<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 98 (File No. 2-11328)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940
Amendment No. 42 (File No. 811-54)
IDS INVESTMENT SERIES, INC.
IDS Tower 10, Minneapolis, Minnesota 55440-0010
Leslie L. Ogg
901 S. Marquette Avenue, Suite 2810
Minneapolis, MN 55402-3268
(612) 330-9283
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective
(check appropriate box)
immediately upon filing pursuant to paragraph (b)
X on Nov. 28, 1997 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
This Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Growth and Income Trust has also executed this Amendment to the
Registration Statement.
<PAGE> 2
IDS MUTUAL Cross reference sheet showing the location in its
prospectus and the Statement of Additional Information of the information
called for by the items enumerated in Parts A and B of Form N-1A.
Negative answers omitted are so indicated.
<TABLE>
<CAPTION>
PART A PART B
Item No. Section in Prospectus Item No. Section in Statement of Additional Information
-------- --------------------- -------- ----------------------------------------------
<S> <C> <C> <C>
1 Cover page of prospectus 10 Cover page of SAI
2(a) Sales charge and Fund expenses 11 Table of Contents
(b) The Fund in brief 12 NA
(c) The Fund in brief 13(a) Additional Investment Policies; all appendices
3(a) Financial highlights except Dollar-Cost Averaging
(b) NA (b) Additional Investment Policies
(c) Performance (c) Additional Investment Policies
(d) Financial highlights (d) Security Transactions
4(a) The Fund in brief; Investment policies and risks; 14(a) Board Members and Officers
How the Fund and Portfolio are organized Board Members and Officers
(b) Investment policies and risks (b) Board Members and Officers
(c) Investment policies and risks (c) Board Members and Officers
5(a) Board members and officers 15(a) NA
(b) Principal Holders of Securities, if applicable
(b)(i) Investment manager; About American Express (c) Board Members and Officers
Financial Corporation -- General information 16(a)(i) How the Fund and Portfolio are organized; About
(b)(ii) Investment manager American Express Financial Corporation**
(b)(iii) Investment manager (a)(ii) Agreements: Investment Management Services
(c) Portfolio manager Agreements: Plan and Agreement of Distribution
(d) Administrator and transfer agent (a)(iii) Agreements: Investment Management Services Agreement
(e) Administrator and transfer agent (b) Agreements: Investment Management Services Agreement
(f) Distributor (c) NA
(g) Investment manager; About American Express (d) Agreements: Administrative Services Agreement,
Financial Corporation -- General information Shareholder Service Agreement
5A(a) * (e) NA
(b) * (f) Agreements: Distribution Agreement
6(a) Shares; Voting rights (g) NA
(b) NA (h) Custodian Agreement; Independent Auditors
(c) NA (i) Agreements: Transfer Agency Agreement; Custodian
(d) Voting rights Agreement
(e) Cover page; Special shareholder services 17(a) Security Transactions
(f) Dividend and capital gain distributions; (b) Brokerage Commissions Paid to Brokers
Reinvestments Affiliated with American Express Financial
(g) Taxes Corporation
(h) Alternative purchase arrangements; Special (c) Security Transactions
considerations regarding master/feeder (d) Security Transactions
structure (e) Security Transactions
7(a) Distributor 18(a) Shares; Voting rights**
(b) Valuing Fund shares (b) NA
(c) How to purchase, exchange or redeem shares 19(a) Investing in the Fund
(d) How to purchase shares (b) Valuing Fund Shares; Investing in the Fund
(e) NA (c) Redeeming Shares
(f) Distributor 20 Taxes
(g) Alternative purchase arrangements; Reductions
and Waivers of the Sales Charge 21(a) Agreements: Distribution Agreement
8(a) How to redeem shares (b) NA
(b) NA (c) NA
(c) How to purchase shares: Three ways to invest 22(a) Performance Information (for money market
(d) How to purchase, exchange or redeem shares: funds only)
Redemption policies -- "Important..." (b) Performance Information (for all funds
except money market funds)
9 None 23 Financial Statements
</TABLE>
* Designates information is located in annual report.
** Designates location in prospectus.
<PAGE> 3
IDS DIVERSIFIED EQUITY INCOME FUND Cross reference sheet showing the location
in its prospectus and the Statement of Additional Information of the
information called for by the items enumerated in Parts A and B of Form N-1A.
Negative answers omitted are so indicated.
<TABLE>
<CAPTION>
PART A PART B
Item No. Section in Prospectus Item No. Section in Statement of Additional Information
-------- --------------------- -------- ----------------------------------------------
<S> <C> <C> <C>
1 Cover page of prospectus 10 Cover page of SAI
2(a) Sales charge and Fund expenses 11 Table of Contents
(b) The Fund in brief 12 NA
(c) The Fund in brief 13(a) Additional Investment Policies; all
3(a) Financial highlights appendices except Dollar-Cost Averaging
(b) NA (b) Additional Investment Policies
(c) Performance (c) Additional Investment Policies
(d) Financial highlights (d) Security Transactions
4(a) The Fund in brief; Investment policies and 14(a) Board Members and Officers
risks; How the Fund and Portfolio are organized Board Members and Officers
(b) Investment policies and risks (b) Board Members and Officers
(c) Investment policies and risks (c) Board Members and Officers
5(a) Board members and officers 15(a) NA
(b) Principal Holders of Securities; if applicable
(b)(i) Investment manager; About American Express (c) Board Members and Officers
Financial Corporation -- General information 16(a)(i) How the Fund and Portfolio are organized; About
(b)(ii) Investment manager American Express Financial Corporation**
(b)(iii) Investment manager (a)(ii) Agreements: Investment Management Services
(c) Portfolio manager Agreement, Plan and Agreement of Distribution
(d) Administrator and transfer agent (a)(iii) Agreements: Investment Management Services Agreement
(e) Administrator and transfer agent (b) Agreements: Investment Management Services Agreement
(f) Distributor (c) NA
(g) Investment manager; About American Express (d) Agreements: Administrative Services Agreement,
Financial Corporation -- General information Shareholder Service Agreement
5A(a) * (e) NA
(b) * (f) Agreements: Distribution Agreement
6(a) Shares; Voting rights (g) NA
(b) NA (h) Custodian Agreement; Independent Auditors
(c) NA (i) Agreements: Transfer Agency Agreement; Custodian
(d) Voting rights Agreement
(e) Cover page; Special shareholder services 17(a) Security Transactions
(f) Dividend and capital gain distributions; (b) Brokerage Commissions Paid to Brokers Affiliated
Reinvestments with American Express Financial Corporation
(g) Taxes (c) Security Transactions
(h) Alternative purchase arrangements; Special (d) Security Transactions
considerations regarding master/feeder structure (e) Security Transactions
7(a) Distributor 18(a) Shares; Voting rights**
(b) Valuing Fund shares (b) NA
(c) How to purchase, exchange or redeem shares 19(a) Investing in the Fund
(d) How to purchase shares (b) Valuing Fund Shares; Investing in the Fund
(e) NA (c) Redeeming Shares
(f) Distributor 20 Taxes
(g) Alternative purchase arrangements; Reductions
and waives of the Sales Charge 21(a) Agreements: Distribution Agreement
8(a) How to redeem shares (b) NA
(b) NA (c) NA
(c) How to purchase shares: Three ways to invest 22(a) Performance Information (for money market
funds only)
(d) How to purchase, exchange or redeem shares: (b) Performance Information (for all funds except
Redemption policies -- "Important..." money market funds)
23 Financial Statements
9 None
</TABLE>
* Designates information is located in annual report.
** Designates location in prospectus.
<PAGE> 4
IDS
Mutual
Prospectus/Nov. 28, 1997
LOGO
The goal of IDS Mutual, a part of IDS Investment Series, Inc., is to provide a
balance of growth of capital and current income.
The Fund seeks to achieve its goal by investing all of its assets in Balanced
Portfolio of Growth and Income Trust. The Portfolio is managed by American
Express Financial Corporation and has the same goal as the Fund. This
arrangement is commonly known as a master/feeder structure.
This prospectus contains facts that can help you decide if the Fund is the right
investment for you. Read it before you invest and keep it for future reference.
Additional facts about the Fund are in a Statement of Additional Information
(SAI), filed with the Securities and Exchange Commission (SEC) and available for
reference, along with other related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI, is incorporated here by reference. For a free
copy, contact American Express Shareholder Service.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
any representation to the contrary is a criminal offense.
Please note that the Fund:
- - is not a bank deposit
- - is not federally insured
- - is not endorsed by any bank or government agency
- - is not guaranteed to achieve its goal
American Express Shareholder Service
P.O. Box 534, Minneapolis, MN 55440-0534 800-862-7919 TTY: 800-846-4852
Web site address: http://www.AmericanExpress.com/advisors
<PAGE> 5
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
THE FUND IN BRIEF 3p
Goal 3p
Investment policies and risks 3p
Structure of the Fund 4p
Manager and distributor 4p
Portfolio managers 5p
Alternative purchase arrangements 5p
SALES CHARGE AND FUND EXPENSES 6p
PERFORMANCE 8p
Financial highlights 8p
Total returns 10p
INVESTMENT POLICIES AND RISKS 12p
Facts about investments and their risks 13p
Valuing Fund shares 16p
HOW TO PURCHASE, EXCHANGE OR REDEEM SHARES 18p
Alternative purchase arrangements 18p
How to purchase shares 20p
How to exchange shares 23p
How to redeem shares 24p
Reductions and waivers of the sales charge 29p
SPECIAL SHAREHOLDER SERVICES 34p
Services 34p
Quick telephone reference 34p
DISTRIBUTIONS AND TAXES 35p
Dividend and capital gain distributions 35p
Reinvestments 36p
Taxes 36p
How to determine the correct TIN 38p
HOW THE FUND AND PORTFOLIO ARE ORGANIZED 39p
Shares 39p
Voting rights 39p
Shareholder meetings 39p
Special considerations regarding master/feeder structure 40p
Board members and officers 41p
Investment manager 43p
Administrator and transfer agent 43p
Distributor 44p
ABOUT AMERICAN EXPRESS FINANCIAL CORPORATION 45p
General information 45p
APPENDIX 46p
Descriptions of derivative instruments 46p
</TABLE>
2p
<PAGE> 6
The Fund in brief
GOAL
IDS Mutual (the Fund) seeks to provide shareholders with a
balance of growth of capital and current income. It does so
by investing all of its assets in Balanced Portfolio (the
Portfolio) of Growth and Income Trust (the Trust) rather than
by directly investing in and managing its own portfolio of
securities. Both the Fund and the Portfolio are diversified
investment companies that have the same goal. Because any
investment involves risk, achieving this goal cannot be
guaranteed. The goal can be changed only by holders of a
majority of outstanding securities.
The Fund may withdraw its assets from the Portfolio at any
time if the board determines that it is in the best interests
of the Fund to do so. In that event, the Fund would consider
what action should be taken, including whether to retain an
investment advisor to manage the Fund's assets directly or to
reinvest all of the Fund's assets in another pooled
investment entity.
INVESTMENT POLICIES AND RISKS
Both the Fund and the Portfolio have the same investment
policies. Accordingly, the Portfolio balances its investments
between common stocks and senior securities (preferred stocks
and debt securities) issued by U.S. and foreign companies. No
more than 65% of the Portfolio's total assets will be
invested in common stocks and no less than 35% in senior
securities, convertible securities, derivative instruments
and money market instruments. Some of the Portfolio's
investments may be considered speculative and involve
additional investment risks. For further information, refer
to the later section in the prospectus titled "Investment
policies and risks."
3p
<PAGE> 7
The Fund in brief
STRUCTURE OF THE FUND
This Fund uses what is commonly known as a master/feeder
structure. This means that the Fund (the feeder fund) invests
all of its assets in the Portfolio (the master fund). The
Portfolio invests in and manages the securities and has the
same goal and investment policies as the Fund. This structure
is described in more detail in the section captioned "Special
considerations regarding master/feeder structure". Here is an
illustration of the structure:
--------------------------------------------------------------------
Investors buy shares in the Fund
--------------------------------------------------------------------
.
--------------------------------------------------------------------
The Fund invests in the Portfolio
--------------------------------------------------------------------
.
--------------------------------------------------------------------
The Portfolio invests in
securities, such as stocks or bonds
--------------------------------------------------------------------
MANAGER AND DISTRIBUTOR
The Portfolio is managed by American Express Financial
Corporation (AEFC), a provider of financial services since
1894. AEFC currently manages more than $70 billion in assets
for the IDS MUTUAL FUND GROUP. Shares of the Fund are sold
through American Express Financial Advisors Inc. (AEFA), a
wholly-owned subsidiary of AEFC.
4p
<PAGE> 8
PORTFOLIO MANAGERS
Edward Labenski joined AEFC in 1975 and serves as president
-- Fixed-Income Advisors of American Express Asset Management
Group Inc. and senior portfolio manager. He has managed the
fixed income portion of the assets of the Fund since 1987 and
serves as portfolio manager of the Portfolio.
Kurt Winters joined AEFC in 1987 and serves as senior
portfolio manager. He has managed the assets of the Portfolio
since December 1997. Kurt is responsible for overall
investment management, including the determination of the
sectors in which the fund will invest. A team of research
professionals makes investment decisions within those
sectors. From 1992 to 1995, he managed IDS Life Series Fund,
Managed Portfolio. He was appointed to managed IDS Discovery
Fund in 1995. He also manages IDS Equity Value Fund, IDS
Progressive Fund and Equity Income 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.
5p
<PAGE> 9
Shareholder transaction expenses are incurred directly by an
investor on the purchase or redemption of Fund shares. Fund
operating expenses are paid out of Fund assets for each class
of shares and include expenses charged by both the Fund and
the Portfolio. Operating expenses are reflected in the Fund's
daily share price and dividends, and are not charged directly
to shareholder accounts.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
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%
------------------------------------------------------
</TABLE>
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES
(as a percentage of average daily net assets):
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Management fee**.... 0.49% 0.49% 0.49%
12b-1 fee........... 0.00% 0.75% 0.00%
Other expenses***... 0.34% 0.35% 0.27%
Total****........... 0.83% 1.59% 0.76%
</TABLE>
* This charge may be reduced depending on your total
investments in IDS funds. See "Reductions of the sales
charge."
** The management fee is paid by the Trust on behalf of the
Portfolio. It includes the impact of a performance fee
that decreased the management fee by 0.001% in fiscal
year 1997.
*** Other expenses include an administrative services fee, a
shareholder services fee, a transfer agency fee and
other non-advisory expenses. Class Y expenses have been
restated to reflect the 0.10% shareholder services fee
effective May 9, 1997.
**** The Fund changed to a master/feeder structure on May 13,
1996. The board considered whether the aggregate
expenses of the Fund and the Portfolio would be more or
less than if the Fund invested directly in the type of
securities being held by the Portfolio. AEFC agreed to
pay the small additional costs required to use a
master/feeder structure to manage the investment
portfolio during the first year of its operation and
half of such costs in the second year. These additional
costs may be more than offset in subsequent years if the
assets being managed increase.
6p
Sales charge and Fund expenses
<PAGE> 10
EXAMPLE: Suppose for each year for the next 10 years, Fund
expenses are as above and annual return is 5%. If you sold
your shares at the end of the following years, for each
$1,000 invested, you would pay total expenses of:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A............. $58 $75 $ 94 $148
Class B............. $66 $90 $107 $169**
Class B*............ $16 $50 $ 87 $169**
Class Y............. $ 8 $24 $ 42 $ 95
</TABLE>
* Assuming Class B shares are not redeemed at the end of the
period.
** Based on conversion of Class B shares to Class A shares
after eight years.
THIS EXAMPLE DOES NOT REPRESENT ACTUAL EXPENSES, PAST OR
FUTURE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE
SHOWN. Because Class B pays annual distribution (12b-1) fees,
long-term shareholders of Class B may indirectly pay an
equivalent of more than a 6.25% sales charge, the maximum
permitted by the National Association of Securities Dealers.
7p
<PAGE> 11
Financial highlights
Fiscal period ended Sept. 30,
[CAPTION]
<TABLE>
<CAPTION>
PER SHARE INCOME AND CAPITAL CHANGES(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $13.51 $12.69 $11.89 $13.13 $12.62 $12.00 $10.39 $13.15 $11.57 $12.71
beginning of period
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .57 .54 .58 .56 .55 .61 .66 .72 .73 .76
Net gains (losses) 2.61 .93 1.29 (.56) 1.39 .91 2.01 (2.01) 1.58 (.70)
(both realized and
unrealized)
Total from investment 3.18 1.47 1.87 -- 1.94 1.52 2.67 (1.29) 2.31 .06
operations
LESS DISTRIBUTIONS:
Dividends from net (.53) (.52) (.54) (.56) (.55) (.60) (.67) (.73) (.73) (.76)
investment income
Distributions from (.84) (.13) (.51) (.68) (.88) (.30) (.39) (.74) -- (.44)
realized gains
Total distributions (1.37) (.65) (1.05) (1.24) (1.43) (.90) (1.06) (1.47) (.73) (1.20)
Net asset value, end $15.32 $13.51 $12.69 $11.89 $13.13 $12.62 $12.00 $10.39 $13.15 $11.57
of period
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
CLASS A
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net assets, end of $3,251 $2,770 $2,596 $2,999 $2,788 $2,222 $1,889 $1,496 $1,687 $1,441
period (in millions)
Ratio of expenses to .83% .87% .83% .79% .79% .78% .71% .69% .67% .63%
average daily net
assets(b)
Ratio of net income 4.00% 4.01% 4.58% 4.57% 4.41% 4.99% 5.81% 6.04% 5.94% 6.49%
to average daily net
assets
Portfolio turnover 49% 45% 38% 69% 48% 50% 47% 37% 46% 60%
rate (excluding
short-term
securities) for the
underlying portfolio
Total return(c) 24.9% 11.8% 16.8% (0.1%) 16.7% 13.3% 26.9% (10.8%) 20.5% 0.8%
Average brokerage $.0465 $.0522 -- -- -- -- -- -- -- --
commission rate for
the underlying
portfolio(d)
</TABLE>
(a) For a share outstanding throughout the period. Rounded to
the nearest cent.
(b) Effective fiscal year 1996, expense ratio is based on
total expense of the Fund before reduction of earnings
credit on cash balances.
(c) Total return does not reflect payment of a sales charge.
(d) Effective fiscal year 1996, the Fund is required to
disclose an average brokerage commission rate per share
for security trades on which commissions are charged. The
comparability of this information may be affected by the
fact that commission rates vary significantly among
foreign countries.
8p
Performance
<PAGE> 12
Fiscal period ended Sept. 30,
<TABLE>
<CAPTION>
Per share income and capital changes(a)
CLASS B CLASS Y
1997 1996 1995(B) 1997 1996 1995(B)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of $13.47 $12.66 $11.67 $13.51 $12.69 $11.67
period
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .46 .45 .25 .59 .56 .32
Net gains (both realized and 2.59 .93 1.11 2.61 .93 1.11
unrealized)
Total from investment operations 3.05 1.38 1.36 3.20 1.49 1.43
LESS DISTRIBUTIONS:
Dividends from net investment (.43) (.44) (.37) (.55) (.54) (.41)
income
Distributions from realized gains (.84) (.13) -- (.84) (.13)
Total distributions (1.27) (.57) (.37) (1.39) (.67) (.41)
Net asset value, end of period $15.25 $13.47 $12.66 $15.32 $13.51 $12.69
RATIOS/SUPPLEMENTAL DATA
<CAPTION>
CLASS B CLASS Y
1997 1996 1995(B) 1997 1996 1995(B)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net assets, end of period (in $264 $133 $33 $1,337 $1,114 $876
millions)
Ratio of expenses to average daily 1.59% 1.64% 1.65%(e) .70% .70% .70%(e)
net assets(c)
Ratio of net income to average 3.28% 3.32% 3.94%(e) 4.13% 4.18% 4.58%(e)
daily net assets
Portfolio turnover rate (excluding 49% 45% 38% 49% 45% 38%
short-term securities) for the
underlying portfolio
Total return(d) 23.9% 11.0% 11.7% 25.0% 12.0% 12.2%
Average brokerage commission rate $.0465 $.0522 -- $.0465 $.0522 --
for the underlying portfolio(f)
</TABLE>
(a) For a share outstanding throughout the period. Rounded to
the nearest cent.
(b) Inception date was March 20, 1995.
(c) Effective fiscal year 1996, expense ratio is based on
total expense of the Fund before reduction of earnings
credit on cash balances.
(d) Total return does not reflect payment of a sales charge.
(e) Adjusted to an annual basis.
(f) Effective fiscal year 1996, the Fund is required to
disclose an average brokerage commission rate per share
for security trades on which commissions are charged. The
comparability of this information may be affected by the
fact that commission rates vary significantly among
foreign countries.
The information in these tables has been audited by KPMG Peat
Marwick LLP, independent auditors. The independent auditors'
report and additional information about the performance of
the Fund are contained in the Fund's annual report, which, if
not included with this prospectus, may be obtained without
charge.
9p
<PAGE> 13
PERFORMANCE
Total returns
TOTAL RETURN is the sum of all of your returns for a given
period, assuming you reinvest all distributions. It is
calculated by taking the total value of shares you own at the
end of the period (including shares acquired by
reinvestment), less the price of shares you purchased at the
beginning of the period.
AVERAGE ANNUAL TOTAL RETURN is the annually compounded rate
of return over a given time period (usually two or more
years). It is the total return for the period converted to an
equivalent annual figure.
AVERAGE ANNUAL TOTAL RETURNS
as of Sept. 30, 1997
<TABLE>
<CAPTION>
1 YEAR SINCE 5 YEARS 10 YEARS
PURCHASE MADE AGO INCEPTION AGO AGO
<S> <C> <C> <C> <C> <C>
Mutual:
Class A +18.63% --% +12.54% +10.89%
Class B +19.93% +17.31% * --% --%
Class Y +25.04% +19.62% * --% --%
S&P 500 +40.43% +31.28% ** +20.78% +14.73%
Lipper Balanced Fund
Index +24.92% +19.93% ** +13.70% +11.14%
</TABLE>
*Inception date was March 20, 1995.
**Measurement period started April 1, 1995.
CUMULATIVE TOTAL RETURNS
as of Sept. 30, 1997
<TABLE>
<CAPTION>
1 YEAR SINCE 5 YEARS 10 YEARS
PURCHASE MADE AGO INCEPTION AGO AGO
<S> <C> <C> <C> <C> <C>
Mutual:
Class A +18.63% --% +80.60% +181.38%
Class B +19.93% +49.98% * --% --%
Class Y +25.04% +57.47% * --% --%
S&P 500 +40.43% +99.51% ** +156.52% +295.09%
Lipper Balanced Fund
Index +24.92% +57.50% ** +90.03% +187.74%
</TABLE>
*Inception date was March 20, 1995.
**Measurement period started April 1, 1995.
10p
<PAGE> 14
These examples show total returns from hypothetical
investments in Class A, Class B and Class Y shares of the
Fund. These returns are compared to those of popular indexes
for the same periods. The performance of Class B and Class Y
will vary from the performance of Class A based on
differences in sales charges and fees. Past performance for
Class Y for the periods prior to March 20, 1995 may be
calculated based on the performance of Class A, adjusted to
reflect differences in sales charges although not for other
differences in expenses.
For purposes of calculation, information about the Fund
assumes:
-a sales charge of 5% for Class A shares
-redemption at the end of the period and deduction of the
applicable contingent deferred sales charge for Class B
shares
-no sales charge for Class Y shares
-no adjustments for taxes an investor may have paid on the
reinvested income and capital gains
-a period of widely fluctuating securities prices. Returns
shown should not be considered a representation of the Fund's
future performance.
Standard & Poor's 500 Stock Index (S&P 500), an unmanaged
list of common stocks, is frequently used as a general
measure of market performance. The index reflects
reinvestment of all distributions and changes in market
prices, but excludes brokerage commissions or other fees.
Lipper Balanced Fund Index, an unmanaged index published by
Lipper Analytical Services, Inc., includes 30 funds that are
generally similar to the Fund, although some funds in the
index may have somewhat different investment policies or
objectives.
11p
<PAGE> 15
Investment policies and risks
The policies described below apply both to the Fund and the
Portfolio. The Portfolio balances its investments between
common stocks and senior securities (preferred stocks and
bonds) issued by U.S. and foreign companies. The Portfolio
buys common stocks that it believes offer both current income
and growth potential. The Portfolio buys senior securities
for stability of value and regular income. No more than 65%
of the Portfolio's total assets will be invested in common
stocks and no less than 35% in senior securities, convertible
securities, derivative instruments and money market
instruments. At least 25% of the Portfolio's total assets
will be invested in debt securities and convertible
securities. Common stocks comprised 52% of the Portfolio's
total assets on Sept. 30, 1997.
The various types of investments the investment managers use
to achieve investment performance are described in more
detail in the next section and in the SAI.
12p
<PAGE> 16
FACTS ABOUT INVESTMENTS AND THEIR RISKS
COMMON STOCKS: Stock prices are subject to market
fluctuations. Stocks of larger, established companies that
pay dividends may be less volatile than the stock market as a
whole.
PREFERRED STOCKS: If a company earns a profit, it generally
must pay its preferred stockholders a dividend at a
pre-established rate.
CONVERTIBLE SECURITIES: These securities generally are
preferred stocks or bonds that can be exchanged for other
securities, usually common stock, at prestated prices. When
the trading price of the common stock makes the exchange
likely, convertible securities trade more like common stock.
13p
<PAGE> 17
INVESTMENT POLICIES AND RISKS
DEBT SECURITIES: The price of bonds generally falls as
interest rates increase, and rises as interest rates
decrease. The price of bonds also fluctuates if the credit
rating is upgraded or downgraded. The price of bonds below
investment grade may react more to the ability of the issuing
company to pay interest and principal when due than to
changes in interest rates. These bonds have greater price
fluctuations and are more likely to experience a default. The
Portfolio will not invest more than 5% of its net assets in
bonds below investment grade. Securities that are
subsequently downgraded in quality may continue to be held by
the Portfolio and will be sold only when the investment
manager believes it is advantageous to do so.
FOREIGN INVESTMENTS: Securities of foreign companies and
governments may be traded in the United States, but often
they are traded only on foreign markets. Frequently, there is
less information about foreign companies and less government
supervision of foreign markets. Foreign investments are
subject to political and economic risks of the countries in
which the investments are made, including the possibility of
seizure or nationalization of companies, imposition of
withholding taxes on income, establishment of exchange
controls or adoption of other restrictions that might affect
an investment adversely. If an investment is made in a
foreign market, the local currency may be purchased using a
forward contract in which the price of the foreign currency
in U.S. dollars is established on the date the trade is made,
but delivery of the currency is not made until the securities
are received. As long as the Portfolio holds foreign
currencies or securities valued in foreign currencies, the
value of those assets will be affected by changes in the
value of the currencies relative to the U.S. dollar. Because
of the limited trading volume in some foreign markets,
efforts to buy or sell a security may change the price of the
security, and it may be difficult to complete the
transaction. The Portfolio may invest up to 25% of its total
assets in foreign investments.
14p
<PAGE> 18
DERIVATIVE INSTRUMENTS: The investment 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 investment
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.
15p
<PAGE> 19
Investment policies and risks
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
investment manager will follow guidelines established by the
board and consider relevant factors such as the nature of the
security and the number of likely buyers when determining
whether a security is illiquid. No more than 10% of the
Portfolio's net assets will be held in securities and other
instruments that are illiquid.
MONEY MARKET INSTRUMENTS: Short-term debt securities rated in
the top two grades or the equivalent are used to meet daily
cash needs and at various times to hold assets until better
investment opportunities arise. Generally, less than 25% of
the Portfolio's total assets are in these money market
instruments. However, for temporary defensive purposes these
investments could exceed that amount for a limited period of
time.
The investment policies described above may be changed by the
boards.
LENDING PORTFOLIO SECURITIES: The Portfolio may lend its
securities to earn income so long as borrowers provide
collateral equal to the market value of the loans. The risks
are that borrowers will not provide collateral when required
or return securities when due. Unless a majority of the
outstanding voting securities approve otherwise, loans may
not exceed 30% of the Portfolio's net assets.
VALUING FUND SHARES
The PUBLIC OFFERING PRICE is the net asset value (NAV)
adjusted for the sales charge for Class A. It is the NAV for
Class B and Class Y.
The NAV is the value of a single Fund share. The NAV usually
changes daily, and is calculated at the close of business,
normally 3 p.m. Central time, each business day (any day the
New York Stock Exchange is open).
16p
<PAGE> 20
To establish the net assets, all securities held by the
Portfolio are valued as of the close of each business day. In
valuing assets:
-Securities and assets with available market values are
valued on that basis.
-Securities maturing in 60 days or less are valued at
amortized cost.
-Assets without readily available market values are valued
according to methods selected in good faith by the board.
17p
<PAGE> 21
How to purchase, exchange or redeem shares
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers three different classes of shares -- Class A,
Class B and Class Y. The primary differences among the
classes are in the sales charge structures and in their
ongoing expenses. These differences are summarized in the
table below. You may choose the class that best suits your
circumstances and objectives.
<TABLE>
<CAPTION>
SALES CHARGE
AND DISTRIBUTION OTHER
(12B-1) FEE SERVICE FEE INFORMATION
-----------------------------------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial 0.175% of average Initial sales
sales charge of daily net assets charge waived or
5%; no 12b-1 fee reduced for
certain purchases
-----------------------------------------------------------------
CLASS B No initial sales 0.175% of average Shares convert to
charge; maximum daily net assets Class A in the
CDSC of 5% ninth year of
declines to 0% ownership; CDSC
after six years; waived in certain
12b-1 fee of circumstances
0.75% of average
daily net assets
-----------------------------------------------------------------
CLASS Y None 0.10% of average Available only to
daily net assets certain
qualifying
institutional
investors
</TABLE>
CONVERSION OF CLASS B SHARES TO CLASS A SHARES -- During the
ninth calendar year of owning your Class B shares, Class B
shares will convert to Class A shares and will no longer be
subject to a distribution fee. Class B shares that convert to
Class A shares are not subject to a sales charge. Class B
shares purchased through reinvested dividends and
distributions also will convert to Class A shares in the same
proportion as the other Class B shares. This means more of
your money will be put to work for you.
18p
<PAGE> 22
CONSIDERATIONS IN DETERMINING WHETHER TO PURCHASE CLASS A OR CLASS B SHARES --
You should consider the information below in determining whether to purchase
Class A or Class B shares. The distribution fee (included in "Ongoing expenses")
and sales charges are structured so that you will have approximately the same
total return at the end of eight years regardless of which class you chose.
SALES CHARGES ON PURCHASE OR REDEMPTION
IF YOU PURCHASE CLASS A SHARES
IF YOU PURCHASE CLASS B SHARES
- - You will not have all of your purchase price invested. Part of your purchase
price will go to pay the sales charge. You will not pay a sales charge when
you redeem your shares.
- - You will be able to take advantage of reductions in the sales charge.
- - All of your money is invested in shares of stock. However, you will pay a
sales charge if you redeem your shares within six years of purchase.
- - No reductions of the sales charge are 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 lower expense ratio than Class B shares because Class
A does not pay a distribution fee and the transfer agency fee for Class A is
lower than the fee for Class B. As a result, Class A shares will pay higher
dividends than Class B shares.
- - The distribution and transfer agency fees for Class B will cause your shares
to have a higher expense ratio and to pay lower dividends than Class A shares.
In the ninth year of ownership, Class B shares will convert to Class A shares
and you will no longer be subject to higher fees.
You should consider how long you plan to hold your shares and whether the
accumulated higher fees and CDSC on Class B shares prior to conversion would be
less than the initial sales charge on Class A shares. Also consider to what
extent the difference would be offset by the lower expenses on Class A shares.
To help you in this analysis, the example in the "Sales charge and Fund
expenses" section of the prospectus illustrates the charges applicable to each
class of shares.
19p
<PAGE> 23
How to purchase, exchange or redeem shares
CLASS Y SHARES -- Class Y shares are offered to certain
institutional investors. Class Y shares are sold without a
front-end sales charge or a CDSC and are not subject to a
distribution fee. The following investors are eligible to
purchase Class Y shares:
-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.
* Eligibility must be determined in advance by AEFA. To do so,
contact your financial advisor.
HOW TO PURCHASE SHARES
If you're investing in this Fund for the first time, you will
need to set up an account. Your financial advisor will help
you fill out and submit an application. Once your account is
set up, you can choose among several convenient ways to
invest.
IMPORTANT: When opening an account, you must provide your
correct Taxpayer Identification Number (Social Security or
Employer Identification number). See "Distributions and
taxes."
When you purchase shares for a new or existing account, the
price you pay per share is determined at the close of
business on the day your investment is received and accepted
at the Minneapolis headquarters.
20p
<PAGE> 24
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 for 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.
21p
<PAGE> 25
How to purchase, exchange or redeem shares
THREE WAYS TO INVEST
- ------------------------------------------------------------------------------
1
<TABLE>
<S> <C> <C> <C>
BY REGULAR Send your check and MINIMUM AMOUNTS*
ACCOUNT application Initial
(or your name investment: $2,000
and account number if Additional
you have an investments: $100
established account) Account balances: $300
to: Qualified retirement
American Express accounts: none
Financial Advisors
Inc.
P.O. Box 74
Minneapolis, MN
55440-0074
Your financial advisor
will help you with
this process.
</TABLE>
- ------------------------------------------------------------------------------
2
<TABLE>
<S> <C> <C>
BY SCHEDULED Contact your financial MINIMUM AMOUNTS/
INVESTMENT advisor to set up one Initial
PLAN of the following investment: $100
scheduled plans: Additional
- automatic payroll investments: $100/
deduction each payment
- bank authorization Account balances: none
- direct deposit of (on active plans of
Social Security monthly payments)
check If account balance is
- other plan approved below $2,000,
by the Fund frequency of payments
must be at least
monthly
</TABLE>
- ------------------------------------------------------------------------------
3
<TABLE>
<S> <C> <C>
BY WIRE If you have an If this information is
established account, not included, the
you may wire money to: order may
be rejected and all
Norwest Bank money received by the
Minneapolis Fund, less any costs
Routing No. 091000019 the Fund
Minneapolis, MN or AEFC incurs, will
Attn: Domestic Wire be returned promptly.
Dept. MINIMUM AMOUNTS
Give these Each wire investment: $1,000
instructions:
Credit IDS Account
#00-30-015 for
personal
account # (your
account
number) for (your
name).
</TABLE>
* If your account balance falls below $300, you will be asked
in writing to bring it up to $300 or establish a scheduled
investment plan. If you do not do so within 30 days, your
shares can be redeemed and the proceeds mailed to you. If
you are in a "wrap-fee" program sponsored by AEFA and your
account balance falls below $50,000 or the program is
terminated, your shares will be redeemed and the proceeds
mailed to you.
22p
<PAGE> 26
HOW TO EXCHANGE SHARES
You can exchange your shares of the Fund at no charge for
shares of the same class of any other publicly offered fund
in the IDS MUTUAL FUND GROUP available in your state.
Exchanges into IDS Tax-Free Money Fund must be made from
Class A shares. For complete information on any other fund,
including fees and expenses, read that fund's prospectus
carefully.
If your exchange request arrives at the Minneapolis
headquarters before the close of business, your shares will
be redeemed at the net asset value set for that day. The
proceeds will be used to purchase new fund shares the same
day. Otherwise, your exchange will take place the next
business day at that day's net asset value.
For tax purposes, an exchange represents a redemption and
purchase and may result in a gain or loss. However, you
cannot use the sales charge imposed on the purchase of Class
A shares to create or increase a tax loss (or reduce a
taxable gain) by exchanging from the Fund within 91 days of
your purchase. For further explanation, see the SAI.
23p
<PAGE> 27
How to purchase, exchange or redeem shares
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 the proceeds from
your redemption are more or less than the cost of your
shares, you will have a gain or loss, which can affect your
tax liability. Redeeming shares held in an IRA or qualified
retirement account may subject you to certain federal taxes,
penalties and reporting requirements. Consult your tax
advisor.
24p
<PAGE> 28
TWO WAYS TO REQUEST AN EXCHANGE OR REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
1
<TABLE>
<S> <C> <C>
BY LETTER Include in your REGULAR MAIL:
letter: American Express
- the name of the Shareholder Service
fund(s) Attn: Redemptions
- the class of shares P.O. Box 534
to be exchanged or Minneapolis, MN
redeemed 55440-0534
- your account EXPRESS MAIL:
number(s) (for American Express
exchanges, both funds Shareholder Service
must be registered in Attn: Redemptions
the same ownership) 733 Marquette Ave.
- your Taxpayer Minneapolis, MN 55402
Identification Number
(TIN)
- 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
</TABLE>
- ------------------------------------------------------------------------------
2
<TABLE>
<S> <C> <C>
BY PHONE - The Fund and AEFC Each registered owner
American will honor any must sign the request.
Express telephone exchange or - AEFC answers phone
Telephone redemption request requests promptly, but
Transaction believed to be you may experience
Service: authentic and will use delays when call
800-437-3133 reasonable procedures volume is high. If you
or to confirm that they are unable to get
612-671-3800 are. This includes through, use mail
asking identifying proce-
questions and tape dure as an
recording calls. If alternative.
reasonable procedures - Acting on your
are not followed, the instructions, your
Fund or AEFC will be financial advisor may
liable for conduct telephone
any loss resulting transactions on your
from fraudulent behalf.
requests. - Phone privileges may
- Phone exchange and be modified or
redemption privileges discontinued at any
automatically apply to time.
all accounts except MINIMUM AMOUNT
custodial, corporate Redemption: $100
or qualified MAXIMUM AMOUNT
retirement accounts Redemption: $50,000
unless you request
these privileges NOT
apply by writing
American Express
Shareholder Service.
</TABLE>
25p
<PAGE> 29
How to purchase, exchange or redeem shares
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 preapproval 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.
26p
<PAGE> 30
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 purchase new shares in the same account from
which you redeemed. If you reinvest in Class A, you will
purchase the new shares at net asset value rather than the
offering price on the date of a new purchase. If you reinvest
in Class B, any CDSC you paid on the amount you are
reinvesting also will be reinvested. To take advantage of
this option, send a written request within 30 days of the
date your redemption request was received. Include your
account number and mention this option. This privilege may be
limited or withdrawn at any time, and it may have tax
consequences.
-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.)
27p
<PAGE> 31
How to purchase, exchange or redeem shares
THREE WAYS TO RECEIVE PAYMENT WHEN YOU REDEEM SHARES
- ------------------------------------------------------------------------------
1
<TABLE>
<S> <C>
BY REGULAR OR - Mailed to the address on record.
EXPRESS MAIL - Payable to names listed on the account.
NOTE: You will be charged a fee if you
request express mail delivery.
</TABLE>
- ------------------------------------------------------------------------------
2
<TABLE>
<S> <C>
BY WIRE - Minimum wire redemption: $1,000.
- 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.
</TABLE>
- ------------------------------------------------------------------------------
3
<TABLE>
<S> <C>
BY SCHEDULED - Minimum payment: $50.
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>
28p
<PAGE> 32
REDUCTIONS AND WAIVERS OF THE SALES CHARGE
CLASS A -- INITIAL SALES CHARGE ALTERNATIVE On purchases of
Class A shares, you pay a 5% sales charge on the first
$50,000 of your total investment and less on investments
after the first $50,000:
<TABLE>
<CAPTION>
TOTAL INVESTMENT SALES CHARGE AS A PERCENTAGE OF:*
PUBLIC OFFERING NET AMOUNT
PRICE INVESTED
<S> <C> <C>
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
</TABLE>
* 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.
29p
<PAGE> 33
How to purchase, exchange or redeem shares
-If you intend to invest $1 million over a period of 13
months, you can reduce the sales charges in Class A by filing
a letter of intent.
For more details, see the SAI.
WAIVERS OF THE SALES CHARGE FOR CLASS A SHARES
Sales charges do not apply to:
-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.
-Investors who have a business relationship with a newly
associated financial advisor who joined AEFA from another
investment firm provided that (1) the purchase is made within
six months of the advisor's appointment date with AEFA, (2)
the purchase is made with proceeds of a redemption of shares
that were sponsored by the financial advisor's previous
broker-dealer, and (3) the proceeds must be the result of a
redemption of an equal or greater value where a sales load
was previously assessed.
-Qualified employee benefit plans* using a daily transfer
recordkeeping system offering participants daily access to
IDS funds.
(Participants in certain qualified plans for which the
initial sales charge is waived may be subject to a deferred
sales charge of up to 4% on certain redemptions. For more
information, see the SAI.)
-Shareholders who have at least $1 million invested in funds
of the IDS MUTUAL FUND GROUP. If the investment is redeemed
in the first year after purchase, a CDSC of 1% will be
charged on the redemption. The CDSC will be waived only in
the circumstances described for waivers for Class B shares.
-Purchases made within 30 days after a redemption of shares
(up to the amount redeemed):
-- of a product distributed by AEFA 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.
30p
<PAGE> 34
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 the same class of another fund in the IDS MUTUAL FUND
GROUP that has a sales charge.
-Purchases made through or under a "wrap fee" product
sponsored by AEFA (total amount of all investments must be
$50,000); the University of Texas System ORP or a segregated
separate account offered by Nationwide Life Insurance Company
or Nationwide Life and Annuity Insurance Company.
-Purchases made with the proceeds from IDS Life Real Estate
Variable Annuity surrenders through December 31, 1997.
* Eligibility must be determined in advance by AEFA. To do so,
contact your financial advisor.
CLASS B -- CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE
Where a CDSC is imposed on a redemption, it is based on the
amount of the redemption and the number of calendar years,
including the year of purchase, between purchase and
redemption. The following table shows the declining scale of
percentages that apply to redemptions during each year after
a purchase:
<TABLE>
<CAPTION>
IF A REDEMPTION IS THE PERCENTAGE RATE
MADE DURING THE FOR THE CDSC IS:
<S> <C>
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
</TABLE>
31p
<PAGE> 35
How to purchase, exchange or redeem shares
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.
32p
<PAGE> 36
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
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 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 AEFA, or a custodian-to-custodian transfer to
a product not distributed by AEFA, the CDSC will not be
waived), or
-- redeeming under an approved substantially equal periodic
payment arrangement.
33p
<PAGE> 37
Special shareholder services
SERVICES
To help you track and evaluate the performance of your
investments, AEFC provides these services:
QUARTERLY STATEMENTS listing all of your holdings and
transactions during the previous three months.
YEARLY TAX STATEMENTS featuring average-cost-basis reporting
of capital gains or losses if you redeem your shares along
with distribution information which simplifies tax
calculations.
A PERSONALIZED MUTUAL FUND PROGRESS REPORT detailing returns
on your initial investment and cash-flow activity in your
account. It calculates a total return to reflect your
individual history in owning Fund shares. This report is
available from your financial advisor.
