<PAGE>
IDS RESEARCH OPPORTUNITIES FUND
Prospectus
August 5, 1996
The goal of IDS Research Opportunities Fund, a part of IDS Growth
Fund, Inc., is long-term growth of capital. The Fund has chosen to
participate in a master/feeder structure. Unlike most funds that invest
directly in securities, the Fund seeks to achieve its objective by
investing all of its assets in a corresponding Portfolio of Growth Trust,
which is a separate investment company. This arrangement is commonly
known as a master/feeder structure. The Portfolio in which the Fund
invests has the same investment objective, policies and restrictions as
the Fund. The Portfolio will be managed using a research methodology
developed by American Express Financial Corporation, which is designed to
give investors the opportunity to achieve a return in excess of the
Standard & Poor's 500 Composite Stock Price Index (S&P 500).
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. The
SAI, dated August 5, 1996, is incorporated here by reference. For a free
copy, contact American Express Shareholder Service.
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.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY. INVESTMENTS IN THE FUND INVOLVE INVESTMENT RISK
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN 55440-0534
612-671-3733
TTY: 800-846-4852
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
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Table of contents
Page
----
The Fund in brief . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Goal and types of investments and their risks . . . . . . . . . . . . . 3
Manager and distributor . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio manager . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Alternative purchase arrangements . . . . . . . . . . . . . . . . . . . 4
Sales charge and Fund expenses . . . . . . . . . . . . . . . . . . . . 4
Performance
Total return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment policies and risks . . . . . . . . . . . . . . . . . . . . 8
Facts about investments and their risks . . . . . . . . . . . . . . . . 9
Special considerations regarding master/feeder structure . . . . . . 12
Valuing Fund shares . . . . . . . . . . . . . . . . . . . . . . . . . 14
How to purchase, exchange or redeem shares
Alternative purchase arrangements . . . . . . . . . . . . . . . . . . 14
How to purchase shares . . . . . . . . . . . . . . . . . . . . . . . 17
How to exchange shares . . . . . . . . . . . . . . . . . . . . . . . 19
How to redeem shares . . . . . . . . . . . . . . . . . . . . . . . . 19
Reductions and waivers of the sales charge . . . . . . . . . . . . . 25
Special shareholder services
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Quick telephone reference . . . . . . . . . . . . . . . . . . . . . . 30
Distributions and taxes
Dividend and capital gain distributions . . . . . . . . . . . . . . . 30
Reinvestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
How to determine the correct TIN . . . . . . . . . . . . . . . . . . . 32
How the Fund and the Portfolio are organized
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Voting rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Shareholder meetings . . . . . . . . . . . . . . . . . . . . . . . . 33
Board members and officers . . . . . . . . . . . . . . . . . . . . . 34
Investment manager . . . . . . . . . . . . . . . . . . . . . . . . . 35
Administrator and transfer agent . . . . . . . . . . . . . . . . . . 36
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
About American Express Financial Corporation
General information . . . . . . . . . . . . . . . . . . . . . . . . . 37
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The Fund in brief
----------------
IDS Research Opportunities Fund (the Fund) is a diversified mutual fund
that seeks long-term capital growth. It seeks to achieve its goal by
investing all of its assets in Aggressive Growth Portfolio (the Portfolio)
of Growth Trust (the Trust) rather than by directly investing in and
managing its own portfolio of securities. The Fund is a series of IDS
Growth Fund, Inc. (the Company). Because any investment involves risk,
achieving this goal cannot be guaranteed.
Goal and types of investments and their risks
---------------------------------------------
The Fund seeks to provide shareholders with long-term growth of capital.
It seeks to achieve this goal by investing all of its assets in the
Portfolio of the Trust with the same investment objective as the Fund.
The Portfolio is a diversified mutual fund that invests primarily in the
equity securities of companies that comprise the S&P 500. The Portfolio
does not seek to replicate the S&P 500. Rather, it invests in those
securities within the universe of S&P 500 stocks that the Portfolio's
adviser believes are undervalued or that offer potential for long-term
capital growth. Ordinarily, at least 65% of the Portfolio's total assets
will be invested in equity securities. The Portfolio will be managed
using a research methodology developed by the Research Department of
American Express Financial Corporation (AEFC) that is designed to achieve
a return in excess of the return of the S&P 500.
Undervalued stocks and stock of companies with above-average growth rates
can provide higher returns to investors than stocks of other companies,
although the prices of these stocks can fluctuate more. Thus, the Fund is
appropriate for long-term investors who seek above average investment
returns and, in return, are willing to accept a relatively high degree of
short-term price variability and investment risk.
The foregoing investment goal is a fundamental policy of the Fund and the
Portfolio, which may not be changed unless authorized by a majority of the
outstanding voting securities of the Fund or of the Portfolio, as the case
may be. However, the Fund may withdraw its assets from the corresponding
Portfolio at any time if the board of directors of the Company determines
that it is in the best interests of the Fund to do so. In such event, the
Company would consider what action should be taken, including whether to
retain an investment adviser to manage the Fund's assets directly or to
reinvest the Fund's assets in another pooled investment entity.
Manager and distributor
The Portfolio is managed by AEFC, a provider of financial services since
1894. AEFC currently manages more than $52 billion in assets. Shares of
the Fund are sold through American Express Financial Advisors Inc., a
wholly owned subsidiary of AEFC.
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Portfolio manager
Guru Baliga joined AEFC in 1991 as a research analyst. He became
portfolio manager of the Portfolio and IDS Small Company Index Fund in
August 1996. He has been portfolio manager of IDS Blue Chip Advantage
Fund since 1994. He was appointed to the portfolio management team of IDS
Managed Retirement Fund in 1995, and is also a portfolio manager of IDS
advisory accounts that are managed similarly to the 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 and include expenses
charged by both the Fund and the Portfolio.
The purpose of the following table and example is to summarize the
aggregate expenses of the Fund and its corresponding Portfolio and to
assist investors in understanding the various costs and expenses that
investors in the Fund may bear directly or indirectly. The Company's
board of directors believes that, over time, the aggregate per share
expenses of the Fund and its corresponding Portfolio should be
approximately equal to (and may be less than) the per share expenses the
Fund would have if the Company retained its own investment adviser and the
assets of the Fund were invested directly in the type of securities held
by the corresponding Portfolio. The percentages indicated as "Management
fee" and "Other expenses" are based on both the Fund's and the Portfolio's
projected fees and expenses for the current fiscal year ending July 31,
1996. For additional information concerning Fund and Portfolio expenses,
see "How the Fund and the Portfolio are organized."
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<PAGE>
<TABLE>
<CAPTION>
Shareholder transaction expenses
Class A Class B Class Y
<S> <C> <C> <C>
Maximum sales charge on
purchases* (as a percentage of
offering price) . . . . . . . . . . . . . . . . . . . . 5% 0% 0%
Maximum deferred sales charge
imposed on redemptions (as a
percentage of original purchase
price) . . . . . . . . . . . . . . . . . . . . . . . . 0% 5% 0%
Annual Fund and allocated Portfolio operating expenses**
(as a % of average daily net assets):
Class A Class B Class Y
Management fee*** . . . . . . . . . . . . . . . . . . . 0.65% 0.65% 0.65%
12b-1 fee . . . . . . . . . . . . . . . . . . . . . . . 0.00% 0.75% 0.00%
Other expenses+ . . . . . . . . . . . . . . . . . . . . 0.85% 0.86% 0.65%
Total++ . . . . . . . . . . . . . . . . . . . . . . . . 1.50% 2.26% 1.30%
</TABLE>
* This charge may be reduced depending on your total investments in
IDS Funds. See "Reductions of the sales charge."
** Expenses are based on projected expenses for the Fund's first
fiscal year ending July 31, 1996.
*** The management fee is paid by the Trust on behalf of the
Portfolio.
+ Other expenses include an administrative services fee, a
shareholder services fee for Class A and Class B, a transfer
agency fee and other non-advisory expenses.
++ The Board considered whether the aggregate expenses of the Fund
and the Portfolio would be more or less than if the Fund invested
directly in the type of securities being held by its
corresponding Portfolio. AEFC has agreed to pay the small
additional costs required to use a master/feeder structure to
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<PAGE>
manage the investment portfolio during the first year of its
operation and half of such costs in the second year. AEFC
expects that, in subsequent years, the Portfolio's expenses as a
master-feeder fund will be equivalent to those of a similar
stand-alone fund.
Example: Suppose for each year for the next three years, Fund and
Portfolio 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
Class A $64 $95
Class B $73 $111
Class B* $23 $71
Class Y $13 $41
* Assuming Class B shares are not redeemed at the end of the period.
This example does not represent actual expenses, past or future. Actual
expenses may be higher or lower than those shown. Because Class B pays
annual distribution (12b-1) fees, long term shareholders of Class B may
indirectly pay an equivalent of more than a 6.25% sales charge, the
maximum permitted by the National Association of Securities Dealers.
Performance
Total Return
The Fund may at times advertise its average annual total return and
cumulative total return and compare its performance to that of other
mutual funds with similar investment objectives and to the performance of
the S&P 500, as well as other indices, and may also disclose its
performance as ranked by certain ranking entities. Each class of the Fund
has different expenses that will impact its performance. See the SAI for
more information about the calculation of 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.
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<PAGE>
<TABLE>
<CAPTION>
Average annual total returns
as of March 31, 1996
<S> <C> <C> <C>
Since
Inception
Purchase made 1 year ago 5 years ago (10/11/88)
IDS Advisory Accounts* 34.66% 18.45% 20.47%
S&P 500** 32.11% 14.67% 15.33%
Cumulative total returns
as of March 31, 1996
Since
Inception
Purchase made 1 year ago 5 years ago (10/11/88)
IDS Advisory 34.66% 133.17% 301.86%
Accounts*
S&P 500** 32.11% 98.27% 190.32%
</TABLE>
* The examples show combined performance returns for the IDS
advisory accounts ("Advisory Accounts") that are managed by AEFC
using the same strategy that it will use to manage the Fund. The
Advisory Accounts' performance reflects reinvestment of dividends
and is calculated net of brokerage commissions and management
fees. At March 31, 1996, the composite included all 10 fully
discretionary, equity Advisory Accounts under management using
this strategy with total assets of $550.5 million, which is 61%
of the total assets using this strategy and 2% of total assets
under management by AEFC. Terminated accounts are not purged
from the composite. Expenses and fees associated with
registering a mutual fund have not been deducted from these
returns. The returns for the Fund will be lower, initially, due
to these expenses and fees. Returns shown should not be
considered a representation of the Fund's future performance.
