board member Fund Fund expenses* retirement Master Trust Group
<S> <C> <C> <C> <C>
Lynne V. Cheney $ 812 $ 206 $ 300 $74,500
Robert F. Froehlke 852 800 260 76,800
Heinz F. Hutter 872 312 145 77,300
Anne P. Jones 876 215 300 77,400
Donald M. Kendall 483 211 173 36,000
(part of year)
Melvin R. Laird 945 565 218 80,600
Lewis W. Lehr 500 -- 170 36,700
(part of year)
Edson W. Spencer 1,017 375 160 83,300
Wheelock Whitney 829 433 300 75,200
C. Angus Wurtele 817 342 298 75,300
/TABLE
<PAGE>
PAGE 64
On Oct. 31, 1996, the Fund's board members and officers as a group
owned less than 1% of the outstanding shares. During the fiscal
period ended Oct. 31, 1996, no board member or officer earned more
than $60,000 from this Fund. All board members and officers as a
group earned $16,990, including $3,459 of retirement plan benefits,
from this Fund.
*The Fund had a retirement plan for its independent board members.
The plan was terminated April 30, 1996.
COMPENSATION FOR THE PORTFOLIO BOARD MEMBERS
Members of the board who are not officers of the Portfolio or of
the Advisor receive an annual fee of $300 for World Income
Portfolio. They also receive attendance and other fees. These
fees include for each day in attendance at meetings of the board,
$50; for meetings of the Contracts and Investment Review
Committees, $50; meetings of the Audit Committee, $25; for
traveling from out-of-state, $8; and as Chair of the Contracts
Committee, $90. Expenses for attending meetings are reimbursed.
During the fiscal period from May 13, 1996 to Oct. 31, 1996 the
members of the board, for attending up to 25 meetings, received the
following compensation, in total, from all Portfolios in the
Preferred Master Trust Group:
<TABLE><CAPTION>
Compensation Table
for World Income Portfolio
Pension or Estimated Total cash
Aggregate Retirement annual compensation
compensation benefits benefit from the Preferred
from the accrued as upon Master Trust Group and
Board member Portfolio Portfolio expenses* retirement IDS MUTUAL FUND GROUP
<S> <C> <C> <C> <C>
Lynne V. Cheney $ 289 $0 $0 $74,500
Robert F. Froehlke 332 0 0 76,800
Heinz F. Hutter 310 0 0 77,300
Anne P. Jones 314 0 0 77,400
Melvin R. Laird 351 0 0 80,600
Edson W. Spencer 352 0 0 83,300
Wheelock Whitney 302 0 0 75,200
C. Angus Wurtele 320 0 0 75,300
</TABLE>
During the fiscal period from May 13, 1996 to Oct. 31, 1996, no
board member or officer earned more than $60,000 from the World
Income Portfolio. All board members and officers as a group earned
$1,338 from World Income Portfolio.
CUSTODIAN
The Trust'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
Fund also retains the custodian pursuant to a custodian agreement.
The custodian is permitted to deposit some or all of its securities
in central depository systems as allowed by federal law. For its
services, the Portfolio pays the custodian a maintenance charge and
a charge per transaction in addition to reimbursing the custodian's
out-of-pocket expenses.
<PAGE>
PAGE 65
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 such other financial institutions as may be permitted
by law and by the Fund's sub-custodian agreement.
INDEPENDENT AUDITORS
The Fund's and corresponding Portfolio's financial statements
contained in the Annual Report to shareholders for the fiscal year
ended Oct. 31, 1996, were audited by independent auditors, KPMG
Peat Marwick LLP, 4200 Norwest Center, 90 S. Seventh St.,
Minneapolis, MN 55402-3900. The independent auditors also provide
other accounting and tax-related services as requested by the Fund.
FINANCIAL STATEMENTS
The Independent Auditors' Reports and the Financial Statements,
including Notes to the Financial Statements and the Schedule of
Investments in Securities, contained in the 1996 Annual Report to
shareholders, pursuant to Section 30(d) of the Investment Company
Act of 1940, as amended, are hereby incorporated in this SAI by
reference. No other portion of the Annual Report, however, is
incorporated by reference.
