-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N7fPQ7CqUgxgUFJGtAJUPN0vW02nDXotiu/3++IYo2v4zOottnUg6b3nZPvmhah3 f8+w4g/F0uslK1Sg1Rd6Ng== 0000898432-96-000369.txt : 19960823 0000898432-96-000369.hdr.sgml : 19960823 ACCESSION NUMBER: 0000898432-96-000369 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960822 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS GROWTH FUND INC CENTRAL INDEX KEY: 0000049702 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 410329910 STATE OF INCORPORATION: MN FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-38355 FILM NUMBER: 96619409 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126712772 497 1 IDS RESEARCH OPPORTUNITIES FUND Prospectus August 5, 1996 The goal of IDS Research Opportunities Fund, a part of IDS Growth Fund, Inc., is long-term growth of capital. The Fund has chosen to participate in a master/feeder structure. Unlike most funds that invest directly in securities, the Fund seeks to achieve its objective by investing all of its assets in a corresponding Portfolio of Growth Trust, which is a separate investment company. This arrangement is commonly known as a master/feeder structure. The Portfolio in which the Fund invests has the same investment objective, policies and restrictions as the Fund. The Portfolio will be managed using a research methodology developed by American Express Financial Corporation, which is designed to give investors the opportunity to achieve a return in excess of the Standard & Poor's 500 Composite Stock Price Index (S&P 500). 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. - 2 - Table of contents Page ---- The Fund in brief . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Goal and types of investments and their risks . . . . . . . . . . . . . 3 Manager and distributor . . . . . . . . . . . . . . . . . . . . . . . . 3 Portfolio manager . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Alternative purchase arrangements . . . . . . . . . . . . . . . . . . . 4 Sales charge and Fund expenses . . . . . . . . . . . . . . . . . . . . 4 Performance Total return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Investment policies and risks . . . . . . . . . . . . . . . . . . . . 8 Facts about investments and their risks . . . . . . . . . . . . . . . . 9 Special considerations regarding master/feeder structure . . . . . . 12 Valuing Fund shares . . . . . . . . . . . . . . . . . . . . . . . . . 14 How to purchase, exchange or redeem shares Alternative purchase arrangements . . . . . . . . . . . . . . . . . . 14 How to purchase shares . . . . . . . . . . . . . . . . . . . . . . . 17 How to exchange shares . . . . . . . . . . . . . . . . . . . . . . . 19 How to redeem shares . . . . . . . . . . . . . . . . . . . . . . . . 19 Reductions and waivers of the sales charge . . . . . . . . . . . . . 25 Special shareholder services Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Quick telephone reference . . . . . . . . . . . . . . . . . . . . . . 30 Distributions and taxes Dividend and capital gain distributions . . . . . . . . . . . . . . . 30 Reinvestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 How to determine the correct TIN . . . . . . . . . . . . . . . . . . . 32 How the Fund and the Portfolio are organized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Voting rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Shareholder meetings . . . . . . . . . . . . . . . . . . . . . . . . 33 Board members and officers . . . . . . . . . . . . . . . . . . . . . 34 Investment manager . . . . . . . . . . . . . . . . . . . . . . . . . 35 Administrator and transfer agent . . . . . . . . . . . . . . . . . . 36 Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 About American Express Financial Corporation General information . . . . . . . . . . . . . . . . . . . . . . . . . 37 - 3 - The Fund in brief ---------------- IDS Research Opportunities Fund (the Fund) is a diversified mutual fund that seeks long-term capital growth. It seeks to achieve its goal by investing all of its assets in Aggressive Growth Portfolio (the Portfolio) of Growth Trust (the Trust) rather than by directly investing in and managing its own portfolio of securities. The Fund is a series of IDS Growth Fund, Inc. (the Company). Because any investment involves risk, achieving this goal cannot be guaranteed. Goal and types of investments and their risks --------------------------------------------- The Fund seeks to provide shareholders with long-term growth of capital. It seeks to achieve this goal by investing all of its assets in the Portfolio of the Trust with the same investment objective as the Fund. The Portfolio is a diversified mutual fund that invests primarily in the equity securities of companies that comprise the S&P 500. The Portfolio does not seek to replicate the S&P 500. Rather, it invests in those securities within the universe of S&P 500 stocks that the Portfolio's adviser believes are undervalued or that offer potential for long-term capital growth. Ordinarily, at least 65% of the Portfolio's total assets will be invested in equity securities. The Portfolio will be managed using a research methodology developed by the Research Department of American Express Financial Corporation (AEFC) that is designed to achieve a return in excess of the return of the S&P 500. Undervalued stocks and stock of companies with above-average growth rates can provide higher returns to investors than stocks of other companies, although the prices of these stocks can fluctuate more. Thus, the Fund is appropriate for long-term investors who seek above average investment returns and, in return, are willing to accept a relatively high degree of short-term price variability and investment risk. The foregoing investment goal is a fundamental policy of the Fund and the Portfolio, which may not be changed unless authorized by a majority of the outstanding voting securities of the Fund or of the Portfolio, as the case may be. However, the Fund may withdraw its assets from the corresponding Portfolio at any time if the board of directors of the Company determines that it is in the best interests of the Fund to do so. In such event, the Company would consider what action should be taken, including whether to retain an investment adviser to manage the Fund's assets directly or to reinvest the Fund's assets in another pooled investment entity. Manager and distributor The Portfolio is managed by AEFC, a provider of financial services since 1894. AEFC currently manages more than $52 billion in assets. Shares of the Fund are sold through American Express Financial Advisors Inc., a wholly owned subsidiary of AEFC. - 4 - Portfolio manager Guru Baliga joined AEFC in 1991 as a research analyst. He became portfolio manager of the Portfolio and IDS Small Company Index Fund in August 1996. He has been portfolio manager of IDS Blue Chip Advantage Fund since 1994. He was appointed to the portfolio management team of IDS Managed Retirement Fund in 1995, and is also a portfolio manager of IDS advisory accounts that are managed similarly to the Portfolio. Alternative purchase arrangements The Fund offers its shares in three classes. Class A shares are subject to a sales charge at the time of purchase. Class B shares are subject to a contingent deferred sales charge (CDSC) on redemptions made within six years of purchase and an annual distribution (12b-1) fee. Class Y shares are sold without a sales charge to qualifying institutional investors. Sales charge and Fund expenses Shareholder transaction expenses are incurred directly by an investor on the purchase or redemption of Fund shares. Fund operating expenses are paid out of Fund assets for each class of shares and include expenses charged by both the Fund and the Portfolio. The purpose of the following table and example is to summarize the aggregate expenses of the Fund and its corresponding Portfolio and to assist investors in understanding the various costs and expenses that investors in the Fund may bear directly or indirectly. The Company's board of directors believes that, over time, the aggregate per share expenses of the Fund and its corresponding Portfolio should be approximately equal to (and may be less than) the per share expenses the Fund would have if the Company retained its own investment adviser and the assets of the Fund were invested directly in the type of securities held by the corresponding Portfolio. The percentages indicated as "Management fee" and "Other expenses" are based on both the Fund's and the Portfolio's projected fees and expenses for the current fiscal year ending July 31, 1996. For additional information concerning Fund and Portfolio expenses, see "How the Fund and the Portfolio are organized." - 5 -
Shareholder transaction expenses Class A Class B Class Y Maximum sales charge on purchases* (as a percentage of offering price) . . . . . . . . . . . . . . . . . . . . 5% 0% 0% Maximum deferred sales charge imposed on redemptions (as a percentage of original purchase price) . . . . . . . . . . . . . . . . . . . . . . . . 0% 5% 0% Annual Fund and allocated Portfolio operating expenses** (as a % of average daily net assets): Class A Class B Class Y Management fee*** . . . . . . . . . . . . . . . . . . . 0.65% 0.65% 0.65% 12b-1 fee . . . . . . . . . . . . . . . . . . . . . . . 0.00% 0.75% 0.00% Other expenses+ . . . . . . . . . . . . . . . . . . . . 0.85% 0.86% 0.65% Total++ . . . . . . . . . . . . . . . . . . . . . . . . 1.50% 2.26% 1.30%