** Returns for the Advisory Accounts are compared to those of the
S&P 500 for the same periods. The S&P 500 is an unmanaged index
of common stock prices that is frequently used as a general
measure of market performance. The Advisory Accounts, like the
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<PAGE>
Portfolio, invest in those stocks included in the S&P 500 that
AEFC believes will outperform the S&P 500 within the 6- to 12-
month period following investment because, in AEFC's opinion,
such stocks are undervalued or have above-average growth
potential. The S&P 500 reflects reinvestment of all
distributions and changes in market prices, but excludes
brokerage commissions and other fees.
Investment policies and risks
Unlike mutual funds which directly acquire and manage their own portfolio
of securities, the Fund seeks to achieve its investment objective by
investing all of its assets in a corresponding Portfolio of the Trust,
which is a separate investment company. The Portfolio in which the Fund
invests has the same investment objective, policies and restrictions as
the Fund. The board of directors of the Company believes that by
investing all of its assets in the corresponding Portfolio, the Fund will
be in a position to realize directly or indirectly certain economies of
scale inherent in managing a larger asset base, although there is no
assurance this will occur. The policies described below apply both to the
Fund and its corresponding Portfolio.
The Portfolio is a diversified mutual fund that invests primarily in
equity securities of companies comprising the S&P 500 that, in the opinion
of AEFC, are undervalued in relation to their long-term earning power or
the asset value of their issuers or that have above-average growth
potential. Ordinarily, at least 65% of the Portfolio's total assets will
be invested in equity securities consisting of common stocks, preferred
stocks, securities convertible into common stocks, securities having
common stock characteristics such as rights and warrants and foreign
equity securities.
Securities may be undervalued because of several factors, including the
following: market decline, poor economic conditions, tax-loss selling or
actual or anticipated unfavorable developments affecting the issuer of the
security. Companies also may be undervalued because they are part of an
industry that is out of favor with investors even though the individual
companies may be financially sound and have high rates of earning growth.
Any or all of these factors may provide buying opportunities at attractive
prices relevant to the long-term prospects for the companies in question.
Companies with above-average growth potential generally will have steady
earnings and cash flow growth, good and/or improving balance sheets,
strong positions in their market niches and the ability to perform well in
a stagnant economy.
The Portfolio may invest more than 25% of its total assets in equity
securities of companies included in the S&P 500 that are primarily engaged
in either the utilities or the energy industry. Because the Portfolio may
concentrate its investments in one or both of these industries, the value
of its shares will be especially affected by factors peculiar to these
industries, and may fluctuate more widely than the value of shares of a
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<PAGE>
fund that invests in a broader range of industries. The Portfolio will
concentrate its investments in either of these industries only to the
extent that the S&P 500 becomes heavily weighted in that industry. The
Portfolio's concentration policy can be changed only if holders of a
majority of the outstanding voting securities agree to make the change.
See "Utilities industry" and Energy industry" below.
In order to seek long-term capital growth when interest rates are expected
to decline, the Portfolio may invest in debt securities that, at the time
of purchase, are rated in one of the four highest rating categories by one
nationally recognized statistical rating organization rating that security
(i.e., "investment grade securities"). The Portfolio may invest in an
unrated debt security if the adviser deems it to be of comparable quality
to investment grade.
Research Methodology. The Research Department of AEFC has designed a
proprietary research rating system that is used as the basis for rating
securities of issuers listed on the S&P 500. The research ratings range
from a "strong buy" to " strong sell." The Portfolio will invest
primarily in equity securities that the Research Department rates highly
and expects to outperform the S&P 500. The securities in which the
Portfolio invests will not correspond entirely to the S&P 500 securities
recommended by the Research Department because some of these
recommendations may not be appropriate investments for the Portfolio due
to diversification, liquidity or other requirements that apply to
registered investment companies. In addition, some of the recommendations
may not be appropriate for the Portfolio under its investment objective or
investment limitations. Moreover, other AEFC clients who receive the
Research Department's recommendations may place purchase or sale orders
that make it more difficult for the Portfolio to implement its own orders
to buy or sell the same securities.
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
Market risk: The Portfolio is subject to market risk because it invests
primarily in common stocks. Market risk is the possibility that common
stock prices will decline over short or even extended periods. The U.S.
stock market tends to be cyclical, with periods when stock prices
generally rise and periods when stock prices generally decline.
Utilities industry: Utility stocks, including electric, gas, telephone
and other energy-related (e.g., nuclear) utilities stocks, generally offer
dividend yields that exceed those of industrial companies and their prices
tend to be less volatile than stocks of industrial companies. However,
utility stocks can still be affected by the risks of the stock market in
general, as well as factors specific to public utilities companies. Many
utility companies, especially electric utility companies, historically
have been subject to the risk of increases in fuel and other operating
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<PAGE>
costs, changes in interest rates on borrowing for capital improvement
programs, changes in applicable laws and regulations, and costs and
operating constraints associated with compliance with environmental
regulations. In addition, because securities issued by utility companies
are particularly sensitive to movements in interest rates, the equity
securities of these companies are more affected by movements in interest
rates than the equity securities of other companies. Each of these risks
could adversely affect the ability of public utilities companies to
declare or pay dividends and the ability of holders of common stock, such
as the Portfolio, to realize any value from the assets of the company upon
liquidation or bankruptcy.
Energy Industry: The Portfolio may concentrate its investments in
companies in the energy field, including the conventional areas of oil,
gas, electricity and coal, as well as newer sources of energy such as
geothermal, nuclear, oil shale and solar power. These companies include
those that produce, transmit, market or measure energy, as well as those
companies involved in exploring for new sources of energy. Securities of
companies in the energy field are subject to changes in value and dividend
yield which depend largely on the price and supply of energy fuels. Swift
price and supply fluctuations may be caused by events relating to
international politics, energy conservation, the success of exploration
projects and tax or other governmental regulatory policies.
Debt securities: The price of bonds generally falls as interest rates
increase, and rises as interest rates decrease. The price of an
investment-grade bond also fluctuates if its credit rating is upgraded or
downgraded. Securities that are subsequently downgraded in quality may
continue to be held by the Portfolio, and will be sold only if the
portfolio manager believes it is advantageous to do so.
Foreign investments: The Portfolio may invest only in foreign securities
that are included in the S&P 500 (or that will be included in the S&P 500
in the near future) or in Canadian money market instruments. 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. The Portfolio may invest up to 20%
of its total assets in foreign investments included in the S&P 500.
American depository receipts: The Portfolio may invest in foreign
securities included in the S&P 500 that are traded in the form of American
Depository Receipts (ADRs). ADRs are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying securities of
foreign issuers. Generally, ADRs, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S. securities market.
Thus, these securities are not denominated in the same currency as the
securities into which they may be converted. ADRs are considered to be
foreign investments by the Portfolio and thus subject to the risks and
investment limitation set forth under "Foreign investments."
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<PAGE>
Derivative instruments: The portfolio manager may use derivative
instruments in addition to securities to achieve investment performance.
Derivative instruments include futures, options and forward contracts.
Such instruments may be used to maintain cash reserves while remaining
fully invested, to offset anticipated declines in values of investments,
to facilitate trading, to reduce transaction costs, or to pursue higher
investment returns. Derivative instruments are characterized by requiring
little or no initial payment and a daily change in price based on or
derived from a security, a currency, a group of securities or currencies,
or an index. A number of strategies or combination of instruments can be
used to achieve the desired investment performance characteristics. A
small change in the value of the underlying security, currency or index
will cause a sizable gain or loss in the price of the derivative
instrument. Derivative instruments allow the portfolio manager to change
the investment performance characteristics very quickly and at lower
costs. Risks include losses of premiums, rapid changes in prices,
defaults by other parties, and inability to close such instruments. The
Portfolio will use derivative instruments only to achieve the same
investment performance characteristics it could achieve by directly
holding those securities and currencies permitted under the investment
policies. The Portfolio will designate cash or appropriate liquid assets
to cover its portfolio obligations. No more than 5% of the Portfolio's
net assets can be used at any one time for good faith deposits on futures
and premiums for options on futures that do not offset existing investment
positions. This does not, however, limit the portion of the Portfolio's
assets at risk to 5%. The Portfolio is not limited as to the percentage
of its assets that may be invested in permissible investments, including
derivatives, except as otherwise explicitly provided in this prospectus or
the SAI. For descriptions of these and other types of derivative
instruments, see the Appendix to this prospectus and the SAI.
The Portfolio may use any of the above instruments, and there can be no
assurance that any strategy that is used will succeed. The Portfolio's
ability to use these instruments may be limited by market conditions,
regulatory limits and tax considerations. Risks include loss of premiums
for purchased options, defaults by other parties with respect to over-the-
counter instruments, and inability to close-out positions in such
instruments due, for example, to lack of a liquid secondary market. For
further information regarding derivative instruments, see the SAI.
Securities and other instruments that are illiquid: A security or other
instrument is illiquid if it cannot be sold quickly in the normal course
of business. Some investments cannot be resold to the U.S. public because
of their terms or government regulations. Securities and instruments,
however, can be sold in private sales, and many may be sold to other
institutions and qualified buyers or on foreign markets. The portfolio
manager will follow guidelines established by the board and consider
relevant factors such as the nature of the security and the number of
likely buyers when determining whether a security is illiquid. No more
than 10% of the Portfolio's net assets will be held in securities and
other instruments that are illiquid.
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<PAGE>
Money market instruments: Short-term debt securities rated in the top two
grades or the equivalent are used to meet daily cash needs and at various
times to hold assets until better investment opportunities arise.
Generally, less than 25% of the Portfolio's total assets are in these
money market instruments. However, for temporary defensive purposes,
these investments could exceed that amount for a limited period of time.
The investment policies described above, including the Portfolio's policy
of investing in stocks included in the S&P 500, may be changed by the
board.