QUICK TELEPHONE REFERENCE
<TABLE>
<S> <C> <C>
AMERICAN Redemptions and National/Minnesota:
EXPRESS exchanges, dividend 800-437-3133
FINANCIAL payments or Mpls./St. Paul
ADVISORS reinvestments and area:
TELEPHONE automatic payment 671-3800
TRANSACTION arrangements
SERVICE
------------------------------------------------------------
TTY SERVICE For the hearing 800-846-4852
impaired
------------------------------------------------------------
AMERICAN Automated account 800-862-7919
EXPRESS information
FINANCIAL (TouchTone(R) phones
ADVISORS only), including
EASY ACCESS current Fund prices
LINE and performance,
account values and
recent account
transactions
------------------------------------------------------------
</TABLE>
34p
<PAGE> 38
How to purchase, exchange or redeem shares
As a shareholder you are entitled to your share of the Fund's
net income and any net gains realized on its investments. The
Fund distributes dividends and capital gain distributions to
qualify as a regulated investment company and to avoid paying
corporate income and excise taxes. Dividend and capital gain
distributions will have tax consequences you should know
about.
DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS
The Portfolio allocates investment income from dividends and
interest and net realized capital gains or losses, if any, to
the Fund. The Fund deducts direct and allocated expenses from
the investment income. The Fund's net investment income is
distributed to you at the end of each calendar quarter as
DIVIDENDS. Capital gains are realized when a security is sold
for a higher price than was paid for it. Short-term capital
gains are distributed at the end of the calendar year and are
included in net investment income. Long-term capital gains
are realized when a security is held for more than one year.
The Fund will offset any net realized capital gains by any
available capital loss carryover. Net realized long-term
capital gains, if any, are distributed at the end of the
calendar year as CAPITAL GAIN DISTRIBUTIONS. These long-term
capital gains will be subject to differing tax rates
depending on the holding period of the underlying
investments. Before they are distributed, both net investment
income and net long-term capital gains are included in the
value of each share. After they are distributed, the value of
each share drops by the per-share amount of the distribution.
(If your distributions are reinvested, the total value of
your holdings will not change.)
Dividends for each class will be calculated at the same time,
in the same manner and will be the same amount prior to
deduction of expenses. Expenses attributable solely to a
class of shares will be paid exclusively by that class.
35p
Distributions and taxes
<PAGE> 39
Distributions and taxes
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 the same
class of another publicly available IDS fund for which you
have previously opened an account.
The reinvestment price is the net asset value at close of
business on the day the distribution is paid. (Your quarterly
statement will confirm the amount invested and the number of
shares purchased.)
If you choose cash distributions, you will receive only those
declared after your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the
cash distributions, we will reinvest the checks into your
account at the then-current net asset value and make future
distributions in the form of additional shares. Prior to
reinvestment, no interest will accrue on amounts represented
by uncashed distribution or redemption checks.
TAXES
The Fund has received a Private Letter Ruling from the
Internal Revenue Service stating that, for purposes of the
Internal Revenue Code, the Fund will be regarded as directly
holding its allocable share of the income and gain realized
by the Portfolio.
Distributions are subject to federal income tax and also may
be subject to state and local taxes. Distributions are
taxable in the year the Fund declares them regardless of
whether you take them in cash or reinvest them.
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.
36p
<PAGE> 40
Buying a dividend creates a tax liability. This means buying
shares shortly before a net investment income or a capital
gain distribution. You pay the full pre-distribution price
for the shares, then receive a portion of your investment
back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital
gain. If you sell shares for more than their cost, the
difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for
shares held for more than one year). Long-term capital gains
will be taxed at rates that vary depending upon the holding
period. Long-term capital gains are divided into two holding
periods: 1) shares held more than one year but not more than
18 months and 2) shares held more than 18 months.
YOUR TAXPAYER IDENTIFICATION NUMBER (TIN) IS IMPORTANT. As
with any financial account you open, you must list your
current and correct Taxpayer Identification Number (TIN) --
either your Social Security or Employer Identification
number. The TIN must be certified under penalties of perjury
on your application when you open an account.
If you do not provide the TIN, or the TIN you report is
incorrect, you could be subject to backup withholding of 31%
of taxable distributions and proceeds from certain sales and
exchanges. You also could be subject to further penalties,
such as:
-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.
37p
<PAGE> 41
Distributions and taxes
HOW TO DETERMINE THE CORRECT TIN
<TABLE>
<CAPTION>
USE THE SOCIAL SECURITY OR
FOR THIS TYPE OF ACCOUNT: EMPLOYER IDENTIFICATION NUMBER OF:
-----------------------------------------------------------------
<S> <C>
Individual or joint account The individual or individuals
listed on the account
-----------------------------------------------------------------
Custodian account of a minor The minor
(Uniform Gifts/Transfers
to Minors Act)
-----------------------------------------------------------------
A living trust The grantor-trustee
(the person who puts the money
into the trust)
-----------------------------------------------------------------
An irrevocable trust, The legal entity
pension trust or estate (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 The organization
tax-exempt organization
-----------------------------------------------------------------
</TABLE>
For details on TIN requirements, ask your financial advisor
or local American Express Financial Advisors office for
federal Form W-9, "Request for Taxpayer Identification Number
and Certification."
IMPORTANT: This information is a brief and selective summary
of certain federal tax rules that apply to this Fund. Tax
matters are highly individual and complex, and you should
consult a qualified tax adviser about your personal
situation.
38p
<PAGE> 42
How the Fund and Portfolio are organized
SHARES
IDS Investment Series, Inc. currently is composed of two
funds, each issuing its own series of capital stock: IDS
Diversified Equity Income Fund and IDS Mutual. 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 one cent per share. Both full and fractional shares
can be issued.
The shares of each fund making up IDS Investment Series, Inc.
represent an interest in that fund's assets only (and profits
or losses), and, in the event of liquidation, each share of a
fund would have the same rights to dividends and assets as
every other share of that fund.
IDS Mutual no longer issues stock certificates.
VOTING RIGHTS
As a shareholder, you have voting rights over the Fund's
management and fundamental policies. You are entitled to one
vote for each share you own. Shares of the Fund have
cumulative voting rights. Each class has exclusive voting
rights with respect to the provisions of the Fund's
distribution plan that pertain to a particular class and
other matters for which separate class voting is appropriate
under applicable law.
SHAREHOLDER MEETINGS
The Fund does not hold annual shareholder meetings. However,
the board members may call meetings at their discretion, or
on demand by holders of 10% or more of the outstanding
shares, to elect or remove board members.
39p
<PAGE> 43
How the Fund and Portfolio are organized
SPECIAL CONSIDERATIONS REGARDING
MASTER/FEEDER STRUCTURE
The Fund pursues its goal by investing its assets in a master
fund called the Portfolio. This means that the Fund does not
invest directly in securities; rather the Portfolio invests
in and manages its portfolio of securities. The Portfolio is
a separate investment company but it has the same goal and
investment policies as the Fund. The goal and investment
policies of the Portfolio are described under the captions
"Investment policies and risks" and "Facts about investments
and their risks." Additional information on investment
policies may be found in the SAI.
BOARD CONSIDERATIONS: The board considered the advantages and
disadvantages of investing the Fund's assets in the
Portfolio. The board believes that the master/feeder
structure can be in the best interest of the Fund and its
shareholders since it offers the opportunity for economies of
scale. The Fund may redeem all of its assets from the
Portfolio at any time. Should the board determine that it is
in the best interest of the Fund and its shareholders to
terminate its investment in the Portfolio, it would consider
hiring an investment advisor to manage the Fund's assets, or
other appropriate options. The Fund would terminate its
investment if the Portfolio changed its goal, investment
policies or restrictions without the same change being
approved by the Fund.
OTHER FEEDERS: The Portfolio sells securities to other
affiliated mutual funds and may sell securities to
nonaffiliated investment companies and institutional accounts
(known as feeders). These feeders buy the Portfolio's
securities on the same terms and conditions as the Fund and
pay their proportionate share of the Portfolio's expenses.
However, their operating costs and sales charges are
different from those of the Fund. Therefore, the investment
returns for other feeders are different from the returns of
the Fund. Information about other feeders may be obtained by
calling American Express Financial Advisors at
1-800-AXP-SERV.
40p
<PAGE> 44
Each feeder that invests in the Portfolio is different and
activities of its investors may adversely affect all other
feeders, including the Fund. For example, if one feeder
decides to terminate its investment in the Portfolio, the
Portfolio may elect to redeem in cash or in kind. If cash is
used, the Portfolio will incur brokerage, taxes and other
costs in selling securities to raise the cash. This may
result in less investment diversification if entire
investment positions are sold, and it also may result in less
liquidity among the remaining assets. If in-kind distribution
is made, a smaller pool of assets remains that may affect
brokerage rates and investment options. In both cases,
expenses may rise since there are fewer assets to cover the
costs of managing those assets.
SHAREHOLDER MEETINGS: Whenever the Portfolio proposes to
change a fundamental investment policy or to take any other
action requiring approval of its security holders, the Fund
will hold a shareholder meeting. The Fund will vote for or
against the Portfolio's proposals in proportion to the vote
it receives for or against the same proposals from its
shareholders.
BOARD MEMBERS AND OFFICERS
Shareholders elect a board that oversees the operations of
the Fund and chooses its officers. Its officers are
responsible for day-to-day business decisions based on
policies set by the board. The board has named an executive
committee that has authority to act on its behalf between
meetings. Board members and officers serve 47 IDS and IDS
Life funds and 15 Master Trust portfolios, except for William
H. Dudley, who does not serve the nine IDS Life funds. The
board members 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.
41p
<PAGE> 45
How the Fund and Portfolio are organized
<TABLE>
<S> <C>
INDEPENDENT BOARD MEMBERS AND OFFICERS
Chairman of the board WILLIAM R. PEARCE*
Chairman of the board, Board Services
Corporation (provides administrative
services to boards including the boards of
the IDS and IDS Life funds and Master Trust
portfolios).
H. BREWSTER ATWATER JR.
Former chairman and chief executive officer,
General Mills, Inc.
LYNNE V. CHENEY
Distinguished fellow, American Enterprise
Institute for Public Policy Research.
HEINZ F. HUTTER
Former president and chief operating
officer, Cargill, Inc.
ANNE P. JONES
Attorney and telecommunications consultant.
ALAN K. SIMPSON
Former United States senator for Wyoming.
EDSON W. SPENCER
Former chairman and chief executive officer,
Honeywell, Inc.
WHEELOCK WHITNEY
Chairman, Whitney Management Company.
C. ANGUS WURTELE
Chairman of the board, The Valspar
Corporation.
OFFICER
Vice president, LESLIE L. OGG*
general counsel President, treasurer and corporate secretary
and secretary of Board Services Corporation.
BOARD MEMBERS AND OFFICERS ASSOCIATED WITH AEFC
President JOHN R. THOMAS*
Senior vice president, AEFC.
WILLIAM H. DUDLEY*
Senior advisor to the chief executive
officer, AEFC.
DAVID R. HUBERS*
President and chief executive officer, AEFC.
OFFICERS ASSOCIATED WITH AEFC
Vice president PETER J. ANDERSON*
Senior vice president.
- -------------------------------------------------------------------------
Treasurer MELINDA S. URION*
Senior vice president and chief financial
officer, AEFC.
</TABLE>
Refer to the SAI for the board members' and officers' biographies.
* Interested persons as defined by the Investment Company Act of 1940.
42p
<PAGE> 46
INVESTMENT MANAGER
The Portfolio pays AEFC for managing its assets. The Fund
pays its proportionate share of the fee. Under the Investment
Management Services Agreement, AEFC is paid a fee for these
services based on the average daily net assets of the
Portfolio, as follows:
<TABLE>
<CAPTION>
ASSETS ANNUAL RATE
(BILLIONS) AT EACH ASSET LEVEL
<S> <C>
First $1.0 0.530%
Next 1.0 0.505
Next 1.0 0.480
Next 3.0 0.455
Over 6.0 0.430
</TABLE>
This fee may be increased or decreased by a performance
adjustment based on a comparison of performance of Class A
shares of the Fund to the Lipper Balanced Fund Index. The
maximum adjustment is 0.08% of the Portfolio's average daily
net assets on an annual basis.
For the fiscal year ended Sept. 30, 1997, the Portfolio paid
AEFC a total investment management fee of 0.49% of its
average daily net assets. Under the Agreement, the Portfolio
also pays taxes, brokerage commissions and nonadvisory
expenses.
ADMINISTRATOR AND TRANSFER AGENT
The Fund pays AEFC for shareholder accounting and transfer
agent services under two agreements. The first agreement, the
Administrative Services Agreement, has a declining annual
rate beginning at 0.04% and decreasing to 0.02% as assets
increase.
The second agreement, the Transfer Agency Agreement, has an
annual fee per shareholder account as follows:
-Class A $15
-Class B $16
-Class Y $15
43p
<PAGE> 47
How the Fund and Portfolio are organized
DISTRIBUTOR
The Fund has an exclusive distribution agreement with
American Express Financial Advisors, a wholly owned
subsidiary of AEFC. Financial advisors representing AEFA
provide information to investors about individual investment
programs, the Fund and its operations, new account
applications, and exchange and redemption requests. The cost
of these services is paid partially by the Fund's sales
charges.
Persons who buy Class A shares pay a sales charge at the time
of purchase. Persons who buy Class B shares are subject to a
contingent deferred sales charge on a redemption in the first
six years and pay an asset-based sales charge (also known as
a 12b-1 fee) of 0.75% of the Fund's average daily net assets.
Class Y shares are sold without a sales charge and without an
asset-based sales charge.
Financial advisors may receive different compensation for
selling Class A, Class B and Class Y shares. Portions of the
sales charge also may be paid to securities dealers who have
sold the Fund's shares or to banks and other financial
institutions. The amounts of those payments range from 0.8%
to 4% of the Fund's offering price depending on the monthly
sales volume.
Under a Shareholder Service Agreement, the Fund also pays a
fee for service provided to shareholders by financial
advisors and other servicing agents. The fee is calculated at
a rate of 0.175% of average daily net assets for Class A and
Class B shares and 0.10% for Class Y shares.
Total expenses paid by the Fund's Class A shares for the
fiscal year ended Sept. 30, 1997, were 0.83% of its average
daily net assets. Expenses for Class B and Class Y were 1.59%
and 0.70%, respectively.
44p
How the Fund and Portfolio are organized
<PAGE> 48
About American Express Financial Corporation
GENERAL INFORMATION
The AEFC family of companies offers not only mutual funds but
also insurance, annuities, investment certificates and a
broad range of financial management services.
Besides managing investments for all funds in the IDS MUTUAL
FUND GROUP, AEFC also manages investments for itself and its
subsidiaries, IDS Certificate Company and IDS Life Insurance
Company. Total assets under management on Sept. 30, 1997 were
more than $171 billion.
AEFA serves individuals and businesses through its nationwide
network of more than 175 offices and more than 8,500
advisors.
Other AEFC subsidiaries provide investment management and
related services for pension, profit sharing, employee
savings and endowment funds of businesses and institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010.
It is a wholly owned subsidiary of American Express Company
(American Express), a financial services company with
headquarters at American Express Tower, World Financial
Center, New York, NY 10285. The Portfolio may pay brokerage
commissions to broker-dealer affiliates of AEFC.
45p
<PAGE> 49
Appendix
DESCRIPTIONS OF DERIVATIVE INSTRUMENTS
What follows are brief descriptions of derivative instruments
the Portfolio may use. At various times the Portfolio may use
some or all of these instruments and is not limited to these
instruments. It may use other similar types of instruments if
they are consistent with the Portfolio's investment goal and
policies. For more information on these instruments, see the
SAI.
OPTIONS AND FUTURES CONTRACTS -- An option is an agreement to
buy or sell an instrument at a set price during a certain
period of time. A futures contract is an agreement to buy or
sell an instrument for a set price on a future date. The
Portfolio may buy and sell options and futures contracts to
manage its exposure to changing interest rates, security
prices and currency exchange rates. Options and futures may
be used to hedge the Portfolio's investments against price
fluctuations or to increase market exposure.
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES -- Asset-backed
securities include interests in pools of assets such as motor
vehicle installment sale contracts, installment loan
contracts, leases on various types of real and personal
property, receivables from revolving credit (credit card)
agreements or other categories of receivables.
Mortgage-backed securities include collateralized mortgage
obligations and stripped mortgage-backed securities. Interest
and principal payments depend on payment of the underlying
loans or mortgages. The value of these securities may also be
affected by changes in interest rates, the market's
perception of the issuers and the creditworthiness of the
parties involved. The non-mortgage related asset-backed
securities do not have the benefit of a security interest in
the related collateral. Stripped mortgage-backed securities
include interest only (IO) and principal only (PO)
securities. Cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments on the
underlying mortgage loans or mortgage-backed securities.
46p
<PAGE> 50
INDEXED SECURITIES -- The value of indexed securities is
linked to currencies, interest rates, commodities, indexes or
other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose
values at maturity or interest rates rise or fall according
to the change in one or more specified underlying
instruments. Indexed securities may be more volatile than the
underlying instrument itself.
INVERSE FLOATERS -- Inverse floaters are created by
underwriters using the interest payment on securities. A
portion of the interest received is paid to holders of
instruments based on current interest rates for short-term
securities. The remainder, minus a servicing fee, is paid to
holders of inverse floaters. As interest rates go down, the
holders of the inverse floaters receive more income and an
increase in the price for the inverse floaters. As interest
rates go up, the holders of the inverse floaters receive less
income and a decrease in the price for the inverse floaters.
STRUCTURED PRODUCTS -- Structured products are over-
the-counter financial instruments created specifically to
meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option or a forward
contract embedded in a note or any of a wide variety of debt,
equity and/or currency combinations. Risks of structured
products include the inability to close such instruments,
rapid changes in the market and defaults by other parties.
47p
<PAGE> 51
IDS MUTUAL
IDS Tower 10
Minneapolis, MN 55440-0010
Distributed by
American Express
Financial Advisors Inc.
PRINTED WITH SOY INK LOGO S-6326 M (11/97)
<PAGE> 52
IDS DIVERSIFIED EQUITY INCOME FUND
PROSPECTUS
NOV. 28, 1997
The primary goal of IDS Diversified Equity Income Fund, a part of IDS
Investment Series, Inc., is to provide a high level of income. Its secondary
goal is to provide capital growth.
The Fund seeks to achieve its goals by investing all of its assets in Equity
Income Portfolio of Growth and Income Trust. The Portfolio is managed by
American Express Financial Corporation and has the same goals as the Fund. This
arrangement is commonly known as a master/feeder structure.
This prospectus contains facts that can help you decide if the Fund is the
right investment for you. Read it before you invest and keep it for future
reference.
Additional facts about the Fund are in a Statement of Additional Information
(SAI), filed with the Securities and Exchange Commission (SEC) and available
for reference, along with other related materials, on the SEC Internet web site
(http://www.sec.gov). The SAI is incorporated by reference. For a free copy,
contact American Express Shareholder Service.
LIKE ALL MUTUAL FUND SHARES, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE NOTE THAT THE FUND:
- IS NOT A BANK DEPOSIT
- IS NOT FEDERALLY INSURED
- IS NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
- IS NOT GUARANTEED TO ACHIEVE ITS GOALS
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN
55440-0534
800-862-7919
TTY: 800-846-4852
Web site address: http://www.americanexpress.com/advisors
1
<PAGE> 53
TABLE OF CONTENTS
THE FUND IN BRIEF
Goals
Investment policies and risks
Structure of the Fund
Manager and distributor
Portfolio manager
Alternative purchase arrangements
SALES CHARGE AND FUND EXPENSES
PERFORMANCE
Financial highlights
Total returns
INVESTMENT POLICIES AND RISKS
Facts about investments and their risks
Valuing Fund shares
HOW TO PURCHASE, EXCHANGE OR REDEEM SHARES
Alternative purchase arrangements
How to purchase shares
How to exchange shares
How to redeem shares
Reductions and waivers of the sales charge
SPECIAL SHAREHOLDER SERVICES
Services
Quick telephone reference
DISTRIBUTIONS AND TAXES
Dividend and capital gain distributions
Reinvestments
Taxes
How to determine the correct TIN
2
<PAGE> 54
HOW THE FUND AND PORTFOLIO ARE ORGANIZED
Shares
Voting rights
Shareholder meetings
Special considerations regarding master/feeder structure
Board members and officers
Investment manager
Administrator and transfer agent
Distributor
ABOUT AMERICAN EXPRESS FINANCIAL CORPORATION
General information
APPENDICES
Description of corporate bond ratings
Descriptions of derivative instruments
3
<PAGE> 55
THE FUND IN BRIEF
GOALS
IDS Diversified Equity Income Fund (the Fund) seeks to provide shareholders
with a high level of current income and, as a secondary goal, steady growth of
capital. It does so by investing all of its assets in Equity Income Portfolio
(the Portfolio) of Growth and Income Trust (the Trust) rather than by directly
investing in and managing its own portfolio of securities. Both the Fund and
the Portfolio are diversified investment companies that have the same goals.
Because any investment involves risk, achieving these goals cannot be
guaranteed. The goals can be changed only by holders of a majority of
outstanding securities.
The Fund may withdraw its assets from the Portfolio at any time if the board
determines that it is in the best interests of the Fund to do so. In that
event, the Fund would consider what action should be taken, including whether
to retain an investment advisor to manage the Fund's assets directly or to
reinvest all of the Fund's assets in another pooled investment entity.
INVESTMENT POLICIES AND RISKS
Both the Fund and the Portfolio have the same investment policies. Accordingly,
the Portfolio invests primarily in dividend-paying stocks. The Portfolio also
invests in other common stocks, foreign securities, convertible securities,
debt securities, derivative instruments and money market instruments. Some of
the Portfolio's investments may be considered speculative and involve
additional investment risks. For further information, refer to the later
section in the prospectus titled "Investment policies and risks."
STRUCTURE OF THE FUND
This Fund uses what is commonly known as a master/feeder structure. This means
that the Fund (the feeder fund) invests all of its assets in the Portfolio (the
master fund). The Portfolio invests in and manages the securities and has the
same goal and investment policies as the Fund. This structure is described in
more detail in the section captioned "Special considerations regarding
master/feeder structure." Here is an illustration of the structure:
4
<PAGE> 56
Investors buy
shares in the Fund
The Fund invests
in the Portfolio
The Portfolio invests
in securities, such
as stocks or bonds
MANAGER AND DISTRIBUTOR
The Portfolio is managed by American Express Financial Corporation (AEFC), a
provider of financial services since 1894. AEFC currently manages more than $70
billion in assets for the IDS MUTUAL FUND GROUP. Shares of the Fund are sold
through American Express Financial Advisors Inc. (AEFA), a wholly-owned
subsidiary of AEFC.
PORTFOLIO MANAGER
Kurt Winters joined AEFC in 1987 and serves as senior portfolio manager. He has
managed the assets of the Portfolio since December 1997. Kurt is responsible
for overall investment management, including the determination of the sectors
in which the fund will invest. A team of research professionals makes
investment decisions within those sectors. From 1992, to 1995, he managed IDS
Life Series Fund, Managed Portfolio. He was appointed to manage IDS Discovery
Fund in 1995. He also manages IDS Equity Value Fund, IDS Progressive Fund and
Balanced 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. Operating expenses are reflected in the Fund's daily
share price and dividends, and are not charged directly to shareholder
accounts.
5
<PAGE> 57
SHAREHOLDER TRANSACTION EXPENSES
CLASS A CLASS B CLASS Y
Maximum sales charge on purchases*
(as a percentage of offering price) 5% 0% 0%
Maximum deferred sales charge
imposed on redemptions (as a
percentage of original purchase price) 0% 5% 0%
ANNUAL FUND AND ALLOCATED PORTFOLIO OPERATING EXPENSES
(as a percentage of average daily net assets):
CLASS A CLASS B CLASS Y
Management fee** 0.50% 0.50% 0.50%
12b-1 fee 0.00% 0.75% 0.00%
Other expenses*** 0.38% 0.40% 0.31%
Total**** 0.88% 1.65% 0.81%
*This charge may be reduced depending on your total investments in IDS funds.
See "Reductions of the sales charge."
**The management fee is paid by the Trust on behalf of the Portfolio.
***Other expenses include an administrative services fee, a shareholder
services fee, a transfer agency fee and other nonadvisory expenses. Class Y
expenses have been restated to reflect the 0.10% shareholder services fee
effective May 9, 1997.
****The Fund changed to a master/feeder structure on May 13, 1996. The board
considered whether the aggregate expenses of the Fund and the Portfolio would
be more or less than if the Fund invested directly in the type of securities
being held by the Portfolio. AEFC agreed to pay the small additional costs
required to use a master/feeder structure to manage the investment portfolio
during the first year of its operation and half of such costs in the second
year. These additional costs may be more than offset in subsequent years if the
assets being managed increase.
EXAMPLE: Suppose for each year for the next 10 years, Fund expenses are as
above and annual return is 5%. If you sold your shares at the end of the
following years, for each $1,000 invested, you would pay total expenses of:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $59 $77 $96 $153
Class B $67 $92 $110 $175**
Class B* $17 $52 $90 $175**
Class Y $8 $26 $45 $101
*Assuming Class B shares are not redeemed at the end of the period.
**Based on conversion of Class B shares to Class A shares after eight years.
6
<PAGE> 58
THIS EXAMPLE DOES NOT REPRESENT ACTUAL EXPENSES, PAST OR FUTURE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. Because Class B pays annual
distribution (12b-1) fees, long-term shareholders of Class B may indirectly pay
an equivalent of more than a 6.25% sales charge, the maximum permitted by the
National Association of Securities Dealers.
PERFORMANCE
FINANCIAL HIGHLIGHTS
The information in these tables has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of the Fund are contained in the Fund's
annual report which, if not included with this prospectus, may be obtained
without charge.
7
<PAGE> 59
Finacial highlights
Performance
IDS Diversified Equity Income, Inc.
Fiscal period ended Sept. 30,
Per share income and capital changesa
<TABLE>
<CAPTION>
Class A
1997 1996 1995 1994 1993 1992 1991b
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $8.96 $7.89 $7.66 $7.73 $6.48 $5.98 $5.00
beginning of period
Income from investment operations:
Net investment income (loss) .34 .27 .30 .27 .28 .31 .30
Net gains (losses) 2.04 1.06 .53 .20 1.31 .58 .98
(both realized
and unrealized)
Total from investment 2.38 1.33 .83 .47 1.59 .89 1.28
operations
Less distributions:
Dividends from net (.33) (.26) (.29) (.27) (.28) (.30) (.30)
investment income
Distributions from (.62) -- (.31) (.27) (.06) (.09) --
realized gains
Total distributions (.95) (.26) (.60) (.54) (.34) (.39) (.30)
Net asset value, $ 10.39 $8.96 $7.89 $7.66 $7.73 $6.48 $5.98
end of period
Ratios/supplemental data
<CAPTION>
Class A
1997 1996 1995 1994 1993 1992 1991b
<S> <C> <C> <C> <C> <C> <C> <C>
Net assets, end of $ 1,789 $1,292 $1,091 $936 $487 $162 $23
period (in millions)
Ratio of expenses to .88% .93% .94% .88% .96% 1.08%d .90%e
average daily net assets c
Ratio of net income (loss) 3.62% 3.18% 3.95% 3.75% 3.94% 4.79%d 5.97%e
to average daily net assets
Portfolio turnover rate 81% 84% 98% 95% 73% 34% 74%
(excluding short-term
securities)
Total return f 28.1% 17.0% 11.8% 6.3% 25.0% 15.4% 25.9%
Average brokerage $.0482 $.0345 -- -- -- -- --
commission rateg
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date. Period from Oct. 15, 1990 to Sept. 30, 1991.
c Effective fiscal year 1996, expense ratio is based on total expenses of
the Fund before reduction of earnings credits on cash balances.
d During the period from Oct 1, 1991, to Feb. 19, 1992, AEFC reimbursed the
Fund for expenses in excess of 0.9% of its average daily net assets, on an
annual basis. Had AEFC not done so, the ratios of expenses and net investment
income would have been 1.13% and 4.74%, respectively.
e For the period ended Sept. 30, 1991, AEFC reimbursed the Fund for expenses
in excess of 0.9% of its average daily net assets, on an annual basis. Had AEFC
not done so, the ratios of expenses and net investment income would have been
1.34% and 5.53%, respectively.
f Total return does not reflect payment of a sales charge.
g Effective fiscal year 1996, the Fund is required to disclose an
average brokerage commission rate per share for security trades on which
commissions are charged. The comparability of this information may be affected
by the fact that commission rates per share vary significantly among foreign
countries.
<PAGE> 60
IDS Diversified Equity Income, Inc.
Fiscal period ended Sept. 30,
Per share income and capital changesa
<TABLE>
<CAPTION>
Class B Class Y
1997 1996 1995b 1997 1996 1995b
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $8.96 $7.89 $7.13 $8.96 $7.89 $7.13
beginning of period
Income from investment operations:
Net investment
income (loss) .27 .20 .19 .35 .28 .22
Net gains (losses) 2.04 1.06 .74 2.05 1.06 .74
(both realized
and unrealized)
Total from investment 2.31 1.26 .93 2.40 1.34 .96
operations
Less distributions:
Dividends from net (.26) (.19) (.17) (.34) (.27) (.20)
investment income
Distributions from (.62) -- -- (.62) -- --
realized gains
Total distributions (.88) (.19) (.17) (.96) (.27) (.20)
Net asset value, $10.39 $8.96 $7.89 $10.40 $8.96 $7.89
end of period
Ratios/supplemental data
Class B Class Y
1997 1996 1995b 1997 1996 1995b
<S> <C> <C> <C> <C> <C> <C>
Net assets, end of $350 $125 $32 $79 $37 $26
period (in millions)
Ratio of expenses to 1.65% 1.69% 1.77%c .76% .76% .80%c
average daily net assets d
Ratio of net income
(loss) to average daily
net assets 2.97% 2.56% 3.00%c 3.85% 3.38% 3.95%c
Portfolio turnover rate 81% 84% 98% 81% 84% 98%
(excluding short-term
securities)
Total returne 27.2% 16.2% 13.1% 28.3% 17.3% 13.6%
Average brokerage $.0482 $.0345 -- $.0482 $.0345 --
commission rate f
</TABLE>
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective fiscal year 1996, expense ratio is based on total expenses of
the Fund before reduction of earnings credits on cash balances.
e Total return does not reflect payment of a sales charge.
f Effective fiscal year 1996, the Fund is required to disclose an average
brokerage commission rate per share for security trades on which commissions are
charged. The comparability of this information may be affected by the fact that
commission rates per share vary significantly among foreign countries.
The information in these tables has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of the Fund ar contained in the Fund's annual
report which, if not included with the prospectus, may be obtained without
charge.
<PAGE> 61
TOTAL RETURNS
TOTAL RETURN is the sum of all of your returns for a given period, assuming you
reinvest all distributions. It is calculated by taking the total value of
shares you own at the end of the period (including shares acquired by
reinvestment), less the price of shares you purchased at the beginning of the
period.
AVERAGE ANNUAL TOTAL RETURN is the annually compounded rate of return over a
given time period (usually two or more years). It is the total return for the
period converted to an equivalent annual figure.
AVERAGE ANNUAL TOTAL RETURNS as of Sept. 30, 1997
<TABLE>
<CAPTION>
PURCHASE 1 YEAR SINCE INCEPTION 5 YEARS SINCE INCEPTION
MADE AGO (B&Y) AGO (A)
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Diversified
Equity Income:
Class A +21.71% --% +16.18% +17.50%*
Class B +23.16% +21.38%# --% --%
Class Y +28.29% +23.64%# --% --%
S&P 500 +40.43% +31.28%## +20.73% +21.03%**
Lipper Equity
Income Fund Index +33.71% +25.30%## +17.67% +18.52%**
</TABLE>
*Inception date was Oct. 15, 1990.
**Measurement period started Nov. 1, 1990.
#Inception date was March 20, 1995.
##Measurement period started April 1, 1995.
10
<PAGE> 62
CUMULATIVE TOTAL RETURNS as of Sept. 30, 1997
<TABLE>
<CAPTION>
PURCHASE 1 YEAR SINCE INCEPTION 5 YEARS SINCE INCEPTION
MADE AGO (B&Y) AGO (A)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Diversified
Equity Income:
Class A +21.71% --% +111.72% +207.57%*
Class B +23.16% +63.39%# --% --%
Class Y +28.29% +71.23%# --% --%
S&P 500 +40.43% +99.51%## +156.52% +275.17%**
Lipper Equity
Income Fund Index +33.71% +77.01%## +125.64% +224.35%**
</TABLE>
*Inception date was Oct. 15, 1990.
**Measurement period started Nov. 1, 1990.
#Inception date was March 20, 1995.
##Measurement period started April 1, 1995.
These examples show total returns from hypothetical investments in Class A,
Class B and Class Y shares of the Fund. These returns are compared to those of
popular indexes for the same periods. The performance of Class B and Class Y
will vary from the performance of Class A based on differences in sales charges
and fees. Past performance for Class Y for the periods prior to March 20, 1995
may be calculated based on the performance of Class A, adjusted to reflect
differences in sales charges although not for other differences in expenses.
For purposes of calculation, information about the Fund assumes:
- - a sales charge of 5% for Class A shares
- - redemption at the end of the period and deduction of the applicable
contingent deferred sales charge for Class B shares
- - no sales charge for Class Y shares
- - no adjustments for taxes an investor may have paid on the reinvested
income and capital gains
- - a period of widely fluctuating securities prices. Returns shown should
not be considered a representation of the Fund's future performance.
Standard & Poor's 500 Stock Index (S&P 500), an unmanaged list of common
stocks, is frequently used as a general measure of market performance. The
index reflects reinvestment of all distributions and changes in market prices,
but excludes brokerage commissions or other fees.
11
<PAGE> 63
Lipper Equity Income Fund Index, an unmanaged index published by Lipper
Analytical Services, Inc., includes 30 funds that are generally similar to the
Fund, although some funds in the index may have somewhat different investment
policies or objectives.
INVESTMENT POLICIES AND RISKS
The policies described below apply both to the Fund and the Portfolio. Under
normal market conditions, the Portfolio will invest at least 65% of its net
assets in dividend-paying common and preferred stocks. Often these stocks are
issued by established companies in the utilities, financial, consumer and
energy sectors of the economy. In selecting stocks, the investment manager will
look at factors such as the current dividend, the present price of the
security, the ability of the company to maintain and increase the dividend, and
the likelihood the company will continue to grow.
The other assets of the Portfolio will be invested in other common stocks,
foreign securities, convertible securities, debt securities, derivative
instruments and money market instruments.
The various types of investments the investment manager uses to achieve
investment performance are described in more detail in the next section and in
the SAI.
FACTS ABOUT INVESTMENTS AND THEIR RISKS
COMMON STOCKS: Stock prices are subject to market fluctuations. Stocks of
larger, established companies that pay dividends may be less volatile than the
stock market as a whole.
PREFERRED STOCKS: If a company earns a profit, it generally must pay its
preferred stockholders a dividend at a pre-established rate.
CONVERTIBLE SECURITIES: These securities generally are preferred stocks or
bonds that can be exchanged for other securities, usually common stock, at
prestated prices. When the trading price of the common stock makes the exchange
likely, convertible securities trade more like common stock.
DEBT SECURITIES: The price of bonds generally falls as interest rates increase,
and rises as interest rates decrease. The price of bonds also fluctuates if the
credit rating is upgraded or downgraded.
The price of bonds below investment grade may react more to the ability of the
issuing company to pay interest and principal when due than to changes in
interest rates. They have greater price fluctuations, are more likely to
experience a default and sometimes are referred to as junk bonds. Reduced
market liquidity for these bonds may occasionally make it more difficult to
value them. In valuing bonds, the Portfolio relies both on
12
<PAGE> 64
independent rating agencies and on the investment manager's credit analysis.
Securities that are subsequently downgraded in quality may continue to be held
by the Portfolio and will be sold only when the investment manager believes it
is advantageous to do so. No more than 20% of the Portfolio's net assets may be
invested in bonds below investment grade unless the bonds are convertible
securities.
BOND RATINGS AND HOLDINGS FOR FISCAL 1997
<TABLE>
<CAPTION>
PERCENT OF NET
S&P RATING PROTECTION OF ASSETS IN UNRATED
PERCENT OF (OR MOODY'S PRINCIPAL AND SECURITIES ASSESSED
NET ASSETS EQUIVALENT) INTEREST BY AEFC
<S> <C> <C> <C>
7.45% AAA Highest quality %
0.48 AA High quality
3.16 A Upper medium grade
2.07 BBB Medium grade
0.20 BB Moderately
speculative
-- B Speculative
-- CCC Highly speculative
-- CC Poor quality
-- C Lowest quality
-- D In default
6.95 Unrated Unrated securities
</TABLE>
(See the Appendix to this prospectus describing corporate bond ratings for
further information.)
DEBT SECURITIES SOLD AT A DEEP DISCOUNT: Some bonds are sold at deep discounts
because they do not pay interest until maturity. They include zero coupon bonds
and PIK (pay-in-kind) bonds. Because such securities do not pay current cash
income, the market value of these securities may be subject to greater
volatility than other debt securities. To comply with tax laws, the Portfolio
has to recognize a computed amount of interest income and pay dividends to
shareholders even though no cash has been received. In some instances, the
Portfolio may have to sell securities to have sufficient cash to pay the
dividends.
FOREIGN INVESTMENTS: Securities of foreign companies and governments may be
traded in the United States, but often they are traded only on foreign markets.
Frequently, there is less information about foreign companies and less
government supervision of foreign markets. Foreign investments are subject to
political and economic risks of the countries in which the investments are
made, including the possibility of seizure or nationalization of companies,
imposition of withholding taxes on income, establishment of exchange controls
or adoption of other restrictions that might affect an investment adversely. If
an
13
<PAGE> 65
investment is made in a foreign market, the local currency may be purchased
using a forward contract in which the price of the foreign currency in U.S.
dollars is established on the date the trade is made, but delivery of the
currency is not made until the securities are received. As long as the
Portfolio holds foreign currencies or securities valued in foreign currencies,
the value of those assets will be affected by changes in the value of the
currencies relative to the U.S. dollar. Because of the limited trading volume
in some foreign markets, efforts to buy or sell a security may change the price
of the security, and it may be difficult to complete the transaction. The
Portfolio may invest up to 25% of its total assets in foreign investments.
DERIVATIVE INSTRUMENTS: The investment 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 investment manager to
change the investment performance characteristics very quickly and at lower
costs. Risks include losses of premiums, rapid changes in prices, defaults by
other parties and inability to close such instruments. The Portfolio will use
derivative instruments only to achieve the same investment performance
characteristics it could achieve by directly holding those securities and
currencies permitted under the investment policies. The Portfolio will
designate cash or appropriate liquid assets to cover its portfolio obligations.
No more than 5% of the Portfolio's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do not
offset existing investment positions. This does not, however, limit the portion
of the Portfolio's assets at risk to 5%. The Portfolio is not limited as to the
percentage of its assets that may be invested in permissible investments,
including derivatives, except as otherwise explicitly provided in this
prospectus or the SAI. For descriptions of these and other types of derivative
instruments, see the Appendix to this prospectus and the SAI.
SECURITIES AND OTHER INSTRUMENTS THAT ARE ILLIQUID: A security or other
instrument is illiquid if it cannot be sold quickly in the normal course of
business. Some investments cannot be resold to the U.S. public because of their
terms or government regulations. Securities and instruments, however, can be
sold in private sales, and many may be sold to other institutions and qualified
buyers or on foreign markets. The investment 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.
14
<PAGE> 66
MONEY MARKET INSTRUMENTS: Short-term debt securities rated in the top two
grades or the equivalent are used to meet daily cash needs and at various times
to hold assets until better investment opportunities arise. Generally, less
than 25% of the Portfolio's total assets are in these money market instruments.
However, for temporary defensive purposes these investments could exceed that
amount for a limited period of time.
The investment policies described above may be changed by the boards.
LENDING PORTFOLIO SECURITIES: The Portfolio may lend its securities to earn
income so long as borrowers provide collateral equal to the market value of the
loans. The risks are that borrowers will not provide collateral when required
or return securities when due. Unless a majority of the outstanding voting
securities approve otherwise, loans may not exceed 30% of the Portfolio's net
assets.
VALUING FUND SHARES
The PUBLIC OFFERING PRICE is the net asset value (NAV) adjusted for the sales
charge for Class A. It is the NAV for Class B and Class Y.
The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business, normally 3 p.m. Central time, each
business day (any day the New York Stock Exchange is open).
To establish the net assets, all securities held by the Portfolio are valued as
of the close of each business day. In valuing assets:
- - Securities and assets with available market values are valued on that
basis
- - Securities maturing in 60 days or less are valued at amortized cost
- - Assets without readily available market values are valued according to
methods selected in good faith by the board
HOW TO PURCHASE, EXCHANGE OR REDEEM SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers three different classes of shares - Class A, Class B and Class
Y. The primary differences among the classes are in the sales charge structures
and in their ongoing expenses.
15
<PAGE> 67
These differences are summarized in the table below. You may choose the class
that best suits your circumstances and objectives.
<TABLE>
<CAPTION>
SALES CHARGE AND
DISTRIBUTION
(12B-1) FEE SERVICE FEE OTHER INFORMATION
----------- ----------- -----------------
<S> <C> <C> <C>
CLASS A Maximum initial 0.175% of average Initial sales charge waived
sales charge of 5%; daily net assets or reduced for certain
no 12b-1 fee purchases
CLASS B No initial sales 0.175% of average Shares convert to
charge; maximum daily net assets Class A in the
CDSC of 5% declines ninth year of
to 0% after six ownership; CDSC
years; 12b-1 fee of waived in certain
0.75% of average circumstances
daily net assets
CLASS Y None 0.10% of average Available only to
daily net assets certain qualifying
institutional
investors
</TABLE>
CONVERSION OF CLASS B SHARES TO CLASS A SHARES - During the ninth calendar year
of owning your Class B shares, Class B shares will convert to Class A shares
and will no longer be subject to a distribution fee. Class B shares that
convert to Class A shares are not subject to a sales charge. Class B shares
purchased through reinvested dividends and distributions also will convert to
Class A shares in the same proportion as the other Class B shares. This means
more of your money will be put to work for you.
CONSIDERATIONS IN DETERMINING WHETHER TO PURCHASE CLASS A OR CLASS B SHARES -
You should consider the information below in determining whether to purchase
Class A or Class B shares. The distribution fee (included in "Ongoing
expenses") and sales charges are structured so that you will have approximately
the same total return at the end of eight years regardless of which class you
chose.
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. invested in shares of stock.