* This charge may be reduced depending on your total investments in IDS Funds. See "Reductions of the sales charge." ** Expenses are based on projected expenses for the Fund's first fiscal year ending July 31, 1996. *** The management fee is paid by the Trust on behalf of the Portfolio. + 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. ++ The Board considered whether the aggregate expenses of the Fund and the Portfolio would be more or less than if the Fund invested directly in the type of securities being held by its corresponding Portfolio. AEFC has agreed to pay the small additional costs required to use a master/feeder structure to - 6 - manage the investment portfolio during the first year of its operation and half of such costs in the second year. AEFC expects that, in subsequent years, the Portfolio's expenses as a master-feeder fund will be equivalent to those of a similar stand-alone fund. Example: Suppose for each year for the next three years, Fund and Portfolio 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 $64 $95 Class B $73 $111 Class B* $23 $71 Class Y $13 $41 * 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 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 Return 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 500, 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. See the SAI for more information about the calculation of 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. - 7 -
Average annual total returns as of March 31, 1996 Since Inception Purchase made 1 year ago 5 years ago (10/11/88) IDS Advisory Accounts* 34.66% 18.45% 20.47% S&P 500** 32.11% 14.67% 15.33% Cumulative total returns as of March 31, 1996 Since Inception Purchase made 1 year ago 5 years ago (10/11/88) IDS Advisory 34.66% 133.17% 301.86% Accounts* S&P 500** 32.11% 98.27% 190.32%
* The examples show combined performance returns for the IDS advisory accounts ("Advisory Accounts") that are managed by AEFC using the same strategy that it will use to manage the Fund. The Advisory Accounts' performance reflects reinvestment of dividends and is calculated net of brokerage commissions and management fees. At March 31, 1996, the composite included all 10 fully discretionary, equity Advisory Accounts under management using this strategy with total assets of $550.5 million, which is 61% of the total assets using this strategy and 2% of total assets under management by AEFC. Terminated accounts are not purged from the composite. Expenses and fees associated with registering a mutual fund have not been deducted from these returns. The returns for the Fund will be lower, initially, due to these expenses and fees. Returns shown should not be considered a representation of the Fund's future performance. ** Returns for the Advisory Accounts are compared to those of the S&P 500 for the same periods. The S&P 500 is an unmanaged index of common stock prices that is frequently used as a general measure of market performance. The Advisory Accounts, like the - 8 - Portfolio, invest in those stocks included in the S&P 500 that AEFC believes will outperform the S&P 500 within the 6- to 12- month period following investment because, in AEFC's opinion, such stocks are undervalued or have above-average growth potential. The S&P 500 reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions and other fees. Investment policies and risks Unlike mutual funds which directly acquire and manage their own portfolio of securities, the Fund seeks to achieve its investment objective by investing all of its assets in a corresponding Portfolio of the Trust, which is a separate investment company. The Portfolio in which the Fund invests has the same investment objective, policies and restrictions as the Fund. The board of directors of the Company believes that by investing all of its assets in the corresponding Portfolio, the Fund will be in a position to realize directly or indirectly certain economies of scale inherent in managing a larger asset base, although there is no assurance this will occur. The policies described below apply both to the Fund and its corresponding Portfolio. The Portfolio is a diversified mutual fund that invests primarily in equity securities of companies comprising the S&P 500 that, in the opinion of AEFC, are undervalued in relation to their long-term earning power or the asset value of their issuers or that have above-average growth potential. Ordinarily, at least 65% of the Portfolio's total assets will be invested in equity securities consisting of common stocks, preferred stocks, securities convertible into common stocks, securities having common stock characteristics such as rights and warrants and foreign equity securities. Securities may be undervalued because of several factors, including the following: market decline, poor economic conditions, tax-loss selling or actual or anticipated unfavorable developments affecting the issuer of the security. Companies also may be undervalued because they are part of an industry that is out of favor with investors even though the individual companies may be financially sound and have high rates of earning growth. Any or all of these factors may provide buying opportunities at attractive prices relevant to the long-term prospects for the companies in question. Companies with above-average growth potential generally will have steady earnings and cash flow growth, good and/or improving balance sheets, strong positions in their market niches and the ability to perform well in a stagnant economy. The Portfolio may invest more than 25% of its total assets in equity securities of companies included in the S&P 500 that are primarily engaged in either the utilities or the energy industry. Because the Portfolio may concentrate its investments in one or both of these industries, the value of its shares will be especially affected by factors peculiar to these industries, and may fluctuate more widely than the value of shares of a - 9 - fund that invests in a broader range of industries. The Portfolio will concentrate its investments in either of these industries only to the extent that the S&P 500 becomes heavily weighted in that industry. The Portfolio's concentration policy can be changed only if holders of a majority of the outstanding voting securities agree to make the change. See "Utilities industry" and Energy industry" below. In order to seek long-term capital growth when interest rates are expected to decline, the Portfolio may invest in debt securities that, at the time of purchase, are rated in one of the four highest rating categories by one nationally recognized statistical rating organization rating that security (i.e., "investment grade securities"). The Portfolio may invest in an unrated debt security if the adviser deems it to be of comparable quality to investment grade. Research Methodology. The Research Department of AEFC has designed a proprietary research rating system that is used as the basis for rating securities of issuers listed on the S&P 500. The research ratings range from a "strong buy" to " strong sell." The Portfolio will invest primarily in equity securities that the Research Department rates highly and expects to outperform the S&P 500. The securities in which the Portfolio invests will not correspond entirely to the S&P 500 securities recommended by the Research Department because some of these recommendations may not be appropriate investments for the Portfolio due to diversification, liquidity or other requirements that apply to registered investment companies. In addition, some of the recommendations may not be appropriate for the Portfolio under its investment objective or investment limitations. Moreover, other AEFC clients who receive the Research Department's recommendations may place purchase or sale orders that make it more difficult for the Portfolio to implement its own orders to buy or sell the same securities. 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 Market risk: The Portfolio 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. Utilities industry: Utility stocks, including electric, gas, telephone and other energy-related (e.g., nuclear) utilities stocks, generally offer dividend yields that exceed those of industrial companies and their prices tend to be less volatile than stocks of industrial companies. However, utility stocks can still be affected by the risks of the stock market in general, as well as factors specific to public utilities companies. Many utility companies, especially electric utility companies, historically have been subject to the risk of increases in fuel and other operating - 10 - costs, changes in interest rates on borrowing for capital improvement programs, changes in applicable laws and regulations, and costs and operating constraints associated with compliance with environmental regulations. In addition, because securities issued by utility companies are particularly sensitive to movements in interest rates, the equity securities of these companies are more affected by movements in interest rates than the equity securities of other companies. Each of these risks could adversely affect the ability of public utilities companies to declare or pay dividends and the ability of holders of common stock, such as the Portfolio, to realize any value from the assets of the company upon liquidation or bankruptcy. Energy Industry: The Portfolio may concentrate its investments in companies in the energy field, including the conventional areas of oil, gas, electricity and coal, as well as newer sources of energy such as geothermal, nuclear, oil shale and solar power. These companies include those that produce, transmit, market or measure energy, as well as those companies involved in exploring for new sources of energy. Securities