Lending portfolio securities: The Portfolio may lend its securities to
earn income so long as borrowers provide collateral equal to the market
value of the loans. The risks are that borrowers will not provide
collateral when required or return securities when due. Unless a
majority of the outstanding voting securities approve otherwise, loans may
not exceed 30% of the Portfolio's net assets.
Portfolio turnover: The Portfolio does not expect its portfolio turnover
rate to exceed 200% during its initial fiscal period. High portfolio
turnover can lead to increased brokerage commissions and taxes.
Special considerations regarding master/feeder structure
An investor in the Fund should be aware that the Fund, unlike mutual funds
which directly acquire and manage their own portfolio of securities, seeks
to achieve its investment objective by investing its assets in the
Portfolio of the Trust with an identical investment objective to the Fund.
This arrangement is commonly known as a "master/feeder structure." The
Trust is a separate investment company. The Fund's interest in securities
owned by the Portfolio will be indirect. The board of the Company has
considered the advantages and disadvantages of investing the assets of the
Fund in the Portfolio. The board believes that this approach will be in
the best interests of the Fund and its shareholders and offers
opportunities for economies of scale. The investment objective, policies
and restrictions of the Portfolio are described under the captions "Goal
and types of investments and their risks" and "Facts about investments and
their risks." Additional information on investment policies may be found
in the SAI.
In addition to selling units to the Fund, the Portfolio may sell units to
other affiliated and non-affiliated mutual funds and to institutional
investors. Such investors will invest in the Portfolio on the same terms
and conditions and will pay a proportionate share of the Portfolio's
expenses. However, the other investors investing in the Portfolio are not
required to sell their shares at the same price as the Fund due to
variations in sales commissions and other operating expenses. Therefore,
investors in the Fund should be aware that these differences may result in
differences in returns experienced by investors in the different funds
that invest in the same Portfolio. Information on other funds investing
in the Portfolio may be obtained by contacting American Express Financial
Advisors at 1-800-AXP-SERV.
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<PAGE>
The Fund may withdraw (completely redeem) all its assets from the
Portfolio at any time if the board determines that it is in the best
interest of the Fund to do so. In the event the Fund withdraws all of its
assets from the Portfolio, the board would consider what action might be
taken, including investing all assets of the Fund in another pooled
investment entity or retaining an investment advisor to manage the Fund's
assets in accordance with its investment objective. The investment
objective of the Fund and its Portfolio can only be changed with the
approval of a majority of the applicable entity's outstanding voting
securities. If the objective of the Portfolio changes and shareholders of
the Fund do not approve a parallel change in the Fund's investment
objective, the Fund would seek an alternative investment vehicle for the
Fund or retain an investment advisor on its behalf.
Investors in the Fund should be aware that smaller funds investing in the
Portfolio may be adversely affected by the actions of larger funds
investing in the Portfolio. For example, if a large fund withdraws from
the Portfolio, the remaining funds may experience higher prorated
operating expenses, thereby producing lower returns. Additionally, the
Portfolio may become less diverse, resulting in increased portfolio risk,
and experience decreasing economies of scale. Institutional investors in
the Portfolio that have a greater pro rata ownership than the Fund could
have effective voting control over the operation of the Portfolio.
Certain changes in the Portfolio's fundamental objective, policies and
restrictions could require the Fund to redeem its interest in the
Portfolio. Any such withdrawal could result in a distribution of in-kind
portfolio securities (as opposed to a cash distribution). If securities
are distributed, the Fund could incur brokerage, tax or other charges in
converting the securities to cash. In addition, a distribution in kind
may result in a less diversified portfolio of investments or adversely
affect the liquidity of the Fund.
As required by the Investment Company Act of 1940, the Fund will hold a
meeting of Fund shareholders. The Fund will vote its units in the
Portfolio for or against such matters proportionately to the instructions
to vote for or against such matters received from Fund shareholders. The
Fund will vote shares for which it receives no voting instructions in the
same proportion as the shares for which it receives voting instructions.
See "Investment manager and transfer agent" for a description of the
management and other expenses associated with the Fund's investment in the
Portfolio.
Valuing Fund shares
The public offering price is the net asset value (NAV) plus 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
each business day. In valuing assets:
- 14 -
<PAGE>
. Securities (except bonds) and assets with available market values
are valued on that basis.
. Securities maturing in 60 days or less are valued at amortized
cost.
. Bonds and assets without readily available market values are
valued according to methods selected in good faith by the board
of directors.
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. Qualifying institutional investors should
purchase Class Y shares. Other investors may choose Class A or Class B
shares as best suits their circumstances and objectives.
<TABLE>
<CAPTION>
Sales Charge and distribution
(12b-1) fee Service fee Other Information
<S> <C> <C> <C>
Class A Maximum initial sales charge 0.175% of average daily Initial sales charge
of 5%; no 12b-1 fee net assets waived or reduced for
certain purchases
Class B No initial sales charge; 0.175% of average daily Shares convert to Class
maximum CDSC of 5% declines net assets A after eight years;
to 0% after six years; 12b-1 CDSC waived in certain
fee of 0.75% of average daily circumstances
net assets
Class Y None None Available only to
certain qualifying
institutional investors
</TABLE>
Conversion of Class B shares to Class A shares -- Eight calendar years
after Class B shares were originally purchased, Class B shares will
convert to Class A shares and will no longer be subject to a distribution
fee. The conversion will be on the basis of relative net asset values of
the two classes, without the imposition of any sales charge. Class B
shares purchased through reinvested dividends and other distributions will
convert to Class A shares on a pro rata basis with Class B shares not
purchased through reinvestment.
- 15 -
<PAGE>
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 shares. The sales charges and distribution
fee (included in "Ongoing expenses") are structured so that you will have
approximately the same total return at the end of eight years (and
thereafter, as a result of the conversion feature) regardless of which
class you chose.
Sales charges on purchase or redemption
If you purchase Class A shares If you purchase Class B shares
. You will not have all of . All of your money is
your purchase price invested in shares of
invested. Part of your stock. However, you will
purchase price will go to pay a sales charge if you
pay the sales charge. You redeem your shares within
will not pay a sales six years of purchase.
charge when you redeem
your shares.
. You will be able to take . No reductions of the
advantage of reductions in sales charge are
the sales charge. available for large
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 shares If you purchase Class B shares
. Your shares will have a . The distribution and
lower expense ratio than transfer agency fees for
Class B shares because Class B will cause your
Class A does not pay a shares to have a higher
distribution fee and the expense ratio and to pay
transfer agency fee for lower dividends than Class
Class A is lower than the A shares. After eight
fee for Class B. As a years, Class B shares will
result, Class A shares convert to Class A shares
will pay higher dividends and will no longer be
than Class B shares. subject to higher fees.
- 16 -
<PAGE>
You should consider how long you plan to hold your shares and whether the
accumulated higher fees and CDSC on Class B shares prior to conversion
would be less than the initial sales charge on Class A shares. Also
consider to what extent the difference would be offset by the lower
expenses on Class A shares. To help you in this analysis, the example in
the "Sales charge and Fund expenses" section of the prospectus illustrates
the charges applicable to each class of shares.
Class Y Shares -- Class Y shares are offered to certain institutional
investors. Class Y shares are sold without a front-end sales charge or a
CDSC and are not subject to either a service fee or a distribution fee.
The following investors are eligible to purchase Class Y shares:
. 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.
. 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.
. Nonqualified deferred compensation plans* whose participants are
included in a qualified employee benefit plan described above.
How to purchase shares
If you're investing in this Fund for the first time, you'll need
to set up an account. Your financial advisor will help you fill out and
submit an application. Once your account is set up, you can choose among
several convenient ways to invest.
Important: When opening an account, you must provide AEFC with
your correct Taxpayer Identification Number (Social Security or Employer
Identification Number). See "Distributions and taxes."
* Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
- 17 -
<PAGE>
When you buy shares for a new 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
. 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.
. The minimums allowed for investment may change from time
to time.
. Wire orders can be accepted only on days when your bank,
AEFC, the Fund and Norwest Bank Minneapolis are open for
business.
. Wire purchases are completed when wired payment is
received and the Fund accepts the purchase.
. AEFC and the Fund are not responsible for any delays that
occur in wiring funds, including delays in processing by
the bank.
. You must pay any fee the bank charges for wiring.
. The Fund reserves the right to reject any application for
any reason.
. 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.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Three ways to invest
<S> <C> <C>
1 Send your check and application (or your name Minimum amounts
By regular account and account number if you have an established
account) to: Initial Investment: $2,000
American Express Additional Investment: $100
Financial Advisors Inc.
P.O. Box 74 Account Balances: $300*
Minneapolis, MN 55440-0074
Qualified retirement
Your financial advisor will help you with accounts: none
this process.
2 Contact your financial advisor to set up one Minimum amounts
By scheduled of the following scheduled plans:
investment plan Initial investment $100
. automatic payroll deduction
Additional investments: $100/mo.
. bank authorization
Account balances: none
. direct deposit of Social Security (on active plans of monthly payments)
check
. other plan approved by the Fund
3 If you have an established account, you may If this information is not included, the order may
By wire wire money to: be rejected and all money received by the Fund
less any costs the Fund or AEFC incurs, will be
Norwest Bank Minneapolis returned promptly.
Routing No. 091000019
Minneapolis, MN Minimum amounts
Attn: Domestic Wire Dept.
Each wire investment: $1,000
Give these instructions:
Credit IDS Account
#00-30-015 for personal account # (your
account number) or (your name).
* If your account balance falls below $300, you will be asked in writing to bring it up to $300 or establish a
scheduled investment plan. If you don't do so within 30 days, your shares can be redeemed and the proceeds
mailed to you.
</TABLE>
- 19 -
<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, including fees and
expenses, read the prospectus carefully before exchanging into a new fund.
If your exchange request arrives at the Minneapolis headquarters before
the close of business, your shares will be redeemed at the net asset value
set for that day. The proceeds will be used to purchase new fund shares
the same day. Otherwise, your exchange will take place the next business
day at that day's net asset value.
