<PAGE>
IDS SMALL COMPANY INDEX FUND
Prospectus
August 5, 1996
The goal of IDS Small Company Index Fund, a part of IDS Market
Advantage Series, Inc., is to achieve long-term capital appreciation. The
Fund attempts to mirror the performance of the Standard & Poor's Small
Capitalization Stock Index[REGISTERED] (S&P SmallCap 600
Index[REGISTERED]) by investing in all or a representative group of the
equity securities comprising that Index.
This prospectus contains facts that can help you decide if the
Fund is the right investment for you. Read it before you invest and keep
it for future reference.
Additional facts about the Fund are in a Statement of Additional
Information (SAI), filed with the Securities and Exchange Commission. The
SAI, dated August 5, 1996, is incorporated here by reference. For a free
copy, contact American Express Shareholder Service.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY. INVESTMENTS IN THE FUND INVOLVE INVESTMENT RISK
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
American Express Shareholder Service
P.O. Box 534
Minneapolis, MN 55440-0534
612-671-3733
TTY: 800-846-4852
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be
any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the Securities laws of any such State.
<PAGE>
Table of contents
Page
----
The Fund in brief . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Types of Fund investments and their risks . . . . . . . . . . . . . . 3
Manager and distributor . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio manager . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Alternative purchase arrangements . . . . . . . . . . . . . . . . . . 4
Sales charge and Fund expenses . . . . . . . . . . . . . . . . . . . . 4
Performance
Total Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment policies and risks . . . . . . . . . . . . . . . . . . . . . 8
Facts about investments and their risks . . . . . . . . . . . . . . . 9
Alternative Investment Option . . . . . . . . . . . . . . . . . . . . . 11
Valuing Fund shares . . . . . . . . . . . . . . . . . . . . . . . . . 11
How to purchase, exchange or redeem shares
Alternative purchase arrangements . . . . . . . . . . . . . . . . . . 12
How to purchase shares . . . . . . . . . . . . . . . . . . . . . . . 12
How to exchange shares . . . . . . . . . . . . . . . . . . . . . . . 18
How to redeem shares . . . . . . . . . . . . . . . . . . . . . . . . 19
Reductions and waivers of the sales charge . . . . . . . . . . . . . 25
Special shareholder services
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Quick telephone reference . . . . . . . . . . . . . . . . . . . . . . 29
Distributions and taxes
Dividend and capital gain distributions . . . . . . . . . . . . . . . 30
Reinvestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
How to determine the correct TIN . . . . . . . . . . . . . . . . . . . 32
How the Fund is organized
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Voting rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Shareholder meetings . . . . . . . . . . . . . . . . . . . . . . . . 33
Board members and officers . . . . . . . . . . . . . . . . . . . . . 34
Investment manager and transfer agent . . . . . . . . . . . . . . . . 35
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
About American Express Financial Corporation
General information . . . . . . . . . . . . . . . . . . . . . . . . . 37
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<PAGE>
The Fund in Brief
-----------------
Goal
IDS Small Company Index Fund (the Fund), a part of IDS Market Advantage
Series, Inc., seeks to provide shareholders with long-term capital
appreciation. Because any investment involves risk, achieving this goal
cannot be guaranteed. Only shareholders can change this goal. To achieve
its goal, the Fund attempts to mirror the performance of the S&P SmallCap
600 Index by investing in all or a representative group of the equity
securities comprising that Index.
Types of Fund investments and their risks
The Fund is a diversified mutual fund that invests primarily in common
stocks of small-capitalization companies that are expected to provide
investment results that correspond to the performance of the S&P SmallCap
600 Index1/, an index composed of approximately 600 small-capitalization
common stocks in the United States chosen based upon their market size,
liquidity and industry group representation. As of November 30, 1995,
stocks in the S&P SmallCap 600 Index had market capitalization of between
$25 million and $3 billion. To be included in the Index, stock selections
are also screened by Standard & Poor's Corporation for trading volume,
share turnover, ownership concentration, share price and bid/ask spreads.
Because the Fund invests in many of the stocks included in the S&P
SmallCap 600 Index, your investment will be subject to the risks of
investments in such companies. Some of the companies included in the
Index do not have the financial strength needed to do well in difficult
times. The S&P SmallCap 600 Index has above-average risk and may
fluctuate more than the Standard & Poor's 500 Stock Price Index, which
invests in stocks of larger, more established firms. Small-capitalization
companies also often sell limited numbers of products, which can make it
harder for them to compete with medium and large companies. An index fund
holding all or a representative group of the 600 stocks in the S&P
SmallCap 600 Index, like the Fund, reduces certain risks of a more
actively managed fund, such as the risk of individual stock selection and
seeks to provide investors with returns corresponding to the performance
of the smaller-sized company sector of the market. Additional information
about the investment policies of the Fund appear in "Investment policies
and risks."
Manager and distributor
The Fund is managed by American Express Financial Corporation (AEFC), a
provider of financial services since 1894. AEFC currently manages more
than $52 billion in assets for the IDS MUTUAL FUND GROUP. Shares of the
1/ "Standard & Poor's," "Standard & Poor's Small Capitalization
Stock Index" and "S&P SmallCap 600" are trademarks of McGraw-Hill, Inc.
- 3 -
<PAGE>
Fund are sold through American Express Financial Advisors Inc., a wholly
owned subsidiary of AEFC.
Portfolio manager
Guru Baliga joined AEFC in 1991 as a research analyst. He became
portfolio manager of this Fund and IDS Research Opportunities Fund in
August 1996. He has been portfolio manager of IDS Blue Chip Fund since
1994. He was appointed to the portfolio management team for IDS Managed
Retirement in December 1995 and is also a portfolio manager of certain IDS
advisory accounts.
Alternative purchase arrangements
The Fund offers its shares in three classes. Class A shares are subject
to a sales charge at the time of purchase. Class B shares are subject to
a contingent deferred sales charge (CDSC) on redemptions made within six
years of purchase and an annual distribution (12b-1) fee. Class Y shares
are sold without a sales charge to qualifying institutional investors.
Sales charge and Fund expenses
------------------------------
Shareholder transaction expenses are incurred directly by an investor on
the purchase or redemption of Fund shares. Fund operating expenses are
paid out of Fund assets for each class of shares. Operating expenses are
reflected in the Fund's daily share price and dividends, and are not
charged directly to shareholder accounts.
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 operation expenses**
--------------------------------
(as a % of average daily net assets):
Class A Class B Class Y
Management fee*** . . . . . . . 0.00% 0.00% 0.00%
12b-1 fee . . . . . . . . . . . 0.00% 0.75% 0.00%
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<PAGE>
Class A Class B Class Y
Other expenses+ . . . . . . . . 1.00% 1.01% 0.82%
Total++ . . . . . . . . . . . . 1.00% 1.76% 0.82%
* This charge may be reduced depending on your total investments in
IDS Funds. See "Reductions of the sales charge."
** Expenses are those expected to be incurred by each class during
the Fund's initial fiscal period ending January 31, 1997.
*** Absent fee waivers, the management fee would be 0.38% for each
class.
+ Other expenses include an administrative services fee, a
shareholder services fee for Class A and Class B, a transfer
agency fee and other non-advisory expenses. Absent fee waivers
and expense reimbursements, other expenses are estimated to be
1.95% for Class A, 1.96% for Class B, and 1.77% for Class Y.
++ AEFC and American Express Financial Advisors have agreed to waive
certain fees and reimburse expenses, with the exception of 12b-1
fees, to the extent that total expenses for Class A shares exceed
1.00% for a minimum period ending July 31, 1997. Any waiver or
reimbursement will apply to each class on a pro rata basis.
Absent fee waiver and expense reimbursements, total expenses are
estimated to be 2.33% for Class A, 3.09% for Class B, and 2.15%
for Class Y.
Example: Suppose for each year for the next three 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
------ -------
Class A $60 $80
Class B $68 $95
Class B* $18 $55
Class Y $ 8 $26
* Assuming Class B shares are not redeemed at the end of the period.
THIS EXAMPLE DOES NOT REPRESENT ACTUAL EXPENSES, PAST OR FUTURE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. Because Class B pays
- 5 -
<PAGE>
annual distribution (12b-1) fees, long term shareholders of Class B may
indirectly pay an equivalent of more than a 6.25% sales charge, the
maximum permitted by the National Association of Securities Dealers.
Performance
-----------
Total 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.
The Fund may at times advertise its average annual total return and
cumulative total return and compare its performance to that of other
mutual funds with similar investment objectives and to the performance of
the S&P SmallCap 600 Index, as well as other indices, and may also
disclose its performance as ranked by certain ranking entities. Each
class of the Fund has different expenses that will impact its performance.
Performance will vary from time to time and past results are not
necessarily representative of future results. See the SAI for more
information about the calculation of total returns.
The S&P SmallCap 600 Index is a market-weighted index, with each stock
affecting the index in proportion to its market value. Standard & Poor's
Corporation is responsible for selecting and maintaining the list of
stocks to be included in the Index. Inclusion in the Index in no way
implies an opinion by Standard & Poor's Corporation as to attractiveness
as an investment. This unmanaged Index tracks the common stock
performance of 600 small-capitalized U.S. companies in various industries.
The Fund may invest in common stocks that may not be listed in the S&P
SmallCap 600 Index. The Index reflects reinvestment of all distributions
and changes in market prices, but excludes brokerage commissions or other
fees. The Fund is not promoted, sponsored or endorsed by, nor in any way
affiliated with Standard & Poor's.
The following table shows the performance of the S&P SmallCap 600 Index
for the ten years ending in 1995. Although the Index was first published
in 1994, Standard & Poor's reconstructed its performance for earlier
years. The past performance of the S&P SmallCap 600 Index should not be
viewed as representative of the Index's or the Fund's future performance.
The fees and costs involved in the operation of the Fund mean that the
performance of a share of stock in the Fund may not equal the performance
of the S&P SmallCap 600 Index even if the performance of the assets held
by the Fund do equal that performance.
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<PAGE>
S&P SMALLCAP 600 INDEX WITH DIVIDENDS REINVESTED
ANNUAL PERCENTAGE CHANGE
1986 +3.23
1987 -13.50
1988 +19.49
1989 +13.89
1990 -9.90
1991 +48.49
1992 +21.04
1993 +18.79
1994 -4.77
1995 +29.96
Source: Standard & Poor's Corporation.
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<PAGE>
Investment policies and risks
-----------------------------
The Fund will primarily invest in a representative group of the stocks
comprising the S&P SmallCap 600 Index. The Fund will not be managed
according to traditional methods of "active" investment management,
instead it will follow a passive or indexing investment approach under
which stocks are generally purchased or sold in order to match the
performance of the S&P SmallCap 600 Index. Accordingly, the portfolio
manager will not select securities for the Fund's investment portfolio
based upon traditional economic, financial and market analyses or
forecasting.
The Fund seeks to mirror the performance of the S&P SmallCap 600 Index by
replicating the S&P SmallCap 600 Index or by investing in a statistically
selected sample of the approximately 600 stocks included in the S&P
SmallCap 600 Index. The Fund will invest in as many stocks as necessary
to closely track the performance of the S&P SmallCap 600 Index. Under
normal market conditions, the Fund will invest at least 80% of its net
assets in stocks of issuers that comprise the S&P SmallCap 600 Index. As
part of its investment strategy, the Fund also may hold cash or its
equivalent or invest in short-term fixed income securities, which may
cause its performance to differ from that of the S&P SmallCap 600 Index.
The Fund will attempt to minimize any such differences through
transactions involving stock index futures contracts, options on stock
indices, and/or options on stock index futures contracts. During its
initial fiscal period, the Fund's investments in cash or its equivalent
and in stock index futures contracts may be weighted more heavily. Until
the Fund's assets reach $100 million, at which asset level the Fund will
begin to replicate the S&P SmallCap 600 Index, the Fund's assets will be
invested primarily in some of the securities included in the SmallCap 600
Index, cash or its equivalent, money market instruments and stock index
futures. Stock index futures are described below under "Facts about
investments and their risks - Derivative instruments".
In addition, the Fund may purchase and sell options on equity securities,
lend its portfolio securities and purchase securities on a when-issued or
delayed delivery basis. These techniques are described below under "Facts
about investments and their risks" and further information about some of
them is included in the SAI.
The stocks of the S&P SmallCap 600 Index to be included in the Fund's
investment portfolio may be selected by utilizing a statistical sampling.
The Fund generally will select stocks by closely approximating the risks,
fundamentals, industry weightings and other characteristics of the stocks
listed on the S&P SmallCap 600 Index. Over the long term, AEFC seeks a
correlation between the performance of the Fund and that of the S&P
SmallCap 600 Index of 0.95 or better. It is not possible to attain a
perfect correlation between the performance of the Fund and the S&P
SmallCap 600 Index on a regular basis. In the unlikely event that a
correlation of 0.95 or better is not achieved, the board will consider
alternative arrangements.
