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1997 ANNUAL REPORT
IDS
Discovery
Fund
(prospectus enclosed)
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The goal of IDS Discovery Fund, Inc. is long-term growth of capital. The Fund
invests primarily in common stocks of small- and medium-size growth companies.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment policies, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
American
Express
Financial
Advisors
Distributed by American Express Financial Advisors Inc.
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Your piece of
the future
Glance through current business magazine and newspaper articles on the
fastest-growing companies in America -- and you'll find many of the stocks that
Discovery Fund owns. The Fund seeks small to medium-size firms at the forefront
of rapidly growing markets or industries. From high-tech companies in computer
networking or biotechnology to firms that have found new ways to make, manage or
market traditional products and services, these are the companies that are
creating jobs and reshaping U.S. industry today.
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Contents
1997 annual report
From the president 4
From the portfolio manager 4
The Fund's ten largest holdings 6
Making the most of the Fund 7
The Fund's long-term performance 8
Independent auditors' report 9
Financial statements 10
Notes to financial statements 13
Investments in securities 21
IDS mutual funds 25
Federal income tax information 29
1997 prospectus
The Fund in brief 3p
Goal 3p
Investment policies and risks 3p
Manager and distributor 3p
Portfolio manager 3p
Alternative purchase arrangements 3p
Sales charge and Fund expenses 4p
Performance 6p
Financial highlights 6p
Total returns 8p
Investment policies and risks 10p
Facts about investments and their risks 11p
Alternative investment option 15p
Valuing Fund shares 15p
How to purchase, exchange or redeem shares 16p
Alternative purchase arrangements 16p
How to purchase shares 19p
How to exchange shares 22p
How to redeem shares 23p
Reductions and waivers of the sales charge 28p
Special shareholder services 33p
Services 33p
Quick telephone reference 33p
Distributions and taxes 34p
Dividend and capital gain distributions 34p
Reinvestments 34p
Taxes 35p
How to determine the correct TIN 37p
How the Fund is organized 38p
Shares 38p
Voting rights 38p
Shareholder meetings 39p
Board members and officers 39p
Investment manager 41p
Administrator and transfer agent 42p
Distributor 43p
About American Express Financial Corporation 45p
General information 45p
Appendix 46p
Descriptions of derivative instruments 46p
(icon of) one book inside of another
The purpose of this annual report is to tell investors how the Fund performed.
The prospectus, which is bound into the middle of this annual report, describes
the Fund in detail.
(This annual report is not a part of the porspectus.)
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To our shareholders
From the president
If you're an experienced investor, you know that the past two years have
been unusually strong ones in many financial markets. Perhaps just as
important, you also know that history shows that bull markets don't last
forever. Though often unpredictable, declines -- whether they're brief or
long-lasting, moderate or substantial -- are always a possibility.
That fact reinforces the need for investors to periodically review their
long-term goals and examine whether their investment program remains on
track to achieving them. Your quarterly investment statements are one past
of that monitoring process. The other is a meeting with your American
Express financial advisor. That becomes even more important if there's a
major change in your financial situation or in the financial markets.
William R. Pearce
(picture of) William Pearce
William Pearce
President of the Fund
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From the portfolio manager
IDS Discovery Fund's fiscal year -- August 1996 through July 1997 --
coincided with a tremendous rally in the stock market. While the Fund
couldn't match the breakneck pace of the broad market, which was led by a
relatively small group of large-capitalization issues -- it did register a
substantial gain. For investors in the Fund's Class A shares, the return
for the 12 months was 39.1%, which, according to Lipper Analytical
Services, was well ahead of the average for mutual funds that focus on
small-capitalization stocks. (A portion of the Fund's return came in the
form of a capital gain, which was paid to shareholders last December and
reduced its net asset value by a like amount at that time.)
Stocks could hardly have had things more to their liking during the
period, as the economy kept chugging along, corporate profits remained
healthy and ongoing low inflation prevented long-term interest rates from
reaching an uncomfortably high level. In this best of all worlds, stocks
powered their way higher last fall and winter before hitting a stumbling
block in the spring brought on by a rise in long-term interest rates. That
proved to be the market's only meaningful decline, however, as it promptly
went on another blistering run from May through July.
`Large-caps' lead
The great majority of the time, large-capitalization stocks -- those of
companies of substantial size and worth -- led the market's charge, which
worked to the disadvantage of the Fund, the core of which is composed of
small-capitalization issues. Still, by maintaining a diverse group of
investments and not trying to time the ups and downs of the market, the
Fund outperformed the small-cap stock sector as a whole, as measured by
the Russell 2000 (an unmanaged index of small- cap stocks often used to
measure that market sector's performance).