Part of your purchase price However, you will pay a sales
will go to pay the sales charge if you redeem your
charge. You will not pay a shares within six years of
sales charge when you redeem purchase.
your shares.
- - You will be able to take - No reductions of the sales
advantage of reductions in charge are available for
the sales charge. large purchases.
16
<PAGE> 68
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 Class B will cause your
A does not pay a distribution shares to have a higher
fee and the transfer agency expense ratio and to pay
fee for Class A is lower than lower dividends than Class A
the fee for Class B. As a shares. In the ninth year of
result, Class A shares will ownership, Class B shares
pay higher dividends than will convert to Class A
Class B shares. shares and you will no longer
be subject to higher fees.
You should consider how long you plan to hold your shares and whether the
accumulated higher fees and CDSC on Class B shares prior to conversion would be
less than the initial sales charge on Class A shares. Also consider to what
extent the difference would be offset by the lower expenses on Class A shares.
To help you in this analysis, the example in the "Sales charge and Fund
expenses" section of the prospectus illustrates the charges applicable to each
class of shares.
CLASS Y SHARES - Class Y shares are offered to certain institutional investors.
Class Y shares are sold without a front-end sales charge or a CDSC and are not
subject to 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.
17
<PAGE> 69
* Eligibility must be determined in advance by AEFA. To do so, contact your
financial advisor.
HOW TO PURCHASE SHARES
If you are investing in this Fund for the first time, you will need to set up
an account. Your financial advisor will help you fill out and submit an
application. Once your account is set up, you can choose among several
convenient ways to invest.
IMPORTANT: When opening an account, you must provide your correct Taxpayer
Identification Number (Social Security or Employer Identification number). See
"Distributions and taxes."
When you purchase shares for a new or existing account, the price you pay per
share is determined at the close of business on the day your investment is
received and accepted at the Minneapolis headquarters.
PURCHASE POLICIES:
- - 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> 70
THREE WAYS TO INVEST
<TABLE>
<S> <C> <C>
1
BY REGULAR ACCOUNT Send your check and application (or your name and MINIMUM AMOUNTS
account number if you have an established account) Initial investment: $2,000
to: Additional
American Express Financial Advisors Inc. investments: $ 100
P.O. Box 74 Account balances: $ 300*
Minneapolis, MN 55440-0074 Qualified retirement
Your financial advisor will help you with this process. accounts: none
2
BY SCHEDULED INVESTMENT Contact your financial advisor to set up one of the MINIMUM AMOUNTS
PLAN following scheduled plans: Initial investment: $ 100
Additional
- automatic payroll deduction investments: $ 100/
each payment
- bank authorization Account balances: none
(on active plans of
- direct deposit of Social Security check monthly payments)
- other plan approved by the Fund If account balance is below
$2,000, frequency of
payments must be at least
monthly.
3
BY WIRE If you have an established account, you may wire money If this information is not included,
to: the order may be rejected and all
Norwest Bank Minneapolis money received by the Fund, less
Routing No. 091000019 any costs the Fund or AEFC incurs,
Minneapolis, MN will be returned promptly.
Attn: Domestic Wire Dept.
MINIMUM AMOUNTS
Give these instructions: Each wire investment: $1,000
Credit IDS Account #00-30-015 for personal account #
(your account number) for (your name).
</TABLE>
*If your account balance falls below $300, you will be asked in writing to
bring it up to $300 or establish a scheduled investment plan. If you do not do
so within 30 days, your shares can be redeemed and the proceeds mailed to you.
HOW TO EXCHANGE SHARES
You can exchange your shares of the Fund at no charge for shares of the same
class of any other publicly offered fund in the IDS MUTUAL FUND GROUP available
in your state. Exchanges into IDS Tax-Free Money Fund must be made from Class A
shares. For complete information on any other fund, including fees and
expenses, read that fund's prospectus carefully.
If your exchange request arrives at the Minneapolis headquarters before the
close of business, your shares will be redeemed at the net asset value set for
that day. The proceeds will be used to purchase new fund shares the same day.
Otherwise, your exchange will take place the next business day at that day's
net asset value.
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<PAGE> 71
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 the proceeds from your redemption are
more or less than the cost of your shares, you will have a gain or loss, which
can affect your tax liability. Redeeming shares held in an IRA or qualified
retirement account may subject you to certain federal taxes, penalties and
reporting requirements. Consult your tax advisor.
TWO WAYS TO REQUEST AN EXCHANGE OR REDEMPTION OF SHARES
<TABLE>
<S> <C>
1
BY LETTER Include in your letter:
- the name of the fund (s)
- the class of shares to be exchanged or redeemed
- your account number(s) (for exchanges, both funds must be
registered in the same ownership)
- your Taxpayer Identification Number (TIN)
- 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
REGULAR MAIL:
American Express Shareholder Service
Attn: Redemptions
P.O. Box 534
Minneapolis, MN 55440-0534
EXPRESS MAIL:
American Express Shareholder Service
Attn: Redemptions
733 Marquette Ave.
Minneapolis, MN 55402
</TABLE>
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<PAGE> 72
<TABLE>
<S> <C>
2
BY PHONE
American Express Financial Advisors - The Fund and AEFC will honor any telephone exchange or
Telephone Transaction Service: redemption request believed to be authentic and will use
800-437-3133 or reasonable procedures to confirm that they are. This includes
612-671-3800 asking identifying questions and tape recording calls. If
reasonable procedures are not followed, the Fund or AEFC will
be liable for any loss resulting from fraudulent requests.
- Phone exchange and redemption privileges automatically
apply to all accounts except custodial, corporate or
qualified retirement accounts unless you request these
privileges NOT apply by writing American Express Shareholder
Service. Each registered owner must sign the request.
- AEFC answers phone requests promptly, but you may
experience delays when call volume is high. If you are unable
to get through, use mail procedure as an alternative.
- Acting on your instructions, your financial advisor may
conduct telephone transactions on your behalf.
- Phone privileges may be modified or discontinued at any
time.
MINIMUM AMOUNT
Redemption: $100
MAXIMUM AMOUNT
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.
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<PAGE> 73
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 purchase new shares in the
same account from which you redeemed. If you reinvest in Class A, you will
purchase the new shares at net asset value rather than the offering price on
the date of a new purchase. If you reinvest in Class B, any CDSC you paid on
the amount you are reinvesting also will be reinvested. To take advantage of
this option, send a written request within 30 days of the date your redemption
request was received. Include your account number and mention this option. This
privilege may be limited or withdrawn at any time, and it may have tax
consequences.
- - 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.)
THREE WAYS TO RECEIVE PAYMENT WHEN YOU REDEEM SHARES
<TABLE>
<S> <C>
1 - Mailed to the address on record
BY REGULAR OR - Payable to names listed on the account
EXPRESS MAIL NOTE: You will be charged a fee if you request express mail delivery.
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
- Contact your financial advisor or American Express Shareholder
BY SCHEDULED Service to set up regular payments to you on a monthly, bimonthly,
PAYOUT PLAN quarterly, semiannual or annual basis
- Purchasing new shares while under a payout plan may be
disadvantageous because of the sales charges
</TABLE>
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<PAGE> 74
REDUCTIONS AND WAIVERS OF THE SALES CHARGE
CLASS A - INITIAL SALES CHARGE ALTERNATIVE
On purchases of Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:
<TABLE>
TOTAL INVESTMENT SALES CHARGE AS A
PERCENTAGE OF:*
PUBLIC NET
OFFERING AMOUNT
PRICE INVESTED
--------- ---------
<S> <C> <C>
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
</TABLE>
* 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.
23
<PAGE> 75
- - 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.
For more details, see the SAI.
WAIVERS OF THE SALES CHARGE FOR CLASS A SHARES
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.
- - Investors who have a business relationship with a newly associated financial
advisor who joined AEFA from another investment firm provided that (1) the
purchase is made within six months of the advisor's appointment date with AEFA,
(2) the purchase is made with proceeds of a redemption of shares that were
sponsored by the financial advisor's previous broker-dealer, and (3) the
proceeds must be the result of a redemption of an equal or greater value where
a sales load was previously assessed.
- - Qualified employee benefit plans* using a daily transfer recordkeeping system
offering participants daily access to IDS funds.
(Participants in certain qualified plans for which the initial sales charge is
waived may be subject to a deferred sales charge of up to 4% on certain
redemptions. For more information, see the SAI.)
- - Shareholders who have at least $1 million invested in funds of the IDS MUTUAL
FUND GROUP. If the investment is redeemed in the first year after purchase, a
CDSC of 1% will be charged on the redemption. The CDSC will be waived only in
the circumstances described for waivers for Class B shares.
- - Purchases made within 30 days after a redemption of shares (up to the amount
redeemed):
- of a product distributed by AEFA 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.
24
<PAGE> 76
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 the same
class of another fund in the IDS MUTUAL FUND GROUP that has a sales charge.
- - Purchases made through or under a "wrap fee" product sponsored by AEFA (total
amount of all investments must be $50,000); the University of Texas System ORP;
or a segregated separate account offered by Nationwide Life Insurance Company
or Nationwide Life and Annuity Insurance Company.
- - Purchases made with the proceeds from IDS Life Real Estate Variable Annuity
surrenders through December 31, 1997.
* Eligibility must be determined in advance by AEFA. To do so, contact your
financial advisor.
CLASS B - CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE
Where a CDSC is imposed on a redemption, it is based on the amount of the
redemption and the number of calendar years, including the year of purchase,
between purchase and redemption. The following table shows the declining scale
of percentages that apply to redemptions during each year after a purchase:
IF A REDEMPTION IS THE PERCENTAGE RATE
MADE DURING THE FOR THE CDSC IS:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are redeeming reduces the current net asset value of your
investment in Class B shares below the total dollar amount of all your purchase
payments during the last six years (including the year in which your redemption
is made), the CDSC is based on the lower of the redeemed purchase payments or
market value.
The following example illustrates how the CDSC is applied. Assume you had
invested $10,000 in Class B shares and that your investment had appreciated in
value to $12,000 after 15 months, including reinvested dividend and capital
gain distributions. You could redeem any amount up to $2,000 without paying a
CDSC ($12,000 current value less
25
<PAGE> 77
$10,000 purchase amount). If you redeemed $2,500, the CDSC would apply only to
the $500 that represented part of your original purchase price. The CDSC rate
would be 4% because a redemption after 15 months would take place during the
second year after purchase.
Because the CDSC is imposed only on redemptions that reduce the total of your
purchase payments, you never have to pay a CDSC on any amount you redeem that
represents appreciation in the value of your shares, income earned by your
shares or capital gains. In addition, when determining the rate of any CDSC,
your redemption will be made from the oldest purchase payment you made. Of
course, once a purchase payment is considered to have been redeemed, the next
amount redeemed is the next oldest purchase payment. By redeeming the oldest
purchase payments first, lower CDSCs are imposed than would otherwise be the
case.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The CDSC on Class B shares will be waived on redemptions of shares:
- - 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 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 AEFA, or a
custodian-to-custodian transfer to a product not distributed by AEFA, 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.
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<PAGE> 78
A PERSONALIZED MUTUAL FUND PROGRESS REPORT detailing returns on your initial
investment and cash-flow activity in your account. It calculates a total return
to reflect your individual history in owning Fund shares. This report is
available from your financial advisor.
QUICK TELEPHONE REFERENCE
AMERICAN EXPRESS FINANCIAL ADVISORS TELEPHONE TRANSACTION SERVICE
Redemptions and exchanges, dividend payments or reinvestments and automatic
payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
TTY SERVICE
For the hearing impaired
800-846-4852
AMERICAN EXPRESS FINANCIAL ADVISORS EASY ACCESS LINE
Automated account information (TouchToneR phones only), including current Fund
prices and performance, account values and recent account transactions
800-862-7919
DISTRIBUTIONS AND TAXES
As a shareholder you are entitled to your share of the Fund's net income and
any net gains realized on its investments. The Fund distributes dividends and
capital gain distributions to qualify as a regulated investment company and to
avoid paying corporate income and excise taxes. Dividend and capital gain
distributions will have tax consequences you should know about.
DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS
The Portfolio allocates investment income from dividends and interest and net
realized capital gains or losses, if any, to the Fund. The Fund deducts direct
and allocated expenses from the investment income. The Fund's net investment
income is distributed to you at the end of each calendar quarter as DIVIDENDS.
Capital gains are realized when a security is sold for a higher price than was
paid for it. Short-term capital gains are distributed at the end of the
calendar year and are included in net investment income. Long-term capital
gains are realized when a security is held for more than one year. The Fund
will offset any net realized capital gains by any available capital loss
carryovers. Net realized long-term capital gains, if any, are distributed at
the end of the calendar year as CAPITAL GAIN DISTRIBUTIONS. These long-term
capital gains will be subject to differing tax rates depending on the holding
period of the underlying investments. Before they are distributed, both net
investment income and net long-term capital gains
27
<PAGE> 79
are included in the value of each share. After they are distributed, the value
of each share drops by the per-share amount of the distribution. (If your
distributions are reinvested, the total value of your holdings will not
change.)
Dividends for each class will be calculated at the same time, in the same
manner and will be the same amount prior to deduction of expenses. Expenses
attributable solely to a class of shares will be paid exclusively by that
class.
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 the same class of
another publicly available IDS fund for which you have previously opened
an account.
The reinvestment price is the net asset value at close of business on the day
the distribution is paid. (Your quarterly statement will confirm the amount
invested and the number of shares purchased.)
If you choose cash distributions, you will receive only those declared after
your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash
distributions, we will reinvest the checks into your account at the
then-current net asset value and make future distributions in the form of
additional shares. Prior to reinvestment, no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
TAXES
The Fund has received a Private Letter Ruling from the Internal Revenue Service
stating that, for purposes of the Internal Revenue Code, the Fund will be
regarded as directly holding its allocable share of the income and gain
realized by the Portfolio.
Distributions are subject to federal income tax and also may be subject to
state and local taxes. Distributions are taxable in the year the Fund declares
them regardless of whether you take them in cash or reinvest them.
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.
28
<PAGE> 80
Buying a dividend creates a tax liability. This means buying shares shortly
before a net investment income or a capital gain distribution. You pay the full
pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain. If you sell
shares for more than their cost, the difference is a capital gain. Your gain
may be short term (for shares held for one year or less) or long term (for
shares held for more than one year). Long-term capital gains will be taxed at
rates that vary depending upon the holding period. Long-term capital gains are
divided into two holding periods: 1) shares held more than one year but not
more than 18 months and 2) shares held more than 18 months.
YOUR TAXPAYER IDENTIFICATION NUMBER (TIN) IS IMPORTANT. As with any financial
account you open, you must list your current and correct Taxpayer
Identification Number (TIN) -- either your Social Security or Employer
Identification number. The TIN must be certified under penalties of perjury on
your application when you open an account.
If you do not provide the TIN, or the TIN you report is incorrect, you could be
subject to backup withholding of 31% of taxable distributions and proceeds from
certain sales and exchanges. You also could be subject to further penalties,
such as:
- - 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.
HOW TO DETERMINE THE CORRECT TIN
USE THE SOCIAL SECURITY OR
FOR THIS TYPE OF ACCOUNT: EMPLOYER IDENTIFICATION NUMBER OF:
Individual or joint account The individual or individuals listed on the
account
Custodian account of a The minor
minor (Uniform
Gifts/Transfers to Minors
Act)
A living trust The grantor-trustee
(the person who puts the money into the
trust)
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<PAGE> 81
An irrevocable trust, The legal entity
pension trust or estate (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 The organization
tax-exempt organization
For details on TIN requirements, ask your financial advisor or local American
Express Financial Advisors office for federal Form W-9, "Request for Taxpayer
Identification Number and Certification."
IMPORTANT: This information is a brief and selective summary of certain
federal tax rules that apply to this Fund. Tax matters are highly individual
and complex, and you should consult a qualified tax advisor about your personal
situation.
HOW THE FUND AND PORTFOLIO ARE ORGANIZED
SHARES
IDS Investment Series, Inc. currently is composed of two funds, each issuing
its own series of capital stock: IDS Diversified Equity Income Fund and IDS
Mutual. 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 one cent per share. Both full and fractional
shares can be issued.
The shares of each fund making up IDS Investment Series, Inc. represent an
interest in that fund's assets only (and profits or losses), and, in the event
of liquidation, each share of a fund would have the same rights to dividends
and assets as every other share of that fund.
VOTING RIGHTS
As a shareholder, you have voting rights over the Fund's management and
fundamental policies. You are entitled to one vote for each share you own.
Shares of the Fund have cumulative voting rights. Each class has exclusive
voting rights with respect to the provisions of the Fund's distribution plan
that pertain to a particular class and other matters for which separate class
voting is appropriate under applicable law.
30
<PAGE> 82
SHAREHOLDER MEETINGS
The Fund does not hold annual shareholder meetings. However, the board members
may call meetings at their discretion, or on demand by holders of 10% or more
of the outstanding shares, to elect or remove board members.
SPECIAL CONSIDERATIONS REGARDING MASTER/FEEDER STRUCTURE
The Fund pursues its goal by investing its assets in a master fund called the
Portfolio. This means that the Fund does not invest directly in securities;
rather the Portfolio invests in and manages its portfolio of securities. The
Portfolio is a separate investment company, but it has the same goal and
investment policies as the Fund. The goal and investment policies of the
Portfolio are described under the captions "Investment policies and risks" and
"Facts about investments and their risks." Additional information on investment
policies may be found in the SAI.
BOARD CONSIDERATIONS: The board considered the advantages and disadvantages of
investing the Fund's assets in the Portfolio. The board believes that the
master/feeder structure can be in the best interest of the Fund and its
shareholders since it offers the opportunity for economies of scale. The Fund
may redeem all of its assets from the Portfolio at any time. Should the board
determine that it is in the best interest of the Fund and its shareholders to
terminate its investment in the Portfolio, it would consider hiring an
investment advisor to manage the Fund's assets, or other appropriate options.
The Fund would terminate its investment if the Portfolio changed its goal,
investment policies or restrictions without the same change being approved by
the Fund.
OTHER FEEDERS: The Portfolio sells securities to other affiliated mutual funds
and may sell securities to non-affiliated investment companies and
institutional accounts (known as feeders). These feeders buy the Portfolio's
securities on the same terms and conditions as the Fund and pay their
proportionate share of the Portfolio's expenses. However, their operating costs
and sales charges are different from those of the Fund. Therefore, the
investment returns for other feeders are different from the returns of the
Fund. Information about other feeders may be obtained by calling American
Express Financial Advisors at 1-800-AXP-SERV.
Each feeder that invests in the Portfolio is different and activities of its
investors may adversely affect all other feeders, including the Fund. For
example, if one feeder decides to terminate its investment in the Portfolio,
the Portfolio may elect to redeem in cash or in kind. If cash is used, the
Portfolio will incur brokerage, taxes and other costs in selling securities to
raise the cash. This may result in less investment diversification if entire
investment positions are sold, and it also may result in less liquidity among
the remaining assets. If in-kind distribution is made, a smaller pool of assets
remains that may affect brokerage rates and investment options. In both cases,
expenses may rise since there are fewer assets to cover the costs of managing
those assets.
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<PAGE> 83
SHAREHOLDER MEETINGS: Whenever the Portfolio proposes to change a fundamental
investment policy or to take any other action requiring approval of its
security holders, the Fund will hold a shareholder meeting. The Fund will vote
for or against the Portfolio's proposals in proportion to the vote it receives
for or against the same proposals from its shareholders.
BOARD MEMBERS AND OFFICERS
Shareholders elect a board that oversees the operations of the Fund and chooses
its officers. Its officers are responsible for day-to-day business decisions
based on policies set by the board. The board has named an executive committee
that has authority to act on its behalf between meetings. Board members and
officers serve 47 IDS and IDS Life funds and 15 Master Trust portfolios, except
for William H. Dudley, who does not serve the nine IDS Life funds. The board
members 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.
INDEPENDENT BOARD MEMBERS AND OFFICERS
CHAIRMAN OF THE BOARD
WILLIAM R. PEARCE *
Chairman of the board, Board Services Corporation (provides administrative
services to boards including the boards of the IDS and IDS Life funds and
Master Trust portfolios).
H. BREWSTER ATWATER, JR.
Former chairman and chief executive officer, General Mills, Inc.
LYNNE V. CHENEY
Distinguished fellow, American Enterprise Institute for Public Policy Research.
HEINZ F. HUTTER
Former president and chief operating officer, Cargill, Inc.
ANNE P. JONES
Attorney and telecommunications consultant.
ALAN K. SIMPSON
Former United States senator for Wyoming.
EDSON W. SPENCER
Former chairman and chief executive officer, Honeywell, Inc.
32
<PAGE> 84
WHEELOCK WHITNEY
Chairman, Whitney Management Company.
C. ANGUS WURTELE
Chairman of the board, The Valspar Corporation.
OFFICER
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
LESLIE L. OGG *
President, treasurer and corporate secretary of Board Services Corporation
BOARD MEMBERS AND OFFICERS ASSOCIATED WITH AEFC
PRESIDENT
JOHN R. THOMAS*
Senior Vice President, AEFC.
WILLIAM H. DUDLEY*
Senior advisor to the chief executive officer, AEFC.
DAVID R. HUBERS*
President and chief executive officer, AEFC.
OFFICERS ASSOCIATED WITH AEFC
VICE PRESIDENT
PETER J. ANDERSON*
Senior vice president, AEFC.
TREASURER
MELINDA S. URION*
Senior vice president and chief financial officer, AEFC.
Refer to the SAI for the board members' and officers' biographies.
*Interested persons as defined by the Investment Company Act of 1940.
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<PAGE> 85
INVESTMENT MANAGER
The Portfolio pays AEFC for managing its assets. The Fund pays its
proportionate share of the fee. Under the Investment Management Services
Agreement, AEFC is paid a fee for these services based on the average daily net
assets of the Portfolio, as follows:
ASSETS ANNUAL RATE
(BILLIONS) AT EACH ASSET LEVEL
- ------------ -------------------
First $0.50 0.530%
Next 0.50 0.505
Next 1.0 0.480
Next 1.0 0.455
Next 3.0 0.430
Over 6.0 0.400
For the fiscal year ended Sept. 30, 1997, the Portfolio paid AEFC a total
investment management fee of 0.50% of its average daily net assets. Under the
Agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory
expenses.
ADMINISTRATOR AND TRANSFER AGENT
The Fund pays AEFC for shareholder accounting and transfer agent services under
two agreements. The first agreement, the Administrative Services Agreement, has
a declining annual rate beginning at 0.04% and decreasing to 0.02% as assets
increase. The second agreement, the Transfer Agency Agreement, has an annual
fee per shareholder account 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 AEFA 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
34
<PAGE> 86
0.75% of the Fund's average daily net assets. Class Y shares are sold without a
sales charge and without an asset-based sales charge.
Financial advisors may receive different compensation for selling Class A,
Class B and Class Y shares. Portions of the sales charge also may be paid to
securities dealers who have sold the Fund's shares or to banks and other
financial institutions. The amounts of those payments range from 0.8% to 4% of
the Fund's offering price depending on the monthly sales volume.
Under a Shareholder Service Agreement, the Fund also pays a fee for service
provided to shareholders by financial advisors and other servicing agents. The
fee is calculated at a rate of 0.175% of average daily net assets for Class A
and Class B shares and 0.10% for Class Y shares.
Total expenses paid by the Fund's Class A shares for the fiscal year ended
Sept. 30, 1997, were 0.88% of its average daily net assets. Expenses for Class
B and Class Y were 1.65% and 0.76%, respectively.
ABOUT AMERICAN EXPRESS FINANCIAL CORPORATION
GENERAL INFORMATION
The AEFC family of companies offers not only mutual funds but also insurance,
annuities, investment certificates and a broad range of financial management
services.
Besides managing investments for all funds in the IDS MUTUAL FUND GROUP, AEFC
also manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management on Sept.
30, 1997 were more than $171 billion.
AEFA serves individuals and businesses through its nationwide network of more
than 175 offices and more than 8,500 advisors.
Other AEFC subsidiaries provide investment management and related services for
pension, profit sharing, employee savings and endowment funds of businesses and
institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a
wholly-owned subsidiary of American Express Company (American Express), a
financial services company with headquarters at American Express Tower, World
Financial Center, New York, NY 10285. The Portfolio may pay brokerage
commissions to broker-dealer affiliates of AEFC.
35
<PAGE> 87
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
Bond ratings concern the quality of the issuing corporation. They are not an
opinion of the market value of the security. Such ratings are opinions on
whether the principal and interest will be repaid when due. A security's rating
may change, which could affect its price. Ratings by Moody's Investors Service,
Inc. are Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Ratings by Standard & Poor's
Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D. The following is a
compilation of the two agencies' rating descriptions. For further information,
see the SAI.
AAA/AAA - Judged to be of the best quality and carry the smallest degree of
investment risk. Interest and principal are secure.
AA/AA - Judged to be high-grade although margins of protection for interest and
principal may not be quite as good as Aaa or AAA rated securities.
A - Considered upper-medium grade. Protection for interest and principal is
deemed adequate but may be susceptible to future impairment.
BAA/BBB - Considered medium-grade obligations. Protection for interest and
principal is adequate over the short-term; however, these obligations may have
certain speculative characteristics.
BA/BB - Considered to have speculative elements. The protection of interest and
principal payments may be very moderate.
B - Lack characteristics of more desirable investments. There may be small
assurance over any long period of time of the payment of interest and
principal.
CAA/CCC - Are of poor standing. Such issues may be in default or there may be
risk with respect to principal or interest.
CA/CC - Represent obligations that are highly speculative. Such issues are
often in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These securities have
major risk exposures to default.
D - Are in payment default. The D rating is used when interest payments or
principal payments are not made on the due date.
NON-RATED SECURITIES will be considered for investment when they possess a risk
comparable to that of rated securities consistent with the Portfolio's
objectives and
36
<PAGE> 88
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.
DEFINITIONS OF ZERO-COUPON AND PAY-IN-KIND SECURITIES
A ZERO-COUPON SECURITY is a security that is sold at a deep discount from its
face value and makes no periodic interest payments. The buyer of such a
security receives a rate of return by gradual appreciation of the security,
which is redeemed at face value on the maturity date.
A PAY-IN-KIND SECURITY is a security in which the issuer has the option to make
interest payments in cash or in additional securities. The securities issued as
interest usually have the same terms, including maturity date, as the
pay-in-kind securities.
37
<PAGE> 89
APPENDIX B
DESCRIPTIONS OF DERIVATIVE INSTRUMENTS
What follows are brief descriptions of derivative instruments the Portfolio may
use. At various times the Portfolio may use some or all of these instruments
and is not limited to these instruments. It may use other similar types of
instruments if they are consistent with the Portfolio's investment goal and
policies. For more information on these instruments, see the SAI.
OPTIONS AND FUTURES CONTRACTS - An option is an agreement to buy or sell an
instrument at a set price during a certain period of time. A futures contract
is an agreement to buy or sell an instrument for a set price on a future date.
The Portfolio may buy and sell options and futures contracts to manage its
exposure to changing interest rates, security prices and currency exchange
rates. Options and futures may be used to hedge the Portfolio's investments
against price fluctuations or to increase market exposure.
INDEXED SECURITIES - The value of indexed securities is linked to currencies,
interest rates, commodities, indexes or other financial indicators. Most
indexed securities are short- to intermediate-term fixed income securities
whose values at maturity or interest rates rise or fall according to the change
in one or more specified underlying instruments. Indexed securities may be more
volatile than the underlying instrument itself.
STRUCTURED PRODUCTS - Structured products are over-the-counter financial
instruments created specifically to meet the needs of one or a small number of
investors. The instrument may consist of a warrant, an option or a forward
contract embedded in a note or any of a wide variety of debt, equity and/or
currency combinations. Risks of structured products include the inability to
close such instruments, rapid changes in the market and defaults by other
parties.
38
<PAGE> 90
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS INVESTMENT SERIES, INC.
IDS MUTUAL
Nov. 28, 1997
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
Annual Report which may be obtained from your American Express financial advisor
or by writing to American Express Shareholder Service, P.O. Box 534,
Minneapolis, MN 55440-0534.
This SAI is dated Nov. 28, 1997, and it is to be used with the prospectus dated
Nov. 28, 1997, and the Annual Report for the fiscal year ended Sept. 30, 1997.
1
<PAGE> 91
TABLE OF CONTENTS
<TABLE>
<S> <C>
Goal and Investment Policies................................ See Prospectus
Additional Investment Policies.............................. 3
Security Transactions....................................... 5
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation.................... 7
Performance Information..................................... 8
Valuing Fund Shares......................................... 8
Investing in the Fund....................................... 9
Redeeming Shares............................................ 12
Pay-out Plans............................................... 13
Taxes....................................................... 14
Agreements.................................................. 15
Organizational Information.................................. 17
Board Members and Officers.................................. 18
Compensation for Fund and Portfolio Board Members........... 20
Independent Auditors........................................ 22
Financial Statements........................................ See Annual Report
Prospectus.................................................. 22
Appendix A: Description of Bond Ratings and Additional
Information on Investment Policies........................ 23
Appendix B: Foreign Currency Transactions................... 25
Appendix C: Options and Futures Contracts................... 28
Appendix D: Mortgage-Backed Securities...................... 32
Appendix E: Dollar-Cost Averaging........................... 33
</TABLE>
2
<PAGE> 92
ADDITIONAL INVESTMENT POLICIES
IDS Mutual Fund (the Fund) pursues its goals by investing all of its assets
in Balanced Portfolio (the Portfolio) of Growth and Income Trust (the Trust), a
separate investment company, rather than by directly investing in and managing
its own portfolio of securities. The Portfolio has the same investment
objectives, policies and restrictions as the Fund.
Fundamental investment policies adopted by the Fund or Portfolio cannot be
changed without the approval of a majority of the outstanding voting securities
of the Fund or Portfolio, respectively, as defined in the Investment Company Act
of 1940, as amended (the 1940 Act). Whenever the Fund is requested to vote on a
change in the investment policies of the corresponding Portfolio, the Fund will
hold a meeting of Fund shareholders and will cast the Fund's vote as instructed
by the shareholders.
Notwithstanding any of the Fund's other investment policies, the Fund may
invest its assets in an open-end management investment company having
substantially the same investment objectives, policies and restrictions as the
Fund for the purpose of having those assets managed as part of a combined pool.
These are investment policies in addition to those presented in the
prospectus. The policies below are fundamental policies that apply to both the
Fund and the Portfolio and may be changed only with shareholder/unitholder
approval. Unless holders of a majority of the outstanding voting securities
agree to make the change, the Fund and the Portfolio will not:
- Act as an underwriter (sell securities for others). However, under the
securities laws, the Portfolio may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
- 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 and Fund
have not borrowed in the past and have no present intention to borrow.
- Make cash loans if the total commitment amount exceeds 5% of the
Portfolio's total assets.
- Concentrate in any one industry. According to the present interpretation
by the Securities and Exchange Commission (SEC), this means no more than
25% of the Portfolio's total assets, based on current market value at time
of purchase, can be invested in any one industry.
- Purchase more than 10% of the outstanding voting securities of an issuer.
- 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 options and futures contracts or from
investing in securities or other instruments backed by, or whose value is
derived from, physical commodities.
- Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its
own board members and officers.
- Purchase securities of an issuer if the board members and officers of the
Fund, the Portfolio and of AEFC hold more than a certain percentage of the
issuer's outstanding securities. If the holdings of all board members and
officers of the Fund, the Portfolio and of AEFC who own more than 0.5% of
an
3
<PAGE> 93
issuer's securities are added together, and if in total they own more than
5%, the Portfolio will not purchase securities of that issuer.
- Lend Portfolio securities in excess of 30% of its net assets. The current
policy of the Portfolio's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio 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 the investment manager believes the opportunity for additional
income outweighs the risks.
Unless changed by the board, the Fund and Portfolio will not:
- Buy on margin or sell short, except the Portfolio may make margin
payments in connection with transactions in futures contracts.
- Invest in a company to control or manage it.
- 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.
- Invest more than 5% of its net assets in warrants.
- Invest in exploration or development programs, such as oil, gas or
mineral leases.
- Invest more than 10% of the Portfolio's net assets in securities and
derivative instruments that are illiquid. For purposes of this policy,
illiquid securities include some privately placed securities, public
securities and Rule 144A securities that for one reason or another may no
longer have a readily available market, repurchase agreements with
maturities greater than seven days, nonnegotiable fixed-time deposits and
over-the-counter options.
In determining the liquidity of Rule 144A securities, which are
unregistered securities offered to qualified institutional buyers, and
interest-only and principal-only fixed mortgage-backed securities (IOs and POs)
issued by the U.S. government or its agencies and instrumentalities, the
investment manager, under guidelines established by the board, will consider any
relevant factors including the frequency of trades, the number of dealers
willing to purchase or sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board, will evaluate
relevant factors such as the issuer and the size and nature of its commercial
paper programs, the willingness and ability of the issuer or dealer to
repurchase the paper, and the nature of the clearance and settlement procedures
for the paper.
The Portfolio may make contracts to purchase securities for a fixed price
at a future date beyond normal settlement time (when-issued securities or
forward commitments). Under normal market conditions, the Portfolio does not
intend to commit more than 5% of its total assets to these practices. The
Portfolio does not pay for the securities or receive dividends or interest on
them until the contractual settlement date. The Portfolio will designate cash or
liquid high-grade debt securities at least equal in value to its commitments to
purchase the securities. When-issued securities or forward commitments are
subject to market fluctuations and they may affect the Portfolio's total assets
the same as owned securities.
4
<PAGE> 94
The Portfolio may maintain a portion of its assets in cash and
cash-equivalent investments. The cash-equivalent investments the Portfolio may
use are shortterm 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 investments 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 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.
The Portfolio may invest in foreign securities that are traded in the form
of American Depositary Receipts (ADRs). ADRS are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities of
foreign issuers. European Depositary Receipts (EDRS) and Global Depositary
Receipts (GDRs) are receipts typically issued by foreign banks or trust
companies, evidencing ownership of underlying securities issued by either a
foreign or U.S. issuer. Generally Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary Receipts also
involve the risks of other investments in foreign securities.
For a description of bond ratings and additional information on investment
policies, see Appendix A. For a discussion about foreign currency transactions,
see Appendix B. For a discussion on options and futures contracts, see Appendix
C. For a discussion on mortgage-backed securities, see Appendix D.
SECURITY TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's and 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 where
otherwise authorized by the board. In selecting broker-dealers to execute
transactions, AEFC may consider the price of the security, including commission
or mark-up, the size and difficulty of the order, the reliability, integrity,
financial soundness and general operation and execution capabilities of the
broker, the broker's expertise in particular markets, and research services
provided by the broker.
AEFC has a strict Code of Ethics that prohibits its affiliated personnel
from engaging in personal investment activities that compete with or attempt to
take advantage of planned portfolio transactions for any fund or trust for which
it acts as investment manager. AEFC carefully monitors compliance with its Code
of Ethics.
On occasion, it may be desirable to compensate a broker for research
services or for brokerage services by paying a commission that might not
otherwise be charged or a commission in excess of the amount another broker
might charge. The board has adopted a policy authorizing AEFC to do so to the
extent authorized by law, if AEFC determines, in good faith, that such
commission is reasonable in relation to the value of the brokerage or research
services provided by a broker or dealer, viewed either in the light of that
transaction or AEFC's overall responsibilities with respect to the fund and
other funds and trust in the IDS MUTUAL FUND GROUP 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
5
<PAGE> 95
information; market data services providing information on specific issues and
prices; and technical analysis of various aspects of the securities markets,
including technical charts. Research services may take the form of written
reports, computer software or personal contact by telephone or at seminars or
other meetings. AEFC has obtained, and in the future may obtain, computer
hardware from brokers, including but not limited to personal computers that will
be used exclusively for investment decision-making purposes, which include the
research, portfolio management and trading functions and other services to the
extent permitted under an interpretation by the SEC.
When paying a commission that might not otherwise be charged or a
commission in excess of the amount another broker might charge, AEFC must follow
procedures authorized by the board. To date, three procedures have been
authorized. One procedure permits AEFC to direct an order to buy or sell a
security traded on a national securities exchange to a specific broker for
research services it has provided. The second procedure permits AEFC, in order
to obtain research, to direct an order on an agency basis to buy or sell a
security traded in the over-the-counter market to a firm that does not make a
market in that security. The commission paid generally includes compensation for
research services. The third procedure permits AEFC, in order to obtain research
and brokerage services, to cause the Portfolio to pay a commission in excess of
the amount another broker might have charged. AEFC has advised the Portfolio it
is necessary to do business with a number of brokerage firms on a continuing
basis to obtain such services as the handling of large orders, the willingness
of a broker to risk its own money by taking a position in a security, and the
specialized handling of a particular group of securities that only certain
brokers may be able to offer. As a result of this arrangement, some portfolio
transactions may not be effected at the lowest commission, but AEFC believes it
may obtain better overall execution. AEFC has represented that under all three
procedures the amount of commission paid will be reasonable and competitive in
relation to the value of the brokerage services performed or research provided.
All other transactions 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 Portfolio is made independently from
any decision made for another portfolio, fund or other account advised by AEFC
or any of its subsidiaries. When the Portfolio buys or sells the same security
as another portfolio, fund or account, AEFC carries out the purchase or sale in
a way the Portfolio agrees in advance is fair. Although sharing in large
transactions may adversely affect the price or volume purchased or sold by the
Portfolio, the Portfolio hopes to gain an overall advantage in execution. AEFC
has assured the Fund it will continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC makes a comprehensive review of the
broker-dealers and the overall reasonableness of their commissions. The review
evaluates execution, operational efficiency and research services.
The Portfolio paid total brokerage commissions of $3,749,845 for the fiscal
year ended Sept. 30, 1997, $3,836,080 for fiscal year 1996, and $2,934,605 for
fiscal year 1995. Substantially all firms through whom transactions were
executed provide research services.
In fiscal year 1997, transactions amounting to $146,560,000, on which
$277,857 in commissions were imputed or paid, were specifically directed to
firms in exchange for research services.
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<PAGE> 96
As of the fiscal year ended Sept. 30, 1997, the Portfolio held securities
of its regular brokers or dealers or of the parent of those brokers or dealers
that derived more than 15% of gross revenue from securities-related activities
as presented below:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
OWNED AT END OF
NAME OF ISSUER FISCAL YEAR
-------------- -------------------
<S> <C>
Bank of America............................................. $ 9,929,100
Equitable IBM............................................... 5,755,235
Goldman Sachs............................................... 38,901,344
J.P. Morgan................................................. 54,218,250
Morgan Stanley.............................................. 23,636,149
Salomon Brothers............................................ 6,985,860
</TABLE>
The portfolio turnover rate was 49% in the fiscal year ended Sept. 30,
1997, and 45% in fiscal year 1996.
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.
Information about brokerage commissions paid by the Portfolio for the last
three fiscal years to brokers affiliated with AEFC is contained in the following
table:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPT. 30, 1997 1996 1995
------------------------------------------------ ----------- -----------
AGGREGATE PERCENT OF AGGREGATE AGGREGATE
DOLLAR AGGREGATE DOLLAR DOLLAR DOLLAR
AMOUNT OF PERCENT OF AMOUNT OF AMOUNT OF AMOUNT OF
NATURE COMMISSIONS AGGREGATE TRANSACTIONS COMMISSIONS COMMISSIONS
OF PAID TO BROKERAGE INVOLVING PAYMENT PAID TO PAID TO
BROKER AFFILIATION BROKER COMMISSIONS OF COMMISSIONS BROKER BROKER
------ ----------- ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
American Enterprise
Investment Services
Inc. ................ (1) $24,783 0.66% 1.12% $36,239 $71,051
</TABLE>
- -------------------------
(1) Wholly owned subsidiary of AEFC.
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<PAGE> 97
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past
performance. Average annual total returns quotations used by the Fund are based
on standardized methods of computing performance as required by the SEC. An
explanation of the methods used by the Fund to compute performance follows
below.
AVERAGE ANNUAL TOTAL RETURN
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C>
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)
</TABLE>
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
<TABLE>
<S> <C> <C>
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)
</TABLE>
In its sales material and other communications, the Fund may quote, compare
or refer to rankings, yields or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, Donoghue's Money Market Fund Report, Financial
Services Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster,
Newsweek, The New York Times, Personal Investor, Stanger Report, Sylvia Porter's
Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal
and Wiesenberger Investment Companies Service.
VALUING FUND SHARES
The value of an individual share for each class is determined by using the
net asset value before shareholder transactions for the day. On Oct. 1, 1997,
the first business day following the end of the fiscal year, the computation
looked like this:
<TABLE>
<CAPTION>
NET ASSETS BEFORE SHARES OUTSTANDING NET ASSET VALUE
SHAREHOLDER TRANSACTIONS AT END OF PREVIOUS DAY OF ONE SHARE
------------------------ ---------------------- ---------------
<S> <C> <C> <C>
Class A.............................. $3,270,677,667 divided by 212,243,846 equals $15.41
Class B.............................. 265,116,035 17,282,662 15.34
Class Y.............................. 1,344,890,907 87,273,907 15.41
</TABLE>
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<PAGE> 98
In determining net assets before shareholder transactions, the Portfolio's
securities are valued as follows as of the close of business of the New York
Stock Exchange (the Exchange):
- Securities, except bonds other than convertibles, traded on a securities
exchange for which a last-quoted sales price is readily available are
valued at the last-quoted sales price on the exchange where such security
is primarily traded.
- Securities traded on a securities exchange for which a last-quoted sales
price is not readily available are valued at the mean of the closing bid
and asked prices, looking first to the bid and asked prices on the
exchange where the security is primarily traded and, if none exist, to the
over-the-counter market.
- Securities included in the NASDAQ National Market System are valued at
the last-quoted sales price in this market.
- Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System are valued at the mean of the closing bid and asked prices.
- Futures and options traded on major exchanges are valued at the
last-quoted sales price on their primary exchange.
- Foreign securities traded outside the United States are generally valued
as of the time their trading is complete, which is usually different from
the close of the Exchange. Foreign securities quoted in foreign currencies
are translated into U.S. dollars at the current rate of exchange.
Occasionally, events affecting the value of such securities may occur
between such times and the close of the Exchange that will not be
reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such
period, these securities will be valued at their fair value according to
procedures decided upon in good faith by the board.
- Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in
60 days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on
the 61st day before maturity. Short-term securities maturing in 60 days or
less at acquisition date are valued at amortized cost. Amortized cost is
an approximation of market value determined by systematically increasing
the carrying value of a security if acquired at a discount, or reducing
the carrying value if acquired at a premium, so that the carrying value is
equal to maturity value on the maturity date.
- Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board
is responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the
Portfolio. If a valuation of a bond is not available from a pricing
service, the bond will be valued by a dealer knowledgeable about the bond
if such a dealer is available.