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<PAGE>
While the Fund will not precisely match the S&P SmallCap 600 Index's
performance, the Fund will attempt to minimize the variation between its
performance and that of the Index. The Fund's ability to mirror
performance of the S&P SmallCap 600 Index may be affected by factors such
as the size of the Fund's portfolio, transaction costs, management fees
and expenses, brokerage commissions and fees, the extent and timing of
cash flows into and out of the Fund, the Fund's policy of minimizing
transaction costs and tax liability from capital gain distributions, and
changes in the securities markets and the Index itself.
The various types of investments the portfolio manager uses to achieve
investment performance are described in more detail in the next section
and in the SAI.
Facts about investments and their risks
Because of the risks associated with investing in the small companies that
comprise the S&P Small Cap 600 Index, the Fund is intended to be a long-
term investment vehicle and is not designed to provide you with a means of
speculating on short-term market movements.
Small-capitalization common stocks: Stocks of smaller companies may be
subject to more abrupt or erratic price movements than stocks of larger,
established companies or the stock market as a whole. Among the reasons
for greater price volatility of stocks of smaller companies are the less
than certain growth prospects of smaller firms, the lower degree of
liquidity in the markets for such stocks, and the greater exposure of
small-size companies to changing economic conditions. Also, small
companies often have limited product lines, smaller markets or fewer
financial resources. Therefore, some of the securities in which the Fund
invests involve substantial risk and may be considered speculative.
Market risk: The Fund is subject to market risk because it invests
primarily in common stocks. Market risk is the possibility that common
stock prices will decline over short or even extended periods. The U.S.
stock market tends to be cyclical, with periods when stock prices
generally rise and periods when stock prices generally decline.
Derivative Instruments: The portfolio manager may use derivative
instruments in addition to securities to achieve investment performance.
Derivative instruments include futures, options and forward contracts.
Such instruments may be used to maintain cash reserves while remaining
fully invested, to offset anticipated declines in values of investments,
to facilitate trading, to reduce transaction costs, or to pursue higher
investment returns. Derivative instruments are characterized by requiring
little or no initial payment and a daily change in price based on or
derived from a security, a currency, a group of securities or currencies,
or an index. A number of strategies or combination of instruments can be
used to achieve the desired investment performance characteristics. A
small change in the value of the underlying security, currency or index
will cause a sizable gain or loss in the price of the derivative
instrument. Derivative instruments allow the portfolio manager to change
- 9 -
<PAGE>
the investment performance characteristics very quickly and at lower
costs. Risks include losses of premiums, rapid changes in prices,
defaults by other parties, and inability to close such instruments. The
Fund will use derivative instruments only to achieve the same investment
performance characteristics it could achieve by directly holding those
securities and currencies permitted under the investment policies. The
Fund will designate cash or appropriate liquid assets to cover its
portfolio obligations. No more than 5% of the Fund's net assets can be
used at any one time for good faith deposits on futures and premiums for
options on futures that do not offset existing investment positions. This
does not, however, limit the portion of the Fund's assets at risk to 5%.
The Fund is not limited as to the percentage of its assets that may be
invested in permissible investments, including derivatives, except as
otherwise explicitly provided in this prospectus or the SAI.
The Fund may use any of the above instruments, and there can be no
assurance that any strategy that is used will succeed. The Fund's
ability to use these instruments may be limited by market conditions,
regulatory limits and tax considerations. Risks include loss of premiums
for purchased options, defaults by other parties with respect to over-the-
counter instruments, and inability to close-out positions in such
instruments due, for example, to lack of a liquid secondary market. For
further information regarding derivative instruments, see the SAI.
Stock Index Futures Contracts: Stock index futures contracts are
commodity contracts listed on commodity exchanges. A stock index assigns
relative values to common stocks included in the index and the index
fluctuates with the value of the common stocks so included. Unlike the
purchase or sale of an equity security, no price would be paid or received
by the Fund upon entering into futures contracts. However, the Fund would
be required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. Treasury bills equal
to approximately 5% of the contract value. The Fund intends to use stock
index futures contracts for hedging and not for speculation. Hedging
permits the Fund to gain rapid exposure to or protect itself from changes
in the market. There are several risks in using stock index futures
contracts as a hedging device, however, because the prices of futures
contracts may not correlate perfectly with movements in the underlying
stock index due to certain market distortions. See Appendix A to the SAI
for a complete description of the risks involved.
Securities and other instruments that are illiquid: A security or other
instrument is illiquid if it cannot be sold quickly in the normal course
of business. Some investments cannot be resold to the U.S. public because
of their terms or government regulations. Securities and instruments,
however, can be sold in private sales, and many may be sold to other
institutions and qualified buyers or on foreign markets. The portfolio
manager will follow guidelines established by the board and consider
relevant factors such as the nature of the security and the number of
likely buyers when determining whether a security is illiquid. No more
than 10% of the Fund's net assets will be held in securities and other
instruments that are illiquid.
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<PAGE>
Money market instruments: Short-term debt securities rated in the top two
grades are used to meet daily cash needs and at various times to hold
assets until better investment opportunities arise. Generally, less than
25% of the Fund's total assets are in these money market instruments.
However, for temporary defensive purposes these investments could exceed
that amount for a limited period of time.
The investment policies described above, including the Fund's investment
in stocks listed on the S&P SmallCap 600 Index, may be changed by the
board.
Lending portfolio securities: The Fund may lend its securities to earn
income so long as borrowers provide collateral equal to the market value
of the loans. The risks are that borrowers will not provide collateral
when required or return securities when due. Unless a majority of the
Fund's outstanding voting securities approve otherwise, loans may not
exceed 30% of the Fund's net assets.
Portfolio turnover: The Fund does not expect its portfolio turnover rate
to exceed 250% during its initial fiscal period. High portfolio turnover
can lead to increased brokerage commissions and taxes.
Alternative investment option
In the future, the board of the Fund may determine for operating
efficiencies to use a master/feeder structure. Under that structure, the
Fund's assets would be invested in an investment company with the same
goal as the Fund, rather than invested directly in a portfolio of
securities.
Valuing Fund shares
The public offering price is the net asset value (NAV) plus the sales
charge for Class A. It is the NAV for Class B and Class Y. The NAV is
the value of a single Fund share. The NAV usually changes daily, and is
calculated at the close of business, normally 3 p.m. Central time, each
business day (any day the New York Stock Exchange is open).
To establish the net assets, all securities are valued as of the close
each business day. In valuing assets:
. Securities (except bonds) and assets with available market values
are valued on that basis.
. Securities maturing in 60 days or less are valued at amortized
cost.
. Bonds and assets without readily available market values are
valued according to methods selected in good faith by the board.
How to purchase, exchange or redeem shares
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<PAGE>
------------------------------------------
Alternative purchase arrangements
The Fund offers three different classes of shares -- Class A, Class B and
Class Y. The primary differences among the classes are in the sales charge
structures and in their ongoing expenses. These differences are
summarized in the table below. Qualifying institutional investors should
purchase Class Y shares. Other investors may choose Class A or Class B
shares, as best suits their circumstances and objectives.
<TABLE>
<CAPTION>
Sales charge and
distribution (12b-1) fee Service fee Other information
<S> <C> <C> <C>
Class A Maximum initial sales 0.175% of average Initial sales charge waived or
charge of 5%; no 12b-1 daily net assets reduced for certain purchases
fee
Class B No initial sales charge; 0.175% of average Shares convert to Class A
maximum CDSC of 5% daily net assets after eight years; CDSC waived
declines to 0% after six in certain circumstances
years; 12b-1 fee of 0.75%
of average daily net
assets
Class Y None None Available only to certain
qualifying institutional
investors
</TABLE>
Conversion of Class B shares to Class A shares -- Eight calendar years
after Class B shares were originally purchased, Class B shares will
convert to Class A shares and will no longer be subject to a distribution
fee. The conversion will be on the basis of relative net asset values of
the two classes, without the imposition of any sales charge. Class B
shares purchased through reinvested dividends and other distributions will
convert to Class A shares on a pro rata basis with Class B shares not
purchased through reinvestment.
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 sales charges and distribution
fee (included in "Ongoing expenses") are structured so that you will have
approximately the same total return at the end of eight years (and
thereafter, as a result of the conversion feature) regardless of which
class you chose.
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<PAGE>
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 . All of your money is invested
purchase price invested. Part in shares of stock. However,
of your purchase price will go you will pay a sales charge if
to pay the sales charge. You you redeem your shares within
will not pay a sales charge six years of purchase.
when you redeem your shares.
. You will be able to take . No reductions of the sales
advantage of reductions in the charge are available for large
sales charge. purchases.
If your investments in IDS funds that are subject to a sales charge total
$250,000 or more, you are better off paying the reduced sales charge in
Class A than paying the higher fees in Class B. If you qualify for a
waiver of the sales charge, you should purchase Class A shares.
Ongoing expenses
----------------
If you purchase Class A shares If you purchase Class B shares
. Your shares will have a . The distribution and transfer
lower expense ratio than agency fees for Class B will
Class B shares because cause your shares to have a
Class A does not pay a higher expense ratio and to pay
distribution fee and the lower dividends than Class A
transfer agency fee for shares. After eight years, Class
Class A is lower than the B shares will convert to Class A
fee for Class B. As a shares and will no longer be
result, Class A shares will subject to higher fees.
pay higher dividends than
Class B shares.
You should consider how long you plan to hold your shares and whether the
accumulated higher fees and CDSC on Class B shares prior to conversion
would be less than the initial sales charge on Class A shares. Also
consider to what extent the difference would be offset by the lower
expenses on Class A shares. To help you in this analysis, the example in
the "Sales charge and Fund expenses" section of the prospectus illustrates
the charges applicable to each class of shares.
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<PAGE>
Class Y shares -- Class Y shares are offered to certain institutional
investors. Class Y shares are sold without a front-end sales charge or a
CDSC and are not subject to either a service fee or a distribution fee.
The following investors are eligible to purchase Class Y shares:
. Qualified employee benefit plans* if the plan:
-- uses a daily transfer recordkeeping service offering participants
daily access to IDS funds and has:
-- at least $10 million in plan assets or
-- 500 or more participants; or
-- does not use daily transfer recordkeeping and has:
-- at least $3 million invested in funds of the IDS
MUTUAL FUND GROUP or
-- 500 or more participants.
. Trust companies or similar institutions, and charitable organizations
that meet the definition in Section 501(c)(3) of the Internal Revenue
Code.* These must have at least $10 million invested in funds of the
IDS MUTUAL FUND GROUP.
. Nonqualified deferred compensation plans* whose participants are
included in a qualified employee benefit plan described above.
_______________
* Eligibility must be determined in advance by American Express
Financial Advisors. To do so, contact your financial advisor.
- 14 -
<PAGE>
How to purchase shares
If you're investing in this Fund for the first time, you'll need to
set up an account. Your financial advisor will help you fill out and
submit an application. Once your account is set up, you can choose
among several convenient ways to invest.
Important: When opening an account, you must provide AEFC with your
correct Taxpayer Identification Number (Social Security or Employer
Identification number). See "Distributions and taxes."
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.
. The maximum purchase allowed is $1 million. Any order for $1 million
or more must be pre-approved by AEFC prior to placing the order or it
will be rejected. This maximum amount 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.
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Three ways to invest
----------------------------------------------------------------------------------------
<S> <C> <C>
1. Send your check and application (or Minimum amounts
your name and account number if you
have an established account) to: Initial Investment: $2,000
By regular
account American Express Additional Investment: $100
Financial Advisors Inc.
P.O. Box 74 Account Balances: $300*
Minneapolis, MN 55440-0074
Qualified retirement
Your financial advisor will help accounts: none
you with this process.
----------------------------------------------------------------------------------------
2 Contact your financial advisor to Minimum amounts
set up one of the following
By scheduled scheduled plans: Initial investment $100
investment
plan . automatic payroll deduction Additional investments: $100/mo.
. bank authorization Account balances: none
(on active plans of monthly
. direct deposit of Social payments)
Security check
. other plan approved by the Fund
----------------------------------------------------------------------------------------
3 If you have an established account, If this information is not
you may wire money to: included, the order may be
By wire rejected and all money received by
Norwest Bank Minneapolis the Fund less any costs the Fund
Routing No. 091000019 or AEFC incurs, will be returned
Minneapolis, MN promptly.
Attn: Domestic Wire Dept.
Minimum amounts
Give these instructions:
Credit IDS Account Each wire investment: $1,000
#00-30-015 for personal account #
(your account number) or (your
name).
* If your account balance falls below $300, you will be asked in writing to bring it up to $300 or establish a scheduled
investment plan. If you don't do so within 30 days, your shares can be redeemed and the proceeds mailed to you.
</TABLE>
- 16 -
<PAGE>
How to exchange shares
You can exchange your shares of the Fund at no charge for shares of the
same class of any other publicly offered fund in the IDS MUTUAL FUND GROUP
available in your state. Exchanges into IDS Tax-Free Money Fund must be
made from Class A shares. For complete information, including fees and
expenses, read the prospectus carefully before exchanging into a new fund.
