SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 24 (File No. 33-30770) [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY (ACT OF 1940) [X]
Amendment No. 28 (File No. 811-5897)
AXP MARKET ADVANTAGE SERIES, INC.
(formerly IDS Market Advantage Series, Inc.)
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Leslie L. Ogg - 901 Marquette Avenue South, Suite 2810,
Minneapolis, MN 55402-3268
(612) 330-9283
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on March 31, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
AXP(SM) Blue Chip Advantage Fund
PROSPECTUS MARCH 31, 2000
AXP Blue Chip Advantage Fund seeks to provide shareholders with a long-term
total return exceeding that of the U.S. stock market.
Please note that this Fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 5p
Past Performance 6p
Fees and Expenses 8p
Management 9p
Buying and Selling Shares 10p
Valuing Fund Shares 10p
Investment Options 11p
Purchasing Shares 12p
Transactions through Third Parties 15p
Sales Charges 15p
Exchanging/Selling Shares 19p
Distributions and Taxes 24p
Other Information 26p
Financial Highlights 27p
<PAGE>
FUND INFORMATION KEY
Goal and Investment Strategy
The Fund's particular investment goal and the strategies it intends to use
in pursuing its goal.
Risks
The major risk factors associated with the Fund.
Fees and Expenses
The overall costs incurred by an investor in the Fund,including sales
charges and annual expenses.
Management
The individual or group designated by the investment manager to handle
the Fund's day-to-day management.
Financial Highlights
Tables showing the Fund's financial performance.
<PAGE>
The Fund
GOAL
AXP Blue Chip Advantage Fund (the Fund) seeks to provide shareholders with a
long-term total return exceeding that of the U.S. stock market. Because any
investment involves risk, achieving this goal cannot be guaranteed.
INVESTMENT STRATEGY
Currently, the Standard & Poor's 500 Stock Price Index (S&P 500) is the
unmanaged market index used to measure total return of the U.S. stock market
(the Fund may change this market index from time to time). Accordingly, the
Fund's assets primarily are invested in common stocks of companies that are
included in the S&P 500. To the extent practicable, the Fund's total assets are
fully invested in stocks with 65% of those being blue chip stocks. Blue Chip
stocks are issued by companies with a market capitalization of at least $1
billion, an established management, a history of consistent earnings and a
leading position within their respective industries. Although the Fund invests
in common stocks that comprise the S&P 500, it is not an index fund, it will not
own all of the companies in the market index, and its results will likely differ
from the market index.
The selection of common stocks is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, American Express Financial Corporation (AEFC),
the Fund's investment manager, chooses equity investments by:
o Identifying companies that are included in the S&P 500 with:
-- effective management,
-- financial strength,
-- strong, sustainable earnings growth, and
-- competitive market position.
o Focusing on those companies that AEFC considers to be "blue chips."
o Establishing one or more industry classifications for each company (AEFC will
classify each company into one of at least 25 industries -- the
classifications may or may not be the same as the ones assigned by others).
<PAGE>
o Assigning ratings to each company based on that company's merits and on its
industry grouping(s).
o Buying a diversified portfolio of securities. AEFC will weight certain
industry classifications more heavily based on AEFC's expectations for
growth and for expected market trends.
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
-- the security is overvalued relative to alternative investments,
-- the security has reached AEFC's price objective,
-- the company has met AEFC's earnings and/or growth expectations,
-- political, economic, or other events could affect the company's
performance,
-- AEFC wishes to minimize potential losses (i.e., in a market down-turn),
-- AEFC wishes to lock-in profits,
-- AEFC identifies a more attractive opportunity, and
-- the company or the security continues to meet the other standards
described above.
Although not a primary investment strategy, the Fund also may invest in other
instruments, such as money market securities and derivatives (such as futures,
options and forward contracts).
During weak or declining markets, the Fund may invest more of its assets in
money market securities. Although the Fund primarily will invest in these
securities to avoid losses, this type of investing also could prevent the Fund
from achieving its investment objective. During these times, AEFC may make
frequent securities trades that could result in increased fees, expenses, and
taxes.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
<PAGE>
RISKS
This Fund is designed for investors with above-average risk tolerance. Please
remember that with any mutual fund investment you may lose money. Principal
risks associated with an investment in the Fund include:
Market Risk
Style Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Style Risk
The objective of the Fund is to provide shareholders with a long-term return
exceeding that of the U.S. stock market. Currently, the S&P 500 is the market
index used to measure total return of the U.S. stock market. However, unlike the
unmanaged index, the Fund's performance is affected by factors such as the size
of the Fund's portfolio, transaction costs, management fees and expenses,
brokerage commissions and fees, the extent and timing of cash flows in and out
of the Fund, stock selection, sector weightings, and other such factors. As a
result, once these factors are accounted for, the Fund may under-perform the
market index.
<PAGE>
PAST PERFORMANCE
The following bar chart and table indicate the risks and variability of
investing in the Fund by showing:
o how the Fund's performance has varied for each full calendar year that the
Fund has existed, and
o how the Fund's average annual total returns compare to recognized indexes.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
Class A Performance (based on calendar years)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
+29.39% +6.94% +12.15% +1.27% +36.57% +21.43% +26.18% +22.91% +20.42%
1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was +20.14% (quarter ending December 1998) and the lowest return for a
calendar quarter was -14.12% (quarter ending September 1990).
The 5.75% sales charge applicable to Class A shares of the Fund is not reflected
in the bar chart; if reflected, returns would be lower than those shown. The
performance of Class B and Class Y may vary from that shown above because of
differences in sales charges and fees.
The Fund's year to date return as of Dec. 31, 1999 was +20.42%.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Dec. 31, 1999)
<S> <C> <C> <C> <C>
1 year 5 years Since inception (A) Since inception (B&Y)
Blue Chip Advantage:
Class A +14.40% +24.09% +17.13%(a) --%
Class B +15.51% --% --% +23.64%(b)
Class Y +20.58% --% --% +24.93%(b)
S&P 500 Index +21.04% +28.56% +19.09%(c) +27.74%(d)
Lipper Large Cap Core Index +19.35% +25.32% +17.46%(c) +24.81%(d)
</TABLE>
(a) Inception date was March 5, 1990.
(b) Inception date was March 20, 1995.
(c) Measurement period started April 1, 1990.
(d) Measurement period started April 1, 1995.
This table shows total returns from hypothetical investments in Class A, Class B
and Class Y shares of the Fund. These returns are compared to the indexes shown
for the same periods. The performance of Classes A, B and Y vary because of
differences in sales charges and fees. Past performance for Class Y for the
periods prior to March 20, 1995 may be calculated based on the performance of
Class A, adjusted to reflect differences in sales charges, although not for
other differences in expenses.
For purposes of this calculation we assumed:
o a sales charge of 5% for Class A shares (effective March 20, 2000 the sales
charge increased to 5.75%),
o sales at the end of the period and deduction of the applicable contingent
deferred sales charge (CDSC) for Class B shares,
o no sales charge for Class Y shares, and
o no adjustments for taxes paid by an investor on the reinvested income and
capital gains.
S&P 500 Index, an unmanaged list of common stocks, is frequently used as a
general measure of market performance. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage commissions
or other fees.
Lipper Large-Cap Core Index, an unmanaged index published by Lipper Inc.,
includes 30 funds that are generally similar to the Fund, although some funds in
the index may have somewhat different investment policies or objectives.
<PAGE>
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Class A Class B Class Y
Maximum sales charge (load) imposed on
purchases(a)
(as a percentage of offering price) 5.75% none none
Maximum deferred sales charge (load)
imposed on sales (as a percentage of
offering price at time of purchase) none 5% none
Annual Fund operating expenses(b)
(expenses that are deducted from Fund assets)
As a percentage of average daily net assets: Class A Class B Class Y
Management fees 0.43% 0.43% 0.43%
Distribution (12b-1) fees 0.25% 1.00% 0.00%
Other expenses(c) 0.21% 0.23% 0.29%
Total 0.89% 1.66% 0.72%
(a) This charge may be reduced depending on your total investments in American
Express mutual funds. See "Sales Charges."
(b) Expenses for Class A, Class B and Class Y are based on actual expenses for
the last fiscal year, restated to reflect current fees.
(c) Other expenses include an administrative services fee, a shareholder
services fee for Class Y, a transfer agency fee and other nonadvisory expenses.
<PAGE>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you hold your shares until the end of the
years shown, your costs would be:
1 year 3 years 5 years 10 years
Class A(a) $661 $843 $1,040 $1,612
Class B(b) $569 $824 $1,003 $1,764(d)
Class B(c) $169 $524 $903 $1,764(d)
Class Y $74 $230 $401 $898
(a) Includes a 5.75% sales charge.
(b) Assumes you sold your Class B shares at the end of the period and incurred
the applicable CDSC.
(c) Assumes you did not sell your Class B shares at the end of the period.
(d) Based on conversion of Class B shares to Class A shares in the ninth year of
ownership.
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
Keith Tufte, co-portfolio manager, joined AEFC in 1990. He became portfolio
manager of AXP Blue Chip Advantage Fund and Aggressive Growth Portfolio in
November 1998. He also became director of research-equities in 1998. Prior to
that he was portfolio manager of Equity Income Portfolio. He also serves as
co-manager of AXP Variable Portfolio-Blue Chip Advantage Fund. James Johnson,
co-portfolio manager, joined AEFC in 1994 as an equity quantitative analyst. He
began managing portfolios for American Express Asset Management in 1996. He is
portfolio manager of Total Return Portfolio, AXP Small Company Index Fund, AXP
S&P 500 Index Fund, AXP Mid Cap Index Fund, AXP Total Stock Market Index Fund,
and AXP Nasdaq 100 Index Fund. He is co-portfolio manager of Aggressive Growth
Portfolio and AXP Variable Portfolio-Blue Chip Advantage Fund.
<PAGE>
Buying and Selling Shares
VALUING FUND SHARES
The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B and Class Y, it is the NAV.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Time (CT), each business day (any day the New York Stock Exchange
is open).
Fund shares may be purchased through various third-party organizations,
including 401(k) plans, banks, brokers and investment advisers. Where authorized
by the Fund, orders will be priced at the NAV next computed after receipt by the
organization or their selected agent.
The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. If the Fund's investment policies permit it to invest in securities
that are listed on foreign stock exchanges that trade on weekends or other days
when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.
<PAGE>
INVESTMENT OPTIONS
1. Class A shares are sold to the public with a sales charge at the time of
purchase and an annual distribution (12b-1) fee.
2. Class B shares are sold to the public with a CDSC and an annual
distribution (12b-1) fee.
3. Class Y shares are sold to qualifying institutional investors without a
sales charge or distribution fee. Please see the SAI for information on
eligibility to purchase Class Y shares.
Investment options summary:
Class A Maximum sales charge of 5.75%
Initial sales charge waived or reduced for certain purchases
Annual distribution fee of 0.25% of average daily net assets*
Lower annual expenses than Class B shares
_______________________________________________________________________________
Class B No initial sales charge
CDSC on shares sold in the first six years (maximum of 5% in
first year, reduced to 0% after year six)
CDSC waived in certain circumstances
Shares convert to Class A in ninth year of ownership
Annual distribution fee of 1.00% of average daily net assets*
Higher annual expenses than Class A shares
_______________________________________________________________________________
Class Y No initial sales charge
No annual distribution fee
Service fee of 0.10% of average daily net assets
Available only to certain qualifying institutional investors
________________________________________________________________________________
* The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 that allows it to pay distribution and servicing-related fees for the sale
of Class A and Class B shares. Because these fees are paid out of the Fund's
assets on an on-going basis, the fees may cost long-term shareholders more than
paying other types of sales charges imposed by some mutual funds.
<PAGE>
Should you purchase Class A or Class B shares?
If your investments in American Express mutual funds total $250,000 or more,
Class A shares may be the better option. If you qualify for a waiver of the
sales charge, Class A shares will be the best option.
If you invest less than $250,000, consider how long you plan to hold your
shares. Class B shares have a higher annual distribution fee and a CDSC for six
years. To help you determine what is best for you, consult your financial
advisor.
Class B shares convert to Class A shares in the ninth calendar year of
ownership. Class B shares purchased through reinvested dividends and
distributions also will convert to Class A shares in the same proportion as the
other Class B shares.
PURCHASING SHARES
To purchase shares through a brokerage account or from entities other than
American Express Financial Advisors Inc., please consult your selling agent. The
following section explains how you can purchase shares from American Express
Financial Advisors (the Distributor).
If you do not have a mutual fund account, you need to establish one. Your
financial advisor will help you fill out and submit an application. Once your
account is set up, you can choose among several convenient ways to invest.
When you purchase shares for a new or existing account, your order will be
priced at the next NAV calculated after your order is accepted by the Fund. If
your application does not specify which class of shares you are purchasing, we
will assume you are investing in Class A shares.
Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.
If you do not provide the correct TIN, you could be subject to backup
withholding of 31% of taxable distributions and proceeds from certain sales and
exchanges. You also could be subject to further penalties, such as:
o a $50 penalty for each failure to supply your correct TIN,
o a civil penalty of $500 if you make a false statement that results in no
backup withholding, and
o criminal penalties for falsifying information.
You also could be subject to backup withholding, if the IRS notifies us to do
so, because you failed to report required interest or dividends on your tax
return.
<PAGE>
How to determine the correct TIN
For this type of account: Use the Social Security or Employer
Identification number of:
Individual or joint account The individual or one of the owners listed on
the joint account
Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors
Act)
A revocable living trust The grantor-trustee (the person who puts the
money into the trust)
An irrevocable trust, The legal entity (not the personal
pension trust or estate 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, contact your financial advisor to obtain a copy
of federal Form W-9, "Request for Taxpayer Identification Number and
Certification." You also may obtain the form on the Internet at
(http://www.irs.gov/prod/forms_pubs/).
Three ways to invest
1 By mail:
Once your account has been established, send your check with the account number
on it to:
American Express Funds
P.O. Box 74
Minneapolis, MN 55440-0074
Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $300
Qualified accounts: none
If your account balance falls below $300, you will be asked to increase it to
$300 or establish a scheduled investment plan. If you do not do so within 30
days, your shares can be sold and the proceeds mailed to you.
<PAGE>
2 By scheduled investment plan:
Contact your financial advisor for assistance in setting up one of the following
scheduled plans:
o automatic payroll deduction,
o bank authorization,
o direct deposit of Social Security check, or
o other plan approved by the Fund.
Minimum amounts
Initial investment: $100
Additional investments: $50/mo. for qualified accounts; $100/mo. for
nonqualified accounts
Account balances: none (on active plans with monthly payments)
If your account balance is below $2,000, you must make payments at least
monthly.
3 By wire or electronic funds transfer:
If you have an established account, you may wire money to:
Norwest Bank Minnesota
Routing Transit No. 091000019
Give these instructions:
Credit American Express Financial Advisors Account #0000030015 for personal
account # (your account number) for (your name). Please remember that you need
to provide all 10 digits.
If this information is not included, the order may be rejected, and all money
received by the Fund, less any costs the Fund or American Express Client Service
Corporation (AECSC) incurs, will be returned promptly.
Minimum amounts
Each wire investment: $1,000
<PAGE>
TRANSACTIONS THROUGH THIRD PARTIES
You may buy or sell shares through certain 401(k) plans, banks, broker-dealers,
financial advisors or other investment professionals. These organizations may
charge you a fee for this service and may have different policies. Some policy
differences may include different minimum investment amounts, exchange
privileges, fund choices and cutoff times for investments. The Fund and the
Distributor are not responsible for the failure of one of these organizations to
carry out its obligations to its customers. Some organizations may receive
compensation from the Distributor or its affiliates for shareholder
recordkeeping and similar services. Where authorized by the Fund, some
organizations may designate selected agents to accept purchase or sale orders on
the Fund's behalf. To buy or sell shares through third parties or determine if
there are policy differences, please consult your selling agent. For other
pertinent information related to buying or selling shares, please refer to the
appropriate section in the prospectus.
SALES CHARGES
Class A -- initial sales charge alternative
When you purchase Class A shares, you pay a sales charge as shown in the
following table:
Total investment Sales charge as percentage of:
Public offering price (a) Net amount invested
Up to $50,000 5.75% 6.10%
$50,000 - $99,999 4.75 4.99
$100,000 - $249,999 3.75 3.90
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00* 2.04*
$1,000,000 or more 0.00 0.00
(a) Offering price includes the sales charge.
* The sales charge will be waived until Dec. 31, 2000.
<PAGE>
The sales charge on Class A shares may be lower than 5.75%, based on the
combined market value of:
o your current investment in this Fund,
o your previous investment in this Fund, and
o investments you and your primary household group have made in other
American Express mutual funds that have a sales charge. (The primary
household group consists of accounts in any ownership for spouses or
domestic partners and their unmarried children under 21. For purposes of
this policy, domestic partners are individuals who maintain a shared
primary residence and have joint property or other insurable interests.)
AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do
not have sales charges.
Other Class A sales charge policies:
o IRA purchases or other employee benefit plan purchases made through a
payroll deduction plan or through a plan sponsored by an employer,
association of employers, employee organization or other similar group, may
be added together to reduce sales charges for all shares purchased through
that plan, and
o if you intend to invest a large amount over a period of 13 months, you can
reduce the sales charges in Class A by filing a letter of intent. For more
details, please contact your financial advisor or 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 or domestic partners and unmarried
children under 21.
o current or retired American Express financial advisors, their spouses or
domestic partners and unmarried children under 21.
o investors who have a business relationship with a newly associated
financial advisor who joined the Distributor from another investment firm
provided that (1) the purchase is made within six months of the advisor's
appointment date with the Distributor, (2) the purchase is made with
proceeds of shares sold that were sponsored by the financial advisor's
previous broker-dealer, and (3) the proceeds are the result of a sale of an
equal or greater value where a sales load was assessed.
<PAGE>
o qualified employee benefit plans offering participants daily access to
American Express mutual funds. Eligibility must be determined in advance.
For assistance, please contact your financial advisor. (Participants in
certain qualified plans where the initial sales charge is waived may be
subject to a deferred sales charge of up to 4%.)
o shareholders who have at least $1 million invested in American Express
mutual funds. If the investment is sold in the first year after purchase, a
CDSC of 1% will be charged. The CDSC will be waived only in the
circumstances described for waivers for Class B shares.
o purchases made within 90 days after a sale of shares (up to the amount
sold):
-- of American Express mutual funds in a qualified plan subject to a
deferred sales charge, or
-- in a qualified plan or account where American Express Trust Company
has a recordkeeping, trustee, investment management, or investment
servicing relationship.
Send the Fund a written request along with your payment, indicating the
date and the amount of the sale.
o purchases made:
-- with dividend or capital gain distributions from this Fund or from the
same class of another American Express mutual fund that has a sales
charge,
-- through or under a wrap fee product or other investment product
sponsored by the Distributor or another authorized broker-dealer,
investment advisor, bank or investment professional,
-- within the University of Texas System ORP,
-- within a segregated separate account offered by Nationwide Life
Insurance Company or Nationwide Life and Annuity Insurance Company,
-- within the University of Massachusetts After-Tax Savings Program, or
-- through or under a subsidiary of AEFC offering Personal Trust
Services' Asset-Based pricing alternative.
<PAGE>
Class B -- contingent deferred sales charge (CDSC) alternative
A CDSC is based on the sale amount and the number of calendar years -- including
the year of purchase -- between purchase and sale. The following table shows how
CDSC percentages on sales decline after a purchase:
If the sale is made during the: The CDSC percentage rate is:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are selling causes the value of your investment in Class B
shares to fall below the cost of the shares you have purchased during the last
six years including the current year, the CDSC is based on the lower of the cost
of those shares purchased or market value.
Example:
Assume you had invested $10,000 in Class B shares and that your investment had
appreciated in value to $12,000 after 15 months, including reinvested dividends
and capital gain distributions. You could sell up to $2,000 worth of shares
without paying a CDSC ($12,000 current value less $10,000 purchase amount). If
you sold $2,500 worth of shares, the CDSC would apply to the $500 representing
part of your original purchase price. The CDSC rate would be 4% because the sale
was made during the second year after the purchase.
Because the CDSC is imposed only on sales that reduce your total purchase
payments, you never have to pay a CDSC on any amount that represents
appreciation in the value of your shares, income earned by your shares, or
capital gains. In addition, the CDSC rate on your sale will be based on your
oldest purchase payment. The CDSC on the next amount sold will be based on the
next oldest purchase payment.
<PAGE>
The CDSC on Class B shares will be waived on sales of shares:
o in the event of the shareholder's death,
o held in trust for an employee benefit plan, or
o held in IRAs or certain qualified plans if American Express Trust Company
is the custodian, such as Keogh plans, tax-sheltered custodial accounts or
corporate pension plans, provided that the shareholder is:
-- at least 59 1/2 years old AND
-- taking a retirement distribution (if the sale is part of a transfer to
an IRA or qualified plan, or a custodian-to-custodian transfer, the
CDSC will not be waived) OR
-- selling under an approved substantially equal periodic payment
arrangement.
EXCHANGING/SELLING SHARES
Exchanges
You can exchange your Fund shares at no charge for shares of the same class of
any other publicly offered American Express mutual fund. Exchanges into AXP
Tax-Free Money Fund may only be made from Class A shares. For complete
information on the other fund, including fees and expenses, read that fund's
prospectus carefully. Your exchange will be priced at the next NAV calculated
after it is accepted by that fund.
You may make up to three exchanges (1 1/2 round trips) within any 30-day period.
These limits do not apply to scheduled exchange programs and certain employee
benefit plans. Exceptions may be allowed with pre-approval of the Fund.
Other exchange policies:
o Exchanges must be made into the same class of shares of the new fund.
o If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.
o Once we receive your exchange request, you cannot cancel it.
o Shares of the new fund may not be used on the same day for another
exchange.
o If your shares are pledged as collateral, the exchange will be delayed
until AECSC receives written approval from the secured party.
<PAGE>
AECSC and the Fund reserve the right to reject any exchange, limit the amount,
or modify or discontinue the exchange privilege, to prevent abuse or adverse
effects on the Fund and its shareholders. For example, if exchanges are too
numerous or too large, they may disrupt the Fund's investment strategies or
increase its costs.
Selling Shares
You can sell your shares at any time. The payment will be mailed within seven
days after accepting your request.
When you sell shares, the amount you receive may be more or less than the amount
you invested. Your sale price will be the next NAV calculated after your request
is accepted by the Fund, minus any applicable CDSC.
You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If you
reinvest in Class A, you will purchase the new shares at NAV rather than the
offering price on the date of a new purchase. If you reinvest in Class B, any
CDSC you paid on the amount you are reinvesting also will be reinvested. To take
advantage of this option, send a request within 90 days of the date your sale
request was received and include your account number. This privilege may be
limited or withdrawn at any time and may have tax consequences.
The Fund reserves the right to redeem in kind.
For more details and a description of other sales policies, please see the SAI.
<PAGE>
To sell or exchange shares held through a brokerage account or with entities
other than American Express Financial Advisors, please consult your selling
agent. The following section explains how you can exchange or sell shares held
with American Express Financial Advisors.
Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.
Important: If you request a sale of shares you recently purchased by a check or
money order that is not guaranteed, the Fund will wait for your check to clear.
It may take up to 10 days from the date of purchase before payment is made.
(Payment may be made earlier if your bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)
Two ways to request an exchange or sale of shares
1 By letter:
Include in your letter:
o the name of the fund(s),
o the class of shares to be exchanged or sold,
o your mutual fund account number(s) (for exchanges, both funds must be
registered in the same ownership),
o your Social Security number or Employer Identification number,
o the dollar amount or number of shares you want to exchange or sell,
o signature(s) of all registered account owners,
o for sales, indicate how you want your money delivered to you, and
o any paper certificates of shares you hold.
Regular mail:
American Express Client Service Corporation
Attn: Transactions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Client Service Corporation
Attn: Transactions
733 Marquette
Ave. Minneapolis, MN 55402
<PAGE>
2 By telephone:
American Express Client Service Corporation
Telephone Transaction Service
800-437-3133
o The Fund and AECSC will use reasonable procedures to confirm authenticity
of telephone exchange or sale requests.
o Telephone exchange and sale privileges automatically apply to all accounts
except custodial, corporate or qualified retirement accounts. You may
request that these privileges NOT apply by writing AECSC. Each registered
owner must sign the request.
o Acting on your instructions, your financial advisor may conduct telephone
transactions on your behalf.
o Telephone privileges may be modified or discontinued at any time.
Minimum sale amount: $100 Maximum sale amount: $50,000
<PAGE>
Three ways to receive payment when you sell shares
1 By regular or express mail:
o Mailed to the address on record.
o Payable to names listed on the account.
NOTE:The express mail delivery charges you pay will vary depending on the
courier you select.
2 By wire or electronic funds transfer:
o Minimum wire: $1,000.
o Request that money be wired to your bank.
o Bank account must be in the same ownership as the American Express mutual
fund account.
NOTE:Pre-authorization required. For instructions, contact your financial
advisor or AECSC.
3 By scheduled payout plan:
o Minimum payment: $50.
o Contact your financial advisor or AECSC to set up regular payments on a
monthly, bimonthly, quarterly, semiannual or annual basis.
o Purchasing new shares while under a payout plan may be disadvantageous
because of the sales charges.
<PAGE>
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Each realized capital gain or loss is long-term or short-term depending on
the length of time the Fund held the security. Realized capital gains and losses
offset each other. The Fund offsets any net realized capital gains by any
available capital loss carryovers. Net short-term capital gains are included in
net investment income. Net realized long-term capital gains, if any, are
distributed by the end of the calendar year as capital gain distributions.
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
o you request distributions in cash, or
o you direct the Fund to invest your distributions in the same class of any
publicly offered American Express mutual fund for which you have previously
opened an account.
We reinvest the distributions for you at the next calculated NAV after the
distribution is paid.
If you choose cash distributions, you will receive cash only for distributions
declared after your request has been processed.
<PAGE>
TAXES
Distributions are subject to federal income tax and may be subject to state and
local taxes in the year they are declared. You must report distributions on your
tax returns, even if they are reinvested in additional shares.
If you buy shares shortly before the record date of a distribution you may pay
taxes on money earned by the Fund before you were a shareholder. You will pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which may be taxable.
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for less
than their cost, the difference is a capital loss. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held for more
than one year).
If you buy Class A shares of this or another American Express mutual fund and
within 91 days exchange into this Fund, you may not include the sales charge in
your calculation of tax gain or loss on the sale of the first fund you
purchased. The sales charge may be included in the calculation of your tax gain
or loss on a subsequent sale of this Fund.
Selling shares held in an IRA or qualified retirement account may subject you to
federal taxes, penalties and reporting requirements. Please consult your tax
advisor.
Important: This information is a brief and selective summary of some of the tax
rules that apply to this Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
<PAGE>
Other Information
INVESTMENT MANAGER
The investment manager of the Fund is AEFC, 200 AXP Financial Center,
Minneapolis, MN 55474. The Fund pays AEFC a fee for managing its assets. Under
the Investment Management Services Agreement, the fee for the most recent fiscal
year was 0.40% of its average daily net assets. Under the agreement, the Fund
also pays taxes, brokerage commissions and nonadvisory expenses. AEFC or an
affiliate may make payments from its own resources, which include the managment
fees paid by the Fund, to compensate broker-dealers or other persons for
providing distribution assistance. AEFC is a wholly-owned subsidiary of American
Express Company, a financial services company with headquarters at American
Express Tower, World Financial Center, New York, NY 10285.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Fiscal period ended Jan. 31,
Per share income and capital changes(a)
<S> <C> <C> <C> <C>
Class A
2000 1999 1998 1997 1996
Net asset value, beginning of period $11.88 $9.49 $8.97 $7.62 $5.97
Income from investment operations:
Net investment income (loss) .03 .06 .10 .09 .11
Net gains (losses) (both realized
and unrealized) 1.11 2.55 1.67 1.69 2.18
Total from investment operations 1.14 2.61 1.77 1.78 2.29
Less distributions:
Dividends from net investment income (.03) (.06) (.10) (.09) (.11)
Distributions from realized gains (1.19) (.16) (1.15) (.34) (.53)
Total distributions (1.22) (.22) (1.25) (.43) (.64)
Net asset value, end of period $11.80 $11.88 $9.49 $8.97 $7.62
Ratios/supplemental data
Net assets, end of period
(in millions) $2,455 $1,863 $1,202 $687 $247
Ratio of expenses to average
daily net assets(b) .83% .73% .78% .89% .96%
Ratio of net investment income
(loss) to average daily net assets .40% .69% 1.03% 1.18% 1.68%
Portfolio turnover rate (excluding
short-term securities) 81% 105% 145% 128% 126%
Total return(c) 9.30% 27.71% 20.22% 23.79% 39.01%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Total return does not reflect payment of a sales charge.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal period ended Jan. 31,
Per share income and capital changes(a)
Class B Class Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996b 2000 1999 1998 1997 1996b
Net asset value,
beginning of period $11.79 $9.43 $8.92 $7.59 $6.30 $11.89 $9.50 $8.97 $7.62 $6.30
Income from investment operations:
Net investment
income (loss) -- -- .03 .04 .07 .04 .07 .11 .10 .11
Net gains (losses)
(both realized
and unrealized) 1.03 2.52 1.66 1.67 1.83 1.11 2.55 1.68 1.69 1.86
Total from investment
operations 1.03 2.52 1.69 1.71 1.90 1.15 2.62 1.79 1.79 1.97
Less distributions:
Dividends from net
investment income -- -- (.03) (.04) (.08) (.04) (.07) (.11) (.10) (.12)
Distributions from
realized gains (1.19) (.16) (1.15) (.34) (.53) (1.19) (.16) (1.15) (.34) (.53)
Total distributions (1.19) (.16) (1.18) (.38) (.61) (1.23) (.23) (1.26) (.44) (.65)
Net asset value,
end of period $11.63 $11.79 $9.43 $8.92 $7.59 $11.81 $11.89 $9.50 $8.97 $7.62
Ratios/supplemental data
Net assets, end of
period
(in millions) $1,588 $1,109 $645 $302 $42 $369 $323 $239 $77 $28
Ratio of expenses
to average daily
net assets(c) 1.59% 1.49% 1.54% 1.65% 1.74%d .69% .66% .69% .72% .80%(d)
Ratio of net investment
income (loss) to average
daily net assets (.36%) (.07%) .26% .39% .81%d .54% .77% 1.10% 1.33% 1.75%(d)
Portfolio turnover rate
(excluding short-term
securities) 81% 105% 145% 128% 126% 81% 105% 145% 128% 126%
Total return(e) 8.45% 26.75% 19.32% 22.86% 30.93% 9.44% 27.82% 20.35% 24.00% 31.98%
</TABLE>
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was March 20, 1995.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
The information in these tables has been audited by KPMG LLP, independent
auditors. The independent auditors' report and additional information about the
performance of the Fund are contained in the Fund's annual report which, if not
included with this prospectus, may be obtained without charge.
<PAGE>
AMERICAN
EXPRESS (R)
FUNDS
This Fund, along with the other American Express mutual funds, is distributed by
American Express Financial Advisors Inc. and can be purchased from an American
Express financial advisor or from other authorized broker-dealers or third
parties. The Funds can be found under the "Amer Express" banner in most mutual
fund quotations.
Additional information about the Fund and its investments is available in the
Fund's Statement of Additional Information (SAI), annual and semiannual reports
to shareholders. In the Fund's annual report, you will find a discussion of
market conditions and investment strategies that significantly affected the Fund
during its last fiscal year. The SAI is incorporated by reference in this
prospectus. For a free copy of the SAI, the annual report or the semiannual
report contact your selling agent or American Express Client Service
Corporation.
American Express Client Service Corporation
P.O. Box 534, Minneapolis, MN 55440-0534
800-862-7919 TTY: 800-846-4852
Web site address:
http://www.americanexpress.com/advisors
You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-202-942-8090). Reports and other information about the Fund are available on
the EDGAR Database on the Commission's Internet site at (http://www.sec.gov).
Copies of this information may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: [email protected], or by
writing to the Public Reference Section of the Commission, Washington, D.C.
20549-6009.
Investment Company Act File #811-5897
TICKER SYMBOL
Class A: IBLUX Class B: IDBCX Class Y:IBCYX
AMERICAN
EXPRESS(R) (Logo)
S-6025-99 P(3/00)
<PAGE>
AXPSM Small Company Index Fund
PROSPECTUS
March 31, 2000
AXP Small Company Index Fund seeks to provide shareholders with long-term
capital appreciation.
Please note that this Fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Fund 3p
Goal 3p
Investment Strategy 3p
Risks 4p
Past Performance 6p
Fees and Expenses 8p
Management 9p
Buying and Selling Shares 9p
Valuing Fund Shares 9p
Investment Options 10p
Purchasing Shares 11p
Transactions through Third Parties 14p
Sales Charges 14p
Exchanging/Selling Shares 18p
Distributions and Taxes 23p
Other Information 25p
Financial Highlights 26p
FUND INFORMATION KEY
Goal and Investment Strategy
The Fund's particular investment goal and the strategies it intends to use in
pursuing its goal.
Risks
The major risk factors associated with the Fund.
Fees and Expenses
The overall costs incurred by an investor in the Fund, including sales
charges and annual expenses.
Management
The individual or group designated by the investment manager to handle the
Fund's day-to-day management.
Financial Highlights
Tables showing the Fund's financial performance.
<PAGE>
The Fund
GOAL
AXP Small Company Index Fund (the Fund) seeks to provide shareholders with
long-term capital appreciation. Because any investment involves risk, achieving
this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund is a diversified mutual fund that invests primarily in common stocks of
small-capitalization companies that are expected to provide investment results
that correspond to the performance of the S&P Small Cap 600 Index* (S&P 600
Index). This Index is composed of approximately 600 companies located in the
United States. These companies are chosen to be a part of the Index based upon
their market size, liquidity and industry group representation. To be included
in the Index, stock selections are also screened by Standard & Poor's
Corporation for trading volume, share turnover, ownership concentration, share
price and bid/ask spreads. The Index has above-average risk and may fluctuate
more than the Standard & Poor's 500 Stock Price Index, which includes stock of
larger, more established firms. The Fund is not managed according to traditional
methods of "active" investment management. Instead, it follows a passive or
indexing investment approach in an attempt to mirror the performance of the S&P
600. Although the Fund invests in common stocks of companies that comprise the
S&P 600, it may not own all of the companies in the market index and it will not
own all of the companies in the same proportion to their weightings in the
market index.
The selection of common stocks issued by companies that are included in the S&P
600 is the primary decision in building the investment portfolio.
American Express Financial Corporation (AEFC), the Fund's investment manager,
chooses investments by:
o Attempting to replicate the Index by investing in a statistically selected
sample of the stocks included in the S&P 600.
o Purchasing securities based on the timing of cash flows in and out of the
Fund.
* "Standard & Poor's," "Standard & Poor's Small Capitalization Stock Index," and
"S&P SmallCap 600" are trademarks of McGraw-Hill, Inc.
<PAGE>
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
-- the security continues to be included in the S&P 600;
-- corporate actions have affected the company's stock (such as
corporate reorganizations, mergers, acquisitions, or other such
factors);
-- a company's market weighting otherwise changes with respect to the
index; and
-- timing of cash flows in and out of the Fund require AEFC to sell a
security.
Although not a primary investment strategy the Fund also may invest in other
instruments, such as money market securities, and derivatives (such as futures,
options and forward contracts). Additionally, the Fund may hold cash or its
equivalent or invest in short-term fixed income securities. The Fund is not
managed with respect to tax efficiency.
AEFC may make frequent securities trades that could result in increased fees,
expenses, and taxes.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
This Fund is designed for investors with above-average risk tolerance. Please
remember that with any mutual fund investment you may lose money. Principal
risks associated with an investment in the Fund include:
Market Risk
Small Company Risk
Style Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
<PAGE>
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
Style Risk
AEFC purchases stocks and other instruments in an attempt to replicate the
performance of the S&P 600. However, the tools that AEFC utilizes to replicate
the market index are not perfect and the Fund's performance is affected by
factors such as the size of the Fund's portfolio, transaction costs, management
fees and expenses, brokerage commissions and fees, the extent and timing of cash
flows in and out of the Fund, changes in the S&P 600, and other such factors. As
a result, once these factors are accounted for, the Fund will likely
under-perform the market index.
<PAGE>
PAST PERFORMANCE
The following bar chart and table indicate the risks and variability of
investing in the Fund by showing:
o how the Fund's performance has varied for each full calendar year that the
Fund has existed, and
o how the Fund's average annual total returns compare to recognized indexes.
How the Fund has performed in the past does not indicate how the Fund will
perform in the future.
Class A Performance (based on calendar years)
+23.29%
+11.33%
-2.39%
1997 1998 1999
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.53% (quarter ending June 1997) and the lowest return for a
calendar quarter was -21.10% (quarter ending September 1998).
The 5.75% sales charge applicable to Class A shares of the Fund is not reflected
in the bar chart; if reflected, returns would be lower than those shown. The
performance of Class B and Class Y may vary from that shown above because of
differences in sales charges and fees.
The Fund's year to date return as of Dec. 31, 1999 was +11.33%.
<PAGE>
Average Annual Total Returns (as of Dec. 31, 1999)
1 year Since inception
Small Company:
Class A +5.76% +10.29%a
Class B +6.49% +10.44%a
Class Y +11.47% +12.09%a
S&P SmallCap 600 Index +12.41% +13.78%b
Lipper Small-Cap Core Index +20.17% +13.54%b
a Inception date was Aug. 19, 1996.
b Measurement period started Sept. 1, 1996.
This table shows total returns from hypothetical investments in Class A, Class B
and Class Y shares of the Fund. These returns are compared to the indexes shown
for the same periods. The performance of Classes A, B and Y vary because of
differences in sales charges and fees.
For purposes of this calculation we assumed:
o a sales charge of 5% for Class A shares (effective March 20, 2000 the sales
charge increased to 5.75%),
o sales at the end of the period and deduction of the applicable contingent
deferred sales charge (CDSC) for Class B shares,
o no sales charge for Class Y shares, and
o no adjustments for taxes paid by an investor on the reinvested income and
capital gains.
Standard and Poor's SmallCap 600 Index (S&P 600 Index), an unmanaged
market-weighted index, that consists of 600 domestic stocks chosen for market
size, liquidity, (bid-asked spread, ownership, share turnover and number of no
trade days) and industry group representation. The index reflects reinvestment
of all distributions and changes in market prices, but excludes brokerage
commissions or other fees. The Fund may invest in stocks that may not be listed
in the Index.
Lipper Small-Cap Core Index, an unmanaged index published by Lipper Inc.,
includes 30 funds that are generally similar to the Fund, although some funds in
the index may have somewhat different investment policies or objectives.
<PAGE>
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Class A Class B Class Y
Maximum sales charge (load)
imposed on purchases(a)
(as a percentage of offering price) 5.75% none none
Maximum deferred sales charge (load)
imposed on sales (as a percentage of
offering price at time of purchase) none 5% none
Annual Fund operating expenses(b) (expenses that are deducted from Fund assets)
As a percentage of average daily net assets: Class A Class B Class Y
Management fees 0.37% 0.37% 0.37%
Distribution (12b-1) fees 0.25% 1.00% 0.00%
Other expenses(c) 0.38% 0.39% 0.45%
Total 1.00% 1.76% 0.82%
a This charge may be reduced depending on your total investments in American
Express mutual funds. See "Sales Charges."
b Expense for Class A, Class B and Class Y are based on actual expenses for the
last fiscal year, restated to reflect current fees.
c Other expenses include an administrative services fee, a shareholder services
fee for Class Y, a transfer agency fee and other nonadvisory expenses.
<PAGE>
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you hold your shares until the end of the
years shown, your costs would be:
1 year 3 years 5 years 10 years
Class A(a) $671 $875 $1,097 $1,734
Class B(b) $579 $854 $1,055 $1,877(d)
Class B(c) $179 $554 $955 $1,877(d)
Class Y $84 $262 $456 $1,018
a Includes a 5.75% sales charge.
b Assumes you sold your Class B shares at the end of the period and incurred the
applicable CDSC.
c Assumes you did not sell your Class B shares at the end of the period.
d Based on conversion of Class B shares to Class A shares in the ninth year of
ownership.
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
James Johnson, portfolio manager, joined AEFC in 1994. He became portfolio
manager of this Fund in 1998. He is portfolio manager of Total Return Portfolio,
AXP S&P 500 Index Fund, AXP MidCap Index Fund, AXP Total Stock Market Index Fund
and AXP Nasdaq 100 Index Fund. He is co-portfolio manager of AXP Blue Chip
Advantage Fund, Aggressive Growth Portfolio and AXP Variable Portfolio - Blue
Chip Advantage Fund.
Buying and Selling Shares
VALUING FUND SHARES
The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B and Class Y, it is the NAV.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Time (CT), each business day (any day the New York Stock Exchange
is open).
<PAGE>
Fund shares may be purchased through various third-party organizations,
including 401(k) plans, banks, brokers and investment advisers. Where authorized
by the Fund, orders will be priced at the NAV next computed after receipt by the
organization or their selected agent.
The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. If the Fund's investment policies permit it to invest in securities
that are listed on foreign stock exchanges that trade on weekends or other days
when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.
INVESTMENT OPTIONS
1. Class A shares are sold to the public with a sales charge at the time of
purchase and an annual distribution (12b-1) fee.
2. Class B shares are sold to the public with a CDSC and an annual distribution
(12b-1) fee.
3. Class Y shares are sold to qualifying institutional investors without a sales
charge or distribution fee. Please see the SAI for information on eligibility
to purchase Class Y shares.
Investment options summary:
Class A Maximum sales charge of 5.75%
Initial sales charge waived or reduced for certain purchases
Annual distribution fee of 0.25% of average daily net assets*
Lower annual expenses than Class B shares
Class B No initial sales charge
CDSC on shares sold in the first six years (maximum of 5% in first
year, reduced to 0% after year six)
CDSC waived in certain circumstances
Shares convert to Class A in ninth year of ownership
Annual distribution fee of 1.00% of average daily net assets*
Higher annual expenses than Class A shares
Class Y No initial sales charge
No annual distribution fee
Service fee of 0.10% of average daily net assets
Available only to certain qualifying institutional investors
*The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 that allows it to pay distribution and servicing-related fees for the sale
of Class A and Class B shares. Because these fees are paid out of the Fund's
assets on an on-going basis, the fees may cost long-term shareholders more than
paying other types of sales charges imposed by some mutual funds.
<PAGE>
Should you purchase Class A or Class B shares?
If your investments in American Express mutual funds total $250,000 or more,
Class A shares may be the better option. If you qualify for a waiver of the
sales charge, Class A shares will be the best option.
If you invest less than $250,000, consider how long you plan to hold your
shares. Class B shares have a higher annual distribution fee and a CDSC for six
years. To help you determine what is best for you, consult your financial
advisor.
Class B shares convert to Class A shares in the ninth calendar year of
ownership. Class B shares purchased through reinvested dividends and
distributions also will convert to Class A shares in the same proportion as the
other Class B shares.
PURCHASING SHARES
To purchase shares through a brokerage account or from entities other than
American Express Financial Advisors Inc., please consult your selling agent. The
following section explains how you can purchase shares from American Express
Financial Advisors (the Distributor).
If you do not have a mutual fund account, you need to establish one. Your
financial advisor will help you fill out and submit an application. Once your
account is set up, you can choose among several convenient ways to invest.
When you purchase shares for a new or existing account, your order will be
priced at the next NAV calculated after your order is accepted by the Fund. If
your application does not specify which class of shares you are purchasing, we
will assume you are investing in Class A shares.
Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.
If you do not provide the correct TIN, you could be subject to backup
withholding of 31% of taxable distributions and proceeds from certain sales and
exchanges. You also could be subject to further penalties, such as:
o a $50 penalty for each failure to supply your correct TIN,
o a civil penalty of $500 if you make a false statement that results in no
backup withholding, and
o criminal penalties for falsifying information.
You also could be subject to backup withholding, if the IRS notifies us to do
so, because you failed to report required interest or dividends on your tax
return.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
How to determine the correct TIN
For this type of account: Use the Social Security or Employer Identification number of:
Individual or joint account The individual or one of the owners listed on the joint account
Custodian account of a minor The minor
(Uniform Gifts/Transfers to Minors Act)
A revocable living trust The grantor-trustee (the person who puts the money into the trust)
An irrevocable trust,
pension trust or estate The legal entity (not the personal representative or trustee,
unless no legal entity is designated in the account title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or tax-exempt
organization The organization
</TABLE>
For details on TIN requirements, contact your financial advisor to obtain a copy
of federal Form W-9, "Request for Taxpayer Identification Number and
Certification." You also may obtain the form on the Internet at
(http://www.irs.gov/prod/forms_pubs/).
Three ways to invest
1 By mail:
Once your account has been established, send your check with the account number
on it to:
American Express Funds
P.O. Box 74
Minneapolis, MN 55440-0074
Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $300
Qualified accounts: none
If your account balance falls below $300, you will be asked to increase it to
$300 or establish a scheduled investment plan. If you do not do so within 30
days, your shares can be sold and the proceeds mailed to you.
<PAGE>
2 By scheduled investment plan:
Contact your financial advisor for assistance in setting up one of the following
scheduled plans:
o automatic payroll deduction,
o bank authorization,
o direct deposit of Social Security check, or
o other plan approved by the Fund.
Minimum amounts
Initial investment: $100
Additional investments: $50/mo. for qualified accounts; $100/mo. for
nonqualified accounts
Account balances: none (on active plans with monthly payments)
If your account balance is below $2,000, you must make payments at least
monthly.
3 By wire or electronic funds transfer:
If you have an established account, you may wire money to:
Norwest Bank Minnesota
Routing Transit No. 091000019
Give these instructions: Credit American Express Financial Advisors Account
#0000030015 for personal account # (your account number) for (your name). Please
remember that you need to provide all 10 digits.
If this information is not included, the order may be rejected, and all money
received by the Fund, less any costs the Fund or American Express Client Service
Corporation (AECSC) incurs, will be returned promptly.
Minimum amounts
Each wire investment: $1,000
<PAGE>
TRANSACTIONS THROUGH THIRD PARTIES
You may buy or sell shares through certain 401(k) plans, banks, broker-dealers,
financial advisors or other investment professionals. These organizations may
charge you a fee for this service and may have different policies. Some policy
differences may include different minimum investment amounts, exchange
privileges, fund choices and cutoff times for investments. The Fund and the
Distributor are not responsible for the failure of one of these organizations to
carry out its obligations to its customers. Some organizations may receive
compensation from the Distributor or its affiliates for shareholder
recordkeeping and similar services. Where authorized by the Fund, some
organizations may designate selected agents to accept purchase or sale orders on
the Fund's behalf. To buy or sell shares through third parties or determine if
there are policy differences, please consult your selling agent. For other
pertinent information related to buying or selling shares, please refer to the
appropriate section in the prospectus.
SALES CHARGES
Class A -- initial sales charge alternative
When you purchase Class A shares, you pay a sales charge as shown in the
following table:
Total investment Sales charge as percentage of
Public offering price(a) Net amount invested
Up to $50,000 5.75% 6.10%
$50,000-$99,999 4.75 4.99
$100,000-$249,999 3.75 3.90
$250,000-$499,999 2.50 2.56
$500,000-$999,999 2.00* 2.04*
$1,000,000 or more 0.00 0.00
aOffering price includes the sales charge.
*The sales charge will be waived until Dec. 31, 2000.
The sales charge on Class A shares may be lower than 5.75%, based on the
combined market value of:
o your current investment in this Fund,
o your previous investment in this Fund, and
o investments you and your primary household group have made in other
American Express mutual funds that have a sales charge. (The primary
household group consists of accounts in any ownership for spouses or
domestic partners and their unmarried children under 21. For purposes of
this policy, domestic partners are individuals who maintain a shared
primary residence and have joint property or other insurable interests.)
AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do
not have sales charges.
<PAGE>
Other Class A sales charge policies:
o IRA purchases or other employee benefit plan purchases made through a
payroll deduction plan or through a plan sponsored by an employer,
association of employers, employee organization or other similar group, may
be added together to reduce sales charges for all shares purchased through
that plan, and
o if you intend to invest a large amount over a period of 13 months, you can
reduce the sales charges in Class A by filing a letter of intent. For more
details, please contact your financial advisor or 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 or domestic partners and unmarried
children under 21.
o current or retired American Express financial advisors, their spouses or
domestic partners and unmarried children under 21.
o investors who have a business relationship with a newly associated
financial advisor who joined the Distributor from another investment firm
provided that (1) the purchase is made within six months of the advisor's
appointment date with the Distributor, (2) the purchase is made with
proceeds of shares sold that were sponsored by the financial advisor's
previous broker-dealer, and (3) the proceeds are the result of a sale of an
equal or greater value where a sales load was assessed.
o qualified employee benefit plans offering participants daily access to
American Express mutual funds. Eligibility must be determined in advance.
For assistance, please contact your financial advisor. (Participants in
certain qualified plans where the initial sales charge is waived may be
subject to a deferred sales charge of up to 4%.)
o shareholders who have at least $1 million invested in American Express
mutual funds. If the investment is sold in the first year after purchase, a
CDSC of 1% will be charged. The CDSC will be waived only in the
circumstances described for waivers for Class B shares.
o purchases made within 90 days after a sale of shares (up to the amount
sold):
-- of American Express mutual funds in a qualified plan subject to a
deferred sales charge, or
-- in a qualified plan or account where American Express Trust Company
has a recordkeeping, trustee, investment management, or
investment servicing relationship.
Send the Fund a written request along with your payment, indicating
the date and the amount of the sale.
<PAGE>
o purchases made:
-- with dividend or capital gain distributions from this Fund or from
the same class of another American Express mutual fund that has a
sales charge,
-- through or under a wrap fee product or other investment product
sponsored by the Distributor or another authorized broker-dealer,
investment advisor, bank or investment professional,
-- within the University of Texas System ORP,
-- within a segregated separate account offered by Nationwide Life
Insurance Company or Nationwide Life and Annuity Insurance Company,
-- within the University of Massachusetts After-Tax Savings Program, or
-- through or under a subsidiary of AEFC offering Personal Trust
Services' Asset-Based pricing alternative.
Class B -- contingent deferred sales charge (CDSC) alternative
A CDSC is based on the sale amount and the number of calendar years -- including
the year of purchase -- between purchase and sale. The following table shows how
CDSC percentages on sales decline after a purchase:
If the sale is made during the: The CDSC percentage rate is:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are selling causes the value of your investment in Class B
shares to fall below the cost of the shares you have purchased during the last
six years including the current year, the CDSC is based on the lower of the cost
of those shares purchased or market value.
<PAGE>
Example:
Assume you had invested $10,000 in Class B shares and that your investment had
appreciated in value to $12,000 after 15 months, including reinvested dividends
and capital gain distributions. You could sell up to $2,000 worth of shares
without paying a CDSC ($12,000 current value less $10,000 purchase amount). If
you sold $2,500 worth of shares, the CDSC would apply to the $500 representing
part of your original purchase price. The CDSC rate would be 4% because the sale
was made during the second year after the purchase.
Because the CDSC is imposed only on sales that reduce your total purchase
payments, you never have to pay a CDSC on any amount that represents
appreciation in the value of your shares, income earned by your shares, or
capital gains. In addition, the CDSC rate on your sale will be based on your
oldest purchase payment. The CDSC on the next amount sold will be based on the
next oldest purchase payment.
The CDSC on Class B shares will be waived on sales of shares:
o in the event of the shareholder's death,
o held in trust for an employee benefit plan, or
o held in IRAs or certain qualified plans if American Express Trust Company
is the custodian, such as Keogh plans, tax-sheltered custodial accounts or
corporate pension plans, provided that the shareholder is:
-- at least 591/2 years old AND
-- taking a retirement distribution (if the sale is part of a transfer
to an IRA or qualified plan, or a custodian-to-custodian transfer,
the CDSC will not be waived) OR
-- selling under an approved substantially equal periodic payment
arrangement.
<PAGE>
EXCHANGING/SELLING SHARES
Exchanges
You can exchange your Fund shares at no charge for shares of the same class of
any other publicly offered American Express mutual fund. Exchanges into AXP
Tax-Free Money Fund may only be made from Class A shares. For complete
information on the other fund, including fees and expenses, read that fund's
prospectus carefully. Your exchange will be priced at the next NAV calculated
after it is accepted by that fund.
You may make up to three exchanges (11/2 round trips) within any 30-day period.
These limits do not apply to scheduled exchange programs and certain employee
benefit plans. Exceptions may be allowed with pre-approval of the Fund.
Other exchange policies:
o Exchanges must be made into the same class of shares of the new fund.
o If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.
o Once we receive your exchange request, you cannot cancel it.
o Shares of the new fund may not be used on the same day for another
exchange.
o If your shares are pledged as collateral, the exchange will be delayed
until AECSC receives written approval from the secured party.
AECSC and the Fund reserve the right to reject any exchange, limit the amount,
or modify or discontinue the exchange privilege, to prevent abuse or adverse
effects on the Fund and its shareholders. For example, if exchanges are too
numerous or too large, they may disrupt the Fund's investment strategies or
increase its costs.
Selling Shares
You can sell your shares at any time. The payment will be mailed within seven
days after accepting your request.
When you sell shares, the amount you receive may be more or less than the amount
you invested. Your sale price will be the next NAV calculated after your request
is accepted by the Fund, minus any applicable CDSC.
<PAGE>
You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If you
reinvest in Class A, you will purchase the new shares at NAV rather than the
offering price on the date of a new purchase. If you reinvest in Class B, any
CDSC you paid on the amount you are reinvesting also will be reinvested. To take
advantage of this option, send a request within 90 days of the date your sale
request was received and include your account number. This privilege may be
limited or withdrawn at any time and may have tax consequences.
The Fund reserves the right to redeem in kind.
For more details and a description of other sales policies, please see the SAI.
To sell or exchange shares held through a brokerage account or with entities
other than American Express Financial Advisors, please consult your selling
agent. The following section explains how you can exchange or sell shares held
with American Express Financial Advisors.
Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.
Important: If you request a sale of shares you recently purchased by a check or
money order that is not guaranteed, the Fund will wait for your check to clear.
It may take up to 10 days from the date of purchase before payment is made.
(Payment may be made earlier if your bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)
<PAGE>
Two ways to request an exchange or sale of shares
1 By letter:
Include in your letter:
o the name of the fund(s),
o the class of shares to be exchanged or sold,
o your mutual fund account number(s) (for exchanges, both funds must be
registered in the same ownership),
o your Social Security number or Employer Identification number,
o the dollar amount or number of shares you want to exchange or sell,
o signature(s) of all registered account owners,
o for sales, indicate how you want your money delivered to you, and
o any paper certificates of shares you hold.
Regular mail:
American Express Client Service Corporation
Attn: Transactions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Client Service Corporation
Attn: Transactions
733 Marquette Ave.
Minneapolis, MN 55402
<PAGE>
2 By telephone:
American Express Client Service Corporation
Telephone Transaction Service
800-437-3133
o The Fund and AECSC will use reasonable procedures to confirm authenticity
of telephone exchange or sale requests.
o Telephone exchange and sale privileges automatically apply to all accounts
except custodial, corporate or qualified retirement accounts. You may
request that these privileges NOT apply by writing AECSC. Each registered
owner must sign the request.
o Acting on your instructions, your financial advisor may conduct telephone
transactions on your behalf.
o Telephone privileges may be modified or discontinued at any time.
Minimum sale amount: $100 Maximum sale amount: $50,000
<PAGE>
Three ways to receive payment when you sell shares
1 By regular or express mail:
o Mailed to the address on record.
o Payable to names listed on the account.
NOTE: The express mail delivery charges you pay will vary depending on
the courier you select.
2 By wire or electronic funds transfer:
o Minimum wire: $1,000.
o Request that money be wired to your bank.
o Bank account must be in the same ownership as the American Express mutual
fund account.
NOTE: Pre-authorization required. For instructions, contact your
financial advisor or AECSC.
3 By scheduled payout plan:
o Minimum payment: $50.
o Contact your financial advisor or AECSC to set up regular payments on a
monthly, bimonthly, quarterly, semiannual or annual basis.
o Purchasing new shares while under a payout plan may be disadvantageous
because of the sales charges.
<PAGE>
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Each realized capital gain or loss is long-term or short-term depending on
the length of time the Fund held the security. Realized capital gains and losses
offset each other. The Fund offsets any net realized capital gains by any
available capital loss carryovers. Net short-term capital gains are included in
net investment income. Net realized long-term capital gains, if any, are
distributed by the end of the calendar year as capital gain distributions. As a
result of the Fund's goal and investment strategies, distributions from the Fund
may consist of a significant amount of capital gains.
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
o you request distributions in cash, or
o you direct the Fund to invest your distributions in the same class of any
publicly offered American Express mutual fund for which you have previously
opened an account.
We reinvest the distributions for you at the next calculated NAV after the
distribution is paid.
If you choose cash distributions, you will receive cash only for distributions
declared after your request has been processed.
<PAGE>
TAXES
Distributions are subject to federal income tax and may be subject to state and
local taxes in the year they are declared. You must report distributions on your
tax returns, even if they are reinvested in additional shares.
If you buy shares shortly before the record date of a distribution you may pay
taxes on money earned by the Fund before you were a shareholder. You will pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which may be taxable.
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for less
than their cost, the difference is a capital loss. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held for more
than one year).
If you buy Class A shares of this or another American Express mutual fund and
within 91 days exchange into this Fund, you may not include the sales charge in
your calculation of tax gain or loss on the sale of the first fund you
purchased. The sales charge may be included in the calculation of your tax gain
or loss on a subsequent sale of this Fund.
Selling shares held in an IRA or qualified retirement account may subject you to
federal taxes, penalties and reporting requirements. Please consult your tax
advisor.
Important: This information is a brief and selective summary of some of the tax
rules that apply to this Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
<PAGE>
Other Information
INVESTMENT MANAGER
The investment manager of the Fund is AEFC, 200 AXP Financial Center,
Minneapolis, MN 55474. The Fund pays AEFC a fee for managing its assets. Under
the Investment Management Services Agreement, the fee for the most recent fiscal
year was 0.37% of its average daily net assets. Under the agreement, the Fund
also pays taxes, brokerage commissions and nonadvisory expenses. AEFC or an
affiliate may make payments from its own resources, which include management
fees paid by the Fund, to compensate broker-dealers or other persons for
providing distribution assistance. AEFC is a wholly-owned subsidiary of American
Express Company, a financial services company with headquarters at American
Express Tower, World Financial Center, New York, NY 10285.
<PAGE>
Financial Highlights
Fiscal period ended Jan. 31,
Per share income and capital changes(a)
Class A
2000 1999 1998 1997(b)
Net asset value, beginning of period $6.11 $6.47 $5.51 $5.00
Income from investment operations:
Net investment income (loss) (.01) -- -- .02
Net gains (losses)
(both realized and unrealized) .58 (.12) 1.05 .52
Total from investment operations .57 (.12) 1.05 .54
Less distributions:
Dividends from net investment income -- -- -- (.03)
Distributions from realized gains (.38) (.24) (.09) --
Total distributions (.38) (.24) (.09) (.03)
Net asset value, end of period $6.30 $6.11 $6.47 $5.51
Ratios/supplemental data
Net assets, end of period
(in millions) $608 $596 $391 $95
Ratio of expenses to average daily
net assets(d) .97% .94% 1.00%(f) 1.00%(c,f)
Ratio of net investment income (loss)
to average daily net assets (.11%) (.02%) (.05%) 1.55%(c)
Portfolio turnover rate (excluding
short-term securities) 30% 29% 25% 48%
Total return(e) 9.41% (1.69%) 19.00% 10.84%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was Aug. 19, 1996.
c Adjusted to an annual basis.
d Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
f AEFC reimbursed the Fund for certain expenses. Had AEFC not done so, the
annual ratios of expenses would have been 1.05% and 1.48% for the year
ended 1998 and the period ended 1997, respectively.
<PAGE>
<TABLE>
<CAPTION>
Fiscal period ended Jan. 31,
Per share income and capital changes(a)
Class B Class Y
2000 1999 1998 1997(b) 2000 1999 1998 1997(b)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $6.00 $6.40 $5.50 $5.00 $6.12 $6.47 $5.51 $5.00
Income from investment operations:
Net investment income (loss) (.05) (.04) (.05) .02 -- -- -- .02
Net gains (losses) (both realized
and unrealized) .56 (.12) 1.04 .50 .58 (.11) 1.05 .52
Total from investment operations .51 (.16) .99 .52 .58 (.11) 1.05 .54
Less distributions:
Dividends from net investment income -- -- -- (.02) -- -- -- (.03)
Distributions from realized gains (.38) (.24) (.09) -- (.38) (.24) (.09) --
Total distributions (.38) (.24) (.09) (.02) (.38) (.24) (.09) (.03)
Net asset value, end of period $6.13 $6.00 $6.40 $5.50 $6.32 $6.12 $6.47 $5.51
</TABLE>
<TABLE>
<CAPTION>
Ratios/supplemental data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net assets, end of period (in millions) $392 $371 $225 $42 $3 $2 $1 --
Ratio of expenses to average
daily net assets(d) 1.73% 1.70% 1.76%(f) 1.76%(c,f) .81% .87% .92%f .82%(c,f)
Ratio of net investment income
(loss) to average daily net assets (.87%) (.79%) (.81%) .63%(c) .03% .06% .01% 1.93%(c)
Portfolio turnover rate
(excluding short-term securities) 30% 29% 25% 48% 30% 29% 25% 48%
Total return(e) 8.55% (2.42%) 18.12% 10.46% 9.54% (1.61%) 19.13% 10.86%
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was Aug. 19, 1996.
c Adjusted to an annual basis.
d Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
f AEFC reimbursed the Fund for certain expenses. Had AEFC not done so, the
annual ratios of expenses would have been 1.81% and 2.60% for Class B, and
.92% and 1.22% for Class Y, for the year ended 1998 and the period ended
1997, respectively.
The information in these tables has been audited by KPMG LLP, independent
auditors. The independent auditors' report and additional information about the
performance of the Fund are contained in the Fund's annual report which, if not
included with this prospectus, may be obtained without charge.
<PAGE>
American
Express(R)
Funds
This Fund, along with the other American Express mutual funds, is distributed by
American Express Financial Advisors Inc. and can be purchased from an American
Express financial advisor or from other authorized broker-dealers or third
parties. The Funds can be found under the "Amer Express" banner in most mutual
fund quotations.
Additional information about the Fund and its investments is available in the
Fund's Statement of Additional Information (SAI), annual and semiannual reports
to shareholders. In the Fund's annual report, you will find a discussion of
market conditions and investment strategies that significantly affected the Fund
during its last fiscal year. The SAI is incorporated by reference in this
prospectus. For a free copy of the SAI, the annual report or the semiannual
report contact your selling agent or American Express Client Service
Corporation.
American Express Client Service Corporation
P.O. Box 534, Minneapolis, MN 55440-0534
800-862-7919 TTY: 800-846-4852
Web site address:
http://www.americanexpress.com/advisors
You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-202-942-8090). Reports and other information about the Fund are available on
the EDGAR Database on the Commission's Internet site at (http://www.sec.gov).
Copies of this information may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: [email protected], or by
writing to the Public Reference Section of the Commission, Washington, D.C.
20549-6009.
Investment Company Act File #811-5897
TICKER SYMBOL
Class A: ISIAX Class B: ISIBX Class Y: N/A
S-6357-99 G (3/00)
<PAGE>
AXPSM S&P 500 Index Fund
AXPSM Mid Cap Index Fund
AXPSM Total Stock Market Index Fund
AXPSM International Equity Index Fund
AXPSM Nasdaq 100 Index(R) Fund
Prospectus
March 31, 2000
Please note that each Fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
The Funds 3p
Goals 3p
Investment Strategies 3p
Risks 7p
Past Performance 9p
Fees and Expenses 9p
Management 13p
Buying and Selling Shares 13p
Valuing Fund Shares 13p
Investment Options 14p
Purchasing Shares 14p
Transactions through Third Parties 18p
Exchanging/Selling Shares 19p
Distributions and Taxes 22p
Other Information 24p
Financial Highlights 25p
<PAGE>
FUND INFORMATION KEY
icon of maginfying glass Goal and Investment Strategy
The Fund's particular investment goal
and the strategies it intends to use in
pursuing its goal.
icon of die Risks
The major risk factors associated with
the Fund.
icon of checkbook Fees and Expenses
The overall costs incurred by an
investor in the Fund, including annual
expenses.
icon of folder Management
The individual or group designated by
the investment manager to handle the
Fund's day-to-day management.
icon of stack of dollar bills Financial Highlights
Tables showing the Fund's financial
performance.
<PAGE>
The Funds
GOALS
AXP S&P 500 Index Fund, AXP Mid Cap Index Fund, AXP Total Stock Market Index
Fund, AXP International Equity Index Fund and AXP Nasdaq 100 Index Fund seek to
provide shareholders with long-term capital appreciation. Because any investment
involves risk, achieving the goal cannot be guaranteed.
INVESTMENT STRATEGIES
Each Fund invests primarily in securities that are expected to provide
investment results that correspond to the performance of a specified index. An
index is an unmanaged group of securities whose overall performance is used as a
standard to measure investment performance. The Funds are not managed according
to traditional methods of "active" investment management. Instead, they follow a
passive or indexing investment approach in an attempt to mirror the performance
of an index. Keep in mind that an index fund has operating expenses and
transaction costs, while an index does not. This means that, while an index fund
may track its index closely, it is typically unable to match the performance of
the index exactly. While there is no guarantee, the investment manager expects
the correlation between a Fund and its respective index to be at least .95. A
correlation of 1.00 means the return of the Fund can be completely explained by
the return of the index.
This prospectus includes five index funds. The following chart shows the types
of investments for each of the funds.
Fund Principal types of investments
AXP S&P 500 Index Fund Large-cap stocks
AXP Mid Cap Index Fund Mid-cap stocks
AXP Total Stock Market Index Fund Large-, mid- and small-cap stocks
AXP International Equity Index Fund Foreign stocks
AXP Nasdaq 100 Index Fund Over-the-counter stocks
AXP S&P 500 Index Fund seeks to provide investment results that correspond to
the total return (the combination of appreciation and income) of
large-capitalization stocks of U.S. companies. The Fund invests in common stocks
included in the Standard & Poor's 500 Composite Stock Price Index (S&P 500). The
S&P 500 is made up primarily of large-capitalization companies that represent a
broad spectrum of the U.S. economy.
The Fund normally will invest in all stocks in the S&P 500 in roughly the same
proportions as their weightings in the index. For example, if 5% of the S&P 500
is made up of a stock of a particular company, the Fund normally will invest
approximately 5% of its assets in that company. This strategy is known as "full
replication." Although the Fund attempts to replicate the S&P 500, there may be
times when the Fund and the index do not match exactly. The investment manager
may purchase stocks not included in the S&P 500 when it believes it would be a
cost efficient way of approximating the S&P 500's performance to do so, for
example, in anticipation of a stock being added to the index.
AXP Mid Cap Index Fund seeks to provide investment results that correspond to
the total return of mid-capitalization stocks of U.S. companies. The Fund
invests in common stocks included in the Standard & Poor's MidCap 400 Index (S&P
MidCap 400). The S&P MidCap 400 consists of a group of medium-sized U.S.
companies.
<PAGE>
The Fund normally will invest in all stocks in the S&P MidCap 400 in roughly the
same proportions as their weightings in the index. For example, if 5% of the S&P
MidCap 400 is made up of a stock of a particular company, the Fund normally will
invest approximately 5% of its assets in that company. This strategy is known as
"full replication." Although the Fund attempts to replicate the S&P MidCap 400,
there may be times when the Fund and the index do not match exactly. The
investment manager may purchase stocks not included in the S&P MidCap 400 when
it believes it would be a cost efficient way of approximating the S&P MidCap
400's performance to do so, for example, in anticipation of a stock being added
to the index.
AXP Total Stock Market Index Fund seeks to provide investment results that
correspond to the total return of the overall U.S. stock market. The Fund
invests in common stocks included in the Wilshire 5000 Total Market Index (the
Wilshire 5000). The Wilshire 5000 consists of U.S. common stocks regularly
traded on the New York and American Stock Exchanges and the Nasdaq over-the
counter market.
The investment manager may use sampling techniques in an attempt to replicate
the returns of the index using a smaller number of securities. Sampling
techniques attempt to match the investment characteristics of the index and the
Fund by taking into account such factors as capitalization, industry exposure,
dividend yield, price/earnings ratio, price/book ratio and earnings growth.
AXP International Equity Index Fund seeks to provide investment results that
correspond to the total return of foreign stock markets. The Fund invests in
common stocks included in the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. The EAFE Index currently includes stocks of
companies from various industrial sectors whose primary trading markets are
located outside the U.S. Companies included in the EAFE Index are selected from
among the larger capitalization companies in those markets.
The investment manager may use optimization or sampling techniques in an attempt
to replicate the returns of the index using a smaller number of securities.
Optimization and sampling techniques attempt to match the investment
characteristics of the index and the Fund by taking into account such factors as
capitalization, industry exposures, dividend yield, price/earnings ratio,
price/book ratio, earnings growth, country weightings, and the effect of foreign
taxes.
AXP Nasdaq 100 Index Fund seeks to provide investment results that correspond to
the total return of the over-the-counter market. The Fund invests in common
stocks included in the Nasdaq 100 Index. The Nasdaq 100 includes the largest and
most active non-financial domestic and international companies listed on the
Nasdaq Stock Market.
The Fund normally will invest in all stocks in the Nasdaq 100 in roughly the
same proportions as their weightings in the index. For example, if 5% of the
Nasdaq 100 is made up of a stock of a particular company, the Fund normally will
invest approximately 5% of its assets in that company. This strategy is known as
"full replication." Although the Fund attempts to replicate the Nasdaq 100,
there may be times when the Fund and the index do not match exactly. The
investment manager may purchase stocks not included in the Nasdaq 100 when it
believes it would be a cost efficient way of approximating the Nasdaq 100's
performance to do so, for example, in anticipation of a stock being added to the
index.
Indexing Strategies
The investment manager may use various techniques, such as buying and selling
options and futures contracts, to increase or decrease the Fund's exposure to
changing security prices or other factors that affect security values. Each Fund
normally will invest at least 80% of its total assets in securities that are
contained in the applicable index. The investment manager will monitor the
performance of each Fund against its index and will adjust the Fund's holdings,
as necessary, to minimize tracking error. In the event a correlation of .95 or
better is not achieved, the Fund's board will consider alternative arrangements.
<PAGE>
A Fund may change its target index for a different index if the current index is
discontinued or if the Fund's board believes a different index would better
enable the Fund to match the performance of the market segment represented by
the current index. The substitute index will measure the same general segment of
the market as the current index.
The Fund may hold cash or its equivalent or invest in investment grade
short-term fixed income securities. Although index funds, by their nature, tend
to be tax-efficient investments, the Funds generally are managed without regard
to tax efficiency.
For each of the Funds, in evaluating whether to sell a security, the investment
manager considers, among other factors, whether:
o The security continues to be included in the index,
o Corporate actions have affected the company's security (such as corporate
reorganizations, mergers or acquisitions),
o A company's market weighting otherwise changes with respect to the index,
and
o Timing of cash flows in and out of the Fund require the investment manager
to sell a security.
For more information on investment strategies and the indexes, please refer to
the Statement of Additional Information (SAI). "Standard & Poor's", "S&P", "S&P
500", "Standard & Poor's 500", "S&P MidCap 400 Index", and "Standard & Poor's
MidCap 400 Index" are trademarks of The McGraw-Hill Companies, Inc. "Wilshire
5000" is a trademark and "Wilshire" is a service mark of Wilshire Associates
Incorporated. The Nasdaq-100, Nasdaq-100 Index, and Nasdaq are trade or service
marks of The Nasdaq Stock Market, Inc. (which with its affiliates are the
"Corporations"). The MSCI EAFE Index is the exclusive property of MSCI. Morgan
Stanley Capital International is a service mark of MSCI. These trademarks and
service marks have been licensed for use by American Express Financial Advisors
Inc. The Funds are not sponsored, endorsed, sold or promoted by Standard &
Poor's, Wilshire, the Corporations, MSCI or any of their subsidiaries or
affiliates (the "Licensors") and the Licensors make no representation regarding
the advisability of investing in the Funds.
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Tracking Error Risk
Sector/Concentration Risk
Small Company Risk
Foreign Risk
Market Risk (all funds)
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Tracking Error Risk (all funds)
A Fund may not track the index perfectly because differences between the index
and the Fund's portfolio can cause differences in performance. The investment
manager purchases securities and other instruments in an attempt to replicate
the performance of the index. However, the tools that the investment manager
uses to replicate the index are not perfect and the Fund's performance is
affected by factors such as the size of the Fund's portfolio, transaction costs,
management fees and expenses, brokerage commissions and fees, the extent and
timing of cash flows in and out of the Fund and changes in the index.
<PAGE>
In addition, the returns from a specific type of security (for example, mid-cap
stocks) may trail returns from other asset classes or the overall market. Each
type of security will go through cycles of doing better or worse than stocks or
bonds in general. These periods may last for several years.
Sector/Concentration Risk (all funds)
Each Fund is non-diversified. A non-diversified fund may invest more of its
assets in fewer companies than if it were a diversified fund. Because each
investment has a greater effect on the Fund's performance, it may be more
susceptible to a single economic, political or regulatory occurrence than a
diversified fund. In addition, in tracking an index, the Fund may have a
considerable portion of its assets invested in one or more sectors of the
market. This may lead to a greater market fluctuation than would occur with a
fund invested in a wider spectrum of industries. A Fund will invest more than
25% of its total assets in a particular industry only if necessary to track its
respective index.
Small Company Risk (Mid Cap Index Fund, Total Stock Market Index Fund, Nasdaq
100 Index Fund)
Investment in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
Foreign Risk (International Equity Index Fund)
The following are all components of foreign risk:
Country risk includes the political, economic, and other conditions of a
country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate between local
currency and the U.S. dollar. Whenever the Fund holds securities valued in a
foreign currency or holds the currency, changes in the exchange rate add or
subtract from the value of the investment.
Custody risk refers to the process of clearing and settling trades. It also
covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
PAST PERFORMANCE
Each Fund commenced operations in October 1999 and therefore past performance
information is not shown.
The following chart shows the performance of the indexes for the ten years ended
in December 1999. How the indexes performed in the past does not indicate how
they will perform in the future. The past performance of indexes should not be
viewed as representative of the Fund's future performance.
<PAGE>
Index S&P 500 S&P MidCap 400 Wilshire 5000 EAFE Nasdaq 100
1999 +21.04% +14.72% +23.83% +31.45% +101.95%
1998 +28.58 +19.11 +23.43 +20.33 +85.31
1997 +33.36 +32.25 +31.29 +2.06 +20.63
1996 +22.96 +19.20 +21.20 +6.36 +42.54
1995 +37.58 +30.95 +36.45 +11.55 +42.54
1994 +1.32 -3.58 -0.07 +8.06 +1.50
1993 +10.08 +13.95 +11.28 +32.94 +10.58
1992 +7.62 +11.91 +8.97 -11.85 +8.86
1991 +30.47 +50.10 +34.21 +12.50 +64.99
1990 -3.10 -5.12 -6.18 -23.20 -10.41
FEES AND EXPENSES
Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Funds.
Shareholder Feesa (fees paid directly from your investment)
Class D Class E
Maximum sales charge (load) on purchasesb
(as a percentage of offering price) 0% 0%
Annual index account fee (for accounts under
$10,000) $10 $10
Annual Fund operating expenses (expenses that are deducted from Fund assets)
As a percentage of average daily net assets:
S&P 500 Index Fund Class D Class E
Management fees 0.24% 0.24%
Distribution (12b-1) fees (c) 0.25% 0.00%
Other expenses(d) 1.22% 1.22%
Total(e) 1.71% 1.46%
Fee waiver/expense reimbursement 1.07% 1.07%
Net expenses 0.64% 0.39%
Mid Cap Index Fund Class D Class E
Management fees 0.26% 0.26%
Distribution (12b-1) fees(c) 0.25% 0.00%
Other expenses(d) 1.05% 1.05%
Total(e) 1.56% 1.31%
Fee waiver/expense reimbursement 0.86% 0.86%
Net expenses 0.70% 0.45%
Total Stock Market Index Fund Class D Class E
Management fees 0.30% 0.30%
Distribution (12b-1) fees(c) 0.25% 0.00%
Other expenses(d) 0.72% 0.72%
Total(e) 1.27% 1.02%
Fee waiver/expense reimbursement 0.53% 0.53%
Net expenses 0.74% 0.49%
<PAGE>
International Equity Index Fund Class D Class E
Management fees 0.50% 0.50%
Distribution (12b-1) fees(c) 0.25% 0.00%
Other expenses(d) 0.79% 0.79%
Total(e) 1.54% 1.29%
Fee waiver/expense reimbursement 0.65% 0.65%
Net expenses 0.89% 0.64%
Nasdaq 100 Index Fund Class D Class E
Management fees 0.38% 0.38%
Distribution (12b-1) fees(c) 0.25% 0.00%
Other expenses(d) 1.01% 1.01%
Total(e) 1.64% 1.39%
Fee waiver/expense reimbursement 0.85% 0.85%
Net expenses 0.79% 0.54%
a A wire transfer charge, currently $15, may be deducted from your brokerage
account for wire transfers made at your request.
b There are no sales loads; however, for S&P 500 Index Fund, Mid Cap Index Fund,
Total Stock Market Index Fund and Nasdaq 100 Index Fund, the Fund charges a
redemption fee of 0.50% on shares redeemed within 180 days of purchase. For
International Equity Index Fund, the Fund charges a redemption fee of 0.75% on
shares redeemed within 180 days of purchase.
c 12b-1 fees are paid out of the Fund's assets on an ongoing basis. Over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
d Other expenses include an administrative services fee, a transfer agency fee
and other nonadvisory expenses.
e Expenses are based on estimated amounts for the current fiscal year. The
Advisor and the Transfer Agent have contractually obligated themselves to waive
certain fees and to absorb certain other Fund expenses until Jan. 31, 2001.
Under this agreement, total expenses for Class D will not exceed 0.64% for S&P
500 Index Fund, 0.70% for Mid Cap Index Fund, 0.74% for Total Stock Market Index
Fund, 0.89% for International Equity Index Fund, and 0.79% for Nasdaq 100 Index
Fund. Total expenses for Class E will not exceed 0.39% for S&P 500 Index Fund,
0.45% for Mid Cap Index Fund, 0.49% for Total Stock Market Index Fund, 0.64% for
International Equity Index Fund, and 0.54% for Nasdaq 100 Index Fund.
Example
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you sell your shares at the end of the
years shown, your costs would be:
S&P 500 Index Fund 1 year 3 years
Class D $65 $435
Class E $40 $357
Mid Cap Index Fund 1 year 3 years
Class D $72 $409
Class E $46 $331
Total Stock Market Index Fund 1 year 3 years
Class D $76 $351
Class E $50 $272
<PAGE>
International Equity Index Fund 1 year 3 years
Class D $91 $423
Class E $65 $345
Nasdaq 100 Index Fund 1 year 3 years
Class D $81 $434
Class E $55 $357
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.
MANAGEMENT
S&P 500 Index Fund, Mid Cap Index Fund, Total Stock Market Index Fund, Nasdaq
100 Index Fund
James Johnson, portfolio manager, joined American Express Financial Corporation
(AEFC) in 1994 as an equity quantitative analyst. He began managing portfolios
for American Express Asset Management Group in 1996. He became portfolio manager
of these Funds in 1999. He also serves as portfolio manager of AXP Small Company
Index Fund and Total Return Portfolio. He co-manages AXP Blue Chip Advantage
Fund, Aggressive Growth Portfolio and AXP Variable Portfolio - Blue Chip
Advantage Fund.
International Equity Index Fund
A team consisting of Adele Kohler and Lynn Blake manage the Fund's portfolio.
Adele Kohler, lead portfolio manager, is a Principal and Portfolio Manager in
the Global Structured Products Group of State Street Global Advisors. She joined
State Street Global Advisors in 1994 and has been a member of the Global
Structured Products team since 1996. In addition to portfolio management, Adele
is responsible for new product development and research. Lynn Blake is a
Principal, Unit Head and Portfolio Manager in the Global Structured Products
Group. Lynn joined State Street Global Advisors in 1987. In addition to
portfolio management, Lynn is responsible for new product development and
research.