For tax purposes, an exchange represents a redemption and purchase and may
result in a gain or loss. However, you cannot 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
redemptions 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.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
Two ways to request an exchange or redemption of shares
<S> <C> <C>
1 Include in your letter: Regular mail:
By letter
. the name of the fund(s) American Express
Shareholder Service
. the class of shares to be Attn: Redemptions
exchanged or redeemed P.O. Box 534
Minneapolis, MN
. your account number(s) (for 55440-0534
exchanges, both funds must be
registered in the same Express mail:
ownership) American Express
Shareholder Service
. your Taxpayer Identification Attn: Redemptions
Number (TIN) 733 Marquette Ave.
Minneapolis, MN 55402
. the dollar amount or number of
shares you want to exchange or
redeem
. signature of all registered
account owners
. for redemptions, indicate how
you want your money delivered to
you
. any paper certificates of shares
you hold
2 . The Fund and AEFC will honor any . AEFC answers phone
By phone telephone exchange or redemption requests promptly, but you
request believed to be authentic may experience delays when
American Express and will use reasonable call volume is high. If
Telephone Transaction procedures to confirm that they you are unable to get
Service: are. This includes asking through, use mail proce-
800-437-3133 identifying questions and tape dure as an alternative.
or recording calls. If reasonable
612-671-3800 procedures are not followed, the . Acting on your
Fund or AEFC will be liable for instructions, your
any loss resulting from financial advisor may
fraudulent requests. conduct telephone
transactions on your
behalf.
- 21 -
<PAGE>
. Phone exchange and redemption . Phone privileges may be
privileges automatically apply modified or discontinued
to all accounts except at any time.
custodial, corporate or
qualified retirement accounts Minimum amount
unless you request these Redemption: $100
privileges NOT apply by writing
American Express Shareholder Maximum amount
Service. Each registered owner
must sign the request. Redemption: $50,000
</TABLE>
Exchange policies:
. 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.
. Exchanges must be made into the same class of shares of the new fund.
. If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.
. Once we receive your exchange request, you cannot cancel it.
. Shares of the new fund may not be used on the same day for another
exchange.
. If your shares are pledged as collateral, the exchange will be delayed
until written approval is obtained from the secured party.
. AEFC and the Fund reserve the right to reject any exchange, limit the
amount, or modify or discontinue the exchange privilege, to prevent
abuse or adverse effects on the Fund and its shareholders. For
example, if exchanges are too numerous or too large, they may disrupt
the Fund's investment strategies or increase its costs.
Redemption policies:
. 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 buy
new shares in the same class 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.
- 22 -
<PAGE>
. 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 . Mailed to the address on record
By regular or express
mail . Payable to names listed on the account.
NOTE: The express mail delivery charges you pay will vary depending
on the courier you select.
2 . Minimum wire redemption: $1,000.
By wire
. Request that money be wired to your bank.
. 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 . Minimum payment: $50.
By scheduled payout
plan . 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.
. Purchasing new shares while under a payout plan may be disadvantageous
because of the sales charges.
</TABLE>
- 23 -
<PAGE>
Reductions and waivers of the sales charge
Class A -- initial sales charge alternative
On purchases of Class A shares, you pay a 5% sales charge on the
first $50,000 of your total investment and less on investments after the
first $50,000:
Total Investment Sales charge as a percent of:*
Public offering price Net amount invested
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
* 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:
. the amount you are investing in this Fund now,
. the amount of your existing investment in this Fund, if any, and
. 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:
. 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.
. 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.
. 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.
- 24 -
<PAGE>
For more details, see the SAI.
Waivers of the sales charge for Class A shares
- 25 -
<PAGE>
Sales charges do not apply to:
. Current or retired board members, officers or employees of the
Fund or AEFC or its subsidiaries, their spouses and unmarried
children under 21.
. Current or retired American Express financial advisors, their
spouses and unmarried children under 21.
. 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 CDSC of up to 4% on
certain redemptions. For more information, see the SAI.)
. 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 1% CDSC on redemption of those shares will be
waived in the same circumstances described for Class B.
. 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.
. Purchases made with dividend or capital gain distributions from
another fund in the IDS MUTUAL FUND GROUP that has a sales
charge.
. Purchases made through American Express Strategic Portfolio
Service (total amount of all investments made in the Strategic
Portfolio Service must be at least $50,000).
. Purchase made under the University of Texas System ORP.
____________________
* Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
- 26 -
<PAGE>
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 made The percentage rate for the CDSC
during the: 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.
- 27 -
<PAGE>
Waivers of the sales charge for Class B shares
The CDSC on Class B shares will be waived on redemptions of shares:
. In the event of the shareholder's death,
. Purchased by any board member, officer or employee of a fund or
AEFC or its subsidiaries,
. Held in a trusteed employee benefit plan,
. Held in IRAs or certain qualified plans for which American
Express Trust Company acts as trustee or 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 Inc., 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.
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.
- 28 -
<PAGE>
<TABLE>
<CAPTION>
Quick telephone reference
<S> <C> <C>
American Express Telephone Redemptions and exchanges, dividend National/Minnesota:
Transaction Service payments or reinvestments and automatic 800-437-3133
payment arrangements
Mpls./St. Paul area:
671-3800
American Express Shareholder Service Fund performance, objectives and 612-671-3733
account inquiries
TTY Service For the hearing impaired 800-846-4852
American Express Infoline Automated account information National/Minnesota:
(TouchTone[REGISTERED TRADEMARK] phones 800-272-4445
only), including current Fund prices
and performance, account values and Mpls./St. Paul area:
recent account transactions 671-1630
</TABLE>
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 at the end of the calendar year as dividends. Short-
term capital gains are distributed at the end of the calendar year and
included in net investment income. The Fund realizes long-term capital
gains whenever it sells securities held for more than one year for a
higher price than it paid for them. Net realized long-term capital gains,
if any, are distributed at the end of the calendar year as capital gain
distributions. Before they're distributed, net long-term capital gains
are included in the value of each share. After they're distributed, the
value of each share drops by the per-share amount of the distribution.
(If your distributions are reinvested, the total value of your holdings
will not change.)
- 29 -
<PAGE>
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. Class B shareholders will receive lower per share
dividends than Class A and Class Y shareholders because expenses for
Class B are higher than for Class A or Class Y. Class A shareholders will
receive lower per share dividends than Class Y shareholders because
expenses for Class A are higher than for Class Y.
Reinvestments
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
. you request the Fund in writing or by phone to pay distributions
to you in cash, or
. you direct the Fund to invest your distributions in any publicly
available IDS Fund for which you've previously opened an account.
You pay no sales charge on shares purchased through reinvestment
of distributions from this Fund into any IDS fund.
The reinvestment price is the net asset value at close of business on the
day the distribution is paid. (Your quarterly statement will confirm the
amount invested and the number of shares purchased.)
If you choose cash distributions, you will receive only those declared
after your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash
distributions, we will reinvest the checks into your account at the
then-current net asset value and make future distributions in the form of
additional shares.
Taxes
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 pays
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.
- 30 -
<PAGE>
Your gain may be either short term (for shares held for one year or less)
or long term (for shares held for more than one year).
Your Taxpayer Identification Number (TIN) is important. As with any
financial account you open, you must list your current and correct
taxpayer identification number (TIN) -- either your social security or
employer identification number. The TIN must be certified under penalties
of perjury on your application when you open an account at AEFC.
If you don't provide the TIN, or the TIN you report is incorrect, you
could be subject to backup withholding of 31% of taxable distributions and
proceeds from redemptions and exchanges. You also could be subject to
further penalties, such as:
. a $50 penalty for each failure to supply your correct TIN
. a civil penalty of $500 if you make a false statement that
results in no backup withholding
. 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.
<TABLE>
<CAPTION>
How to determine the correct TIN
<S> <C>
For This Type of Account: Use the Social Security or Employer Identification
Number of:
Individual or joint account The individual listed on the account (the first
name listed on a joint account)
Custodian account of a minor (Uniform Gifts/Transfers The minor
to Minors Act)
A living trust The grantor-trustee (the person who puts the money
into the trust)
An irrevocable trust, pension trust or estate The legal entity (not the personal representative
or trustee, unless no legal entity is designated
in the account title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or tax-exempt organization The organization
</TABLE>
- 31 -
<PAGE>
For details on TIN requirements, ask your financial advisor or local
American Express Financial Advisors office for federal Form W-9, "Request
for Taxpayer Identification Number and Certification."
Important: This information is a brief and selective summary of certain
federal tax rules that apply to the Fund. Tax matters are highly
individual and complex, and you should consult a qualified tax advisor
about your personal situation.
How the Fund and the Portfolio are organized
IDS Growth Fund, Inc., of which IDS Research Opportunities Fund is a part,
is a diversified, open-end management investment company, as defined in
the Investment Company Act of 1940. Originally incorporated on May 21,
1970, in Nevada, the corporation changed its state of incorporation on
June 13, 1986, by merging into a Minnesota corporation incorporated on
April 7, 1986. The Fund's headquarters are at 901 S. Marquette Ave.,
Suite 2810, Minneapolis, MN 55402-3268.
Shares
IDS Growth Fund, Inc. currently is composed of two funds, each issuing its
own series of capital stock: IDS Growth Fund and IDS Research
Opportunities Fund. Each fund is owned by its shareholders. Each fund
issues shares in three classes -- Class A, Class B and Class Y. Each
class has different sales arrangements and bears different expenses. Each
class represents interests in the assets of a fund. Par value is 1 cent
per share. Both full and fractional shares can be issued.
The shares of each fund making up IDS Growth Fund, Inc. represents an
interest in that fund's assets only (and profits or losses) and, in the
event of liquidation, each share of a fund would have the same rights to
dividends and assets as every other share of that fund (except expenses
attributable solely to a class of shares will be borne by that class).
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.
- 32 -
<PAGE>
Board members and officers
Shareholders elect a board that oversees the operations of the Fund and
chooses its officers. Its officers are responsible for day-to-day business
decisions based on policies set by the board. The board has named an
executive committee that has authority to act on its behalf between
meetings. The board members also serve on the boards of the 46 other funds
in the IDS MUTUAL FUND GROUP, except for Mr. Dudley, who is a board member
of all 34 publicly offered funds. The members of the board also serve as
members of the board of the Trust which manages the investments of the
Portfolio and other accounts. Should any conflict of interest arise
between the interests of the shareholders of the Fund and those of the
other accounts, the board will follow written procedures to address the
conflict.