If your exchange request arrives at the Minneapolis headquarters before
the close of business, your shares will be redeemed at the net asset value
set for that day. The proceeds will be used to purchase new fund shares
the same day. Otherwise, your exchange will take place the next business
day at that day's net asset value.
For tax purposes, an exchange represents a redemption and purchase and may
result in a gain or loss. However, you cannot use the sales charge imposed
on the purchase of Class A shares to create or increase a tax loss (or
reduce a taxable gain) by exchanging from the Fund within 91 days of your
purchase. For further explanation, see the SAI.
- 17 -
<PAGE>
How to redeem shares
You can redeem your shares at any time. American Express Shareholder
Service normally will mail payment within seven days after receiving your
request.
When you redeem shares, the amount you receive may be more or less than
the amount you invested. Your shares will be redeemed at net asset value,
minus any applicable sales charge, at the close of business on the day
your request is accepted at the Minneapolis headquarters. If your request
arrives after the close of business, the price per share will be the net
asset value, minus any applicable sales charge, at the close of business
on the next business day.
A redemption is a taxable transaction. If your proceeds from your
redemption are more or less than the cost of your shares, you will have a
gain or loss, which can affect your tax liability. Redeeming shares held
in an IRA or qualified retirement account may subject you to certain
federal taxes, penalties and reporting requirements. Consult your tax
advisor.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Two ways to request an exchange or redemption of shares
----------------------------------------------------------------------------------
<S> <C> <C>
1 Include in your letter: Regular mail:
By letter . the name of the fund(s) American Express
Shareholder Service
. the class of shares to be exchanged Attn: Redemptions
or redeemed P.O. Box 534
Minneapolis, MN
. your account number(s) (for 55440-0534
exchanges, both funds must be
registered in the same ownership) Express mail:
. your Taxpayer Identification Number American Express
(TIN) Shareholder Service
Attn: Redemptions
. the dollar amount or number of 733 Marquette Ave.
shares you want to exchange or Minneapolis, MN 55402
redeem
. signature of all registered account
owners
. for redemptions, indicate how you
want your money delivered to you
. any paper certificates of shares
you hold
__________________________________________________________________________________
2 . The Fund and AEFC will honor any . AEFC answers phone
telephone exchange or redemption requests promptly,
By phone request believed to be authentic but you may
and will use reasonable procedures experience delays
American Express to confirm that they are. This when call volume is
Telephone includes asking identifying high. If you are
Transaction questions and tape recording calls. unable to get
Service: If reasonable procedures are not through, use mail
800-437-3133 followed, the Fund or AEFC will be procedure as an
or liable for any loss resulting from alternative.
612-671-3800 fraudulent requests.
- 19 -
<PAGE>
. Phone exchange and redemption . Acting on your
privileges automatically apply to instructions, your
all accounts except custodial, financial advisor may
corporate or qualified retirement conduct telephone
accounts unless you request these transactions on your
privileges NOT apply by writing behalf.
American Express Shareholder
Service. Each registered owner . Phone privileges may
must sign the request. be modified or
discontinued at any
time.
Minimum amount
Redemption: $100
Maximum amount
Redemption: $50,000
</TABLE>
- 20 -
<PAGE>
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.
- 21 -
<PAGE>
Redemption policies:
. A "change of mind" option allows you to change your mind after
requesting a redemption and to use all or part of the proceeds to buy
new shares in the same class from which you redeemed. If you reinvest
in Class A, you will purchase the new shares at net asset value rather
than the offering price on the date of a new purchase. If you reinvest
in Class B, any CDSC you paid on the amount you are reinvesting also
will be reinvested. To take advantage of this option, send a written
request within 30 days of the date your redemption request was
received. Include your account number and mention this option. This
privilege may be limited or withdrawn at any time, and it may have tax
consequences.
. 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.)
- 22 -
<PAGE>
Three ways to receive payment when you redeem shares
_______________________________________________________________________
1 . Mailed to the address on record
By regular or . Payable to names listed on the account.
express mail
NOTE: The express mail delivery charges you
pay will vary depending on the courier you
select.
_______________________________________________________________________
2 . Minimum wire redemption: $1,000.
By wire . Request that money be wired to your bank.
. Bank account must be in the same ownership
as the IDS Fund account.
NOTE: Pre-authorization required.
For instructions, contact your financial
advisor or American Express Shareholder
Service
_______________________________________________________________________
3 . Minimum payment: $50.
By scheduled . Contact your financial advisor or American
payout plan 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.
- 23 -
<PAGE>
Reductions and waivers of the sales charge
Class A -- initial sales charge alternative
On purchases of Class A shares, you pay a 5% sales charge on the first
$50,000 of your total investment and less on investments after the first
$50,000:
Total Investment Sales charge as a percent of:*
---------------- -----------------------------------
Public offering Net invested
price amount
Up to $50,000 5.0% 5.26%
Next $50,000 4.5 4.71
Next $400,000 3.8 3.95
Next $500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
* To calculate the actual sales charge on an investment greater than
$50,000 and less than $1,000,000, amounts for each applicable increment
must be totaled. See the SAI.
Reductions of the sales charge on Class A Shares
Your sales charge may be reduced, depending on the totals of:
. the amount you are investing in this Fund now,
. the amount of your existing investment in this Fund, if any, and
. the amount you and your primary household group are investing or have
in other funds in the IDS MUTUAL FUND GROUP that carry a sales charge.
(The primary household group consists of accounts in any ownership for
spouses or domestic partners and their unmarried children under 21.
Domestic partners are individuals who maintain a shared primary
residence and have joint property or other insurable interests.)
Other policies that affect your sales charge:
. IDS Tax-Free Money Fund and Class A shares of IDS Cash Management Fund
do not carry sales charges. However, you may count investments in these
funds if you acquired shares in them by exchanging shares from IDS
funds that carry sales charges.
. IRA purchases or other employee benefit plan purchases made through a
payroll deduction plan or through a plan sponsored by an employer,
- 24 -
<PAGE>
association of employers, employee organization or other similar
entity, may be added together to reduce sales charges for all shares
purchased through that plan. Plans eligible to purchase Class Y shares
should purchase shares of that class.
. 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 trustees, board members, officers or employees of
the Fund or AEFC or its subsidiaries, their spouses and unmarried
children under 21.
. Current or retired American Express financial advisors, their spouses
and unmarried children under 21.
. Qualified employee benefit plans* using a daily transfer recordkeeping
system offering participants daily access to IDS funds.
(Participants in certain qualified plans for which the initial sales
charge is waived may be subject to a 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.
. Purchases made within 30 days after a redemption of shares (up to the
amount redeemed):
-- of a product distributed by American Express Financial Advisors in a
qualified plan subject to a deferred sales charge or
-- in a qualified plan where American Express Trust Company has a
recordkeeping, trustee, investment management or investment servicing
relationship.
Send the Fund a written request along with your payment, indicating the
amount of the redemption and the date on which it occurred.
. Purchases made with dividend or capital gain distributions from another
fund in the IDS MUTUAL FUND GROUP that has a sales charge.
- 25 -
<PAGE>
. Purchases made through American Express Strategic Portfolio Service
(total amount of all investments made in the Strategic Portfolio
Service must be at least $50,000).
. Purchases made under the University of Texas System ORP.
_________________________
* Eligibility must be determined in advance by American Express Financial
Advisors. To do so, contact your financial advisor.
Class B--contingent deferred sales charge alternative
Where a CDSC is imposed on a redemption, it is based on the amount of the
redemption and the number of calendar years, including the year of
purchase, between purchase and redemption. The following table shows the
declining scale of percentages that apply to redemptions during each year
after a purchase:
If a redemption is made The percentage rate for the
during the: CDSC is:
First year 5%
Second year 4%
Third year 4%
Fourth year 3%
Fifth year 2%
Sixth year 1%
Seventh year 0%
If the amount you are redeeming reduces the current net asset value of
your investment in Class B shares below the total dollar amount of all
your purchase payments during the last six years (including the year in
which your redemption is made), the CDSC is based on the lower of the
redeemed purchase payments or market value.
The following example illustrates how the CDSC is applied. Assume you had
invested $10,000 in Class B shares and that your investment had
appreciated in value to $12,000 after 15 months, including reinvested
dividend and capital gain distributions. You could redeem any amount up to
$2,000 without paying a CDSC ($12,000 current value less $10,000 purchase
amount). If you redeemed $2,500, the CDSC would apply only to the $500
- 26 -
<PAGE>
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 sales charge for Class B shares
The CDSC on Class B shares will be waived on redemptions of shares:
. In the event of the shareholder's death,
. Purchased by any trustee, board member, officer or employee of a Fund
or AEFC or its subsidiaries,
. Held in a trusteed employee benefit plan,
. Held in IRAs or certain qualified plans for which American Express
Trust Company acts as trustee or custodian, such as Keogh plans,
tax-sheltered custodial accounts or corporate pension plans, provided
that the shareholder is:
-- at least 59-1/2 years old, and
-- taking a retirement distribution (if the redemption is part of a
transfer to an IRA or qualified plan in a product distributed by
American Express Financial Advisors, or a custodian-to-custodian
transfer to a product not distributed by American Express
Financial Advisors, the CDSC will not be waived), or
-- redeeming under an approved substantially equal periodic payment
arrangement.
- 27 -
<PAGE>
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
-------------------------
American Express Redemptions and National/Minnesota:
Telephone Transaction exchanges, dividend 800-437-3133
Service payments or
reinvestments and Mpls./St. Paul area:
automatic payment 671-3800
arrangements
_______________________________________________________________________
American Express Fund performance, 612-671-3733
Shareholder Service objectives and account
inquiries
_______________________________________________________________________
TTY Service For the hearing 800-846-4852
impaired
_______________________________________________________________________
American Express Automated account National/Minnesota:
Infoline information 800-272-4445
(TouchTone[REGISTERED]
phones only), including Mpls./St. Paul area:
current Fund prices and 671-1630
performance, account
values and recent
account transactions
- 28 -
<PAGE>
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 gains distributions to qualify as a regulated
investment company and to avoid paying corporate income and excise taxes.
Dividend and capital gains distributions will have tax consequences you
should know about.
Dividend and capital gain distributions
The Fund's net investment income from dividends and interest is
distributed to you at the end of the calendar year as dividends. Short-
term capital gains are distributed at the end of the calendar year and
included in net investment income. The Fund realizes long-term capital
gains whenever it sells securities held for more than one year for a
higher price than it paid for them. Net realized long-term capital gains,
if any, are distributed at the end of the calendar year as capital gain
distributions. Before they're distributed, net long-term capital gains
are included in the value of each share. After they're distributed, the
value of each share drops by the per-share amount of the distribution.
(If your distributions are reinvested, the total value of your holdings
will not change.)
Dividends for each class will be calculated at the same time, in the same
manner and will be the same amount prior to deduction of expenses.
Expenses attributable solely to a class of shares will be paid exclusively
by that class. Class B shareholders will receive lower per share
dividends than Class A and Class Y shareholders because expenses for Class
B are higher than for Class A or Class Y. Class A shareholders will
receive lower per share dividends than Class Y shareholders because
expenses for Class A are higher than for Class Y.
Reinvestments
Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:
. you request the Fund in writing or by phone to pay distributions to
you in cash, or
. you direct the Fund to invest your distributions in any publicly
available IDS fund for which you've previously opened an account. You
pay no sales charge on shares purchased through reinvestment of
distributions from this Fund into any IDS fund.
The reinvestment price is the net asset value at close of business on the
day the distribution is paid. (Your quarterly statement will confirm the
amount invested and the number of shares purchased.)
- 29 -
<PAGE>
If you choose cash distributions, you will receive only those declared
after your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash
distributions, we will reinvest the checks into your account at the
then-current net asset value and make future distributions in the form of
additional shares.
Taxes
Distributions are subject to federal income tax and also may be subject to
state and local taxes. Distributions are taxable in the year the Fund pays
them regardless of whether you take them in cash or reinvest them.
Each January, you will receive a tax statement showing the kinds and total
amount of all distributions you received during the previous year. You
must report distributions on your tax returns, even if they are reinvested
in additional shares.
Buying a dividend creates a tax liability. This means buying shares
shortly before a net investment income or a capital gain distribution. You
pay the full pre-distribution price for the shares, then receive a portion
of your investment back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain. If you
sell shares for more than their cost, the difference is a capital gain.
Your gain may be either short term (for shares held for one year or less)
or long term (for shares held for more than one year).
YOUR TAXPAYER IDENTIFICATION NUMBER (TIN) IS IMPORTANT. As with any
financial account you open, you must list your current and correct
Taxpayer Identification Number (TIN)--either your Social Security or
Employer Identification number. The TIN must be certified under penalties
of perjury on your application when you open an account at AEFC.