Nevertheless, as is typical of small-cap stocks' performance, the gain was
accompanied by plenty of volatility. For example, last February and March,
the Fund experienced a decline of more than 13%, as small stocks in
general and technology stocks in particular hit rough going. But within
two months, the Fund had more than made up the lost ground, capped by a
striking gain of nearly 16% in May alone.
Technology, consumer are largest areas
As has been true for some time, the largest portion of the Fund's
investments fell into two groups -- technology and consumer stocks,
including health care. Energy stocks, a newer area of investment for the
Fund, gave it a nice performance boost during the first several months of
the period. Also working to the Fund's benefit was its low level of cash
reserves throughout the 12 months, as cash provided a meager return
compared with the stock market.
While the investment environment is largely unchanged from several months
ago, it would be unrealistic to expect stocks to repeat their remarkable
performance of the past year. Therefore, at this point (mid-August) I
think it's prudent to take a somewhat more risk-conscious approach. In
that vein, I have begun focusing more on stocks with lower price/earnings
ratios and reducing holdings among technology-related issues. Should the
market stumble in the months ahead, these measures ought to provide some
cushion for the Fund while still allowing it to participate in potential
gains.
Kurt Winters
(picture of) Kurt Winters
Kurt Winters
Porfolio manager
(This annual report is not a part of the porspectus.)
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Class A
12-month performance
(All figures per share)
Net asset value (NAV)
July 31, 1997 $13.02
July 31, 1996 $10.73
Increase $ 2.29
Distributions
Aug. 1, 1996 - July 31, 1997
From income $ 1.42
From capital gains $ 0.20
Total distributions $ 1.62
Total return* +39.1%**
Class B
12-month performance
(All figures per share)
Net asset value (NAV)
July 31, 1997 $12.82
July 31, 1996 $10.63
Increase $ 2.19
Distributions
Aug. 1, 1996 - July 31, 1997
From income $ 1.39
From capital gains $ 0.20
Total distributions $ 1.59
Total return* +38.1%**
Class Y
12-month performance
(All figures per share)
Net asset value (NAV)
July 31, 1997 $13.03
July 31, 1996 $10.73
Increase $ 2.30
Distributions
Aug. 1, 1996 - July 31, 1997
From income $ 1.44
From capital gains $ 0.20
Total distributions $ 1.64
Total return* +39.3%**
*The prospectus discusses the effect of sales charges, if any, on the
various classes.
**The total return is a hypothetical investment in the Fund with all
distributions reinvested.
(This annual report is not a part of the prospectus.)
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The Fund's ten largest holdings
Percent Value
(of Fund's net assets) (as of July 31, 1997)
Gulf South Medical Supply 2.76% $29,700,000
Watson Pharmaceuticals 2.76 29,700,000
PairGain Technologies 2.60 27,950,000
Network General 2.56 27,625,000
Sybron Intl 2.47 26,609,375
Tech Data 2.41 25,987,500
AccuStaff 2.35 25,338,413
OfficeMax 2.27 24,500,000
FelCor Suite Hotels REIT 2.17 23,400,000
Fiserv 2.12 22,800,000
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The ten holdings listed here make up 24.47% of the Fund's net assets
(This annual report is not a part of the prospectus.)
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Making the most of the Fund
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost averaging --
a time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly.
You'll automatically buy more shares when the Fund's share price is low,
fewer shares when it is high.
Using this strategy does not ensure a profit or avoid a loss if the market
declines, and requires that you be able to keep on investing on a regular
basis, even when the price of your shares falls or the market declines.
Investing in this manner can be an effective way to accumulate shares to
meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
(footnotes to table) By investing an equal number of dollars each
month...
(arrow in table pointing to April) you automatically buy more shares when the
per share market price is low...
(arrow in table pointing to September) and fewer shares when the per share
market price is high.
You have paid an average price of only $17.91 per share over the 10 months,
while the average market price actually was $18.10.
(This annual report is not a part of the prospectus.)
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The Fund's long-term performance
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's
investments do well
o you receive capital gains when the gains on
investments sold by the Fund exceed losses
o you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and
capital gain distributions to buy additional shares of the Fund or another
fund.