<TABLE>
<CAPTION>
Board members and officers
<S> <C>
President and interested board William R. Pearce
members President of all Funds in the IDS MUTUAL FUND GROUP
Independent board members Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for Public Policy
Research.
Robert F. Froehlke
Former president of all Funds in the IDS MUTUAL FUND GROUP
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Melvin R. Laird
Senior counsellor for national and international affairs, The
Reader's Digest Association, Inc.
Edson W. Spencer
Former chairman and chief executive officer,
Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
- 33 -
<PAGE>
Board members and officers
C. Angus Wurtele
Chairman of the board, The Valspar Corporation
Interested directors who are William H. Dudley
officers and/or employees of Executive vice president, AEFC
AEFC
David R. Hubers
President and chief executive officer, AEFC
John R. Thomas
Senior vice president, AEFC
Officers who also are officers Peter J. Anderson
and/or employees of AEFC Vice president of all Funds in the IDS MUTUAL FUND GROUP.
Melinda S. Urion
Treasurer of all Funds in the IDS MUTUAL FUND GROUP.
Other officer Leslie L. Ogg
Vice President, general counsel and secretary of all Funds in the IDS
MUTUAL FUND GROUP.
Refer to the SAI for the board members' and officers' biographies.
</TABLE>
Investment manager
The Trust, on behalf of the Portfolio, pays AEFC for managing its
portfolio. Under its Investment Management Services Agreement, AEFC
determines which securities will be purchased, held or sold (subject to
the direction and control of the board). Under the current agreement,
effective August ___, 1996 the Trust pays AEFC a fee for these services
based on the average daily net assets of the Portfolio, as follows:
- 34 -
<PAGE>
Assets Annual rate
(billions) at each asset level
First $0.25 0.650%
Next 0.25 0.625%
Next 0.50 0.600%
Next 1.00 0.575%
Next 1.00 0.550%
Next 3.00 0.525%
Over 6.00 0.500%
Under the Agreement, the Portfolio also pays taxes, brokerage commissions
and non-advisory expenses.
Administrator and Transfer Agent
Under an Administrative Services Agreement, the Fund pays AEFC for
administration and accounting services at an annual rate of 0.06%
decreasing in gradual percentages to 0.03% as assets increase.
In addition, 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:
. Class A $15
. Class B $16
. Class Y $15
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 up to 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.
- 35 -
<PAGE>
Under a Shareholder Service Agreement, the Fund also pays a fee for
service provided to Class A and Class B shareholders by financial advisers
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.
Portions of sales charges may be paid to securities dealers who sell the
Fund's shares or to banks and other financial institutions. The amounts
of those payments will range from 0.8% to 4% of the Fund's offering price
depending on the monthly sales volume.
About American Express Financial Corporation
General information
The AEFC family of companies offers not only mutual funds but also
insurance, annuities, investment certificates and a broad range of
financial management services.
Besides managing investments for all publicly offered funds in the IDS
MUTUAL FUND GROUP, AEFC also manages investments for itself and its
subsidiaries, IDS Certificate Company and IDS Life Insurance Company.
Total assets under management on May 31, 1996 were more than $137 billion.
American Express Financial Advisors Inc. serves individuals and businesses
through its nationwide network of more than 175 offices and more than
7,800 advisors.
Other AEFC subsidiaries provide investment management and related services
for pension, profit sharing, employee savings and endowment funds of
businesses and institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a
wholly owned subsidiary of American Express Company (American Express), a
financial services company with headquarters at American Express Tower,
World Financial Center, New York, NY 10285. The Fund may pay brokerage
commissions to broker-dealer affiliates of American Express and AEFC.
- 36 -
<PAGE>
IDS Research Opportunities Fund
IDS Tower 10
Minneapolis, MN 55440-0010
Distributed by
American Express
Financial Advisors Inc.
- 37 -
<PAGE>
IDS GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS RESEARCH OPPORTUNITIES FUND
August 5, 1996
This Statement of Additional Information (SAI) is not a
prospectus. It should be read together with the prospectus, 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 August 5, 1996, and it is to be used with the
prospectus dated August 5, 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
IDS Research Opportunities Fund
TABLE OF CONTENTS
Page
----
Goals and Investment Policies . . . . . . . . . . . . . . . See Prospectus
Additional Investment Policies . . . . . . . . . . . . . . . 1
Portfolio Transactions . . . . . . . . . . . . . . . . . . . 5
Brokerage Commissions Paid to Brokers Affiliated With
American Express Financial Corporation . . . . . . . . . 7
Performance Information . . . . . . . . . . . . . . . . . . 7
Valuing Fund Shares . . . . . . . . . . . . . . . . . . . . 8
Investing in the Fund . . . . . . . . . . . . . . . . . . . 10
Redeeming Shares . . . . . . . . . . . . . . . . . . . . . . 14
Pay-Out Plans . . . . . . . . . . . . . . . . . . . . . . . 15
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 17
Board Members and Officers . . . . . . . . . . . . . . . . . 20
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . 25
Independent Auditors . . . . . . . . . . . . . . . . . . . . 25
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . 25
APPENDIX A: Description of Bond Ratings . . . . . . . . . . A-1
APPENDIX B: Options and Stock Futures Contracts . . . . . . B-1
APPENDIX C: Dollar-Cost Averaging . . . . . . . . . . . . . C-1
<PAGE>
IDS Research Opportunities Fund
ADDITIONAL INVESTMENT POLICIES
IDS Research Opportunities Fund (the Fund) is a series of IDS Growth Fund,
Inc. (the Company). The Fund is a diversified mutual fund with its own
goal and investment policies. The Fund seeks to achieve its goal by
investing all of its assets in Aggressive Growth Portfolio (the Portfolio)
of Growth Trust (the Trust), a separate investment company, rather than by
directly investing in and managing its own portfolio of securities.
Fundamental investment policies adopted by the Fund or Portfolio cannot be
changed without the approval of a majority of the outstanding voting
securities of the Fund or Portfolio, as defined in the Investment Company
Act of 1940 ("1940 Act"). Whenever the Fund is requested to vote on a
change in the investment policies of the corresponding Portfolio, the
Company will hold a meeting of Fund shareholders and will cast the Fund's
vote as instructed by the shareholders.
Notwithstanding any of the Fund's other investment policies, the Fund may
invest its assets in an open-end management investment company having
substantially the same investment objectives, policies and restrictions as
the Fund for the purpose of having those assets managed as part of a
combined pool.
Investment policies applicable to Aggressive Growth Portfolio: These are
investment policies in addition to those presented in the prospectus. The
policies below are fundamental policies that apply both to the Fund and
its corresponding Portfolio and may be changed only with
shareholder/unitholder approval. Unless holders of a majority of the
outstanding shares agree to make the changes, the Portfolio will not:
. Act as an underwriter (sell securities for others). However,
under the securities laws, the Portfolio may be deemed to be
an underwriter when it purchases securities directly from the
issuer and later resells them.
. Borrow money or property, except as a temporary measure for
extraordinary or emergency purposes, in an amount not
exceeding one-third of the market value of its total assets
(including borrowings) less liabilities (other than
borrowings) immediately after the borrowing. The Portfolio
has no present intention to borrow.
. Make cash loans if the total commitment amount exceeds 5% of
the Portfolio's total assets.
. Purchase more than 10% of the outstanding voting securities of
an issuer.
1
<PAGE>
IDS Research Opportunities Fund
. 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
Portfolio'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 Portfolio from investing in securities
or other instruments backed by real estate or securities of
companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate
includes real estate limited partnerships.
. Buy or sell physical commodities unless acquired as a result
of ownership of securities or other instruments, except this
shall not prevent the Portfolio from buying or selling
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.
. 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.
. Lend Portfolio securities in excess of 30% of its net assets.
In making loans the Portfolio 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 Portfolio will get additional
collateral on a daily basis. The risks are that the borrower
may not provide additional collateral when required or return
the securities when due. During the existence of the loan,
the Portfolio receives cash payments equivalent to all
interest or other distributions paid on the loaned securities.
A loan will not be made unless AEFC believes the opportunity
for additional income outweighs the risks.
. Concentrate in any industry except in either or both the
energy or utilities industries. According to the present
interpretation by the SEC, this means no more than 25% of the
Portfolio's total assets, based on current market value, can
2
<PAGE>
IDS Research Opportunities Fund
be invested in any one industry other than the energy and/or
utility industries.
The policies below are nonfundamental policies that apply both to the Fund
and its corresponding Portfolio and may be changed without
shareholder/unitholder approval.
Unless changed by the board, the Portfolio will not:
. Buy on margin or sell short, but it may make margin payments
in connection with transactions in options, futures contracts
and other financial instruments.
. Pledge or mortgage its assets beyond 15% of total assets. If
the Portfolio were ever to do so, valuation of the pledged or
mortgaged assets would be based on market values. For
purposes of this policy, collateral arrangements for margin
deposits on a futures contract 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. The Portfolio has no intention to
invest in securities of other investment companies.
. Invest in a company to control or manage it.
. Invest in exploration or development programs such as oil, gas
or mineral leases.
. Purchase securities of an issuer if the board members and
officers of the Portfolio and of AEFC hold more than a certain
percentage of the issuer's outstanding securities. If the
holdings of all board members and officers of the Portfolio
and AEFC who own more than 0.5% of an issuer's securities are
added together, and if in total they own more than 5%, the
Portfolio will not purchase securities of that issuer.
. Invest more than 5% of its net assets in warrants. Under one
state's law no more than 2% of the Portfolio's net assets may
be invested in warrants not listed on the New York or American
Stock Exchange.
. Invest more than 10% of its net assets in securities and other
instruments that are illiquid. For purposes of this policy
illiquid securities include some privately placed securities,
3
<PAGE>
IDS Research Opportunities Fund
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 Portfolio may make contracts to purchase securities for a fixed price
at a future date beyond normal settlement time (when-issued securities or
forward commitments). Under normal market conditions, the Portfolio does
not intend to commit more than 5% of its total assets to these practices.
