<PAGE>
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. 34 (File No. 2-72174) X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 34 (File No. 811-3178) X
IDS DISCOVERY FUND, INC.
IDS Tower 10, Minneapolis, Minnesota 55440-0010
Leslie L. Ogg - 901 S. Marquette Ave., 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 Sept. 29, 1997 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i) on (date) pursuant to
paragraph (a)(i) 75 days after filing pursuant to paragraph (a)(ii) on
(date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has registered an indefinite number or amount of securities under the
Securities Act of 1933 pursuant to Section 24f of the Investment Company Act of
1940. Registrant's Rule 24f-2 Notice for its most recent fiscal year was filed
on or about Sept. 25, 1997.
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Cross reference sheet showing the location in the prospectus and Statement of
Additional Information of the information called for by items enumerated in
Parts A and B of Form N-1A.
Negative answers omitted are so indicated.
<TABLE>
<CAPTION>
PART A PART B
<S> <C> <C> <C>
Section in Statement
Item No. Section in Prospectus Item No. of Additional Information
1 Cover page of prospectus 10 Cover page of SAI
2(a) Sales charge and Fund expenses 11 Table of Contents
(b) The Fund in brief 12 NA
(c) The Fund in brief 13(a) Additional Investment Policies; all appendices
except
3(a) Financial highlights Dollar-Cost Averaging
(b) NA (b) Additional Investment Policies
(c) Performance (c) Additional Investment Policies
(d) Financial highlights (d) Security Transactions
4(a) The Fund in brief; Investment policies and 14(a) Board members and officers of the Fund**; Board
risks; How the Fund is organized Members and Officers
(b) Investment policies and risks (b) Board Members and Officers
(c) Investment policies and risks (c) Board Members and Officers
5(a) Board members and officers; Board members 15(a) NA
and
officers of the Fund (listing) (b) Principal Holders of Securities, if applicable
(b)(i) Investment manager; About American Express (c) Board Members and Officers
Financial Corporation-General information 16(a)(i) How the Fund is organized; About American Express
(b)(ii) Investment manager Financial Corporation**
(b)(iii) Investment manager (a)(ii) Agreements: Investment Management Services
Agreement,
(c) Portfolio manager Plan and Agreement of Distribution
(d) Administrator and transfer agent (a)(iii) Agreements: Investment Management Services
Agreement
(e) Administrator and transfer agent (b) Agreements: Investment Management Services
Agreement
(f) Distributor (c) NA
(g) Investment manager; About American Express (d) Agreements: Administrative Services Agreement,
Shareholder
Financial Corporation-General information Service Agreement
5A(a) * (e) NA
(b) * (f) Agreement: Distribution Agreement
6(a) Shares; Voting rights (g) NA
(b) NA (h) Custodian Agreement; Independent Auditors
(c) NA (i) Agreements: Transfer Agency Agreement; Custodian
(d) Voting rights Agreement
(e) Cover page; Special shareholder services 17(a) Security Transactions
(f) Dividend and capital gain distributions; (b) Brokerage Commissions Paid to Brokers Affiliated
with
Reinvestments American Express Financial Corporation
(g) Taxes (c) Security Transactions
(h) Alternative purchase arrangements (d) Security Transactions
7(a) Distributor (e) Security Transactions
(b) Valuing Fund shares 18(a) Shares; Voting rights**
(c) How to purchase, exchange or redeem shares (b) NA
(d) How to purchase shares 19(a) Investing in the Fund
(e) NA (b) Valuing Fund Shares; Investing in the Fund
(f) Distributor (c) Redeeming Shares
(g) Alternative purchase arrangements; 20 Taxes
Reductions and
waivers of the sales charge 21(a) Agreements: Distribution Agreement
8(a) How to redeem shares (b) NA
(b) NA (c) NA
(c) How to purchase shares: Three ways to 22(a) Performance Information (for money market funds
invest only)
(d) How to purchase, exchange or redeem shares: (b) Performance Information (for all funds except
money market
Redemption policies-"Important..." funds)
9 None 23 Financial Statements
</TABLE>
*Designates information is located in annual report.
**Designates location in prospectus.
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IDS Discovery Fund
Prospectus
Sept. 29, 1997
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 prospectus contains facts that can help you decide if the Fund is the right
investment for you. Read it before you invest and keep it for future reference.
Additional facts about the Fund are in a Statement of Additional Information
(SAI), filed with the Securities and Exchange Commission (SEC) and available for
reference, along with other related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI is incorporated by reference. For a free copy,
contact American Express Shareholder Service.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Please note that the Fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN
55440-0534
800-862-7919
TTY: 800-846-4852
Web site address: http://www.americanexpress.com/advisors
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Table of contents
The Fund in brief
Goal
Investment policies and risks
Manager and distributor
Portfolio manager
Alternative purchase arrangements
Sales charge and Fund expenses
Performance
Financial highlights
Total returns
Investment policies and risks Facts about investments and their risks
Alternative investment option Valuing Fund shares
How to purchase, exchange or redeem shares Alternative purchase arrangements
How to purchase shares How to exchange shares How to redeem shares
Reductions and waivers of the sales charge
Special shareholder services
Services
Quick telephone reference
Distributions and taxes
Dividend and capital gain distributions
Reinvestments
Taxes
How to determine the correct TIN
How the Fund is organized
Shares
Voting rights
Shareholder meetings
Board members and officers
Investment manager
Administrator and transfer agent
Distributor
About American Express Financial Corporation
General information
Appendix
Descriptions of derivative instruments
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<PAGE>
The Fund in brief
Goal
IDS Discovery Fund (the Fund) seeks to provide shareholders with long-term
growth of capital. Because any investment involves risk, achieving this goal
cannot be guaranteed. Only shareholders can change the goal.
Investment policies and risks
The Fund is a diversified mutual fund that invests primarily in common stocks of
small- and medium-size growth companies. Many are in businesses involving
technological innovation or experiencing rapidly improving productivity.
Stocks of smaller, growing companies historically have provided higher returns
to investors than stocks of larger, established companies. However, the price of
their stocks is more volatile. Therefore, the Fund is appropriate for long-term
investors who are comfortable with a relatively high degree of price variability
and investment risk. For further information, refer to the later section in the
prospectus titled "Investment policies and risks."
Manager and distributor
The Fund is managed by American Express Financial Corporation (AEFC), a provider
of financial services since 1894. AEFC currently manages more than $69 billion
in assets for the IDS MUTUAL FUND GROUP. Shares of the Fund are sold through
American Express Financial Advisors Inc., a wholly-owned subsidiary of AEFC.
Portfolio manager
Kurt Winters joined AEFC in 1987 and serves as senior portfolio manager. He was
appointed to manage this Fund in January 1995. From 1992 to 1995, he managed IDS
Life Series Fund, Managed Portfolio.
Alternative purchase arrangements
The Fund offers its shares in three classes. Class A shares are subject to a
sales charge at the time of purchase. Class B shares are subject to a contingent
deferred sales charge (CDSC) on redemptions made within six years of purchase
and an annual distribution (12b-1) fee. Class Y shares are sold without a sales
charge to qualifying institutional investors.
Sales charge and Fund expenses
Shareholder transaction expenses are incurred directly by an investor on the
purchase or redemption of Fund shares. Fund operating expenses are paid out of
Fund assets for each class of shares. Operating expenses are reflected in the
Fund's daily share price and dividends, and are not charged directly to
shareholder accounts.
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Shareholder transaction expenses
Class A Class B Class Y
Maximum sales charge on purchases*
(as a percentage of offering price).......5% 0% 0%
Maximum deferred sales charge
imposed on redemptions (as a
percentage of original purchase price)....0% 5% 0%
Annual Fund operating expenses (as a percentage of average daily net assets):
Class A Class B Class Y
Management fee** 0.68% 0.68% 0.68%
12b-1 fee 0.00% 0.75% 0.00%
Other expenses*** 0.45% 0.47% 0.38%
Total 1.13% 1.90% 1.06%
*This charge may be reduced depending on your total investments in
IDS funds. See "Reductions of the sales charge."
**Includes the impact of a performance fee that increased the management fee by
0.07% in fiscal year 1997.
***Other expenses include an administrative services fee, a shareholder services
fee, a transfer agency fee and other nonadvisory expenses. Class Y expenses have
been restated to reflect the 0.10% shareholder services fee which commenced on
May 9, 1997.
Example: Suppose for each year for the next 10 years, Fund expenses are as above
and annual return is 5%. If you sold your shares at the end of the following
years, for each $1,000 invested, you would pay total expenses of:
1 year 3 years 5 years 10 years
Class A $61 $ 84 $109 $181
Class B $69 $100 $123 $203**
Class B* $19 $ 60 $103 $203**
Class Y $11 $ 34 $ 59 $130
*Assuming Class B shares are not redeemed at the end of the period.
**Based on conversion of Class B shares to Class A shares after
eight years.
This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown. Because Class B pays annual
distribution (12b-1) fees, long-term shareholders of Class B may indirectly pay
an equivalent of more than a 6.25% sales charge, the maximum permitted by the
National Association of Securities Dealers.
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<PAGE>
Performance
Financial highlights
<TABLE>
<CAPTION>
Fiscal period ended July 31,
Per share income and capital changesa
Class A
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $10.73 $13.16 $10.33 $11.37 $9.87 $9.58 $9.05 $7.75 $6.69 $7.99
beginning of
period
Income from investment operations:
Net investment (.04) .06 .07 (.04) (.02) (.01) .04 .14 .13 .11
income
(loss)
Net gains (losses) 3.95 .34 2.79 (.52) 1.75 1.01 1.03 1.35 .98 (1.04)
(both realized
and unrealized)
Total from 3.91 .40 2.86 (.56) 1.73 1.00 1.07 1.49 1.11 (.93)
investment
operations
Less distributions:
Dividends from net (.03) (.09) -- -- -- (.02) (.11) (.14) (.05) (.10)
investment income
Distributions (1.59) (2.74) (.03) (.48) (.23) (.69) (.43) (.05) -- (.27)
from
realized gains
Total (1.62) (2.83) (.03) (.48) (.23) (.71) (.54) (.19) (.05) (.37)
distributions
Net asset value, $13.02 $10.73 $13.16 $10.33 $11.37 $9.87 $9.58 $9.05 $7.75 $6.69
end of period
Ratios/supplemental data
Class A
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net assets, end of $904 $683 $730 $523 $445 $293 $207 $168 $167 $182
period (in
millions)
Ratio of expenses 1.13% 1.00% .99% .97% 1.03% 1.04% .98% .76% .66% .63%
to average daily
net assetsc
Ratio of net (.32%) .46% .59% (.39%) (.17%) (.11%) .40% 1.51% 1.86% 1.49%
income (loss) to
average daily
net assets
Portfolio 153% 179% 192% 67% 76% 90% 95% 76% 109% 61%
turnover rate
(excluding
short-term
securities)
Total returnb 39.1% 4.0% 27.6% (5.5%) 17.5% 9.9% 13.4% 19.8% 16.7% (10.9%)
Average brokerage $.0502 $-- $-- $-- $-- $-- $-- $-- $-- $--
commission rated
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<PAGE>
aFor a share outstanding throughout the period. Rounded to the nearest
cent. bTotal return does not reflect payment of a sales charge. cEffective
fiscal year 1996, expense ratio is based on total expenses of the Fund
before reduction of earnings credits on cash balances. dEffective fiscal
year 1997, the Fund is required to disclose an average brokerage
commission rate per share for security trades on which commissions are
charged. The comparablity of this information may be affected by the fact
that commission rates per share vary significantly among foreign
countries.
</TABLE>
Fiscal period ended July 31,
Per share income and capital changesa
Class B Class Y
1997 1996 1995b 1997 1996 1995b
Net asset value, $10.63 $13.12 $11.31 $10.73 $13.17 $11.31
beginning of
period
Income from investment operations:
Net investment (.11) -- .01 (.01) .07 .07
income
(loss)
Net gains (both 3.89 .31 1.80 3.95 .34 1.80
realized
and unrealized)
Total from 3.78 .31 1.81 3.94 .41 1.86
investment
operations
Less distributions:
Dividends from net -- (.06) -- (.05) (.11) --
investment income
Distributions (1.59) (2.74) -- (1.59) (2.74) --
from
realized gains
Total (1.59) (2.80) -- (1.64) (2.85) --
distributions
Net asset value, $12.82 $10.63 $13.12 $13.03 $10.73 $13.17
end of period
Ratios/supplemental data
Class B Class Y
1997 1996 1995b 1997 1996 1995b
Net assets, end of $101 $43 $10 $72 $52 $39
period (in
millions)
Ratio of expenses 1.90% 1.74% 1.95%c .98% .81% .93%c
to average daily
net assetse
Ratio of net (1.10%) (.10%) .44%c (.17%) .61% 1.51%c
income (loss)
to average daily
net assets
Portfolio 153% 179% 192% 153% 179% 192%
turnover rate
(excluding
short-term
securities)
Total returnd 38.1% 3.2% 16.0% 39.3% 4.2% 16.4%
Average brokerage $.0502 $-- $-- $.0502 $-- $--
commission ratef
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<PAGE>
a For a share outstanding throughout the period. Rounded to the nearest
cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Total return does not reflect payment of a sales charge.
e Effective fiscal year 1996, expense ratio is based on total
expenses of the Fund before reduction of earnings credits on cash
balances.
f Effective fiscal year 1997, the Fund is required to disclose an average
brokerage commission rate per share for security trades on which
commissions are charged. The comparability of this information may be
affected by the fact that commission rates per share vary significantly
among foreign countries.
The information in these tables has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of the Fund are contained in the Fund's annual
report which, if not included with this prospectus, may be obtained without
charge.
Total returns
Total return is the sum of all of your returns for a given period, assuming you
reinvest all distributions. It is calculated by taking the total value of shares
you own at the end of the period (including shares acquired by reinvestment),
less the price of shares you purchased at the beginning of the period.
Average annual total return is the annually compounded rate of return over a
given time period (usually two or more years). It is the total return for the
period converted to an equivalent annual figure.
Average annual total returns as of July 31, 1997
Purchase 1 year Since 5 years 10 years
made ago inception ago ago
Discovery:
Class A +32.16% --% +14.27% +11.69%
Class B +34.06% +22.38%* --% --%
Class Y +39.32% +24.79%* --% --%
S&P 500 +52.10% +34.06%** +20.61% +14.94%
Lipper Small
Cap Fund Index +24.58% +22.27%** +17.97% +12.22%
*Inception date was March 20, 1995.
**Measurement period started April 1, 1995.
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<PAGE>
Cumulative total returns as of July 31, 1997
Purchase 1 year Since 5 years 10 years
made ago inception ago ago
Discovery:
Class A 32.16% --% +94.89% +202.45%
Class B 34.06% 61.28%* --% --%
Class Y 39.32% 68.90%* --% --%
S&P 500 52.10% 100.36%** +155.27% +302.43%
Lipper Small
Cap Fund Index 24.58% 59.85%** +128.50% +216.70%
*Inception date was March 20, 1995.
**Measurement period started April 1, 1995.
These examples show total returns from hypothetical investments in Class A,
Class B and Class Y shares of the Fund. These returns are compared to those of
popular indexes for the same periods. The performance of Class B and Class Y
will vary from the performance of Class A based on differences in sales charges
and fees. March 20, 1995 was the inception date for Class B and Class Y. Past
performance for Class Y for the periods prior to March 20, 1995 may be
calculated based on the performance of Class A, adjusted to reflect differences
in sales charges although not for other differences in expenses.
For purposes of calculation, information about the Fund assumes:
o a sales charge of 5% for Class A shares
o redemption at the end of the period and deduction of the
applicable contingent deferred sales charge for Class B shares
o no sales charge for Class Y shares
o no adjustments for taxes an investor may have paid on the
reinvested income and capital gains
o a period of widely fluctuating securities prices. Returns
shown should not be considered a representation of the Fund's
future performance.
Standard & Poor's 500 Stock Index (S&P 500), an unmanaged list of common stocks,
is frequently used as a general measure of market performance. However, the S&P
500 companies are generally larger than those in which the Fund invests. The
index reflects reinvestment of all distributions and changes in market prices,
but excludes brokerage commissions or other fees.
Lipper Small Cap Fund Index, an unmanaged index published by Lipper Analytical
Services, Inc., includes 30 funds that are generally similar to the Fund,
although some funds in the index may have somewhat different investment policies
or objectives.
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<PAGE>
Investment policies and risks
The Fund invests primarily in common stocks of U.S. and foreign small- and
medium-size growth companies. Many of these companies emphasize technological
innovation or productivity improvements.
The Fund invests in common stock and debt securities of large, well-established
companies when the portfolio manager believes such investments offer the best
opportunity for capital growth. The Fund also may invest in debt securities,
derivative instruments and money market instruments.
The various types of investments the portfolio manager uses to achieve
investment performance are described in more detail in the next section and in
the SAI.
Facts about investments and their risks
Common stocks: Stock prices are subject to market fluctuations. Stocks of
smaller companies may be subject to more abrupt or erratic price movements than
stocks of larger, established companies or the stock market as a whole. Also,
small companies often have limited product lines, smaller markets or fewer
financial resources. Therefore, some of the securities in which the Fund invests
involve substantial risk and may be considered speculative.
Debt securities: The price of bonds generally falls as interest rates increase,
and rises as interest rates decrease. The price of bonds also fluctuates if the
credit rating is upgraded or downgraded. The price of bonds below investment
grade may react more to the ability of the issuing company to pay interest and
principal when due than to changes in interest rates. These bonds have greater
price fluctuations and are more likely to experience a default. The Fund will
not invest more than 5% of its net assets in bonds below investment grade.
Securities that are subsequently downgraded in quality may continue to be held
by the Fund and will be sold only when the investment manager believes it is
advantageous to do so.
Foreign investments: Securities of foreign companies and governments may be
traded in the United States, but often they are traded only on foreign markets.