of companies in the energy field are subject to changes in value and dividend yield which depend largely on the price and supply of energy fuels. Swift price and supply fluctuations may be caused by events relating to international politics, energy conservation, the success of exploration projects and tax or other governmental regulatory policies. Debt securities: The price of bonds generally falls as interest rates increase, and rises as interest rates decrease. The price of an investment-grade bond also fluctuates if its credit rating is upgraded or downgraded. Securities that are subsequently downgraded in quality may continue to be held by the Portfolio, and will be sold only if the portfolio manager believes it is advantageous to do so. Foreign investments: The Portfolio may invest only in foreign securities that are included in the S&P 500 (or that will be included in the S&P 500 in the near future) or in Canadian money market instruments. Foreign investments are subject to political and economic risks of the countries in which the investments are made, including the possibility of seizure or nationalization of companies, imposition of withholding taxes on income, establishment of exchange controls, or adoption of other restrictions that might affect an investment adversely. The Portfolio may invest up to 20% of its total assets in foreign investments included in the S&P 500. American depository receipts: The Portfolio may invest in foreign securities included in the S&P 500 that are traded in the form of American Depository Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. Generally, ADRs, in registered form, are denominated in U.S. dollars and are designed for use in the U.S. securities market. Thus, these securities are not denominated in the same currency as the securities into which they may be converted. ADRs are considered to be foreign investments by the Portfolio and thus subject to the risks and investment limitation set forth under "Foreign investments." - 11 - 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 the investment performance characteristics very quickly and at lower costs. Risks include losses of premiums, rapid changes in prices, defaults by other parties, and inability to close such instruments. The Portfolio will use derivative instruments only to achieve the same investment performance characteristics it could achieve by directly holding those securities and currencies permitted under the investment policies. The Portfolio will designate cash or appropriate liquid assets to cover its portfolio obligations. No more than 5% of the Portfolio's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. This does not, however, limit the portion of the Portfolio's assets at risk to 5%. The Portfolio is not limited as to the percentage of its assets that may be invested in permissible investments, including derivatives, except as otherwise explicitly provided in this prospectus or the SAI. For descriptions of these and other types of derivative instruments, see the Appendix to this prospectus and the SAI. The Portfolio may use any of the above instruments, and there can be no assurance that any strategy that is used will succeed. The Portfolio'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. 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 Portfolio's net assets will be held in securities and other instruments that are illiquid. - 12 - Money market instruments: Short-term debt securities rated in the top two grades or the equivalent are used to meet daily cash needs and at various times to hold assets until better investment opportunities arise. Generally, less than 25% of the Portfolio's total assets are in these money market instruments. However, for temporary defensive purposes, these investments could exceed that amount for a limited period of time. The investment policies described above, including the Portfolio's policy of investing in stocks included in the S&P 500, may be changed by the board. Lending portfolio securities: The Portfolio may lend its securities to earn income so long as borrowers provide collateral equal to the market value of the loans. The risks are that borrowers will not provide collateral when required or return securities when due. Unless a majority of the outstanding voting securities approve otherwise, loans may not exceed 30% of the Portfolio's net assets. Portfolio turnover: The Portfolio does not expect its portfolio turnover rate to exceed 200% during its initial fiscal period. High portfolio turnover can lead to increased brokerage commissions and taxes. Special considerations regarding master/feeder structure An investor in the Fund should be aware that the Fund, unlike mutual funds which directly acquire and manage their own portfolio of securities, seeks to achieve its investment objective by investing its assets in the Portfolio of the Trust with an identical investment objective to the Fund. This arrangement is commonly known as a "master/feeder structure." The Trust is a separate investment company. The Fund's interest in securities owned by the Portfolio will be indirect. The board of the Company has considered the advantages and disadvantages of investing the assets of the Fund in the Portfolio. The board believes that this approach will be in the best interests of the Fund and its shareholders and offers opportunities for economies of scale. The investment objective, policies and restrictions of the Portfolio are described under the captions "Goal and types of investments and their risks" and "Facts about investments and their risks." Additional information on investment policies may be found in the SAI. In addition to selling units to the Fund, the Portfolio may sell units to other affiliated and non-affiliated mutual funds and to institutional investors. Such investors will invest in the Portfolio on the same terms and conditions and will pay a proportionate share of the Portfolio's expenses. However, the other investors investing in the Portfolio are not required to sell their shares at the same price as the Fund due to variations in sales commissions and other operating expenses. Therefore, investors in the Fund should be aware that these differences may result in differences in returns experienced by investors in the different funds that invest in the same Portfolio. Information on other funds investing in the Portfolio may be obtained by contacting American Express Financial Advisors at 1-800-AXP-SERV. - 13 - The Fund may withdraw (completely redeem) all its assets from the Portfolio at any time if the board determines that it is in the best interest of the Fund to do so. In the event the Fund withdraws all of its assets from the Portfolio, the board would consider what action might be taken, including investing all assets of the Fund in another pooled investment entity or retaining an investment advisor to manage the Fund's assets in accordance with its investment objective. The investment objective of the Fund and its Portfolio can only be changed with the approval of a majority of the applicable entity's outstanding voting securities. If the objective of the Portfolio changes and shareholders of the Fund do not approve a parallel change in the Fund's investment objective, the Fund would seek an alternative investment vehicle for the Fund or retain an investment advisor on its behalf. Investors in the Fund should be aware that smaller funds investing in the Portfolio may be adversely affected by the actions of larger funds investing in the Portfolio. For example, if a large fund withdraws from the Portfolio, the remaining funds may experience higher prorated operating expenses, thereby producing lower returns. Additionally, the Portfolio may become less diverse, resulting in increased portfolio risk, and experience decreasing economies of scale. Institutional investors in the Portfolio that have a greater pro rata ownership than the Fund could have effective voting control over the operation of the Portfolio. Certain changes in the Portfolio's fundamental objective, policies and restrictions could require the Fund to redeem its interest in the Portfolio. Any such withdrawal could result in a distribution of in-kind portfolio securities (as opposed to a cash distribution). If securities are distributed, the Fund could incur brokerage, tax or other charges in converting the securities to cash. In addition, a distribution in kind may result in a less diversified portfolio of investments or adversely affect the liquidity of the Fund. As required by the Investment Company Act of 1940, the Fund will hold a meeting of Fund shareholders. The Fund will vote its units in the Portfolio for or against such matters proportionately to the instructions to vote for or against such matters received from Fund shareholders. The Fund will vote shares for which it receives no voting instructions in the same proportion as the shares for which it receives voting instructions. See "Investment manager and transfer agent" for a description of the management and other expenses associated with the Fund's investment in the Portfolio. 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: - 14 - . 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 of directors. How to purchase, exchange or redeem shares Alternative purchase arrangements The Fund offers three different classes of shares -- Class A, Class B and Class Y. The primary differences among the classes are in the sales charge structures and in their ongoing expenses. These differences are summarized in the table below. 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.