Buying and Selling Shares
References to "Fund" throughout the remainder of this prospectus refers to AXP
S&P 500 Index Fund, AXP Mid Cap Index Fund, AXP Total Stock Market Index Fund,
AXP International Equity Index Fund, and AXP Nasdaq 100 Index Fund, singularly
or collectively as the context requires.
VALUING FUND SHARES
The public offering price for a single Fund share is the net asset value (NAV).
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Time (CT), each business day (any day the New York Stock Exchange
is open).
Fund shares may be purchased through various third-party organizations,
including 401(k) plans, banks, brokers and investment advisers. Where authorized
by the Fund, orders will be priced at the NAV next computed after receipt by the
organization or their selected agent.
The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. If the Fund's investment policies permit it to invest in securities
that are listed on foreign stock exchanges that trade on weekends or other days
when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.
<PAGE>
INVESTMENT OPTIONS
1. Class D shares are sold without a sales charge through wrap fee programs or
other investment products sponsored by an authorized broker-dealer,
investment adviser, bank or other investment professional. Shareholders pay
a 12b-1 fee of 0.25% for distribution services, including the services
provided by investment professionals.
2. Class E shares are sold without a sales charge or 12b-1 fee through
American Express brokerage accounts and qualifying institutional accounts.
Institutional investors should refer to the SAI to determine eligibility to
invest in Class E.
PURCHASING SHARES
You may purchase shares of the Fund in a wrap fee product, a brokerage account
(including online brokerage) or a qualifying institutional account. If you are
investing through a wrap fee program or an entity other than American Express
Financial Advisors Inc., some of the instructions, minimums, policies and cutoff
times for investments may be different. You should contact your selling agent
for more details. The following section explains how you can purchase shares
from American Express Financial Advisors (the Distributor).
If you do not have a mutual fund account, you will need to establish one.
Contact your financial advisor or visit our website to establish an account.
Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.
If you do not provide the correct TIN, you could be subject to backup
withholding of 31% of taxable distributions and proceeds from certain sales and
exchanges. You also could be subject to further penalties, such as:
o a $50 penalty for each failure to supply your correct TIN,
o a civil penalty of $500 if you make a false statement that results in no
backup withholding, and
o criminal penalties for falsifying information.
You also could be subject to backup withholding, if the IRS notifies us to do
so, because you failed to report required interest or dividends on your tax
return. For details on TIN requirements, contact your financial advisor to
obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number
and Certification." You also may obtain the form on the Internet at
(http://www.irs.gov/prod/forms_pubs/).
The Fund and the Distributor reserve the right to refuse any purchase, including
those that appear to be associated with short-term trading activities.
Methods of purchasing shares
1 By mail:
o Regular Mail
Mail checks (along with any applications) to:
Wrap Business Brokerage Accounts
American Express Funds American Express Funds
Attn: SPS P.O. Box 9446
P.O. Box 534 Minneapolis, MN 55440
Minneapolis, MN 55440
<PAGE>
Online Brokerage Accounts
American Express Funds
P.O. Box 59196
Minneapolis, MN 55440
o Express Mail
Mail checks (along with any applications) to:
American Express Funds
733 Marquette Ave.
Minneapolis, MN 55402
2 By internet:
Complete a brokerage account application online (www.americanexpress.com/trade)
and mail the application to:
American Express Funds
P.O. Box 59196
Minneapolis, MN 55440
Corporations and other organizations should contact the Distributor at
800-658-4677 to determine what additional forms may be necessary to open a
brokerage account.
3 By telephone:
You may use money in your brokerage account to make initial and subsequent
purchases.
To place your order, call:
800-967-4377 for Wrap accounts,
800-872-4377 for Brokerage accounts, or
800-658-4677 for Online brokerage accounts.
You must have money available in your brokerage account in order to purchase
Fund shares.
4 By wire:
Once your account is established, you may wire money into your brokerage
account:
Norwest Bank Minneapolis
ABA # 091000019
FBO American Enterprise
Account # 000-106-5930
FBO Client's brokerage account number
For instructions on how to wire money for wrap accounts, call 800-967-4377.
Minimum wire amount: $1,000
<PAGE>
Minimum Fund investment requirements
Your initial investment in the Fund may be as low as $2,000 ($500 for custodial
accounts, Individual Retirement Accounts (IRAs) and certain other retirement
plans). The minimum subsequent investment is $100 ($50 for custodial accounts,
IRAs and certain other retirement plans).
Minimum balance account requirements and annual account fee
The Fund reserves the right to sell your shares if, as a result of sales, the
aggregate value of your holdings in the Fund drops below $1,000 ($500 for
custodial accounts, IRAs and certain other retirement plans). You will be
notified in writing 30 days before the Fund takes such action to allow you to
increase your holdings to the minimum level. If you close your brokerage
account, the Fund will automatically sell your shares and mail the proceeds to
you.
An annual account fee of $10 will be assessed on accounts whose balances are
below $10,000 (for any reason, including market fluctuation). The fee may be
deducted from either your year-end dividend distribution or through a redemption
of shares. If your distribution is less than the fee, fractional shares will be
redeemed to cover the difference. If the fee is deducted from your dividend
distribution, you will still be taxed on the full amount of the dividend. This
fee will not apply to certain qualifying institutional investors.
When and at what price shares will be purchased
Once your request is received and accepted by the Fund, your order will be
priced at the next calculated NAV. See "Valuing Fund Shares."
TRANSACTIONS THROUGH THIRD PARTIES
You may buy or sell shares through certain 401(k) plans, banks, broker-dealers,
financial advisors or other investment professionals. These organizations may
charge you a fee for this service and may have different policies. Some policy
differences may include different minimum investment amounts, exchange
privileges, fund choices and cutoff times for investments. The Fund and the
Distributor are not responsible for the failure of one of these organizations to
carry out its obligations to its customers. Some organizations may receive
compensation from the Distributor or its affiliates for shareholder
recordkeeping and similar services. Where authorized by the Fund, some
organizations may designate selected agents to accept purchase or sale orders on
the Fund's behalf. To buy or sell shares through third parties or determine if
there are policy differences, please consult your selling agent. For other
pertinent information related to buying or selling shares, please refer to the
appropriate section in the prospectus.
EXCHANGING/SELLING SHARES
There are no sales loads; however, the Fund charges a redemption fee on shares
sold or exchanged within 180 days of purchase. This fee does not apply to
qualifying institutional investors or to shares held in a wrap account.
Exchanging Shares
You may make up to four exchanges (two round trips) per calendar year. You can
exchange your shares of the Fund for shares of the same class of other funds
described in this prospectus at any time. Your exchange will be priced at the
next NAV calculated after it is accepted by that fund. When exchanging into
another fund you must meet that fund's minimum investment requirements.
The Distributor and the Fund reserve the right to reject any exchange, limit the
number or 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.
The Fund does not permit market-timing. Do not invest in the Fund if you are a
market timer.
Selling Shares
You may sell your shares at any time. When you sell shares, the amount you
receive may be more or less than the amount you invested. Your sale price will
be the next NAV calculated after receipt by the Distributor of proper sale
instructions, as follows:
<PAGE>
Normally, payment for shares sold will be credited directly to your brokerage
account on the next business day. However, the Fund may delay payment, but no
later than seven days after the Distributor receives your selling instructions
in proper form. Sale proceeds will be held in your brokerage account or mailed
to you according to your account instructions.
If you recently purchased shares by check, your sale proceeds may be held in
your brokerage account until your check clears (which may take up to 10 days
from the purchase date) before a check is mailed to you.
The Fund reserves the right to redeem in kind.
To sell or exchange shares held through entities other than American Express
Financial Advisors, please consult your selling agent. The following section
explains how you can exchange or sell shares held directly with American Express
Financial Advisors.
Four ways to request an exchange or sale of shares
1 By mail:
o Regular Mail
You may request an exchange or sale by writing to:
Wrap Business Brokerage Accounts
American Express Funds American Express Funds
Attn: SPS P.O. Box 9446
P.O. Box 534 Minneapolis, MN 55440
Minneapolis, MN 55440
Online Brokerage Accounts
American Express Funds
P.O. Box 59196
Minneapolis, MN 55440
o Express Mail
You may request an exchange or sale by writing to:
American Express Funds
733 Marquette Ave.
Minneapolis, MN 55402
2 By internet:
If you have a brokerage account you may exchange or sell shares from our website
at (www.americanexpress.com/trade).
<PAGE>
3 By telephone:
You may exchange or sell shares by calling:
800-967-4377 for Wrap accounts,
800-872-4377 for Brokerage accounts, or
800-658-4677 for Online brokerage accounts.
4 By wire:
Money can be wired from your account to your bank account. Call the Distributor
at the above numbers for additional information on wire transfers. A $15 service
fee may be charged against your brokerage account for each wire sent.
To properly process your exchange or sale request we will need the following
information:
o your account number(s) and your name (for exchanges, both funds must be
registered in the same ownership),
o your Social Security number or Employer Identification number,
o the name of the fund(s) and class of shares from which you wish to exchange
or sell shares,
o the dollar amount or number of shares you want to exchange or sell, and
o if a written request, a signature of at least one of the brokerage account
holders in the exact form specified on the account.
Once an exchange or sale request is made it is irrevocable and cannot be
modified or canceled.
Telephone exchange or sale requests received and accepted by the Fund, once the
caller's identity and account ownership have been verified by the Distributor,
will be processed at the next calculated NAV.
See "Valuing Fund Shares."
Telephone Transactions
The privilege to initiate transactions by telephone is automatically available
through your brokerage account. The Fund will honor any telephone transaction
believed to be authentic and will use reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Fund may modify or
discontinue telephone privileges at any time.
Electronic Transactions
The ability to initiate transactions via the internet may be unavailable or
delayed (for example, during periods of unusual market activity) at certain
times. The Fund and the Distributor are not responsible for any losses
associated with unexecuted transactions. In addition, the Fund and the
Distributor are not responsible for any losses resulting from unauthorized
transactions if reasonable security measures are followed to validate the
investor's identity. The Fund may modify or discontinue electronic privileges at
any time.
Distributions and Taxes
As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Each realized capital gain or loss is long-term or short-term depending on
the length of time the Fund held the security. Realized capital gains and losses
offset each other. The Fund offsets any net realized capital gains by any
available capital loss carryovers.
<PAGE>
Net short-term capital gains are included in net investment income. Net realized
long-term capital gains, if any, are distributed by the end of the calendar year
as capital gain distributions.
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund unless you request distributions
in cash. We reinvest the distributions for you at the next calculated NAV after
the distribution is paid. If you choose cash distributions, you will receive
cash only for distributions declared after your request has been processed.
TAXES
Distributions are subject to federal income tax and may be subject to state and
local taxes in the year they are declared. You must report distributions on your
tax returns, even if they are reinvested in additional shares.
If you buy shares shortly before the record date of a distribution you may pay
taxes on money earned by the Fund before you were a shareholder. You will pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which may be taxable.
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for less
than their cost, the difference is a capital loss. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held for more
than one year).
Selling shares held in an IRA or qualified retirement account may subject you to
federal taxes, penalties and reporting requirements. Please consult your tax
advisor.
Important: This information is a brief and selective summary of some of the tax
rules that apply to the Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
Other Information
INVESTMENT MANAGER
The investment manager of the Fund is AEFC, located at 200 AXP Financial Center,
Minneapolis, MN 55474. AEFC is a wholly-owned subsidiary of American Express
Company, a financial services company with headquarters at American Express
Tower, World Financial Center, New York, NY 10285.
The Fund pays AEFC a fee for managing its assets. Under the Investment
Management Services Agreement, the fee will be as follows: S&P 500 Index Fund --
0.24% on the first $250 million gradually reducing to 0.21% as assets increase;
Mid Cap Index Fund -- 0.26% on the first $250 million gradually reducing to
0.23% as assets increase; Total Stock Market Index Fund -- 0.30% on the first
$250 million gradually reducing to 0.26% as assets increase; International
Equity Index Fund -- 0.50% on the first $250 million gradually reducing to 0.46%
as assets increase; Nasdaq 100 Index Fund -- 0.38% on the first $250 million
gradually reducing to 0.34% as assets increase. Under the Agreement, the Fund
also pays taxes, brokerage commissions and nonadvisory expenses. AEFC or an
affiliate may make payments from its own resources, which include the management
fees paid by the Fund, to compensate broker-dealers or other persons for
providing distribution assistance.
State Street Global Advisors (Sub-Adviser), Two International Place, Boston,
Massachusetts 02110, is the sub-adviser for International Equity Index Fund.
Sub-Adviser is a division of State Street Bank and Trust Company, a wholly-owned
subsidiary of State Street Corporation.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Fiscal period ended Jan. 31, 2000 (b)
Per share income and capital changes(a)
AXP AXP AXP
S&P 500 Mid Cap Total Stock Market
Index Fund Index Fund Index Fund
<S> <C> <C> <C> <C> <C> <C>
Class D Class E Class D Class E Class D Class E
Net asset value, beginning of period $5.07 $5.07 $5.07 $5.07 $5.19 $5.19
Income from investment operations:
Net investment income (loss) .01 .01 .01 .02 .01 .01
Net gains (losses)
(both realized and unrealized) .35 .35 .64 .64 .57 .57
Total from investment operations .36 .36 .65 .66 .58 .58
Less distributions:
Dividends from net investment income (.01) (.01) (.01) (.02) (.01) (.01)
Distributions from realized gains -- -- -- -- -- --
Total distributions (.01) (.01) (.01) (.02) (.01) (.01)
Net asset value, end of period $5.42 $5.42 $5.71 $5.71 $5.76 $5.76
Ratios/supplemental data
Net assets, end of period (in millions) $7 $9 $4 $8 $8 $16
Ratio of expenses to average
daily net assets(d) .64%(c)(e) .39%(c)(e) .69%(c)(e) .45%(c),(e) .74%(c)(e) .49%(c)(e)
Ratio of net investment income (loss)
to average daily net assets .52%(c) .83%(c) .59%(c) .83%(c) .39%(c) .64%(c)
Portfolio turnover rate
(excluding short-term securities) 37% 37% 16% 16% 4% 4%
Total return 7.72% 7.75% 12.87% 12.92% 11.57% 11.61%
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b For the period from Oct. 25, 1999 (when shares became publicly available) to
Jan. 31, 2000.
c Adjusted to an annual basis.
d Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
e AEFC reimbursed each Fund for certain expenses. Had AEFC not done so, the
annual ratios of expense would have been 4.00% for Class D and 3.70% for Class E
for AXP S&P 500 Index Fund; 2.22% for Class D and 1.96% for Class E for AXP Mid
Cap Index Fund and 1.52% for Class D and 1.27% for Class E for AXP Total Stock
Market Index Fund.
<PAGE>
<TABLE>
<CAPTION>
Fiscal period ended Jan. 31, 2000 b
Per share income and capital changes(a)
AXP AXP
International Equity Nasdaq 100
Index Fund Index Fund
<S> <C> <C> <C> <C>
Class D Class E Class D Class E
Net asset value, beginning of period $5.00 $5.00 $5.26 $5.26
Income from investment operations:
Net investment income (loss) -- .01 (.01) (.01)
Net gains (losses) (both realized and unrealized) .43 .42 2.27 2.27
Total from investment operations .43 .43 2.26 2.26
Less distributions:
Dividends from net investment income -- -- -- --
Distributions from realized gains (.01) (.01) -- --
Total distributions (.01) (.01) -- --
Net asset value, end of period $5.42 $5.42 $7.52 $7.52
Ratios/supplemental data
Net assets, end of period (in millions) $7 $15 $11 $13
Ratio of expenses to average
daily net assets(d) .89% (c),(e) .64% (c),(e) .79%(c),(e) .54%(c),(e)
Ratio of net investment income (loss)
to average daily net assets .13%(c) .39%(c) (.67%)(c) (.41%)(c)
Portfolio turnover rate
(excluding short-term securities) 4% 4% 51% 51%
Total return 8.09% 8.09% 42.97% 42.97%
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b For the period from Oct. 25, 1999 (when shares became publicly available) to
Jan. 31, 2000.
c Adjusted to an annual basis.
d Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
e AEFC reimbursed each Fund for certain expenses. Had AEFC not done so, the
annual ratios of expense would have been 1.62% for Class D and 1.37% for Class E
for AXP International Equity Index Fund and 1.82% for Class D and 1.54% for
Class E for AXP Nasdaq 100 Index Fund.
The information in these tables has been audited by KPMG LLP, independent
auditors. The independent auditor's report and additional information about the
performance of each Fund are contained in the Funds' annual report which, if not
included with this prospectus, may be obtained without charge.
<PAGE>
AMERICAN
EXPRESS(R)
FUNDS
This Fund, along with the other American Express mutual funds, is distributed by
American Express Financial Advisors Inc. and can be purchased from an American
Express financial advisor or from other authorized broker-dealers or third
parties. The Funds can be found under the "Amer Express" banner in most mutual
fund quotations.
Additional information about the Fund and its investments is available in the
Fund's Statement of Additional Information (SAI), annual and semiannual reports
to shareholders. In the Fund's annual report, you will find a discussion of
market conditions and investment strategies that significantly affected the Fund
during its last fiscal year. The SAI is incorporated by reference in this
prospectus. For a free copy of the SAI, the annual report or the semiannual
report contact your selling agent or American Express Client Service
Corporation.
American Express Client Service Corporation
P.O. Box 534, Minneapolis, MN 55440-0534
800-862-7919 TTY: 800-846-4852
Web site address:
http://www.americanexpress.com
You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-202-942-8090). Reports and other information about the Fund are available on
the EDGAR Database on the Commission's Internet site at (http://www.sec.gov).
Copies of this information may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: [email protected], or by
writing to the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
Investment Company Act File #811-5897
S-6434-99 C (3/00)
<PAGE>
AXPSM MARKET ADVANTAGE SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXPSM BLUE CHIP ADVANTAGE FUND (the Fund)
March 31, 2000
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
most recent Annual Report to shareholders (Annual Report) that may be obtained
from your financial advisor or by writing to American Express Client Service
Corporation, P.O. Box 534, Minneapolis, MN 55440-0534 or by calling
800-862-7919.
The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.
<PAGE>
TABLE OF CONTENTS
Mutual Fund Checklist.....................................................p.3
Fundamental Investment Policies...........................................p.5
Investment Strategies and Types of Investments............................p.6
Information Regarding Risks and Investment Strategies.....................p.8
Security Transactions....................................................p.31
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation...................................p.33
Performance Information..................................................p.33
Valuing Fund Shares......................................................p.34
Investing in the Fund....................................................p.35
Selling Shares...........................................................p.38
Pay-out Plans............................................................p.38
Taxes....................................................................p.39
Agreements...............................................................p.41
Organizational Information...............................................p.44
Board Members and Officers...............................................p.48
Compensation for Board Members...........................................p.50
Independent Auditors.....................................................p.51
Appendix: Description of Ratings........................................p.52
<PAGE>
MUTUAL FUND CHECKLIST
|X| Mutual funds are NOT guaranteed or insured by any
bank or government agency. You can lose money.
|X| Mutual funds ALWAYS carry investment risks. Some
types carry more risk than others.
|X| A higher rate of return typically involves a
higher risk of loss.
|X| Past performance is not a reliable indicator of future
performance.
|X| ALL mutual funds have costs that lower investment return.
|X| You can buy some mutual funds by contacting them
directly. Others, like this one, are sold mainly
through brokers, banks, financial planners, or
insurance agents. If you buy through these
financial professionals, you generally will pay a
sales charge.
|X| Shop around. Compare a mutual fund with others of
the same type before you buy.
OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:
Develop a Financial Plan
Have a plan - even a simple plan can help you take control of your financial
future. Review your plan with your advisor at least once a year or more
frequently if your circumstances change.
Dollar-Cost Averaging
An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.
<PAGE>
Dollar-cost averaging:
Regular Market Price Shares
Investment of a Share Acquired
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
----- -------- ------
$500 $25.00 103.4
Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5)
The average price you paid for each share: $4.84 ($500 divided by 103.4)
Diversify
Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
Understand Your Investment
Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies, and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
The policies below are fundamental policies that apply to the Fund and may be
changed only with shareholder approval. Unless holders of a majority of the
outstanding voting securities agree to make the change, the Fund will not:
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the Securities and Exchange Commission (SEC), this means no more than 25%
of the Fund's total assets, based on current market value at time of
purchase, can be invested in any one industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Lend Fund securities in excess of 30% of its net assets.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It is intended to show the breadth of
investments that the investment manager may make on behalf of the Fund. For a
description of principal risks, please see the prospectus. Notwithstanding the
Fund's ability to utilize these strategies and techniques, the investment
manager is not obligated to use them at any particular time. For example, even
though the investment manager is authorized to adopt temporary defensive
positions and is authorized to attempt to hedge against certain types of risk,
these practices are left to the investment manager's sole discretion.
Allowable for
Investment strategies & types of investments: the Fund?
Agency and Government Securities yes
Borrowing yes
Cash/Money Market Instruments yes
Collateralized Bond Obligations yes
Commercial Paper yes
Common Stock yes
Convertible Securities yes
Corporate Bonds yes
Debt Obligations yes
Depositary Receipts yes
Derivative Instruments yes
Foreign Currency Transactions yes
Foreign Securities yes
High-Yield (High-Risk) Securities (Junk Bonds) no
Illiquid and Restricted Securities yes
Indexed Securities yes
Inverse Floaters no
Investment Companies yes
Lending of Portfolio Securities yes
Loan Participations yes
Mortgage- and Asset-Backed Securities no
Mortgage Dollar Rolls no
Municipal Obligations yes
Preferred Stock yes
Real Estate Investment Trusts yes
Repurchase Agreements yes
Reverse Repurchase Agreements yes
Short Sales no
Sovereign Debt yes
Structured Products yes
Variable- or Floating-Rate Securities yes
Warrants yes
When-Issued Securities yes
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes
The following are guidelines that may be changed by the board at any time:
o The Fund may invest up to 20% of its total assets in foreign investments
included in the market index.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
<PAGE>
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o The Fund will not buy on margin or sell short, except the Fund may make
margin payments in connection with transactions in stock index futures
contracts.
o The Fund will not invest in a company to control or manage it.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Correlation Risk
The risk that a given transaction may fail to achieve its objectives due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. Junk bonds have greater price fluctuations and are
more likely to experience a default than investment grade bonds.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of a
country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate between
local currency and the U.S. dollar. Whenever the Fund holds securities valued in
a foreign currency or holds the currency, changes in the exchange rate add or
subtract from the value of the investment.
<PAGE>
Custody risk refers to the process of clearing and settling trades. It also
covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a bond, the higher its yield and
the greater its sensitivity to changes in interest rates.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Reinvestment Risk
The risk that an investor will not be able to reinvest income or principal at
the same rate it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the
<PAGE>
convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
<PAGE>
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend, in whole or in part, on (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable percentage gain or loss in the price of
the derivative instrument.
<PAGE>
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees for the length of the contract 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 during the length of the contract, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price
or, if such a price is not readily available, at the mean of the last bid and
ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a
buyer (holding the "long" position) and a seller (holding the "short" position)
for an asset with delivery deferred until a future date. The buyer agrees to pay
a fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
<PAGE>
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day a buyer
would pay out cash in an amount equal to any decline in the contract's value or
receive cash equal to any increase. At the time a futures contract is closed
out, a nominal commission is paid, which is generally lower than the commission
on a comparable transaction in the cash market.
Futures contracts may be based on various securities, securities indices (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indices.
Options on Futures Contracts. Options on futures contracts give the
holder a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date (some futures are settled in cash), an option on a futures
contract merely entitles its holder to decide on or before a future date (within
nine months of the date of issue) whether to enter into a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, because the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the change
in the value of the underlying contract. However, since an option gives the
buyer the right to enter into a contract at a set price for a fixed period of
time, its value does change daily.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities
traded on national securities exchanges. An option on a stock index is similar
to an option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
If the Fund is using futures contracts for hedging purposes, such an election
may result in the Fund being required to defer recognizing losses incurred on
futures contracts and on underlying securities identified as hedged positions
and require recognition of unrealized gain.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term.
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.
<PAGE>
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
Other Risks of Derivatives.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities.
There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
<PAGE>
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of the Fund's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, the Fund may incur costs in connection with
conversions between various currencies. Currency exchange rates may fluctuate
significantly over short periods of time causing the Fund's NAV to fluctuate.
Currency exchange rates are generally determined by the forces of supply and
demand in the foreign exchange markets, actual or anticipated changes in
interest rates, and other complex factors. Currency exchange rates also can be
affected by the intervention of U.S. or foreign governments or central banks, or
the failure to intervene, or by currency controls or political developments.
Spot Rates and Derivative Instruments. The Fund conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts) as a hedge against fluctuations in future foreign exchange
rates. (See also Derivative Instruments). These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Because foreign currency transactions
occurring in the interbank market might involve substantially larger amounts
than those involved in the use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market for the underlying foreign
currencies at prices that are less favorable than for round lots.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment in dollars. By entering into
a forward contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between different
currencies from the date the security is purchased or sold to the date on which
payment is made or received or when the dividend or interest is actually
received.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may change in relationship
to another currency. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since the future
value of securities in foreign currencies more than likely will change between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency.
The Fund will designate cash or securities in an amount equal to the value of
the Fund's total assets committed to consummating forward contracts entered into
under the second circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a daily basis so
that the value of the cash or securities will equal the amount of the Fund's
commitments on such contracts.
At maturity of a forward contract, the Fund may either sell the security and
make delivery of the foreign currency or retain the security and terminate its
contractual obligation to deliver the foreign currency by purchasing an
offsetting contract with the same currency trader obligating it to buy, on the
same maturity date, the same amount of foreign currency.
<PAGE>
If the Fund retains the security and engages in an offsetting transaction, the
Fund will incur a gain or loss (as described below) to the extent there has been
movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline between the date the Fund enters
into a forward contract for selling foreign currency and the date it enters into
an offsetting contract for purchasing the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to buy. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to buy exceeds the price of the currency it has agreed to
sell.
It is impossible to forecast what the market value of securities will be at the
expiration of a contract. Accordingly, it may be necessary for the Fund to buy
additional foreign currency on the spot market (and bear the expense of that
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that can be achieved at some point in time. Although forward contracts
tend to minimize the risk of loss due to a decline in value of hedged currency,
they tend to limit any potential gain that might result should the value of such
currency increase.
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Fund may buy options on foreign currencies
for hedging purposes. For example, a decline in the dollar value of a foreign
currency in which securities are denominated will reduce the dollar value of
such securities, even if their value in the foreign currency remains constant.
In order to protect against the diminutions in the value of securities, the Fund
may buy options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell the currency for a fixed amount in
dollars and will offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted.
As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put 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>
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to buy or sell
the underlying currency at a loss that may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in certain foreign countries
for that purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The Fund may enter into currency
futures contracts to sell currencies. It also may buy put options and write
covered call options on currency futures. Currency futures contracts are similar
to currency forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size and delivery
date. Most currency futures call for payment of delivery in U.S. dollars. The
Fund may use currency futures for the same purposes as currency forward
contracts, subject to Commodity Futures Trading Commission (CFTC) limitations.
Currency futures and options on futures values can be expected to correlate with
exchange rates, but will not reflect other factors that may affect the value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Fund's investments
denominated in that currency over time.
<PAGE>
The Fund will hold securities or other options or futures positions whose values
are expected to offset its obligations. The Fund will not enter into an option
or futures position that exposes the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient to cover its
potential obligations.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor to miss attractive
investment opportunities. Payment for securities without delivery may be
required in certain foreign markets and, when participating in new issues, some
foreign countries require payment to be made in advance of issuance (at the time
of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
<PAGE>
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates; the fluctuation of the euro relative to non-euro currencies during the
transition period from January 1, 1999 to December 31, 2000 and beyond; whether
the interest rate, tax or labor regimes of European countries participating in
the euro will converge over time; and whether the conversion of the currencies
of other EU countries such as the United Kingdom, Denmark, and Greece into the
euro and the admission of other non-EU countries such as Poland, Latvia, and
Lithuania as members of the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
<PAGE>
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time- consuming
negotiations and legal expense, and it may be difficult or impossible for the
Fund to sell such an investment promptly and at an acceptable price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
Indexed Securities
The value of indexed securities is linked to currencies, interest rates,
commodities, indexes, or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile than the
underlying instrument itself and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
Inverse Floaters
Inverse floaters are created by underwriters using the interest payment on
securities. A portion of the interest received is paid to holders of instruments
based on current interest rates for short-term securities. The remainder, minus
a servicing fee, is paid to holders of inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floaters. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
<PAGE>
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
<PAGE>
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities. The cash
flows and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
<PAGE>
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia and Puerto Rico). The
interest on these obligations is generally exempt from federal income tax.
Municipal obligations are generally classified as either "general obligations"
or "revenue obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
Taxable Municipal Obligations. There is another type of municipal obligation
that is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
<PAGE>
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
<PAGE>
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased between the date of the
short sale and the date on which the borrowed security is replaced, the investor
looses the opportunity to participate in the gain. A "Short Sale against the
box" may result in a constructive sale of appreciated securities thereby
generating capital gains to the Fund.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
Structured Products
Structured products are over-the-counter financial instruments created
specifically to meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option, or a forward contract embedded
in a note or any of a wide variety of debt, equity, and/or currency
combinations. Risks of structured products include the inability to close such
instruments, rapid changes in the market, and defaults by other parties. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
<PAGE>
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets. In addition, when the Fund engages in forward commitment and
when-issued transactions, it relies on the counterparty to consummate the
transaction. The failure of the counterparty to consummate the transaction may
result in the Fund losing the opportunity to obtain a price and yield considered
to be advantageous.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
SECURITY TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's investment goal and policies, which securities will
be purchased, held, or sold. In determining where the buy and sell orders are to
be placed, AEFC has been directed to use its best efforts to obtain the best
available price and the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions,
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness, and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.
The Fund, AEFC, and American Express Financial Advisors Inc. (the Distributor)
each have 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 the Fund.
The Fund's securities may be traded on a principal rather than an agency basis.
In other words, AEFC will trade directly with the issuer or with a dealer who
buys or sells for its own account, rather than acting on behalf of another
client. AEFC does not pay the dealer commissions. Instead, the dealer's profit,
if any, is the difference, or spread, between the dealer's purchase and sale
price for the security.
On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a policy authorizing AEFC to do so to the extent authorized by
law, if AEFC determines, in good faith, that such commission is reasonable in
relation to the value of the brokerage or research services provided by a broker
or dealer, viewed either in the light of that transaction or AEFC's overall
responsibilities with respect to the Fund and the other American Express mutual
funds for which it acts as investment manager.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business, and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software, or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management, and trading
functions and other services to the extent permitted under an interpretation by
the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits AEFC, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Fund to pay a commission in excess of the amount another
broker might have charged. AEFC has advised the Fund that it is necessary to do
<PAGE>
business with a number of brokerage firms on a continuing basis to obtain such
services as the handling of large orders, the willingness of a broker to risk
its own money by taking a position in a security, and the specialized handling
of a particular group of securities that only certain brokers may be able to
offer. As a result of this arrangement, some portfolio transactions may not be
effected at the lowest commission, but AEFC believes it may obtain better
overall execution. AEFC has represented that under all three procedures the
amount of commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
All other transactions will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by AEFC in providing advice to all American
Express mutual funds even though it is not possible to relate the benefits to
any particular fund.
Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by AEFC or
any of its subsidiaries. When the Fund buys or sells the same security as
another portfolio, fund, or account, AEFC carries out the purchase or sale in a
way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency, and research services.
The Fund paid total brokerage commissions of $5,007,525 for fiscal year ended
Jan. 31, 2000, $5,572,273 for fiscal year 1999, and $4,523,705 for fiscal year
1998. Substantially all firms through whom transactions were executed provide
research services.
In fiscal year 2000, transactions amounting to $220,000, on which $13,212 in
commissions were imputed or paid, were specifically directed to firms in
exchange for research services.
As of the end of the most recent fiscal year, the Fund held no 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 of the end of the most recent fiscal year, the Fund held securities of its
regular brokers or dealers or of the parent of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities as
presented below:
Value of Securities
Name of Issuer owned at End of Fiscal Year
-------------- ---------------------------
Bank of America $45,953,819
FleetBoston Financial 27,101,231
Fleet Funding 5,590,355
Morgan Stanley 38,305,750
Salomon Smith Barney 4,796,773
The portfolio turnover rate was 81% in the most recent fiscal year, and 105% in
the year before. Higher turnover rates may result in higher brokerage expenses.
<PAGE>
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL
CORPORATION
Affiliates of American Express Company (of which AEFC is a wholly-owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities laws. AEFC will
use an American Express affiliate only if (i) AEFC determines that the Fund will
receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar brokerage and other services
for the Fund and (ii) the affiliate charges the Fund commission rates consistent
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
Information about brokerage commissions paid by the Fund for the last three
fiscal years to brokers affiliated with AEFC is contained in the following
table:
<TABLE>
<CAPTION>
As of the end of Fiscal Year
<S> <C> <C> <C> <C> <C> <C>
2000 1999 1998
Percent of
Aggregate
Dollar Amount
of
Aggregate Percent of Transactions Aggregate Aggregate
Dollar amount Aggregate Involving Dollar Amount Dollar Amount
Broker Nature of of Commissions Brokerage Payment of of Commissions of
Affiliation Paid to Broker Commissions Commissions Paid to Broker Commissions
Paid to Broker
American Wholly-owned $153,839 3.07% 5.49% $132,549 $332,604
Enterprise subsidiary of
Investment AEFC
Services Inc.
</TABLE>
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, used by
the Fund are based on standardized methods of computing performance as required
by the SEC. An explanation of the methods used by the Fund to compute
performance follows below.
AVERAGE ANNUAL TOTAL RETURN
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
<PAGE>
AGGREGATE TOTAL RETURN
The Fund may calculate aggregate total return for a class for certain periods
representing the cumulative change in the value of an investment in the Fund
over a specified period of time according to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
The total return of the S&P 500 is calculated by several sources. The Fund will
use the total return as calculated by Standard & Poor's Corporation (S&P) to
measure the U.S. stock market. The total return is calculated by adding dividend
income to price appreciation. For periods after 1987, total return on the S&P
500 is determined by reinvesting cash dividends paid on stocks on the
ex-dividend date - that is, the date on or after which a sale of stock does not
carry with it the right to a dividend already declared. For periods before 1988,
S&P calculated total return by compiling actual dividends on a quarterly basis
and assumed they were reinvested as of the end of a particular quarter. S&P also
makes adjustments for special dividends, such as stock dividends. The percentage
changes for the indexes other than the S&P 500 reflect reinvestment of all
distributions on a quarterly basis and changes in market prices. The percentage
changes for all the indexes exclude brokerage commissions or other fees. By
comparison, the Fund will incur such fees and other expenses.
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields, or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal
Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and
Wiesenberger Investment Companies Service. The Fund also may compare its
performance to a wide variety of indexes or averages. There are similarities and
differences between the investments that the Fund may purchase and the
investments measured by the indexes or averages and the composition of the
indexes or averages will differ from that of the Fund.
VALUING FUND SHARES
As of the end of the most recent fiscal year, the computation looked like this:
Net asset value
Net assets Shares of one share
outstanding
Class A $2,454,976,470 Divided by 208,005,529 Equals $11.80
Class B 1,588,203,490 136,515,216 11.63
Class Y 369,396,419 31,269,596 11.81
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
o Securities traded on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.
<PAGE>
o Securities traded on a securities exchange for which a last-quoted sales
price is not readily available are valued at the mean of the closing bid
and asked prices, looking first to the bid and asked prices on the exchange
where the security is primarily traded and, if none exist, to the
over-the-counter market.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System are valued at the mean of the closing bid and asked prices.
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
o Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on the
61st day before maturity. Short-term securities maturing in 60 days or less
at acquisition date are valued at amortized cost. Amortized cost is an
approximation of market value determined by systematically increasing the
carrying value of a security if acquired at a discount, or reducing the
carrying value if acquired at a premium, so that the carrying value is
equal to maturity value on the maturity date.
o Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
INVESTING IN THE FUND
SALES CHARGE
Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the NAV. For Class A, the public offering price for an
investment of less than $50,000, is determined by dividing the NAV of one share,
by 0.9425 (1.00-0.0575 for a maximum 5.75% sales charge). The sales charge is
paid to the Distributor by the person buying the shares.
<PAGE>
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
Up to $50,000 5.75% 6.10%
$50,000-$99,000 4.75 4.99
$100,000-$249,999 3.75 3.90
$250,000-$499,999 2.50 2.56
$500,000-$999,999 2.00* 2.04*
$1,000,000 or more 0.00 0.00
* The sales charge will be waived until Dec. 31, 2000.
The initial sales charge is waived for certain qualified plans. Participants in
these qualified plans may be subject to a deferred sales charge on certain
redemptions. The Fund will waive the deferred sales charge on certain
redemptions if the redemption is a result of a participant's death, disability,
retirement, attaining age 59 1/2, loans, or hardship withdrawals. The deferred
sales charge varies depending on the number of participants in the qualified
plan and total plan assets as follows:
Deferred Sales Charge
Number of Participants
Total Plan Assets 1-99 100 or more
Less than $1 million 4% 0%
$1 million or more 0% 0%
Class A - Reducing the Sales Charge
The market value of your investments in the Fund determines your sales charges.
For example, suppose you have made an investment that now has a value of $20,000
and you later decide to invest $40,000 more. The value of your investments would
be $60,000. As a result, your $40,000 investment qualifies for the lower 4.75%
sales charge that applies to investments of more than $50,000 and up to
$100,000.
Class A - Letter of Intent (LOI)
If you intend to invest a large amount over a period of time, you can reduce the
sales charge in Class A by filing a LOI and committing to invest a certain
amount. The agreement can start at any time and will remain in effect for 13
months. The LOI start date can be backdated by 90 days. Your investments will be
charged the charges that apply to the amount you have committed to invest. Five
percent of the commitment amount will be placed in escrow. If your commitment
amount is reached within the 13-month period, the shares will be released from
escrow. If you do not invest the commitment amount by the end of the 13 months,
the remaining unpaid sales charge will be redeemed from the escrowed shares and
the remaining balance released from escrow. The commitment amount does not
include purchases in any class of American Express funds other than Class A;
purchases in American Express funds held within a wrap product; and purchases of
AXP Cash Management Fund and AXP Tax-Free Money Fund unless they are
subsequently exchanged to Class A shares of an American Express mutual fund
within the 13 month period. A LOI is not an option (absolute right) to buy
shares.
<PAGE>
Class Y Shares
Class Y shares are offered to certain institutional investors. Class Y shares
are sold without a front-end sales charge or a CDSC and are not subject to a
distribution fee. The following investors are eligible to purchase Class Y
shares:
o Qualified employee benefit plans* if the plan:
-uses a daily transfer recordkeeping service offering participants
daily access to American Express mutual 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 American Express mutual
funds or
- 500 or more participants.
o Trust companies or similar institutions, and charitable organizations that
meet the definition in Section 501(c)(3) of the Internal Revenue Code.*
These institutions must have at least $10 million in American Express
mutual funds.
o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.
* Eligibility must be determined in advance. To do so, contact your financial
advisor.
SYSTEMATIC INVESTMENT PROGRAMS
After you make your initial investment of $100 or more, you must make additional
payments of $100 or more on at least a monthly basis until your balance reaches
$2,000. These minimums do not apply to all systematic investment programs. You
decide how often to make payments - monthly, quarterly, or semiannually. You are
not obligated to make any payments. You can omit payments or discontinue the
investment program altogether. The Fund also can change the program or end it at
any time.
AUTOMATIC DIRECTED DIVIDENDS
Dividends, including capital gain distributions, paid by another American
Express mutual fund may be used to automatically purchase shares in the same
class of this Fund. Directed dividends from AXP Cash Management or AXP Tax-Free
Money Fund will be subject to a sales charge. Dividends may be directed to
existing accounts only. Dividends declared by a fund are exchanged to this Fund
the following day. Dividends can be exchanged into the same class of another
American Express mutual fund but cannot be split to make purchases in two or
more funds. Automatic directed dividends are available between accounts of any
ownership except:
<PAGE>
o Between a non-custodial account and an IRA, or 401(k) plan account or other
qualified retirement account of which American Express Trust Company acts
as custodian;
o Between two American Express Trust Company custodial accounts with
different owners (for example, you may not exchange dividends from your IRA
to the IRA of your spouse); and
o Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA
or UTMA accounts with identical ownership.
The Fund's investment goal is described in its prospectus along with other
information, including fees and expense ratios. Before exchanging dividends into
another fund, you should read that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.
REJECTION OF BUSINESS
The Fund or AECSC reserves the right to reject any business, in its sole
discretion.
SELLING SHARES
You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.
During an emergency, the board can suspend the computation of NAV, stop
accepting payments for purchase of shares, or suspend the duty of the Fund to
redeem shares for more than seven days. Such emergency situations would occur
if:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or
o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.
Should the Fund stop selling shares, the board may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all shareholders.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the net assets
of the Fund at the beginning of the period. Although redemptions in excess of
this limitation would normally be paid in cash, the Fund reserves the right to
make these payments in whole or in part in securities or other assets in case of
an emergency, or if the payment of a redemption in cash would be detrimental to
the existing shareholders of the Fund as determined by the board. In these
circumstances, the securities distributed would be valued as set forth in this
SAI. Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.
<PAGE>
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment in regular
installments. If you redeem 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 consult your selling agent or write American
Express Client Service Corporation, P.O. Box 534, Minneapolis, MN 55440-0534, or
call 800-437-3133. Your authorization must be received at least five days before
the date you want your payments to begin. The initial payment must be at least
$50. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or
annual basis. Your choice is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you will have to send in
a separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed for each
payment and that amount will be sent to you. The length of time these payments
continue is based on the number of shares in your account.
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares is necessary
to make the payment will be redeemed in regular installments until the account
is closed.
Plan #4: Redemption of a percentage of net asset value
Payments are made based on a fixed percentage of the net asset value of the
shares in the account computed on the day of each payment. Percentages range
from 0.25% to 0.75%. For example, if you are on this plan and arrange to take
0.5% each month, you will get $50 if the value of your account is $10,000 on the
payment date.
<PAGE>
TAXES
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for less
than their cost, the difference is a capital loss. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held more than
one year).
If you buy Class A shares and within 91 days exchange into another fund, you may
not include the sales charge in your calculation of tax gain or loss on the sale
of the first fund you purchased. The sales charge may be included in the
calculation of your tax gain or loss on a subsequent sale of the second fund you
purchased.
For example:
You purchase 100 shares of one fund having a public offering price of $10.00 per
share. With a sales load of 5.75%, you pay $57.50 in sales load. With a NAV of
$9.425 per share, the value of your investment is $950.00. Within 91 days of
purchasing that fund, you decide to exchange out of that fund, now at a NAV of
$11.00 per share, up from the original NAV of $9.425, and purchase into a second
fund, at a NAV of $15.00 per share. The value of your investment is now
$1,100.00 ($11.00 x 100 shares). You cannot use the $57.50 paid as a sales load
when calculating your tax gain or loss in the sale of the first fund shares. So
instead of having $100.00 gain ($1,100.00 - $1,000.00), you have a $157.50 gain
($1,100.00 - $942.50). You can include the $57.50 sales load in the basis of
your shares in the second fund.
If you have a nonqualified investment in the Fund and you wish to move part or
all of those shares to an IRA or qualified retirement account in the Fund, you
can do so without paying a sales charge. However, this type of exchange is
considered a redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5.75% ($115) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as dividend income
for federal income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities. For
the most recent fiscal year, 26.86% of the Fund's net investment income
dividends qualified for the corporate deduction.
The Fund may be subject to U.S. taxes resulting from holdings in a passive
foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or
more of its gross income for the taxable year is passive income or 50% or more
of the average value of its assets consists of assets that produce or could
produce passive income.
Income earned by the Fund may have had foreign taxes imposed and withheld on it
in foreign countries. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes. If more than 50% of the Fund's total assets at
the close of its fiscal year consists of securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
under which shareholders of the Fund would be required to include their pro rata
portions of foreign taxes withheld by foreign countries as gross income in their
federal income tax returns. These pro rata portions of foreign taxes withheld
may be taken as a credit or deduction in computing the shareholders' 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.
<PAGE>
Capital gain distributions, if any, received by shareholders 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. A special 28% rate on capital
gains may apply to sales of precious metals, if any, owned directly by the Fund.
A special 25% rate on capital gains may apply to investments in REITs.
Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable
to fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gains or losses. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
Under federal tax law, by the end of a calendar year the Fund must declare and
pay dividends representing 98% of ordinary income for that calendar year and 98%
of net capital gains (both long-term and short-term) for the 12-month period
ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.
For purposes of the excise tax distributions, "section 988" ordinary gains and
losses are distributable based on an Oct. 31 year end. This is an exception to
the general rule that ordinary income is paid based on a calendar year end.
If a mutual fund is the holder of record of any share of stock on the record
date for any dividend payable with respect to such stock, such dividend shall be
included in gross income by the Fund as of the later of (1) the date such share
became ex-dividend or (2) the date the Fund acquired such share. Because the
dividends on some foreign equity investments may be received some time after the
stock goes ex-dividend, and in certain rare cases may never be received by the
Fund, this rule may cause the Fund to take into income dividend income that it
has not received and pay such income to its shareholders. To the extent that the
dividend is never received, the Fund will take a loss at the time that a
determination is made that the dividend will not be received.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state, and local income tax laws to Fund distributions.
AGREEMENTS
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, AEFC,
subject to the policies set by the board, provides investment management
services.
<PAGE>
For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $0.25 0.540%
Next 0.25 0.515
Next 0.25 0.490
Next 0.25 0.465
Next 1.00 0.440
Next 1.00 0.410
Next 3.00 0.380
Over 6.00 0.350
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.428% 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.
Before the fee based on the asset charge is paid, it is adjusted for investment
performance. The adjustment, determined monthly, will be calculated using the
percentage point difference between the change in the net asset value of one
Class A share of the Fund and the change in the Lipper Large-Cap Core Index
(Index). The performance of one Class A share of the Fund is measured by
computing the percentage difference between the opening and closing net asset
value of one Class A share of the Fund, as of the last business day of the
period selected for comparison, adjusted for dividend or capital gain
distributions which are treated as reinvested at the end of the month during
which the distribution was made. The performance of the Index for the same
period is established by measuring the percentage difference between the
beginning and ending Index for the comparison period. The performance is
adjusted for dividend or capital gain distributions (on the securities which
comprise the Index), which are treated as reinvested at the end of the month
during which the distribution was made. One percentage point will be subtracted
from the calculation to help assure that incentive adjustments are attributable
to AEFC's management abilities rather than random fluctuations and the result
multiplied by 0.01%. That number will be multiplied times the Fund's average net
assets for the comparison period and then divided by the number of months in the
comparison period to determine the monthly adjustment.
Where the Fund's Class A share performance exceeds that of the Index, the base
fee will be increased. Where the performance of the Index exceeds the
performance of the Fund's Class A share, the base fee will be decreased. The
maximum monthly increase or decrease will be 0.08% of the Fund's average net
assets on an annual basis.
For fiscal year 2000, the performance difference was less than 1%, so no
adjustment was made.
The 12 month comparison period rolls over with each succeeding month, so that it
always equals 12 months, ending with the month for which the performance
adjustment is being completed.
The management fee is paid monthly. Under the agreement, the total amount paid
was $15,726,885 for fiscal year 2000, $9,417,660 for fiscal year 1999, and
$5,953,408 for fiscal year 1998.
Under the agreement, the Fund also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity bond premiums; registration fees for shares; office expenses;
postage of confirmations except purchase confirmations; consultants' fees;
compensation of board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the board.
Under the agreement, nonadvisory expenses, net of earnings credits, paid by the
Fund were $1,232,645 for fiscal year 2000, $873,009 for fiscal year 1999, and
$887,606 for fiscal year 1998.
<PAGE>
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
Assets Annual rate at
(billions) Each asset level
- --------- ----------------
First $0.25 0.040%
Next 0.25 0.035
Next 0.25 0.030
Next 0.25 0.025
Over 1.00 0.020
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.022% 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 $944,752 for fiscal year 2000, $671,329 for
fiscal year 1999, and $450,673 for fiscal year 1998.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC's responsibility for
administering and/or performing transfer agent functions, for acting as service
agent in connection with dividend and distribution functions and for performing
shareholder account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Fund's shares. Under the
agreement, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A is $19.00 per year, for Class B is $20.00 per year and for Class Y is
$17.00 per year. The fees paid to AECSC may be changed by the board without
shareholder approval.
DISTRIBUTION AGREEMENT
American Express Financial Advisors Inc. is the Fund's principal underwriter
(distributor). The Fund's shares are offered on a continuous basis.
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to the Distributor daily. These charges amounted to $12,126,368
for fiscal year 2000. After paying commissions to personal financial advisors,
and other expenses, the amount retained was $(493,154). The amounts were
$9,712,196 and $(308,978) for fiscal year 1999, and $8,090,835 and $(822,617)
for fiscal year 1998.
Part of the sales charge may be paid to selling dealers who have agreements with
the Distributor. The Distributor will retain the balance of the sales charge. At
times the entire sales charge may be paid to selling dealers.
SHAREHOLDER SERVICE AGREEMENT
With respect to Class Y shares, 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 0.10% of average daily net assets. During the most
recent fiscal year, the Fund also paid a shareholder service fee with respect to
Class A and Class B shares at a rate of 0.175% of average daily net assets. The
Shareholder Service Agreement for Class A and Class B shares was converted to a
Plan and Agreement of Distribution effective July 1, 1999.
<PAGE>
PLAN AND AGREEMENT OF DISTRIBUTION
For Class A and Class B shares, to help defray the cost of distribution and
servicing not covered by the sales charges received under the Distribution
Agreement, the Fund and the Distributor entered into a Plan and Agreement of
Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the Fund pays a fee up to actual expenses incurred at an annual rate of up to
0.25% of the Fund's average daily net assets attributable to Class A shares and
up to 1.00% for Class B shares.
Expenses covered under this Plan include sales commissions; business, employee
and financial advisor expenses charged to distribution of Class A and Class B
shares; and overhead appropriately allocated to the sale of Class A and Class B
shares. These expenses also include costs of providing personal service to
shareholders. A substantial portion of the costs are not specifically identified
to any one of the American Express mutual funds.
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 relevant class of shares or by the Distributor. The
Plan (or any agreement related to it) will terminate in the event of its
assignment, as that term is defined in the 1940 Act. The Plan may not be amended
to increase the amount to be spent for distribution without shareholder
approval, and all material amendments to the Plan must be approved by a majority
of the board members, including a majority of the board members who are not
interested persons of the Fund and who do not have a financial interest in the
operation of the Plan or any agreement related to it. The selection and
nomination of disinterested board members is the responsibility of the other
disinterested board members. No board member who is not an interested person,
has any direct or indirect financial interest in the operation of the Plan or
any related agreement. For the most recent fiscal year, the Fund paid fees of
$3,389,187 for Class A shares and $12,296,196 for Class B shares. For Class A
shares, these fees were based on the 0.25% fee in effect as of July 1, 1999. The
Plan was not effective with respect to Class A shares prior to July 1, 1999. For
Class B shares, these fees were based on the 1.00% fee in effect as of July 1,
1999 and the 0.75% fee in effect prior thereto. The fee is not allocated to any
one service (such as advertising, payments to underwriters, or other uses).
However, a significant portion of the fee is generally used for sales and
promotional expenses.
Custodian Agreement
The Fund's securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, through a
custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depository systems as allowed by federal law. For its
services, the Fund pays the custodian a maintenance charge and a charge per
transaction in addition to reimbursing the custodian's out-of-pocket expenses.
ORGANIZATIONAL INFORMATION
The Fund is an open-end management investment company. The Fund headquarters are
at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.
SHARES
The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.
<PAGE>
VOTING RIGHTS
As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
AMERICAN EXPRESS FINANCIAL CORPORATION
AEFC has been a provider of financial services since 1894. Its family of
companies offers not only mutual funds but also insurance, annuities, investment
certificates and a broad range of financial management services.
In addition to managing assets of more than $98 billion for the American Express
Funds, AEFC manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management as of the
end of the most recent fiscal year were more than $259 billion.
AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,500 advisors.
<PAGE>
<TABLE>
<CAPTION>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
<S> <C> <C> <C> <C> <C>
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes
AXP Discovery Fund, Inc. 4/29/81, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Equity Select Fund, Inc.** 3/18/57, 6/13/86*** Corporation NV/MN 11/30 Yes
AXP Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
AXP Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
AXP Global Series, Inc. 10/28/88 Corporation MN 10/31
AXP Emerging Markets Fund Yes
AXP Global Balanced Fund Yes
AXP Global Bond Fund No
AXP Global Growth Fund Yes
AXP Innovations Fund Yes
AXP Growth Series, Inc. 5/21/70, 6/13/86*** Corporation NV/MN 7/31
AXP Growth Fund Yes
AXP Research Opportunities Fund Yes
AXP High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86***
AXP International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
AXP Investment Series, Inc. 1/18/40, 6/13/86*** Corporation NV/MN 9/30
AXP Diversified Equity Income Fund Yes
AXP Mutual Yes
AXP Managed Series, Inc. 10/9/84 Corporation MN 9/30
AXP Managed Allocation Fund Yes
AXP Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
AXP Blue Chip Advantage Fund Yes
AXP International Equity Index No
Fund
AXP Mid Cap Index Fund No
AXP Nasdaq 100 Index Fund No
AXP S&P 500 Index Fund No
AXP Small Company Index Fund Yes
AXP Total Stock Market Index Fund No
AXP Money Market Series, Inc. 8/22/75, 6/13/86*** Corporation NV/MN 7/31
AXP Cash Management Fund Yes
AXP New Dimensions Fund, Inc. 2/20/68, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
AXP Progressive Fund, Inc. 4/23/68, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Selective Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 5/31 Yes
AXP Stock Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Strategy Series, Inc. 1/24/84 Corporation MN 3/31
AXP Equity Value Fund** Yes
AXP Small Cap Advantage Fund Yes
AXP Strategy Aggressive Fund** Yes
AXP Tax-Exempt Series, Inc. 9/30/76, 6/13/86*** Corporation NV/MN 11/31
AXP Intermediate Tax-Exempt Fund Yes
AXP Tax-Exempt Bond Fund Yes
AXP Tax-Free Money Fund, Inc. 2/29/80, 6/13/86*** Corporation NV/MN 12/31 Yes
AXP Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
AXP California Tax-Exempt Trust 4/7/86 Business MA 6/30
Trust****
AXP California Tax-Exempt Fund No
AXP Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30
Trust****
AXP Insured Tax-Exempt Fund Yes
AXP Massachusetts Tax-Exempt Fund No
AXP Michigan Tax-Exempt Fund No
AXP Minnesota Tax-Exempt Fund No
AXP New York Tax-Exempt Fund No
AXP Ohio Tax-Exempt Fund No
</TABLE>
<PAGE>
* At the shareholders meeting held on June 16, 1999, shareholders of the
existing funds (except for AXP Small Cap Advantage Fund) approved the name
change from IDS to AXP. In addition to substituting AXP for IDS, the
following series changed their names: IDS Growth Fund, Inc. to AXP Growth
Series, Inc., IDS Managed Retirement Fund, Inc. to AXP Managed Series,
Inc., IDS Strategy Fund, Inc. to AXP Strategy Series, Inc., and IDS
Tax-Exempt Bond Fund, Inc. to AXP Tax-Exempt Series, Inc.
** At the shareholders meeting held on Nov. 9, 1994, IDS Equity Plus Fund,
Inc. changed its name to IDS Equity Select Fund, Inc. At that same time IDS
Strategy Aggressive Equity Fund changed its name to IDS Strategy Aggressive
Fund, and IDS Strategy Equity Fund changed its name to IDS Equity Value
Fund.
*** Date merged into a Minnesota corporation incorporated on 4/7/86.
**** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.
<PAGE>
BOARD MEMBERS AND OFFICERS
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 58 American Express mutual funds.
Peter J. Anderson**
Born in 1942
IDS Tower 10
Minneapolis, MN
Senior vice president - investments and director of AEFC. Vice president -
investments of the Fund
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources and EXCIDE Corporation (auto parts and batteries).
David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
<PAGE>
Heinz F. Hutter'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), and Amnex,
Inc. (communications).
William R. Pearce'+
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former chairman, American Express Funds.
Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY
Director of The Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, PacifiCorp (electric power) and Biogen (bio-pharmaceuticals).
John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC. President of the Fund.
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of investment review 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.
<PAGE>
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, who
is chairman of the board, Mr. Thomas, who is president, and Mr. Anderson who is
vice president, the Fund's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.
Officers who also are officers and employees of AEFC:
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice president - investment accounting of AEFC. Treasurer for the Fund.
COMPENSATION FOR BOARD MEMBERS
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 24 meetings, received the following compensation:
Compensation Table
Total cash compensation from
American Express Funds and
Aggregate compensation Preferred Master
Board member from the Fund Trust Group
H. Brewster Atwater, Jr. $2,517 $115,958
Lynne V. Cheney 2,353 104,358
Heinz F. Hutter 2,342 105,383
Anne P. Jones 2,353 104,108
William R. Pearce 2,075 94,033
Alan K. Simpson 2,303 101,158
C. Angus Wurtele 2,475 113,233
As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.
<PAGE>
INDEPENDENT AUDITORS
The financial statements contained in the Annual Report were audited by
independent auditors, KPMG LLP, 4200 Norwest Center, 90 S. Seventh St.,
Minneapolis, MN 55402-3900. The independent auditors also provide other
accounting and tax-related services as requested by the Fund.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
<PAGE>
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
<PAGE>
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
<PAGE>
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
<PAGE>
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
AXPSM MARKET ADVANTAGE SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXPSM SMALL COMPANY INDEX FUND (the Fund)
March 31, 2000
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
most recent Annual Report to shareholders (Annual Report) that may be obtained
from your financial advisor or by writing to American Express Client Service
Corporation, P.O. Box 534, Minneapolis, MN 55440-0534 or by calling
800-862-7919.
The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.
<PAGE>
AXP Market Advantage Series, Inc.
AXP Small Company Index Fund
TABLE OF CONTENTS
Mutual Fund Checklist........................................p.3
Fundamental Investment Policies..............................p.5
Investment Strategies and Types of Investments...............p.6
Information Regarding Risks and Investment Strategies........p.8
Security Transactions.......................................p.28
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation......................p.29
Performance Information.....................................p.30
Valuing Fund Shares.........................................p.31
Investing in the Fund.......................................p.33
Selling Shares..............................................p.35
Pay-out Plans...............................................p.36
Taxes.......................................................p.37
Agreements..................................................p.39
Organizational Information..................................p.42
Board Members and Officers..................................p.44
Compensation for Board Members..............................p.47
Independent Auditors........................................p.47
Appendix: Description of Ratings...........................p.48
<PAGE>
MUTUAL FUND CHECKLIST
- --------------------------------------------------------------------------------
|X| Mutual funds are NOT guaranteed or insured by any bank or
government agency. You can lose money.
|X| Mutual funds ALWAYS carry investment risks. Some types carry more
risk than others.
|X| A higher rate of return typically involves a higher risk of loss.
|X| Past performance is not a reliable indicator of future
performance.
|X| ALL mutual funds have costs that lower investment return.
|X| You can buy some mutual funds by contacting them directly.
Others, like this one, are sold mainly through brokers, banks,
financial planners, or insurance agents. If you buy through these
financial professionals, you generally will pay a sales charge.
|X| Shop around. Compare a mutual fund with others of the same type
before you buy.
OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:
Develop a Financial Plan
Have a plan - even a simple plan can help you take control of your financial
future. Review your plan with your advisor at least once a year or more
frequently if your circumstances change.
Dollar-Cost Averaging
An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.
<PAGE>
Dollar-cost averaging:
- ------------------------------------------------------------------
Regular Market Price Shares
Investment of a Share Acquired
- ------------------------------------------------------------------
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
----- -------- ------
$500 $25.00 103.4
Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5)
The average price you paid for each share: $4.84 ($500 divided by 103.4)
Diversify
Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
Understand Your Investment
Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
- -------------------------------------------------------------------------------
Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies, and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
The policies below are fundamental policies that apply to the Fund and may be
changed only with shareholder approval. Unless holders of a majority of the
outstanding voting securities agree to make the change, the Fund will not:
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the Securities and Exchange Commission (SEC), this means no more than 25%
of the Fund's total assets, based on current market value at time of
purchase, can be invested in any one industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
o Lend Fund securities in excess of 30% of its net assets.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It is intended to show the breadth of
investments that the investment manager may make on behalf of the Fund. For a
description of principal risks, please see the prospectus. Notwithstanding the
Fund's ability to utilize these strategies and techniques, the investment
manager is not obligated to use them at any particular time. For example, even
though the investment manager is authorized to adopt temporary defensive
positions and is authorized to attempt to hedge against certain types of risk,
these practices are left to the investment manager's sole discretion.
________________________________________________________________________________
Investment strategies & types of investments: Allowable for the Fund?
________________________________________________________________________________
Agency and Government Securities yes
Borrowing yes
Cash/Money Market Instruments yes
Collateralized Bond Obligations yes
Commercial Paper yes
Common Stock yes
Convertible Securities yes
Corporate Bonds yes
Debt Obligations yes
Depositary Receipts yes
Derivative Instruments yes
Foreign Currency Transactions yes
Foreign Securities yes
High-Yield (High-Risk) Securities (Junk Bonds) no
Illiquid and Restricted Securities yes
Indexed Securities yes
Inverse Floaters no
Investment Companies yes
Lending of Portfolio Securities yes
Loan Participations yes
Mortgage- and Asset-Backed Securities no
Mortgage Dollar Rolls no
Municipal Obligations yes
Preferred Stock yes
Real Estate Investment Trusts yes
Repurchase Agreements yes
Reverse Repurchase Agreements yes
Short Sales no
Sovereign Debt yes
Structured Products yes
Variable- or Floating-Rate Securities yes
Warrants yes
When-Issued Securities yes
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes
________________________________________________________________________________
<PAGE>
The following are guidelines that may be changed by the board at any time:
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell short, except the Fund may make
margin payments in connection with transactions in options, futures
contracts and other financial instruments.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o The Fund will not invest in a company to control or manage it.
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Correlation Risk
The risk that a given transaction may fail to achieve its objectives due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. Junk bonds have greater price fluctuations and are
more likely to experience a default than investment grade bonds.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
<PAGE>
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a bond, the higher its yield and
the greater its sensitivity to changes in interest rates.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Reinvestment Risk
The risk that an investor will not be able to reinvest income or principal at
the same rate it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
<PAGE>
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (i) have higher yields than common stocks
but lower yields than comparable non-convertible securities, (ii) are less
subject to fluctuation in value than the underlying stock since they have fixed
income characteristics, and (iii) provide the potential for capital appreciation
if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
<PAGE>
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
<PAGE>
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend, in whole or in part, on (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable percentage gain or loss in the price of
the derivative instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees for the length of the contract 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 during the length of the contract, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price
or, if such a price is not readily available, at the mean of the last bid and
ask prices.
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Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a
buyer (holding the "long" position) and a seller (holding the "short" position)
for an asset with delivery deferred until a future date. The buyer agrees to pay
a fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day a buyer
would pay out cash in an amount equal to any decline in the contract's value or
receive cash equal to any increase. At the time a futures contract is closed
out, a nominal commission is paid, which is generally lower than the commission
on a comparable transaction in the cash market.
Futures contracts may be based on various securities, securities indices (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indices.
Options on Futures Contracts. Options on futures contracts give the
holder a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date (some futures are settled in cash), an option on a futures
contract merely entitles its holder to decide on or before a future date (within
nine months of the date of issue) whether to enter into a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, because the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the change
in the value of the underlying contract. However, since an option gives the
buyer the right to enter into a contract at a set price for a fixed period of
time, its value does change daily.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities
traded on national securities exchanges. An option on a stock index is similar
to an option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
If the Fund is using futures contracts for hedging purposes, such an election
may result in the Fund being required to defer recognizing losses incurred on
futures contracts and on underlying securities identified as hedged positions
and require recognition of unrealized gain.
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Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
Other Risks of Derivatives.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
<PAGE>
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of an investor'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, an investor may incur costs in connection
with conversions between various currencies. Currency exchange rates may
fluctuate significantly over short periods of time causing a fund's NAV to
fluctuate. Currency exchange rates are generally determined by the forces of
supply and demand in the foreign exchange markets, actual or anticipated changes
in interest rates, and other complex factors. Currency exchange rates also can
be affected by the intervention of U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments.
Many funds utilize diverse types of derivative instruments in connection with
their foreign currency exchange transactions.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor to miss attractive
investment opportunities. Payment for securities without delivery may be
required in certain foreign markets and, when participating in new issues, some
foreign countries require payment to be made in advance of issuance (at the time
of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
<PAGE>
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates; the fluctuation of the euro relative to non-euro currencies during the
transition period from January 1, 1999 to December 31, 2000 and beyond; whether
the interest rate, tax or labor regimes of European countries participating in
the euro will converge over time; and whether the conversion of the currencies
of other EU countries such as the United Kingdom, Denmark, and Greece into the
euro and the admission of other non-EU countries such as Poland, Latvia, and
Lithuania as members of the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
<PAGE>
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time- consuming
negotiations and legal expense, and it may be difficult or impossible for the
Fund to sell such an investment promptly and at an acceptable price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
Indexed Securities
The value of indexed securities is linked to currencies, interest rates,
commodities, indexes, or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile than the
underlying instrument itself and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
<PAGE>
Inverse Floaters
Inverse floaters are created by underwriters using the interest payment on
securities. A portion of the interest received is paid to holders of instruments
based on current interest rates for short-term securities. The remainder, minus
a servicing fee, is paid to holders of inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floaters. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
<PAGE>
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities. The cash
flows and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
<PAGE>
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia and Puerto Rico). The
interest on these obligations is generally exempt from federal income tax.
Municipal obligations are generally classified as either "general obligations"
or "revenue obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
<PAGE>
Taxable Municipal Obligations. There is another type of municipal obligation
that is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
<PAGE>
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased between the date of the
short sale and the date on which the borrowed security is replaced, the investor
loses the opportunity to participate in the gain. A "Short Sale against the box"
will result in a constructive sale of appreciated securities thereby generating
capital gains to the Fund.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
<PAGE>
Structured Products
Structured products are over-the-counter financial instruments created
specifically to meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option, or a forward contract embedded
in a note or any of a wide variety of debt, equity, and/or currency
combinations. Risks of structured products include the inability to close such
instruments, rapid changes in the market, and defaults by other parties. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
<PAGE>
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets. In addition, when the Fund engages in forward commitment and
when-issued transactions, it relies on the counterparty to consummate the
transaction. The failure of the counterparty to consummate the transaction may
result in the Fund losing the opportunity to obtain a price and yield considered
to be advantageous.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
SECURITY TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's investment goal and policies, which securities will
be purchased, held, or sold. In determining where the buy and sell orders are to
be placed, AEFC has been directed to use its best efforts to obtain the best
available price and the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions,
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness, and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.
The Fund, AEFC and American Express Financial Advisors Inc. (the Distributor)
each have a strict Code of Ethics that prohibits affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for the Fund.
The Fund's securities may be traded on a principal rather than an agency basis.
In other words, AEFC will trade directly with the issuer or with a dealer who
buys or sells for its own account, rather than acting on behalf of another
client. AEFC does not pay the dealer commissions. Instead, the dealer's profit,
if any, is the difference, or spread, between the dealer's purchase and sale
price for the security.
On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a policy authorizing AEFC to do so to the extent authorized by
law, if AEFC determines, in good faith, that such commission is reasonable in
relation to the value of the brokerage or research services provided by a broker
or dealer, viewed either in the light of that transaction or AEFC's overall
responsibilities with respect to the Fund and the other American Express mutual
funds for which it acts as investment manager.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business, and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software, or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management, and trading
functions and other services to the extent permitted under an interpretation by
the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits AEFC, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Fund to pay a commission in excess of the amount another
broker might have charged. AEFC has advised the Fund that it is necessary to do
business with a number of brokerage firms on a continuing basis to obtain such
services as the handling of large orders, the willingness of a broker to risk
its own money by taking a position in a security, and the specialized handling
of a particular group of securities that only certain brokers may be able to
<PAGE>
offer. As a result of this arrangement, some portfolio transactions may not be
effected at the lowest commission, but AEFC believes it may obtain better
overall execution. AEFC has represented that under all three procedures the
amount of commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
All other transactions will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by AEFC in providing advice to all American
Express mutual funds even though it is not possible to relate the benefits to
any particular fund.
Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by AEFC or
any of its subsidiaries. When the Fund buys or sells the same security as
another portfolio, fund, or account, AEFC carries out the purchase or sale in a
way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency, and research services.
The Fund paid total brokerage commissions of $134,054 for fiscal year ended Jan.
31, 2000, $386,571 for fiscal year 1999, and $471,412 for fiscal year 1998.
Substantially all firms through whom transactions were executed provide research
services.
No transactions were directed to brokers because of research services they
provided to the Fund.
As of the end of the most recent fiscal year, the Fund held securities of its
regular brokers or dealers or of the parent of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities as
presented below:
Value of Securities
Name of Issuer owned at End of Fiscal Year
Dain Rauscher $1,722,926
Jefferies Group 1,447,124
Raymond James Financial 2,463,027
The portfolio turnover rate was 30% in the most recent fiscal year, and 29% in
the year before.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL
CORPORATION
- --------------------------------------------------------------------------------
Affiliates of American Express Company (of which AEFC is a wholly-owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities laws. AEFC will
use an American Express affiliate only if (i) AEFC determines that the Fund will
receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar brokerage and other services
for the Fund and (ii) the affiliate charges the Fund commission rates consistent
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
No brokerage commissions were paid to brokers affiliated with AEFC for the three
most recent fiscal years.
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, used by
the Fund are based on standardized methods of computing performance as required
by the SEC. An explanation of the methods used by the Fund to compute
performance follows below.
AVERAGE ANNUAL TOTAL RETURN
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
AGGREGATE TOTAL RETURN
The Fund may calculate aggregate total return for a class for certain periods
representing the cumulative change in the value of an investment in the Fund
over a specified period of time according to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
Standard & Poor's Small Capitalization Stock(R) Index total return
The Standard & Poor's Small Capitalization Stock Index ("S&P SmallCap 600(R)
Index") consists of 600 domestic stocks chosen for market size, liquidity
(bid/asked spread, ownership, share turnover and number of no trade days) and
industry group representation. It is a market value weighted index.
The S&P SmallCap 600 Index is valued at the end of every day using composite
prices and available shares. A geometric rate of return is calculated from the
daily valuations.
S&P uses the ex-dividend date rather than the payment date to determine the
total daily dividends for each day because the marketplace price adjustment for
the dividend occurs on the ex-date. Treatment of special dividends, such as
stock dividends and extraordinary dividends, paid by companies in the S&P
SmallCap 600 Index is decided on a case-by-case basis.
The S&P SmallCap 600 Index total-return calculation assumes the reinvestment of
dividends on a daily basis. Monthly, quarterly, and annual total-return numbers
for the S&P SmallCap 600 Index are calculated by daily compounding of the
reinvested dividends. The year-to-date total-return index is also calculated
assuming daily reinvestment of dividends; however, the base period is the last
day of the prior year.
<PAGE>
The total return calculations for the S&P SmallCap 600 Index industry groups are
calculated with dividends reinvested on a MONTHLY, not a daily basis. The
quarterly and annual industry total return numbers are calculated by compounding
the monthly total returns.
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly or the ability of the S&P SmallCap 600 Index to track general stock
market performance. The S&P SmallCap 600 Index is determined, composed and
calculated by S&P without regard to the Fund. S&P has no obligation to take the
needs of the Fund into consideration in determining, composing or calculating
the S&P SmallCap 600 Index. S&P is not responsible for and has not participated
in the determination of the prices and amount of the Fund shares or the timing
of the issuance or sale of those shares or in the determination or calculation
of the equation by which the shares are to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Fund's shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P SMALLCAP
600 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED AS TO RESULTS TO BE OBTAINED BY THE FUND, OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. S&P
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE S&P SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF
THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields, or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal
Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and
Wiesenberger Investment Companies Service. The Fund also may compare its
performance to a wide variety of indexes or averages. There are similarities and
differences between the investments that the Fund may purchase and the
investments measured by the indexes or averages and the composition of the
indexes or averages will differ from that of the Fund.
VALUING FUND SHARES
- --------------------------------------------------------------------------------
As of the end of the most recent fiscal year, the computation looked like this:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net assets Shares outstanding Net asset value of one
share
----------------- ------------- --------------------- ---------- ------------------------
Class A $607,592,507 divided by 96,491,975 equals $6.30
Class B 391,590,145 63,907,563 6.13
Class Y 2,784,696 440,493 6.32
</TABLE>
<PAGE>
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
o Securities traded on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.
o Securities traded on a securities exchange for which a last-quoted sales
price is not readily available are valued at the mean of the closing bid
and asked prices, looking first to the bid and asked prices on the exchange
where the security is primarily traded and, if none exist, to the
over-the-counter market.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System are valued at the mean of the closing bid and asked prices.
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
o Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on the
61st day before maturity. Short-term securities maturing in 60 days or less
at acquisition date are valued at amortized cost. Amortized cost is an
approximation of market value determined by systematically increasing the
carrying value of a security if acquired at a discount, or reducing the
carrying value if acquired at a premium, so that the carrying value is
equal to maturity value on the maturity date.
o Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
<PAGE>
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SALES CHARGE
Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the NAV. For Class A, the public offering price for an
investment of less than $50,000, is determined by dividing the NAV of one share
by 0.9425 (1.00-0.0575 for a maximum 5.75% sales charge). The sales charge is
paid to the Distributor by the person buying the shares.
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
<TABLE>
<CAPTION>
Sales charge as a percentage of:
------------------------------------------------------------
<S> <C> <C>
Public Net
Amount of Investment Offering Price Amount Invested
- -------------------- -------------- ---------------
Up to $50,000 5.75% 6.10%
$50,000 - $99,999 4.75 4.99
$100,000 - $249,999 3.75 3.90
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00* 2.04*
$1,000,000 or more 0.00 0.00
*The sales charge will be waived until Dec. 31, 2000.
</TABLE>
The initial sales charge is waived for certain qualified plans. Participants in
these qualified plans may be subject to a deferred sales charge on certain
redemptions. The Fund will waive the deferred sales charge on certain
redemptions if the redemption is a result of a participant's death, disability,
retirement, attaining age 59 1/2, loans, or hardship withdrawals. The deferred
sales charge varies depending on the number of participants in the qualified
plan and total plan assets as follows:
Deferred Sales Charge
Number of Participants
Total Plan Assets 1-99 100 or more
- ----------------- ---- -----------
Less than $1 million 4% 0%
$1 million or more 0% 0%
- --------------------------------------------------------------------------------
Class A - Reducing the Sales Charge
The market value of your investments in the Fund determine your sales charges.
For example, suppose you have made an investment that now has a value of $20,000
and you later decide to invest $40,000 more. The value of your investment would
be $60,000. As a result, your $40,000 investment qualifies for the lower 4.75%
sales charge that applies to investments of more than $50,000 and up to
$100,000.
<PAGE>
Class A - Letter of Intent (LOI)
If you intend to invest a large amount over a period of time, you can reduce the
sales charge in Class A by filing a LOI and committing to invest a certain
amount. The agreement can start at any time and will remain in effect for 13
months. The LOI start date can be backdated by 90 days. Your investments will be
charged the charges that apply to the amount you have committed to invest. Five
percent of the commitment amount will be placed in escrow. If your commitment
amount is reached within the 13-month period, the shares will be released from
escrow. If you do not invest the commitment amount by the end of the 13 months,
the remaining unpaid sales charge will be redeemed from the escrowed shares and
the remaining balance released from escrow. The commitment amount does not
include purchases in any class of American Express funds other than Class A;
purchases in American Express funds held within a wrap product; and purchases of
AXP Cash Management Fund and AXP Tax-Free Money Fund unless they are
subsequently exchanged to Class A shares of an American Express mutual fund
within the 13 month period. A LOI is not an option (absolute right) to buy
shares.
Class Y Shares
Class Y shares are offered to certain institutional investors. Class Y shares
are sold without a front-end sales charge or a CDSC and are not subject to a
distribution fee. The following investors are eligible to purchase Class Y
shares:
o Qualified employee benefit plans* if the plan:
- uses a daily transfer recordkeeping service offering participants
daily access to American Express mutual 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 American Express mutual
funds or
- 500 or more participants.
o Trust companies or similar institutions, and charitable organizations that
meet the definition in Section 501(c)(3) of the Internal Revenue Code.*
These institutions must have at least $10 million in American Express
mutual funds.
o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.
* Eligibility must be determined in advance. To do so, contact your financial
advisor.
SYSTEMATIC INVESTMENT PROGRAMS
After you make your initial investment of $100 or more, you must make additional
payments of $100 or more on at least a monthly basis until your balance reaches
$2,000. These minimums do not apply to all systematic investment programs. You
decide how often to make payments - monthly, quarterly, or semiannually. You are
not obligated to make any payments. You can omit payments or discontinue the
investment program altogether. The Fund also can change the program or end it at
any time.
<PAGE>
AUTOMATIC DIRECTED DIVIDENDS
Dividends, including capital gain distributions, paid by another American
Express mutual fund may be used to automatically purchase shares in the same
class of this Fund. Directed dividends from AXP Cash Management Fund or AXP
Tax-Free Money Fund will be subject to a sales charge. Dividends may be directed
to existing accounts only. Dividends declared by a fund are exchanged to this
Fund the following day. Dividends can be exchanged into the same class of
another American Express mutual fund but cannot be split to make purchases in
two or more funds. Automatic directed dividends are available between accounts
of any ownership except:
o Between a non-custodial account and an IRA, or 401(k) plan account or other
qualified retirement account of which American Express Trust Company acts
as custodian;
o Between two American Express Trust Company custodial accounts with
different owners (for example, you may not exchange dividends from your IRA
to the IRA of your spouse); and
o Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA
or UTMA accounts with identical ownership.
The Fund's investment goal is described in its prospectus along with other
information, including fees and expense ratios. Before exchanging dividends into
another fund, you should read that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.
REJECTION OF BUSINESS
The Fund or AECSC reserve the right to reject any business, in its sole
discretion.
SELLING SHARES
- --------------------------------------------------------------------------------
You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.
During an emergency, the board can suspend the computation of NAV, stop
accepting payments for purchase of shares, or suspend the duty of the Fund to
redeem shares for more than seven days. Such emergency situations would occur
if:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the
fair value of its net assets, or
o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.
Should the Fund stop selling shares, the board may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all shareholders.
<PAGE>
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the net assets
of the Fund at the beginning of the period. Although redemptions in excess of
this limitation would normally be paid in cash, the Fund reserves the right to
make these payments in whole or in part in securities or other assets in case of
an emergency, or if the payment of a redemption in cash would be detrimental to
the existing shareholders of the Fund as determined by the board. In these
circumstances, the securities distributed would be valued as set forth in this
SAI. Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.
PAY-OUT PLANS
- --------------------------------------------------------------------------------
You can use any of several pay-out plans to redeem your investment in regular
installments. If you redeem 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 consult your selling agent or write American
Express Client Service Corporation, P.O. Box 534, Minneapolis, MN 55440-0534, or
call 800-437-3133. Your authorization must be received at least five days before
the date you want your payments to begin. The initial payment must be at least
$50. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or
annual basis. Your choice is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you will have to send in
a separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed for each
payment and that amount will be sent to you. The length of time these payments
continue is based on the number of shares in your account.
<PAGE>
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
- -------------------------------------------------------------------------------
For tax purposes, an exchange is considered a sale and purchase, and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for less
than their cost, the difference is a capital loss. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held more than
one year).