The Exchange, AEFC and the Fund will be closed on the following holidays:
New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
INVESTING IN THE FUND
SALES CHARGE
Shares of the Fund are sold at the public offering price determined at the
close of business on the day an application is accepted. The public offering
price is the net asset value of one share adjusted for the sales charge for
Class A. For Class B and Class Y, there is no initial sales charge so the public
offering price is the same as the net asset value. For Class A, the public
offering price for an investment of less than $50,000, made Oct. 1, 1997, was
determined by dividing the net asset value of one share, $15.41, by 0.95
(1.00-0.05 for a maximum 5% sales charge) for a public offering price of $16.22.
The sales charge is paid to American Express Financial Advisors Inc. (AEFA) by
the person buying the shares.
9
<PAGE> 99
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>
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 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 OFFERING NET AMOUNT
PRICE INVESTED
------------------ -------------
AMOUNT OF INVESTMENT RANGES FROM:
- -------------------- ----------------------------------
<S> <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................................... 0.00 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 varies depending on the
number of participants in the qualified plan and total plan assets as follows:
DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
NUMBER OF
PARTICIPANTS
------------------
TOTAL PLAN ASSETS 1-99 100 OR MORE
----------------- ---- -----------
<S> <C> <C>
Less than $1 million........................................ 4% 0%
$1 million or more.......................................... 0% 0%
</TABLE>
10
<PAGE> 100
CLASS A -- REDUCING THE SALES CHARGE
Sales charges are based on the total amount of your investments in the
Fund. The amount of all prior investments plus any new purchase is referred to
as your "total amount invested." For example, suppose you have made an
investment of $20,000 and later decide to invest $40,000 more. Your total amount
invested would be $60,000. As a result, $10,000 of your $40,000 investment
qualifies for the lower 4.5% sales charge that applies to investments of more
than $50,000 and up to $100,000.
The total amount invested includes any shares held in the Fund in the name
of a member of your primary household group. (The primary household group
consists of accounts in any ownership for spouses or domestic partners and their
unmarried children under 21. Domestic partners are individuals who maintain a
shared primary residence and have joint property or other insurable interests.)
For instance, if your spouse already has invested $20,000 and you want to invest
$40,000, your total amount invested will be $60,000 and therefore you will pay
the lower charge of 4.5% on $10,000 of the $40,000. Until a spouse remarries,
the sales charge is waived for spouses and unmarried children under 21 of
deceased board members, officers or employees of the Fund or AEFC or its
subsidiaries and deceased advisors.
The total amount invested also includes any investment you or your
immediate family already have in the other publicly offered funds in the IDS
MUTUAL FUND GROUP where the investment is subject to a sales charge. For
example, suppose you already have an investment of $30,000 in another IDS fund.
If you invest $40,000 more in this Fund, your total amount invested in the funds
will be $70,000 and therefore $20,000 of your $40,000 investment will incur a
4.5% sales charge.
Finally, Individual Retirement Account (IRA) purchases, or other employee
benefit plan purchases made through a payroll deduction plan or through a plan
sponsored by an employer, association of employers, employee organization or
other similar entity, may be added together to reduce sales charges for shares
purchased through that plan.
CLASS A -- LETTER OF INTENT (LOI)
If you intend to invest $1 million over a period of 13 months, you can
reduce the sales charges in Class A by filing a LOI. The agreement can start at
any time and will remain in effect for 13 months. Your investment will be
charged normal sales charges until you have invested $1 million. At that time,
your account will be credited with the sales charges previously paid. Class A
investments made prior to signing an LOI may be used to reach the $1 million
total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will
not adjust for sales charges on investments made prior to the signing of the
LOI. If you do not invest $1 million by the end of 13 months, there is no
penalty, you'll just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
Here's an example. You file a LOI to invest $1 million and make an
investment of $100,000 at that time. You pay the normal 5% sales charge on the
first $50,000 and 4.5% sales charge on the next $50,000 of this investment.
Let's say you make a second investment of $900,000 (bringing the total up to $1
million) one month before the 13-month period is up. On the date that you bring
your total to $1 million, AEFC makes an adjustment to your account. The
adjustment is made by crediting your account with additional shares, in an
amount equivalent to the sales charge previously paid.
SYSTEMATIC INVESTMENT PROGRAMS
After you make your initial investment of $2,000 or more, you can arrange
to make additional payments of $100 or more on a regular basis. These minimums
do not apply to all systematic investment programs. You decide how often to make
payments -- monthly, quarterly, or semiannually. You are not obligated to make
any payments. You can omit payments or discontinue the investment program
altogether. The Fund also can change the program or end it at any time. If there
is no obligation, why do it? Putting money aside is an important part of
financial planning. With a systematic investment program, you have a goal to
work for.
How does this work? Your regular investment amount will purchase more
shares when the net asset value per share decreases, and fewer shares when the
net asset value per share increases. Each purchase is a separate
11
<PAGE> 101
transaction. After each purchase your new shares will be added to your account.
Shares bought through these programs are exactly the same as any other fund
shares. They can be bought and sold at any time. A systematic investment program
is not an option or an absolute right to buy shares.
The systematic investment program itself cannot ensure a profit, nor can it
protect against a loss in a declining market. If you decide to discontinue the
program and redeem your shares when their net asset value is less than what you
paid for them, you will incur a loss.
For a discussion on dollar-cost averaging, see Appendix E.
AUTOMATIC DIRECTED DIVIDENDS
Dividends, including capital gain distributions, paid by another fund in
the IDS MUTUAL FUND GROUP subject to a sales charge, may be used to
automatically purchase shares in the same class of this Fund without paying a
sales charge. Dividends may be directed to existing accounts only. Dividends
declared by a fund are exchanged to this Fund the following day. Dividends can
be exchanged into the same class of another fund in the IDS MUTUAL FUND GROUP
but cannot be split to make purchases in two or more funds. Automatic directed
dividends are available between accounts of any ownership except:
Between a non-custodial account and an IRA, or 401(k) plan account or
other qualified retirement account of which American Express Trust Company
acts as custodian;
Between two American Express Trust Company custodial accounts with
different owners (for example, you may not exchange dividends from your IRA
to the IRA of your spouse);
Between different kinds of custodial accounts with the same ownership
(for example, you may not exchange dividends from your IRA to your 401(k)
plan account, although you may exchange dividends from one IRA to another
IRA).
Dividends may be directed from accounts established under the Uniform Gifts
to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other
UGMA or UTMA accounts with identical ownership.
The Fund's investment goal is described in its prospectus along with other
information, including fees and expense ratios. Before exchanging dividends into
another fund, you should read that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an explanation of
redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net asset
value, stop accepting payments for purchase of shares or suspend the duty of the
Fund to redeem shares for more than seven days. Such emergency situations would
occur if:
- The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
- Disposal of the Portfolio's securities is not reasonably practicable or
it is not reasonably practicable for the Portfolio 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.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of
12
<PAGE> 102
$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 American Express Shareholder
Service, P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express
Financial Advisors Telephone Transaction Service at 800-437-3133
(National/Minnesota) or 612-671-3800 (Mpls./St. Paul). Your authorization must
be received in the Minneapolis headquarters at least five days before the date
you want your payments to begin. The initial payment must be at least $50.
Payments will be made on a monthly, bimonthly, quarterly, semiannual or annual
basis. Your choice is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you'll have to send in a
separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at
regular intervals during the time period you choose. This plan is designed to
end in complete redemption of all shares in your account by the end of the fixed
period.
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
13
<PAGE> 103
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 redemption 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 redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5% ($100) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as dividend
income for federal income tax purposes. Corporate shareholders are generally
entitled to a deduction equal to 70% of that portion of the Fund's dividend that
is attributable to dividends the Fund received from domestic (U.S.) securities.
For the fiscal year ended Sept. 30, 1997, 27.52% of the Fund's net investment
income dividends qualified for the corporate deduction.
Capital gain distributions, if any, received by corporate shareholders
should be treated as long-term capital gains regardless of how long they owned
their shares. Capital gain distributions, if any, received by individuals should
be treated as long-term if held for more than one year; however, recent tax laws
have divided long-term capital gains into two holding periods: (1) shares held
more than one year but not more than 18 months and (2) shares held more than 18
months. Short-term capital gains earned by the Fund are paid to shareholders as
part of their ordinary income dividend and are taxable.
Under federal tax law, by the end of a calendar year the Fund must declare
and pay dividends representing 98% of ordinary income for that calendar year and
98% of net capital gains (both long-term and short-term) for the 12-month period
ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.
The Fund may be subject to U.S. taxes resulting from holdings in a passive
foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or
more of its gross income for the taxable year is passive income or if 50% or
more of the average value of its assets consists of assets that produce or could
produce passive income.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state and local income tax laws to Fund distributions.
14
<PAGE> 104
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. The Fund pays its proportionate share of the fee.
<TABLE>
<CAPTION>
ANNUAL RATE AT
ASSETS EACH ASSET
(BILLIONS) LEVEL
---------- --------------
<S> <C>
First $1.0........................................ 0.530%
Next 1.0.......................................... 0.505
Next 1.0.......................................... 0.480
Next 3.0.......................................... 0.455
Over 6.0.......................................... 0.430
</TABLE>
On Sept. 30, 1997, the daily rate applied to the Portfolio's net assets was
equal to 0.486% on an annual basis. The fee is calculated for each calendar day
on the basis of net assets as of the close of business two business days prior
to the day for which the calculation is made.
Before the fee based on the asset charge is paid, it is adjusted for
investment performance. The adjustment, determined monthly, will be calculated
using the percentage point difference between the change in the net asset value
of one Class A share of the Fund and the change in the Lipper Balanced Fund
Index (Index). The performance of one Class A share of the Fund is measured by
computing the percentage difference between the opening and closing net asset
value of one Class A share of the Fund, as of the last business day of the
period selected for comparison, adjusted for dividend or capital gain
distributions which are treated as reinvested at the end of the month during
which the distribution was made. The performance of the Index for the same
period is established by measuring the percentage difference between the
beginning and ending Index for the comparison period. The performance is
adjusted for dividend or capital gain distributions (on the securities which
comprise the Index), which are treated as reinvested at the end of the month
during which the distribution was made. One percentage point will be subtracted
from the calculation to help assure that incentive adjustments are attributable
to AEFC's management abilities rather than random fluctuations and the result
multiplied by 0.01%. That number will be multiplied times the Fund's average net
assets for the comparison period and then divided by the number of months in the
comparison period to determine the monthly adjustment.
Where the Fund's Class A share performance exceeds that of the Index, the
base fee will be increased. Where the performance of the Index exceeds the
performance of Class A shares, the base fee will be decreased. The maximum
monthly increase or decrease will be 0.08% of the Fund's average net assets on
an annual basis.
The 12 month comparison period rolls over with each succeeding month, so
that it always equals 12 months, ending with the month for which the performance
adjustment is being computed. The adjustment decreased the fee by $31,926 for
the fiscal year ended Sept. 30, 1997.
The management fee is paid monthly. Under the agreement, the total amount
paid was $21,571,200 for the fiscal year ended Sept. 30, 1997, $18,924,906 for
fiscal year 1996, and $16,124,106 for fiscal year 1995.
Under the agreement, the Portfolio also pays taxes, brokerage commissions
and nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity bond premiums; registration fees for shares; office expenses;
consultants' fees; compensation of board members, Portfolio officers and
employees; corporate filing fees; organizational expenses; expenses incurred in
connection with lending securities of the Portfolio; and expenses properly
payable by the Portfolio, approved by the board. Under the agreement, the
nonadvisory expenses paid by the Fund and Portfolio were $578,518 for the fiscal
year ended Sept. 30, 1997, $1,744,668 for fiscal year 1996, and $1,306,758 for
fiscal year 1995.
15
<PAGE> 105
In this section, prior to May 13, 1996, the fees and expenses described
were paid directly by the Fund. After that date, the management fees were paid
by the Portfolio.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
<TABLE>
<CAPTION>
ASSETS ANNUAL RATE
(BILLIONS) EACH ASSET LEVEL
---------- ----------------
<S> <C>
First $1.0................................................. 0.040%
Next 1.0................................................... 0.035
Next 1.0................................................... 0.030
Next 3.0................................................... 0.025
Over 6.0................................................... 0.020
</TABLE>
On Sept. 30, 1997, the daily rate applied to the Fund's net assets was
equal to 0.031% on an annual basis. The fee is calculated for each calendar day
on the basis of net assets as of the close of business two business days prior
to the day for which the calculation is made. Under the agreement, the Fund paid
fees of $1,434,260 for the fiscal year ended Sept. 30, 1997.
TRANSFER AGENCY AGREEMENT
The Fund has a Transfer Agency Agreement with AEFC. This agreement governs
AEFC's responsibility for administering and/or performing transfer agent
functions, for acting as service agent in connection with dividend and
distribution functions and for performing shareholder account administration
agent functions in connection with the issuance, exchange and redemption or
repurchase of the Fund's shares. Under the agreement, AEFC will earn a fee from
the Fund determined by multiplying the number of shareholder accounts at the end
of the day by a rate determined for each class per year and dividing by the
number of days in the year. The rate for Class A and Class Y is $15 per year and
for Class B is $16 per year. The fees paid to AEFC may be changed from time to
time upon agreement of the parties without shareholder approval. Under the
agreement, the Fund paid fees of $5,199,308 for the fiscal year ended Sept. 30,
1997.
DISTRIBUTION AGREEMENT
Under a Distribution Agreement, sales charges deducted for distributing
Fund shares are paid to AEFA daily. These charges amounted to $4,945,297 for the
fiscal year ended Sept. 30, 1997. After paying commissions to personal financial
advisors, and other expenses, the amount retained was $277,279. The amounts were
$5,005,077 and $327,126 for fiscal year 1996, and $3,942,864 and $2,846,475 for
fiscal year 1995.
SHAREHOLDER SERVICE AGREEMENT
The Fund pays a fee for service provided to shareholders by financial
advisors and other servicing agents. The fee is calculated at a rate of 0.175%
of average daily net assets for Class A and Class B and 0.10% for Class Y.
PLAN AND AGREEMENT OF DISTRIBUTION
For Class B shares, to help AEFA defray the cost of distribution and
servicing, not covered by the sales charges received under the Distribution
Agreement, the Fund and AEFA 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, AEFA is paid a fee at an annual rate of 0.75% of the Fund's average
daily net assets attributable to Class B shares.
16
<PAGE> 106
The Plan must be approved annually by the board, including a majority of
the disinterested board members, if it is to continue for more than a year. At
least quarterly, the board must review written reports concerning the amounts
expended under the Plan and the purposes for which such expenditures were made.
The Plan and any agreement related to it may be terminated at any time by vote
of a majority of board members who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the Plan or in
any agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the Fund's Class B shares or by AEFA. The Plan (or any
agreement related to it) will terminate in the event of its assignment, as that
term is defined in the 1940 Act. The Plan may not be amended to increase the
amount to be spent for distribution without shareholder approval, and all
material amendments to the Plan must be approved by a majority of the board
members, including a majority of the board members who are not interested
persons of the Fund and who do not have a financial interest in the operation of
the Plan or any agreement related to it. The selection and nomination of
disinterested board members is the responsibility of the other disinterested
board members. No board member who is not an interested person, has any direct
or indirect financial interest in the operation of the Plan or any related
agreement. For the fiscal year ended Sept. 30, 1997, under the agreement, the
Fund paid fees of $1,456,221.
CUSTODIAN AGREEMENT
The Trust's securities and cash are held by American Express Trust Company,
1200 Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307,
through a custodian agreement. The Fund also retains the custodian pursuant to a
custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depositary 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.
The custodian has entered into a sub-custodian arrangement with the Morgan
Stanley Trust Company (Morgan Stanley), One Pierrepont Plaza, Eighth Floor,
Brooklyn NY 11201-2775. As part of this arrangement, securities purchased
outside the United States are maintained in the custody of various foreign
branches of Morgan Stanley or in such other financial institutions as may be
permitted by law and by the Portfolio's sub-custodian agreement.
TOTAL FEES AND EXPENSES
The Fund paid total fees and nonadvisory expenses, net of earnings credits,
of $36,172,339 for the fiscal year ended Sept. 30, 1997.
ORGANIZATIONAL INFORMATION
IDS Investment Series. Inc., of which IDS Mutual is a part, is an open-end
management company, as defined in the Investment Company Act of 1940. Originally
incorporated on Jan. 18, 1940 in Nevada, IDS Investment Series, Inc. changed its
state of incorporation on June 13, 1986 by merging into a Minnesota corporation
incorporated on April 7, 1986. The Fund headquarters are at 901 S. Marquette
Ave., Suite 2810, Minneapolis, MN 55402, 3268.
17
<PAGE> 107
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members. They serve 15 Master
Trust portfolios and 47 IDS and IDS Life funds (except for William H. Dudley,
who does not serve on the nine IDS Life fund boards). All shares have cumulative
voting rights with respect to the election of board members.
H. BREWSTER ATWATER JR.
Born in 1931
4900 IDS Tower
Minneapolis, MN
Former chairman and chief executive officer, General Mills, Inc. Director, Merck
& Co., Inc. and Darden Restaurants, Inc.
LYNNE V. CHENEY'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources and FPL Group, Inc. (holding company for Florida Power and Light).
WILLIAM H. DUDLEY**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of AEFC.
DAVID R. HUBERS+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President and chief executive officer of AEFC since August 1993, and director of
AEFC. Previously, senior vice president, finance and chief financial officer of
AEFC.
HEINZ F. HUTTER+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
ANNE P. JONES
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor Electronics,
Inc.
18
<PAGE> 108
WILLIAM R. PEARCE+*
Born in 1927
901 S. Marquette Ave.
Minneapolis, MN
Chairman of the board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
ALAN K. SIMPSON'
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, PacifiCorp (electric power).
EDSON W. SPENCER+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation
(forest products). Member of International Advisory Council, of NEC (Japan).
JOHN R. THOMAS**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC.
WHEELOCK WHITNEY+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
19
<PAGE> 109
C. ANGUS WURTELE'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company
(air cleaners & mufflers) and General Mills, Inc. (consumer foods).
- -------------------------
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer and employee of the Fund.
** Interested person by reason of being an officer, board member, employee
and/or shareholder of AEFC or American Express.
The board also has appointed officers who are responsible for day-to-day
business decisions based on policies it has established.
In addition to Mr. Pearce, who is chairman of the board, and Mr. Thomas,
who is president, the Fund's other officers are:
LESLIE L. OGG
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President, treasurer and corporate secretary of Board Services Corporation. Vice
president, general counsel and secretary for the Fund.
Officers who also are officers and/or employees of AEFC
PETER J. ANDERSON
Born in 1942
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.
MELINDA S. URION
Born in 1953
IDS Tower 10
Minneapolis, MN
Director, senior vice president and chief financial officer of AEFC. Director,
executive vice president and controller of IDS Life Insurance Company. Treasurer
for the Fund.
COMPENSATION FOR FUND AND PORTFOLIO BOARD MEMBERS
Members of the Fund board who are not officers of the Fund or of AEFC
receive an annual fee of $800 and the Chair of the Contracts Committee receives
an additional $86. Board members receive a $50 per day attendance fee for the
board meetings. The attendance fee for meetings of the Contracts and Investment
Review Committees is $50; for meetings of the Audit Committee and Personnel
Committee $25 and for traveling from out-of-state $8. Expenses for attending
meetings are reimbursed.
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<PAGE> 110
Members of the Portfolio board who are not officers of the Portfolio or of
AEFC receive an annual fee of $2,200 and the Chair of the Contracts Committee
receives an additional $86. Board members receive a $50 per day attendance fee
for board meetings. The attendance fee for meetings of the Contracts and
Investment Review Committees is $50; for meetings of the Audit and Personnel
Committee $25; and for traveling from out-of-state, $22. Expenses for attending
meetings are reimbursed.
During the fiscal year ended Sept. 30, 1997, the independent members of the
Fund and Portfolio boards, for attending up to 32 meetings, received the
following compensation:
<TABLE>
<CAPTION>
COMPENSATION TABLE
---------------------------
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL CASH
AGGREGATE AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION COMPENSATION FUND OR BENEFIT FROM THE PREFERRED MASTER
FROM THE FROM THE PORTFOLIO UPON TRUST GROUP AND IDS
BOARD MEMBER FUND PORTFOLIO EXPENSES RETIREMENT MUTUAL FUND GROUP
------------ ------------ ------------ ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C>
H. Brewster Atwater, Jr.
(part of year)........... $1,491 $2,822 0 0 $ 90,300
Lynne V. Cheney............ 1,582 3,102 0 0 95,800
Robert F. Froehlke......... 1,708 3,172 0 0 103,000
Heinz F. Hutter............ 1,783 3,247 0 0 107,200
Anne P. Jones.............. 1,823 3,371 0 0 110,000
Melvin R. Laird............ 1,599 3,118 0 0 97,000
Alan K. Simpson
(part of year)........... 1,565 3,084 0 0 94,600
Edson W. Spencer........... 1,669 2,733 0 0 100,700
Wheelock Whitney........... 1,833 3,297 0 0 110,400
C. Angus Wurtele........... 1,858 3,322 0 0 111,600
</TABLE>
- -------------------------
On Sept. 30, 1997, the Fund's board members and officers as a group owned
less than 1% of the outstanding shares of any class.
INDEPENDENT AUDITORS
The Fund's and corresponding Portfolio's financial statements contained in
the Annual Report to shareholders for the fiscal year ended Sept. 30, 1997, were
audited by independent auditors, KPMG Peat Marwick LLP, 4200 Norwest Center, 90
S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also
provide other accounting and tax-related services as requested by the Fund.
FINANCIAL STATEMENTS
The Independent Auditors' Report and the Financial Statements, including
Notes to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report to shareholders for the fiscal year ended 1997,
pursuant to Section 30(d) of the 1940 Act, are hereby incorporated in this SAI
by reference. No other portion of the Annual Report, however, is incorporated by
reference.
PROSPECTUS
The prospectus for IDS Mutual Fund dated Nov. 28, 1997, is hereby
incorporated in this SAI by reference.
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<PAGE> 111
APPENDIX A
DESCRIPTION OF BOND RATINGS AND
ADDITIONAL INFORMATION ON INVESTMENT POLICIES
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.
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.
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<PAGE> 112
BBB is regarded as having adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher-rated categories.
BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B has a greater vulnerability to default but currently has the capacity to
meet interest payments and principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB- rating.
CCC has a currently identifiable vulnerability to default, and is dependent
upon favorable business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
C typically is applied to debt subordinated to senior debt that is assigned
an actual or implied CCC- rating. The C rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service payments are
continued.
D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the due date, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Non-rated securities will be considered for investment when they possess a
risk comparable to that of rated securities consistent with the Fund's
objectives and policies. When assessing the risk involved in each non-rated
security, the Portfolio will consider the financial condition of the issuer or
the protection afforded by the terms of the security.
Definitions of Zero-Coupon and Pay-In-Kind Securities
A zero-coupon security is a security that is sold at a deep discount from
its face value and makes no periodic interest payments. The buyer of such a
security receives a rate of return by gradual appreciation of the security,
which is redeemed at face value on the maturity date.
A pay-in-kind security is a security in which the issuer has the option to
make interest payments in cash or in additional securities. The securities
issued as interest usually have the same terms, including maturity date, as the
pay-in-kind securities.
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<PAGE> 113
APPENDIX B
FOREIGN CURRENCY TRANSACTIONS
Since investments in foreign countries usually involve currencies of
foreign countries, and since the Portfolio may hold cash and cash-equivalent
investments in foreign currencies, the value of the Portfolio's assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency exchange rates and exchange control regulations. Also, the Portfolio
may incur costs in connection with conversions between various currencies.
SPOT RATES AND FORWARD CONTRACTS. The Portfolio conducts its foreign
currency exchange transactions either at the spot (cash) rate prevailing in the
foreign currency exchange market or by entering into forward currency exchange
contracts (forward contracts) as a hedge against fluctuations in future foreign
exchange rates. A forward contract involves an obligation to buy or sell a
specific currency at a future date, which may be any fixed number of days from
the contract date, at a price set at the time of the contract. These contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements. No commissions are charged at any stage
for trades.
The Portfolio may enter into forward contracts to settle a security
transaction or handle dividend and interest collection. When the Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency or has been notified of a dividend or interest payment, it may
desire to lock in the price of the security or the amount of the payment in
dollars. By entering into a forward contract, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between different currencies from the date the security is
purchased or sold to the date on which payment is made or received or when the
dividend or interest is actually received.
The Portfolio also may enter into forward contracts when management of the
Portfolio believes the currency of a particular foreign country may suffer a
substantial decline against another currency. It may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. The precise matching of forward contract amounts and
the value of securities involved generally will not be possible since the future
value of such securities in foreign currencies more than likely will change
between the date the forward contract is entered into and the date it matures.
The projection of short-term currency market movements is extremely difficult
and successful execution of a short-term hedging strategy is highly uncertain.
The Portfolio will not enter into such forward contracts or maintain a net
exposure to such contracts when consummating the contracts would obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency.
The Portfolio will designate cash or securities in an amount equal to the
value of the Portfolio's total assets committed to consummating forward
contracts entered into under the second circumstance set forth above. If the
value of the securities declines, additional cash or securities will be
designated on a daily basis so that the value of the cash or securities will
equal the amount of the Portfolio's commitments on such contracts.
At maturity of a forward contract, the Portfolio may either sell the
security and make delivery of the foreign currency or retain the security and
terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract with the same currency trader obligating it to
buy, on the same maturity date, the same amount of foreign currency.
If the Portfolio retains the security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss (as described below) to
the extent there has been movement in forward contract prices. If the Portfolio
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
between the date the Portfolio enters into a forward contract for selling
foreign currency and the date it enters into an offsetting contract for
purchasing the foreign currency, the Portfolio will realize a gain to the extent
that the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to buy. Should forward prices increase, the Portfolio
will suffer
24
<PAGE> 114
a loss to the extent the price of the currency it has agreed to buy exceeds the
price of the currency it has agreed to sell.
It is impossible to forecast what the market value of securities will be at
the expiration of a contract. Accordingly, it may be necessary for the Portfolio
to buy additional foreign currency on the spot market (and bear the expense of
such purchase) if the market value of the security is less than the amount of
foreign currency the Portfolio is obligated to deliver and a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it may
be necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver.
The Portfolio's dealing in forward contracts will be limited to the
transactions described above. This method of protecting the value of the
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange that can be achieved at some point in time.
Although such forward contracts tend to minimize the risk of loss due to a
decline in value of hedged currency, they tend to limit any potential gain that
might result should the value of such currency increase.
Although the Portfolio values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and shareholders should be
aware of currency conversion costs. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(spread) between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may buy put and write covered
call options on foreign currencies for hedging purposes. For example, a decline
in the dollar value of a foreign currency in which securities are denominated
will reduce the dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such diminutions
in the value of securities, the Portfolio may buy put options on the foreign
currency. If the value of the currency does decline, the Portfolio will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which otherwise
would have resulted.
As in the case of other types of options, however, the benefit to the
Portfolio derived from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Portfolio could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, when the Portfolio anticipates a decline in the
dollar value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised and the diminution in value of securities will be fully
or partially offset by the amount of the premium received.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Portfolio would be required to buy or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option
written on foreign currencies is covered if the Portfolio holds currency
sufficient to cover the option or has an absolute and immediate right to acquire
that currency without additional cash consideration upon conversion of assets
denominated in that currency or exchange of other currency held in its
portfolio. An option writer could lose amounts substantially
25
<PAGE> 115
in excess of its initial investments, due to the margin and collateral
requirements associated with such positions.
Options on foreign currencies are traded through financial institutions
acting as market-makers, although foreign currency options also are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation (OCC),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in certain foreign countries
for the purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
FOREIGN CURRENCY FUTURES AND RELATED OPTIONS. The Portfolio may enter into
currency futures contracts to sell currencies. It also may buy put options and
write covered call options on currency futures. Currency futures contracts are
similar to currency forward contracts, except that they are traded on exchanges
(and have margin requirements) and are standardized as to contract size and
delivery date. Most currency futures call for payment of delivery in U.S.
dollars. The Portfolio may use currency futures for the same purposes as
currency forward contracts, subject to Commodity Futures Trading Commission
(CFTC) limitations. All futures contracts are aggregated for purposes of the
percentage limitations.
Currency futures and options on futures values can be expected to correlate
with exchange rates, but will not reflect other factors that may affect the
values of the Portfolio's investments. A currency hedge, for example, should
protect a Yen-denominated bond against a decline in the Yen, but will not
protect the Portfolio against price decline if the issuer's creditworthiness
deteriorates. Because the value of the Portfolio's investments denominated in
foreign currency will change in response to many factors other than exchange
rates, it may not be possible to match the amount of a forward contract to the
value of the Portfolio's investments denominated in that currency over time.
The Portfolio will hold securities or other options or futures positions
whose values are expected to offset its obligations. The Portfolio will not
enter into an option or futures position that exposes the Portfolio to an
obligation to another party unless it owns either (i) an offsetting position in
securities or (ii) cash, receivables and short-term debt securities with a value
sufficient to cover its potential obligations.
26
<PAGE> 116
APPENDIX C
OPTIONS AND FUTURES CONTRACTS
The Portfolio may buy or write options traded on any U.S. or foreign
exchange or in the over-the-counter market. The Portfolio may enter into
interest rate futures contracts and stock index futures contracts traded on any
U.S. or foreign exchange. The Portfolio also may buy or write put and call
options on these futures and on stock indexes. Options in the over-the-counter
market will be purchased only when the investment manager believes a liquid
secondary market exists for the options and only from dealers and institutions
the investment manager believes present a minimal credit risk. Some options are
exercisable only on a specific date. In that case, or if a liquid secondary
market does not exist, the Portfolio could be required to buy or sell securities
at disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees to sell the security at the set price when the buyer wants to
exercise the option, no matter what the market price of the security is at that
time. A person who buys a put option has the right to sell a security at a set
price for the length of the contract. A person who writes a put option agrees to
buy the security at the set price if the purchaser wants to exercise the option,
no matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition
the buyer generally pays a broker a commission. The writer receives a premium,
less another commission, at the time the option is written. The cash received is
retained by the writer whether or not the option is exercised. A writer of a
call option may have to sell the security for a below-market price if the market
price rises above the exercise price. A writer of a put option may have to pay
an above-market price for the security if its market price decreases below the
exercise price. The risk of the writer is potentially unlimited, unless the
option is covered.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options and futures contracts may benefit the Portfolio and its shareholders by
improving the Portfolio's liquidity and by helping to stabilize the value of its
net assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. Options are
used as a trading technique to take advantage of any disparity between the price
of the underlying security in the securities market and its price on the options
market. It is anticipated the trading technique will be utilized only to effect
a transaction when the price of the security plus the option price will be as
good or better than the price at which the security could be bought or sold
directly. When the option is purchased, the Portfolio pays a premium and a
commission. It then pays a second commission on the purchase or sale of the
underlying security when the option is exercised. For record keeping and tax
purposes, the price obtained on the purchase of the underlying security will be
the combination of the exercise price, the premium and both commissions. When
using options as a trading technique, commissions on the option will be set as
if only the underlying securities were traded.
Put and call options also may be held by the Portfolio for investment
purposes. Options permit the Portfolio to experience the change in the value of
a security with a relatively small initial cash investment.
The risk the Portfolio assumes when it buys an option is the loss of the
premium. To be beneficial to the Portfolio, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a
27
<PAGE> 117
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:
- Underlying securities will continue to be bought or sold solely on the
basis of investment considerations consistent with the Fund's goal.
- All options written by the Portfolio will be covered. For covered call
options if a decision is made to sell the security, or for put options if
a decision is made to buy the security, the Portfolio will attempt to
terminate the option contract through a closing purchase transaction.
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains. Since the Fund is taxed as a regulated
investment company under the Internal Revenue Code, any gains on options and
other securities held less than three months must be limited to less than 30% of
its annual gross income.
If a covered call option is exercised, the security is sold by the
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 options are included as a
deferred credit in the Statement of Assets and Liabilities and adjusted daily to
the current market value.
Options on many securities are listed on options exchanges. If the
Portfolio writes listed options, it will follow the rules of the options
exchange. Options are valued at the close of the New York Stock Exchange. An
option listed on a national exchange, CBOE or NASDAQ will be valued at the last
quoted sales price or, if such a price is not readily available, at the mean of
the last bid and ask prices.
Options on certain securities are not actively traded on any exchange, but
may be entered into directly with a dealer. When the Portfolio writes such an
option, the Custodian will segregate assets as appropriate to cover the option.
These options may be more difficult to close. If the Portfolio is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security until the call written by the Portfolio expires or is
exercised.
FUTURES CONTRACTS. A futures contract is an agreement between two parties
to buy and sell a security for a set price on a future date. Futures contracts
trade in a manner similar to the way a stock trades on a stock exchange and the
commodity exchanges, through their clearing corporations, guarantee performance
of the contracts. Futures contracts are commodity contracts listed on commodity
exchanges. They include contracts based on U.S. Treasury bonds and on Standard &
Poor's 500 Index (S&P 500 Index). In the case of S&P 500 index futures
contracts, the specified multiple is $500. Thus, if the value of the S&P 500
Index were 150, the value of one contract would be $75,000 (150 X $500).
Unlike other futures contracts, a stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract. For
example, excluding any transaction costs, if the Portfolio enters into one
futures contract to buy the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 154 on that future date, the
Portfolio will gain $500 X (154 - 150) or $2,000. If the Portfolio enters into
one futures contract to sell the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 152 on that future date, the
Portfolio will lose $500 X (152 - 150) or $1,000.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by the Portfolio taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up within a segregated account at the Portfolio's
custodian bank. Daily thereafter, the futures contract is valued and the payment
of variation margin is required so that each day the Portfolio would pay out
cash in an amount equal to any decline in the contract's value or receive cash
equal to any increase. At the time a futures contract is closed out, a nominal
commission is paid, which is generally lower than the commission on a comparable
transaction in the cash markets.
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The purpose of a futures contract is to allow the Portfolio to gain rapid
exposure to or protect itself from changes in the market without actually buying
or selling securities. For example, if the Portfolio owned long-term bonds and
interest rates were expected to increase, it might enter into futures contracts
to sell securities which would have much the same effect as selling some of the
long-term bonds it owned. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Portfolio's
futures contracts would increase at approximately the same rate, thereby keeping
the net asset value of the Portfolio from declining as much as it otherwise
would have. If, on the other hand, the Portfolio held cash reserves and interest
rates were expected to decline, the Portfolio might enter into interest rate
futures contracts for the purchase of securities. If short-term rates were
higher than long-term rates, the ability to continue holding these cash reserves
would have a very beneficial impact on the Portfolio's earnings. Even if
short-term rates were not higher, the Portfolio would still benefit from the
income earned by holding these short-term investments. At the same time, by
entering into futures contracts for the purchase of securities, the Portfolio
could take advantage of the anticipated rise in the value of long-term bonds
without actually buying them until the market had stabilized. At that time, the
futures contracts could be liquidated and the Portfolio's cash reserves could
then be used to buy long-term bonds on the cash market. The Portfolio could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase or
by buying bonds with long maturities and selling bonds with short maturities
when interest rates are expected to decline. But by using futures contracts as
an investment tool, given the greater liquidity in the futures market than in
the cash market, it might be possible to accomplish the same result more easily
and more quickly.
Risks of Transactions in Futures Contracts
The Portfolio may elect to close some or all of its contracts prior to
expiration. Although the Portfolio intends to enter into futures contracts only
on exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular contract at any particular time. In such event, it may not be
possible to close a futures contract position, and in the event of adverse price
movements, the Portfolio would have to make daily cash payments of variation
margin. Such price movements, however, will be offset all or in part by the
price movements of the securities owned by the Portfolio. Of course, there is no
guarantee the price of the securities will correlate with the price movements in
the futures contract and thus provide an offset to losses on a futures contract.
Another risk in employing futures contracts to protect against the price
volatility of securities is that the prices of securities subject to futures
contracts may not correlate perfectly with the behavior of the cash prices of
the Portfolio's securities. The correlation may be distorted because the futures
market is dominated by short-term traders seeking to profit from the difference
between a contract or security price and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
In addition, the Portfolio's investment manager could be incorrect in its
expectations as to the direction or extent of various interest rate or market
movements or the time span within which the movements take place. For example,
if the Portfolio sold futures contracts for the sale of securities in
anticipation of an increase in interest rates, and interest rates declined
instead, the Portfolio would lose money on the sale.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the holder
a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date, an option on a futures contract merely entitles its holder to
decide on or before a future date (within nine months of the date of issue)
whether to enter into such a contract. If the holder decides not to enter into
the contract, all that is lost is the amount (premium) paid for the option.
Further, because the value of the option is fixed at the point of sale, there
are no daily payments of cash to reflect the change in the value of the
underlying contract. However, since an option gives the buyer the right to enter
into a contract at a set price for a fixed period of time, its value does change
daily and that change is reflected in the net asset value of the Fund.
The risk the Portfolio assumes when it buys an option is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts the Portfolio owns, or on securities held in its portfolio, is
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that there could be an increase in the market value of such contracts or
securities. If that occurred, the option would be exercised and the asset sold
at a lower price than the cash market price. To some extent, the risk of not
realizing a gain could be reduced by entering into a closing transaction. The
Portfolio could enter into a closing transaction by purchasing an option with
the same terms as the one it had previously sold. The cost to close the option
and terminate the Portfolio's obligation, however, might be more or less than
the premium received when it originally wrote the option. Further, the Portfolio
might not be able to close the option because of insufficient activity in the
options market. Purchasing options also limits the use of monies that might
otherwise be available for long-term investments.
OPTIONS ON STOCK INDEXES. Options on stock indexes are securities traded on
national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A portfolio
exercising a put, for example, would receive the difference between the exercise
price and the current index level. Such options would be used in the same manner
as options on futures contracts.
TAX TREATMENT. As permitted under federal income tax laws, the Portfolio
intends to identify futures contracts as mixed straddles and not mark them to
market, that is, not treat them as having been sold at the end of the year at
market value. Such an election may result in the Portfolio being required to
defer recognizing losses incurred by entering into futures contracts and losses
on underlying securities identified as being hedged against.
Federal income tax treatment of gains or losses from transactions in
options on futures contracts and indexes will depend on whether such option is a
section 1256 contract. If the option is a non-equity option, the Portfolio will
either make a 1256(d) election and treat the option as a mixed straddle or mark
to market the option at fiscal year end and treat the gain/loss as 40%
short-term and 60% long-term. Certain provisions of the Internal Revenue Code
may also limit the Portfolio's ability to engage in futures contracts and
related options transactions. For example, at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its assets must consist of
cash, government securities and other securities, subject to certain
diversification requirements. Less than 30% of its gross income must be derived
from sales of securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a
security for purposes of the 50%-of-assets test and that its issuer is the
issuer of the underlying security, not the writer of the option, for purposes of
the diversification requirements. In order to avoid realizing a gain within the
three-month period, the Portfolio may be required to defer closing out a
contract beyond the time when it might otherwise be advantageous to do so. The
Portfolio also may be restricted in purchasing put options for the purpose of
hedging underlying securities because of applying the short sale holding period
rules with respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Portfolio's agent in acquiring the futures position). During
the period the futures contract is open, changes in value of the contract will
be recognized as unrealized gains or losses by marking to market on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments will be made or received depending upon
whether gains or losses are incurred. All contracts and options will be valued
at the last-quoted sales price on their primary exchange.
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APPENDIX D
MORTGAGE-BACKED SECURITIES
A mortgage pass-through certificate is one that represents an interest in a
pool, or group, of mortgage loans assembled by the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) or non-governmental entities. In
pass-through certificates, both principal and interest payments, including
prepayments, are passed through to the holder of the certificate. Prepayments on
underlying mortgages result in a loss of anticipated interest, and the actual
yield (or total return) to the Portfolio, which is influenced by both stated
interest rates and market conditions, may be different than the quoted yield on
certificates. Some U.S. government securities may be purchased on a when-issued
basis, which means that it may take as long as 45 days after the purchase before
the securities are delivered to the Portfolio.
STRIPPED MORTGAGE-BACKED SECURITIES. The Portfolio may invest in stripped
mortgage-backed securities. Generally, there are two classes of stripped
mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs
entitle the holder to receive distributions consisting of all or a portion of
the interest on the underlying pool of mortgage loans or mortgage-backed
securities. POs entitle the holder to receive distributions consisting of all or
a portion of the principal of the underlying pool of mortgage loans or
mortgage-backed securities. The cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments (including prepayments) on
the underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs. A slow
rate of principal payments may adversely affect the yield to maturity of POs. On
an IO, if prepayments of principal are greater than anticipated, an investor may
incur substantial losses. If prepayments of principal are slower than
anticipated, the yield on a PO will be affected more severely than would be the
case with a traditional mortgage-backed security.
MORTGAGE-BACKED SECURITY SPREAD OPTIONS. The Portfolio may purchase
mortgage-backed security (MBS) put spread options and write covered MBS call
spread options. MBS spread options are based upon the changes in the price
spread between a specified mortgage-backed security and a like-duration Treasury
security. MBS spread options are traded in the OTC market and are of short
duration, typically one to two months. The Portfolio would buy or sell covered
MBS call spread options in situations where mortgage-backed securities are
expected to underperform like-duration Treasury securities.
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APPENDIX E
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that eliminates
random buy and sell decisions. One such system is dollar-cost averaging.
Dollar-cost averaging involves building a portfolio through the investment of
fixed amounts of money on a regular basis regardless of the price or market
condition. This may enable an investor to smooth out the effects of the
volatility of the financial markets. By using this strategy, more shares will be
purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.
While this technique does not ensure a profit and does not protect against
a loss if the market declines, it is an effective way for many shareholders who
can continue investing through changing market conditions, including times when
the price of their shares falls or the market declines, to accumulate shares in
a fund to meet long-term goals.
DOLLAR-COST AVERAGING
<TABLE>
<CAPTION>
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). THE AVERAGE PRICE YOU PAID FOR EACH SHARE: $4.84 ($500 DIVIDED BY 103.4).
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IDS INVESTMENT SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS DIVERSIFIED EQUITY INCOME FUND
Nov. 28, 1997
This Statement of Additional Information (SAI) is not a prospectus. It should
be read together with the prospectus and the financial statements contained in
the Annual Report which may be obtained from your American Express financial
advisor or by writing to American Express Shareholder Service, P.O. Box 534,
Minneapolis, MN 55440-0534.
This SAI is dated Nov. 28, 1997, and it is to be used with the prospectus dated
Nov. 28, 1997, and the Annual Report for the fiscal year ended Sept. 30, 1997.