Sales Charge and distribution (12b-1) fee Service fee Other Information Class A Maximum initial sales charge 0.175% of average daily Initial sales charge of 5%; no 12b-1 fee net assets waived or reduced for certain purchases Class B No initial sales charge; 0.175% of average daily Shares convert to Class maximum CDSC of 5% declines net assets A after eight years; to 0% after six years; 12b-1 CDSC waived in certain fee of 0.75% of average daily circumstances net assets Class Y None None Available only to certain qualifying institutional investors
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. - 15 - 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 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. Sales charges on purchase or redemption If you purchase Class A shares If you purchase Class B shares . You will not have all of . All of your money is your purchase price invested in shares of invested. Part of your stock. However, you will purchase price will go to pay a sales charge if you pay the sales charge. You redeem your shares within will not pay a sales six years of purchase. charge when you redeem your shares. . You will be able to take . No reductions of the advantage of reductions in sales charge are the sales charge. available for large purchases. If your investments in IDS funds that are subject to a sales charge total $250,000 or more, you are better off paying the reduced sales charge in Class A than paying the higher fees in Class B. If you qualify for a waiver of the sales charge, you should purchase Class A shares. Ongoing expenses If you purchase Class A shares If you purchase Class B shares . Your shares will have a . The distribution and lower expense ratio than transfer agency fees for Class B shares because Class B will cause your Class A does not pay a shares to have a higher distribution fee and the expense ratio and to pay transfer agency fee for lower dividends than Class Class A is lower than the A shares. After eight fee for Class B. As a years, Class B shares will result, Class A shares convert to Class A shares will pay higher dividends and will no longer be than Class B shares. subject to higher fees. - 16 - You should consider how long you plan to hold your shares and whether the accumulated higher fees and CDSC on Class B shares prior to conversion would be less than the initial sales charge on Class A shares. Also consider to what extent the difference would be offset by the lower expenses on Class A shares. To help you in this analysis, the example in the "Sales charge and Fund expenses" section of the prospectus illustrates the charges applicable to each class of shares. Class Y Shares -- Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to 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. 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." * Eligibility must be determined in advance by American Express Financial Advisors. To do so, contact your financial advisor. - 17 - When you buy shares for a new account, the price you pay per share is determined at the close of business on the day your investment is received and accepted at the Minneapolis headquarters. Purchase policies . Investments must be received and accepted in the Minneapolis headquarters on a business day before 3 p.m. Central time to be included in your account that day and to receive that day's share price. Otherwise, your purchase will be processed the next business day and you will pay the next day's share price. . The minimums allowed for investment may change from time to time. . Wire orders can be accepted only on days when your bank, AEFC, the Fund and Norwest Bank Minneapolis are open for business. . Wire purchases are completed when wired payment is received and the Fund accepts the purchase. . AEFC and the Fund are not responsible for any delays that occur in wiring funds, including delays in processing by the bank. . You must pay any fee the bank charges for wiring. . The Fund reserves the right to reject any application for any reason. . If your application does not specify which class of shares you are purchasing, it will be assumed that you are investing in Class A shares. - 18 -
Three ways to invest 1 Send your check and application (or your name Minimum amounts By regular account and account number if you have an established account) to: Initial Investment: $2,000 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 you with accounts: none this process. 2 Contact your financial advisor to set up one Minimum amounts By scheduled of the following scheduled plans: investment plan Initial investment $100 . automatic payroll deduction Additional investments: $100/mo. . bank authorization Account balances: none . direct deposit of Social Security (on active plans of monthly payments) check . other plan approved by the Fund 3 If you have an established account, you may If this information is not included, the order may By wire wire money to: be rejected and all money received by the Fund less any costs the Fund or AEFC incurs, will be Norwest Bank Minneapolis returned promptly. Routing No. 091000019 Minneapolis, MN Minimum amounts Attn: Domestic Wire Dept. Each wire investment: $1,000 Give these instructions: Credit IDS Account #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.