Frequently, there is less information about foreign companies and less
government supervision of foreign markets. Foreign investments are subject to
political and economic risks of the countries in which the investments are made,
including the possibility of seizure or nationalization of companies, imposition
of withholding taxes on income, establishment of exchange controls or adoption
of other restrictions that might affect an investment adversely. If an
investment is made in a foreign market, the local currency may be purchased
using a forward contract in which the price of the foreign currency in U.S.
dollars is established on the date the trade is made, but delivery of the
currency is not made until the securities are received. As long as
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<PAGE>
the Fund holds foreign currencies or securities valued in foreign currencies,
the value of those assets will be affected by changes in the value of the
currencies relative to the U.S. dollar. Because of the limited trading volume in
some foreign markets, efforts to buy or sell a security may change the price of
the security, and it may be difficult to complete the transaction. The Fund may
invest up to 25% of its total assets in foreign investments.
Technology sector: Stocks of companies that have, or likely will develop,
products, processes, or services that will provide or benefit significantly from
technological advances and improvements are subject to volatility and price
fluctuations as the technology market sector increases and decreases in favor
with the investing public. Technology-based issues are exposed to risks
associated with economic conditions in that market sector. Due to competition, a
less diversified product line, and other factors, companies that develop and/or
rely on technology could become increasingly sensitive to down swings in the
economy.
Derivative instruments: The portfolio manager may use derivative instruments in
addition to securities to achieve investment performance. Derivative instruments
include futures, options and forward contracts. Such instruments may be used to
maintain cash reserves while remaining fully invested, to offset anticipated
declines in values of investments, to facilitate trading, to reduce transaction
costs or to pursue higher investment returns.
Derivative instruments are characterized by requiring little or no initial
payment and a daily change in price based on or derived from a security, a
currency, a group of securities or currencies, or an index. A number of
strategies or combination of instruments can be used to achieve the desired
investment performance characteristics. A small change in the value of the
underlying security, currency or index will cause a sizable gain or loss in the
price of the derivative instrument. Derivative instruments allow the portfolio
manager to change the investment performance characteristics very quickly and at
lower costs. Risks include losses of premiums, rapid changes in prices, defaults
by other parties and inability to close such instruments. The Fund will use
derivative instruments only to achieve the same investment performance
characteristics it could achieve by directly holding those securities and
currencies permitted under the investment policies. The Fund will designate cash
or appropriate liquid assets to cover its portfolio obligations. 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. This does not, however, limit the portion of the Fund's
assets at risk to 5%. The Fund is not limited as to the percentage of its assets
that may be invested in permissible investments, including derivatives, except
as otherwise explicitly provided in this prospectus or the SAI. For descriptions
of these and other types of derivative instruments, see the Appendix to this
prospectus and the SAI.
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<PAGE>
Securities and other instruments that are illiquid: A security or other
instrument is illiquid if it cannot be sold quickly in the normal course of
business. Some investments cannot be resold to the U.S. public because of their
terms or government regulations. Securities and instruments, however, can be
sold in private sales, and many may be sold to other institutions and qualified
buyers or on foreign markets. The portfolio manager will follow guidelines
established by the board and consider relevant factors such as the nature of the
security and the number of likely buyers when determining whether a security is
illiquid. No more than 10% of the Fund's net assets will be held in securities
and other instruments that are illiquid.
Money market instruments: Short-term debt securities rated in the top two grades
or the equivalent are used to meet daily cash needs and at various times to hold
assets until better investment opportunities arise. Generally, less than 25% of
the Fund's total assets are in these money market instruments. However, for
temporary defensive purposes these investments could exceed that amount for a
limited period of time.
The investment policies described above may be changed by the board.
Lending portfolio securities: The Fund may lend its securities to earn income so
long as borrowers provide collateral equal to the market value of the loans. The
risks are that borrowers will not provide collateral when required or return
securities when due. Unless a majority of the outstanding voting securities
approve otherwise, loans may not exceed 30% of the Fund's net assets.
Alternative investment option
In the future, the board of the Fund may determine for operating efficiencies to
use a master/feeder structure. Under that structure, the Fund's assets would be
invested in an investment company with the same goal as the Fund, rather than
invested directly in a portfolio of securities.
Valuing Fund shares
The public offering price is the net asset value (NAV) adjusted for the sales
charge for Class A. It is the NAV for Class B and Class Y.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business, normally 3 p.m. Central time, each
business day (any day the New York Stock Exchange is open).
To establish the net assets, all securities are valued as of the close of each
business day. In valuing assets:
o Securities (except bonds) and assets with available market
values are valued on that basis
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<PAGE>
o Securities maturing in 60 days or less are valued at amortized
cost
o Bonds and assets without readily available market values are
valued according to methods selected in good faith by the
board
How to purchase, exchange or redeem shares
Alternative purchase arrangements
The Fund offers three different classes of shares - Class A, Class B and Class
Y. The primary differences among the classes are in the sales charge structures
and in their ongoing expenses. These differences are summarized in the table
below. You may choose the class that best suits your circumstances and
objectives.
Sales charge and
distribution
(12b-1) fee Service fee Other information
Class A Maximum initial 0.175% of average Initial sales charge
sales charge of daily net assets waived or reduced
5%; no 12b-1 fee for certain purchases
Class B No initial sales 0.175% of average Shares convert to
charge; maximum CDSC daily net assets Class A in the ninth
of 5% declines to 0% year of ownership;
after six years; 12b-1 CDSC waived in
fee of 0.75% of average certain circumstances
daily net assets
Class Y None 0.10% of average Available only to
daily net assets certain qualifying
institutional
investors
Conversion of Class B shares to Class A shares - During the ninth calendar year
of owning your Class B shares, Class B shares will convert to Class A shares and
will no longer be subject to a distribution fee. Class B shares that convert to
Class A shares are not subject to a sales charge or distribution fee. Class B
shares purchased through reinvested dividends and distributions also will
convert to Class A shares in the same proportion as the other Class B shares.
This means more of your money will be put to work for you.
Considerations in determining whether to purchase Class A or Class B shares -
You should consider the information below in determining whether to purchase
Class A or Class B shares. The distribution fee (included in "Ongoing expenses")
and sales charges are structured so that you will have approximately the same
total return at the end of eight years regardless of which class you chose.
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<PAGE>
Sales charges on purchase or redemption
If you purchase Class A If you purchase Class B
shares shares
o You will not have all o All of your money is
of your purchase price invested in shares of
invested. Part of your stock. However, you will
purchase price will go pay a sales charge if you
to pay the sales charge. redeem your shares within
You will not pay a sales six years of purchase.
charge when you redeem
your shares.
o You will be able to o No reductions of the
take advantage of sales charge are
reductions in the sales available for large
charge. purchases.
If your investments in IDS funds that are subject to a sales charge total
$250,000 or more, you are better off paying the reduced sales charge in Class A
than paying the higher fees in Class B. If you qualify for a waiver of the sales
charge, you should purchase Class A shares.
Ongoing expenses
If you purchase Class A If you purchase Class B
shares shares
o Your shares will have o The distribution and
a lower expense ratio transfer agency fees for
than Class B shares Class B will cause your
because Class A does not shares to have a higher
pay a distribution fee expense ratio and to pay
and the transfer agency lower dividends than
fee for Class A is lower Class A shares. After
than the fee for Class B. eight years, Class B
As a result, Class A shares shares will convert to
will pay higher dividends Class A shares and you
than Class B shares. will no longer be
subject to higher fees.
You should consider how long you plan to hold your shares and whether the
accumulated higher fees and CDSC on Class B shares prior to conversion would be
less than the initial sales charge on Class A shares. Also consider to what
extent the difference would be offset by the lower expenses on Class A shares.
To help you in this analysis, the example in the "Sales charge and Fund
expenses" section of the prospectus illustrates the charges applicable to each
class of shares.
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<PAGE>
Class Y shares - Class Y shares are offered to certain institutional investors.
Class Y shares are sold without a front-end sales charge or a CDSC and are not
subject to a distribution fee. The following investors are eligible to purchase
Class Y shares:
o Qualified employee benefit plans* if the plan: - uses a daily transfer
recordkeeping service offering participants daily access to IDS funds
and has - at least $10 million in plan assets or - 500 or more
participants; or - does not use daily transfer recordkeeping and has -
at least $3 million invested in funds of the IDS MUTUAL FUND GROUP or -
500 or more participants.
o Trust companies or similar institutions, and charitable organizations
that meet the definition in Section 501(c)(3) of the Internal Revenue
Code.* These must have at least $10 million invested in funds of the IDS
MUTUAL FUND GROUP.
o Nonqualified deferred compensation plans* whose participants are
included in a qualified employee benefit plan described above.
* Eligibility must be determined in advance by American Express Financial
Advisors. To do so, contact your financial advisor.
How to purchase shares
If you're investing in this Fund for the first time, you'll need to set up an
account. Your financial advisor will help you fill out and submit an
application. Once your account is set up, you can choose among several
convenient ways to invest.
Important: When opening an account, you must provide your correct
Taxpayer Identification Number (Social Security or Employer
Identification number). See "Distributions and taxes."
When you purchase shares for a new or existing account, the price you pay per
share is determined at the close of business on the day your investment is
received and accepted at the Minneapolis headquarters.
Purchase policies:
o Investments must be received and accepted in the Minneapolis
headquarters on a business day before 3 p.m. Central time to be included
in your account that day and to receive that day's share price.
Otherwise, your purchase will be processed the next business day and you
will pay the next day's share price.
o The minimums allowed for investment may change from time to
time.
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<PAGE>
o Wire orders can be accepted only on days when your bank, AEFC, the Fund
and Norwest Bank Minneapolis are open for business.
o Wire purchases are completed when wired payment is received
and the Fund accepts the purchase.
o AEFC and the Fund are not responsible for any delays that
occur in wiring funds, including delays in processing by the
bank.
o You must pay any fee the bank charges for wiring.
o The Fund reserves the right to reject any application for any
reason.
o If your application does not specify which class of shares you are
purchasing, it will be assumed that you are investing in Class A shares.
<TABLE>
<CAPTION>
Three ways to invest
<S> <C> <C>
1
By regular account Send your check and application Minimum amounts
(or your name and account number Initial investment: $2,000
if you have an established account) Additional
to: investments: $ 100
American Express Financial Advisors Inc. Account balances: $ 300*
P.O. Box 74 Qualified retirement
Minneapolis, MN 55440-0074 accounts: none
Your financial advisor will help you with this process.
2
By scheduled Contact your financial advisor Minimum amounts
investment plan to set up one of the following Initial investment: $100
scheduled plans: Additional
investments: $100/each payment
o automatic payroll deduction Account balances: none
(on active plans of
o bank authorization monthly payments)
o direct deposit of If account balance is below $2,000,
Social Security check frequency of payments must be at
least monthly.
o other plan approved by the Fund
3
By wire If you have an established account, If this information is not
you may wire money to: included, the order may be
rejected and all money
Norwest Bank Minneapolis received by the Fund, less
Routing No. 091000019 any costs the Fund or AEFC
Minneapolis, MN incurs, will be returned
Attn: Domestic Wire Dept. promptly.
Give these instructions: Minimum amounts
Credit IDS Account #00-30-015 Each wire investment: $1,000
for personal account # (your
account number) for (your name).
</TABLE>
*If your account balance falls below $300, you will be asked in writing to bring
it up to $300 or establish a scheduled investment plan. If you don't do so
within 30 days, your shares can be redeemed and the proceeds mailed to you.
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<PAGE>
How to exchange shares
You can exchange your shares of the Fund at no charge for shares of the same
class of any other publicly offered fund in the IDS MUTUAL FUND GROUP available
in your state. Exchanges into IDS Tax-Free Money Fund must be made from Class A
shares. For complete information on any other fund, including fees and expenses,
read that fund's prospectus carefully.
If your exchange request arrives at the Minneapolis headquarters before the
close of business, your shares will be redeemed at the net asset value set for
that day. The proceeds will be used to purchase new fund shares the same day.
Otherwise, your exchange will take place the next business day at that day's net
asset value.
For tax purposes, an exchange represents a redemption and purchase and may
result in a gain or loss. However, you cannot use the sales charge imposed on
the purchase of Class A shares to create or increase a tax loss (or reduce a
taxable gain) by exchanging from the Fund within 91 days of your purchase. For
further explanation, see the SAI.
How to redeem shares
You can redeem your shares at any time. American Express Shareholder Service
will mail payment within seven days after receiving your request.
When you redeem shares, the amount you receive may be more or less than the
amount you invested. Your shares will be redeemed at net asset value, minus any
applicable sales charge, at the close of business on the day your request is
accepted at the Minneapolis headquarters. If your request arrives after the
close of business, the price per share will be the net asset value, minus any
applicable sales charge, at the close of business on the next business day.
A redemption is a taxable transaction. If your proceeds from your redemption are
more or less than the cost of your shares, you will have a gain or loss, which
can affect your tax liability. Redeeming shares held in an IRA or qualified
retirement account may subject you to certain federal taxes, penalties and
reporting requirements. Consult your tax advisor.
Two ways to request an exchange or redemption of shares
1
By letter Include in your letter:
o the name of the fund(s)
o the class of shares to be exchanged or
redeemed
o your account number(s) (for exchanges,
both funds must be registered in the same
ownership) o your Taxpayer Identification
Number (TIN) o the dollar amount or number
of shares you want to exchange or redeem o
signature of all registered account owners
o for redemptions, indicate how you want
your money delivered to you o any paper
certificates of shares you hold
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<PAGE>
Regular mail:
American Express Shareholder Service
Attn: Redemptions
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Express Shareholder Service
Attn: Redemptions
733 Marquette Ave.
Minneapolis, MN 55402
2
By phone
American Express Financial o The Fund and AEFC will honor any
Advisors Telephone telephone exchange or redemption request
Transaction Service: believed to be authentic and will use
800-437-3133 or reasonable procedures to confirm that
612-671-3800 they are. This includes asking identifying
questions and tape recording calls. If
reasonable procedures are not followed,
the Fund or AEFC will be liable for any
loss resulting from fraudulent requests.
o Phone exchange and redemption privileges
automatically apply to all accounts except
custodial, corporate or qualified
retirement accounts unless you request
these privileges NOT apply by writing
American Express Shareholder Service. Each
registered owner must sign the request. o
AEFC answers phone requests promptly, but
you may experience delays when call volume
is high. If you are unable to get through,
use mail procedure as an alternative. o
Acting on your instructions, your financial
advisor may conduct telephone transactions
on your behalf. o Phone privileges may be
modified or discontinued at any time.
Minimum amount
Redemption: $100
Maximum amount
Redemption: $50,000
Exchange policies:
o You may make up to three exchanges within any 30-day period, with each limited
to $300,000. These limits do not apply to scheduled exchange programs and
certain employee benefit plans or other arrangements through which one
shareholder represents the interests of several. Exceptions may be allowed with
pre-approval of the Fund.
o Exchanges must be made into the same class of shares of the new
fund.
o If your exchange creates a new account, it must satisfy the minimum investment
amount for new purchases.
o Once we receive your exchange request, you cannot cancel it.
o Shares of the new fund may not be used on the same day for
another exchange.
o If your shares are pledged as collateral, the exchange will be delayed until
written approval is obtained from the secured party.
o AEFC and the Fund reserve the right to reject any exchange, limit the amount,
or modify or discontinue the exchange privilege, to prevent abuse or adverse
effects on the Fund and its shareholders. For example, if exchanges are too
numerous or too large, they may disrupt the Fund's investment strategies or
increase its costs.
-17-
<PAGE>
Redemption policies:
o A "change of mind" option allows you to change your mind after requesting a
redemption and to use all or part of the proceeds to purchase new shares in the
same account from which you redeemed. If you reinvest in Class A, you will
purchase the new shares at net asset value rather than the offering price on the
date of a new purchase. If you reinvest in Class B, any CDSC you paid on the
amount you are reinvesting also will be reinvested. To take advantage of this
option, send a written request within 30 days of the date your redemption
request was received. Include your account number and mention this option. This
privilege may be limited or withdrawn at any time, and it may have tax
consequences.
o A telephone redemption request will not be allowed within 30 days of a
phoned-in address change.
Important: If you request a redemption of shares you recently purchased by a
check or money order that is not guaranteed, the Fund will wait for your check
to clear. It may take up to 10 days from the date of purchase before a check is
mailed to you. (A check may be mailed earlier if your bank provides evidence
satisfactory to the Fund and AEFC that your check has cleared.)
<TABLE>
<CAPTION>
Three ways to receive payment when you redeem shares
<S> <C>
1
By regular or express mail o Mailed to the address on record
o Payable to names listed on the account
NOTE: You will be charged a fee if you
request express mail delivery.
2
By wire o Minimum wire redemption: $1,000
o Request that money be wired to your bank
o Bank account must be in the same
ownership as the IDS fund account
NOTE: Pre-authorization required. For
instructions, contact your financial
advisor or American Express Shareholder Service.
3
By scheduled payout plan o Minimum payment: $50
o Contact your financial
advisor or American
Express Shareholder
Service to set up regular
payments to you on a monthly, bimonthly,
quarterly, semiannual or
annual basis
o Purchasing new shares while under a payout
plan may be disadvantageous because of
the sales charges
Reductions and waivers of the sales charge
Class A - initial sales charge alternative
On purchases of Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:
</TABLE>
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<PAGE>
Total investment Sales charge as a
percent of:*
Public Net
offering amount
price invested
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
* To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, amounts for each applicable increment must be totaled. See
the SAI.
Reductions of the sales charge on Class A shares
Your sales charge may be reduced, depending on the totals of:
o the amount you are investing in this Fund now,
o the amount of your existing investment in this Fund, if any, and
o the amount you and your primary household group are investing or have in other
funds in the IDS MUTUAL FUND GROUP that carry a sales charge. (The primary
household group consists of accounts in any ownership for spouses or domestic
partners and their unmarried children under 21. Domestic partners are
individuals who maintain a shared primary residence and have joint property or
other insurable interests.)
Other policies that affect your sales charge:
o IDS Tax-Free Money Fund and Class A shares of IDS Cash Management Fund do not
carry sales charges. However, you may count investments in these funds if you
acquired shares in them by exchanging shares from IDS funds that carry sales
charges.
o IRA purchases or other employee benefit plan purchases made through a payroll
deduction plan or through a plan sponsored by an employer, association of
employers, employee organization or other similar entity, may be added together
to reduce sales charges for all shares purchased through that plan.
o If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a letter of intent.
For more details, see the SAI.
