-----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, TsbcRd9BEr6hZtu1F7lJRwodLkT+fnqmDxwPjHdAqpJVc7GEboD8YtdK87Ec1P9N 94nZOu9JNCQqvGch+3DcKQ== 0000820027-97-000778.txt : 19971107 0000820027-97-000778.hdr.sgml : 19971107 ACCESSION NUMBER: 0000820027-97-000778 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971106 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS LIFE INVESTMENT SERIES FUND INC CENTRAL INDEX KEY: 0000353968 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 411409539 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03218 FILM NUMBER: 97709135 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126718626 MAIL ADDRESS: STREET 1: IDS FINANCIAL SERVICES INC STREET 2: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE CAPITAL RESOURCE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE CAPITAL RESOURCE FUND II INC DATE OF NAME CHANGE: 19851104 N-30D 1 IDS LIFE INVESTMENT SERIES, INC. Privileged Assets Select Annuity Retirement Annuity Mutual Funds 1997 Annual Report IDS Life Capital Resource Fund IDS Life Special Income Fund IDS Life Managed Fund IDS Life Moneyshare Fund IDS Life International Equity Fund IDS Life Aggressive Growth Fund part of IDS Mutual Fund Group Contents (icon of) One open book inside of another. The purpose of this annual report is to tell investors how the Funds performed. The prospectus, which is bound into the middle of this annual report, describes the Funds in detail. 1997 annual report From the chairman of the board 4 Capital Resource Fund 5 From the portfolio manager 5 The Fund's ten largest holdings 6 The Fund's long-term performance 7 Special Income Fund 8 From the portfolio manager 8 The Fund's ten largest holdings 9 The Fund's long-term performance 10 Managed Fund 11 From the portfolio manager 11 The Fund's ten largest holdings 12 The Fund's long-term performance 13 Moneyshare Fund 14 From the portfolio manager 14 International Equity Fund 15 From the portfolio manager 15 The Fund's ten largest holdings 16 The Fund's long-term performance 17 Aggressive Growth Fund 18 From the portfolio manager 18 The Fund's ten largest holdings 19 The Fund's long-term performance 20 All Funds 21 Independent auditors' report 21 Financial statements 22 Notes to financial statements 30 Investments in securities 45 (This annual report is not part of the prospectus.) To our contract owners From the chairman of the board The past fiscal year was largely a productive period for financial assets, especially U.S. stocks. As a result, all of the IDS Life Retirement Annuity Mutual Funds experienced positive results for the period -- September 1996 through August 1997. While the stock and bond markets can be volatile on a short-term basis, they historically have provided attractive returns over the long term. A focus on long-term financial objectives and a balanced investment program are good guidelines for investing in today's economic environment. The IDS Life Retirement Annuity Mutual Funds allow you to take advantage of long-term opportunities through a variety of investment avenues. Your American Express financial advisor can tell you about the role each fund can play in meeting your long-term financial objectives. Your advisor also can help make sure your investment and protection strategies continue to fit your financial situation. As your objectives and time horizons change, talk to your advisor about the broad range of American Express products and services designed to help you meet a variety of investment and protection needs. William R. Pearce (picture of) William R. Pearce William R. Pearce Chairman of the board (This annual report is not part of the prospectus.) From the portfolio manager Capital Resource Fund's value rose sharply during the final months of the fiscal year, as it took good advantage of a surging stock market. For the period -- September 1996 through August 1997 -- the Fund's gain was 28.47%. (This figure does not reflect expenses that apply to the variable accounts, subaccounts, or the annuity contract.) Buoyed by low long-term interest rates and ongoing reports of solid economic growth, tame inflation and healthy corporate profits, the stock market started moving higher almost in concert with the beginning of the fiscal year. From that point through period-end, stocks experienced only two stumbles worth noting -- one early last spring and another this past August, both resulting from a run-up in long-term interest rates. The rest of the time, the market hardly took time to catch its breath as it raced into ever-higher record territory. As has been true in recent years, stocks of large companies ("large-caps") generally performed far better than stocks of small companies ("small-caps"). When I became manager of the Fund in early 1997, I added many more rapidly growing large-caps -- including stalwarts such as General Electric, Microsoft, Intel, Procter & Gamble and Coca-Cola -- to take advantage of that trend, which, to the Fund's benefit, continued through most of the fiscal year. Moreover, I added or expanded investments in several mid-cap