If you buy Class A shares and within 91 days exchange into another Fund, you may
not include the sales charge in your calculation of tax gain or loss on the sale
of the first fund you purchased. The sales charge may be included in the
calculation of your tax gain or loss on a subsequent sale of the second fund you
purchased.
For example:
You purchase 100 shares of one fund having a public offering price of $10.00 per
share. With a sales load of 5.75%, you pay $57.50 in sales load. With a NAV of
$9.425 per share, the value of your investment is $942.50 Within 91 days of
purchasing that fund, you decide to exchange out of that fund, now at a NAV of
$11.00 per share, up from the original NAV of $9.425, and purchase into a second
fund, at a NAV of $15.00 per share. The value of your investment is now
$1,100.00 ($11.00 x 100 shares). You cannot use the $57.50 paid as a sales load
when calculating your tax gain or loss in the sale of the first fund shares. So
instead of having $100.00 gain ($1,100.00 - $1,000.00), you have a $157.50 gain
($1,100.00 - $942.50). You can include the $57.50 sales load in the basis of
your shares in the second fund.
If you have a nonqualified investment in the Fund and you wish to move part or
all of those shares to an IRA or qualified retirement account in the Fund, you
can do so without paying a sales charge. However, this type of exchange is
considered a redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5.75% ($115) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as dividend income
for federal income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities. For
the most recent fiscal year, 32.12% of the Fund's net investment income
dividends qualified for the corporate deduction.
<PAGE>
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 U.S. may
reduce or eliminate such taxes. If more than 50% of the Fund's total assets at
the close of its fiscal year consists of securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
under which shareholders of the Fund would be required to include their pro rata
portions of foreign taxes withheld by foreign countries as gross income in their
federal income tax returns. These pro rata portions of foreign taxes withheld
may be taken as a credit or deduction in computing the shareholders' federal
income taxes. If the election is filed, the Fund will report to its shareholders
the per share amount of such foreign taxes withheld and the amount of foreign
tax credit or deduction available for federal income tax purposes.
Capital gain distributions, if any, received by shareholders 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. A special 28% rate on capital
gains may apply to sales of precious metals, if any, owned directly by the Fund.
A special 25% rate on capital gains may apply to investments in REITs.
Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable
to fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gains or losses. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
Under federal tax law, by the end of a calendar year the Fund must declare and
pay dividends representing 98% of ordinary income for that calendar year and 98%
of net capital gains (both long-term and short-term) for the 12-month period
ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.
For purposes of the excise tax distributions, "section 988" ordinary gains and
losses are distributable based on an Oct. 31 year end. This is an exception to
the general rule that ordinary income is paid based on a calendar year end.
If a mutual fund is the holder of record of any share of stock on the record
date for any dividend payable with respect to such stock, such dividend shall be
included in gross income by the Fund as of the later of (1) the date such share
became ex-dividend or (2) the date the Fund acquired such share. Because the
dividends on some foreign equity investments may be received some time after the
stock goes ex-dividend, and in certain rare cases may never be received by the
Fund, this rule may cause the Fund to take into income dividend income that it
has not received and pay such income to its shareholders. To the extent that the
dividend is never received, the Fund will take a loss at the time that a
determination is made that the dividend will not be received.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state, and local income tax laws to Fund distributions.
<PAGE>
AGREEMENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, AEFC,
subject to the policies set by the board, provides investment management
services.
For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $0.25 0.380%
Next 0.25 0.370
Next 0.25 0.360
Next 0.25 0.350
Over 1.00 0.340
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.365% 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.
Before the fee based on the asset charge is paid, it is adjusted for investment
performance. The adjustment, determined monthly, will be calculated using the
percentage point difference between the change in the net asset value of one
Class A share of the Fund and the change in the Lipper Small-Cap Core Index
(Index). The performance of one Class A share of the Fund is measured by
computing the percentage difference between the opening and closing net asset
value of one Class A share of the Fund, as of the last business day of the
period selected for comparison, adjusted for dividend or capital gain
distributions which are treated as reinvested at the end of the month during
which the distribution was made. The performance of the Index for the same
period is established by measuring the percentage difference between the
beginning and ending Index for the comparison period. The performance is
adjusted for dividend or capital gain distributions (on the securities which
comprise the Index), which are treated as reinvested at the end of the month
during which the distribution was made. One percentage point will be subtracted
from the calculation to help assure that incentive adjustments are attributable
to AEFC's management abilities rather than random fluctuations and the result
multiplied by 0.01%. That number will be multiplied times the Fund's average net
assets for the comparison period and then divided by the number of months in the
comparison period to determine the monthly adjustment.
Where the Fund's Class A share performance exceeds that of the Index, the base
fee will be increased. Where the performance of the Index exceeds the
performance of the Fund's Class A share, the base fee will be decreased. The
maximum monthly increase or decrease will be 0.12% of the Fund's average net
assets on an annual basis.
The 12 month comparison period rolls over with each succeeding month, so that it
always equals 12 months, ending with the month for which the performance
adjustment is being computed. For fiscal year 2000 the performance difference
was less than 1%, so no adjustment was made.
The management fee is paid monthly. Under the agreement, the total amount paid
was $3,549,810 for fiscal year 2000, $3,011,812 for fiscal year 1999, and
$1,080,910 for fiscal year 1998.
<PAGE>
Under the agreement, the Fund also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity bond premiums; registration fees for shares; office expenses;
postage of confirmations except purchase confirmations; consultants' fees;
compensation of board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the board.
Under the agreement, nonadvisory expenses, net of earnings credits, paid by the
Fund were $531,374 for fiscal year 2000, $847,116 for fiscal year 1999, and
$628,519 for fiscal year 1998.
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administrative and accounting
services. The fee is calculated as follows:
Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $0.25 0.10%
Next 0.25 0.08
Next 0.25 0.06
Next 0.25 0.04
Over 1.00 0.02
On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.07% 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 $700,105 for fiscal year 2000, $632,666 for
fiscal year 1999, and $324,356 for fiscal year 1998.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC's responsibility for
administering and/or performing transfer agent functions, for acting as service
agent in connection with dividend and distribution functions and for performing
shareholder account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Fund's shares. Under the
agreement, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A is $19.00 per year, for Class B is $20.00 per year and for Class Y is
$17.00 per year. The fees paid to AECSC may be changed by the board without
shareholder approval.
DISTRIBUTION AGREEMENT
American Express Financial Advisors Inc. is the Fund's principal underwriter
(distributor). The Fund's shares are offered on a continuous basis.
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to the Distributor daily. These charges amounted to $3,007,219
for fiscal year 2000. After paying commissions to personal financial advisors,
and other expenses, the amount retained was $550,688. The amounts were
$5,485,793 and $27,088 for fiscal year 1999, and $4,106,630 and $(432,620) for
fiscal year 1998.
Part of the sales charge may be paid to selling dealers who have agreements with
the Distributor. The Distributor will retain the balance of the sales charge. At
times the entire sales charge may be paid to selling dealers.
<PAGE>
SHAREHOLDER SERVICE AGREEMENT
With respect to Class Y shares, 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 0.10% of average daily net assets. During the most
recent fiscal year, the Fund also paid a shareholder service fee with respect to
Class A and Class B shares at a rate of 0.175% of average daily net assets. The
Shareholder Service Agreement for Class A and Class B shares was converted to a
Plan and Agreement of Distribution effective July 1, 1999.
PLAN AND AGREEMENT OF DISTRIBUTION
For Class A and Class B shares, to help defray the cost of distribution and
servicing not covered by the sales charges received under the Distribution
Agreement, the Fund and the Distributor entered into a Plan and Agreement of
Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the Fund pays a fee up to actual expenses incurred at an annual rate of up to
0.25% of the Fund's average daily net assets attributable to Class A shares and
up to 1.00% for Class B shares.
Expenses covered under this Plan include sales commissions; business, employee
and financial advisor expenses charged to distribution of Class A and Class B
shares; and overhead appropriately allocated to the sale of Class A and Class B
shares. These expenses also include costs of providing personal service to
shareholders. A substantial portion of the costs are not specifically identified
to any one of the American Express mutual funds.
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 relevant class of shares or by the Distributor. The
Plan (or any agreement related to it) will terminate in the event of its
assignment, as that term is defined in the 1940 Act. The Plan may not be amended
to increase the amount to be spent for distribution without shareholder
approval, and all material amendments to the Plan must be approved by a majority
of the board members, including a majority of the board members who are not
interested persons of the Fund and who do not have a financial interest in the
operation of the Plan or any agreement related to it. The selection and
nomination of disinterested board members is the responsibility of the other
disinterested board members. No board member who is not an interested person,
has any direct or indirect financial interest in the operation of the Plan or
any related agreement. For the most recent fiscal year, the Fund paid fees of
$892,720 for Class A shares and $3,373,381 for Class B shares. For Class A
shares, these fees were based on the 0.25% fee in effect as of July 1, 1999. The
Plan was not effective with respect to Class A shares prior to July 1, 1999. For
Class B shares, these fees were based on the 1.00% fee in effect as of July 1,
1999 and the 0.75% fee in effect prior thereto. The fee is not allocated to any
one service (such as advertising, payments to underwriters, or other uses).
However, a significant portion of the fee is generally used for sales and
promotional expenses.
Custodian Agreement
The Fund's securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, through a
custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depository systems as allowed by federal law. For its
services, the Fund pays the custodian a maintenance charge and a charge per
transaction in addition to reimbursing the custodian's out-of-pocket expenses.
<PAGE>
ORGANIZATIONAL INFORMATION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company. The Fund headquarters are
at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.
SHARES
The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.
VOTING RIGHTS
As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
AMERICAN EXPRESS FINANCIAL CORPORATION
AEFC has been a provider of financial services since 1894. Its family of
companies offers not only mutual funds but also insurance, annuities, investment
certificates and a broad range of financial management services.
In addition to managing assets of more than $98 billion for the American Express
Funds, AEFC manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management as of the
end of the most recent fiscal year were more than $259 billion.
The Distributor serves individuals and businesses through its nationwide network
of more than 180 offices and more than 9,500 advisors.
<PAGE>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
- -------------------------------------- -------------------- ----------------- ------------- --------- -----------
AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes
AXP Discovery Fund, Inc. 4/29/81, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Equity Select Fund, Inc.** 3/18/57, 6/13/86*** Corporation NV/MN 11/30 Yes
AXP Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
AXP Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
AXP Global Series, Inc. 10/28/88 Corporation MN 10/31
AXP Emerging Markets Fund Yes
AXP Global Balanced Fund Yes
AXP Global Bond Fund No
AXP Global Growth Fund Yes
AXP Innovations Fund Yes
AXP Growth Series, Inc. 5/21/70, 6/13/86*** Corporation NV/MN 7/31
AXP Growth Fund Yes
AXP Research Opportunities Fund Yes
AXP High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86***
AXP International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
AXP Investment Series, Inc. 1/18/40, 6/13/86*** Corporation NV/MN 9/30
AXP Diversified Equity Income Fund Yes
AXP Mutual Yes
AXP Managed Series, Inc. 10/9/84 Corporation MN 9/30
AXP Managed Allocation Fund Yes
AXP Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
AXP Blue Chip Advantage Fund Yes
AXP International Equity Index No
Fund
AXP Mid Cap Index Fund No
AXP Nasdaq 100 Index Fund No
AXP S&P 500 Index Fund No
AXP Small Company Index Fund Yes
AXP Total Stock Market Index Fund No
AXP Money Market Series, Inc. 8/22/75, 6/13/86*** Corporation NV/MN 7/31
AXP Cash Management Fund Yes
AXP New Dimensions Fund, Inc. 2/20/68, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
AXP Progressive Fund, Inc. 4/23/68, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Selective Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 5/31 Yes
AXP Stock Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Strategy Series, Inc. 1/24/84 Corporation MN 3/31
AXP Equity Value Fund** Yes
AXP Small Cap Advantage Fund Yes
AXP Strategy Aggressive Fund** Yes
AXP Tax-Exempt Series, Inc. 9/30/76, 6/13/86*** Corporation NV/MN 11/31
AXP Intermediate Tax-Exempt Fund Yes
AXP Tax-Exempt Bond Fund Yes
AXP Tax-Free Money Fund, Inc. 2/29/80, 6/13/86*** Corporation NV/MN 12/31 Yes
AXP Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
AXP California Tax-Exempt Trust 4/7/86 BusinesTrust**** MA 6/30
AXP California Tax-Exempt Fund No
AXP Special Tax-Exempt Series Trust 4/7/86 BusinessTrust**** MA 6/30
AXP Insured Tax-Exempt Fund Yes
AXP Massachusetts Tax-Exempt Fund No
AXP Michigan Tax-Exempt Fund No
AXP Minnesota Tax-Exempt Fund No
AXP New York Tax-Exempt Fund No
AXP Ohio Tax-Exempt Fund No
</TABLE>
<PAGE>
* At the shareholders meeting held on June 16, 1999, shareholders of the
existing funds (except for AXP Small Cap Advantage Fund) approved the name
change from IDS to AXP. In addition to substituting AXP for IDS, the
following series changed their names: IDS Growth Fund, Inc. to AXP Growth
Series, Inc., IDS Managed Retirement Fund, Inc. to AXP Managed Series,
Inc., IDS Strategy Fund, Inc. to AXP Strategy Series, Inc., and IDS
Tax-Exempt Bond Fund, Inc. to AXP Tax-Exempt Series, Inc.
** At the shareholders meeting held on Nov. 9, 1994, IDS Equity Plus Fund,
Inc. changed its name to IDS Equity Select Fund, Inc. At that same time IDS
Strategy Aggressive Equity Fund changed its name to IDS Strategy Aggressive
Fund, and IDS Strategy Equity Fund changed its name to IDS Equity Value
Fund.
*** Date merged into a Minnesota corporation incorporated on 4/7/86.
**** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.
BOARD MEMBERS AND OFFICERS
- --------------------------------------------------------------------------------
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 58 American Express mutual funds.
Peter J. Anderson**
Born in 1942
IDS Tower 10
Minneapolis, MN
Senior vice president - investments and director of AEFC. Vice president -
investments of the Fund.
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources and EXCIDE Corporation (auto parts and batteries).
<PAGE>
David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
Heinz F. Hutter'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics) and Amnex,
Inc. (communications).
William R. Pearce'+
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former chairman, American Express(R) Funds.
Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY
Visiting lecturer and Director of The Institute of Politics, Harvard University.
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, Biogen (bio-pharmaceuticals).
John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC. President of the Fund.
<PAGE>
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of investment review 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 has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, who
is chairman of the board, Mr. Thomas, who is president, and Mr. Anderson, who is
vice president, the Fund's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.
Officers who also are officers and employees of AEFC:
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice president - investment accounting of AEFC. Treasurer for the Fund.
<PAGE>
COMPENSATION FOR BOARD MEMBERS
- -------------------------------------------------------------------------------
During the most recent fiscal year, the independent members of the Fund board,
for attending up to 24 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
<S> <C> <C>
Aggregate compensation Total cash compensation from American
Board member -------------------------------- Express Funds and Preferred Master Trust
from the Fund Group
H. Brewster Atwater, Jr. $1,475 $115,958
Lynne V. Cheney 1,249 104,358
Heinz F. Hutter 1,300 105,383
Anne P. Jones 1,249 104,108
William R. Pearce 1,183 94,033
Alan K. Simpson 1,199 101,158
C. Angus Wurtele 1,433 113,233
</TABLE>
As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The financial statements contained in the Annual Report were audited by
independent auditors, KPMG LLP, 4200 Norwest Center, 90 S. Seventh St.,
Minneapolis, MN 55402-3900. The independent auditors also provide other
accounting and tax-related services as requested by the Fund.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
<PAGE>
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
<PAGE>
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
<PAGE>
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
<PAGE>
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
AXPSM MARKET ADVANTAGE SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXPSM S&P 500 INDEX FUND
AXPSM MID CAP INDEX FUND
AXPSM TOTAL STOCK MARKET INDEX FUND
AXPSM INTERNATIONAL EQUITY INDEX FUND
AXPSM NASDAQ 100 INDEX FUND
(singularly and collectively, where the context requires,
referred to as the "Fund")
March 31, 2000
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
most recent Annual Report to shareholders (Annual Report) that may be obtained
by calling 800-AXP-SERV (TTY: 800-710-5260) or by writing to P.O. Box 59196,
Minneapolis, MN 55459-0196.
The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.
<PAGE>
TABLE OF CONTENTS
Mutual Fund Checklist.................................................p. 3
Fundamental Investment Policies.......................................p. 5
Investment Strategies and Types of Investments........................p. 6
Information Regarding Risks and Investment Strategies.................p. 8
Security Transactions................................................p. 30
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation...............................p. 33
Performance Information..............................................p. 33
Valuing Fund Shares..................................................p. 34
Investing in the Fund................................................p. 35
Selling Shares.......................................................p. 36
Taxes................................................................p. 36
Agreements...........................................................p. 38
Organizational Information...........................................p. 42
Board Members and Officers...........................................p. 45
Compensation for Board Members.......................................p. 48
Independent Auditors.................................................p. 48
Appendix A: Description of Ratings...................................p. 49
Appendix B: Additional Information about the Indexes.................p. 54
<PAGE>
MUTUAL FUND CHECKLIST
- -------------------------------------------------------------------------------
|X|
Mutual funds are NOT guaranteed or insured by any
bank or government agency. You can lose money.
|X|
Mutual funds ALWAYS carry investment risks. Some
types carry more risk than others.
|X|
A higher rate of return typically involves a
higher risk of loss.
|X|
Past performance is not a reliable indicator of
future performance.
|X|
ALL mutual funds have costs that lower investment
return.
|X|
Shop around. Compare a mutual fund with others of
the same type before you buy.
OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:
Develop a Financial Plan
Have a plan - even a simple plan can help you take control of your financial
future.
Dollar-Cost Averaging
An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.
<PAGE>
Dollar-cost averaging:
- ------------------------------------------------------------------------------
Regular Market Price Shares
Investment of a Share Acquired
- ------------------------------------------------------------------------------
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
----- -------- ------
$500 $25.00 103.4
Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5)
The average price you paid for each share: $4.84 ($500 divided by 103.4)
Diversify
Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
Understand Your Investment
Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
- -------------------------------------------------------------------------------
Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies, and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.
These are investment policies in addition to those presented in the prospectus.
The policies below are fundamental policies that apply to the Fund and may be
changed only with shareholder approval. Unless holders of a majority of the
outstanding voting securities agree to make the change, the Fund will not:
(All Funds)
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry, unless that industry represents more than
25% of the index tracked by the Fund. For all other industries, in
accordance with the current interpretation by the Securities and Exchange
Commission (SEC), no more than 25% of the Fund's total assets, based on
current market value at time of purchase, can be invested in any one
industry.
o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
o Lend Fund securities in excess of 30% of its net assets.
o Issue senior securities, except as permitted under the 1940 Act.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
- -------------------------------------------------------------------------------
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It is intended to show the breadth of
investments that the investment manager may make on behalf of the Fund. For a
description of principal risks, please see the prospectus. Notwithstanding the
Fund's ability to utilize these strategies and techniques, the investment
manager is not obligated to use them at any particular time. For example, even
though the investment manager is authorized to hedge against certain types of
risk, these practices are left to the investment manager's sole discretion.
<TABLE>
<CAPTION>
Investment strategies & types of Allowable for
investments: the Fund
- ------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AXP Total AXP
AXP S&P Stock International AXP Nasdaq
500 Index AXP Mid Cap Market Equity 100 Index
Fund Index Fund Index Fund Index Fund Fund
Agency and Government Securities yes yes yes yes yes
Borrowing yes yes yes yes yes
Cash/Money Market Instruments yes yes yes yes yes
Collateralized Bond Obligations yes yes yes yes yes
Commercial Paper yes yes yes yes yes
Common Stock yes yes yes yes yes
Convertible Securities yes yes yes yes yes
Corporate Bonds yes yes yes yes yes
Debt Obligations yes yes yes yes yes
Depositary Receipts yes yes yes yes yes
Derivative Instruments yes yes yes yes yes
Foreign Currency Transactions yes yes yes yes yes
Foreign Securities yes yes yes yes yes
High-Yield (High-Risk) Securities (Junk no no no no no
Bonds)
Illiquid and Restricted Securities yes yes yes yes yes
Indexed Securities yes yes yes yes yes
Inverse Floaters no no no no no
Investment Companies yes yes yes yes yes
Lending of Portfolio Securities yes yes yes yes yes
Loan Participations yes yes yes yes yes
Mortgage- and Asset-Backed Securities no no no no no
Mortgage Dollar Rolls no no no no no
Municipal Obligations yes yes yes yes yes
Preferred Stock yes yes yes yes yes
Real Estate Investment Trusts yes yes yes yes yes
Repurchase Agreements yes yes yes yes yes
Reverse Repurchase Agreements yes yes yes yes yes
Short Sales yes yes yes yes yes
Sovereign Debt yes yes yes yes yes
Structured Products yes yes yes yes yes
Variable- or Floating-Rate Securities yes yes yes yes yes
Warrants yes yes yes yes yes
When-Issued Securities yes yes yes yes yes
Zero-Coupon, Step-Coupon, and Pay-in-Kind yes yes yes yes yes
Securities
</TABLE>
<PAGE>
The following are guidelines that may be changed by the board at any time:
(All Funds)
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o The Fund will not buy on margin, except the Fund may make margin payments
in connection with transactions in futures contracts.
For additional information about the Indexes, see Appendix B.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- -------------------------------------------------------------------------------
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Correlation Risk
The risk that a given transaction may fail to achieve its objectives due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. Junk bonds have greater price fluctuations and are
more likely to experience a default than investment grade bonds.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
<PAGE>
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a bond, the higher its yield and
the greater its sensitivity to changes in interest rates.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Reinvestment Risk
The risk that an investor will not be able to reinvest income or principal at
the same rate it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
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INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
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Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique
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investment characteristics in that they generally (i) have higher yields than
common stocks but lower yields than comparable non-convertible securities, (ii)
are less subject to fluctuation in value than the underlying stock since they
have fixed income characteristics, and (iii) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
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As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend, in whole or in part, on (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable percentage gain or loss in the price of
the derivative instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars,
<PAGE>
and options on futures) and exchange-traded options on futures. Diverse types of
derivatives may be created by combining options or futures in different ways,
and by applying these structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees for the length of the contract 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 during the length of the contract, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price
or, if such a price is not readily available, at the mean of the last bid and
ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a
buyer (holding the "long" position) and a seller (holding the "short" position)
for an asset with delivery deferred until a future date. The buyer agrees to pay
a fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day a buyer
would pay out cash in an amount equal to
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any decline in the contract's value or receive cash equal to any increase. At
the time a futures contract is closed out, a nominal commission is paid, which
is generally lower than the commission on a comparable transaction in the cash
market.
Futures contracts may be based on various securities, securities indices (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indices.
Options on Futures Contracts. Options on futures contracts give the
holder a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date (some futures are settled in cash), an option on a futures
contract merely entitles its holder to decide on or before a future date (within
nine months of the date of issue) whether to enter into a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, because the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the change
in the value of the underlying contract. However, since an option gives the
buyer the right to enter into a contract at a set price for a fixed period of
time, its value does change daily.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities
traded on national securities exchanges. An option on a stock index is similar
to an option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
If the Fund is using futures contracts for hedging purposes, such an election
may result in the Fund being required to defer recognizing losses incurred on
futures contracts and on underlying securities identified as hedged positions
and require recognition of unrealized gains.
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
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Other Risks of Derivatives.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of the Fund's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, the Fund may incur costs in connection with
conversions between various currencies. Currency exchange rates may fluctuate
significantly over short periods of time causing the Fund's NAV to fluctuate.
Currency exchange rates are generally determined by
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the forces of supply and demand in the foreign exchange markets, actual or
anticipated changes in interest rates, and other complex factors. Currency
exchange rates also can be affected by the intervention of U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments.
Spot Rates and Derivative Instruments. The Fund conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts) as a hedge against fluctuations in future foreign exchange
rates. (See also Derivative Instruments). These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Because foreign currency transactions
occurring in the interbank market might involve substantially larger amounts
than those involved in the use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market for the underlying foreign
currencies at prices that are less favorable than for round lots.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment in dollars. By entering into
a forward contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between different
currencies from the date the security is purchased or sold to the date on which
payment is made or received or when the dividend or interest is actually
received.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may change in relationship
to another currency. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since the future
value of securities in foreign currencies more than likely will change between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency.
The Fund will designate cash or securities in an amount equal to the value of
the Fund's total assets committed to consummating forward contracts entered into
under the second circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a daily basis so
that the value of the cash or securities will equal the amount of the Fund's
commitments on such contracts.
At maturity of a forward contract, the Fund may either sell the security and
make delivery of the foreign currency or retain the security and terminate its
contractual obligation to deliver the foreign currency by purchasing an
offsetting contract with the same currency trader obligating it to buy, on the
same maturity date, the same amount of foreign currency.
If the Fund retains the security and engages in an offsetting transaction, the
Fund will incur a gain or loss (as described below) to the extent there has been
movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline between the date the Fund enters
into a forward contract for selling foreign currency and the date it enters into
an offsetting contract for purchasing the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to buy. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to buy exceeds the price of the currency it has agreed to
sell.
It is impossible to forecast what the market value of securities will be at the
expiration of a contract. Accordingly, it may be necessary for the Fund to buy
additional foreign currency on the spot market (and bear the expense of that
purchase) if the market value of the security is less than the amount of foreign
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currency the Fund is obligated to deliver and a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that can be achieved at some point in time. Although forward contracts
tend to minimize the risk of loss due to a decline in value of hedged currency,
they tend to limit any potential gain that might result should the value of such
currency increase.
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Fund may buy options on foreign currencies
for hedging purposes. For example, a decline in the dollar value of a foreign
currency in which securities are denominated will reduce the dollar value of
such securities, even if their value in the foreign currency remains constant.
In order to protect against the diminutions in the value of securities, the Fund
may buy options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell the currency for a fixed amount in
dollars and will offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted.
As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the diminution in value of securities will be fully or
partially offset by the amount of the premium received.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to buy or sell
the underlying currency at a loss that may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an over-the-
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counter trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to an
unlimited extent over a period of time. Although the purchaser of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in certain foreign countries
for that purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The Fund may enter into currency
futures contracts to sell currencies. It also may buy put options and write
covered call options on currency futures. Currency futures contracts are similar
to currency forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size and delivery
date. Most currency futures call for payment of delivery in U.S. dollars. The
Fund may use currency futures for the same purposes as currency forward
contracts, subject to Commodity Futures Trading Commission (CFTC) limitations.
Currency futures and options on futures values can be expected to correlate with
exchange rates, but will not reflect other factors that may affect the value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Fund's investments
denominated in that currency over time.
The Fund will hold securities or other options or futures positions whose values
are expected to offset its obligations. The Fund will not enter into an option
or futures position that exposes the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient to cover its
potential obligations.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume
<PAGE>
than the New York Stock Exchange, and securities of some foreign companies are
less liquid and more volatile than securities of domestic companies. Similarly,
volume and liquidity in most foreign bond markets are less than the volume and
liquidity in the U.S. and, at times, volatility of price can be greater than in
the U.S. Further, foreign markets have different clearance, settlement,
registration, and communication procedures and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions making it difficult to conduct such transactions. Delays
in such procedures could result in temporary periods when assets are uninvested
and no return is earned on them. The inability of an investor to make intended
security purchases due to such problems could cause the investor to miss
attractive investment opportunities. Payment for securities without delivery may
be required in certain foreign markets and, when participating in new issues,
some foreign countries require payment to be made in advance of issuance (at the
time of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates; the fluctuation of the euro relative to non-euro currencies during the
transition period from January 1, 1999 to December 31, 2000 and beyond; whether
the interest rate, tax or labor regimes of European countries participating in
the euro will converge over time; and whether the conversion of the currencies
of other EU countries such as the United Kingdom, Denmark, and Greece into the
euro and the admission of other non-EU countries such as Poland, Latvia, and
Lithuania as members of the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
<PAGE>
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time- consuming
negotiations and legal expense, and it may be difficult or impossible for the
Fund to sell such an investment promptly and at an acceptable price.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
Indexed Securities
The value of indexed securities is linked to currencies, interest rates,
commodities, indexes, or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile than the
underlying instrument itself and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
Inverse Floaters
Inverse floaters are created by underwriters using the interest payment on
securities. A portion of the interest received is paid to holders of instruments
based on current interest rates for short-term securities. The remainder, minus
a servicing fee, is paid to holders of inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floaters. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
<PAGE>
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities. The cash
flows and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the
<PAGE>
originator or any other affiliated entities, and the amount and quality of any
credit enhancement of the securities. Payments or distributions of principal and
interest on asset-backed debt obligations may be supported by non-governmental
credit enhancements including letters of credit, reserve funds,
overcollateralization, and guarantees by third parties. The market for privately
issued asset-backed debt obligations is smaller and less liquid than the market
for government sponsored mortgage-backed securities. (See also Derivative
Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia and Puerto Rico). The
interest on these obligations is generally exempt from federal income tax.
Municipal obligations are generally classified as either "general obligations"
or "revenue obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds
<PAGE>
trade infrequently, the spread between the bid and offer may be wider and the
time needed to develop a bid or an offer may be longer than other security
markets. See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
Taxable Municipal Obligations. There is another type of municipal obligation
that is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
<PAGE>
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased between the date of the
short sale and the date on which the borrowed security is replaced, the investor
loses the opportunity to participate in the gain. A "short sale against the box"
will result in a constructive sale of appreciated securities thereby generating
capital gains to the Fund.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
<PAGE>
Structured Products
Structured products are over-the-counter financial instruments created
specifically to meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option, or a forward contract embedded
in a note or any of a wide variety of debt, equity, and/or currency
combinations. Risks of structured products include the inability to close such
instruments, rapid changes in the market, and defaults by other parties. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
<PAGE>
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets. In addition, when the Fund engages in forward commitment and
when-issued transactions, it relies on the counterparty to consummate the
transaction. The failure of the counterparty to consummate the transaction may
result in the Fund losing the opportunity to obtain a price and yield considered
to be advantageous.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
SECURITY TRANSACTIONS
- -------------------------------------------------------------------------------
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's investment goal and policies, which securities will
be purchased, held, or sold. In determining where the buy and sell orders are to
be placed, AEFC has been directed to use its best efforts to obtain the best
available price and the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions,
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness, and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.
The Fund, AEFC and American Express Financial Advisors Inc. (the Distributor)
each have a strict Code of Ethics that prohibits affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for the Fund.
The Fund's securities may be traded on a principal rather than an agency basis.
In other words, AEFC will trade directly with the issuer or with a dealer who
buys or sells for its own account, rather than acting on behalf of another
client. AEFC does not pay the dealer commissions. Instead, the dealer's profit,
if any, is the difference, or spread, between the dealer's purchase and sale
price for the security.
On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a policy authorizing AEFC to do so to the extent authorized by
law, if AEFC determines, in good faith, that such commission is reasonable in
relation to the value of the brokerage or research services provided by a broker
or dealer, viewed either in the light of that transaction or AEFC's overall
responsibilities with respect to the Fund and the other American Express mutual
funds for which it acts as investment manager.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business, and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software, or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management, and trading
functions and other services to the extent permitted under an interpretation by
the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits AEFC, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Fund to pay a commission in excess of the amount another
broker might have charged. AEFC has advised the Fund that it is necessary to do
business with a number of brokerage firms on a continuing basis to obtain such
services as the handling of large orders, the willingness of a broker to risk
its own money by taking a position in a security, and the specialized handling
of a particular group of securities that only certain brokers may be able to
offer. As a result of this arrangement, some portfolio transactions may not be
effected at the lowest commission, but
<PAGE>
AEFC believes it may obtain better overall execution. AEFC has represented that
under all three procedures the amount of commission paid will be reasonable and
competitive in relation to the value of the brokerage services performed or
research provided.
All other transactions will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by AEFC in providing advice to all American
Express mutual funds even though it is not possible to relate the benefits to
any particular fund.
Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by AEFC or
any of its subsidiaries. When the Fund buys or sells the same security as
another portfolio, fund, or account, AEFC carries out the purchase or sale in a
way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency, and research services.
For fiscal period ended Jan. 31, 2000, each Fund paid the following total
brokerage commissions. Substantially all firms through whom transactions were
executed provide research services.
Fiscal Period
Fund 2000
- ------------------------------------------------------------------------------
S&P 500 Index Fund $ 3,408
Mid Cap Index Fund 2,530
Total Stock Market Index Fund 4,854
International Equity Index Fund 13,474
Nasdaq 100 Index Fund 3,153
No transactions were directed to brokers because of research services they
provided to each Fund.
As of the end of the most recent fiscal period, International Equity Index Fund
and Nasdaq 100 Index Fund held no securities of their 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 of the end of the most recent fiscal period, S&P 500 Index Fund, Mid Cap
Index Fund and Total Stock Market Index Fund held securities of their 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:
<PAGE>
Value of Securities
Name of Issuer Owned at end of fiscal period
S&P 500 Index Fund
Bank of America $109,178
Bear Stearns Companies 6,476
Chase Manhattan 87,596
FleetBoston Financial 38,008
Lehman Brothers Holdings 11,297
Merrill Lynch 42,508
Morgan (JP) 28,124
Morgan Stanley 97,520
Paine Webber Group 7,226
Schwab (Charles) 39,056
Mid Cap Index Fund
Edwards (AG) 38,922
Legg Mason 26,808
Total Stock Market Index Fund
Bank of America 130,102
Bear Stearns Companies 7,838
Chase Manhattan 104,085
Dain Rauscher 2,166
Edwards (AG) 4,836
FleetBoston Financial 45,049
Goldman Sachs Group 9,804
Jefferies Group 2,228
Legg Mason 3,245
Lehman Brothers Holdings 13,299
Merrill Lynch 49,881
Morgan (JP) 33,527
Morgan Keegan 1,740
Morgan Stanley 117,527
Paine Webber Group 8,687
Raymond James Financial 2,185
Schwab (Charles) 45,835
Travelers Property Casualty 3,553
The portfolio turnover rates in the most recent fiscal period were as follows:
Portfolio turnover
Fund rate
- -------------------------------------------------------------------------------
S&P 500 Index Fund 37%
Mid Cap Index Fund 16
Total Stock Market Index Fund 4
International Equity Index Fund 4
Nasdaq 100 Index Fund 51
<PAGE>
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL
CORPORATION
- -------------------------------------------------------------------------------
Affiliates of American Express Company (of which AEFC is a wholly-owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities laws. AEFC will
use an American Express affiliate only if (i) AEFC determines that the Fund will
receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar brokerage and other services
for the Fund and (ii) the affiliate charges the Fund commission rates consistent
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
No brokerage commissions were paid to brokers affiliated with AEFC for the most
recent fiscal period.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, used by
the Fund are based on standardized methods of computing performance as required
by the SEC. An explanation of the methods used by the Fund to compute
performance follows below.
AVERAGE ANNUAL TOTAL RETURN
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
AGGREGATE TOTAL RETURN
The Fund may calculate aggregate total return for a class for certain periods
representing the cumulative change in the value of an investment in the Fund
over a specified period of time according to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
<PAGE>
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields, or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal
Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and
Wiesenberger Investment Companies Service. The Fund also may compare its
performance to a wide variety of indexes or averages. There are similarities and
differences between the investments that the Fund may purchase and the
investments measured by the indexes or averages and the composition of the
indexes or averages will differ from that of the Fund.
VALUING FUND SHARES
- -------------------------------------------------------------------------------
As of the end of the most recent fiscal period, the computation looked like
this:
<TABLE>
<CAPTION>
Shares
Fund Net assets outstanding Net asset value of one share
<S> <C> <C> <C> <C> <C>
- ------------------------------- ----------- ----------- ------------ ------- ---------------------------
S&P 500 Index Fund Divided by equals
Class D $7,158,022 1,320,235 $5.42
Class E 9,344,968 1,722,656 5.42
Mid Cap Index Fund
Class D 4,003,896 700,920 5.71
Class E 8,168,372 1,429,563 5.71
Total Stock Market Index Fund
Class D 1,306,169 5.76
Class E 7,521,896 2,843,133 5.76
16,377,676
International Equity Index
Fund
Class D 6,884,763 1,271,158 5.42
Class E 15,374,765 2,836,948 5.42
Nasdaq 100 Index Fund
Class D 11,043,321 1,468,827 7.52
Class E 12,674,074 1,684,565 7.52
</TABLE>
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
o Securities traded on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.
o Securities traded on a securities exchange for which a last-quoted sales
price is not readily available are valued at the mean of the closing bid
and asked prices, looking first to the bid and asked prices on the exchange
where the security is primarily traded and, if none exist, to the
over-the-counter market.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System are valued at the mean of the closing bid and asked prices.
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
<PAGE>
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
o Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on the
61st day before maturity. Short-term securities maturing in 60 days or less
at acquisition date are valued at amortized cost. Amortized cost is an
approximation of market value determined by systematically increasing the
carrying value of a security if acquired at a discount, or reducing the
carrying value if acquired at a premium, so that the carrying value is
equal to maturity value on the maturity date.
o Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
INVESTING IN THE FUND
- -------------------------------------------------------------------------------
Class E shares are available to certain institutional investors. Class E shares
are sold without a sales charge and are not subject to a distribution fee. The
following institutional investors are eligible to purchase Class E shares:
o Qualified employee benefit plans* if the plan:
- uses a daily transfer recordkeeping service offering participants daily
access to American Express mutual 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 American Express mutual funds or
-500 or more participants.
o Trust companies or similar institutions, and charitable organizations that
meet the definition in Section 501(c)(3) of the Internal Revenue Code.*
These institutions must have at least $10 million invested in American
Express mutual funds.
o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.
o Eligibility must be determined in advance. To do so, contact your financial
advisor.
<PAGE>
SELLING SHARES
- -------------------------------------------------------------------------------
You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net asset value,
stop accepting payments for purchase of shares or suspend the duty of the Funds
to redeem shares for more than seven days. Such emergency situations would occur
if:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or
o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.
Should the Fund stop selling shares, the board members 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 reserves the right to redeem, involuntarily, the shares of any
shareholder whose account has a value of less than a minimum amount but only
where the value of such account has been reduced by voluntary redemption of
shares. Until further notice, it is the policy of the Fund not to exercise this
right with respect to any shareholder whose account has a value of $1,000 or
more ($500 in the case of Custodial accounts, IRAs and other retirement plans).
In any event, before the Fund redeems such shares and sends the proceeds to the
shareholder, it will notify the shareholder that the value of the shares in the
account is less than the minimum amount and allow the shareholder 30 days to
make an additional investment in an amount which will increase the value of the
accounts to at least $1,000.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the net assets
of that Fund at the beginning of such period. Although redemptions in excess of
this limitation would normally be paid in cash, the Fund reserves the right to
make payments in whole or in part in securities or other assets in case of an
emergency, or if the payment of such redemption in cash would be detrimental to
the existing shareholders of the Fund as determined by the board. In such
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.
Rejection of Business
The Fund reserves the right to reject any business, in its sole discretion.
TAXES
- -------------------------------------------------------------------------------
You may be able to defer taxes on current income from a Fund by investing
through an IRA 401(k) plan account or other qualified retirement account. If you
move all or part of a non-qualified investment in a Fund to a qualified account,
this type of exchange is considered a redemption of shares. You pay no sales
charge, but the exchange may result in a gain or loss for tax purposes, or
excess contributions under IRA or qualified plan regulations.
<PAGE>
Net investment income dividends received should be treated as dividend income
for federal income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities. For
the most recent fiscal period, the following percent of the Fund's net
investment income dividends qualified for the corporate deduction.
Fiscal Period
Fund 2000
- -------------------------------------------------------------------------------
S&P 500 Index Fund 100.00%
Mid Cap Index Fund 14.45
Total Stock Market Index Fund 80.70
No dividends were paid for International Equity Index Fund or Nasdaq 100 Index
Fund.
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 U.S. may
reduce or eliminate such taxes. If more than 50% of the Fund's total assets at
the close of its fiscal year consists of securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
under which shareholders of the Fund would be required to include their pro rata
portions of foreign taxes withheld by foreign countries as gross income in their
federal income tax returns. These pro rata portions of foreign taxes withheld
may be taken as a credit or deduction in computing federal income taxes. If the
election is filed, the Fund will report to its shareholders the per share amount
of such foreign taxes withheld and the amount of foreign tax credit or deduction
available for federal income tax purposes.
Capital gain distributions, if any, received by shareholders 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. A special 28% rate on capital
gains may apply to sales of precious metals, if any, owned directly by the Fund.
A special 25% rate on capital gains may apply to investments in REITs.
Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable
to fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gains or losses. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
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.
<PAGE>
If a mutual fund is the holder of record of any share of stock on the record
date for any dividend payable with respect to such stock, such dividend shall be
included in gross income by the Fund as of the later of (1) the date such share
became ex-dividend or (2) the date the Fund acquired such share. Because the
dividends on some foreign equity investments may be received some time after the
stock goes ex-dividend, and in certain rare cases may never be received by the
Fund, this rule may cause the Fund to take into income dividend income that it
has not received and pay such income to its shareholders. To the extent that the
dividend is never received, the Fund will take a loss at the time that a
determination is made that the dividend will not be received.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state, and local income tax laws to Fund distributions.
AGREEMENTS
- -------------------------------------------------------------------------------
Investment Management Services Agreement
AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, AEFC,
subject to the policies set by the board, provides investment management
services.
For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.
AXP S&P 500 Index Fund AXP Mid Cap Index Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
------------------ ---------------- ------------- ----------------
First $0.25 0.24% First $0.25 0.26%
Next 0.25 0.24 Next 0.25 0.26
Next 0.25 0.24 Next 0.25 0.26
Next 0.25 0.24 Next 0.25 0.26
Next 1.00 0.23 Next 1.00 0.25
Next 3.00 0.22 Next 3.00 0.24
Over 5.00 0.21 Over 5.00 0.23
AXP Total Stock Market Index Fund AXP International Equity Index Fund
Assets Annual rate at Assets Annual rate at each
(billions) each asset level (billions) asset level
---------------- ------------------ ------------ ------------------
First $0.25 0.30% First $0.25 0.50%
Next 0.25 0.30 Next 0.25 0.50
Next 0.25 0.29 Next 0.25 0.49
Next 0.25 0.29 Next 0.25 0.49
Next 1.00 0.28 Next 1.00 0.48
Next 3.00 0.27 Next 3.00 0.47
Over 5.00 0.26 Over 5.00 0.46
<PAGE>
AXP Nasdaq 100 Index Fund
Assets Annual rate at
(billions) each asset level
----------------- -----------------
First $0.25 0.38%
Next 0.25 0.38
Next 0.25 0.37
Next 0.25 0.37
Next 1.00 0.36
Next 3.00 0.35
Over 5.00 0.34
On the last day of the most recent fiscal period, the daily rate applied to each
Fund's net assets was equal to the following percent 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.
Fund Daily rate
- -------------------------------------------------------------------------------
S&P 500 Index Fund 0.24%
Mid Cap Index Fund 0.25
Total Stock Market Index Fund 0.30
International Equity Index Fund 0.50
Nasdaq 100 Index Fund 0.38
The management fee is paid monthly. The table below shows the total amount paid
by each Fund over the past fiscal period. AEFC has agreed to certain fee waivers
and expense reimbursements as discussed in the Fund's prospectus.
Fiscal Period
Fund 2000
- -------------------------------------------------------------------------------
S&P 500 Index Fund $ 8,319
Mid Cap Index Fund 8,233
Total Stock Market Index Fund 19,190
International Equity Index Fund 29,704
Nasdaq 100 Index Fund 17,173
Under the Agreement, each Fund also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity bond premiums; registration fees for shares; office expenses;
consultants' fees; compensation of board members, officers and employees;
corporate filing fees; organizational expenses; expenses incurred in connection
with lending securities; and expenses properly payable by the Funds, approved by
the board. Under the Agreement each Fund pays nonadvisory expenses, net of
expenses voluntarily reimbursed by AEFC. The table below shows the expenses paid
over the past fiscal period.
Fiscal Period
Fund 2000
- -------------------------------------------------------------------------------
S&P 500 Index Fund $1,122
Mid Cap Index Fund 2,525
Total Stock Market Index Fund 5,216
International Equity Index Fund 151
Nasdaq 100 Index Fund 3,726
<PAGE>
Sub-Investment Adviser:
State Street Global Advisors (Sub-Adviser) manages the assets of AXP
International Equity Index Fund. Sub-Adviser, subject to the supervision and
approval of AEFC, provides investment advisory assistance and day-to-day
management of the Fund's portfolio, as well as investment research and
statistical information, under an Investment Sub-Advisory Agreement with AEFC.
Sub-Adviser has been providing investment advisory services since 1978, and as
of Jan. 31, 2000 manages more than $667 billion in assets. Sub-Adviser is a
division of State Street Bank and Trust Company, a wholly-owned subsidiary of
State Street Corporation. State Street Corporation services financial assets,
including custody, pricing and asset management, for retail and institutional
clients.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, each Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
AXP S&P 500 Index Fund AXP Mid Cap Index Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
- ------------------ ----------------- --------------- ------------------
First $0.25 0.080% First $0.25 0.080%
Next 0.25 0.080 Next 0.25 0.080
Next 0.25 0.080 Next 0.25 0.080
Next 0.25 0.080 Next 0.25 0.080
Next 1.00 0.075 Next 1.00 0.075
Next 3.00 0.070 Next 3.00 0.070
Over 5.00 0.065 Over 5.00 0.065
AXP Total Stock Market Index Fund AXP International Equity Index Fund
Assets Annual rate at Assets Annual rate at each
(billions) each asset level (billions) asset level
----------------- ----------------- --------------- -------------------
First $0.25 0.110% First $0.25 0.100%
Next 0.25 0.110 Next 0.25 0.100
Next 0.25 0.105 Next 0.25 0.095
Next 0.25 0.105 Next 0.25 0.095
Next 1.00 0.100 Next 1.00 0.090
Next 3.00 0.095 Next 3.00 0.085
Over 5.00 0.090 Over 5.00 0.080
AXP Nasdaq 100 Index Fund
Assets Annual rate at
(billions) each asset level
- ----------------- -----------------
First $0.25 0.060%
Next 0.25 0.060
Next 0.25 0.055
Next 0.25 0.055
Next 1.00 0.050
Next 3.00 0.045
Over 5.00 0.040
On the last day of the most recent fiscal period, the daily rate applied to each
Fund's net assets was equal to the following percent on an annual basis. The fee
is calculated for each calendar day on the basis of net assets as of the close
of business two business days prior to the day for which the calculation is
made.
<PAGE>
Fund Daily rate
- -------------------------------------------------------------------------------
S&P 500 Index Fund 0.080%
Mid Cap Index Fund 0.080
Total Stock Market Index Fund 0.110
International Equity Index Fund 0.100
Nasdaq 100 Index Fund 0.060
The following fees were paid under the agreement for the most recent fiscal
period.
Fiscal Period
Fund 2000
- -------------------------------------------------------------------------------
S&P 500 Index Fund $3,622
Mid Cap Index Fund 3,382
Total Stock Market Index Fund 6,935
International Equity Index Fund 8,210
Nasdaq 100 Index Fund 2,712
TRANSFER AGENCY AGREEMENT
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs the responsibility for administering
and/or performing transfer agent functions, for acting as service agent in
connection with dividend and distribution functions and for performing
shareholder account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Fund's shares. The fee is
determined by multiplying the number of shareholder accounts at the end of the
day by a rate of $19 per year and dividing by the number of days in the year.
The fees paid to AECSC may be changed by the board without shareholder approval.
DISTRIBUTION AGREEMENT
American Express Financial Advisors Inc. is the Fund's principal underwriter
(distributor). The Fund's shares are offered on a continuous basis.
PLAN AND AGREEMENT OF DISTRIBUTION
For Class D shares, to help defray the cost of distribution and servicing, the
Fund and the Distributor entered into a Plan and Agreement of Distribution
(Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays
a fee for expenses incurred at an annual rate of up to 0.25% of the Fund's
average daily net assets attributable to Class D shares.
Expenses covered under this Plan include sales commissions, business, employee
and financial advisor expenses charged to distribution of Class D shares; and
overhead appropriately allocated to the sale of Class D shares. These expenses
also include costs of providing personal service to shareholders. A substantial
portion of the costs are not specifically identified to any one of the funds.
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 relevant class of shares or by the Distributor. The
Plan (or any agreement related to it) will terminate in the event of its
assignment, as that term is defined in the 1940 Act. The Plan may not be amended
to increase the amount to be spent for distribution without shareholder
approval, and all material amendments to the Plan must be approved by a majority
of the board members, including a majority of the board members who are not
interested persons of the Fund and who do not have a financial interest in the
operation of the Plan or any agreement related to it. The selection and
nomination of disinterested board
<PAGE>
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. The fee is not
allocated to any one service (such as advertising, payments to underwriters, or
other uses). However, a significant portion of the fee is generally used for
sales and promotional expenses.
The following fees were paid under the Plan for Class D shares for the most
recent fiscal period.
Fiscal Period
Fund 2000
- -------------------------------------------------------------------------------
S&P 500 Index Fund $3,155
Mid Cap Index Fund 2,451
Total Stock Market Index Fund 4,872
International Equity Index Fund 4,525
Nasdaq 100 Index Fund 4,263
Custodian Agreement
The Fund's securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, through a
custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depository systems as allowed by federal law. For its
services, the Fund pays the custodian a maintenance charge and a charge per
transaction in addition to reimbursing the custodian's out-of-pocket expenses.
The custodian has entered into a sub-custodian agreement with the Bank of New
York, 90 Washington Street, New York, NY 10286. As part of this arrangement,
securities purchased outside the United States are maintained in the custody of
various foreign branches of Bank of New York or in other financial institutions
as permitted by law and by the Fund's sub-custodian agreement.
ORGANIZATIONAL INFORMATION
- -------------------------------------------------------------------------------
The Fund is an open-end management investment company. The Fund headquarters are
at P.O. Box 59196, Minneapolis, MN 55459-0196.
SHARES
The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.
VOTING RIGHTS
As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.
<PAGE>
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
AMERICAN EXPRESS FINANCIAL CORPORATION
AEFC has been a provider of financial services since 1894. Its family of
companies offers not only mutual funds but also insurance, annuities, investment
certificates and a broad range of financial management services.
In addition to managing assets of more than $98 billion for the American Express
Funds, AEFC manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management as of the
end of the most recent fiscal period were more than $259 billion.
AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,500 advisors.
<PAGE>
<TABLE>
<CAPTION>
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
<S> <C> <C> <C> <C> <C>
- -------------------------------------- -------------------- ----------------- ------------- --------- -----------
AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes
AXP Discovery Fund, Inc. 4/29/81, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Equity Select Fund, Inc.** 3/18/57, 6/13/86*** Corporation NV/MN 11/30 Yes
AXP Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
AXP Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
AXP Global Series, Inc. 10/28/88 Corporation MN 10/31
AXP Emerging Markets Fund Yes
AXP Global Balanced Fund Yes
AXP Global Bond Fund No
AXP Global Growth Fund Yes
AXP Innovations Fund Yes
AXP Growth Series, Inc. 5/21/70, 6/13/86*** Corporation NV/MN 7/31
AXP Growth Fund Yes
AXP Research Opportunities Fund Yes
AXP High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86***
AXP International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
AXP Investment Series, Inc. 1/18/40, 6/13/86*** Corporation NV/MN 9/30
AXP Diversified Equity Income Fund Yes
AXP Mutual Yes
AXP Managed Series, Inc. 10/9/84 Corporation MN 9/30
AXP Managed Allocation Fund Yes
AXP Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
AXP Blue Chip Advantage Fund Yes
AXP International Equity Index No
Fund
AXP Mid Cap Index Fund No
AXP Nasdaq 100 Index Fund No
AXP S&P 500 Index Fund No
AXP Small Company Index Fund Yes
AXP Total Stock Market Index Fund No
AXP Money Market Series, Inc. 8/22/75, 6/13/86*** Corporation NV/MN 7/31
AXP Cash Management Fund Yes
AXP New Dimensions Fund, Inc. 2/20/68, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
AXP Progressive Fund, Inc. 4/23/68, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Selective Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 5/31 Yes
AXP Stock Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Strategy Series, Inc. 1/24/84 Corporation MN 3/31
AXP Equity Value Fund** Yes
AXP Small Cap Advantage Fund Yes
AXP Strategy Aggressive Fund** Yes
AXP Tax-Exempt Series, Inc. 9/30/76, 6/13/86*** Corporation NV/MN 11/31
AXP Intermediate Tax-Exempt Fund Yes
AXP Tax-Exempt Bond Fund Yes
AXP Tax-Free Money Fund, Inc. 2/29/80, 6/13/86*** Corporation NV/MN 12/31 Yes
AXP Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
AXP California Tax-Exempt Trust 4/7/86 Business MA 6/30
Trust****
AXP California Tax-Exempt Fund No
AXP Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30
Trust****
AXP Insured Tax-Exempt Fund Yes
AXP Massachusetts Tax-Exempt Fund No
AXP Michigan Tax-Exempt Fund No
AXP Minnesota Tax-Exempt Fund No
AXP New York Tax-Exempt Fund No
AXP Ohio Tax-Exempt Fund No
</TABLE>
<PAGE>
* At the shareholders meeting held on June 16, 1999, shareholders of the
existing funds (except for AXP Small Cap Advantage Fund) approved the name
change from IDS to AXP. In addition to substituting AXP for IDS, the
following series changed their names: IDS Growth Fund, Inc. to AXP Growth
Series, Inc., IDS Managed Retirement Fund, Inc. to AXP Managed Series,
Inc., IDS Strategy Fund, Inc. to AXP Strategy Series, Inc., and IDS
Tax-Exempt Bond Fund, Inc. to AXP Tax-Exempt Series, Inc.
** At the shareholders meeting held on Nov. 9, 1994, IDS Equity Plus Fund,
Inc. changed its name to IDS Equity Select Fund, Inc. At that same time IDS
Strategy Aggressive Equity Fund changed its name to IDS Strategy Aggressive
Fund, and IDS Strategy Equity Fund changed its name to IDS Equity Value
Fund.
*** Date merged into a Minnesota corporation incorporated on 4/7/86.
**** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.
- -------------------------------------------------------------------------------
BOARD MEMBERS AND OFFICERS
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 58 American Express mutual funds.
Peter J. Anderson**
Born in 1942
IDS Tower 10
Minneapolis, MN
Senior vice president-investments and director of AEFC. Vice
president-investments of the Fund.
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources and EXCIDE Corporation (auto parts and batteries).
<PAGE>
David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
Heinz F. Hutter'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), and Amnex,
Inc. (communications).
William R. Pearce'+
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former chairman, American Express Funds.
Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY
Visting Lecturer and Director of The Institute of Politics, Harvard University.
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, Biogen (bio-pharmaceuticals).
John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC. President of the Fund.
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).
<PAGE>
+ Member of executive committee.
' Member of investment review 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 has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, who
is chairman of the board, Mr. Thomas, who is president, and Mr. Anderson, who is
vice president, the Fund's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.
Officers who also are officers and employees of AEFC:
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice president - investment accounting of AEFC. Treasurer for the Fund.
<PAGE>
COMPENSATION FOR BOARD MEMBERS
- -------------------------------------------------------------------------------
During the most recent fiscal period, the independent members of the Fund board,
for attending up to 24 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
Total Stock Market Index Fund Total cash compensation from
<S> <C> <C>
--------------------------------- ---------------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $158 $115,958
Lynne V. Cheney 158 104,358
Heinz F. Hutter 158 105,383
Anne P. Jones 108 104,108
William R. Pearce 158 94,033
Alan K. Simpson 108 101,158
C. Angus Wurtele 108 113,233
</TABLE>
No board compensation was paid for S&P 500 Index Fund, Mid Cap Index Fund,
International Equity Index Fund or Nasdaq 100 Index Fund.
As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.
INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
The financial statements contained in the Annual Report were audited by
independent auditors, KPMG LLP, 4200 Norwest Center, 90 S. Seventh St.,
Minneapolis, MN 55402-3900. The independent auditors also provide other
accounting and tax-related services as requested by the Fund.
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
<PAGE>
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
<PAGE>
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
<PAGE>
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
<PAGE>
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION ABOUT THE INDEXES
AXP S&P 500 Index Fund and AXP Mid Cap Index Fund (S&P 500 Index Fund and Mid
Cap Index Fund) are not sponsored, endorsed, sold or promoted by S&P. S&P makes
no representation or warranty, express or implied, to the shareholders of S&P
500 Index Fund or Mid Cap Index Fund or any member of the public regarding the
advisability of investing in securities generally or in S&P 500 Index Fund or
Mid Cap Index Fund particularly or the ability of the S&P Indexes to track
general stock market performance. S&P's only relationship to S&P 500 Index Fund
and Mid Cap Index Fund is the licensing of certain trademarks and trade names of
S&P and of the S&P Indexes, which are determined, composed and calculated by S&P
without regard to S&P 500 Index Fund and Mid Cap Index Fund. S&P has no
obligation to take the needs of S&P 500 Index Fund and Mid Cap Index Fund or
their shareholders into consideration in determining, composing or calculating
the S&P Indexes. S&P is not responsible for and has not participated in the
determination of the prices and amount of S&P 500 Index Fund and Mid Cap Index
Fund or the timing of the issuance or sale of the funds or in the determination
or calculation of the equation by which the funds' shares are to be converted
into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of S&P 500 Index Fund and Mid Cap Index
Fund shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR THE S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN (THE S&P INDEXES) AND
S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
FUNDS, THEIR SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P
INDEXES OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P INDEXES OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
AXP Total Stock Market Index Fund (Total Stock Market Index Fund) is not
sponsored, endorsed, sold or promoted by Wilshire Associates Incorporated
(Wilshire). Wilshire makes no representation or warranty, express or implied, to
the shareholders of Total Stock Market Index Fund or any member of the public
regarding the advisability of investing in securities generally or in Total
Stock Market Index Fund particularly or the ability of the Wilshire 5000 Index
to track general stock market performance. Wilshire's only relationship to Total
Stock Market Index Fund is the licensing of certain trademarks and trade names
of Wilshire. The Wilshire 5000 Index is composed and calculated without regard
to Total Stock Market Index Fund. Wilshire has no obligation to take the needs
of Total Stock Market Index Fund or its shareholders into consideration in
determining, composing or calculating the Wilshire 5000 Index. Wilshire does not
guarantee the accuracy or the completeness of the Wilshire 5000 Index or any
data included therein and Wilshire shall have no liability for any errors,
omissions or interruptions therein. Wilshire makes no warranty, express or
implied, as to results to be obtained by the fund, its shareholders or any other
person or entity from the use of the Wilshire 5000 Index or any data included
therein. Wilshire makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the Wilshire 5000 Index or any data included therein.
Without limiting any of the foregoing, in no event shall Wilshire have any
liability for any special, punitive, indirect or consequential damages
(including lost profits), even if notified of the possibility of such damages.
<PAGE>
AXP International Equity Index Fund (International Equity Index Fund) is not
sponsored, endorsed, sold or promoted by MSCI or any affiliate of MSCI. Neither
MSCI nor any other party makes any representation or warranty, express or
implied, to the owners of shares of International Equity Index Fund or any
member of the public regarding the advisability of investing in funds generally
or in International Equity Index Fund particularly or the ability of the MSCI
EAFE Index to track general stock market performance. MSCI is the licensor of
certain trademarks, service marks and trade names of MSCI and of the MSCI EAFE
Index which is determined, composed and calculated by MSCI without regard to
International Equity Fund. MSCI has no obligation to take the needs of
International Equity Index Fund or the owners of shares of International Equity
Index Fund into consideration in determining, composing or calculating the MSCI
EAFE Index. MSCI is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of shares of
International Equity Index Fund to be issued or in the determination or
calculation of the equation by which the shares of International Equity Index
Fund are redeemable for cash. Neither MSCI nor any other party has any
obligation or liability to owners of shares of International Equity Index Fund
in connection with the administration, marketing or trading of the fund.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE MSCI EAFE INDEX FROM SOURCES WHICH MSCI CONSIDERS RELIABLE,
NEITHER MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS
OF THE INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY
MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
LICENSEE, LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF SHARES OF
INTERNATIONAL EQUITY INDEX FUND OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE MSCI EAFE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MSCI NOR ANY OTHER PARTY MAKES
ANY EXPRESS OR IMPLIED WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT
TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR ANY
DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES
(INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
AXP Nasdaq 100 Index Fund (Nasdaq 100 Index Fund) is not sponsored, endorsed,
sold or promoted by The Nasdaq Stock Market, Inc. (including its affiliates)
(Nasdaq, with its affiliates, are referred to as the Corporations). The
Corporations have not passed on the legality or suitability of, or the accuracy
or adequacy of descriptions and disclosures relating to Nasdaq 100 Index Fund.
The Corporations make no representation or warranty, express or implied, to the
owners of shares of Nasdaq 100 Index Fund or any member of the public regarding
the advisability of investing in securities generally or in Nasdaq 100 Index
Fund particularly or the ability of the Nasdaq-100 Index(R) to track general
stock market performance. The Corporations' only relationship to AEFA (Licensee)
is the licensing of the Nasdaq-100(R), Nasdaq-100 Index(R), or Nasdaq(R)
trademarks or service marks, and certain trade names of the Corporations and the
use of the Nasdaq-100 Index(R) which is determined, composed and calculated by
Nasdaq without regard to the Licensee or Nasdaq 100 Index Fund. Nasdaq has no
obligation to take the needs of the Licensee or the shareholders of Nasdaq 100
Index Fund into consideration in determining, composing or calculating the
Nasdaq-100 Index(R). The Corporations are not responsible for and have not
participated in the determination of the timing of, prices at, or quantities of
shares of Nasdaq 100 Index Fund to be issued or in the determination or
calculation of the equation by which the shares of Nasdaq 100 Index Fund are
redeemable for cash. The Corporations have no liability in connection with the
administration, marketing or trading of Nasdaq 100 Index Fund.
<PAGE>
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY LICENSEE,
SHAREHOLDERS OF NASDAQ 100 INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS
MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST
PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
<PAGE>
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
AXP MARKET ADVANTAGE SERIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP Blue Chip Advantage Fund (a
series of AXP Market Advantage Series, Inc.) as of January 31, 2000, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period ended
January 31, 2000. These financial statements and the financial highlights are
the responsibility of fund management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 2000, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXP Blue Chip Advantage Fund as
of January 31, 2000, and the results of its operations, changes in its net
assets and the financial highlights for the periods stated in the first
paragraph above, in conformity with generally accepted accounting principles.
/s/ KPMG
KPMG LLP
Minneapolis, Minnesota
March 3, 2000
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statement of assets and liabilities
AXP Blue Chip Advantage Fund
Jan. 31, 2000
Assets
Investments in securities, at value (Note 1)
<S> <C> <C>
(identified cost $3,868,890,165) $4,410,303,610
Cash in bank on demand deposit 132,600
Dividends and accrued interest receivable 3,370,327
Receivable for investment securities sold 17,721,627
----------
Total assets 4,431,528,164
-------------
Liabilities
Payable for investment securities purchased 18,141,128
Accrued investment management services fee 154,812
Accrued distribution fee 180,196
Accrued service fee 3,062
Accrued transfer agency fee 36,383
Accrued administrative services fee 8,256
Other accrued expenses 427,948
-------
Total liabilities 18,951,785
----------
Net assets applicable to outstanding capital stock $4,412,576,379
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 3,757,903
Additional paid-in capital 3,670,499,276
Accumulated net realized gain (loss) 199,682,988
Unrealized appreciation (depreciation) on investments (Note 4) 538,636,212
-----------
Total-- representing net assets applicable to outstanding capital stock $4,412,576,379
==============
Net assets applicable to outstanding shares: Class A $2,454,976,470
Class B $1,588,203,490
Class Y $ 369,396,419
Net asset value per share of outstanding capital stock: Class A shares 208,005,529 $ 11.80
Class B shares 136,515,216 $ 11.63
Class Y shares 31,269,596 $ 11.81
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
AXP Blue Chip Advantage Fund
Year ended Jan. 31, 2000
Investment income
Income:
<S> <C>
Dividends $ 41,776,099
Interest 5,999,841
Less foreign taxes withheld (4,604)
------
Total income 47,771,336
----------
Expenses (Note 2):
Investment management services fee 15,726,885
Distribution fee
Class A 3,389,187
Class B 12,296,196
Transfer agency fee 5,043,821
Incremental transfer agency fee
Class A 350,411
Class B 357,938
Service fee
Class A 1,428,424
Class B 873,450
Class Y 355,874
Administrative services fees and expenses 944,752
Compensation of board members 17,949
Custodian fees 218,116
Printing and postage 585,390
Registration fees 487,518
Audit fees 23,500
Other 18,961
------
Total expenses 42,118,372
Earnings credits on cash balances (Note 2) (118,789)
--------
Total net expenses 41,999,583
----------
Investment income (loss) -- net 5,771,753
---------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 457,671,632
Financial futures contracts 25,476,433
Options contracts written (Note 6) (1,438,488)
----------
Net realized gain (loss) on investments 481,709,577
Net change in unrealized appreciation (depreciation) on investments (144,389,996)
------------
Net gain (loss) on investments 337,319,581
-----------
Net increase (decrease) in net assets resulting from operations $ 343,091,334
=============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP Blue Chip Advantage Fund
Year ended Jan. 31, 2000 1999
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 5,771,753 $ 11,656,610
Net realized gain (loss) on security transactions 481,709,577 125,597,202
Net change in unrealized appreciation (depreciation) on investments (144,389,996) 513,693,695
------------ -----------
Net increase (decrease) in net assets resulting from operations 343,091,334 650,947,507
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (4,865,443) (9,676,304)
Class B (13,635) (226,279)
Class Y (1,174,209) (1,941,731)
Excess distributions of net investment income
Class A (505,418) --
Class B (1,264) --
Class Y (125,091) --
Net realized gain
Class A (222,300,020) (23,694,693)
Class B (144,513,386) (14,096,805)
Class Y (34,190,368) (4,007,760)
----------- ----------
Total distributions (407,688,834) (53,643,572)
------------ -----------
Capital share transactions (Note 5)
Proceeds from sales
Class A shares (Note 2) 858,316,297 601,112,516
Class B shares 537,708,369 360,571,798
Class Y shares 154,754,757 141,092,219
Reinvestment of distributions at net asset value
Class A shares 214,088,382 31,264,700
Class B shares 143,309,158 14,214,476
Class Y shares 35,489,668 5,949,491
Payments for redemptions
Class A shares (450,445,991) (313,174,627)
Class B shares (Note 2) (170,000,172) (105,895,017)
Class Y shares (140,606,635) (122,848,077)
------------ ------------
Increase (decrease) in net assets from capital share transactions 1,182,613,833 612,287,479
------------- -----------
Total increase (decrease) in net assets 1,118,016,333 1,209,591,414
Net assets at beginning of year 3,294,560,046 2,084,968,632
------------- -------------
Net assets at end of year $4,412,576,379 $3,294,560,046
============== ==============
Undistributed net investment income $ -- $ 281,534
-------------- --------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
AXP Blue Chip Advantage Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Market Advantage Series, Inc. and is registered
under the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Market Advantage Series has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the board. The Fund invests in common stocks that are
included in a broad market index.
The Fund offers Class A, Class B and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year
of ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differs among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Fund may buy and write call options traded on
any U.S. or foreign exchange or in the over-the-counter market where completing
the obligation depends upon the credit standing of the other party. The risk in
buying an option is that the Fund pays a premium whether or not the option is
exercised. The risk in writing a call option is that the Fund gives up the
opportunity for profit if the market price of the security increases. The Fund
also has the additional risk of being unable to enter into a closing transaction
if a liquid secondary market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. When an
option is exercised, the proceeds on sales for a written call option, and the
cost of a security for a purchased call option is adjusted by the amount of
premium received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Fund may buy
financial futures contracts and may also buy call options on these future
contracts. Risks of entering into futures contracts include the possibility of
an illiquid market and that a change in the value of the contract may not
correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, the Fund is required to
deposit either cash or securities in an amount (initial margin) equal to a
certain percentage of the contract value. Subsequent payments (variation margin)
are made or received by the Fund each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Fund recognizes a realized gain or loss when the contract
is closed or expires.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $631,773
and additional paid-in capital has been decreased by $631,773.
Dividends to shareholders
Dividends from net investment income, declared and paid each calendar quarter,
are reinvested in additional shares of the Fund at net asset value or payable in
cash. Capital gains, when available, are distributed along with the last income
dividend of the calendar year.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date and interest income,
including level-yield amortization of premium and discount, is accrued daily.
2. EXPENSES AND SALES CHARGES
The Fund has agreements with American Express Financial Corporation (AEFC) to
manage its portfolio and provide administrative services. Under an Investment
Management Services Agreement, AEFC determines which securities will be
purchased, held or sold. The management fee is a percentage of the Fund's
average daily net assets in reducing percentages from 0.54% to 0.35% annually.
Under terms of a prior agreement that ended June 30, 1999, the management fee
was a percentage of the Fund's average daily net assets in reducing percentages
from 0.44% to 0.34% annually. Effective with the new Investment Management
Services Agreement, the fee will be adjusted upward or downward by a performance
incentive adjustment based on a comparison of the performance of Class A shares
of AXP Blue Chip Advantage Fund to the Lipper Large-Cap Core Index. The maximum
adjustment is 0.08% of the Fund's average daily net assets after deducting 1%
from the performance difference. If the difference is less than 1%, the
adjustment will be zero.
Under an Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.04% to 0.02% annually. A minor
portion of additional administrative service expenses paid by the Fund are
consultants' fees and fund office expenses. Under this agreement, the Fund also
pays taxes, audit and certain legal fees, registration fees for shares,
compensation of board members, corporate filing fees and any other expenses
properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19
o Class B $20
o Class Y $17
Under terms of a prior agreement that ended March 31, 1999, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $15 for Class
Y.
The Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution (the Plan), the Fund pays a distribution fee at an
annual rate up to 0.25% of the Fund's average daily net assets attributable to
Class A shares and up to 1.00% for Class B shares. The Plan went into effect
July 1, 1999. Under terms of a prior Plan and Agreement of Distribution (the
Prior Plan) that ended June 30, 1999, the Fund paid a distribution fee for Class
B shares at an annual rate up to 0.75% of average daily net assets. The Prior
Plan was not effective with respect to Class A shares.
Under a Shareholder Service Agreement, the Fund's Class Y shares pay a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares. Under terms of a prior agreement that
ended June 30, 1999, the Fund paid a shareholder service fee for Class A and
Class B shares at a rate of 0.175% of average daily net assets. Effective July
1, 1999, the agreement for Class A and Class B shares were converted to the Plan
and Agreement of Distribution discussed above.
Sales charges received by the Distributor for distributing Fund shares were
$11,038,013 for Class A and $1,088,355 for Class B for the year ended Jan. 31,
2000.
During the year ended Jan. 31, 2000, the Fund's custodian and transfer agency
fees were reduced by $118,789 as a result of earnings credits from overnight
cash balances. The Fund also pays custodian fees to American Express Trust
Company, an affiliate of AEFC.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $3,762,987,453 and $3,034,508,488, respectively, for the
year ended Jan. 31, 2000. Realized gains and losses are determined on an
identified cost basis.
Brokerage commissions paid to brokers affiliated with AEFC were $153,839 for the
year ended Jan. 31, 2000.
Income from securities lending amounted to $44,392 for the year ended Jan. 31,
2000. The risks to the Fund of securities lending are that the borrower may not
provide additional collateral when required of return the securities when due.
4. STOCK INDEX FUTURES CONTRACTS
As of Jan. 31, 2000, investments in securities included securities valued at
$24,381,188 that were pledged as collateral to cover initial margin deposits on
265 open purchase contracts. The market value of the open purchase contracts as
of Jan. 31, 2000 was $92,816,250 with a net unrealized loss of $3,333,676.
<PAGE>
<TABLE>
<CAPTION>
5. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended Jan. 31, 2000
Class A Class B Class Y
<S> <C> <C> <C>
Sold 70,306,873 44,520,338 12,651,836
Issued for reinvested distributions 17,613,425 11,947,993 2,919,894
Redeemed (36,683,617) (14,036,097) (11,465,349)
----------- ----------- -----------
Net increase (decrease) 51,236,681 42,432,234 4,106,381
Year ended Jan. 31, 1999
Class A Class B Class Y
Sold 57,329,603 34,676,763 13,370,022
Issued for reinvested distributions 2,859,070 1,291,423 544,664
Redeemed (30,000,871) (10,217,534) (11,862,710)
----------- ----------- -----------
Net increase (decrease) 30,187,802 25,750,652 2,051,976
6. OPTIONS CONTRACTS WRITTEN
Contracts and premium amounts associated with options contracts written are as
follows:
Year ended Jan. 31, 2000
Calls
Contracts Premium
Balance Jan. 31, 1999 -- $--
Opened 26,358 3,448,935
Closed (21,286) (2,851,888)
Exercised (2,940) (423,332)
Expired (2,132) (173,715)
------ --------
Balance Jan. 31, 2000 -- $--
See "Summary of significant accounting policies."
7. BANK BORROWINGS
The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund
is permitted to have bank borrowings for temporary or emergency purposes to fund
shareholder redemptions. The Fund must have asset coverage for borrowings not to
exceed the aggregate of 333% of advances equal to or less than five business
days plus 367% of advances over five business days. The agreement, which enables
the Fund to participate with other American Express mutual funds, permits
borrowings up to $200 million, collectively. Interest is charged to each Fund
based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or
the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to
90 days after such loan is executed. The Fund also pays a commitment fee equal
to its pro rata share of the amount of the credit facility at a rate of 0.05%
per annum. The Fund had no borrowings outstanding during the year ended Jan. 31,
2000.
8. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
is presented on pages 27 and 28 of the prospectus.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP Blue Chip Advantage Fund
Jan. 31, 2000
(Percentages represent value of investments compared to net assets)
Common stocks (97.5%)
Issuer Shares Value(a)
Aerospace & defense (1.3%)
<S> <C> <C>
Goodrich (BF) 600,600 $15,015,000
Honeywell Intl 776,400 37,267,200
United Technologies 104,400 5,526,675
Total 57,808,875
Airlines (0.6%)
AMR 174,800(b) 9,406,425
Southwest Airlines 940,250 14,985,234
Total 24,391,659
Automotive & related (0.8%)
Delphi Automotive Systems 858,972 14,870,953
Ford Motor 399,100 19,855,225
Total 34,726,178
Banks and savings & loans (6.1%)
Bank of America 948,724 45,953,819
Bank of New York 1,392,300 56,562,188
Firstar 281,400 6,718,425
FleetBoston Financial 862,067 27,101,231
Mellon Financial 502,200 17,231,738
SLM Holding 34,700 1,351,131
Wachovia 538,550 34,500,859
Wells Fargo 1,948,400 77,936,000
Total 267,355,391
Beverages & tobacco (1.8%)
Coca-Cola 1,385,000 79,550,938
Building materials & construction (0.6%)
Fluor 142,800 5,703,075
Weyerhaeuser 364,200 20,895,975
Total 26,599,050
Chemicals (0.6%)
Air Products & Chemicals 109,400 3,240,975
Du Pont (EI) de Nemours 392,748 23,172,132
Great Lakes Chemical 200 6,625
Total 26,419,732
Communications equipment & services (4.2%)
Lucent Technologies 1,406,070 77,685,367
Motorola 380,600 52,047,050
Nortel Networks 383,300(c) 36,653,063
Tellabs 340,100(b) 18,365,400
Total 184,750,880
Computers & office equipment (19.7%)
3Com 404,400(b) 20,523,300
America Online 610,800(b) 34,777,425
Automatic Data Processing 130,900 6,209,569
BMC Software 344,400(b) 13,044,150
Cisco Systems 1,166,100(b) 127,687,949
Citrix Systems 115,700(b) 15,879,825
Compaq Computer 873,100 23,901,113
Computer Sciences 251,100(b) 23,069,813
Dell Computer 876,900(b,e) 33,815,456
Electronic Data Systems 518,700 35,077,088
EMC 331,006(b) 35,252,139
First Data 656,600 32,214,438
Hewlett-Packard 566,300 61,301,974
Intl Business Machines 183,100 20,541,531
Lexmark Intl Group Cl A 194,800(b) 18,359,900
Microsoft 2,152,100(b) 210,636,787
Novell 433,300(b) 14,461,388
Oracle 1,357,400(b) 67,806,371
Parametric Technology 530,600(b) 11,374,738
Solectron 274,800(b) 19,957,350
Sun Microsystems 210,000(b) 16,498,125
Unisys 355,200(b) 11,322,000
Yahoo! 64,900(b) 20,901,856
Total 874,614,285
Electronics (6.7%)
Applied Materials 196,600(b) 26,983,350
Corning 237,960 36,705,330
Intel 1,367,500 135,297,030
KLA-Tencor 299,600(b) 17,564,050
LSI Logic 141,070(b) 11,532,473
Natl Semiconductor 271,960(b) 14,277,900
Teradyne 169,000(b) 10,942,750
Texas Instruments 406,300 43,829,613
Total 297,132,496
Energy (5.0%)
Apache 92,900 3,390,850
Chevron 708,500 59,204,031
Conoco Cl B 849,400 20,013,988
Exxon Mobil 1,172,770 97,926,295
Texaco 779,200 41,200,200
Total 221,735,364
Energy equipment & services (0.2%)
Halliburton 192,400 6,926,400
Financial services (5.5%)
Capital One Financial 465,800 19,097,800
Citigroup 996,950 57,262,315
Fannie Mae 542,600 32,522,088
Kansas City Southern Inds 338,700 23,433,806
MBNA 1,711,850 43,224,212
Morgan Stanley, Dean Witter, Discover & Co 578,200 38,305,750
Providian Financial 365,900 30,872,813
Total 244,718,784
Food (2.1%)
Bestfoods 614,500 26,730,750
General Mills 925,900 28,876,506
Sara Lee 1,349,600 24,883,250
SUPERVALU 621,400 11,185,200
Total 91,675,706
Health care (10.1%)
Amgen 714,100(b,e) 45,479,244
Baxter Intl 438,900 28,034,738
Biomet 41,000 1,632,313
Boston Scientific 669,600(b) 13,894,200
Bristol-Myers Squibb 1,263,800 83,410,799
Guidant 467,700(b) 24,612,713
Johnson & Johnson 208,000 17,901,000
Medtronic 1,048,900 47,987,175
Pfizer 1,994,040 72,533,204
Schering-Plough 1,125,100 49,504,400
Warner-Lambert 622,600 59,108,087
Total 444,097,873
Health care services (0.5%)
Cardinal Health 426,600 20,396,813
Household products (2.1%)
Colgate-Palmolive 569,700 33,754,725
Kimberly-Clark 683,500 42,334,281
Procter & Gamble 158,200 15,958,425
Total 92,047,431
Industrial equipment & services (1.0%)
Caterpillar 125,300 5,317,419
Illinois Tool Works 149,200 8,728,200
Ingersoll-Rand 103,100 4,852,144
Parker-Hannifin 573,800 24,816,850
Total 43,714,613
Insurance (1.7%)
American Intl Group 612,775 63,805,197
MBIA 205,300 10,277,831
Total 74,083,028
Leisure time & entertainment (1.4%)
Disney (Walt) 1,004,900 36,490,431
Viacom Cl B 463,500(b) 25,666,313
Total 62,156,744
Media (2.8%)
CBS 679,500(b) 39,623,344
Comcast Special Cl A 760,400 34,978,400
MediaOne Group 619,000(b) 49,210,500
Total 123,812,244
Metals (0.1%)
Nucor 129,100 6,422,725
Multi-industry conglomerates (4.8%)
Danaher 294,000 12,678,750
Emerson Electric 109,700 6,040,356
General Electric 1,076,800 143,618,201
Grainger (WW) 161,900 7,761,081
Tyco Intl 934,800(c) 39,962,700
Total 210,061,088
Paper & packaging (1.2%)
Fort James 249,900 6,684,825
Intl Paper 855,600 40,747,950
Mead 125,200 4,663,700
Total 52,096,475
Restaurants & lodging (0.5%)
Marriott Intl Cl A 238,900 7,420,831
Wendy's Intl 734,000 13,808,375
Total 21,229,206
Retail (6.4%)
Bed Bath & Beyond 212,500(b) 5,777,344
Best Buy 262,000(b) 12,510,500
Circuit City Stores-Circuit City Group 296,000 11,396,000
Costco Wholesale 454,200(b) 22,227,413
CVS 574,900 20,085,569
Gap 144,100 6,439,469
Home Depot 638,150 36,135,244
Kroger 1,018,600(b) 17,698,175
Safeway 742,700(b) 28,361,856
Target 450,000(b,e) 29,728,125
TJX Companies 589,600 9,617,850
Wal-Mart Stores 1,468,500 80,400,374
Total 280,377,919
Transportation (0.3%)
Burlington Northern Santa Fe 445,400 10,717,438
Union Pacific 58,300 2,332,000
Total 13,049,438
Utilities -- electric (1.3%)
AES 92,400(b) 7,403,550
CMS Energy 59,600 1,788,000
DTE Energy 244,900 8,510,275
Edison Intl 239,200 6,936,800
FPL Group 173,600 7,323,750
New Century Energies 136,300 3,944,181
Northern States Power 276,900 5,330,325
PG&E 342,000 7,502,625
Texas Utilities 217,500 7,694,063
Total 56,433,569
Utilities -- gas (0.2%)
Enron 133,300 8,989,419
Utilities -- telephone (8.0%)
AT&T 1,495,041 78,863,413
Bell Atlantic 1,000,800 61,987,050
BellSouth 148,382(e) 6,983,228
MCI WorldCom 1,534,725(b) 70,501,430
SBC Communications 1,910,523 82,391,303
Sprint 104,500 6,759,844
Sprint PCS 72,800(b) 8,012,550
U S WEST Communications Group 563,300 37,459,450
Total 352,958,268
Total common stocks
(Cost: $3,758,870,731) $4,300,332,591
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (2.5%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (1.8%)
Federal Home Loan Bank Disc Nt
<S> <C> <C> <C> <C> <C>
03-29-00 5.68% $34,000,000 $33,675,714
Federal Home Loan Mtge Corp Disc Nts
02-08-00 5.61 1,500,000 1,497,977
03-16-00 5.71 6,600,000 6,551,533
03-21-00 5.66 12,000,000 11,906,333
04-04-00 5.76 6,600,000 6,530,539
Federal Natl Mtge Assn Disc Nts
02-24-00 5.59 3,700,000 3,683,950
03-02-00 5.63 1,400,000 1,392,954
03-09-00 5.85 1,300,000 1,291,952
04-13-00 5.78 6,500,000 6,421,971
04-27-00 5.83 8,700,000 8,575,532
Total 81,528,455
Commerical Paper (0.7%)
Abbey Natl North America
02-16-00 5.68 4,800,000 4,787,904
Barclays U.S. Funding
02-09-00 5.63 4,100,000 4,094,239
BellSouth Capital Funding
02-23-00 6.06 4,000,000 3,983,636
02-25-00 6.10 900,000 896,020
BMW US Capital
02-15-00 5.63 2,600,000 2,593,912
Cargill
02-01-00 5.83 1,700,000(d) 1,699,725
Fleet Funding
02-10-00 5.96 5,600,000(d) 5,590,355
Salomon Smith Barney
02-04-00 6.05 4,800,000 4,796,773
Total 28,442,564
Total short-term securities
(Cost: $110,019,434) $109,971,019
Total investments in securities
(Cost: $3,868,890,165)(f) $4,410,303,610
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of Jan. 31, 2000, the
value of foreign securities represented 1.74% of net assets.