If you don't provide the TIN, or the TIN you report is incorrect, you
could be subject to backup withholding of 31% of taxable distributions and
proceeds from redemptions and exchanges. You also could be subject to
further penalties, such as:
. a $50 penalty for each failure to supply your correct TIN
. a civil penalty of $500 if you make a false statement that results in
no backup withholding
. criminal penalties for falsifying information
You also could be subject to backup withholding because you failed to
report interest or dividends on your tax return as required.
- 30 -
<PAGE>
How to determine the correct TIN
--------------------------------
For this type of account: Use the Social Security or Employer
Identification number of:
______________________________________________________________________
Individual or joint account The individual or individuals
listed on the account
______________________________________________________________________
Custodian account of a minor The minor
(Uniform Gifts/Transfers to
Minors Act)
______________________________________________________________________
A living trust The grantor-trustee (the person who
puts the money into the trust)
______________________________________________________________________
An irrevocable trust, pension The legal entity (not the personal
trust or estate representative or trustee, unless
no legal entity is designated in
the account title)
______________________________________________________________________
Sole proprietorship The owner
______________________________________________________________________
Partnership The partnership
______________________________________________________________________
Corporate The corporation
______________________________________________________________________
Association, club or tax-exempt The organization
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 the Fund. Tax matters are highly
individual and complex, and you should consult a qualified tax advisor
about your personal situation.
- 31 -
<PAGE>
How the Fund is organized
-------------------------
IDS Market Advantage Series, Inc., of which IDS Small Company Index Fund
is a part, is a diversified, open-end management investment company, as
defined in the Investment Company Act of 1940. IDS Market Advantage
Series, Inc. is a Minnesota corporation incorporated on August 25, 1989.
The Fund's headquarters are at 901 S. Marquette Ave., Suite 2810,
Minneapolis, MN 55402-3268.
Shares
IDS Market Advantage Series, Inc. currently is composed of two funds, each
issuing its own series of capital stock: IDS Blue Chip Advantage Fund and
IDS Small Company Index Fund. Each fund is owned by its shareholders.
Each fund issues shares in three classes -- Class A, Class B and Class Y.
Each class has different sales arrangements and bears different expenses.
Each class represents interests in the assets of a fund. Par value is one
cent per share. Both full and fractional shares can be issued.
The shares of each fund making up IDS Market Advantage 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 (except
expenses attributable solely to a class of shares will be borne by that
class).
Voting rights
As a shareholder, you have voting rights over the Fund's management and
fundamental policies. You are entitled to one vote for each share you
own. Shares of the Fund have cumulative voting rights. Each class has
exclusive voting rights with respect to the provisions of the Fund's
distribution plan that pertain to a particular class and other matters for
which separate class voting is appropriate under applicable law.
Shareholder meetings
The Fund does not hold annual shareholder meetings. However, the board
members may call meetings at their discretion, or on demand by holders of
10% or more of the outstanding shares, to elect or remove board members.
- 32 -
<PAGE>
Board members and officers
Shareholders elect a board that oversees the operations of the Fund and
chooses its officers. Its officers are responsible for day-to-day
business decisions based on policies set by the board. The board has
named an executive committee that has authority to act on its behalf
between meetings. The board members also serve on the boards of the 46
other funds in the IDS MUTUAL FUND GROUP, except for Mr. Dudley, who is a
board member of all 34 publicly offered funds.
Board members and officers of the Fund
President and interested William R. Pearce
board member President of all funds in the IDS
MUTUAL FUND GROUP.
Independent board Lynne V. Cheney
members Distinguished fellow, American
Enterprise Institute for Public Policy
Research.
Robert F. Froehlke
Former president of all funds in the
IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating
officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications
consultant.
Melvin R. Laird
Senior counsellor for national and
international affairs, The Reader's
Digest Association, Inc.
Edson W. Spencer
Former chairman and chief executive
officer,
Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar
Corporation.
- 33 -
<PAGE>
Interested board members William H. Dudley
who are officers and/or Executive vice president, AEFC.
employees of AEFC
David R. Hubers
President and chief executive officer,
AEFC.
John R. Thomas
Senior vice president, AEFC.
Officers who also are Peter J. Anderson
officers and/or Vice president of all funds in the IDS
employees of AEFC MUTUAL FUND GROUP.
Melinda S. Urion
Treasurer of all funds in the IDS
MUTUAL FUND GROUP.
Other officer Leslie L. Ogg
Vice President, general counsel and
secretary of all funds in the IDS
MUTUAL FUND GROUP.
Refer to the SAI for the board members' and officers' biographies.
Investment manager and transfer agent
The Fund pays AEFC for managing its portfolio, providing administrative
services and serving as transfer agent (handling shareholder accounts).
The Fund also pays taxes, brokerage commissions and other non-advisory
expenses.
Under its Investment Management Services Agreement, AEFC determines which
securities will be purchased, held or sold (subject to the direction and
control of the board). Under the current agreement, effective August ___,
1996, the Fund pays AEFC a fee for these services based on the average
daily net assets of the Fund, as follows:
Assets Annual rate
(billions) at each asset level
---------- -------------------
First $0.25 0.38%
Next 0.25 0.37%
- 34 -
<PAGE>
Next 0.25 0.36%
Next 0.25 0.35%
Over 1.0 0.34%
Under the Agreement, the Fund also pays taxes, brokerage commissions and
nonadvisory expenses.
Under an Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at an annual rate of 0.10%
decreasing in gradual percentages to 0.02% as assets increase.
In addition, under a separate Transfer Agency Agreement, AEFC maintains
shareholder accounts and records. The Fund pays AEFC an annual fee per
shareholder account for this service as follows:
. Class A $15
. Class B $16
. Class Y $15
Distributor
The Fund has an exclusive distribution agreement with American Express
Financial Advisors, a wholly owned subsidiary of AEFC. Financial advisors
representing American Express Financial Advisors provide information to
investors about individual investment programs, the Fund and its
operations, new account applications and exchange and redemption requests.
The cost of these services is paid partially by the Fund's sales charges.
Persons who buy Class A shares pay a sales charge at the time of purchase.
Persons who buy Class B shares are subject to a contingent deferred sales
charge on a redemption in the first six years and pay an asset-based sales
charge (also known as a 12b-1 fee) of up to 0.75% of the Fund's average
daily net assets. Class Y shares are sold without a sales charge and
without an asset-based sales charge.
Portions of the sales charge also may be paid to securities dealers who
sell 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 the Fund's average
daily net assets attributable to Class A and Class B shares.
Total fees and expenses (excluding taxes and brokerage commissions) cannot
exceed the most restrictive applicable state expense limitation.
- 35 -
<PAGE>
About American Express Financial Corporation
--------------------------------------------
General information
The AEFC family of companies offers not only mutual funds but also
insurance, annuities, investment certificates and a broad range of
financial management services.
Besides managing investments for all publicly-offered funds in the IDS
MUTUAL FUND GROUP, AEFC also manages investments for itself and its
subsidiaries, IDS Certificate Company and IDS Life Insurance Company.
Total assets under management on May 31, 1996 were more than $137 billion.
American Express Financial Advisors serves individuals and businesses
through its nationwide network of more than 175 offices and more than
7,800 advisors.
Other AEFC subsidiaries provide investment management and related services
for pension, profit sharing, employee savings and endowment funds of
businesses and institutions.
AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a
wholly-owned subsidiary of American Express Company (American Express), a
financial services company with headquarters at American Express Tower,
World Financial Center, New York, NY 10285. The Fund may pay brokerage
commissions to broker-dealer affiliates of American Express and AEFC.
- 36 -
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IDS Small Company Index Fund
IDS Tower 10
Minneapolis, MN 55440-0010
Distributed by
American Express
Financial Advisors Inc.
<PAGE>
IDS MARKET ADVANTAGE SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
IDS SMALL COMPANY INDEX FUND
August 5, 1996
This Statement of Additional Information (SAI) is not a
prospectus. It should be read together with the prospectus, which may be
obtained from your American Express financial advisor or by writing to
American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534
This SAI is dated August 5, 1996, and it is to be used with the
prospectus dated August 5, 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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IDS Small Company Index Fund
TABLE OF CONTENTS
Page
Goal and Investment Policies . . . . . . . . . . . . . . . See Prospectus
Additional Investment Policies . . . . . . . . . . . . . . . . . . . 1
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . 4
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation . . . . . . . . . . . . . . 6
Performance Information . . . . . . . . . . . . . . . . . . . . . . . 7
Valuing Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investing in the Fund . . . . . . . . . . . . . . . . . . . . . . . . 12
Redeeming Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Pay-Out Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Board Members and Officers . . . . . . . . . . . . . . . . . . . . . 23
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . 28
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
APPENDIX A: Options and Stock Index Futures Contracts . . . . . . . . A-1
APPENDIX B: Dollar-Cost Averaging . . . . . . . . . . . . . . . . . . B-1
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IDS Small Company Index Fund
ADDITIONAL INVESTMENT POLICIES
These are investment policies in addition to those presented in the
prospectus. The policies below are fundamental policies of the Fund and
may be changed only with shareholder approval. Unless holders of a
majority of the outstanding voting securities agree to make the change,
approved by shareholders, the Fund will not:
. Act as an underwriter (sell securities for others).
However, under the securities laws, the Fund may be
deemed to be an underwriter when it purchases securities
directly from the issuer and later resells them.
. Borrow money or property, except as a temporary measure
for extraordinary or emergency purposes, in an amount not
exceeding one-third of the market value of its total
assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing. The
Fund has no present intention to borrow.
. Make cash loans if the total commitment amount exceeds 5%
of the Fund's total assets.
. Concentrate in any one industry. According to the
present interpretation by the Securities and Exchange
Commission (SEC), this means no more than 25% of the
Fund's total assets, based on current market value at
time of purchase, can be invested in any one industry.
. Purchase more than 10% of the outstanding voting
securities of an issuer.
Invest more than 5% of its total assets in securities of
any one company, government or political subdivision
thereof, except the limitation will not apply to
investments in securities issued by the U.S. government,
its agencies or instrumentalities, and except that up to
25% of the Fund's total assets may be invested without
regard to this 5% limitation.
. Buy or sell real estate, unless acquired as a result of
ownership of securities or other instruments, except this
shall not prevent the Fund from investing in securities
or other instruments backed by real estate or securities
of companies engaged in the real estate business or real
estate investment trusts. For purposes of this policy,
real estate includes real estate limited partnerships.
. Buy or sell physical commodities unless acquired as a
result of ownership of securities or other instruments,
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IDS Small Company Index Fund
except this shall not prevent the Fund from buying or
selling financial instruments (such as options and
futures contracts) or from investing in securities or
other instruments backed by, or whose value is derived
from, physical commodities.
Make a loan of any part of its assets to American Express
Financial Corporation (AEFC), to the board members and
officers of AEFC or to its own board members and
officers.
. Purchase securities of an issuer if the board members and
officers of the Fund and 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 and of AEFC who own more than 0.5% of an issuer's
securities are added together, and if in total they own
more than 5%, the Fund will not purchase securities of
that issuer.
. Lend Fund securities in excess of 30% of its net assets.
In making loans, the Fund receives the market price in
cash, U.S. government securities, letters of credit or
such other collateral as may be permitted by regulatory
agencies and approved by the board. If the market price
of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are
that the borrower may not provide additional collateral
when required or return the securities when due. During
the existence of the loan, the Fund receives cash
payments equivalent to all interest or other
distributions paid on the loaned securities. A loan will
not be made unless the investment manager believes the
opportunity for additional income outweighs the risks.
Unless changed by the board, the Fund will not:
. Buy on margin or sell short, but it may make margin
payments in connection with transactions in options,
futures contracts and other financial instruments.
. Pledge or mortgage its assets beyond 15% of total assets.
If the Fund were ever to do so, valuation of the pledged
or mortgaged assets would be based on market values. For
purposes of this policy, collateral arrangements for
margin deposits are not deemed to be a pledge of assets.
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IDS Small Company Index Fund
. Invest more than 5% of its total assets in securities of
companies, including any predecessors, that have a record
of less than three years continuous operations.
. Invest more than 10% of its total assets in securities of
investment companies.
. Invest in a company to control or manage it.
. Invest in exploration or development programs, such as
oil, gas or mineral leases.
. Invest more than 5% of its net assets in warrants. Under
one state's law no more than 2% of the Fund's net assets
may be invested in warrants not listed on the New York or
American Stock Exchange.
. Invest more than 10% of its net assets in securities and
other instruments that are illiquid. For purposes of
this policy illiquid securities include some privately
placed securities, public securities and Rule 144A
securities that for one reason or another may no longer
have a readily available market, repurchase agreements
with maturities greater than seven days, non-negotiable
fixed-time deposits and over-the-counter options.
The Fund may make contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or
forward commitments). Under normal market conditions, the Fund does not
intend to commit more than 5% of its total assets to these practices. The
Fund does not pay for the securities or receive dividends or interest on
them until the contractual settlement date. The Fund will designate cash
or liquid high-grade debt securities at least equal in value to its
commitments to purchase the securities. When-issued securities or forward
commitments are subject to market fluctuations and they may affect the
Fund's total assets the same as owned securities.