growth stocks such as Ace Insurance, Carnival Cruise, USA Waste, Rite Aid and Kohl's, which also proved to be productive. Also working to the Fund's advantage was a paring back of the number of holdings, from 121 to 91 at period-end. This reduction allowed the Fund to take more substantial positions in those stocks that appeared to hold the greatest promise. Concurrently, I avoided investments in utilities, a group that turned out to be a laggard performer. Finally, I maintained a low level of cash reserves, a strategy that paid off given the meager return provided by cash-equivalent investments compared with that generated by well-performing stocks. As a new fiscal year begins, the investment environment is little changed from 12 months ago. Inflation remains well-behaved, interest rates are at a comfortable level, the economy continues to chug along and corporate profits still look good. As for the stock market, I think the best rewards may come from so-called `cyclical stocks' _ those of companies whose fortunes closely follow the ebb and flow of the economy. Therefore, to complement the growth stocks that form the core of the portfolio, I have begun shifting some investments toward companies in the auto, retailing, energy, aerospace and paper industries, which should benefit more than most if the economy keeps growing. Joseph M. Barsky (picture of) Joseph M. Barsky Joseph M. Barsky Portfolio manager (This annual report is not part of the prospectus.) The Fund's ten largest holdings Capital Resource Fund (icon of) pie chart The ten holdings listed here make up 18.62% of the Fund's net assets Percent Value (of Fund's net assets) (as of Aug. 31, 1997) ACE 2.22% $108,062,500 Compaq Computer 2.02 98,250,000 Tyco Intl 1.93 94,125,000 General Electric 1.93 93,750,000 USA Waste Service 1.81 88,200,000 Carnival Cl A 1.80 87,625,000 Microsoft 1.76 85,921,875 Deere & Co 1.73 84,000,000 Solectron 1.72 83,750,000 State Street 1.70 82,712,700 (This annual report is not part of the prospectus.) The Fund's long-term performance Capital Resource Fund How $10,000 has grown in Capital Resource Fund Capital Resource Fund $31,962 S&P 500 $10,000 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 Average annual total returns (as of August 31, 1997) 1 year 5 years 10 years +28.47% +13.36% +12.32% On the graph above you can see how the Fund's total return compared to a widely cited performance index, Standard & Poor's 500 Stock Index (S&P 500). The S&P 500, an unmanaged list of common stocks, is frequently used as a general measure of the market performance. However, the S&P 500 companies are generally larger than those in which the Fund invests. Your investment and return values fluctuate so that your accumulation units, when redeemed, may be worth more or less than their original cost. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. The above graph does not reflect expenses that apply to the variable accounts or the annuity contracts. (This annual report is not part of the prospectus.) To our contract owners Special Income Fund From the portfolio manager Led by investments in foreign markets and high-yield U.S. corporate bonds, Special Income Fund had a productive fiscal year. For the period -- September 1996 through August 1997 -- the Fund's value appreciated 12.24%. (This figure does not reflect expenses that apply to the variable accounts, subaccounts or the annuity contract.) Thanks to reports of moderate economic growth and benign inflation, the mood of the U.S. bond market began improving about the time the period began. Investors' confidence increased through last fall, driving long-term interest rates lower and bond prices higher. The rally stalled out over the winter, though, and ultimately turned into a retreat, as concern about a strengthening economy leading to higher inflation spawned a rising-rate trend that took a toll on the market. The period ended on an encouraging note, though, when the bond market, reassured by ongoing reports of low inflation, recovered nicely from May through July as long-term interest rates came back down. During the 12 months, the best-performing U.S. fixed-income investments proved to be high-yield corporate bonds, which tend to thrive during periods of economic growth and well-behaved inflation. As has been true for some time, I kept between 15% and 20% of assets invested in such securities, which not only provided a substantial yield but some price appreciation as well. Complementing those holdings were investments in so-called "emerging" foreign markets such as Russia, Mexico, Africa and Argentina. They comprised between 8% and 15% of assets and were among the best-performing sectors of the worldwide bond market. As for the rest of the portfolio, I kept the assets diversified among investment-grade U.S. corporate bonds, mortgage-backed bonds and U.S. Treasury bonds. Investments in those high-quality sectors, which comprised between 50% and 70% of assets, provided positive results, though less impressive than those of the emerging-market and high-yield U.S. corporate bonds described