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1997 ANNUAL REPORT
IDS
Diversified
Equity Income
Fund
(prospectus enclosed)
(icon of) two puzzle pieces
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.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment policies, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
AMERICAN EXPRESS Financial Advisors
Distributed by American Express Financial Advisors Inc.
<PAGE> 2
(icon of) two puzzle pieces
Dual-purpose
stocks
Some of the most successful investments over the years have been stocks that
reward investors in two ways -- through growth in the value of the share price
as well as through payment of regular dividend income. Diversified Equity Income
sets its sights on stocks that can provide this double-barreled benefit. The
Fund takes advantage of opportunities across various industries, among different
types of securities and in markets throughout the world to find investments that
meet its combination growth-and-dividend requirement.
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Contents
The purpose of this annual report is to tell investors how the Fund performed.
(icon of)one open book inside of another
The prospectus, which is bound into the middle of this annual report, describes
the Fund in detail.
1997 annual report
From the chairman 4
From the portfolio manager 4
The Portfolio's ten largest holdings 6
Making the most of the Fund 7
The Fund's long-term performance 8
Independent auditors' report (Fund) 9
Financial statements (Fund) 10
Notes to financial statements (Fund) 13
Independent auditors' report (Portfolio) 18
Financial statements (Portfolio) 19
Notes to financial statements (Portfolio) 22
Investments in securities 29
IDS mutual funds 34
Federal income tax information 38
1997 prospectus
The Fund in brief 3p
Goals 3p
Investment policies and risks 4p
Structure of the Fund 5p
Manager and distributor 6p
Portfolio manager 6p
Alternative purchase arrangements 6p
Sales charge and Fund expenses 7p
Performance 9p
Financial highlights 9p
Total returns 11p
Investment policies and risks 14p
Facts about investments and their risks 15p
Valuing Fund shares 22p
How to purchase, exchange or redeem shares 23p
Alternative purchase arrangements 23p
How to purchase shares 26p
How to exchange shares 29p
How to redeem shares 29p
Reductions and waivers of the sales charge 34p
Special shareholder services 39p
Services 39p
Quick telephone reference 39p
Distributions and taxes 40p
Dividend and capital gain distributions 40p
Reinvestments 41p
Taxes 42p
How to determine the correct TIN 44p
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How the Fund and Portfolio are organized 45p
Shares 45p
Voting rights 45p
Shareholder meetings 45p
Special considerations regarding
master/feeder structure 46p
Board members and officers 48p
Investment manager 50p
Administrator and transfer agent 50p
Distributor 51p
About American Express Financial Corporation 52p
General information 52p
Appendices 53p
Description of corporate bond ratings 53p
Descriptions of derivative instruments 55p
(This annual report is not part of the prospectus.)
<PAGE> 5
To our shareholders
From the chairman
If you're an experienced investor, you know that the past few years have
been unusually strong ones in many financial markets. Perhaps just as
important, history shows that bull markets don't last forever. Though
they're often unpredictable, declines -- whether they're brief or
long-lasting, moderate or substantial -- are always a possibility. We saw
evidence of that in late October, when declines in certain Asian markets
spawned a sharp drop in the U.S. stock market.
That fact reinforces the need for investors to review periodically their
long-term goals and examine whether their investment program remains on
track to achieving them. Your quarterly investment statements are one part
of that monitoring process. The other is a meeting with your American
Express financial advisor. That becomes even more important if there's a
major change in your financial situation or in the financial markets.
I also want to point out that on December 1, 1997, Kurt Winters will
become portfolio manager of this Fund. Please see the prospectus for more
information on his investment experience.
William R. Pearce
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
<PAGE> 6
From the portfolio manager
IDS Diversified Equity Income Fund generated a substantial return during
the past fiscal year, as it participated in the stock market's
advances while holding up well during its declines. For the 12 months
-- October 1996 through September 1997 -- the Fund recorded a total
return of 28.1% for investors in Class A shares. (This figure includes a
capital gain that was paid to shareholders in December 1996 and reduced
the Fund's net asset value by the same amount at that time.)