(d) Commercial paper sold within terms of a private placement memorandum, exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
and may be sold only to dealers in that program or other "accredited investors."
This security has been determined to be liquid under guidelines established by
the board.
(e) Partially pledged as initial margin deposit on the following open stock
index futures purchase contracts (see Note 4 to the financial statements):
Type of security Contracts
S&P 500 Index, March 2000 265
(f) At Jan. 31, 2000, the cost of securities for federal income tax purposes was
$3,875,742,252 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $707,670,537
Unrealized depreciation (173,109,179)
------------
Net unrealized appreciation $534,561,358
<PAGE>
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
AXP MARKET ADVANTAGE SERIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP Small Company Index Fund (a
series of AXP Market Advantage Series, Inc.) as of January 31, 2000, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for the three-year period ended January 31, 2000
and for the period from August 19, 1996 (commencement of operations) to January
31, 1997. These financial statements and the financial highlights are the
responsibility of fund management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 2000, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXP Small Company Index Fund as
of January 31, 2000, and the results of its operations, changes in its net
assets, and the financial highlights for the periods stated in the first
paragraph above, in conformity with generally accepted accounting principles.
/S/ KPMG
KPMG LLP
Minneapolis, Minnesota
March 3, 2000
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statement of assets and liabilities
AXP Small Company Index Fund
Jan. 31, 2000
Assets
Investments in securities, at value (Note 1):
<S> <C>
(identified cost $1,003,062,913) $1,013,426,583
Cash in bank on demand deposit 220,146
Dividends and accrued interest receivable 301,815
Receivable for investment securities sold 6,915,613
U.S. government securities held as collateral (Note 4) 133,296
-------
Total assets 1,020,997,453
-------------
Liabilities
Payable for investment securities purchased 5,402,813
Payable upon return of securities loaned (Note 4) 13,370,296
Accrued investment management services fee 31,161
Accrued distribution fee 46,455
Accrued service fee 25
Accrued transfer agency fee 16,091
Accrued administrative services fee 5,811
Other accrued expenses 157,453
-------
Total liabilities 19,030,105
----------
Net assets applicable to outstanding capital stock $1,001,967,348
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 1,608,400
Additional paid-in capital 991,792,006
Accumulated net realized gain (loss) (1,537,680)
Unrealized appreciation (depreciation) on investments (Note 5) 10,104,622
----------
Total -- representing net assets applicable to outstanding capital stock $1,001,967,348
==============
Net assets applicable to outstanding shares: Class A $ 607,592,507
Class B $ 391,590,145
Class Y $ 2,784,696
Net asset value per share of outstanding capital stock: Class A shares 96,491,975 $ 6.30
Class B shares 63,907,563 $ 6.13
Class Y shares 440,493 $ 6.32
------- --------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
AXP Small Company Index Fund
Year ended Jan. 31, 2000
Investment income
Income:
<S> <C>
Dividends $ 7,519,707
Interest 785,490
-------
Total income 8,305,197
---------
Expenses (Note 2):
Investment management services fee $ 3,549,810
Distribution fee
Class A 892,720
Class B 3,373,381
Transfer agency fee 2,139,868
Incremental transfer agency fee
Class A 175,423
Class B 169,855
Service fee
Class A 410,936
Class B 256,569
Class Y 2,347
Administrative services fees and expenses 700,105
Compensation of board members 9,872
Custodian fees 94,024
Printing and postage 246,463
Registration fees 127,482
Licensing fees 48,455
Audit fees 20,000
Other 29,046
------
Total expenses 12,246,356
Earnings credits on cash balances (Note 2) (43,968)
-------
Total net expenses 12,202,388
----------
Investment income (loss) -- net (3,897,191)
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 54,009,693
Financial futures contracts 2,214,329
---------
Net realized gain (loss) on investments 56,224,022
Net change in unrealized appreciation (depreciation) on investments 32,500,509
----------
Net gain (loss) on investments 88,724,531
----------
Net increase (decrease) in net assets resulting from operations $84,827,340
===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP Small Company Index Fund
Year ended Jan. 31, 2000 1999
Operations and distributions
<S> <C> <C>
Investment income (loss) -- net $ (3,897,191) $ (2,499,650)
Net realized gain (loss) on investments 56,224,022 37,922,351
Net change in unrealized appreciation (depreciation) on investments 32,500,509 (61,299,801)
---------- -----------
Net increase (decrease)in net assets resulting from operations 84,827,340 (25,877,100)
---------- -----------
Distributions to shareholders from:
Net realized gain
Class A (35,465,025) (22,119,664)
Class B (23,349,925) (13,932,020)
Class Y (159,701) (63,657)
-------- -------
Total distributions (58,974,651) (36,115,341)
----------- -----------
Capital share transactions (Note 6)
Proceeds from sales
Class A shares (Note 2) 205,529,545 346,959,760
Class B shares 113,234,833 206,964,012
Class Y shares 1,905,600 1,686,708
Reinvestment of distributions at net asset value
Class A shares 32,781,016 20,219,551
Class B shares 23,141,842 13,836,948
Class Y shares 159,700 63,657
Payments for redemptions
Class A shares (245,018,171) (125,266,252)
Class B shares (Note 2) (123,362,413) (49,812,491)
Class Y shares (1,202,601) (623,501)
---------- --------
Increase (decrease) in net assets from capital share transactions 7,169,351 414,028,392
--------- -----------
Total increase (decrease) in net assets 33,022,040 352,035,951
Net assets at beginning of year 968,945,308 616,909,357
----------- -----------
Net assets at end of year $1,001,967,348 $968,945,308
============== ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
AXP Small Company Index Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Market Advantage Series, Inc. and is registered
under the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Market Advantage Series has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the board. The Fund invests primarily in common stocks
of small capitalization companies that are expected to provide investment
results that correspond to the performance of the S&P SmallCap 600 Index.
The Fund offers Class A, Class B and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year of
ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differs among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liablilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Fund may buy and write options traded on any
U.S. or foreign exchange or in the over-the-counter market where completing the
obligation depends upon the credit standing of the other party. The Fund also
may buy and sell put and call options and write covered call options on
portfolio securities as well as write cash-secured put options. The risk in
writing a call option is that the Fund gives up the opportunity for profit if
the market price of the security increases. The risk in writing a put option is
that the Fund may incur a loss if the market price of the security decreases and
the option is exercised. The risk in buying an option is that the Fund pays a
premium whether or not the option is exercised. The Fund also has the additional
risk of being unable to enter into a closing transaction if a liquid secondary
market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of premium received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts traded on any U.S. or foreign exchange. The
Fund also may buy and write put and call options on these futures contracts.
Risks of entering into futures contracts and related options include the
possibility of an illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by
$3,897,191 and accumulated net realized gain has been decreased by $3,897,191.
Dividends to shareholders
An annual dividend from net investment income, declared and paid at the end of
the calendar year, when available, is reinvested in additional shares of the
Fund at net asset value or payable in cash. Capital gains, when available, are
distributed along with the income dividend.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date and interest income,
including level-yield amortization of premium and discount, is accrued daily.
2. EXPENSES AND SALES CHARGES
The Fund has an agreement with American Express Financial Corporation (AEFC) to
manage its portfolio and provide administrative services. Under an Investment
Management Services Agreement, AEFC determines which securities will be
purchased, held or sold. The management fee is a percentage of the Fund's
average daily net assets in reducing percentages from 0.38% to 0.34% annually.
Effective with the new Investment Management Services Agreement, the fee will be
adjusted upward or downward by a performance incentive adjustment based on a
comparison of the performance of Class A shares of AXP Small Company Index Fund
to the Lipper Small-Cap Core Index. The maximum adjustment is 0.12% of the
Fund's average daily net assets after deducting 1% from the performance
difference. If the performance difference is less than 1%, the adjustment will
be zero.
Under an Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.10% to 0.02% annually. A minor
portion of additional administrative service expenses paid by the Fund are
consultants' fees and fund office expenses. Under this agreement, the Fund also
pays taxes, audit and certain legal fees, registration fees for shares,
compensation of board members, corporate filing fees and any other expenses
properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19
o Class B $20
o Class Y $17
Under terms of a prior agreement that ended March 31, 1999, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $15 for Class
Y.
The Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution (the Plan), the Fund pays a distribution fee at an
annual rate up to 0.25% of the Fund's average daily net assets attributable to
Class A shares and up to 1.00% for Class B shares. The Plan went into effect
July 1, 1999. Under terms of a prior Plan and Agreement of Distribution (the
Prior Plan) that ended June 30, 1999, the Fund paid a distribution fee for Class
B shares at an annual rate up to 0.75% of average daily net assets. The Prior
Plan was not effective with respect to Class A shares.
Under a Shareholder Service Agreement, the Fund's Class Y shares pay a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares. Under terms of a prior agreement that
ended June 30, 1999, the Fund paid a shareholder service fee for Class A and
Class B shares at a rate of 0.175% of average daily net assets. Effective July
1, 1999, the agreement for Class A and Class B shares was converted to the Plan
and Agreement of Distribution discussed above.
Sales charges received by the Distributor for distributing Fund shares were
$2,505,425 for Class A and $501,794 for Class B for the year ended Jan. 31,
2000.
AEFC agreed to waive certain fees and to absorb certain other of the Funds'
expenses until Jan. 31, 2000. Under this agreement, the Fund's total expenses
would not exceed 1.00% for Class A, 1.76% for Class B and 0.92% for Class Y of
the Fund's average daily net assets.
During the year ended Jan. 31, 2000, the Fund's custodian and transfer agency
fees were reduced by $43,968 as a result of earnings credits from overnight cash
balances. The Fund also pays custodian fees to American Express Trust Company,
an affiliate of AEFC.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $290,042,783 and $347,880,473, respectively, for the
year ended Jan. 31, 2000. Realized gains and losses are determined on an
identified cost basis.
4. LENDING OF PORTFOLIO SECURITIES
As of Jan. 31, 2000, securities valued at $12,134,273 were on loan to brokers.
For collateral, the Fund received $13,237,000 in cash and U.S. government
securities valued at $133,296. Income from securities lending amounted to
$353,614 for the year ended Jan. 31, 2000. The risks to the Fund of securities
lending are that the borrower may not provide additional collateral when
required or return securities when due.
5. STOCK INDEX FUTURES CONTRACTS
Investments in securities as of Jan. 31, 2000, included securities valued at
$6,855,534 that were pledged as collateral to cover initial margin deposits on
18 open purchase contracts. The market value of the open purchase contracts as
of Jan. 31, 2000 was $4,461,750 with a net unrealized loss of $259,072.
6. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended Jan. 31, 2000
Class A Class B Class Y
Sold 33,651,255 18,957,974 306,356
Issued for reinvested distributions 5,251,329 3,805,558 25,510
Redeemed (39,981,350) (20,639,324) (192,506)
----------- ----------- --------
Net increase (decrease) (1,078,766) 2,124,208 139,360
Year ended Jan. 31, 1999
Class A Class B Class Y
Sold 53,874,693 32,482,960 266,752
Issued for reinvested distributions 3,414,327 2,377,447 10,733
Redeemed (20,253,176) (8,157,328) (99,646)
----------- ---------- -------
Net increase (decrease) 37,035,844 26,703,079 177,839
7. BANK BORROWINGS
The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund
is permitted to have bank borrowings for temporary or emergency purposes to fund
shareholder redemptions. The Fund must have asset coverage for borrowings not to
exceed the aggregate of 333% of advances equal to or less than five business
days plus 367% of advances over five business days. The agreement, which enables
the Fund to participate with other American Express mutual funds, permits the
borrowings up to $200 million, collectively. Interest is charged to each Fund
based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or
the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to
90 days after such loan is executed. The Fund also pays a commitment fee equal
to its pro rata share of the amount of the credit facility at a rate of 0.05%
per annum. The Fund had no borrowings outstanding during the year ended Jan. 31,
2000.
8. FINANICAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
are presented on pages 26 and 27 of the prospectus.
See accompanying notes to investments in securities.
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP Small Company Index Fund
Jan. 31, 2000
(Percentages represent value of investments compared to net assets)
Common stocks (99.2%)
Issuer Shares Value(a)
Aerospace & defense (0.4%)
<S> <C> <C>
AAR 75,062 $1,327,659
Alliant Techsystems 27,344(b) 1,773,942
BE Aerospace 68,010(b) 596,150
Kaman Cl A 63,737 613,469
Total 4,311,220
Airlines (0.8%)
Air Express Intl 92,013 3,001,924
Atlantic Coast Airlines Holdings 50,818(b) 917,900
Aviation Sales 41,226(b) 352,998
Mesa Air Group 92,683(b) 538,720
Midwest Express Holdings 38,710(b) 858,878
SkyWest 67,266 1,875,040
Total 7,545,460
Automotive & related (2.2%)
Central Parking 100,584(d) 1,508,760
Disc Auto Parts 45,720(b) 751,523
GenCorp 114,483 930,174
Gentex 200,706(b) 6,021,179
Intermet 69,452 790,017
MascoTech 122,086 1,518,445
Myers Inds 54,757 725,530
O'Reilly Automotive 138,810(b) 1,821,881
Simpson Inds 49,343 511,934
Smith (AO) 64,072 1,261,418
Spartan Motors 34,343 139,518
SPS Technologies 34,512(b) 1,160,466
Standard Motor Products 35,594 576,178
TBC 58,025(b) 340,897
Titan Intl 56,614 421,067
Tower Automotive 128,396(b) 1,845,692
Winnebago Inds 61,042 1,209,395
Wynn's Intl 51,109 798,578
Total 22,332,652
Banks and savings & loans (5.5%)
Anchor Bancorp Wisconsin 69,206 951,583
Banknorth Group 63,923 1,685,969
Carolina First 70,457 1,144,926
Centura Banks 76,889 3,118,810
Chittenden 77,622 2,197,673
Commerce Bancorp 80,665 2,969,484
Commercial Federal 161,559 2,342,606
Community First Bankshares 136,765 1,889,067
Cullen/Frost Bankers 145,413 3,617,147
Downey Financial 77,105 1,484,271
First Midwest Bankcorp 112,432 2,673,774
Firstbank 78,043 1,414,529
Hudson United Bancorp 138,273 3,232,131
Investors Financial Services 39,925 1,527,131
JSB Financial 25,617 1,306,467
MAF Bancorp 65,904 1,248,057
Provident Bankshares 69,903 1,057,283
Queens County Bancorp 58,033 1,323,878
Riggs Natl 77,558 780,427
Silicon Valley Bancshares 61,053(b) 3,403,705
Staten Island Bancorp 108,490 1,844,330
Susquehanna Bancshares 101,265 1,474,672
TrustCo Bank NY 146,681 1,769,340
U.S. Trust 51,106 6,068,837
United Bankshares 117,029 2,472,238
Whitney Holding 61,847 2,025,489
Total 55,023,824
Beverages & tobacco (0.7%)
Beringer Wine Estates Holdings Cl B 53,669(b,d) 2,361,436
Canandaigua Wine Cl A 49,446(b) 2,565,011
Coca-Cola 23,920 1,213,940
DIMON 121,955 335,376
Schweitzer-Mauduit Intl 43,011 612,907
Total 7,088,670
Building materials & construction (3.3%)
Apogee Enterprises 76,130 352,101
Building Materials Holding 34,731(b) 373,358
Butler Mfg 19,274 433,665
Dycom Inds 70,371(b) 3,025,954
Elcor 53,602 1,799,017
Fleetwood Enterprises 89,405 1,458,419
Florida Rock Inds 51,770 1,734,295
Foster Wheeler 111,510 787,539
Horton (DR) 175,870 2,033,497
Hughes Supply 63,970 1,127,471
Insituform Technologies Cl A 68,818(b) 1,780,666
Insteel Inds 23,182 179,661
Lennox Intl 156,717 1,469,222
M.D.C. Holdings 61,136 863,546
Monaco Coach 51,679(b) 1,124,018
Morrison Knudsen 143,387(b) 1,057,479
Oakwood Homes 129,079 354,967
Republic Group 32,384 429,088
Ryland Group 39,067 642,164
Simpson Mfg 32,907(b) 1,295,713
Skyline 24,659 508,592
Southern Energy Homes 33,230(b) 60,229
Standard Pacific 80,780 752,264
Stone & Webster 35,785 572,560
Texas Inds 57,604 2,106,146
Toll Brothers 99,834(b) 1,697,178
Tredegar Inds 102,054 1,996,431
U.S. Home 37,479(b) 897,154
Universal Forest Products 55,573 694,663
URS 42,873(b) 744,918
Watts Inds Cl A 72,521 1,096,880
Total 33,448,855
Chemicals (1.8%)
Cambrex 67,396 2,527,349
Chemed 28,617 801,276
ChemFirst 49,897 969,873
Geon 64,944 1,887,435
Ionics 44,306(b) 1,312,565
Lilly Inds Cl A 63,626 827,138
MacDermid 88,075 2,994,549
Mississippi Chemical 71,575 572,600
OM Group 65,146 2,451,118
Omnova Solutions 114,483 858,623
Penford 20,386 333,821
Quaker Chemical 24,463 353,185
Tetra Tech 104,453(b) 1,540,682
TETRA Technologies 37,069(b) 301,186
WD-40 42,729 801,169
Total 18,532,569
Communications equipment & services (4.3%)
Adaptive Broadband 44,013(b) 5,237,547
Allen Group 75,723(b) 993,864
Aspect Communications 133,206(b) 6,510,443
C-COR Electronics 83,129(b,e) 1,776,882
Centigram Communications 16,434(b) 252,673
CommScope 139,131(b) 5,295,674
Digi Intl 40,841(b) 487,539
Digital Microwave 186,221(b) 5,959,072
General Communication Cl A 138,671(b) 832,026
General Semiconductor 100,897(b) 1,500,843
InterVoice 87,746(b) 2,281,396
Network Equipment Technologies 58,686(b) 546,513
Orbital Sciences 102,483(b) 1,787,047
P-COM 197,192(b) 2,994,854
PictureTel 110,988(b) 672,865
Plantronics 45,358(b) 3,248,767
Proxim 32,157(b) 2,747,414
SymmetriCom 41,511(b) 407,327
Total 43,532,746
Computers & office equipment (16.7%)
ADAC Laboratories 56,279(b) 738,662
American Management Systems 111,906(b) 3,441,110
Analysts Intl 61,783 776,149
Artesyn Technologies 101,960(b) 1,752,438
Aspen Technology 68,951(b) 2,499,474
Auspex Systems 75,325 508,444
Avid Technology 65,279(b) 836,387
BARRA 38,456(b) 1,374,802
Billing Information Concepts 102,306(b) 601,048
BISYS Group 74,708(b) 4,431,118
Black Box 52,426(b) 3,099,687
BMC Inds 74,976 356,136
Ciber 162,002(b) 3,655,170
Clarify 64,955(b) 7,896,091
Cognex 113,484(b) 4,624,472
Computer Task Group 57,178 950,584
Concord Communications 39,322(b) 1,449,999
Cybex Computer Products 35,035(b) 1,839,338
DBT Online 52,268(b) 980,025
Dendrite Intl 107,213(b) 3,162,784
Epicor Software 111,829(b) 922,589
Exabyte 62,323(b) 459,632
FactSet Research Systems 43,327 2,902,909
Fair Isaac & Co 38,406 1,757,075
FileNet 88,689(b) 2,394,603
Great Plains Software 42,612(b) 2,918,922
Hadco 37,346(b) 1,484,504
Harbinger 106,023(b) 2,292,747
Henry (Jack) & Associates 55,172 3,158,597
HNC Software 67,269(b) 6,066,822
Hutchinson Technology 67,775(b) 1,101,344
Hyperion Solutions 85,382(b) 2,988,370
InaCom 124,966(b) 593,589
Insight Enterprises 70,817(b) 2,443,187
Inter-Tel 70,955 2,128,650
Intermagnetics General 33,925(b) 337,130
Komag 149,675(b) 420,961
Kronos 34,540(b) 2,072,400
Macromedia 136,100(b) 9,314,343
MAXIMUS 57,477(b) 2,130,241
MedQuist 98,354(b) 1,960,933
Mercury Interactive 105,068(b) 11,491,812
MicroAge 56,154(b) 217,597
MICROS Systems 44,970(b) 2,627,934
Midway Games 104,030(b) 1,404,405
Natl Computer Systems 87,427 2,994,375
Natl Data 92,857 2,971,424
Natl Instruments 136,953(b) 5,212,773
Pinnacle Systems 65,403(b) 3,188,396
Primark 54,743(b) 1,279,618
Profit Recovery Group Intl 133,280(b) 3,615,220
Progress Software 95,676(b) 2,068,994
Project Software & Development 58,008(b) 2,740,878
QRS 37,047(b) 2,676,646
Read-Rite 136,062(b,d) 437,950
Remedy 79,487(b) 3,214,256
RSA Security 105,608(b) 5,742,434
Technology Solutions 117,489(b) 4,134,144
Telxon 44,600 671,788
THQ 50,605(b) 1,050,054
Verity 81,975(b) 2,787,150
Whittman-Hart 155,014(b,d) 5,502,996
Xircom 77,168(b) 3,805,347
Zixit 41,946(b,d) 1,295,083
Total 165,954,740
Electronics (12.9%)
Actel 60,043(b) 1,489,817
Alpha Inds 53,500(b) 4,480,625
American Xtal Technology 51,300(b,d) 804,769
Analogic 34,841 1,254,276
Anixter Intl 99,007(b) 1,949,200
Audiovox Cl A 54,454(b) 2,586,565
Belden 66,715 1,438,542
Benchmark Electronics 44,445(b) 1,119,458
Brush Wellman 44,716 715,456
Burr-Brown 151,939(b) 5,621,743
C&D Technologies 35,173 1,437,696
C-Cube Microsystems 111,148(b) 7,759,521
Cable Design Technologies 77,240(b) 1,776,520
CTS 75,394(e) 5,291,716
Dallas Semiconductor 79,103 5,285,069
Dionex 60,942(b) 1,752,083
Electro Scientific Inds 35,862(b) 2,873,443
Electroglas 54,560(b) 1,606,110
Esterline 47,497(b) 531,373
Etec Systems 59,118(b) 4,973,302
Gerber Scientific 60,743 1,131,338
Harman Intl Inds 47,276 2,759,737
Harmon Inds 31,083 407,964
Helix Technology 61,186 2,975,169
Innovex 40,573 342,335
Intl Rectifier 142,455(b) 4,736,629
Itron 40,966(b,d) 286,762
KEMET 115,734(b) 5,504,598
Kent Electronics 76,894(b) 1,773,368
Kulicke & Soffa Inds 64,282(b) 3,362,752
Lattice Semiconductor 131,268(b) 6,735,689
Methode Electronics Cl A 97,202 3,317,018
Micrel 112,958(b) 7,144,594
Park Electrochemical 28,584 541,310
Paxar 127,925(b) 1,103,353
Photronics 65,210(b) 1,952,224
Pioneer-Standard Electronics 74,201 1,012,148
Plexus 47,979(b) 2,231,024
Powerwave Technologies 55,216(b) 5,031,558
S3 208,444(b) 3,022,438
Scott Technologies 48,956(b) 832,252
Silicon Valley Group 90,563(b) 1,884,842
SLI 98,091 1,152,569
SpeedFam-IPEC 80,619(b) 1,214,324
Standard Microsystems 42,947(b) 515,364
Technitrol 44,483 1,873,846
Three-Five Systems 33,051(b) 1,270,398
Trimble Navigation 61,781(b) 1,173,839
Ultratech Stepper 58,581(b) 790,844
Varian Medical Systems 83,633 3,188,508
Vicor 112,975(b) 4,603,731
X-Rite 58,172 489,008
Total 129,108,817
Energy (1.7%)
Atmos Energy 85,100 1,489,250
Barrett Resources 89,243(b,e) 2,638,246
Cabot Oil & Gas Cl A 68,669 1,012,868
Cross Timbers Oil 133,596 1,068,768
HS Resources 51,502(b) 766,092
Newfield Exploration 113,952(b) 3,133,680
Pogo Producing 110,119 2,484,560
St. Mary Land & Exploration 30,416 775,608
Stone Energy 50,209(b) 1,870,285
Vintage Petroleum 170,924 2,189,964
Total 17,429,321
Energy equipment & services (1.4%)
Atwood Oceanics 37,473(b) 1,529,367
Cal Dive Intl 42,408(b) 1,293,444
Dril-Quip 47,229(b) 1,490,665
Friede Goldman Halter 109,233(b) 662,225
Input/Output 138,785(b) 815,362
Oceaneering Intl 63,889(b) 1,062,155
Plains Resources 49,089(b) 653,497
Pride Intl 165,459(b) 2,657,685
Remington Oil & Gas 58,282(b) 180,310
SEACOR SMIT 30,897(b) 1,425,124
Seitel 66,516(b) 540,443
Tuboscope 121,432(b) 1,578,616
Total 13,888,893
Financial services (3.0%)
AmeriCredit 201,492(b) 3,299,432
Bowne & Co 101,108 1,105,869
Dain Rauscher 34,202 1,722,926
Delphi Financial Group Cl A 56,602(b) 1,867,866
Eaton Vance 98,265 4,022,723
Insurance Auto Auctions 31,692(b) 469,438
Jefferies Group 65,592 1,447,124
Mutual Risk Management 119,711(c) 1,960,268
Natl Disc Brokers Group 46,535(b) 1,012,136
Pioneer Group 72,604(b) 1,034,607
Radian Group 101,752 4,101,877
Raymond James Financial 129,633 2,463,027
SEI Investments 48,566 5,063,005
Total 29,570,298
Food (1.6%)
American Italian Pasta Cl A 49,614(b) 1,358,183
Chiquita Brands Intl 180,395 845,602
Corn Products Intl 102,004 2,346,091
Delta & Pine Land 105,403 1,739,150
Earthgrains 116,440 1,833,930
Fleming Companies 106,319 1,063,190
J & J Snack Foods 24,585(b) 470,188
Michael Foods 55,559 1,163,267
Nash Finch 31,072 258,286
Performance Food Group 38,658(b) 891,550
Ralcorp Holdings 83,899(b) 1,242,754
Smithfield Foods 124,186(b) 2,274,156
United Natural Foods 49,982(b) 537,307
Total 16,023,654
Furniture & appliances (0.9%)
Aaron Rents 54,527 817,905
Bassett Furniture Inds 33,585 445,001
Ethan Allen Interiors 111,724 2,793,100
Fedders 98,633 517,823
Interface 144,140 702,683
La-Z-Boy 168,331 2,304,031
Natl Presto Inds 20,129 704,515
Royal Appliance Mfg 47,298(b) 242,402
Thomas Inds 43,343 807,263
Total 9,334,723
Health care (10.0%)
Advanced Tissue Sciences 155,022(b) 746,043
Alliance Pharmaceutical 122,299(b) 1,414,082
Alpharma Cl A 81,045(e) 2,755,530
Barr Laboratories 62,555(b) 2,498,290
Bio-Technology General 144,918(b) 1,992,623
Biomatrix 63,007(b,d) 1,397,968
Cephalon 88,750(b) 3,150,625
Coherent 65,896(b) 2,903,543
Conmed 41,918(b) 1,079,389
Cooper Companies 38,414 1,162,024
COR Therapeutics 68,852(b) 1,824,578
Cygnus 67,866(b,d) 1,117,668
Datascope 41,060 1,483,293
Diagnostic Products 37,465 845,304
Dura Pharmaceuticals 121,125(b,e) 1,877,438
Enzo Biochem 68,351(b) 5,886,729
Hologic 41,910(b) 288,131
IDEC Pharmaceuticals 115,853(b,e) 14,619,199
IDEXX Laboratories 100,144(b) 1,508,419
Immune Response 71,005(b,d) 532,538
Incyte Pharmaceuticals 77,929(b) 8,552,707
Invacare 82,117 1,626,943
Jones Pharma 118,737 6,894,166
Laser Vision Centers 68,589(b) 606,584
Liposome 107,249(b) 1,421,049
Medicis Pharmaceutical Cl A 78,948(b) 3,296,079
Mentor 66,748 1,535,204
North American Vaccine 90,023(b) 512,006
Noven Pharmaceuticals 58,924(b) 950,150
Organogenesis 83,445(b,d) 745,790
Osteotech 38,860(b) 544,040
Priority Healthcare Cl B 59,910(b) 1,733,646
Protein Design Labs 51,294(b) 4,186,873
Regeneron Pharmaceuticals 85,797(b) 1,056,376
ResMed 40,747(b) 1,749,574
Respironics 81,682(b) 913,817
Safeskin 157,535(b) 1,880,574
Spacelabs Medical 25,905(b) 430,671
Summit Technology 128,027(b) 1,664,351
Sunrise Medical 60,912(b) 289,332
Syncor Intl 32,422(b) 786,234
Techne 55,249(b) 3,446,156
Theragenics 80,824(b) 823,395
Vertex Pharmaceuticals 70,249(b) 2,880,209
Vital Signs 33,560 738,320
Wesley Jessen VisionCare 47,921(b) 1,855,441
Total 100,203,101
Health care services (2.3%)
Advance Paradigm 58,080(b) 1,092,630
Cerner 92,080(b) 1,830,090
Coventry Health Care 162,182(b) 1,175,820
Curative Health Services 27,651(b) 184,916
Genesis Health Ventures 133,236(b) 316,436
Hanger Orthopedic Group 52,268(b) 235,206
Magellan Health Services 87,120(b) 620,730
Orthodontic Centers of America 131,797(b) 2,018,142
Owens & Minor 89,578 811,801
PAREXEL Intl 69,200(b) 916,900
Patterson Dental 92,235(b) 4,017,986
Pediatrix Medical Group 42,657(b,d) 389,245
Pharmaceutical Product Development 67,465(b) 860,179
Renal Care Group 122,329(b) 3,004,705
Sierra Health Services 73,609(b) 529,065
Universal Health Services Cl B 83,982(b) 3,752,945
US Oncology 235,209(b) 1,220,147
Total 22,976,943
Household products (0.8%)
Action Performance Companies 46,368(b,d) 452,088
Enesco Group 36,928(e) 362,356
Libbey 43,883 1,129,987
Nature's Sunshine Products 47,027 411,486
Scotts Cl A 78,331(b) 2,746,481
Sola Intl 68,127(b) 421,536
Valence Technology 86,459(b) 2,680,229
Total 8,204,163
Industrial equipment & services (2.8%)
Applied Industrial Technologies 57,352 914,048
Applied Power Cl A 106,665 2,973,286
Arctic Cat 70,216 693,383
Astec Inds 52,346(b) 1,243,218
Barnes Group 52,075 758,342
Clarcor 65,694 1,141,433
Flow Intl 40,266(b) 427,826
G & K Services Cl A 56,218 1,240,310
Gardner Denver 41,124(b) 724,811
Graco 55,930 1,719,848
IDEX 81,164 2,181,282
JLG Inds 121,280 1,015,720
Kroll-O'Gara 60,851(b) 1,015,451
Lawson Products 28,343 651,889
Lindsay Mfg 33,994 563,026
Lydall 42,950(b) 322,125
Manitowoc 71,163 1,943,639
Regal Beloit 57,447 1,141,759
Robbins & Myers 29,976 644,484
Roper Inds 83,002 2,785,754
Specialty Equipment Companies 52,780(b) 943,443
Toro 34,728 1,178,582
Watsco 79,808 927,768
Wolverine Tube 34,869(b) 462,014
Total 27,613,441
Insurance (1.6%)
Blanch (EW) Holdings 36,023 1,742,613
Enhance Financial Services Group 104,226 1,452,650
Fidelity Natl Financial 78,037 975,463
First American Financial 178,693 2,121,979
Fremont General 191,819 1,486,597
Frontier Insurance Group 95,166 291,446
Gallagher (Arthur J) 50,320 2,704,699
Hilb, Rogal & Hamilton 35,940 1,008,566
Hooper Holmes 79,648 1,548,158
Selective Insurance Group 75,289 1,134,041
Trenwick Group 50,915 715,992
Zenith Natl Insurance 47,107(e) 986,303
Total 16,168,507
Leisure time & entertainment (0.9%)
Anchor Gaming 32,871(b) 1,466,868
Aztar 119,711(b) 1,144,736
Carmike Cinemas Cl A 31,141(b) 217,987
Coachmen Inds 43,064 619,045
Hollywood Park 71,509(b) 1,403,364
Huffy 27,845 158,368
K2 49,042 355,555
Players Intl 87,917(b) 695,094
Polaris Inds 66,826 2,163,492
Thor Inds 33,250 976,719
Total 9,201,228
Media (2.6%)
ADVO 58,025(b) 1,508,650
Catalina Marketing 49,958(b) 4,983,311
Consolidated Graphics 43,169(b) 577,385
GC Companies 21,352(b) 611,201
Gibson Greetings 43,410(b) 379,838
HA-LO Inds 133,435(b) 1,200,915
Harland (John H) 82,839 1,387,553
Information Resources 77,176(b) 629,467
Snyder Communications 195,943(b,d) 3,918,860
Thomas Nelson 38,987 316,769
True North Communications 132,007 5,486,541
Valassis Communications 154,051(b) 5,237,734
Total 26,238,224
Metals (1.8%)
Amcast Inds 24,535 334,289
AMCOL Intl 73,388 1,036,606
Birmingham Steel 81,447 320,698
Castle (AM) 38,481 423,291
Coeur d'Alene Mines 79,939(b) 264,798
Commercial Metals 39,269 1,249,245
Commonwealth Inds 45,527 472,343
IMCO Recycling 45,327 515,595
Material Sciences 42,740(b) 544,935
Mueller Inds 95,788(b) 3,155,016
Quanex 39,087 845,256
Reliance Steel & Aluminum 76,105 1,579,179
RTI Intl Metals 57,101(b) 421,120
Steel Dynamics 131,345(b) 2,044,057
Steel Technologies 30,502 375,556
Stillwater Mining 103,745(b) 3,695,915
WHX 39,430(b,d) 300,654
Total 17,578,553
Miscellaneous (1.3%)
ABM Inds 61,183 1,254,252
American States Water 24,543 816,055
Apex 56,923(b) 2,170,189
Champion Enterprises 130,574(b) 1,003,788
Cross (AT) Cl A 46,678(b) 227,555
JAKKS Pacific 51,734(b) 845,528
Philadelphia Suburban 112,194 2,250,892
Tenneco Automotive 92,226 916,496
United Water Resources 106,441 3,672,214
Total 13,156,969
Multi-industry conglomerates (3.1%)
Agribrands Intl 28,426(b) 1,174,349
Baldor Electric 98,340 1,677,926
Brady (WH) Cl A 62,038 1,764,206
CDI 52,183(b) 1,216,516
ChoicePoint 80,835(b) 2,829,225
Cyrk Intl 43,116(b) 428,465
F.Y.I. 39,815(b) 1,249,196
Franklin Covey 55,781(b) 446,248
Griffon 83,276(b) 608,956
Interim Services 173,969(b) 4,360,098
Labor Ready 117,192(b) 974,159
Lason 51,751(b) 485,166
New England Business Service 37,946 747,062
NFO Worldwide 61,186(b) 1,250,489
Pre-Paid Legal Services 61,753(b) 1,389,443
Rural/Metro 39,945(b) 164,773
StaffMark 80,495(b) 705,589
Standex Intl 35,218 585,499
Teledyne Technologies 73,977(b) 684,287
Triarc Companies 64,808(b) 1,126,039
Valmont Inds 64,299 1,245,793
Volt Information Sciences 41,173(b) 964,992
Zebra Technologies Cl A 85,836(b) 5,080,417
Total 31,158,893
Paper & packaging (0.7%)
AptarGroup 99,834 2,196,349
Buckeye Technologies 96,361(b) 1,614,047
Caraustar Inds 69,806 1,348,128
Pope & Talbot 41,038 656,608
Shorewood Packaging 75,477(b) 1,198,197
Total 7,013,329
Restaurants & lodging (1.8%)
Applebee's Intl 74,592 1,869,462
CEC Entertainment 74,475(b) 1,875,839
Cheesecake Factory (The) 55,039(b) 1,575,491
CKE Restaurants 142,657 918,354
Consolidated Products 80,168(b) 816,712
IHOP 55,086(b) 908,919
Jack in the Box 104,810(b) 2,155,155
Landry's Seafood Restaurants 68,005(b) 599,294
Luby's Cafeterias 61,401 671,573
Marcus 81,926 911,427
Panera Bread Cl A 33,286(b) 237,163
Prime Hospitality 133,842(b) 1,054,006
Ruby Tuesday 85,058 1,594,838
Ryan's Family Steak Houses 99,048(b) 885,242
Sonic 51,220(b) 1,472,575
Taco Cabana Cl A 35,874(b) 255,602
TCBY Enterprises 62,694 211,592
Total 18,013,244
Retail (5.6%)
99 Cents Only Stores 68,614(b) 2,401,490
Ames Dept Stores 79,911(b) 1,668,142
AnnTaylor Stores 86,387(b) 1,900,514
Baker (J) 38,528 204,680
Bindley Western Inds 92,403 1,576,626
Bombay 99,505(b) 391,801
Books-A-Million 49,304(b,d) 366,699
Casey's General Stores 144,428 1,489,414
Cash America Intl 69,532 690,974
Cato Cl A 72,593 744,078
Checkpoint Systems 82,606(b) 913,829
Copart 147,046(b) 2,499,782
Cost Plus 55,936(b) 936,928
CPI 27,181 606,476
Damark Intl Cl A 15,095(b) 428,321
Dept 56 47,558(b) 912,519
Dress Barn 54,939(b) 858,422
Footstar 57,076(b) 1,426,900
Fossil 87,784(b) 1,706,302
Goody's Family Clothing 90,934(b) 440,462
Gottschalks 34,457(b) 228,278
Group 1 Automotive 58,202(b) 723,887
Gymboree 66,676(b) 302,126
Hancock Fabrics 52,390 166,993
Jan Bell Marketing 67,343(b) 193,611
Jo-Ann Stores Cl A 49,208(b) 507,458
Justin Inds 69,798 1,012,071
Lillian Vernon 25,080 291,555
Linens `N Things 108,060(b) 2,120,678
Men's Wearhouse 114,610(b) 2,736,313
Michaels Stores 79,695(b) 2,131,841
Nashua 16,158(b) 133,304
NBTY 183,572(b) 2,592,954
Pacific Sunwear of California 85,319(b) 2,506,245
Phillips-Van Heusen 74,749 504,556
Pier 1 Imports 264,780 2,184,435
Regis 106,023 1,868,655
Russ Berrie 56,295 1,382,746
ShopKo Stores 83,215 1,523,875
Sports Authority 87,599(b) 218,998
Stein Mart 121,872(b) 586,509
Sturm, Ruger & Co 73,706 686,387
Swiss Army Brands 21,513(b) 134,456
United Stationers 93,098(b) 2,420,548
Wet Seal Cl A 37,802(b) 472,525
Whole Foods Market 71,943(b) 3,309,377
Zale 96,538(b) 3,451,233
Total 56,555,973
Textiles & apparel (1.1%)
Angelica 23,763 219,808
Ashworth 38,569(b) 178,382
Brown Shoe 49,982 518,563
Cone Mills 69,812(b) 283,611
Dixie Group 31,819(b) 198,869
Guilford Mills 60,782 558,435
Haggar 19,686 275,604
Hartmarx 83,763(b) 256,524
K-Swiss Cl A 29,566 365,879
Kellwood 76,047 1,340,328
Nautica Enterprises 94,808(b) 847,347
Oshkosh B'Gosh Cl A 35,082 635,861
Oxford Inds 21,145 364,751
Pillowtex 39,233(d) 166,740
Quiksilver 62,171(b) 753,823
Stride Rite 125,988 763,802
Timberland Cl A 57,269(b,e) 2,118,954
Wolverine World Wide 113,096 1,032,001
Total 10,879,282
Transportation (2.3%)
American Freightways 87,906(b) 1,197,719
Arkansas Best 54,070(b) 642,081
Eagle USA Airfreight 78,259(b) 2,562,982
Expeditors Intl of Washington 138,168 5,824,644
Fritz Companies 100,413(b) 1,054,337
Frozen Food Express Inds 44,683 171,750
Heartland Express 82,180(b) 1,129,975
Landstar System 26,101(b) 1,230,010
M.S. Carriers 33,698(b) 724,507
Offshore Logistics 57,806(b) 534,706
RailTex 25,470(b) 471,195
Rollins Truck Leasing 157,123 1,541,769
USFreightways 72,541 2,638,679
Wabash Natl 62,949 838,009
Werner Enterprises 130,106 1,658,852
Yellow Corp 68,157(b) 1,039,394
Total 23,260,609
Utilities -- electric (0.9%)
Bangor Hydro Electric 20,179 297,640
Central Vermont Public Service 31,412 345,532
CH Energy Group 46,194 1,432,014
Eastern Utilities Associates 55,985 1,721,539
Green Mountain Power 14,746 126,263
NorthWestern 63,308 1,400,690
TNP Enterprises 36,759 1,516,309
United Illuminating 39,275 1,968,658
Total 8,808,645
Utilities -- gas (1.9%)
Cascade Natural Gas 30,269 448,360
Connecticut Energy 28,454 1,179,063
Energen 81,690 1,409,153
Kirby 67,227(b) 1,252,103
New Jersey Resources 48,823 1,846,120
Northwest Natural Gas 68,603 1,406,362
Piedmont Natural Gas 85,399 2,433,871
Public Service Co of North Carolina 56,378 1,839,332
Southern Union 132,829 2,258,092
Southwest Gas 84,560 1,654,205
Southwestern Energy 68,312 388,525
WICOR 103,072 3,047,065
Total 19,162,251
Utilities -- telephone (0.5%)
Brightpoint 146,191(b) 1,918,757
TALK.com 177,110(b) 2,889,107
Total 4,807,864
Total common stocks
(Cost: $983,756,084) $994,127,661
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (1.9%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (1.8%)
Federal Home Loan Bank Disc Nt
<S> <C> <C> <C>
03-08-00 5.79% $600,000 $596,442
Federal Home Loan Mtge Corp Disc Nts
02-24-00 5.58 1,200,000 1,195,552
02-29-00 5.60 1,100,000 1,095,064
03-07-00 5.68 1,500,000 1,491,525
03-14-00 5.63 600,000 595,994
03-21-00 5.66 2,000,000 1,984,389
03-28-00 5.65 800,000 792,628
04-13-00 5.79 1,100,000 1,086,795
Federal Natl Mtge Assn Disc Nts
04-13-00 5.78 1,300,000 1,284,394
04-27-00 5.83 8,600,000 8,476,963
Total 18,599,746
Commercial paper (0.1%)
AT&T
02-07-00 6.06 700,000 699,176
Total short-term securities
(Cost: $19,306,829) $19,298,922
Total investments in securities
(Cost: $1,003,062,913)(f) $1,013,426,583
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of Jan. 31, 2000, the
value of foreign securities represented 0.20% of net assets.
(d) Security is partially or fully on loan. See Note 4 to the financial
statements.
(e) Partially pledged as initial margin deposit on the following open stock
index futures purchase contracts (see Note 5 to the financial statements):
Type of security Contracts
Russell Index, March 2000 18
(f) At Jan. 31, 2000, the cost of securities for federal income tax purposes was
$1,008,424,351 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $235,493,234
Unrealized depreciation (230,491,002)
------------
Net unrealized appreciation $5,002,232
<PAGE>
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
AXP MARKET ADVANTAGE SERIES, INC.
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments in securities, of AXP S&P 500 Index Fund, AXP Mid
Cap Index Fund, AXP Total Stock Market Index Fund, AXP International Equity
Index Fund and AXP Nasdaq 100 Index Fund (funds within AXP Market Advantage
Series, Inc.) as of January 31, 2000 and the related statements of operations,
changes in net assets, and the financial highlights for the period from October
25, 1999 (when shares became publicly available) to January 31, 2000. These
financial statements and the financial highlights are the responsibility of fund
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 2000 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXP S&P 500 Index Fund, AXP Mid
Cap Index Fund, AXP Total Stock Market Index Fund, AXP International Equity
Index Fund and AXP Nasdaq 100 Index Fund as of January 31, 2000, and the results
of its operations, changes in its net assets and the financial highlights for
the period stated in the first paragraph above, in conformity with generally
accepted accounting principles.
/S/ KPMG
KPMG LLP
Minneapolis, Minnesota
March 3, 2000
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Statements of assets and liabilities
AXP Market Advantage Series, Inc.
AXP AXP AXP
S&P 500 Mid Cap Total
Index Index Stock Market
Jan. 31, 2000 Fund Fund Index Fund
Assets
Investments in securities, at value (Note 1)
(identified cost $16,047,984, $11,050,355
<S> <C> <C> <C> <C>
and $20,897,960) $16,778,873 $12,221,216 $23,877,585
Cash in bank on demand deposit 50,807 24,494 26,092
Expense receivable from AEFC 3,785 981 1,627
Capital shares receivable 34,105 2,000 2,000
Dividends and accrued interest receivable 9,632 8,624 15,207
Receivable for investment securities sold 48,275 322,235 --
Other prepaid assets -- 7,288 --
---- ----- ---
Total assets 16,925,477 12,586,838 23,922,511
---------- ---------- ----------
Liabilities
Payable for investment securities purchased 348,101 398,795 --
Accrued investment management services fee 319 264 595
Accrued distribution fee 142 84 156
Accrued transfer agency fee 35 5 6
Accrued administrative services fee 106 81 218
Other accrued expenses 73,784 15,341 21,964
------ ------ ------
Total liabilities 422,487 414,570 22,939
------- ------- ------
Net assets applicable to outstanding capital stock $16,502,990 $12,172,268 $23,899,572
=========== =========== ===========
Represented by
Capital stock-- $.01 par value (Note 1) $ 30,429 $ 21,305 $ 41,493
Additional paid-in capital 15,748,373 10,731,399 20,827,595
Undistributed net investment income 5,505 8,455 2,494
Accumulated net realized gain (loss) (12,206) 240,248 48,365
Unrealized appreciation (depreciation) on investments 730,889 1,170,861 2,979,625
------- --------- ---------
Total -- representing net assets applicable to outstanding
capital stock $16,502,990 $12,172,268 $23,899,572
=========== =========== ===========
Net assets applicable to outstanding shares: Class D $ 7,158,022 $ 4,003,896 $ 7,521,896
Class E $ 9,344,968 $ 8,168,372 $16,377,676
Shares outstanding: Class D shares 1,320,235 700,920 1,306,169
Class E shares 1,722,656 1,429,563 2,843,133
Net asset value per share of
outstanding capital stock: Class D $ 5.42 $ 5.71 $ 5.76
Class E $ 5.42 $ 5.71 $ 5.76
----------- ----------- ------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of assets and liabilities
AXP Market Advantage Series, Inc.
AXP AXP
International Nasdaq
Equity 100
Jan. 31, 2000 Index Fund Index Fund
Assets
Investments in securities, at value (Note 1)
<S> <C> <C> <C> <C>
(identified cost $20,247,688 and $18,945,006) $21,770,992 $24,111,589
Cash in bank on demand deposit
(including foreign currency holdings of $235,663) 309,943 2,271
Expense receivable from AEFC 8,791 1,540
Capital shares receivable 28,802 86,108
Dividends and accrued interest receivable 13,913 363
Receivable for investment securities sold 527,426 719,231
Other prepaid assets 5,548 --
Total assets 22,665,415 24,921,102
Liabilities
Capital shares payable -- 4,148
Unrealized depreciation on foreign currency contracts held, at value (Notes 1 and 6) 37,522 --
Payable for investment securities purchased 341,084 1,183,544
Accrued investment management services fee 6,904 731
Accrued distribution fee 3,011 221
Accrued transfer agency fee -- 68
Accrued administrative services fee -- 115
Other accrued expenses 17,366 14,880
Total liabilities 405,887 1,203,707
Net assets applicable to outstanding capital stock $22,259,528 $23,717,395
Represented by
Capital stock-- $.01 par value (Note 1) $ 41,081 $ 31,534
Additional paid-in capital 20,539,504 18,289,620
Undistributed (excess of distributions over) net investment income 37,522 --
Accumulated net realized gain (loss) 132,166 229,658
Unrealized appreciation (depreciation) on investments (Notes 5 and 6) 1,509,255 5,166,583
Total-- representing net assets applicable to outstanding capital stock $22,259,528 $23,717,395
Net assets applicable to outstanding shares: Class D $ 6,884,763 $11,043,321
Class E $15,374,765 $12,674,074
Shares outstanding: Class D shares 1,271,158 1,468,827
Class E shares 2,836,948 1,684,565
Net asset value per share of
outstanding capital stock: Class D $ 5.42 $ 7.52
Class E $ 5.42 $ 7.52
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of operations
AXP Market Advantage Series, Inc.
AXP AXP AXP
S&P 500 Mid Cap Total
Index Index Stock Market
For the period from Oct. 25, 1999* to Jan. 31, 2000 Fund Fund Index Fund
Investment income
Income:
<S> <C> <C> <C>
Dividends $ 39,322 $ 40,700 $ 72,378
Interest 2,247 -- --
----- ---- ----
Total income 41,569 40,700 72,378
Expenses (Note 2):
Investment management services fee 8,319 8,233 19,190
Distribution fee--Class D 3,155 2,451 4,872
Transfer agency fee 479 77 98
Administrative services fees and expenses 3,622 3,382 6,935
Compensation of board members -- -- 958
Custodian fees 15,081 2,170 2,170
Printing and postage 2,630 2,713 2,713
Registration fees 67,921 28,030 31,660
Licensing fees 15,081 2,713 2,713
Audit fees 13,000 12,000 12,000
Other 2,849 2,849 2,847
----- ----- -----
Total expenses 132,137 64,618 86,156
Less expenses reimbursed by AEFC (Note 2) (115,440) (47,950) (49,845)
-------- ------- -------
Total net expenses 16,697 16,668 36,311
------ ------ ------
Investment income (loss)-- net 24,872 24,032 36,067
------ ------ ------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on security transactions (Note 3) (10,672) 247,671 47,889
Net change in unrealized appreciation
(depreciation) on investments 591,911 1,032,789 2,215,879
------- --------- ---------
Net gain (loss) on investments 581,239 1,280,460 2,263,768
------- --------- ---------
Net increase (decrease) in net assets resulting
from operations $606,111 $1,304,492 $2,299,835
======== ========== ==========
*When shares became publicly available.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of operations
AXP Market Advantage Series, Inc.
AXP AXP
International Nasdaq
Equity 100
For the period from Oct. 25, 1999* to Jan. 31, 2000 Index Fund Index Fund
Investment income
Income:
<S> <C> <C>
Dividends $ 37,778 $ 2,660
Interest 25,432 2,972
Less foreign taxes withheld (2,170) --
------ ----
Total income 61,040 5,632
Expenses (Note 2):
Investment management services fee 29,704 17,173
Distribution fee--Class D 4,525 4,263
Transfer agency fee 83 787
Administrative services fees and expenses 8,210 2,712
Custodian fees 3,255 2,170
Printing and postage 2,713 2,713
Registration fees 19,969 28,358
Licensing fee 1,356 1,356
Audit fees 13,500 12,000
Other 2,848 2,848
----- -----
Total expenses 86,163 74,380
Less expenses reimbursed by AEFC (Note 2) (43,490) (45,719)
------- -------
Total net expenses 42,673 28,661
------ ------
Investment income (loss)-- net 18,367 (23,029)
------ -------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 35,789 253,802
Financial futures contracts 157,573 (3,912)
Foreign currency transactions (Note 6) (36,228) --
------- ------
Net realized gain (loss) on investments 157,134 249,890
Net change in unrealized appreciation (depreciation) on investments 1,509,255 4,641,157
--------- ---------
Net gain (loss) on investments 1,666,389 4,891,047
--------- ---------
Net increase (decrease) in net assets resulting from operations $1,684,756 $4,868,018
========== ==========
*When shares became publicly available.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP Market Advantage Series, Inc.
AXP AXP AXP
S&P 500 Mid Cap Total
Index Index Stock Market
For the period from Oct. 25, 1999* to Jan. 31, 2000 Fund Fund Index Fund
Operations and distributions
<S> <C> <C> <C>
Investment income (loss)-- net $ 24,872 $ 24,032 $ 36,067
Net realized gain (loss) on security transactions (10,672) 247,671 47,889
Net change in unrealized appreciation
(depreciation) on investments 591,911 1,032,789 2,215,879
------- --------- ---------
Net increase (decrease) in net assets resulting
from operations 606,111 1,304,492 2,299,835
------- --------- ---------
Distributions to shareholders from:
Net investment income
Class D (7,957) (5,860) (10,479)
Class E (15,647) (16,180) (30,026)
Net realized gain
Class D (614) (2,300) --
Class E (1,011) (5,107) --
------ ------ -----
Total distributions (25,229) (29,447) (40,505)
------- ------- -------
Capital share transactions (Note 4)
Proceeds from sales
Class D shares (Note 2) 4,014,584 585,403 623,511
Class E shares 1,871,463 149,059 222,739
Reinvestment of distributions at net asset value
Class D shares 6,839 8,025 10,141
Class E shares 16,658 21,287 30,026
Payments for redemptions
Class D shares (38,105) (11,070) (17,179)
Class E shares (Note 2) (92,637) -- (150)
------- ------ ----
Increase (decrease) in net assets from share transactions 5,778,802 752,704 869,088
--------- ------- -------
Total increase (decrease) in net assets 6,359,684 2,027,749 3,128,418
Net assets at beginning of period (Note 1) 10,143,306 10,144,519 20,771,154
---------- ---------- ----------
Net assets at end of period $16,502,990 $12,172,268 $23,899,572
=========== =========== ===========
Undistributed net investment income $ 5,505 $ 8,455 $ 2,494
----------- ----------- -----------
*When shares became publicly available.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP Market Advantage Series, Inc.
AXP AXP
International Nasdaq
Equity 100
For the period from Oct. 25, 1999* to Jan. 31, 2000 Index Fund Index Fund
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 18,367 $ (23,029)
Net realized gain (loss) on investments 157,134 249,890
Net change in unrealized appreciation (depreciation) on investments 1,509,255 4,641,157
--------- ---------
Net increase (decrease) in net assets resulting from operations 1,684,756 4,868,018
--------- ---------
Distributions to shareholders from:
Net realized gain
Class D (7,690) --
Class E (17,627) --
------- ----
Total distributions (25,317) --
------- ----
Capital share transactions (Note 4)
Proceeds from sales
Class D shares (Note 2) 398,295 6,357,030
Class E shares 212,199 2,173,520
Reinvestment of distributions at net asset value
Class D shares 7,577 --
Class E shares 17,627 --
Payments for redemptions
Class D shares (15,342) (109,117)
Class E shares (Note 2) (22,927) (100,279)
------- --------
Increase (decrease) in net assets from share transactions 597,429 8,321,154
------- ---------
Total increase (decrease) in net assets 2,256,868 13,189,172
Net assets at beginning of period (Note 1) 20,002,660 10,528,223
---------- ----------
Net assets at end of period $22,259,528 $23,717,395
=========== ===========
Undistributed net investment income $ 37,522 $ --
----------- -----------
*When shares became publicly available.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Notes to Financial Statements
AXP Market Advantage Series, Inc.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Each Fund is a series of AXP Market Advantage Series, Inc. and is registered
under the Investment Company Act of 1940 (as amended) as a non-diversified,
open-end management investment company. AXP Market Advantage Series, Inc. has 10
billion authorized shares of capital stock that can be allocated among the
separate series as designated by the board.
Shares of the Funds were offered to the public on Oct. 25, 1999 (when they
became publicly available). Prior to this date, American Express Financial
Corporation (AEFC) purchased the following shares of capital stock, which
represented the initial capital in each Fund at $5.00 per share:
Number of shares
Fund Class D Class E
AXP S&P 500 Index Fund 600,000 1,400,000
AXP Mid Cap Index Fund 600,000 1,400,000
AXP Total Stock Market Index Fund 1,200,000 2,800,000
AXP International Equity Index Fund 1,200,000 2,800,000
AXP Nasdaq 100 Index Fund 600,000 1,400,000
The primary investments of each Fund are as follows:
AXP S&P 500 Index Fund invests in common stocks included in the Standard &
Poor's 500 Composite Stock Price Index (S&P 500).
AXP Mid Cap Index Fund invests in common stocks included in the Standard &
Poor's MidCap 400 Index (S&P MidCap 400).
AXP Total Stock Market Index Fund invests in common stocks included in the
Wilshire 5000 Total Market Index (Wilshire 5000).
AXP International Equity Index Fund invests in common stocks included in the
Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index.
AXP Nasdaq 100 Index Fund invests in common stocks included in the Nasdaq 100
Index.
While the Funds may track its index closely, it is typically unable to match the
performance of the index exactly, primarily due to fund operating expenses and
transaction costs.
Each Fund offers Class D and Class E shares and are sold without a sales charge.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee (class specific expense) differs among classes. Income,
expenses (other than class specific expenses) and realized and unrealized gains
or losses on investments are allocated to each class of shares based upon its
relative net assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sale price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
As part of its indexing strategies, the Funds may buy and sell put and call
options and write covered call options on portfolio securities as well as write
cash-secured put options. The risk in writing a call option is that the Funds
give up the opportunity for profit if the market price of the security
increases. The risk in writing a put option is that the Funds may incur a loss
if the market price of the security decreases and the option is exercised. The
risk in buying an option is that the Funds pay a premium whether or not the
option is exercised. The Funds also have the additional risk of being unable to
enter into a closing transaction if a liquid secondary market does not exist.
The Funds also may write over-the-counter options where completing the
obligation depends upon the credit standing of the other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. Each Fund
will realize a gain or loss when the option transaction expires or closes. When
an option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of the premium received or paid.
Foreign currency translations and foreign currency contracts
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars. Foreign currency amounts related to the
purchase or sale of securities and income and expenses are translated at the
exchange rate on the transaction date. The effect of changes in foreign exchange
rates on realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net realized
gains or losses from foreign currency transactions, if any, may arise from sales
of foreign currency, closed forward contracts, exchange gains or losses realized
between the trade date and settlement date on securities transactions, and other
translation gains or losses on dividends, interest income and foreign
withholding taxes.
The Funds may enter into foreign currency exchange contracts for operational
purposes and to protect against adverse exchange rate fluctuation. The net U.S.
dollar value of foreign currency underlying all contractual commitments held by
the Funds and the resulting unrealized appreciation or depreciation are
determined using foreign currency exchange rates from an independent pricing
service. The Funds are subject to the credit risk that the other party will not
complete its contract obligations.
Futures transactions
As part of its indexing strategies,, the Funds may buy and sell futures
contracts traded on any U.S. or foreign exchange. The Funds also may buy and
write put and call options on these futures contracts. Risks of entering into
futures contracts and related options include the possibility of an illiquid
market and that a change in the value of the contract or option may not
correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, the Funds are required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Funds each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Funds recognize a realized gain or loss when the contract is closed
or expires.
Federal taxes
Each Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required. Each Fund is treated as a separate entity for federal income
tax purposes.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Funds.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income and accumulated net realized
gain (loss) have been increased (decreased), resulting in net reclassification
adjustments to additional paid-in capital by the following:
AXP
AXP AXP AXP Total International AXP
S&P 500 Mid Cap Stock Market Equity Nasdaq 100
Index Fund Index Fund Index Fund Index Fund Index Fund
<S> <C> <C> <C> <C> <C>
Undistributed net investment income $(91) $-- $(240) $16,495 $20,241
Accumulated net realized gain (loss) 91 -- 240 349 (20,241)
Additional paid-in capital reduction (increase) $-- $-- $-- $16,844 $--
Dividends to shareholders
An annual dividend from net investment income, declared and paid at the end of
the calendar year, when available, is reinvested in additional shares of each
Fund at net asset value or payable in cash. Capital gains, when available, are
distributed along with the income dividend.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date and interest income,
including level-yield amortization of premium and discount, is accrued daily.
2. EXPENSES AND SALES CHARGES
Each Fund has agreements with AEFC to manage its portfolio and provide
administrative services. Under an Investment Management Services Agreement, AEFC
determines which securities will be purchased, held or sold. The management fee
is a percentage of each Fund's average daily net assets in reducing percentages
as follows:
Fund Percentage Range
AXP S&P 500 Index Fund 0.24% to 0.21%
AXP Mid Cap Index Fund 0.26% to 0.23%
AXP Total Stock Market Index Fund 0.30% to 0.26%
AXP International Equity Index Fund 0.50% to 0.46%
AXP Nasdaq 100 Index Fund 0.38% to 0.34%
AEFC has a Sub-investment Advisory Agreement with State Street Global Advisors
for AXP International Equity Index Fund.
Under an Administrative Services Agreement, each Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages as follows:
Fund Percentage Range
AXP S&P 500 Index Fund 0.080% to 0.065%
AXP Mid Cap Index Fund 0.080% to 0.065%
AXP Total Stock Market Index Fund 0.110% to 0.090%
AXP International Equity Index Fund 0.100% to 0.080%
AXP Nasdaq 100 Index Fund 0.060% to 0.040%
A minor portion of additional administrative service expenses paid by each Fund
are consultants' fees and fund office expenses. Under this agreement, each Fund
also pays taxes, audit and certain legal fees, registration fees for shares,
compensation of board members, corporate filing fees and any other expenses
properly payable by each Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. Each Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class D $19
o Class E $19
Each Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution, each Fund pays a distribution fee at an annual rate
of 0.25% of the Fund's average daily net assets attributable to Class D shares.
The Advisor and the Transfer Agent have contractually obligated themselves to
waive certain fees and to absorb certain other Fund expenses until Jan. 31,
2001. Under this agreement, total expenses for Class D will not exceed 0.64% for
AXPS&P 500 Index Fund, 0.70% for AXPMid Cap Index Fund, 0.74% for AXPTotal Stock
Market Index Fund, 0.89% for AXPInternational Equity Index Fund, and 0.79% for
AXPNasdaq 100 Index Fund. Total expenses for Class E will not exceed 0.39% for
AXPS&P 500 Index Fund, 0.45% for AXPMid Cap Index Fund, 0.49% for AXPTotal Stock
Market Index Fund, 0.64% for AXPInternational Equity Index Fund, and 0.54% for
AXPNasdaq 100 Index Fund.
3. SECURITIES TRANSACTIONS
For the period from Oct. 25, 1999 to Jan. 31, 2000, cost of purchases and
proceeds from sales (other than short-term obligations) aggregated for each Fund
are as follows:
Fund Purchases Proceeds
AXP S&P 500 Index Fund $10,458,839 $4,900,052
AXP Mid Cap Index Fund 2,674,642 1,871,892
AXP Total Stock Market Index Fund 1,900,583 1,040,969
AXP International Equity Index Fund 19,656,192 791,004
AXP Nasdaq 100 Index Fund 16,723,269 8,631,972
Realized gains and losses are determined on an identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the period from Oct. 25, 1999 to
Jan. 31, 2000 are as follows:
AXP S&P 500 Index Fund
Class D Class E
Sold 725,932 336,139
Issued for reinvested distributions 1,206 2,933
Redeemed (6,903) (16,416)
------ -------
Net increase (decrease) 720,235 322,656
AXP Mid Cap Index Fund
Class D Class E
Sold 101,424 25,880
Issued for reinvested distributions 1,388 3,683
Redeemed (1,892) --
------ ----
Net increase (decrease) 100,920 29,563
AXP Total Stock Market Index Fund
Class D Class E
Sold 107,366 38,120
Issued for reinvested distributions 1,702 5,038
Redeemed (2,899) (25)
------ ---
Net increase (decrease) 106,169 43,133
AXP International Equity Index Fund
Class D Class E
Sold 72,742 38,018
Issued for reinvested distributions 1,341 3,115
Redeemed (2,925) (4,185)
------ ------
Net increase (decrease) 71,158 36,948
AXP Nasdaq 100 Index Fund
Class D Class E
Sold 882,474 298,249
Issued for reinvested distributions -- --
Redeemed (13,647) (13,684)
------- -------
Net increase (decrease) 868,827 284,565
5. STOCK INDEX FUTURES CONTRACTS
Investments in securities as of Jan. 31, 2000, included securities that were
valued and pledged as collateral to cover initial margin deposits. The market
value of this collateral and open futures contracts is as follows:
Open Notional Net
Market purchase market unrealized
value (sale) value gain (loss)
Fund of collateral contracts of futures of futures
<S> <C> <C> <C> <C>
AXP International Equity Index Fund $204,312 33 $1,387,677 $31,999
See "Summary of significant accounting policies."
6. FOREIGN CURRENCY CONTRACTS
As of Jan. 31, 2000, AXP International Equity Index Fund has foreign currency
exchange contracts that obligate it to deliver currencies at specified future
dates. The unrealized appreciation and/or depreciation on these contracts is
included in the accompanying financial statements. See "Summary of significant
accounting policies." The terms of the open contracts are as follows:
Exchange date Currency to Currency to Unrealized Unrealized
be delivered be received appreciation depreciation
April 12, 2000 492,140 507,457 $-- $21,860
U.S. Dollar European Currency
April 12, 2000 44,106 69,294 -- 1,894
U.S. Dollar Australian Dollar
April 12, 2000 354,258 37,580,400 -- 5,742
U.S. Dollar Japanese Yen
April 12, 2000 186,515 115,404 -- 2,484
U.S. Dollar British Pound
April 12, 2000 121,458 1,071,753 -- 5,542
U.S. Dollar Swedish Krona
Total $-- $37,522
7. BANK BORROWINGS
Each Fund has a revolving credit agreement with U.S. Bank, N.A., whereby each
Fund is permitted to have bank borrowings for temporary or emergency purposes to
fund shareholder redemptions. Each Fund must have asset coverage for borrowings
not to exceed the aggregate of 333% of advances equal to or less than five
business days plus 367% of advances over five business days. The agreement,
which enables each Fund to participate with other American Express mutual funds,
permits borrowings up to $200 million, collectively. Interest is charged to each
Fund based on its borrowings at a rate equal to the Federal Funds Rate plus
0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are
payable up to 90 days after such loan is executed. Each Fund also pays a
commitment fee equal to its pro rata share of the amount of the credit facility
at a rate of 0.05% per annum. Each Fund had no borrowings outstanding during the
period ended Jan. 31, 2000.
8. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
are presented on pages 25 and 26 of the prospectus.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
AXP S&P 500 Index Fund
Jan. 31, 2000
(Percentages represent value of investments compared to net assets)
Common stocks (98.6%)
Issuer Shares Value(a)
Aerospace & defense (1.2%)
<S> <C> <C>
Boeing 1,234 $54,682
General Dynamics 265 12,488
Goodrich (BF) 145 3,625
Honeywell Intl 1,046 50,208
Lockheed Martin 522 9,788
Northrop Grumman 91 4,573
Raytheon Cl B 446 10,174
Rockwell Intl 251 12,409
United Technologies 633 33,509
Total 191,456
Airlines (0.2%)
AMR 195(b) 10,493
Delta Air Lines 175 8,105
Southwest Airlines 665 10,598
US Airways Group 94(b) 2,074
Total 31,270
Automotive & related (1.3%)
Cooper Tire & Rubber 100 1,306
Cummins Engine 54 2,066
Dana 217 5,100
Delphi Automotive Systems 745 12,898
Eaton 97 6,929
Ford Motor 1,595 79,351
General Motors 846 68,050
Genuine Parts 234 5,645
Goodyear Tire & Rubber 206 4,893
Johnson Controls 112 6,188
Navistar Intl 83(b) 3,263
PACCAR 103 4,268
Snap-On 77 2,069
TRW 160 7,010
Total 209,036
Banks and savings & loans (4.9%)
AmSouth Bancorporation 516 8,998
Bank of America 2,254 109,178
Bank of New York 973 39,528
Bank One 1,515 45,166
BB&T 458 12,881
Chase Manhattan 1,089 87,596
Comerica 206 9,103
Fifth Third Bancorp 408 27,081
First Union 1,304 43,766
Firstar 1,295 30,918
FleetBoston Financial 1,209 38,008
Golden West Financial 213 6,270
Huntington Bancshares 303 6,533
KeyCorp 590 12,390
Mellon Financial 672 23,058
Morgan (JP) 229 28,124
Natl City 814 17,603
Northern Trust 294 17,750
Old Kent Financial 155 5,008
PNC Bank 389 18,672
Regions Financial 288 6,984
SLM Holding 210 8,177
Southtrust 221 6,727
State Street 211 16,920
Summit Bancorp 230 6,886
SunTrust Banks 423 25,195
Synovus Financial 369 7,011
U.S. Bancorp 961 21,322
Union Planters 186 6,266
Wachovia 268 17,169
Washington Mutual 763 19,361
Wells Fargo 2,169 86,760
Total 816,409
Beverages & tobacco (2.4%)
Anheuser-Busch 615 41,513
Brown-Forman Cl B 90 5,034
Coca-Cola 3,261 187,304
Coca-Cola Enterprises 561 14,165
Coors (Adolph) Cl B 48 2,328
Fortune Brands 216 6,264
PepsiCo 1,922 65,588
Philip Morris 3,124 65,409
UST 225 5,161
Total 392,766
Building materials & construction (0.4%)
Armstrong World Inds 52 1,190
Centex 78 1,716
Fluor 100 3,994
Georgia-Pacific Group 225 9,169
Kaufman & Broad Home 62 1,345
Louisiana-Pacific 140 1,803
Masco 590 11,762
Owens-Corning 72 1,157
Potlatch 38 1,530
Pulte 57 994
Sherwin-Williams 218 3,842
Temple-Inland 73 4,083
Vulcan Materials 132 5,585
Weyerhaeuser 311 17,843
Total 66,013
Chemicals (1.5%)
Air Products & Chemicals 302 8,947
Allied Waste Inds 249(b) 1,603
Dow Chemical 290 33,785
Du Pont (EI) de Nemours 1,379 81,360
Eastman Checmical 103 4,107
Ecolab 171 6,017
Engelhard 166 2,646
FMC 40(b) 2,150
Grace (WR) 94(b) 1,110
Great Lakes Chemical 75 2,484
Hercules 140 2,398
Millipore 59 $2,526
Monsanto 838 29,592
Pall 163 3,005
PPG Inds 229 12,609
Praxair 209 8,478
Rohm & Haas 288 12,168
Sigma-Aldrich 133 4,456
Union Carbide 176 9,856
Waste Management 818 14,315
Total 243,612
Communications equipment & services (4.2%)
ADC Telecommunications 197(b) 12,990
Andrew Corp 108(b) 2,484
Lucent Technologies 4,137 228,569
Motorola 938 128,268
Nortel Networks 1,764(c) 168,683
QUALCOMM 872(b) 110,744
Scientific-Atlanta 103 7,937
Tellabs 532(b) 28,728
Total 688,403
Computers & office equipment (18.1%)
3Com 456(b) 23,142
Adaptec 134(b) 7,018
Adobe Systems 158 8,700
America Online 2,952(b) 168,080
Apple Computer 213(b) 22,099
Autodesk 80 2,445
Automatic Data Processing 826 39,183
BMC Software 319(b) 12,082
Cabletron Systems 238(b) 6,114
Ceridian 190(b) 3,040
Cisco Systems 4,319(b) 472,930
Citrix Systems 119(b) 16,333
Compaq Computer 2,245 61,457
Computer Associates Intl 712 48,906
Computer Sciences 220(b) 20,213
Compuware 472(b) 10,001
Comverse Technology 94(b) 13,477
Dell Computer 3,355(b) 129,377
Electronic Data Systems 622 42,063
EMC 1,344(b) 143,136
Equifax 186 3,999
First Data 554 27,181
Gateway 418(b) 25,576
Hewlett-Packard 1,346 145,705
IKON Office Solutions 196 1,580
Intl Business Machines 2,380 267,006
Lexmark Intl Group Cl A 168(b) 15,834
Microsoft 6,813(b) 666,821
NCR 127(b) 4,890
Network Appliance 198(b) 19,874
Novell 439(b) 14,652
Oracle 3,760(b) 187,824
Parametric Technology 355(b) 7,610
PeopleSoft 354(b) 7,965
Pitney Bowes 351 17,199
Seagate Technology 274(b) 10,977
Silicon Graphics 242(b) 2,344
Solectron 387(b) 28,106
Sun Microsystems 2,063(b) 162,074
Unisys 409(b) 13,037
Yahoo! 348(b) 112,078
Total 2,992,128
Electronics (5.1%)
Advanced Micro Devices 194(b) 7,033
Analog Devices 231(b) 21,599
Applied Materials 500(b) 68,624
Conexant Systems 259(b) 21,886
Corning 358 55,222
Intel 4,411 436,412
KLA-Tencor 237(b) 13,894
LSI Logic 196(b) 16,023
Micron Technology 357(b) 22,201
Molex 206 10,480
Natl Semiconductor 226(b) 11,865
PerkinElmer 60 3,004
Tektronix 62 2,515
Teradyne 226(b) 14,634
Texas Instruments 1,059 114,239
Thomas & Betts 76 2,313
Xilinx 421(b) 19,261
Total 841,205
Energy (4.8%)
Amerada Hess 119 6,329
Anadarko Petroleum 168 5,513
Apache 150 5,475
Ashland 95 3,093
Atlantic Richfield 427 32,879
Burlington Resources 287 9,202
Chevron 867 72,449
Conoco Cl B 827 19,486
Exxon Mobil 4,560 380,760
FirstEnergy 307 6,984
Kerr-McGee 114 6,313
Occidental Petroleum 485 9,639
Phillips Petroleum 334 13,652
Royal Dutch Petroleum 2,831(c) 155,882
Sunoco 119 2,744
Texaco 731 38,652
Tosco 190 4,881
Union Pacific Resources Group 332 3,652
Unocal 320 9,160
USX-Marathon Group 410 10,532
Total 797,277
Energy equipment & services (0.5%)
Baker Hughes 434 10,687
Halliburton 584 21,024
McDermott Intl 78 770
Rowan Companies 109(b) 2,473
Schlumberger 726 44,332
Transocean Sedco Forex 277 8,812
Total 88,098
Financial services (5.1%)
American Express 592 97,570
Associates First Capital Cl A 962 19,240
Bear Stearns Companies 157 6,476
Capital One Financial 260 10,660
Citigroup 4,452 255,713
Countrywide Credit Inds 149 3,874
Fannie Mae 1,354 81,155
Franklin Resources 332 11,848
FREDDIE MAC 918 46,072
H&R Block 129 5,563
Household Intl 621 21,890
Kansas City Southern Inds 145 10,032
Lehman Brothers Holdings 158 11,297
MBNA 1,059 26,740
Merrill Lynch & Co 490 42,508
MGIC Investment 139 6,472
Morgan Stanley, Dean Witter, Discover & Co 1,472 97,520
Paine Webber Group 188 7,226
Paychex 325 14,320
Providian Financial 187 15,778
Schwab (Charles) 1,083 39,056
T.Rowe Price Associates 157 6,103
Total 837,113
Food (1.1%)
Archer-Daniels-Midland 803 9,435
Bestfoods 369 16,052
Campbell Soup 565 17,762
ConAgra 649 13,872
General Mills 401 12,506
Heinz (HJ) 474 17,627
Hershey Foods 182 7,735
Kellogg 535 12,974
Nabisco Group Holdings 430 3,709
Quaker Oats 176 10,450
Ralston-Purina Group 426 11,955
Sara Lee 1,200 22,125
SUPERVALU 184 3,312
Sysco 434 15,434
Wrigley (Wm) Jr 152 11,856
Total 186,804
Furniture & appliances (0.1%)
Black & Decker 114 4,567
Briggs & Stratton 30 1,331
Leggett & Platt 259 4,662
Maytag 111 4,496
Stanley Works 118 2,965
Whirlpool 98 5,708
Total 23,729
Health care (9.3%)
Abbott Laboratories 2,030 66,229
Allergan 173 9,861
ALZA 134(b) 4,782
American Home Products 1,724 81,136
Amgen 1,349(b) 85,914
Bard (CR) 67 2,998
Bausch & Lomb 76 4,712
Baxter Intl 385 24,592
Becton, Dickinson & Co 330 8,642
Biogen 198(b) 17,078
Biomet 148 5,892
Boston Scientific 547(b) 11,350
Bristol-Myers Squibb 2,619 172,854
Guidant 406(b) 21,366
Johnson & Johnson 1,836 158,011
Lilly (Eli) 1,440 96,300
Mallinckrodt 91 2,622
Medtronic 1,578 72,194
Merck & Co 3,086 243,214
PE Corp-PE Biosystems Group 137 20,516
Pfizer 5,111 185,913
Pharmacia & Upjohn 685 32,195
Schering-Plough 1,940 85,360
St. Jude Medical 111(b) 2,754
Warner-Lambert 1,134 107,659
Watson Pharmaceuticals 126(b) 5,079
Total 1,529,223
Health care services (0.6%)
Aetna 197 10,490
Cardinal Health 370 17,690
Columbia/HCA Healthcare 744 20,320
HEALTHSOUTH Rehabilitation 509(b) 2,800
Humana 221(b) 1,768
IMS Health 406 9,110
Manor Care 136(b) 1,811
McKesson HBOC 371 7,629
Quintiles Transnational 151(b) 3,992
Service Corp Intl 359 1,638
Shared Medical Systems 35 1,549
Tenet Healthcare 411(b) 9,350
United Healthcare 224 11,872
Wellpoint Health Networks 84(b) 5,712
Total 105,731
Household products (2.4%)
Alberto-Culver Cl B 73 1,793
Avon Products 319 10,148
Clorox 312 14,898
Colgate-Palmolive 770 45,623
Gillette 1,417 53,315
Intl Flavors/Fragrances 138 4,925
Jostens 44 1,031
Kimberly-Clark 719 44,533
Newell Rubbermaid 372 11,160
Procter & Gamble 1,735 175,017
Tupperware 76 1,240
Unilever 755(c) 34,919
Total 398,602
Industrial equipment & services (0.5%)
Caterpillar 470 19,945
Cooper Inds 124 4,759
Deere & Co 308 13,456
Illinois Tool Works 397 23,224
Ingersoll-Rand 215 10,118
Milacron 48 579
NACCO Inds Cl A 10 508
Parker-Hannifin 147 6,358
Thermo Electron 208(b) 3,601
Timken 81 1,321
Total 83,869
Insurance (2.6%)
AFLAC 351 15,247
Allstate 1,064 24,671
American General 327 20,090
American Intl Group 2,044 212,831
Aon 338 8,746
Chubb 232 13,050
CIGNA 246 17,651
Cincinnati Financial 216 6,210
Conseco 431 6,573
Hartford Financial Services Group 292 11,133
Jefferson-Pilot 138 8,108
Lincoln Natl 258 9,530
Loews 140 7,840
Marsh & McLennan 353 33,181
MBIA 131 6,558
Progressive Corp 96 5,976
SAFECO 171 4,190
St. Paul Companies 300 9,056
Torchmark 173 4,357
UnumProvident 316 8,453
Total 433,451
Leisure time & entertainment (2.4%)
Brunswick 121 2,291
Carnival Cl A 815 36,726
Disney (Walt) 2,723 98,879
Harley-Davidson 200 14,038
Harrah's Entertainment 169(b) 3,369
Hasbro 255 3,825
Mattel 555 5,793
Mirage Resorts 255(b) 3,188
Seagram 573(c) 33,270
Time Warner 1,699 135,814
Viacom Cl B 921(b) 51,000
Total 388,193
Media (2.2%)
American Greetings Cl A 85 1,881
CBS 1,007(b) 58,720
Clear Channel Communications 447(b) 38,610
Comcast Special Cl A 1,146 52,715
Deluxe 96 2,568
Donnelley (RR) & Sons 166 3,642
Dow Jones 118 7,316
Dun & Bradstreet 212 5,340
Gannett 369 25,646
Harcourt General 93 3,720
Interpublic Group of Companies 371 17,066
Knight-Ridder 110 5,864
McGraw-Hill Companies 258 14,464
MediaOne Group 808(b) 64,235
Meredith 68 2,380
New York Times Cl A 226 10,325
Omnicom Group 235 22,017
Times Mirror Cl A 79 4,676
Tribune 313 13,205
Young & Rubicam 91 4,903
Total 359,293
Metals (0.7%)
Alcan Aluminium 289(c) 11,289
Alcoa 484 33,729
Allegheny Technologies 123 2,568
Avery Dennison 148 10,027
Barrick Gold 520(c) 8,515
Bethlehem Steel 173(b) 1,179
Freeport-McMoRan Copper & Gold Cl B 215(b) 3,749
Homestake Mining 343 2,272
Inco 253(b,c) 4,807
Newmont Mining 221 4,503
Nucor 115 5,721
Phelps Dodge 106 6,161
Placer Dome 429(c) 3,861
Reynolds Metals 83 5,540
USX-U.S. Steel Group 116 2,886
Worthington Inds 117 1,689
Total 108,496
Miscellaneous (4.7%)
Standard & Poor's Depositary Receipts 5,592 780,084
Multi-industry conglomerates (5.2%)
Cendant 939(b) 18,956
Crane 86 1,682
Danaher 187 8,064
Dover 268 10,804
Eastman Kodak 417 25,802
Emerson Electric 574 31,606
General Electric 4,332 577,780
Grainger (WW) 123 5,896
ITT Inds 116 3,669
Minnesota Mining & Mfg 530 49,621
Natl Service Inds 53 1,318
Polaroid 58 1,378
Textron 196 11,699
Tyco Intl 2,230(c) 95,333
Xerox 877 18,307
Total 861,915
Paper & packaging (0.5%)
Ball 39 1,419
Bemis 69 2,178
Boise Cascade 75 2,653
Champion Intl 127 7,429
Crown Cork & Seal 160 3,250
Fort James 285 7,623
Intl Paper 547 26,050
Mead 135 5,029
Owens-Illinois 198(b) 3,626
Pactiv 226(b) 2,091
Sealed Air 110(b) 6,174
Westvaco 132 3,622
Willamette Inds 147 6,027
Total 77,171
Restaurants & lodging (0.6%)
Darden Restaurants 173 2,746
Hilton Hotels 486 4,101
Marriott Intl Cl A 328 10,189
McDonald's 1,788 66,491
Tricorn Global Restaurants 202(b) 5,782
Wendy's Intl 157 2,954
Total 92,263
Retail (5.6%)
Albertson's 560 17,150
AutoZone 190(b) 4,988
Bed Bath & Beyond 184(b) 5,003
Best Buy 270(b) 12,893
Circuit City Stores-Circuit City Group 268 10,318
Consolidated Stores 146(b) 2,081
Costco Wholesale 586(b) 28,677
CVS 518 18,098
Dillard's Cl A 141 2,705
Dollar General 351 7,459
Federated Dept Stores 277(b) 11,530
Gap 1,131 50,542
Great Atlantic & Pacific Tea 50 1,381
Home Depot 3,040 172,140
K mart 651(b) 5,452
Kohl's 215(b) 15,077
Kroger 1,099(b) 19,095
Limited 283 8,685
Longs Drug Stores 51 1,097
Lowe's Companies 505 22,536
May Dept Stores 441 13,726
Nordstrom 182 4,004
Office Depot 434(b) 4,367
Penney (JC) 343 6,731
Pep Boys - Manny, Moe & Jack 69 500
Rite Aid 341 2,408
Safeway 672(b) 25,662
Sears, Roebuck 498 15,407
Staples 613 14,597
Tandy 255 12,463
Target 582(b) 38,448
TJX Companies 409 6,672
Toys "R" Us 323(b) 3,331
Wal-Mart Stores 5,875 321,655
Walgreen 1,325 36,603
Winn-Dixie Stores 196 3,969
Total 927,450
Textiles & apparel (0.2%)
Liz Claiborne 78 2,637
Nike Cl B 370 16,835
Reebok Intl 74(b) 546
Russell 43 642
Springs Inds Cl A 23 837
VF 155 4,020
Total 25,517
Transportation (0.4%)
Burlington Northern Santa Fe 603 14,510
CSX 288 8,424
FedEx 395(b) 15,627
Norfolk Southern 502 8,534
Ryder System 84 1,853
Union Pacific 328 13,120
Total 62,068
Utilities -- electric (1.7%)
AES 273(b) 21,874
Ameren 181 5,894
American Electric Power 256 8,576
Carolina Power & Light 210 6,773
Central & South West 280 5,653
Cinergy 209 5,199
CMS Energy 152 4,560
Consolidated Edison 291 9,512
Constellation Energy Group 197 5,935
Dominion Resources 320 13,360
DTE Energy 191 6,637
Duke Energy 483 27,892
Edison Intl 458 13,282
Entergy 325 8,105
Florida Progress 129 5,466
FPL Group 236 9,956
GPU 162 4,698
New Century Energies 152 4,399
Niagara Mohawk Holdings 247(b) 3,103
Northern States Power 204 3,927
PG&E 506 11,100
PECO Energy 245 10,198
Pinnacle West Capital 111 3,427
PP & L Resources 189 4,382
Public Service Enterprise Group 288 9,900
Reliant Energy 390 8,897
Sempra Energy 317(b) 5,884
Southern Co 889 22,781
Texas Utilities 364 12,877
Unicom 287 11,229
Total 275,476
Utilities -- gas (0.7%)
Coastal 282 10,399
Columbia Energy Group 107 6,955
Eastern Enterprises 35 2,002
El Paso Energy 301 9,707
Enron 945 63,727
NICOR 62 2,124
ONEOK 41 1,071
Peoples Energy 46 1,438
Williams Companies 574 22,243
Total 119,666
Utilities -- telephone (7.5%)
ALLTEL 415 27,701
AT&T 4,219 222,552
Bell Atlantic 2,050 126,972
BellSouth 2,486 116,997
CenturyTel 184 7,038
Global Crossing 1,002(b,c) 50,852
GTE 1,283 94,060
MCI WorldCom 3,748(b) 172,197
Nextel Communications Cl A 480(b) 51,060
SBC Communications 4,504 194,235
Sprint 1,151 74,455
Sprint PCS 569(b) 62,626
U S WEST Communications Group 668 44,422
Total 1,245,167
Total common stocks
(Cost: $15,547,984) $16,278,954
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term security (3.0%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
Commercial paper
General Electric Capital
<S> <C> <C> <C> <C> <C>
02-01-00 5.81% $500,000 $499,919
Total short-term security
(Cost: $500,000) $499,919
Total investments in securities
(Cost: $16,047,984)(d) $16,778,873
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of Jan. 31, 2000, the
value of foreign securities represented 3.44% of net assets.