PROSPECTUS
The prospectus for IDS Global Bond Fund dated Dec. 30, 1996, is
hereby incorporated in this SAI by reference.
<PAGE>
PAGE 66
APPENDIX A
FOREIGN CURRENCY TRANSACTIONS
Since investments in foreign countries usually involve currencies
of foreign countries, and since the Portfolio may hold cash and
cash-equivalent investments in foreign currencies, the value of the
Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, the Portfolio may incur costs
in connection with conversions between various currencies.
Spot Rates and Forward Contracts. The Portfolio conducts its
foreign currency exchange transactions either at the spot (cash)
rate prevailing in the foreign currency exchange market or by
entering into forward currency exchange contracts (forward
contracts) as a hedge against fluctuations in future foreign
exchange rates. A forward contract involves an obligation to buy
or sell a specific currency at a future date, which may be any
fixed number of days from the contract date, at a price set at the
time of the contract. These contracts are traded in the interbank
market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract
generally has no deposit requirements. No commissions are charged
at any stage for trades.
The Portfolio may enter into forward contracts to settle a security
transaction or handle dividend and interest collection. When the
Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency or has been notified of
a dividend or interest payment, it may desire to lock in the price
of the security or the amount of the payment in dollars. By
entering into a forward contract, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse
change in the relationship between different currencies from the
date the security is purchased or sold to the date on which payment
is made or received or when the dividend or interest is actually
received.
The Portfolio also may enter into forward contracts when management
of the Portfolio believes the currency of a particular foreign
country may change in relationship to the U.S. dollar or 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 such securities in foreign currencies more than
likely will change between the date the forward contract is entered
into and the date it matures. The projection of short-term
currency market movements is extremely difficult and successful
execution of a short-term hedging strategy is highly uncertain.
The Portfolio will not enter into such forward contracts or
maintain a net exposure to such contracts when consummating the
contracts would obligate the Portfolio to deliver an amount of
foreign currency in excess of an offsetting position composed of
the Portfolio's securities and cash. Under normal circumstances, <PAGE>
PAGE 67
consideration of the prospect for currency parities will be
incorporated into the longer term investment strategies. The
investment manager believes it is important, however, to have the
flexibility to enter into such forward contracts when it determines
it is in the best interest of the Portfolio to do so.
The Portfolio will designate cash or securities in an amount equal
to the value of the Portfolio's total assets committed to
consummating forward contracts entered into under the second
circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a
daily basis so that the value of the cash or securities will equal
the amount of the Portfolio's commitments on such contracts.
At maturity of a forward contract, the Portfolio may either sell
the security and make delivery of the foreign currency or retain
the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an offsetting contract with the
same currency trader obligating it to buy, on the same maturity
date, the same amount of foreign currency.
If the Portfolio retains the security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss (as
described below) to the extent there has been movement in forward
contract prices. If the Portfolio engages in an offsetting
transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline
between the date the Portfolio enters into a forward contract for
selling foreign currency and the date it enters into an offsetting
contract for purchasing the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to
buy. Should forward prices increase, the Portfolio will suffer a
loss to the extent the price of the currency it has agreed to buy
exceeds the price of the currency it has agreed to sell.
It is impossible to forecast what the market value of securities
will be at the expiration of a contract. Accordingly, it may be
necessary for the Portfolio to buy additional foreign currency on
the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and a decision is
made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received on the sale of the
security if its market value exceeds the amount of foreign currency
the Portfolio is obligated to deliver.
The Portfolio's dealing in forward contracts will be limited to the
transactions described above. This method of protecting the value
of the Portfolio's securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange that
can be achieved at some point in time. Although such forward <PAGE>
PAGE 68
contracts tend to minimize the risk of loss due to a decline in
value of hedged currency, they tend to limit any potential gain
that might result should the value of such currency increase.
