<PAGE>
1998 ANNUAL REPORT
IDS
Small Company
Index Fund
(prospectus enclosed)
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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(R)
(S&P SmallCap 600 Index(R)) by investing in all or a representative group of the
equity securities comprising that Index.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment policies, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
AMERICAN EXPRESS Financial Advisors
Distributed by American Express Financial Advisors Inc.
<PAGE>
(icon of) building
Good things, small packages
When people talk stocks, the conversation often centers on big, household names.
But the fact is that all companies were small once, and, as a group, the small
ones have actually provided a greater investment return than their more-sizable
siblings over the long run. Instead of trying to sort out the most likely
winners from the huge number of contenders, IDS Small Company Index Fund simply
buys a representative sample of stocks from a popular index. Therefore, as the
index performs, so, too, should the Fund.
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Contents
The purpose of this annual report is to tell investors how the Fund performed.
(icon of) one open book inside of another
The prospectus, which is bound into the middle of this annual report, describes
the Fund in detail.
1998 annual report
From the chairman 4
From the portfolio manager 4
The Fund's ten largest holdings 6
Making the most of the Fund 7
The Fund's long-term performance 8
Independent auditors' report 9
Financial statements 10
Notes to financial statements 13
Investments in securities 27
IDS mutual funds 34
Federal income tax information 38
1998 prospectus
The Fund in brief 3p
Goal 3p
Investment policies and risks 3p
Manager and distributor 4p
Portfolio manager 4p
Alternative purchase arrangements 4p
Sales charge and Fund expenses 5p
Performance 7p
Financial highlights 7p
Total returns 8p
Investment policies and risks 10p
Facts about investments and their risks 11p
Alternative investment option 13p
Valuing Fund shares 14p
How to purchase, exchange or redeem shares 15p
Alternative purchase arrangements 15p
How to purchase shares 18p
How to exchange shares 20p
How to redeem shares 20p
Reductions and waivers of the sales charge 25p
Special shareholder services 29p
Services 29p
Quick telephone reference 29p
Distributions and taxes 30p
Distributions and Taxes 30p
Dividend and capital gain distributions 30p
Reinvestments 31p
Taxes 31p
How to determine the correct TIN 33p
How the Fund is organized 34p
Shares 34p
Voting rights 34p
Shareholder meetings 34p
Board members and officers 34p
Investment manager 36p
Administrator and transfer agent 36p
Distributor 37p
About American Express Financial Corporation 38p
General information 38p
Appendix 39p
Descriptions of derivative instruments 39p
(This annual report is not part of the prospectus.)
<PAGE>
To our shareholders
From the chairman
If you're an experienced investor, you know that the past few years have
been unusually strong in many financial markets. Perhaps just as
important, you also know that history shows that bull markets don't last
forever. Though they're often unpredictable , declines -- whether they're
brief or long-lasting, moderate or substantial -- are always a
possibility. We saw evidence of that last October, when financial turmoil
in Southeast Asia sparked a sharp decline in worldwide stock markets,
including the U.S.
The potential for such volatility reinforces the need for an investor to
review periodically their long-term goals and examine whether their
investment program remains on track to achieving them. Your quarterly
investment statements are one part of that monitoring process. The other
is a meeting with your American Express financial advisor. That becomes
even more important if there's a major change in your financial situation
or in the financial markets.
William R. Pearce
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
<PAGE>
From the portfolio manager
Although unable to match the torrid pace of large-capitalization issues,
small-cap stocks recorded a healthy gain during the past 12 months.
Reflecting that trend, IDS Small Company Index Fund's Class A shares
generated a total return of 19% for the fiscal year -- February 1997
through January 1998.
The period began with small stocks in a slump, as large-capitalization
issues continued to attract the bulk of investors' capital. The main
reason for the disparity was the perceived safety offered by the
large-caps given their more-predictable earnings growth and trading
liquidity. This negative environment took a particular toll on technology
and financial services stocks, which make up a substantial portion of the
small-cap sector, and resulted in the small-cap index and the Fund losing
ground for the first two months of the period.
By spring, though, inflation fears had pretty well subsided, interest
rates began coming down and money started flowing back into small-cap
issues. Led most often by technology and financial services stocks, the
positive momentum continued largely unabated into the fall. To illustrate
the strength of the rally, the Fund gained more than 30% in the five
months from May through September.