(d) At Jan. 31, 2000, the cost of securities for federal income tax purposes was
$16,049,653 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $1,359,402
Unrealized depreciation (630,182)
--------
Net unrealized appreciation $729,220
<PAGE>
<TABLE>
<CAPTION>
AXP Mid Cap Index Fund
Jan. 31, 2000
(Percentages represent value of investments compared to net assets)
Common stocks (100.4%)
Issuer Shares Value(a)
Aerospace & defense (0.7%)
<S> <C> <C>
Cordant Technologies 469 $15,506
L-3 Communications Holdings 418(b) 16,825
Litton Inds 581(b) 24,655
Newport News Shipbuilding 420 10,605
Precision Castparts 313 8,021
Sequa Cl A 132(b) 5,792
Total 81,404
Airlines (0.1%)
Alaska Air Group 337(b) 10,742
Automotive & related (1.0%)
Arvin inds 330 7,652
Bandag 280 6,668
Borg-Warner Automotive 346 11,634
Federal-Mogul 943 14,263
Lear 855(b) 23,993
Meritor Automotive 885 14,824
SPX 397 29,377
Superior Inds Intl 343 9,240
Total 117,651
Banks and savings & loans (5.9%)
Associated Banc-Corp 817 24,714
Astoria Financial 694 20,213
CCB Financial 517 22,490
Charter One Financial 2,708 52,636
City Natl 579 20,193
Compass Bancshares 1,450 28,728
Dime Bancorp 1,414 19,973
First Security 2,501 64,712
First Tennessee Natl 1,664 43,472
First Virginia Banks 634 24,013
FirstMerit 1,146 21,273
GreenPoint Financial 1,376 27,262
Hibernia Cl A 2,051 21,536
Keystone Financial 621 11,372
Marshall & Ilsley 1,360 69,699
Mercantile Bankshares 879 25,601
Natl Commerce Bancorporation 1,382 28,763
North Fork Bancorporation 1,664 28,288
Pacific Century Financial 1,027 17,652
Provident Financial Group 563 17,594
Sovereign Bancorp 2,804 19,190
TCF Financial 1,058 24,268
Webster Financial 581 13,508
Westamerica Bancorporation 479 12,095
Zions Bancorp 1,092 64,564
Total 723,809
Beverages & tobacco (0.4%)
RJ Reynolds Tobacco Holdings 1,400 24,062
Universal 395 8,073
Whitman 1,801 22,625
Total 54,760
Building materials & construction (1.6%)
Alexander & Baldwin 554 11,184
American Financial Group 745 15,924
American Standard 902(b) 34,051
Carlisle Companies 386 12,473
Clayton Homes 1,786 15,181
Georgia-Pacific (Timber Group) 1,061 23,010
Granite Construction 348 6,938
Martin Marietta Materials 598 25,116
Southdown 459 22,979
USG 631 23,741
Total 190,597
Chemicals (2.0%)
Airgas 906(b) 7,022
Albemarle 602 10,874
Cabot 846 20,303
CK Witco 1,520 18,144
Cytec Inds 538(b) 13,585
Dexter 295 10,970
Ethyl 1,069 4,076
Ferro 453 8,834
Fuller (HB) 179 11,635
Georgia Gulf 396 10,841
Hanna (MA) 626 7,160
IMC Global 1,466 24,005
Lubrizol 699 20,707
Lyondell Petrochemical 1,504 16,262
NCH 69 3,002
Olin 579 10,133
RPM/Ohio 1,378 14,125
Schulman (A) 398 5,696
Solutia 1,405 19,318
Wellman 434 7,541
Total 244,233
Commercial finance (0.2%)
Finova Group 783 25,301
Communications equipment & services (0.5%)
Adtran 504(b) 32,634
Polycom 420(b) 25,358
Total 57,992
Computers & office equipment (16.2%)
Acxiom 1,097(b) 27,802
Affiliated Computer Services Cl A 630(b) 25,043
Cadence Design Systems 3,108(b) 64,103
Cambridge Technology Partners 771(b) 15,468
CheckFree Holdings 699(b) 41,241
Comdisco 1,954 65,215
Concord EFS 2,625(b) 53,320
DST Systems 809(b) 50,259
Electronic Arts 807(b) 65,972
Fiserv 1,565(b) 53,112
Informix 2,570(b) 32,125
Intuit 2,494(b) 150,419
Keane 917(b) 24,759
Legato Systems 1,085(b) 27,328
Mentor Graphics 819(b) 11,108
Navigant Consulting 531(b) 5,642
Network Associates 1,776(b) 46,065
NOVA 938(b) 28,257
Policy Management Systems 455(b) 7,195
Quantum-DLT & Storage Systems 2,104(b) 20,251
Rational Software 1,114(b) 57,928
Reynolds & Reynolds Cl A 989 21,882
Sanmina 744(b) 79,050
Siebel Systems 2,461(b) 225,643
Standard Register 361 5,596
Sterling Commerce 1,127(b) 31,626
Sterling Software 1,075(b) 29,831
Storage Technology 1,283(b) 19,486
Structural Dynamics Research 459(b) 5,049
SunGard Data Systems 1,637(b) 47,882
Sybase 1,041(b) 24,789
Sykes Enterprises 541(b) 14,979
Symantec 743(b) 37,196
Synopsys 904(b) 41,754
Tech Data 664(b) 14,795
Transaction Systems Architects Cl A 416(b) 8,944
Veritas Software 3,309(b) 482,700
Wallace Computer Services 536 5,863
Total 1,969,677
Electronics (12.5%)
Altera 2,548(b) 167,531
American Power Conversion 2,462(b) 67,936
Arrow Electronics 1,228(b) 25,788
Atmel 2,574(b) 79,955
Avnet 535 28,723
Cirrus Logic 839(b) 11,484
Cypress Semiconductor 1,395(b) 46,733
Harris 1,015 29,435
Integrated Device Technology 1,163(b) 33,146
Jabil Circuit 1,120(b) 70,840
Linear Technology 1,970 186,533
MagneTek 307(b) 2,744
Maxim Integrated Products 3,490(b) 174,935
Microchip Technology 650(b) 40,869
Novellus Systems 1,497(b) 73,540
QLogic 467(b) 71,422
Sawtek 540(b) 34,155
SCI Systems 920(b) 66,240
Sensormatic Electronics 968 17,606
Symbol Technologies 1,131 67,507
TriQuint Semiconductor 236(b) 36,056
Vishay Intertechnology 1,084(b) 40,379
Vitesse Semiconductor 1,958(b) 85,173
Waters 794(b) 58,657
Total 1,517,387
Energy (1.3%)
Devon Energy 1,096 38,497
Indiana Energy 381 5,953
Murphy Oil 576 33,048
Noble Affiliates 729 14,626
Pennzoil-Quaker State 997 11,403
Santa Fe Snyder 2,354(b) 17,214
Ultramar Diamond Shamrock 1,109 24,259
Valero Energy 711 16,131
Total 161,131
Energy equipment & services (3.1%)
BJ Services 904(b) 38,759
ENSCO Intl 1,752 40,077
Global Marine 2,232(b) 39,758
Hanover Compressor 366 14,503
Helmerich & Payne 632 14,852
Jacobs Engineering Group 332(b) 9,794
Nabors Inds 1,772(b) 52,495
Noble Drilling 1,677(b) 49,157
Pioneer Natural Resources 1,284(b) 10,994
Smith Intl 624(b) 32,019
Tidewater 712 20,248
Varco Intl 833(b) 8,434
Weatherford Intl 1,380(b) 51,836
Total 382,926
Financial services (1.7%)
Allmerica Financial 692 32,351
E*TRADE Group 3,572(b) 75,235
Edwards (AG) 1,175 38,922
Investment Technology Group 395 14,023
Legg Mason 727 26,808
Wilmington Trust 415 20,724
Total 208,063
Food (2.0%)
Dean Foods 499 16,935
Dole Food 712 10,903
Dreyer's Grand Ice Cream 353 5,339
Flowers Inds 1,283 15,637
Hormel Foods 924 37,537
IBP 1,181 17,715
Interstate Bakeries 898 13,751
Intl Multifoods 239 3,032
Lance 383 3,998
McCormick 903 23,873
Smucker (JM) Cl A 373 6,528
Suiza Foods 398(b) 16,368
Tyson Foods Cl A 2,930 40,103
U.S. Foodservice 1,296(b) 23,409
Universal Foods 643 11,815
Vlasic Foods Intl 582(b) 2,546
Total 249,489
Furniture & appliances (0.6%)
Furniture Brands Intl 630(b) 10,710
Heilig-Meyers 766 2,202
HON Inds 770 14,823
Miller (Herman) 1,019 22,226
Mohawk Inds 776(b) 18,188
Total 68,149
Health care (7.3%)
Acuson 343(b) 4,631
Beckman Coulter 371 19,408
Carter-Wallace 576 10,980
Chiron 2,319(b) 102,905
DENTSPLY Intl 677 16,756
Forest Laboratories 1,066(b) 71,955
Genzyme (General Division) 1,074(b) 55,848
Gilead Sciences 561(b) 26,262
ICN Pharmaceuticals 1,002 25,175
IVAX 1,346(b) 44,755
MedImmune 861(b) 125,705
Millennium Pharmaceuticals 567(b) 106,276
MiniMed 398(b) 30,696
Mylan Laboratories 1,649 43,905
Sepracor 422(b) 59,080
STERIS 862(b) 9,051
Stryker 1,237 77,931
Sybron Intl 1,324(b) 30,535
VISX 821(b) 23,296
Total 885,150
Health care services (2.4%)
Apria Healthcare Group 666(b) 13,320
Bergen Brunswig Cl A 1,718 11,274
Beverly Enterprises 1,312(b) 4,838
Covance 753(b) 10,401
Express Scripts Cl A 492(b) 25,430
First Health Group 626(b) 18,663
Foundation Health Systems Cl A 1,565(b) 16,041
Health Management Associates Cl A 3,233(b) 45,061
Hillenbrand Inds 835 28,390
Lincare Holdings 689(b) 24,416
Omnicare 1,168 12,337
Oxford Health Plans 1,041(b) 14,769
PacifiCare Health Systems 556(b) 23,526
PSS World Medical 909(b) 5,738
Quorum Health Group 901(b) 8,644
Stewart Enterprises Cl A 1,386 7,970
Total Renal Care Holdings 1,039(b) 4,805
Trigon Healthcare 501(b) 15,249
Total 290,872
Household products (0.5%)
Church & Dwight 498 10,987
Dial 1,345 21,604
Viad 1,212 31,891
Total 64,482
Industrial equipment & services (2.2%)
AGCO 762 8,858
Albany Intl Cl A 388(b) 5,747
AMETEK 415 9,130
Blyth Inds 620(b) 14,531
Cintas 1,417 66,377
Donaldson 591 12,189
Fastenal 485 21,218
Flowserve 479 7,335
Harsco 512 13,792
Kaydon 392 10,609
Kennametal 383 10,078
Minerals Technologies 269 12,139
Modine Mfg 378 9,356
Nordson 211 9,073
Ogden 630 7,127
Tecumseh Products Cl A 254 11,589
Teleflex 485 15,398
Trinity Inds 503 11,758
UCAR Intl 577(b) 13,019
Total 269,323
Insurance (1.8%)
Ambac Financial Group 892 43,652
Everest Reinsurance Holdings 599 15,087
Horace Mann Educators 525 9,811
HSB Group 370 10,198
Ohio Casualty 766 9,671
Old Republic Intl 1,611 19,533
PMI Group 570 23,513
Protective Life 826 22,973
ReliaStar Financial 1,133 33,636
Unitrin 923 33,228
Total 221,302
Leisure time & entertainment (1.0%)
Callaway Golf 971 12,380
GTECH Holdings 446(b) 9,924
Intl Game Technology 1,010(b) 19,884
Intl Speedway Cl A 681 34,305
Mandalay Resort Group 1,156(b) 17,846
Premier Parks 1,000 28,063
Total 122,402
Media (4.4%)
Banta 339 6,441
Belo (AH) Cl A 1,515 24,051
Chris-Craft Inds 430(b) 32,680
Gartner Group Cl B 1,127(b) 15,355
Harte-Hanks 876 20,860
Hispanic Broadcasting 693(b) 72,028
Houghton Mifflin 397 16,327
Lee Enterprises 568 15,088
Media General Cl A 340 17,701
Reader's Digest Assn Cl A 1,358 51,265
Scholastic 212(b) 13,674
Univision Communications Cl A 1,302(b) 139,476
Washington Post Cl B 120 66,000
Westwood One 708(b) 43,100
Total 534,046
Metals (0.4%)
AK Steel Holdings 1,316 13,324
Carpenter Technology 280 6,720
Cleveland-Cliffs 143 3,995
MAXXAM 89(b) 3,121
Oregon Steel Mills 330 1,753
Pittston Brink's Group 651 12,695
Ryerson Tull 319 6,081
Total 47,689
Miscellaneous (9.1%)
Convergys 1,949(b) 57,252
Federal Signal 591 9,271
Rollins 388 6,014
S&P Mid-Cap 400 Depositary Receipts 12,964 1,029,828
Total 1,102,365
Multi-industry conglomerates (2.6%)
ACNielsen 743(b) 15,232
Apollo Group Cl A 989(b) 21,387
DeVry 888(b) 16,373
Diebold 883 19,592
Hubbell Cl B 826 21,423
Imation 467(b) 14,127
Kelly Services Cl A 459 11,590
Lancaster Colony 510 16,193
Manpower 968 34,545
Mark IV Inds 596 12,404
Modis Professional Services 1,228(b) 21,337
NCO Group 324(b) 7,472
Olsten 1,041 10,670
Pentair 617 20,670
Robert Half Intl 1,144(b) 44,186
Ruddick 594 7,982
Stewart & Stevenson Services 358 3,893
Sylvan Learning Systems 650(b) 8,816
YORK Intl 497 11,959
Total 319,851
Paper & packaging (1.1%)
Bowater 660 34,113
Chesapeake 223 5,812
Consolidated Papers 1,158 31,990
Glatfelter (PH) 540 6,649
Longview Fibre 661 9,461
Rayonier 350 15,050
Sonoco Products 1,305 26,100
Wausau-Mosinee Paper 656 6,478
Total 135,653
Restaurants & lodging (1.6%)
Bob Evans Farms 507 8,049
Brinker Intl 836(b) 21,109
Buffets 539(b) 5,019
CBRL Group 748 6,919
Lone Star Steakhouse & Saloon 423(b) 3,807
Outback Steakhouse 957(b) 23,686
Papa John's Intl 388(b) 9,652
Park Place Entertainment 3,892(b) 40,866
Starbucks 2,325(b) 74,399
Total 193,506
Retail (3.8%)
American Eagle Outfitters 595(b) 21,606
Barnes & Noble 888(b) 17,871
BJ's Wholesale Club 940(b) 32,900
Borders Group 993(b) 13,654
CDW Computer Centers 551(b) 36,039
Claire's Stores 653 12,244
CompUSA 1,175(b) 11,309
Dollar Tree Stores 791(b) 34,853
Family Dollar Stores 2,213 35,546
Hannaford Bros 539 37,797
Lands' End 385(b) 13,258
Neiman Marcus Group Cl A 627(b) 15,322
OfficeMax 1,451(b) 9,432
Payless ShoeSource 396(b) 16,137
Perrigo 938(b) 8,061
Ross Stores 1,154 14,714
Saks 1,854(b) 25,724
Sotheby's Holdings Cl A 752 15,416
Tiffany 921 68,155
Williams-Sonoma 716(b) 22,688
Total 462,726
Textiles & apparel (0.9%)
Abercrombie & Fitch 1,315(b) 28,108
Burlington Inds 677(b) 2,116
Jones Apparel Group 1,563(b) 34,386
Shaw Inds 1,707 23,151
Unifi 755 8,352
Warnaco Cl A 711 7,421
WestPoint Stevens 681 11,194
Total 114,728
Transportation (0.7%)
Airborne Freight 622 12,051
Arnold Inds 318 4,293
CNF Transportation 619 18,532
GATX 627 18,026
Hunt (JB) Transport Services 456 5,757
Overseas Shipbuilding Group 429 6,381
Swift Transportation 823(b) 10,493
Wisconsin Central Transportation 656(b) 8,651
Total 84,184
Utilities -- electric (7.6%)
Allegheny Energy 1,409 38,659
Alliant Energy 1,004 29,932
American Water Works 1,237 29,997
Black Hills Corp 272 6,511
Calpine 803(b) 58,718
Cleco 288 9,684
CMP Group 415 11,490
Conectiv 1,187 20,698
DPL 2,024 38,836
DQE 961 44,807
Energy East 1,460 32,941
Hawaiian Electric Inds 412 12,412
Idacorp 481 16,144
Illinova 895 39,156
IPALCO Enterprises 1,097 21,323
Kansas City Power & Light 792 19,256
LG&E Energy 1,661 28,237
MidAmerican Energy Holdings 764(b) 26,119
Minnesota Power 936 15,737
Montana Power 1,406 56,942
New England Electric System 754 39,868
NiSource 1,601 29,418
Northeast Utilities 1,684 34,522
NSTAR 767 32,166
OGE Energy 996 20,231
Potomac Electric Power 1,512 36,477
Public Service Co of New Mexico 522 8,287
Puget Sound Energy 1,083 24,368
SCANA 1,321 35,915
Sierra Pacific Resources 1,000 16,000
Teco Energy 1,652 32,421
UtiliCorp United 1,192 23,319
Wisconsin Energy 1,500 29,625
Total 920,216
Utilities -- gas (1.6%)
AGL Resources 728 12,467
KeySpan 1,708 40,031
Kinder Morgan 1,438 37,837
MCN 1,097 28,248
Natl Fuel Gas 496 22,103
Ocean Energy 2,133(b) 19,064
Questar 1,059 16,216
Washington Gas Light 595 14,949
Total 190,915
Utilities -- telephone (1.6%)
BroadWing 2,760(b) 104,880
COMSAT 675 11,559
Telephone & Data Systems 789 82,056
Total 198,495
Total common stocks
(Cost: $11,050,355) $12,221,216
Total investments in securities
(Cost: $11,050,355)(c) $12,221,216
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) At Jan. 31, 2000, the cost of securities for federal income tax purposes was
$11,053,827 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $1,921,151
Unrealized depreciation (753,762)
Net unrealized appreciation $1,167,389
<PAGE>
<TABLE>
<CAPTION>
AXP Total Stock Market Index Fund
Jan. 31, 2000
(Percentages represent value of investments compared to net assets)
Common stocks (99.9%)
Issuer Shares Value(a)
Aerospace & defense (1.2%)
<S> <C> <C>
AAR 61 $1,079
Alliant Techsystems 32(b) 2,076
Boeing 1,493 66,158
Cordant Technologies 73 2,414
General Dynamics 310 14,609
General Motors Cl H 209 23,513
Goodrich (BF) 171 4,275
Honeywell Intl 1,226 58,847
Howmet Intl 162(b) 2,977
L-3 Communications Holdings 178(b) 7,165
Litton Inds 71(b) 3,013
Lockheed Martin 614 11,513
Newport News Shipbuilding 67 1,692
Northrop Grumman 108 5,427
Precision Castparts 66 1,691
Raytheon Cl B 525 11,977
Rockwell Intl 297 14,683
Titan 121(b) 4,749
United Technologies 749 39,649
Total 277,507
Airlines (0.2%)
Air Express Intl 79 2,577
Alaska Air Group 52(b) 1,658
America West Holdings Cl B 110(b) 1,966
AMR 234(b) 12,592
Continental Airlines Cl B 113(b) 3,574
Delta Air Lines 218 10,096
Northwest Airlines Cl A 131(b) 2,645
SkyWest 93 2,592
Southwest Airlines 784 12,495
UAL 82(b) 4,684
US Airways Group 111(b) 2,449
Total 57,328
Automotive & related (1.2%)
American Axle & Mfg Holdings 144(b) 2,268
Arvin inds 70 1,623
Avis Rent A Car 115(b) 2,444
Bandag 70 1,667
Borg-Warner Automotive 49 1,648
Central Parking 73 1,095
Cooper Tire & Rubber 118 1,541
CSK Auto 102(b) 1,192
Cummins Engine 65 2,486
Dana 258 6,063
Delphi Automotive Systems 878 15,200
Detroit Diesel 106 1,670
DollarThrifty Automotive Group 100(b) 1,981
Eaton 112 8,001
Federal-Mogul 185 2,798
Ford Motor 1,881 93,580
GenCorp 165 1,341
General Motors 1,002 80,598
Gentex 114(b) 3,420
Genuine Parts 278 6,707
Goodyear Tire & Rubber 243 5,771
Hayes Lemmerz Intl 86(b) 1,720
Hertz 63 2,788
Johnson Controls 133 7,348
Lear 104(b) 2,919
MascoTech 130 1,617
Meritor Automotive 264 4,422
Navistar Intl 103(b) 4,049
O'Reilly Automotive 96(b) 1,260
PACCAR 122 5,055
Smith (AO) 70 1,378
Snap-On 102 2,741
SPX 48(b) 3,552
Superior Inds Intl 72 1,940
Tower Automotive 114(b) 1,639
TRW 188 8,237
United Rentals 122(b) 2,333
Total 296,092
Banks and savings & loans (5.2%)
Allied Capital 99 1,832
AMCORE Financial 92 1,875
AmSouth Bancorporation 612 10,672
Anchor Bancorp Wisconsin 122 1,678
Area Bancshares 76 1,720
Associated Banc-Corp 98 2,965
Astoria Financial 85 2,476
Banco Santander-Puerto Rico 130(c) 2,093
Bancorp South 117 1,799
BancWest 114 1,838
Bank of America 2,686 130,102
Bank of New York 1,143 46,433
Bank One 1,823 54,347
Bank United Cl A 60 1,556
Banknorth Group 67 1,767
BB&T 629 17,691
Capitol Federal Financial 203 1,960
Carolina First 97 1,576
CCB Financial 62 2,697
Centura Banks 44 1,785
Charter One Financial 332 6,453
Chase Manhattan 1,294 104,085
Chittenden 68 1,925
Citizens Banking 147 2,848
City Natl 87 3,034
Colonial BancGroup 184 1,748
Comerica 243 10,738
Commerce Bancorp 50 1,855
Commerce Bancshares 97 2,986
Commercial Federal 103 1,494
Community First Bankshares 115 1,588
Compass Bancshares 177 3,507
CompuCredit 107(b) 3,745
CORUS Bankshares 74 1,836
Cullen/Frost Bankers 83 2,065
CVB Financial 80 1,880
Dime Bancorp 176 2,486
Downey Financial 94 1,810
E-Loan 102(b) 1,390
F&M Natl 74 1,767
F.B.N. 78 1,716
Fifth Third Bancorp 469 31,130
First Citizens BancShares Cl A 27 1,644
First Commonwealth Financial 146 1,451
First Finanical Bancorp 96 1,764
First Midwest Bankcorp 76 1,807
First Security 304 7,866
First Source 69 1,380
First Tennessee Natl 203 5,303
First Union 1,487 49,906
First United Bancshares 41 472
First Virginia Banks 78 2,954
Firstar 1,531 36,552
Firstbank 96 1,740
FirstMerit 141 2,617
FleetBoston Financial 1,433 45,049
Frontier Financial 85 1,727
Fulton Financial 107 1,752
Golden State Bancorp 206(b) 2,910
Golden West Financial 258 7,595
GreenPoint Financial 170 3,368
Hancock Holding 51 1,964
Hibernia Cl A 249 2,615
Hudson City Bancorp 149 2,207
Hudson United Bancorp 72 1,683
Huntington Bancshares 358 7,719
Imperial Bancorp 98(b) 2,634
Independence Community Bank 169 1,944
Intl Bancshares 44 1,782
Investors Financial Services 52 1,989
Irwin Financial 103 1,803
JSB Financial 36 1,836
KeyCorp 698 14,658
Keystone Financial 86 1,575
M&T Bank 12 4,932
MAF Bancorp 95 1,799
Marshall & Ilsley 160 8,200
Mellon Financial 799 27,416
Mercantile Bankshares 108 3,146
Morgan (JP) 273 33,527
Natl Bancorp of Alaska 78 2,257
Natl City 961 20,782
Natl City Bancshares 78 1,706
Natl Commerce Bancorporation 164 3,413
Natl Penn Bancshares 80 1,620
Net.B@nk 94(b) 1,439
NextCard 74(b) 2,562
North Fork Bancorporation 212 3,604
Northern Trust 346 20,890
Old Kent Financial 185 5,978
Old Natl Bancorp 76 2,051
One Valley Bancorp 57 1,439
Pacific Capital Bancorp 60 1,774
Pacific Century Financial 125 2,148
Park Natl 21 2,019
People's Bank 99 2,048
Peoples Heritage Financial Group 163 2,394
PNC Bank 473 22,704
Popular 211(c) 5,275
Provident Bankshares 96 1,452
Provident Financial Group 68 2,125
Queens County Bancorp 73 1,665
Regions Financial 348 8,439
Republic Bancorp 179 1,902
Republic Security Financial 237 1,778
Richmond County Financial 109 1,928
Riggs Natl 126 1,268
Roslyn Bancorp 120 2,025
S&T Bancorp 87 1,843
Silicon Valley Bancshares 84(b) 4,683
Sky Financial Group 104 1,866
SLM Holding 250 9,734
Southtrust 260 7,914
Southwest Bancorp of Texas 122(b) 2,082
Sovereign Bancorp 833 5,701
State Street 251 20,127
Staten Island Bancorp 105 1,785
Summit Bancorp 275 8,233
SunTrust Banks 500 29,781
Susquehanna Bancshares 129 1,879
Synovus Financial 422 8,018
TCF Financial 130 2,982
Triangle Bancorp 99 1,788
Trust Company of New Jersey 90 1,789
TrustCo Bank NY 136 1,641
Trustmark 112 2,023
U.S. Bancorp 1,200 26,625
U.S. Trust 29 3,444
UMB Financial 53 1,779
Union Planters 222 7,479
UnionBanCal 256 9,104
United Bankshares 83 1,753
United Community Financial 134 921
Valley Natl Bancorp 293 7,288
W Holding 142(c) 1,411
Wachovia 314 20,116
Walter Inds 153 1,339
Washington Federal 89 1,491
Washington Mutual 900 22,838
Webster Financial 78 1,814
Wells Fargo 2,564 102,559
Westamerica Bancorporation 65 1,641
Westcorp 128 1,464
WFS Financial 98(b) 1,568
Whitney Holding 54 1,769
Zions Bancorp 123 7,272
Total 1,248,463
Beverages & tobacco (2.0%)
Anheuser-Busch 727 49,073
Beringer Wine Estates Holdings Cl B 54(b) 2,376
Brooke Group 42 680
Brown-Forman Cl B 107 5,985
Canandaigua Wine Cl A 35(b) 1,816
Coca-Cola 3,839 220,502
Coca-Cola Bottling 37 1,878
Coca-Cola Enterprises 661 16,690
Coors (Adolph) Cl B 57 2,765
Fortune Brands 259 7,511
Pepsi Bottling Group 241 4,986
PepsiCo 2,274 77,599
Philip Morris 3,716 77,803
RJ Reynolds Tobacco Holdings 169 2,905
Universal 82 1,676
UST 271 6,216
Whitman 220 2,764
Total 483,225
Building materials & construction (0.7%)
Alexander & Baldwin 84 1,696
American Financial Group 93 1,988
American Standard 110(b) 4,153
Armstrong World Inds 88 2,013
Carlisle Companies 54 1,745
Centex 115 2,530
Centex Construction Products 53 1,716
CIRCOR Intl 50(b) 606
Clayton Homes 229 1,947
Dycom Inds 56(b) 2,408
Elcor 84 2,819
Fairfield Communities 170(b) 1,934
Fleetwood Enterprises 107 1,745
Florida Rock Inds 60 2,010
Fluor 118 4,713
Foster Wheeler 172 1,215
Georgia-Pacific (Timber Group) 129 2,798
Georgia-Pacific Group 267 10,880
Granite Construction 87 1,735
Horton (DR) 181 2,093
Hughes Supply 91 1,604
Hussmann Intl 121 1,671
Huttig Building Products 23(b) 102
Insituform Technologies Cl A 89(b) 2,303
Johns Manville 229 2,562
Kaufman & Broad Home 94 2,039
Lafarge 106 2,557
Lennar 138 2,199
Lennox Intl 140 1,313
Louisiana-Pacific 315 4,056
Martin Marietta Materials 73 3,066
Masco 689 13,736
Morrison Knudsen 198(b) 1,460
NVR 40(b) 1,810
Owens-Corning 102 1,638
Potlatch 77 3,099
Pulte 99 1,726
Quanta Services 75(b) 2,456
Sherwin-Williams 263 4,635
Simpson Mfg 43(b) 1,693
Southdown 59 2,954
Temple-Inland 87 4,867
Texas Inds 54 1,974
Toll Brothers 113(b) 1,921
Tredegar Inds 92 1,800
USG 77 2,897
Valspar 67 2,399
Vulcan Materials 156 6,601
Watts Inds Cl A 100 1,513
Weyerhaeuser 364 20,884
Total 156,279
Chemicals (1.5%)
Air Products & Chemicals 357 10,576
Airgas 184(b) 1,426
Albemarle 103 1,860
Allied Waste Inds 939(b) 6,045
Azurix 182(b) 1,831
Cabot 103 2,472
Cambrex 80 3,000
CK Witco 248 2,961
Cytec Inds 86(b) 2,172
Dexter 58 2,157
Dow Chemical 342 39,842
Du Pont (EI) de Nemours 1,622 95,697
Eastman Chemical 122 4,865
Ecolab 201 7,073
Engelhard 196 3,124
Ferro 100 1,950
FMC 50(b) 2,688
Fuller (HB) 34 2,210
Geon 77 2,238
Geprgoa Gulf 112 3,066
Grace (WR) 124(b) 1,465
Great Lakes Chemical 91 3,014
Hercules 165 2,826
IMC Global 178 2,915
Intl Specialty Products 224(b) 1,596
Ionics 63(b) 1,866
Lubrizol 85 2,518
Lyondell Petrochemical 279 3,017
MacDermid 63 2,142
Millennium Chemicals 107 1,953
Millipore 70 2,997
Monsanto 985 34,782
NL Inds 200 2,888
Olin 157 2,748
OM Group 53 1,994
Optical Coating Laboratory 22 8,357
Pall 193 3,558
Polymer Group 116 1,972
PPG Inds 270 14,866
Praxair 248 10,060
Republic Services 273(b) 3,208
Rohm & Haas 339 14,322
RPM/Ohio 171 1,753
Sigma-Aldrich 157 5,260
Solutia 173 2,379
Spartech 71 1,819
Tetra Tech 133(b) 1,962
Union Carbide 207 11,592
Valhi 180 2,048
Waste Management 963 16,852
Total 365,982
Commercial finance (--%)
Finova Group 95 3,070
Communications equipment & services (4.0%)
Adaptive Broadband 49(b) 5,831
ADC Telecommunications 233(b) 15,363
Adtran 61(b) 3,950
Advanced Fibre Communications 120(b) 4,418
Aether Systems 65(b) 7,995
Alcatel Alsthom ADR 169(c) 6,771
Allied Riser Communications 114(b) 2,594
American Tower Cl A 224(b) 8,036
Andrew 150(b) 3,450
ANTEC 199(b) 7,786
Aspect Communications 107(b) 5,230
CapRock Communications 100(b) 4,550
Carrier Access 45(b) 1,980
Centennial Cellular Cl A 147(b) 3,689
CIENA 214(b) 14,044
Commonwealth Telephone Enterprises 131(b) 7,058
CommScope 79(b) 3,007
Copper Mountain Networks 72(b) 3,978
Covad Communications Group 151(b) 10,683
Digital Microwave 115(b) 3,680
Ditech Communications 26(b) 3,058
E-Tek Dynamics 103(b) 18,746
EchoStar Communications Cl A 168(b) 13,682
Efficient Networks 58(b) 4,433
Fairchild Semiconductor Intl Cl A 94(b) 3,196
Finisar 77(b) 4,663
Focal Communications 121(b) 4,855
Harmonic Lightwaves 47(b) 4,527
Healtheon/WebMD 111(b) 7,215
iBasis 68(b) 5,075
IDT 88(b) 1,837
Leap Wireless Intl 96(b) 5,046
Loral Space & Communications 380(b) 7,458
Lucent Technologies 4,904 270,945
MasTec 60(b) 2,771
Metricom 70(b) 6,720
Motorola 1,099 150,287
Net2Phone 37(b) 1,674
Netro 74(b) 3,182
Next Level Communications 121(b) 9,756
NorthEast Optic Network 61(b) 5,978
NorthPoint Communications Group 189(b) 5,918
NTL 158(b) 19,878
Orbital Sciences 124(b) 2,162
Ortel 70(b) 10,054
PairGain Technologies 156(b) 1,804
Plantronics 36(b) 2,579
Polycom 51(b) 3,079
Proxim 45(b) 3,845
QUALCOMM 1,020(b) 129,539
Rhythms NetConnections 113(b) 3,849
Scientific-Atlanta 119 9,170
Splitrock Services 110(b) 3,884
Sycamore Networks 121(b) 38,598
Tekelec 132(b) 3,152
Tellabs 609(b) 32,886
Time Warner Telecom Cl A 87(b) 5,285
Tritel Cl A 147(b) 3,896
VoiceStream Wireless 149(b) 17,489
Williams Communications Group 100(b) 3,763
World Access 162(b) 2,795
Total 962,822
Computers & office equipment (20.8%)
3Com 556(b) 28,216
About.com 39(b) 2,730
Accrue Software 64(b) 2,528
Active Software 74(b) 5,772
Actuate 118(b) 4,093
Acxiom 132(b) 3,345
Adaptec 161(b) 8,432
Adobe Systems 190 10,462
Advanced Digital Information 66(b) 3,234
Advantage Learning Systems 121(b) 1,528
Advent Software 37(b) 2,447
Affiliated Computer Services Cl A 77(b) 3,061
Agile Software 31(b) 4,573
Allaire 29(b) 3,625
Alteon WebSystems 59(b) 5,804
America Online 3,499(b) 199,223
American Management Systems 91(b) 2,798
AnswerThink Consulting Group 200(b) 6,513
Apple Computer 250(b) 25,937
AppNet 64(b) 2,968
Ariba 142(b) 23,092
Art Technology Group 49(b) 5,268
Artesyn Technologies 114(b) 1,959
ASK Jeeves 42(b) 4,011
Aspect Development 74(b) 4,958
At Home Corp Series A 519(b) 18,708
Autodesk 100 3,056
Automatic Data Processing 962 45,634
Avant! 143 2,547
Aware 83(b) 2,573
Be Free 55(b) 5,500
BEA Systems 188(b) 14,171
BindView Development 75(b) 3,450
BISYS Group 47(b) 2,788
Black Box 39(b) 2,306
BMC Software 372(b) 14,090
Breakaway Solutions 66(b) 5,713
Broadbase Software 56(b) 4,935
BroadVision 120(b) 15,278
Brocade Communications Systems 82(b) 13,284
BSQUARE 100(b) 3,644
Cabletron Systems 271(b) 6,961
Cadence Design Systems 379(b) 7,817
Calico Commerce 100(b) 3,200
Cambridge Technology Partners 155(b) 3,110
CareInsite 108(b) 7,887
Ceridian 225(b) 3,600
CheckFree Holdings 84(b) 4,956
Ciber 138(b) 3,114
Cisco Systems 5,120(b) 560,639
Citrix Systems 137(b) 18,803
Clarent 43(b) 3,730
Clarify 46(b) 5,592
CMGI 384(b) 43,223
CNET 113(b) 5,537
Cognex 131(b) 5,338
Comdisco 238 7,943
Commerce One 111(b) 19,120
Compaq Computer 2,643 72,351
Complete Business Solutions 139(b) 2,815
Computer Associates Intl 836 57,422
Computer Sciences 249(b) 22,877
Compuware 555(b) 11,759
Comverse Technology 109(b) 15,628
Concentric Network 84(b) 3,560
Concord Communications 50(b) 1,844
Concord EFS 318(b) 6,459
Concurrent Computer 218(b) 4,115
Critical Path 59(b) 3,780
CSG Systems Intl 81(b) 3,063
CyberSource 38(b) 1,335
Cybex Computer Products 62(b) 3,255
Data Return 98(b) 5,696
DBT Online 87(b) 1,631
Dell Computer 3,950(b) 152,321
Dendrite Intl 212(b) 6,254
Diamond Technology Partners 63(b) 5,162
Digital Island 86(b) 7,267
Digital Lightwave 50(b) 2,950
Digital River 88(b) 2,299
drkoop.com 140(b) 1,908
DST Systems 99(b) 6,150
E.piphany 39(b) 6,162
Earthlink Network 161(b) 6,883
Echelon 120(b) 4,125
Edwards (JD) 166(b) 4,949
eGain Communications 92(b) 3,186
Electronic Arts 97(b) 7,930
Electronic Data Systems 766 51,800
EMC 1,576(b) 167,843
Emulex 54(b) 5,400
Engage Technologies 73(b) 9,490
Entrust Technologies 84(b) 3,980
Equifax 224 4,816
Exodus Communications 258(b) 29,637
Extreme Networks 76(b) 6,432
F5 Networks 29(b) 2,726
FactSet Research Systems 38 2,546
Fair Isaac & Co 60 2,745
First Data 667 32,724
Fiserv 192(b) 6,516
Gadzoox Networks 138(b) 5,244
Gateway 487(b) 29,797
Globix 52(b) 4,440
go2net 43(b) 3,462
Great Plains Software 36(b) 2,466
Hadco 49(b) 1,948
Harbinger 105(b) 2,271
Henry (Jack) & Associates 51 2,920
Hewlett-Packard 1,575 170,493
High Speed Access 86(b) 1,564
HNC Software 51(b) 4,600
homestore.com 104(b) 10,147
Hutchinson Technology 80(b) 1,300
Hyperion Solutions 87(b) 3,045
i2 Technologies 118(b) 22,730
IDX Systems 120(b) 4,568
IKON Office Solutions 579 4,668
INFOCURE 101(b) 3,346
Informatica 28(b) 2,622
Informix 302(b) 3,775
InfoSpace.com 148(b) 20,739
Ingram Micro Cl A 157(b) 1,796
Inktomi 160(b) 15,910
Insight Enterprises 63(b) 2,174
InsWeb 103(b) 1,500
Interliant 133(b) 5,037
Internet Capital Group 46(b) 5,474
internet.com 79(b) 3,869
InterVU 50(b) 4,625
InterWorld 49(b) 3,614
Interwoven 35(b) 4,410
Intl Business Machines 2,813 315,582
Intuit 290(b) 17,491
Iomega 1,016(b) 4,128
ISS Group 62(b) 4,104
ITXC 100(b) 10,750
iVillage 66(b) 1,081
IXL Enterprises 100(b) 4,788
IXnet 100(b) 3,650
Juniper Networks 234(b) 31,662
Juno Online Services 131(b) 3,422
Kana Communications 42(b) 10,497
Keane 111(b) 2,997
Keynote Systems 55(b) 4,462
Kronos 47(b) 2,820
Legato Systems 127(b) 3,199
Lexmark Intl Group Cl A 200(b) 18,850
LHS Group 129(b) 3,926
Liberate Technologies 128(b) 10,088
Liquid Audio 62(b) 1,783
LookSmart 131(b) 4,298
Luminant Worldwide 67(b) 2,102
Lycos 136(b) 9,988
Macromedia 67(b) 4,585
MapQuest.com 125(b) 2,178
Mastech 162(b) 3,949
MAXIMUS 76(b) 2,817
Maxtor 348(b) 2,393
Media Metrix 40(b) 1,338
MedQuist 66(b) 1,316
Mentor Graphics 226(b) 3,065
Mercury Interactive 59(b) 6,453
Micromuse 30(b) 4,896
MICROS Systems 50(b) 2,922
Microsoft 8,077(b) 790,535
MicroStrategy 52(b) 7,222
Midway Games 120(b) 1,620
MindSpring Enterprises 99(b) 2,624
Mission Critical Software 43(b) 2,473
MMC Networks 72(b) 2,016
MTI Technology 136(b) 3,987
Natl Computer Systems 114 3,905
Natl Data 83 2,656
Natl Information Consortium 82(b) 3,598
Natl Instruments 118(b) 4,491
Navigant Consulting 66(b) 701
NCR 153(b) 5,891
Netcentives 83(b) 5,665
Netopia 48(b) 2,382
NetScout Systems 88(b) 2,376
Network Access Solutions 154(b) 4,235
Network Appliance 228(b) 22,885
Network Associates 216(b) 5,603
Network Solutions Cl A 52(b) 11,278
NetZero 160(b) 5,140
New Era of Networks 84(b) 4,384
NOVA 114(b) 3,434
Novell 521(b) 17,388
NVIDIA 94(b) 3,484
OnDisplay 54(b) 4,354
Open Market 152(b) 7,828
Oracle 4,476(b) 223,589
Paradyne Networks 69(b) 1,863
Parametric Technology 419(b) 8,982
Pegasus Systems 75(b) 2,025
PeopleSoft 378(b) 8,505
Peregrine Systems 77(b) 5,847
Perot Systems Cl A 137(b) 2,757
Pervasive Software 55(b) 615
Phone.com 94(b) 10,340
Pinnacle Systems 56(b) 2,730
Pitney Bowes 416 20,384
Policy Management Systems 100(b) 1,581
Portal Software 240(b) 11,910
Predictive Systems 76(b) 3,577
Primark 77(b) 1,800
Prodigy Communications 290(b) 5,764
Profit Recovery Group Intl 226(b) 6,130
Progress Software 122(b) 2,638
Project Software & Development 68(b) 3,213
Proxicom 38(b) 3,838
PSINet 115 9,213
Puma Technology 46(b) 3,531
QRS 31(b) 2,240
Quantum-DLT & Storage Systems 257(b) 2,474
Quantum-Hard Disk Drive 337(b) 2,485
Quest Software 59(b) 5,694
Rare Medium Group 77(b) 2,762
Rational Software 135(b) 7,020
Razorfish Cl A 130(b) 5,038
RealNetworks 114(b) 17,919
Red Hat 206(b) 19,596
Redback Networks 67(b) 12,475
Remedy 69(b) 2,790
Reynolds & Reynolds Cl A 120 2,655
RSA Security 67(b) 3,643
S1 52(b) 4,709
SABRE Holdings Cl A 46(b) 2,047
Safeguard Scientifics 54(b) 7,668
Sanchez Computer Associates 70(b) 2,367
SanDisk 42(b) 5,623
Sanmina 91(b) 9,669
Sapient 86(b) 7,600
Scient 110(b) 8,319
SCM Microsystems 47(b) 2,979
Seagate Technology 346(b) 13,862
Siebel Systems 288(b) 26,405
Silicon Graphics 293(b) 2,838
Silknet Software 29(b) 4,281
SilverStream Software 62(b) 6,898
Software.com 63(b) 4,276
Solectron 455(b) 33,043
SonicWALL 78(b) 4,544
Standard Register 85 1,318
Sterling Commerce 137(b) 3,845
Sterling Software 131(b) 3,635
Storage Technology 156(b) 2,369
Sun Microsystems 2,445(b) 192,084
SunGard Data Systems 186(b) 5,441
Sybase 182(b) 4,334
Sykes Enterprises 77(b) 2,132
Symantec 88(b) 4,406
Synopsys 110(b) 5,081
Tanning Technology 63(b) 2,748
Tech Data 138(b) 3,075
Technology Solutions 121(b) 4,258
TeleTech Holdings 152(b) 3,658
TenFold 82(b) 3,521
TheStreet.com 100(b) 1,725
TIBCO Software 91(b) 14,037
Total System Services 303 5,000
Transaction Systems Architects Cl A 77(b) 1,656
Tumbleweed Communications 63(b) 3,164
Unisys 476(b) 15,173
USinternetworking 93(b) 4,046
USWeb 119(b) 3,414
VA Linux Systems 64(b) 7,376
Varian 115(b) 3,306
Verio 116(b) 7,468
VeriSign 158(b) 25,319
Veritas Software 398(b) 57,984
Verity 62(b) 2,108
VerticalNet 53(b) 12,627
Viant 34(b) 3,264
Vignette 86(b) 16,770
Visual Networks 50(b) 3,144
Vitria Technology 94(b) 9,212
Wallace Computer Services 95 1,039
WebTrends 12(b) 1,034
Whittman-Hart 84(b) 2,982
Wind River Systems 103(b) 3,051
Wireless Facilities 89(b) 4,483
Xircom 130(b) 6,411
Yahoo! 406(b) 130,756
Zixit 61(b) 1,883
Total 4,955,992
Electronics (6.5%)
Advanced Energy Inds 54(b) 2,747
Advanced Micro Devices 229(b) 8,301
Agilent Technologies 111(b) 7,347
Alpha Inds 39(b) 3,266
Altera 309(b) 20,317
American Power Conversion 299(b) 8,251
Amkor Technology 184(b) 5,842
Amphenol Cl A 43(b) 2,919
ANADIGICS 63(b) 4,894
Analog Devices 269(b) 25,152
Ancor Communications 84(b) 3,161
Anixter Intl 91(b) 1,792
Applied Materials 584(b) 80,153
Applied Micro Circuits 83(b) 12,263
Arrow Electronics 149(b) 3,129
Atmel 312(b) 9,692
Avnet 73 3,919
AVX 134 7,973
Belden 49 1,057
Broadcom Cl A 75(b) 21,698
Burr-Brown 87(b) 3,219
C&D Technologies 62 2,534
C-Cube Microsystems 62(b) 4,328
Cable Design Technologies 87(b) 2,001
Cirrus Logic 205(b) 2,806
Conexant Systems 304(b) 25,688
Corning 435 67,064
Credence Systems 43(b) 3,650
Cree Research 53(b) 4,989
CTS 43 3,018
Cymer 58(b) 3,197
Cypress Semiconductor 163(b) 5,461
Dallas Semiconductor 45 3,007
DII Group 50(b) 3,888
Dionex 44(b) 1,265
DSP Group 46(b) 4,186
DuPont Photomasks 40(b) 1,910
Electro Scientific Inds 41(b) 3,285
ESS Technology 157(b) 2,551
Etec Systems 54(b) 4,543
Foundry Networks 200(b) 26,937
GenRad 118(b) 1,763
GlobeSpan 38(b) 4,218
Harman Intl Inds 50 2,919
Harris 124 3,596
Helix Technology 55 2,674
Integrated Device Technology 138(b) 3,933
Integrated Electrical Services 41(b) 359
Intel 5,229 517,343
Intl Rectifier 115(b) 3,824
Jabil Circuit 136(b) 8,602
JDS Uniphase 350(b) 71,377
KEMET 70(b) 3,329
KLA-Tencor 274(b) 16,063
Kopin 61(b) 4,293
Kulicke & Soffa Inds 79(b) 4,133
Lam Research 60(b) 7,493
Lattice Semiconductor 74(b) 3,797
Linear Technology 238 22,536
LSI Logic 229(b) 18,721
LTX 129(b) 3,830
Maxim Integrated Products 420(b) 21,053
MEMC Electronic Materials 164(b) 2,593
Methode Electronics Cl A 114 3,890
Micrel 64(b) 4,048
Microchip Technology 79(b) 4,967
Micron Electronics 198(b) 2,104
Micron Technology 417(b) 25,932
MKS Instruments 100(b) 3,256
Molex 241 12,261
MRV Communications 91(b) 6,620
Natl Semiconductor 261(b) 13,703
Novellus Systems 183(b) 8,990
PerkinElmer 71 3,554
Photronics 68(b) 2,036
Plexus 68(b) 3,162
Power Integrations 54(b) 1,974
Powerwave Technologies 33(b) 3,007
PRI Automation 56(b) 3,927
QLogic 56(b) 8,565
Rambus 37(b) 2,789
RF Micro Devices 123(b) 9,948
S3 185(b) 2,683
Sawtek 65(b) 4,111
SCI Systems 112(b) 8,064
SDL 49(b) 12,700
Semtech 54(b) 3,240
Sensormatic Electronics 183(b) 3,328
Silicon Image 61(b) 4,529
Siliconix 19(b) 3,620
SLI 155 1,821
Symbol Technologies 137 8,177
Technitrol 59 2,485
Tektronix 73 2,961
Teradyne 266(b) 17,224
Texas Instruments 1,238 133,548
Thermo Instrument Systems 204(b) 3,277
Thomas & Betts 88 2,679
TranSwitch 66(b) 3,304
TriQuint Semiconductor 32(b) 4,889
Varian Medical Systems 94 3,584
Varian Semiconductor Equipment Associates 92(b) 4,451
Veeco Instruments 61(b) 3,347
Vicor 74(b) 3,016
Vishay Intertechnology 132(b) 4,917
Vitesse Semiconductor 238(b) 10,353
Waters 95(b) 7,018
Xilinx 492(b) 22,509
Total 1,548,417
Energy (3.4%)
Amerada Hess 141 7,499
Anadarko Petroleum 198 6,497
Apache 177 6,461
Arch Coal 174 1,523
Ashland 112 3,647
Atlantic Richfield 501 38,577
Atmos Energy 84 1,470
Barrett Resources 59(b) 1,744
Brown (Tom) 121(b) 1,792
Buckeye Partners LP 77 2,146
Burlington Resources 276 8,849
Cabot Oil & Gas Cl A 119 1,755
Chevron 1,020 85,233
Conoco Cl B 975 22,973
CONSOL Energy 148 1,795
Cross Timbers Oil 176 1,408
Devon Energy 124 4,356
EOG Resources 239 3,794
Exxon Mobil 5,406 451,400
FirstEnergy 364 8,281
Forest Oil 154(b) 1,540
Houston Exploration 98(b) 1,752
Indiana Energy 99 1,547
Kerr-McGee 134 7,420
Mitchell Energy & Development Cl A 83 1,868
Murphy Oil 70 4,016
Newfield Exploration 113(b) 3,108
Noble Affiliates 204 4,093
Occidental Petroleum 542 10,772
Pennzoil-Quaker State 166 1,899
Phillips Petroleum 394 16,105
Pogo Producing 101 2,279
Rayovac 90(b) 1,946
Santa Fe Snyder 421(b) 3,079
Stone Energy 40(b) 1,490
Sunoco 141 3,252
Texaco 859 45,420
Tosco 237 6,088
Ultramar Diamond Shamrock 135 2,953
Union Pacific Resources Group 392 4,312
Unocal 377 10,792
USEC 212 1,113
USX-Marathon Group 480 12,330
Valero Energy 106 2,405
Vastar Resources 152 8,455
Vintage Petroleum 163 2,088
Total 823,322
Energy equipment & services (0.8%)
Baker Hughes 511 12,582
BJ Services 110(b) 4,716
Cooper Cameron 83(b) 4,109
Diamond Offshore Drilling 211 5,842
Dril-Quip 75(b) 2,367
ENSCO Intl 213 4,872
Enterprise Products Partners LP 104 2,119
Global Inds 278(b) 2,433
Global Marine 271(b) 4,827
Halliburton 686 24,695
Hanover Compressor 57(b) 2,259
Helmerich & Payne 87 2,045
Jacobs Engineering Group 58(b) 1,711
Lone Star Technologies 99(b) 2,729
Louis Dreyfus Natural Gas 102(b) 1,823
Marine Drilling 139(b) 2,676
McDermott Intl 110 1,086
Nabors Inds 181(b) 5,362
Natl-Oilwell 151(b) 2,831
Newpark Resources 330(b) 2,083
Noble Drilling 205(b) 6,009
Pioneer Natural Resources 184(b) 1,576
Pride Intl 143(b) 2,297
R&B Falcon 301(b) 3,819
Rowan Companies 136 3,086
Santa Fe Intl 178 4,762
Schlumberger 851 51,963
SEACOR SMIT 44(b) 2,030
Smith Intl 77(b) 3,951
Tidewater 86 2,446
Transocean Sedco Forex 320 10,180
Tuboscope 175(b) 2,275
Varco Intl 188(b) 1,904
Weatherford Intl 165(b) 6,198
Total 195,663
Financial services (4.8%)
ADVANTA Cl A 114 2,109
Affiliated Managers Group 82(b) 2,839
Alliance Capital Managment Holding LP 266 10,008
Allmerica Financial 84 3,927
American Express 699 115,203
AmeriCredit 146(b) 2,391
AmeriTrade Holding Cl A 246(b) 3,921
Apartment Investment & Management 101 3,825
Associates First Capital Cl A 1,132 22,640
Bear Stearns Companies 190 7,838
BOK Financial 96(b) 1,608
Boston Properties 106 3,180
Capital One Financial 307 12,587
Carey Diversified LLC 118 1,947
Catellus Development 182(b) 2,275
Chemical Financial 66 1,720
CIT Group Cl A 368 7,038
Citigroup 5,277 303,097
Countrywide Credit Inds 176 4,576
Dain Rauscher 43 2,166
Delphi Financial Group Cl A 68(b) 2,244
Donaldson, Lufkin & Jenrette - DLJ 196 9,371
Doral Financial 154(c) 1,598
E*TRADE Group 449(b) 9,457
Eaton Vance 65 2,661
Edwards (AG) 146 4,836
Fannie Mae 1,594 95,540
Federated Investors Cl B 131 2,587
Forest City Enterprises Cl A 89 2,320
Franchise Finance Corp of America 94 2,256
Franklin Resources 392 13,990
FREDDIE MAC 1,081 54,253
Glenborough Realty Trust 139 1,894
Goldman Sachs Group 107 9,804
H&R Block 152 6,555
Heller Financial 95 1,977
Household Intl 744 26,226
IndyMac Mtge Holdings 143(b) 1,591
Investment Technology Group 91 3,231
Jefferies Group 101 2,228
Jones Lang LaSalle 46(b) 624
Kansas City Southern Inds 172 11,900
Knight/Trimark Group Cl A 165(b) 5,218
Labranche 211(b) 2,901
Legg Mason 88 3,245
Lehman Brothers Holdings 186 13,299
LNR Property 108 2,025
MarketWatch.com 40(b) 1,525
MBNA 1,247 31,487
Merrill Lynch & Co 575 49,881
MessageMedia 163(b) 2,903
Metris Companies 74 2,710
MGIC Investment 170 7,916
Morgan Keegan 119 1,740
Morgan Stanley, Dean Witter, Discover & Co 1,774 $117,527
Neuberger Berman 61 1,514
Nvest LP 103 1,951
Paine Webber Group 226 8,687
Paychex 382 16,832
PIMCO Advisors Holdings LP 77 2,921
Providian Financial 220 18,563
Radian Group 57 2,298
Raymond James Financial 115 2,185
Schwab (Charles) 1,271 45,835
Security Capital Group Cl B 142(b) 1,811
SEI Investments 28 2,919
St. Joe 136 3,222
Student Loan 50 2,488
T.Rowe Price Associates 189 7,347
United Asset Mgmt 112 1,792
Wilmington Trust 52 2,597
Total 1,147,377
Food (1.2%)
Archer-Daniels-Midland 960 11,280
Aurora Foods 144(b) 1,242
Bestfoods 434 18,879
Campbell Soup 675 21,219
ConAgra 759 16,224
Corn Products Intl 66 1,518
Dean Foods 154 5,226
Del Monte Foods 139(b) 1,303
Delta & Pine Land 75 1,238
Dole Food 112 1,715
Dreyer's Grand Ice Cream 114 1,724
Earthgrains 87 1,370
Flowers Inds 156 1,901
Fresh Del Monte Produce 209(b) 1,659
General Mills 476 14,845
Heinz (HJ) 557 20,712
Hershey Foods 217 9,223
Hormel Foods 113 4,591
IBP 160 2,400
Interstate Bakeries 109 1,669
Intl Home Foods 114(b) 1,746
Keebler Foods 130(b) 2,966
Kellogg 630 15,278
McCormick 111 2,935
Michael Foods 80 1,675
Nabisco Group Holdings 507 4,373
Nabisco Holdings Cl A 241 7,275
Newhall Land & Farming LP 83 2,324
Quaker Oats 208 12,350
Ralcorp Holdings 110(b) 1,629
Ralston-Ralston Purina Group 503 14,115
Sara Lee 1,405 25,904
Smithfield Foods 83(b) 1,520
Smucker (JM) Cl A 101 1,768
Suiza Foods 54(b) 2,221
SUPERVALU 216 3,888
Sysco 515 18,315
Tootsie Roll Inds 67 2,111
Tyson Foods Cl A 357 4,886
U.S. Foodservice 154(b) 2,782
Universal Foods 100 1,838
Wrigley (Wm) Jr 181 14,118
Total 285,955
Furniture & appliances (0.2%)
Black & Decker 135 5,408
Briggs & Stratton 36 1,598
Ethan Allen Interiors 90 2,250
Furniture Brands Intl 106(b) 1,802
HON Inds 95 1,829
Kimball Intl Cl B 125 1,914
La-Z-Boy 103 1,410
Lanier Worldwide 124(b) 434
Leggett & Platt 306 5,508
Maytag 136 5,508
Miller (Herman) 124 2,705
Mohawk Inds 115(b) 2,695
Stanley Works 138 3,467
Sunbeam 496(b) 2,293
Whirlpool 117 6,815
Total 45,636
Health care (8.9%)
Abbott Laboratories 2,421 78,985
Affymetrix 38(b) 8,797
Alkermes 56(b) 3,714
Allergan 206 11,742
Alpharma Cl A 222 7,548
ALZA 158(b) 5,639
American Home Products 2,032 95,631
Amgen 1,586(b) 101,008
Andrx 49(b) 3,442
Arrow Intl 76 2,418
ArthroCare 37(b) 2,521
Bard (CR) 80 3,580
Barr Laboratories 70(b) 2,796
Bausch & Lomb 89 5,518
Baxter Intl 453 28,935
Beckman Coulter 48 2,511
Becton, Dickinson & Co 389 10,187
Bio-Technology General 208(b) 2,860
Biogen 234(b) 20,183
Biomatrix 88(b) 1,953
Biomet 175 6,967
Block Drug Cl A 54 1,549
Boston Scientific 643(b) 13,342
Bristol-Myers Squibb 3,088 203,807
Caliper Technologies 61(b) 8,445
Carter-Wallace 113 2,154
Celgene 63(b) 4,394
Cephalon 133(b) 4,722
Chiron 281(b) 12,469
Coherent 97(b) 4,274
Conmed 78(b) 2,009
COR Therapeutics 117(b) 3,101
Datascope 52 1,879
DENTSPLY Intl 292 7,227
Dura Pharmaceuticals 155(b) 2,403
Enzo Biochem 80(b) 6,890
ENZON 70(b) 3,539
Forest Laboratories 130(b) 8,775
Genentech 130(b) 18,265
Genzyme (General Division) 130(b) 6,760
Gilead Sciences 65(b) 3,043
Guidant 470(b) 24,734
Haemonetics 108(b) 2,815
Human Genome Sciences 72(b) 7,056
ICN Pharmaceuticals 122 3,065
ICOS 69(b) 2,376
IDEC Pharmaceuticals 64(b) 8,076
IDEXX Laboratories 136(b) 2,049
IGEN Intl 77(b) 2,339
ImClone Systems 86(b) 4,805
Immunex 254(b) 33,211
Incyte Pharmaceuticals 50(b) 5,488
Inhale Therapeutic Systems 73(b) 4,266
Invacare 90 1,783
IVAX 166(b) 5,520
Johnson & Johnson 2,177 187,357
Jones Pharma 71 4,122
King Pharmaceuticals 78(b) 4,602
Lilly (Eli) 1,699 113,621
Mallinckrodt 110 3,169
Maxygen 69(b) 5,149
Medarex 113(b) 5,622
Medicis Pharmaceutical Cl A 87(b) 3,632
MedImmune 108(b) 15,768
Medtronic 1,887 86,330
Mentor 84 1,932
Merck & Co 3,647 287,428
Millennium Pharmaceuticals 56(b) 10,497
MiniMed 48(b) 3,702
Mylan Laboratories 201 5,352
PE Corp-PE Biosystems Group 159(b) 23,810
Pfizer 6,059 220,395
Priority Healthcare Cl B 81(b) 2,344
Protein Design Labs 62(b) 5,061
Quest Diagnostics 84(b) 2,856
ResMed 73(b) 3,134
SangStat Medical 83(b) 2,500
Schering-Plough 2,283 100,452
Sepracor 51(b) 7,140
SICOR 444(b) 3,261
St. Jude Medical 132(b) 3,275
STERIS 166(b) 1,743
Stryker 151 9,513
Summit Technology 127(b) 1,651
SuperGen 82(b) 3,516
Sybron Intl 161(b) 3,713
Techne 62(b) 3,867
Transkaryotic Therapies 44(b) 1,433
Triangle Pharmaceuticals 121(b) 2,375
Vertex Pharmaceuticals 65(b) 2,665
VISX 99(b) 2,809
Warner-Lambert 1,329 126,171
Watson Pharmaceuticals 149(b) 6,007
Wesley Jessen VisionCare 64(b) 2,478
Total 2,114,017
Health care services (1.0%)
Abgenix 52(b) 6,864
Aetna 219 11,662
Allscripts 105(b) 5,001
AmeriSource Health Cl A 113(b) 2,048
Apria Healthcare Group 158(b) 3,160
Bergen Brunswig Cl A 836 5,486
Beverly Enterprises 516(b) 1,903
BioMarin Pharmaceutical 125(b) 1,820
Cardinal Health 424 20,272
Caremark Rx 410(b) 1,743
Celera Genomics 40(b) 8,058
Columbia/HCA Healthcare 877 23,952
Covance 206(b) 2,845
Cytyc 132(b) 3,968
Eclipsys 132(b) 3,308
Express Scripts Cl A 60(b) 3,101
First Health Group 88(b) 2,624
Foundation Health Systems Cl A 258(b) 2,645
Health Management Associates Cl A 394(b) 5,491
HEALTHSOUTH Rehabilitation 645(b) 3,548
Hillenbrand Inds 103 3,502
Humana 909(b) 7,272
IMS Health 486 10,905
Lincare Holdings 91(b) 3,225
Manor Care 517(b) 6,883
McKesson HBOC 437 8,986
Medical Manager 54(b) 3,790
Omnicare 278 2,936
Orthodontic Centers of America 125(b) 1,914
Oxford Health Plans 190(b) 2,696
PacifiCare Health Systems 71(b) 3,004
Patterson Dental 168(b) 7,319
PSS World Medical 296(b) 1,869
Quintiles Transnational 178(b) 4,706
Quorum Health Group 305(b) 2,926
Renal Care Group 105(b) 2,579
Service Corp Intl 423 1,930
Shared Medical Systems 97 4,292
Stewart Enterprises Cl A 398 2,289
Tenet Healthcare 483(b) 10,988
Trigon Healthcare 229(b) 6,970
United Healthcare 270 14,310
Universal Health Services Cl B 82(b) 3,664
US Oncology 237(b) 1,229
Wellpoint Health Networks 102(b) 6,936
Total 246,619
Household products (2.0%)
Alberto-Culver Cl B 94 2,309
Avon Products 405 12,884
Boyds Collection 158(b) 1,106
Church & Dwight 82 1,809
Clorox 367 17,524
Colgate-Palmolive 906 53,681
Dial 159 2,554
Estee Lauder Cl A 192 9,816
Gillette 1,687 63,473
Intl Flavors/Fragrances 165 5,888
Jostens 107 2,508
Kimberly-Clark 828 51,284
Libbey 70 1,803
Newell Rubbermaid 438 13,140
Nu Skin Enterprises Cl A 37(b) 310
Playtex Products 153(b) 1,932
Procter & Gamble 2,066 208,408
Scotts Cl A 52(b) 1,823
ServiceMaster 485 6,942
Tupperware 103 1,680
Viad 151 3,973
Water Pik Technologies 14(b) 119
Yankee Candle 115(b) 1,919
Total 466,885
Industrial equipment & services (0.8%)
AGCO 173 2,011
AMETEK 107 2,354
Applied Power Cl A 177 4,934
Astec Inds 78(b) 1,853
Blyth Inds 82(b) 1,922
Caterpillar 553 23,467
Cintas 172 8,056
Cooper Inds 147 5,641
Deere & Co 363 15,858
Donaldson 86 1,774
Fastenal 73 3,194
Flowserve 127(b) 1,945
G & K Services Cl A 49 1,081
Graco 61 1,876
Harsco 75 2,020
IDEX 75 2,016
Illinois Tool Works 466 27,260
Ingersoll-Rand 257 12,094
Iron Mountain 136(b) 4,471
JLG Inds 146 1,223
Kaydon 80 2,165
Kennametal 72 1,895
Lincoln Electric Holdings 97 1,898
Manitowoc 66 1,803
Milacron 113 1,363
Minerals Technologies 43 1,940
Modine Mfg 86 2,129
NACCO Inds Cl A 31 1,573
Nordson 44 1,892
Ogden 213 2,410
Parker-Hannifin 169 7,309
Reckson Service Inds 103(b) 5,324
Regal Beloit 97 1,928
Roper Inds 59 1,980
Safety-Kleen 164(b) 994
Tecumseh Products Cl A 45 2,053
Teleflex 59 1,873
Terex 67(b) 1,524
Thermo Electron 245(b) 4,242
ThermoQuest 195(b) 3,169
Timken 114 1,860
Toro 54 1,833
Trinity Inds 71 1,660
UCAR Intl 93(b) 2,098
UNOVA 157(b) 1,688
WESCO Intl 146(b) 1,223
Westinghouse Air Brake 121 1,346
Total 186,222
Insurance (3.2%)
AFLAC 413 17,940
Alfa 132 1,972
Alleghany 27(b) 5,034
Allstate 1,326 30,746
Ambac Financial Group 109 5,334
American Annuity Group 106 1,716
American General 387 23,775
American Intl Group 2,407 250,628
American Natl Insurance 41 2,368
AmerUs Life Holdings Cl A 89 1,813
Aon 398 10,298
AXA Financial 697 22,696
Berkley (WR) 90 1,564
Berkshire Hathaway Cl A 2(b) 102,399
Berkshire Hathaway Cl B 10(b) 16,460
Blanch (EW) Holdings 34 1,645
Brown & Brown 60 2,059
Chicago Title 52 2,265
Chubb 274 15,413
CIGNA 310 22,243
Cincinnati Financial 257 7,389
CNA Financial 286(b) 9,688
Commerce Group 92 2,381
Conseco 508 7,747
Crawford Cl B 167 2,035
Enhance Financial Services Group 113 1,575
Erie Indemnity Cl A 103 3,142
Everest Reinsurance Holdings 93 2,342
Fidelity Natl Financial 133 1,663
Financial Security Assurance Holdings 121 6,678
First American Financial 163 1,936
Foremost Corp of America 85 2,428
Gallagher (Arthur J) 39 2,096
Hartford Financial Services Group 351 13,382
Hartford Life Cl A 51 2,075
HCC Insurance Holdings 133 1,771
Hooper Holmes 77 1,497
Horace Mann Educators 78 1,458
HSB Group 59 1,626
Jefferson-Pilot 164 9,635
Leucadia Natl 95 2,019
Liberty 44 1,562
Liberty Financial Companies 97 2,025
Lincoln Natl 309 11,414
Loews 167 9,352
Markel 12(b) 1,968
Marsh & McLennan 411 38,633
MBIA 155 7,760
Medical Assurance 84(b) 1,838
Mercury General 85 2,019
MONY Group 78 2,106
Nationwide Financial Services Cl A 62 1,542
Ohio Casualty 131 1,654
Old Republic Intl 201 2,437
PMI Group 70 2,888
Progressive Corp 113 7,034
Protective Life 100 2,781
Reinsurance Group of America 89 1,969
ReliaStar Financial 134 3,978
SAFECO 204 4,998
St. Paul Companies 352 10,626
StanCorp Financial Group 93 2,255
Torchmark 207 5,214
Transatlantic Holdings 54 4,050
Travelers Property Casualty Cl A 98 3,553
UICI 86(b) 849
Unitrin 113 4,068
UnumProvident 371 9,924
White Mountains Insurance Group 16 1,800
Total 773,228
Leisure time & entertainment (2.0%)
Anchor Gaming 34(b) 1,517
Aztar 184(b) 1,760
Bally Total Fitness Holdings 83(b) 1,821
Boyd Gaming 110(b) 584
Brunswick 143 2,708
Callaway Golf 165 2,104
Carnival Cl A 954 42,990
Cedar Fair LP 98 1,856
Disney (Walt) 3,206 116,417
Dover Downs Entertainment 139 2,102
Gaylord Entertainment 67 1,868
GTECH Holdings 96(b) 2,136
Handleman 142(b) 1,491
Harley-Davidson 237 16,634
Harrah's Entertainment 199(b) 3,968
Hasbro 303 4,545
Hollywood Park 118(b) 2,316
Intl Game Technology 140(b) 2,756
Intl Speedway Cl A 82 4,131
Mandalay Resort Group 361(b) 5,573
Mattel 653 6,816
Metro-Goldwyn-Mayer 235(b) 5,449
Mirage Resorts 309(b) 3,863
Polaris Inds 59 1,910
Premier Parks 121(b) 3,396
Royal Caribbean Cruises 263 13,002
SFX Entertainment Cl A 96(b) 3,126
Speedway Motorsports 98(b) 3,087
SportsLine USA 77(b) 2,719
Station Casinos 79(b) 1,699
Time Warner 2,011 160,753
Vail Resorts 98(b) 1,599
Viacom Cl B 1,083(b) 59,970
Total 486,666
Media (3.4%)
4 Kids Entertainment 34(b) 786
ACTV 131(b) 4,642
Adelphia Communications Cl A 78(b) 5,163
American Greetings Cl A 105 2,323
AMFM 307(b) 23,946
Banta 85 1,615
Belo (AH) Cl A 184 2,921
BHC Communications Cl A 35 5,661
Cablevision Systems Cl A 202(b) 15,428
Catalina Marketing 29(b) 2,893
CBS 1,185(b) 69,099
Central Newspapers Cl A 55 1,794
Charter Communications Cl A 176(b) 3,124
Chris-Craft Inds 52(b) 3,952
Circle.com 38(b) 418
Citadel Communications 54(b) 2,700
Clear Channel Communications 525(b) 45,347
Comcast Special Cl A 1,358 62,467
Cox Communications Cl A 882(b) 43,053
Cox Radio Cl A 33(b) 2,904
Deluxe 118 3,157
Donnelley (RH) 109(b) 1,928
Donnelley (RR) & Sons 198 4,344
DoubleClick 162(b) 16,008
Dow Jones 141 8,742
Dun & Bradstreet 250 6,297
Emmis Communications Cl A 46(b) 4,068
Entercom Communications Cl A 46(b) 2,444
Fox Entertainment Group Cl A 194(b) 4,559
Gannett 435 30,233
Gartner Group Cl B 468(b) 6,377
Getty Images 98(b) 3,822
Grey Advertising 5 2,050
Harcourt General 111 4,440
Harland (John H) 105 1,759
Harte-Hanks 341 8,120
Hearst-Argyle Television Cl A 253(b) 6,167
Hispanic Broadcasting 80(b) 8,315
Hollinger Intl Cl A 194 2,461
Houghton Mifflin 112 4,606
Infinity Broadcasting Cl A 588(b) 19,110
Insight Communications 80(b) 2,035
Interpublic Group of Companies 438 20,148
Jones Intercable Cl A 64(b) 4,024
Journal Register 147(b) 1,727
Knight-Ridder 126 6,717
Lamar Advertising 68(b) 3,987
Lee Enterprises 71 1,886
Liberty Digital Cl A 74(b) 3,922
Macrovision 43(b) 4,029
McClatchy Newspapers 70 2,949
McGraw-Hill Companies 306 17,155
Media General Cl A 52 2,707
MediaOne Group 943(b) 74,968
Meredith 81 2,835
New York Times Cl A 271 12,381
Omnicom Group 276 25,858
On Command 113(b) 1,836
Paxson Communications Cl A 168(b) 1,953
Pegasus Communications 46(b) 5,077
Pixar 72(b) 2,570
Playboy Enterprises Cl B 86(b) 2,005
Price Communications 272(b) 5,916
PRIMEDIA 226(b) 3,969
Radio One Cl A 44(b) 3,366
Reader's Digest Assn Cl A 167 6,304
Scholastic 42(b) 2,709
Scripps (EW) Cl A 122 5,742
Sinclair Broadcast Group Cl A 190(b) 1,520
Sirius Satellite Radio 74(b) 3,062
Snyder Communications 153(b) 3,060
Times Mirror Cl A 93 5,504
TMP Worldwide 55(b) 7,707
Tribune 369 15,567
True North Communications 74 3,076
TV Guide Cl A 240(b) 8,895
United Television 18 2,520
UnitedGlobalCom Cl A 98(b) 6,701
Univision Communications Cl A 158(b) 16,926
USA Networks 211(b) 10,471
Valassis Communications 87(b) 2,958
ValueVision Intl Cl A 71(b) 2,525
Washington Post Cl B 16 8,800
Westwood One 83(b) 5,053
Wiley (John) & Sons Cl A 120 1,800
Wink Communications 75(b) 4,369
Young & Rubicam 109 5,872
Young Broadcasting Cl A 42(b) 1,866
Ziff-Davis 161(b) 2,797
Zomax 57(b) 2,565
Total 801,632
Metals (0.6%)
AK Steel Holdings 157 1,590
Alcoa 570 39,721
Allegheny Technologies 148 3,090
Avery Dennison 177 11,991
Battle Mountain Gold 89(b) 167
Bethlehem Steel 317(b) 2,160
Carpenter Technology 86 2,064
Cleveland-Cliffs 8 224
Commercial Metals 31 986
FreeMarkets 50(b) 11,449
Freeport-McMoRan Copper & Gold Cl B 254(b) 4,429
Homestake Mining 405 2,683
Kaiser Aluminum 286(b) 1,716
LTV 471 1,649
Meridian Gold 294(b) 1,507
Mueller Inds 67(b) 2,207
Newmont Mining 260 5,298
Nucor 136 6,766
Phelps Dodge 170 9,880
Pittston Brink's Group 103 2,009
Reliance Steel & Aluminum 99 2,054
Reynolds Metals 98 6,542
Ryerson Tull 89 1,697
Steel Dynamics 134(b) 2,085
Stillwater Mining 85(b) 3,028
USX-U.S. Steel Group 137 3,408
Worthington Inds 183 2,642
Total 133,042
Miscellaneous (1.4%)
24/7 Media 49(b) 3,007
ABM Inds 80 1,640
AGENCY.COM 96(b) 3,540
Akamai Technologies 19(b) 4,733
Bluestone Software 70(b) 6,169
CacheFlow 52(b) 4,524
Champion Enterprises 246(b) 1,891
Cobalt Networks 42(b) 3,297
Convergys 237(b) 6,962
Corporate Executive Board 51(b) 2,620
Crossroads Systems 58(b) 4,220
Cumulus Media Cl A 68(b) 2,656
CuraGen 44(b) 4,048
Federal Signal 104 1,632
Galileo Intl 147 3,537
Inet Technologies 70(b) 2,855
Interdigital Communications 75(b) 2,184
Internap Network Services 200(b) 12,399
InterTrust Technologies 58(b) 8,374
Intraware 67(b) 3,417
JNI 50(b) 2,969
John Nuveen Cl A 54 1,917
Marimba 65(b) 2,535
Mediaplex 47(b) 4,794
MetaSolv Software 69(b) 7,366
MyPoints.com 49(b) 2,086
NaviSite 82(b) 8,436
Optical Cable 31(b) 1,023
Packeteer 63(b) 2,646
Philadelphia Suburban 91 1,826
Quintus 85(b) 2,869
Retek 70(b) 3,719
Standard & Poor's Depositary Receipts 1,298 181,070
StarMedia Network 89(b) 2,859
Tenneco Automotive 53 527
Terayon Communication Systems 49(b) 5,243
TiVo 68(b) 2,193
Triton PCS Holdings Cl A 105(b) 4,298
TSI Intl Software 74(b) 4,537
Tularik 101(b) 5,138
United Water Resources 60 2,070
ViroPharma 41(b) 2,614
West Pharmaceutical Services 54 1,671
WorldGate Communications 87(b) 3,730
Xpedior 169(b) 4,648
Total 346,489
Multi-industry conglomerates (4.3%)
ACNielsen 294(b) 6,027
Agribrands Intl 41(b) 1,694
Apollo Group Cl A 363(b) 7,850
Baldor Electric 107 1,826
Bell & Howell 61(b) 2,181
Brady (WH) Cl A 66 1,877
CDI 71(b) 1,655
Cendant 1,120(b) 22,610
Century Business Services 188(b) 699
ChoicePoint 64(b) 2,240
Crane 105 2,054
Danaher 221 9,531
DeVry 353(b) 6,508
Diebold 107 2,374
Dover 324 13,061
Eastman Kodak 492 30,443
Electronics for Imaging 85(b) 3,984
Emerson Electric 676 37,221
F.Y.I. 60(b) 1,883
Fisher Scientific Intl 76(b) 2,940
General Electric 5,136 685,013
Grainger (WW) 145 6,951
HotJobs.com 75(b) 2,091
Hubbell Cl B 101 2,620
Imation 110(b) 3,328
Interim Services 129(b) 3,233
ITT Educational Services 110(b) 1,464
ITT Inds 137 4,333
Kelly Services Cl A 72 1,818
Korn/Ferry Intl 91(b) 3,134
Lancaster Colony 64 2,032
Lason 57(b) 534
Mail-Well 153(b) 1,673
Manpower 119 4,247
Mark IV Inds 104 2,165
MemberWorks 60(b) 1,665
Metamor Worldwide 120(b) 3,390
Minnesota Mining & Mfg 626 58,608
Modis Professional Services 174(b) 3,023
Natl Service Inds 64 1,592
NCO Group 42(b) 969
Olsten 194 1,989
Pentair 75 2,513
Pierce Leahy 89(b) 2,943
Pittway Cl A 66 2,987
Polaroid 96 2,280
Pre-Paid Legal Services 56(b) 1,260
Robert Half Intl 142(b) 5,485
Ruddick 125 1,680
Student Advantage 158(b) 2,844
Sylvan Learning Systems 123(b) 1,668
Symyx Technologies 88(b) 4,532
