<PAGE>
1998 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>
(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.
<PAGE>
Contents
1998 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
1998 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
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 47p
Investment manager 49p
Administrator and transfer agent 49p
Distributor 50p
About American Express Financial Corporation 51p
General information 51p
Year 2000 52p
Appendices 53p
Description of corporate bond ratings 53p
Descriptions of derivative instruments 55p
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.
(This annual report is not part of the prospectus.)
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To our shareholders
From the chairman
If you're an experienced investor, you know that the past 12 months was a
highly volatile period in many financial markets. But history tells us that
substantial market moves are nothing new. Though they're often
unpredictable, declines -- whether they're brief or long-lasting, moderate
or substantial -- are always a possibility.
That potential for such volatility reinforces the need for investors to
periodically review their long-term goals and examine whether their
investment program remains on track to achieving them. Your quarterly
investment statements are one 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.
William R. Pearce
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
From the portfolio manager
A double-digit gain by IDS Diversified Equity Income Fund was wiped out by
a stock-market slump late in the fiscal year that ultimately pushed the
Fund into negative territory. For the 12 months -- October 1997 through
September 1998 -- the Fund's Class A shares experienced a loss of 2.2%.
(This figure includes a substantial capital gain that was paid to
shareholders in December 1997 and reduced the Fund's net asset value by the
same amount at that time.)
Although the favorable fundamentals of low inflation, healthy corporate
profits and solid economic growth remained in place, a financial crisis in
Asia sent the U.S. stock market into a tailspin in the opening month of the
period. Although the market soon got back on its feet, ongoing concerns
about the ultimate effect of the "Asian flu" kept stocks off balance
through most of the winter.
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By February, thanks to still-positive economic data, stocks began an
advance that turned into a robust rally through March. But more overseas
worries re-surfaced in mid-summer (this time regarding Latin America and
Russia) and drove the market and the Fund down sharply for several weeks.
A narrow market
The Fund's performance roughly followed that of the broad market, although
it lagged behind during the upturns. This was a reflection of the fact that
the market continued to be led by an increasingly small number of
large-capitalization growth stocks. The Fund, on the other hand, emphasizes
stocks that offer good relative value in terms of price and which provide
an above-average yield -- quite the opposite of the high-priced growth
stocks that have been so popular in recent years.
There were some substantial changes to the portfolio that I began
instituting after becoming manager in December 1997. Most notable was a
reduction in the level of cash reserves -- from about 26% of assets to
about 5%, a strategy designed to allow the Fund to better participate in
potential market upturns. I also pared back holdings among financial
services stocks, and put more money into consumer stocks in the health
care, food/beverage and household products sectors.
Still, these shifts haven't altered the Fund's basic investment style. It
will continue to emphasize stocks in a wide range of industries whose
current price doesn't, in the opinion of our securities analysts, fully
reflect the intrinsic worth of their respective companies. These issues are
complemented by comparatively high-yield securities, such as utility
stocks, to provide an above-average dividend for the Fund.
Kurt Winters
(picture of) Kurt Winters
Kurt Winters
Portfolio manager
(This annual report is not part of the prospectus.)
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Class A
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1998 $ 8.96
Sept. 30, 1997 $10.39
Decrease $ 1.43
Distributions
Oct. 1, 1997 - Sept. 30, 1998
From income $ 0.52
From capital gains $ 0.71
Total distributions $ 1.23
Total return* -2.2%**
Class B
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1998 $ 8.96
Sept. 30, 1997 $10.39
Decrease $ 1.43
Distributions
Oct. 1, 1997 - Sept. 30, 1998
From income $ 0.45
From capital gains $ 0.71
Total distributions $ 1.16
Total return* -2.9%**
Class Y
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1998 $ 8.96
Sept. 30, 1997 $10.40
Decrease $ 1.44
Distributions
Oct. 1, 1997 - Sept. 30, 1998
From income $ 0.53
From capital gains $ 0.71
Total distributions $ 1.24
Total return* -2.1%**
*The prospectus discusses the effect of sales charges, if any, on the
various classes.
**The total return is a hypothetical investment in the Fund with all
distributions reinvested.
(This annual report is not part of the prospectus.)
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The Portfolio's ten largest holdings
Percent Value
(of Portfolio's net assets) (as of Sept. 30, 1998)
Intl Business Machines 3.21% $77,414,400
Royal Dutch Petroleum 2.62 63,103,124
First Union 2.22 53,490,937
Lincoln Natl 2.16 52,023,125
Marsh & McLennan 2.08 50,172,875
First Chicago NBD 2.03 48,977,499
Exxon 1.92 46,386,918
Mobil 1.89 45,562,500
General Mills 1.81 43,540,000
American General 1.75 42,157,500
For further information about these holdings, please refer to the section
entitled "Investments in securities" herein.
(icon of) pie chart
The ten holdings listed here make up 21.69% 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
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
(footnotes to table) By investing an equal number of dollars each
month...