In determining the liquidity of Rule 144A securities, which are
unregistered securities offered to qualified institutional buyers, and
interest-only and principal-only, fixed mortgage-backed securities (IOs
and POs) issued by the U.S. government or its agencies and
instrumentalities, the investment manger, under guidelines established by
the board, will consider any relevant factors including frequency of
trades, the number of dealers willing to purchase or sell the security and
the nature of marketplace trades.
In determining the liquidity of commercial paper issued in transactions
not involving a public offering under Section 4(2) of the Securities Act
of 1933, the investment manager, under guidelines established by the
board, will evaluate relevant factors such as the issuer and the size and
3
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IDS Small Company Index Fund
nature of its commercial paper programs, the willingness and ability of
the issuer or dealer to repurchase the paper, and the nature of the
clearance and settlement procedures for the paper.
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. The cash-equivalent investments the Fund may use are short-
term U.S. and Canadian government securities and negotiable certificates
of deposit, non-negotiable fixed-time deposits, bankers' acceptances and
letters of credit of basis or savings and loan associations having
capital, surplus and undivided profits (as of the date of its most
recently published annual financial statements) in excess of $100 million
(or the equivalent in the instance of a foreign branch of a U.S. bank) at
the date of investment. Any cash-equivalent investment in foreign
securities will be subject to the limitations on foreign investments
described in the prospectus. The Fund also may purchase short-term
corporate notes and obligations rated in the top two classifications by
Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Corporation
(S&P) or the equivalent and may use repurchase agreements with broker-
dealers registered under the Securities Exchange Act of 1934 and with
commercial banks. A risk of a repurchase agreement is that if the seller
seeks the protection of the bankruptcy laws, the Fund's ability to
liquidate the security involved could be impaired.
Notwithstanding any of the Fund's other investment policies, the Fund may
invest its assets in an open-end management investment company having
substantially the same investment objectives, policies and restrictions as
the Fund for the purpose of having those assets managed as part of a
combined pool.
For a discussion of options and stock index futures contracts, see
Appendix A.
PORTFOLIO TRANSACTIONS
Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's investment goal and policies, which securities
will be purchased, held or sold. In determining where the buy and sell
orders are to be placed, AEFC has been directed to use its best efforts to
obtain the best available price and the most favorable execution, except
when otherwise authorized by the board. In selecting broker-dealers to
execute transactions, AEFC may consider the price of the security,
including commission or mark-up, the size and difficulty of the order, the
reliability, integrity, financial soundness and general operation and
execution capabilities of the broker, the broker's expertise in particular
markets, and research services provided by the broker.
AEFC has a strict Code of Ethics that prohibits its affiliated personnel
from engaging in personal investment activities that compete with or
attempt to take advantage of planned portfolio transactions for any Fund
4
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IDS Small Company Index Fund
in the IDS MUTUAL FUND GROUP. AEFC carefully monitors compliance with its
Code of Ethics.
On occasion, it may be desirable to compensate a broker for research
services or for brokerage services by paying a commission that might not
otherwise be charged or a commission in excess of the amount another
broker might charge. The board has adopted a policy authorizing AEFC to
do so to the extent authorized by law, if AEFC determines, in good faith,
that such commission is reasonable in relation to the value of the
brokerage or research services provided by a broker or dealer, viewed
either in the light of that transaction or AEFC's overall responsibilities
to the Funds in the IDS MUTUAL FUND GROUP and other accounts for which it
acts as investment advisor.
Research provided by brokers supplements AEFC's own research activities.
Such services include economic data on, and analysis of, U.S. and foreign
economies; information on specific industries; information about specific
companies, including earnings estimates; purchase recommendations for
stocks and bonds; portfolio strategy services; political, economic,
business and industry trend assessments; historical statistical
information; market data services providing information on specific issues
and prices; and technical analysis of various aspects of the securities
markets, including technical charts. Research services may take the form
of written reports, computer software or personal contact by telephone or
at seminars or other meetings. AEFC has obtained, and in the future may
obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment
decision-making purposes, which include the research, portfolio management
and trading functions and other services to the extent permitted under an
interpretation by the SEC.
When paying a commission that might not otherwise be charged or a
commission in excess of the amount another broker might charge, AEFC must
follow procedures authorized by the board. To date, three procedures have
been authorized. One procedure permits AEFC to direct an order to buy or
sell a security traded on a national securities exchange to a specific
broker for research services it has provided. The second procedure
permits AEFC, in order to obtain research, to direct an order on an agency
basis to buy or sell a security traded in the over-the-counter market to a
firm that does not make a market in that security. The commission paid
generally includes compensation for research services. The third
procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Fund to pay a commission in excess of the amount
another broker might have charged. AEFC has advised the Fund it is
necessary to do business with a number of brokerage firms on a continuing
basis to obtain services such as the handling of large orders, the
willingness of a broker to risk its own money by taking a position in a
security, and the specialized handling of a particular group of securities
that only certain brokers may be able to offer. As a result of this
5
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IDS Small Company Index Fund
arrangement, some portfolio transactions may not be effected at the lowest
commission, but AEFC believes it may obtain better overall execution.
AEFC has assured the Fund that under all three procedures the amount of
commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
All transactions, including the foregoing, shall be placed on the basis of
obtaining the best available price and the most favorable execution. In
so doing, if in the professional opinion of the person responsible for
selecting the broker or dealer, several firms can execute the transaction
on the same basis, consideration will be given by such person to those
firms offering research services. Such services may be used by AEFC in
providing advice to all the Funds in the IDS MUTUAL FUND GROUP even though
it is not possible to relate the benefits to any particular Fund or
account.
Each investment decision made for the Fund is made independently from any
decision made for another Fund in the IDS MUTUAL FUND GROUP or other
account advised by AEFC or any of its subsidiaries. When the Fund buys or
sells the same security as another Fund or account, AEFC carries out the
purchase or sale in a way the Fund agrees in advance is fair. Although
sharing in large transactions may adversely affect the price or volume
purchased or sold by the Fund, the Fund hopes to gain an overall advantage
in execution. AEFC has assured the Fund it will continue to seek ways to
reduce brokerage costs.
On a periodic basis, AEFC makes a comprehensive review of the
broker-dealers and the overall reasonableness of their commissions. The
review evaluates execution, operational efficiency and research services.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH
AMERICAN EXPRESS FINANCIAL CORPORATION
Affiliates of American Express Company (American Express) (of which AEFC
is a wholly owned subsidiary) may engage in brokerage and other securities
transactions on behalf of the Fund according to procedures adopted by the
Fund's board and to the extent consistent with applicable provisions of
the federal securities laws. AEFC will use an American Express affiliate
only if (i) AEFC determines that the Fund will receive prices and
executions at least as favorable as those offered by qualified independent
brokers performing similar brokerage and other services for the Fund and
(ii) the affiliate charges the Fund commission rates consistent with those
the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
AEFC may direct brokerage to compensate an affiliate. AEFC will receive
research on South Africa from New Africa Advisors, a wholly-owned
6
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IDS Small Company Index Fund
subsidiary of Sloan Financial Group. AEFC owns 100% of IDS Capital
Holdings, Inc. which in turn owns 40% of Sloan Financial Group. New
Africa Advisors will send research to AEFC, and in turn AEFC will direct
trades to a particular broker. The broker will have an agreement to pay
New Africa Advisors. All transactions will be on a best execution basis.
Compensation received will be reasonable for the services rendered.
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past
performance. Average annual total return to be used by the Fund will be
based on standardized methods of computing performance as required by the
SEC. An explanation of these methods used by the Fund to compute
performance follows below.
Average annual total return
The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
n
P(l+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)
Standard & Poor's Small Capitalization Stock(Registered
Trademark) Index total return
The Standard & Poor's Small Capitalization Stock Index ("S&P SmallCap
600(Registered Trademark) Index") consists of 600 domestic stocks chosen
for market size, liquidity (bid/asked spread, ownership, share turnover
and number of no trade days) and industry group representation. It is a
market value weighted index. The weighted average market capitalization
as of November 30, 1995 is $684 million.
The index is valued at the end of every day using composite prices and
available shares. Standard & Poor's ("S&P") does not use an index divisor
method for calculating the index. A geometric rate of return is
calculated from the daily valuations.
7
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IDS Small Company Index Fund
To calculate the total return for the S&P SmallCap 600 Index for a given
time period, add the indexed dividend to the closing Index value. Then,
divide this number by the closing S&P SmallCap 600 Index value at the
beginning of the time period. The indexed dividend is an index number
that represents the dividend distribution of the companies in the Index.
It is calculated by adding the total daily dividends (based on the ex-
dividend date) for all of the stocks in the Index for a given time period,
and then converting that sum to an indexed number by dividing it by the
same Index Divisor that is used to calculate the actual S&P SmallCap 600
Index.
The general formula to calculate the indexed dividend is:
Total Daily Dividends
----------------------- = Indexed Dividend
Latest Index Divisor
The Daily Indexed Dividend for the S&P SmallCap 600 Index on December 5,
1994, can be calculated using the above formula and the appropriate index
divisor -- 1990.5639.
7.9928
------------------ = Indexed Dividend
1900.5639
Indexed Dividend = 0.00421
S&P's uses the ex-dividend date rather than the payment date to determine
the total daily dividends for each day because the marketplace price
adjustment for the dividend occurs on the ex-date. Treatment of special
dividends, such as stock dividends and extraordinary dividends, paid by
companies in the S&P SmallCap 600 Index is decided upon on a case-by-case
basis.
The S&P SmallCap 600 Index total-return calculation assumes the
reinvestment of dividends on a daily basis. Monthly, quarterly, and
annual total-return numbers for the S&P SmallCap 600 Index are calculated
by daily compounding of the reinvested dividends. The table below
calculates the 1994 annual total return for the S&P SmallCap 600 Index by
compounding the monthly total returns, which are based on compounded daily
total returns. The year-to-date total-return index is also calculated
assuming daily reinvestment of dividends; however, the base period is the
last day of the prior year.
The total return calculations for the S&P SmallCap 600 Index industry
groups are calculated with dividends reinvested on a MONTHLY, not a daily
8
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IDS Small Company Index Fund
basis. The quarterly and annual industry total return numbers are
calculated by compounding the monthly total returns.
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes
no representation or warranty, express or implied, to any member of the
public regarding the advisability of investing in securities generally or
in the Fund particularly or the ability of the S&P SmallCap 600 Index to
track general stock market performance. The S&P SmallCap 600 Index is
determined, composed and calculated by S&P without regard to the Fund.
S&P has no obligation to take the needs of the Fund into consideration in
determining, composing or calculating the S&P SmallCap 600 Index. S&P is
not responsible for and has not participated in the determination of the
prices and amount of the Fund shares or the timing of the issuance or sale
of those shares or in the determination or calculation of the equation by
which the shares are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of
the Fund's shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES
NO WARRANTY, EXPRESS OR IMPLIED AS TO RESULTS TO BE OBTAINED BY THE FUND,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P SMALLCAP 600 INDEX
OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P SMALLCAP 600 INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
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
9
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IDS Small Company Index Fund
in the Fund over a specified period of time according to the following
formula:
ERV - P
--------
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the
period (or fractional portion thereof)
In its sales material and other communications, the Fund may quote,
compare or refer to rankings, yields or returns as published by
independent statistical services or publishers and publications such as
The Bank Rate Monitor National Index, Barron's, BusinessWeek, Donoghue's
Money Market Fund Report, Financial Services Week, Financial Times,
Financial World, Forbes, Fortune, Global Investor, Institutional Investor,
Investor's Daily, Kiplinger's Personal Finance, Lipper Analytical
Services, Money, Mutual Fund Forecaster, Newsweek, The New York Times,
Personal Investor, Stanger Report, Sylvia Porter's Personal Finance, USA
Today, U.S. News and World Report, The Wall Street Journal and
Wiesenberger Investment Companies Service.
VALUING FUND SHARES
The value of an individual share for each class is determined by using the
net asset value before shareholder transactions for the day.
In determining net assets before shareholder transactions, the Fund's
securities are valued as follows as of the close of business of the New
York Stock Exchange (the Exchange):
. Securities, except bonds other than convertibles, traded
on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted
sales price on the exchange where such security is
primarily traded.
. Securities traded on a securities exchange for which a
last-quoted sales price is not readily available are
valued at the mean of the closing bid and asked prices,
looking first to the bid and asked prices on the exchange
where the security is primarily traded and, if none
exist, to the over-the-counter market.
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IDS Small Company Index Fund
. Securities included in the NASDAQ National Market System
(NASDAQ) are valued at the last-quoted sales price in
this market.
. Securities included in NASDAQ for which a last-quoted
sales price is not readily available, and other
securities traded over-the-counter but not included in
the NASDAQ are valued at the mean of the closing bid and
asked prices.