Although the Portfolio values its assets each business day in terms
of U.S. dollars, it does not intend to convert its foreign
currencies into U.S. dollars on a daily basis. It will do so from
time to time, and shareholders should be aware of currency
conversion costs. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the
difference (spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Portfolio may buy put and call
options and write covered call and cash-secured put options on
foreign currencies for hedging purposes. For example, a decline in
the dollar value of a foreign currency in which securities are
denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order
to protect against such diminutions in the value of securities, the
Portfolio may buy put options on the foreign currency. If the
value of the currency does decline, the Portfolio will have the
right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a change in the dollar value of a currency in
which securities to be acquired are denominated is projected, which
would increase the cost of such securities, the Portfolio may buy
call options thereon. The purchase of such options could offset,
at least partially, the effects of the adverse movements in
exchange rates.
As in the case of other types of options, however, the benefit to
the Portfolio derived from purchases of foreign currency options
will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do
not move in the direction or to the extent anticipated, the
Portfolio could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
The Portfolio may write options on foreign currencies for the same
types of hedging purposes. For example, where the Portfolio
anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it could,
instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will
most likely not be exercised and the diminution in value of
securities will be fully or partially offset by the amount of the
premium received.<PAGE>
PAGE 69
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be
acquired, the Portfolio could write a put option on the relevant
currency which, if rates move in the manner projected, will expire
unexercised and allow the Portfolio to hedge such increased cost up
to the amount of the premium.
As in the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and
the Portfolio would be required to buy or sell the underlying
currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the
Portfolio also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable
movements on exchange rates.
All options written on foreign currencies will be covered. An
option written on foreign currencies is covered if the Portfolio
holds currency sufficient to cover the option or has an absolute
and immediate right to acquire that currency without additional
cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An
option writer could lose amounts substantially in excess of its
initial investments, due to the margin and collateral requirements
associated with such positions.
Options on foreign currencies are traded through financial
institutions acting as market-makers, although foreign currency
options also are traded on certain national securities exchanges,
such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. In an over-the-
counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there
are no daily price fluctuation limits, and adverse market movements
could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this
entire amount could be lost.
Foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options
Clearing Corporation (OCC), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting the Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of availability of a liquid
secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature <PAGE>
PAGE 70
of the foreign currency market, possible intervention by
governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-
counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has
established banking relationships in certain foreign countries for
the purpose. As a result, the OCC may, if it determines that
foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would
result in undue burdens on OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The Portfolio may
enter into currency futures contracts to buy or sell currencies.
It also may buy put and call options and write covered call and
cash-secured put options on currency futures. Currency futures
contracts are similar to currency forward contracts, except that
they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency
futures call for payment of delivery in U.S. dollars. The
Portfolio may use currency futures for the same purposes as
currency forward contracts, subject to Commodity Futures Trading
Commission (CFTC) limitations. All futures contracts are
aggregated for purposes of the percentage limitations.
Currency futures and options on futures values can be expected to
correlate with exchange rates, but will not reflect other factors
that may affect the values of the Portfolio's investments. A
currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect the Portfolio
against price decline if the issuer's creditworthiness
deteriorates. Because the value of the Portfolio's investments
denominated in foreign currency will change in response to many
factors other than exchange rates, it may not be possible to match
the amount of a forward contract to the value of the Portfolio's
investments denominated in that currency over time.
The Portfolio will hold securities or other options or futures
positions whose values are expected to offset its obligations. The
Portfolio will not enter into an option or futures position that
exposes the Portfolio to an obligation to another party unless it
owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient
to cover its potential obligations.