The Portfolio does not pay for the securities or receive dividends or
interest on them until the contractual settlement date. The Portfolio
will designate cash or liquid high-grade debt securities at least equal in
value to its forward commitments to purchase the securities. When-issued
securities or forward commitments are subject to market fluctuations and
they may affect the Portfolio's total assets the same as owned securities.
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 Portfolio may maintain a portion of its assets in cash and cash-
equivalent investments. The cash-equivalent investments the Portfolio may
use are short-term U.S. and Canadian government securities and negotiable
certificates of deposit, non-negotiable fixed-time deposits, bankers'
acceptances and letters of credit of banks or savings and loan
associations having capital, surplus and undivided profits (as of the date
of its most recently published annual financial statements) in excess of
$100 million (or the equivalent in the instance of a foreign branch of a
U.S. bank) at the date of investment. Any cash-equivalent investment in
foreign securities will be subject to the limitations on foreign
investments described in the prospectus. The Portfolio 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 Corporation ("S&P") or the equivalent and may use repurchase
agreements with broker-dealers registered under the Securities Exchange
4
<PAGE>
IDS Research Opportunities Fund
Act of 1934 and with commercial banks. A risk of a repurchase agreement
is that if the seller seeks the protection of the bankruptcy laws, the
Portfolio's ability to liquidate the security involved could be impaired.
For a discussion of bond ratings, see Appendix A. For a discussion on
options and stock index futures contracts, see Appendix B.
PORTFOLIO TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Portfolio'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 when 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.
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
5
<PAGE>
IDS Research Opportunities Fund
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 services such as the handling of large orders, the
willingness of a broker to risk its own money by taking a position in a
security, and the specialized handling of a particular group of securities
that only certain brokers may be able to offer. As a result of this
arrangement, some portfolio transactions may not be effected at the lowest
commission, but AEFC believes it may obtain better overall execution.
AEFC has assured the 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 transactions, including the foregoing, 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
account advised by AEFC or any of its subsidiaries. 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
6
<PAGE>
IDS Research Opportunities Fund
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.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH
AMERICAN EXPRESS FINANCIAL CORPORATION
Affiliates of American Express Company (American Express) (of which AEFC
is a wholly owned subsidiary) may engage in brokerage and other securities
transactions on behalf of the Portfolio according to procedures adopted by
the board and to the extent consistent with applicable provisions of the
federal securities laws. AEFC will use an American Express affiliate only
if (i) AEFC determines that the Portfolio will receive prices and
executions at least as favorable as those offered by qualified independent
brokers performing similar brokerage and other services for the Portfolio
and (ii) the affiliate charges the Portfolio commission rates consistent
with those the affiliate charges comparable unaffiliated customers in
similar transactions and if such use is consistent with terms of the
Investment Management Services Agreement.
AEFC may direct brokerage to compensate an affiliate. AEFC will receive
research on South Africa from New Africa Advisors, a wholly owned
subsidiary of Sloan Financial Group. AEFC owns 100% of IDS Capital
Holdings Inc., which in turn owns 40% of Sloan Financial Group. New
Africa Advisors will send research to AEFC and in turn AEFC will direct
trades to a particular broker. The broker will have an agreement to pay
New Africa Advisors. All transactions will be on a best execution basis.
Compensation received will be reasonable for the services rendered.
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past
performance. Average annual total return to be used by the Fund will be
based on standardized methods of computing performance as required by the
SEC. An explanation of these methods used by the Fund to compute
performance follows below.
Average annual total return
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(l+T)n = ERV
7
<PAGE>
IDS Research Opportunities Fund
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, 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.
In determining net assets before shareholder transactions, the securities
held by the Fund's corresponding Portfolio 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
8
<PAGE>
IDS Research Opportunities Fund
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
(NASDAQ) are valued at the last-quoted sales price in this
market.
. Securities included in NASDAQ for which a last-quoted sales
price is not readily available, and other securities traded
over-the-counter but not included in the NASDAQ 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
Portfolio's net asset value. If events materially affecting
the value of such securities occur during such period, these
securities will be valued at their fair value according to
procedures decided upon in good faith by the board.
. Short-term securities maturing more than 60 days from the
valuation date are valued at the readily available market
price or approximate market value based on current interest
rates. Short-term securities maturing in 60 days or less that
originally had maturities of more than 60 days at acquisition
date are valued at amortized cost using the market value on
the 61st day before maturity. Short-term securities maturing
in 60 days or less at acquisition date are valued at amortized
cost. Amortized cost is an approximation of market value
determined by systematically increasing the carrying value of
a security if acquired at a discount, or reducing the carrying
value if acquired at a premium, so that the carrying value is
equal to maturity value on the maturity date.
. Securities without a readily available market price, bonds
other than convertibles and other assets are valued at fair
value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair
value. When possible, bonds are valued by a pricing service
9
<PAGE>
IDS Research Opportunities Fund
independent from the Trust. 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, Presidents' Day, Good Friday, 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 is
determined by dividing the net asset value of one share by 0.95 (1.00-0.05
for a maximum 5% sales charge) to get the public offering price. 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:
<TABLE>
<CAPTION>
Within each increment,
sales charge as a
percentage of:
-----------------------
Public Net
Amount of Investment Offering Price Amount Invested
-------------------- -------------- ---------------
<S> <C> <C> <C>
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
</TABLE>
Sales charges on an investment greater than $50,000 and less than
$1,000,000 are calculated for each increment separately and then totaled.
The resulting total sales charge, expressed as a percentage of the public
10
<PAGE>
IDS Research Opportunities Fund
offering price and of the net amount invested, will vary depending on the
proportion of the investment at different sales charge levels.
For example, compare an investment of $60,000 with an investment of
$85,000. The $60,000 investment is composed of $50,000 that incurs a
sales charge of $2,500 (5.0% x $50,000) and $10,000 that incurs a sales
charge of $450 (4.5% x $10,000). The total sales charge of $2,950 is
4.92% of the public offering price and 5.17% of the net amount invested.
In the case of the $85,000 investment, the first $50,000 also incurs a
sales charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge
of $1,575 (4.5% x $35,000). The total sales charge of $4,075 is 4.79% of
the public offering price and 5.04% of the net amount invested.
The following table shows the range of sales charges as a percentage of
the public offering price and of the net amount invested on total
investments at each applicable level.
<TABLE>
<CAPTION>
On total investment,
sales charge as a
percentage of:
--------------------
Public Net
Amount of Investment Offering Price Amount Invested
-------------------- -------------- --------------
ranges from:
-----------------------------------------
<S> <C> <C> <C> <C>
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 0.0 0.00
</TABLE>
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 only applies to plans with less than $1 million in
assets and fewer than 100 participants.
11
<PAGE>
IDS Research Opportunities Fund
Class A - Reducing the Sales Charge
Sales charges are based on the total amount of your investments in the
Fund. The amount of all prior investments plus any new purchase is
referred to as your "total amount invested." For example, suppose you
have made an investment of $20,000 and later decide to invest $40,000
more. Your total amount invested would be $60,000. As a result, $10,000
of your $40,000 investment qualifies for the lower 4.5% sales charge that
applies to investments of more than $50,000 and up to $100,000.
The total amount invested includes any shares held in the Fund in the name
of a member of your immediate family (spouse and unmarried children under
21). 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 trustees, board members, officers
or employees of the Fund or AEFC or its subsidiaries and of 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.
12
<PAGE>
IDS Research Opportunities Fund
Here's an example. You file a LOI to invest $1 million and make an
investment of $100,000 at that time. You pay the normal 5% sales charge
on the first $50,000 and 4.5% sales charge on the next $50,000 of this
investment. Let's say you make a second investment of $900,000 (bringing
the total up to $1 million) one month before the 13-month period is up.
On the date that you bring your total to $1 million, AEFC makes an
adjustment to your account. The adjustment is made by crediting your
account with additional shares, in an amount equivalent to the sales
charge previously paid.
Systematic Investment Programs
After you make your initial investment of $2,000 or more, you can arrange
to make additional payments of $100 or more on a regular basis. These
minimums do not apply to all systematic investment programs. You decide
how often to make payments - monthly, quarterly or semiannually. You are
not obligated to make any payments. You can omit payments or discontinue
the investment program altogether. The Fund also can change the program
or end it at any time. If there is no obligation, why do it? Putting
money aside is an important part of financial planning. With a systematic
investment program, you have a goal to work for.
How does this work? Your regular investment amount will purchase more
shares when the net asset value per share decreases, and fewer shares when
the net asset value per share increases. Each purchase is a separate
transaction. After each purchase your new shares will be added to your
account. Shares bought through these programs are exactly the same as any
other fund shares. They can be bought and sold at any time. A systematic
investment program is not an option or an absolute right to buy shares.
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 C.
Automatic Directed Dividends
Dividends, including capital gain distributions, paid by another fund in
the IDS MUTUAL FUND GROUP subject to a sales charge, may be used to
automatically purchase shares in the same class of this Fund without
paying a sales charge. Dividends may be directed to existing accounts
only. Dividends declared by a Fund are exchanged to this Fund the
following day. Dividends can be exchanged into one fund but cannot be
split to make purchases in two or more funds. Automatic directed
dividends are available between accounts of any ownership except:
13
<PAGE>
IDS Research Opportunities Fund
. Between a non-custodial account and an IRA, or 401(k) plan
account or other qualified retirement account of which
American Express Trust Company acts as custodian;
. Between two American Express Trust Company custodial accounts
with different owners (for example, you may not exchange
distributions 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 distributions
from your IRA to your 401(k) plan account, although you may
exchange distributions 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 expanse ratios. Before exchanging
dividends into another fund, you should read its prospectus. You will
receive a confirmation that the automatic directed dividend service has
been set up for your account.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an explanation of
redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net asset
value, stop accepting payments for purchase of shares or suspend the duty
of the Fund to redeem shares for more than seven days. Such emergency
situations would occur if:
. 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 1940 Act declares a
period of emergency to exist.
Should the Fund stop selling shares, the board may make a deduction from
the value of the assets held by the Fund to cover the cost of future
liquidations of the assets so as to distribute fairly these costs among
all shareholders.