(arrow in table pointing to April) you automatically buy more shares when the
per share market price is low...
(arrow in table pointing to September) and fewer shares when the per share
market price is high.
You have paid an average price of only $17.91 per share over the 10
months, while the average market price actually was $18.10.
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's investments do well
o you receive capital gains when the gains on investments sold by the
Fund exceed losses
o you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and capital
gain distributions to buy additional shares of the Fund or another fund.
(This annual report is not part of the prospectus.)
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The Fund's long-term performance
Assumes: oHolding period from 11/1/90 to 9/30/98. oReturns do not reflect
taxes payable on distributions. oReinvestment of all income and capital
gain distributions for the Fund, with a value of $13,053. 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.
How your $10,000 has grown in IDS Diversified Equity Income Fund
$40,000
S&P 500
Stock Index
$30,000
Lipper Equity
Income Fund Index
$30,272
$20,000 Diversified Equity
Income Fund
Class A
$10,000
$9,500
'90 '91 '92 '93 '94 '95 '96 '97 '98
Average annual total return
(as of Sept. 30, 1998)
1 year 5 years Since inception
Class A* -7.06% +10.63% +14.84%
Class B** -6.36% --% +14.13%
Class Y** -2.11% --% +15.75%
* 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>
The financial statements contained in Post-Effective Amendment #99 to
Registration Statement No. 2-11328 filed on or about November 25, 1998, are
incorporated herein by reference.
<PAGE>
IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
(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
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 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 Stock 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
(This annual report is not part of the prospectus.)
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IDS Growth Fund
Invests in a Portfolio comprised primarily of companies that have above-average
potential for long-term growth as a result of new management, marketing
opportunities or technological superiority.
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IDS New Dimensions Fund
Invests in a Portfolio comprised primarily of companies with
significant growth potential due to superiority in
technology, marketing or management. The Fund frequently
changes its industry mix.
(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 that generaly pay
dividends 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.
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IDS Mutual
Invests in a Portfolio that 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
(This annual report is not part of the prospectus.)
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IDS mutual funds
Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly 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
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
(This annual report is not part of the prospectus.)
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Money market funds
These money market funds have three main goals: conservation of capital,
constant liquidity and the highest possible current income consistent with these
objectives. An investment in these funds is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that these funds will be able
to maintain a stable net asset value of $1.00 per share. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial paper,
bankers' acceptances, certificates of deposit (CDs) and other bank securities.
(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.
(This annual report is not part of the prospectus.)
<PAGE>
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
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, 1998
Class A
Income distributions
taxable as dividend income, 52.90% qualifying for deduction by
corporations.
Payable date Per share
Dec. 26, 1997 $0.37176
March 26, 1998 0.05237
June 25, 1998 0.05096
Sept. 24, 1998 0.04640
Total $0.52149
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 26, 1997 $0.70912
Total distributions $1.23061
The distribution of $1.08088 per share, payable Dec. 26, 1997, consisted of
$0.08093 derived from net investment income, $0.29083 from net short-term
capital gains (a total of $0.37176 taxable as dividend income) and $0.70912
from net long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.36264 and 20% - $0.34648.
(This annual report is not part of the prospectus.)
<PAGE>
Class B
Income distributions
taxable as dividend income, 52.90% qualifying for deduction by
corporations.
Payable date Per share
Dec. 26, 1997 $0.35240
March 26, 1998 0.03416
June 25, 1998 0.03158
Sept. 24, 1998 0.02802
Total $0.44616
Capital gain distributions
taxable as long-term capital gain.
Payable date Per share
Dec. 26, 1997 $0.70912
Total distributions $1.15528
The distribution of $1.06152 per share, payable Dec. 26, 1997, consisted of
$0.06157 derived from net investment income $0.29083 from net short-term
capital gains (a total of $0.35240 taxable as dividend income) and $0.70912
from net long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.36264 and 20% - $0.34648.
Class Y
Income distributions
taxable as dividend income, 52.90% qualifying for deduction by
corporations.
Payable date Per share
Dec. 26, 1997 $0.37363
March 26, 1998 0.05414
June 25, 1998 0.05284
Sept. 24, 1998 0.04817
Total $0.52878
Capital gain distributions
taxable as long-term capital gain.
Payable date Per share
Dec. 26, 1997 $0.70912
Total distributions $1.23790
The distribution of $1.08275 per share, payable Dec. 26, 1997, consisted of
$0.08280 derived from net investment income, $0.29083 from net short-term
capital gains (a total of $0.37363 taxable as dividend income) and $0.70912
from net long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.36264 and 20% - $0.34648.
(This annual report is not part of the prospectus.)
<PAGE>
Quick telephone reference*
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
612-671-3800
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
*You may experience delays when call volumes are high.
AMERICAN EXPRESS Financial Advisors
IDS Diversified Equity Income Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