Late sell-off tempers gain
From that point, the broad market, and small-cap stocks in particular,
began to struggle. Although the domestic investment environment remained
quite healthy, financial turmoil in Southeast Asia raised concerns that
U.S. companies doing business in those markets would experience a drop-off
in earnings. Most vulnerable, it was assumed, would be technology
companies, a substantial component of the small-cap sector. With this
cloud hanging over their heads, small stocks were forced to give up a
portion of their gains over the final four months of the fiscal year.
During the 12 months, the Fund's portfolio held 598 of the 600 issues in
the Standard & Poor's Small Capitalization 600 Index, the remaining two
being left out because there were restrictions on owning the stocks. Their
omission had virtually no effect on the Fund's performance over the
period.
As this point (mid-February), the investment environment continues to
benefit from three factors that have powered the bull market for stocks
during the past three years: low inflation, solid economic growth and low
long-term interest rates. The other part of the puzzle -- corporate
earnings -- remains something of a question mark, as investors wait to see
how much effect weakness in Asian economies will ultimately have on U.S.
companies. Should it prove to be modest, I expect relatively positive
performance from small stocks, given the fact that they continue to
represent good value compared with large-cap issues.
Guru Baliga
(picture of) Guru Baliga
Guru Baliga
Portfolio manager
(This annual report is not part of the prospectus.)
<PAGE>
Class A
12-month performance
(all figures per share)
Net asset value (NAV)
Jan. 31, 1998 $6.47
Jan. 31, 1997 $5.51
Increase $0.96
Distributions
Feb. 1, 1997 - Jan. 31, 1998
From income $ .09
From capital gains $ --
Total distribution $ .09
Total return* +19.0%**
Class B
12-month performance
(all figures per share)
Net asset value (NAV)
Jan. 31, 1998 $6.40
Jan. 31, 1997 $5.50
Increase $0.90
Distributions
Feb. 1, 1997 - Jan. 31, 1998
From income $ .09
From capital gains $ --
Total distribution $ .09
Total return* +18.1%**
Class Y
12-month performance
(all figures per share)
Net asset value (NAV)
Jan. 31, 1998 $6.47
Jan. 31, 1997 $5.51
Increase $0.96
Distributions
Feb. 1, 1997 - Jan. 31, 1998
From income $ .09
From capital gains $ --
Total distribution $ .09
Total return* +19.1%**
* The prospectus discusses the effect of sales charges, if any, on the
various classes.
** The total return is a hypothetical investment in the Fund with all
distributions reinvested.
(This annual report is not part of the prospectus.)
<PAGE>
The Fund's ten largest holdings
Percent Value
(of Fund's net assets) (as of Jan. 31, 1998)
Keane .75% $4,659,687
First Commercial .65 4,022,049
American Bankers Insurance Group .64 3,977,999
ICN Pharmaceuticals .64 3,940,462
Deposit Guaranty .60 3,691,187
CCB Financial .60 3,678,750
Camco Intl .59 3,656,952
Keystone Financial .59 3,618,000
CKE Restaurants .58 3,563,721
Tech Data .57 3,517,124
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The ten holdings listed here make up 6.21% of
the Portfolio's net assets
(This annual report is not part of the prospectus.)
<PAGE>
Making the most of the Fund
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost averaging --
a time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly.
You'll automatically buy more shares when the Fund's share price is low,
fewer shares when it is high.
Using this strategy does not ensure a profit or avoid a loss if the market
declines, and requires that you be able to keep on investing on a regular
basis, even when the price of your shares falls or the market declines.
Investing in this manner can be an effective way to accumulate shares to
meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of
invested market price shares purchased
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
(footnote to table) By investing an equal number of dollars each month....
(arrow in table pointing to April) you automatically buy more shares when
the per-share market price is low....
(arrow in table pointing to September) and fewer shares when the per share
market price is high.
You have paid an average price of only $17.91 per share over the 10
months, while the average market price actually was $18.10.
(This annual report is not part of the prospectus.)
<PAGE>
The Fund's long-term performance
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's
investments do well
o you receive capital gains when the gains on
investments sold by the Fund exceed losses
o you receive income when the Fund's stock dividends,
interest and short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and
capital gain distributions to buy additional shares of the Fund or another
fund.
How $10,000 has grown in IDS Small Company Index Fund
X
S&P SmallCap 600 Index
X
$12,412
IDS Small Company
Index Fund Class A
X
$9,500
Oct. Jan. April July Oct. Jan.