14
<PAGE>
IDS Research Opportunities Fund
The Company has elected to be governed by Rule 18f-1 under the 1940 Act,
which obligates the Fund to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1%
of the net assets of the Fund at the beginning of the period. Although
redemptions in excess of this limitation would normally be paid in cash,
the Fund reserves the right to make these payments in whole or in part in
securities or other assets in case of an emergency, or if the payment of a
redemption in cash would be detrimental to the existing shareholders of
the Fund as determined by the board. In these circumstances, the
securities distributed would be valued as set forth in the prospectus.
Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment in
regular installments. If you redeem Class B shares you may be subject to
a contingent deferred sales charge as discussed in the prospectus. While
the plans differ on how the pay-out is figured, they all are based on the
redemption of your investment. Net investment income dividends and any
capital gain distributions will automatically be reinvested, unless you
elect to receive them in cash. If you are redeeming a tax-qualified plan
account for which American Express Trust Company acts as custodian, you
can elect to receive your dividends and other distributions in cash when
permitted by law. If you redeem an IRA or a qualified retirement account,
certain restrictions, federal tax penalties and special federal income tax
reporting requirements may apply. You should consult your tax advisor
about this complex area of the tax law.
Applications for a systematic investment in a class of the Fund subject to
a sales charge normally will not be accepted while a pay-out plan for any
of those funds is in effect. Occasional investments, however, may be
accepted.
To start any of these plans, please write or call American Express
Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534, 612--
671-3733. Your authorization must be received in the Minneapolis
headquarters at least five days before the date you want your payments to
begin. The initial payment must be at least $50. Payments will be made on
a monthly, bimonthly, quarterly, semiannual or annual basis. Your choice
is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable
cost. If you need a more irregular schedule of payments, it may be
necessary for you to make a series of individual redemptions, in which
case you'll have to send in a separate redemption request for each
15
<PAGE>
IDS Research Opportunities Fund
pay-out. The Fund reserves the right to change or stop any pay-out plan
and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
-------
If you choose this plan, a varying number of shares will be redeemed at
regular intervals during the time period you choose. This plan is designed
to end in complete redemption of all shares in your account by the end of
the fixed period.
Plan #2: Redemption of a fixed number of shares
-------
If you choose this plan, a fixed number of shares will be redeemed for
each payment and that amount will be sent to you. The length of time
these payments continue is based on the number of shares in your account.
Plan #3: Redemption of a fixed dollar amount
-------
If you decide on a fixed dollar amount, whatever number of shares is
necessary to make the payment will be redeemed in regular installments
until the account is closed.
Plan #4: Redemption of a percentage of net asset value
-------
Payments are made based on a fixed percentage of the net asset value of
the shares in the account computed on the day of each payment.
Percentages range from 0.25% to 0.75%. For example, if you are on this
plan and arrange to take 0.5% each month, you will get $50 if the value of
your account is $10,000 on the payment date.
TAXES
If you buy shares in the Fund and then exchange into another fund, it is
considered a sale and subsequent purchase of shares. Under the tax laws,
if this exchange is done within 91 days, any sales charge waived on Class
A shares on a subsequent purchase of shares applies to the new shares
acquired in the exchange. Therefore, you cannot create a tax loss or
reduce a tax gain attributable to the sales charge when exchanging shares
within 91 days.
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
16
<PAGE>
IDS Research Opportunities Fund
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.
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 and an election made by the Fund under federal tax
regulations, 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 Nov. 30 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 Trust, on behalf of the Portfolio, has an Investment Management
Services Agreement with AEFC. For its services, AEFC is paid a fee based
on the following schedule:
17
<PAGE>
IDS Research Opportunities Fund
Assets Annual rate at
(billions) each asset level
---------- ---------------
First $0.25 0.650%
Next 0.25 0.625
Next 0.50 0.600
Next 1.0 0.575
Next 1.0 0.550
Next 3.0 0.525
Over 6.0 0.500
The fee is calculated for each calendar day on the basis of net assets as
of the close of business two business days prior to the day for which the
calculation is made. The management fee is paid monthly.
Under the Agreement, the Portfolio also pays taxes, brokerage commissions
and nonadvisory expenses, which include custodian fees; audit and certain
legal fees; fidelity bond premiums; registration fees for units; Portfolio
office expenses; consultants' fees; compensation of board members,
officers and employees; corporate filing fees; organizational expenses;
expenses incurred in connection with lending portfolio securities; and
expenses properly payable by the Portfolio, approved by the board.
Administrative Services Agreement
The Company, on behalf of the Fund, has an Administrative Services
Agreement with AEFC. Under this agreement, the Fund pays AEFC for
providing administration and accounting services. The fee is calculated
as follows:
Assets Annual rate at
(billions) each asset level
---------- ----------------
First $0.25 0.060%
Next 0.25 0.055
Next 0.50 0.050
Next 1.0 0.045
Next 1.0 0.040
18
<PAGE>
IDS Research Opportunities Fund
Assets Annual rate at
(billions) each asset level
---------- ----------------
Next 3.0 0.035
Over 6.0 0.030
Under the agreement, the Fund also pays taxes; audit and certain legal
fees; registration fees for shares; office expenses; consultant's fees;
compensation of board members, officers and employees; corporate filing
fees; organizational expenses; and expenses properly payable by the Fund
approved by the board.
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.
Transfer Agency Agreement
The Company, on behalf of 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.
Distribution Agreement
Under a Distribution Agreement, sales charges deducted for distributing
Fund shares are paid to American Express Financial Advisors daily.
Shareholder Service Agreement
The Company, on behalf of 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.
19
<PAGE>
IDS Research Opportunities Fund
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 Company 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. 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
Company 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.
Total Fees and Expenses
Total combined fees and nonadvisory expenses of both the master fund and
this feeder fund cannot exceed the most restrictive applicable state
limitation. Currently, the most restrictive applicable state expense
limitation, subject to exclusion of certain expenses, is 2.5% of the first
$30 million of the Fund's average daily net assets, 2% of the next $70
million and 1.5% of average daily net assets over $100 million, on an
annual basis. At the end of each month, if the fees and expenses of the
Fund exceed this limitation for the Fund's fiscal year in progress, AEFC
will assume all expenses in excess of the limitation. AEFC then may bill
the Fund for such expenses in subsequent months up to the end of that
20
<PAGE>
IDS Research Opportunities Fund
fiscal year, but not after that date. No interest charges are assessed by
AEFC for expenses it assumes.
BOARD MEMBERS AND OFFICERS
The following is a list of the Company's board members who, except for Mr.
Dudley, also are board members of all other funds in the IDS MUTUAL FUND
GROUP. As of June 30, 1996, there were 41 registered investment companies
in the IDS MUTUAL FUND GROUP. The members of the board also serve as
members of the board of the Trust which manages the investments of the
Fund and other accounts. Should any conflict of interest arise between
the interests of the shareholders of the Fund and those of the other
account, the board will follow written procedures to address the conflict.
Mr. Dudley is a board member of the 32 publicly offered funds. All shares
have cumulative voting rights with respect to the election of board
members. At all elections of board members, each shareholder shall be
entitled to as many votes as shall equal the number of shares owned
multiplied by the number of board members to be elected and may cast all
of such votes for a single board member or may distribute them among the
number to be voted for, or any two or more of them.
Lynne V. Cheney'
Born in 1941.
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow, AEI. Former Chair of National Endowment of the
Humanities. Director, The Reader's Digest Association Inc., Lockheed-
Martin, the Interpublic Group of Companies, Inc. (advertising) and FPL
Group Inc. (holding company for Florida Power and Light).
William H. Dudley**
Born in 1932.
2900 IDS Tower
Minneapolis, MN
Executive vice president and director of AEFC.
Robert F. Froehlke+
Born in 1922.
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP. Director, the
ICI Mutual Insurance Co., Institute for Defense Analyses, Marshall Erdman
21
<PAGE>
IDS Research Opportunities Fund
and Associates, Inc. (architectural engineering) and Public Oversight
Board of the American Institute of Certified Public Accountants.
David R. Hubers+**
Born in 1943.
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC. Previously,
senior vice president, finance and chief financial officer of AEFC.
Heinz F. Hutter+'
Born in 1929.
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated
(commodity merchants and processors).
Anne P. Jones
Born in 1935.
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor
Electronics, Inc.
Melvin R. Laird
Born in 1922.
Reader's Digest Association, Inc.
1730 Rhode Island Ave., N.W.
Washington, D.C.
Senior counsellor for national and international affairs, The Reader's
Digest Association, Inc. Former nine-term congressman, secretary of
defense and presidential counsellor. Director, Martin Marietta Corp.,
Metropolitan Life Insurance Co., The Reader's Digest Association, Inc.,
Science Applications International Corp., Wallace Reader's Digest Funds
and Public Oversight Board (SEC Practice Section, American Institute of
Certified Public Accountants).
William R. Pearce+*
Born in 1927.
901 S. Marquette Ave.
Minneapolis, MN
22
<PAGE>
IDS Research Opportunities Fund
President of all funds in the IDS MUTUAL FUND GROUP since June 1993.
Former vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors).
Edson W. Spencer+
Born in 1926.
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman of the
board and chief executive officer, Honeywell Inc. Director, Boise Cascade
Corporation (forest products). Member of International Advisory Council
of NEC (Japan).
John R. Thomas**
Born in 1937.
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of AEFC.
Wheelock Whitney+
Born in 1926.
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele
Born in 1934.
Valspar Corporation
Suite 1700
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.
23
<PAGE>
IDS Research Opportunities Fund
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
Vice president, general counsel and secretary of all funds in the IDS
MUTUAL FUND GROUP.
Peter J. Anderson
Born in 1942.
IDS Tower 10
Minneapolis, MN
Vice president-investments of all funds in the IDS MUTUAL FUND GROUP.
Director and senior vice president-investments of AEFC.
Melinda S. Urion
Born in 1953.
IDS Tower 10
Minneapolis, MN
Treasurer of all funds in the IDS MUTUAL FUND GROUP. Director, senior
vice president and chief financial officer of AEFC. Director and
executive vice president and controller of IDS Life Insurance Company.
The Fund did not commence operations until August 19, 1996 and, as a
result, did not pay any board members' fees for the previous fiscal year.
As of the year ended May 31, 1996, the members of the board received the
following compensation, in total, from all funds in the IDS MUTUAL FUND
GROUP.