. Futures and options traded on major exchanges are valued
at the last-quoted sales price on their primary exchange.
. Foreign securities traded outside the United States are
generally valued as of the time their trading is
complete, which is usually different from the close of
the Exchange. Foreign securities quoted in foreign
currencies are translated into U.S. dollars at the
current rate of exchange. Occasionally, events affecting
the value of such securities may occur between such times
and the close of the Exchange that will not be reflected
in the computation of the 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 Fund's board.
. Short-term securities maturing more than 60 days from the
valuation date are valued at the readily available market
price or approximate market value based on current
interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than
60 days at acquisition date are valued at amortized cost
using the market value on the 61st day before maturity.
Short-term securities maturing in 60 days or less at
acquisition date are valued at amortized cost. Amortized
cost is an approximation of market value determined by
systematically increasing the carrying value of a
security if acquired at a discount, or reducing the
carrying value if acquired at a premium, so that the
carrying value is equal to maturity value on the maturity
date.
. Securities without a readily available market price,
bonds other than convertibles and other assets are valued
at fair value as determined in good faith by the board.
The board is responsible for selecting methods it
believes provide fair value. When possible, bonds are
valued by a pricing service independent from the Fund.
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IDS Small Company Index Fund
If a valuation of a bond is not available from a pricing
service, the bond will be valued by a dealer
knowledgeable about the bond if such a dealer is
available.
The Exchange, AEFC and the Fund will be closed on the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
INVESTING IN THE FUND
Sales Charge
Shares of the Fund are sold at the public offering price determined at the
close of business on the day an application is accepted. The public
offering price is the net asset value of one share plus a sales charge, if
applicable. For Class B and Class Y, there is no initial sales charge so
the public offering price is the same as the net asset value. For Class
A, the public offering price for an investment of less than $50,000 is
determined by dividing the net asset value of one share by 0.95 (1.00-0.05
for a maximum 5% sales charge) to get the public offering price. The
sales charge is paid to American Express Financial Advisors by the person
buying the shares.
Class A - Calculation of the Sales Charge
Sales charges are determined as follows:
Within each increment,
sales charge as a
percentage of:
---------------------------
Public Net
Amount of Investment Offering Price Amount Invested
-------------------- -------------- ---------------
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00
Sales charges on an investment greater than $50,000 and less than
$1,000,000 are calculated for each increment separately and then totaled.
The resulting total sales charge, expressed as a percentage of the public
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IDS Small Company Index Fund
offering price and of the net amount invested, will vary depending on the
proportion of the investment at different sales charge levels.
For example, compare an investment of $60,000 with an investment of
$85,000. The $60,000 investment is composed of $50,000 that incurs a
sales charge of $2,500 (5.0% x $50,000) and $10,000 that incurs a sales
charge of $450 (4.5% x $10,000). The total sales charge of $2,950 is
4.92% of the public offering price and 5.17% of the net amount invested.
In the case of the $85,000 investment, the first $50,000 also incurs a
sales charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge
of $1,575 (4.5% x $35,000). The total sales charge of $4,075 is 4.79% of
the public offering price and 5.04% of the net amount invested.
The following table shows the range of sales charges as a percentage of
the public offering price and of the net amount invested on total
investments at each applicable level.
<TABLE>
<CAPTION>
On total investment,
sales charge as a
percentage of:
--------------------
Public Net
Amount of Investment Offering Price Amount Invested
-------------------- -------------- ---------------
ranges from:
---------------------------------
<S> <C> <C> <C> <C>
First $ 50,000 5.00% 5.26%
More than 50,000 to 100,000 5.00-4.50 5.26-4.71
More than 100,000 to 500,000 4.50-3.80 4.71-3.95
More than 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.0 0.00
</TABLE>
The initial sales charge is waived for certain qualified plans that meet
the requirements described in the prospectus. Participants in these
qualified plans may be subject to a deferred sales charge on certain
redemptions. The deferred sales charge on certain redemptions will be
waived if the redemption is a result of a participant's death, disability,
retirement, attaining age 59 1/2, loans or hardship withdrawals. The
deferred sales charge only applies to plans with less than $1 million in
assets and fewer than 100 participants.
13
<PAGE>
IDS Small Company Index Fund
Class A - Reducing the Sales Charge
Sales charges are based on the total amount of your investments in the
Fund. The amount of all prior investments plus any new purchase is
referred to as your "total amount invested." For example, suppose you
have made an investment of $20,000 and later decide to invest $40,000
more. Your total amount invested would be $60,000. As a result, $10,000
of your $40,000 investment qualifies for the lower 4.5% sales charge that
applies to investments of more than $50,000 and up to $100,000.
The total amount invested includes any shares held in the Fund in the name
of a member of your immediate family (spouse and unmarried children under
21). For instance, if your spouse already has invested $20,000 and you
want to invest $40,000, your total amount invested will be $60,000 and
therefore you will pay the lower charge of 4.5% on $10,000 of the $40,000.
Until a spouse remarries, the sales charge is waived for spouses and
unmarried children under 21 of deceased trustees, board members, officers
or employees of the Fund or AEFC or its subsidiaries and of deceased
advisors.
The total amount invested also includes any investment you or your
immediate family already have in the other publicly offered funds in the
IDS MUTUAL FUND GROUP where the investment is subject to a sales charge.
For example, suppose you already have an investment of $30,000 in another
IDS Fund. If you invest $40,000 more in this Fund, your total amount
invested in the Funds will be $70,000 and therefore $20,000 of your
$40,000 investment will incur a 4.5% sales charge.
Finally, Individual Retirement Account (IRA) purchases, or other employee
benefit plan purchases made through a payroll deduction plan or through a
plan sponsored by an employer, association of employers, employee
organization or other similar entity, may be added together to reduce
sales charges for shares purchased through that plan.
Class A - Letter of Intent (LOI)
If you intend to invest $1 million over a period of 13 months, you can
reduce the sales charges in Class A by filing a LOI. The agreement can
start at any time and will remain in effect for 13 months. Your
investment will be charged normal sales charges until you have invested $1
million. At that time, your account will be credited with the sales
charges previously paid. Class A investments made prior to signing a 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.
14
<PAGE>
IDS Small Company Index Fund
Here's an example. You file a LOI to invest $1 million and make an
investment of $100,000 at that time. You pay the normal 5% sales charge
on the first $50,000 and 4.5% sales charge on the next $50,000 of this
investment. Let's say you make a second investment of $900,000 (bringing
the total up to $1 million) one month before the 13-month period is up.
On the date that you bring your total to $1 million, AEFC makes an
adjustment. The adjustment is made by crediting your account with
additional shares, in an amount equivalent to the sales charge previously
paid to your account.
Systematic Investment Programs
After you make your initial investment of $2,000 or more, you can arrange
to make additional payments of $100 or more on a regular basis. These
minimums do not apply to all systematic investment programs. You decide
how often to make payments - monthly, quarterly or semiannually. You are
not obligated to make any payments. You can omit payments or discontinue
the investment program altogether. The Fund also can change the program
or end it at any time. If there is no obligation, why do it? Putting
money aside is an important part of financial planning. With a systematic
investment program, you have a goal to work for.
How does this work? Your regular investment amount will purchase more
shares when the net asset value per share decreases, and fewer shares when
the net asset value per share increases. Each purchase is a separate
transaction. After each purchase your new shares will be added to your
account. Shares bought through these programs are exactly the same as any
other fund shares. They can be bought and sold at any time. A systematic
investment program is not an option or an absolute right to buy shares.
The systematic investment program itself cannot ensure a profit, nor can
it protect against a loss in a declining market. If you decide to
discontinue the program and redeem your shares when their net asset value
is less than what you paid for them, you will incur a loss.
For a discussion on dollar-cost averaging, see Appendix B.
Automatic Directed Dividends
Dividends, including capital gain distributions, paid by another fund in
the IDS MUTUAL FUND GROUP subject to a sales charge, may be used to
automatically purchase shares in the same class of this Fund without
paying a sales charge. Dividends may be directed to existing accounts
only. Dividends declared by a fund are exchanged to this Fund the
following day. Dividends can be exchanged into one fund but cannot be
split to make purchases in two or more funds. Automatic directed
dividends are available between accounts of any ownership except:
------
15
<PAGE>
IDS Small Company Index Fund
. Between a non-custodial account and an IRA, or 401(k)
plan account or other qualified retirement account of
which American Express Trust Company acts as custodian;
. Between two American Express Trust Company custodial
accounts with different owners (for example, you may not
exchange distributions from your IRA to the IRA of your
spouse);
. Between different kinds of custodial accounts with the
same ownership (for example, you may not exchange
distributions from your IRA to your 401(k) plan account,
although you may exchange distributions from one IRA to
another IRA).
Dividends may be directed from accounts established under the Uniform
Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only
into other UGMA or UTMA accounts with identical ownership.
The Fund's investment goal is described in its prospectus along with other
information, including fees and expanse ratios. Before exchanging
dividends into another fund, you should read its prospectus. You will
receive a confirmation that the automatic directed dividend service has
been set up for your account.
REDEEMING SHARES
You have a right to redeem your shares at any time. For an explanation of
redemption procedures, please see the prospectus.
DURING AN EMERGENCY, the board can suspend the computation of net asset
value, stop accepting payments for purchase of shares or suspend the duty
of the Fund to redeem shares for more than seven days. Such emergency
situations would occur if:
. The Exchange closes for reasons other than the usual
weekend and holiday closings or trading on the Exchange
is restricted, or
. Disposal of the Fund's securities is not reasonably
practicable or it is not reasonably practicable for the
Fund to determine the fair value of its net assets, or
. The SEC, under the provisions of the Investment Company
Act of 1940 (the 1940 Act) declares a period of emergency
to exist.
16
<PAGE>
IDS Small Company Index Fund
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 lesser of $250,000 or 1% of
the net assets of the Fund at the beginning of the period. Although
redemptions in excess of this limitation would normally be paid in cash,
the Fund reserves the right to make these payments in whole or in part in
securities or other assets in case of an emergency, or if the payment of a
redemption in cash would be detrimental to the existing shareholders of
the Fund as determined by the board. In these circumstances, the
securities distributed would be valued as set forth in the prospectus.
Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.
PAY-OUT PLANS
You can use any of several pay-out plans to redeem your investment in
regular installments. If you redeem Class B shares you may be subject to
a contingent deferred sales charge as discussed in the prospectus. While
the plans differ on how the pay-out is figured, they all are based on the
redemption of your investment. Net investment income dividends and any
capital gain distributions will automatically be reinvested, unless you
elect to receive them in cash. If you are redeeming a tax-qualified plan
account for which American Express Trust Company acts as custodian, you
can elect to receive your dividends and other distributions in cash when
permitted by law. If you redeem an IRA or a qualified retirement account,
certain restrictions, federal tax penalties and special federal income tax
reporting requirements may apply. You should consult your tax advisor
about this complex area of the tax law.
Applications for a systematic investment in a class of the Fund subject to
a sales charge normally will not be accepted while a pay-out plan for any
of those funds is in effect. Occasional investments, however, may be
accepted.
To start any of these plans, please write or call American Express
Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534, 612--
671-3733. Your authorization must be received in the Minneapolis
headquarters at least five days before the date you want your payments to
begin. The initial payment must be at least $50. Payments will be made on
a monthly, bimonthly, quarterly, semiannual or annual basis. Your choice
is effective until you change or cancel it.
17
<PAGE>
IDS Small Company Index Fund
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
plan and arrange to take 0.5% each month, you will get $50 if the value of
your account is $10,000 on the payment date.
TAXES
If you buy shares in the Fund and then exchange into another fund, it is
considered a sale and subsequent purchase of shares. Under the tax laws,
if this exchange is done within 91 days, any sales charge waived on Class
A shares on a subsequent purchase of shares applies to the new shares
acquired in the exchange. Therefore, you cannot create a tax loss or
18
<PAGE>
IDS Small Company Index Fund
reduce a tax gain attributable to the sales charge when exchanging shares
within 91 days.
Retirement Accounts
If you have a nonqualified investment in the Fund and you wish to move
part or all of those shares to an IRA or qualified retirement account in
the Fund, you can do so without paying a sales charge. However, this type
of exchange is considered a sale of shares and may result in a gain or
loss for tax purposes. In addition, this type of exchange may result in
an excess contribution under IRA or qualified plan regulations if the
amount exchanged plus the amount of the initial sales charge applied to
the amount exchanged exceeds annual contribution limitations. For
example: If you were to exchange $2,000 in Class A shares from a non-
qualified account to an IRA without considering the 5% ($100) initial
sales charge applicable to that $2,000, you may be deemed to have exceeded
current IRA annual contribution limitations. You should consult your tax
advisor for further details about this complex subject.
Net investment income dividends received should be treated as dividend
income for federal income tax purposes. Corporate shareholders are
generally entitled to a deduction equal to 70% of that portion of the
Fund's dividend that is attributable to dividends the Fund received from
domestic (U.S.) securities.