- 19 - 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. How to redeem shares You can redeem your shares at any time. American Express Shareholder Service will mail payment within seven days after receiving your request. When you redeem shares, the amount you receive may be more or less than the amount you invested. Your shares will be redeemed at net asset value, minus any applicable sales charge, at the close of business on the day your request is accepted at the Minneapolis headquarters. If your request arrives after the close of business, the price per share will be the net asset value, minus any applicable sales charge, at the close of business on the next business day. A redemption is a taxable transaction. If your proceeds from your redemptions 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. - 20 -
Two ways to request an exchange or redemption of shares 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 Attn: Redemptions exchanged or redeemed P.O. Box 534 Minneapolis, MN . your account number(s) (for 55440-0534 exchanges, both funds must be registered in the same Express mail: ownership) American Express Shareholder Service . your Taxpayer Identification Attn: Redemptions Number (TIN) 733 Marquette Ave. Minneapolis, MN 55402 . the dollar amount or number of shares you want to exchange or redeem . signature of all registered account owners . for redemptions, indicate how you want your money delivered to you . any paper certificates of shares you hold 2 . The Fund and AEFC will honor any . AEFC answers phone By phone telephone exchange or redemption requests promptly, but you request believed to be authentic may experience delays when American Express and will use reasonable call volume is high. If Telephone Transaction procedures to confirm that they you are unable to get Service: are. This includes asking through, use mail proce- 800-437-3133 identifying questions and tape dure as an alternative. or recording calls. If reasonable 612-671-3800 procedures are not followed, the . Acting on your Fund or AEFC will be liable for instructions, your any loss resulting from financial advisor may fraudulent requests. conduct telephone transactions on your behalf. - 21 - . Phone exchange and redemption . Phone privileges may be privileges automatically apply modified or discontinued to all accounts except at any time. custodial, corporate or qualified retirement accounts Minimum amount unless you request these Redemption: $100 privileges NOT apply by writing American Express Shareholder Maximum amount Service. Each registered owner must sign the request. Redemption: $50,000
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. 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. - 22 - . A telephone redemption request will not be allowed within 30 days of a phoned-in address change. Important: If you request a redemption of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before a check is mailed to you. (A check may be mailed earlier if your bank provides evidence satisfactory to the Fund and AEFC that your check has cleared.)
Three ways to receive payment when you redeem shares 1 . Mailed to the address on record By regular or express mail . Payable to names listed on the account. 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 payout plan . Contact your financial advisor or American Express Shareholder Service to set up regular payments to you on a monthly, bimonthly, quarterly, semiannual or annual basis. . Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges.
- 23 - 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 price Net amount invested 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, association of employers, employee organization or other similar entity, may be added together to reduce sales charges for all shares purchased through that plan. . If you intend to invest $1 million over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. - 24 - For more details, see the SAI. Waivers of the sales charge for Class A shares - 25 - Sales charges do not apply to: . Current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses and unmarried children under 21. . Current or retired American Express financial advisors, their spouses and unmarried children under 21. . 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 CDSC 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 1% CDSC on redemption of those shares will be waived in the same circumstances described 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. . 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). . Purchase 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. - 26 - 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 CDSC during the: 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 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. - 27 - 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 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 Inc., 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. 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. - 28 -
Quick telephone reference American Express Telephone Redemptions and exchanges, dividend National/Minnesota: Transaction Service payments or reinvestments and automatic 800-437-3133 payment arrangements Mpls./St. Paul area: 671-3800 American Express Shareholder Service Fund performance, objectives and 612-671-3733 account inquiries TTY Service For the hearing impaired 800-846-4852 American Express Infoline Automated account information National/Minnesota: (TouchTone[REGISTERED TRADEMARK] phones 800-272-4445 only), including current Fund prices and performance, account values and Mpls./St. Paul area: recent account transactions 671-1630
Distributions and taxes As a shareholder you are entitled to your share of the Fund's net income and any net gains realized on its investments. The Fund distributes dividends and capital gain distributions to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. Dividend and capital gain distributions will have tax consequences you should know about. Dividend and capital gain distributions The 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.) - 29 - 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.) 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. - 30 - 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.
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 listed on the account (the first name listed on a joint account) Custodian account of a minor (Uniform Gifts/Transfers The minor to Minors Act) A living trust The grantor-trustee (the person who puts the money into the trust) An irrevocable trust, pension trust or estate The legal entity (not the personal representative or trustee, unless no legal entity is designated in the account title) Sole proprietorship The owner Partnership The partnership Corporate The corporation Association, club or tax-exempt organization The organization
- 31 - 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. How the Fund and the Portfolio are organized IDS Growth Fund, Inc., of which IDS Research Opportunities Fund is a part, is a diversified, open-end management investment company, as defined in the Investment Company Act of 1940. Originally incorporated on May 21, 1970, in Nevada, the corporation changed its state of incorporation on June 13, 1986, by merging into a Minnesota corporation incorporated on April 7, 1986. The Fund's headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. Shares IDS Growth Fund, Inc. currently is composed of two funds, each issuing its own series of capital stock: IDS Growth Fund and IDS Research Opportunities 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 1 cent per share. Both full and fractional shares can be issued. The shares of each fund making up IDS Growth Fund, Inc. represents 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 - 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. The members of the board also serve as members of the board of the Trust which manages the investments of the Portfolio and other accounts. Should any conflict of interest arise between the interests of the shareholders of the Fund and those of the other accounts, the board will follow written procedures to address the conflict.
Board members and officers President and interested board William R. Pearce members President of all Funds in the IDS MUTUAL FUND GROUP Independent board members Lynne V. Cheney 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. - 33 - Board members and officers C. Angus Wurtele Chairman of the board, The Valspar Corporation Interested directors who are William H. Dudley officers and/or employees of Executive vice president, AEFC AEFC David R. Hubers President and chief executive officer, AEFC John R. Thomas Senior vice president, AEFC Officers who also are officers Peter J. Anderson and/or employees of AEFC Vice president of all Funds in the IDS 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 The Trust, on behalf of the Portfolio, pays AEFC for managing its portfolio. 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 Trust pays AEFC a fee for these services based on the average daily net assets of the Portfolio, as follows: - 34 - Assets Annual rate (billions) at each asset level First $0.25 0.650% Next 0.25 0.625% Next 0.50 0.600% Next 1.00 0.575% Next 1.00 0.550% Next 3.00 0.525% Over 6.00 0.500% Under the Agreement, the Portfolio also pays taxes, brokerage commissions and non-advisory expenses. Administrator and Transfer Agent Under an Administrative Services Agreement, the Fund pays AEFC for administration and accounting services at an annual rate of 0.06% decreasing in gradual percentages to 0.03% 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. - 35 - Under a Shareholder Service Agreement, the Fund also pays a fee for service provided to Class A and Class B shareholders by financial advisers 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. Portions of sales charges may be paid to securities dealers who sell the Fund's shares or to banks and other financial institutions. The amounts of those payments will range from 0.8% to 4% of the Fund's offering price depending on the monthly sales volume. 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 Inc. 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 - IDS Research Opportunities Fund IDS Tower 10 Minneapolis, MN 55440-0010 Distributed by American Express Financial Advisors Inc. - 37 - IDS GROWTH FUND, INC. STATEMENT OF ADDITIONAL INFORMATION FOR IDS RESEARCH OPPORTUNITIES 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. IDS Research Opportunities Fund TABLE OF CONTENTS Page ---- Goals and Investment Policies . . . . . . . . . . . . . . . See Prospectus Additional Investment Policies . . . . . . . . . . . . . . . 1 Portfolio Transactions . . . . . . . . . . . . . . . . . . . 5 Brokerage Commissions Paid to Brokers Affiliated With American Express Financial Corporation . . . . . . . . . 7 Performance Information . . . . . . . . . . . . . . . . . . 7 Valuing Fund Shares . . . . . . . . . . . . . . . . . . . . 8 Investing in the Fund . . . . . . . . . . . . . . . . . . . 10 Redeeming Shares . . . . . . . . . . . . . . . . . . . . . . 14 Pay-Out Plans . . . . . . . . . . . . . . . . . . . . . . . 15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 17 Board Members and Officers . . . . . . . . . . . . . . . . . 20 Custodian . . . . . . . . . . . . . . . . . . . . . . . . . 