Teledyne Technologies 42(b) 389
Textron 233 13,907
Triarc Companies 102(b) 1,772
U.S. Inds 140 1,811
United Dominion Inds 94 1,886
Wesco Financial 11 2,915
Xerox 1,031 21,522
YORK Intl 79 1,901
Zebra Technologies Cl A 49(b) 2,900
Total 1,031,725
Paper & packaging (0.5%)
American Natl Can Group 150 1,800
AptarGroup 77 1,694
Ball 86 3,128
Bemis 81 2,557
Boise Cascade 89 3,148
Bowater 80 4,135
Caraustar Inds 82 1,584
Champion Intl 149 8,717
Chesapeake 69 1,798
Consolidated Papers 141 3,895
Crown Cork & Seal 190 3,859
Fort James 344 9,202
Glatfelter (PH) 134 1,650
Greif Bros Cl A 73 2,039
Intl Paper 643 30,624
Longview Fibre 65 930
Mead 159 5,923
Owens-Illinois 242(b) 4,432
Pactiv 265(b) 2,451
Rayonier 53 2,279
Sealed Air 130(b) 7,296
Shorewood Packaging 34(b) 540
Smurfit-Stone Container 337(b) 6,677
Sonoco Products 158 3,160
Wausau-Mosinee Paper 174 1,718
Westvaco 156 4,280
Willamette Inds 173 7,093
Total 126,609
Real estate investment trust (0.8%)
AMB Property 135 2,759
Archstone Communities Trust 217 4,353
Arden Realty 98 2,070
AvalonBay Communities 101 3,485
Bradley Real Estate 113 1,921
Brandywine Realty Trust 122 1,998
BRE Properties Cl A 86 1,892
Cabot Industrial Trust 105 2,048
Camden Property Trust 76 1,967
CarrAmerica Realty 104 2,256
CBL & Associates Properties 87 1,832
CenterPoint Properties 61 2,162
Chateau Properties 79 2,074
Chelsea GCA Realty 68 1,908
Colonial Properties Trust 80 1,965
Cornerstone Properties 194 2,789
Cousins Properties 62 2,220
Crescent Real Estate Equities 186 3,348
Developers Diversified Realty 144 1,872
Duke-Weeks Realty 182 3,606
Equity Office Properties Trust 392 10,020
Equity Residential Properties Trust 197 8,175
Essex Property Trust 61 2,074
FelCor Suite Hotels 122 2,196
First Industrial Realty Trust 84 2,258
Gables Residential Trust 83 1,800
General Growth Properties 80 2,280
Health Care 103 1,661
Health Care Property Investors 153 3,910
Healthcare Realty Trust 110 1,966
Highwoods Properties 96 2,184
Home Properties of New York 73 1,976
Hospitality Properties Trust 90 1,761
Host Marriott 355 3,151
HRPT Properties Trust 205 1,922
JDN Realty 106 1,736
Kilroy Realty 104 2,022
Kimco Realty 94 3,314
Koger Equity 131 2,063
Liberty Property Trust 104 2,425
Macerich 99 2,234
Mack-Cali Realty 92 2,340
Manufactured Home Communities 88 2,112
Meditrust 250 906
MeriStar Hospitality 130 2,121
Mid-America Apartment Communities 87 1,925
Mills 74 1,290
Nationwide Health Properties 120 1,620
New Plan Excel Realty Trust 138 2,260
Pacific Gulf Properties 98 1,911
Pinnacle Holdings 85(b) 3,607
Post Properties 65 2,494
Prentiss Properties Trust 95 1,995
Prison Realty Trust 190(b) 843
ProLogis Trust 251 4,784
PS Business Parks 88 1,980
Public Storage 201 4,559
Realty Income 89 1,891
Reckson Associates Realty 104 2,054
Regency Realty 103 2,015
Rouse 118 2,626
Shurgard Storage Centers Cl A 84 1,869
Simon Property Group 265 6,541
SL Green Realty 104 2,262
Smith (Charles E) Residential Realty 59 2,095
Spieker Properties 99 3,849
Starwood Financial Cl A 185 3,214
Storage USA 72 2,147
Summit Properties 108 2,052
Sun Communities 63 1,953
Taubman Centers 182 2,036
United Dominion Realty Trust 186 1,790
Urban Shopping Centers 76 2,119
Vornado Realty Trust 134 4,195
Walden Residential Properties 93 2,093
Washington Real Estate Investment Trust 130 2,015
Weingarten Realty Investors 53 1,978
Westfield America 145 1,894
Total 199,088
Restaurants & lodging (0.7%)
21st Century Insurance Group 135 2,523
Applebee's Intl 61 1,529
Bob Evans Farms 130 2,064
Boca Resorts Cl A 199(b) 1,853
Brinker Intl 103(b) 2,601
CBRL Group 144 1,332
CEC Entertainment 63(b) 1,587
Cheesecake Factory (The) 75(b) 2,147
Choice Hotels Intl 139(b) 2,302
Darden Restaurants 205 3,254
Extended Stay America 260(b) 2,031
Hilton Hotels 788 6,649
Jack in the Box 77(b) 1,583
Marriott Intl Cl A 387 12,021
McDonald's 2,106 78,317
MGM Grand 97 4,013
Outback Steakhouse 117(b) 2,896
Papa John's Intl 47(b) 1,169
Park Place Entertainment 470(b) 4,935
Ruby Tuesday 105 1,969
Sodexho Marriott Services 114 1,503
Sonic 64(b) 1,840
Starbucks 283(b) 9,056
Starwood Hotels & Resorts Worldwide 277 6,648
Tricorn Global Restaurants 239(b) 6,841
Wendy's Intl 189 3,556
Wyndham Intl Cl A 727(b) 1,681
Total 167,900
Retail (5.8%)
7-Eleven 916(b) 2,462
99 Cents Only Stores 68(b) 2,380
Albertson's 654 20,029
Amazon.com 524(b) 33,830
American Eagle Outfitters 72(b) 2,615
Ames Dept Stores 58(b) 1,211
AnnTaylor Stores 52(b) 1,144
AutoNation 729(b) 5,513
AutoZone 231(b) 6,064
Barnes & Noble 279(b) 5,615
barnesandnoble.com Cl A 105(b) 1,221
bebe stores 102(b) 1,855
Bed Bath & Beyond 217(b) 5,900
Best Buy 317(b) 15,137
Bindley Western Inds 153 2,611
BJ's Wholesale Club 115(b) 4,025
Boise Cascade Office Products 198(b) 2,982
Borders Group 155(b) 2,131
Casey's General Stores 158 1,629
CDnow 145(b) 1,668
CDW Computer Centers 67(b) 4,382
Charming Shoppes 390(b) 2,657
Chemdex 54(b) 5,265
Children's Place Retail Stores 76(b) 1,102
Circuit City Stores-Circuit City Group 312 12,012
Claire's Stores 125 2,344
CompUSA 317(b) 3,051
Consolidated Stores 171(b) 2,437
Cost Plus 59(b) 988
Costco Wholesale 686(b) 33,570
CVS 609 21,277
Delhaize America Cl B 246 4,413
Dillard's Cl A 166 3,185
Dollar General 349 7,416
Dollar Tree Stores 96(b) 4,230
drugstore.com 66(b) 1,980
eBay 200(b) 30,013
eToys 179(b) 2,618
Family Dollar Stores 269 4,321
Federated Dept Stores 324(b) 13,487
Footstar 62(b) 1,550
Fossil 73(b) 1,419
Gap 1,333 59,567
GoTo.com 71(b) 5,316
Great Atlantic & Pacific Tea 67 1,851
Hannaford Bros 66 4,628
Hanover Direct 889(b) 2,667
Haverty Furniture Companies 78 858
Hollywood Entertainment 150(b) 1,791
Home Depot 3,604 204,076
Intimate Brands 387 11,707
K mart 768(b) 6,432
Kohl's 253(b) 17,742
Kroger 1,290(b) 22,414
Lands' End 47(b) 1,619
Limited 333 10,219
Linens `N Things 61(b) 1,197
Longs Drug Stores 76 1,634
Lowe's Companies 593 26,463
May Dept Stores 520 16,185
Men's Wearhouse 94(b) 2,244
Michaels Stores 62(b) 1,659
MP3.com 106(b) 2,995
NBTY 271(b) 3,828
Neiman Marcus Group Cl A 155(b) 3,788
Nordstrom 218 4,796
Office Depot 583(b) 5,866
OfficeMax 432(b) 2,808
Pacific Sunwear of California 72(b) 2,115
Payless ShoeSource 158(b) 6,439
Penney (JC) 410 8,046
Pep Boys - Manny, Moe & Jack 160 1,160
Perrigo 260(b) 2,234
Pier 1 Imports 337 2,780
priceline.com 225(b) 13,050
PurchasePro.com 55(b) 4,558
Regis 117 2,062
Rent-A-Center 112(b) 1,932
Rexall Sundown 194(b) 2,510
Rite Aid 403 2,846
Ross Stores 142 1,811
Russ Berrie 101 2,481
Safeway 793(b) 30,282
Saks 225(b) 3,122
SciQuest.com 38(b) 2,152
Sears, Roebuck 591 18,284
ShopKo Stores 78(b) 1,428
Sotheby's Holdings Cl A 141 2,891
Spiegel Cl A 205(b) 1,448
Stamps.com 62(b) 2,077
Staples 723(b) 17,216
Sunglass Hut Intl 171(b) 1,528
Talbots 49 1,736
Tandy 300 14,663
Target 687(b) 45,384
Tiffany 109 8,066
TJX Companies 494 8,058
Too 60(b) 994
Toys R Us 385(b) 3,970
Trans World Entertainment 170(b) 1,573
Tuesday Morning 88(b) 1,309
United Stationers 90(b) 2,340
Value City Dept Stores 129(b) 1,975
Venator Group 267(b) 1,602
Wal-Mart Stores 6,965 381,333
Walgreen 1,560 43,094
Weis Markets 65 2,791
Whole Foods Market 62(b) 2,852
Wild Oats Markets 75(b) 1,238
Williams-Sonoma 87(b) 2,757
Winn-Dixie Stores 231 4,678
Zale 57(b) 2,038
Total 1,374,992
Textiles & apparel (0.3%)
Abercrombie & Fitch 161(b) 3,441
Burlington Coat Factory Warehouse 4 42
Guess? 174(b) 4,078
Jones Apparel Group 190(b) 4,180
Kellwood 96 1,692
Kenneth Cole Productions Cl A 56(b) 1,855
Liz Claiborne 95 3,212
Nautica Enterprises 139(b) 1,242
Nike Cl B 437 19,884
Oakley 317(b) 1,704
Polo Ralph Lauren Cl A 114(b) 1,696
Reebok Intl 224(b) 1,652
Russell 135 2,017
Shaw Inds 214 2,902
Springs Inds Cl A 60 2,183
Timberland Cl A 52(b) 1,924
Unifi 175 1,936
VF 185 4,798
Warnaco Cl A 121 1,263
WestPoint Stevens 100 1,644
Total 63,345
Transportation (0.5%)
AMERCO 73(b) 1,898
American Freightways 108(b) 1,472
Atlas Air 99(b) 2,624
Burlington Northern Santa Fe 723 17,396
C.H. Robinson Worldwide 64 2,604
CNF Transportation 84 2,515
CSX 338 9,887
Eagle USA Airfreight 66(b) 2,162
Expeditors Intl of Washington 78 3,288
FedEx 462(b) 18,277
Florida East Coast Inds 59 2,345
Fritz Companies 51(b) 536
GATX 77 2,214
Hunt (JB) Transport Services 147 1,856
Norfolk Southern 592 10,063
Rollins Truck Leasing 205 2,012
Ryder System 109 2,405
Swift Transportation 113(b) 1,441
Union Pacific 385 15,399
United Parcel Service 168 9,995
USFreightways 47 1,710
Werner Enterprises 114 1,454
Wisconsin Central Transportation 152(b) 2,005
XTRA 49(b) 2,150
Yellow Corp 119(b) 1,815
Total 119,523
Utilities -- electric (2.0%)
AES 320(b) 25,639
Allegheny Energy 179 4,911
Alliant Energy 122 3,637
Ameren 213 6,936
American Electric Power 301 10,084
American Water Works 150 3,638
Avista 115 3,292
Calpine 84(b) 6,143
Carolina Power & Light 248 7,998
Central & South West 331 6,682
CH Energy Group 52 1,612
Cinergy 247 6,144
Citizens Utilities 405(b) 5,999
Cleco 62 2,085
CMP Group 75 2,077
CMS Energy 184 5,520
Conectiv 145 2,528
Consolidated Edison 344 11,245
Constellation Energy Group 233 7,019
Dominion Resources 298 12,442
DPL 247 4,739
DQE 117 5,455
DTE Energy 226 7,854
Duke Energy 567 32,743
Eastern Utilities Associates 66 2,030
Edison Intl 540 15,659
Energy East 178 4,016
Entergy 384 9,576
Florida Progress 153 6,483
FPL Group 279 11,770
GPU 195 5,655
Hawaiian Electric Inds 58 1,747
Idacorp 67 2,249
Illinova 109 4,769
IPALCO Enterprises 329 6,395
Kansas City Power & Light 96 2,334
LG&E Energy 202 3,434
MDU Resources Group 84 1,664
MidAmerican Energy Holdings 95 3,248
Minnesota Power 119 2,001
Montana Power 171 6,926
New Century Energies 179 5,180
New England Electric System 92 4,865
Niagara Mohawk Holdings 291(b) 3,656
NiSource 194 3,565
Northeast Utilities 204 4,182
Northern States Power 240 4,620
NSTAR 98 4,110
OGE Energy 223 4,530
PG&E 597 13,097
PECO Energy 290 12,071
Pinnacle West Capital 132 4,076
Plug Power 83(b) 7,781
Potomac Electric Power 184 4,439
PP & L Resources 245 5,681
Public Service Co of New Mexico 113 1,794
Public Service Enterprise Group 341 11,722
Puget Sound Energy 131 2,948
Reliant Energy 460 10,494
RGS Energy Group 83 1,676
SCANA 161(b) 4,377
Sempra Energy 374 6,942
Sierra Pacific Resources 121 1,936
SIGCORP 77 1,583
Southern Co 1,062 27,213
Teco Energy 205 4,023
Texas Utilities 430 15,210
Unicom 338 13,223
United Illuminating 41 2,055
UtiliCorp United 145 2,837
Western Resources 105 1,680
Wisconsin Energy 182 3,595
WPS Resources 71 1,797
Total 473,336
Utilities -- gas (0.8%)
AGL Resources 118 2,021
Coastal 332 12,242
Columbia Energy Group 128 8,320
Dynegy 241 7,471
Eastern Enterprises 128 7,320
El Paso Energy 354 11,416
Enron 1,110 74,855
Equitable Resources 55 1,898
KeySpan 217 5,086
Kinder Morgan 175 4,605
MCN 133 3,425
Natl Fuel Gas 60 2,674
New Jersey Resources 50 1,891
NICOR 73 2,500
Northwest Natural Gas 77 1,579
Ocean Energy 259(b) 2,315
ONEOK 67 1,750
Peoples Energy 57 1,781
Piedmont Natural Gas 65 1,853
Public Service Co of North Carolina 63 2,055
Questar 129 1,975
Teppco Partners LP 87 1,860
UGI 88 1,870
Washington Gas Light 78 1,960
Western Gas Resources 114 1,454
WICOR 69 2,040
Williams Companies 675 26,155
Total 194,371
Utilities -- telephone (7.2%)
Adelphia Business Solutions Cl A 68(b) 3,485
Aerial Communications 64(b) 3,328
Allegiance Telecom 97(b) 10,221
ALLTEL 475 31,706
AT&T 5,001 263,802
AT&T - Liberty Media Group Cl A 39(b) 1,994
Bell Atlantic 2,414 149,517
BellSouth 2,931 137,940
BroadWing 335 12,730
CenturyTel 217 8,300
COMSAT 90 1,541
Crown Castle Intl 218(b) 6,894
Global TeleSystems Group 265(b) 6,608
GTE 1,525 111,802
ICG Communications 126(b) 3,040
Illuminet Holdings 50(b) 2,519
Infonet Services Cl B 472(b) 13,334
Intermedia Communications 94(b) 4,042
ITC DeltaCom 92(b) 2,668
Latitude Communications 69(b) 1,889
Level 3 Communications 528(b) 62,271
MCI WorldCom 4,443(b) 204,100
McLeodUSA Cl A 234(b) 16,088
Metromedia Fiber Network Cl A 300(b) 20,306
MGC Communications 67(b) 3,823
Network Plus 167(b) 4,405
Nextel Communications Cl A 558(b) 59,357
NEXTLINK Communications Cl A 114(b) 9,619
Omnipoint 83(b) 8,513
PanAmSat 55(b) 2,891
Powertel 43(b) 3,806
Primus Telecommunications Group 99(b) 3,162
Qwest Communications Intl 1,152(b) 45,360
RCN 118(b) 7,014
SBC Communications 5,340 230,287
Sprint 1,349 87,263
Sprint PCS 684(b) 75,283
TALK.com 150(b) 2,447
TeleCorp PCS 129(b) 5,555
Telephone & Data Systems 96 9,984
Teligent Cl A 21(b) 1,408
U S WEST Communications Group 785 52,203
U.S. Cellular 136(b) 9,112
Viatel 67(b) 2,475
West TeleServices 172(b) 4,365
Western Wireless Cl A 77(b) 4,197
WinStar Communications 85(b) 6,019
Total 1,718,673
Total common stocks
(Cost: $20,897,960) $23,877,492
Other (--%)
Issuer Shares Value(a)
Sunbeam 83 $93
Warrants
Total other
(Cost: $--) $93
Total investments in securities
(Cost: $20,897,960)(d) $23,877,585
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of Jan. 31, 2000, the
value of foreign securities represented 0.07% of net assets.
(d) At Jan. 31, 2000, the cost of securities for federal income tax purposes was
$20,897,428 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $3,913,799
Unrealized depreciation (933,642)
Net unrealized appreciation $2,980,157
<PAGE>
<TABLE>
<CAPTION>
AXP International Equity Index Fund
Jan. 31, 2000
(Percentages represent value of investments compared to net assets)
Common stocks (91.4%)
Issuer Shares Value(a)
Australia (1.9%)
Banks and savings & loans (0.3%)
<S> <C> <C>
Natl Australia Bank 3,213 $44,735
Suncorp-Metway 437 2,275
Westpac Banking 3,956 26,850
Total 73,860
Beverages & tobacco (0.1%)
British American Tobacco Australasia 321 2,774
Coca-Cola Amatil 2,175 5,174
Foster's Brewing Group 3,672 9,462
Southcorp 1,317 4,636
Total 22,046
Building materials & construction (0.1%)
Boral 2,405 3,651
CSR 2,208 5,342
James Hardie Inds 868 2,048
Leighton Holdings 558 2,004
Pioneer Intl 1,757 4,998
Total 18,043
Communications equipment & services (0.4%)
Telstra 16,712 83,136
Financial services (0.1%)
Colonial 1,977 7,994
General Property Trust 3,088 4,805
Lend Lease 1,072 13,640
Total 26,439
Food (--%)
Goodman Fielder 2,711 2,223
Health care (--%)
CSL 281 4,139
Health care services (--%)
Faulding (FH) 340 1,919
Mayne Nickless 732 1,704
Pacific Dunlop 2,189 2,736
Total 6,359
Industrial equipment & services (0.1%)
Brambles Inds 483 11,456
Orica 577 2,870
Total 14,326
Insurance (0.1%)
AMP 2,313 22,423
QBE Insurance Group 827 3,734
Total 26,157
Leisure time & entertainment (--%)
TABCORP Holdings 649 3,525
Media (0.2%)
News Corp 3,946 46,432
Metals (0.4%)
Broken Hill Proprietary 3,830 45,789
M.I.M. Holdings 3,612 3,179
Normandy Mining 3,661 2,428
North 1,622 3,196
Rio Tinto 617 10,960
WMC 2,441 12,401
Total 77,953
Multi-industry conglomerates (--%)
Howard Smith 408 2,547
Wesfarmers 568 4,511
Total 7,058
Paper & packaging (--%)
Amcor 1,360 5,681
Retail (0.1%)
Coles Myer 2,459 11,920
Westfield Trust 3,278 6,146
Woolworths 2,458 7,634
Total 25,700
Utilities -- gas (--%)
Australian Gas Light 701 4,069
Santos 1,291 3,499
Total 7,568
Austria (0.1%)
Banks and savings & loans (0.1%)
Bank Austria 264 12,204
Beverages & tobacco (--%)
Austria Tabakwerke 51 2,500
Building materials & construction (--%)
Wienerberger Baustoffindustrie 162 3,233
Insurance (--%)
Generali Holding Vienna 18 3,064
Multi-industry conglomerates (--%)
VA Technologie 35 2,353
Utilities -- electric (--%)
Oesterreichiesche Elektrizitaetswirtschafts Cl A 72(b) 7,890
Utilities -- gas (--%)
OMV 60 5,741
Belgium (0.7%)
Banks and savings & loans (0.1%)
KBC Bancassurance Holding 697 29,323
Automotive & related (--%)
D'Ieteren 13 4,173
Building materials & construction (--%)
Cimenteries CBR Cementbedrijven 2 200
Chemicals (0.1%)
Solvay 200 13,697
Financial services (0.2%)
Fortis (B) 1,683 47,423
Food (--%)
Colruyt 93 4,550
Delhaize "Le Lion" 100 5,855
Total 10,405
Health care (0.1%)
UCB 340 11,643
Multi-industry conglomerates (--%)
Groupe Bruxelles Lambert 50 9,363
Utilities -- electric (0.2%)
Electrabel 128 34,752
Wire & cable (--%)
Bekaert 100 4,760
Denmark (0.6%)
Banks and savings & loans (0.1%)
Den Danske Bank Group 120 11,373
Unidanmark Cl A 200 11,989
Total 23,362
Beverages & tobacco (--%)
Carlsberg Cl A 100 3,155
Carlsberg Cl B 100 3,247
Total 6,402
Building materials & construction (--%)
FLS Inds Cl B 100 2,169
Computers & office equipment (--%)
Navision Software 100(b) 10,385
Food (--%)
Danisco 100 3,273
Health care services (0.1%)
Novo Nordisk 200 24,450
Household products (--%)
ISS Intl Service System Cl B 100(b) 7,164
Insurance (--%)
Topdanmark 100(b) 1,643
Transportation (0.2%)
D/S 1912 Cl B 2 21,058
D/S Dampskibsselskabet Svendborg Cl B 2 29,576
Total 50,634
Utilities -- telephone (0.2%)
Tele Danmark 500 35,558
Finland (3.2%)
Communications equipment & services (2.9%)
Nokia 2,900 526,040
Sonera 1,700 117,177
Total 643,217
Computers & office equipment (0.1%)
Tietoenator 200 11,349
Food (--%)
Raisio Group 400 1,198
Industrial equipment & services (--%)
Metso 300(b) 4,403
Insurance (--%)
Sampo Insurance Cl A 100 3,473
Metals (--%)
Outokumpu 500 6,555
Miscellaneous (0.1%)
Nordbanken Finnish Depositary Receipts 2,040 11,516
Paper & packaging (0.1%)
UPM-Kymmene 600 22,483
Retail (--%)
Kesko 200(b) 2,446
France (8.7%)
Automotive & related (0.2%)
Michelin (CGDE) Cl B 300 10,599
PSA Peugeot Citroen 100 21,123
Valeo 180 12,328
Total 44,050
Banks and savings & loans (0.5%)
Banque Nationale de Paris 955 75,916
Societe Generale Cl A 215 43,249
Total 119,165
Beverages & tobacco (0.4%)
LVMH 210 84,444
Pernod-Ricard 125 6,800
Total 91,244
Building materials & construction (0.4%)
Bouygues 62 39,126
Compagnie de Saint-Gobain 190 26,955
Groupe GTM 33 2,914
Lafarge 230 20,343
Technip 34 3,606
Total 92,944
Chemicals (0.1%)
Air Liquide 180 27,685
Communications equipment & services (0.4%)
Alcatel 411 82,032
Computers & office equipment (0.3%)
Cap Gemini 168 35,701
Dassault Systemes 245 17,223
Societe BIC 120 5,753
Total 58,677
Electronics (0.7%)
Sagem 23 18,902
Schneider Electric 340 24,117
STMicroelectronics 600 98,329
Thomson CSF 400 14,871
Total 156,219
Financial services (--%)
Societe Eurafrance 11 5,378
Food (0.8%)
Carrefour 738 117,623
Casino Guichard-Perrachon 150 14,426
Danone 160 34,439
Eridania Beghin-Say 50 4,677
Sodexho Alliance 73 11,113
Total 182,278
Health care services (0.7%)
Aventis 1,602 84,795
Essilor Intl 23 6,458
Sanofi-Synthelabo 1,587(b) 59,779
Total 151,032
Household products (0.4%)
L'Oreal 144 93,408
Industrial equipment & services (--%)
Sidel 73 6,142
Insurance (0.4%)
Axa 750 94,586
Leisure time & entertainment (--%)
Club Mediterranee 33(b) 3,629
Zodiac 11 2,086
Total 5,715
Media (0.2%)
Canal Plus 270 43,983
Metals (--%)
Pechiney CI A 177 11,949
Miscellaneous (0.2%)
Gecina 37 3,910
Simco 50 3,914
Suez Lyonnaise des Eaux 222 32,017
Suez Lyonnaise des Eaux 200(b) 2
Unibail 27 3,548
Total 43,391
Multi-industry conglomerates (0.7%)
Lagardere S.C.A. 263 20,482
Usinor 528 8,859
Vivendi 1,252 128,620
Total 157,961
Restaurants & lodging (--%)
Accor 375 15,410
Retail (0.2%)
Pinault-Printemps-Redoute 255 50,920
Utilities -- gas (0.9%)
Coflexip 34 2,799
Total Fina Cl B 1,535 191,032
Total 193,831
Utilities -- telephone (1.2%)
France Telecom 2,118 274,569
Germany (9.0%)
Automotive & related (0.7%)
Continental 300 4,931
DaimlerChrysler 2,000 131,104
Volkswagen 600 28,295
Total 164,330
Airlines (0.1%)
Deutsche Lufthansa 800 16,437
Banks and savings & loans (0.6%)
Deutsche Bank 1,200 90,849
Dresdner Bank 1,000 49,115
Total 139,964
Building materials & construction (0.1%)
Bilfinger & Berger Bau 100 1,673
Heidelberger Zement 32(b) 2,226
Heidelberger Zement 100 6,946
Heidelberger Zement 32(b,d) --
Hochtief 200 5,362
Total 16,207
Chemicals (0.7%)
BASF 1,200 51,131
Bayer 2,200 103,288
Total 154,419
Communications equipment & services (1.8%)
Deutsche Telekom 6,000 409,749
Computers & office equipment (0.6%)
SAP 200 136,094
Health care services (0.2%)
Fresenius Medical Care 200 15,419
Gehe 100 3,346
Merck KGaA 400 12,516
Schering 100 11,261
Total 42,542
Household products (0.1%)
Beiersdorf 200 12,964
Industrial equipment & services (1.2%)
Mannesman 1,000 268,274
Insurance (1.1%)
Allianz 500 166,081
Muenchener Rueckversicherungs-Gesellschaft 300 79,690
Total 245,771
Media (0.1%)
EM. TV & Merchandising 200 16,241
Miscellaneous (0.2%)
Thyssen Krupp 1,100 29,004
WCM Beteiligungs & Grundbesitz 300 11,198
Total 40,202
Multi-industry conglomerates (1.2%)
Linde 200 9,119
MAN 300 8,913
Preussag 300 14,353
Siemens 1,200 170,473
Veba 1,000 42,756
Viag 1,500 25,712
Total 271,326
Retail (0.2%)
Adidas-Salomon 100 5,861
Douglas Holding 100 3,376
Karstadtquelle 200 6,281
Metro 500 20,400
Total 35,918
Utilities -- electric (0.1%)
RWE 900 28,926
Hong Kong (2.2%)
Airlines (0.1%)
Cathay Pacific Airways 8,000 12,647
Banks and savings & loans (0.2%)
Bank of East Asia 3,200 8,246
Hang Seng Bank 4,500 43,813
Total 52,059
Building materials & construction (--%)
New World Development 5,000 9,575
Communications equipment & services (0.3%)
Cable & Wireless HKT 28,000 68,018
Electronics (0.1%)
Johnson Electric Holdings 2,000 12,827
Media (--%)
South China Morning Post 4,000 3,496
Television Broadcasts 1,000 7,326
Total 10,822
Miscellaneous (0.6%)
Cheung Kong 5,000 63,139
Hang Lung Development 3,000 2,796
Hysan Development 2,000 2,044
Sino Land 8,099 4,216
Sun Hung Kai Properties 6,000 55,718
Varitronix Intl 1,000 2,063
Wharf 5,000 9,961
Total 139,937
Multi-industry conglomerates (0.7%)
Hutchison Whampoa 9,000 129,558
Swire Pacific Cl A 3,500 16,959
Total 146,517
Restaurants & lodging (--%)
Shangri-La Asia 4,000 4,396
Utilities -- electric (0.1%)
CLP Holdings 5,500 22,975
Utilities -- gas (0.1%)
Hong Kong & China Gas 11,000 14,068
Ireland (0.3%)
Airlines (--%)
Ryanair Holdings 387(b) 5,112
Banks and savings & loans (0.1%)
Allied Irish Bank 2,038 19,042
Building materials & construction (0.1%)
CRH 912 17,426
Financial services (--%)
Irish Life & Permanent 684 5,789
Food (--%)
Kerry Group Cl A 406 4,767
Media (--%)
Independent News & Media 608 4,759
Paper & packaging (--%)
Jefferson Smurfit Group 2,555 7,249
Utilities -- telephone (0.1%)
eircom 5,212 21,468
Italy (3.9%)
Airlines (--%)
Alitalia 4,000 7,631
Automotive & related (0.2%)
Fiat 1,000 28,422
Magneti Marelli 1,000 3,953
Pirelli 5,000 11,936
Total 44,311
Banks and savings & loans (0.6%)
Banca di Roma 12,000 13,032
Banca Intesa 13,000 38,910
Banca Popolare di Milano 1,000 7,015
San Paolo-IMI 3,000 35,868
UniCredito Italiano 11,000 43,803
Total 138,628
Broker dealers (--%)
Mediobanca 1,000 8,052
Chemicals (--%)
Montedison 6,000 8,600
Communications equipment & services (1.0%)
Olivetti 11,000(b) 37,022
Sirti 1,000 3,150
Telecom Italia Mobile 19,000 181,169
Total 221,341
Food (0.1%)
La Rinascente 1,000 5,381
Parmalat Finanziaria 5,000 5,797
Total 11,178
Insurance (0.4%)
Assicurazioni Generali 3,030 85,437
Riunione Adriatica di Sicurta 1,000 8,346
Total 93,783
Media (0.2%)
Mediaset 3,000 47,491
Miscellaneous (--%)
Beni Stabili 3,000(b) 1,104
Restaurants & lodging (--%)
Autogrill 1,000 10,185
Retail (--%)
Bulgari 1,000 9,931
Textiles & apparel (--%)
Benetton Group 4,000 7,514
Utilities -- electric (0.3%)
Enel 17,000(b) 68,127
Utilities -- gas (0.4%)
ENI 19,000 89,972
Italgas 2,000 8,571
Total 98,543
Utilities -- telephone (0.7%)
Telecom Italia 11,500 163,473
Japan (25.7%)
Airlines (0.1%)
Japan Airlines 4,000 11,472
Automotive & related (2.5%)
Autobacs Seven 100 3,260
Bridgestone 2,000 42,320
Denso 2,000 44,188
Honda Motor 2,000 64,087
NGK Spark Plug 1,000 10,127
Nissan Motor 9,000(b) 42,880
Toyota Motor 8,000 350,519
Total 557,381
Banks and savings & loans (2.7%)
77 Bank 1,000 9,931
Asahi Bank 6,000 33,632
Ashikaga Bank 1,000(b) 2,009
Bank of Fukuoka 1,000 5,998
Bank of Tokyo-Mitsubishi 10,000 128,174
Bank of Yokohama 3,000 12,416
Daiwa Bank 4,000 11,584
Fuji Bank 8,000 79,670
Gunma Bank 1,000 6,427
Hokuriku Bank 2,000(b) 4,484
Industrial Bank of Japan 6,000 57,903
Joyo Bank 2,000 8,221
Mitsubishi Trust & Banking 3,000 27,662
Mitsui Trust & Banking 3,000 6,474
Sakura Bank 9,000 57,174
Shizuoka Bank 2,000 19,320
Sumitomo Bank 7,000 95,150
Tokai Bank 5,000 28,680
Total 594,909
Beverages & tobacco (0.3%)
Asahi Breweries 1,000 9,819
Japan Tobacco 40 33,183
Kirin Brewery 2,000 24,738
Sapporo Breweries 1,000 3,270
Total 71,010
Building materials & construction (0.6%)
Asahi Glass 3,000 25,363
Daikin Inds 1,000 14,667
Daiwa House Inds 1,000 8,595
Inax 1,000 6,138
Kajima 2,000 5,456
Nippon Sheet Glass 1,000 8,268
Nishimatsu Construction 1,000 3,877
Obayashi 2,000 8,016
Okumura 1,000 3,597
Sanwa Shutter 1,000 3,438
Sekisui House 2,000 19,432
Shimizu 2,000 6,110
Taiheiyo Cement 2,000 3,924
Taisei 2,000 3,737
Toda 1,000 3,970
Total 124,588
Chemicals (0.7%)
Asahi Chemical Inds 3,000 16,788
Daicel Chemicals Inds 1,000 3,559
Dainippon Ink & Chemicals 2,000 7,081
Denki Kagaku Kogyo Kabushiki Kaisha 1,000 3,288
Kaneka 1,000 13,023
Mitsubishi Chemical 5,000 20,086
Mitsubishi Gas Chemical 1,000 1,962
Sekisui Chemical 1,000 4,092
Shin-Etsu Chemical 1,000 53,625
Showa Denko K.K. 2,000 2,578
Sumitomo Chemical 4,000 19,245
Tosoh 1,000 3,868
Ube Inds 2,000 4,054
Total 153,249
Communications equipment & services (1.8%)
Nippon Telegraph & Telephone 270 408,626
Computers & office equipment (2.2%)
Canon 2,000 82,024
CSK 100 12,705
Fuji Soft ABC 100 7,633
Fujitsu 4,000 148,353
Konami 100 16,816
Meitec 100 3,438
Softbank 200 196,184
Trans Cosmos 100 31,810
Total 498,963
Consumer finance -- personal loans (0.3%)
ACOM 300 35,061
Takefuji 300 35,874
Total 70,935
Electronics (5.8%)
Advantest 200 45,963
Casio Computer 1,000 8,165
Fanuc 500 52,783
Hirose Electric 100 16,536
Hitachi 8,000 113,675
Kyocera 400 67,675
Matsushita Electric 4,000 106,314
Minebea 1,000 13,873
Mitsubishi Electric 5,000 34,659
Murata Mfg 1,000 202,164
NEC 4,000 85,948
NGK Insulators 1,000 7,418
Omron 1,000 28,961
Rohm 300 99,214
Sanyo Electric 4,000 17,077
Sharp 3,000 53,306
Sony 1,000 251,865
Tohoku Electric Power 1,100 14,675
Toshiba 7,000 54,866
Yokogawa Electric 1,000 8,408
Total 1,283,545
Financial services (0.9%)
Credit Saison 400 8,053
Daiwa Securities Group 3,000 48,906
Nichiei 100 3,064
Nippon Shinpan 1,000 2,644
Nomura Securities 4,000 91,178
Orient 1,000 3,130
ORIX 100 18,684
Promise 300 20,712
Total 196,371
Food (0.3%)
Ajinomoto 1,000 12,145
Meiji Milk Products 1,000 4,157
Meiji Seika Kaisha 1,000 6,820
Nichirei 1,000 2,803
Nippon Meat Packers 1,000 11,351
Nisshin Flour Milling 1,000 7,548
Nissin Food Products 300 7,147
Snow Brand Milk Products 1,000 4,596
Total 56,567
Health care services (1.2%)
Chugai Pharmaceutical 1,000 14,574
Daiichi Pharmaceutical 1,000 13,499
Eisai 1,000 18,684
Kyowa Hakko Kogyo 1,000 10,510
Sankyo 1,000 23,449
Shionogi 1,000 14,574
Taisho Pharmaceutical 1,000 30,175
Takeda Chemical Inds 2,000 108,369
Yamanouchi Pharmaceutical 1,000 43,908
Total 277,742
Household products (0.2%)
Kao 1,000 27,373
Shiseido 1,000 13,826
Toto 1,000 5,820
Total 47,019
Industrial equipment & services (0.7%)
Amada 1,000 7,483
Brother Inds 1,000 2,569
Chiyoda 1,000(b) 1,513
Ebara 1,000 12,705
Fuji Machine Mfg 100 6,801
Ishikawajima-Harima Heavy Inds 3,000 3,699
Japan Energy 2,000 1,868
Kinden 1,000 7,334
Komatsu 2,000 9,006
Kubota 3,000 11,155
Marubeni 3,000 11,827
Mitsubishi Heavy Inds 8,000 25,636
NIDEC 100 22,701
Nippon Mitsubishi Oil 3,000 13,593
SMC 100 20,908
Sumitomo Heavy Inds 1,000(b) 2,756
Total 161,554
Industrial transportation (0.6%)
Central Japan Railway 5 30,829
East Japan Railway 9 42,629
Kamigumi 1,000 4,475
Nippon Express 2,000 14,088
Tobu Railway 2,000 5,867
Tokyu 2,000 5,082
Yamato Transport 1,000 29,988
Total 132,958
Insurance (0.2%)
Mitsui Marine & Fire Insurance 2,000 10,276
Sumitomo Marine & Fire Insurance 2,000 11,211
Tokio Marine & Fire Insurance 3,000 31,165
Total 52,652
Leisure time & entertainment (0.4%)
Namco 100 7,007
Nintendo 300 55,380
Oriental Land 200 17,339
Sega Enterprises 200 7,511
Total 87,237
Media (0.2%)
Asatsu-Dk 100 6,521
Dai Nippon Printing 2,000 35,033
Total 41,554
Metals (0.4%)
Kawasaki Steel 7,000(b) 13,602
Mitsubishi Materials 3,000(b) 7,763
Mitsui Mining & Smelting 1,000 5,615
Nippon Steel 15,000 35,734
NSK 1,000 7,567
NTN 1,000 2,644
Sumitomo Metal Inds 1,000(b) 2,560
Sumitomo Metal Mining 8,000(b) 6,427
Total 81,912
Miscellaneous (1.2%)
Benesse 100 18,395
Daito Trust Construction 300 3,781
Fuji Photo Film 1,000 38,677
Itochu 3,000(b) 12,780
Iwatani Intl 1,000 1,831
Konica 1,000 4,344
Mitsubishi 4,000 31,988
Mitsubishi Estate 3,000 29,792
Mitsui Fudosan 2,000 17,918
Nikon 1,000 40,357
Nippon Suisan Kaisha 1,000 1,738
Olympus Optical 1,000 13,406
Sho-Bond 100 1,710
Sumitomo 2,000 22,328
Tokyo Tatemono 1,000 1,887
Toppan Printing 2,000 23,991
World 100 11,210
Total 276,133
Multi-industry conglomerates (0.1%)
Kawasaki Heavy Inds 3,000 3,980
Mitsui 4,000 29,147
Total 33,127
Paper & packaging (0.2%)
Nippon Paper Inds 2,000 13,826
Oji Paper 2,000 12,761
Uni-Charm 200 14,798
Total 41,385
Retail (0.8%)
Aoyamma Trading 200 3,709
Citizen Watch 1,000 7,203
Daiei 2,000 8,258
Daimaru 1,000 3,849
Ito-Yokado 1,000 91,365
Jusco 1,000 18,076
Marui 1,000 14,013
Mitsukoshi 1,000(b) 3,728
Mycal 1,000 5,110
Seiyu 1,000(b) 3,373
Shimamura 100 15,480
Takashimaya 1,000 7,633
Total 181,797
Textiles & apparel (0.2%)
Gunze 1,000 2,663
Kuraray 1,000 10,061
Mitsubishi Rayon 1,000 2,597
Nisshinbo Inds 1,000 4,643
Nitto Boseki 1,000 1,364
Teijin 2,000 8,782
Toray Inds 3,000 12,780
Toyobo 2,000 2,896
Total 45,786
Transportation (0.2%)
Kawasaki Kisen Kaisha 1,000 1,598
Keihin Electric Express Railway 1,000 3,503
Kinki Nippon Railway 4,000 16,442
Nippon Yusen Kabushiki Kaisha 3,000 11,883
Total 33,426
Utilities -- electric (0.5%)
Kansai Electric Power 2,200 38,125
Tokyo Electric Power 3,000 70,066
Total 108,191
Utilities -- gas (0.2%)
Osaka Gas 6,000 14,853
Showa Shell Sekiyu K.K. 1,000 4,111
Teikoku Oil 1,000 2,999
Tokyo Gas 6,000 13,621
Total 35,584
Wire & cable (0.2%)
Fujikura 1,000 4,335
Furukawa Electric 1,000 14,686
Sumitomo Electric Inds 2,000 26,569
Total 45,590
Netherlands (4.8%)
Airlines (--%)
KLM 131 2,820
Banks and savings & loans (0.8%)
ABN AMRO Holding 3,429 69,144
ING Groep 2,235 112,833
Total 181,977
Beverages & tobacco (0.2%)
Heineken 738 38,305
Chemicals (0.1%)
Akzo Nobel 672 27,969
Communications equipment & services (0.4%)
KPN 1,121 96,187
Computers & office equipment (0.3%)
ASM Lithography Holding 317(b) 37,838
Getronics 265 17,177
Oce 197 2,417
Total 57,432
Electronics (0.5%)
Philips Electronics 798 117,503
Food (0.4%)
Koninklijke Ahold 1,507 35,917
Unilever 1,345 61,072
Total 96,989
Insurance (0.5%)
Aegon 1,567 112,532
Media (0.2%)
Elsevier 1,571 18,337
Wolters Kluwer 654 23,649
Total 41,986
Miscellaneous (--%)
Buhrmann 182 3,597
Vedior 226 1,957
Total 5,554
Multi-industry conglomerates (--%)
Hagemeyer 248 4,496
Transportation (0.2%)
IHC Caland 65 2,544
Koninklijke Vopak 78(b) 1,809
TNT Post Group 1,122 29,090
Total 33,443
Utilities -- gas (1.2%)
Royal Dutch Petroleum 4,881 260,457
New Zealand (0.1%)
Beverages & tobacco (--%)
Lion Nathan 1,279 2,704
Communications equipment & services (0.1%)
Telecom Corp of New Zealand 4,095 17,034
Paper & packaging (--%)
Carter Holt Harvey 4,053 4,416
Utilities -- electric (--%)
Contact Energy 1,411 2,222
Norway (0.1%)
Banks and savings & loans (--%)
Christiania Bank Og Kreditkasse 1,300 6,131
DNB Holding 1,500 5,460
Total 11,591
Chemicals (--%)
Dyno 100 2,407
Computers & office equipment (--%)
Merkantildata 300 3,446
Energy equipment & services (--%)
Smedvig Cl A 135 1,714
Food (--%)
Orkla 535 8,605
Industrial equipment & services (--%)
Kvaerner 135(b) 2,481
Insurance (--%)
Storebrand 600(b) 3,991
Media (--%)
Schibsted 200 3,604
Metals (--%)
Elkem 135 2,571
Miscellaneous (--%)
Tomra Systems 200 2,576
Multi-industry conglomerates (0.1%)
Norsk Hydro 677 26,853
Paper & packaging (--%)
Norske Skogindustrier Cl A 100 4,378
Transportation (--%)
Bergesen d.y. Cl A 135 2,221
Bergesen d.y. Cl B 135 2,155
Leif Hoegh 135 1,322
SAS Norge Cl B 135 1,322
Total 7,020
Utilities -- electric (--%)
Hafslund Cl A 270 1,388
Hafslund Cl B 270 1,012
Total 2,400
Utilities -- gas (--%)
Petroleum Geo-Services 200(b) 3,023
Portugal (0.3%)
Banks and savings & loans (0.1%)
Banco Comercial Portugues 2,500 14,016
Banco Espirito Santo 300 7,951
Total 21,967
Building materials & construction (--%)
Cimpor-Cimentos de Portugal 300 4,608
Financial services (--%)
BPI 1,300 5,024
Food (--%)
Jeronimo Martins 200 4,334
Miscellaneous (--%)
Brisa-Auto Estradas de Portugal 500 3,982
Retail (--%)
Sonae 200 10,199
Utilities -- electric (0.1%)
Electricidade de Portugal 1,400 21,929
Utilities -- telephone (0.1%)
Portugal Telecom 2,500 29,841
Singapore (1.0%)
Airlines (0.1%)
Singapore Airlines 3,000 31,407
Automotive & related (--%)
Cycle & Carriage 1,000 2,176
Banks and savings & loans (0.4%)
DBS Group Holdings 3,000 40,228
Oversea-Chinese Banking 3,000 25,584
United Overseas Bank 2,112 15,527
Total 81,339
Beverages & tobacco (--%)
Fraser & Neave 1,000 3,117
Communications equipment & services (0.1%)
Singapore Telecommunications 14,000 23,219
Electronics (0.1%)
Venture Mfg 1,000 13,527
Industrial equipment & services (0.1%)
Sembcorp Inds 4,000 4,399
Singapore Technologies Engineering 7,000 9,058
Total 13,457
Media (0.1%)
Singapore Press Holdings 1,000 19,644
Miscellaneous (0.1%)
City Developments 2,000 9,998
DBS Land 3,000 4,623
Total 14,621
Multi-industry conglomerates (--%)
Keppel 2,000 4,611
Transportation (--%)
Neptune Orient Lines 3,000(b) 2,999
Spain (2.6%)
Banks and savings & loans (0.8%)
Banco Bilboa Vizcaya Argentaria 6,816 88,364
Banco Santander Central Hispano 8,630 85,026
Total 173,390
Beverages & tobacco (--%)
Altadis 775 8,492
Building materials & construction (0.1%)
ACS, Actividades de Construccion y Servicios 129 2,306
Autopistas, Concesionaria Espanola 623 5,632
Fomento de Construcciones y Contratas 283 4,372
Grupo Dragados 405 3,237
Total 15,547
Communications equipment & services (0.9%)
Telefonica 7,676(b) 194,512
Financial services (--%)
Corporacion Financiera Alba 193 5,710
Food (--%)
Azucarera Ebro Agricolas 156 1,908
Industrial equipment & services (--%)
Zardoya Otis 321 2,745
Insurance (--%)
Corporacion Mapfre 142 2,108
Metals (--%)
Acerinox 138 5,195
Miscellaneous (--%)
Metrovacesa 122 1,792
Vallehermoso 304 1,725
Total 3,517
Multi-industry conglomerates (0.3%)
Aguas de Barcelona 3(b) 37
Aguas de Barcelona 322 3,528
Repsol-YPF 2,795 52,915
Total 56,480
Restaurants & lodging (--%)
Sol Melia 404(b) 4,597
Retail (--%)
Cortefiel 92 1,832
TelePizza 505(b) 2,095
Total 3,927
Utilities -- electric (0.4%)
Endesa 2,491 46,087
Iberdrola 2,121 24,528
Union Electrica Fenosa 717 12,978
Total 83,593
Utilities -- gas (0.1%)
Gas Natural SDG Cl E 1,054 19,366
Sweden (2.1%)
Automotive & related (0.1%)
Volvo Cl A 300 6,960
Volvo Cl B 600 14,466
Total 21,426
Banks and savings & loans (0.2%)
ForeningsSparbanken (Swedbank) 1,000 13,363
Skandinaviska Enskilda Banker Cl A 1,320 11,709
Svenska Handelsbanken Cl A 1,300 15,227
Total 40,299
Beverages & tobacco (--%)
Swedish Match 800 2,693
Building materials & construction (--%)
Skanska Cl B 200 6,607
Communications equipment & services (1.2%)
NetCom Cl B 200(b) 13,010
Ericsson (LM) Cl B 3,600 254,651
Total 267,661
Computers & office equipment (--%)
WM-Data Cl B 100 6,380
Financial services (--%)
OM Gruppen 200 6,369
Furniture & appliances (0.1%)
Electrolux Series B 700 14,926
Health care services (--%)
Gambro Cl A 500 3,895
Industrial equipment & services (0.1%)
Atlas Copco Cl A 300 7,591
Atlas Copco Cl B 100 2,451
Sandvik Cl A 400 10,826
Sandvik Cl B 100 2,758
Total 23,626
Insurance (0.1%)
Skandia Forsakrings 1,000 26,725
Metals (--%)
SKF Cl A 100 2,201
SKF Cl B 100 2,297
SSAB Svenskt Stal Series A 200 2,843
Total 7,341
Miscellaneous (0.1%)
Securitas Cl B 600 12,555
Paper & packaging (--%)
AssiDoman 200 2,889
Svenska Cellulosa Cl B 400 10,076
Total 12,965
Textiles & apparel (0.2%)
Hennes & Mauritz Cl B 1,600 49,129
Switzerland (5.2%)
Airlines (--%)
SAirGroup 30 5,977
Automotive & related (--%)
Fischer (Georg) 10 3,364
Banks and savings & loans (1.0%)
Credit Suisse Group 630 108,659
UBS 490 114,770
Total 223,429
Building materials & construction (0.1%)
Holderbank Financiere Glarus Cl B 18 22,865
Sika Finanz 10 3,407
Total 26,272
Chemicals (--%)
Lonza 10(b) 5,871
Communications equipment & services (0.3%)
Swisscom 170 60,606
Food (0.7%)
Nestle 90 148,164
Health care services (2.0%)
Novartis 170 209,847
Roche Holding 21 231,852
Total 441,699
Industrial equipment & services (0.4%)
ABB 710 78,830
Insurance (0.5%)
Swiss Re 34 58,538
Zurich Allied 110 51,329
Total 109,867
Miscellaneous (0.1%)
Adecco 40 30,200
Multi-industry conglomerates (--%)
Sulzer 10(b) 6,790
Paper & packaging (--%)
Alusuisse Lonza Group 10 7,161
Restaurants & lodging (--%)
Valora Holding 10 2,932
Retail (0.1%)
Swatch Group 40 8,274
Swatch Group Cl B 10 10,221
Total 18,495
Transportation (--%)
Kuoni Reisen 1 4,502
United Kingdom (17.3%)
Aerospace & defense (0.2%)
British Aerospace 6,369 34,274
Airlines (0.1%)
British Airways 2,342 12,451
Automotive & related (0.1%)
GKN 1,554 19,597
Banks and savings & loans (2.4%)
Abbey Natl 3,093 37,450
Barclays 3,248 78,707
Halifax Group 4,902 42,271
HSBC Holdings 18,320 214,844
Lloyds TSB Group 11,657 117,620
Royal Bank of Scotland Group 1,931 31,362
Schroders 643 14,539
Total 536,793
Beverages & tobacco (0.4%)
Bass 1,737 16,626
British American Tobacco 4,747 20,987
Diageo 7,481 55,475
Total 93,088
Building materials & construction (0.2%)
Barratt Developments 509 1,753
Berkeley Group (The) 276 2,707
Blue Circle Inds 1,737 11,655
Caradon 1,018 2,541
Hanson 1,422 10,338
Pilkington 2,394 3,279
RMC Group 569 7,535
Tarmac 878 8,041
Taylor Woodrow 879 1,667
Total 49,516
Chemicals (0.2%)
BOC Group 1,067 22,967
Burmah Castrol 386 6,038
Imperial Chemical Inds 1,588 12,613
Total 41,618
Communications equipment & services (3.2%)
British Telecommunications 14,066 269,491
Marconi 5,843 85,854
Vodafone AirTouch 65,917 361,669
Total 717,014
Computers & office equipment (0.5%)
Logica 900 23,808
London Bridge Software Holdings 68 6,283
Misys 1,233 17,228
Psion 200 10,027
Sage Group (The) 3,234 38,974
SEMA Group 1,000 19,499
Total 115,819
Electronics (0.3%)
ARM Holdings 400(b) 23,898
Electrocomponents 941 11,165
Johnson Matthey 476 5,937
Natl Grid Group 3,226 22,223
Racal Electronic 634 4,296
Williams 1,592 6,400
Total 73,919
Financial services (0.3%)
Amvescap 1,500 16,448
Provident Financial 573 5,531
Reuters Group 3,103 46,524
Total 68,503
Food (0.7%)
Cadbury Schweppes 4,470 25,033
Compass Group 1,478 18,315
Sainsbury (J) 4,189 23,086
Tate & Lyle 996 4,315
Tesco 14,798 39,158
Unigate 526 2,532
Unilever 6,354 38,982
United Biscuits 1,034 4,462
Total 155,883
Health care services (2.3%)
AstraZeneca Group 3,818 140,605
Glaxo Wellcome 7,746 199,131
Nycomed Amersham 1,400 8,816
Smith & Nephew 2,400 7,109
SmithKline Beecham 11,973 143,418
SSL Intl 402 4,099
Total 503,178
Industrial equipment & services (0.1%)
De La Rue 492 2,297
Meyer Intl 440 3,049
Smiths Inds 682 7,931
TI Group 1,050 6,178
Total 19,455
Insurance (0.8%)
Allied Zurich 3,436 33,054
CGU 2,857 37,904
Legal & General Group 11,170 26,569
Prudential 4,255 78,763
Total 176,290
Leisure time & entertainment (0.1%)
Eidos 215(b) 1,770
EMI Group 1,718 21,178
Hilton Group 3,247 8,934
Total 31,882
Media (0.9%)
British Sky Broadcasting Group 3,754 87,591
Carlton Communications 1,332 12,728
Pearson 1,331 45,132
Reed Intl 2,489 20,112
WPP Group 1,700 27,101
Total 192,664
Metals (0.2%)
Corus Group 6,730 13,445
Rio Tinto 2,311 43,303
Total 56,748
Miscellaneous (0.5%)
3i Group 1,300 21,471
Anglian Water 594 4,410
British Land 1,130 6,823
Canary Wharf Finance 1,500(b) 8,972
Capita Group 500 7,942
FKI 1,243 5,531
Great Portland Estates 824 2,498
Hammerson 629 3,783
Land Securities 1,218 13,385
MEPC 757 4,917
Slough Estates 897 4,674
Thames Water 764 9,300
United Utilities 1,200 11,593
Total 105,299
Multi-industry conglomerates (2.4%)
BBA Group 934 6,358
BP Amoco 43,482 383,412
Granada Group 3,996 39,737
Hays 3,800 26,301
IMI 764 2,916
Invensys 8,143 40,390
Rank Group 1,688 4,350
Rentokil Initial 6,253 24,173
Total 527,637
Paper & packaging (0.1%)
Arjo Wiggins Appleton 1,833 5,422
Bunzl 992 4,969
Rexam 862 3,049
Total 13,440
Retail (0.5%)
Boots 1,997 16,152
Dixons Group 1,000 19,791
Great Universal Stores 2,195 14,089
Kingfisher 2,968 22,779
Marks & Spencer 6,265 27,698
Wolseley 1,250 6,995
Total 107,504
Transportation (0.3%)
Airtours 1,000 5,280
BAA 2,324 14,550
Ocean Group 312 5,629
Peninsular & Oriental Steam Navigation 1,403 19,945
Railtrack Group 1,120 13,924
Stagecoach Holdings 3,017 6,846
Total 66,174
Utilities -- electric (0.2%)
Natl Power 2,704 15,789
ScottishPower 4,069 28,361
Total 44,150
Utilities -- gas (0.3%)
BG Group 7,665 39,167
Centrica 8,718 26,672
LASMO 2,929 5,056
Total 70,895
Total common stocks
(Cost: $18,842,796) $20,351,911
Preferred stocks & other (0.3%)
Issuer Shares Value(a)
Australia
AMP
Rights 1,344(d) $--
News Corp 4,537 46,772
France
Casino Guichard-Perrachon 38 2,472
Germany
Dyckerhoff 100 3,033
RWE 200 5,459
Volkswagen 200 5,577
Total preferred stocks &other
Cost:$48,626) $63,313
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Bonds (--%)
Issuer Coupon Principal Value(a)
rate amount
Aerospace & defense (--%)
British Aerospace
(British Pound)
<S> <C> <C> <C> <C> <C>
11-30-03 7.45% $791 $1,282
Insurance (--%)
AMP
(Australian Dollar)
12-20-49 7.00 3,600 2,009
Utilities -- gas (--%)
BG Transco Holdings
(Australian Dollar)
12-14-00 4.19 1,000(e) 1,640
12-14-00 7.06 1,000(e) 1,584
12-16-24 7.00 1,000 1,591
Total 4,815
Total bonds
(Cost: $8,633) $8,106
Short-term securities (6.1%)
Issuer Annualized Amount Value(a)
yield on date payable at
of puchase maturity
U.S. government agency (2.3%)
U.S. Treasury
03-16-00 4.98% $508,000 $504,937
Investment company (3.8%)
Issuer Rate Shares Value(a)
Bank of New York Cash Reserve Fund 4.20% 842,725 $842,725
Total short-term securites
(Cost $1,347,633) $1,347,662
Total investments in securities
(Cost: $20,247,688)(f) $21,770,992
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements. Foreign security values are stated in U.S. dollars.
(b) Non-income producing.
(c) Partially pledged as initial margin deposit on the following open stock
index futures purchase/sales contracts (see Note 5 to the financial statements):
Type of security Contracts
All Ords Index 1
CAC 40 4
Eurx DAX 2
FTSE 100 2
Nikkei 300 15
OMX Stock 9
(d) Negligible market value.
(e) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on Jan. 31, 2000.
(f) At Jan. 31, 2000, the cost of securities for federal income tax purposes was
$20,265,251 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $2,934,372
Unrealized depreciation (1,428,631)
----------
Net unrealized appreciation $1,505,741
<PAGE>
<TABLE>
<CAPTION>
AXP Nasdaq 100 Index Fund
Jan. 31, 2000
(Percentages represent value of investments compared to net assets)
Common stocks (99.1%)
Issuer Shares Value(a)
Airlines (0.1%)
<S> <C> <C>
Northwest Airlines Cl A 871(b) $17,583
Automotive & related (0.2%)
PACCAR 1,098 45,498
Chemicals (0.2%)
Sigma-Aldrich 1,328 44,488
Communications equipment & services (10.3%)
ADC Telecommunications 2,343(b) 154,492
CIENA 2,040(b) 133,875
EchoStar Communications Cl A 1,403(b) 114,257
Ericsson (LM) ADR Cl B 3,080(c) 229,653
NTL 1,369(b) 172,237
QUALCOMM 10,515(b) 1,335,404
Tellabs 2,869(b) 154,926
VoiceStream Wireless 1,285(b) 150,827
Total 2,445,671
Computer software & services (21.1%)
Adobe Systems 1,473 81,107
At Home Series A 3,426(b) 123,497
BMC Software 2,308(b) 87,416
BroadVision 1,059(b) 134,824
Citrix Systems 1,333(b) 182,954
Compuware 2,761(b) 58,499
Electronic Arts 797(b) 65,155
i2 Technologies 1,036(b) 199,560
Intuit 3,122(b) 188,296
Legato Systems 1,158(b) 29,167
Lycos 1,584(b) 116,325
Microsoft 22,222(b) 2,174,977
Network Associates 1,808(b) 46,895
Novell 4,996(b) 166,742
Oracle 14,856(b) 742,103
Parametric Technology 4,577(b) 98,119
PeopleSoft 4,750(b) 106,875
RealNetworks 876(b) 137,696
Siebel Systems 2,774(b) 254,341
Total 4,994,548
Computers & office equipment (23.0%)
3Com 2,191(b) 111,193
Adaptec 1,052(b) 55,099
Apple Computer 2,808(b) 291,330
Cisco Systems 14,746(b) 1,614,686
CMGI 3,700(b) 416,481
CNET 1,046(b) 51,254
Comverse Technology 991(b) 142,085
Concord EFS 2,902(b) 58,947
Dell Computer 11,748(b) 453,032
Fiserv 1,919(b) 65,126
Gemstar Intl Group 2,632(b) 174,699
Network Appliance 1,954(b) 196,133
Network Solutions Cl A 455(b) 98,678
Sanmina 787(b) 83,619
Sun Microsystems 7,681(b) 603,438
Synopsys 1,027(b) 47,435
Veritas Software 3,295(b) 480,658
Yahoo! 1,584(b) 510,147
Total 5,454,040
Electronics (20.0%)
Altera 3,511(b) 230,848
American Power Conversion 3,167(b) 87,389
Applied Materials 2,449(b) 336,125
Applied Micro Circuits 783(b) 115,688
Atmel 1,891(b) 58,739
Conexant Systems 2,714(b) 229,333
Intel 14,639 1,448,347
JDS Uniphase 3,509(b) 715,617
KLA-Tencor 2,727(b) 159,870
Linear Technology 2,581 244,388
Maxim Integrated Products 5,089(b) 255,086
Microchip Technology 529(b) 33,261
Molex 965 49,094
PMC-Sierra 940(b) 169,670
QLogic 466(b) 71,269
RF Micro Devices 1,129(b) 91,308
SDL 458(b) 118,708
Vitesse Semiconductor 2,083(b) 90,611
Xilinx 5,293(b) 242,155
Total 4,747,506
Financial services (0.5%)
Paychex 2,927 128,971
Furniture & appliances (0.1%)
Miller (Herman) 790 17,232
Health care (5.8%)
Amgen 5,958(b) 379,449
Biogen 2,310(b) 199,238
Biomet 1,900 75,644
Chiron 3,178(b) 141,024
Genzyme (General Division) 1,319(b) 68,588
Immunex 2,820(b) 368,715
MedImmune 847(b) 123,662
VISX 922(b) 26,162
Total 1,382,482
Health care services (0.3%)
PacifiCare Health Systems 535(b) 22,637
Quintiles Transnational 2,017(b) 53,325
Total 75,962
Industrial equipment & services (0.3%)
Cintas 1,667 78,089
Media (1.7%)
Adelphia Communications Cl A 1,520(b) 100,605
Comcast Special Cl A 4,390 201,940
USA Networks 1,950(b) 96,769
Total 399,314
Miscellaneous (1.0%)
Nasdaq-100 Shares 1,303(b) 233,400
Multi-industry conglomerates (0.1%)
Apollo Group Cl A 893(b) 19,311
Paper & packaging (0.2%)
Smurfit-Stone Container 2,670(b) 52,899
Restaurants & lodging (0.4%)
Starbucks 3,169(b) 101,408
Retail (2.9%)
Amazon.com 2,832(b) 182,842
Bed Bath & Beyond 2,353(b) 63,972
Costco Wholesale 2,924(b) 143,093
Dollar Tree Stores 707(b) 31,152
eBay 1,207(b) 181,125
Staples 3,861(b) 91,940
Total 694,124
Utilities -- telephone (10.9%)
Global Crossing 10,467(b,c) 531,200
Level 3 Communications 2,965(b) 349,685
MCI WorldCom 12,776(b) 586,920
McLeodUSA Cl A 1,570(b) 107,938
Metromedia Fiber Network Cl A 2,723(b) 184,313
Nextel Communications Cl A 5,622(b) 598,040
NEXTLINK Communications Cl A 1,052(b) 88,763
PanAmSat 2,517(b) 132,300
Total 2,579,159
Total common stocks
(Cost: $18,345,006) $23,511,685
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term security (2.5%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
Commercial paper
Household Finance
<S> <C> <C> <C> <C> <C>
02-01-00 5.79% $600,000 $599,904
Total short-term security
(Cost: $600,000) $599,904
Total investments in securities
(Cost: $18,945,006)(d) $24,111,589
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of Jan. 31, 2000, the
value of foreign securities represented 3.21% of net assets.
(d) At Jan. 31, 2000, the cost of securities for federal income tax purposes was
$18,946,372 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
Unrealized appreciation $5,542,859
Unrealized depreciation (377,642)
--------
Net unrealized appreciation $5,165,217
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation as amended on Jan. 16, 1990, filed as
Exhibit 1 to Registration Statement No. 33-30770 are incorporated by
reference.
(b) By-laws filed as Exhibit 2 to Pre-Effective Amendment No. 3 to
Registration Statement No. 33-30770 are incorporated by reference.
(c) Instruments Defining Rights of Security Holders: Not Applicable.
(d)(1) Investment Management Services Agreement between Registrant, on behalf
of AXP Blue Chip Advantage Fund, and American Express Financial
Corporation, dated July 1, 1999, is filed electronically herewith as
Exhibit (d)(1).
(d)(2) Investment Management Services Agreement between Registrant, on behalf
of AXP Small Company Index Fund, and American Express Financial
Corporation, dated July 1, 1999, is filed electronically herewith as
Exhibit (d)(2).
(d)(3) Investment Management Services Agreement between Registrant, on behalf
of AXP International Equity Index Fund, AXP Mid Cap Index Fund, AXP
Nasdaq 100 Index Fund, AXP S&P 500 Index Fund and AXP Total Stock
Market Index Fund, and American Express Financial Corporation, dated
September 9, 1999, is incorporated by reference to Exhibit (d)(3) to
Registrant's Post-Effective Amendment No. 23 filed on or about Oct.
14, 1999.
(d)(4) Investment Sub-advisory Agreement for AXP International Equity Index
Fund, between American Express Financial Corporation and State Street
Global Advisors, dated October 18, 1999, is incorporated by reference
to Exhibit (d)(4) to Registrant's Post-Effective Amendment No. 23
filed on or about Oct. 14, 1999.
(e)(1) Distribution Agreement, dated July 8, 1999, between AXP Utilities
Income Fund, Inc. and American Express Financial Advisors Inc. is
incorporated by reference to Exhibit (e) to AXP Utilities Income Fund,
Inc., Post-Effective Amendment No. 22 to Registration Statement File
No. 33-20872 filed on or about August 27, 1999. Registrant's
Distribution Agreement for AXP Blue Chip Advantage Fund and AXP Small
Company Index Fund differs from the one incorporated by reference only
by the fact that Registrant is one executing party.
(e)(2) Distribution Agreement between Registrant, on behalf of AXP
International Equity Index Fund, AXP Mid Cap Index Fund, AXP Nasdaq
100 Index Fund, AXP S&P 500 Index Fund and AXP Total Stock Market
Index Fund, and American Express Financial Advisors Inc., dated
September 9, 1999, is incorporated by reference to Exhibit (e)(2) to
Registrant's Post-Effective Amendment No. 23 filed on or about Oct.
14, 1999.
(f) All employees are eligible to participate in a profit sharing plan.
Entry into the plan is Jan. 1 or July 1. The Registrant contributes
each year an amount up to 15 percent of their annual salaries, the
maximum deductible amount permitted under Section 404(a) of the
Internal Revenue Code.
(g)(1) Custodian Agreement between Registrant, on behalf of IDS Blue Chip
Advantage Fund, and American Express Trust Company, dated March 20,
1995, filed electronically as Exhibit 8 to Post-Effective Amendment
No. 13 to Registration Statement No. 33-30770 is incorporated by
reference.
<PAGE>
(g)(2) Custodian Agreement between Registrant, on behalf of IDS Small Company
Index Fund, and American Express Trust Company, dated August 19, 1996,
filed electronically as Exhibit 8(a) to Post-Effective Amendment No.
16 to Registration Statement No. 33-30770 is incorporated by
reference.
(g)(3) Custodian Agreement between Registrant, on behalf of AXP International
Equity Index Fund, AXP Mid Cap Index Fund, AXP Nasdaq 100 Index Fund,
AXP S&P 500 Index Fund and AXP Total Stock Market Index Fund, and
American Express Trust Company, dated September 9, 1999, is
incorporated by reference to Exhibit (g)(3) to Registrant's
Post-Effective Amendment No. 23 filed on or about Oct. 14, 1999.
(g)(4) Custodian Agreement, dated May 13, 1999, between American Express
Trust Company and The Bank of New York is incorporated by reference to
Exhibit (g)(3) to IDS Precious Metals Fund, Inc., Post-Effective
Amendment No. 33 to Registration Statement File No. 2-93745 filed on
or about May 24, 1999.
(g)(5) Custodian Agreement Amendment between IDS International Fund, Inc. and
American Express Trust Company, dated October 9, 1997, filed
electronically on or about December 23, 1997 as Exhibit 8(c) to IDS
International Fund, Inc.'s Post-Effective Amendment No. 26 to
Registration Statement No. 2-92309, is incorporated herein by
reference. Registrant's Custodian Agreement Amendment for AXP Blue
Chip Advantage Fund and AXP Small Company Index Fund differs from the
one incorporated by reference only by the fact that Registrant is one
executing party.
(h)(1) Administrative Services Agreement between Registrant, on behalf of IDS
Blue Chip Advantage Fund, and American Express Financial Corporation,
dated March 20, 1995, filed electronically as Exhibit 9(c) to
Registrant's Post-Effective Amendment No. 13 to Registration Statement
No. 33-30770 is incorporated by reference.
(h)(2) Administrative Services Agreement between Registrant, on behalf of IDS
Small Company Index Fund, and American Express Financial Corporation,
dated August 19, 1996, filed electronically as Exhibit 9(d) to
Registrant's Post-Effective Amendment No. 17 to Registration Statement
No. 33-30770 is incorporated by reference.
(h)(3) Administrative Services Agreement between Registrant, on behalf of AXP
International Equity Index Fund, AXP Mid Cap Index Fund, AXP Nasdaq
100 Index Fund, AXP S&P 500 Index Fund and AXP Total Stock Market
Index Fund, and American Express Financial Corporation, dated
September 9, 1999, is incorporated by reference to Exhibit (h)(3) to
Registrant's Post-Effective Amendment No. 23 filed on or about Oct.
14, 1999.
(h)(4) License Agreement between Registrant, on behalf of IDS Small Company
Index Fund, and American Express Financial Corporation, dated August
19, 1996, filed electronically as Exhibit 9(c) to Post-Effective
Amendment No. 16 to Registration Statement No. 33-30770, is
incorporated by reference.
(h)(5) License Agreement, dated June 17, 1999, between the American Express
Funds and American Express Company, filed electronically on or about
September 23, 1999 as Exhibit (h)(4) to AXP Stock Fund, Inc.'s
Post-Effective Amendment No. 98 to Registration Statement No. 2-11358,
is incorporated by reference.
<PAGE>
(h)(6) Class Y Shareholder Service Agreement between IDS Precious Metals
Fund, Inc. and American Express Financial Advisors Inc., dated May 9,
1997, filed electronically on or about May 27, 1997 as Exhibit 9(e) to
IDS Precious Metals Fund, Inc.'s Post-Effective Amendment No. 30 to
Registration Statement No. 2-93745, is incorporated by reference.
Registrant's Class Y Shareholder Service Agreement for AXP Blue Chip
Advantage Fund and AXP Small Company Index Fund differs from the one
incorporated by reference only by the fact that Registrant is one
executing party.
(h)(7) Transfer Agency Agreement, dated Feb. 1, 1999, between Registrant, on
behalf of AXP Blue Chip Advantage Fund and AXP Small Company Index
Fund, and American Express Client Service Corporation is incorporated
by reference to Exhibit (h)(7) to Registrant's Post-Effective
Amendment No. 21 filed on or about March 19, 1999.
(h)(8) Transfer Agency Agreement, between Registrant, on behalf of AXP
International Equity Index Fund, AXP Mid Cap Index Fund, AXP Nasdaq
100 Index Fund, AXP S&P 500 Index Fund and AXP Total Stock Market
Index Fund, and American Express Client Service Corporation, dated
September 9, 1999, is incorporated by reference to Exhibit (h)(8) to
Registrant's Post-Effective Amendment No. 23 filed on or about Oct.
14, 1999.
(i) Opinion and consent of counsel as to the legality of the securities
being registered is filed electronically herewith as Exhibit (i).
(j) Independent Auditor's Consent is filed electronically herewith as
Exhibit (j).
(k) Omitted Financial Statements: None.
(l) Agreement made in consideration for providing initial capital between
Registrant and IDS Financial Corporation filed as Exhibit 13 on March
1, 1990 to Pre-Effective Amendment No. 4 to Registration Statement No.
33-30770 is incorporated by reference.
(m)(1) Plan and Agreement of Distribution, dated July 1, 1999, between AXP
Discovery Fund, Inc. and American Express Financial Advisors Inc. is
incorporated by reference to Exhibit (m) to AXP Discovery Fund, Inc.,
Post-Effective Amendment No. 36 to Registration Statement File No.