<PAGE>
PAGE 71
APPENDIX B
OPTIONS AND FUTURES CONTRACTS
The Portfolio may buy or write options traded on any U.S. or
foreign exchange or in the over-the-counter market. The Portfolio
may enter into interest rate futures contracts and stock index
futures contracts traded on any U.S. or foreign exchange. The
Portfolio also may buy or write put and call options on these
futures and on stock indexes. Options in the over-the-counter
market will be purchased only when the investment manager believes
a liquid secondary market exists for the options and only from
dealers and institutions the investment manager believes present a
minimal credit risk. Some options are exercisable only on a
specific date. In that case, or if a liquid secondary market does
not exist, the Portfolio could be required to buy or sell
securities at disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option
for a security has the right to buy the security at a set price for
the length of the contract. A person who sells a call option is
called a writer. The writer of a call option agrees to sell the
security at the set price when the buyer wants to exercise the
option, no matter what the market price of the security is at that
time. A person who buys a put option has the right to sell a
security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price
if the purchaser wants to exercise the option, no matter what the
market price of the security is at that time. An option is covered
if the writer owns the security (in the case of a call) or sets
aside the cash or securities of equivalent value (in the case of a
put) that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In
addition the buyer generally pays a broker a commission. The
writer receives a premium, less another commission, at the time the
option is written. The cash received is retained by the writer
whether or not the option is exercised. A writer of a call option
may have to sell the security for a below-market price if the
market price rises above the exercise price. A writer of a put
option may have to pay an above-market price for the security if
its market price decreases below the exercise price. The risk of
the writer is potentially unlimited, unless the option is covered.
Options can be used to produce incremental earnings, protect gains
and facilitate buying and selling securities for investment
purposes. The use of options may benefit the Portfolio and its
shareholders by improving the Portfolio's liquidity and by helping
to stabilize the value of its net assets.
Buying options. Put and call options may be used as a trading
technique to facilitate buying and selling securities for
investment reasons. Options are used as a trading technique to
take advantage of any disparity between the price of the <PAGE>
PAGE 72
underlying security in the securities market and its price on the
options market. It is anticipated the trading technique will be
utilized only to effect a transaction when the price of the
security plus the option price will be as good or better than the
price at which the security could be bought or sold directly. When
the option is purchased, the Portfolio pays a premium and a
commission. It then pays a second commission on the purchase or
sale of the underlying security when the option is exercised. For
record keeping and tax purposes, the price obtained on the purchase
of the underlying security will be the combination of the exercise
price, the premium and both commissions. When using options as a
trading technique, commissions on the option will be set as if only
the underlying securities were traded.
Put and call options also may be held by the Portfolio for
investment purposes. Options permit the Portfolio to experience
the change in the value of a security with a relatively small
initial cash investment.
The risk the Portfolio assumes when it buys an option is the loss
of the premium. To be beneficial to the Portfolio, the price of
the underlying security must change within the time set by the
option contract. Furthermore, the change must be sufficient to
cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the
exercise of the option and 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 assure a profit
since prices in the option market may not reflect such a change.
Writing covered options. The Portfolio will write covered options
when it feels it is appropriate and will follow these guidelines:
'Underlying securities will continue to be bought or sold solely on
the basis of investment considerations consistent with the
Portfolio's goal.
'All options written by the Portfolio will be covered. For covered
call options if a decision is made to sell the security, or for put
options if a decision is made to buy the security, the Portfolio
will attempt to terminate the option contract through a closing
purchase transaction.
A call option written by the Portfolio will be covered (i) if the
Portfolio owns the security in connection with which the option was
written, or has an absolute and immediate right to acquire such
security upon conversion of exchange or other securities held in
its portfolio, or (ii) in such other manner that is in accordance
with the rules of the exchange on which the option is traded and
applicable laws and regulations. A put option written by the
Portfolio will be covered through (i) segregation in a segregated
account held by the Portfolio's custodian of cash, short-term U.S.
government securities or money market instruments in an amount <PAGE>
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equal to the exercise price of the option, or (ii) in any other
manner that is in accordance with the requirements of the exchange
on which the option is traded and applicable laws and regulations.
Upon exercise of the option, the holder is required to pay the
purchase price of the underlying security in the case of a call
option, or to deliver the security in return for the purchase price
in the case of a put option. Conversely the writer is required to
deliver the security in the case of a call option or to purchase
the security in the case of a put option. Options that have been
purchased or written may be closed out prior to exercise or
expiration by entering into an offsetting transaction on the
exchange on which the initial position was established subject to
the availability of a liquid secondary market.