<PAGE> 123
IDS INVESTMENT SERIES
IDS DIVERSIFIED EQUITY INCOME FUND
TABLE OF CONTENTS
Goals and Investment Policies See Prospectus
Additional Investment Policies p.4
Security Transactions p.7
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation p.10
Performance Information p.11
Valuing Fund Shares p.13
Investing in the Fund p.14
Redeeming Shares p.19
Pay-out Plans p.19
Taxes p.21
Agreements p.22
Organizational Information p.25
Board Members and Officers p.25
Compensation for Fund and Portfolio Board Members p.29
Independent Auditors p.30
Financial Statements See Annual Report
Prospectus p.30
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IDS INVESTMENT SERIES
IDS DIVERSIFIED EQUITY INCOME FUND
Appendix A: Foreign Currency Transactions p.31
Appendix B: Options and Futures Contracts p.36
Appendix C: Mortgage-Backed Securities p.42
Appendix D: Dollar-Cost Averaging p.43
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IDS INVESTMENT SERIES
IDS DIVERSIFIED EQUITY INCOME FUND
ADDITIONAL INVESTMENT POLICIES
IDS Diversified Equity Income Fund (the Fund) pursues its goals by investing
all of its assets in Equity Income Portfolio (the Portfolio) of Growth and
Income Trust (the Trust), a separate investment company, rather than by
directly investing in and managing its own portfolio of securities. The
Portfolio has the same investment objectives, policies and restrictions as the
Fund.
Fundamental investment policies adopted by the Fund or Portfolio cannot be
changed without the approval of a majority of the outstanding voting securities
of the Fund or Portfolio, respectively, as defined in the Investment Company
Act of 1940, as amended (the 1940 Act). Whenever the Fund is requested to vote
on a change in the investment policies of the corresponding Portfolio, the Fund
will hold a meeting of Fund shareholders and will cast the Fund's vote as
instructed by the shareholders.
Notwithstanding any of the Fund's other investment policies, the Fund may
invest its assets in an open-end management investment company having
substantially the same investment objectives, policies and restrictions as the
Fund for the purpose of having those assets managed as part of a combined pool.
These are investment policies in addition to those presented in the prospectus.
The policies below are fundamental policies that apply to both the Fund and the
Portfolio and may be changed only with shareholder/unitholder approval. Unless
holders of a majority of the outstanding voting securities agree to make the
change, the Fund and 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 and Fund have not
borrowed in the past and have 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.
'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
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IDS INVESTMENT SERIES
IDS DIVERSIFIED EQUITY INCOME FUND
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 options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
'Lend Portfolio securities in excess of 30% of its net assets. The current
policy of the Portfolio's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Portfolio 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 the investment manager believes the
opportunity for additional income outweighs the risks.
'Concentrate in any one industry. According to the present interpretation by
the Securities and Exchange Commission (SEC), this means no more than 25% of
the Portfolio's total assets, based on current market value at the time of
purchase, can be invested in any one industry.
Unless changed by the board, the Fund and Portfolio will not:
'Buy on margin or sell short, except the Portfolio may make margin payments in
connection with transactions in futures contracts.
'Pledge or mortgage its assets beyond 15% of total assets. If the Portfolio
were ever to do so, valuation of the pledged or mortgaged assets would be based
on market values. For purposes of this 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.
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IDS DIVERSIFIED EQUITY INCOME FUND
'Invest in a company to control or manage it.
'Invest in exploration or development programs, such as oil, gas or mineral
leases.
'Invest more than 10% of its total assets in securities of investment
companies.
'Purchase securities of an issuer if the board members and officers of the
Fund, the Portfolio and of AEFC hold more than a certain percentage of the
issuer's outstanding securities. If the holdings of all board members and
officers of the Fund, the Portfolio and AEFC who own more than 0.5% of an
issuer's securities are added together, and if in total they own more than 5%,
the Portfolio will not purchase securities of that issuer.
'Invest more than 5% of its net assets in warrants.
'Invest more than 10% of the Portfolio's net assets in securities and
derivative instruments that are illiquid. For purposes of this policy illiquid
securities include some privately placed securities, public securities and Rule
144A securities that for one reason or another may no longer have a readily
available market, repurchase agreements with maturities greater than seven
days, non-negotiable fixed-time deposits and over-the-counter options.
In determining the liquidity of Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the
U.S. government or its agencies and instrumentalities, the investment manager,
under guidelines established by the board, will consider any relevant factors
including the frequency of trades, the number of dealers willing to purchase or
sell the security and the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933,
the investment manager, under guidelines established by the board, will
evaluate relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or dealer
to repurchase the paper, and the nature of the clearance and settlement
procedures for the paper.
The Portfolio may make contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). Under normal market conditions, the Portfolio does not intend to
commit more than 5% of its total assets to these practices. The Portfolio does
not pay for the securities or receive dividends or interest on them until the
contractual settlement date. The Portfolio will designate cash or liquid
high-grade debt securities at least equal in value to its commitments to
purchase the securities. When-issued securities or forward commitments are
subject to market fluctuations and they may affect the Portfolio's total assets
the same as owned securities.
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IDS INVESTMENT SERIES
IDS DIVERSIFIED EQUITY INCOME FUND
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 investments 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 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.
The Portfolio may invest in foreign securities that are traded in the form of
American Depositary Receipts (ADRs). ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities of
foreign issuers. European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs) are receipts typically issued by foreign banks or trust
companies, evidencing ownership of underlying securities issued by either a
foreign or U.S. issuer. Generally Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in
bearer form are designed for use in securities markets outside the U.S.
Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. Depositary Receipts
also involve the risks of other investments in foreign securities.
For a discussion of foreign currency transactions, see Appendix A. For a
discussion of options and futures contracts, see Appendix B. For a discussion
on mortgage-backed securities, see Appendix C.
SECURITY TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's and 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 where
otherwise authorized by the board. In selecting broker-dealers to execute
transactions, AEFC may consider the price of the security, including commission
or mark-up, the size and difficulty of the order, the reliability, integrity,
financial soundness and general operation and execution capabilities of the
broker, the broker's expertise in particular markets, and research services
provided by the broker.
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IDS INVESTMENT SERIES
IDS DIVERSIFIED EQUITY INCOME FUND
AEFC has a strict Code of Ethics that prohibits its affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for any fund or trust for which it
acts as investment manager. AEFC carefully monitors compliance with its Code of
Ethics.
On occasion, it may be desirable to compensate a broker for research services
or for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge.
The board has adopted a policy authorizing AEFC to do so to the extent
authorized by law, if AEFC determines, in good faith, that such commission is
reasonable in relation to the value of the brokerage or research services
provided by a broker or dealer, viewed either in the light of that transaction
or AEFC's overall responsibilities with respect to the Fund and other funds and
trusts in the IDS MUTUAL FUND GROUP for which it acts as investment advisor.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research
services may take the form of written reports, computer software or personal
contact by telephone or at seminars or other meetings. AEFC has obtained, and
in the future may obtain, computer hardware from brokers, including but not
limited to personal computers that will be used exclusively for investment
decision-making purposes, which include the research, portfolio management and
trading functions and other services to the extent permitted under an
interpretation by the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits AEFC, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Portfolio to pay a commission in excess of the amount
another broker might have charged. AEFC has advised the Portfolio it is
necessary to do business with a number of brokerage firms on a continuing basis
to obtain such services as the handling of large orders, the willingness of a
broker to risk its own money by taking a position in a security, and the
specialized handling of a particular group of securities that only certain
brokers may be able to offer. As a result of this arrangement, some portfolio
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IDS INVESTMENT SERIES
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transactions may not be effected at the lowest commission, but AEFC believes it
may obtain better overall execution. AEFC has represented that under all three
procedures the amount of commission paid will be reasonable and competitive in
relation to the value of the brokerage services performed or research provided.
All other transactions 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 Portfolio is made independently from any
decision made for another portfolio, fund or other account advised by AEFC or
any of its subsidiaries. When the Portfolio buys or sells the same security as
another portfolio, fund or account, AEFC carries out the purchase or sale in a
way the Portfolio agrees in advance is fair. Although sharing in large
transactions may adversely affect the price or volume purchased or sold by the
Portfolio, the Portfolio hopes to gain an overall advantage in execution. AEFC
has assured the Fund it will continue to seek ways to reduce brokerage costs.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers
and the overall reasonableness of their commissions. The review evaluates
execution, operational efficiency and research services.
The Portfolio paid total brokerage commissions of $1,979,701 for the fiscal
year ended Sept. 30, 1997, $2,585,347 for the fiscal year ended 1996, and
$3,312,655 for the fiscal year ended 1995. Substantially all firms through whom
transactions were executed provide research services.
In fiscal year 1997, transactions amounting to $10,905,000, on which $17,364 in
commissions were imputed or paid, were specifically directed to firms in
exchange for research services.
As of the fiscal year ended Sept. 30, 1997, the Portfolio held securities of
its regular brokers or dealers or of the parent of those brokers or dealers
that derived more than 15% of gross revenue from securities-related activities
as presented below:
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<TABLE>
<CAPTION>
Value of Securities owned at
Name of Issuer End of Fiscal Year
- ----------------- ----------------------------
<S> <C>
Morgan Stanley $17,564,981
NationsBank 17,943,750
Bank of America 9,964,797
Goldman Sachs 23,029,408
Morgan (J.P.) 18,180,000
Salomon Brothers 32,858,105
</TABLE>
The portfolio turnover rate was 81% in the fiscal year ended Sept. 30, 1997,
and 84% in fiscal year 1996.
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.
Information about brokerage commissions paid by the Portfolio for the last
three fiscal years to brokers affiliated with AEFC is contained in the
following table:
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<TABLE>
<CAPTION>
For the Fiscal Year Ended Sept. 30,
1997 1996
---------------------------------------------------------------- ---------------------
Percent of
Aggregate Dollar
Aggregate Dollar Amount of Aggregate Dollar
Amount of Percent of Transactions Amount of
Nature of Commissions Paid to Aggregate Brokerage Involving Payment Commissions Paid to
Broker Affiliation Broker Commissions of Commissions Broker
- ------ ------------ -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
American Enterprise (1) $125,796 6.35% 12.23% $139,258
Investment Service
Inc.
<CAPTION>
1995
--------------------
Aggregate Dollar
Amount of
Commissions Paid to
Broker Broker
- ------ --------------------
<S> <C>
American Enterprise $86,872
Investment Service
Inc.
</TABLE>
(1) Wholly-owned subsidiary of AEFC.
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations used by the Fund are
based on standardized methods of computing performance as required by the SEC.
An explanation of the methods used by the Fund to compute performance follows
below.
AVERAGE ANNUAL TOTAL RETURN
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
n
P(1+T) = ERV
where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
AGGREGATE TOTAL RETURN
The Fund may calculate aggregate total return for a class for certain periods
representing the cumulative change in the value of an investment in the Fund
over a specified period of time according to the following formula:
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ERV - P
-------
P
where P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of a period, at the
end of the period (or fractional portion thereof)
ANNUALIZED YIELD
The Fund may calculate an annualized yield for a class by dividing the net
investment income per share deemed earned during a period by the net asset
value per share on the last day of the period and annualizing the results.
Yield is calculated according to the following formula:
6
Yield = 2[a-b + 1) - 1]
---
cd
where a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive dividends
d = the maximum offering price per share on the last
day of the period
The Fund's yield, calculated as described above according to the formula
prescribed by the SEC, is a hypothetical return based on market value yield to
maturity for the Portfolio's securities. It is not necessarily indicative of
the amount which was or may be paid to the Fund's shareholders. Actual amounts
paid to Fund shareholders are reflected in the distribution yield.
DISTRIBUTION YIELD
Distribution yield is calculated according to the following formula:
F
D divided by POP equals DY
-- ---
30 30
where D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor
DY = distribution yield
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The Fund's distribution yield was 3.43% for Class A, 2.87% for Class B and
3.69% for Class Y for the 30-day period ended Sept. 30, 1997.
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, Donoghue's Money Market Fund Report, Financial
Services Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund
Forecaster, Newsweek, The New York Times, Personal Investor, Stanger Report,
Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The
Wall Street Journal and Wiesenberger Investment Companies Service.
VALUING FUND SHARES
The value of an individual share for each class is determined by using the net
asset value before shareholder transactions for the day. On Oct. 1, 1997, the
first business day following the end of the fiscal year, the computation looked
like this:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
NET ASSETS BEFORE SHARES OUTSTANDING NET ASSET VALUE
SHAREHOLDER TRANSACTIONS AT END OF PREVIOUS DAY OF ONE SHARE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $1,795,728,573 divided by 172,169,566 equals $10.43
- ----------------------------------------------------------------------------
Class B 351,100,814 33,662,590 10.43
- ----------------------------------------------------------------------------
Class Y 79,012,966 7,575,548 10.43
- ----------------------------------------------------------------------------
</TABLE>
In determining net assets before shareholder transactions, the Portfolio's
securities are valued as follows as of the close of business of the New York
Stock Exchange (the Exchange):
'Securities, except bonds other than convertibles, traded on a securities
exchange for which a last-quoted sales price is readily available are valued at
the last-quoted sales price on the exchange where such security is primarily
traded.
'Securities traded on a securities exchange for which a last-quoted sales price
is not readily available are valued at the mean of the closing bid and asked
prices, looking first to the bid and asked prices on the exchange where the
security is primarily traded and, if none exist, to the over-the-counter
market.
'Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
'Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities traded
over-the-counter but not
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included in the NASDAQ National Market System are valued at the mean of the
closing bid and asked prices.
'Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
'Foreign securities traded outside the United States are generally valued as of
the time their trading is complete, which is usually different from the close
of the Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at the current rate of exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange that will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, these securities will be valued at their
fair value according to procedures decided upon in good faith by the board.
'Short-term securities maturing more than 60 days from the valuation date are
valued at the readily available market price or approximate market value based
on current interest rates. Short-term securities maturing in 60 days or less
that originally had maturities of more than 60 days at acquisition date are
valued at amortized cost using the market value on the 61st day before
maturity. Short-term securities maturing in 60 days or less at acquisition date
are valued at amortized cost. Amortized cost is an approximation of market
value determined by systematically increasing the carrying value of a security
if acquired at a discount, or reducing the carrying value if acquired at a
premium, so that the carrying value is equal to maturity value on the maturity
date.
'Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Portfolio.
If a valuation of a bond is not available from a pricing service, the bond will
be valued by a dealer knowledgeable about the bond if such a dealer is
available.
The Exchange, AEFC and the Fund will be closed on the following holidays: New
Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
INVESTING IN THE FUND
Sales Charge
Shares of the Fund are sold at the public offering price determined at the
close of business on the day an application is accepted. The public offering
price is the net asset value of one share adjusted for the sales charge for
Class A. For Class B and Class Y, there is no initial sales charge so the
public offering price is the same as the net asset value. For Class A, the
public offering price for an investment of less than $50,000, made Oct 31,
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1997, was determined by dividing the net asset value of one share, $10.43, by
0.95 (1.00-0.05 for a maximum 5% sales charge) for a public offering price of
$10.98. The sales charge is paid to American Express Financial Advisors Inc.
(AEFA) 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
Offering Price Amount invested
---------------- ----------------
<S> <C> <C> <C>
Amount of Investment
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 0.00 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 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.
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<TABLE>
<CAPTION>
On total investment, sales
charge as a percentage of:
------------------------------------
Public Net
Offering Price Amount Invested
-------------- --------------------
Amount of Investment ranges from:
<S> <C> <C> <C>
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$ 1,000,000 or more 0.00 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 varies depending on
the number of participants in the qualified plan and total plan assets as
follows:
Deferred Sales Charge
<TABLE>
<CAPTION>
Number of Participants
----------------------
Total Plan Assets 1-99 100 or more
<S> <C> <C>
Less than $1 million 4% 0%
$1 million or more 0% 0%
</TABLE>
Class A - Reducing the Sales Charge
Sales charges are based on the total amount of your investments in the Fund.
The amount of all prior investments plus any new purchase is referred to as
your "total amount invested." For example, suppose you have made an investment
of $20,000 and later decide to invest $40,000 more. Your total amount invested
would be $60,000. As a result, $10,000 of your $40,000 investment qualifies for
the lower 4.5% sales charge that applies to investments of more than $50,000
and up to $100,000.
The total amount invested includes any shares held in the Fund in the name of a
member of your primary household group. (The primary household group consists
of accounts in any ownership for spouses or domestic partners and their
unmarried children under 21.
Domestic partners are individuals who maintain a shared primary residence and
have joint property or other insurable interests.) For instance, if your
spouse already has
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invested $20,000 and you want to invest $40,000, your total amount invested
will be $60,000 and therefore you will pay the lower charge of 4.5% on $10,000
of the $40,000.
Until a spouse remarries, the sales charge is waived for spouses and unmarried
children under 21 of deceased board members, officers or employees of the Fund
or AEFC or its subsidiaries and deceased advisors.
The total amount invested also includes any investment you or your immediate
family already have in the other publicly offered funds in the IDS MUTUAL FUND
GROUP where the investment is subject to a sales charge. For example, suppose
you already have an investment of $30,000 in another IDS fund. If you invest
$40,000 more in this Fund, your total amount invested in the funds will be
$70,000 and therefore $20,000 of your $40,000 investment will incur a 4.5%
sales charge.
Finally, Individual Retirement Account (IRA) purchases, or other employee
benefit plan purchases made through a payroll deduction plan or through a plan
sponsored by an employer, association of employers, employee organization or
other similar entity, may be added together to reduce sales charges for shares
purchased through that plan.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a LOI. The agreement can start at any
time and will remain in effect for 13 months. Your investment will be charged
normal sales charges until you have invested $1 million. At that time, your
account will be credited with the sales charges previously paid. Class A
investments made prior to signing an LOI may be used to reach the $1 million
total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will
not adjust for sales charges on investments made prior to the signing of the
LOI. If you do not invest $1 million by the end of 13 months, there is no
penalty, you'll just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.
Here's an example. You file a LOI to invest $1 million and make an investment
of $100,000 at that time. You pay the normal 5% sales charge on the first
$50,000 and 4.5% sales charge on the next $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,
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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 D.
Automatic Directed Dividends
Dividends, including capital gain distributions, paid by another fund in the
IDS MUTUAL FUND GROUP subject to a sales charge, may be used to automatically
purchase shares in the same class of this Fund without paying a sales charge.
Dividends may be directed to existing accounts only. Dividends declared by a
fund are exchanged to this Fund the following day. Dividends can be exchanged
into the same class of another fund in the IDS MUTUAL FUND GROUP but cannot be
split to make purchases in two or more funds. Automatic directed dividends are
available between accounts of any ownership except:
Between a non-custodial account and an IRA, or 401(k) plan account or other
qualified retirement account of which American Express Trust Company acts as
custodian;
Between two American Express Trust Company custodial accounts with different
owners (for example, you may not exchange dividends from your IRA to the IRA of
your spouse);
Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).
Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other
UGMA or UTMA accounts with identical ownership.
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The Fund's investment goals are described in its prospectus along with other
information, including fees and expense ratios. Before exchanging dividends
into another fund, you should read that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an explanation of
redemption procedures, please see the prospectus.
During an emergency, the board can suspend the computation of net asset value,
stop accepting payments for purchase of shares or suspend the duty of the Fund
to redeem shares for more than seven days. Such emergency situations would
occur if:
'The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
'Disposal of the Portfolio's securities is not reasonably practicable or it is
not reasonably practicable for the Portfolio 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.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the
net assets of the Fund at the beginning of the period. Although redemptions in
excess of this limitation would normally be paid in cash, the Fund reserves the
right to make these payments in whole or in part in securities or other assets
in case of an emergency, or if the payment of a redemption in cash would be
detrimental to the existing shareholders of the Fund as determined by the
board. In these circumstances, the securities distributed would be valued as
set forth in 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
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elect to receive them in cash. If you are redeeming a tax-qualified plan
account for which American Express Trust Company acts as custodian, you can
elect to receive your dividends and other distributions in cash when permitted
by law. If you redeem an IRA or a qualified retirement account, certain
restrictions, federal tax penalties and special federal income tax reporting
requirements may apply. You should consult your tax advisor about this complex
area of the tax law.
Applications for a systematic investment in a class of the Fund subject to a
sales charge normally will not be accepted while a pay-out plan for any of
those funds is in effect. Occasional investments, however, may be accepted.
To start any of these plans, please write American Express Shareholder Service,
P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial
Advisors Telephone Transaction Service at 800-437-3133 (National/Minnesota) or
612-671-3800 (Mpls./St. Paul). Your authorization must be received in the
Minneapolis headquarters at least five days before the date you want your
payments to begin. The initial payment must be at least $50. Payments will be
made on a monthly, bimonthly, quarterly, semiannual or annual basis. Your
choice is effective until you change or cancel it.
The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you'll have to send in a
separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.
Plan #1: Pay-out for a fixed period of time
If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.
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
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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 redemption 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 redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5% ($100) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.
Net investment income dividends received should be treated as dividend income
for federal income tax purposes. Corporate shareholders are generally entitled
to a deduction equal to 70% of that portion of the Fund's dividend that is
attributable to dividends the Fund received from domestic (U.S.) securities.
For the fiscal year ended Sept. 30, 1997, 44.50% of the Fund's net investment
income dividends qualified for the corporate deduction.
Capital gain distributions, if any, received by corporate shareholders should
be treated as long-term capital gains regardless of how long they owned their
shares. Capital gain distributions, if any, received by individuals should be
treated as long-term if held for more than one year; however, recent tax laws
have divided long-term capital gains into two holding periods: (1) shares held
more than one year but not more than 18 months and (2) shares held more than 18
months. Short-term capital gains earned by the Fund are paid to shareholders as
part of their ordinary income dividend and are taxable.
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Under federal tax law, by the end of a calendar year the Fund must declare and
pay dividends representing 98% of ordinary income for that calendar year and
98% of net capital gains (both long-term and short-term) for the 12-month
period ending Oct. 31 of that calendar year. The Fund is subject to an excise
tax equal to 4% of the excess, if any, of the amount required to be distributed
over the amount actually distributed. The Fund intends to comply with federal
tax law and avoid any excise tax.
The Fund may be subject to U.S. taxes resulting from holdings in a passive
foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or
more of its gross income for the taxable year is passive income or if 50% or
more of the average value of its assets consists of assets that produce or
could produce passive income.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state and local income tax laws to Fund distributions.
AGREEMENTS
Investment Management Services Agreement
The 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. The Fund pays its proportionate share of the fee.
<TABLE>
<CAPTION>
Assets Annual rate at
(billions) each asset level
- ---------- ----------------
<S> <C>
First $0.50 0.530%
Next 0.50 0.505
Next 1.0 0.480
Next 1.0 0.455
Next 3.0 0.430
Over 6.0 0.400
</TABLE>
On Sept. 30, 1997, the daily rate applied to the Portfolio's net assets was
equal to 0.494% on an annual basis. The fee is calculated for each calendar day
on the basis of net assets as of the close of business two business days prior
to the day for which the calculation is made.
The management fee is paid monthly. Under the agreement, the total amount paid
was $9,000,327 for the fiscal year ended Sept. 30, 1997, $6,613,709 for fiscal
year 1996, and $5,291,578 for fiscal year 1995.
Under the agreement, the Portfolio also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity
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bond premiums; registration fees for shares; office expenses; consultants'
fees; compensation of board members, officers and employees; corporate filing
fees; organizational expenses; expenses incurred in connection with lending
securities of the Portfolio; and expenses properly payable by the Portfolio,
approved by the board. Under the agreement, the nonadvisory expenses paid by
the Fund and Portfolio were $669,884 for the fiscal year ended Sept. 30, 1997,
$851,067 for fiscal year 1996, and $968,395 for fiscal year 1995.
In this section, prior to May 13, 1996, the fees and expenses described were
paid directly by the Fund. After that date, the management fees were paid by
the Portfolio.
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
<TABLE>
<CAPTION>
Assets Annual rate
(billions) each asset level
- ---------- ----------------
<S> <C>
First $0.50 0.040%
Next 0.50 0.035
Next 1.0 0.030
Next 1.0 0.025
Next 3.0 0.020
Over 6.0 0.020
</TABLE>
On Sept. 30, 1997, the daily rate applied to the Fund's net assets was equal to
0.033% on an annual basis. The fee is calculated for each calendar day on the
basis of net assets as of the close of business two business days prior to the
day for which the calculation is made. Under the agreement, the Fund paid fees
of $614,714 for the fiscal year ended Sept. 30. 1997.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with AEFC. This agreement governs
AEFC's responsibility for administering and/or performing transfer agent
functions, for acting as service agent in connection with dividend and
distribution functions and for performing shareholder account administration
agent functions in connection with the issuance, exchange and redemption or
repurchase of the Fund's shares. Under the agreement, AEFC will earn a fee from
the Fund determined by multiplying the number of shareholder accounts at the
end of the day by a rate determined for each class per year and dividing by the
number of days in the year. The rate for Class A and Class Y is $15 per year
and for Class B is $16 per year. The fees paid to AEFC may be changed from time
to time upon agreement of the parties without shareholder approval. Under the
agreement, the Fund paid fees of $2,337,208 for the fiscal year ended Sept. 30,
1997.
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Distribution Agreement
Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to AEFA daily. These charges amounted to $6,708,006 for the
fiscal year ended Sept. 30, 1997. After paying commissions to personal
financial advisors, and other expenses, the amount retained was $(160,271). The
amounts were $4,349,285 and $361,555 for fiscal year 1996, and $5,396,014 and
$1,641,448 for fiscal year 1995.
Shareholder Service Agreement
The Fund pays a fee for service provided to shareholders by financial advisors
and other servicing agents. The fee is calculated at a rate of 0.175% of
average daily net assets for Class A and Class B and 0.10% for Class Y.
Plan and Agreement of Distribution
For Class B shares, to help AEFA defray the cost of distribution and servicing,
not covered by the sales charges received under the Distribution Agreement, the
Fund and AEFA 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, AEFA is paid a fee at an annual rate of 0.75% of the Fund's average daily
net assets attributable to Class B shares.
The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At
least quarterly, the board must review written reports concerning the amounts
expended under the Plan and the purposes for which such expenditures were made.
The Plan and any agreement related to it may be terminated at any time by vote
of a majority of board members who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the Plan or
in any agreement related to the Plan, or by vote of a majority of the
outstanding voting securities of the Fund's Class B shares or by AEFA. The Plan
(or any agreement related to it) will terminate in the event of its assignment,
as that term is defined in the 1940 Act. The Plan may not be amended to
increase the amount to be spent for distribution without shareholder approval,
and all material amendments to the Plan must be approved by a majority of the
board members, including a majority of the board members who are not interested
persons of the Fund and who do not have a financial interest in the operation
of the Plan or any agreement related to it. The selection and nomination of
disinterested board members is the responsibility of the other disinterested
board members. No board member who is not an interested person, has any direct
or indirect financial interest in the operation of the Plan or any related
agreement. For the fiscal year ended Sept. 30, 1997, under the agreement, the
Fund paid fees of $1,677,884.
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Custodian Agreement
The Trust's securities and cash are held by American Express Trust Company,
1200 Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307,
through a custodian agreement. The Fund also retains the custodian pursuant to
a custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depository systems as allowed by federal law. For its
services, the Portfolio pays the custodian a maintenance charge and a charge
per transaction in addition to reimbursing the custodian's out-of-pocket
expenses.
The custodian has entered into a sub-custodian arrangement with the Morgan
Stanley Trust Company (Morgan Stanley), One Pierrepont Plaza, Eighth Floor,
Brooklyn, NY 11201-2775. As part of this arrangement, securities purchased
outside the United States are maintained in the custody of various foreign
branches of Morgan Stanley or in such other financial institutions as may be
permitted by law and by the Portfolio's sub-custodian agreement.
TOTAL FEES AND EXPENSES
The Fund paid total fees and nonadvisory expenses, net of earnings credits of
$17,338,757 for the fiscal year ended Sept. 30, 1997.
ORGANIZATIONAL INFORMATION
IDS Investment Series, Inc., of which IDS Diversified Equity Income Fund is a
part, is an open-end management investment company, as defined in the
Investment Company Act of 1940. Originally incorporated on Jan. 18, 1940 in
Nevada, IDS Investment Series, Inc. changed its state of incorporation on June
13, 1986 by merging into a Minnesota corporation incorporated on April 7, 1986.
The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN
55402-3268.
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 47 IDS and IDS Life funds (except for William H. Dudley, who
does not serve on the nine IDS Life fund boards).
All shares have cumulative voting rights with respect to the election of board
members.
H. BREWSTER ATWATER, JR.
Born in 1931
4900 IDS Tower
Minneapolis, MN
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Former chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
LYNNE V. CHENEY'
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W.
Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific
Resources, and FPL Group, Inc. (holding company for Florida Power and Light).
WILLIAM H. DUDLEY**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior advisor to the chief executive officer of AEFC.
DAVID R. HUBERS+**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President and chief executive officer of AEFC since August 1993, and director
of AEFC. Previously, senior vice president, finance and chief financial officer
of AEFC.
HEINZ F. HUTTER+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
ANNE P. JONES
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor Electronics,
Inc.
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WILLIAM R. PEARCE+*
Born in 1927
901 S. Marquette Ave.
Minneapolis, MN
Chairman of the board, Board Services Corporation (provides administrative
services to boards). Director, trustee and officer of registered investment
companies whose boards are served by the company. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
ALAN K. SIMPSON'
Born in 1931
1201 Sunshine Ave.
Cody, WY
Former three-term United States Senator for Wyoming. Former Assistant
Republican Leader, U.S. Senate. Director, PacifiCorp (electric power).
EDSON W. SPENCER+
Born in 1926
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
President, Spencer Associates Inc. (consulting). Former chairman of the board
and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation
(forest products). Member of International Advisory Council of NEC (Japan).
JOHN R. THOMAS**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president, of AEFC.
WHEELOCK WHITNEY+
Born in 1926
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
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C. ANGUS WURTELE'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson
Company (air cleaners & mufflers) and General Mills, Inc. (consumer foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer and employee of the Fund.
** Interested person by reason of being an officer, board member, employee
and/or shareholder of AEFC or American Express.
The board also has appointed officers who are responsible for day-to-day
business decisions based on policies it has established.
In addition to Mr. Pearce, who is chairman of the board and Mr. Thomas, who is
president, the Fund's other officers are:
LESLIE L. OGG
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President, treasurer and corporate secretary of Board Services Corporation.
Vice president, general counsel and secretary for the Fund.
Officers who also are officers and/or employees of AEFC
PETER J. ANDERSON
Born in 1942
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.
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MELINDA S. URION
Born in 1953
IDS Tower 10
Minneapolis, MN
Director, senior vice president and chief financial officer of AEFC. Director,
executive vice president and controller of IDS Life Insurance Company.
Treasurer for the Fund.
COMPENSATION FOR FUND AND PORTFOLIO BOARD MEMBERS
Members of the Fund board who are not officers of the Fund or of AEFC receive
an annual fee of $200, and the chair of the Contracts Committee receives an
additional $86. Board members receive a $50 per day attendance fee for board
meetings. The attendance fee for meetings of the Contracts and Investment
Review Committees is $50; for meetings of the Audit Committee and Personnel
Committee $25 and for traveling from out-of-state $2. Expenses for attending
meetings are reimbursed.
Members of the Portfolio board who are not officers of the Portfolio or of AEFC
receive an annual fee of $600 and the chair of the Contracts Committee receives
an additional $86. Board members receive a $50 per day attendance fee for board
meetings. The attendance fee for meetings of the Contracts and Investment
Review Committees is $50; for meetings of the Audit and Personnel Committee $25
and for traveling from out-of-state $6. Expenses for attending meetings are
reimbursed.
During the fiscal year ended Sept. 30, 1997, the independent members of the
Fund and Portfolio boards, for attending up to 32 meetings, received the
following compensation:
Compensation Table
<TABLE>
<CAPTION>
Pension or
Aggregate Aggregate Retirement benefits Estimated annual
compensation compensation accrued as Fund or benefit upon
Board member from the Fund from the Portfolio Portfolio expenses retirement
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
H. Brewster Atwater, Jr. $ 935 $1,306 $0 $0
(part of the year) 0 0
Lynne V. Cheney 953 1,373 0 0
Robert F. Froehlke 1,102 1,506 0 0
Heinz F. Hutter 1,177 1,581 0 0
Anne P. Jones 1,182 1,610 0 0
Melvin R. Laird 969 1,389 0 0
Alan K. Simpson 935 1,355 0 0
(part of the year) 0 0
Edson W. Spencer 1,213 1,517 0 0
Wheelock Whitney 1,227 1,631 0 0
C. Angus Wurtele 1,252 1,656 0 0
</TABLE>
<TABLE>
<CAPTION>
Total cash
compensation from
the IDS MUTUAL FUND
GROUP and Preferred
Board member Master Trust Group
- ------------------------------------------------
<S> <C>
H. Brewster Atwater, Jr. $ 90,300
(part of the year)
Lynne V. Cheney 95,800
Robert F. Froehlke 103,000
Heinz F. Hutter 107,200
Anne P. Jones 110,000
Melvin R. Laird 97,000
Alan K. Simpson 94,600
(part of the year)
Edson W. Spencer 100,700
Wheelock Whitney 110,400
C. Angus Wurtele 111,600
</TABLE>
Sept. 30, 1997, the Fund's board members and officers as a group owned less
than 1% of the outstanding shares of any class.
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INDEPENDENT AUDITORS
The Fund's and corresponding Portfolio's financial statements contained in the
Annual Report to shareholders for the fiscal year ended Sept. 30, 1997, were
audited by independent auditors, KPMG Peat Marwick LLP, 4200 Norwest Center, 90
S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also
provide other accounting and tax-related services as requested by the Fund.
FINANCIAL STATEMENTS
The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report to shareholders for the fiscal year ended Sept.
30, 1997, pursuant to Section 30(d) of the 1940 Act, are hereby incorporated in
this SAI by reference. No other portion of the Annual Report, however, is
incorporated by reference.
PROSPECTUS
The prospectus for IDS Diversified Equity Income Fund, dated Nov. 28, 1997, is
hereby incorporated in this SAI by reference.
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APPENDIX A
FOREIGN CURRENCY TRANSACTIONS
Since investments in foreign countries usually involve currencies of foreign
countries, and since the Portfolio may hold cash and cash-equivalent
investments in foreign currencies, the value of the Portfolio's assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency exchange rates and exchange control regulations. Also, the Portfolio
may incur costs in connection with conversions between various currencies.
Spot Rates and Forward Contracts. The Portfolio conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange
contracts (forward contracts) as a hedge against fluctuations in future foreign
exchange rates. A forward contract involves an obligation to buy or sell a
specific currency at a future date, which may be any fixed number of days from
the contract date, at a price set at the time of the contract. These contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements. No commissions are charged at any stage
for trades.
The Portfolio may enter into forward contracts to settle a security transaction
or handle dividend and interest collection. When the Portfolio enters into a
contract for the purchase or sale of a security denominated in a foreign
currency or has been notified of a dividend or interest payment, it may desire
to lock in the price of the security or the amount of the payment in dollars.
By entering into a forward contract, the Portfolio will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between different currencies from the date the security is
purchased or sold to the date on which payment is made or received or when the
dividend or interest is actually received.
The Portfolio also may enter into forward contracts when management of the
Portfolio believes the currency of a particular foreign country may suffer a
substantial decline against another currency. It may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency. The precise matching of forward contract
amounts and the value of securities involved generally will not be possible
since the future value of such securities in foreign currencies more than
likely will change between the date the forward contract is entered into and
the date it matures. The projection of short-term currency market movements is
extremely difficult and successful execution of a short-term hedging strategy
is highly uncertain. The Portfolio will not enter into such forward contracts
or maintain a net exposure to such contracts when consummating the contracts
would obligate the Portfolio to deliver an amount of foreign currency in excess
of the value of the Portfolio's securities or other assets denominated in that
currency.
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The Portfolio will designate cash or securities in an amount equal to the value
of the Portfolio's total assets committed to consummating forward contracts
entered into under the second circumstance set forth above. If the value of the
securities declines, additional cash or securities will be designated on a
daily basis so that the value of the cash or securities will equal the amount
of the Portfolio's commitments on such contracts.
At maturity of a forward contract, the Portfolio may either sell the security
and make delivery of the foreign currency or retain the security and terminate
its contractual obligation to deliver the foreign currency by purchasing an
offsetting contract with the same currency trader obligating it to buy, on the
same maturity date, the same amount of foreign currency.
If the Portfolio retains the security and engages in an offsetting transaction,
the Portfolio will incur a gain or a loss (as described below) to the extent
there has been movement in forward contract prices. If the Portfolio engages in
an offsetting transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices decline between
the date the Portfolio enters into a forward contract for selling foreign
currency and the date it enters into an offsetting contract for purchasing the
foreign currency, the Portfolio will realize a gain to the extent that the
price of the currency it has agreed to sell exceeds the price of the currency
it has agreed to buy. Should forward prices increase, the Portfolio will suffer
a loss to the extent the price of the currency it has agreed to buy exceeds the
price of the currency it has agreed to sell.
It is impossible to forecast what the market value of securities will be at the
expiration of a contract. Accordingly, it may be necessary for the Portfolio to
buy additional foreign currency on the spot market (and bear the expense of
such purchase) if the market value of the security is less than the amount of
foreign currency the Portfolio is obligated to deliver and a decision is made
to sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received on the sale of the portfolio security if its market value exceeds the
amount of foreign currency the Portfolio is obligated to deliver.
The Portfolio's dealing in forward contracts will be limited to the
transactions described above. This method of protecting the value of the
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange that can be achieved at some point in time.
Although such forward contracts tend to minimize the risk of loss due to a
decline in value of hedged currency, they tend to limit any potential gain that
might result should the value of such currency increase.
Although the Portfolio values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and shareholders should be
aware of currency conversion costs. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(spread) between the prices at which they are buying and
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selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
Options on Foreign Currencies. The Portfolio may buy put and write covered call
options on foreign currencies for hedging purposes. For example, a decline in
the dollar value of a foreign currency in which securities are denominated will
reduce the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in the
value of securities, the Portfolio may buy put options on the foreign currency.
If the value of the currency does decline, the Portfolio will have the right to
sell such currency for a fixed amount in dollars and will thereby offset, in
whole or in part, the adverse effect on its portfolio which otherwise would
have resulted.
As in the case of other types of options, however, the benefit to the Portfolio
derived from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Portfolio could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, when the Portfolio anticipates a decline in the
dollar value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised and the diminution in value of securities
will be fully or partially offset by the amount of the premium received.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Portfolio would be required to buy
or sell the underlying currency at a loss which may not be offset by the amount
of the premium. Through the writing of options on foreign currencies, the
Portfolio also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Portfolio holds currency sufficient to
cover the option or has an absolute and immediate right to acquire that
currency without additional cash consideration upon conversion of assets
denominated in that currency or exchange of other currency held in its
portfolio. An option writer could lose amounts substantially in excess of its
initial investments, due to the margin and collateral requirements associated
with such positions.
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Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation (OCC),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in certain foreign
countries for the purpose. As a result, the OCC may, if it determines that
foreign governmental restrictions or taxes would prevent the orderly settlement
of foreign currency option exercises, or would result in undue burdens on OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. The Portfolio may enter into
currency futures contracts to sell currencies. It also may buy put options and
write covered call options on currency futures. Currency futures contracts are
similar to currency forward contracts, except that they are traded on exchanges
(and have margin requirements) and are standardized as to contract size and
delivery date. Most currency futures call for payment of delivery in U.S.
dollars. The Portfolio may use currency futures for the same purposes as
currency forward contracts, subject to Commodity Futures Trading Commission
(CFTC) limitations. All futures contracts are aggregated for purposes of the
percentage limitations.
Currency futures and options on futures values can be expected to correlate
with exchange rates, but will not reflect other factors that may affect the
values of the Portfolio's investments. A currency hedge, for example, should
protect a Yen-denominated bond against a decline in the Yen, but will not
protect the Portfolio against
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price decline if the issuer's creditworthiness deteriorates. Because the value
of the Portfolio's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Portfolio's
investments denominated in that currency over time.
The Portfolio will hold securities or other options or futures positions whose
values are expected to offset its obligations. The Portfolio will not enter
into an option or futures position that exposes the Portfolio to an obligation
to another party unless it owns either (i) an offsetting position in securities
or (ii) cash, receivables and short-term debt securities with a value
sufficient to cover its potential obligations.
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APPENDIX B
OPTIONS AND FUTURES CONTRACTS
The Portfolio may buy or write options traded on any U.S. or foreign exchange
or in the over-the-counter market. The Portfolio may enter into interest rate
futures contracts and stock index futures contracts traded on any U.S. or
foreign exchange. The Portfolio also may buy or write put and call options on
these futures and on stock indexes. Options in the over-the-counter market will
be purchased only when the investment manager believes a liquid secondary
market exists for the options and only from dealers and institutions the
investment manager believes present a minimal credit risk. Some options are
exercisable only on a specific date. In that case, or if a liquid secondary
market does not exist, the Portfolio could be required to buy or sell
securities at disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees to sell the security at the set price when the buyer wants
to exercise the option, no matter what the market price of the security is at
that time. A person who buys a put option has the right to sell a security at a
set price for the length of the contract. A person who writes a put option
agrees to buy the security at the set price if the purchaser wants to exercise
the option, no matter what the market price of the security is at that time. An
option is covered if the writer owns the security (in the case of a call) or
sets aside the cash or securities of equivalent value (in the case of a put)
that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In addition the
buyer generally pays a broker a commission. The writer receives a premium, less
another commission, at the time the option is written. The cash received is
retained by the writer whether or not the option is exercised. A writer of a
call option may have to sell the security for a below-market price if the
market price rises above the exercise price. A writer of a put option may have
to pay an above-market price for the security if its market price decreases
below the exercise price. The risk of the writer is potentially unlimited,
unless the option is covered.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options and futures contracts may benefit the Portfolio and its shareholders by
improving the Portfolio's liquidity and by helping to stabilize the value of
its net assets.
Buying options. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. Options are
used as a trading technique to take advantage of any disparity between the
price of the 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
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the option price will be as good or better than the price at which the security
could be bought or sold directly. When the option is purchased, the Portfolio
pays a premium and a commission. It then pays a second commission on the
purchase or sale of the underlying security when the option is exercised. For
record keeping and tax purposes, the price obtained on the purchase of the
underlying security will be the combination of the exercise price, the premium
and both commissions. When using options as a trading technique, commissions on
the option will be set as if only the underlying securities were traded.
Put and call options also may be held by the Portfolio for investment purposes.
Options permit the Portfolio to experience the change in the value of a
security with a relatively small initial cash investment.