2-72174 filed on or about July 30, 1999. Registrant's Plan and
Agreement of Distribution for AXP Blue Chip Advantage Fund and AXP
Small Company Index Fund differs from the one incorporated by
reference only by the fact that the Registrant is one executing party.
(m)(2) Plan and Agreement of Distribution between Registrant, on behalf of
AXP International Equity Index Fund, AXP Mid Cap Index Fund, AXP
Nasdaq 100 Index Fund, AXP S&P 500 Index Fund and AXP Total Stock
Market Index Fund, and American Express Financial Advisors Inc., dated
September 9, 1999, is incorporated by reference to Exhibit (m)(2) to
Registrant's Post-Effective Amendment No. 23 filed on or about Oct.
14, 1999.
(n)(1) Rule 18f-3 Plan for AXP Blue Chip Advantage Fund and AXP Small Company
Index Fund, dated April 1999, is incorporated by reference to Exhibit
(o) to IDS Precious Metals Fund, Inc., Post-Effective Amendment No.
33, File No. 2-93745 filed on or about May 24, 1999.
(n)(2) Rule 18f-3 Plan for AXP International Equity Index Fund, AXP Mid Cap
Index Fund, AXP Nasdaq 100 Index Fund, AXP S&P 500 Index Fund and AXP
Total Stock Market Index Fund, dated September 1999, is incorporated
by reference to Exhibit (o)(2) to Registrant's Post-Effective
Amendment No. 23 filed on or about Oct. 14, 1999.
(o) Reserved.
<PAGE>
(p)(1) Code of Ethics adopted under Rule 17j-1 by Registrant is filed
electronically herewith as Exhibit (p)(1).
(p)(2) Code of Ethics adopted under Rule 17j-1 by Registrant's investment
advisor and principal underwriter is filed electronically herewith as
Exhibit (p)(2).
(p)(3) Code of Ethics adopted under Rule 17j-1 by AXP International Equity
Index Fund's subadvisor (State Street Global Advisors) is filed
electronically herewith as Exhibit (p)(3).
(q)(1) Directors' Power of Attorney to sign amendments to this Registration
Statement, dated Jan. 13, 2000, is filed electronically herewith as
Exhibit (q)(1).
(q)(2) Officers' Power of Attorney to sign amendments to this Registration
Statement, dated Jan. 13, 2000, is filed electronically herewith as
Exhibit (q)(2).
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
Item 25. Indemnification
The Articles of Incorporation of the registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that she or he is or was a director, officer, employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Fund may purchase
liability insurance and advance legal expenses, all to the fullest extent
permitted by the laws of the State of Minnesota, as now existing or hereafter
amended. The By-laws of the registrant provide that present or former directors
or officers of the Fund made or threatened to be made a party to or involved
(including as a witness) in an actual or threatened action, suit or proceeding
shall be indemnified by the Fund to the full extent authorized by the Minnesota
Business Corporation Act, all as more fully set forth in the By-laws filed as an
exhibit to this registration statement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the directors, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.
<PAGE>
<TABLE>
<CAPTION>
Item 26. Business and Other Connections of Investment Adviser (American Express Financial Corporation)
Directors and officers of American Express Financial Corporation who are directors and/or officers of one or more
other companies:
<S> <C> <C> <C>
Name and Title Other company(s) Address Title within other
company(s)
Ronald G. Abrahamson, American Express Client IDS Tower 10 Director and Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
Public Employee Payment Director and Vice President
Company
Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
Peter J. Anderson, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President
American Express Asset Director and Chairman of
Management Group Inc. the Board
American Express Asset Director, Chairman of the
Management International, Board and Executive Vice
Inc. President
American Express Financial Senior Vice President
Advisors Inc.
IDS Capital Holdings Inc. Director and President
IDS Futures Corporation Director
NCM Capital Management 2 Mutual Plaza Director
Group, Inc. 501 Willard Street
Durham, NC 27701
Ward D. Armstrong, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
American Express Trust Director and Chairman of
Company the Board
John M. Baker, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Trust Senior Vice President
Company
Joseph M. Barsky III, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Timothy V. Bechtold, American Centurion Life IDS Tower 10 Director and President
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Life Insurance Company Executive Vice President
IDS Life Insurance Company P.O. Box 5144 Director and President
of New York Albany, NY 12205
IDS Life Series Fund, Inc. Director
John C. Boeder, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Futures Corporation Director and President
IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
Douglas W. Brewers, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Karl J. Breyer, American Express Financial IDS Tower 10 Senior Vice President
Director, Corporate Senior Advisors Inc. Minneapolis, MN 55440
Vice President
American Express Financial Director
Advisors Japan Inc.
American Express Minnesota Director
Foundation
Cynthia M. Carlson, American Enterprise IDS Tower 10 Director, President and
Vice President Investment Services Inc. Minneapolis, MN 55440 Chief Executive Officer
American Express Financial Vice President
Advisors Inc.
American Express Service Vice President
Corporation
Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer
President and Chief Marketing
Officer
IDS Life Insurance Company Executive Vice President
Kenneth I. Chenaut American Express Company American Express Tower President and Chief
Director World Financial Center Operating Officer
New York, NY 10285
James E. Choat, American Centurion Life IDS Tower 10 Executive Vice President
Director and Senior Vice Assurance Company Minneapolis, MN 55440
President
American Enterprise Life Director, President and
Insurance Company Chief Executive Officer
American Express Financial Senior Vice President
Advisors Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
IDS Life Insurance Company P.O. Box 5144 Executive Vice President
of New York Albany, NY 12205
Kenneth J. Ciak, AMEX Assurance Company IDS Tower 10 Director and President
Vice President and General Minneapolis, MN 55440
Manager
American Express Financial Vice President and General
Advisors Inc. Manager
IDS Property Casualty 1 WEG Blvd. Director and President
Insurance Company DePere, WI 54115
Paul A. Connolly, American Express Financial IDS Tower 10 Vice President - Retail
Vice President - Retail Advisors Inc. Minneapolis, MN 55440 Distribution Services
Distribution Services
Colleen Curran, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Service Vice President and Chief
Corporation Legal Counsel
Luz Maria Davis American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Douglas K. Dunning, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Gordon L. Eid, American Express Financial IDS Tower 10 Senior Vice President,
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Counsel and Chief
President, General Counsel Compliance Officer
and Chief Compliance Officer
American Express Financial Vice President and Chief
Advisors Japan Inc. Compliance Officer
American Express Insurance Director and Vice President
Agency of Arizona Inc.
American Express Insurance Director and Vice President
Agency of Idaho Inc.
American Express Insurance Director and Vice President
Agency of Nevada Inc.
American Express Insurance Director and Vice President
Agency of Oregon Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Director and Vice President
Alabama Inc.
IDS Insurance Agency of Director and Vice President
Arkansas Inc.
IDS Insurance Agency of Director and Vice President
Massachusetts Inc.
IDS Insurance Agency of Director and Vice President
New Mexico Inc.
IDS Insurance Agency of Director and Vice President
North Carolina Inc.
IDS Insurance Agency of Director and Vice President
Ohio Inc.
IDS Insurance Agency of Director and Vice President
Wyoming Inc.
IDS Real Estate Services, Vice President
Inc.
Investors Syndicate Director
Development Corp.
Robert M. Elconin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
Gordon M. Fines, American Express Asset IDS Tower 10 Senior Vice President and
Vice President Management Group Inc. Minneapolis, MN 55440 Chief Investment Officer
American Express Financial Vice President
Advisors Inc.
Douglas L. Forsberg, American Centurion Life IDS Tower 10 Director
Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
American Express Financial Director, President and
Advisors Japan Inc. Chief Executive Officer
Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and
Vice President and Corporate Insurance Company Minneapolis, MN 55440 Controller
Controller
American Express Financial Vice President and
Advisors Inc. Corporate Controller
Peter A. Gallus American Express Financial IDS Tower 10 Vice President-Investment
Vice President-Investment Advisors Inc. Minneapolis, MN 55440 Administration
Administration
Harvey Golub, American Express Company American Express Tower Chairman and Chief
Director World Financial Center Executive Officer
New York, NY 10285
American Express Travel Chairman and Chief
Related Services Company, Executive Officer
Inc.
David A. Hammer, American Express Financial IDS Tower 10 Vice President and
Vice President and Marketing Advisors Inc. Minneapolis, MN 55440 Marketing Controller
Controller
IDS Plan Services of Director and Vice President
California, Inc.
Teresa A. Hanratty American Express Financial IDS Tower 10 Senior Vice
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President-Field Management
President-Field Management
Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Centurion Life Vice President
Assurance Company
American Enterprise Life Vice President
Insurance Company
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and Vice
Insurance Company President
IDS Certificate Company Vice President
IDS Life Insurance Company Vice President
IDS Life Series Fund, Inc. Vice President
IDS Life Variable Annuity Vice President
Funds A and B
Investors Syndicate Director and Vice
Development Corp. President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
IDS Property Casualty 1 WEG Blvd. Vice President
Insurance Company DePere, WI 54115
Scott A. Hawkinson, American Express Financial IDS Tower 10 Vice President and
Vice President and Controller Advisors Inc. Minneapolis, MN 55440 Controller
Janis K. Heaney, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Brian M. Heath American Express Financial IDS Tower 10 Senior Vice President and
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Sales Manager
President and General Sales
Manager
Darryl G. Horsman, American Express Trust IDS Tower 10 Director and President
Vice President Company Minneapolis, MN 55440
American Express Asset Vice President
Management International
Inc.
Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer
Vice President and Corporate Minneapolis, MN 55440 and Assistant Secretary
Treasurer
American Centurion Life Vice President and
Assurance Company Treasurer
American Enterprise Vice President and
Investment Services Inc. Treasurer
American Enterprise Life Vice President and
Insurance Company Treasurer
American Express Asset Vice President and
Management Group Inc. Treasurer
American Express Asset Vice President and
Management International Treasurer
Inc.
American Express Client Vice President and
Service Corporation Treasurer
American Express Vice President and
Corporation Treasurer
American Express Financial Vice President and
Advisors Inc. Treasurer
American Express Financial Vice President and
Advisors Japan Inc. Treasurer
American Express Insurance Vice President and
Agency of Arizona Inc. Treasurer
American Express Insurance Vice President and
Agency of Idaho Inc. Treasurer
American Express Insurance Vice President and
Agency of Nevada Inc. Treasurer
American Express Insurance Vice President and
Agency of Oregon Inc. Treasurer
American Express Minnesota Vice President and
Foundation Treasurer
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Kentucky Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Maryland Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Pennsylvania Inc.
American Partners Life Vice President and
Insurance Company Treasurer
IDS Cable Corporation Director, Vice President
and Treasurer
IDS Cable II Corporation Director, Vice President
and Treasurer
IDS Capital Holdings Inc. Vice President, Treasurer
and Assistant Secretary
IDS Certificate Company Vice President and
Treasurer
IDS Insurance Agency of Vice President and
Alabama Inc. Treasurer
IDS Insurance Agency of Vice President and
Arkansas Inc. Treasurer
IDS Insurance Agency of Vice President and
Massachusetts Inc. Treasurer
IDS Insurance Agency of Vice President and
New Mexico Inc. Treasurer
IDS Insurance Agency of Vice President and
North Carolina Inc. Treasurer
IDS Insurance Agency of Vice President and
Ohio Inc. Treasurer
IDS Insurance Agency of Vice President and
Wyoming Inc. Treasurer
IDS Life Insurance Company Vice President, Treasurer
and Assistant Secretary
IDS Life Insurance Company P.O. Box 5144 Vice President and
of New York Albany, NY 12205 Treasurer
IDS Life Series Fund Inc. Vice President and
Treasurer
IDS Life Variable Annuity Vice President and
Funds A & B Treasurer
IDS Management Corporation Director, Vice President
and Treasurer
IDS Partnership Services Vice President and
Corporation Treasurer
IDS Plan Services of Vice President and
California, Inc. Treasurer
IDS Real Estate Services, Vice President and
Inc. Treasurer
IDS Realty Corporation Vice President and
Treasurer
IDS Sales Support Inc. Vice President and
Treasurer
Investors Syndicate Vice President and
Development Corp. Treasurer
IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer
Insurance Company DePere, WI 54115 and Assistant Secretary
Public Employee Payment Vice President and
Company Treasurer
David R. Hubers, AMEX Assurance Company IDS Tower 10 Director
Director, President and Chief Minneapolis, MN 55440
Executive Officer
American Express Financial Chairman, President and
Advisors Inc. Chief Executive Officer
American Express Service Director and President
Corporation
IDS Certificate Company Director
IDS Life Insurance Company Director
IDS Plan Services of Director and President
California, Inc.
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
Debra A. Hutchinson American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
James M. Jensen, American Express Financial IDS Tower 10 Vice President and
Vice President and Advisors Inc. Minneapolis, MN 55440 Controller-Advice and
Controller-Advice and Retail Retail Distribution Group
Distribution Group
IDS Life Insurance Company Vice President
Marietta L. Johns, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
Nancy E. Jones, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Service Vice President
Corporation
Ora J. Kaine, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Linda B. Keene, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director
Director and Senior Vice Minneapolis, MN 55440
President - Insurance Products
American Centurion Life Director and Chairman of
Assurance Company the Board
American Enterprise Life Director and Chairman of
Insurance Company the Board
American Express Director and President
Corporation
American Express Financial Senior Vice President -
Advisors Inc. Insurance Products
American Express Insurance Director and President
Agency of Arizona Inc.
American Express Insurance Director and President
Agency of Idaho Inc.
American Express Insurance Director and President
Agency of Nevada Inc.
American Express Insurance Director and President
Agency of Oregon Inc.
American Express Property Director and President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and President
Casualty Insurance Agency
of Pennsylvania Inc.
American Express Service Vice President
Corporation
American Partners Life Director and Chairman of
Insurance Company the Board
IDS Certificate Company Director and Chairman of
the Board
IDS Insurance Agency of Director and President
Alabama Inc.
IDS Insurance Agency of Director and President
Arkansas Inc.
IDS Insurance Agency of Director and President
Massachusetts Inc.
IDS Insurance Agency of Director and President
New Mexico Inc.
IDS Insurance Agency of Director and President
North Carolina Inc.
IDS Insurance Agency of Director and President
Ohio Inc.
IDS Insurance Agency of Director and President
Wyoming Inc.
IDS Life Insurance Company Director, Chief Executive
Officer and President
IDS Life Series Fund, Inc. Director and President
IDS Life Variable Annuity Manager, Chairman of the
Funds A and B Board and President
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
IDS Life Insurance Company P.O. Box 5144 Director and Chairman of
of New York Albany, NY 12205 the Board
John M. Knight American Express Financial IDS Tower 10 Vice President
Advisors Minneapolis, MN 55440
Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Director and Executive
Vice President
IDS Life Series Fund, Inc. Vice President and Chief
Actuary
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
Claire Kolmodin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Steve C. Kumagai, American Express Financial IDS Tower 10 Director and Senior Vice
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President-Direct and
President-Direct and Interactive Group
Interactive Group
Kurt A Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Lori J. Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief
Vice President and Chief U.S. Advisors Inc. Minneapolis, MN 55440 U.S. Economist
Economist
Peter A. Lefferts, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Trust Director
Company
IDS Plan Services of Director
California, Inc.
Douglas A. Lennick, American Express Financial IDS Tower 10 Director and Executive
Director and Executive Vice Advisors Inc. Minneapolis, MN 55440 Vice President
President
Mary J. Malevich, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Fred A. Mandell, American Express Financial IDS Tower 10 Vice President -
Vice President - Distribution Advisors Inc. Minneapolis, MN 55440 Distribution Channel
Channel Marketing Marketing
Timothy J. Masek American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Global Research
of Global Research
Sarah A. Mealey, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President
Vice President Insurance Company Minneapolis, MN 55440
American Express Director
Corporation
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and President
Insurance Company
IDS Certificate Company Director and President
IDS Life Insurance Company Director and Executive
Vice President
Investors Syndicate Director, Chairman of the
Development Corporation Board and President
Shashank B. Modak American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Pamela J. Moret, American Express Financial IDS Tower 10 Senior Vice President -
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 Investment Products
President - Investment
Products
American Express Trust Vice President
Company
IDS Certificate Company Director
IDS Life Insurance Company Executive Vice President
Barry J. Murphy, American Express Client IDS Tower 10 Director and President
Director and Senior Vice Service Corporation Minneapolis, MN 55440
President
American Enterprise Director
Investment Services, Inc.
American Express Financial Senior Vice President
Advisors Inc.
IDS Life Insurance Company Director and Executive
Vice President
Mary Owens Neal, American Express Financial IDS Tower 10 Vice President-Consumer
Vice President-Consumer Advisors Inc. Minneapolis, MN 55440 Marketing
Marketing
Michael J. O'Keefe, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
James R. Palmer, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Life Insurance Company Vice President
Carla P. Pavone, American Express Financial IDS Tower 10 Vice
Vice President-Compensation Advisors Inc. Minneapolis, MN 55440 President-Compensation
Services and ARD Product Services and ARD Product
Distribution Distribution
Public Employee Payment Director and President
Company
Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
Susan B. Plimpton, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Ronald W. Powell, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
IDS Cable Corporation Vice President and
Assistant Secretary
IDS Cable II Corporation Vice President and
Assistant Secretary
IDS Management Corporation Vice President and
Assistant Secretary
IDS Partnership Services Vice President and
Corporation Assistant Secretary
IDS Plan Services of Vice President and
California, Inc. Assistant Secretary
IDS Realty Corporation Vice President and
Assistant Secretary
James M. Punch, American Express Financial IDS Tower 10 Vice President - Branded
Vice President - Branded Advisors Inc. Minneapolis, MN 55440 Platform Project
Platform Project
Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Senior Vice President and
Director and Senior Vice Management Group Inc. Minneapolis, MN 55440 Senior Portfolio Manager
President
American Express Financial Senior Vice President
Advisors Inc.
Rollyn C. Renstrom, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Rebecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
Stephen W. Roszell, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President
American Express Asset Director, President and
Management Group Inc. Chief Executive Officer
American Express Asset Director
Management International,
Inc.
American Express Asset Director
Management Ltd.
American Express Financial Senior Vice President
Advisors Inc.
American Express Trust Director
Company
Erven A. Samsel, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
Theresa M. Sapp American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Stuart A. Sedlacek, AMEX Assurance Company IDS Tower 10 Director
Director, Senior Vice Minneapolis, MN 55440
President and Chief Financial
Officer
American Enterprise Life Executive Vice President
Insurance Company
American Express Financial Senior Vice President and
Advisors Inc. Chief Financial Officer
American Express Trust Director
Company
American Partners Life Director and Vice President
Insurance Agency
IDS Certificate Company Director and President
IDS Life Insurance Company Executive Vice President
and Controller
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
Donald K. Shanks, AMEX Assurance Company IDS Tower 10 Senior Vice President
Vice President Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
IDS Property Casualty 1 WEG Blvd. Senior Vice President
Insurance Company DePere, WI 54115
Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Bridget Sperl, American Express Client IDS Tower 10 Vice President
Vice President Service Corporation Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
Public Employee Payment Director and President
Company
Lisa A. Steffes, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President,
Vice President and Assistant Insurance Company Minneapolis, MN 55440 General Counsel and
General Counsel Secretary
American Express Director, Vice President
Corporation and Secretary
American Express Financial Vice President and
Advisors Inc. Assistant General Counsel
American Partners Life Director, Vice President,
Insurance Company General Counsel and
Secretary
IDS Life Insurance Company Vice President, General
Counsel and Secretary
IDS Life Series Fund Inc. General Counsel and
Assistant Secretary
IDS Life Variable Annuity General Counsel and
Funds A & B Assistant Secretary
James J. Strauss, American Express Financial IDS Tower 10 Vice President
Vice President and General Advisors Inc. Minneapolis, MN 55440
Auditor
Jeffrey J. Stremcha, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Barbara Stroup Stewart, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Keith N. Tufte American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Equity Research
of Equity Research
Norman Weaver Jr., American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Arizona Inc.
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
Michael L. Weiner, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
IDS Capital Holdings Inc. Vice President
IDS Futures Brokerage Group Vice President
IDS Futures Corporation Vice President, Treasurer
and Secretary
IDS Sales Support Inc. Director, Vice President
and Assistant Treasurer
Jeffry F. Welter, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
Edwin M. Wistrand, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel
American Express Financial Vice President and Chief
Advisors Japan Inc. Legal Officer
Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440 and Senior Portfolio
Manager
American Express Financial Vice President
Advisors Inc.
Michael R. Woodward, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Insurance Vice President
Agency of Idaho Inc.
American Express Insurance Vice President
Agency of Nevada Inc.
American Express Insurance Vice President
Agency of Oregon Inc.
American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.
IDS Insurance Agency of Vice President
Alabama Inc.
IDS Insurance Agency of Vice President
Arkansas Inc.
IDS Insurance Agency of Vice President
Massachusetts Inc.
IDS Insurance Agency of Vice President
New Mexico Inc.
IDS Insurance Agency of Vice President
North Carolina Inc.
IDS Insurance Agency of Vice President
Ohio Inc.
IDS Insurance Agency of Vice President
Wyoming Inc.
IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
</TABLE>
Item 27. Principal Underwriters.
(a) American Express Financial Advisors acts as principal underwriter for
the following investment companies:
AXP Bond Fund, Inc.; AXP California Tax-Exempt Trust; AXP Discovery
Fund, Inc.; AXP Equity Select Fund, Inc.; AXP Extra Income Fund, Inc.;
AXP Federal Income Fund, Inc.; AXP Global Series, Inc.; AXP Growth
Series, Inc.; AXP High Yield Tax-Exempt Fund, Inc.; AXP International
Fund, Inc.; AXP Investment Series, Inc.; AXP Managed Series, Inc.; AXP
Market Advantage Series, Inc.; AXP Money Market Series, Inc.; AXP New
Dimensions Fund, Inc.; AXP Precious Metals Fund, Inc.; AXP Progressive
Fund, Inc.; AXP Selective Fund, Inc.; AXP Special Tax-Exempt Series
Trust; AXP Stock Fund, Inc.; AXP Strategy Series, Inc.; AXP Tax-Exempt
Series, Inc.; AXP Tax-Free Money Fund, Inc.; AXP Utilities Income Fund,
Inc., Growth Trust; Growth and Income Trust; Income Trust; Tax-Free
Income Trust; World Trust; IDS Certificate Company; Strategist Income
Fund, Inc.; Strategist Growth Fund, Inc.; Strategist Growth and Income
Fund, Inc.; Strategist World Fund, Inc. and Strategist Tax-Free Income
Fund, Inc.
(b) As to each director, officer or partner of the principal underwriter:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Principal Business Address Position and Offices with Offices with Registrant
Underwriter
Ronald G. Abrahamson Vice President-Service Quality None
IDS Tower 10 and Reengineering
Minneapolis, MN 55440
Douglas A. Alger Senior Vice President-Human None
IDS Tower 10 Resources
Minneapolis, MN 55440
Peter J. Anderson Senior Vice President-Investment Vice President-Investments
IDS Tower 10 Operations
Minneapolis, MN 55440
Ward D. Armstrong Vice President-American Express None
IDS Tower 10 Retirement Services
Minneapolis, MN 55440
John M. Baker Vice President-Plan Sponsor None
IDS Tower 10 Services
Minneapolis, MN 55440
Joseph M. Barsky III Vice President - Mutual Fund None
IDS Tower 10 Equities
Minneapolis, MN 55440
Timothy V. Bechtold Vice President-Risk Management None
IDS Tower 10 Products
Minneapolis, MN 55440
John D. Begley Group Vice President-Ohio/Indiana None
Suite 100
7760 Olentangy River Rd.
Columbus, OH 43235
Brent L. Bisson Group Vice President-Los Angeles None
Suite 900, E. Westside Twr Metro
11835 West Olympic Blvd.
Los Angeles, CA 90064
John C. Boeder Vice President-Nonproprietary None
IDS Tower 10 Products
Minneapolis, MN 55440
Walter K. Booker Group Vice President-New Jersey None
Suite 200, 3500 Market Street
Camp Hill, NJ 17011
Bruce J. Bordelon Group Vice President - San None
1333 N. California Blvd., Suite 200 Francisco Area
Walnut Creek, CA 94596
Charles R. Branch Group Vice President-Northwest None
Suite 200
West 111 North River Dr.
Spokane, WA 99201
Douglas W. Brewers Vice President-Sales Support None
IDS Tower 10
Minneapolis, MN 55440
Karl J. Breyer Corporate Senior Vice President None
IDS Tower 10
Minneapolis, MN 55440
Cynthia M. Carlson Vice President-American Express None
IDS Tower 10 Securities Services
Minneapolis, MN 55440
Mark W. Carter Senior Vice President and Chief None
IDS Tower 10 Marketing Officer
Minneapolis, MN 55440
James E. Choat Senior Vice President - Third None
IDS Tower 10 Party Distribution
Minneapolis, MN 55440
Kenneth J. Ciak Vice President and General None
IDS Property Casualty Manager-IDS Property Casualty
1400 Lombardi Avenue
Green Bay, WI 54304
Paul A. Connolly Vice President-Retail - Retail None
IDS Tower 10 Distribution Services
Minneapolis, MN 55440
Henry J. Cormier Group Vice President-Connecticut None
Commerce Center One
333 East River Drive
East Hartford, CT 06108
John M. Crawford Group Vice President-Arkansas/ None
Suite 200 Springfield/Memphis
10800 Financial Ctr Pkwy
Little Rock, AR 72211
Kevin F. Crowe Group Vice None
Suite 312 President-Carolinas/Eastern
7300 Carmel Executive Pk Georgia
Charlotte, NC 28226
Colleen Curran Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Luz Maria Davis Vice President-Communications None
IDS Tower 10
Minneapolis, MN 55440
Arthur E. Delorenzo Group Vice President - Upstate None
4 Atrium Drive, #100 New York
Albany, NY 12205
Scott M. DiGiammarino Group Vice None
Suite 500, 8045 Leesburg Pike President-Washington/Baltimore
Vienna, VA 22182
Bradford L. Drew Group Vice President-Eastern None
Two Datran Center Florida
Penthouse One B
9130 S. Dadeland Blvd.
Miami, FL 33156
Douglas K. Dunning Vice President-Assured Assets None
IDS Tower 10 Product Development and Management
Minneapolis, MN 55440
James P. Egge Group Vice President-Western None
4305 South Louise, Suite 202 Iowa, Nebraska, Dakotas
Sioux Falls, SD 57103
Gordon L. Eid Senior Vice President, General None
IDS Tower 10 Counsel and Chief Compliance
Minneapolis, MN 55440 Officer
Robert M. Elconin Vice President-Government None
IDS Tower 10 Relations
Minneapolis, MN 55440
Phillip W. Evans Group Vice President-Rocky None
Suite 600 Mountain
6985 Union Park Center
Midvale, UT 84047-4177
Gordon M. Fines Vice President-Mutual Fund Equity None
IDS Tower 10 Investments
Minneapolis, MN 55440
Douglas L. Forsberg Vice President - International None
IDS Tower 10
Minneapolis, MN 55440
Jeffrey P. Fox Vice President and Corporate None
IDS Tower 10 Controller
Minneapolis, MN 55440
William P. Fritz Group Vice President-Gateway None
Suite 160
12855 Flushing Meadows Dr
St. Louis, MO 63131
Carl W. Gans Group Vice President-Twin City None
8500 Tower Suite 1770 Metro
8500 Normandale Lake Blvd.
Bloomington, MN 55437
Peter A. Gallus Vice President-Investment None
IDS Tower 10 Administration
Minneapolis, MN 55440
David A. Hammer Vice President and Marketing None
IDS Tower 10 Controller
Minneapolis, MN 55440
Teresa A. Hanratty Senior Vice President-Field None
Suites 6&7 Management
169 South River Road
Bedford, NH 03110
Robert L. Harden Group Vice President-Boston Metro None
Two Constitution Plaza
Boston, MA 02129
Lorraine R. Hart Vice President-Insurance None
IDS Tower 10 Investments
Minneapolis, MN 55440
Scott A. Hawkinson Vice President and None
IDS Tower 10 Controller-Private Client Group
Minneapolis, MN 55440
Brian M. Heath Senior Vice President and General None
Suite 150 Sales Manager
801 E. Campbell Road
Richardson, TX 75081
Janis K. Heaney Vice President-Incentive None
IDS Tower 10 Management
Minneapolis, MN 55440
Jon E. Hjelm Group Vice President-Rhode None
319 Southbridge Street Island/Central-Western
Auburn, MA 01501 Massachusetts
David J. Hockenberry Group Vice President-Tennessee None
30 Burton Hills Blvd. Valley
Suite 175
Nashville, TN 37215
Jeffrey S. Horton Vice President and Treasurer None
IDS Tower 10
Minneapolis, MN 55440
David R. Hubers Chairman, President and Chief Board member
IDS Tower 10 Executive Officer
Minneapolis, MN 55440
Debra A. Hutchinson Vice President - Relationship None
IDS Tower 10 Leader
Minneapolis, MN 55440
James M. Jensen Vice President and None
IDS Tower 10 Controller-Advice and Retail
Minneapolis, MN 55440 Distribution Group
Marietta L. Johns Senior Vice President-Field None
IDS Tower 10 Management
Minneapolis, MN 55440
Nancy E. Jones Vice President-Business None
IDS Tower 10 Development
Minneapolis, MN 55440
Ora J. Kaine Vice President-Financial Advisory None
IDS Tower 10 Services
Minneapolis, MN 55440
Linda B. Keene Vice President-Market Development None
IDS Tower 10
Minneapolis, MN 55440
Raymond G. Kelly Group Vice President-North Texas None
Suite 250
801 East Campbell Road
Richardson, TX 75081
Richard W. Kling Senior Vice President-Insurance None
IDS Tower 10 Products
Minneapolis, MN 55440
John M. Knight Vice President-Investment Treasurer
IDS Tower 10 Accounting
Minneapolis, MN 55440
Paul F. Kolkman Vice President-Actuarial Finance None
IDS Tower 10
Minneapolis, MN 55440
Claire Kolmodin Vice President-Service Quality None
IDS Tower 10
Minneapolis, MN 55440
David S. Kreager Group Vice President-Greater None
Suite 108 Michigan
Trestle Bridge V
5136 Lovers Lane
Kalamazoo, MI 49002
Steven C. Kumagai Director and Senior Vice None
IDS Tower 10 President-Direct and Interactive
Minneapolis, MN 55440 Group
Mitre Kutanovski Group Vice President-Chicago Metro None
Suite 680
8585 Broadway
Merrillville, IN 48410
Kurt A. Larson Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Lori J. Larson Vice President-Brokerage and None
IDS Tower 10 Direct Services
Minneapolis, MN 55440
Daniel E. Laufenberg Vice President and Chief U.S. None
IDS Tower 10 Economist
Minneapolis, MN 55440
Peter A. Lefferts Senior Vice President-Corporate None
IDS Tower 10 Strategy and Development
Minneapolis, MN 55440
Douglas A. Lennick Director and Executive Vice None
IDS Tower 10 President-Private Client Group
Minneapolis, MN 55440
Mary J. Malevich Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
<PAGE>
Fred A. Mandell Vice President-Distribution None
IDS Tower 10 Channel Marketing
Minneapolis, MN 55440
Daniel E. Martin Group Vice President-Pittsburgh None
Suite 650 Metro
5700 Corporate Drive
Pittsburgh, PA 15237
Timothy J. Masek Vice President and Director of None
IDS Tower 10 Global Research
Minnapolis, MN 55440
Sarah A. Mealey Vice President-Mutual Funds None
IDS Tower 10
Minneapolis, MN 55440
Paula R. Meyer Vice President-Assured Assets None
IDS Tower 10
Minneapolis, MN 55440
Shashank B. Modak Vice President - Technology Leader None
IDS Tower 10
Minneapolis, MN 55440
Pamela J. Moret Senior Vice President-Investment None
IDS Tower 10 Products and Vice
Minneapolis, MN 55440 President-Variable Assets
Barry J. Murphy Senior Vice President-Client None
IDS Tower 10 Service
Minneapolis, MN 55440
Mary Owens Neal Vice President-Consumer Marketing None
IDS Tower 10
Minneapolis, MN 55440
Thomas V. Nicolosi Group Vice President-New York None
Suite 220 Metro Area
500 Mamaroneck Avenue
Harrison, NY 10528
Michael J. O'Keefe Vice President-Advisory Business None
IDS Tower 10 Systems
Minneapolis, MN 55440
James R. Palmer Vice President-Taxes None
IDS Tower 10
Minneapolis, MN 55440
Marc A. Parker Group Vice None
10200 SW Greenburg Road President-Portland/Eugene
Suite 110
Portland, OR 97223
Carla P. Pavone Vice President-Compensation None
IDS Tower 10 Services and ARD Product
Minneapolis, MN 55440 Distribution
Thomas P. Perrine Senior Vice President-Group None
IDS Tower 10 Relationship Leader/American
Minneapolis, MN 55440 Express Technologies Financial
Services
Susan B. Plimpton Vice President-Marketing Services None
IDS Tower 10
Minneapolis, MN 55440
Larry M. Post Group Vice President-Philadelphia None
One Tower Bridge Metro
100 Front Street 8th Fl
West Conshohocken, PA 19428
Ronald W. Powell Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Diana R. Prost Group Vice None
3030 N.W. Expressway President-Kansas/Oklahoma
Suite 900
Oklahoma City, OK 73112
James M. Punch Vice President Branded Platform None
IDS Tower 10 Project
Minneapolis, MN 55440
Frederick C. Quirsfeld Senior Vice President-Fixed Income Vice President - Fixed Income
IDS Tower 10 Investments
Minneapolis, MN 55440
Rollyn C. Renstrom Vice President-Corporate Planning None
IDS Tower 10 and Analysis
Minneapolis, MN 55440
R. Daniel Richardson III Group Vice President-Southern None
Suite 800 Texas
Arboretum Plaza One
9442 Capital of Texas Hwy N.
Austin, TX 78759
ReBecca K. Roloff Senior Vice President-Field None
IDS Tower 10 Management and Financial Advisory
Minneapolis, MN 55440 Service
Stephen W. Roszell Senior Vice None
IDS Tower 10 President-Institutional
Minneapolis, MN 55440
Max G. Roth Group Vice None
Suite 201 S IDS Ctr President-Wisconsin/Upper Michigan
1400 Lombardi Avenue
Green Bay, WI 54304
Diane M. Ruebling Group Vice President-Central None
Suite 200, Bldg. B California/Western Nevada
2200 Douglas Blvd.
Roseville, CA 95661
Erven A. Samsel Senior Vice President-Field None
45 Braintree Hill Park Management
Suite 402
Braintree, MA 02184
Theresa M. Sapp Vice President - Relationship None
IDS Tower 10 Leader
Minneapolis, MN 55440
Russell L. Scalfano Group Vice None
Suite 201 President-Illinois/Indiana/Kentucky
101 Plaza East Blvd.
Evansville, IN 47715
William G. Scholz Group Vice President-Arizona/Las None
Suite 205 Vegas
7333 E Doubletree Ranch Rd
Scottsdale, AZ 85258
Stuart A. Sedlacek Senior Vice President and Chief None
IDS Tower 10 Financial Officer
Minneapolis, MN 55440
Donald K. Shanks Vice President-Property Casualty None
IDS Tower 10
Minneapolis, MN 55440
F. Dale Simmons Vice President-Senior Portfolio None
IDS Tower 10 Manager, Insurance Investments
Minneapolis, MN 55440
Judy P. Skoglund Vice President-Quality and None
IDS Tower 10 Service Support
Minneapolis, MN 55440
James B. Solberg Group Vice President-Eastern Iowa None
466 Westdale Mall Area
Cedar RapIDS, IA 52404
Bridget Sperl Vice President-Geographic Service None
IDS Tower 10 Teams
Minneapolis, MN 55440
Paul J. Stanislaw Group Vice President-Southern None
Suite 1100 California
Two Park Plaza
Irvine, CA 92714
Lisa A. Steffes Vice President - Marketing Offer None
IDS Tower 10 Development
Minneapolis, MN 55440
Lois A. Stilwell Group Vice President-Outstate None
Suite 433 Minnesota Area/ North
9900 East Bren Road Dakota/Western Wisconsin
Minnetonka, MN 55343
William A. Stoltzmann Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
James J. Strauss Vice President and General Auditor None
IDS Tower 10
Minneapolis, MN 55440
Jeffrey J. Stremcha Vice President-Information None
IDS Tower 10 Resource Management/ISD
Minneapolis, MN 55440
Barbara Stroup Stewart Vice President-Channel Development None
IDS Tower 10
Minneapolis, MN 55440
Craig P. Taucher Group Vice None
Suite 150 President-Orlando/Jacksonville
4190 Belfort Road
Jacksonville, FL 32216
Neil G. Taylor Group Vice None
Suite 425 President-Seattle/Tacoma/Hawaii
101 Elliott Avenue West
Seattle, WA 98119
John R. Thomas Senior Vice President Board Member
IDS Tower 10
Minneapolis, MN 55440
Keith N. Tufte Vice President and Director of None
IDS Tower 10 Equity Research
Minneapolis, MN 55440
Peter S. Velardi Group Vice None
Suite 180 President-Atlanta/Birmingham
1200 Ashwood Parkway
Atlanta, GA 30338
Charles F. Wachendorfer Group Vice President-Detroit Metro None
8115 East Jefferson Avenue
Detroit, MI 48214
Donald F. Weaver Group Vice President-Greater None
3500 Market Street, Suite 200 Pennsylvania
Camp Hill, PA 17011
Norman Weaver Jr. Senior Vice President - Alliance None
1010 Main St. Suite 2B Group
Huntington Beach, CA 92648
Michael L. Weiner Vice President-Tax Research and None
IDS Tower 10 Audit
Minneapolis, MN 55440
Jeffry M. Welter Vice President-Equity and Fixed None
IDS Tower 10 Income Trading
Minneapolis, MN 55440
Thomas L. White Group Vice President-Cleveland None
Suite 200 Metro
28601 Chagrin Blvd.
Woodmere, OH 44122
Eric S. Williams Group Vice President-Virginia None
Suite 250
3951 Westerre Parkway
Richmond, VA 23233
William J. Williams Group Vice President-Western None
Two North Tamiami Trail Florida
Suite 702
Sarasota, FL 34236
Edwin M. Wistrand Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440
Michael D. Wolf Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440
Michael R. Woodward Senior Vice President-Field None
32 Ellicott St Management
Suite 100
Batavia, NY 14020
Rande L. Zellers Group Vice President-Gulf States None
1 Galleria Blvd., Suite 1900
Metairie, LA 70001
</TABLE>
Item 27 (c). Not Applicable
Item 28. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant, AXP Market Advantage Series, Inc., certifies that it meets
all of the requirements for effectiveness of this Amendment to the Registration
Statement under Rule 485(b) under the Securities Act and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Minneapolis and State of Minnesota
on the 31st day of March, 2000.
AXP MARKET ADVANTAGE SERIES, INC.
by /s/ Arne H. Carlson**
Arne H. Carlson, Chief Executive Officer
by /s/ Steven A. Turbenson
Steven A. Turbenson
Assistant Treasurer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities indicated on the 31st day of March, 2000.
Signatures Capacity
Director
Peter J. Anderson
/s/ H. Brewster Atwater, Jr.* Director
H. Brewster Atwater, Jr.
/s/ Arne H. Carlson* Chairman of the board
Arne H. Carlson
/s/ Lynne V. Cheney* Director
Lynne V. Cheney
/s/ David R. Hubers* Director
David R. Hubers
/s/ Heinz F. Hutter* Director
Heinz F. Hutter
/s/ Anne P. Jones* Director
Anne P. Jones
<PAGE>
Signatures Capacity
/s/ William R. Pearce* Director
William R. Pearce
/s/ Alan K. Simpson* Director
Alan K. Simpson
/s/ John R. Thomas* Director
John R. Thomas
/s/ C. Angus Wurtele* Director
C. Angus Wurtele
*Signed pursuant to Directors' Power of Attorney, dated Jan. 13, 2000, filed
electronically herewith as Exhibit (q)(1), by:
/s/ Leslie L. Ogg
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney, dated Jan. 13, 2000, filed
electronically herewith as Exhibit (q)(2), by:
/s/ Leslie L. Ogg
Leslie L. Ogg
<PAGE>
CONTENTS OF THIS
POST-EFFECTIVE AMENDMENT NO. 24
TO REGISTRATION STATEMENT NO. 33-30770
This post-effective amendment comprises the following papers and documents:
The facing sheet.
Part A.
Prospectuses for:
AXP Blue Chip Advantage Fund
AXP Small Company Index Fund
AXP S&P 500 Index Fund
AXP Mid Cap Index Fund
AXP Total Stock Market Index Fund
AXP International Equity Index Fund
AXP Nasdaq 100 Index Fund
Part B.
Statements of Additional Information for:
AXP Blue Chip Advantage Fund
AXP Small Company Index Fund
AXP S&P 500 Index Fund
AXP Mid Cap Index Fund
AXP Total Stock Market Index Fund
AXP International Equity Index Fund
AXP Nasdaq 100 Index Fund
Financial Statements for:
AXP Blue Chip Advantage Fund
AXP Small Company Index Fund
AXP S&P 500 Index Fund
AXP Mid Cap Index Fund
AXP Total Stock Market Index Fund
AXP International Equity Index Fund
AXP Nasdaq 100 Index Fund
Part C.
Other information.
The signatures.
Exhibit Index
Exhibit (d)(1) Investment Mgmt Services Agmt for AXP Blue Chip Advantage Fund
Exhibit (d)(2) Investment Mgmt Services Agmt for AXP Small Company Index Fund
Exhibit (i) Opinion and Consent of Counsel
Exhibit (j) Independent Auditors' Consent
Exhibit (p)(1) Code of Ethics for Registrant
Exhibit (p)(2) Code of Ethics for investment advisor and principal underwriter
Exhibit (p)(3) Code of Ethics for subadvisor
Exhibit (q)(1) Directors' Power of Attorney
Exhibit (q)(2) Officers' Power of Attorney
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AGREEMENT made the 1st day of July, 1999, by and between AXP Market
Advantage Series, Inc., a Minnesota corporation (the "Corporation"), on behalf
of its underlying series fund AXP Blue Chip Advantage Fund (the "Fund"), and
American Express Financial Corporation, a Delaware corporation.
Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES
(1) The Fund hereby retains American Express Financial Corporation, and
American Express Financial Corporation hereby agrees, for the period of
this Agreement and under the terms and conditions hereinafter set forth,
to furnish the Fund continuously with suggested investment planning; to
determine, consistent with the Fund's investment objectives and
policies, which securities in American Express Financial Corporation's
discretion shall be purchased, held or sold and to execute or cause the
execution of purchase or sell orders; to prepare and make available to
the Fund all necessary research and statistical data in connection
therewith; to furnish services of whatever nature required in connection
with the management of the Fund as provided under this Agreement; and to
pay such expenses as may be provided for in Part Three; subject always
to the direction and control of the Board of Directors (the "Board"),
the Executive Committee and the authorized officers of the Fund.
American Express Financial Corporation agrees to maintain an adequate
organization of competent persons to provide the services and to perform
the functions herein mentioned. American Express Financial Corporation
agrees to meet with any persons at such times as the Board deems
appropriate for the purpose of reviewing American Express Financial
Corporation's performance under this Agreement.
(2) American Express Financial Corporation agrees that the investment
planning and investment decisions will be in accordance with general
investment policies of the Fund as disclosed to American Express
Financial Corporation from time to time by the Fund and as set forth in
its prospectuses and registration statements filed with the United
States Securities and Exchange Commission (the "SEC").
(3) American Express Financial Corporation agrees that it will maintain
all required records, memoranda, instructions or authorizations relating
to the acquisition or disposition of securities for the Fund.
(4) The Fund agrees that it will furnish to American Express Financial
Corporation any information that the latter may reasonably request with
respect to the services performed or to be performed by American Express
Financial Corporation under this Agreement.
(5) American Express Financial Corporation is authorized to select the
brokers or dealers that will execute the purchases and sales of
portfolio securities for the Fund and is directed to use its best
efforts to obtain the best available price and most favorable execution,
except as prescribed herein. Subject to prior authorization by the
Fund's Board of appropriate policies and procedures, and subject to
termination at any time by the Board, American Express Financial
Corporation may also be authorized to effect individual securities
transactions at commission rates in excess of the minimum commission
rates available, to the extent authorized by law, if American Express
Financial Corporation determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in terms of
either that particular transaction or American Express Financial
Corporation's overall responsibilities with respect to the Fund and
other funds for which it acts as investment adviser.
<PAGE>
(6) It is understood and agreed that in furnishing the Fund with the
services as herein provided, neither American Express Financial
Corporation, nor any officer, director or agent thereof shall be held
liable to the Fund or its creditors or shareholders for errors of
judgment or for anything except willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or reckless disregard of
its obligations and duties under the terms of this Agreement. It is
further understood and agreed that American Express Financial
Corporation may rely upon information furnished to it reasonably
believed to be accurate and reliable.
Part Two: COMPENSATION TO INVESTMENT MANAGER
(1) The Fund agrees to pay to American Express Financial Corporation,
and American Express Financial Corporation covenants and agrees to
accept from the Fund in full payment for the services furnished, a fee
composed of an asset charge and a performance incentive adjustment.
(a) The asset charge
(i) The asset charge for each calendar day of each year shall
be equal to the total of 1/365th (1/366th in each leap year)
of the amount computed in accordance with paragraph (ii)
below. The computation shall be made for each day on the basis
of net assets as of the close of business of the full business
day two (2) business days prior to the day for which the
computation is being made. In the case of the suspension of
the computation of net asset value, the asset charge for each
day during such suspension shall be computed as of the close
of business on the last full business day on which the net
assets were computed. Net assets as of the close of a full
business day shall include all transactions in shares of the
Fund recorded on the books of the Fund for that day.
(ii) The asset charge shall be based on the net assets of the
Fund as set forth in the following table.
Assets Annual Rate at
(Billions) Each Asset Level
First $0.25 0.540%
Next 0.25 0.515
Next 0.25 0.490
Next 0.25 0.465
Next 1 0.440
Next 1 0.410
Next 3 0.380
Over 6 0.350
(b) The performance incentive adjustment
(i) The performance incentive adjustment, determined monthly,
shall be computed by measuring the percentage point difference
between the performance of one Class A share of the Fund and
the performance of the Lipper Growth and Income Fund Index
(the "Index"). The performance of one Class A share of the
Fund shall be measured by computing the percentage difference,
carried to two decimal places, between the opening net asset
value of one share of the Fund and the closing net asset value
of such share as of the last business day of the period
selected for comparison, adjusted for dividends or capital
gain distributions treated as reinvested at the end of the
month during which the distribution
<PAGE>
was made but without adjustment for expenses related to a
particular class of shares. The performance of the Index will
then be established by measuring the percentage difference,
carried to two decimal places, between the beginning and
ending Index for the comparison period, with dividends or
capital gain distributions on the securities which comprise
the Index being treated as reinvested at the end of the month
during which the distribution was made.
(ii) In computing the adjustment, one percentage point shall
be deducted from the difference, as determined in (b) (i)
above. The result shall be converted to a decimal value (e.g.,
2.38% to 0.0238), multiplied by .01 and then multiplied by the
Fund's average net assets for the comparison period. This
product next shall be divided by 12 to put the adjustment on a
monthly basis. Where the performance of the Fund exceeds the
Index, the amount so determined shall be an increase in fees
as computed under paragraph (a). Where Fund performance is
exceeded by the Index, the amount so determined shall be a
decrease in such fees. The percentage point difference between
the performance of the Fund and that of the Index, as
determined above, is limited to a maximum of 0.0008 per year.
(iii) The 12 month comparison period will roll over with each
succeeding month, so that it always equals 12 months, ending
with the month for which the performance adjustment is being
computed.
(iv) If the Index ceases to be published for a period of more
than 90 days, changes in any material respect or otherwise
becomes impracticable to use for purposes of the adjustment,
no adjustment will be made under this paragraph (b) until such
time as the Board approves a substitute index.
(2) The fee shall be paid on a monthly basis and, in the event of the
termination of this Agreement, the fee accrued shall be prorated on the
basis of the number of days that this Agreement is in effect during the
month with respect to which such payment is made.
(3) The fee provided for hereunder shall be paid in cash by the Fund to
American Express Financial Corporation within five business days after
the last day of each month.
Part Three: ALLOCATION OF EXPENSES
(1) The Fund agrees to pay:
(a) Fees payable to American Express Financial Corporation for
its services under the terms of this Agreement.
(b) Taxes.
(c) Brokerage commissions and charges in connection with the
purchase and sale of assets.
(d) Custodian fees and charges.
(e) Fees and charges of its independent certified public
accountants for services the Fund requests.
(f) Premium on the bond required by Rule 17g-1 under the
Investment Company Act of 1940.
(g) Fees and expenses of attorneys (i) it employs in matters
not involving the assertion of a claim by a third party
against the Fund, its directors and officers, (ii) it employs
in conjunction with a claim asserted by the Board against
American Express Financial Corporation, except that American
Express Financial Corporation shall reimburse the Fund for
such fees and expenses if it is ultimately determined by a
court of competent jurisdiction, or American Express Financial
Corporation agrees, that it is liable in whole or in part to
the Fund, and (iii) it employs to assert a claim against a
third party.
(h) Fees paid for the qualification and registration for
public sale of the securities of the Fund under the laws of
the United States and of the several states in which such
securities shall be offered for sale.
(i) Fees of consultants employed by the Fund.
(j) Directors, officers and employees expenses which shall
include fees, salaries, memberships, dues, travel, seminars,
pension, profit sharing, and all other benefits paid to or
provided for directors, officers and employees, directors and
officers liability insurance, errors and omissions liability
insurance, worker's compensation insurance and other expenses
applicable to the directors, officers and employees, except
the Fund will not pay any fees or expenses of any person who
is an officer or employee of American Express Financial
Corporation or its affiliates.
(k) Filing fees and charges incurred by the Fund in connection
with filing any amendment to its articles of incorporation, or
incurred in filing any other document with the State of
Minnesota or its political subdivisions.
(l) Organizational expenses of the Fund.
(m) Expenses incurred in connection with lending portfolio
securities of the Fund.
(n) Expenses properly payable by the Fund, approved by the
Board.
(2) American Express Financial Corporation agrees to pay all expenses
associated with the services it provides under the terms of this
Agreement. Further, American Express Financial Corporation agrees that
if, at the end of any month, the expenses of the Fund under this
Agreement and any other agreement between the Fund and American Express
Financial Corporation, but excluding those expenses set forth in (1)(b)
and (1)(c) of this Part Three, exceed the most restrictive applicable
state expenses limitation, the Fund shall not pay those expenses set
forth in (1)(a) and (d) through (n) of this Part Three to the extent
necessary to keep the Fund's expenses from exceeding the limitation, it
being understood that American Express Financial Corporation will assume
all unpaid expenses and bill the Fund for them in subsequent months but
in no event can the accumulation of unpaid expenses or billing be
carried past the end of the Fund's fiscal year.
Part Four: MISCELLANEOUS
(1) American Express Financial Corporation shall be deemed to be an
independent contractor and, except as expressly provided or authorized
in this Agreement, shall have no authority to act for or represent the
Fund.
(2) A "full business day" shall be as defined in the By-laws.
(3) The Fund recognizes that American Express Financial Corporation now
renders and may continue to render investment advice and other services
to other investment companies and persons which may or may not have
investment policies and investments similar to those of the Fund and
that American Express Financial Corporation manages its own investments
and/or those of its subsidiaries. American Express Financial Corporation
shall be free to render such investment advice and other services and
the Fund hereby consents thereto.
(4) Neither this Agreement nor any transaction had pursuant hereto shall
be invalidated or in any way affected by the fact that directors,
officers, agents and/or shareholders of the Fund are or may be
interested in American Express Financial Corporation or any successor or
assignee thereof, as directors, officers, stockholders or otherwise;
that directors, officers, stockholders or agents of American Express
Financial Corporation are or may be interested in the Fund as directors,
officers, shareholders, or otherwise; or that American Express Financial
Corporation or any successor or assignee, is or may be interested in the
Fund as shareholder or otherwise, provided, however, that neither
American Express Financial Corporation, nor any officer, director or
employee thereof or of the Fund, shall sell to or buy from the Fund any
property or security other than shares issued by the Fund, except in
accordance with applicable regulations or orders of the SEC.
(5) Any notice under this Agreement shall be given in writing,
addressed, and delivered, or mailed postpaid, to the party to this
Agreement entitled to receive such, at such party's principal place of
business in Minneapolis, Minnesota, or to such other address as either
party may designate in writing mailed to the other.
(6) American Express Financial Corporation agrees that no officer,
director or employee of American Express Financial Corporation will deal
for or on behalf of the Fund with himself as principal or agent, or with
any corporation or partnership in which he may have a financial
interest, except that this shall not prohibit:
(a) Officers, directors or employees of American Express
Financial Corporation from having a financial interest in the
Fund or in American Express Financial Corporation.
(b) The purchase of securities for the Fund, or the sale of
securities owned by the Fund, through a security broker or
dealer, one or more of whose partners, officers, directors or
employees is an officer, director or employee of American
Express Financial Corporation, provided such transactions are
handled in the capacity of broker only and provided
commissions charged do not exceed customary brokerage charges
for such services.
(c) Transactions with the Fund by a broker-dealer affiliate of
American Express Financial Corporation as may be allowed by
rule or order of the SEC, and if made pursuant to procedures
adopted by the Fund's Board.
(7) American Express Financial Corporation agrees that, except as herein
otherwise expressly provided or as may be permitted consistent with the
use of a broker-dealer affiliate of American Express Financial
Corporation under applicable provisions of the federal securities laws,
neither it nor any of its officers, directors or employees shall at any
time during the period of this Agreement, make, accept or receive,
directly or indirectly, any fees, profits or emoluments of any character
in connection with the purchase or sale of securities (except shares
issued by the Fund) or other assets by or for the Fund.
<PAGE>
Part Five: RENEWAL AND TERMINATION
(1) This Agreement shall continue in effect until June 30, 2001, or
until a new agreement is approved by a vote of the majority of the
outstanding shares of the Fund and by vote of the Fund's Board,
including the vote required by (b) of this paragraph, and if no new
agreement is so approved, this Agreement shall continue from year to
year thereafter unless and until terminated by either party as
hereinafter provided, except that such continuance shall be specifically
approved at least annually (a) by the Board of the Fund or by a vote of
the majority of the outstanding shares of the Fund and (b) by the vote
of a majority of the directors who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called
for the purpose of voting on such approval. As used in this paragraph,
the term "interested person" shall have the same meaning as set forth in
the Investment Company Act of 1940, as amended (the "1940 Act").
(2) This Agreement may be terminated by either the Fund or American
Express Financial Corporation at any time by giving the other party 60
days' written notice of such intention to terminate, provided that any
termination shall be made without the payment of any penalty, and
provided further that termination may be effected either by the Board of
the Fund or by a vote of the majority of the outstanding voting shares
of the Fund. The vote of the majority of the outstanding voting shares
of the Fund for the purpose of this Part Five shall be the vote at a
shareholders' regular meeting, or a special meeting duly called for the
purpose, of 67% or more of the Fund's shares present at such meeting if
the holders of more than 50% of the outstanding voting shares are
present or represented by proxy, or more than 50% of the outstanding
voting shares of the Fund, whichever is less.
(3) This Agreement shall terminate in the event of its assignment, the
term "assignment" for this purpose having the same meaning as set forth
in the 1940 Act.
IN WITNESS THEREOF, the parties hereto have executed the foregoing
Agreement as of the day and year first above written.
AXP MARKET ADVANTAGE SERIES, INC.
AXP Blue Chip Advantage Fund
By /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
AMERICAN EXPRESS FINANCIAL CORPORATION
By /s/ Pamela J. Moret
Pamela J. Moret
Vice President
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AGREEMENT made the 1st day of July, 1999, by and between AXP Market
Advantage Series, Inc., a Minnesota corporation (the "Corporation"), on behalf
of its underlying series fund AXP Small Company Index Fund (the "Fund"), and
American Express Financial Corporation, a Delaware corporation (the "Advisor").
Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES
(1) The Fund hereby retains the Advisor, and the Advisor hereby agrees,
for the period of this Agreement and under the terms and conditions
hereinafter set forth, to furnish the Fund continuously with suggested
investment planning; to determine, consistent with the Fund's investment
objectives and policies, which securities in the Advisor's discretion
shall be purchased, held or sold and to execute or cause the execution
of purchase or sell orders; to prepare and make available to the Fund
all necessary research and statistical data in connection therewith; to
furnish services of whatever nature required in connection with the
management of the Fund as provided under this Agreement; and to pay such
expenses as may be provided for in Part Three; subject always to the
direction and control of the Board of Directors (the "Board"), the
Executive Committee of the Board and the authorized officers of the
Fund. The Advisor agrees to maintain an adequate organization of
competent persons to provide the services and to perform the functions
herein mentioned. The Advisor agrees to meet with any persons at such
times as the Board deems appropriate for the purpose of reviewing the
Advisor's performance under this Agreement.
(2) The Advisor agrees that the investment planning and investment
decisions will be in accordance with general investment policies of the
Fund as disclosed to the Advisor from time to time by the Fund and as
set forth in its prospectuses and registration statements filed with the
Securities and Exchange Commission (the "SEC").
(3) The Advisor agrees that it will maintain all required records,
memoranda, instructions or authorizations relating to the acquisition or
disposition of securities for the Fund.
(4) The Fund agrees that it will furnish to the Advisor any information
that the latter may reasonably request with respect to the services
performed or to be performed by the Advisor under this Agreement.
(5) The Advisor is authorized to select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund and
is directed to use its best efforts to obtain the best available price
and most favorable execution, except as prescribed herein. Subject to
prior authorization by the Fund's Board of appropriate policies and
procedures, and subject to termination at any time by the Board, the
Advisor may also be authorized to effect individual securities
transactions at commission rates in excess of the minimum commission
rates available, to the extent authorized by law, if the Advisor
determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided
by such broker or dealer, viewed in terms of either that particular
transaction or the Advisor's overall responsibilities with respect to
the Fund and other funds for which it acts as investment advisor.
(6) It is understood and agreed that in furnishing the Fund with the
services as herein provided, neither the Advisor, nor any officer,
director or agent thereof shall be held liable to the Fund or its
creditors or shareholders for errors of judgment or for anything except
willful misfeasance, bad faith, or gross negligence in the performance
of its duties, or reckless disregard of its obligations and duties under
the terms of this Agreement. It is further understood and agreed that
the Advisor may rely upon information furnished to it reasonably
believed to be accurate and reliable.
<PAGE>
Part Two: COMPENSATION TO INVESTMENT MANAGER
(1) The Fund agrees to pay to the Advisor, and the Advisor covenants and agrees
to accept from the Fund in full payment for the services furnished, a fee
composed of an asset charge and a performance incentive adjustment.
(a) The asset charge
(i) The asset charge for each calendar day of each year shall
be equal to the total of 1/365th (1/366th in each leap year)
of the amount computed in accordance with paragraph (ii)
below. The computation shall be made for each day on the basis
of net assets as of the close of business of the full business
day two (2) business days prior to the day for which the
computation is being made. In the case of the suspension of
the computation of net asset value, the asset charge for each
day during such suspension shall be computed as of the close
of business on the last full business day on which the net
assets were computed. Net assets as of the close of a full
business day shall include all transactions in shares of the
Fund recorded on the books of the Fund for that day.
(ii) The asset charge shall be based on the net assets of the
Fund as set forth in the following table.
Assets Annual Rate at
(Billions) Each Asset Level
First $0.25 0.38%
Next 0.25 0.37
Next 0.25 0.36
Next 0.25 0.35
Over 1 0.34
(b) The performance incentive adjustment
(i) The performance incentive adjustment, determined monthly,
shall be computed by measuring the percentage point difference
between the performance of one Class A share of the Fund and
the performance of the Lipper Small Cap Fund Index (the
"Index"). The performance of one Class A share of the Fund
shall be measured by computing the percentage difference,
carried to two decimal places, between the opening net asset
value of one share of the Fund and the closing net asset value
of such share as of the last business day of the period
selected for comparison, adjusted for dividends or capital
gain distributions treated as reinvested at the end of the
month during which the distribution was made but without
adjustment for expenses related to a particular class of
shares. The performance of the Index will then be established
by measuring the percentage difference, carried to two decimal
places, between the beginning and ending Index for the
comparison period, with dividends or capital gain
distributions on the securities which comprise the Index being
treated as reinvested at the end of the month during which the
distribution was made.
(ii) In computing the adjustment, one percentage point shall
be deducted from the difference, as determined in (b) (i)
above. The result shall be converted to a decimal value (e.g.,
2.38% to 0.0238), multiplied by .01 and then multiplied by the
Fund's average net assets for the comparison period. This
product next shall be divided by 12 to put the adjustment on a
monthly basis. Where the performance of the Fund exceeds the
Index, the amount so determined shall be an increase in fees
as computed under paragraph (a). Where Fund performance is
exceeded by the Index, the amount so
<PAGE>
determined shall be a decrease in such fees. The percentage
point difference between the performance of the Fund and that
of the Index, as determined above, is limited to a maximum of
0.0012 per year.
(iii) The 12 month comparison period will roll over with each
succeeding month, so that it always equals 12 months, ending
with the month for which the performance adjustment is being
computed.
(iv) If the Index ceases to be published for a period of more
than 90 days, changes in any material respect or otherwise
becomes impracticable to use for purposes of the adjustment,
no adjustment will be made under this paragraph (b) until such
time as the Board approves a substitute index.
(2) The fee shall be paid on a monthly basis and, in the event of the
termination of this Agreement, the fee accrued shall be pro-rated on the basis
of the number of days that this Agreement is in effect during the month with
respect to which such payment is made.
(3) The fee provided for hereunder shall be paid in cash by the Fund to the
Advisor within five business days after the last day of each month.
Part Three: ALLOCATION OF EXPENSES
(1) The Fund agrees to pay:
(a) Fees payable to American Express Financial
Corporation for its services under the terms of this
Agreement.
(b) Taxes.
(c) Brokerage commissions and charges in connection with
the purchase and sale of assets.
(d) Custodian fees and charges.
(e) Fees and charges of its independent certified public
accountants for services the Fund requests.
(f) Premium on the bond required by Rule 17g-1 under the
Investment Company Act of 1940.
(g) Fees and expenses of attorneys (i) it employs in
matters not involving the assertion of a claim by a
third party against the Fund, its directors and
officers, (ii) it employs in conjunction with a claim
asserted by the Board against American Express
Financial Corporation, except that American Express
Financial Corporation shall reimburse the Fund for
such fees and expenses if it is ultimately
determined by a court of competent jurisdiction, or
American Express Financial Corporation agrees,
that it is liable in whole or in part to the Fund,
and (iii) it employs to
assert a claim against a third party.
(h) Fees paid for the qualification and registration for
public sale of the securities of the Fund under the
laws of the United States and of the several states
in which such securities shall be offered for sale.
(i) Fees of consultants employed by the Fund.
<PAGE>
(j) Directors, officers and employees expenses which
shall include fees, salaries, memberships, dues,
travel, seminars, pension, profit sharing, and all
other benefits paid to or provided for directors,
officers and employees, directors and officers
liability insurance, errors and omissions liability
insurance, worker's compensation insurance and other
expenses applicable to the directors, officers and
employees, except the Fund will not pay any fees or
expenses of any person who is an officer or employee
of American Express Financial Corporation or its
affiliates.
(k) Filing fees and charges incurred by the Fund in
connection with filing any amendment to its articles
of incorporation, or incurred in filing any other
document with the State of Minnesota or its political
subdivisions.
(l) Organizational expenses of the Fund.
(m) Expenses incurred in connection with lending
portfolio securities of the Fund.
(n) Expenses properly payable by the Fund, approved by
the Board.
(2) American Express Financial Corporation agrees to pay all expenses
associated with the services it provides under the terms of this
Agreement. Further, American Express Financial Corporation agrees that
if, at the end of any month, the expenses of the Fund under this
Agreement and any other agreement between the Fund and American Express
Financial Corporation, but excluding those expenses set forth in (1)(b)
and (1)(c) of this Part Three, exceed the most restrictive applicable
state expenses limitation, the Fund shall not pay those expenses set
forth in (1)(a) and (d) through (n) of this Part Three to the extent
necessary to keep the Fund's expenses from exceeding the limitation, it
being understood that American Express Financial Corporation will assume
all unpaid expenses and bill the Fund for them in subsequent months but
in no event can the accumulation of unpaid expenses or billing be
carried past the end of the Fund's fiscal year.
Part Four: MISCELLANEOUS
(1) American Express Financial Corporation shall be deemed to be an
independent contractor and, except as expressly provided or authorized
in this Agreement, shall have no authority to act for or represent the
Fund.
(2) A "full business day" shall be as defined in the By-laws.
(3) The Fund recognizes that American Express Financial Corporation now
renders and may continue to render investment advice and other services
to other investment companies and persons which may or may not have
investment policies and investments similar to those of the Fund and
that American Express Financial Corporation manages its own investments
and/or those of its subsidiaries. American Express Financial Corporation
shall be free to render such investment advice and other services and
the Fund hereby consents thereto.
(4) Neither this Agreement nor any transaction had pursuant hereto shall
be invalidated or in any way affected by the fact that directors,
officers, agents and/or shareholders of the Fund are or may be
interested in American Express Financial Corporation or any successor or
assignee thereof, as directors, officers, stockholders or otherwise;
that directors, officers, stockholders or agents of American Express
Financial Corporation are or may be interested in the Fund as directors,
officers, shareholders, or otherwise; or that American Express Financial
Corporation or any successor or assignee, is or may be interested in the
Fund as shareholder or otherwise, provided, however, that neither
American Express Financial Corporation, nor any officer, director or
employee thereof or of the Fund, shall sell to or buy from the Fund any
property or security other than shares issued by the Fund, except in
accordance with applicable regulations or orders of the SEC.
<PAGE>
(5) Any notice under this Agreement shall be given in writing,
addressed, and delivered, or mailed postpaid, to the party to this
Agreement entitled to receive such, at such party's principal place of
business in Minneapolis, Minnesota, or to such other address as either
party may designate in writing mailed to the other.
(6) American Express Financial Corporation agrees that no officer,
director or employee of American Express Financial Corporation will deal
for or on behalf of the Fund with himself as principal or agent, or with
any corporation or partnership in which he may have a financial
interest, except that this shall not prohibit:
(a) Officers, directors or employees of American Express
Financial Corporation from having a financial interest in the
Fund or in American Express Financial Corporation.
(b) The purchase of securities for the Fund, or the sale of
securities owned by the Fund, through a security broker or
dealer, one or more of whose partners, officers, directors or
employees is an officer, director or employee of American
Express Financial Corporation, provided such transactions are
handled in the capacity of broker only and provided
commissions charged do not exceed customary brokerage charges
for such services.
(c) Transactions with the Fund by a broker-dealer affiliate of
American Express Financial Corporation as may be allowed by
rule or order of the SEC, and if made pursuant to procedures
adopted by the Fund's Board.
(7) American Express Financial Corporation agrees that, except as
herein otherwise expressly provided or as may be permitted consistent
with the use of a broker-dealer affiliate of American Express Financial
Corporation under applicable provisions of the federal securities laws,
neither it nor any of its officers, directors or employees shall at any
time during the period of this Agreement, make, accept or receive,
directly or indirectly, any fees, profits or emoluments of any
character in connection with the purchase or sale of securities (except
shares issued by the Fund) or other assets by or for the Fund.
Part Five: RENEWAL AND TERMINATION
(1) This Agreement shall continue in effect until June 30, 2001, or
until a new agreement is approved by a vote of the majority of the
outstanding shares of the Fund and by vote of the Fund's Board,
including the vote required by (b) of this paragraph, and if no new
agreement is so approved, this Agreement shall continue from year to
year thereafter unless and until terminated by either party as
hereinafter provided, except that such continuance shall be
specifically approved at least annually (a) by the Board of the Fund or
by a vote of the majority of the outstanding shares of the Fund and (b)
by the vote of a majority of the directors who are not parties to this
Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval. As used in
this paragraph, the term "interested person" shall have the same
meaning as set forth in the Investment Company Act of 1940, as amended
(the "1940 Act").
(2) This Agreement may be terminated by either the Fund or American
Express Financial Corporation at any time by giving the other party 60
days' written notice of such intention to terminate, provided that any
termination shall be made without the payment of any penalty, and
provided further that termination may be effected either by the Board
of the Fund or by a vote of the majority of the outstanding voting
shares of the Fund. The vote of the majority of the outstanding voting
shares of the Fund for the purpose of this Part Five shall be the vote
at a shareholders' regular meeting, or a special meeting duly called
for the purpose, of 67% or more of the Fund's shares present at such
meeting if the holders of more than 50% of the outstanding voting
shares are present or represented by proxy, or more than 50% of the
outstanding voting shares of the Fund, whichever is less.
<PAGE>
(3) This Agreement shall terminate in the event of its assignment, the
term "assignment" for this purpose having the same meaning as set forth
in the 1940 Act.
IN WITNESS THEREOF, the parties hereto have executed the foregoing
Agreement as of the day and year first above written.
AXP MARKET ADVANTAGE SERIES, INC.
AXP Small Company Index Fund
By: /s/ Leslie L. Ogg
Leslie L. Ogg
Vice President
AMERICAN EXPRESS FINANCIAL CORPORATION
By: /s/ Pamela J. Moret
Pamela J. Moret
Vice President
March 31, 2000
AXP Market Advantage Series, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Gentlemen:
I have examined the Articles of Incorporation and the By-Laws of AXP Market
Advantage Series, Inc. (the Company) and all necessary certificates, permits,
minute books, documents and records of the Company, and the applicable statutes
of the State of Minnesota, and it is my opinion that the shares sold in
accordance with applicable federal and state securities laws will be legally
issued, fully paid, and nonassessable.
This opinion may be used in connection with the Post-Effective Amendment.
Sincerely,
/s/ Leslie L. Ogg
Leslie L. Ogg
Attorney at Law
901 Marquette Ave. S., Suite 2810
Minneapolis, Minnesota 55402-3268
Independent auditors' consent
The board and shareholders
AXP Market Advantage Series, Inc.
AXP Blue Chip Advantage Fund
AXP Small Company Index Fund
AXP S&P 500 Index Fund
AXP Mid Cap Index Fund
AXP Total Stock Market Index Fund
AXP International Equity Index Fund
AXP Nasdaq 100 Index Fund
We consent to the use of our reports incorporated herein by reference and to the
references to our Firm under the headings "Financial highlights" in Part A and
"INDEPENDENT AUDITORS" in Part B of the Registration Statement.
/S/ KPMG LLP
KPMG LLP
Minneapolis, Minnesota
March 29, 2000
CODE OF ETHICS
for Members of the Boards and Officers
of
American Express Funds
and
Preferred Master Trust
November 10, 1999
<PAGE>
Adopted November 10, 1999, by a majority of independent members of the Board and
the Board as a whole of each American Express fund and Preferred Master Trust
Group portfolio [fund and portfolio are referred to as Fund].
CODE OF ETHICS
Standard of Conduct
Each member of the Board and each officer shall in all actions for,
with, or on behalf of the Fund be motivated by and render decisions based upon
the best interests of Fund and its shareholders. If in any instance there is
doubt about how an activity or transaction may be perceived, it should be
discussed with the Chair of the Board before proceeding. Full responsibility for
observance is entirely upon each member and officer.
Personal Security Transaction
With respect to a personal security transaction, each independent
member of the Board and each independent officer shall comply with the
provisions in this portion of the Code of Ethics adopted, pursuant to the
requirements of Securities and Exchange Commission Rule 17j-1, as reasonably
necessary to prevent such persons from violating the anti-fraud provisions of
the rule.
Access Person [Independent Access Persons]
An access person is each member of the Board, each officer, and each
person who obtains information that a security is being considered for
the Fund by an adviser or that there is an open authorization to buy
or sell a security for the Fund's account. An independent access
person is a person who is not current or former officer or employee of
the investment manager, its subsidiaries and affiliates. Independent
access persons do not make investment decisions for the Fund nor are
they likely to learn about orders to buy or sell securities but may
occasionally see or hear a report that contains a discuss of a pending
security transaction. The General Counsel shall maintain a list of
independent access persons of the Fund and advise them of their status
once each year. Each member of the Board and officer who is also a
director, officer, employee, consultant, or partner of the Fund's
investment manager, and any sub-adviser, or principal underwriter for
shares of the Fund is subject to the code of ethics adopted pursuant
to rule 17j-1 of his or her organization. Under the rule, such
organization shall obtain approval of its code from the Fund's Board,
be responsible for the compliance with its provisions and provide the
Board with information required by the rule in a timely fashion.
Covered Security and a Covered Security Transaction
A covered security is any stock, bond or other instrument as defined
in Section 2(a)(36) of the Investment Company Act except it is not a
security issued by the Government of the United States, a bankers'
acceptance, a bank certificates of deposit, commercial paper or stock
issued by a registered open-end investment companies. A covered
security transaction includes among other things an option to purchase
or sell a covered security and an over-the-counter contract on a
narrow-based index of securities.
<PAGE>
Prohibited Security Transaction
No independent access person shall purchase or sell, directly or
indirectly, any covered security in which such access person has, or
by reason of such transaction acquires, any direct or indirect
beneficial ownership, or cause any account over which he or she has
any direct or indirect influence or control to purchase or sell any
covered security, if at the time of such purchase or sale he or she
knew or should have known the covered security is being considered for
purchase or sale, or being purchased or sold for the Fund.
No independent officer shall purchase a covered security in an initial
public offering.
Reporting
Independent access persons shall report to the Chair of the Board both
on a quarterly and an annual basis as follows:
Quarterly report by independent officers
A quarterly report shall be filed not later than 10 days after
the end of the calendar quarter. It may state that the
independent officer had no covered security transactions during
the quarter or the officer had only covered security transactions
that are set forth on the monthly statements issued by each
broker at which the independent officer has an account. The
report shall attach monthly statements of each brokerage account
he or she maintains which shall include the following
information:
1. Date of the transaction;
2. Title of the security, interest rate and maturity date;
3. Number of shares or principle amount;
4. Nature of transaction (purchase, sale, option, etc.);
5. Price at which the transaction was effected.
Any other securities transaction shall be explained in detail.
Annual report by independent officer
An annual report shall be filed not later than 30 days after the
end of the year. It shall list the title, number of shares and
principal amount of each covered security in which the
independent officer has a direct or indirect beneficial ownership
and the name of the brokers at which the access person maintains
an account. In addition it shall state that the independent
officer has read the Code and complied with its provisions.
<PAGE>
Quarterly report by independent members of the Board
No quarterly report shall be filed unless at the time of a
covered security transaction, the independent member knew or in
the ordinary course of fulfilling his or her official duties as a
member should have known that, during the 15-day period
immediately preceding the date of the transaction, the covered
security was purchased or sold or was being considered for
purchase or sale for the Fund. It is responsibility of the
independent officers and the investment manager to keep to a
minimum reports that discuss covered securities that are being
considered or being actively traded for the Fund and to alert
independent members when such a discussion occurs so that they
can either pre-clear a personal transaction or avoid trading the
covered security.
Annual report from independent members of the Board
An annual report shall be filed stating whether he or she has
read the Code and complied with its provisions.
Pre-Clearance
Each independent member of the Board may and each officer shall
receive prior clearance for a covered security transaction. To do so,
they need only provide the name of the security to an independent
officer who shall call the investment manager's trading operations and
ask it there is an open authorization to trade the covered security.
If there is no open authorization, clearance shall be granted.
Clearance of a covered security transaction shall constitute
compliance with this Code so long as the transaction is effected
within five business days after obtaining clearance.
Violations
The General Counsel shall review each report except the Chair of the
Board shall review the report of the General Counsel. Should any
violation occur, the violation shall be brought to the attention of
the Board.
Recordkeeping
The General Counsel shall maintain the following records for a period
of six years and shall keep all reports filed pursuant to this Code
confidential except that such reports may be made available to the
Securities and Exchange Commission or any representative thereof upon
proper request.
1. Copy of the Code of Ethics.
2. A list of all persons who are required to file reports.
3. A record of all pre-clearances.
4. A record of any violation and of any action taken.
5. Copy of each report filed under this Code.
<PAGE>
Doing Business with or Borrowing Money from the Fund
No member of the Board, no officer, no members of their families, no
company for which they serve as a director, officer or employee, nor any
partnership or association of which they are a member, may:
(a) Borrow money or other property from the Fund, directly or
indirectly, except the Fund may own debt securities
including commercial paper of such a company provided the
securities are issued on the same terms of other comparable
securities.
(b) Buy or sell any security or other property from or to the
Fund as principal (except a security of the Fund) unless
permitted to do so by statute, rule or order of the
Securities and Exchange Commission and done pursuant to
procedures established by the Boards.
Owning Shares of Stock of a Broker
Except for members of the Board and officers who are also directors,
officers or employees of the investment manager or any affiliate thereof, no
independent member of the Board or officer nor any member of his or her
immediate family, may:
(a) Own, directly or indirectly, 1% or more of the capital
stock, voting or non-voting, of any company which buys or
sells any security or other property from or to the Fund.
(b) Own, directly or indirectly, any security issued by the
Fund's investment manager or underwriter, or by an
affiliated company of the investment manager or underwriter
[American Express Company].
Receiving or Giving Gifts
No access person may:
(a) Directly or indirectly, give to, solicit or receive from any
person with whom he or she transacts business on behalf of
the Fund or that may be related, directly or indirectly, to
any transaction of the Fund any gratuities in money or
services of more than nominal value.
(b) Use assets of the Fund to reward or remunerate officials of
any government for decisions or actions favorable to the
Fund or to its access persons.
(c) Use assets for political contributions for the support of
political parties or political candidates.
(d) Establish any unrecorded fund or bookkeeping account for any
purpose.
<PAGE>
(e) Give any information or data of or about the Fund to anyone
except as is already public. All data and records (other
than that which has been made public by the Fund) shall be
treated at all times as confidential and this is especially
necessary in connection with recommendations or
authorizations with respect to the purchase and sale of
securities by the Fund and the execution thereof.
(f) Falsely report or record any expenditure of monies.
Outside Employment
No independent officer may:
(a) Accept or perform any outside employment that interferes
with the efficient performance of his or her duties to the
Fund.
(b) Engage, directly or indirectly, in any business transaction
or arrangement for personal profit which accrues from or is
based upon his or her position as an officer or upon
confidential information gained by reason of such position.
Review of Processes
The Joint Audit Committee will annually review whether the processes
for updating the list of access persons, for reviewing the quarterly and annual
reports, and for pre-clearing security transactions continue to accomplish the
purposes of this Code.
PERSONAL TRADING RULES AND PROCEDURES FOR ACCESS PERSONS
AMERICAN EXPRESS FINANCIAL CORPORATION AND ITS AFFILIATES
MARCH 2000
<PAGE>
Section I
Personal Trading Rules and Procedures
American Express Financial Corporation and its Affiliates
Topic Page
- ----------------------------------------------------------- --------------------
Personal Trading Rules Framework
General Applicability Of Personal Trading Rules 3
Basis For Rules 4
Definitions 4
Reporting Requirements for Access Persons
Security Activities Which Must Be Reported 5
How To Comply 5-6
Additional Rules & Requirements for Access Persons
Preclearance Of Security Trades 7
Preclearance Form 8
Reporting & Preclearance Chart 9-10
Miscellaneous Special Instructions Chart 10
Additional Reporting Requirements 11
Investment Clubs 12
Giving Securities 12
Sanctions 13
Unusual Trading Activity 13
Incremental Restrictions and Requirements for Investment Personnel
60-Day Holding Period 14-15
Private Placement Preclearance 15
Research Analysts: Additional Rules 16
Incremental Portfolio Manager Restriction
7-Day Blackout Period 17
American Express' Insider Trading Policy 18-20
Sample Forms & Completion Instructions 21-26
Brokerage Account Certification Form 22
Personal Holdings Disclosure Form 23
407 Notification Instructions & Form 24-25
Quarterly Certification 26
<PAGE>
Personal Trading Rule Framework
Applicability
These rules apply to all personal securities activities in your own accounts as
well as any security investment:
o in which you have a beneficial interest (e.g., a trust account for a minor
child)
o held by you, your spouse/partner, and/or other financially dependent
members of your household
o for which you provide investment advice by reason of any contract,
understanding, relationship, agreement or other arrangement substantially
equivalent to direct or indirect ownership. (If you give investment advice
or effect securities trading for others, notify your leader and Corporate
Compliance.)
o in which you (or anyone meeting the above criteria) participate as a member
of an investment club
General Personal Trading Rules
These general rules, along with the procedures contained in the rest of this
document, must always be followed:
1. No use of inside information (refer to Insider Trading Policy on page 18).
2. No purchasing of initial public offerings (new or secondary issues)
3. No front-running. This involves an individual taking advantage of
non-public information about imminent trading activity in our mutual funds
or advised accounts by trading in a security before the fund or advised
account does.