Capital gain distributions received by individual and corporate
shareholders, if any, should be treated as long-term capital gains
regardless of how long they owned their shares. Short-term capital gains
earned by the Fund are paid to shareholders as part of their ordinary
income dividend and are taxable.
Under federal tax law, 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
19
<PAGE>
IDS Small Company Index Fund
75% or more of its gross income for the taxable year is passive income or
if 50% or more of the average value of its assets consists of assets that
produce or could produce passive income.
This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of
federal, state and local income tax laws to fund distributions.
AGREEMENTS
Investment Management Services Agreement
The Fund has an Investment Management Services Agreement with AEFC. For
its services, AEFC is paid a fee based on the following schedule:
Assets Annual rate at
(billions) each asset level
---------- ----------------
First $0.25 0.38%
Next 0.25 0.37
Next 0.25 0.36
Next 0.25 0.35
Over 1.0 0.34
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 current Agreement, the Fund also pays taxes, brokerage
commissions and nonadvisory expenses, which include custodian fees; audit
and certain legal fees; fidelity bond premiums; registration fees for
shares; Fund office expenses; consultants' fees; compensation of board
members, officers and employees; corporate filing fees; organizational
expenses; expenses incurred in connection with lending securities to the
Fund; and expenses properly payable by the Fund, approved by the board.
20
<PAGE>
IDS Small Company Index Fund
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
Assets Annual rate at
(billions) each asset level
---------- ----------------
First $0.25 0.10%
Next 0.25 0.08
Next 0.25 0.06
Next 0.25 0.04
Over $1 0.02
The fee is calculated for each calendar day on the basis of net assets as
of the close of business two business days prior to the day for which the
calculation is made.
Transfer Agency Agreement
The Fund has a Transfer Agency Agreement with AEFC. This agreement
governs AEFC's responsibility for administering and/or performing transfer
agent functions, for acting as service agent in connection with dividend
and distribution functions and for performing shareholder account
administration agent functions in connection with the issuance, exchange
and redemption or repurchase of the Fund's shares. Under the agreement,
AEFC will earn a fee from the Fund determined by multiplying the number of
shareholder accounts at the end of the day by a rate determined for each
class per year and dividing by the number of days in the year. The rate
for Class A and Class Y is $15 per year and for Class B is $16 per year.
The fees paid to AEFC may be changed from time to time upon agreement of
the parties without shareholder approval.
Distribution Agreement
Under a Distribution Agreement, sales charges deducted for distributing
fund shares are paid to American Express Financial Advisors daily.
Shareholder Service Agreement
The 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.
21
<PAGE>
IDS Small Company Index Fund
Plan and Agreement of Distribution
For Class B shares, to help American Express Financial Advisors defray the
cost of distribution and servicing, not covered by the sales charges
received under the Distribution Agreement, the Fund and American Express
Financial Advisors entered into a Plan and Agreement of Distribution
(Plan). These costs cover almost all aspects of distributing the Fund's
shares except compensation to the sales force. A substantial portion of
the costs are not specifically identified to any one fund in the IDS
MUTUAL FUND GROUP. Under the Plan, American Express Financial Advisors is
paid a fee at an annual rate of 0.75% of the Fund's average daily net
assets attributable to Class B shares.
The Plan must be approved annually by the board, including a majority of
the disinterested board members, if it is to continue for more than a
year. At least quarterly, the board must review written reports
concerning the amounts expended under the Plan and the purposes for which
such expenditures were made. The Plan and any agreement related to it may
be terminated at any time by vote of a majority of board members who are
not interested persons of the Fund and have no direct or indirect
financial interest in the operation of the Plan or in any agreement
related to the Plan, or by vote of a majority of the outstanding voting
securities of the Fund's Class B shares or by American Express Financial
Advisors. The Plan (or any agreement related to it) will terminate in the
event of its assignment, as that term is defined in the 1940 Act, as
amended. The Plan may not be amended to increase the amount to be spent
for distribution without shareholder approval, and all material amendments
to the Plan must be approved by a majority of the board members, including
a majority of the board members who are not interested persons of the Fund
and who do not have a financial interest in the operation of the Plan or
any agreement related to it. The selection and nomination of
disinterested board members is the responsibility of the other
disinterested board members. No interested person of the Fund, and no
board member who is not an interested person, has any direct or indirect
financial interest in the operation of the Plan or any related agreement.
Total Fees and Expenses
Total fees and nonadvisory expenses cannot exceed the most restrictive
applicable state limitation. Currently, the most restrictive applicable
state expense limitation, subject to exclusion of certain expenses, is
2.5% of the first $30 million of the Fund's average daily net assets, 2%
of the next $70 million and 1.5% of average daily net assets over $100
million, on an annual basis. At the end of each month, if the fees and
expenses of the Fund exceed this limitation for the Fund's fiscal year in
progress, AEFC will assume all expenses in excess of the limitation. AEFC
then may bill the Fund for such expenses in subsequent months up to the
end of that fiscal year, but not after that date. No interest charges are
assessed by AEFC for expenses it assumes.
22
<PAGE>
IDS Small Company Index Fund
BOARD MEMBERS AND OFFICERS
The following is a list of the Fund's board members who, except for Mr.
Dudley, also are board members of the other funds in the IDS MUTUAL FUND
GROUP. As of June 30, 1996, there were 41 registered investment companies
in the IDS MUTUAL FUND GROUP. Mr. Dudley is a board member of 32 publicly
offered funds. All shares have cumulative voting rights with respect to
the election of board members. At all elections of board members, each
shareholder shall be entitled to as many votes as shall equal the number
of shares owned multiplied by the number of board members to be elected
and may cast all of such votes for a single board member or may distribute
them among the number to be voted for, or any two or more of them.
Lynne V. Cheney'
Born in 1941.
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow, AEI. Former Chair of National Endowment of the
Humanities. Director, The Reader's Digest Association Inc., Lockheed-
Martin, the Interpublic Group of Companies, Inc. (advertising) and FPL
Group Inc. (holding company for Florida Power and Light).
William H. Dudley**
Born in 1932.
2900 IDS Tower
Minneapolis, MN
Executive vice president and director of AEFC.
Robert F. Froehlke+
Born in 1922.
1201 Yale Place
Minneapolis, MN
Former president of all funds in the IDS MUTUAL FUND GROUP. Director, the
ICI Mutual Insurance Co., Institute for Defense Analyses, Marshall Erdman
and Associates, Inc. (architectural engineering) and Public Oversight
Board of the American Institute of Certified Public Accountants.
David R. Hubers+**
Born in 1943.
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC. Previously,
senior vice president, finance and chief financial officer of AEFC.
23
<PAGE>
IDS Small Company Index Fund
Heinz F. Hutter+'
Born in 1929.
P.O. Box 2187
Minneapolis, MN
Former president and chief operating officer, Cargill, Incorporated
(commodity merchants and processors).
Anne P. Jones
Born in 1935.
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor
Electronics, Inc.
Melvin R. Laird
Born in 1922.
Reader's Digest Association, Inc.
1730 Rhode Island Ave., N.W.
Washington, D.C.
Senior counsellor for national and international affairs, The Reader's
Digest Association, Inc. Former nine-term congressman, secretary of
defense and presidential counsellor. Director, Martin Marietta Corp.,
Metropolitan Life Insurance Co., The Reader's Digest Association, Inc.,
Science Applications International Corp., Wallace Reader's Digest Funds
and Public Oversight Board (SEC Practice Section, American Institute of
Certified Public Accountants).
William R. Pearce+*
Born in 1927.
901 S. Marquette Ave.
Minneapolis, MN
President of all funds in the IDS MUTUAL FUND GROUP since June 1993.
Former vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors).
Edson W. Spencer+
Born in 1926.
4900 IDS Center
80 S. 8th St.
Minneapolis, MN
24
<PAGE>
IDS Small Company Index Fund
President, Spencer Associates Inc. (consulting). Former chairman of the
board and chief executive officer, Honeywell Inc. Director, Boise Cascade
Corporation (forest products). Member of International Advisory Council
of NEC (Japan).
John R. Thomas**
Born in 1937.
2900 IDS Tower
Minneapolis, MN
Senior vice president and director of AEFC.
Wheelock Whitney+
Born in 1926.
1900 Foshay Tower
821 Marquette Ave.
Minneapolis, MN
Chairman, Whitney Management Company (manages family assets).
C. Angus Wurtele
Born in 1934.
Valspar Corporation
Suite 1700
Minneapolis, MN
Chairman of the board and retired chief executive officer, The Valspar
Corporation (paints). Director, Bemis Corporation (packaging), Donaldson
Company (air cleaners & mufflers) and General Mills, Inc. (consumer
foods).
+ Member of executive committee.
' Member of joint audit committee.
* Interested person by reason of being an officer and employee of
the Fund.
**Interested person by reason of being an officer, board member,
employee and/or shareholder of AEFC or American Express.
The board also has appointed officers who are responsible for day-to-day
business decisions based on policies it has established.
In addition to Mr. Pearce, who is president, the Fund's other officers
are:
Leslie L. Ogg
Born in 1938.
901 S. Marquette Ave.
Minneapolis, MN
25
<PAGE>
IDS Small Company Index Fund
Vice president, general counsel and secretary of all funds in the IDS
MUTUAL FUND GROUP.
Peter J. Anderson
Born in 1942.
IDS Tower 10
Minneapolis, MN
Vice president-investments of all funds in the IDS MUTUAL FUND GROUP.
Director and senior vice president-investments of AEFC.
Melinda S. Urion
Born in 1953.
IDS Tower 10
Minneapolis, MN
Treasurer of all funds in the IDS MUTUAL FUND GROUP. Director and senior
vice president and chief financial officer of AEFC. Director and
executive vice president and controller of IDS Life Insurance Company.
The Fund did not commence operations until August 19, 1996 and, as a
result, did not pay any board members' fees for the previous fiscal year.
As of January 31, 1996, the members of the board received the following
compensation, in total, from all funds in the IDS Mutual Fund Group.
26
<PAGE>
IDS Small Company Index Fund
<TABLE>
<CAPTION>
Compensation Table
------------------
Board Member Aggregate Pension or Estimated Total cash
Compensation Retirement annual benefit compensation from
from the Fund benefits accrued upon the IDS MUTUAL FUND
as Fund expenses retirement GROUP
<S> <C> <C> <C> <C>
Lynne V. Cheney $0 $0 $0 $69,800
Robert F. Froehlke 0 0 0 69,300
Heinz F. Hutter 0 0 0 70,300
Anne P. Jones 0 0 0 70,800
Melvin R. Laird 0 0 0 72,600
Edson W. Spencer 0 0 0 74,300
Wheelock Whitney 0 0 0 70,000
C. Angus Wurtele 0 0 0 67,300
</TABLE>
CUSTODIAN
The Fund's securities and cash are held by American Express Trust Company,
1200 Northstar Center West, 625 Marquette Ave., Minneapolis, MN
55402-2307, through a custodian agreement. The 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 Fund pays the custodian a
maintenance charge and a charge per transaction in addition to reimbursing
the custodian's out-of-pocket expenses.
INDEPENDENT AUDITORS
The Fund's independent auditors are KPMG Peat Marwick LLP, 4200 Norwest
Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent
auditors also provide other accounting and tax-related services as
requested by the Fund.
PROSPECTUS
The prospectus for IDS Small Company Index Fund, dated August 5, 1996, is
hereby incorporated in this SAI by reference.
27
<PAGE>
IDS Small Company Index Fund
APPENDIX A: Options and Stock Index Futures Contracts
The Fund may buy or write options traded on any U.S. or foreign exchange
or in the over-the-counter market. The Fund may enter into stock index
futures contracts traded on any U.S. or foreign exchange. The Fund also
may buy or write put and call options on these futures and on stock
indexes. Options in the over-the-counter market will be purchased only
when the investment manager believes a liquid secondary market exists for
the options and only from dealers and institutions the investment manager
believes present a minimal credit risk. In that case, or if a liquid
secondary market does not exist, the Fund could be required to buy or sell
securities at disadvantageous prices, thereby incurring losses.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length
of the contract. A person who sells a call option is called a writer.
The writer of a call option agrees to sell the security at the set price
when the buyer wants to exercise the option, no matter what the market
price of the security is at that time. A person who buys a put option has
the right to sell a security at a set price for the length of the
contract. A person who writes a put option agrees to buy the security at
the set price if the purchaser wants to exercise the option, no matter
what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets
aside the cash or securities of equivalent value (in the case of a put)
that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In
addition the buyer generally pays a broker a commission. The writer
receives a premium, less another commission, at the time the option is
written. The cash received is retained by the writer whether or not the
option is exercised. A writer of a call option may have to sell the
security for a below-market price if the market price rises above the
exercise price. A writer of a put option may have to pay an above-market
price for the security if its market price decreases below the exercise
price. The risk of the writer is potentially unlimited, unless the option
is covered.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use
of options may benefit the Fund and its shareholders by improving the
Fund's liquidity and by helping to stabilize the value of its net assets.