-19-
<PAGE>
Waivers of the sales charge for Class A shares
Sales charges do not apply to:
o Current or retired board members, officers or employees of the Fund or AEFC or
its subsidiaries, their spouses and unmarried children under 21.
o Current or retired American Express financial advisors, their spouses and
unmarried children under 21.
o Investors who have a business relationship with a newly associated financial
advisor who joined AEFA from another investment firm provided that (1) the
purchase is made within six months of the advisor's appointment date with AEFA,
(2) the purchase is made with proceeds of a redemption of shares that were
sponsored by the financial advisor's previous broker-dealer, and (3) the
proceeds must be the result of a redemption of an equal or greater value where a
sales load was previously assessed.
o Qualified employee benefit plans* using a daily transfer recordkeeping system
offering participants daily access to IDS funds.
(Participants in certain qualified plans for which the initial sales charge is
waived may be subject to a deferred sales charge of up to 4% on certain
redemptions. For more information, see the SAI.)
o Shareholders who have at least $1 million invested in funds of the IDS MUTUAL
FUND GROUP. If the investment is redeemed in the first year after purchase, a
CDSC of 1% will be charged on the redemption. The CDSC will be waived only in
the circumstances described for waivers for Class B shares.
o Purchases made within 30 days after a redemption of shares (up to the amount
redeemed):
- of a product distributed by American Express Financial
Advisors in a qualified plan subject to a deferred sales
charge or
- in a qualified plan where American Express Trust Company has a
recordkeeping, trustee, investment management or investment servicing
relationship.
Send the Fund a written request along with your payment, indicating the amount
of the redemption and the date on which it occurred.
o Purchases made with dividend or capital gain distributions from the same class
of another fund in the IDS MUTUAL FUND GROUP that has a sales charge.
o Purchases made through or under a "wrap fee" product sponsored by American
Express Financial Advisors Inc. (total amount of all investments must be
$50,000); the University of Texas System ORP; or a segregated separate account
offered by Nationwide Life Insurance Company or Nationwide Life and Annuity
Insurance Company.
-20-
<PAGE>
o Purchases made with the proceeds from IDS Life Real Estate Variable Annuity
surrenders through December 31, 1997.
*Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
Class B - contingent deferred sales charge alternative
Where a CDSC is imposed on a redemption, it is based on the amount of the
redemption and the number of calendar years, including the year of purchase,
between purchase and redemption. The following table shows the declining scale
of percentages that apply to redemptions during each year after a purchase:
If a redemption is The percentage rate
made during the for the CDSC is:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are redeeming reduces the current net asset value of your
investment in Class B shares below the total dollar amount of all your purchase
payments during the last six years (including the year in which your redemption
is made), the CDSC is based on the lower of the redeemed purchase payments or
market value.
The following example illustrates how the CDSC is applied. Assume you had
invested $10,000 in Class B shares and that your investment had appreciated in
value to $12,000 after 15 months, including reinvested dividend and capital gain
distributions. You could redeem any amount up to $2,000 without paying a CDSC
($12,000 current value less $10,000 purchase amount). If you redeemed $2,500,
the CDSC would apply only to the $500 that represented part of your original
purchase price. The CDSC rate would be 4% because a redemption after 15 months
would take place during the second year after purchase.
Because the CDSC is imposed only on redemptions that reduce the total of your
purchase payments, you never have to pay a CDSC on any amount you redeem that
represents appreciation in the value of your shares, income earned by your
shares or capital gains. In addition, when determining the rate of any CDSC,
your redemption will be made from the oldest purchase payment you made. Of
course, once a purchase payment is considered to have been redeemed, the next
amount redeemed is the next oldest purchase payment. By redeeming the oldest
purchase payments first, lower CDSCs are imposed than would otherwise be the
case.
-21-
<PAGE>
Waivers of the contingent deferred sales charge
The CDSC on Class B shares will be waived on redemptions of shares:
o In the event of the shareholder's death,
o Purchased by any board member, officer or employee of a fund or
AEFC or its subsidiaries,
o Held in a trusteed employee benefit plan, o Held in IRAs or certain qualified
plans for which American Express Trust Company acts as custodian, such as Keogh
plans, tax-sheltered custodial accounts or corporate pension plans, provided
that the shareholder is:
- at least 59-1/2 years old, and
- taking a retirement distribution (if the redemption is part of a
transfer to an IRA or qualified plan in a product distributed by
American Express Financial Advisors, or a custodian-to-custodian
transfer to a product not distributed by American Express Financial
Advisors, the CDSC will not be waived), or - redeeming under an approved
substantially equal periodic payment arrangement.
For investors in Class A shares who have over $1 million invested in one year,
the 1% CDSC on redemption of those shares will be waived in the same
circumstances described for Class B.
Special shareholder services
Services
To help you track and evaluate the performance of your investments, AEFC
provides these services:
Quarterly statements listing all of your holdings and transactions during the
previous three months.
Yearly tax statements featuring average-cost-basis reporting of capital gains or
losses if you redeem your shares along with distribution information which
simplifies tax calculations.
A personalized mutual fund progress report detailing returns on your initial
investment and cash-flow activity in your account. It calculates a total return
to reflect your individual history in owning Fund shares. This report is
available from your financial advisor.
-22-
<PAGE>
Quick telephone reference
American Express Financial Advisors Telephone Transaction Service
Redemptions and exchanges, dividend payments or reinvestments and
automatic payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
TTY Service
For the hearing impaired
800-846-4852
American Express Financial Advisors Easy Access Line
Automated account information (TouchToneR phones only), including current
Fund prices and performance, account values and recent account
transactions 800-862-7919
Distributions and taxes
As a shareholder you are entitled to your share of the Fund's net income and any
net gains realized on its investments. The Fund distributes dividends and
capital gain distributions to qualify as a regulated investment company and to
avoid paying corporate income and excise taxes. Dividend and capital gain
distributions will have tax consequences you should know about.
Dividend and capital gain distributions
The Fund's net investment income from dividends and interest is distributed to
you by the end of the calendar year as dividends. Short-term capital gains are
included in net investment income. Long-term capital gains are realized whenever
a security held for more than one year is sold for a higher price than was paid
for it.
The Fund will offset any net realized capital gains by any available capital
loss carryovers. Net realized long-term capital gains, if any, are distributed
at the end of the calendar year as capital gain distributions. Before they are
distributed, both net investment income and net long-term capital gains are
included in the value of each share. After they are distributed, the value of
each share drops by the per-share amount of the distribution. (If your
distributions are reinvested, the total value of your holdings will not change.)
Dividends for each class will be calculated at the same time, in the same manner
and will be the same amount prior to deduction of expenses. Expenses
attributable solely to a class of shares will be paid exclusively by that class.
-23-
<PAGE>
Reinvestments
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
o you request the Fund in writing or by phone to pay
distributions to you in cash, or
o you direct the Fund to invest your distributions in the same class of
another publicly available IDS fund for which you've previously opened
an account.
The reinvestment price is the net asset value at close of business on the day
the distribution is paid. (Your quarterly statement will confirm the amount
invested and the number of shares purchased.)
If you choose cash distributions, you will receive only those declared after
your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash distributions,
we will reinvest the checks into your account at the then-current net asset
value and make future distributions in the form of additional shares. Prior to
reinvestment, no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
Taxes
Distributions are subject to federal income tax and also may be subject to state
and local taxes. Distributions are taxable in the year the Fund declares them
regardless of whether you take them in cash or reinvest them.
Each January, you will receive a tax statement showing the kinds and total
amount of all distributions you received during the previous year. You must
report distributions on your tax returns, even if they are reinvested in
additional shares.
Buying a dividend creates a tax liability. This means buying shares shortly
before a net investment income or a capital gain distribution. You pay the full
pre-distribution price for the shares, then receive a portion of your investment
back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain. If you sell
shares for more than their cost, the difference is a capital gain. Your gain may
be either short term (for shares held for one year or less) or long term (for
shares held for more than one year).
-24-
<PAGE>
Your Taxpayer Identification Number (TIN) is important. As with any financial
account you open, you must list your current and correct Taxpayer Identification
Number (TIN) -- either your Social Security or Employer Identification number.
The TIN must be certified under penalties of perjury on your application when
you open an account.
If you don't provide the TIN, or the TIN you report is incorrect, you could be
subject to backup withholding of 31% of taxable distributions and proceeds from
certain sales and exchanges. You also could be subject to further penalties,
such as:
o a $50 penalty for each failure to supply your correct TIN
o a civil penalty of $500 if you make a false statement that
results in no backup withholding
o criminal penalties for falsifying information
You also could be subject to backup withholding because you failed to report
interest or dividends on your tax return as required.
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification number
of:
Individual or joint account The individual or individuals
listed on the account
Custodian account of a minor The minor
(Uniform Gifts/Transfers to
Minors Act)
A living trust The grantor-trustee (the person
who puts the money into the
trust)
An irrevocable trust, pension The legal entity (not the
trust or estate personal representative or
trustee, unless no legal entity
is designated in the account
title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or The organization
tax-exempt organization
For details on TIN requirements, ask your financial advisor or local American
Express Financial Advisors office for federal Form W-9, "Request for Taxpayer
Identification Number and Certification."
-25-
<PAGE>
Important: This information is a brief and selective summary of certain federal
tax rules that apply to this Fund. Tax matters are highly individual and
complex, and you should consult a qualified tax advisor about your personal
situation.
How the Fund is organized
Shares
The Fund is owned by its shareholders. The Fund issues shares in three classes -
Class A, Class B and Class Y. Each class has different sales arrangements and
bears different expenses. Each class represents interests in the assets of the
Fund. Par value is one cent per share. Both full and fractional shares can be
issued.
The Fund no longer issues stock certificates.
Voting rights
As a shareholder, you have voting rights over the Fund's management and
fundamental policies. You are entitled to one vote for each share you own.
Shares of the Fund have cumulative voting rights. Each class has exclusive
voting rights with respect to the provisions of the Fund's distribution plan
that pertain to a particular class and other matters for which separate class
voting is appropriate under applicable law.
Shareholder meetings
The Fund does not hold annual shareholder meetings. However, the board members
may call meetings at their discretion, or on demand by holders of 10% or more of
the outstanding shares, to elect or remove board members.
Board members and officers
Shareholders elect a board that oversees the operations of the Fund and chooses
its officers. Its officers are responsible for day-to-day business decisions
based on policies set by the board. The board has named an executive committee
that has authority to act on its behalf between meetings. Board members and
officers serve 47 IDS and IDS Life funds and 15 Master Trust portfolios, except
for William H. Dudley, who does not serve the nine IDS Life funds.
Board members and officers of the Fund
President and interested board member
William R. Pearce
Chairman of the board, Board Services Corporation (provides administrative
services to boards including the boards of the IDS and IDS Life funds and Master
Trust portfolios).
-26-
<PAGE>
Independent board members
H. Brewster Atwater, Jr.
Former chairman and chief executive officer, General Mills, Inc.
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public
Policy Research.
Robert F. Froehlke
Former president of all funds in the IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Melvin R. Laird
Senior counsellor for national and international affairs, The Reader's Digest
Association, Inc.
Alan K. Simpson
Former United States senator for Wyoming.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
Interested board members who are officers and/or employees of AEFC
William H. Dudley
Senior advisor to the chief executive officer, AEFC.
David R. Hubers
President and chief executive officer, AEFC.
John R. Thomas
Senior vice president, AEFC.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Senior vice president, AEFC. Vice president - Investments for the Fund.
Melinda S. Urion
Senior vice president and chief financial officer, AEFC. Treasurer for the Fund.
-27-
<PAGE>
Other officer
Leslie L. Ogg
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the Fund.
Refer to the SAI for the board members' and officers' biographies.
Investment manager
The Fund pays AEFC for managing its assets. Under its Investment Management
Services Agreement, AEFC is paid a fee for these services based on the average
daily net assets of the Fund, as follows:
Assets Annual rate
(billions) at each asset level
First $0.25 0.640%
Next 0.25 0.615
Next 0.25 0.590
Next 0.25 0.565
Next 1.0 0.540
Over 2.0 0.515
This fee may be increased or decreased by a performance adjustment based on a
comparison of performance of Class A shares of the Fund to the Lipper Small
Company Growth Fund Index. The maximum adjustment is 0.12% of the Fund's average
daily net assets on an annual basis.
For the fiscal year ended July 31, 1997, the Fund paid AEFC a total investment
management fee of 0.68% of its average daily net assets. Under the Agreement,
the Fund also pays taxes, brokerage commissions and nonadvisory expenses.
Administrator and transfer agent
The Fund pays AEFC for shareholder accounting and transfer agent services under
two agreements. The first agreement, the Administrative Services Agreement, has
a declining annual rate beginning at 0.06% and decreasing to 0.035% as assets
increase. The second agreement, the Transfer Agency Agreement, has an annual fee
per shareholder account as follows:
o Class A $15
o Class B $16
o Class Y $15
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<PAGE>
Distributor
The Fund has an exclusive distribution agreement with American Express Financial
Advisors, a wholly-owned subsidiary of AEFC. Financial advisors representing
American Express Financial Advisors provide information to investors about
individual investment programs, the Fund and its operations, new account
applications, and exchange and redemption requests. The cost of these services
is paid partially by the Fund's sales charges.
Persons who buy Class A shares pay a sales charge at the time of purchase.
Persons who buy Class B shares are subject to a contingent deferred sales charge
on a redemption in the first six years and pay an asset-based sales charge (also
known as a 12b-1 fee) of 0.75% of the Fund's average daily net assets. Class Y
shares are sold without a sales charge and without an asset-based sales charge.
Financial advisors may receive different compensation for selling Class A, Class
B and Class Y shares. Portions of the sales charge also may be paid to
securities dealers who have sold the Fund's shares or to banks and other
financial institutions. The amounts of those payments range from 0.8% to 4% of
the Fund's offering price depending on the monthly sales volume.
Under a Shareholder Service Agreement, the Fund also pays a fee for service
provided to shareholders by financial advisors and other servicing agents. The
fee is calculated at a rate of 0.175% of average daily net assets for Class A
and Class B shares and 0.10% for Class Y shares.
Total expenses paid by the Fund's Class A shares for the fiscal year ended July
31, 1997, were 1.13% of its average daily net assets. Expenses for Class B and
Class Y were 1.90% and 0.98%, respectively.
About American Express Financial Corporation
General information
The AEFC family of companies offers not only mutual funds but also insurance,
annuities, investment certificates and a broad range of financial management
services.
Besides managing investments for all funds in the IDS MUTUAL FUND GROUP, AEFC
also manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management on July
31, 1997 were more than $170 billion.
American Express Financial Advisors serves individuals and businesses through
its nationwide network of more than 175 offices and more than 8,500 advisors.
-29-
<PAGE>
Other AEFC subsidiaries provide investment management and related services for
pension, profit sharing, employee savings and endowment funds of businesses and
institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a
wholly-owned subsidiary of American Express Company (American Express), a
financial services company with headquarters at American Express Tower, World
Financial Center, New York, NY 10285.
The Fund may pay brokerage commissions to broker-dealer affiliates of AEFC.
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<PAGE>
Appendix
Descriptions of derivative instruments
What follows are brief descriptions of derivative instruments the Fund may use.
At various times the Fund may use some or all of these instruments and is not
limited to these instruments. It may use other similar types of instruments if
they are consistent with the Fund's investment goal and policies. For more
information on these instruments, see the SAI.
Options and futures contracts. An option is an agreement to buy or sell an
instrument at a set price during a certain period of time. A futures contract is
an agreement to buy or sell an instrument for a set price on a future date. The
Fund may buy and sell options and futures contracts to manage its exposure to
changing interest rates, security prices and currency exchange rates. Options
and futures may be used to hedge the Fund's investments against price
fluctuations or to increase market exposure.
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.
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.
-31-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS DISCOVERY FUND
Sept. 29, 1997
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
Annual Report which may be obtained from your American Express financial advisor
or by writing to American Express Shareholder Service, P.O. Box 534,
Minneapolis, MN 55440-0534.
This SAI is dated Sept. 29, 1997, and it is to be used with the
prospectus dated Sept. 29, 1997, and the Annual Report for the
fiscal year ended July 31, 1997.
<PAGE>
IDS Discovery Fund
TABLE OF CONTENTS
Goal and Investment Policies....................See Prospectus
Additional Investment Policies...............................p. 3
Security Transactions........................................p. 6
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation.......................p. 9
Performance Information......................................p. 9
Valuing Fund Shares..........................................p. 10
Investing in the Fund........................................p. 12
Redeeming Shares.............................................p. 16
Pay-out Plans................................................p. 17
Taxes........................................................p. 18
Agreements...................................................p. 19
Organizational Information...................................p. 23
Board Members and Officers...................................p. 23
Compensation for Board Members...............................p. 27
Independent Auditors.........................................p. 27
Financial Statements..........................See Annual Report
Prospectus...................................................p. 28
Appendix A: Description of Bond Ratings.....................p. 29
Appendix B: Foreign Currency Transactions...................p. 32
Appendix C: Options and Stock Index Futures Contracts.......p. 37
Appendix D: Mortgage-Backed Securities......................p. 44
Appendix E: Dollar-Cost Averaging...........................p. 45
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IDS Discovery Fund
ADDITIONAL INVESTMENT POLICIES
These are investment policies in addition to those presented in the prospectus.
The policies below are fundamental policies of 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:
'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.
'Borrow money or property, except as a temporary measure for extraordinary or
emergency purposes, in an amount not exceeding one-third of the market value of
its total assets (including borrowings) less liabilities (other than borrowings)
immediately after the borrowing. The Fund has not borrowed in the past and has
no present intention to borrow.
'Make cash loans if the total commitment amount exceeds 5% of the Fund's total
assets.
'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.
'Purchase more than 10% of the outstanding voting securities of an
issuer.
'Invest more than 5% of its total assets in securities of any one company,
government or political subdivision thereof, except the limitation will not
apply to investments in securities issued by the U.S. government, its agencies
or instrumentalities, and except that up to 25% of the Fund's total assets may
be invested without regard to this 5% limitation.
'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.
'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 financial instruments (such as options and futures contracts)
or from investing in securities or other instruments backed by, or whose value
is derived from, physical commodities.
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<PAGE>
IDS Discovery Fund
'Make a loan of any part of its assets to American Express Financial Corporation
(AEFC), to the board members and officers of AEFC or to its own board members
and officers.