4. No preferential treatment from other brokerage firms due to the purchaser's
employment by American Express or its subsidiaries.
5. No direct trades with broker/dealers' trading desks.
6. No non-retail relationships with broker/dealers.
7. No use of American Express' name (or the name of any of its subsidiaries)
to obtain a better price from a broker who is a market maker in the
security being traded.
8. No speculative trading of American Express stock, which is characterized by
transactions in "put" or "call" options, or short sales or similar
derivative transactions. As part of the American Express Company Code of
Conduct, the Company discourages short-term trading in its own stock.
9. No stopping stock. This is defined as a guarantee by a specialist that an
order placed by a Floor Broker will be executed at the best bid or offer
price then in the Specialist's book unless it can be executed at a better
price within a specified period of time.
10. If the company's managed or owned accounts are active in a given security,
no use of that security to meet margin calls if cash or other securities
are available to meet the call.
11. No trading of OTC or brokerage firm stocks by any traders or trading
assistants.
<PAGE>
Basis for Rules
The rules and procedures that apply to personal trading for access persons are
derived from:
Investment Company Institute (ICI) Guidelines to Industry on Personal
Investing
Securities and investment laws
o Securities Act of 1933
o Securities Exchange Act of 1934
o Investment Company Act of 1940
o Investment Advisers Act of 1940
o Insider Trading and Securities Fraud Enforcement Act of
1988
Rules, regulations and corporate policies
o Securities and Exchange Commission (SEC)
o National Association of Securities Dealers (NASD)
o American Express Financial Corporation (AEFC) Insider
Trading Policy
o American Express Company Code of Conduct
Definitions
Personal trading rules for access persons apply to three groups of personnel.
Each successive group is a subset of the previous group, and is subject to
incrementally restrictive procedures. Therefore: Investment Personnel are
subject to Access Person rules, plus the additional rules. Portfolio Managers
are subject to Investment Personnel and Access Person rules, plus the additional
rules.
Access Persons are individuals who meet one or more of the following criteria:
1. Have access to information regarding impending purchases or sales of
portfolio securities for any account owned or managed.
2. Obtain such information within 10 days after the trade.
3. Have access to the Investment Department's investment research and
recommendations.
4. Work in the Investment Department or Asset Management Group, in
Minneapolis, London, Hong Kong, Singapore, or Tokyo.
Investment Personnel are research analysts, traders and portfolio managers.
Portfolio Managers are individuals with direct responsibility and authority over
investment decisions affecting any account owned or managed. This includes
associate portfolio managers.
<PAGE>
Reporting Requirements for Access Persons
Securities Activities Which Must Be Reported
All personal securities activities (i.e., stocks, options, bonds, etc.), whether
bought or sold, must be reported, with the exception of such things as mutual
funds and certificates of deposit. A chart indicating which transactions must be
reported is located on page 9.
In addition to transactions in your own accounts, you must report activity in
accounts:
o in which you have a beneficial interest (e.g., a trust account for a minor
child)
o held by you, your spouse/partner, and/or financially dependent members of
your household
o for which you provide investment advice by reason of any contract,
understanding, relationship, agreement or other arrangement substantially
equivalent to direct or indirect ownership. (If you give investment advice
or effect securities trading for others, notify your leader and Corporate
Compliance.)
o in which you (or anyone meeting the above criteria) participate as a member
of an investment club
Failure to disclose all brokerage accounts may result in a sanction, which
includes possible termination.
How To Comply
You must report all personal securities transactions for the types of accounts
listed above in one of two ways:
1. Conduct all your securities transactions in an American Express Brokerage
(formerly AESS) account. If you choose this alternative, notify Corporate
Compliance by sending a Lotus Note listing your account number(s) to:
Personal Trading. For assistance in opening an American Express Brokerage
account, contact your advisor or the Minneapolis Skyway Office.
2. Conduct your securities transactions with an outside brokerage
firm--traditional or online. If you choose to open or maintain an account
with any other brokerage firm, you must perform the following steps at the
time the account is opened:
o Contact Corporate Compliance by sending a Lotus Note to Personal
Trading and request a 407 Notification Form before opening an external
brokerage account. This form needs to be completed because it notifies
the external brokerage firm to provide duplicate confirmations and
monthly statements for your account(s) and for those in which you have
a beneficial interest. Failure to properly carry out this notification
process may result in a sanction.
o Fully disclose any information the brokerage firm legally requests.
o Notify the other brokerage firm of your association with American
Express. The broker/dealer must be informed that American Express
engages in securities transactions and has membership in the NASD,
Pacific Stock Exchange and the Midwest Stock Exchange.
You are responsible for ensuring your broker provides Corporate Compliance with
duplicate statements and confirmations.
<PAGE>
Additional Rules & Requirements for Access Persons
Preclearance of Security Trades
You must obtain prior approval - known as preclearance - when trading in any of
the investment vehicles indicated on the "Securities Reporting and Preclearance
Chart" (see page 8. When requesting preclearance, you must follow these
procedures:
Requesting preclearance - On the day you intend to purchase or sell a security
requiring preclearance, complete Section 1 of the Preclearance Form (see form on
the following page) and fax it to the equity trading desk on T30 at (612)
671-5101 between 8 AM and 3 PM.
Approval process - Before approving the transaction, the trading desk will
verify that there are no managed or owned accounts trading in the security. For
example, the trading desk verifies there is no same day or opposite way/previous
day trading in that security. The trade desk will complete Section 2 of the
preclearance form and fax it back to you. Preclearance is only effective for the
day it is given.
After Hours Trading (On-line) - When trading through an on line account you have
until midnight the day you are granted preclearance to enter your trade. When
routing your preclearance form to Corporate Compliance, please attach a copy of
your electronic confirmation from your broker showing that the trade was entered
on the day preclearance was given. The trade then needs to be executed no later
than the next business day. We will not consider the trade in good form unless
both documents are submitted.
Execution of your trade - Complete Section 3 of the preclearance form upon
execution of the trade and route it to Corporate Compliance immediately. Even if
the trade is not executed, you are still required to send the form to Corporate
Compliance.
Exceptions
Exceptions may be granted if the individual has tried to preclear a trade at
least three times in any five consecutive day period. In order to be granted
this exception, you must request approval by sending your request via Lotus
Notes addressed to: Personal Trading. Provide a written explanation of the
circumstances, including:
o The type of trade
o The name of the security
o The number of shares
o Your position, such as trader, analyst, portfolio manager, other. The three
most recent dates you have tried to preclear
You will receive a written response to your request within 24 hours.
<PAGE>
Personal Trading Date:__________________
Preclearance Form
1. Request for trade approval (completed by employee)
Type of trade: [ ] Buy [ ] Sell [ ] Short Sale [ ] Cover Short
Security Description: __________________________________________
Ticker:____________
If requesting preclearance for a put or call option, indicate expiration month
and strike price.
Name: __________________________________
Emp #: ____________
Unit #: ____________
Signature: ________________________________
Ext: ____________
Fax: ____________
When Section 1 is completed, fax this request to the equity trade desk at
x15101.
2. Trade Authorization (completed by trade desk - T30)
Equity/option authorized? [ ] Yes [ ] No
Equity/option traded same day? [ ] Yes [ ] No
Equity traded previous day opposite way? [ ] Yes [ ] No
Option traded previous day opposite way? [ ] Yes [ ] No
Fixed income approved by: ___________
Request approved? [ ] Yes [ ] No
Log number:_____________________
Approved by: ______________________________
Date/time: ___________________________
<PAGE>
3. Execution (completed by employee)
Quantity: ___________________
Price: _____________________
Brokerage Firm: _________________________________________
Account Number(s): ______________________________________
Registered Representative: ________________________________
[ ] Trade not executed
Please route completed form to Personal Trading - T20 / 95 immediately.
Note: Preclearance is not required to close, sell, or exercise an option during
the last five days before expiration.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Reporting & Preclearance Chart Reporting Preclearance Required?
required for
these
transactions?
American Depository Receipts/Shares/Units Yes Yes (against underlying security and
(ADRs/ADSs/ADUs) ADR/ADU)
Advised Accounts Yes Yes
Annuities No No
American Express Stock (shares not purchased in Yes No, except for SVPs and other American
Incentive Savings Plan or stock purchase plan) Express Officers who have been advised they
must preclear.
(Options on) American Express Stock (i.e., puts and Prohibited by Prohibited by American Express Code of
calls) American Express Conduct
Code of Conduct
American Express stock options (obtained as a part of Yes No, except for SVPs
an incentive plan)
Certificates of Deposit, Savings Certificates No No
Closed-end funds Yes Yes
Commercial Paper No No
Debt: corporate Yes No
Debt: convertible Yes Yes (against both underlying stock &
convertible debt)
Debt: Government (Treasury notes, bills, bonds or No No
STRIPS)
Debt: U.S. Guaranteed or of federally sponsored Yes No
enterprises (FHLMC, FNMA, GNMA, etc.)
Debt: closely held Yes No
Derivatives (DECS, ELKS, PRIDES, etc.) Yes Yes (against both underlying stock &
derivative)
Futures: commodity, currency, financial, or stock index Yes No
Index Securities - (S&P 500, SPDRS/SPY, Diamonds/DIA, Yes No
Cubes/QQQ, etc.)
Limited Partnerships Yes Yes
Mutual Funds No No
Options on stocks Yes Yes (except to close position in the
last 5 business days before expiration)
Options: exercise of option to buy or sell underlying Yes No
stock
Options on futures and indices (currency, financial, Yes No
or stock index)
REITS (Real Estate Investment Trusts) Yes Yes
Private Placements Yes, on quarterly Yes, if Investment Personnel
reporting form
Stocks: common or preferred Yes Yes
Stocks: convertible preferred Yes Yes (both underlying stock and convertible
preferred)
Stocks: over-the-counter (OTC) Yes (prohibited Yes (prohibited for traders & trading
for traders & assistants)
trading
assistants)
Stocks: short sales (short sales prohibited on Yes Yes
American Express stock)
Stocks (owned) - exchanges, swaps, mergers, tender Yes No
offers
Stocks - public offerings (initial OR secondary) Prohibited Prohibited
Stocks - Rights or warrants acquired separately Yes Yes
Stocks - employer-sponsored purchase plan (spouse or Yes, on quarterly No
partner) reporting form
Unit Investment Trusts (UITs) Yes No
Miscellaneous Special Instructions Reporting Preclearance Required?
required for
these
transactions?
Transactions in accounts you advise for others Yes Yes
American Express Incentive Savings Plan No No
American Express Stock Purchase Plan No No
Dividend Reinvestment Plans Yes, on quarterly No
reporting form
Transactions by investment clubs in which you belong Yes Yes
or have a beneficial interest
Limit Orders Yes Yes, must renew daily
</TABLE>
<PAGE>
Additional Reporting Requirements
Annual Certification
In addition to reporting requirements already outlined, every Access Person must
submit an annual certification form. If you are new to the company, you will
receive a form and instructions when you attend your orientation session. If you
do not attend this orientation session, please contact the Personal Trade area
612-671-5196 for the information. All Access Persons will receive a form
annually from Corporate Compliance - Personal Trade.
Failure to disclose all brokerage accounts in which you have a beneficial
interest may result in a sanction, which includes possible termination. An
example of the annual certification form is located on page 22.
Quarterly Reporting
Corporate Compliance will send you a form each quarter to indicate whether, for
a given calendar quarter, you executed securities transactions outside of a
broker-dealer account. If so, you must return the quarterly reporting form to
Corporate Compliance--Personal Trade within 10 calendar days of the last day of
the quarter.
An example of the quarterly reporting form is located on page 26. This need for
quarterly reporting is based upon Rule 204-2(a)(12) of the Investment Advisers
Act; American Express is required to collect information on certain securities
transactions quarterly.
Investment Clubs
There is no prohibition against joining an investment club. However, Access
Persons who are members of investment clubs are required to preclear club
transactions. Execution of non-precleared trades made by club members will
result in a violation for the American Express Access Person. (This also applies
to any other accounts which meet the criteria indicated under "security
activities which need to be reported" on page 5) When forming an investment
club, provide the following to Corporate Compliance:
o a copy of the broker 407 notification form (see page 25)
o a copy of your investment club's bylaws
o a listing of the members of the club and an indication of any
employees or independent contractors or advisors of American Express
in the club. Please include the individual's identification number.
o the contact person for the club in case of questions
For information on setting up an investment club, you can contact the National
Association of Investors Corporation at (248) 583-6242.
<PAGE>
Giving Securities
If you are giving securities to a non-profit organization, please provide the
following information in writing to Corporate Compliance:
o the name of the organization to which you are giving the securities
o a description of the security
o the number of shares being given
o the day you intend to buy the security (if not already owned)
o the day you intend to give the securities (if the gift was not
actually given on the day intended, please inform Corporate
Compliance)
Preclearance is not necessary for a gift to a non-profit organization, and the
60-day and 7-day rules do not apply.
For giving securities to a for-profit organization or to an individual or trust,
the preclearance and 7-day rules do apply if you are purchasing the securities
you intend to give. The 60-day rule does not apply. You will need to report the
transaction on the quarterly reporting form described above.
Sanctions
Sanctions will be imposed for violations of American Express, SEC, or NASD rules
or policies. It is standard in the industry to impose sanctions when violations
occur. These sanctions are communicated via violation letters and will vary
depending on the severity of the violation and/or if a record of previous
violations exists. Examples of potential sanctions include (but are not limited
to):
o a written reminder about the rules, (a record of which will be
maintained by Corporate Compliance)
o unwinding the trade and forfeiting any profits to a charity, which is
the typical sanction for a 60-day holding period or 7-day blackout
violation (see note below for forfeiture process)
o prohibition against personal trading for a specific period of time
o negative impact on the individual's bonus and or performance rating
o termination
Note: The process for forfeiture of profits is this:
o Calculate the profit using the last in, first out (LIFO) method.
o Send a check to a non-profit charity of your choice. (You may be able
to take a charitable deduction on your tax return for contributions to
a tax-qualified 501(c)(3) charity - please consult with your tax
advisor.)
o Send a copy of the calculation, the receipt from the charity and both
sides of the canceled check to Corporate Compliance.
<PAGE>
The Personal Trade Committee will work with your manager to impose sanctions
when necessary.
Unusual Trading Activity
The Personal Trade Committee and your department head review your personal
trading activity regularly. We may ask to review specific transactions with you
or your broker if clarification is necessary. You may be asked to supply
Corporate Compliance--Personal Trade with an explanation of your personal
trade(s). Examples of situations that may require a memo of explanation include,
but are not limited to:
o violations of personal trading rules
o significant changes in trading volume
o patterns of short-term, in and out trading
o significant positions in illiquid securities
o a number of employees trading in the same security in the same time
frame.
Incremental Restrictions and Requirements for Investment Personnel
(defined as research analysts, traders, and portfolio managers)
60-Day Holding Period
Profiting from short-term trading is prohibited. You may not buy, then sell (or
sell short, then cover the short) the same securities (or equivalent) within
60-calendar days while realizing a gain. You must wait until calendar day 61 to
close out your position if you will be making a profit. When calculating the
60-day holding period, you must use the last-in, first-out (LIFO) method. We use
LIFO for two main reasons:
o the purpose of the rule is to discourage short-term trading. A first-in,
first-out (FIFO) or specific identification method could encourage
short-term trading.
o application of a method other than LIFO could be very cumbersome and
time-consuming.
Exceptions
The Firm grants three exceptions to this rule:
o Financial Hardship - a financial hardship must be an "immediate and
heavy financial need" and must be a situation where funds are not
readily available from other sources. Financial hardships must meet
the criteria outlined in the American Express Incentive Savings Plan
(ISP). See the ISP Summary Plan Description in the Total Compensation
Guide for these guidelines. Hardships are further subject to the
following stipulations:
o The amount traded may not exceed the amount required to meet the
financial hardship, though the trade amount may include an amount
for anticipated income taxes and tax penalties. Please consult
with your tax advisor for advice.
<PAGE>
o You must receive approval from Corporate Compliance before a
hardship trade. Begin by calling x15196 for assistance. You will
need to put your request in writing and to route it to Corporate
Compliance. You will receive a response within two business days.
o Your request may not be approved if the standards outlined above
are not met.
o Small trades -defined as $10,000 or less of S&P 500 securities or ten
option contracts in S&P 500 securities. There is a limit of one small
trade exception per calendar month. Please indicate on your
preclearance form "small trade exception". The small trade exception
still requires you to obtain preclearance.
Incremental Restrictions and Requirements for Investment Personnel
o Futures and Indices - due to the size and liquidity of certain
markets, the following investment vehicles are exceptions to the
60-day holding period requirement and do not need to be precleared:
- financial futures (e.g., Treasury bond futures)
- stock index futures (e.g., S&P 500 index futures)
- currency futures (e.g., futures on Japanese Yen)
This exception also applies to options on futures and indices. Options on
equities continue to be subject to the 60-day rule.
Private Placement Preclearance
You must receive prior approval from your manager and Corporate
Compliance--Personal Trade before acquiring any securities in a private
placement.
How to obtain approval - Write an explanation of the investment and submit the
request to your manager (or next level manager if your manager is not
available). Included in the request should be an explanation of:
o the nature of the investment
o how you were solicited
o whether or not the opportunity was being offered to any of American
Express's managed accounts
o whether the security is likely to be purchased by an American Express
managed account fund in the future.
How private placements are approved - Your manager will approve (by signing) or
reject your request, and return the request to you. If approval is granted, send
the request to Corporate Compliance. Corporate Compliance will have one business
day after receipt of the request to ask for any additional information or
further documentation needed to make a decision. Upon receipt of all necessary
documentation, Corporate Compliance will then confirm in writing within one
business day whether you can invest. You must report the investment on the
quarterly reporting form described on page 11.
<PAGE>
If you have questions about how the 60-day holding period, or private placement
approval process, applies to a transaction you are considering, please contact
Personal Trade at x15196 before you execute.
Research Analysts: Additional Rules
Research Analysts must conduct their personal trading activities in a manner
such that transactions for an analyst's customers, clients, and employer have
priority over transactions in securities or other investments of which he or she
is the beneficial owner. In order to clarify how Research Analysts at AEFA
should comply with this requirement, please note the following:
o All new investment recommendations or changes in recommendations should be
communicated immediately in the Research Notes section of Lotus Notes.
Other appropriate means of communication should be used in addition to
Lotus Notes to facilitate broad and immediate dissemination of the
recommendation.
o Analysts should not trade a security in their own account if they
anticipate issuing a new recommendation or changing an existing
recommendation on the same security.
o Analysts should not trade in a security for their own account contrary to
their current recommendation with respect to the security or rating.
o Analysts should not trade in their own account for a period of 2 business
days after a written recommendation is disseminated through the Research
Notes section of Lotus Notes.
Notwithstanding the above, all trades for an analyst's own account remain
subject to the normal pre-clearance and personal trading rules.
Incremental Portfolio Manager Requirements and Restrictions
7-day Blackout Period
Portfolio managers are not allowed to buy or sell a security during the
seven-day blackout period, which is defined as:
o trade date less seven calendar days before and trade date plus seven
calendar days after a fund or account they manage trades in that same (or
equivalent) security. This means a portfolio manager must wait until
calendar day 8.
For example, a portfolio manager's fund trades XYZ Co. on August 12. The last
day for a personal trade of XYZ Co. is August 4 and the next day a personal
trade can be made is August 20.
Exceptions
The Firm grants two exceptions to this rule:
Smalltrades - defined as $10,000 or less of S&P 500 securities or ten option
contracts in S&P 500 securities. There is a limit of one small trade
exception per calendar month. Please indicate on your preclearance form
"small trade exception". The small trade exception still requires you to
obtain preclearance.
<PAGE>
o Futures and Indices - due to the size and liquidity of certain markets, the
following investment vehicles are exceptions to the 7-day blackout period
rule and do not need to be precleared:
o financial futures (e.g., Treasury bond futures)
o stock index/futures (e.g., S&P 500 index/futures)
o currency futures (e.g., futures on Japanese Yen)
This exception also applies to options on futures and indices. Options on
equities continue to be subject to the 7-day blackout rule.
If you have questions about how the 7-day blackout rule applies to a trade you
are considering, please contact Personal Trade at x15196 before you execute your
trade.
American Express'
Statement of Policy and Procedures with Respect to Receipt
and Use of Material, Inside (Non-Public) Information
This statement represents the policy of American Express Financial Advisors
(AEFA) and its subsidiaries with regard to the receipt and use of material
inside (non-public) information. If you have any questions about this policy,
contact the Law Department.
1. Court and SEC administrative decisions interpreting Rule 10b-5, promulgated
under the Securities Exchange Act of 1934, make it unlawful for any person
to trade or recommend trading in securities while in possession of material
inside (non-public) information.
In particular, trading by a corporate insider or by someone who is not a
corporate insider, while in possession of material non-public information,
is unlawful where the information was disclosed to the non-insider in
violation of an insider's duty to keep it confidential, or the non-insider
had a duty to keep the information confidential or the information was
misappropriated (i.e., stolen). In addition, communicating material,
non-public information to others is unlawful.
2. Material inside information is any information about a company or the
market for the company's securities that has come directly or indirectly
from the company and that has not been disclosed generally to the
marketplace, and that the dissemination of which is likely to affect the
market price of any of the company's securities or is likely to be
considered important by reasonable investors, including reasonable
speculative investors, in determining whether to trade in such securities.
3. Information should be presumed "material" if it relates to such matters as
dividend increases or decreases, earnings estimates, changes in previously
released earnings estimates, significant explanation or curtailment of
operation, a significant increase or decline of orders, significant merger
or acquisition proposals or agreements, significant new products or
discoveries, extraordinary borrowing, major litigation, liquidity problems,
extraordinary management developments, purchase or sale of substantial
assets, etc.
4. "Inside" information is information that has not been publicly disclosed.
Information received about a company under circumstances that indicate that
it is not yet in general circulation and that such information may be
attributable, directly or indirectly, to the company (or its insiders)
should be deemed to be inside information. As a rule, one should be able to
point to some fact to show that the information is generally available; for
example, its announcement on the broad tape or by Reuters, The Wall Street
Journal or trade publications.
<PAGE>
5. In addition to the prohibition on trading on insider information, AEFA -
associated persons are prohibited from front-running. Front-running is
trading for a personal account with the expectation that an AEFA managed
account will soon trade the same security.
6. To supplement its own research and analysis, to corroborate data compiled
by its staff, and to consider the views and information of others in
arriving at its investment decisions, AEFA allocates brokerage business to
broker-dealers who are in a position to provide such services. This policy
is consistent with AEFA's efforts to secure best price and execution.
However, it is AEFA's policy that brokerage not be allocated in
consideration of the furnishing of material inside information. AEFA -
associated persons, in recommending the allocation of brokerage to
broker/dealers, should not give consideration to any material inside
information furnished by any broker/dealer.
7. AEFA - associated persons have no obligation to investment companies or
other clients advised by AEFA to trade or recommend trading on the basis of
material, non-public information in their possession. AEFA - associated
persons' fiduciary responsibility to their clients does not require that
they disregard the limitations imposed by the federal securities laws,
particularly Rule 10b-5.
8. Whenever an AEFA - associated person receives material information about a
company that he or she knows or has reason to believe is directly or
indirectly attributable to such company (or its insiders), he or she must
determine that the information is public before trading or recommending
trading on the basis of such information or before divulging such
information to any person. If he or she has any question at all as to
whether the information is material or whether it is inside and not public,
he or she must resolve the question by contacting the Law Department before
trading. He or she must not discuss the information with any AEFA -
associated person of AEFA other than his/her direct supervisor, the
director of trading or the vice president of investment services. In
addition, care should be taken so that the information is secured.
9. If there are any unresolved questions whatsoever in an AEFA - associated
person's mind as to the applicability or interpretation of the foregoing
standards or the propriety of any desired action, he/she must discuss the
matter with the law department prior to trading or recommending trading.
10. Penalties for trading on material, non-public information are severe, both
for the individuals involved in such unlawful conduct and their firms.
Penalties include civil injunctions; suspension or bar from working in the
securities industry; triple damages; forfeiture of profits; jail terms of
up to 10 years; criminal penalties of up to $1 million for individuals and
$2.5 million for firms; and civil fines of up to three times the profit
gained or loss avoided for individuals, or the greater of $1 million or
three times the profit gained or loss avoided for firms. In addition, any
violation of this policy can be expected to result in serious sanctions by
AEFA, including dismissal of the person(s) involved. Violations may also
result in a permanent bar from the securities industry.
11. All AEFA - associated persons will be subject to the following personal
trading procedures. AEFA - associated persons will:
o Elect either to execute all personal securities trades through
American Express Securities Services or require their broker-dealer to
provide duplicate confirmations and statements to the Corporate
Compliance Department.
o Report any change in the above election promptly, in writing, to
Corporate Compliance.
o Complete an annual certification form about their personal securities
activities (example attached).
o Provide any additional information about personal trading activities
at AEFA's request.
<PAGE>
The Investment Department and IDS Advisory Group will be required to preclear
all personal trades.
In addition to applying to an associated person's personal accounts, these
personal trading procedures also apply to accounts:
o In which you have beneficial interest;
o That are held by you, your spouse or members of your household;
o For which you provide investment advice by reason of any contract,
understanding, relationship, agreement or other arrangement
substantially equivalent to direct or indirect ownership; and,
o In which you participate as part of an investment club.
The executive vice president - Investment and Brokerage Operations is
responsible for the implementation of this statement of policy with respect to
AEFA - associated persons in the Investment Department and American Express
Securities Services. The Corporate Compliance Department is responsible for
implementing this Statement of Policy with respect to all other corporate-office
associated persons. The senior vice president and general sales manager are
responsible for implementing this Statement of Policy in the field.
This statement will be distributed to all AEFA - associated persons and will be
issued and explained to all new personnel at the time of their employment with
AEFA. In addition, at least annually and at such other times as the senior vice
president of the Law Department may determine it is necessary or appropriate,
representatives of the Law Department will meet with the traders and Investment
Department personnel to review this Statement of Policy.
The Personal Trade Committee, consisting of representatives of Corporate
Compliance, the Investment Department, Corporate Audit and the Law Department;
will review records maintained in connection with trading or recommending
trading in securities and allocation of brokerage.
The Law Department will review this Statement of Policy on a periodic basis and
may revise it in the light of developments in the law, questions or
interpretation, and practical experience with the procedures contemplated by the
Statement.
<PAGE>
Section II
Sample Forms and Completion Instructions
Below are the steps for completing the brokerage account disclosure form found
on the following page:
1. Write your name, ID number, and routing in the upper right hand corner of the
form.
2. Check the appropriate box in Section 1.
Brokerage firm account - an account in which securities are bought and
sold (i.e. stock, bonds, futures, options, etc.). Do NOT include mutual
fund accounts, employer-sponsored incentive savings plans, or the
American Express Stock Purchase Plan.
o If you checked "YES" in Section 1, complete all requested
information in Sections 2, 3 and 4.
o If you checked "NO" in Section 1, complete Sections 3 and 4.
3. In Section 2, please be sure to state the brokerage firm name and branch
location, account number, and type of ownership (definitions listed below):
- Direct (D): you are the owner of the account (i.e., joint or
single ownership).
- Indirect (I): accounts in which you have a beneficial
interest, and that are registered in another person's name.
This includes members of your household (e.g., spouse,
partner, minor children, etc.).
- Club (C): you are a member of an investment club.
- Advised (A): you serve in an advisory capacity by making
investment decisions or recommendations.
- Managed (M): you have no discretion over the investments in
the account.
________________________________________________________________________________
Brokerage Firm Name and Account Ownership
Location of Branch Office Number (D, I, C, A, M)
________________________________________________________________________________
EZ Financial Corp - Minneapolis JH-062588-PG D
________________________________________________________________________________
4. Complete section 3 if you are a member of a board of directors of a
for-profit company.
5. Sign and date the form in Section 4.
<PAGE>
Name:______________________________
ID Number:_________________________
Routing:____________________________
American Express
Brokerage Account Certification and Disclosure
Section 1
Do you or any members of your household have any brokerage account(s) (including
American Express Brokerage accounts) in which you own directly or indirectly,
advise for others, have managed by another person(s), or participate in as a
member of an investment club?
[ ] YES (if yes, complete Section 2 listing all brokerage firm accounts
including American Express Brokerage accounts. Then complete section 3 and
4).
[ ] NO (if no, complete Section 3 and 4).
Section 2
<TABLE>
<CAPTION>
BROKERAGE ACCOUNT DETAIL
<S> <C> <C>
Brokerage Firm Name & Location of Branch Office Account Number Ownership (D, I, C, A, M)
____________________________________________ _______________ ________________________
____________________________________________ _______________ ________________________
____________________________________________ _______________ ________________________
</TABLE>
D = Direct
I = Indirect
C = Club
A = Advised
M=Managed
If more space is needed, please attach the additional information on a separate
page. Please sign and date any attached sheets.
Section 3
List any for-profit companies for which you are a member of the Board of
Directors (if none, please indicate):
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE>
Section 4
By signing this document, I am certifying that the brokerage firms listed above
are the only brokerage firms where I hold accounts (directly, indirectly, club,
advised or managed) at this time. I also certify that I have made arrangements
with those firms to have duplicate confirmations and statements for any
brokerage activity conducted to be sent to American Express. I have done this by
informing Corporate Compliance in writing about the account so a letter
authorizing duplicate confirmations and statements can be sent to my broker.
I understand that failure to completely disclose all brokerage accounts and
provide Corporate Compliance duplicate confirmations and statements may result
in sanctions, which could include termination. If I open any new outside
brokerage accounts I will notify Corporate Compliance in writing before the
first trade is conducted. I also certify I have read and understand the American
Express insider trading policy and personal trading rules document and will
abide by them.
___________________________
Signature
__________________
Date
Note: We suggest that you check in with your brokerage firm semi-annually to
ensure they are continuing to send American Express duplicate confirmations and
statements.
Return to: Corporate Compliance--Personal Trade T20/95
<PAGE>
Personal Holdings Disclosure Form for Access Persons
Name: ___________________
ID Number: ________________
Routing: ___________________
o Fill in the security quantity, security name, and location of the security;
o List all stocks, bonds, options, and futures held at the commencement of
your employment with American Express.
o Attach (if available) a copy of a current brokerage statement(s). If not,
include detail on:
-- Quantity: The number of shares, bonds (par value), etc. held.
-- Security Description: The name of the issuer, investment type,
e.g. IBM stock.
-- Where held: the brokerage firm where the investment is located.
If held in certificate form, indicate it is a certificate.
o Do NOT list mutual funds.
o Write in "none" if you have no holdings to disclose; and,
o Route completed form to Corporate Compliance - Personal Trade, T20/95 no
later than 5 days after receiving this packet.
Call Personal Trade 612-671-5196 with any questions.
Quantity Security Description Where held
____________ _____________________________ ____________________
____________ _____________________________ ____________________
____________ _____________________________ ____________________
____________ _____________________________ ____________________
____________ _____________________________ ____________________
If you need more space, please attach a sheet of paper. Be sure to sign and date
any attachment.
I hereby certify this list as complete:
_________________________________
Signature
__________________
Date
<PAGE>
407 Notification Form
Process
On the following page is the 407 Notification Form that is required to be
completed if you--or an immediate family member--maintains an external brokerage
account.
Please be sure to:
o Fill out the broker information section with the a full US Postal System
mailing address
o Fill out the access person information section. Be sure to include family
members' information if applicable
o Send the form to Corporate Compliance - Personal Trade T20/95 no later than
5 days after receiving this packet.
The Personal Trade team will generate an authorization letter within 48 business
hours of receipt of the form. The letter serves as notification to the external
brokerage firm to send duplicate confirmations and statements of activity
occurring in your account to our office.
If you have questions, please contact the Personal Trade Hotline 612-671-5196 or
send a Lotus Notes
addressed to: Personal Trading
<PAGE>
407 Notification Form
Date: ____________________
Brokerage Firm Name & Address:
____________________________________
____________________________________
____________________________________
____________________________________
Access Person's Information:
Access Person's Name: _______________________________
Name on Account: ____________________________________
(if different than access person's name i.e. spouse, child, trustee)
Account #: ___________________________________________
(if not established, write "NEW"):
Access Person's Social Security #: ________________________
Other individuals' SSN#s: ______________________________
(i.e. spouse, child, trustee if applicable):
Access Person's ID #: _________________________________
Access Person's Area Office or Corporate Office Routing: _____________________
You will receive a copy of the 407 letter for your records)
NOTE: In order to expedite the process, all of the above applicable lines must
be completed before submitting.
Send the form to Corporate Compliance - Personal Trade T20/95.
<PAGE>
Quarterly Non-Brokerage Certification Form - Sample
Have you or any member of your household participated in any of the types of
transactions listed below during the ___ quarter of _____?
o if no, you do not need to return this form unless you have a new AESS
account number to report on the front side of this form
o if yes, check the appropriate box below, provide the requested
information and return to Corporate Compliance no later than
_________________.
Do NOT include any AEFA products or plans, such as the Incentive Savings Plan
(ISP) or Direct U.S. Obligations (e.g. US Savings Bonds)
Please check all that apply & fill in as necessary:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Non-Brokerage Activity Description and Date Buy or sell or any Price
share/face amount of other acquisition or
security disposition
_____________________________________________________________________________________________________________________
[ ] Non AXP 401K, If spousal 401(k) list
Profit Sharing, or Co. only company name: NA NA NA
Stock Plan (e.g.: spouse's
contribution to 401k plan) __________________
_____________________________________________________________________________________________________________________
[ ] Dividend Reinvestment Activity
- -outside of a retail brokerage account
(directly from the issuer or transfer
agent, e.g. DRIPS)
_____________________________________________________________________________________________________________________
[ ] Merger Activity
_____________________________________________________________________________________________________________________
[ ] Tender Offer
_____________________________________________________________________________________________________________________
[ ] Private Placement Activity
_____________________________________________________________________________________________________________________
[ ] Limited Partnership
_____________________________________________________________________________________________________________________
[ ] Other purchase or sales of securities not conducted through a broker, or
securities given or received via a gift (e.g., inherited stock, stock given to
charity)
_____________________________________________________________________________________________________________________
</TABLE>
_______________________________
Signature
___________________
Date
Return to Corporate Compliance at: T20/95 no later than __________________
<PAGE>
SSgA
Atlanta
STATE STREET GLOBAL ADVISORS
Boston
Code of Ethics
Brussels
Copenhagen
D
Hong Kong
London
Minneapolis
Montpellier
Montreal
Munich
Paris
San Francisco
Sydney
Tokyo
Toronto
<PAGE>
Code of Ethics - Table of Contents
Statement of General Principles 1
Applicability of Code to Employees of Non-US Offices 1
What is the Code of Ethics 2
Section 1 - Definitions 2
Section 2 - Exempted Transactions 6
Section 3 - Prohibitions
A. Prohibited Purchases and Sales:
Portfolio Managers 6
Investment Persons and Reporting Associates....................8
Access Persons in Areas that maintain "Approved" Lists.........9
B. Additional Prohibited Activities...............................9
Section 4 - Preclearance
A. Preclearance of Securities Transactions 13
B. Short-term Trading 13
Section 5 - Reporting 14
Section 6 - Annual Certification 15
Section 7 - Exemptive Relief 15
Section 8 - Violations and Sanctions..........................................15
Section 9 - Issues Forum......................................................16
Disclosure of Securities Holdings (Upon Employment & Annually) Appendix A
Form Letter to Broker (Duplicate Confirms and Account Statements) Appendix B
Access Person - Proposed Transaction Form (Preclearance Form) Appendix C
Sample Quarterly Transaction Form Appendix D
Request for Approval of Privately Offered Security Transaction Appendix E
Frequently Asked Questions and Answers................................Appendix F
Preclearance of Fixed Income Trades by Access Persons Appendix G
List of Local Compliance Officers.................................... Appendix H
<PAGE>
Code Of Ethics
State Street Global Advisors
("SSgA")
Statement of General Principles
In addition to any particular duties or restrictions set forth in the
SSgA Code of Ethics (the "Code"), every employee of the Adviser must
adhere to the following general principles:
I. Since our clients have entrusted us with their assets, we must,
at all times, place the interests of these clients first. These
clients include shareholders in mutual funds which we advise,
participants in the State Street Bank and Trust Company
collective investment vehicles and those clients for whom we
manage discretionary accounts.
II. Transactions executed for the employee's personal account must
be conducted in a manner consistent with this Code and in such a
manner as to avoid any actual or perceived conflict of interest
or any abuse of the employee's position of trust and
responsibility.
III. Employees are encouraged to make investment decisions regarding
their personal accounts with a long term view. Short-term
trading is strongly discouraged.
IV. Employees must not take inappropriate advantage of their position.
Applicability of Code to Employees of Non-US Offices
Employees of the Adviser's Non-US offices are subject to the terms of
the Code. In addition, however, such employees remain subject to any
local laws and regulations affecting personal investments, investments
on behalf of customers and other activities governed by the Code. It is
the responsibility of each employee to adhere to such regulations. In
the event of any inconsistency between local law or regulation and the
terms of this Code, the employee must adhere to the highest applicable
standard.
<PAGE>
What is the Code of Ethics?
The Code of Ethics, hereafter referred to as the "Code", is the policy
statement that State Street Global Advisors has adopted which primarily
governs personal securities transactions of its employees. It is
designed to ensure that employees conduct their personal securities
transactions in a manner which does not create an actual or potential
conflict of interest to the bank's business or fiduciary
responsibilities. In addition, the Code establishes standards that
prohibit the trading in or recommending of securities based upon
material, non-public information or the tipping of such information to
others.
The SSgA Risk Management and Compliance Department oversees overall
compliance with the Code. Failure to comply with the Code could result
in company imposed sanctions, and possible criminal and civil
liability, depending on the circumstances.
Section 1 - Definitions
A. "Access Person" means "any Portfolio Manager, Investment Person
or Reporting Associate of State Street Global Advisors or of
such other divisions as determined by the Adviser from time to
time, and any other employee of the Adviser designated as an
Access Person by the Compliance Officer by virtue of his or her
stature within the organization."
1. "Portfolio Manager" (Level 1) means "the persons identified
by the Adviser, as the portfolio manager or back-up
portfolio manager of a Fund."
2. "Investment Person" (Level 2) means "any director, officer
or employee of the Adviser who, in connection with his or
her regular functions or duties, makes, participates in, or
obtains information regarding the purchase or sale of a
Security by a Fund prior to or contemporaneous with such
purchase or sale, or whose functions relate to the making of
any recommendations with respect to such purchase or sale."
3. "Reporting Associate" (Level 3) means "any director, officer
or employee of the Adviser who, in connection with his or
her regular functions or duties, obtains information
regarding the purchases or sales of Securities made by a
Fund, either prior to or subsequent to any such purchases or
sales."
<PAGE>
4. "Non-Access Person" (Level 4) means any individual who has
no contact with information regarding purchases or sales of
Securities made by a Fund in his or her regular functions or
duties. However, such individual is subject to the Statement
of General Principles and the antifraud provisions (Section
3B(1)) of the Code.
B. "Adviser" means "State Street Global Advisors" and any other
investment advisory division of State Street Bank and Trust
Company, "State Street Global Advisors, Inc." and any subsidiary
thereof, "State Street Brokerage" and "State Street Banque,
S.A." and such other entities as from time to time designated by
the Compliance Officer.
C. "Associated Portfolio" means with respect to an Access Person
any Portfolio in the fund group for which such person acts as a
Portfolio Manager, Investment Person or Reporting Associate
(e.g., accounts for which the Access Person is Portfolio
Manager, designated Back-up Portfolio Manager).
D. "Beneficial Ownership" shall be interpreted in the same manner
as it would be in determining whether a person is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934
and the rules and regulations thereunder, except that the
determination of direct or indirect Beneficial Ownership shall
apply to all Securities which an Access Person has or acquires
other than those Securities which are acquired through dividend
reinvestment.
Beneficial Ownership generally extends to accounts in the name
of: o the Access Person; o the Access Person's spouse; o the
Access Person's minor children; o the Access Person's adult
children living in the Access Person's home; and o any other
relative whose investments the Access Person directs (regardless
of whether he or she resides in the Access Person's home).
<PAGE>
Beneficial Ownership also includes accounts of another person or
entity if by reason of any contract, understanding,
relationship, agreement or other arrangement the Access Person
obtains therefrom benefits substantially equivalent to those of
ownership. Access Persons should contact the local Compliance
Officer regarding any questions they may have concerning
Beneficial Ownership.
E. "Compliance Officer" shall mean "the person identified by the
State Street Global Advisors division of the Adviser, from time
to time, as the local Compliance Officer of SSgA."
F. "Control" means the power to exercise a controlling influence
over an account.
G. "Fund" or "Funds" means "any mutual fund, bank collective fund,
common trust fund, separate account or other type of account
advised or sub-advised by the Adviser."
H. "Portfolio" means "any investment portfolio of a Fund."
I. "Purchase or sale of a Security" includes, among other things,
the writing of an option to purchase or sell a Security.
J. "Security" shall have the meaning set forth in Section 2(a)(36)
of the 1940 Act. This definition of "Security" includes, but is
not limited to: any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement, any put, call,
straddle, option or privilege on any Security or on any group or
index of Securities, or any put, call, straddle, option or
privilege entered into on a national securities exchange
relating to foreign currency.
Further, for the purpose of this Code, "Security" shall include
any commodities contracts as defined in Section 2(a)(1)(A) of
the Commodity Exchange Act. This definition includes but is not
limited to futures contracts on equity indexes.
"Security" shall not include securities issued by the government
of the United States, or, with respect to Access Persons
employed in the Non-US offices, the government of the country in
which such office is located, bankers' acceptances, bank
certificates of deposit, commercial paper and shares of
registered open-end investment companies (e.g., open-end mutual
funds, or the equivalent such as SICAVs). Any question as to
whether a particular investment constitutes a "Security" should
be referred to the local Compliance Officer.
<PAGE>
K. "Seven Day Blackout"
o Portfolio Manager - The Code prohibits a portfolio manager
from buying or selling a security within seven calendar days
after it is traded in a portfolio he or she manages.
o Access Person - who has access to the fundamental research
in his or her area, is also restricted from buying or
selling a security that is added to, removed from, or has
had a rating change to an approved stock list. (See Section
3 - "Access Persons in Areas that maintain approved lists
for Portfolio Selection" for additional detail.)
L. "Short-term Trading" means buying and selling or selling and
buying the same security within a 60 day period.
<PAGE>
Section 2 - Exempted Transactions
The prohibitions of Section 3A of this Code shall not apply to:
A. Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control (e.g.,
assignment of management discretion in writing to another
party). If management authority is ceded to a person in the same
household (spouse, dependent children or other individual living
in the same household as the Access Person, then preclearance
requirements still have to be met.)
B. Purchases or sales which receive the prior approval of counsel to
the Adviser or the Compliance Officer.
C. Purchases or sales by an Access Person other than a Portfolio
Manager which are categorized as de minimis through the
Preclearance Procedure described in Section 3A(1).
D. Acquisition of a Security due to dividend reinvestment or
similar automatic periodic investment process or through the
exercise of rights, warrants or tender offers. However, these
transactions should be reported by Level 1-3 Access Persons in
their quarterly reporting once acknowledgement of the
transaction is received.
Section 3 - Prohibitions
A. Prohibited Purchases and Sales
Portfolio Managers: (Level 1) Access Persons
1. Portfolio Manager shall not, for his or her own personal
account (or for an account in which he or she has
Beneficial Ownership(1)):
a. purchase a Security that is being purchased or sold or
is being considered for purchase or sale in any
Associated Portfolio; or
b. sell a Security that is being purchased or sold or is
being considered for purchase or sale in any Associated
Portfolio.(2)
(1) Please see Section 1D of the Code for definition of "Beneficial Ownership."
(2) This "front-running" prevention rule is designed to prevent personal gain
based upon the investment activities or recommended investment activities
of any of the Associated Portfolios.
<PAGE>
A Security is "being considered for purchase or sale" when
a recommendation to purchase or sell a Security has been
made and communicated and, with respect to the person
making the recommendation, when such person seriously
considers making such a recommendation.
Here is an example of this prohibition:
This morning, Access Person "A" overhears Portfolio Manager
"B" planning to purchase shares of XYZ for the stock Fund
which he manages. "A" hastily purchases shares of XYZ for
her personal account. Portfolio Manager "B" places the buy
order for the stock in the afternoon. "A" would be
front-running the Fund, and would be subjected to sanctions
and criminal penalties.
2. No Portfolio Manager shall, for his or her own personal
account (or for an account in which he or she has
Beneficial Ownership):
a. sell any Security until seven (7) full calendar days
have elapsed since the most recent purchase or sale of
that Security by any Associated Portfolio; or
b. purchase any Security until seven (7) full calendar
days have elapsed since the most recent purchase or
sale of that Security from any Associated Portfolio.(3)
(3) This black-out requirement is designed to prevent personal gain based upon
the investment activities of any of the Associated Portfolios. A Portfolio
Manager may not trade the same security as an Associated Portfolio until
seven full calendar days have elapsed since the Portfolio trade (the seven
days do not include the day of the Portfolio trade).
<PAGE>
Here is an example of this prohibition:
Yesterday, Portfolio Manager "A" sold 100 shares of XYZ
from the Fund which he manages. Today, back-up Portfolio
Manager "B", who manages a different Fund within the same
investment group, decides to purchase 50 shares of XYZ for
his own personal account. Because trading occurred within 7
days of the most recent fund transaction it is a direct
violation of the black-out requirement, therefore,
subjecting the manager to sanctions.
Investment Persons and Reporting Associates: (Level 2 & 3) Access Persons
1. No Access Person (other than Portfolio Managers) shall, for
his or her own personal account or for an account in which
he or she has Beneficial Ownership(4)):
a. purchase a Security that is being purchased or sold or
is being considered for purchase or sale in any Fund
unless the transaction is considered de minimis as
noted above in Section 2C Exempted Transactions; or
b. sell a Security that is being purchased or sold or is
being considered for purchase or sale in any Fund
unless the transaction is considered de minimis as
noted above in Section 2C Exempted Transactions.(5)
A Security is "being considered for purchase or sale" when
a recommendation to purchase or sell a Security has been
made and communicated and, with respect to the person
making the recommendation, when such person seriously
considers making such a recommendation.
(4) Please see Section 1D of the Code for definition of "Beneficial Ownership."
(5) This "front-running" prevention rule is designed to prevent personal gain
based upon the investment activities or recommended investment activities
of any of the Associated Portfolios.
<PAGE>
Access Persons in Areas that maintain approved lists for Portfolio
Security Selection
Personal securities transactions in a security that is
added to or removed from an approved stock list are
prohibited for a period of seven days after the addition,
removal or change in rating of the security. The same seven
day restriction applies following any change to the short
or long term investment rating. Furthermore, the Access
Person is restricted from sharing this information with
others who do not have the same access levels.
(Currently, this list is maintained by the Global
Fundamental Research Group. There may be other lists or
groups that this restriction applies. See your local
Compliance Officer for additional information.)
B. Additional Prohibited Activities
1. Neither an employee of the Adviser nor any Access Person
shall, in connection with the purchase or sale (directly or
indirectly) by the Adviser, of a Security held or to be
acquired by a Fund:
a. employ any device, scheme or artifice to defraud a
Fund;
b. make any material misstatement to a Fund or omit any
material fact in any statement to a Fund where such
omission would tend to make the statement misleading;
c. engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon a Fund; or
d. engage in any manipulative practice with respect to a
Fund.
<PAGE>
The above prohibited activities shall at all times include,
but shall not be limited to, the following:
(i) purchasing or selling securities on the basis
of material(6) non-public(7) information;
(ii) purchasing or selling, knowingly, directly or
indirectly, securities in such a way as to
compete personally in the market with a Fund,
or acting personally in such a way as to injure
a Fund's transactions;
(iii) using knowledge of securities transactions by
a Fund, including securities being considered
for purchase or sale, to profit personally,
directly or indirectly, by the market effect
of such transactions.
(iv) engaging in short selling and options trading
of State Street securities (except to the
extent such options are issued by the
Corporation as part of an employee's
compensation.)
2. Each of the following activities by an Access Person Level 1-4 shall
be prohibited:
a. purchasing Securities in an initial public offering
unless:
(i) the Access Person has a right to purchase the
Security due to the Access Person's
pre-existing status as a policy holder or
depositor with respect to such Security or as a
shareholder of a related company; or,
(6) Material Information: information the dissemination of which would have a
substantial impact on the market price of the company's securities, or is
likely to be considered important by reasonable investors in determining
whether to trade in such securities. Examples of the type of information
that might be "material" would include the following: earnings estimates or
changes in previously released earnings estimates, merger or acquisition
proposals, major litigation, significant contracts, dividend changes,
extraordinary management developments.
(7) Non-public Information: information that has not been generally disclosed
to the investing public. Information found in a report filed with a local
regulatory agency, such as the SEC, or appearing in publications of wide
circulation would be considered public.
<PAGE>
(ii) the right to purchase is awarded by lottery or
other non-discretionary method by the issuer.
b. participation in a private offering (e.g., offerings of
securities not registered with a local regulatory
agency, such as the SEC, stocks of privately held
companies, private placements and non-publicly traded
limited partnerships) without prior written consent
from an SSgA Compliance Officer by use of the form
attached here as Appendix E;
c. participation in a private offering and failing to
disclose any subsequent conflicts of interests to the
Compliance Officer. An example of this would be a
portfolio manager purchasing a private offering (with
approval as detailed in 2(b) above) and then causing a
portfolio which he or she manages to purchase the same
private offering without disclosing this conflict of
interest.
d. using any derivative, or using any evasive tactic, to
avoid the restrictions of this Code;
e. serving as a director of the following without prior
written consent of State Street Global Advisors' Area
Executive and notice to the Compliance Officer:
o a publicly traded company other than State Street
Corporation or its subsidiaries or its affiliates; or
o any company the Securities of which are owned by a
Fund,
f. accepting or receiving, either directly or indirectly,
from any organization or employee thereof with which we
conduct a business relationship (e.g., customers or
vendors) a gratuity or anything of value in excess of
one hundred (US $100) dollars per individual per
calendar year. A gratuity includes a gift of any type.
<PAGE>
The purpose of this gratuity restriction is to allow only
proper and customary business amenities. Amenities
considered permissible include the following:
o occasional meals, social gatherings or meetings
conducted for business purposes; or
o gifts in the nature of promotional materials, such as a
pen, calendar, umbrella or the like, which are
inscribed with the giver's name or a business message.
Amenities considered not to be permissible include, but are
not limited to, the following:
o transportation expenditures, such as airfare or rental
car; or
o hotel or other lodging accommodation expenditures
<PAGE>
Section 4 - Preclearance
A. Preclearance of Securities Transactions
In order to monitor this Section 4A, Adviser requires each Access
Person to comply with the Personal Securities Transaction
Preclearance Procedure(8) attached hereto as Appendix C.
o Preclearance must be obtained after 10:00 a.m. EST (or
at such local time as is designated by each Non-US
office) of the day on which the Access Person proposes
to trade.
o Such preclearance is good until midnight of the day it
is granted in the location of the primary exchange
where the security is traded. It is also allowable to
order a market trade electronically up to this time
deadline. Any order not executed on the day of
preclearance must be re-submitted for preclearance
before being executed on a subsequent day (e.g.,
"good-'til-canceled" or "limit" orders must receive
preclearance every day that the order is open).
o Preclearance of any registered open-end investment
company is not required.
o The Lotus Notes preclearance process must be used in
sites where available consistent with policies
established from time to time by Risk Management and
Compliance.
B. Short-term Trading
In order to monitor short-term trading activity, each Access Person is
required to identify on Appendix C whether he or she has traded in the
proposed security within the past 60 days. Short -term trades will be
monitored and reported to management to ensure that Access Persons are
adhering to SSgA's long- term investment philosophy generally.
(8) See Appendix F for additional information on preclearance.
<PAGE>
Section 5 - Reporting
A. Every Access Person who is identified and notified by the
Compliance Officer as having to comply with this Section shall:
1. upon such notification, provide the Compliance Officer with
disclosure of all personal Securities holdings as described
in Appendix A within 10 calendar days of employment and
annually) thereafter, except that the requirement of this
Section 5A(1) shall only apply to Portfolio Managers and
Investment Persons (Access Person Level 1 and 2); and
2. report to the Compliance Officer the information described
in Section 5C with respect to transactions in any Security9
in which such Access Person has, or by reason of such
transaction acquires, any direct or indirect Beneficial
Ownership in the Security.
B. Quarterly reports required under this Section shall be made not
later than nine (9) days after the end of each calendar quarter
(calendar quarters are March 31, June 30, September 30 and
December 31).
Access Persons will be reminded quarterly of this obligation by a
notice, but it is incumbent upon each Access Person to report to
the Compliance Officer within the nine-day (9-day) reporting
period whether he or she did or did not effect such transactions.
C. Access Persons are required to notify any brokers, dealers,
investment advisers, banks and other financial institutions with
whom they have their securities trading accounts to forward
duplicate confirms of any and all of their trades and periodic
account statements containing trading activity to the Compliance
Officer and may use the form letter attached as Appendix B to
notify such financial institutions.
D. Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report
that he or she has any direct or indirect Beneficial Ownership in
the Security to which the report relates.
(9) See definition of "Security" and "Beneficial Ownership" for additional
information.
<PAGE>
E. Access Persons transacting in Securities, as defined in Section
1J. of the Code, contained in self directed pension brokerage
accounts, self managed brokerage accounts (SMBA) or 401(k)
retirement accounts are included in any reporting or preclearance
requirements.
F. Investment in the State Street Stock Fund through the State
Street 401k plan do not require regular preclearance or
reporting. Although transactions in the State Street Stock Fund
do not need to be reported, as they are not defined as a
Security, employees trading in the State Street Stock Fund should
be aware that these transactions are subject to the insider
trading restrictions contained in the Code of Ethics and State
Street's Standard of Conduct.
G. Access Persons are prohibited from engaging in short selling and
options trading of State Street securities (except to the extent
such options are issued by the Corporation as part of an
employee's compensation).
H. State Street options granted in conjunction with an employee's
compensation do not need to be precleared or reported if
exercised at first opportunity as dictated by Global Human
Resources. Options exercised on any other date are subject to
preclearance and reporting requirements.
Section 6 - Annual Certification
All Access Persons and Non Access Persons must certify annually that he
or she has read, understands and recognizes that he or she is subject
to the Code. In addition, all Access Persons and Non Access Persons
must certify annually that he or she has complied with the Code and has
disclosed and reported all personal securities transactions required to
be disclosed or reported.
Section 7 - Exemptive Relief
An Access Person who believes that aspects of the Code impose a
particular hardship or unfairness upon them with respect to a
particular transaction or situation, without conferring a corresponding
benefit toward the goals of the Code, may appeal to the Compliance
Officer for relief from Code provision(s) relating to a particular
transaction or ongoing activity or reporting requirement.
<PAGE>
If relief is granted, the Compliance Officer may impose alternative
controls or requirements. Any relief granted in this regard shall apply
only to the Access Person who had sought relief and no other Access
Person may rely on such individual relief unless specifically
authorized by their local Compliance Officer. If circumstances warrant,
the Compliance Officer may submit the anonymous request to the Code of
Ethics Committee for input.
Section 8 - Violations and Sanctions
The Code of Ethics Committee is presented with the facts and
circumstances of a violation on an anonymous basis by the Compliance
Officer on a quarterly basis. The Code of Ethics Committee is charged
with reviewing violations of the Code and imposing sanctions by a
majority vote.
Upon discovering a violation of this Code, its policies or procedures,
the directors of a Fund, the Adviser, or the Committee may impose such
sanctions as it deems appropriate, including, among other things, the
following:
o a letter of censure to the violator;
o a monetary fine levied on the violator;
o suspension of the employment of the violator;
o termination of the employment of the violator;
o civil referral to the SEC or other civil regulatory authorities
determined by the Board of the Fund, the Adviser or other
appropriate entity; or
o criminal referral -- determined by the Board of the Fund, the
Adviser or other appropriate entity.
The Access Person is given an opportunity to appeal a Committee decision if
he/she is believes there are extenuating facts and circumstances of which
the Committee and Compliance were unaware.
Section 9 - Issues Forum
If you have a concern or question, you can voice this concern, i.e., issue or
personal complaint on an anonymous basis by submitting it in writing to:
State Street Global Advisors
Attention: Compliance Officer
P.O. Box 9185
Boston, MA 02209
<PAGE>
APPENDIX A
Upon Employment/Annual Disclosure
of Securities Holdings
I have been identified by the Compliance Officer as a Level 1 or 2 "Access
Person" as defined in the State Street Global Advisors Code of Ethics. As
required under the Code, I am reporting (within 10 days of my employment
and annually thereafter) all Securities in which I have Beneficial
Ownership. The Securities are as follows:
Number of Shares, Contracts Name and Class
or Par Value of Securities
Attached are statements disclosing all securities holdings as of the
month-end of my first month of employment at SSgA.
------------------ ---------------------- -------------- -------
Print Name Signature Area Date
STATEMENT OF CONFIDENTIALITY
State Street Global Advisors Risk Management & Compliance area recognizes
the sensitive nature of all materials disclosed for reporting purposes.
Direct access to any personal information is limited to SSgA Compliance
personnel. Requests for access from internal auditors or external
regulators (i.e. the SEC, the Federal Reserve Bank Examiners, the
Commodities Futures Trading Commission, etc.) are controlled to restrict
the flow of information to the minimum necessary.
To further ensure confidentiality, all information provided to SSgA Risk
Management & Compliance is kept in a secured location.
<PAGE>
APPENDIX B
Form Letter Requesting Broker, Dealer, Investment Adviser, Bank or
Other Financial Institution to Forward Duplicate
Confirmations of Trades and Periodic Account Statements
Date
Name and
Address of Broker
Re: Name of Access Person and Account Number(s)
Dear Sir or Madam:
I am associated with State Street Global Advisors, an area of State
Street Bank and Trust Company, an investment adviser to certain
registered investment companies and other accounts. I have beneficial
interest in and/or discretionary control over the above-referenced
account(s). Therefore, please send a duplicate confirmation of each
transaction in the account(s) and periodic account statements to:
State Street Global Advisors
Attn: Compliance Officer
A/C (Name of Access Person)
P.O. Box 9185
Boston, MA 02209
Additionally, please disregard any prior requests concerning duplicate
confirmations in the account(s).
Very truly yours,
Name of Access Person
<PAGE>
APPENDIX C
Access Person - Proposed Transaction Form
Section A:
ACCESS PERSON:
_______________________ ________ ______________________ ____________
Print Name AP Level Signature Date
<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------- ------------------------- -------------- ------------- -------------- ----------------
Have you bought or sold any security Security Name Date Buy/Sell Amount Price
listed below within the past 60 days?
If so, please complete the following
for Each previous trade:
- ----------------------------------------- ------------------------- -------------- ------------- -------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
Section B: TO BE COMPLETED BY TRADING DESK
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------------- -------------- ------------ ------------ ---------- --------------
Pending Buy or If Pending % of % of Trade Do NOT Trade -
Sell by a Buy or Sell, Access Portfolio Approved % exceeds
Portfolio* Average 10 Person Trade vs. (Trading limit
Trade Buy or # of (Name and # day Volume of Trade vs. Average Desk (Trading
Security Date Sell Shares of Shares) Security Trade 10 day 10 day Initials) Desk
Volume* volume** Initials)
----------------- -------------- ------------ ------------ ---------- --------------
</TABLE>
<PAGE>
In the event that (1) the above security is NOT a pending purchase or sale by an
account managed by SSgA, or (2) the above equity security is a pending purchase
or sale by an account managed by SSgA, but the size of the proposed transaction
by the Access Person and the relevant Portfolio compared to the ten-day average
volume of the security are such that the above transaction by the Access Person
will not adversely affect the execution of the pending trade by the account, the
transaction will be permitted. Such a transaction shall be exempt from Section
3A, Prohibited Purchases and Sales of the Code of Ethics.
* Level 1 APs preclearing a security that a Portfolio over which they have
trading control has traded recently, may not trade this security until seven
days after the last trade of this security in the Portfolio (7 day black-out
period). In addition, if you are a member of the Trust Strategy et al
distribution list, you can not trade in a security for 7 days after a rating
change, addition, or deletion of that security to the Global Fundamental
Research Group's Approved List. executing as the trading desk will NOT evaluate.
You are responsible for not executing as the trading desk will NOT evaluate.
** MUST be 2% or less in both cases or transaction is not permitted.
<TABLE>
<S> <C>
DIRECTIONS FOR PROPOSED TRANSACTION FORM:
Step 1: Section A is completed by Access Person
Section C Step 2: Section B is completed by Trading Desk
Reviewed by: ________________________________ Step 3: Section C is signed by a Compliance Officer
SSgA Compliance Officer
</TABLE>
o Access Persons are required to preclear electronically via Lotus Notes
where available.
o Preclearance is valid until midnight in the location of the primary
exchange where the security is traded.
o List Beneficial Owner account name if applicable.
<PAGE>
APPENDIX D
SSgA
Sample Quarterly Transaction Form
To: Access Person Date: ____________
From: SSgA Risk Management Fax#: (617) 664-6174
Re: Quarter-end Report of Securities Transactions
I have been identified by the Compliance Officer as a Level 1,2 or 3 "Access
Person" as defined by the SSgA Code of Ethics. As required under the Code, I am
reporting all securities in which I have Beneficial Ownership. Transactions in
any "Security" as defined in the Code (Section 1.4.J) are reportable.
This completed memo must be submitted by XXXXXXXX
________________________________________________________________________________
(1) Please check ONE:
NO I DO NOT have any reportable securities transactions for the specified
calendar quarter.
YES I HAVE reportable transactions ("reportable transactions" do not include
dividend reinvestments and transactions in any open-end mutual funds) for
the specified calendar quarter and have requested my confirms and
statements to be forwarded directly to the local Compliance Officer at
SSgA.
_______________________________________________________________________
(2) Please check ONE:
NO I HAVE NOT had any short-term transactions (transactions in the same
security within any 60-day period) this past quarter.
YES I HAVE HAD short-term transactions this past quarter. The date(s) and
security names(s) for the transations must be provided below. If you need
to see your account documentation, please contact Compliance.
Date(s): Security Name(s):
_______________________________________________________________________
<PAGE>
(3) Please check ONE:
NO I HAVE NOT complied with all applicable provisions contained in the Code of
Ethics for the past quarter. (Please explain below.)
YES I HAVE complied with all applicable provisions contained in the Code of
Ethics for the past quarter.
________________________________________________________________________________
Explanation of "NO" answer or any comments you would like to make:
By clicking on this button you are electronically signing off on your quarterly
transaction reporting.
________
SUBMIT
________
<PAGE>
APPENDIX E
Request for Approval of Privately Offered Security Transaction
As required by Code S
ection 3B.2(b)
ACCESS PERSON:
____________________ ______________________ _____________ ______
Print Name Signature Area Date
Please describe in detail (list buyer/seller) the nature of the proposed Private
Offering Transaction and your involvement in the offering. Please provide
offering memorandum or any other documentation pertinent to this transaction to
your local Compliance Officer. Describe how and why you were invited to
participate in this Private Offering.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
What is your initial investment amount? $____________________________
Do you have investment discretion? Yes ______ No _____
Will you be compensated? Yes ________ No _____
If yes, provide details (include specific amount):
Any possible conflict of interest with State Street Corporation or its
affiliates?
Yes _____ No _____
If yes, please describe:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Do you have any reason to believe that this Private Offering involves any
potential conflict of interest with any customers of State Street
Corporation or its affiliates?
Yes _____ No _____
If yes, please describe:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Date: ______________ Approved by: ___________________________________
Compliance Officer
<PAGE>
APPENDIX F
Frequently Asked Questions and Answers
1. Preclearance
A. What trades require preclearance?
Any and all trades of Securities, as defined in the SSgA Code of Ethics
(Section I-J), placed by an Access Person for his or her own personal
account; or accounts of relatives for whom the Access Person provides
investment advice (i.e., a trade made at the specfic direction of the
Access Person on behalf of a relative regardless of who actually places
the order). See the definition of Beneficial Ownership (Section 1-D of
the Code) for further information. If the relative makes the specific
investment decisions on their own, preclearance is not required, even
if the Access Person provides general investment advice to the
relative.
B. SSgA Funds?
No preclearance or reporting is required for trades in the SSgA Funds
or any other open-end mutual fund.
C. (Good `Till Cancelled Order) GTC or Limit Order?
Yes, Access Persons are required to obtain preclearance every day the
GTC or Limit Order is open. Your broker needs to understand that you
need Trading Desk approval before the trade is executed.
D. Dividend Reinvestments or the Exercise of Rights, Warrants, or
Tender Offers?
No, acquisition of a security due to dividend reinvestment or the
exercise of rights, warrants or tender offers that may have resulted
from a spin off do not need to be precleared. These transactions should
be reported to your local Compliance Officer once acknowledgment of the
transaction is received.
E. Can I preclear Fixed Income Trades via Lotus Notes?
No, preclearance for Fixed Income trades must be done manually via
Appendix G of the Code. Deliver or fax the form to the Fixed Income
Group at 225 Franklin Street to the attention of the Fixed Income
Manager.
<PAGE>
F. Is it necessary to preclear or report trades in State Street stock
options granted pursuant to employment?
When State Street (ticker symbol STT) stock options, granted pursuant
to employment, are exercised and the securities are sold at the first
possible time, no preclearance is necessary. When STT options are
exercised and then sold at a later time, the transaction(s) must be
precleared and reported at quarter end. Confirms and account statements
for these transactions should be forwarded to your local Compliance
Officer as with any other Securities reporting. Shares purchased by
exercising State Street stock options must be reflected on the Annual
Disclosure report (Appendix A) for Access Person Levels 1 and 2.
Access Persons are prohibited from engaging in short selling and options
trading of State Street securities (except to the extent such options are
issued by the Corporation as part of an Access Person's employee
compensation.)
G. Do option trades require preclearance and reporting?
Option trades initiated by you must be precleared. If another party
exercises an option sold by you this transaction must be reported with
your other securities transactions.
H. Is preclearance or reporting required if I donate, rather than
sell, Securities from my portfolio?
No preclearance is required by the donor but reporting is required for
any receipt by gift of securities. A copy of the transfer certificate
must be supplied to your local Compliance Officer as part of the
quarterly reporting process at the quarter end following the transfer.
I. What trades must be reported on a quarterly basis, post trade?
For any reportable Securities trade, the Access Person must direct his
or her broker to forward duplicate confirms and periodic
transaction/account statements directly to their local Compliance
Officer. In addition, any and all transactions for accounts which the
Access Person has a Beneficial Ownership (regardless of who makes the
actual investment decisions), must be reported. Account statements and
confirms must be forwarded to your local Compliance Officer as trades
occur.
<PAGE>
J. Is preclearance or disclosure required if I am a member of an
Investment Club?
If an Access Person joins an investment club or is an existing member
upon employment with SSgA, a list of holdings must be submitted to your
local Compliance Officer. No preclearance for trades is necessary
although quarterly statements of the Investment Club's Securities
transactions must be sent to Compliance directly from the Broker,
referencing the Access Person. Annual disclosure of the investment
club's holdings is required for Access Person Levels 1 and 2. Trades
should be precleared if an Access Person exercises influence over the
selection of securities.
2. INDIVIDUAL RETIREMENT ACCOUNTS
A. Are trades in my self-directed Individual Retirement Account
covered by the Code?
Preclearance and reporting are necessary when the IRA contains
Securities as defined in Section 4 of the Code.
For transactions within the Salary Savings Program, including the State
Street Self Managed Brokerage Accounts (SMBA), all investments of
Securities, as defined in Section 1-J of the Code, must be precleared
and reported as required by the Code.
The fund options contained in the State Street 401(k) program do not
require regular preclearance or reporting. Although transactions in the
State Street Stock Fund do not need to be reported, as they are not
defined as a Security, employees transacting in the State Street Stock
Fund should be aware that these transactions are subject to the insider
trading restrictions contained in the Code and State Street's Standard
of Conduct.
3. MARGIN ACCOUNTS
A. What are my responsibilities concerning a margin account?
SSgA employees are allowed to open margin accounts, however, prior
written disclosure must be made by all Access Person Levels 1-4 to your
local Compliance Officer. This may be done via Lotus Notes. All Access
Persons who maintain a margin account are required to provide copies of
account statements to your local Compliance Officer for review. Please
remember that short-term trading is discouraged and will be monitored
by Compliance.
<PAGE>
4. TRUSTEE POSITION
A. What are my responsibilities if I serve as a Trustee for a
relative's trust account? Am I subject to the preclearance and
reporting requirements of the Code?
Each situation differs and will be reviewed on a case-by-case basis to
determine what reporting and disclosure is required. A memo detailing
the Trustee's role must be submitted to your local Compliance Officer
who will review the facts and circumstances and inform you of
preclearing or reporting requirements.
5. DIRECTORSHIP
A. What if I sit on a Board of Directors, or serve as Treasurer or
Finance Director for a non-profit organization? Does the Code
govern the investment activities of the non-profit organization?
Under the State Street Standard of Conduct, there is generally no
requirements for an employee to disclose to or request approval from
State Street in order to serve in a non-profit organization; however,
if the employee is eligible to receive any fee, income or compensation
in connection with the service, then a request for approval must be
made as though the organization were a "for profit" entity.
If the non-profit organization invests only in open-end mutual funds or
obligations backed by the United States Government, no preclearance or
reporting is required.
Under the SSgA Code of Ethics, if the non-profit organization's
portfolio contains Securities (as defined in the Code), you are
required to submit a memo to your local Compliance Officer explaining
the investment structure and your participation in the investment
selection. If you either direct or individually trade Securities for
the organization, then all trades must be precleared and reported.
<PAGE>
B. What are my obligations to State Street regarding disclosure of
business directorships under the SSgA Code and the State Street
Standard of Conduct?
The SSgA Code prohibits the Access Person from service as a director of
a publicly traded company or any company whose Securities are owned by
a Fund, without prior written consent of an area Executive Vice
President and notice to your local Compliance Officer. The SSgA Code
does not prohibit the Access Person from service as a director of State
Street Corporation or any of its subsidiaries or affiliates.
Under the State Street Standard of Conduct, an employee is required to
obtain the approval of his or her Area Executive before becoming a
director, officer, employee, partner or sole proprietor of a "for
profit" organization. The request for approval should disclose the name
of the organization, the nature of the business, whether any conflicts
of interest could reasonable result from the association, whether fees
or income will be earned, and whether there are any relationships
between the organization and State Street. The request for approval
along with the preliminary approval of the Area Executive is subject to
the final review and approval of the General Counsel. An employee
generally is permitted to retain the fees, income or compensation
earned in connection with an approved activity.
<PAGE>
6. ADDITIONAL INFORMATION
A. Where can I go for additional information on the Code of Ethics?
The Code of Ethics is available on the SSgA Intranet Home Page under
"Recent Sightings". To look up a specific questions consult the Code of
Ethics "Quick Reference Tool" (Appendix H) which contains interpretive
business practices.
<PAGE>
APPENDIX G
Preclearance of Fixed Income Trades by Access Persons (Personal Transactions)
Effective Date: 10/1/96
Revised: 05/03/99
Area/Business Unit: SSgA
Approved by: Robert Fort
Policy Statement
U.S. domiciled Access Persons are required to preclear personal securities
transactions in corporate and municipal fixed income securities. If the Fixed
Income Department is not participating in the purchase or sale of the relevant
security for clients, the limits listed below will not apply.
The Fixed Income Unit Head is not responsible for judging the credit quality of
proposed personal transactions.
Procedure:
Responsibility Action
U.S.domiciled Access Submit proposed transaction form (Appendix C of
Persons Code of Ethics) for a personal fixed income
security trade via hard copy to the Unit
Head/Bond Desk of the PAM Fixed Income Department.
The Bond Unit Head-PAM Review the proposed personal transaction based on
the following criteria:
a. New Issues: Proposed personal
transactions may not exceed 0.05% of the
new issue.
b. Secondary Market Trades: Proposed
transactions may not exceed 0.05% of the
current total outstandings of the issue.
c. Municipal Securities: Approval of
personal trades in the secondary
municipal securities will be effective
for 15 calendar days. After that time,
the Access Person will have to re-apply
for preclearance.
If approved, the Unit Head will sign and date the
Proposed Transaction Form and return it to the
Access Person. The Access Person submits a copy
of the approved Proposed Transaction Form to
SSgA's Compliance Department
Effective 05/03/99
Robert Fort - Unit Head
Back-ups:
Deborah Vargo
Paul Mattocks
Maureen Buttenheim
<PAGE>
APPENDIX H
List of Local Compliance Officers
AREA COMPLIANCE OFFICER TELEPHONE/EMAIL
Boston Kathleen Griffin (617)664-3921
GA (Boston, PAM, SSBSI) Kathleen Griffin/BOSTON/SSGA
Retirement Investment
Services Judy Dorian (617)376-9634
Judith A Dorian/RIS/SSGA
AIT Dana Vicander (727)799-3671
Dana Vicander/BOSTON/SSGA
Australia Ray Moses 011 61 2 9240 7628
Ray Moses/SYDNEY/SSGA
Chile Inma Pena 011 56 2 350 420
Inma Pena/BOSTON/SSGA
Hong Kong Yan Yan Li 011 852 2103 0268
Yan Yan Li/BOSTON/SSGA
London, Rexiter Capital Neil Warrender 011 44 207 698 6005
Management, Dubai, Neil Warrender/LONDON/SSGA
Brussels, Switzerland,
Spain
Munich Klaus Esswein 011 49 89 55878
Klaus Esswein/LONDON/SSGA
Paris Andgy Ma 011 33 01 5375 8026
Angdy Ma/PARIS/SSGA
Toronto/Montreal Marilina Mastronardi (514)282-2420
Marilina Mastronardi/
MONTREAL/SSGA
Tokyo Paul Lavala 011 81 3 5408 7205
Paul Lavalla/TOKYO/SSGA
DIRECTORS/TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as directors and trustees of the below listed
open-end, diversified investment companies that previously have filed
registration statements and amendments thereto pursuant to the requirements of
the Securities Act of 1933 and the Investment Company Act of 1940 with the
Securities and Exchange Commission:
1933 Act 1940 Act
Reg. Number Reg. Number
AXP Bond Fund, Inc. 2-51586 811-2503
AXP California Tax-Exempt Trust 33-5103 811-4646
AXP Discovery Fund, Inc. 2-72174 811-3178
AXP Equity Select Fund, Inc. 2-13188 811-772
AXP Extra Income Fund, Inc. 2-86637 811-3848
AXP Federal Income Fund, Inc. 2-96512 811-4260
AXP Global Series, Inc. 33-25824 811-5696
AXP Growth Series, Inc. 2-38355 811-2111
AXP High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
AXP International Fund, Inc. 2-92309 811-4075
AXP Investment Series, Inc. 2-11328 811-54
AXP Managed Series, Inc. 2-93801 811-4133
AXP Market Advantage Series, Inc. 33-30770 811-5897
AXP Money Market Series, Inc. 2-54516 811-2591
AXP New Dimensions Fund, Inc. 2-28529 811-1629
AXP Precious Metals Fund, Inc. 2-93745 811-4132
AXP Progressive Fund, Inc. 2-30059 811-1714
AXP Selective Fund, Inc. 2-10700 811-499
AXP Special Tax-Exempt Series Trust 33-5102 811-4647
AXP Stock Fund, Inc. 2-11358 811-498
AXP Strategy Series, Inc. 2-89288 811-3956
AXP Tax-Exempt Series, Inc. 2-57328 811-2686
AXP Tax-Free Money Fund, Inc. 2-66868 811-3003
AXP Utilities Income Fund, Inc. 33-20872 811-5522
<PAGE>
hereby constitutes and appoints William R. Pearce, Arne H. Carlson and Leslie L.
Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for
her or him in her or his name, place and stead any and all further amendments to
said registration statements filed pursuant to said Acts and any rules and
regulations thereunder, and to file such amendments with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission, granting to either of them the full power and authority to do and
perform each and every act required and necessary to be done in connection
therewith.
Dated the 13th day of January, 2000.
/s/ H. Brewster Atwater, Jr. /s/ Anne P. Jones
H. Brewster Atwater, Jr. Anne P. Jones
/s/ Arne H. Carlson /s/ William R. Pearce
Arne H. Carlson William R. Pearce
/s/ Lynne V. Cheney /s/ Alan K. Simpson
Lynne V. Cheney Alan K. Simpson
/s/ William H. Dudley /s/ John R. Thomas
William H. Dudley John R. Thomas
/s/ David R. Hubers /s/ C. Angus Wurtele
David R. Hubers C. Angus Wurtele
/s/ Heinz F. Hutter
Heinz F. Hutter
Officers' Power of Attorney
City of Minneapolis
State of Minnesota
Each of the undersigned, as officers of the below listed open-end, diversified
investment companies that previously have filed registration statements and
amendments thereto pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940 with the Securities and Exchange
Commission:
1933 Act 1940 Act
Reg. Number Reg. Number
AXP Bond Fund, Inc. 2-51586 811-2503
AXP California Tax-Exempt Trust 33-5103 811-4646
AXP Discovery Fund, Inc. 2-72174 811-3178
AXP Equity Select Fund, Inc. 2-13188 811-772
AXP Extra Income Fund, Inc. 2-86637 811-3848
AXP Federal Income Fund, Inc. 2-96512 811-4260
AXP Global Series, Inc. 33-25824 811-5696
AXP Growth Series, Inc. 2-38355 811-2111
AXP High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
AXP International Fund, Inc. 2-92309 811-4075
AXP Investment Series, Inc. 2-11328 811-54
AXP Variable Portfolio-Investment Series, Inc. 2-73115 811-3218
AXP Variable Portfolio-Managed Series, Inc. 2-96367 811-4252
AXP Variable Portfolio-Money Market Series, Inc. 2-72584 811-3190
AXP Variable Portfolio-Income Series, Inc. 2-73113 811-3219
AXP Managed Series, Inc. 2-93801 811-4133
AXP Market Advantage Series, Inc. 33-30770 811-5897
AXP Money Market Series, Inc. 2-54516 811-2591
AXP New Dimensions Fund, Inc. 2-28529 811-1629
AXP Precious Metals Fund, Inc. 2-93745 811-4132
AXP Progressive Fund, Inc. 2-30059 811-1714
AXP Selective Fund, Inc. 2-10700 811-499
AXP Special Tax-Exempt Series Trust 33-5102 811-4647
AXP Stock Fund, Inc. 2-11358 811-498
AXP Strategy Series, Inc. 2-89288 811-3956
AXP Tax-Exempt Series, Inc. 2-57328 811-2686
AXP Tax-Free Money Fund, Inc. 2-66868 811-3003
AXP Utilities Income Fund, Inc. 33-20872 811-5522
hereby constitutes and appoints the other as his attorney-in-fact and agent, to
sign for him in his name, place and stead any and all further amendments to said
registration statement filed pursuant to said Acts and any rules and regulations
thereunder, and to file such amendments with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting to either of them the full power and authority to do and perform each
and every act required and necessary to be done in connection therewith.
Dated the 13th day of January, 2000.
/s/ Arne H. Carlson /s/ Leslie L. Ogg
Arne H. Carlson Leslie L. Ogg
/s/ John R. Thomas /s/ Peter J. Anderson
John R. Thomas Peter J. Anderson
/s/ Frederick C. Quirsfeld /s/ John M. Knight
Frederick C. Quirsfeld John M. Knight