Stocks began to gather forward momentum last fall, as low
inflation, decent economic growth, strong corporate earnings and low
interest rates provided plenty of support. By the time the period started
in October, the market was in the middle of a robust rally that,
apart from moderate downturns last spring and this past August,
continued throughout the fiscal year.
Less volatile than
the market
Consistent with its relatively conservative nature, the Fund followed
suit with the advances of the broad market (as measured by the
Standard & Poor's 500), but to a lesser degree. On the other hand,
when the market stumbled, the Fund's above-average yield allowed it
to hold its ground better than the market.
The bulk of the Fund's best-performing stocks came from the
banking, insurance and food sectors, with health care also making
a solid contribution.
Among the laggards were investments in real estate investment
trusts, energy and utility stocks. The utility stocks, which included
electric and telephone providers, did provide the Fund with a healthy
yield, however.
Defensive measures
As the period progressed, I grew more cautious on the stock market, and
I took some measures to cushion the Fund against a possible downturn.
These include beefing up the bond portion of the portfolio late in
1996 and culling out some stocks that had reached unacceptably high
valuation levels. This past summer, I sold most of the bonds and built
up the level of cash reserves. While the increased cash helped cushion
the Fund during the August decline, it did temper performance in the
previous two months, when the market advanced sharply.
As of this writing in mid-October, my outlook for the stock market
remains on the cautious side. While fundamentals such as good economic
growth and low inflation continue to work in the market's favor, I
think the potential for higher stock prices has diminished.
Keith Tufte
(picture of) Keith Tufte
Ketih Tufte
Portfolio manager
(This annual report is not part of the prospectus.)
<PAGE> 7
Class A
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1997 $10.39
Sept. 30, 1996 $ 8.96
Increase $ 1.43
Distributions
Oct. 1, 1996 - Sept. 30, 1997
From income $ 0.52
From capital gains $ 0.43
Total distributions $ 0.95
Total return* +28.1%
Class B
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1997 $10.39
Sept. 30, 1996 $ 8.96
Increase $ 1.43
Distributions
Oct. 1, 1996 - Sept. 30, 1997
From income $ 0.45
From capital gains $ 0.43
Total distributions $ 0.88
Total return* +27.2%
Class Y
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1997 $10.40
Sept. 30, 1996 $ 8.96
Increase $ 1.44
Distributions
Oct. 1, 1996 - Sept. 30, 1997
From income $ 0.53
From capital gains $ 0.43
Total distributions $ 0.96
Total return* +28.3%
*The prospectus discusses the effect of sales charges, if any, on the various
classes.
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**The total return is a hypothetical investment in the Fund with all
distributions reinvested.
(This annual report is not part of the prospectus.)
<PAGE> 9
The Portfolio's ten largest holdings
<TABLE>
<CAPTION>
Percent Value
(of Portfolio's net assets) (as of Sept. 30, 1997)
<S> <C> <C>
U.S. Treasury 4.26% $94,669,172
8.125% 2019-2021
Bell Atlantic 1.85 41,026,343
Mid Ocean 1.54 34,222,500
Crown Cork & Seal 1.40 31,150,000
Preferred
Ikon Office Solutions 1.39 30,815,625
$5.04 Cv Preferred
Unisource Worldwide 1.38 30,685,000
Philip Morris 1.38 30,548,437
First Union 1.38 30,538,125
Thomas & Betts 1.34 29,770,625
Enron 1.27 28,297,500
</TABLE>
(icon of)pie chart
The ten holdings listed here make up 17.19% of the Portfolio's net assets
(This annual report is not part of the prospectus.)
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Making the most of the Fund
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost averaging --
a time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly.
You'll automatically buy more shares when the Fund's share price is low,
fewer shares when it is high.