25 Independent Auditors . . . . . . . . . . . . . . . . . . . . 25 Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . 25 APPENDIX A: Description of Bond Ratings . . . . . . . . . . A-1 APPENDIX B: Options and Stock Futures Contracts . . . . . . B-1 APPENDIX C: Dollar-Cost Averaging . . . . . . . . . . . . . C-1 IDS Research Opportunities Fund ADDITIONAL INVESTMENT POLICIES IDS Research Opportunities Fund (the Fund) is a series of IDS Growth Fund, Inc. (the Company). The Fund is a diversified mutual fund with its own goal and investment policies. The Fund seeks to achieve its goal by investing all of its assets in Aggressive Growth Portfolio (the Portfolio) of Growth Trust (the Trust), a separate investment company, rather than by directly investing in and managing its own portfolio of securities. Fundamental investment policies adopted by the Fund or Portfolio cannot be changed without the approval of a majority of the outstanding voting securities of the Fund or Portfolio, as defined in the Investment Company Act of 1940 ("1940 Act"). Whenever the Fund is requested to vote on a change in the investment policies of the corresponding Portfolio, the Company will hold a meeting of Fund shareholders and will cast the Fund's vote as instructed by the shareholders. Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. Investment policies applicable to Aggressive Growth Portfolio: These are investment policies in addition to those presented in the prospectus. The policies below are fundamental policies that apply both to the Fund and its corresponding Portfolio and may be changed only with shareholder/unitholder approval. Unless holders of a majority of the outstanding shares agree to make the changes, the Portfolio will not: . Act as an underwriter (sell securities for others). However, under the securities laws, the Portfolio may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. . Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Portfolio has no present intention to borrow. . Make cash loans if the total commitment amount exceeds 5% of the Portfolio's total assets. . Purchase more than 10% of the outstanding voting securities of an issuer. 1 IDS Research Opportunities Fund . Invest more than 5% of its total assets in securities of any one company, government or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies or instrumentalities, and except that up to 25% of the Portfolio's total assets may be invested without regard to this 5% limitation. . Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Portfolio from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. . Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Portfolio from buying or selling 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. . Lend Portfolio securities in excess of 30% of its net assets. In making loans the Portfolio receives the market price in cash, U.S. government securities, letters of credit or such other collateral as may be permitted by regulatory agencies and approved by the board. If the market price of the loaned securities goes up, the Portfolio will get additional collateral on a daily basis. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the Portfolio receives cash payments equivalent to all interest or other distributions paid on the loaned securities. A loan will not be made unless AEFC believes the opportunity for additional income outweighs the risks. . Concentrate in any industry except in either or both the energy or utilities industries. According to the present interpretation by the SEC, this means no more than 25% of the Portfolio's total assets, based on current market value, can 2 IDS Research Opportunities Fund be invested in any one industry other than the energy and/or utility industries. The policies below are nonfundamental policies that apply both to the Fund and its corresponding Portfolio and may be changed without shareholder/unitholder approval. Unless changed by the board, the Portfolio 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 Portfolio were ever to do so, valuation of the pledged or mortgaged assets would be based on market values. For purposes of this policy, collateral arrangements for margin deposits on a futures contract are not deemed to be a pledge of assets. . Invest more than 5% of its total assets in securities of companies, including any predecessors, that have a record of less than three years continuous operations. . Invest more than 10% of its total assets in securities of investment companies. The Portfolio has no intention to invest in securities of other investment companies. . Invest in a company to control or manage it. . Invest in exploration or development programs such as oil, gas or mineral leases. . Purchase securities of an issuer if the board members and officers of the Portfolio and of AEFC hold more than a certain percentage of the issuer's outstanding securities. If the holdings of all board members and officers of the Portfolio and AEFC who own more than 0.5% of an issuer's securities are added together, and if in total they own more than 5%, the Portfolio will not purchase securities of that issuer. . Invest more than 5% of its net assets in warrants. Under one state's law no more than 2% of the Portfolio'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, 3 IDS Research Opportunities Fund 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 Portfolio may make contracts to purchase securities for a fixed price at a future date beyond normal settlement time (when-issued securities or forward commitments). Under normal market conditions, the Portfolio does not intend to commit more than 5% of its total assets to these practices. The Portfolio does not pay for the securities or receive dividends or interest on them until the contractual settlement date. The Portfolio will designate cash or liquid high-grade debt securities at least equal in value to its forward commitments to purchase the securities. When-issued securities or forward commitments are subject to market fluctuations and they may affect the Portfolio's total assets the same as owned securities. In determining the liquidity of Rule 144A securities, which are unregistered securities offered to qualified institutional buyers, and interest-only and principal-only, fixed mortgage-backed securities (IOs and POs) issued by the U.S. government or its agencies and instrumentalities, the investment manager, under guidelines established by the board, will consider any relevant factors including frequency of trades, the number of dealers willing to purchase or sell the security and the nature of marketplace trades. In determining the liquidity of commercial paper issued in transactions not involving a public offering under Section 4(2) of the Securities Act of 1933, the investment manager, under guidelines established by the board, will evaluate relevant factors such as the issuer and the size and nature of its commercial paper programs, the willingness and ability of the issuer or dealer to repurchase the paper, and the nature of the clearance and settlement procedures for the paper. The Portfolio may maintain a portion of its assets in cash and cash- equivalent investments. The cash-equivalent investments the Portfolio may use are short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances and letters of credit of banks or savings and loan associations having capital, surplus and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. Any cash-equivalent investment in foreign securities will be subject to the limitations on foreign investments described in the prospectus. The Portfolio also may purchase short-term corporate notes and obligations rated in the top two classifications by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") or the equivalent and may use repurchase agreements with broker-dealers registered under the Securities Exchange 4 IDS Research Opportunities Fund Act of 1934 and with commercial banks. A risk of a repurchase agreement is that if the seller seeks the protection of the bankruptcy laws, the Portfolio's ability to liquidate the security involved could be impaired. For a discussion of bond ratings, see Appendix A. For a discussion on options and stock index futures contracts, see Appendix B. PORTFOLIO TRANSACTIONS Subject to policies set by the board, AEFC is authorized to determine, consistent with the Portfolio's investment goal and policies, which securities will be purchased, held or sold. In determining where the buy and sell orders are to be placed, AEFC has been directed to use its best efforts to obtain the best available price and the most favorable execution, except 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 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 5 IDS Research Opportunities Fund 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 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 6 IDS Research Opportunities Fund 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 Portfolio according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. AEFC will use an American Express affiliate only if (i) AEFC determines that the Portfolio will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Portfolio and (ii) the affiliate charges the Portfolio commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. AEFC may direct brokerage to compensate an affiliate. AEFC will receive research on South Africa from New Africa Advisors, a wholly owned subsidiary of Sloan Financial Group. AEFC owns 100% of IDS Capital Holdings Inc., which in turn owns 40% of Sloan Financial Group. New Africa Advisors will send research to AEFC and in turn AEFC will direct trades to a particular broker. The broker will have an agreement to pay New Africa Advisors. All transactions will be on a best execution basis. Compensation received will be reasonable for the services rendered. 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: P(l+T)n = ERV 7 IDS Research Opportunities Fund where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) Aggregate total return The Fund may calculate aggregate total return for a class for certain periods representing the cumulative change in the value of an investment in the Fund over a specified period of time according to the following formula: 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, Business Week, Donoghue's Money Market Fund Report, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, Institutional Investor, Investor's Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, 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 securities held by the Fund's corresponding Portfolio 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 8 IDS Research Opportunities Fund the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. . Securities included in the NASDAQ National Market System (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 Portfolio's net asset value. If events materially affecting the value of such securities occur during such period, these securities will be valued at their fair value according to procedures decided upon in good faith by the board. . Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. . Securities without a readily available market price, 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 9 IDS Research Opportunities Fund independent from the Trust. 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 10 IDS Research Opportunities 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.