'Purchase securities of an issuer if the board members and officers of the Fund
and AEFC hold more than a certain percentage of the issuer's outstanding
securities. If the holdings of all board members and officers of the Fund and of
AEFC who own more than 0.5% of an issuer's securities are added together, and if
in total they own more than 5%, the Fund will not purchase securities of that
issuer.
'Lend Fund securities in excess of 30% of its net assets. 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. A loan will not be made unless the
investment manager believes the opportunity for additional income outweighs the
risks.
Unless changed by the board, 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.
'Pledge or mortgage its assets beyond 15% of total assets. If the Fund were ever
to do so, valuation of the pledged or mortgaged assets would be based on market
values. For purposes of this policy, collateral arrangements for margin deposits
on futures contracts are not deemed to be a pledge of assets.
'Invest more than 5% of its total assets in securities of companies, including
any predecessors, that have a record of less than three years continuous
operations.
'Invest more than 10% of its total assets in securities of
investment companies.
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or
mineral leases.
'Invest more than 5% of its net assets in warrants.
-4-
<PAGE>
IDS Discovery Fund
'Invest more than 10% of its net assets in securities and other instruments that
are illiquid. For purposes of this policy illiquid securities include some
privately placed securities, public securities and Rule 144A securities that for
one reason or another may no longer have a readily available market, repurchase
agreements with maturities greater than seven days, non-negotiable fixed-time
deposits and over-the-counter options.
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond normal settlement time (when-issued securities or forward
commitments). Under normal market conditions, the Fund does not intend to commit
more than 5% of its total assets to these practices. The Fund does not pay for
the securities or receive dividends or interest on them until the contractual
settlement date. The Fund will designate cash or liquid high-grade debt
securities at least equal in value to its commitments to purchase the
securities. When-issued securities or forward commitments are subject to market
fluctuations and they may affect the fund's total assets the same as owned
securities.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal only fixed mortgage-backed securities (IOs and POs) issued by the U.S.
government or its agencies and instrumentalities, the investment manager, under
guidelines established by the board, will consider any relevant factors
including frequency of trades, the number of dealers willing to purchase or sell
the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board, will evaluate
relevant factors such as the issuer and the size and nature of its commercial
paper programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and settlement procedures
for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The cash-equivalent investments the Fund may use are short-term
U.S. and Canadian government securities and negotiable certificates of deposit,
non-negotiable fixed-time deposits, bankers' acceptances and letters of credit
of banks or savings and loan associations having capital, surplus and undivided
profits (as of the date of its most recently published annual financial
statements) in excess of $100 million (or the equivalent in the instance of a
foreign branch of a U.S. bank) at the date of investment. Any cash-equivalent
investment in foreign securities will be subject to the limitations on foreign
investments described in the prospectus. The Fund also may purchase short-term
corporate notes and obligations rated in the top two classifications by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's
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<PAGE>
IDS Discovery Fund
Corporation (S&P) or the equivalent and may use repurchase agreements with
broker-dealers registered under the Securities Exchange Act of 1934 and with
commercial banks. A risk of a repurchase agreement is that if the seller seeks
the protection of the bankruptcy laws, the Fund's ability to liquidate the
security involved could be impaired.
The Fund may invest in foreign securities that are traded in the form of
American Depositary Receipts (ADRs). ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities of
foreign issuers. European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs) are receipts typically issued by foreign banks or trust
companies, evidencing ownership of underlying securities issued by either a
foreign or U.S. issuer. Generally Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary Receipts also
involve the risks of other investments in foreign securities.
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.
For a discussion of bond ratings, see Appendix A. For a discussion about foreign
currency transactions, see Appendix B. For a discussion on options and stock
index futures contracts, see Appendix C. For a discussion on mortgage-backed
securities, see Appendix D.
SECURITY TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's investment goal and policies, which securities will
be purchased, held or sold. In determining where the buy and sell orders are to
be placed, AEFC has been directed to use its best efforts to obtain the best
available price and the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions,
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.
AEFC has a strict Code of Ethics that prohibits its affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for any fund in the IDS MUTUAL FUND
GROUP. AEFC carefully monitors compliance with its Code of Ethics.
-6-
<PAGE>
IDS Discovery Fund
On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a policy authorizing AEFC to do so to the extent authorized by
law, if AEFC determines, in good faith, that such commission is reasonable in
relation to the value of the brokerage or research services provided by a broker
or dealer, viewed either in the light of that transaction or AEFC's overall
responsibilities to the funds in the IDS MUTUAL FUND GROUP and other accounts
for which it acts as investment advisor.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management and trading functions
and other services to the extent permitted under an interpretation by the SEC.
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 it is necessary to do
business with a number of brokerage firms on a continuing basis to obtain such
services as the handling of large orders, the willingness of a broker to risk
its own money by taking a position in a security, and the specialized handling
of a particular group of securities that only certain brokers may be able to
offer. As a result of this arrangement, some portfolio transactions may not be
effected at the lowest commission, but AEFC believes it may obtain better
overall execution. AEFC has assured
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<PAGE>
IDS Discovery Fund
the Fund that under all three procedures the amount of commission paid will be
reasonable and competitive in relation to the value of the brokerage services
performed or research provided.
All other transactions shall be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by AEFC in providing advice to all the funds
in the IDS MUTUAL FUND GROUP even though it is not possible to relate the
benefits to any particular fund or account.
Each investment decision made for the Fund is made independently from any
decision made for another fund in the IDS MUTUAL FUND GROUP or other accounts
advised by AEFC or any AEFC subsidiary. When the Fund buys or sells the same
security as another 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. AEFC has assured the Fund it
will continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency and research services.
The Fund paid total brokerage commissions of $2,154,157 for the fiscal year
ended July 31, 1997, $3,297,943 for the fiscal year 1996, and $2,182,719 for the
fiscal year 1995. Substantially all firms through whom transactions were
executed provide research services.
In fiscal year 1997, transactions amounting to $663,000,000 on which $36,150 in
commissions were imputed or paid, were specifically directed to firms in
exchange for research services.
As of the fiscal year ended July 31, 1997, the Fund held no securities of its
regular brokers or dealers or of the parents of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities.
The portfolio turnover rate was 153% in the fiscal year ended July 31, 1997, and
179% in fiscal year 1996. Higher turnover rates may result in higher brokerage
expenses.
-8-
<PAGE>
IDS Discovery Fund
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN
EXPRESS FINANCIAL CORPORATION
Affiliates of American Express Company (American Express) (of which AEFC is a
wholly-owned subsidiary) may engage in brokerage and other securities
transactions on behalf of the Fund according to procedures adopted by that
Fund's board and to the extent consistent with applicable provisions of the
federal securities laws. AEFC will use an American Express affiliate only if (i)
AEFC determines that the 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.
AEFC may direct brokerage to compensate an affiliate. AEFC will receive research
on South Africa from New Africa Advisors, a wholly-owned subsidiary of Sloan
Financial Group. AEFC owns 100% of IDS Capital Holdings Inc. which in turn owns
40% of Sloan Financial Group. New Africa Advisors will send research to AEFC and
in turn AEFC will direct trades to a particular broker. The broker will have an
agreement to pay New Africa Advisors. All transactions will be on a best
execution basis. Compensation received will be reasonable for the services
rendered.
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>
For the Fiscal Year Ended July 31,
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Aggregate Percent of Aggregate Aggregate
Dollar Aggregate Dollar Dollar Dollar
Amount of Percent of Amount of Amount of Amount of
Nature Commissions Aggregate Transactions Commissions Commissions
of Paid to Brokerage Involving Payment Paid to Paid to
Broker Affiliation Broker Commissions of Commissions Broker Broker
American (1) $254,844 11.83% 13.53% $232,645 $146,985
Enterprise
Investment
Services Inc.
(1) Wholly-owned subsidiary of AEFC.
</TABLE>
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past performance.
Average annual total return quotations used by the Fund are based on
standardized methods of computing performance as required by the SEC. An
explanation of the methods used by the Fund to compute performance follows
below.
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<PAGE>
IDS Discovery Fund
Average annual total return
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)
n
= ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment, made
at the beginning of a period, at the end of the period (or
fractional portion thereof)
Aggregate total return
The Fund may calculate aggregate total return for a class for certain periods
representing the cumulative change in the value of an investment in the Fund
over a specified period of time according to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, Donoghue's Money Market Fund Report, Financial
Services Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster,
Newsweek, The New York Times, Personal Investor, Stanger Report, Sylvia Porter's
Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal
and Wiesenberger Investment Companies Service.
VALUING FUND SHARES
The value of an individual share for each class is determined by
using the net asset value before shareholder transactions for the
day. On Aug. 1, 1997, the first business day following the end of
the fiscal year, the computation looked like this:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net assets before Shares outstanding Net asset value
shareholder transactions at end of previous day of one share
Class A $903,377,204 divided by 69,437,141 equals $13.011
Class B 100,805,131 7,869,253 12.809
Class Y 72,082,639 5,536,301 13.019
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</TABLE>
<PAGE>
IDS Discovery Fund
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):
'Securities, except bonds other than convertibles, traded on a securities
exchange for which a last-quoted sales price is readily available are valued at
the last-quoted sales price on the exchange where such security is primarily
traded.
'Securities traded on a securities exchange for which a last-quoted sales price
is not readily available are valued at the mean of the closing bid and asked
prices, looking first to the bid and asked prices on the exchange where the
security is primarily traded and, if none exist, to the over-the-counter market.
'Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
'Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities traded
over-the-counter but not included in the NASDAQ National Market System are
valued at the mean of the closing bid and asked prices.
'Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
'Foreign securities traded outside the United States are generally valued as of
the time their trading is complete, which is usually different from the close of
the Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at the current rate of exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange that will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, these securities will be valued at their
fair value according to procedures decided upon in good faith by the board.
'Short-term securities maturing more than 60 days from the valuation date are
valued at the readily available market price or approximate market value based
on current interest rates. Short- term securities maturing in 60 days or less
that originally had maturities of more than 60 days at acquisition date are
valued at amortized cost using the market value on the 61st day before maturity.
Short-term securities maturing in 60 days or less at acquisition date are valued
at amortized cost. Amortized cost is an approximation of market value determined
by systematically increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium, so that the
carrying value is equal to maturity value on the maturity date.
-11-
<PAGE>
IDS Discovery Fund
'Securities without a readily available market price, bonds other than
convertibles and other assets are valued at fair value as determined in good
faith by the board. The board is responsible for selecting methods it believes
provide fair value. When possible, bonds are valued by a pricing service
independent from the 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.
The Exchange, AEFC and the Fund will be closed on the following
holidays: New Year's Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
INVESTING IN THE FUND
Sales Charge
Shares of the Fund are sold at the public offering price determined at the close
of business on the day an application is accepted. The public offering price is
the net asset value of one share plus a sales charge, if applicable. For Class B
and Class Y, there is no initial sales charge so the public offering price is
the same as the net asset value. For Class A, the public offering price for an
investment of less than $50,000, made Aug. 1, 1997 was determined by dividing
the net asset value of one share, $13.011, by 0.95 (1.00-0.05 for a maximum 5%
sales charge) for a public offering price of $13.70. The sales charge is paid to
American Express Financial Advisors by the person buying the shares.
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
Within each increment,
sales charge as a
percentage of:
Public Net
Amount of Investment Offering Price Amount Invested
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
Sales charges on an investment greater than $50,000 and less than $1,000,000 are
calculated for each increment separately and then totaled. The resulting total
sales charge, expressed as a percentage of the public offering price and of the
net amount invested, will vary depending on the proportion of the investment at
different sales charge levels.
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<PAGE>
IDS Discovery Fund
For example, compare an investment of $60,000 with an investment of $85,000. The
$60,000 investment is composed of $50,000 that incurs a sales charge of $2,500
(5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x
$10,000). The total sales charge of $2,950 is 4.92% of the public offering price
and 5.17% of the net amount invested.
In the case of the $85,000 investment, the first $50,000 also incurs a sales
charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575
(4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public
offering price and 5.04% of the net amount invested.
The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
On total investment, sales
charge as a percentage of
Public Net
Offering Price Amount Invested
Amount of Investment ranges from:
First $ 50,000 5.00% 5.26%
More than 50,000 to 100,000 5.00-4.50 5.26-4.71
More than 100,000 to 500,000 4.50-3.80 4.71-3.95
More than 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
The initial sales charge is waived for certain qualified plans that meet the
requirements described in the prospectus. Participants in these qualified plans
may be subject to a deferred sales charge on certain redemptions. The deferred
sales charge on certain redemptions will be waived if the redemption is a result
of a participant's death, disability, retirement, attaining age 59 1/2, loans or
hardship withdrawals. The deferred sales charge varies depending on the number
of participants in the qualified plan and total plan assets as follows:
Deferred Sales Charge
Number of Participants
Total Plan Assets 1-99 100 or more
Less than $1 million 4% 0%
$1 million or more 0% 0%
- ---------------------------------------------------------
Class A - Reducing the Sales Charge
Sales charges are based on the total amount of your investments in the Fund. The
amount of all prior investments plus any new purchase is referred to as your
"total amount invested." For example, suppose you have made an investment of
$20,000 and later
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IDS Discovery Fund
decide to invest $40,000 more. Your total amount invested would be $60,000. As a
result, $10,000 of your $40,000 investment qualifies for the lower 4.5% sales
charge that applies to investments of more than $50,000 and up to $100,000.
The total amount invested includes any shares held in the Fund in the name of a
member of your primary household group. (The primary household group consists of
accounts in any ownership for spouses or domestic partners and their unmarried
children under 21. Domestic partners are individuals who maintain a shared
primary residence and have joint property or other insurable interests.) For
instance, if your spouse already has invested $20,000 and you want to invest
$40,000, your total amount invested will be $60,000 and therefore you will pay
the lower charge of 4.5% on $10,000 of the $40,000.
Until a spouse remarries, the sales charge is waived for spouses and unmarried
children under 21 of deceased board members, officers or employees of the Fund
or AEFC or its subsidiaries and deceased advisors.
The total amount invested also includes any investment you or your immediate
family already have in the other publicly offered funds in the IDS MUTUAL FUND
GROUP where the investment is subject to a sales charge. For example, suppose
you already have an investment of $30,000 in another IDS fund. If you invest
$40,000 more in this Fund, your total amount invested in the funds will be
$70,000 and therefore $20,000 of your $40,000 investment will incur a 4.5% sales
charge.
Finally, Individual Retirement Account (IRA) purchases, or other employee
benefit plan purchases made through a payroll deduction plan or through a plan
sponsored by an employer, association of employers, employee organization or
other similar entity, may be added together to reduce sales charges for shares
purchased through that plan.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a LOI. The agreement can start at any
time and will remain in effect for 13 months. Your investment will be charged
normal sales charges until you have invested $1 million. At that time, your
account will be credited with the sales charges previously paid. Class A
investments made prior to signing an LOI may be used to reach the $1 million
total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will
not adjust for sales charges on investments made prior to the signing of the
LOI. If you do not invest $1 million by the end of 13 months, there is no
penalty, you'll just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
Here's an example. You file a LOI to invest $1 million and make an investment of
$100,000 at that time. You pay the normal 5% sales charge on the first $50,000
and 4.5% sales charge on the next
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IDS Discovery Fund
$50,000 of this investment. Let's say you make a second investment of $900,000
(bringing the total up to $1 million) one month before the 13-month period is
up. On the date that you bring your total to $1 million, AEFC makes an
adjustment to your account. The adjustment is made by crediting your account
with additional shares, in an amount equivalent to the sales charge previously
paid.
Systematic Investment Programs
After you make your initial investment of $2,000 or more, you can arrange to
make additional payments of $100 or more on a regular basis. These minimums do
not apply to all systematic investment programs. You decide how often to make
payments - monthly, quarterly, or semiannually. You are not obligated to make
any payments. You can omit payments or discontinue the investment program
altogether. The Fund also can change the program or end it at any time. If there
is no obligation, why do it? Putting money aside is an important part of
financial planning. With a systematic investment program, you have a goal to
work for.
How does this work? Your regular investment amount will purchase more shares
when the net asset value per share decreases, and fewer shares when the net
asset value per share increases. Each purchase is a separate transaction. After
each purchase your new shares will be added to your account. Shares bought
through these programs are exactly the same as any other fund shares. They can
be bought and sold at any time. A systematic investment program is not an option
or an absolute right to buy shares.
The systematic investment program itself cannot ensure a profit, nor can it
protect against a loss in a declining market. If you decide to discontinue the
program and redeem your shares when their net asset value is less than what you
paid for them, you will incur a loss.
For a discussion on dollar-cost averaging, see Appendix E.
Automatic Directed Dividends
Dividends, including capital gain distributions, paid by another fund in the IDS
MUTUAL FUND GROUP subject to a sales charge, may be used to automatically
purchase shares in the same class of this Fund without paying a sales charge.
Dividends may be directed to existing accounts only. Dividends declared by a
fund are exchanged to this Fund the following day. Dividends can be exchanged
into the same class of another fund in the IDS MUTUAL FUND GROUP but cannot be
split to make purchases in two or more funds. Automatic directed dividends are
available between accounts of any ownership except:
Between a non-custodial account and an IRA, or 401(k) plan account or other
qualified retirement account of which American Express Trust Company acts as
custodian;
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IDS Discovery Fund
Between two American Express Trust Company custodial accounts with different
owners (for example, you may not exchange dividends from your IRA to the IRA of
your spouse);
Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA
or UTMA accounts with identical ownership.
The Fund's investment goal is described in its prospectus along with other
information, including fees and expense ratios. Before exchanging dividends into
another fund, you should read that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an explanation of
redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net asset value,
stop accepting payments for purchase of shares or suspend the duty of the Fund
to redeem shares for more than seven days. Such emergency situations would occur
if:
'The Exchange closes for reasons other than the usual weekend and
holiday closings or trading on the Exchange is restricted, or
'Disposal of the 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
'The SEC, under the provisions of the Investment Company Act of 1940 (the 1940
Act), as amended, declares a period of emergency to exist.
Should the Fund stop selling shares, the board may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all shareholders.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to 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
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IDS Discovery Fund
circumstances, the securities distributed would be valued as set forth in the
prospectus. Should the Fund distribute securities, a shareholder may incur
brokerage fees or other transaction costs in converting the securities to cash.