Using this strategy does not ensure a profit or avoid a loss if the market
declines, and requires that you be able to keep on investing on a regular
basis, even when the price of your shares falls or the market declines.
Investing in this manner can be an effective way to accumulate shares to
meet your long-term goals.
How dollar-cost averaging works
<TABLE>
<CAPTION>
Month Amount Per-share Number of shares purchased
invested market price
<S> <C> <C> <C>
Jan $ 100 $ 20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
</TABLE>
(footnotes to table) By investing an equal number of dollars each month.....
(arrow in table pointing to April) you automatically buy more shares when the
per share market price is low.....
(arrow in table pointing to September) and fewer shares when the per share
market price is high.
You have paid an average price of only $17.91 per share over the 10
months, while the average market price actually was $18.10.
(This annual report is not part of the prospectus.)
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The Fund's long-term performance
Three ways to benefit from a mutual fund:
-your shares increase in value when the Fund's
investments do well
-you receive capital gains when the gains on
investments sold by the Fund exceed losses
-you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and
capital gain distributions to buy additional shares of the Fund or another
fund.
How your $10,000 has grown in IDS Bond Fund
$30,000 S&P 500
Stock Inex
$20,000 $30,943
IDS Diversified Equity
Income Fund
$10,000 Class A
$9,500 Lipper Equity
Income Fund Index
11/1/90 '91 '92 '93 '94 '95 '96 '97
Assumes: Holding period from 11/1/90 to 9/30/97. Returns do not reflect
taxes payable on distributions. Reinvestment of all income and capital
gain distributions for the Fund, with a value of $11,071. Also see
"Performance" in the Fund's current prospectus.
Standard & Poor's 500 Stock Index (S&P 500), an unmanaged list of common
stocks, is frequently used as a general measure of market performance;
however, the S&P 500 companies are generally larger than those in which
the Portfolio invests.
Lipper Equity IncomeFund 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.
Average annual total return
(as of Sept. 30, 1997)
1 year 5 years Since inception
Class A* +21.71% +16.18% +17.50%
Class B** +23.16% --% +21.38%
Class Y** +28.29% --% +23.64%
* Inception date was Oct. 15, 1990.
** Inception date was March 20, 1995.
On the graph above you can see how the Fund's total return compared to two
widely cited unmanaged performance indexes, the S&P 500 Stock Index and
the Lipper Equity Income Fund Index. In comparing IDS Diversified Equity
Income Fund (Class A) to the two indexes, you should take into account the
fact that the Fund's performance reflects the maximum sales charge of 5%,
while such charges are not reflected in the performance of the indexes.
Your investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. Average annual
total return figures reflect the impact of the applicable sales charge up
to a maximum of 5%. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
(This annual report is not part of the prospectus.)
<PAGE> 12
The financial statements contained in Post-Effective Amendment 98 to
Registration Statement No. 2-11328 filed on or about November 25, 1997, are
incorporated herein by reference.
<PAGE> 13
IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
(icon of) world with countries
IDS Global Growth Fund
Invests in a Portfolio comprised primarily of stocks of companies throughout the
world that are positioned to meet market needs in a changing world economy.
These companies offer above-average potential for long-term growth.
(icon of) world
IDS International Fund
Invests primarily in common stocks of foreign companies that offer potential for
superior growth. The Fund may invest up to 20% of its assets in the U.S. market.
(icon of) three flags
IDS Global Balanced Fund
Invests in stocks and bonds in, for the most part, major markets throughout the
world, including the U.S. Seeks to provide a balance of growth of capital and
current income.
(icon of) scale of globes
IDS Global Bond Fund
Invests in a Portfolio comprised primarily of debt securities of U.S. and
foreign issuers to seek high total return through income and growth of capital.
(icon of) globe
Growth funds
Funds in this group seek capital growth, primarily from common stocks. They are
high risk mutual funds with a potential for high reward.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic companies that
explore for, mine and process or distribute gold and other precious metals. A
highly aggressive and speculative fund that seeks long-term growth of capital.