On total investment, sales charge as a percentage of: -------------------- Public Net Amount of Investment Offering Price Amount Invested -------------------- -------------- -------------- ranges from: ----------------------------------------- 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
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. 11 IDS Research Opportunities 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 an LOI may be used to reach the $1 million total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will not adjust for sales charges on investments made prior to the signing of the LOI. If you do not invest $1 million by the end of 13 months, there is no penalty, you'll just miss out on the sales charge adjustment. A LOI is not an option (absolute right) to buy shares. 12 IDS Research Opportunities 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 to your account. The adjustment is made by crediting your account with additional shares, in an amount equivalent to the sales charge previously paid. Systematic Investment Programs After you make your initial investment of $2,000 or more, you can arrange to make additional payments of $100 or more on a regular basis. These minimums do not apply to all systematic investment programs. You decide how often to make payments - monthly, quarterly or semiannually. You are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. The Fund also can change the program or end it at any time. If there is no obligation, why do it? Putting money aside is an important part of financial planning. With a systematic investment program, you have a goal to work for. How does this work? Your regular investment amount will purchase more shares when the net asset value per share decreases, and fewer shares when the net asset value per share increases. Each purchase is a separate 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 C. 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: 13 IDS Research Opportunities 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 1940 Act declares a period of emergency to exist. Should the Fund stop selling shares, the board may make a deduction from the value of the assets held by the Fund to cover the cost of future liquidations of the assets so as to distribute fairly these costs among all shareholders. 14 IDS Research Opportunities Fund The Company has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the Fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the Fund as determined by the board. In these circumstances, the securities distributed would be valued as set forth in the prospectus. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. PAY-OUT PLANS You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem Class B shares you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you 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. 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 15 IDS Research Opportunities Fund 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 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 16 IDS Research Opportunities Fund an excess contribution under IRA or qualified plan regulations if the amount exchanged plus the amount of the initial sales charge applied to the amount exchanged exceeds annual contribution limitations. For example: If you were to exchange $2,000 in Class A shares from a nonqualified account to an IRA without considering the 5% ($100) initial sales charge applicable to that $2,000, you may be deemed to have exceeded current IRA annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of the Fund's dividend that is attributable to dividends the Fund received from domestic (U.S.) securities. 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 and an election made by the Fund under federal tax regulations, 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 Nov. 30 of that calendar year. The Fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. The Fund intends to comply with federal tax law and avoid any excise tax. The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or if 50% or more of the average value of its assets consists of assets that produce or could produce passive income. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state and local income tax laws to Fund distributions. AGREEMENTS Investment Management Services Agreement The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with AEFC. For its services, AEFC is paid a fee based on the following schedule: 17 IDS Research Opportunities Fund Assets Annual rate at (billions) each asset level ---------- --------------- First $0.25 0.650% Next 0.25 0.625 Next 0.50 0.600 Next 1.0 0.575 Next 1.0 0.550 Next 3.0 0.525 Over 6.0 0.500 The fee is calculated for each calendar day on the basis of net assets as of the close of business two business days prior to the day for which the calculation is made. The management fee is paid monthly. Under the Agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for units; Portfolio office expenses; consultants' fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending portfolio securities; and expenses properly payable by the Portfolio, approved by the board. Administrative Services Agreement The Company, on behalf of 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 0.060% Next 0.25 0.055 Next 0.50 0.050 Next 1.0 0.045 Next 1.0 0.040 18 IDS Research Opportunities Fund Assets Annual rate at (billions) each asset level ---------- ---------------- Next 3.0 0.035 Over 6.0 0.030 Under the agreement, the Fund also pays taxes; audit and certain legal fees; registration fees for shares; office expenses; consultant's fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; and expenses properly payable by the Fund approved by the board. 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 Company, on behalf of 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 Company, on behalf of 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. 19 IDS Research Opportunities 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 Company 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. 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 Company and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No board member who is not an interested person, has any direct or indirect financial interest in the operation of the Plan or any related agreement. Total Fees and Expenses Total combined fees and nonadvisory expenses of both the master fund and this feeder fund 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 20 IDS Research Opportunities Fund fiscal year, but not after that date. No interest charges are assessed by AEFC for expenses it assumes. BOARD MEMBERS AND OFFICERS The following is a list of the Company's board members who, except for Mr. Dudley, also are board members of all 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. The members of the board also serve as members of the board of the Trust which manages the investments of the Fund and other accounts. Should any conflict of interest arise between the interests of the shareholders of the Fund and those of the other account, the board will follow written procedures to address the conflict. Mr. Dudley is a board member of the 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 21 IDS Research Opportunities Fund 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. 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 22 IDS Research Opportunities Fund 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 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. 23 IDS Research Opportunities Fund 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 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, 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 the year ended May 31, 1996, the members of the board received the following compensation, in total, from all funds in the IDS MUTUAL FUND GROUP. 24 IDS Research Opportunities Fund
Compensation Table ------------------ Pension or Total cash Aggregate retirement benefits Estimated annual compensation from compensation accrued as Fund benefit upon the IDS MUTUAL FUND Board Member from the Fund expenses retirement GROUP 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