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment in regular
installments. If you redeem Class B shares you may be subject to a contingent
deferred sales charge as discussed in the prospectus. While the plans differ on
how the pay-out is figured, they all are based on the redemption of your
investment. Net investment income dividends and any capital gain distributions
will automatically be reinvested, unless you elect to receive them in cash. If
you are redeeming a tax-qualified plan account for which American Express Trust
Company acts as custodian, you can elect to receive your dividends and other
distributions in cash when permitted by law. If you redeem an IRA or a qualified
retirement account, certain restrictions, federal tax penalties and special
federal income tax reporting requirements may apply. You should consult your tax
advisor about this complex area of the tax law.
Applications for a systematic investment in a class of the Fund
subject to a sales charge normally will not be accepted while a
pay-out plan for any of those funds is in effect. Occasional
investments, however, may be accepted.
To start any of these plans, please write American Express Shareholder Service,
P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial
Advisors Telephone Transaction Service at 800-437-3133 (National/Minnesota) or
612-671-3800 (Mpls./St. Paul). Your authorization must be received in the
Minneapolis headquarters at least five days before the date you want your
payments to begin. The initial payment must be at least $50. Payments will be
made on a monthly, bimonthly, quarterly, semiannual or annual basis. Your choice
is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you'll have to send in a
separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.
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IDS Discovery Fund
Plan #2: Redemption of a fixed number of shares
If you choose this plan, a fixed number of shares will be redeemed for each
payment and that amount will be sent to you. The length of time these payments
continue is based on the number of shares in your account.
Plan #3: Redemption of a fixed dollar amount
If you decide on a fixed dollar amount, whatever number of shares is necessary
to make the payment will be redeemed in regular installments until the account
is closed.
Plan #4: Redemption of a percentage of net asset value
Payments are made based on a fixed percentage of the net asset value of the
shares in the account computed on the day of each payment. Percentages range
from 0.25% to 0.75%. For example, if you are on this plan and arrange to take
0.5% each month, you will get $50 if the value of your account is $10,000 on the
payment date.
TAXES
If you buy shares in the Fund and then exchange into another fund, it is
considered a sale and subsequent purchase of shares. Under the tax laws, if this
exchange is done within 91 days, any sales charge waived on Class A shares on a
subsequent purchase of shares applies to the new shares acquired in the
exchange. Therefore, you cannot create a tax loss or reduce a tax gain
attributable to the sales charge when exchanging shares within 91 days.
Retirement Accounts
If you have a nonqualified investment in the Fund and you wish to move part or
all of those shares to an IRA or qualified retirement account in the Fund, you
can do so without paying a sales charge. However, this type of exchange is
considered a sale of shares and may result in a gain or loss for tax purposes.
In addition, this type of exchange may result in an excess contribution under
IRA or qualified plan regulations if the amount exchanged plus the amount of the
initial sales charge applied to the amount exchanged exceeds annual contribution
limitations. For example: If you were to exchange $2,000 in Class A shares from
a nonqualified account to an IRA without considering the 5% ($100) initial sales
charge applicable to that $2,000, you may be deemed to have exceeded current IRA
annual contribution limitations. You should consult your tax advisor for further
details about this complex subject.
Net investment income dividends received should be treated as dividend income
for federal income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities. For
the fiscal year ended July 31, 1997, 5.18% of the Fund's net investment income
dividends qualified for the corporate deduction.
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IDS Discovery Fund
Capital gain distributions received by individual and corporate shareholders, if
any, should be treated as long-term capital gains regardless of how long they
owned their shares. Short-term capital gains earned by the Fund are paid to
shareholders as part of their ordinary income dividend and are taxable.
Under federal tax law, by the end of a calendar year the Fund must declare and
pay dividends representing 98% of ordinary income for that calendar year and 98%
of net capital gains (both long-term and short-term) for the 12-month period
ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.
The Fund may be subject to U.S. taxes resulting from holdings in a passive
foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or
more of its gross income for the taxable year is passive income or if 50% or
more of the average value of its assets consists of assets that produce or could
produce passive income.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state and local income tax laws to Fund distributions.
AGREEMENTS
Investment Management Services Agreement
The Fund has an Investment Management Services Agreement with AEFC. For its
services, AEFC is paid a fee based on the following schedule:
Assets Annual rate at
(billions) each asset level
First $0.25 0.640%
Next 0.25 0.615
Next 0.25 0.590
Next 0.25 0.565
Next 1.0 0.540
Over 2.0 0.515
On July 31, 1997, the daily rate applied to the Fund's net assets was equal to
0.598% 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
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IDS Discovery Fund
and the change in the Lipper Small Company Growth Fund Index (Index). The
performance of one share of the Fund is measured by computing the percentage
difference between the opening and closing net asset value of one 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 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 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. The adjustment increased the fee by $680,977 for
the fiscal year ended July 31, 1997.
The management fee is paid monthly. Under the agreement, the total amount paid
was $6,222,122 for the fiscal year ended July 31, 1997, $4,068,196 for fiscal
year 1996, and $3,600,724 for fiscal year 1995.
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;
consultants' fees; compensation of board members, officers and employees;
corporate filing fees; organizational expenses; expenses incurred in connection
with lending securities of the Fund; and expenses properly payable by the Fund,
approved by the board. Under the agreement, the Fund paid nonadvisory expenses
of $482,959 for the fiscal year ended July 31, 1997, $499,808 for fiscal year
1996, and $587,126 for fiscal year 1995.
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IDS Discovery Fund
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
Assets Annual rate
(billions) each asset level
First $0.25 0.060%
Next 0.25 0.055
Next 0.25 0.050
Next 0.25 0.045
Next 1.0 0.040
Over 2.0 0.035
On July 31, 1997, the daily rate applied to the Fund's net assets was equal to
0.052% 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 $494,961 for the fiscal year ended July 31, 1997.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with AEFC. This agreement governs
AEFC's responsibility for administering and/or performing transfer agent
functions, for acting as service agent in connection with dividend and
distribution functions and for performing shareholder account administration
agent functions in connection with the issuance, exchange and redemption or
repurchase of the Fund's shares. Under the agreement, AEFC will earn a fee from
the Fund determined by multiplying the number of shareholder accounts at the end
of the day by a rate determined for each class per year and dividing by the
number of days in the year. The rate for Class A and Class Y is $15 per year and
for Class B is $16 per year. The fees paid to AEFC may be changed from time to
time upon agreement of the parties without shareholder approval. Under the
agreement, the Fund paid fees of $1,500,668 for the fiscal year ended July 31,
1997.
Distribution Agreement
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to American Express Financial Advisors daily. These charges
amounted to $1,703,437 for the fiscal year ended July 31, 1997. After paying
commissions to personal financial advisors, and other expenses, the amount
retained was $161,079. The amounts were $1,896,604 and $296,642 for fiscal year
1996, and $3,249,265 and $1,019,013 for fiscal year 1995.
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IDS Discovery Fund
Shareholder Service Agreement
The Fund pays a fee for service provided to shareholders by financial advisors
and other servicing agents. The fee is calculated at a rate of 0.175% of average
daily net assets for Class A and Class B and 0.10% for Class Y.
Plan and Agreement of Distribution
For Class B shares, to help American Express Financial Advisors defray the cost
of distribution and servicing, not covered by the sales charges received under
the Distribution Agreement, the Fund and American Express Financial Advisors
entered into a Plan and Agreement of Distribution (Plan). These costs cover
almost all aspects of distributing the Fund's shares except compensation to the
sales force. A substantial portion of the costs are not specifically identified
to any one fund in the IDS MUTUAL FUND GROUP. Under the Plan, American Express
Financial Advisors is paid a fee at an annual rate of 0.75% of the Fund's
average daily net assets attributable to Class B shares.
The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At least
quarterly, the board must review written reports concerning the amounts expended
under the Plan and the purposes for which such expenditures were made. The Plan
and any agreement related to it may be terminated at any time by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the Fund's Class B shares or by American Express Financial
Advisors. The Plan (or any agreement related to it) will terminate in the event
of its assignment, as that term is defined in the 1940 Act, as amended. The Plan
may not be amended to increase the amount to be spent for distribution without
shareholder approval, and all material amendments to the Plan must be approved
by a majority of the board members, including a majority of the board members
who are not interested persons of the Fund and who do not have a financial
interest in the operation of the Plan or any agreement related to it. The
selection and nomination of disinterested board members is the responsibility of
the other disinterested board members. No board member who is not an interested
person, has any direct or indirect financial interest in the operation of the
Plan or any related agreement. For the fiscal year ended July 31, 1997, under
the agreement, the Fund paid fees of $524,729.
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
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IDS Discovery Fund
charge per transaction in addition to reimbursing the custodian's
out-of-pocket expenses.
The custodian has entered into a sub-custodian arrangement with the Morgan
Stanley Trust Company (Morgan Stanley), One Pierrepont Plaza, Eighth Floor,
Brooklyn, NY 11201-2775. As part of this arrangement, securities purchased
outside the United States are maintained in the custody of various foreign
branches of Morgan Stanley or in such other financial institutions as may be
permitted by law and by the Fund's sub-custodian agreement.
Total fees and expenses
The Fund paid total fees and nonadvisory expenses, net of earnings credits, of
$10,711,290 for the fiscal year ended July 31, 1997.
ORGANIZATIONAL INFORMATION
The Fund is a diversified, open-end management investment company, as defined in
the Investment Company Act of 1940. Originally incorporated on April 29, 1981 in
Nevada, the Fund changed its state of incorporation on June 13, 1986 by merging
into a Minnesota corporation incorporated on April 7, 1986. The Fund
headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-
3268.
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 47 IDS and IDS Life funds (except for William H. Dudley, who does
not serve on the nine IDS Life fund boards.)
All shares have cumulative voting rights with respect to the election of board
members.
H. Brewster Atwater, Jr.
Born in 1931
4900 IDS Tower
Minneapolis, MN
Former chairman and chief executive officer, General Mills, Inc.
Director, Merck & Co., Inc. and Darden Restaurants, Inc.
Lynne V. Cheney'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of
the Humanities. Director, The Reader's Digest Association Inc.,
Lockheed-Martin, Union Pacific Resources, and FPL Group, Inc.
(holding company for Florida Power and Light).
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IDS Discovery Fund
William H. Dudley**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer, AEFC.
Robert F. Froehlke+
Born in 1922
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP.
Director, the ICI Mutual Insurance Co., Institute for Defense
Analyses, Marshall Erdman and Associates, Inc. (architectural
engineering) and Public Oversight Board of the American Institute
of Certified Public Accountants.
David R. Hubers+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President and chief executive officer of AEFC since August 1993, and director of
AEFC. Previously, senior vice president, finance and chief financial officer of
AEFC.
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law
firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
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IDS Discovery Fund
Melvin R. Laird
Born in 1922
Reader's Digest Association, Inc.
1730 Rhode Island Ave., N.W.
Washington, D.C.
Senior counsellor for national and international affairs, The Reader's Digest
Association, Inc. Former nine-term U.S. Congressman, U.S. Secretary of Defense
and Presidential Counsellor. Director, Metropolitan Life Insurance Co., The
Reader's Digest Association, Inc., Science Applications International Corp.,
Wallace Reader's Digest Funds and Public Oversight Board (SEC Practice Section,
American Institute of Certified Public Accountants).
William R. Pearce+*
Born in 1927
901 S. Marquette Ave.
Minneapolis, MN
Chairman of the board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
Alan K. Simpson'
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former
Assistant Republican Leader, U.S. Senate. Director, PacifiCorp
(electric power).
Edson W. Spencer+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman
of the board and chief executive officer, Honeywell Inc. Director,
Boise Cascade Corporation (forest products). Member of
International Advisory Council of NEC (Japan).
John R. Thomas**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of AEFC.
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IDS Discovery Fund
Wheelock Whitney+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company
(air cleaners & mufflers) and
General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer and employee of the Fund.
**Interested person by reason of being an officer, board member, employee and/or
shareholder of AEFC or American Express.
The board also has appointed officers who are responsible for day-to-day
business decisions based on policies it has established.
In addition to Mr. Pearce, who is president, the Fund's other officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the Fund.
Officers who also are officers and/or employees of AEFC
Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.
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IDS Discovery Fund
Melinda S. Urion
Born in 1953
IDS Tower 10
Minneapolis, MN
Director, senior vice president and chief financial officer of AEFC. Director,
executive vice president and controller of IDS Life Insurance Company. Treasurer
for the Fund.
COMPENSATION FOR FUND BOARD MEMBERS
Members of the board who are not officers of the Fund or AEFC receive an annual
fee of $600, and the chair of the Contracts Committee receives an additional
$86. Board members receive a $50 per day attendance fee for board meetings. The
attendance fee for meetings of the Contracts and Investment Review Committees is
$50; for meetings of the Audit Committee and Personnel Committee $25 and for
traveling from out-of-state $6. Expenses for attending meetings are reimbursed.
During the fiscal year ended July 31, 1997, the members of the board, for
attending up to 32 meetings, received the following compensation:
<TABLE>
<CAPTION>
Compensation Table
<S> <C> <C> <C> <C>
Pension or Estimated Total cash compensation
Aggregate Retirement annual from the IDS MUTUAL FUND
compensation benefits accrued benefit upon GROUP and the Preferred
Board member from the Fund as Fund expenses retirement Master Trust Group
H. Brewster Atwater, Jr. $1,156 $0 $0 $78,900
(part of year)
Lynne V. Cheney 1,406 0 0 97,400
Robert F. Froehlke 1,539 0 0 104,600
Heinz F. Hutter 1,574 0 0 106,300
Anne P. Jones 1,643 0 0 111,600
Melvin R. Laird 1,422 0 0 98,600
Alan K. Simpson 830 0 0 58,200
(part of year)
Edson W. Spencer 1,935 0 0 127,800
Wheelock Whitney 1,624 0 0 109,500
C. Angus Wurtele 1,649 0 0 110,700
</TABLE>
On July 31, 1997, 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 to shareholders for the
fiscal year ended July 31, 1997, were audited by independent auditors, KPMG Peat
Marwick LLP, 4200 Norwest Center, 90 S. Seventh St., Minneapolis, MN 55402-3900.
The independent auditors also provide other accounting and tax-related services
as requested by the Fund.
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IDS Discovery Fund
FINANCIAL STATEMENTS
The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report to shareholders for the fiscal year ended July
31, 1997, pursuant to Section 30(d) of the Investment Company Act of 1940, as
amended, are hereby incorporated in this SAI by reference. No other portion of
the Annual Report, however, is incorporated by reference.
PROSPECTUS
The prospectus for IDS Discovery Fund, dated Sept. 29, 1997, is hereby
incorporated in this SAI by reference.
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IDS Discovery Fund
APPENDIX A
DESCRIPTION OF BOND RATINGS
These ratings concern the quality of the issuing corporation. They are not an
opinion of the market value of the security. Such ratings are opinions on
whether the principal and interest will be repaid when due. A security's rating
may change which could affect its price.
Ratings by Moody's Investors Service, Inc. are Aaa, Aa, A, Baa, Ba,
B, Caa, Ca, and C.
Bonds rated:
Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edged." 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 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 which make the long-term risk
appear somewhat larger than the Aaa securities.
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 which suggest a
susceptibility to impairment some time in the future.
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 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 generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
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IDS Discovery Fund
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 represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
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.
Ratings by Standard & Poor's Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C
and D.
AAA has the highest rating assigned by S&P. Capacity to pay interest and repay
principal is extremely strong.
AA has a very strong capacity to pay interest and repay principal and differs
from the highest rated issues only in small degree.
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.
BBB is regarded as having 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.
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 which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating category is also used
for debt subordinated to senior debt that is assigned an actual or implied BBB-
rating.
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 is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB- rating.
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 is also used for debt
subordinated to senior debt that is assigned an actual or implied B or B-
rating.
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IDS Discovery Fund
CC typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC rating.
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.
D is in payment default. The D rating category is used when interest payments or
principal payments are not made on the due date, 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.
Non-rated securities will be considered for investment when they possess a risk
comparable to that of rated securities consistent with the Fund's objectives and
policies. When assessing the risk involved in each non-rated security, the Fund
will consider the financial condition of the issuer or the protection afforded
by the terms of the security.
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IDS Discovery Fund
APPENDIX B
FOREIGN CURRENCY TRANSACTIONS
Since investments in foreign countries usually involve currencies of foreign
countries, and since the Fund may hold cash and cash-equivalent investments in
foreign currencies, 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.
Spot Rates and Forward Contracts. 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. A forward contract involves an obligation to buy or sell a specific
currency at a future date, which may be any fixed number of days from the
contract date, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements. No commissions are charged at any stage
for trades.
The 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 suffer a substantial
decline against another currency. It may enter into a forward contract to sell,
for a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. The precise matching of forward contract amounts and the value of
securities involved generally will not be possible since the future value of
such securities in foreign currencies more than likely will change between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
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.
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IDS Discovery Fund
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 a 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 such
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 such forward
contracts tend to minimize the risk of loss due to a decline in value of hedged
currency, they tend to limit any potential gain that might result should the
value of such currency increase.
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
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IDS Discovery Fund
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 put and write covered call
options on foreign currencies for hedging purposes. For example, a decline in
the dollar value of a foreign currency in which securities are denominated will
reduce the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in the
value of securities, the Fund may buy put options on the foreign currency. If
the value of the currency does decline, the Fund will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
As in the case of other types of options, however, the benefit to the 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 which
would require it to forego a portion or all of the benefits of advantageous
changes in such 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 which 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 which might otherwise
have been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash
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IDS Discovery Fund
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 the purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The 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
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IDS Discovery Fund
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. All futures
contracts are aggregated for purposes of the percentage
limitations.
Currency futures and options on futures values can be expected to correlate with
exchange rates, but will not reflect other factors that may affect the values of
the 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.
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IDS Discovery Fund
APPENDIX C
OPTIONS AND STOCK INDEX FUTURES CONTRACTS
The Fund may buy or write options traded on any U.S. or foreign exchange or in
the over-the-counter market. The Fund may enter into stock index futures
contracts traded on any U.S. or foreign exchange. The Fund also may buy or write
put and call options on these futures and on stock indexes. Options in the
over-the-counter market will be purchased only when the investment manager
believes a liquid secondary market exists for the options and only from dealers
and institutions the investment manager believes present a minimal credit risk.