(icon of) cart of precious gems
IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies emphasizing
<PAGE> 14
technological innovation and productivity enhancement. Buys and holds larger
growth-oriented stocks.
(icon of) ship
IDS Small Company Index Fund
Invests in all or a representative group of the equity securities comprising the
S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation.
(icon of) building
IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected for their
potential for above-average growth. Above-average means that their growth
potential is better, in the opinion of the portfolio's investment manager, than
the Standard & Poor's Corporation (S&P) 500 Stock Index.
(icon of) chess piece
IDS Research Opportunities Fund
Invests in a Portfolio comprised primarily of equity securities of companies
included in the S&P 500 Index that are believed to have strong growth potential.
The Portfolio is managed using a research methodology by the Research Department
of AEFC. Goal is long-term appreciation.
(icon of) magnifying glass
IDS Growth Fund
Invests in a Portfolio comprised primarily of companies that have above-average
potential for long-term growth as a result of new management, marketing
opportunities or technological superiority.
(icon of) trees
IDS New Dimensions Fund
Invests in a Portfolio comprised primarily of companies with
significant growth potential due to superiority in
technology, marketing or management. The Fund frequently
changes its industry mix.
(icon of) dimension
IDS Progressive Fund
Invests primarily in undervalued common stocks. The Fund holds stocks for the
long term with the goal of capital growth.
(icon of) shooting star
Growth & income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest. Foreign investments may be subject to currency fluctuations and
political and economic risks of the countries in which the investments are made.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks, higher-yielding
<PAGE> 15
equities and bonds. Seeks growth of capital and income.
(icon of) three pine trees
IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities purchased are
those recommended by our research analysts as the best from each industry
represented on the index. Offers potential for long-term growth as well as
dividend income.
(icon of) ribbon
IDS Managed Allocation Fund
Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and
foreign debt securities, foreign equity securities and money market instruments.
The Fund provides diversification among these major investment categories and
has a target mix that represents the way the Fund's investments will be
allocated over the long term. Seeks maximum total return.
(icon of) gyroscope
IDS Stock Fund
Invests in a Portfolio comprised primarily of common stock of companies
representing many sectors of the economy. Seeks current income and growth of
capital.
(icon of) building with columns
IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential for growth
of capital and income.
(icon of) three growing flowers
IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek high current
income and growth of income and capital with reduced volatility.
(icon of) light bulb
IDS Diversified Equity Income Fund
Invests in a Portfolio comprised primarily in high-yielding common stocks to
seek high current income and, secondarily, to benefit from the growth potential
offered by stock investments.
(icon of) two puzzle pieces
IDS Mutual
Invests in a Portfolio which seeks to balance between common stocks and senior
securities (preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
(icon of) scale of justice
Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
<PAGE> 16
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly of long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
(icon of) two coins
IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
(icon of) Greek column
IDS Selective Fund
Invests in a Portfolio comprised primarily of high-quality corporate bonds and
other highly rated debt instruments including government securities and
short-term investments. Seeks current income and preservation of capital.
(icon of) skyline
IDS Federal Income Fund
Invests in a Portfolio comprised primarily of securities issued or guaranteed as
to the timely payment of principal and interest by the U.S. government, its
agencies and instrumentalities. Seeks a high level of current income and safety
of principal consistent with its type of investments.
(icon of) shield with eagle head
Tax-exempt income funds
These funds provide tax-free income by investing in municipal bonds. The income
is generally free from federal income tax, but a portion of the income may be
subject to state and local taxes. Risk varies by bond quality.
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government units, with at
least 75% in the four highest rated, lowest risk bond categories.
(icon of) shield with Greek column
IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to the timely
payment of principal and interest. The insurance feature minimizes credit risk
of the Fund but does not guarantee the market value of the Fund's shares.
(icon of) shield with star
IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to provide
income to residents of each respective state that is exempt from federal, state
and local income taxes. (New York is the only state that is exempt at the local
level.)