Assumes: o Holding period from 8/1/87 to 7/31/97. o Returns do not reflect
taxes payable on distributions. o Reinvestment of all income and capital
gain distributions for the Fund, with a value of $14,763. Also see
"Performance" in the Fund's current prospectus.
The Standard & Poor's 500 Stock Index, an unmanaged list of larger stocks,
is frequently used as a general measure of market performance. However,
the S&P 500 companies are generally larger than those in which Discovery
Fund invests.
The Lipper Small Company Growth Fund Index includes 30 funds that are
generally similar to Discovery Fund, although some funds in the index may
have somewhat different investment policies or objectives.
How your $10,000 has grown in IDS Discovery Fund
$40,000
$30,245
$30,000 IDS Discovery
Fund
Class A
$20,000
S&P 500
$10,000 Stock Index
Lipper Small Co.
Growth Fund Index
$9,500
'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96
Average annual total return
(as of July 31, 1997)
1 year Since inception* 5 years 10 years
Class A +32.16% --% +14.27% +11.69%
Class B* +34.06% +22.38%* --% --%
Class Y* +39.32% +24.79%* --% --%
*Inception date was March 20, 1995.
On the graph above you can see how the Fund's total return compared to two
widely cited performance indexes, the S&P 500 and the Lipper Small Company
Growth Fund Index. In comparing Discovery Fund (Class A) to the two
indexes, you should take into account the fact that the Fund's performance
reflects the maximum sales charge of 5%, while such charges are not
reflected in the performance of the indexes.
Your investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. Average annual
total return figures reflect the impact of the applicable sales charge up
to a maximum of 5%. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
(This annual report is not a part of the prospectus.)
<PAGE>
The financial statements contained in Post-Effective Amendment #34 to
Registration Statement No. 2-72174 filed on or about September 29, 1997 are
incorporated herein by reference.
<PAGE>
IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
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IDS Global Growth Fund
Invests in a Portfolio comprised primarily of stocks of companies throughout the
world that are positioned to meet market needs in a changing world economy.
These companies offer above-average potential for long-term growth.
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IDS International Fund
Invests primarily in common stocks of foreign companies that offer potential for
superior growth. The Fund may invest up to 20% of its assets in the U.S. market.
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IDS Global Balanced Fund
Invests in stocks-and bonds in, for the most part, major markets throughout the
world, including the U.S. Seeks to provide a balance of growth of capital and
current income.
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IDS Global Bond Fund
Invests in a Portfolio comprised primarily of debt securities of U.S. and
foreign issuers to seek high total return through income and growth of capital.
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Growth funds
Funds in this group seek capital growth, primarily from common stocks. They are
high risk mutual funds with a potential for high reward.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic companies that
explore for, mine and process or distribute gold and other precious metals. A
highly aggressive and speculative fund that seeks long-term growth of capital.
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IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies emphasizing
technological innovation and productivity enhancement. Buys and holds larger
growth-oriented stocks.
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IDS Small Company Index Fund
Invests in all or a representative group of the equity securities comprising the
S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation.
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IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected for their
potential for above-average growth. Above-average means that their growth
potential is better, in the opinion of the portfolio's investment manager, than
the Standard & Poor's Corporation (S&P) 500 Stock Index.
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IDS Research Opportunities Fund
Invests in a Portfolio comprised primarily of equity securities of companies
included in the S&P 500 Index that are believed to have strong growth potential.
The Portfolio is managed using a research methodology by the Research Department
of AEFC. Goal is long-term appreciation.
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IDS Growth Fund
Invests in a Portfolio comprised primarily of companies that have above-average
potential for long-term growth as a result of new management, marketing
opportunities or technological superiority.
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IDS New Dimensions Fund
Invests in a Portfolio comprised primarily of companies with significant growth
potential due to superiority in technology, marketing or management. The Fund
frequently changes its industry mix.
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IDS Progressive Fund
Invests primarily in undervalued common stocks. The Fund holds stocks for the
long term with the goal of capital growth.
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Growth and income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks, higher-yielding
equities and bonds. Seeks growth of capital and income.
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IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities purchased are
those recommended by our research analysts as the best from each industry
represented on the index. Offers potential for long-term growth as well as
dividend income.
(icon of) ribbon
IDS Managed Allocation Fund
Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and
foreign debt securities, foreign equity securities and money market instruments.
The Fund provides diversification among these major investment categories and
has a target mix that represents the way the Fund's investments will be
allocated over the long term. Seeks maximum total return.
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IDS Stock Fund
Invests in a Portfolio comprised primarily of common stocks of companies
representing many sectors of the economy. Seeks current income and growth of
capital.