8/31/96 '96 '97 '97 '97 '97 '98
Average annual total return
(as of Jan. 31, 1998):
1 year Since
inception*
Class A +13.05% +16.81%
Class B +14.12% +17.56%
Class C +19.13% +21.11%
* Inception date was Aug. 19, 1996. For purposes of the graph above, start
date was Aug. 31, 1996.
Assumes o Holding period from 8/19/96 to 1/31/98. o Returns do not reflect
taxes payable on distributions. o Reinvestment of all income and capital
gain distributions for the Fund, with a value of $244. Also see
"Performance" in the Fund's current prospectus.
The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for
market size, liquidity, and industry group representation. It is a market
weighted index (stock price times shares outstanding), with each stock
affecting the Index in proportion to its market value.
On the graph above you can see the Fund's total return compared to an
unmanaged performance index, the S&P SmallCap 600 Index. In comparing IDS
Small Company Index Fund (Class A) to the index, you should take into
account the fact that the Fund's performance reflects the maximum sales
charge of 5%, while such charges are not reflected in the performance of
the index.
Your investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. Average annual
total return figures reflect the impact of the applicable sales charge up
to a maximum of 5%. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
(This annual report is not part of the prospectus.)
<PAGE>
The financial statements contained in Post-Effective Amendment #19 to
Registration Statement No. 33-30770 filed on or about March 31, 1998, are
incorporated herein by reference
<PAGE>
IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
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IDS Global Growth Fund
Invests in a Portfolio comprised primarily of stocks of companies throughout the
world that are positioned to meet market needs in a changing world economy.
These companies offer above-average potential for long-term growth.
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IDS International Fund
Invests primarily in common stocks of foreign companies that offer potential for
superior growth. The Fund may invest up to 20% of its assets in the U.S. market.
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IDS Global Balanced Fund
Invests in stocks and bonds in, for the most part, major markets throughout the
world, including the U.S. Seeks to provide a balance of growth of capital and
current income.
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IDS Global Bond Fund
Invests in a Portfolio comprised primarily of debt securities of U.S. and
foreign issuers to seek high total return through income and growth of capital.
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Growth funds
Funds in this group seek capital growth, primarily from common stocks. They are
high risk mutual funds with a potential for high reward.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic companies that
explore for, mine and process or distribute gold and other precious metals. A
highly aggressive and speculative fund that seeks long-term growth of capital.
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IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies emphasizing
technological innovation and productivity enhancement. Buys and holds larger
growth-oriented stocks.
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IDS Small Company Index Fund
Invests in all or a representative group of the equity securities comprising the
S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation.
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IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected for their
potential for above-average growth. Above-average means that their growth
potential is better, in the opinion of the portfolio's investment manager, than
the Standard & Poor's Corporation (S&P) 500 Stock Index.
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IDS Research Opportunities Fund
Invests in a Portfolio comprised primarily of equity securities of companies
included in the S&P 500 Index that are believed to have strong growth potential.
The Portfolio is managed using a research methodology by the Research Department
of AEFC. Goal is long-term appreciation.
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(This annual report is not part of the prospectus.)
IDS Growth Fund
Invests in a Portfolio comprised primarily of companies that have above-average
potential for long-term growth as a result of new management, marketing
opportunities or technological superiority.
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IDS New Dimensions Fund
Invests in a Portfolio comprised primarily of companies with
significant growth potential due to superiority in
technology, marketing or management. The Fund frequently
changes its industry mix.
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IDS Progressive Fund
Invests primarily in undervalued common stocks. The Fund holds stocks for the
long term with the goal of capital growth.
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Growth & income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest. Foreign investments may be subject to currency fluctuations and
political and economic risks of the countries in which the investments are made.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks, higher-yielding
equities and bonds. Seeks growth of capital and income.
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IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities purchased are
those recommended by our research analysts as the best from each industry
represented on the index. Offers potential for long-term growth as well as
dividend income.
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IDS Managed Allocation Fund
Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and
foreign debt securities, foreign equity securities and money market instruments.
The Fund provides diversification among these major investment categories and
has a target mix that represents the way the Fund's investments will be
allocated over the long term. Seeks maximum total return.
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IDS Stock Fund
Invests in a Portfolio comprised primarily of common stock of companies
representing many sectors of the economy. Seeks current income and growth of
capital.
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IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential for growth
of capital and income.
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IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek high current
income and growth of income and capital with reduced volatility.