The risk the Portfolio assumes when it buys an option is the loss of the
premium. To be beneficial to the Portfolio, the price of the underlying
security must change within the time set by the option contract. Furthermore,
the change must be sufficient to cover the premium paid, the commissions paid
both in the acquisition of the option and in a closing transaction or in the
exercise of the option and subsequent 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:
'Underlying securities will continue to be bought or sold solely on the basis
of investment considerations consistent with the Fund's goal.
'All options written by the Portfolio will be covered. For covered call options
if a decision is made to sell the security, or for put options if a decision is
made to buy the security, the Portfolio will attempt to terminate the option
contract through a closing purchase transaction.
Net premiums on call options closed or premiums on expired call options are
treated as short-term capital gains. Since the Fund is taxed as a regulated
investment company under the Internal Revenue Code, any gains on options and
other securities held less than three months must be limited to less than 30%
of its annual gross income.
If a covered call option is exercised, the security is sold by the 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 options are included as a deferred
credit in the Statement of Assets and Liabilities and adjusted daily to the
current market value.
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Options on many securities are listed on options exchanges. If the Portfolio
writes listed options, it will follow the rules of the options exchange.
Options are valued at the close of the New York Stock Exchange. An option
listed on a national exchange, CBOE or NASDAQ will be valued at the last quoted
sales price or, if such a price is not readily available, at the mean of the
last bid and ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. When the Portfolio writes such an
option, the Custodian will segregate assets as appropriate to cover the option.
These options may be more difficult to close. If the Portfolio is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security until the call written by the Portfolio expires or is
exercised.
FUTURES CONTRACTS. A futures contract is an agreement between two parties to
buy and sell a security for a set price on a future date. Futures contracts
trade in a manner similar to the way a stock trades on a stock exchange and the
commodity exchanges, through their clearing corporations, guarantee performance
of the contracts. Futures contracts are commodity contracts listed on commodity
exchanges. They include contracts based on U.S. Treasury bonds and on Standard
& Poor's 500 Index (S&P 500 Index). In the case of S&P 500 index futures
contracts, the specified multiple is $500. Thus, if the value of the S&P 500
Index were 150, the value of one contract would be $75,000 (150 x $500).
Unlike other futures contracts, a stock index futures contract specifies that
no delivery of the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the contract. For
example, excluding any transaction costs, if the Portfolio enters into one
futures contract to buy the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 154 on that future date, the
Portfolio will gain $500 x (154-150) or $2,000. If the Portfolio enters into
one futures contract to sell the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 152 on that future date, the
Portfolio will lose $500 x (152-150) or $1,000.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by the Portfolio taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up within a segregated account at the Portfolio's
custodian bank. Daily thereafter, the futures contract is valued and the
payment of variation margin is required so that each day the Portfolio would
pay out cash in an amount equal to any decline in the contract's value or
receive cash equal to any increase. At the time a futures contract is closed
out, a nominal commission is paid, which is generally lower than the commission
on a comparable transaction in the cash markets.
The purpose of a futures contract is to allow the Portfolio to gain rapid
exposure to or protect itself from changes in the market without actually
buying or selling securities.
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For example, if the Portfolio owned long-term bonds and interest rates were
expected to increase, it might enter into futures contracts to sell securities
which would have much the same effect as selling some of the long-term bonds it
owned. If interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Portfolio's futures contracts
would increase at approximately the same rate, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have. If, on the
other hand, the Portfolio held cash reserves and interest rates were expected
to decline, the Portfolio might enter into interest rate futures contracts for
the purchase of securities. If short-term rates were higher than long-term
rates, the ability to continue holding these cash reserves would have a very
beneficial impact on the Portfolio's earnings. Even if short-term rates were
not higher, the Portfolio would still benefit from the income earned by holding
these short-term investments. At the same time, by entering into futures
contracts for the purchase of securities, the Portfolio could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Portfolio's cash reserves could then be used to buy
long-term bonds on the cash market. The Portfolio could accomplish similar
results by selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase or by buying bonds with
long maturities and selling bonds with short maturities when interest rates are
expected to decline. But by using futures contracts as an investment tool,
given the greater liquidity in the futures market than in the cash market, it
might be possible to accomplish the same result more easily and more quickly.
Risks of Transactions in Futures Contracts
The Portfolio may elect to close some or all of its contracts prior to
expiration. Although the Portfolio intends to enter into futures contracts only
on exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular contract at any particular time. In such event, it may not be
possible to close a futures contract position, and in the event of adverse
price movements, the Portfolio would have to make daily cash payments of
variation margin. Such price movements, however, will be offset all or in part
by the price movements of the securities owned by the Portfolio. Of course,
there is no guarantee the price of the securities will correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Another risk in employing futures contracts to protect against the price
volatility of securities is that the prices of securities subject to futures
contracts may not correlate perfectly with the behavior of the cash prices of
the Portfolio's securities. The correlation may be distorted because the
futures market is dominated by short-term traders seeking to profit from the
difference between a contract or security price and their cost of borrowed
funds. Such distortions are generally minor and would diminish as the contract
approached maturity.
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In addition, the Portfolio's investment manager could be incorrect in its
expectations as to the direction or extent of various interest rate or market
movements or the time span within which the movements take place. For example,
if the Portfolio sold futures contracts for the sale of securities in
anticipation of an increase in interest rates, and interest rates declined
instead, the Portfolio would lose money on the sale.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the holder a
right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date, an option on a futures contract merely entitles its holder to
decide on or before a future date (within nine months of the date of issue)
whether to enter into such a contract. If the holder decides not to enter into
the contract, all that is lost is the amount (premium) paid for the option.
Further, because the value of the option is fixed at the point of sale, there
are not daily payments of cash to reflect the change in the value of the
underlying contract. However, since an option gives the buyer the right to
enter into a contract at a set price for a fixed period of time, its value does
change daily and that change is reflected in the net asset value of the Fund.
The risk the Portfolio assumes when it buys an option is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts the Portfolio owns, or on securities held in its portfolio, is that
there could be an increase in the market value of such contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. The Portfolio
could enter into a closing transaction by purchasing an option with the same
terms as the one it had previously sold. The cost to close the option and
terminate the Portfolio's obligation, however, might be more or less than the
premium received when it originally wrote the option. Further, the Portfolio
might not be able to close the option because of insufficient activity in the
options market. Purchasing options also limits the use of monies that might
otherwise be available for long-term investments.
OPTIONS ON STOCK INDEXES. Options on stock indexes are securities traded on
national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the
exercise price and the current index level. Such options would be used in the
same manner as options on futures contracts.
TAX TREATMENT. As permitted under federal income tax laws, the Portfolio
intends to identify futures contracts as mixed straddles and not mark them to
market, that is, not treat them as having been sold at the end of the year at
market value. Such an election may result in the Portfolio being required to
defer recognizing losses incurred by entering into futures contracts and losses
on underlying securities identified as being hedged against.
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Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether such option is a section
1256 contract. If the option is a non-equity option, the Portfolio will either
make a 1256(d) election and treat the option as a mixed straddle or mark to
market the option at fiscal year end and treat the gain/loss as 40% short-term
and 60% long-term. Certain provisions of the Internal Revenue Code may also
limit the Portfolio's ability to engage in futures contracts and related
options transactions. For example, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its assets must consist of cash,
government securities and other securities, subject to certain diversification
requirements. Less than 30% of its gross income must be derived from sales of
securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a security
for purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements. In order to avoid realizing a gain within the
three-month period, the Portfolio may be required to defer closing out a
contract beyond the time when it might otherwise be advantageous to do so.
The Portfolio also may be restricted in purchasing put options for the purpose
of hedging underlying securities because of applying the short sale holding
period rules with respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Portfolio's agent in acquiring the futures position). During
the period the futures contract is open, changes in value of the contract will
be recognized as unrealized gains or losses by marking to market on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments will be made or received depending upon
whether gains or losses are incurred. All contracts and options will be valued
at the last-quoted sales price on their primary exchange.
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APPENDIX C
MORTGAGE-BACKED SECURITIES
A mortgage pass-through certificate is one that represents an interest in a
pool, or group, of mortgage loans assembled by the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) or non-governmental entities. In
pass-through certificates, both principal and interest payments, including
prepayments, are passed through to the holder of the certificate. Prepayments
on underlying mortgages result in a loss of anticipated interest, and the
actual yield (or total return) to the Portfolio, which is influenced by both
stated interest rates and market conditions, may be different than the quoted
yield on certificates. Some U.S. government securities may be purchased on a
when-issued basis, which means that it may take as long as 45 days after the
purchase before the securities are delivered to the Portfolio.
Stripped Mortgage-Backed Securities. The Portfolio may invest in stripped
mortgage-backed securities. Generally, there are two classes of stripped
mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs
entitle the holder to receive distributions consisting of all or a portion of
the interest on the underlying pool of mortgage loans or mortgage-backed
securities. POs entitle the holder to receive distributions consisting of all
or a portion of the principal of the underlying pool of mortgage loans or
mortgage-backed securities. The cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments (including prepayments)
on the underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs. A slow
rate of principal payments may adversely affect the yield to maturity of POs.
On an IO, if prepayments of principal are greater than anticipated, an investor
may incur substantial losses. If prepayments of principal are slower than
anticipated, the yield on a PO will be affected more severely than would be the
case with a traditional mortgage-backed security.
Mortgage-Backed Security Spread Options. The Portfolio may purchase
mortgage-backed security (MBS) put spread options and write covered MBS call
spread options. MBS spread options are based upon the changes in the price
spread between a specified mortgage-backed security and a like-duration
Treasury security. MBS spread options are traded in the OTC market and are of
short duration, typically one to two months. The Portfolio would buy or sell
covered MBS call spread options in situations where mortgage-backed securities
are expected to underperform like-duration Treasury securities.
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APPENDIX D
DOLLAR-COST AVERAGING
A technique that works well for many investors is one that eliminates random
buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost
averaging involves building a portfolio through the investment of fixed amounts
of money on a regular basis regardless of the price or market condition. This
may enable an investor to smooth out the effects of the volatility of the
financial markets. By using this strategy, more shares will be purchased when
the price is low and less when the price is high. As the accompanying chart
illustrates, dollar-cost averaging tends to keep the average price paid for the
shares lower than the average market price of shares purchased, although there
is no guarantee.
While this technique does not ensure a profit and does not protect against a
loss if the market declines, it is an effective way for many shareholders who
can continue investing on a regular basis through changing market conditions,
including times when the price of their shares falls or the market declines, to
accumulate shares in a fund to meet long-term goals.
DOLLAR-COST AVERAGING
<TABLE>
<CAPTION>
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).
THE AVERAGE PRICE YOU PAID FOR EACH SHARE: $4.84 ($500 DIVIDED BY 103.4).
43
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Independent auditors' report
The board and shareholders
IDS Investment Series, Inc.:
We have audited the accompanying statement of assets
and liabilities of IDS Mutual (a series of IDS
Investment Series, Inc.) as of September 30, 1997, and
the related statement of operations for the year then
ended and the statements of changes in net assets for
each of the years in the two-year period ended
September 30, 1997, and the financial highlights for
each of the years in the ten-year period ended
September 30, 1997. These financial statements and the
financial highlights are the responsibility of fund
management. Our responsibility is to express an
opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes assessing
the accounting principles used and significant
estimates made by management, as well as evaluating
the overall financial statement presentation. We
believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of IDS Mutual at September 30,
1997, and the results of its operations, changes in
its net assets and the financial highlights for the
periods stated in the first paragraph above, in
conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 7, 1997
9
<PAGE> 166
Financial statements
STATEMENT OF ASSETS AND LIABILITIES
IDS Mutual
Year ended Sept. 30, 1997
<TABLE>
<S> <C>
ASSETS
Investment in Balanced Portfolio (Note 1) $4,852,365,922
--------------
Total assets 4,852,365,922
--------------
LIABILITIES
Accrued distribution fees 5,390
Accrued service fee 20,412
Accrued transfer agency fee 5,935
Accrued administrative services fee 4,136
Other accrued expenses 381,960
--------------
Total liabilities 417,833
--------------
Net assets applicable to outstanding capital stock $4,851,948,089
==============
REPRESENTED BY
Capital stock -- of $.01 par value (Note 1) $ 3,168,004
Additional paid-in capital 3,688,609,504
Undistributed net investment income 10,135,000
Accumulated net realized gain (loss) 515,983,124
Unrealized appreciation (depreciation) on investments and on translation
of assets and liabilities in foreign currencies 634,052,457
--------------
Total -- representing net assets applicable to outstanding capital stock $4,851,948,089
==============
Net assets applicable to outstanding shares: Class A $3,251,343,237
Class B $ 263,556,984
Class Y $1,337,047,868
Net asset value per share of outstanding
capital stock: Class A shares 212,243,846 $ 15.32
Class B shares 17,282,662 $ 15.25
Class Y shares 87,273,907 $ 15.32
</TABLE>
See accompanying notes to financial statements.
10
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STATEMENT OF OPERATIONS
IDS Mutual
Year ended Sept. 30, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Income:
Dividends $ 96,685,223
Interest 117,938,232
Less: Foreign taxes withheld (1,369,298)
------------
Total income 213,254,157
------------
Expenses (Note 2):
Expenses allocated from Balanced Portfolio 21,959,414
Distribution fee -- Class B 1,456,221
Transfer agency fee 5,179,452
Incremental transfer agency fee -- Class B 19,856
Service fee
Class A 5,081,568
Class B 338,116
Class Y 517,007
Administrative services fees and expenses 1,434,260
Compensation of board members 21,266
Compensation of officers 11,104
Postage 117,868
Registration fees 270,610
Reports to shareholders 67,203
Audit fees 9,875
------------
Total expenses 36,483,820
Earnings credits on cash balances (Note 2) (311,481)
------------
Total net expenses 36,172,339
------------
Investment income (loss) -- net 177,081,818
------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
Net realized gain (loss) on:
Security transactions 538,984,415
Foreign currency transactions (3,885,513)
------------
Net realized gain (loss) on investments 535,098,902
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign
securities 270,677,545
------------
Net gain (loss) on investments and foreign currencies 805,776,447
------------
Net increase (decrease) in net assets resulting from
operations $982,858,265
============
</TABLE>
See accompanying notes to financial statements.
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STATEMENTS OF CHANGES IN NET ASSETS
IDS Mutual
Year ended Sept. 30,
<TABLE>
<CAPTION>
OPERATIONS AND DISTRIBUTIONS 1997 1996
<S> <C> <C> <C>
Investment income (loss) -- net $ 177,081,818 $ 156,379,206
Net realized gain (loss) on investments 535,098,902 220,369,417
Net change in unrealized appreciation or
(depreciation) on investments and on
translation
of assets and liabilities in foreign
currencies 270,677,545 52,687,677
-------------- -------------- ---
Net increase (decrease) in net assets
resulting from
operations 982,858,265 429,436,300
-------------- -------------- ---
Distributions to shareholders from:
Net investment income
Class A (112,647,933) (105,659,488)
Class B (6,407,726) (3,138,330)
Class Y (48,077,728) (43,985,217)
Net realized gain
Class A (168,695,556) (27,149,800)
Class B (9,374,819) (554,840)
Class Y (68,558,106) (10,528,422)
-------------- -------------- ---
Total distributions (413,761,868) (191,016,097)
-------------- -------------- ---
CAPITAL SHARE TRANSACTIONS (NOTE 5)
Proceeds from sales
Class A shares (Note 2) 230,401,790 223,241,565
Class B shares 115,020,723 102,302,034
Class Y shares 376,665,066 486,820,247
Reinvestment of distributions at net asset
value
Class A shares 246,260,292 114,008,369
Class B shares 15,422,380 3,581,024
Class Y shares 116,635,834 54,513,639
Payments for redemptions
Class A shares (380,264,514) (331,999,353)
Class B shares (Note 2) (26,018,445) (10,136,983)
Class Y shares (428,165,936) (368,740,312)
-------------- -------------- ---
Increase (decrease) in net assets from capital
share transactions 265,957,190 273,590,230
-------------- -------------- ---
Total increase (decrease) in net assets 835,053,587 512,010,433
Net assets at beginning of year 4,016,894,502 3,504,884,069
-------------- -------------- ---
Net assets at end of year $4,851,948,089 $4,016,894,502
=
================= =================
Undistributed net investment income $ 10,135,000 $ 5,692,748
-------------- -------------- ---
</TABLE>
See accompanying notes to financial statements.
12
Financial statements
<PAGE> 169
Notes to financial statements
IDS Mutual
- --------------------------------------------------------------------------------
1
SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES IDS Mutual (a series of IDS Investment Series, Inc.)
is registered under the Investment Company Act of 1940
(as amended) as a diversified, open-end management
investment company. IDS Investment Series, Inc. has 10
billion authorized shares of capital stock that can be
allocated among the separate series as designated by
the board. The Fund offers Class A, Class B and Class
Y shares. Class A shares are sold with a front-end
sales charge. Class B shares may be subject to a
contingent deferred sales charge and such shares
automatically convert to Class A shares during the
ninth calendar year of ownership. Class Y shares have
no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend,
liquidation and other rights, and the same terms and
conditions, except that the level of distribution fee,
transfer agency fee and service fee (class specific
expenses) differs among classes. Income, expenses
(other than class specific expenses) and realized and
unrealized gains or losses on investments are
allocated to each class of shares based upon its
relative net assets.
INVESTMENT IN BALANCED PORTFOLIO
Effective May 13, 1996, the Fund began investing all
of its assets in Balanced Portfolio (the Portfolio), a
series of Growth and Income Trust, an open-end
investment company that has the same objectives as the
Fund. This was accomplished by transferring the Fund's
assets to the Portfolio in return for a proportionate
ownership interest in the Portfolio. The Portfolio
divides its investments between common stocks and
senior securities (bonds and preferred stocks).
The Fund records daily its share of the Portfolio's
income, expenses and realized and unrealized gains and
losses. The financial statements of the Portfolio are
included elsewhere in this report and should be read
in conjunction with the Fund's financial statements.
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<PAGE> 170
Notes to financial statements
IDS Mutual
The Fund records its investment in the Portfolio at
the value that is equal to the Fund's proportionate
ownership interest in the net assets of the Portfolio.
The percentage of the Portfolio owned by the Fund at
Sept. 30, 1997 was 99.98%. Valuation of securities
held by the Portfolio is discussed in Note 1 of the
Portfolio's "Notes to financial statements," which are
included elsewhere in this report.
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of increase and decrease in net assets from
operations during the period. Actual results could
differ from those estimates.
FEDERAL TAXES
Since the Fund's policy is to comply with all sections
of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its
taxable income to the shareholders, no provision for
income or excise taxes is required.
Net investment income (loss) and net realized gains
(losses) allocated from the Portfolio may differ for
financial statement and tax purposes primarily because
of the deferral of losses on certain futures
contracts, the recognition of certain foreign currency
gains (losses) as ordinary income (loss) for tax
purposes, and losses deferred due to "wash sale"
transactions. The character of distributions made
during the year from net investment income or net
realized gains may differ from their ultimate
characterization for federal income tax purposes.
Also, due to the timing of dividend distributions, the
fiscal year in which amounts are distributed may
differ from the year that the income or realized gains
(losses) were recorded by the Fund.
14
<PAGE> 171
On the statement of assets and liabilities, as a
result of permanent book-to-tax differences,
undistributed net investment income has been decreased
by $5,506,179 and accumulated net realized gain has
been increased by $5,506,179.
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income, declared and
paid each calendar quarter, are reinvested in
additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are
distributed along with the last income dividend of the
calendar year.
- --------------------------------------------------------------------------------
2
EXPENSES AND
SALES CHARGES In addition to the expenses allocated from the
Portfolio, the Fund accrues its own expenses as
follows:
Effective March 20, 1995, the Fund entered into
agreements with American Express Financial Corporation
(AEFC) for providing administrative services and
serving as transfer agent. Under its Administrative
Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage
of the Fund's average daily net assets in reducing
percentages from 0.04% to 0.02% annually. Additional
administrative service expenses paid by the Fund are
office expenses, consultants' fees and compensation of
officers and employees. Under this agreement, the Fund
also pays taxes, audit and certain legal fees,
registration fees for shares, compensation of board
members, corporate filing fees, organizational
expenses, and any other expenses properly payable by
the Fund and approved by the board.
Under a separate Transfer Agency Agreement, AEFC
maintains shareholder accounts and records. The Fund
pays AEFC an annual fee per shareholder account for
this service as follows:
-Class A $15
-Class B $16
-Class Y $15
15
<PAGE> 172
Notes to financial statements
IDS Mutual
Also effective March 20, 1995, the Fund entered into
agreements with American Express Financial Advisors
Inc. for distribution and shareholder
servicing-related services. Under a Plan and Agreement
of Distribution, the Fund pays a distribution fee at
an annual rate of 0.75% of the Fund's average daily
net assets attributable to Class B shares for
distribution-related services.
Under a Shareholder Service Agreement, the Fund pays a
fee for service provided to shareholders by financial
advisors and other servicing agents. The fee is
calculated at a rate of 0.175% of the Fund's average
daily net assets attributable to Class A and Class B
shares and commencing on May 9, 1997, the fee is
calculated at a rate of 0.10% of the Fund's average
daily net assets attributable to Class Y shares.
Sales charges received by American Express Financial
Advisors, Inc. for distributing Fund shares were
$4,782,926 for Class A and $162,371 for Class B for
the year ended Sept. 30, 1997.
During the year ended Sept. 30, 1997, the Fund's
transfer agency fees were reduced by $311,481 as a
result of earnings credits from overnight cash
balances.
16
<PAGE> 173
- --------------------------------------------------------------------------------
3
CAPITAL SHARE
TRANSACTIONS Transactions in shares of capital stock for the
periods indicated are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPT. 30, 1997
CLASS A CLASS B CLASS Y
--------------------------------------------------------------------
<S> <C> <C> <C>
Sold 16,177,572 8,102,822 26,414,352
Issued for reinvested
distributions 17,752,256 1,112,719 8,400,857
Redeemed (26,678,714) (1,825,256) (29,981,793)
--------------------------------------------------------------------
Net increase (decrease) 7,251,114 7,390,285 4,833,416
--------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPT. 30, 1996
CLASS A CLASS B CLASS Y
---------------------------------------------------------------
<S> <C> <C> <C>
Sold 16,903,358 7,776,927 37,176,071
Issued for reinvested
distributions 8,620,489 270,455 4,120,124
Redeemed (25,127,441) (766,410) (27,902,875)
--------------------------------------------------------------------
Net increase (decrease) 396,406 7,280,972 13,393,320
--------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
4
FINANCIAL
HIGHLIGHTS "Financial highlights" showing per share data and
selected information is presented on pages 8 and 9 of
the prospectus.
17
<PAGE> 174
Independent auditors' report
The board of trustees and unitholders
Growth and Income Trust:
We have audited the accompanying statement of assets
and liabilities, including the schedule of investments
in securities, of Balanced Portfolio (a series of
Growth and Income Trust) as of September 30, 1997, and
the related statement of operations for the year then
ended and the statements of changes in net assets for
the year ended September 30, 1997 and for the period
from May 13, 1996 (commencement of operations) to
September 30, 1996. These financial statements are the
responsibility of portfolio management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. Investment securities held in
custody are confirmed to us by the custodian. As to
securities purchased and sold but not received or
delivered, and securities on loan, we request
confirmations from brokers, and where replies are not
received, we carry out other appropriate auditing
procedures. An audit also includes assessing the
accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Balanced Portfolio at September
30, 1997, and the results of its operations and the
changes in its net assets for the periods stated in
the first paragraph above, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 7, 1997
18
<PAGE> 175
Financial statements
STATEMENT OF ASSETS AND LIABILITIES
Balanced Portfolio
Year ended September 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (Note 1)
(identified cost $4,273,232,620) $4,906,047,462
Dividends and accrued interest receivable 36,438,261
Receivable for investment securities sold 11,842,052
U.S. government securities held as collateral (Note 5) 84,333,637
Unrealized appreciation on foreign currency contracts held,
at value (Notes 1 and 4) 1,335,390
--------------
Total assets 5,039,996,802
--------------
LIABILITIES
Disbursements in excess of cash on demand deposit
(including bank overdraft of $11,925,022) 16,210,197
Payable for investment securities purchased 18,370,329
Payable upon return of securities loaned (Note 5) 151,890,137
Accrued investment management services fee 64,470
Other accrued expenses 141,771
--------------
Total liabilities 186,676,904
--------------
Net assets applicable to capital stock $4,853,319,898
==============
</TABLE>
See accompanying notes to financial statements.
19
<PAGE> 176
Financial statements
STATEMENT OF OPERATIONS
Balanced Portfolio
Year ended September 30, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Income:
Dividends $ 96,702,260
Interest 117,904,845
Less: Foreign taxes withheld (1,369,557)
------------
Total income 213,237,548
------------
Expenses (Note 2):
Investment management services fee 21,571,200
Compensation of board members 23,697
Custodian fees 284,831
Audit fees 29,625
Other 65,327
------------
Total expenses 21,974,680
Earnings credits on cash balances (Note 2) (11,407)
------------
Total net expenses 21,963,273
------------
Investment income (loss) -- net 191,274,275
------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
Net realized gain (loss) on:
Security transactions (Note 3) 539,048,011
Foreign currency transactions (3,886,400)
------------
Net realized gain (loss) on investments 535,161,611
Net change in unrealized appreciation (depreciation) on
investments and on translation of assets and liabilities
in foreign currencies 270,752,151
------------
Net gain (loss) on investments and foreign currencies 805,913,762
------------
Net increase (decrease) in net assets resulting from
operations $997,188,037
============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE> 177
STATEMENTS OF CHANGES IN NET ASSETS
Balanced Portfolio
<TABLE>
<CAPTION>
OPERATIONS AND DISTRIBUTIONS
FOR THE PERIOD FROM
YEAR ENDED MAY 13, 1996* TO
OPERATIONS SEPT. 30, 1997 SEPT. 30, 1996
<S> <C> <C>
Investment income (loss) -- net $ 191,274,275 $ 69,251,201
Net realized gain (loss) on investments 535,161,611 58,304,995
Net change in unrealized appreciation
(depreciation) on investments and on
translation of assets and liabilities
in foreign currencies 270,752,151 26,384,443
-------------- --------------
Net increase (decrease) in net assets
resulting from operations 997,188,037 153,940,639
-------------- --------------
Net contributions (withdrawals) from
partners (161,960,911) 3,864,127,133
-------------- --------------
Total increase (decrease) in net assets 835,227,126 4,018,067,772
Net assets at beginning of period (Note 1) 4,018,092,772 25,000
-------------- --------------
Net assets at end of period $4,853,319,898 $4,018,092,772
============== ==============
</TABLE>
* Commencement of operations
See accompanying notes to financial statements.
21
<PAGE> 178
Notes to financial statements
Balanced Portfolio
- --------------------------------------------------------------------------------
1
SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES Balanced Portfolio (the Portfolio) is a series of
Growth and Income Trust (the Trust) and is registered
under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment
company. Balanced Portfolio seeks to provide a balance
of growth of capital and current income by investing
in common stocks and senior securities (preferred
stocks and debt securities) issued by U.S. and foreign
companies. The Portfolio also may invest in derivative
instruments and money market instruments. The
Declaration of Trust permits the Trustees to issue
non-transferable interests in the Portfolio. On April
15, 1996, American Express Financial Corporation
(AEFC) contributed $25,000 to the Portfolio.
Operations did not formally commence until May 13,
1996, at which time an existing fund transferred its
assets to the Portfolio in return for an ownership
percentage of the Portfolio.
Significant accounting polices followed by the
Portfolio are summarized below:
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of increase and decrease in net assets from
operations during the period. Actual results could
differ from those estimates.
22
<PAGE> 179
VALUATION OF SECURITIES
All securities are valued at the close of each
business day. Securities traded on national securities
exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities
are generally traded in the over-the-counter market
and are valued at a price deemed best to reflect fair
value as quoted by dealers who make markets in these
securities or by an independent pricing service.
Securities for which market quotations are not readily
available are valued at fair value according to
methods selected in good faith by the board.
Short-term securities maturing in more than 60 days
from the valuation date are valued at the market price
or approximate market value based on current interest
rates; those maturing in 60 days or less are valued at
amortized cost.
23
<PAGE> 180
Notes to financial statements
Balanced Portfolio
OPTION TRANSACTIONS
In order to produce incremental earnings, protect
gains and facilitate buying and selling of securities
for investment purposes, the Portfolio may buy and
write options traded on any U.S. or foreign exchange
or in the over-the-counter market where the completion
of the obligation is dependent upon the credit
standing of the other party. The Portfolio also may
buy and sell put and call options and write covered
call options on portfolio securities and may write
cash-secured put options. The risk in writing a call
option is that the Portfolio gives up the opportunity
of profit if the market price of the security
increases. The risk in writing a put option is that
the Portfolio may incur a loss if the market price of
the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio
pays a premium whether or not the option is exercised.
The Portfolio also has the additional risk of not
being able to enter into a closing transaction if a
liquid secondary market does not exist.
Option contracts are valued daily at the closing
prices on their primary exchanges and unrealized
appreciation or depreciation is recorded. The
Portfolio will realize a gain or loss upon expiration
or closing of the option transaction. When an option
is exercised, the proceeds on sales for a written call
option, the purchase cost for a written put option or
the cost of a security for a purchased put or call
option is adjusted by the amount of premium received
or paid.
24
<PAGE> 181
FUTURES TRANSACTIONS
In order to gain exposure to or protect itself from
changes in the market, the Portfolio may buy and sell
financial futures contracts traded on any U.S. or
foreign exchange. The Portfolio also may buy and write
put and call options on these futures contracts. Risks
of entering into futures contracts and related options
include the possibility that there may be an illiquid
market and that a change in the value of the contract
or option may not correlate with changes in the value
of the underlying securities.
Upon entering into a futures contract, the Portfolio
is required to deposit either cash or securities in an
amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation
margin) are made or received by the Portfolio each
day. The variation margin payments are equal to the
daily changes in the contract value and are recorded
as unrealized gains and losses. The Portfolio
recognizes a realized gain or loss when the contract
is closed or expires.
25
<PAGE> 182
Notes to financial statements
Balanced Portfolio
FOREIGN CURRENCY TRANSLATIONS
AND FOREIGN CURRENCY CONTRACTS
Securities and other assets and liabilities
denominated in foreign currencies are translated daily
into U.S. dollars at the closing rate of exchange.
Foreign currency amounts related to the purchase or
sale of securities and income and expenses are
translated at the exchange rate on the transaction
date. The effect of changes in foreign exchange rates
on realized and unrealized security gains or losses is
reflected as a component of such gains or losses. In
the statement of operations, net realized gains or
losses from foreign currency transactions may arise
from sales of foreign currency, closed forward
contracts, exchange gains or losses realized between
the trade date and settlement dates on securities
transactions, and other translation gains or losses on
dividends, interest income and foreign withholding
taxes.
The Portfolio may enter into forward foreign currency
exchange contracts for operational purposes and to
protect against adverse exchange rate fluctuation. The
net U.S. dollar value of foreign currency underlying
all contractual commitments held by the Portfolio and
the resulting unrealized appreciation or depreciation
are determined using foreign currency exchange rates
from an independent pricing service. The Portfolio is
subject to the credit risk that the other party will
not complete the obligations of the contract.
26
<PAGE> 183
ILLIQUID SECURITIES
Investments in securities include issues that are
illiquid. The Portfolio currently limits investments
in illiquid securities to 10% of the net assets, at
market value, at the time of purchase. The aggregate
value of such securities at Sept. 30, 1997 was
$4,116,960 representing 0.08% of the net assets.
Pursuant to guidelines adopted by the board, certain
unregistered securities are determined to be liquid
and are not included within the 10% limitation
specified above.
FEDERAL TAXES
For federal income tax purposes the Portfolio
qualifies as a partnership and each investor in the
Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized
and unrealized gains and losses of the Portfolio.
Accordingly, as a "pass-through" entity, the Portfolio
does not pay any income dividends or capital gain
distributions.
OTHER
Security transactions are accounted for on the date
securities are purchased or sold. Dividend income is
recognized on the ex-dividend date and interest
income, including level-yield amortization of premium
and discount, is accrued daily.
27
<PAGE> 184
Notes to financial statements
Balanced Portfolio
- --------------------------------------------------------------------------------
2
FEES AND
EXPENSES The Trust, on behalf of the Portfolio, has entered
into an Investment Management Services Agreement with
AEFC for managing its portfolio. Under this agreement,
AEFC determines which securities will be purchased,
held or sold. The management fee is a percentage of
the Portfolio's average daily net assets in reducing
percentages from 0.53% to 0.43% annually. The fees may
be increased or decreased by a performance adjustment
based on a comparison of the performance of Class A
shares of IDS Mutual Fund to the Lipper Balanced Fund
Index. The maximum adjustment is 0.08% of the
Portfolio's average daily net assets on an annual
basis. The adjustment decreased the fee by $31,926 for
the year ended Sept. 30, 1997.
28
<PAGE> 185
Under the agreement, the Trust also pays taxes,
brokerage commissions and nonadvisory expenses, which
include custodian fees, audit and certain legal fees,
fidelity bond premiums, registration fees for units,
office expenses, consultants' fees, compensation of
trustees, corporate filing fees, expenses incurred in
connection with lending securities of the Portfolio,
and any other expenses properly payable by the Trust
or Portfolio and approved by the board.
During the year ended Sept. 30, 1997, the Portfolio's
custodian fees were reduced by $11,407 as a result of
earnings credits from overnight cash balances.
Pursuant to a Placement Agency Agreement, American
Express Financial Advisors Inc. acts as placement
agent of the units of the Trust.
29
<PAGE> 186
Notes to financial statements
Balanced Portfolio
- --------------------------------------------------------------------------------
3
SECURITIES
TRANSACTIONS Cost of purchases and proceeds from sales of
securities (other than short-term obligations)
aggregated $1,968,011,015 and $2,297,550,674,
respectively, for the year ended Sept. 30, 1997. For
the same period, the portfolio turnover rate was 49%.
Realized gains and losses are determined on an
identified cost basis.
Brokerage commissions paid to brokers affiliated with
AEFC were $24,783 during this period.
30
<PAGE> 187
- --------------------------------------------------------------------------------
4
FOREIGN CURRENCY
CONTRACTS At Sept. 30, 1997, the Portfolio had entered into a
foreign currency exchange contract that obligates the
Portfolio to deliver currency at a specified future
date. The unrealized appreciation and/or depreciation
on this contract is included in the accompanying
financial statements. See Summary of significant
accounting policies. The terms of the open contract
are as follows:
<TABLE>
<CAPTION>
Currency to be Currency to be Unrealized Unrealized
Exchange date delivered received appreciation depreciation
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nov. 7, 1997 123,418,698 200,000,000 $1,335,390 $ --
British Pound U.S. Dollar
</TABLE>
31
<PAGE> 188
Notes to financial statements
Balanced Portfolio
- --------------------------------------------------------------------------------
5
LENDING OF
PORTFOLIO SECURITIES At Sept. 30, 1997, securities valued at $148,051,469
were on loan to brokers. For collateral, the Portfolio
received $67,556,500 in cash and U.S. government
securities valued at $84,333,637. Income from
securities lending amounted to $458,584 for the year
ended Sept. 30, 1997. The risks to the Portfolio of
securities lending are that the borrower may not
provide additional collateral when required or return
the securities when due.
32
<PAGE> 189
INVESTMENTS IN SECURITIES
INVESTMENTS IN SECURITIES
Balanced Portfolio (Percentages represent value of
Sept. 30, 1997 investments compared to net assets)
<TABLE>
<CAPTION>
COMMON STOCKS (53.8%)
ISSUER SHARES VALUE(A)
<S> <C> <C>
AEROSPACE & DEFENSE (0.8%)
Rockwell Intl 625,000 $ 39,335,937
AUTOMOTIVE & RELATED (0.9%)
Genuine Parts 1,050,000 32,353,125
TRW 250,000 13,718,750
Total 46,071,875
BANKS AND SAVINGS & LOANS (3.6%)
Banc One 350,000 19,534,375
First Union 800,000 40,050,000
Morgan (JP) 350,000 39,768,750
Natl City 700,000 43,093,750
NationsBank 400,000 24,750,000
Norwest 157,700 9,659,125
Total 176,856,000
BEVERAGES & TOBACCO (1.9%)
Anheuser-Busch 950,000 42,868,750
Philip Morris 850,000 35,328,125
UST 500,000 15,281,250
Total 93,478,125
BUILDING MATERIALS & CONSTRUCTION (0.9%)
Weyerhaeuser 700,000 41,562,500
CHEMICALS (3.0%)
ARCO Chemical 575,000 26,162,500
Dow Chemical 500,000 45,343,750
Lubrizol 850,000 35,700,000
Nalco Chemical 950,000 38,059,375
Total 145,265,625
ENERGY (4.9%)
Amoco 475,000 45,778,125
Atlantic Richfield 450,000 38,446,875
Chevron 525,000 43,673,438
Mobil 600,000 44,400,000
Texaco 600,000 36,862,500
Ultramar Diamond
Shamrock 925,000 29,889,063
Total 239,050,001
FOOD (1.7%)
General Mills 275,000 18,957,813
Heinz (HJ) 775,000 35,795,313
Sara Lee 500,000 25,750,000
Total 80,503,126
HEALTH CARE (1.5%)
American Home
Products 525,000 38,325,000
Baxter Intl 625,000 32,656,250
Total 70,981,250
HOUSEHOLD PRODUCTS (0.6%)
Kimberly-Clark 600,000 29,362,500
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
ISSUER SHARES VALUE(A)
INDUSTRIAL EQUIPMENT & SERVICES (0.5%)
Waste Management 650,000 $ 22,709,375
INSURANCE (3.2%)
Marsh & McLennan 320,000 24,520,000
SAFECO 850,000 45,050,000
St. Paul Cos 525,000 42,820,312
Transamerica 425,000 42,287,500
Total 154,677,812
MEDIA (2.6%)
Dun & Bradstreet 1,175,000 33,340,625
Gannett 375,000 40,476,563
Knight-Ridder 600,000 32,775,000
McGraw-Hill Cos 325,000 21,998,438
Total 128,590,626
METALS (0.3%)
Aluminum Co of
America 186,450 15,288,900
MULTI-INDUSTRY CONGLOMERATES (1.7%)
Eastman Kodak 525,000 34,092,188
Emerson Electric 850,000 48,981,250
Total 83,073,438
PAPER & PACKAGING (1.1%)
Union Camp 600,000 37,012,500
Unisource Worldwide 750,000 14,250,000
Total 51,262,500
REAL ESTATE INVESTMENT TRUST (4.2%)
Amli Residential
Properties 425,000 9,881,250
CBL & Associates
Properties 550,000 14,265,625
Developers
Diversified
Realty 325,000 13,000,000
FelCor Suite Hotels 300,000 12,318,750
Gables Residential
Trust 475,000 12,884,375
Liberty Property
Trust 575,000 15,489,062
LTC Properties 532,700 10,121,300
Meditrust 500,000 20,750,000
Merry Land &
Investment 550,000 12,134,375
Nationwide Health
Properties 550,000 13,234,375
OMEGA Healthcare
Investors 300,000 10,800,000
Security Capital
Industrial Trust 700,000 16,318,750
Simon DeBartolo
Group 700,000 23,100,000
United Dominion
Realty
Trust 1,175,000 17,625,000
Total 201,922,862
</TABLE>
See accompanying notes to investments in securities.
33
<PAGE> 190
INVESTMENTS IN SECURITIES
Balanced Portfolio (Percentages represent value of
Sept. 30, 1997 investments compared to net assets)
<TABLE>
<CAPTION>
ISSUER SHARES VALUE(A)
<S> <C> <C>
RESTAURANTS & LODGING (0.7%)
McDonald's 675,000 $ 32,146,875
RETAIL (2.2%)
Jostens 800,000 21,700,000
May Dept Stores 800,000 43,600,000
Penney (JC) 750,000 43,687,500
Total 108,987,500
TRANSPORTATION (0.4%)
Union Pacific 344,000 21,543,000
UTILITIES -- ELECTRIC (3.7%)
Baltimore Gas &
Electric 500,000 13,875,000
Dominion Resources 600,000 22,725,000
DTE Energy 700,000 21,306,250
Entergy 1,000,000 26,062,500
GPU 825,000 29,596,875
Northern States
Power 550,000 27,362,500
Southern Co 1,100,000 24,818,750
Union Electric 400,000 15,375,000
Total 181,121,875
UTILITIES -- TELEPHONE (3.8%)
Ameritech 600,000 39,900,000
Bell Atlantic 370,000 29,761,875
BellSouth 950,000 43,937,500
GTE 875,000 39,703,125
SBC Communications 480,000 29,460,000
Total 182,762,500
</TABLE>
<TABLE>
<CAPTION>
ISSUER SHARES VALUE(A)
<S> <C> <C>
FOREIGN (9.6%)(H)
Anglian Water 1,050,000 $ 13,853,872
B.A.T. Inds 3,750,000(b) 32,824,211
British Petroleum
ADR 525,000 47,676,562
BTR 7,000,000 28,379,134
Gallaher Group ADR 750,000(b) 14,390,625
Grand Metropolitan 1,500,000 14,314,499
Natl Westminster
Bank 2,150,000 32,457,079
Nestle 15,000 20,896,651
Rank Group 3,250,000 19,148,464
Royal & Sun Alliance
Insurance Group 3,000,000 28,459,740
Royal Dutch
Petroleum 525,000 29,137,500
Royal PTT Nederland
ADR 750,000 29,296,875
Safeway 3,750,000 24,331,020
Severn Trent Water 724,864 10,744,135
Tele Danmark ADR 1,050,000 28,021,875
Tenneco 600,000 28,725,000
Thames Water 1,473,893 20,741,654
Tomkins 7,194,444 40,532,892
Total 463,931,788
TOTAL COMMON STOCKS
(Cost:
$2,041,916,072) $2,610,485,990
PREFERRED STOCKS (--%)
ISSUER SHARES VALUE(A)
Virginia-American
Water
5.05% 2,000(i) $ 180,160
Western Resources
4.25% 10,000 611,500
TOTAL PREFERRED STOCKS
(Cost: $1,200,000) $ 791,660
</TABLE>
See accompanying notes to investments in securities.