Some options are exercisable only on a specific date. In that case, or if a
liquid secondary market does not exist, the Fund could be required to buy or
sell securities at disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option for a security
has the right to buy the security at a set price for the length of the contract.
A person who sells a call option is called a writer. The writer of a call option
agrees to sell the security at the set price when the buyer wants to exercise
the option, no matter what the market price of the security is at that time. A
person who buys a put option has the right to sell a security at a set price for
the length of the contract. A person who writes a put option agrees to buy the
security at the set price if the purchaser wants to exercise the option, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition the
buyer generally pays a broker a commission. The writer receives a premium, less
another commission, at the time the option is written. The cash received is
retained by the writer whether or not the option is exercised. A writer of a
call option may have to sell the security for a below-market price if the market
price rises above the exercise price. A writer of a put option may have to pay
an above-market price for the security if its market price decreases below the
exercise price. The risk of the writer is potentially unlimited, unless the
option is covered.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options may benefit the Fund and its shareholders by improving the Fund's
liquidity and by helping to stabilize the value of its net assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. Options are
used as a trading technique to take advantage of any disparity between the price
of the underlying security in the securities market and its price on the options
market. It is anticipated the trading technique will be utilized
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IDS Discovery Fund
only to effect a transaction when the price of the security plus the option
price will be as good or better than the price at which the security could be
bought or sold directly. When the option is purchased, the Fund pays a premium
and a commission. It then pays a second commission on the purchase or sale of
the underlying security when the option is exercised. For record keeping and tax
purposes, the price obtained on the purchase of the underlying security will be
the combination of the exercise price, the premium and both commissions. When
using options as a trading technique, commissions on the option will be set as
if only the underlying securities were traded.
Put and call options also may be held by the Fund for investment purposes.
Options permit the Fund to experience the change in the value of a security with
a relatively small initial cash investment.
The risk the Fund assumes when it buys an option is the loss of the premium. To
be beneficial to the Fund, 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.
Writing covered options. The Fund will write covered options when it feels it is
appropriate and will follow these guidelines:
'All options written by the Fund will be covered. For covered call options if a
decision is made to sell the security, the Fund will attempt to terminate the
option contract through a closing purchase transaction.
'The Fund will deal only in standard option contracts traded on national
securities exchanges or those that may be quoted on NASDAQ (a system of price
quotations developed by the National Association of Securities Dealers, Inc.)
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains. Since the Fund is taxed as a regulated
investment company under the Internal Revenue Code, any gains on options and
other securities held less than three months must be limited to less than 30% of
its annual gross income.
If a covered call option is exercised, the security is sold by the Fund. The
premium received upon writing the option is added to the proceeds received from
the sale of the security. The Fund will recognize a capital gain or loss based
upon the difference between the proceeds and the security's basis. Premiums
received from writing outstanding call options are included as a deferred credit
in the Statement of Assets and Liabilities and adjusted daily to the current
market value.
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IDS Discovery Fund
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 asked prices.
STOCK INDEX FUTURES CONTRACTS. Stock index futures contracts are commodity
contracts listed on commodity exchanges. They currently include contracts on the
Standard & Poor's 500 Stock Index (S&P 500 Index) and other broad stock market
indexes such as the New York Stock Exchange Composite Stock Index and the Value
Line Composite Stock Index, as well as narrower sub-indexes such as the S&P 100
Energy Stock Index and the New York Stock Exchange Utilities Stock Index. A
stock index assigns relative values to common stocks included in the index and
the index fluctuates with the value of the common stocks so included.
A futures contract is a legal agreement between a buyer or seller and the
clearinghouse of a futures exchange in which the parties agree to make a cash
settlement on a specified future date in an amount determined by the stock index
on the last trading day of the contract. The amount is a specified dollar amount
(usually $100 or $500) multiplied by the difference between the index value on
the last trading day and the value on the day the contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks, most of
which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those stocks. In the case of S&P
500 Index futures contracts, the specified multiple is $500. Thus, if the value
of the S&P 500 Index were 150, the value of one contract would be $75,000 (150 x
$500). Unlike other futures contracts, a stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract. For
example, excluding any transaction costs, if the Fund enters into one futures
contract to buy the S&P 500 Index at a specified future date at a contract value
of 150 and the S&P 500 Index is at 154 on that future date, the Fund will gain
$500 x (154-150) or $2,000. If the Fund enters into one futures contract to sell
the S&P 500 Index at a specified future date at a contract value of 150 and the
S&P 500 Index is at 152 on that future date, the Fund will lose $500 x (152-150)
or $1,000.
Unlike the purchase or sale of an equity security, no price would be paid or
received by the Fund upon entering into futures contracts. However, the Fund
would be required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. Treasury bills equal to
approximately 5% of the contract value. This amount is known as initial margin.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
borrowing funds by the Fund to finance the transactions. Rather, the initial
margin is in the nature of a performance bond or
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IDS Discovery Fund
good-faith deposit on the contract that is returned to the Fund upon termination
of the contract, assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker would be
made on a daily basis as the price of the underlying stock index fluctuates,
making the long and short positions in the contract more or less valuable, a
process known as marking to market. For example, when the Fund enters into a
contract in which it benefits from a rise in the value of an index and the price
of the underlying stock index has risen, the Fund will receive from the broker a
variation margin payment equal to that increase in value. Conversely, if the
price of the underlying stock index declines, the Fund would be required to make
a variation margin payment to the broker equal to the decline in value.
How the Fund Would Use Stock Index Futures Contracts. The Fund intends to use
stock index futures contracts and related options for hedging and not for
speculation. Hedging permits the Fund to gain rapid exposure to or protect
itself from changes in the market. For example, the Fund may find itself with a
high cash position at the beginning of a market rally. Conventional procedures
of purchasing a number of individual issues entail the lapse of time and the
possibility of missing a significant market movement. By using futures
contracts, the Fund can obtain immediate exposure to the market and benefit from
the beginning stages of a rally. The buying program can then proceed and once it
is completed (or as it proceeds), the contracts can be closed. Conversely, in
the early stages of a market decline, market exposure can be promptly offset by
entering into stock index futures contracts to sell units of an index and
individual stocks can be sold over a longer period under cover of the resulting
short contract position.
The Fund may enter into contracts with respect to any stock index or sub-index.
To hedge the Fund's portfolio successfully, however, the Fund must enter into
contracts with respect to indexes or sub- indexes whose movements will have a
significant correlation with movements in the prices of the Fund's securities.
Special Risks of Transactions in Stock Index Futures Contracts
1. Liquidity. The Fund may elect to close some or all of its contracts prior to
expiration. The purpose of making such a move would be to reduce or eliminate
the hedge position held by the Fund. The Fund may close its positions by taking
opposite positions. Final determinations of variation margin are then made,
additional cash as required is paid by or to the Fund, and the Fund realizes a
gain or a loss.
Positions in stock index futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. For
example, futures contracts transactions can currently be entered into with
respect to the S&P 500 Stock Index on the Chicago Mercantile Exchange, the New
York Stock Exchange
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IDS Discovery Fund
Composite Stock Index on the New York Futures Exchange and the Value Line
Composite Stock Index on the Kansas City Board of Trade. Although the Fund
intends to enter into futures contracts only on exchanges or boards of trade
where there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular contract at any
particular time. In such event, it may not be possible to close a futures
contract position, and in the event of adverse price movements, the Fund would
have to make daily cash payments of variation margin. Such price movements,
however, will be offset all or in part by the price movements of the securities
subject to the hedge. Of course, there is no guarantee the price of the
securities will correlate with the price movements in the futures contract and
thus provide an offset to losses on a futures contract.
2. Hedging Risks. There are several risks in using stock index futures contracts
as a hedging device. One risk arises because the prices of futures contracts may
not correlate perfectly with movements in the underlying stock index due to
certain market distortions. First, all participants in the futures market are
subject to initial margin and variation margin requirements. Rather than making
additional variation margin payments, investors may close the contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, the margin requirements in the futures market
are lower than margin requirements in the securities market, and as a result the
futures market may attract more speculators than does the securities market.
Increased participation by speculators in the futures market also may cause
temporary price distortions. Because of price distortion in the futures market
and because of imperfect correlation between movements in stock indexes and
movements in prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a short
period.
Another risk arises because of imperfect correlation between movements in the
value of the futures contracts and movements in the value of securities subject
to the hedge. If this occurred, the Fund could lose money on the contracts and
also experience a decline in the value of its portfolio securities. While this
could occur, the investment manager believes that over time the value of the
Fund's portfolio will tend to move in the same direction as the market indexes
and will attempt to reduce this risk, to the extent possible, by entering into
futures contracts on indexes whose movements it believes will have a significant
correlation with movements in the value of the Fund's securities sought to be
hedged. It also is possible that if the Fund has hedged against a decline in the
value of the stocks held in its portfolio and stock prices increase instead, the
Fund will lose part or all of the benefit of the increased value of its stock
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising
-41-
<PAGE>
IDS Discovery Fund
market. The Fund may have to sell securities at a time when it may
be disadvantageous to do so.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Options on stock index futures
contracts are similar to options on stock except that options on futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a stock index futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. If the option is
closed instead of exercised, the holder of the option receives an amount that
represents the amount by which the market price of the contract exceeds (in the
case of a call) or is less than (in the case of a put) the exercise price of the
option on the futures contract. If the option does not appreciate in value prior
to the exercise date, the Fund will suffer a loss of the premium paid.
OPTIONS ON STOCK INDEXES. Options on stock indexes are securities traded on
national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level. Such options would be used in the same manner
as options on futures contracts.
SPECIAL RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND
OPTIONS ON STOCK INDEXES. As with options on stocks, the holder of an option on
a futures contract or on a stock index may terminate a position by selling an
option covering the same contract or index and having the same exercise price
and expiration date. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. The Fund will not purchase options unless the market for such options
has developed sufficiently, so that the risks in connection with options are not
greater than the risks in connection with stock index futures contracts
transactions themselves. Compared to using futures contracts, purchasing options
involves less risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). There may be circumstances,
however, when using an option would result in a greater loss to the Fund than
using a futures contract, such as when there is no movement in the level of the
stock index.
TAX TREATMENT. As permitted under federal income tax laws, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred by entering into futures contracts and losses on underlying
securities identified as being hedged against.
-42-
<PAGE>
IDS Discovery Fund
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether such option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term. Certain provisions of the Internal Revenue Code may also limit the
Fund's ability to engage in futures contracts and related options transactions.
For example, at the close of each quarter of the Fund's taxable year, at least
50% of the value of its assets must consist of cash, government securities and
other securities, subject to certain diversification requirements. Less than 30%
of its gross income must be derived from sales of securities held less than
three months.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements. In order to avoid realizing a gain within the
three-month period, the Fund may be required to defer closing out a contract
beyond the time when it might otherwise be advantageous to do so. The Fund also
may be restricted in purchasing put options for the purpose of hedging
underlying securities because of applying the short sale holding period rules
with respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the 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.
-43-
<PAGE>
IDS Discovery Fund
APPENDIX D
MORTGAGE-BACKED SECURITIES
A mortgage pass-through certificate is one that represents an interest in a
pool, or group, of mortgage loans assembled by the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) or non-governmental entities. In
pass-through certificates, both principal and interest payments, including
prepayments, are passed through to the holder of the certificate. Prepayments on
underlying mortgages result in a loss of anticipated interest, and the actual
yield (or total return) to the Fund, which is influenced by both stated interest
rates and market conditions, may be different than the quoted yield on
certificates. Some U.S. government securities may be purchased on a when-issued
basis, which means that it may take as long as 45 days after the purchase before
the securities are delivered to the Fund.
Stripped Mortgage-Backed Securities. The Fund may invest in stripped
mortgage-backed securities. Generally, there are two classes of stripped
mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs
entitle the holder to receive distributions consisting of all or a portion of
the interest on the underlying pool of mortgage loans or mortgage-backed
securities. POs entitle the holder to receive distributions consisting of all or
a portion of the principal of the underlying pool of mortgage loans or
mortgage-backed securities. The cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments (including prepayments) on
the underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs. A slow
rate of principal payments may adversely affect the yield to maturity of POs. On
an IO, if prepayments of principal are greater than anticipated, an investor may
incur substantial losses. If prepayments of principal are slower than
anticipated, the yield on a PO will be affected more severely than would be the
case with a traditional mortgage-backed security.
Mortgage-Backed Security Spread Options. The Fund may purchase mortgage-backed
security (MBS) put spread options and write covered MBS call spread options. MBS
spread options are based upon the changes in the price spread between a
specified mortgage-backed security and a like-duration Treasury security. MBS
spread options are traded in the OTC market and are of short duration, typically
one to two months. The Fund would buy or sell covered MBS call spread options in
situations where mortgage-backed securities are expected to underperform
like-duration Treasury securities.
-44-
<PAGE>
IDS Discovery Fund
APPENDIX E
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that eliminates random buy
and sell decisions. One such system is dollar-cost averaging. Dollar-cost
averaging involves building a portfolio through the investment of fixed amounts
of money on a regular basis regardless of the price or market condition. This
may enable an investor to smooth out the effects of the volatility of the
financial markets. By using this strategy, more shares will be purchased when
the price is low and less when the price is high. As the accompanying chart
illustrates, dollar-cost averaging tends to keep the average price paid for the
shares lower than the average market price of shares purchased, although there
is no guarantee.
While this technique does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many shareholders who
can continue investing on a regular basis through changing market conditions,
including times when the price of their shares falls or the market declines, to
accumulate shares in a fund to meet long-term goals.
Dollar-cost averaging
- -------------------------------------------------------------------
Regular Market Price Shares
Investment of a Share Acquired
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
$500 $25.00 103.4
Average market price of a share over 5 periods:
$5.00 ($25.00 divided by 5).
The average price you paid for each share:
$4.84 ($500 divided by 103.4).
-45-
<PAGE>
Independent auditors' report
The board and shareholders
IDS Discovery Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of IDS Discovery
Fund, Inc. as of July 31, 1997, and the related statement of operations
for the year then ended and the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the ten-year period ended July 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. Investment securities held in
custody are confirmed to us by the custodian. As to securities purchased
and sold but not received or delivered, we request confirmations from
brokers, and where replies are not received, we carry out other
appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IDS Discovery Fund,
Inc. at July 31, 1997, and the results of its operations, changes in its
net assets and the financial highlights for the periods stated in the
first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 5, 1997
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
IDS Discovery Fund, Inc.
July 31, 1997
Assets
Investments in securities, at value (Note 1):
Investments in securities of unaffiliated issuers
<S> <C>
(identified cost $807,763,117) $ 998,310,027
Investments in securities of affiliated issuers
(identified cost $63,589,910) 94,203,125
Dividends and accrued interest receivable 76,500
Receivable for investment securities sold 4,399,853
---------
Total assets 1,096,989,505
-------------
Liabilities
Disbursements in excess of cash on demand deposit 5,276,127
Payable for investment securities purchased 3,033,483
Accrued investment management services fee 114,757
Accrued distribution fee 2,057
Accrued service fee 4,984
Accrued transfer agency fee 4,173
Accrued administrative services fee 1,515
Other accrued expenses 145,849
Option contracts written, at value
(premium received $6,991,624) (Note 5) 10,932,969
----------
Total liabilities 19,515,914
----------
Net assets applicable to outstanding capital stock $1,077,473,591
==============
Represented by
Capital stock-- authorized 10,000,000,000 shares of $.01 par value $ 828,427
Additional paid-in capital 806,510,661
Undistributed (excess of distributions over) net investment income 313,207
Accumulated net realized gain (loss) (Note 1) 52,602,516
Unrealized appreciation (depreciation) on investments 217,218,780
-----------
Total-- representing net assets applicable to outstanding capital stock $1,077,473,591
==============
Net assets applicable to outstanding shares: Class A $ 904,404,070
Class B $ 100,912,321
Class Y $ 72,157,200
Net asset value per share of outstanding capital stock: Class A shares 69,437,141 $ 13.02
Class B shares 7,869,253 $ 12.82
Class Y shares 5,536,301 $ 13.03
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
IDS Discovery Fund, Inc.
Year ended July 31, 1997
Investment income
Income:
<S> <C>
Dividends $ 2,644,059
Interest 4,720,707
---------
Total income 7,364,766
---------
Expenses (Note 2):
Investment management services fee 6,222,122
Distribution fee -- Class B 524,729
Transfer agency fee 1,490,243
Incremental transfer agency fee-- Class B 10,425
Service fee
Class A 1,348,371
Class B 122,004
Class Y 15,476
Administrative services fees and expenses 494,961
Compensation of board members 14,412
Compensation of officers 3,580
Custodian fees 126,132
Postage 118,485
Registration fees 154,266
Reports to sharehoders 72,991
Audit fees 26,000
Other 27,387
------
Total expenses 10,771,584
Earnings credits on cash balances (Note 2) (60,294)
------
Total net expenses 10,711,290
----------
Investment income (loss) -- net (3,346,524)
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (including loss of $1,983,375 on sale
of affiliated issuers) (Note 3) 65,849,489
Financial futures contracts 1,848,675
Options contracts written (Note 5) (2,919,140)
----------
Net realized gain (loss) on investments 64,779,024
Net change in unrealized appreciation (depreciation) on investments 244,479,200
-----------
Net gain (loss) on investments 309,258,224
-----------
Net increase (decrease) in net assets resulting from operations $305,911,700
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial statements
Statements of changes in net assets
IDS Discovery Fund, Inc.
Year ended July 31,
Operations and distributions 1997 1996
<S> <C> <C>
Investment income (loss)-- net $ (3,346,524) $ 3,516,657
Net realized gain (loss) on investments 64,779,024 120,991,863
Net change in unrealized appreciation (depreciation) on investments 244,479,200 (98,059,098)
----------- -----------
Net increase (decrease) in net assets resulting from operations 305,911,700 26,449,422
----------- ----------
Distributions to shareholders from:
Net investment income
Class A (1,927,449) (4,817,749)
Class B -- (109,553)
Class Y (265,909) (369,986)
Net realized gain
Class A (99,183,189) (141,682,931)
Class B (8,597,468) (4,249,927)
Class Y (8,324,287) (9,128,279)
---------- ----------
Total distributions (118,298,302) (160,358,425)
------------ ------------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 736,250,317 423,969,758
Class B shares 48,300,963 39,614,584
Class Y shares 38,054,111 30,960,567
Reinvestment of distributions at net asset value
Class A shares 98,136,993 145,127,830
Class B shares 8,547,699 4,297,905
Class Y shares 8,590,196 9,498,265
Payments for redemptions
Class A shares (773,305,648) (495,135,942)
Class B shares (Note 2) (14,227,780) (5,520,898)
Class Y shares (38,438,270) (19,208,184)
----------- -----------
Increase (decrease) in net assets from capital share transactions 111,908,581 133,603,885
----------- -----------
Total increase (decrease) in net assets 299,521,979 (305,118)
Net assets at beginning of year 777,951,612 778,256,730
----------- -----------
Net assets at end of year $1,077,473,591 $777,951,612
============== ============
Undistributed (excess of distributions over) net investment income $ 313,207 $ 2,185,644
-------------- ------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to financial statements
IDS Discovery Fund, Inc.