The Portfolio will realize a profit from a closing transaction if
the premium paid in connection with the closing of an option
written by the Portfolio is less than the premium received from
writing the option. Conversely, the Portfolio will suffer a loss
if the premium paid is more than the premium received. The
Portfolio also will profit if the premium received in connection
with the closing of an option purchased by the Portfolio is more
than the premium paid for the original purchase. Conversely, the
Portfolio will suffer a loss if the premium received is less than
the premium paid in establishing the option position.
The Portfolio may deal in options on securities that are traded in
U.S. and foreign securities exchanges and over-the-counter markets
and on domestic and foreign securities indexes.
The Portfolio will write options only as permitted under federal or
state laws or regulations, such as those that limit the amount of
total assets subject to the options. While no limit has been set
by the Portfolio, it will conform to the requirements of those
states. For example, California limits the writing of options to
50% of the assets of a fund.
Net premiums on call options closed or premiums on expired call
options are treated as short-term capital gains. Since the
Portfolio is taxed as a regulated investment company under the
Internal Revenue Code, any gains on options and other securities
held less than three months must be limited to less than 30% of its
annual gross income.
If a covered call option is exercised, the security is sold by the
Portfolio. The premium received upon writing the option is added
to the proceeds received from the sale of the security. The
Portfolio will recognize a capital gain or loss based upon the
difference between the proceeds and the security's basis. Premiums
received from writing outstanding call options are included as a
deferred credit in the Statement of Assets and Liabilities and
adjusted daily to the current market value.
<PAGE>
PAGE 74
FUTURES CONTRACTS. A futures contract is an agreement between two
parties to buy and sell a security for a set price on a future
date. Futures contracts are commodity contracts listed on
commodity exchanges. Futures contracts trade in a manner similar
to the way a stock trades on a stock exchange and the commodity
exchanges, through their clearing corporations, guarantee
performance of the contracts. There are contracts based on U.S.
Treasury bonds, Standard & Poor's 500 Index (S&P 500 Index), and
other broad stock market indexes as well as narrower sub-indexes.
The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the
market values of those stocks. In the case of S&P 500 Index
futures contracts, the specified multiple is $500. Thus, if the
value of the S&P 500 Index were 150, the value of one contract
would be $75,000 (150 x $500).
Unlike other futures contracts, a stock index futures contract
specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the
termination of the contract. For example, excluding any
transaction costs, if the Portfolio enters into one futures
contract to buy the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 154 on that
future date, the Portfolio will gain $500 x (154-150) or $2,000.
If the Portfolio enters into one futures contract to sell the S&P
500 Index at a specified future date at a contract value of 150 and
the S&P 500 Index is at 152 on that future date, the Portfolio will
lose $500 x (152-150) or $1,000.
Generally, a futures contract is terminated by entering into an
offsetting transaction. An offsetting transaction is effected by
the Portfolio taking an opposite position. At the time a futures
contract is made, a good faith deposit called initial margin is set
up within a segregated account at the Portfolio's custodian bank.
Daily thereafter, the futures contract is valued and the payment of
variation margin is required so that each day the Portfolio would
pay out cash in an amount equal to any decline in the contract's
value or receive cash equal to any increase. At the time a futures
contract is closed out, a nominal commission is paid, which is
generally lower than the commission on a comparable transaction in
the cash markets.
The purpose of a futures contract is to allow the Portfolio to gain
rapid exposure to or protect itself from changes in the market
without actually buying or selling securities. For example, a
Portfolio may find itself with a high cash position at the
beginning of a market rally. Conventional procedures of purchasing
a number of individual issues entail the lapse of time and the
possibility of missing a significant market movement. By using
futures contracts, the Portfolio can obtain immediate exposure to
the market and benefit from the beginning stages of a rally. The
buying program can then proceed and once it is completed (or as it
proceeds), the contracts can be closed. Conversely, in the early
stages of a market decline, market exposure can be promptly offset <PAGE>
PAGE 75
by entering into stock index futures contracts to sell units of an
index and individual stocks can be sold over a longer period under
cover of the resulting short contract position.