34
<PAGE> 191
<TABLE>
<CAPTION>
BONDS (32.6%)
<CAPTION>
COUPON MATURITY PRINCIPAL
ISSUER RATE YEAR AMOUNT VALUE(A)
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (9.6%)
U.S. Treasury 5.875% 1999-02 $50,000,000 $ 49,891,500
6.25 2000 30,000,000(c) 30,291,600
6.50 2002 25,000,000 25,479,250
6.625 2001 25,000,000 25,551,000
6.75 2000 15,000,000 15,314,400
6.875 2000 20,000,000 20,465,600
7.125 1999 62,650,000 64,193,696
7.50 2001 50,000,000 52,716,500
7.75 2000 25,000,000 26,013,500
8.125 2019 60,000,000 71,368,800
Govt Trust Certificates Israel 9.25 2001 8,378,308 8,814,986
Overseas Private Investment 6.99 2009 17,500,000 17,981,250
Resolution Funding Corp. 8.125 2019 50,000,000 58,919,000
Total 467,001,082
MORTGAGE-BACKED SECURITIES (8.3%)
Collateralized Mtge Obligation
Trust 9.95 2014 4,038,490 4,372,473
Federal Home Loan Mtge Corp 5.50 2009 4,782,364 4,626,363
6.75 2008 2,112,409 2,144,983
6.50 2007-11 41,402,397 41,249,718
7.00 2003 6,067,119 6,158,914
8.00 2024 7,637,348 7,922,984
8.50 2026 11,659,237 12,199,643
Collateralized Mtge
Obligation 7.50 2003 7,800,000 7,985,952
8.50 2022 7,000,000 7,645,470
Inverse Floater 3.77 1997 3,529,545(e) 3,394,929
Trust Series Z 6.50 2023 22,057,763(f) 19,964,907
8.25 2024 6,618,107(f) 7,090,375
Federal Natl Mtge Assn 5.50 2009 7,069,615 6,841,196
6.50 2023-24 29,591,641 29,044,943
7.00 2011 23,074,106 23,312,000
7.40 2004 33,750,000 35,798,962
7.50 2002-25 23,138,545 23,593,641
8.50 2025-26 12,161,455 12,713,829
9.00 2024 6,935,834 7,461,085
Collateralized Mtge
Obligation 4.50 2007 11,900,000 10,644,550
5.00 2024 6,696,552 6,369,158
7.50 2014 1,856,012 1,913,901
Trust Series Z 6.00 2024 7,433,038(f) 6,207,256
6.50 2023 18,311,530(f) 16,128,727
7.00 2016-22 40,114,967(f) 39,293,215
7.50 2014 8,991,662(f) 9,175,372
8.00 2006-20 21,773,134(f) 22,907,988
Govt Natl Mtge Assn 6.50 2027 24,876,295 25,295,957
Total 401,458,491
AEROSPACE & DEFENSE (0.2%)
United Technologies 8.875 2019 9,500,000 11,317,920
AUTOMOTIVE & RELATED (0.3%)
Ford Motor Credit Corp 6.55 2001 13,000,000 13,108,290
</TABLE>
See accompanying notes to investments in securities.
35
<PAGE> 192
INVESTMENTS IN SECURITIES
Balanced Portfolio (Percentages represent value of
Sept. 30, 1997 investments compared to net assets)
<TABLE>
<CAPTION>
BONDS (CONTINUED)
COUPON MATURITY PRINCIPAL
ISSUER RATE YEAR AMOUNT VALUE(A)
<S> <C> <C> <C> <C> <C>
BANKS AND SAVINGS & LOANS
(1.6%)
Asian Development Bank 9.125% 2000 $17,700,000 $ 19,066,263
BankAmerica 7.70 2026 10,000,000(g) 9,929,100
First Bank System 6.875 2007 5,750,000 5,780,475
Interamer Development Bank
Euro 9.50 2000 5,000,000 5,381,250
Mellon Capital 7.72 2026 3,850,000 3,844,918
Morgan (JP) 4.00 2012 15,000,000(k) 14,449,500
Union Planters Trust 8.20 2026 10,000,000 10,199,900
U.S. Capital Trust A 8.41 2027 10,000,000(g) 10,452,100
Total 79,103,506
BEVERAGES & TOBACCO (0.1%)
Coca-Cola 7.375 2093 3,000,000 3,137,670
BUILDING MATERIALS & CONSTRUCTION
(0.1%)
Owens-Corning Fiberglass 9.35 2012 3,500,000 4,012,540
COMMUNICATIONS EQUIPMENT & SERVICES (0.4%)
BellSouth Telecommunications 6.50 2005 9,000,000(c) 9,004,230
7.00 1995 10,000,000 9,970,200
Total 18,974,430
COMPUTERS & OFFICE EQUIPMENT (0.1%)
IBM 6.375 2000 5,100,000 5,135,088
ELECTRONICS (0.1%)
Harris 10.375 2018 4,000,000 4,361,800
ENERGY (0.3%)
Occidental Petroleum 6.25 2000 6,500,000 6,496,880
Petronas 7.75 2015 10,000,000 10,153,600
Total 16,650,480
FINANCIAL SERVICES (1.1%)
Equitable IBM 7.33 2009 5,500,000 5,755,235
Associates 6.00 2000 6,000,000 5,978,220
Avco Financial Services 7.25 1999 6,500,000 6,645,600
Corporate Property Investors 7.18 2013 1,500,000(g) 1,476,435
Intl Lease Finance 5.99 1998 5,000,000 5,011,700
KFW Intl Finance 8.00 2010 6,750,000 7,555,950
Property Trust America REIT 7.50 2014 5,000,000 4,962,150
Salomon Brothers 6.75 2006 7,000,000 6,985,860
Standard Credit Card Trust 5.95 2004 8,550,000 8,370,108
Total 52,741,258
HEALTH CARE (0.2%)
Lilly (Eli) 6.77 2036 5,000,000 4,898,900
Kaiser Foundation 9.55 2005 6,000,000 7,031,280
Total 11,930,180
HOUSEHOLD PRODUCTS (0.1%)
Procter & Gamble 8.00 2024 3,000,000 3,429,270
</TABLE>
See accompanying notes to investments in securities.
36
<PAGE> 193
<TABLE>
<CAPTION>
BONDS (CONTINUED)
COUPON MATURITY PRINCIPAL
ISSUER RATE YEAR AMOUNT VALUE(A)
<S> <C> <C> <C> <C>
INSURANCE (0.9%)
American United Life 7.75% 2026 $ 4,000,000(i) $ 3,936,800
Nationwide Mutual Insurance 7.50 2023 11,500,000(g) 11,432,840
Nationwide Trust 9.875 2025 15,500,000(g) 17,674,030
Principal Mutual 8.00 2044 7,150,000(g) 7,410,117
SunAmerica 8.125 2023 5,150,000 5,544,232
Total 45,998,019
PAPER & PACKAGING (0.4%)
Crown Cork & Seal 8.00 2023 6,000,000 6,125,040
Intl Paper 5.125 2012 13,400,000 11,176,940
Total 17,301,980
RETAIL (0.3%)
Wal-Mart Stores 7.00 2006 14,014,294(g) 14,279,444
TRANSPORTATION (0.3%)
Burlington Northern Santa Fe 7.00 2025 10,200,000 9,929,700
Canadian Natl Railway 7.625 2023 6,000,000 6,118,500
Total 16,048,200
UTILITIES -- ELECTRIC (1.1%)
Wisconsin Electric Power 7.75 2023 5,500,000 5,724,180
Arizona Public Service 8.00 2015 5,400,000 5,781,780
China Light & Power 7.50 2006 7,000,000 7,258,090
Pacific Gas & Electric 8.25 2022 4,600,000 4,846,376
Public Service Electric & Gas 6.75 2016 13,000,000 12,771,070
Texas Utilities Electric 8.175 2037 10,000,000 10,232,500
Wisconsin Electric Power 6.875 2095 8,000,000 7,606,480
Total 54,220,476
UTILITIES -- TELEPHONE (1.3%)
Bell Telephone Pennsylvania 7.375 2033 5,000,000 4,953,100
GTE 9.375 2000 4,600,000 4,992,150
GTE 8.75 2021 5,000,000 5,847,750
Illinois Bell Telephone 4.375 2003 4,600,000 4,176,202
New York Telephone 4.875 2006 13,000,000 11,651,380
Pacific Bell Telephone 6.625 2034 6,100,000 5,662,813
7.375 2043 7,500,000 7,523,325
U S WEST 6.625 2005 7,000,000 7,057,610
Worldcom 7.75 2007 10,000,000 10,549,200
Total 62,413,530
MISCELLANEOUS (0.2%)
M & I Capital Trust 7.65 2026 10,000,000 9,940,600
MUNICIPAL BONDS (0.5%)
Los Angeles County Pension
Obligation Taxable Revenue
Bonds Series 1994C Zero
Coupon (MBIA Insured) 7.05 2008 9,440,000(d,l) 4,557,443
Los Angeles County Pension
Obligation Taxable Revenue
Bonds Series 1995D
(MBIA Insured) 6.97 2008 10,500,000(l) 10,713,255
Orange County Pension
Obligation Taxable Revenue
Bonds 7.31 2009 5,000,000 5,231,800
Yale University 7.375 2096 4,000,000 4,160,440
Total 24,662,938
</TABLE>
See accompanying notes to investments in securities.
37
<PAGE> 194
Investments in securities
Balanced Portfolio (Percentages represent value of
Sept. 30, 1997 investments compared to net assets)
<TABLE>
<CAPTION>
BONDS (CONTINUED)
COUPON MATURITY PRINCIPAL
ISSUER RATE YEAR AMOUNT VALUE(A)
<S> <C> <C> <C> <C>
FOREIGN (5.1%)(H)
ABN Amro Bank
(U.S. Dollar) 7.125% 2093 $ 7,000,000 $ 6,952,890
American General Institute
(U.S. Dollar) 7.57 2045 15,000,000(g) 14,639,700
Bat-Crave-800
(U.S. Dollar) 6.68 2000 7,000,000(g) 7,026,180
Belo (A.H.)
(U.S. Dollar) 7.125 2007 15,000,000 15,328,500
Cleveland Electric/Toledo
Edison
(U.S. Dollar) 7.19 2000 5,000,000(g) 5,052,250
(U.S. Dollar) 7.67 2004 10,000,000 10,288,800
CSX
(U.S. Dollar) 7.25 2027 10,000,000(g) 10,497,200
Dao Heng Bank
(U.S. Dollar) 7.75 2007 10,000,000(g) 10,090,400
EES Coke Battery
(U.S. Dollar) 7.125 2002 9,050,000(g) 9,099,775
Global Marine
(U.S. Dollar) 7.125 2007 10,000,000(g) 10,158,700
Govt of Poland PDI Euro
(U.S. Dollar) 4.00 2014 15,000,000 13,143,750
Grand Metropolitan
(U.S. Dollar) CV 6.50 2000 20,000,000(g) 27,750,000
Hyundai Semiconductor
(U.S. Dollar) 8.25 2004 10,000,000(g) 10,211,200
Israel Electric
(U.S. Dollar) 7.25 2006 10,000,000 10,131,500
Railcar Leasing
(U.S. Dollar) 7.125 2013 15,000,000(g) 15,415,950
Ras Laffan
(U.S. Dollar) 8.29 2014 10,000,000(g) 10,713,100
Republic of Slovenia
(U.S. Dollar) 7.00 2001 7,200,000(g) 7,341,264
Safeco Capital Trust
(U.S. Dollar) 8.07 2037 10,000,000(g) 10,181,200
Swiss Bank
(U.S. Dollar) 7.50 2025 4,700,000 4,872,208
(U.S. Dollar) 7.75 2026 11,000,000 11,713,570
U.S.A. Waste Services
(U.S. Dollar) 7.125 2007 11,000,000 11,168,520
Washington Mutual Capital
(U.S. Dollar) 8.375 2027 5,800,000(g) 6,071,440
Zurich Capital Trust
(U.S. Dollar) 8.38 2037 7,500,000(g) 8,035,575
Total 245,883,672
TOTAL BONDS
(Cost: $1,513,425,063) $1,583,110,864
</TABLE>
<TABLE>
<CAPTION>
OPTION PURCHASED (0.2%)
NUMBER OF EXERCISE EXPIRATION
ISSUER CONTRACTS PRICE DATE VALUE(A)
<S> <C> <C> <C> <C>
PUT
S&P 500 6,000 $900 Dec. 1997 $11,625,000
TOTAL OPTION PURCHASED
(Cost: $16,615,013) $11,625,000
</TABLE>
See accompanying notes to investments in securities.
38
<PAGE> 195
<TABLE>
<CAPTION>
Short-term securities (14.4%)
ANNUALIZED
YIELD ON AMOUNT
DATE OF PAYABLE AT
ISSUER PURCHASE MATURITY VALUE(A)
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY (--%)
Federal Home Loan Mtge Corp Disc Nt
10-14-97 5.42% $ 1,400,000 $ 1,397,270
COMMERCIAL PAPER (14.4%)
ABB Treasury Center (USA)
10-07-97 5.55 17,100,000(j) 17,083,684
ABN Amro
10-16-97 5.92 12,400,000 12,370,303
A.I. Credit
10-01-97 5.53 6,700,000 6,700,000
American General Finance
10-31-97 5.54 10,000,000 9,954,083
Associates Corp North America
10-14-97 5.54 11,500,000 11,477,118
10-21-97 5.54 5,600,000 5,582,858
AT&T
10-27-97 5.54 12,600,000 12,549,859
Avco Financial Services
10-09-97 5.55 19,500,000 19,471,481
10-14-97 5.65 10,000,000 9,976,744
11-25-97 5.58 10,500,000 10,408,180
Barclays US Funding
10-28-97 5.53 15,000,000 14,938,125
Beneficial
10-10-97 5.53 4,800,000 4,793,400
BHP Finance (USA)
10-23-97 5.54 4,900,000 4,883,471
10-24-97 5.54 9,700,000 9,665,791
BOC Group
10-09-97 5.53 4,900,000(j) 4,894,000
CAFCO
11-05-97 5.56 7,900,000(j) 7,857,527
11-13-97 5.57 3,800,000(j) 3,774,945
11-19-97 5.56 8,200,000(j) 8,138,391
Cargill
10-01-97 5.52 5,100,000 5,100,000
10-14-97 5.66 15,000,000 14,966,785
Ciesco LP
10-27-97 5.55 8,300,000 8,266,851
CIT Group Holdings
10-29-97 5.54 10,000,000 9,957,144
10-29-97 5.55 19,300,000 19,217,289
Commerzbank U.S. Finance
10-28-97 5.55 10,000,000 9,958,525
CPC Intl
10-27-97 5.55 9,900,000(j) 9,856,521
11-19-97 5.57 8,700,000(j) 8,632,461
Deutsche Finance
10-29-97 5.53 8,600,000 8,563,211
Fleet Funding
10-22-97 5.54 3,100,000(j) 3,090,036
10-31-97 5.55 11,131,000(j) 11,079,797
Ford Motor Credit
10-06-97 5.53 15,000,000 14,988,521
10-22-97 5.53 11,100,000 11,064,323
10-30-97 5.54 10,000,000 9,953,794
Gannett
10-03-97 5.51 10,100,000(j) 10,096,925
10-15-97 5.52 4,600,000(j) 4,590,197
11-06-97 5.54 3,700,000(j) 3,679,650
General Electric Capital
10-21-97 5.54 15,900,000 15,851,328
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED
YIELD ON AMOUNT
DATE OF PAYABLE AT
ISSUER PURCHASE MATURITY VALUE(A)
<S> <C> <C> <C>
Goldman Sachs Group
10-24-97 5.53% $16,100,000 $ 16,043,324
10-24-97 5.55 6,400,000 6,377,388
11-14-97 5.55 12,100,000 12,018,513
11-25-97 5.56 4,500,000 4,462,119
Household Finance
10-22-97 5.54 15,000,000 14,951,787
Kredietbank North America Finance
10-08-97 5.52 11,100,000 11,088,129
10-08-97 5.53 10,800,000 10,788,429
Lincoln Natl
10-02-97 5.55 4,200,000(j) 4,199,231
May Department Stores
10-28-97 5.55 5,100,000 5,077,708
MCI Communications
11-20-97 5.70 8,200,000(j) 8,135,117
Metlife Funding
10-08-97 5.54 8,800,000 8,789,948
10-17-97 5.55 13,300,000 13,265,019
10-24-97 5.54 9,424,000 9,390,765
Morgan Stanley Group
10-15-97 5.56 10,000,000 9,976,851
10-20-97 5.54 8,000,000 7,976,778
10-21-97 5.56 5,700,000 5,682,520
Motorola
10-23-97 5.52 7,000,000 6,976,472
Natl Australia Funding (Delaware)
10-07-97 5.52 12,000,000 11,989,020
10-10-97 5.52 10,100,000 10,086,113
11-03-97 5.57 20,000,000 19,893,257
New Center Asset Trust
10-17-97 5.54 13,400,000 13,367,185
Paccar Financial
10-07-97 5.52 4,850,000 4,845,554
10-21-97 5.53 11,100,000 11,066,022
10-27-97 5.54 3,200,000 3,187,243
Reed Elsevier
11-03-97 5.54 10,000,000(j) 9,949,583
11-18-97 5.56 5,300,000(j) 5,260,992
SBC Communications
10-23-97 5.55 10,000,000(j) 9,966,389
Societe Generale North America
10-07-97 5.53 28,900,000 28,873,460
Sysco
11-06-97 5.55 2,100,000(j) 2,088,408
UBS Finance (Delaware)
10-06-97 5.52 15,000,000 14,988,542
10-16-97 5.53 6,400,000 6,385,307
USAA Capital
10-01-97 5.64 12,200,000 12,200,000
10-06-97 5.53 8,100,000 8,093,801
10-22-97 5.53 5,900,000 5,881,036
12-02-97 5.58 12,000,000 11,881,350
Total 698,636,678
TOTAL SHORT-TERM SECURITIES
(Cost: $700,076,472) $ 700,033,948
TOTAL INVESTMENT IN SECURITIES
(Cost: $4,273,232,620)(m) $4,906,047,462
==============
</TABLE>
See accompanying notes to investments in securities.
39
<PAGE> 196
Investments in securities
Balanced Portfolio
Sept. 30, 1997
NOTES TO INVESTMENTS IN SECURITIES
(A) Securities are valued by procedures described in
Note 1 to the financial statements.
(B) Non-income producing.
(C) Security is partially or fully on loan. See Note
5 to the financial statements.
(D) For zero coupon bonds, the interest rate disclosed
represents the annualized effective yield on the date
of acquisition.
(E) Inverse floaters represent securities that pay
interest at a rate that increases (decreases) in the
same magnitude as, or in a multiple of, a decline
(increase) in the LIBOR (London InterBank Offering
Rate) Index. Interest rate disclosed is the rate in
effect on Sept. 30, 1997.
(F) This security is a collateralized mortgage
obligation that pays no interest or principal during
its initial accrual period until payment of previous
series within the trust have been paid off. Interest
is accrued at an effective yield; similar to a zero
coupon bond.
(G) Represents a security sold under Rule 144A, which
is exempt from registration under the Securities Act
of 1933, as amended. This security has been
determined to be liquid under guidelines established
by the board.
(H) Foreign security values are stated in U.S.
dollars. For debt securities, principal amounts are
denominated in the currency indicated.
(I) Identifies issues considered to be illiquid (see
Note 1 to the financial statements). Information
concerning such security holdings at Sept. 30, 1997,
is as follows:
<TABLE>
<CAPTION>
ACQUISITION
SECURITY DATE COST
-------------------------------------------------------------
<S> <C> <C>
American United Life* 02/13/96 $4,000,000
7.75% 2026
Virginia-American Water 07/13/56 220,000
5.05% Cm
</TABLE>
* Represents a security sold under Rule 144A, which is
exempt from registration under the Securities Act of
1933, as amended.
(J) Commercial paper sold within terms of a private
placement memorandum, exempt from registration under
Section 4(2) of the Securities Act of 1933, as
amended, and may be sold only to dealers in that
program or other "accredited investors." This
security has been determined to be liquid under
guidelines established by the board.
(K) Interest rate varies to reflect current market
conditions, rate shown is the effective rate on
Sept. 30, 1997.
(L) The following abbreviation is used in portfolio
descriptions to identify the insurer of the issue:
MBIA--Municipal Bond Investors Assurance
(M) At Sept. 30, 1997, the cost of securities for
federal income tax purposes was $4,268,721,986 and
the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation................ $662,128,842
Unrealized depreciation................ (24,803,366)
-----------------------------------------------------
Net unrealized appreciation............ $637,325,476
-----------------------------------------------------
40
<PAGE> 197
Independent auditors' report
The board and shareholders
IDS Investment Series, Inc.
We have audited the accompanying statement of assets and liabilities of
IDS Diversified Equity Income Fund (a series of IDS Investment Series,
Inc.) as of September 30, 1997, and the related statement of operations
for the year then ended, the statements of changes in net assets for each
of the years in the two-year period then ended and the financial
highlights for each of the years in the six-year period ended September
30, 1997, and for the period from October 15, 1990 (commencement of
operations), to September 30, 1991. These financial statements and the
financial highlights are the responsibility of fund management. Our
responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IDS Diversified Equity
Income Fund at September 30, 1997, and the results of its operations,
changes in its net assets and the financial highlights for the periods
stated in the first paragraph above, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 7, 1997
<PAGE> 198
Financial statements
Statement of assets and liabilities
IDS Diversified Equity Income Fund
Sept. 30, 1997
<TABLE>
<CAPTION>
Assets
<S> <C>
Investment in Equity Income Portfolio (Note 1) $2,219,724,700
--------------
Total assets 2,219,724,700
--------------
Liabilities
Dividends payable to shareholders 1,358,075
Accrued distribution fee 7,142
Accrued service fee 12,191
Accrued transfer agency fee 834
Accrued administrative services fee 1,993
Other accrued expenses 264,702
--------------
Total liabilities 1,644,937
--------------
Net assets applicable to outstanding capital stock $2,218,079,763
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 2,134,077
Additional paid-in capital 1,680,504,972
Undistributed net investment income 1,899,134
Accumulated net realized gain (loss) 207,225,172
Unrealized appreciation (depreciation) on investments and on translation
of assets and liabilities in foreign currencies 326,316.408
--------------
Total-- representing net assets applicable to outstanding capital stock $2,218,079,763
==============
Net assets applicable to outstanding shares: Class A $1,789,438,196
Class B $ 349,858,844
Class Y $ 78,782,723
Net asset value per share of outstanding capital stock: Class A shares 172,169,566 $ 10.39
Class B shares 33,662,590 $ 10.39
Class Y shares 7,575,548 $ 10.40
</TABLE>
See accompanying notes to financial statements.
<PAGE> 199
Statement of operations
IDS Diversified Equity Income Fund
Year ended Sept. 30, 1997
<TABLE>
<CAPTION>
Investment income:
<S> <C>
Dividends $ 56,615,321
Interest 24,438,194
Less: Foreign taxes withheld (235,252)
-------------
Total income 80,818,263
-------------
Expenses (Note 2):
Expenses allocated from Equity Income Portfolio 9,160,467
Distribution fee-- Class B 1,677,884
Transfer agency fee 2,311,423
Incremental transfer agency fee-- Class B 25,785
Service fee
Class A 2,627,198
Class B 390,225
Class Y 25,006
Administrative services fees and expenses 614,714
Compensation of board members 9,522
Compensation of officers 2,116
Postage 175,578
Registration fees 349,492
Reports to shareholders 66,607
Audit fees 7,250
Other 7,918
-------------
Total expenses 17,451,185
Earnings credits on cash balances (Note 2) (112,428)
-------------
Total net expenses 17,338,757
-------------
Investment income (loss) -- net 63,479,506
-------------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions 212,200,299
Foreign currency transactions (1,394,204)
-------------
Net realized gain (loss) on investments 210,806,095
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 167,609,218
-------------
Net gain (loss) on investments and foreign currencies 378,415,313
-------------
Net increase (decrease) in net assets resulting from operations $ 441,894,819
=============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 200
Financial statements
Statements of changes in net assets
IDS Diversified Equity Income Fund
Year ended Sept. 30,
<TABLE>
<CAPTION>
Operations and distributions 1997 1996
<S> <C> <C>
Investment income (loss)-- net $ 63,479,506 $ 40,899,762
Net realized gain (loss) on investments 210,806,095 121,028,665
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 167,609,218 41,610,005
-------------- --------------
Net increase (decrease) in net assets resulting from operations 441,894,819 203,538,432
-------------- --------------
Distributions to shareholders from:
Net investment income
Class A (52,847,821) (37,093,606)
Class B (6,401,017) (1,766,252)
Class Y (1,926,320) (1,023,280)
Net realized gain
Class A (89,873,767) --
Class B (10,467,031) --
Class Y (2,712,936) --
-------------- --------------
Total distributions (164,228,892) (39,883,138)
-------------- --------------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 370,773,023 257,566,986
Class B shares 197,003,406 90,334,601
Class Y shares 45,868,611 14,137,057
Reinvestment of distributions at net asset value
Class A shares 137,604,537 34,511,320
Class B shares 16,532,448 1,659,754
Class Y shares 4,615,632 998,821
Payments for redemptions
Class A shares (243,648,909) (242,692,273)
Class B shares (Note 2) (25,827,767) (7,145,048)
Class Y shares (16,887,734) (7,846,192)
-------------- --------------
Increase (decrease) in net assets from capital share transactions 486,033,247 141,525,026
-------------- -------------
Total increase (decrease) in net assets 763,699,174 305,180,320
Net assets at beginning of year 1,454,380,589 1,149,200,269
-------------- --------------
Net assets at end of year $2,218,079,763 $1,454,380,589
============== ==============
Undistributed net investment income $ 1,899,134 $ 1,451,957
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 201
Notes to financial statements
IDS Diversified Equity Income Fund
1
Summary of
significant
accounting policies
IDS Diversified Equity Income Fund (a series of IDS Investment Series,
Inc.) is registered under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment company. IDS Investment
Series, Inc. has 10 billion authorized shares of capital stock that can be
allocated among the separate series as designated by the board. The Fund
offers Class A, Class B and Class Y shares. Class A shares are sold with a
front-end sales charge. Class B shares may be subject to a contingent
deferred sales charge and such shares automatically convert to Class A
shares during the ninth calendar year of ownership. Class Y shares have no
sales charge and are offered only to qualifying institutional investors.
All classes of shares have identical voting, dividend, liquidation and
other rights, and the same terms and conditions, except that the level of
distribution fee, transfer agency fee and service fee (class specific
expenses) differs among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on
investments are allocated to each class of shares based upon its relative
net assets.
Investment in Equity Income Portfolio
Effective May 13, 1996, the Fund began investing all of its assets in
Equity Income Portfolio (the Portfolio), a series of Growth and Income
Trust, an open-end investment company that has the same objectives as the
Fund. This was accomplished by transferring the Fund's assets to the
Portfolio in return for a proportionate ownership interest in the
Portfolio. Equity Income Portfolio seeks to provide shareholders with a
high level of current income and, as a secondary goal, steady growth of
capital by investing primarily in dividend-paying stocks.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at the value that is
equal to the Fund's proportionate ownership interest in the net assets of
the Portfolio. The percentage of the Portfolio owned by the Fund at Sept.
30, 1997 was 99.96%. Valuation of securities held by the Portfolio is
discussed in Note 1 of the Portfolio's "Notes to financial statements,"
which are included elsewhere in this report.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
<PAGE> 202
Federal taxes
Since the Fund's policy is to comply with all sections of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders, no provision for
income or excise taxes is required.
Net investment income (loss) and net realized gains (losses) allocated
from the Portfolio may differ for financial statement and tax purposes
primarily because of the deferral of losses on certain futures contracts,
the recognition of certain foreign currency gains (losses) as ordinary
income (loss) for tax purposes, and losses deferred due to "wash sale"
transactions. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing
of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or realized gains
(losses) were recorded by the Fund.
On the statements of assets and liabilities, as a result of permanent
book-to-tax differences, undistributed net investment income has been
decreased by $1,857,171 and accumulated net realized gain has been
increased by $1,857,171.
Dividends to shareholders
Dividends from net investment income, declared daily and paid each
calendar quarter, are reinvested in additional shares of the Fund at net
asset value or payable in cash. Capital gains, when available, are
distributed along with the last income dividend of the calendar year.
2
Expenses and
sales charges
In addition to the expenses allocated from the Portfolio, the Fund accrues
its own expenses as follows:
Effective March 20, 1995, the Fund entered into agreements with American
Express Financial Corporation (AEFC) for providing administrative services
and serving as transfer agent. Under its Administrative Services
Agreement, the Fund pays AEFC a fee for administration and accounting
services at a percentage of the Fund's average daily net assets in
reducing percentages from 0.04% to 0.02% annually. Additional
administrative service expenses paid by the Fund are office expenses,
consultants' fees and compensation of officers and employees. Under this
agreement, the Fund also pays taxes, audit and certain legal fees,
registration fees for shares, compensation of board members, corporate
filing fees, organizational expenses and any other expenses properly
payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, AEFC maintains shareholder
accounts and records. The Fund pays AEFC an annual fee per shareholder
account for this service as follows:
- Class A $15
- Class B $16
- Class Y $15
Also effective March 20, 1995, the Fund entered into agreements with
American Express Financial Advisors Inc. for distribution and shareholder
servicing-related services. Under a Plan and Agreement of Distribution,
the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's
<PAGE> 203
average daily net assets attributable to Class B shares for
distribution-related services.
Under a Shareholder Service Agreement, the Fund pays a fee for service
provided to shareholders by financial advisors and other servicing agents.
The fee is calculated at a rate of 0.175% of the Fund's average daily net
assets attributable to Class A and Class B shares and commencing on May 9,
1997, the fee is calculated at a rate of 0.10% of the Fund's average daily
net assets attributed to Class Y shares.
Sales charges received by American Express Financial Advisors Inc. for
distributing Fund shares were $6,550,223 for Class A and $157,783 for
Class B for the year ended Sept. 30, 1997.
During the year ended Sept. 30, 1997, the Fund's transfer agency fees were
reduced by $112,428 as a result of earnings credits from overnight cash
balances.
3
Capital share
transactions
Transactions in shares of capital stock for the years indicated are as
follows:
<TABLE>
<CAPTION>
Year ended Sept. 30, 1997
Class A Class B Class Y
<S> <C> <C> <C>
Sold 38,856,816 20,583,228 4,648,685
Issued for reinvested
distributions 14,804,550 1,770,123 493,943
Redeemed (25,579,148) (2,676,635) (1,724,974)
----------- ---------- ----------
Net increase (decrease) 28,082,218 19,676,716 3,417,654
Year ended Sept. 30, 1996
Class A Class B Class Y
Sold 30,304,664 10,622,976 1,658,239
Issued for reinvested
distributions 3,994,897 190,413 115,483
Redeemed (28,559,451) (834,647) (931,450)
----------- ---------- ----------
Net increase (decrease) 5,740,110 9,978,742 842,272
</TABLE>
4
Financial
highlights
"Financial highlights" showing per share data and selected information is
presented on pages 9 and 10 of the prospectus.
<PAGE> 204
Independent auditors' report
The board of trustees and unitholders
Growth and Income Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of Equity Income
Portfolio (a series of Growth and Income Trust) as of September 30, 1997,
the related statement of operations for the year then ended and the
statements of changes in net assets for the year ended September 30, 1997
and for the period from May 13, 1996 (commencement of operations) to
September 30, 1996. These financial statements are the responsibility of
portfolio management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by
the custodian. As to securities sold but not delivered, and securities on
loan, we request confirmations from brokers, and where replies are not
received, we carry out other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Equity Income
Portfolio at September 30, 1997, and the results of its operations and the
changes in its net assets for the periods stated in the first paragraph
above, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 7, 1997
<PAGE> 205
Financial statements
Statement of assets and liabilities
Equity Income Portfolio
Sept. 30, 1997
<TABLE>
<CAPTION>
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $1,897,012,312) $2,223,436,124
Dividends and accrued interest receivable 11,452,466
Receivable for investment securities sold 2,419,781
U.S. government securities held as collateral (Note 4) 5,581,115
--------------
Total assets 2,242,889,486
--------------
Liabilities
Disbursement in excess of cash on demand deposit (including bank overdraft of $580,682) 3,854,181
Payable upon return of securities loaned (Note 4) 18,396,315
Accrued investment management services fee 29,994
Other accrued expenses 24,232
--------------
Total liabilities 22,304,722
--------------
Net assets $2,220,584,764
==============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 206
<TABLE>
<CAPTION>
Financial statements
Statement of operations
Equity Income Portfolio
Year ended Sept. 30, 1997
Investment income
Income:
<S> <C>
Dividends $ 56,638,090
Interest 24,431,586
Less: Foreign taxes withheld (235,345)
--------------
Total income 80,834,331
--------------
Expenses (Note 2):
Investment management services fee 9,000,327
Compensation of board members 13,093
Custodian fees 96,721
Audit fees 21,750
Other 40,370
--------------
Total expenses 9,172,261
Earnings credits on cash balances (Note 2) (8,105)
--------------
Total net expenses 9,164,156
--------------
Investment income (loss) -- net 71,670,175
--------------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 212,265,522
Foreign currency transactions (1,394,798)
--------------
Net realized gain (loss) on investments 210,870,724
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 167,694,853
--------------
Net gain (loss) on investments and foreign currencies 378,565,577
--------------
Net increase (decrease) in net assets resulting from operations $ 450,235,752
==============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 207
Statements of changes in net assets
Equity Income Portfolio
<TABLE>
<CAPTION>
Operations
Year ended For the period from
Sept. 30, 1997 May 13, 1996* to
Sept. 30, 1996
<S> <C> <C>
Investment income (loss)-- net $ 71,670,175 $ 22,182,820
Net realized gain (loss) on investments 210,870,724 16,088,401
Net change in unrealized appreciation (depreciation ) on investments
and on translation of assets and liabilities in foreign currencies 167,694,853 40,690,701
-------------- --------------
Net increase (decrease) in net assets resulting from operations 450,235,752 78,961,922
Net contributions (withdrawals) from partners 314,194,640 1,377,167,450
-------------- --------------
Total increase (decrease) in net assets 764,430,392 1,456,129,372
Net assets at beginning of period (Note 1) 1,456,154,372 25,000
-------------- --------------
Net assets at end of period $2,220,584,764 $1,456,154,372
============== ==============
</TABLE>
*Commencement of operations.
See accompanying notes to financial statements.
<PAGE> 208
Notes to financial statements
Equity Income Portfolio
1
Summary of
significant
accounting policies
Equity Income Portfolio (the Portfolio) is a series of Growth and Income
Trust (the Trust) and is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment
company. Equity Income Portfolio seeks to provide a high level of current
income and, as a secondary goal, steady growth of capital by investing
primarily in dividend-paying stocks. The Declaration of Trust permits the
Trustees to issue non-transferable interests in the Portfolio. On April
15, 1996, American Express Financial Corporation (AEFC) contributed
$25,000 to the Portfolio. Operations did not formally commence until May
13, 1996, at which time, an existing fund transferred its assets to the
Portfolio in return for an ownership percentage of the Portfolio.
Significant accounting policies followed by the Portfolio are summarized
below:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could differ
from those estimates.
Valuation of securities
All securities are valued at the close of each business day. Securities
traded on national securities exchanges or included in national market
systems are valued at the last quoted sales price. Debt securities are
generally traded in the over-the counter market and are valued at a price
deemed best to reflect fair value as quoted by dealers who mark markets in
these securities or by an independent pricing service. Securities for
which market quotations are not readily available are valued at fair value
according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are
valued at the market price or approximate market value based on current
interest rates; those maturing in 60 days or less are valued at amortized
cost.
Option transactions
In order to produce incremental earnings, protect gains and facilitate
buying and selling of securities for investment purposes, the Portfolio
may buy and write options traded on any U.S. or foreign exchange or in the
over-the-counter market where the completion of the obligation is
dependent upon the credit standing of the other party. The Portfolio also
may buy and sell put and call options and write covered call options on
portfolio securities and may write cash-secured put options. The risk in
writing a call option is that the Portfolio gives up the opportunity of
profit if the market price of the security increases. The risk in writing
<PAGE> 209
a put option is that the Portfolio may incur a loss if the market price of
the security decreases and the option is exercised. The risk in buying an
option is that the Portfolio pays a premium whether or not the option is
exercised. The Portfolio also has the additional risk of not being able to
enter into a closing transaction if a liquid secondary market does not
exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The
Portfolio will realize a gain or loss upon expiration or closing of the
option transaction. When an option is exercised, the proceeds on sales for
a written call option, the purchase cost for a written put option or the
cost of a security for a purchased put or call option is adjusted by the
amount of premium received or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the market,
the Portfolio may buy and sell financial futures contracts traded on any
U.S. or foreign exchange. The Portfolio also may buy and write put and
call options on these futures contracts. Risks of entering into futures
contracts and related options include the possibility that there may be an
illiquid market and that a change in the value of the contract or option
may not correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to
deposit either cash or securities in an amount (initial margin) equal to a
certain percentage of the contract value. Subsequent payments (variation
margin) are made or received by the Portfolio each day. The variation
margin payments are equal to the daily changes in the contract value and
are recorded as unrealized gains and losses. The Portfolio recognizes a
realized gain or loss when the contract is closed or expires.
Foreign currency translations and foreign currency contracts
Securities and other assets and liabilities denominated in foreign
currencies are translated daily into U.S. dollars at the closing rate of
exchange. Foreign currency amounts related to the purchase or sale of
securities and income and expenses are translated at the exchange rate on
the transaction date. The effect of changes in foreign exchange rates on
realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net
realized gains or losses from foreign currency transactions may arise from
sales of foreign currency, closed forward contracts, exchange gains or
losses realized between the trade date and settlement dates on securities
transactions, and other translation gains or losses on dividends, interest
income and foreign withholding taxes.
The Portfolio may enter into forward foreign currency exchange contracts
for operational purposes and to protect against adverse exchange rate
fluctuation. The net U.S. dollar value of foreign currency underlying all
contractual commitments held by the Portfolio and the resulting unrealized
appreciation or depreciation are determined using foreign currency
exchange rates from an independent pricing service. The Portfolio is
subject to the credit risk that the other party will not complete the
obligations of the contracts.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership
and each investor in the Portfolio is treated as the owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. Accordingly, as a
"pass-through" entity, the Portfolio does not pay any income dividends or
capital gain distributions.
<PAGE> 210
Other
Security transactions are accounted for on the date securities are
purchased or sold. Dividend income is recognized on the ex-dividend date
and interest income including level-yield amortization of premium and
discount is accrued daily.
2
Fees and
expenses
The Trust, on behalf of the Portfolio, has entered into an Investment
Management Services Agreement with AEFC for managing its portfolio. Under
this agreement, AEFC determines which securities will be purchased, held
or sold. The management fee is a percentage of the Portfolio's average
daily net assets in reducing percentages from 0.53% to 0.4% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain
legal fees, fidelity bond premiums, registration fees for units, office
expenses, consultants' fees, compensation of trustees, corporate filing
fees, expenses incurred in connection with lending securities of the
Portfolio and any other expenses properly payable by the Trust or
Portfolio and approved by the board.
During the year ended Sept. 30, 1997, the Portfolio's custodian fees were
reduced by $8,105 as a result of earnings credits from overnight cash
balances.
Pursuant to a Placement Agency Agreement, American Express Financial
Advisors Inc. acts as placement agent of the units of the Trust.
3
Securities
transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $1,234,036,651 and $1,361,519,799,
respectively, for the year ended Sept. 30, 1997. For the same year, the
portfolio turnover rate was 81%. Realized gains and losses are determined
on an identified cost basis.
Brokerage commissions paid to brokers affiliated with AEFC were $125,796
for the year ended Sept. 30, 1997.
4
Lending of
portfolio
securities
At Sept. 30, 1997, securities valued at $18,396,315 were on loan to
brokers. For collateral, the Portfolio received $12,815,200 in cash and
U.S. government securities valued at $5,581,115. Income from securities
lending amounted to $738,484 for the year ended Sept. 30, 1997. The risks
to the Portfolio of securities lending are that the borrower may not
provide additional collateral when required or return the securities when
due.