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IDS Diversified Equity Income Fund
Invests in a Portfolio comprised primarily in high-yielding common stocks to
seek high current income and, secondarily, to benefit from the growth potential
offered by stock investments.
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IDS Mutual
Invests in a Portfolio which seeks to balance between common stocks and senior
securities (preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
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(This annual report is not part of the prospectus.)
Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly of long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
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IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
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IDS Selective Fund
Invests in a Portfolio comprised primarily of high-quality corporate bonds and
other highly rated debt instruments including government securities and
short-term investments. Seeks current income and preservation of capital.
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IDS Federal Income Fund
Invests in a Portfolio comprised primarily of securities issued or guaranteed as
to the timely payment of principal and interest by the U.S. government, its
agencies and instrumentalities. Seeks a high level of current income and safety
of principal consistent with its type of investments.
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Tax-exempt income funds
These funds provide tax-free income by investing in municipal bonds. The income
is generally free from federal income tax, but a portion of the income may be
subject to state and local taxes. Risk varies by bond quality.
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government units, with at
least 75% in the four highest rated, lowest risk bond categories.
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IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to the timely
payment of principal and interest. The insurance feature minimizes credit risk
of the Fund but does not guarantee the market value of the Fund's shares.
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IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to provide
income to residents of each respective state that is exempt from federal, state
and local income taxes. (New York is the only state that is exempt at the local
level.)
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IDS High Yield Tax-Exempt Fund
Invests in a Portfolio comprised primarily of medium- and lower-quality
municipal bonds and notes. Lower-quality securities generally involve greater
risk of principal and income.
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IDS Intermediate Tax-Exempt Fund
Invests in mainly investment-grade bonds and other debt securities with
intermediate-term maturities issued by state and local government units. Goal is
to seek a high level of current income exempt from federal taxes.
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(This annual report is not part of the prospectus.)
Money market funds
These money market funds have three main goals: conservation of capital,
constant liquidity and the highest possible current income consistent with these
objectives. An investment in these funds is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that these funds will be able
to maintain a stable net asset value of $1.00 per share. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial paper,
bankers' acceptances, certificates of deposit (CDs) and other bank securities.
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IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and local
governments to seek high current income exempt from federal income taxes.
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For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus by contacting your financial advisor or
writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534. Read it carefully before you invest or send money.
(This annual report is not part of the prospectus.)
<PAGE>
Federal income tax information
IDS Small Company Index Fund
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its
fiscal year. The dividends listed below will be reported to you on Form
1099-DIV, Dividends and Distributions, next January. Shareholders should
consult a tax advisor on how to report distributions for state and local
purposes.
IDS Small Company Index Fund
Year ended Jan. 31, 1998
Class A
Income distribution
taxable as dividend income, 23.42% qualifying for deduction by corporations.
Payable date Per share
Dec. 29, 1997 $0.09235
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $0.00227
Total distributions $0.09462
The distribution of $0.09462 per share, payable Dec. 29, 1997, consisted
of $0.09235 from net short-term capital gains and $0.00227 from net
long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories:28%-$0.00227 and 20%-$0.00000.
(This annual report is not part of the prospectus.)
Class B
Income distribution
taxable as dividend income, 23.42% qualifying for deductions by corporations.
Payable date Per share
Dec. 29, 1997 $0.09235
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $0.00227
Total distributions $0.09462
The distribution of $0.09462 per share, payable Dec. 29, 1997, consisted
of $0.09235 from net short-term capital gains and $0.00227 from net
long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories:28%-$0.00227 and 20%-$0.00000.
Class Y
Income distribution
taxable as dividend income, 23.42% qualifying for deduction by corporations.
Payable date Per share
Dec. 29, 1997 $0.09235
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $0.00227
Total distributions $0.09462
The distribution of $0.09462 per share, payable Dec. 29, 1997, consisted
of $0.09235 from net short-term capital gains and $0.00227 from net
long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories:28%-$0.00227 and 20%-$0.00000.
(This annual report is not part of the prospectus.)
<PAGE>
Quick telephone reference
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
671-3800
TTY Service For the hearing impaired 800-846-4852
American Express Automated account information 800-862-7919
Financial Advisors (TouchTone(R) phones only),
Easy Access Line including current fund prices
and performance, account values
and recent account transactions
AMERICAN EXPRESS Financial Advisors
IDS Small Company Index Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