(icon of) shield with U.S. enclosed
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IDS High Yield Tax-Exempt Fund
Invests in a Portfolio comprised primarily of medium- and lower-quality
municipal bonds and notes. Lower-quality securities generally involve greater
risk of principal and income.
(icon of) shield with basket of apples enclosed
IDS Intermediate Tax-Exempt Fund
Invests in mainly investment-grade bonds and other debt securities with
intermediate-term maturities issued by state and local government units. Goal is
to seek a high level of current income exempt from federal taxes.
(icon of) shield with tree enclosed
Money market funds
These money market funds have three main goals: conservation of capital,
constant liquidity and the highest possible current income consistent with these
objectives. An investment in these funds is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that these funds will be able
to maintain a stable net asset value of $1.00 per share. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial paper,
bankers' acceptances, certificates of deposit (CDs) and other bank securities.
(icon of) piggy bank
IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and local
governments to seek high current income exempt from federal income taxes.
(icon of) shield with piggy bank enclosed
For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus by contacting your financial advisor or
writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534. Read it carefully before you invest or send money.
<PAGE> 18
Federal income tax information
IDS Diversified Equity Income Fund
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. Some of the dividends listed below were reported to you on a Form
1099-DIV, Dividends and Distributions, last January. Dividends paid to you since
the end of last year will be reported to you on a tax statement sent next
January. Shareholders should consult a tax advisor on how to report
distributions for state and local purposes.
IDS Diversified Equity Income Fund
Fiscal year ended Sept. 30, 1997
Class A
Income distributions
taxable as dividend income, 41.63% qualifying for deduction by corporations.
Payable date Per share
Dec. 27, 1996 $0.25409
March 27, 1997 0.08505
June 27, 1997 0.08101
Sept. 26, 1997 0.10318
Total $0.52333
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 27, 1996 $0.42911
Total distributions $0.95244
The distribution of $0.68320 per share, payable Dec. 27, 1996, consisted of
$0.05943 derived from net investment income, $0.19466 from net short-term
capital gains (a total of $0.25409 taxable as dividend income) and 0.42911 from
net long-term capital gains.
Class B
Income distributions
taxable as dividend income, 41.63% qualifying for deduction by corporations.
Payable date Per share
Dec. 27, 1996 $0.23632
March 27, 1997 0.06772
June 27, 1997 0.06304
Sept. 26, 1997 0.08395
Total $0.45103
Capital gain distributions taxable as long-term capital gain.
Payable date Per share
Dec. 27, 1996 $0.42911
Total distributions $0.88014
The distribution of $0.66543 per share, payable Dec. 27, 1996, consisted of
$0.04166 derived from net investment income $0.19466 from net short-term capital
gains (a total of $0.23632 taxable as dividend income) and 0.42911 from net
long-term capital gains.
Class Y
Income distributions
taxable as dividend income, 41.63% qualifying for deduction by corporations.
Payable date Per share
Dec. 27, 1996 $0.25812
March 27, 1997 0.08901
June 27, 1997 0.08381
Sept. 26, 1997 0.10507
<PAGE> 19
Total $0.53601
Capital gain distributions taxable as long-term capital gain.
Payable date Per share
Dec. 27, 1996 $0.42911
Total distributions $0.96512
The distribution of $0.68723 per share, payable Dec. 27, 1996, consisted of
$0.06346 derived from net investment income, $0.19466 from net short-term
capital gains (total of $0.25812 taxable as dividend income) and 0.42911 from
net long-term capital gains.
<PAGE> 20
Quick telephone reference
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
671-3800
TTY Service For the hearing impaired 800-846-4852
American Express Automated account information 800-862-7919
Financial Advisors (TouchTone(R) phones only),
Easy Access Line including current fund prices
and performance, account values
and recent account transactions
AMERICAN EXPRESS Financial Advisors
IDS Diversified Equity Income Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE> 21
STATEMENT OF DIFFERENCES:
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