<PAGE> 211
Investments in securities
Equity Income Portfolio (Percentages represent value of
Sept. 30, 1997 investments compared to net assets)
<TABLE>
<CAPTION>
Common stocks (58.2%)
Issuer Shares Value(a)
<S> <C> <C>
Automotive & related (1.7%)
Chrysler 505,000 $ 18,590,313
Ford Motor 420,000 19,005,000
Total 37,595,313
Banks and savings & loans (7.9%)
BankBoston 265,000 23,435,937
First Union 610,000 30,538,125
KeyCorp 410,000 26,086,250
Mellon Bank 345,000 18,888,750
Morgan (JP) 160,000 18,180,000
NationsBank 290,000(c) 17,943,750
Norwest 280,000 17,150,000
Washington Mutual 340,000 23,715,000
Total 175,937,812
Beverages & tobacco (2.4%)
Anheuser-Busch 480,000 21,660,000
Philip Morris 735,000 30,548,437
Total 52,208,437
Building materials & construction (1.1%)
Martin Marietta Materials 395,000 14,220,000
Weyerhaeuser 165,000 9,796,875
Total 24,016,875
Chemicals (0.5%)
Dow Chemical 120,000 10,882,500
Electronics (1.3%)
Thomas & Betts 545,000 29,770,625
Energy (4.1%)
Amoco 185,000 17,829,375
Atlantic Richfield 240,000 20,505,000
Chevron 190,000 15,805,625
Mobil 225,000 16,650,000
Texaco 320,000 19,660,000
Total 90,450,000
Financial services (0.6%)
Fannie Mae 300,000 14,100,000
Food (2.3%)
Heinz (HJ) 305,000 14,087,187
Quaker Oats 440,000 22,165,000
Sara Lee 300,000 15,450,000
Total 51,702,187
Health care (1.9%)
American Home Products 265,000 19,345,000
Baxter Intl 435,000 22,728,750
Total 42,073,750
Industrial equipment & services (0.7%)
</TABLE>
<PAGE> 212
<TABLE>
<S> <C> <C>
General Signal 350,000 15,137,500
Insurance (1.8%)
Lincoln Natl 200,000 13,925,000
SAFECO 470,000 24,910,000
Total 38,835,000
Media (1.9%)
Dun & Bradstreet 850,000 24,118,750
McGraw-Hill 265,000 17,937,188
Total 42,055,938
Paper & packaging (4.8%)
Intl Paper 195,000 10,737,188
Kimberly-Clark 400,000 19,575,000
Tenneco 480,000 22,980,000
Union Camp 380,000 23,441,250
Unisource Worldwide 1,615,000 30,685,000
Total 107,418,438
Real estate investment trust (5.4%)
Alexandria Real Estate
Equities 120,000 3,427,500
Duke Realty 300,000 6,843,750
Equity Residential 105,000 5,729,062
FelCor Suite Hotels 200,000 8,212,500
Gable Residential Trust 220,000 5,967,500
Innkeepers USA Trust 460,000 7,906,250
Kilroy Realty 170,000 4,590,000
LTC Properties 210,000 3,990,000
Merry Land & Investment 245,000 5,405,312
Mid-America Apartment
Communities 275,000 8,164,063
Oasis Residential 162,500 3,960,938
OMEGA Healthcare Investors 125,000 4,500,000
Patriot American
Hospitality 280,004 8,925,138
Prentiss Properties Trust 270,000 7,796,250
Reckson Associates Realty 220,000 5,857,500
RFS Hotel Investors 255,000 4,972,500
Security Capital Industrial
Trust 216,366 5,043,962
Simon DeBartolo Group 140,000 4,620,000
Storage Trust Realty 200,000 5,225,000
Storage USA 105,000 4,265,625
Sun Communities 140,000 5,022,500
Total 120,425,350
Retail (1.9%)
May Dept Stores 370,000 20,165,000
Penney (JC) 370,000 21,552,500
Total 41,717,500
Utilities -- electric (4.0%)
DPL 590,000 14,455,000
Duke Power 275,000 13,595,313
FPL Group 290,000 14,862,500
New Century Energies 385,000 16,001,562
Northern States Power 315,000 15,671,250
Southern Co. 665,000 15,004,063
Total 89,589,688
Utilities -- gas (1.3%)
Enron 735,000 28,297,500
</TABLE>
<PAGE> 213
<TABLE>
<S> <C> <C>
Utilities -- telephone (5.0%)
Ameritech 310,000 20,615,000
Bell Atlantic 510,040(c) 41,026,343
BellSouth 490,000 22,662,500
GTE 585,000 26,544,375
Total 110,848,218
Foreign (7.6%) (d)
British Petroleum ADR 270,000 24,519,375
BTR 4,900,000 19,865,394
EXEL 300,000 17,868,750
Imperial Chemical Inds 375,000(c) 24,796,875
Mid Ocean 540,000 34,222,500
Royal Dutch Petroleum 185,000 10,267,500
SmithKline Beecham ADR 220,000 10,752,500
Tomkins 4,770,000 26,873,779
Total 169,166,673
Total common stocks
(Cost: $986,242,054) $1,292,229,304
Preferred stocks (9.6%)
Issuer Shares Value(a)
AirTouch Communications
4% Cv 450,000(h)$ 13,950,000
6% Cv 500,000 16,281,250
AutoZone
5.50% Cv 715,100 19,472,173
Circuit City Stores
5.50% Cv 357,143(e,i) 13,303,577
ConAgra
4.50% Cv 325,000 19,703,125
Crown Cork & Seal
4.50% Cv 700,000 31,150,000
Gannett
4.50% Cv 200,000 19,038,000
Ikon Office Solutions
$5.04 Cv 475,000(c) 30,815,625
Intel
5% Cv 128,000(i) 20,930,560
Service Corp Intl
5% Cv 475,000(h) 15,318,750
SunAmerica
$3.18 Cv 300,000(i) 13,762,500
Total preferred stocks
(Cost: $196,815,952) $213,725,560
</TABLE>
<PAGE> 214
<TABLE>
<CAPTION>
Bonds (6.3%)
Issuer Coupon Maturity Principal Value (a)
rate year amount
U.S. government obligations (4.3%)
<S> <C> <C> <C> <C>
U.S. Treasury 8.125% 2019-21 $79,400,000 $ 94,669,172
Aerospace & defense (0.6%)
Salomon Brothers United Technologies
Cv 5.00 1998 15,356,625(f) 14,072,016
Chemicals (0.6%)
USA Waste Services
Cv 4.00 2002 12,000,000 13,170,000
Multi-industry conglomerates (0.8%)
Salomon Brothers Emerson Electric
Cv 5.00 1997 19,496,657(f) 18,786,089
Total bonds
(Cost: $133,328,312) $140,697,277
</TABLE>
See accompanying notes to investments in securities.
<PAGE> 215
<TABLE>
<CAPTION>
Options purchased (0.4%)
Issuer Number of Exercise Expiration Value (a)
contracts price date
<S> <C> <C> <C> <C>
Put
S&P 500 3,500 $900 Dec. 1997 $6,781,250
1,000 925 Dec. 1997 2,662,500
Total options purchased
(Cost: $13,251,765) $9,443,750
</TABLE>
<TABLE>
<CAPTION>
Short-term securities (25.5%)
Issuer Annualized Amount Value(a)
yield on payable at
date of maturity
purchase
<S> <C> <C> <C>
U.S. government agencies (0.3%)
Federal Home Loan Mtge Corp Disc Nt
10-14-97 5.42% $ 5,000,000 $ 4,990,250
Federal Natl Mtge Assn Disc Nt
10-08-97 5.48 2,000,000 1,997,869
Total 6,988,119
Commercial paper (24.4%)
American General Finance
10-20-97 5.55 6,800,000 6,780,225
10-30-97 5.54 8,700,000 8,661,384
11-04-97 5.55 15,200,000 15,120,901
Ameritech Capital Funding
10-28-97 5.54 6,900,000(g) 6,871,434
Associates Corp North America
10-02-97 5.55 10,000,000 9,998,049
10-14-97 5.54 10,000,000 9,980,103
Avco Financial Services
12-03-97 5.59 6,500,000 6,434,711
BBV Finance (Delaware)
10-30-97 5.55 7,300,000 7,267,480
Beneficial
11-10-97 5.55 10,000,000 9,938,778
BHP Finance
10-07-97 5.54 9,700,000 9,691,108
BOC Group
10-09-97 5.53 10,200,000(g)10,187,511
CAFCO
10-30-97 5.56 6,100,000(g) 6,072,777
Cargill Global
11-03-97 5.56 8,500,000(g) 8,454,752
Ciesco LP
10-10-97 5.55 10,000,000(g) 9,984,660
11-07-97 5.54 6,100,000 6,065,455
CIT Group Holdings
10-16-97 5.55 15,000,000 14,965,500
11-04-97 5.54 11,100,000 11,042,237
Commercial Credit
11-06-97 5.58 6,900,000 6,859,376
Commerzbank U.S. Finance
10-03-97 5.53 11,800,000 11,796,388
10-16-97 5.54 18,900,000 18,856,609
10-29-97 5.55 9,200,000 9,160,430
</TABLE>
<PAGE> 216
<TABLE>
<S> <C> <C> <C>
Fleet Funding
10-02-97 5.55 15,100,000(g)15,097,689
Gannett
10-14-97 5.56% 9,800,000(g) 9,780,501
Gateway Fuel
10-27-97 5.54 7,000,000 6,970,960
General Electric
11-13-97 5.57 10,900,000 10,828,002
Goldman Sachs Group
10-03-97 5.52 8,800,000 8,797,306
10-24-97 5.55 8,600,000 8,569,616
11-13-97 5.55 5,700,000 5,662,486
Household Finance
10-30-97 5.56 6,300,000 6,271,986
Kredietbank North America Finance
10-08-97 5.53 10,000,000 9,989,286
11-25-97 5.57 7,000,000 6,938,787
May Dept Stores
11-10-97 5.56 8,200,000 8,149,798
Metlife Funding
10-16-97 5.53 12,868,000 12,838,511
10-17-97 5.55 11,184,000 11,154,585
Morgan Stanley Group
10-14-97 5.54 17,600,000 17,564,981
Natl Australia Funding (Delaware)
10-10-97 5.52 11,500,000 11,484,187
NBD Bank Canada
10-15-97 5.53 14,700,000 14,668,501
10-24-97 5.56 7,400,000 7,370,739
Nestle Capital
10-06-97 5.53 4,400,000 4,396,633
New Center Asset Trust
10-21-97 5.54 10,700,000 10,667,246
10-23-97 5.53 15,000,000 14,949,583
Paccar Financial
10-01-97 5.52 3,500,000 3,500,000
Pacific Mutual
10-02-97 5.53 10,000,000 9,998,469
Reed Elsevier
11-07-97 5.56 7,100,000(g) 9,937,992
St. Paul Companies
10-08-97 5.54 13,900,000(g)13,885,108
SBC Communications Capital
10-23-97 5.55 8,200,000(g) 8,172,439
10-28-97 5.55 5,000,000(g) 4,976,516
11-03-97 5.56 8,000,000(g) 7,955,466
12-12-97 5.60 7,000,000(g) 6,919,801
Societe Generale North America
10-15-97 5.54% 18,000,000 17,961,430
10-16-97 5.54 10,000,000 9,977,042
Southern California Gas
10-06-97 5.53 6,600,000 6,594,949
Toyota Motor Credit
10-21-97 5.55 2,900,000 2,891,123
USAA Capital
10-22-97 5.55 5,400,000 5,382,643
UBS Finance (Delaware)
10-06-97 5.52 4,500,000 4,496,563
10-06-97 5.53 15,000,000 14,988,521
10-09-97 5.52 7,500,000 7,490,833
Total 541,470,146
Letters of credit (0.8%)
Bank of America-
AES Barber Point
</TABLE>
<PAGE> 217
<TABLE>
<S> <C> <C> <C>
10-24-97 5.54% $10,000,000 $ 9,964,797
Student Loan Mtge Assn-
Nebraska Higher Education
10-30-97 5.56 8,957,000 8,917,171
Total 18,881,968
Total short-term securities
(Cost: $567,374,229) 567,340,233
Total investments in securities
(Cost: $1,897,012,312) (j) $2,223,436,124
</TABLE>
See accompanying notes to investments in securities.
<PAGE> 218
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Security is partially or fully on loan. See Note 4 to the financial
statements.
(d) Foreign security values are stated in U.S. dollars.
(e) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security has
been determined to be liquid under guidelines established by the board.
(f) ELKS are equity-linked securities that are structured as an interest-bearing
debt security and linked to the common stock of another company. The terms of
ELKS differ from those of ordinary debt securities in that the principal amount
received at maturity is not fixed but is based on the price of the common stock
the ELK is linked to. The principal amount disclosed equals the current
estimated future value of the amount to be received upon maturity.
(g) Commercial paper sold within terms of a private placement memorandum, exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
and may be sold only to dealers in that program or other "accredited investors."
This security has been determined to be liquid under the guidelines established
by the board.
(h) PRIDES (Preferred Redeemable Increased Dividend Equity Securities) -- are
structured as convertible preferred securities. Investors receive an enhanced
yield but based upon a specific formula, potential appreciation is limited.
PRIDES pay dividends have voting rights, are noncallable for three years and
upon maturity, convert into shares of common stock.
(i) PERCS (Preferred-Equity Redeemable Cumulative Securities) -- are convertible
preferred securities. PERCS are like buying an underlying common stock and
selling a call option against the position.
(j) At Sept. 30, 1997, the cost of securities for federal income tax purposes
was $1,895,476,541 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................................$337,838,519
Unrealized depreciation..........................................(9,878,936)
----------
Net unrealized appreciation....................................$327,959,583
</TABLE>
<PAGE> 219
Part C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) FINANCIAL STATEMENTS:
List of financial statements filed as part of this Post-Effective
Amendment to the Registration Statement.
For IDS Mutual:
- Independent auditors' report dated Nov. 7, 1997.
- Statement of assets and liabilities, Sept. 30, 1997.
- Statement of operations, year ended Sept. 30, 1997.
- Statement of changes in net assets, for the
year ended Sept. 30, 1997 and Sept. 30, 1996.
- Notes to financial statements.
For Balanced Portfolio:
- Independent auditors' report dated Nov. 7, 1997.
- Statement of assets and liabilities, Sept. 30, 1997.
- Statement of operations, year ended Sept. 30, 1997.
- Statement of changes in net assets, for the year
ended Sept. 30, 1997 and period from
May 13, 1996 to Sept. 30, 1996.
- Notes to financial statements.
- Investments in securities, Sept. 30, 1997.
- Notes to investments in securities.
For IDS Diversified Equity
Income Fund:
- Independent auditors' report dated Nov. 7, 1997.
- Statement of assets and liabilities, Sept. 30, 1997.
- Statement of operations, year ended Sept. 30, 1997.
- Statements of changes in net assets, for the year
ended Sept. 30, 1997 and Sept. 30, 1996.
- Notes to financial statements.
For Equity Income Portfolio:
- Independent auditors' report dated Nov. 7, 1997.
- Statement of assets and liabilities, Sept. 30, 1997.
- Statement of operations, year ended
Sept. 30, 1997.
- Statement of changes in net assets, for the
year ended Sept. 30, 1997 and period from
May 13, 1996 to Sept. 30, 1996.
- Notes to financial statements.
- Investments in securities, Sept. 30, 1997.
- Notes to investments in securities.
<PAGE> 220
(b) EXHIBITS:
1. Copy of Articles of Incorporation amended
November 13, 1991, filed as Exhibit 1 to
Registrant's Post-Effective Amendment No. 87 to
Registration Statement No. 2-11328 is
incorporated herein by reference.
2. By-laws, as amended January 1O, 1996, filed
electronically as Exhibit 2 to Registrant's Post-
Effective Amendment No. 80 to Registration
Statement No. 2-11328 is incorporated herein by
reference.
3. Not Applicable.
4. Copy of IDS Mutual's stock certificate, filed
as Exhibit No. 3 to Registrant's Form N-1Q for
the calendar quarter ended September 30, 1976
is incorporated herein by reference.
5. Copy of Investment Management Services
Agreement between Registrant and American
Express Financial Corporation, dated March 20,
1995, filed electronically as Exhibit 5 to
Registrant's Post-Effective Amendment No. 97
to Registration Statement No. 2-11328 is
incorporated herein by reference. The
agreement was assumed by the Portfolio when the
Funds adopted the master/feeder structure.
6. Copy of Distribution Agreement between
Registrant and American Express Financial
Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 6 to Registrant's
Post-Effective Amendment No. 97 to Registration
Statement No. 2-11328 is incorporated herein
by reference.
7. All employees are eligible to participate in a profit
sharing plan. Entry into the plan is Jan. 1 or July 1.
The Registrant contributes each year an amount up to
15 percent of their annual salaries, the maximum
deductible amount permitted under Section 404(a) of the
Internal Revenue Code.
8(a). Copy of Custodian Agreement between Registrant
and American Express Trust Company, dated March
20, 1995, filed electronically as Exhibit 8(a)
to Registrant's Post-Effective Amendment No. 97 to
Registration Statement No 2-11328 is incorporated
herein by reference.
8(b). Copy of Custody Agreement between Morgan
Stanley Trust Company and IDS Bank & Trust,
dated May, 1993, is filed electronically as
Exhibit 8(b) to Registrant's Post-Effective
Amendment No. 95 to Registration Statement No.
2-11328 is incorporated herein by reference.
8(c). Copy of Addendum to the Custodian Agreement
between IDS Investment Series, Inc.,
American Express Trust Company and American
Express Financial Corporation dated May 13,
1996 filed electronically as Exhibit 8(c)
to Registrant's Post-Effective Amendment No. 97 to
Registration Statement No 2-11328 is incorporated
herein by reference.
9(a). Copy of Plan and Agreement of Merger between
IDS Mutual Minnesota, Inc. and IDS Mutual, Inc. dated
April 10, 1986, filed as Exhibit 9 to Post-
Effective Amendment No. 70 is incorporated herein
by reference.
9(b). Copy of Transfer Agency Agreement between
Registrant and American Express Financial
Corporation, dated March 20, 1995, filed
electronically as Exhibit 9(b)
to Registrant's Post-Effective Amendment No. 97 to
Registration Statement No 2-11328 is incorporated
herein by reference.
9(c). Copy of License Agreement between Registrant
and IDS Financial Corporation dated January 25,
1988 filed as Exhibit No. 9(d) to Registrant's
Post-Effective Amendment No. 80 to Registration
Statement No. 2-11328 is incorporated herein by
reference.
9(d). Copy of Shareholder Service Agreement between
Registrant and American Express Financial
Advisors Inc., dated March 20, 1995, filed
electronically as Exhibit 9(d)
to Registrant's Post-Effective Amendment No. 97 to
Registration Statement No 2-11328 is incorporated
herein by reference.
9(e). Copy of Administrative Service Agreement
between Registrant and American Express
Financial Corporation, dated March 20, 1995,
filed electronically as Exhibit 9(e)
to Registrant's Post-Effective Amendment No. 97 to
Registration Statement No 2-11328 is incorporated
herein by reference.
9(f). Copy of Agreement and Declaration of
Unitholders between IDS Investment Series, Inc.
on behalf of IDS Mutual and Strategist Growth
and Income Fund, Inc. on behalf of Strategist
Balanced Fund dated May 13, 1996, filed
electronically as Exhibit 9(f)
to Registrant's Post-Effective Amendment No. 97 to
Registration Statement No 2-11328 is incorporated
herein by reference.
9(g). Copy of Agreement and Declaration of
Unitholders between IDS Investment Series, Inc.
on behalf of IDS Diversified Equity Income Fund
and Strategist Growth and Income Fund, Inc. on
behalf of Strategist Equity Income Fund dated
May 13, 1996, filed electronically as Exhibit 9(g)
to Registrant's Post-Effective Amendment No. 97 to
Registration Statement No 2-11328 is incorporated
herein by reference.
9(h). Copy of Class Y Shareholder Service Agreement
between IDS Precious Metals Fund, Inc. and American
Express Financial Advisors Inc., dated May 9, 1997 filed
electronically on or about May 27, 1997 as Exhibit 9(e) to
IDS Precious Metals Fund, Inc.'s Amendment No. 30 to
Registration Statement No. 2-93745, is incorporated
herein by reference.
Registrant's Class Y Shareholder Service Agreement differs
from the one incorporated by reference only by the
fact that Registrant is one executing party.
10. Opinion and consent of counsel as to the
legality of the securities being registered is
filed electronically herewith.
11. Independent Auditors' Consent is filed
electronically herewith.
12. None.
13. Not Applicable.
14. Forms of Keogh, IRA and other retirement
plans, filed as Exhibits 14(a) through 14(n) to
IDS Growth Fund, Inc., Post-Effective Amendment
No. 34 to Registration Statement No. 2-38355
are incorporated herein by reference.
15. Copy of Plan and Agreement of Distribution
between Registrant and American Express
Financial Advisors Inc., dated March 20, 1995,
filed electronically as Exhibit 15 to Post-
Effective Amendment No. 97 to Registration
Statement No. 2-11328, is incorporated herein
by reference.
16(a). Schedule for computation of each performance
quotation provided in the Registration Statement
in response to Item 22 for IDS Mutual, filed
electronically as Exhibit 16(a) to Post-Effective
Amendment No. 88 to Registration No. 2-11328 is
incorporated herein by reference.
16(b). Schedule for computation of each performance
quotation provided in the Registration Statement in
response to Item 22 for IDS Diversified Equity Income
Fund, filed electronically as Exhibit 16(b) to
Post-Effective Amendment No. 88 to Registration
No. 2-11328 is incorporated herein by reference.
17. Financial Data Schedules are filed
electronically herewith.
18. Copy of plan pursuant to Rule 18f-3 under the
1940 Act filed electronically as Exhibit 18 to
Registrant's Post-Effective Amendment No. 95 to
Registration Statement No. 2-11328 is
incorporated herein by reference.
19(a). Directors' Power of Attorney
to sign Amendments to this Registration
Statement, dated January 8, 1997, is filed
electronically herewith.
<PAGE> 221
19(b). Officers' Power of Attorney, to sign
Amendments to this Registration
Statement, dated Nov. 1, 1995,
filed electronically as Exhibit 19(b)
to Registrant Post-Effective Amendment
No. 96 to Registration Statement No.
2-11328, is incorporated herein
by reference.
19(c). Trustees' Power of Attorney to sign Amendments
to this Registration Statement, dated January 8,
1997, is filed electronically herewith.
19(d). Officers' Power of Attorney to sign Amendments
to this Registration Statement, dated April 11,
1996, filed electronically as Exhibit 19(d)
to Registrant's Post-Effective Amendment
No. 97 to Registration Statement No. 2-11328
is incorporated herein by reference.
Item 25. Persons Controlled by or Under Common Control
with Registrant:
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Holders as of
Title of Class November 6, 1997
IDS Mutual
Common Stock
Class A 165,846
Class B 25,312
Class Y 157,209
IDS Diversified Equity
Income Common Stock
Class A 135,649
Class B 39,710
Class Y 8,525
Item 27. Indemnification
The Articles of Incorporation of the registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a
party, by reason of the fact that she or he is or was a director, officer,
employee or agent of the Fund, or is or was serving at the request of the Fund
as a director, officer, employee or agent of another company, partnership,
joint venture, trust or other enterprise, to any threatened, pending or
completed action, suit or proceeding, wherever brought, and the Fund may
purchase liability insurance and advance legal expenses, all to the fullest
extent permitted by the laws of the State of Minnesota, as now existing or
hereafter amended. The By-laws of the registrant provide that present or
former directors or officers of the Fund made or threatened to be made a party
to or involved (including as a witness) in an actual or threatened action,
suit or proceeding shall be indemnified by the Fund to the full extent
authorized by the Minnesota Business Corporation Act, all as more fully set
forth in the By-laws filed as an exhibit to this registration statement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the directors, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.
<PAGE>
PAGE 1
<PAGE>
Item 29(c). Not applicable.
Item 30. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of
the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE> 222
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, IDS Investment Series, Inc., certifies
that it meets the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis and State of Minnesota on the 25th day of November, 1997.
IDS INVESTMENT SERIES, INC.
<PAGE> 223
By Matthew N. Karstetter, Treasurer
By /s/ William R. Pearce**
William R. Pearce, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following persons in
the capacities indicated on the 25th day of November, 1997.
Signature Capacity
/s/ William R. Pearce* Chairman of the Board
William R. Pearce
/s/ John R. Thomas* Director
John R. Thomas
/s/ H. Brewster Atwater, Jr.* Director
H. Brewster Atwater, Jr.
/s/ Lynne V. Cheney* Director
Lynne V. Cheney
/s/ William H. Dudley* Director
William H. Dudley
/s/ David R. Hubers* Director
David R. Hubers
/s/ Heinz F. Hutter* Director
Heinz F. Hutter
/s/ Anne P. Jones* Director
Anne P. Jones
/s/ Alan K. Simpson* Director
Alan K. Simpson
/s/ Edson W. Spencer* Director
Edson W. Spencer
/s/ Wheelock Whitney* Director
Wheelock Whitney
/s/ C. Angus Wurtele* Director
C. Angus Wurtele
*Signed pursuant to Directors' Power of Attorney, dated January 8, 1997,
filed electronically herewith:
- -----------------
Leslie L. Ogg
<PAGE> 224
**Signed pursuant to Officers' Power of Attorney, dated November 1, 1995, filed
electronically as Exhibit 19(b) to Registrant's Post-Effective Amendment No. 96
to Registration Statement No. 2-11328, by:
____________________
Leslie L. Ogg
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, GROWTH AND INCOME TRUST consents to the filing of this
Amendment to the Registration Statement signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis and State
of Minnesota on the 25th November, 1997.
GROWTH AND INCOME TRUST
By
Matthew N. Karstetter
Treasurer
By /s/ William R. Pearce**
William R. Pearce, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in
the capacities indicated on the [day signed] day of November, 1997.
Signature Capacity
/s/ William R. Pearce* Chairman of the Board
William R. Pearce
/s/ John R. Thomas* Trustee
John R. Thomas
/s/ H. Brewster Atwater, Jr. Trustee
H. Brewster Atwater, Jr.
/s/ Lynne V. Cheney* Trustee
Lynne V. Cheney
/s/ William H. Dudley* Trustee
William H. Dudley
/s/ David R. Hubers* Trustee
David R. Hubers
/s/ Heinz F. Hutter* Trustee
Heinz F. Hutter
/s/ Anne P. Jones* Trustee
Anne P. Jones
/s/ Alan K. Simpson* Trustee
Alan K. Simpson
/s/ Edson W. Spencer Trustee
Edson W. Spencer
/s/ Wheelock Whitney Trustee
Wheelock Whitney
<PAGE> 225
/s/ C. Angus Wurtele* Trustee
C. Angus Wurtele
*Signed pursuant to Trustee Power of Attorney, dated
January 8, 1997, filed electronically herewith by:
_____________________________
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney, dated
April 11, 1996, filed electronically as Exhibit 19(d) to
Registrant's Post-Effective Amendment No. 97 to Registration
Statement No. 2-11328, by:
_____________________________
Leslie L. Ogg
CONTENTS OF THIS
POST-EFFECTIVE AMENDMENT NO. 98
TO REGISTRATION STATEMENT NO. 2-11328
This post-effective amendment comprises the following
papers and documents:
The facing sheet.
Cross reference sheet.
Part A:
IDS Mutual's prospectus.
IDS Diversified Equity Income Fund's prospectus.
Part B:
IDS Mutual's SAI.
IDS Diversified Equity Income Fund's SAI.
Financial statements
Part C:
Other information.
The signatures.
<PAGE> 226
EXHIBIT INDEX
10. Opinion and consent of counsel as to the
legality of the securities being registered is
filed electronically herewith.
11. Independent Auditors' Consent is filed
electronically herewith.
17. Financial Data Schedules are filed
electronically herewith.
19(a). Directors' Power of Attorney
to sign Amendments to this Registration
Statement, dated January 8, 1997, filed
electronically herewith.
<PAGE> 227
19(c). Trustees' Power of Attorney to sign Amendments
to this Registration Statement, dated January 8,
1997, is filed electronically herewith.
<PAGE> 1
Opinion of Counsel EXHIBIT 10
November 25, 1997
IDS Investment Series, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Gentlemen:
I have examined the Articles of Incorporation and the By-Laws of the Company
and all necessary certificates, permits, minute books, documents and records of
the Company, and the applicable statutes of the State of Minnesota, and it is
my opinion:
(a) That the Company is a corporation duly organized and existing under the
laws of the State of Minnesota with an authorized capital stock
of 10,000,000,000 shares, all of $.01 par value, that such shares may
be issued as full or fractional shares;
(b) That all such authorized shares are, under the laws of the State of
Minnesota, redeemable as provided in the Articles of
Incorporation of the Company and upon redemption shall have the status
of authorized shares and unissued shares;
(c) That the Company registered on November 29, 1992 an indefinite number of
shares pursuant to Rule 24f-2; and
(d) That shares which were sold at not less than their par value and in
accordance with applicable federal and state securities laws were
legally issued, fully paid and nonassessable.
I hereby consent that the foregoing opinion may be used in connection with this
Post-Effective Amendment.
Leslie L. Ogg
Attorney at Law
901 S. Marquette Ave, Suite 2810
Minneapolis, Minnesota 55402-3268
BOARD OF DIRECTORS SIGNATURE
<PAGE> 1
Independent auditors' consent
- -----------------------------------------------------------------
The board and shareholders IDS Investment Series, Inc.:
IDS Diversified Equity Income Fund
IDS Mutual
The board of trustees and unitholders Growth and Income Trust:
Equity Income Portfolio
Balanced Portfolio
We consent to the use of our reports incorporated herein by reference and to the
references to our Firm under the headings "Financial highlights" in Part A and
"INDEPENDENT AUDITORS" in Part B of the Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November , 1997
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER]5
[NAME] IDS MUTUAL FUND CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 4852365922
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4852365922
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 417833
[TOTAL-LIABILITIES] 417833
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3691777508
[SHARES-COMMON-STOCK] 212243846
[SHARES-COMMON-PRIOR] 204992732
[ACCUMULATED-NII-CURRENT] 10135000
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 515983124
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 634052457
[NET-ASSETS] 3251343237
[DIVIDEND-INCOME] 95315925
[INTEREST-INCOME] 117938232
[OTHER-INCOME] 0
[EXPENSES-NET] 36172339
[NET-INVESTMENT-INCOME] 177081818
[REALIZED-GAINS-CURRENT] 535098902
[APPREC-INCREASE-CURRENT] 270677545
[NET-CHANGE-FROM-OPS] 982858265
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (112647933)
[DISTRIBUTIONS-OF-GAINS] (168695556)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 16177572
[NUMBER-OF-SHARES-REDEEMED] 26678714
[SHARES-REINVESTED] 17752256
[NET-CHANGE-IN-ASSETS] 835053587
[ACCUMULATED-NII-PRIOR] 5692748
[ACCUMULATED-GAINS-PRIOR] 222006524
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 21959414
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 36483820
[AVERAGE-NET-ASSETS] 2998365965
[PER-SHARE-NAV-BEGIN] 13.51
[PER-SHARE-NII] .57
[PER-SHARE-GAIN-APPREC] 2.61
[PER-SHARE-DIVIDEND] (.53)
[PER-SHARE-DISTRIBUTIONS] (.84)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 15.32
[EXPENSE-RATIO] .83
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 2
[ARTICLE] 6
[SERIES]
[NUMBER]6
[NAME] IDS MUTUAL FUND CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 4852365922
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4852365922
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 417833
[TOTAL-LIABILITIES] 417833
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3691777508
[SHARES-COMMON-STOCK] 17282662
[SHARES-COMMON-PRIOR] 9892377
[ACCUMULATED-NII-CURRENT] 10135000
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 515983124
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 634052457
[NET-ASSETS] 263556984
[DIVIDEND-INCOME] 95315925
[INTEREST-INCOME] 117938232
[OTHER-INCOME] 0
[EXPENSES-NET] 36172339
[NET-INVESTMENT-INCOME] 177081818
[REALIZED-GAINS-CURRENT] 535098902
[APPREC-INCREASE-CURRENT] 270677545
[NET-CHANGE-FROM-OPS] 982858265
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (6407726)
[DISTRIBUTIONS-OF-GAINS] (9374819)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 8102822
[NUMBER-OF-SHARES-REDEEMED] 1825256
[SHARES-REINVESTED] 1112719
[NET-CHANGE-IN-ASSETS] 835053587
[ACCUMULATED-NII-PRIOR] 5692748
[ACCUMULATED-GAINS-PRIOR] 222006524
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 21959414
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 36483820
[AVERAGE-NET-ASSETS] 194265746
[PER-SHARE-NAV-BEGIN] 13.47
[PER-SHARE-NII] .46
[PER-SHARE-GAIN-APPREC] 2.59
[PER-SHARE-DIVIDEND] (.43)
[PER-SHARE-DISTRIBUTIONS] (.84)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 15.25
[EXPENSE-RATIO] 1.59
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 3
[ARTICLE] 6
[SERIES]
[NUMBER]7
[NAME] IDS MUTUAL FUND CLASS Y
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 4852365922
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4852365922
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 417833
[TOTAL-LIABILITIES] 417833
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3691777508
[SHARES-COMMON-STOCK] 87273907
[SHARES-COMMON-PRIOR] 82440491
[ACCUMULATED-NII-CURRENT] 10135000
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 515983124
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 634052457
[NET-ASSETS] 1337047868
[DIVIDEND-INCOME] 95315925
[INTEREST-INCOME] 117938232
[OTHER-INCOME] 0
[EXPENSES-NET] 36172339
[NET-INVESTMENT-INCOME] 177081818
[REALIZED-GAINS-CURRENT] 535098902
[APPREC-INCREASE-CURRENT] 270677545
[NET-CHANGE-FROM-OPS] 982858265
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (48077728)
[DISTRIBUTIONS-OF-GAINS] (68558106)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 26414352
[NUMBER-OF-SHARES-REDEEMED] 29981793
[SHARES-REINVESTED] 8400857
[NET-CHANGE-IN-ASSETS] 835053587
[ACCUMULATED-NII-PRIOR] 5692748
[ACCUMULATED-GAINS-PRIOR] 222006524
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 21959414
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 36483820
[AVERAGE-NET-ASSETS] 1226967334
[PER-SHARE-NAV-BEGIN] 13.51
[PER-SHARE-NII] .59
[PER-SHARE-GAIN-APPREC] 2.61
[PER-SHARE-DIVIDEND] (.55)
[PER-SHARE-DISTRIBUTIONS] (.84)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 15.32
[EXPENSE-RATIO] .70
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 4
[ARTICLE] 6
[SERIES]
[NUMBER]8
[NAME] BALANCED PORTFOLIO
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 4273232620
[INVESTMENTS-AT-VALUE] 4906047462
[RECEIVABLES] 48280313
[ASSETS-OTHER] 85669027
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 5039996802
[PAYABLE-FOR-SECURITIES] 18370329
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 168306575
[TOTAL-LIABILITIES] 186676904
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 0
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 4853319898
[DIVIDEND-INCOME] 95332703
[INTEREST-INCOME] 117904845
[OTHER-INCOME] 0
[EXPENSES-NET] 21963273
[NET-INVESTMENT-INCOME] 191274275
[REALIZED-GAINS-CURRENT] 535161611
[APPREC-INCREASE-CURRENT] 270752151
[NET-CHANGE-FROM-OPS] 997188037
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 0
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 835227126
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 21571200
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 21974680
[AVERAGE-NET-ASSETS] 4421367636
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 5
[ARTICLE] 6
[SERIES]
[NUMBER] 1
[NAME] IDS DIVERSIFIED EQUITY INCOME FUND CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 2219724700
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2219724700
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1644937
[TOTAL-LIABILITIES] 1644937
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1682639049
[SHARES-COMMON-STOCK] 172169566
[SHARES-COMMON-PRIOR] 144087348
[ACCUMULATED-NII-CURRENT] 1899134
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 207225172
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 326316408
[NET-ASSETS] 1789438196
[DIVIDEND-INCOME] 56615321
[INTEREST-INCOME] 24202942
[OTHER-INCOME] 0
[EXPENSES-NET] 17338757
[NET-INVESTMENT-INCOME] 63479506
[REALIZED-GAINS-CURRENT] 210806095
[APPREC-INCREASE-CURRENT] 167609218
[NET-CHANGE-FROM-OPS] 441894819
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 52847821
[DISTRIBUTIONS-OF-GAINS] 89873767
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 38856816
[NUMBER-OF-SHARES-REDEEMED] 25579148
[SHARES-REINVESTED] 14804550
[NET-CHANGE-IN-ASSETS] 763699174
[ACCUMULATED-NII-PRIOR] 1451957
[ACCUMULATED-GAINS-PRIOR] 97615640
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 9160467
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 17451185
[AVERAGE-NET-ASSETS] 1515525969
[PER-SHARE-NAV-BEGIN] 8.96
[PER-SHARE-NII] .34
[PER-SHARE-GAIN-APPREC] 2.04
[PER-SHARE-DIVIDEND] .33
[PER-SHARE-DISTRIBUTIONS] .62
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.39
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 6
[ARTICLE] 6
[SERIES]
[NUMBER] 2
[NAME] IDS DIVERSIFIED EQUITY INCOME FUND CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 2219724700
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2219724700
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1644937
[TOTAL-LIABILITIES] 1644937
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1682639049
[SHARES-COMMON-STOCK] 33662590
[SHARES-COMMON-PRIOR] 13985874
[ACCUMULATED-NII-CURRENT] 1899134
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 207225172
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 326316408
[NET-ASSETS] 349858844
[DIVIDEND-INCOME] 56615321
[INTEREST-INCOME] 24202942
[OTHER-INCOME] 0
[EXPENSES-NET] 17338757
[NET-INVESTMENT-INCOME] 63479506
[REALIZED-GAINS-CURRENT] 210806095
[APPREC-INCREASE-CURRENT] 167609218
[NET-CHANGE-FROM-OPS] 441894819
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 6401017
[DISTRIBUTIONS-OF-GAINS] 10467031
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 20583228
[NUMBER-OF-SHARES-REDEEMED] 2676635
[SHARES-REINVESTED] 1770123
[NET-CHANGE-IN-ASSETS] 763699174
[ACCUMULATED-NII-PRIOR] 1451957
[ACCUMULATED-GAINS-PRIOR] 97615640
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 9160467
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 17451185
[AVERAGE-NET-ASSETS] 223815261
[PER-SHARE-NAV-BEGIN] 8.96
[PER-SHARE-NII] .27
[PER-SHARE-GAIN-APPREC] 2.04
[PER-SHARE-DIVIDEND] .26
[PER-SHARE-DISTRIBUTIONS] .62
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.39
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 7
[ARTICLE] 6
[SERIES]
[NUMBER] 3
[NAME] IDS DIVERSIFIED EQUITY INCOME FUND CLASS Y
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 2219724700
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2219724700
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1644937
[TOTAL-LIABILITIES] 1644937
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1682639049
[SHARES-COMMON-STOCK] 7575548
[SHARES-COMMON-PRIOR] 4157894
[ACCUMULATED-NII-CURRENT] 1899134
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 207225172
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 326316408
[NET-ASSETS] 78782723
[DIVIDEND-INCOME] 56615321
[INTEREST-INCOME] 24202942
[OTHER-INCOME] 0
[EXPENSES-NET] 17338757
[NET-INVESTMENT-INCOME] 63479506
[REALIZED-GAINS-CURRENT] 210806095
[APPREC-INCREASE-CURRENT] 167609218
[NET-CHANGE-FROM-OPS] 441894819
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1926320
[DISTRIBUTIONS-OF-GAINS] 2712936
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4648685
[NUMBER-OF-SHARES-REDEEMED] 1724974
[SHARES-REINVESTED] 493943
[NET-CHANGE-IN-ASSETS] 763699174
[ACCUMULATED-NII-PRIOR] 1451957
[ACCUMULATED-GAINS-PRIOR] 97615640
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 9160467
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 17451185
[AVERAGE-NET-ASSETS] 51745191
[PER-SHARE-NAV-BEGIN] 8.96
[PER-SHARE-NII] .35
[PER-SHARE-GAIN-APPREC] 2.05
[PER-SHARE-DIVIDEND] .34
[PER-SHARE-DISTRIBUTIONS] .62
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.40
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 8
[ARTICLE] 6
[SERIES]
[NUMBER] 4
[NAME] EQUITY INCOME PORTFOLIO
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[INVESTMENTS-AT-COST] 1897012312
[INVESTMENTS-AT-VALUE] 2223436124
[RECEIVABLES] 13872247
[ASSETS-OTHER] 5581115
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2242889486
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 22304722
[TOTAL-LIABILITIES] 22304722
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 0
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 2220584764
[DIVIDEND-INCOME] 56638090
[INTEREST-INCOME] 24196241
[OTHER-INCOME] 0
[EXPENSES-NET] 9164156
[NET-INVESTMENT-INCOME] 71670175
[REALIZED-GAINS-CURRENT] 210870724
[APPREC-INCREASE-CURRENT] 167694853
[NET-CHANGE-FROM-OPS] 450235752
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 0
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 764430392
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 9000327
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 9172261
[AVERAGE-NET-ASSETS] 1799556318
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
EXHIBIT 19(a)
DIRECTORS/TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as directors and trustees of the below listed
open-end, diversified investment companies that previously have filed
registration statements and amendments thereto pursuant to the requirements of
the Securities Act of 1933 and the Investment Company Act of 1940 with the
Securities and Exchange Commission:
<TABLE>
<CAPTION>
1933 Act 1940 Act
Reg. Number Reg. Number
----------- -----------
<S> <C> <C>
IDS Bond Fund, Inc. 2-51586 811-2503
IDS California Tax-Exempt Trust 33-5103 811-4646
IDS Discovery Fund, Inc. 2-72174 811-3178
IDS Equity Select Fund, Inc. 2-13188 811-772
IDS Extra Income Fund, Inc. 2-86637 811-3848
IDS Federal Income Fund, Inc. 2-96512 811-4260
IDS Global Series, Inc. 33-25824 811-5696
IDS Growth Fund, Inc. 2-38355 811-2111
IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
IDS International Fund, Inc. 2-92309 811-4075
IDS Investment Series, Inc. 2-11328 811-54
IDS Managed Retirement Fund, Inc. 2-93801 811-4133
IDS Market Advantage Series, Inc. 33-30770 811-5897
IDS Money Market Series, Inc. 2-54516 811-2591
IDS New Dimensions Fund, Inc. 2-28529 811-1629
IDS Precious Metals Fund, Inc. 2-93745 811-4132
IDS Progressive Fund, Inc. 2-30059 811-1714
IDS Selective Fund, Inc. 2-10700 811-499
IDS Special Tax-Exempt Series Trust 33-5102 811-4647
IDS Stock Fund, Inc. 2-11358 811-498
IDS Strategy Fund, Inc. 2-89288 811-3956
IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686
IDS Tax-Free Money Fund, Inc. 2-66868 811-3003
IDS Utilities Income Fund, Inc. 33-20872 811-5522
</TABLE>
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either
one of them, as her or his attorney-in-fact and agent, to sign for her or him in
her or his name, place and stead any and all further amendments to said
registration statements filed pursuant to said Acts and any rules and
-1-
<PAGE> 2
EXHIBIT 19(a)
[CONTINUED]
regulations thereunder, and to file such amendments with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission, granting to either of them the full power and authority to do and
perform each and every act required and necessary to be done in connection
therewith.
Dated the 8th day of January, 1997.
/s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird
------------------------------ ------------------------
H. Brewster Atwater, Jr. Melvin R. Laird
/s/ Lynne V. Cheney /s/ William R. Pearce
------------------------------ ------------------------
Lynne V. Cheney William R. Pearce
/s/ William H. Dudley /s/ Alan K. Simpson
------------------------------ ------------------------
William H. Dudley Alan K. Simpson
/s/ Robert F. Froehlke /s/ Edson W. Spencer
------------------------------ ------------------------
Robert F. Froehlke Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
------------------------------ ------------------------
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
------------------------------ ------------------------
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
------------------------------ ------------------------
Anne P. Jones C. Angus Wurtele
-2-
<PAGE> 1
EXHIBIT 19(c)
TRUSTEES POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as trustees of the below listed open-end,
diversified investment companies that previously have filed registration
statements and amendments thereto pursuant to the requirements of the
Investment Company Act of 1940 with the Securities and Exchange Commission:
1940 Act
Reg. Number
-----------
Growth Trust 811-07395
Growth and Income Trust 811-07393
Income Trust 811-07307
Tax-Free Income Trust 811-07397
World Trust 811-07399
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either
one of them, as her or his attorney-in-fact and agent, to sign for her or him
in her or his name, place and stead any and all further amendments to said
registration statements filed pursuant to said Act and any rules and
regulations thereunder, and to file such amendments with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission, granting to either of them the full power and authority to do
and perform each and every act required and necessary to be done in connection
therewith.
Dated the 8th day of January, 1997.
/s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird
------------------------------ ------------------------
H. Brewster Atwater, Jr. Melvin R. Laird
/s/ Lynne V. Cheney /s/ William R. Pearce
------------------------------ ------------------------
Lynne V. Cheney William R. Pearce
/s/ William H. Dudley /s/ Alan K. Simpson
------------------------------ ------------------------
William H. Dudley Alan K. Simpson
/s/ Robert F. Froehlke /s/ Edson W. Spencer
------------------------------ ------------------------
Robert F. Froehlke Edson W. Spencer
/s/ David R. Hubers /s/ John R. Thomas
------------------------------ ------------------------
David R. Hubers John R. Thomas
/s/ Heinz F. Hutter /s/ Wheelock Whitney
------------------------------ ------------------------
Heinz F. Hutter Wheelock Whitney
/s/ Anne P. Jones /s/ C. Angus Wurtele
------------------------------ ------------------------
Anne P. Jones C. Angus Wurtele