1
Summary of
significant
accounting policies
The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. The
Fund invests primarily in common stocks of small- and medium-size growth
companies. The Fund offers Class A, Class B and Class Y shares. Class A
shares are sold with a front-end sales charge. Class B shares may be
subject to a contingent deferred sales charge and such shares
automatically convert to Class A during the ninth calendar year of
ownership. Class Y shares have no sales charge and are offered only to
qualifying institutional investors.
All classes of shares have identical voting, dividend, liquidation and
other rights, and the same terms and conditions, except that the level of
distribution fee, transfer agency fee and service fee (class specific
expenses) differs among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on
investments are allocated to each class of shares based upon its relative
net assets.
Significant accounting policies followed by the Fund are summarized below:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
Valuation of securities
All securities are valued at the close of each business day. Securities
traded on national securities exchanges or included in national market
systems are valued at the last quoted sales price; securities for which
market quotations are not readily available are valued at fair value
according to methods selected in good faith by the board. Determination of
fair value involves, among other things, reference to market indexes,
matrixes and data from independent brokers. Short-term securities maturing
in more than 60 days from the valuation date are valued at the market
price or approximate market value based on current interest rates; those
maturing in 60 days or less are valued at amortized cost.
Option transactions
In order to produce incremental earnings, protect gains, and facilitate
buying and selling of securities for investment purposes, the Fund may buy
or write options traded on any U.S. or foreign exchange or in the
over-the-counter market where the completion of the obligation is
dependent upon the credit standing of the other party. The Fund also may
buy and sell put and call options and write covered call options on
portfolio securities and may write cash-secured put options. The risk in
writing a call option is that the Fund gives up the opportunity of 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 not being able to
enter into a closing transaction if a liquid secondary market does not
exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The
Fund will realize a gain or loss upon expiration or closing of the option
transaction. When an option is exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the
cost of a security for a purchased put or call option is adjusted by the
amount of premium received or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the market,
the Fund may buy and sell futures contracts traded on any U.S. or foreign
exchange. The Fund also may buy or write put and call options on these
contracts. Risks of entering into futures contracts and related options
include the possibility that there may be an illiquid market and that a
change in the value of the contract or option may not correlate with
changes in the value of the underlying security.
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),
if any, are made or received by the Fund each day. The variation margin
payments or market value of the contracts are equal to the daily changes
in the contract value and are recorded as unrealized gains and losses. The
Fund recognizes a realized gain or loss when the contract is closed or
expires.
Foreign currency translations and
foreign currency contracts
Securities and other assets and liabilities denominated in foreign
currencies are translated daily into U.S. dollars at the closing rate of
exchange. Foreign currency amounts related to the purchase or sale of
securities and income and expenses are translated at the exchange rate on
the transaction date. The effect of changes in foreign exchange rates on
realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net
realized gains or losses from foreign currency transactions may arise from
sales of foreign currency, closed forward contracts, exchange gains or
losses realized between the trade date and settlement dates on securities
transactions, and other translation gains or losses on dividends, interest
income and foreign withholding taxes.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate
fluctuation. The net U.S. dollar value of foreign currency underlying all
contractual commitments held by the Fund and the resulting unrealized
appreciation or depreciation are determined using foreign currency
exchange rates from an independent pricing service. The Fund is subject to
the credit risk that the other party will not complete the obligations of
the contract.
Federal taxes
Since the Fund's policy is to comply with all sections of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders, no provision for
income or excise taxes is required.
Net investment income (loss) and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of the deferral
of losses on certain futures contracts, the recognition of certain foreign
currency gains (losses) as ordinary income (loss) for tax purposes and
losses deferred due to "wash sale" transactions. The character of
distributions made during the year from net investment income or net
realized gains may differ from their ultimate characterization for federal
income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year
that the income or realized gains (losses) were recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent
book-to-tax differences, accumulated net realized gain has been decreased
by $3,667,445 and undistributed net investment income has been increased
by $3,667,445.
Dividends to shareholders
An annual dividend declared and paid at the end of the calendar year from
net investment income 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
Effective March 20, 1995, the Fund entered into agreements with American
Express Financial Corporation (AEFC) for managing its portfolio, providing
administrative services and serving as transfer agent. Under its
Investment Management Services Agreement, AEFC determines which securities
will be purchased, held or sold. The management fee is a percentage of the
Fund's daily net assets in reducing percentages from 0.64% to 0.515%
annually. The fee is adjusted upward or downward by a performance
incentive adjustment based on the Fund's average daily net assets over a
rolling 12-month period as measured against the change in the Lipper Small
Company Growth Fund 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. The adjustment increased the fee by $680,977 for the year
ended July 31, 1997.
Under its Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's
average daily net assets in reducing percentages from 0.06% to 0.035%
annually. Additional administrative service expenses paid by the Fund are
office expenses, consultants' fees and compensation of officers and
employees. Under this agreement, the Fund also pays taxes, audit and
certain legal fees, registration fees for shares, compensation of board
members, corporate filing fees, organizational expenses, and any other
expenses properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, AEFC maintains shareholder
accounts and records. The Fund pays AEFC an annual fee per shareholder
account for this service as follows:
o Class A $15
o Class B $16
o Class Y $15
Also effective March 20, 1995, the Fund entered into agreements with
American Express Financial Advisors Inc. for distribution and shareholder
servicing-related services. Under a Plan and Agreement of Distribution,
the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's
average daily net assets attributable to Class B shares for
distribution-related services.
Under a Shareholder Service Agreement, the Fund pays a fee for service
provided to shareholders by financial advisors and other servicing agents.
The fee is calculated at a rate of 0.175% of the Fund's average daily net
assets attributable to Class A and Class B shares and commencing on May 9,
1997, the fee is calculated at a rate of 0.10% of the Fund's average daily
net assets attributable to Class Y shares.
Sales charges received by American Express Financial Advisors Inc. for
distributing Fund shares were $1,645,427 for Class A and $58,010 for Class
B for the year ended July 31, 1997. The Fund also pays custodian fees to
American Express Trust Company, an affiliate of AEFC.
During the year ended July 31, 1997, the Fund's custodian and transfer
agency fees were reduced by $60,294 as a result of earnings credits from
overnight cash balances.
3
Securities
transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $1,345,252,980 and $1,329,014,178,
respectively, for the year ended July 31, 1997. Realized gains and losses
are determined on an identified cost basis.
Brokerage commissions paid to brokers affiliated with AEFC were $254,844
for the year ended July 31, 1997.
Income from securities lending amounted to $12,589 for the year ended July
31, 1997. The risks to the Fund of securities lending are that the
borrower may not provide additional collateral when required or return the
securities when due.
4
Capital share
transactions
Transactions in shares of capital stock for the years indicated are as
follows:
Year ended July 31, 1997
Class A Class B Class Y
Sold 62,998,962 4,259,010 3,296,071
Issued for reinvested 8,966,980 777,346 772,708
distributions
Redeemed (66,170,688) (1,258,366) (3,358,084)
----------- ---------- ----------
Net increase (decrease) 5,795,254 3,777,990 710,695
--------- --------- -------
Year ended July 31, 1996
Class A Class B Class Y
Sold 36,682,783 3,408,482 2,643,673
Issued for reinvested 14,117,493 419,963 924,046
distributions
Redeemed (42,626,793) (493,590) (1,670,645)
----------- -------- ----------
Net increase (decrease) 8,173,483 3,334,855 1,897,074
--------- --------- ---------
5
Option contracts
written
The number of contracts and premium amounts associated with options
contracts written (see Summary of significant accounting policies) is as
follows:
Year ended July 31, 1997
Puts Calls
Contracts Premium Contracts Premium
Balance July 31, 1996 7,250 $ 963,022 6,000 $ 853,532
Opened 124,100 22,113,438 125,665 41,278,415
Closed (91,350) (15,498,512) (44,407) (24,127,594)
Exercised (22,945) (5,054,293) (46,768) (10,331,842)
Expired (11,305) (1,641,840) (8,740) (1,562,702)
------- ---------- ------ ----------
Balance July 31, 1997 5,750 $ 881,815 31,750 $ 6,109,809
----- ------------ ------ ------------
6
Financial
highlights
"Financial highlights" showing per share data and selected information is
presented on pages 6 and 7 of the prospectus.
<PAGE>
Investments in securities
IDS Discovery Fund, Inc. (Percentages represent value of
July 31, 1997 investments compared to net assets)
Investments in securities of unaffiliated issuers
Common stocks (87.4%)
Issuer Shares Value(a)
Aerospace & defense (0.7%)
AAR 225,000 $ 8,043,750
Banks and savings & loans (2.1%)
TCF Financial 425,000 22,764,062
Beverages & tobacco (0.2%)
800-JR CIGAR 100,000 2,462,500
Building materials & construction (0.9%)
Apogee Enterprises 475,000(c) 10,153,125
Chemicals (1.9%)
Millipore 475,000 20,989,063
Communications equipment & services (4.6%)
Advanced Fibre
Communications 150,000(b) 10,481,250
Aspect Telecommunications 525,000(b) 11,098,828
PairGain Technologies 1,300,000(b,c) 27,950,000
Total 49,530,078
Computers & office equipment (14.3%)
Envoy 275,000(b) 8,215,625
Fiserv 475,000(b,c) 22,800,000
Hyperion Software 400,000(b) 10,750,000
Medic Computer Systems 500,000(b,c) 13,500,000
Metzler Group 50,000(b) 1,725,000
Network General 1,700,000(b,c) 27,625,000
RWD Technologies 80,000 1,680,000
Sterling Software 300,000(b) 10,200,000
Sykes Enterprises 425,000(b) 10,704,687
Tech Data 700,000(b,c) 25,987,500
Technology Solutions 200,000(b) 7,850,000
Transition Systems 275,000(b) 5,293,750
Vantive 100,000(b) 3,125,000
Viasoft 70,000(b) 4,235,000
Total 153,691,562
Electronics (2.6%)
Credence Systems 150,000(b,c) 5,100,000
Lattice Semiconductor 200,000(b,c) 13,475,000
Waters 275,000(b) 9,848,437
Total 28,423,437
Energy (6.3%)
Devon Energy 250,000 9,515,625
KCS Energy 500,000 10,875,000
Nuevo Energy 225,000(b) 9,632,812
Pogo Producing 200,000(c) 8,175,000
Rutherford-Moran Oil 415,000(b) 9,648,750
Stone Energy 375,000(b) 10,898,437
United Meridian 275,000(b) 8,782,813
Total 67,528,437
Energy equipment & services (5.9%)
Atwood Oceanics 100,000(b) 8,500,000
Camco Intl 350,000 22,618,750
Domain Energy 650,000(b) 9,018,750
Input/Output 550,000(b) 11,893,750
Pride Intl 450,000(b) 11,896,875
Total 63,928,125
Financial services (5.4%)
CMAC Investment 200,000 9,437,500
FelCor Suite Hotels REIT 600,000 23,400,000
Kilroy Realty REIT 300,000 7,537,500
Storage USA REIT 225,000 9,281,250
Sun Communities REIT 250,000 9,046,875
Total 58,703,125
Health care (6.9%)
Parexel Intl 275,000(b,c) 10,587,500
Pharmaceutical Product
Development 150,000(b) 3,506,250
STERIS 100,000(b) 3,850,000
Sybron Intl 650,000(b,c) 26,609,375
Watson Pharmaceuticals 600,000(b) 29,700,000
Total 74,253,125
Health care services (6.9%)
Equity Corporation Intl 325,000(b) 7,820,313
Express Scripts Cl A 200,000(b) 8,950,000
Genesis Health Ventures 275,000(b) 9,315,625
PhyCor 650,000(b) 21,775,000
Quorum Health Group 575,000(b) 20,484,375
Trigon Healthcare 275,000(b) 6,548,438
Total 74,893,751
Household products (0.2%)
Amscan Holdings 200,000(b) 2,400,000
Industrial equipment & services (3.4%)
Asyst Technologies 52,000(b) 2,795,000
DT Inds 275,000 9,521,875
Integrated Process
Equipment 575,000(b,c) 15,021,875
KEMET 350,000(b) 8,968,750
Total 36,307,500
Insurance (1.4%)
PennCorp Financial Group 250,000 9,234,375
Vesta Insurance Group 100,000 5,325,000
Total 14,559,375
Media (2.6%)
Regal Cinemas 300,000(b,c) 9,637,500
Universal Outdoor Holdings 250,000(b) 9,093,750
Univision Communications 225,000(b) 9,675,000
Total 28,406,250
Metals (3.9%)
Commonwealth Inds 425,000 9,403,125
Steel Dynamics 450,000(b) 11,925,000
Stillwater Mining 475,000(b) 9,856,250
Titanium Metals 325,000 10,400,000
Total 41,584,375
Multi-industry conglomerates (2.4%)
AccuStaff 929,850(b) 25,338,413
Paper & packaging (0.8%)
Sealed Air 175,000(b,c) 8,203,125
Restaurants & lodging (3.1%)
La Quinta Inns 1,050,000 22,050,000
Landry's Seafood
Restaurants 425,000(b) 10,837,500
Total 32,887,500
Retail (5.1%)
CDW Computer Centers 150,000(b) 9,675,000
Global DirectMail 400,000(b,c) 10,450,000
OfficeMax 1,750,000(b) 24,500,000
Quality Food Centers 125,000 5,242,188
U.S. Office Products 110,000(b) 3,176,250
Viking Office Products 110,000 2,206,875
Total 55,250,313
Utilities -- telephone (2.8%)
ICG Communications 350,000(b) 7,525,000
LCI Intl 1,000,000(b) 19,937,500
West TeleServices 150,000(b) 2,287,500
Total 29,750,000
Foreign (3.0%)(h)
CBT Group ADR 50,000(b) 3,312,500
ECsoft Group ADR 145,000(b) 1,921,250
Philip Services 675,000(b) 10,040,625
Mutual Risk Management 275,000 13,509,375
Saville Systems Ireland ADR 50,000(b) 3,187,500
Total 31,971,250
Total common stocks of unaffiliated issuers
(Cost: $754,825,576) $942,022,241
Preferred stock (0.7%)
Issuer Shares Value(a)
Intermedia Communications
7% 275,000(d) $7,906,250
Total preferred stock
(Cost: $6,875,000) $7,906,250
See accompanying notes to investments in securities.
<PAGE>
<TABLE>
<CAPTION>
Bond (0.8%)
Issuer Coupon Maturity Principal Value(a)
rate year amount
Mutual Risk Management
<S> <C> <C> <C> <C>
Zero Coupon Cv with attached put 5.25% 2015 $15,000,000(d,f) $8,156,250
Total bond
(Cost: $5,836,723) $8,156,250
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Investments in securities of affiliated issuers (g)
Short-term securities (3.7%)
Issuer Annualized Amount Value(a)
yield on payable at
date of maturity
purchase
U.S. government agency (0.4%)
Federal Home Loan Mtge Corp Disc Nts
08-15-97 5.40% $1,000,000 $ 997,908
08-28-97 5.44 3,650,000 3,635,163
Total 4,633,071
Commercial paper (2.9%)
BBV Finance (Delaware)
09-04-97 5.52 11,100,000 11,042,342
Ciesco LP
09-18-97 5.54 3,748,000 3,720,514
Ford Motor Credit
08-08-97 5.49 2,400,000 2,397,442
General Electric Capital
08-01-97 5.58 1,600,000 1,600,000
Paccar Financial
08-06-97 5.48 2,700,000 2,697,949
St. Paul Companies
08-27-97 5.49 8,600,000(e) 8,566,025
SBC Communications Capital
08-25-97 5.58 1,600,000(e) 1,593,569
Total 31,617,841
Letter of credit (0.4%)
Student Loan Marketing Assn-
USA Group
08-25-97 5.52% $3,989,000 $3,974,374
Total short-term securities
(Cost: $40,225,818) $40,225,286
Total investment in securities of unaffiliated issuers
(Cost: $807,763,117) $998,310,027
Common stocks (8.7%)
Issuer Shares Value(a)
ChiRex 750,000(b,c)$ 12,843,750
Dura Automotive Systems 300,000(b) 8,137,500
Gulf South Medical
Supply 1,200,000(b) 29,700,000
Intermedia
Communications 600,000(b,c) 21,825,000
Project Software &
Development 550,000(b) 11,618,750
Transaction Network
Services 625,000(b) 10,078,125
Total $94,203,125
Total investments in securities of affiliated issuers
(Cost: $63,589,910) $94,203,125
Total investments in securities
(Cost: $871,353,027)(i) $1,092,513,152
<PAGE>
<TABLE>
<CAPTION>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) At July 31, 1997, securities valued at $100,748,400 were held to cover open
call options written as follows:
Issuer Shares Exercise Expiration Value (a)
price date
<S> <C> <C> <C> <C>
Apogee Enterprises 150,000 $22 Nov. 1997 $ 309,375
ChiRex 150,000 20 Nov. 1997 215,625
Credence Systems 150,000 35 Sept. 1997 389,063
Fiserv 25,000 45 Sept. 1997 104,688
Fiserv 75,000 50 Sept. 1997 112,500
Global DirectMail 300,000 30 Sept. 1997 375,000
Integrated Process Equipment 175,000 25 Aug. 1997 388,281
Intermedia Communications 25,000 40 Sept. 1997 28,125
Lattice Semiconductor 50,000 70 Sept. 1997 178,125
Medic Computer Systems 500,000 20 Aug. 1997 3,531,250
Issuer Shares Exercise Expiration Value (a)
price date
Network General 200,000 $17 Sept. 1997 $ 168,750
PairGain Technologies 200,000 25 Sept. 1997 231,250
Parexel Intl 275,000 30 Aug. 1997 2,440,625
Pogo Producing 125,000 45 Sept. 1997 109,375
Regal Cinemas 250,000 35 Aug. 1997 78,125
Sealed Air 125,000 50 Oct. 1997 117,188
Sybron Intl 75,000 40 Aug. 1997 126,562
Tech Data 325,000 35 Sept. 1997 1,279,687
---------
Total $10,183,594
At July 31, 1997, cash or short-term securities were designated to cover open put options written
as follows:
Issuer Shares Exercise Expiration Value (a)
price date
ICG Communications 50,000 $20 Aug. 1997 $ 28,125
LCI Intl 100,000 22 Aug. 1997 275,000
Pharmaceutical Product Development 100,000 22 Aug. 1997 50,000
STERIS 125,000 40 Aug. 1997 214,844
Sykes Enterprises 100,000 22 Aug. 1997 50,000
Technology Solutions 75,000 35 Aug. 1997 53,906
Technology Solutions 25,000 40 Aug. 1997 77,500
------
Total $749,375
(d) Represents a security sold under 144A, which is exempt from registration
under the Securities Act of 1933, as amended. This security has been determined
to be liquid under guidelines established by the board.