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IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential for growth
of capital and income.
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IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek high current
income and growth of income and capital with reduced volatility.
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IDS Diversified Equity Income Fund
Invests in a Portfolio comprised primarily in high-yielding common stocks to
seek high current income and, secondarily, to benefit from the growth potential
offered by stock investments.
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IDS Mutual
Invests in a Portfolio which seeks to balance between common stocks and senior
securities (preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
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Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly in long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
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IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
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IDS Selective Fund
Invests in a Portfolio comprised primarily of high-quality corporate bonds and
other highly rated debt instruments including government securities and
short-term investments. Seeks current income and preservation of capital.
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IDS Federal Income Fund
Invests in a Portfolio comprised primarily of securities issued or guaranteed as
to the timely payment of principal and interest by the U.S. government, its
agencies and instrumentalities. Seeks a high level of current income and safety
of principal consistent with its type of investments.
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Tax-exempt income funds
These funds provide tax-free income by investing in municipal bonds. The income
is generally free from federal income tax, but a portion of the income may be
subject to state and local taxes. Risk varies by bond quality.
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government units, with at
least 75% in the four highest rated, lowest risk bond categories.
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IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to the timely
payment of principal and interest. The insurance feature minimizes credit risk
of the Fund but does not guarantee the market value of the Fund's shares.
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IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to provide
income to residents of each respective state that is exempt from federal, state
and local income taxes. (New York is the only state that is exempt at the local
level.)
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IDS High Yield Tax-Exempt Fund
Invests in a Portfolio comprised primarily of medium- and lower-quality
municipal bonds and notes. Lower-quality securities generally involve greater
risk of principal and income.
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IDS Intermediate Tax-Exempt Fund
Invests in mainly investment-grade bonds and other debt securities with
intermediate-term maturities issued by state and local government units. Goal is
to seek a high level of current income exempt from federal taxes.
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Money market funds
These money market funds have three main goals: conservation of capital,
constant liquidity and the highest possible current income consistent with these
objectives. An investment in these funds is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that these funds will be able
to maintain a stable net asset value of $1.00 per share. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial paper,
bankers' acceptances, certificates of deposit (CDs) and other bank securities.
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IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and local
governments to seek high current income exempt from federal income taxes.
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For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus by contacting your financial advisor or
writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534. Read it carefully before you invest or send money.
<PAGE>
Federal income tax information
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividend listed below was reported to you on a Form 1099-DIV,
Dividends and Distributions, last January. Shareholders should consult a tax
adviser on how to report distributions for state and local purposes.
IDS Discovery Fund, Inc.
Fiscal year ended July 31, 1997
Class A
Income distribution
taxable as dividend income, 5.18% qualifying for deduction for
corporations.
Payable date Per share
Dec. 30, 1996 $1.41959
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 30, 1996 $0.20454
Total distributions $1.62413
The distributions of $1.62413 per share, payable Dec. 30, 1996, consisted
of $0.03082 derived from net investment income, $1.38877 from net
short-term capital gains (a total of $1.41959 taxable as dividend income)
and $0.20454 from net long-term capital gains.
Class B
Income distribution
taxable as dividend income, 5.18% qualifying for deduction for
corporations.
Payable date Per share
Dec. 30, 1996 $1.38877
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 30, 1996 $0.20454
Total distributions $1.59331
The distributions of $1.59331 per share, payable Dec. 30, 1996, consisted
of $1.38877 from net short-term capital gains (a total of $1.38877 taxable
as dividend income) and $0.20454 from net long-term capital gains.
Class Y
Income distribution
taxable as dividend income, 5.18% qualifying for deduction for
corporations.
Payable date Per share
Dec. 30, 1996 $1.43988
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 30, 1996 $0.20454
Total distributions $1.64442
The distributions of $1.64442 per share, payable Dec. 30, 1996, consisted
of $0.05111 derived from net investment income, $1.38877 from net
short-term capital gains (a total of $1.43988 taxable as dividend income)
and $0.20454 from net long-term capital gains.
<PAGE>
Quick telephone reference
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
671-3800
TTY Service For the hearing impaired 800-846-4852
American Express Automated account information 800-862-7919
Financial Advisors (TouchTone(R) phones only),
Easy Access Line including current fund prices
and performance, account values
and recent account transactions
<PAGE>
AMERICAN EXPRESS FINANCIAL ADVISORS
IDS Discovery Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