CUSTODIAN The Portfolio'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 Portfolio also retains the custodian pursuant to a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Portfolio pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. INDEPENDENT AUDITORS The Fund's and corresponding Portfolio's financial statements to be contained in its Annual Report to shareholders at the end of the fiscal year will be audited by 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. 25 IDS Research Opportunities Fund PROSPECTUS The prospectus for IDS Research Opportunities Fund, dated August 5, 1996, is hereby incorporated in this SAI by reference. 26 IDS Research Opportunities Fund APPENDIX A: Description of Bond Ratings These ratings concern the quality of the issuing corporation. They are not an opinion of the market value of the security. Such ratings are opinions on whether the principal and interest will be repaid when due. A security's rating may change which could affect its price. Ratings by Moody's Investors Service, Inc. are Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Bonds rated: ----------- Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. A-1 IDS Research Opportunities Fund Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Ratings by Standard & Poor's Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D. AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree. A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB is regarded as having adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating A-2 IDS Research Opportunities Fund category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CC rating. C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC- rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D is in payment default. The D rating category is used when interest payments or principal payments are not made on the due date, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Non-rated securities will be considered for investment when they possess a risk comparable to that of rated securities consistent with the Portfolio's objectives and policies. When assessing the risk involved in each non-rated security, the Portfolio will consider the financial condition of the issuer or the protection afforded by the terms of the security. A-3 IDS Research Opportunities Fund APPENDIX B: Options and Stock Index Futures Contracts The Portfolio may buy or write options traded on any U.S. or foreign exchange or in the over-the-counter market. The 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. Some options are exercisable only on a specific date. 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 Portfolio and its unitholders by improving the Portfolio's liquidity and by helping to stabilize the value of its net assets. Buying Options. Put and call options may be used as a trading technique to facilitate buying and selling securities for investment reasons. They also may be used for investment. Options are used as a trading technique B-1 IDS Research Opportunities Fund to take advantage of any disparity between the price of the underlying security in the securities market and its price on the options market. It is anticipated the trading technique will be utilized only to effect a transaction when the price of the security plus the option price will be as good or better than the price at which the security could be bought or sold directly. When the option is purchased, the Portfolio pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For 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 Portfolio for investment purposes. Options permit the Portfolio to experience the change in the value of a security with a relatively small initial cash investment. The risk the Portfolio assumes when it buys an option is the loss of the premium. To be beneficial to the Portfolio, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Writing covered options. The Portfolio will write covered options when it feels it is appropriate and will follow these guidelines: . All options written by the Portfolio will be covered. For covered call options if a decision is made to sell the security, the Portfolio will attempt to terminate the option contract through a closing purchase transaction. . The Portfolio 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 Portfolio 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 Portfolio, 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. B-2 IDS Research Opportunities Fund Net premiums on call options closed or premiums on expired call options are treated as short-term capital gains. Since the Portfolio is taxed as a regulated investment company under the Internal Revenue Code, any gains on options and other securities held less than three months must be limited to less than 30% of its annual gross income. If a covered call option is exercised, the security is sold by the Portfolio. The premium received upon writing the option is added to the proceeds received from the sale of the security. The Portfolio will recognize a capital gain or loss based upon the difference between the proceeds and the security's basis. Premiums received from writing outstanding 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 Portfolio enters into one B-3 IDS Research Opportunities Fund futures contract to buy the S&P 500 Index at a specified future date at a contract value of 150 and the S&P 500 Index is at 154 on that future date, the Portfolio will gain $500 x (154-150) or $2,000. If the Portfolio enters into one futures contract to sell the S&P 500 Index at a specified future date at a contract value of 150 and the S&P 500 Index is at 152 on that future date, the Portfolio will lose ($500 x (152-150) or $1,000. Unlike the purchase or sale of an equity security, no price would be paid or received by the Portfolio upon entering into futures contracts. However, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio would be required to make a variation margin payment to the broker equal to the decline in value. How the Portfolio would use stock index futures contracts. The Portfolio intends to use stock index futures contracts and related options for hedging and not for speculation. Hedging permits the Portfolio to gain rapid exposure to or protect itself from changes in the market. For example, the Portfolio 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 Portfolio 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 Portfolio may enter into contracts with respect to any stock index or sub-index. To hedge the Portfolio successfully, however, the Portfolio B-4 IDS Research Opportunities 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 Portfolio's securities. Special risks of transactions in stock index futures contracts. -------------------------------------------------------------- 1. Liquidity. The Portfolio 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 Portfolio. The Portfolio 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 Portfolio, and the Portfolio 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 Portfolio intends to enter into futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular contract at any particular time. In such event, it may not be possible to close a futures contract position, and in the event of adverse price movements, the Portfolio would have to make daily cash payments of variation margin. Such price movements, however, will be offset all or in part by the price movements of the securities 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 B-5 IDS Research Opportunities Fund 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 securities subject to the hedge. If this occurred, the Portfolio 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 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 Portfolio's securities sought to be hedged. It also is possible that if the Portfolio has hedged against a decline in the value of the stocks held in its portfolio and stock prices increase instead, the Portfolio 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 Portfolio 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 Portfolio 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 give 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 Portfolio 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 B-6 IDS Research Opportunities Fund close out positions on such options will be subject to the development and maintenance of a liquid secondary market. The Portfolio 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. Compared to using futures contracts, purchasing options involves less risk to the Portfolio 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 Portfolio 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 Portfolio intends to identify futures contracts as mixed straddles and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. Such an election may result in the Portfolio being required to defer recognizing losses incurred by entering into futures contracts and losses on underlying securities identified as being hedged against. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether such option is a section 1256 contract. If the option is a nonequity option, the Portfolio will either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. Certain provisions of the Internal Revenue Code may also limit the Portfolio's ability to engage in futures contracts and related options transactions. For example, at the close of each quarter of the Portfolio's taxable year, at least 50% of the value of its assets must consist of cash, government securities and other securities, subject to certain diversification requirements. Less than 30% of its gross income must be derived from sales of securities held less than three months. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. In order to avoid realizing a gain within the three-month period, the Portfolio may be required to defer closing out a contract beyond the time when it might otherwise be advantageous to do so. The Portfolio also may be restricted in purchasing put options for the purpose of hedging underlying securities because of applying the short sale holding period rules with respect to such underlying securities. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (the Portfolio's agent in acquiring the futures position). During the period the futures contract is open, changes in B-7 IDS Research Opportunities Fund value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. B-8 IDS Research Opportunities Fund APPENDIX C: 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). C-1 -----END PRIVACY-ENHANCED MESSAGE-----