24
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IDS Research Opportunities Fund
<TABLE>
<CAPTION>
Compensation Table
------------------
Pension or Total cash
Aggregate retirement benefits Estimated annual compensation from
compensation accrued as Fund benefit upon the IDS MUTUAL FUND
Board Member from the Fund expenses retirement GROUP
<S> <C> <C> <C> <C>
Lynne V. Cheney $0 $0 $0 $69,800
Robert F. Froehlke 0 0 0 69,300
Heinz F. Hutter 0 0 0 70,300
Anne P. Jones 0 0 0 70,800
Melvin R. Laird 0 0 0 72,600
Edson W. Spencer 0 0 0 74,300
Wheelock Whitney 0 0 0 70,000
C. Angus Wurtele 0 0 0 67,300
</TABLE>
CUSTODIAN
The Portfolio'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 Portfolio also retains the
custodian pursuant to a custodian agreement. The custodian is permitted
to deposit some or all of its securities in central depository systems as
allowed by federal law. For its services, the Portfolio pays the
custodian a maintenance charge and a charge per transaction in addition to
reimbursing the custodian's out-of-pocket expenses.
INDEPENDENT AUDITORS
The Fund's and corresponding Portfolio's financial statements to be
contained in its Annual Report to shareholders at the end of the fiscal
year will be audited by independent auditors are 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.
25
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IDS Research Opportunities Fund
PROSPECTUS
The prospectus for IDS Research Opportunities Fund, dated August 5,
1996, is hereby incorporated in this SAI by reference.
26
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IDS Research Opportunities 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 Research Opportunities 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
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IDS Research Opportunities Fund
category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CC 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
Portfolio's objectives and policies. When assessing the risk involved in
each non-rated security, the Portfolio will consider the financial
condition of the issuer or the protection afforded by the terms of the
security.
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IDS Research Opportunities Fund
APPENDIX B: Options and Stock Index Futures Contracts
The Portfolio may buy or write options traded on any U.S. or foreign
exchange or in the over-the-counter market. The 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 Portfolio and its unitholders by improving the
Portfolio's liquidity and by helping to stabilize the value of its net
assets.
Buying Options. Put and call options may be used as a trading technique
to facilitate buying and selling securities for investment reasons. They
also may be used for investment. Options are used as a trading technique
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IDS Research Opportunities Fund
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 only to effect a
transaction when the price of the security plus the option price will be
as good or better than the price at which the security could be bought or
sold directly. When the option is purchased, the Portfolio pays a premium
and a commission. It then pays a second commission on the purchase or
sale of the underlying security when the option is exercised. For
recordkeeping and tax purposes, the price obtained on the purchase of the
underlying security will be the combination of the exercise price, the
premium and both commissions. When using options as a trading technique,
commissions on the option will be set as if only the underlying securities
were traded.
Put and call options also may be held by the Portfolio for investment
purposes. Options permit the Portfolio to experience the change in the
value of a security with a relatively small initial cash investment.
The risk the Portfolio assumes when it buys an option is the loss of the
premium. To be beneficial to the Portfolio, the price of the underlying
security must change within the time set by the option contract.
Furthermore, the change must be sufficient to cover the premium paid, the
commissions paid both in the acquisition of the option and in a closing
transaction or in the exercise of the option and sale (in the case of a
call) or purchase (in the case of a put) of the underlying security. Even
then the price change in the underlying security does not ensure a profit
since prices in the option market may not reflect such a change.
Writing covered options. The Portfolio will write covered options when it
feels it is appropriate and will follow these guidelines:
. All options written by the Portfolio will be covered. For
covered call options if a decision is made to sell the
security, the Portfolio will attempt to terminate the option
contract through a closing purchase transaction.
. The Portfolio 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.).
. The Portfolio will write options only as permitted under
federal or state laws or regulations, such as those that
limited the amount of total assets subject to the options.
While no limit has been set by the Portfolio, it will conform
to the requirements of those states. For example, California
limits the writing of options to 50% of the assets of a fund.
B-2
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IDS Research Opportunities Fund
Net premiums on call options closed or premiums on expired call
options are treated as short-term capital gains. Since the Portfolio is
taxed as a regulated investment company under the Internal Revenue Code,
any gains on options and other securities held less than three months
must be limited to less than 30% of its annual gross income.
If a covered call option is exercised, the security is sold by the
Portfolio. The premium received upon writing the option is added to the
proceeds received from the sale of the security. The Portfolio will
recognize a capital gain or loss based upon the difference between the
proceeds and the security's basis. Premiums received from writing
outstanding call options are included as a deferred credit in the
Statement of Assets and Liabilities and adjusted daily to the current
market value.
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 Portfolio enters into one
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IDS Research Opportunities Fund
futures contract to buy the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 154 on that future date,
the Portfolio will gain $500 x (154-150) or $2,000. If the Portfolio
enters into one futures contract to sell the S&P 500 Index at a specified
future date at a contract value of 150 and the S&P 500 Index is at 152 on
that future date, the Portfolio will lose ($500 x (152-150) or $1,000.
Unlike the purchase or sale of an equity security, no price would be paid
or received by the Portfolio upon entering into futures contracts.
However, the Portfolio 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 Portfolio to finance the transactions. Rather, the initial
margin is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Portfolio 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 position in the contract more or
less valuable, a process known as marking to market. For example, when
the Portfolio 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 Portfolio 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 Portfolio would be required to make a
variation margin payment to the broker equal to the decline in value.
How the Portfolio would use stock index futures contracts. The Portfolio
intends to use stock index futures contracts and related options for
hedging and not for speculation. Hedging permits the Portfolio to gain
rapid exposure to or protect itself from changes in the market. For
example, the Portfolio may find itself with a high cash position at the
beginning of a market rally. Conventional procedures of purchasing a
number of individual issues entail the lapse of time and the possibility
of missing a significant market movement. By using futures contracts, the
Portfolio can obtain immediate exposure to the market and benefit from the
beginning stages of a rally. The buying program can then proceed and once
it is completed (or as it proceeds), the contracts can be closed.
Conversely, in the early stages of a market decline, market exposure can
be promptly offset 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 Portfolio may enter into contracts with respect to any stock index or
sub-index. To hedge the Portfolio successfully, however, the Portfolio
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IDS Research Opportunities 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 Portfolio's securities.
Special risks of transactions in stock index futures contracts.
--------------------------------------------------------------
1. Liquidity. The Portfolio 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 opposition held by the Portfolio. The
Portfolio 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 Portfolio, and the Portfolio 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 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 Portfolio intends to enter
into futures contracts only on exchanges or boards of trade where there
appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular contract at any
particular time. In such event, it may not be possible to close a futures
contract position, and in the event of adverse price movements, the
Portfolio would have to make daily cash payments of variation margin.
Such price movements, however, will be offset all or in part by the price
movements of the securities 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
B-5
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IDS Research Opportunities Fund
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 Portfolio 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 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 Portfolio's securities sought to be
hedged. It also is possible that if the Portfolio has hedged against a
decline in the value of the stocks held in its portfolio and stock prices
increase instead, the Portfolio 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 Portfolio 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 market. The Portfolio 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
Portfolio 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
B-6
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IDS Research Opportunities Fund
close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. The Portfolio 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 Portfolio 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
Portfolio 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 Portfolio
intends to identify futures contracts as mixed straddles and not mark them
to market, that is, not treat them as having been sold at the end of the
year at market value. Such an election may result in the Portfolio being
required to defer recognizing losses incurred by entering into futures
contracts and losses on underlying securities identified as being hedged
against.
Federal income tax treatment of gains or losses from transactions in
options on futures contracts and indexes will depend on whether such
option is a section 1256 contract. If the option is a nonequity option,
the Portfolio will either make a 1256(d) election and treat the option as
a mixed straddle or mark to market the option at fiscal year end and treat
the gain/loss as 40% short-term and 60% long-term. Certain provisions of
the Internal Revenue Code may also limit the Portfolio's ability to engage
in futures contracts and related options transactions. For example, at
the close of each quarter of the Portfolio's taxable year, at least 50% of
the value of its assets must consist of cash, government securities and
other securities, subject to certain diversification requirements. Less
than 30% of its gross income must be derived from sales of securities held
less than three months.
The IRS has ruled publicly that an exchange-traded call option is a
security for purposes of the 50%-of-assets test and that its issuer is the
issuer of the underlying security, not the writer of the option, for
purposes of the diversification requirements. In order to avoid realizing
a gain within the three-month period, the Portfolio may be required to
defer closing out a contract beyond the time when it might otherwise be
advantageous to do so. The Portfolio also may be restricted in purchasing
put options for the purpose of hedging underlying securities because of
applying the short sale holding period rules with respect to such
underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as
assets due from a broker (the Portfolio's agent in acquiring the futures
position). During the period the futures contract is open, changes in
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IDS Research Opportunities Fund
value of the contract will be recognized as unrealized gains or losses by
marking to market on a daily basis to reflect the market value of the
contract at the end of each day's trading. Variation margin payments will
be made or received depending upon whether gains or losses are incurred.
All contracts and options will be valued at the last-quoted sales price on
their primary exchange.
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IDS Research Opportunities Fund
APPENDIX C: Dollar-Cost Averaging
A technique that works well for many investors is one that eliminates
random buy and sell decisions. One such system is dollar-cost averaging.
Dollar-cost averaging involves building a portfolio through the investment
of fixed amounts of money on a regular basis regardless of the price or
market condition. This may enable an investor to smooth out the effects
of the volatility of the financial markets. By using this strategy, more
shares will be purchased when the price is low and less when the price is
high. As the accompanying chart illustrates, dollar-cost averaging tends
to keep the average price paid for the shares lower than the average
market price of shares purchased, although there is no guarantee.
While this does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many shareholders
who can continue investing through changing market conditions to
accumulate shares in a fund to meet long-term goals.
<TABLE>
<CAPTION>
Dollar-cost averaging
Regular Market Price Shares
Investment of a Share Acquired
<S> <C> <C>
$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
</TABLE>
Average market price of a share over 5 periods: $5.00 ($25.00 divided
by 5).
Average price you paid for each share: $4.84 ($500 divided by 103.4).
C-1<PAGE>