Buying Options. Put and call options may be used as a trading technique
to facilitate buying and selling securities for investment reasons. They
also may be used for investment. 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
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transaction when the price of the security plus the option price will be
as good or better than the price at which the security could be bought or
sold directly. When the option is purchased, the Fund pays a premium and
a commission. It then pays a second commission on the purchase or sale of
the underlying security when the option is exercised. For recordkeeping
and tax purposes, the price obtained on the purchase of the underlying
security will be the combination of the exercise price, the premium and
both commissions. When using options as a trading technique, commissions
on the option will be set as if only the underlying securities were
traded.
Put and call options also may be held by the Fund for investment purposes.
Options permit the Fund to experience the change in the value of a
security with a relatively small initial cash investment.
The risk the Fund assumes when it buys an option is the loss of the
premium. To be beneficial to the fund, the price of the underlying
security must change within the time set by the option contract.
Furthermore, the change must be sufficient to cover the premium paid, the
commissions paid both in the acquisition of the option and in a closing
transaction or in the exercise of the option and sale (in the case of a
call) or purchase (in the case of a put) of the underlying security. Even
then the price change in the underlying security does not ensure a profit
since prices in the option market may not reflect such a change.
Writing covered options. The Fund will write covered options when it
feels it is appropriate and will follow these guidelines:
All options written by the Fund will be covered. For covered call options
if a decision is made to sell the security, the Fund will attempt to
terminate the option contract through a closing purchase transaction.
The Fund will deal only in standard option contracts traded on national
securities exchanges or those that may be quoted on NASDAQ (a system of
price quotations developed by the National Association of Securities
Dealers, Inc.).
The Fund will write options only as permitted under federal or state laws
or regulations, such as those that limited the amount of total assets
subject to the options. While no limit has been set by the Fund, it will
conform to the requirements of those states. For example, California
limits the writing of options to 50% of the assets of a fund.
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.
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If a covered call option is exercised, the security is sold by the Fund.
The premium received upon writing the option is added to the proceeds
received from the sale of the security. The Fund will recognize a capital
gain or loss based upon the difference between the proceeds and the
security's basis. Premiums received from writing outstanding call options
are included as a deferred credit in the Statement of Assets and
Liabilities and adjusted daily to the current market value.
Options are valued at the close of the New York Stock Exchange. An option
listed on a national exchange, CBOE or NASDAQ will be valued at the last-
quoted sales price or, if such a price is not readily available, at the
mean of the last bid and asked prices.
Stock Index Futures Contracts. Stock index futures contracts are
commodity contracts listed on commodity exchanges. They currently include
contracts on the Standard & Poor's 500 Stock Index ("S&P 500 Index") and
other broad stock market indexes such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index, as well as
narrower sub-indexes such as the S&P 100 Energy Stock Index and the New
York Stock Exchange Utilities Stock Index. A stock index assigns relative
values to common stocks included in the index and the index fluctuates
with the value of the common stocks so included.
A futures contract is a legal agreement between a buyer or seller and the
clearinghouse of a futures exchange in which the parties agree to make a
cash settlement on a specified future date in an amount determined by the
stock index on the last trading day of the contract. The amount is a
specified dollar amount (usually $100 or $500) multiplied by the
difference between the index value on the last trading day and the value
on the day the contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The S&P 500
Index assigns relative weightings to the common stocks included in the
Index, and the Index fluctuates with changes in the market values of those
stocks. In the case of S&P 500 Index futures contracts, the specified
multiple is $500. Thus, if the value of the S&P 500 Index were 150, the
value of one contract would be $75,000 (150 x $500). Unlike other futures
contracts, a stock index futures contract specifies that no delivery of
the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the contract. For
example, excluding any transaction costs, if the Fund enters into one
futures contract to buy the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 154 on that future date,
the Fund will gain $500 x (154-150) or $2,000. If the Fund enters into
one futures contract to sell the S&P 500 Index at a specified future date
at a contract value of 150 and the S&P 500 Index is at 152 on that future
date, the Fund will lose ($500 x (152-150) or $1,000.
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Unlike the purchase or sale of an equity security, no price would be paid
or received by the Fund upon entering into futures contracts. However,
the Fund would be required to deposit with its custodian, in a segregated
account in the name of the futures broker, an amount of cash or U.S.
Treasury bills equal to approximately 5% of the contract value. This
amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve borrowing
funds by the Fund to finance the transactions. Rather, the initial margin
is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker would
be made on a daily basis as the price of the underlying stock index
fluctuates, making the long and short position in the contract more or
less valuable, a process known as marking to market. For example, when
the Fund enters into a contract in which it benefits from a rise in the
value of an index and the price of the underlying stock index has risen,
the Fund will receive from the broker a variation margin payment equal to
that increase in value. Conversely, if the price of the underlying stock
index declines, the Fund would be required to make a variation margin
payment to the broker equal to the decline in value.
How the Fund would use stock index futures contracts. The Fund intends to
use stock index futures contracts and related options for hedging and not
for speculation. Hedging permits the Fund to gain rapid exposure to or
protect itself from changes in the market. For example, the Fund may find
itself with a high cash position at the beginning of a market rally.
Conventional procedures of purchasing a number of individual issues entail
the lapse of time and the possibility of missing a significant market
movement. By using futures contracts, the Fund can obtain immediate
exposure to the market and benefit from the beginning stages of a rally.
The buying program can then proceed and once it is completed (or as it
proceeds), the contracts can be closed. Conversely, in the early stages
of a market decline, market exposure can be promptly offset by entering
into stock index futures contracts to sell units of an index and
individual stocks can be sold over a longer period under cover of the
resulting short contract position.
The Fund may enter into contracts with respect to any stock index or sub-
index. To hedge the Fund's portfolio successfully, however, the Fund must
enter into contracts with respect to indexes or sub-indexes whose
movements will have a significant correlation with movements in the prices
of the fund's portfolio securities.
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Special risks of transactions in stock index futures contracts.
--------------------------------------------------------------
1. Liquidity. The Fund may elect to close some or all of its contracts
prior to expiration. The purpose of making such a move would be to reduce
or eliminate the hedge opposition held by the Fund. The Fund may close
its positions by taking opposite positions. Final determinations of
variation margin are then made, additional cash as required is paid by or
to the Fund, and the Fund realizes a gain or a loss.
Positions in stock index futures contracts may be closed only on an
exchange or board of trade providing a secondary market for such futures
contracts. For example, futures contracts transactions can currently be
entered into with respect to the S&P 500 Stock Index on the Chicago
Mercantile Exchange, the New York Stock Exchange Composite Stock Index on
the New York Futures Exchange and the Value Line Composite Stock Index on
the Kansas City Board of Trade. Although the Fund intends to enter into
futures contracts only on exchanges or boards of trade where there appears
to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular contract at any particular
time. In such event, it may not be possible to close a futures contract
position, and in the event of adverse price movements, the Fund would have
to make daily cash payments of variation margin. Such price movements,
however, will be offset all or in part by the price movements of the
securities subject to the hedge. Of course, there is no guarantee the
price of the securities will correlate with the price movements in the
futures contract and thus provide an offset to losses on a futures
contract.
2. Hedging risks. There are several risks in using stock index futures
contracts as a hedging device. One risk arises because the prices of
futures contracts may not correlate perfectly with movements in the
underlying stock index due to certain market distortions. First, all
participants in the futures market are subject to initial margin and
variation margin requirements. Rather than making additional variation
margin payments, investors may close the contracts through offsetting
transactions which could distort the normal relationship between the index
and futures markets. Second, the margin requirements in the futures
market are lower than margin requirements in the securities market, and
as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures
market also may cause temporary price distortions. Because of price
distortion in the futures market and because of imperfect correlation
between movements in stock indexes and movements in prices of futures
contracts, even a correct forecast of general market trends may not result
in a successful hedging transaction over a short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of
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IDS Small Company Index Fund
securities subject to the hedge. If this occurred, the Fund could lose
money on the contracts and also experience a decline in the value of its
portfolio securities. While this could occur, the investment manager
believes that over time the value of the Fund's portfolio will tend to
move in the same direction as the market indexes and will attempt to
reduce this risk, to the extent possible, by entering into futures
contracts on indexes whose movements it believes will have a significant
correlation with movements in the value of the fund's portfolio securities
sought to be hedged. It also is possible that if the Fund has hedged
against a decline in the value of the stocks held in its portfolio and
stock prices increase instead, the Fund will lose part or all of the
benefit of the increased value of its stock which it has hedged because it
will have offsetting losses in its futures positions. In addition, in
such situations, if the fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. The Fund may have to sell securities at a time
when it may be disadvantageous to do so.
Options on stock index futures contracts. Options on stock index futures
contracts are similar to options on stock except that options on futures
contracts given the purchaser the right, in return for the premium paid,
to assume a position in a stock index futures contract (a long position if
the option is a call and a short position if the option is a put) at a
specified exercise price at any time during the period of the option. If
the option is closed instead of exercised, the holder of the option
receives an amount that represents the amount by which the market price of
the contract exceeds (in the case of a call) or is less than (in the case
of a put) the exercise price of the option on the futures contract. If
the option does not appreciate in value prior to the exercise date, the
Fund will suffer a loss of the premium paid.
Options on stock indexes. Options on stock indexes are securities traded
on national securities exchanges. An option on a stock index is similar
to an option on a futures contract except all settlements are in cash. A
fund exercising a put, for example, would receive the difference between
the exercise price and the current index level. Such options would be
used in the same manner as options on futures contracts.
Special risks of transactions in options on stock index futures contracts
and options on stock indexes. As with options on stocks, the holder of an
option on a futures contract or on a stock index may terminate a position
by selling an option covering the same contract or index and having the
same exercise price and expiration date. The ability to establish and
close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. The Fund will not purchase
options unless the market for such options has developed sufficiently, so
that the risks in connection with options are not greater than the risks
in connection with stock index futures contracts transactions themselves.
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Compared to using futures contracts, purchasing options involves less risk
to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). There may be circumstances, however,
when using an option would result in a greater loss to the Fund than using
a futures contract, such as when there is no movement in the level of the
stock index.
Tax Treatment. As permitted under federal income tax laws, the Fund
intends to identify futures contracts as mixed straddles and not mark them
to market, that is, not treat them as having been sold at the end of the
year at market value. Such an election may result in the Fund being
required to defer recognizing losses incurred by entering into futures
contracts and losses on underlying securities identified as being hedged
against.
Federal income tax treatment of gains or losses from transactions in
options on futures contracts and indexes will depend on whether such
option is a section 1256 contract. If the option is a nonequity option,
the Fund will either make a 1256(d) election and treat the option as a
mixed straddle or mark to market the option at fiscal year end and treat
the gain/loss as 40% short-term and 60% long-term. Certain provisions of
the Internal Revenue Code may also limit the Fund's ability to engage in
futures contracts and related options transactions. For example, at the
close of each quarter of the Fund's taxable year, at least 50% of the
value of its assets must consist of cash, government securities and other
securities, subject to certain diversification requirements. Less than
30% of its gross income must be derived from sales of securities held less
than three months.
The IRS has ruled publicly that an exchange-traded call option is a
security for purposes of the 50%-of-assets test and that its issuer is the
issuer of the underlying security, not the writer of the option, for
purposes of the diversification requirements. In order to avoid realizing
a gain within the three-month period, the Fund may be required to defer
closing out a contract beyond the time when it might otherwise be
advantageous to do so. The Fund also may be restricted in purchasing put
options for the purpose of hedging underlying securities because of
applying the short sale holding period rules with respect to such
underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as
assets due from a broker (the Fund's agent in acquiring the futures
position). During the period the futures contract is open, changes in
value of the contract will be recognized as unrealized gains or losses by
marking to market on a daily basis to reflect the market value of the
contract at the end of each day's trading. Variation margin payments will
be made or received depending upon whether gains or losses are incurred.
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All contracts and options will be valued at the last-quoted sales price on
their primary exchange.
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APPENDIX B: Dollar-Cost Averaging
A technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through
the investment of fixed amounts of money on a regular basis regardless of
the price or market condition. This may enable an investor to smooth out
the effects of the volatility of the financial markets. By using this
strategy, more shares will be purchased when the price is low and less
when the price is high. As the accompanying chart illustrates, dollar-
cost averaging tends to keep the average price paid for the shares lower
than the average market price of shares purchased, although there is no
guarantee.
While this does not ensure a profit and does not protect against
a loss if the market declines, it is an effective way for many
shareholders who can continue investing through changing market conditions
to accumulate shares in a fund to meet long-term goals.
Dollar-cost averaging
Regular Market Price Shares
Investment of a Share Acquired
$100 $ 6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
--- ------ -----
$500 $25.00 103.4
Average market price of a share over 5 periods: $5.00 ($25.00 divided by
5).
Average price you paid for each share: $4.84 ($500 divided by 103.4).
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