Risks of Transactions in Futures Contracts
The Portfolio may elect to close some or all of its contracts prior
to expiration. Although the Portfolio intends to enter into
futures contracts only on exchanges or boards of trade where there
appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular
contract at any particular time. In such event, it may not be
possible to close a futures contract position, and in the event of
adverse price movements, the Portfolio would have to make daily
cash payments of variation margin. Such price movements, however,
will be offset all or in part by the price movements of the
securities owned by the Portfolio. Of course, there is no
guarantee the price of the securities will correlate with the price
movements in the futures contract and thus provide an offset to
losses on a futures contract.
Another risk in employing futures contracts to protect against the
price volatility of securities is that the prices of securities
subject to futures contracts may not correlate perfectly with the
behavior of the cash prices of the Portfolio's securities. The
correlation may be distorted because the futures market is
dominated by short-term traders seeking to profit from the
difference between a contract or security price and their cost of
borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
In addition, the Portfolio's investment manager could be incorrect
in its expectations as to the direction or extent of various
interest rate or market movements or the time span within which the
movements take place. For example, if the Portfolio sold futures
contracts in anticipation of a market decline, and the market
rallied instead, the Portfolio would lose part or all of the
benefit of the increased value of the stock it has hedged because
it will have offsetting losses in its futures positions.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give
the holder a right to buy or sell futures contracts in the future.
Unlike a futures contract, which requires the parties to the
contract to buy and sell a security on a set date, an option on a
futures contract merely entitles its holder to decide on or before
a future date (within nine months of the date of issue) whether to
enter into such a contract. If the holder decides not to enter
into the contract, all that is lost is the amount (premium) paid
for the option. Furthermore, because the value of the option is
fixed at the point of sale, there are no daily payments of cash to
reflect the change in the value of the underlying contract.
However, since an option gives the buyer the right to enter into a <PAGE>
PAGE 76
contract at a set price for a fixed period of time, its value does
change daily and that change is reflected in the net asset value of
the Portfolio.
The risk the Portfolio assumes when it buys an option is the loss
of the premium paid for the option. The risk involved in writing
options on futures contracts the Portfolio owns, or on securities
held in its portfolio, is that there could be an increase in the
market value of such contracts or securities. If that occurred,
the option would be exercised and the asset sold at a lower price
than the cash market price. To some extent, the risk of not
realizing a gain could be reduced by entering into a closing
transaction. The Portfolio could enter into a closing transaction
by purchasing an option with the same terms as the one it had
previously sold. The cost to close the option and terminate the
Portfolio's obligation, however, might be more or less than the
premium received when it originally wrote the option. Furthermore,
the Portfolio might not be able to close the option because of
insufficient activity in the options market. 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. Such options would be used in the same manner
as options on futures contracts.
TAX TREATMENT. As permitted under federal income tax laws, the
Portfolio intends to identify futures contracts as mixed straddles
and not mark them to market, that is, not treat them as having been
sold at the end of the year at market value. Such an election may
result in the Portfolio being required to defer recognizing losses
incurred by entering into futures contracts and losses on
underlying securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions
in options on futures contracts and indexes will depend on whether
such option is a section 1256 contract. If the option is a non-
equity option, the Portfolio will either make a 1256(d) election
and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term
and 60% long-term. Certain provisions of the Internal Revenue Code
may also limit the Portfolio's ability to engage in futures
contracts and related options transactions. For example, at the
close of each quarter of the Portfolio's taxable year, at least 50%
of the value of its assets must consist of cash, government
securities and other securities, subject to certain diversification
requirements. Less than 30% of its gross income must be derived
from sales of securities held less than three months.
<PAGE>
PAGE 77
The IRS has ruled publicly that an exchange-traded call option is a
security for purposes of the 50%-of-assets test and that its issuer
is the issuer of the underlying security, not the writer of the
option, for purposes of the diversification requirements. In order
to avoid realizing a gain within the three-month period, the
Portfolio may be required to defer closing out a contract beyond
the time when it might otherwise be advantageous to do so. The
Portfolio also may be restricted in purchasing put options for the
purpose of hedging underlying securities because of applying the
short sale holding period rules with respect to such underlying
securities.