(e) 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.
(f) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(g) Investments representing 5% or more of the outstanding voting securities of
the issuer. Transactions with companies that are or were affiliates during the
year ended July 31, 1997 are as follows:
Issuer Beginning Purchase Sales Ending Dividend
cost cost cost cost income
<S> <C> <C> <C> <C> <C>
Career Horizon* $17,192,843 $ 2,540,215 $19,733,058 $ -- $--
ChiRex* -- 8,577,739 506,250 8,071,489 --
Dura Automotive Systems* -- 8,051,235 615,625 7,435,610 --
Gulf South Medical Supply* -- 19,561,945 -- 19,561,945 --
Intermedia Communications* 3,626,875 15,935,685 9,890,000 9,672,560 --
Physician Support Systems* 7,862,127 3,540,458 11,402,585 -- --
Project Software & Development* -- 11,316,073 968,751 10,347,322 --
Transaction Network Services* 10,790,786 6,348,270 8,638,072 8,500,984 --
---------- --------- --------- ---------
Total $39,472,631 $75,871,620 $51,754,341 $63,589,910 $--
----------- ----------- ----------- ----------- -
*Issuer was not an affiliate for the entire year.
(h) Foreign security values are stated in U.S. dollars.
(i) At July 31, 1997, the cost of securities for federal income tax purposes was
$883,227,302 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
</TABLE>
<PAGE>
Unrealized appreciation...........................................$210,274,512
Unrealized depreciation.. ............................................(988,662)
--------
Net unrealized appreciation.......................................$209,285,850
<PAGE>
PART C. OTHER INFORMATION
Item 24. (a) Financial Statements and Exhibits.
(a) FINANCIAL STATEMENTS
List of financial statements filed as part of this Post-Effective
Amendment to the Registration statement:
- Independent Auditors' Report dated Sept. 5, 1997
- Statement of assets and liabilities, July 31, 1997
- Statement of operations, year ended July 31, 1997
- Statements of changes in net assets, year ended July
31, 1996 and July 31, 1997 - Notes to financial statements -
Investments in securities, July 31, 1997 - Notes to investments
in securities
(b) EXHIBITS:
1. Articles of Incorporation, as amended October 17, 1988, filed as Exhibit 1 to
Post-Effective Amendment No. 16 to Registration Statement No. 2-72174, is
incorporated herein by reference.
2. By-laws, as amended January 12, 1989, filed as Exhibit 3 to Post-Effective
Amendment No. 16 to Registration Statement No. 2-72174, is incorporated herein
by reference.
3. Not Applicable.
4. Stock certificate, filed as Exhibit No.4 to Registrant's Registration
Statement No. 2-72174 on April 28, 1981, is incorporated herein by reference.
5. Form of Investment Management and Services Agreement between Registrant and
American Express Financial Corporation, dated March 20, 1995, filed
electronically as Exhibit 5 to Registrant's Post-Effective Amendment No. 29 to
Registration Statement No. 2-72174 is incorporated herein by reference.
6. Form of Distribution Agreement between Registrant and American Express
Financial Advisors Inc., dated March 20, 1995, filed electronically as Exhibit 6
to Registrant's Post-Effective Amendment No. 29 to Registration Statement No.
2-72174 is incorporated herein by reference.
7. All employees are eligible to participate in a profit sharing plan. Entry
into the plan is Jan. 1 or July 1. The Registrant contributes each year an
amount up to 15 percent of their annual salaries, the maximum deductible amount
permitted under Section 404(a) of the Internal Revenue Code.
8(a). Form of Custodian Agreement between Registrant and American Express Trust
Company, dated March 20, 1995, filed electronically as Exhibit 8(a) to
Registrant's Post-Effective Amendment No. 29 to Registration Statement No.
2-72174 is incorporated herein by reference.
<PAGE>
8(b). Form of Custody Agreement between Morgan Stanley Trust Company and IDS
Bank & Trust dated May, 1993, filed electronically as Exhibit 8(b) to
Post-Effective Amendment No. 30 to Registration Statement No. 2-72174, is
incorporated herein by reference.
9(a). Copy of Plan and Agreement of Merger dated April 10, 1986, filed as
Exhibit 9 to Post-Effective Amendment No. 10 to Registration Statement No.
2-72174, is incorporated herein by reference.
9(b). Form of Transfer Agency Agreement between Registrant and American Express
Financial Corporation, dated March 20, 1995, filed electronically as Exhibit
9(b) to Registrant's Post-Effective Amendment No. 29 to Registration Statement
No. 2-72174 is incorporated herein by reference.
9(c). Copy of License Agreement, dated January 25, 1988, between IDS and
Registrant, filed as Exhibit 9(c) to Post-Effective Amendment No. 16 to
Registration Statement No. 2-72174, is incorporated herein by reference.
9(d). Form of Shareholder Service Agreement between Registrant and American
Express Financial Advisors Inc., dated March 20, 1995, filed electronically as
Exhibit 9(d) to Registrant's Post-Effective Amendment No. 29 to Registration
Statement No. 2-72174 is incorporated herein by reference.
9(e). Form of Administrative Services Agreement between Registrant and American
Express Financial Corporation, dated March 20, 1995, filed electronically as
Exhibit 9(e) to Registrant's Post-Effective Amendment No. 29 to Registration
Statement No. 2-72174 is incorporated herein by reference.
9(f). Copy of Class Y Shareholder Service Agreement between IDS Precious Metals
Fund, Inc. and American Express Financial Advisors Inc. dated May 9, 1997, filed
electronically on or about May 27, as Exhibit 9(e) to IDS Precious Metals Fund,
Inc.'s Amendment No. 30 to Registration Statement, No-2-93745, is incorporated
herein by reference. Registrant's Class Y Shareholder Service Agreement differs
from the one incorporated by reference only by the fact that Registrant is one
executing party.
10. Opinion and consent of counsel as to the legality of the securities being
registered is filed with Registrant's most recent 24f-2 Notice.
11. Consent of Independent Auditors is filed electronically herewith.
12. Schedule III, Investments in Affiliates
13. Not Applicable.
14. Forms of Keogh, IRA and other retirement plans, filed as Exhibits 14(a)
through 14(n) to IDS Growth Fund, Inc., Post-Effective Amendment No. 34 to
Registration Statement No. 2-38355, are incorporated herein by reference.
<PAGE>
15. Form of Plan and Agreement of Distribution between Registrant and American
Express Financial Advisors Inc., dated March 20, 1995, filed electronically as
Exhibit 15 to Registrant's Post-Effective Amendment No. 29 to Registration
Statement No. 2-72174 is incorporated herein by reference.
16. Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 filed as Exhibit 16 to
Post-Effective Amendment No. 23 to Registration Statement No. 2-72174, is
incorporated herein by reference.
17. Financial Data Schedules are filed electronically herewith.
18. Copy of plan pursuant to Rule 18f-3 under the 1940 Act, filed electronically
as Exhibit 18 to Post-Effective Amendment No. 30 to Registration Statement No.
2-72174 is incorporated herein by reference.
19(a). Directors' Power of Attorney, dated Jan. 8, 1997, to sign Amendments to
this Registration Statement is filed electronically herewith.
19(b). Officers' Power of Attorney to sign Amendments to this Registration
Statement, dated Nov. 1, 1995, is filed electronically herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
(1) (2)
Number of Record
Holders as of
Title of Class Sept. 11, 1997
Common Stock
Class A shares 76,396
Class B shares 13,043
Class C shares 11,753
Item 27. Indemnification
The Articles of Incorporation of the registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that she or he is or was a director, officer, employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Fund may purchase
liability insurance and advance legal expenses, all to the fullest extent
permitted by the laws of the State of Minnesota, as now existing or hereafter
amended. The By-laws of the registrant provide that present or former directors
or officers of the Fund made or threatened to be made a party to or involved
(including as a witness) in an actual or threatened action, suit or proceeding
shall be indemnified by the Fund to the full extent authorized by
<PAGE>
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>
<PAGE>
PAGE 1
<PAGE>
Item 29(c). Not applicable.
Item 30. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of
the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, IDS Discovery Fund, Inc., certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis and State of
Minnesota on the 25th day of September, 1997.
IDS DISCOVERY FUND, INC.
By /s/ William R. Pearce**
William R. Pearce, President
By /s/ Melinda S. Urion**
Melinda S. Urion, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following persons in the
capacities indicated on the 25th day of September, 1997.
Signature Capacity
/s/ William R. Pearce** President, Principal
William R. Pearce Executive Officer
and Director
/s/ H. Brewster Atwater, Jr.* Director
H. Brewster Atwater, Jr.
/s/ Leslie L. Ogg** Vice President,
Leslie L. Ogg General Counsel and
Secretary
/s/ Lynne V. Cheney* Director
Lynne V. Cheney
/s/ William H. Dudley* Director
William H. Dudley
/s/ Robert F. Froehlke* Director
Robert F. Froehlke
/s/ David R. Hubers* Director
David R. Hubers
<PAGE>
Signature Capacity
/s/ Heinz F. Hutter * Director
Heinz F. Hutter
/s/ Anne P. Jones* Director
Anne P. Jones
/s/ Melvin R. Laird* Director
Melvin R. Laird
/s/ Alan K. Simpson* Director
Alan K. Simpson
/s/ Edson W. Spencer* Director
Edson W. Spencer
/s/ John R. Thomas* Director
John R. Thomas
/s/ Wheelock Whitney* Director
Wheelock Whitney
/s/ C. Angus Wurtele * Director
C. Angus Wurtele
Signed pursuant to Directors' Power of Attorney filed electronically herewith as
Exhibit 19(a) to Registrant's Post-Effective Amendment No. 34, by:
________________________
William R. Pearce
**Signed pursuant to Officers' Power of Attorney filed electronically herewith
as Exhibit 19(b) to Post-Effective Amendment No. 34 to Registration Statement
No. 2-72174, by:
________________________
William R. Pearce
<PAGE>
CONTENTS OF THIS
POST-EFFECTIVE AMENDMENT NO. 34
TO REGISTRATION STATEMENT NO. 2-72174
This post-effective amendment comprises the following papers and documents:
The facing sheet.
The cross reference sheet.
Part A.
The prospectus.
Part B.
Statement of Additional Information.
Financial statements
Part C.
Other information.
The signatures.
IDS Discovery Fund, Inc.
File No. 2-72174/811-3178
EXHIBIT INDEX
Exhibit 11: Independent Auditors' Consent.
Exhibit 17: Financial Data Schedules.
Exhibit 19(a): Directors' Power of Attorney.
Exhibit 19(b): Officers' Power of Attorney.
Independent auditors' consent
The board and shareholders IDS Discovery Fund, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "Financial highlights" in Part A and
"INDEPENDENT AUDITORS" in Part B of the Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> IDS DISCOVERY FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 871353027
<INVESTMENTS-AT-VALUE> 1092513152
<RECEIVABLES> 4476353
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1096989505
<PAYABLE-FOR-SECURITIES> 3033483
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16482431
<TOTAL-LIABILITIES> 19515914
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 807339088
<SHARES-COMMON-STOCK> 69437141
<SHARES-COMMON-PRIOR> 63641887
<ACCUMULATED-NII-CURRENT> 313207
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52602516
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 217218780
<NET-ASSETS> 904404070
<DIVIDEND-INCOME> 2644059
<INTEREST-INCOME> 4720707
<OTHER-INCOME> 0
<EXPENSES-NET> 10711290
<NET-INVESTMENT-INCOME> (3346524)
<REALIZED-GAINS-CURRENT> 64779024
<APPREC-INCREASE-CURRENT> 244479200
<NET-CHANGE-FROM-OPS> 305911700
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1927449)
<DISTRIBUTIONS-OF-GAINS> (99183189)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 62998962
<NUMBER-OF-SHARES-REDEEMED> (66170688)
<SHARES-REINVESTED> 8966980
<NET-CHANGE-IN-ASSETS> 299521979
<ACCUMULATED-NII-PRIOR> 2185644
<ACCUMULATED-GAINS-PRIOR> 107595881
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6222122
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10771584
<AVERAGE-NET-ASSETS> 782042392
<PER-SHARE-NAV-BEGIN> 10.73
<PER-SHARE-NII> (.04)
<PER-SHARE-GAIN-APPREC> 3.95
<PER-SHARE-DIVIDEND> (.03)
<PER-SHARE-DISTRIBUTIONS> (1.59)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.02
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> IDS DISCOVERY FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 871353027
<INVESTMENTS-AT-VALUE> 1092513152
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<PER-SHARE-NAV-BEGIN> 10.63
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<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> IDS DISCOVERY FUND CLASS Y
<S> <C>
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</TABLE>
DIRECTORS/TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as directors and trustees of the
below listed open-end, diversified investment companies that
previously have filed registration statements and amendments
thereto pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940 with the Securities and
Exchange Commission:
1933 Act 1940 Act
Reg. Number Reg. Number
IDS Bond Fund, Inc. 2-51586 811-2503
IDS California Tax-Exempt Trust 33-5103 811-4646
IDS Discovery Fund, Inc. 2-72174 811-3178
IDS Equity Select Fund, Inc. 2-13188 811-772
IDS Extra Income Fund, Inc. 2-86637 811-3848
IDS Federal Income Fund, Inc. 2-96512 811-4260
IDS Global Series, Inc. 33-25824 811-5696
IDS Growth Fund, Inc. 2-38355 811-2111
IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
IDS International Fund, Inc. 2-92309 811-4075
IDS Investment Series, Inc. 2-11328 811-54
IDS Managed Retirement Fund, Inc. 2-93801 811-4133
IDS Market Advantage Series, Inc. 33-30770 811-5897
IDS Money Market Series, Inc. 2-54516 811-2591
IDS New Dimensions Fund, Inc. 2-28529 811-1629
IDS Precious Metals Fund, Inc. 2-93745 811-4132
IDS Progressive Fund, Inc. 2-30059 811-1714
IDS Selective Fund, Inc. 2-10700 811-499
IDS Special Tax-Exempt Series Trust 33-5102 811-4647
IDS Stock Fund, Inc. 2-11358 811-498
IDS Strategy Fund, Inc. 2-89288 811-3956
IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686
IDS Tax-Free Money Fund, Inc. 2-66868 811-3003
IDS Utilities Income Fund, Inc. 33-20872 811-5522
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg
or either one of them, as her or his attorney-in-fact and agent, to
sign for her or him in her or his name, place and stead any and all
further amendments to said registration statements filed pursuant
to said Acts and any rules and regulations thereunder, and to file
such amendments with all exhibits thereto and other documents in
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.
<PAGE>
Dated the 8th day of January, 1997.
/s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird
H. Brewster Atwater, Jr. Melvin R. Laird
/s/ Lynne V. Cheney /s/ William R. Pearce
Lynne V. Cheney William R. Pearce
/s/ William H. Dudley /s/ Alan K. Simpson
William H. Dudley Alan K. Simpson
/s/ Robert F. Froehlke /s/ Edson W. Spencer
Robert F. Froehlke Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
Anne P. Jones C. Angus Wurtele
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
IDS Bond Fund, Inc. 2-51586 811-2503
IDS California Tax-Exempt Trust 33-5103 811-4646
IDS Discovery Fund, Inc. 2-72174 811-3178
IDS Equity Select Fund, Inc. 2-13188 811-772
IDS Extra Income Fund, Inc. 2-86637 811-3848
IDS Federal Income Fund, Inc. 2-96512 811-4260
IDS Global Series, Inc. 33-25824 811-5696
IDS Growth Fund, Inc. 2-38355 811-2111
IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
IDS International Fund, Inc. 2-92309 811-4075
IDS Investment Series, Inc. 2-11328 811-54
IDS Life Investment Series, Inc. 2-73115 811-3218
IDS Life Managed Fund, Inc. 2-96367 811-4252
IDS Life Moneyshare Fund, Inc. 2-72584 811-3190
IDS Life Special Income Fund, Inc. 2-73113 811-3219
IDS Managed Retirement Fund, Inc. 2-93801 811-4133
IDS Market Advantage Series, Inc. 33-30770 811-5897
IDS Money Market Series, Inc. 2-54516 811-2591
IDS New Dimensions Fund, Inc. 2-28529 811-1629
IDS Precious Metals Fund, Inc. 2-93745 811-4132
IDS Progressive Fund, Inc. 2-30059 811-1714
IDS Selective Fund, Inc. 2-10700 811-499
IDS Special Tax-Exempt Series Trust 33-5102 811-4647
IDS Stock Fund, Inc. 2-11358 811-498
IDS Strategy Fund, Inc. 2-89288 811-3956
IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686
IDS Tax-Free Money Fund, Inc. 2-66868 811-3003
IDS Utilities Income Fund, Inc. 33-20872 811-5522
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg
or either one of them, as her or his attorney-in-fact and agent, to
sign for her or him in her or his name, place and stead, as an
officer, 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
<PAGE>
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 1st day of November, 1995.
/s/ William R. Pearce
William R. Pearce
/s/ Melinda S. Urion
Melinda S. Urion