Accounting for futures contracts will be according to generally
accepted accounting principles. Initial margin deposits will be
recognized as assets due from a broker (the Portfolio's agent in
acquiring the futures position). During the period the futures
contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a
daily basis to reflect the market value of the contract at the end
of each day's trading. Variation margin payments will be made or
received depending upon whether gains or losses are incurred. All
contracts and options will be valued at the last-quoted sales price
on their primary exchange.
<PAGE>
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APPENDIX C
MORTGAGE-BACKED SECURITIES
A mortgage pass-through certificate is one that represents an
interest in a pool, or group, of mortgage loans assembled by the
Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association
(FNMA) or non-governmental entities. In pass-through certificates,
both principal and interest payments, including prepayments, are
passed through to the holder of the certificate. Prepayments on
underlying mortgages result in a loss of anticipated interest, and
the actual yield (or total return) to the Portfolio, which is
influenced by both stated interest rates and market conditions, may
be different than the quoted yield on certificates. Some U.S.
government securities may be purchased on a when-issued basis,
which means that it may take as long as 45 days after the purchase
before the securities are delivered to the Portfolio.
Stripped Mortgage-Backed Securities. The Portfolio may invest in
stripped mortgage-backed securities. Generally, there are two
classes of stripped mortgage-backed securities: Interest Only (IO)
and Principal Only (PO). IOs entitle the holder to receive
distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities.
POs entitle the holder to receive distributions consisting of all
or a portion of the principal of the underlying pool of mortgage
loans or mortgage-backed securities. The cash flows and yields on
IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments
may adversely affect the yield to maturity of IOs. A slow rate of
principal payments may adversely affect the yield to maturity of
POs. On an IO, if prepayments of principal are greater than
anticipated, an investor may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on
a PO will be affected more severely than would be the case with a
traditional mortgage-backed security.
Mortgage-Backed Security Spread Options. The Portfolio may
purchase mortgage-backed security (MBS) put spread options and
write covered MBS call spread options. MBS spread options are
based upon the changes in the price spread between a specified
mortgage-backed security and a like-duration Treasury security.
MBS spread options are traded in the OTC market and are of short
duration, typically one to two months. The Portfolio would buy or
sell covered MBS call spread options in situations where mortgage-
backed securities are expected to underperform like-duration
Treasury securities.
<PAGE>
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APPENDIX D
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is
dollar-cost averaging. Dollar-cost averaging involves building a
portfolio through the investment of fixed amounts of money on a
regular basis regardless of the price or market condition. This
may enable an investor to smooth out the effects of the volatility
of the financial markets. By using this strategy, more shares will
be purchased when the price is low and less when the price is high.
As the accompanying chart illustrates, dollar-cost averaging tends
to keep the average price paid for the shares lower than the
average market price of shares purchased, although there is no
guarantee.
While this does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many
shareholders who can continue investing through changing market
conditions to accumulate shares in a fund to meet long-term goals.
Dollar-cost averaging
___________________________________________________________________
Regular Market Price Shares
Investment of a Share Acquired
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
$500 $25.00 103.4
Average market price of a share over 5 periods:
$5.00 ($25.00 divided by 5).
The average price you paid for each share:
$4.84 ($500 divided by 103.4).
<PAGE>
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STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the prospectus. prospectus to shareholders
is in two columns.
2) Headings. 2) The headings in the
prospectus are placed
in blue strip at the top
of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
prospectus. a heading.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
5) The page numbers in the 5) The prospectus begins on
electronic document do not page 1 in both documents,
correspond to the prospectus ends on page 1 in the
sent to the shareholders. electronic document, and
page 1 in the prospectus
sent to the shareholders.
6) Financial Information. 6) Some of the figures in the
Average annual total
returns table, and the
Cumulative total returns
table have been adjusted.