previously. The most consequential change to the portfolio came late last winter, when I shortened its duration in anticipation of a rising-interest-rate trend -- a negative for bond values. (Duration, a function of the average maturity of the portfolio's investments, determines how sensitive a portfolio's value is to changes in interest rates. The longer the duration, the greater the sensitivity.) While rates did rise, the trend soon reversed direction, causing the portfolio's performance to lag somewhat. As the period progressed, I brought the duration back to a neutral level, which I will likely maintain unless inflation and interest rates appear to be headed substantially higher. Steven C. Merrell (picture of Steven C. Merrell Steven C. Merrell Portfolio manager (This annual report is not part of the prospectus.) The Fund's ten largest holdings Special Income Fund (icon of) pie chart The ten holdings listed here make up 8.28% of the Fund's net assets Percent Value (of Fund's net assets) (as of Aug. 31, 1997) Hydro Quebec 1.16 $22,387,800 8.50% 2029 General Motors Acceptance 1.04 20,089,800 7.85% 1997 Time Warner Entertainment 1.01 19,415,020 9.15% 2023 United Kingdom Treasury .84 16,051,266 8.00% 2003 Univision Network .76 14,677,800 15.18% 2002 Govt of Canada .74 14,290,527 7.64% 2001 Wal-Mart Stores .74 14,155,978 7.00% 2006 Morgan (JP) .68 12,991,300 4.00% 2012 Tenet Healthcare .67 12,950,500 10.125% 2005 Ministry Finance Russia .64 12,402,500 9.25% 2001 Excludes U.S. Treasury and government agency holdings. (This annual report is not part of the prospectus.) The Fund's long-term performance Special Income Fund How $10,000 has grown in Special Income Fund Special Income Fund $24,987 Lehman Aggregate Bond Index $10,000 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 Average annual total returns (as of August 31, 1997) 1 year 5 years 10 years +12.24% +9.28% +9.59% On the graph above you can see how the Fund's total return compared to a widely cited performance index, the Lehman Aggregate Bond Index. The Lehman Aggregate Bond Index is made up of a representative list of government and corporate bonds as well as asset-backed securities and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. However, the securities used to create the index may not be representative of the bonds held in Special Income Fund. Your investment and return values fluctuate so that your accumulation units, when redeemed, may be worth more or less than their original cost. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. The above graph does not reflect expenses that apply to the variable accounts or the annuity contracts. (This annual report is not part of the prospectus.) To our contract owners Managed Fund From the portfolio managers Supported by an overall strong stock market and periodic rallies in the bond market, Managed Fund's value appreciated 28.54% during the fiscal year -- September 1996 through August 1997. (This figure does not reflect expenses that apply to the variable accounts, subaccounts, or the annuity contract.) The beginning of the period coincided with the outset of a powerful advance by the stock market. Thanks to tame inflation, solid economic growth, generally good corporate profits and relatively low long-term interest rates, stocks gained ground through the fall and winter, before stalling out in mid-March. By that time, increased concern about a potential rise in inflation had driven up long-term interest rates, which in turn drove the market down over the ensuing weeks. But by summer, stocks had righted themselves and were on their way to record-high levels. The Fund was well-prepared for the rally, with about two-thirds of the portfolio's assets invested in stocks. Prior to the start of the fiscal year, we repositioned the stock holdings with an emphasis on companies with above-average earnings growth in the following sectors: technology (the portfolio's largest investment), financial services, health care and consumer products. To the portfolio's benefit, these sectors were among the best performers over the past 12 months. In addition, we also reduced the number of stock holdings from 125 to about 90, which we believe provides ample diversification while allowing the potential for the Fund to benefit from more concentrated investments in fewer stocks. Bonds roughly tracked stocks' pattern during the period, as they advanced smartly last fall, gave back much of their gain over the winter and early spring, then rebounded in the summer. The swings basically followed investors' outlooks for economic growth and inflation. Last fall, most were expecting weaker growth and low inflation -- a view that flip-flopped a few months later, then resurfaced in the summer. Given our expectation of a rather volatile market, we maintained an essentially "neutral" structure in the bond portion of the portfolio. That strategy kept the value of our holdings from experiencing excessive swings. To help maintain the income level of the bond investments, we also added some higher-yielding securities. As for the new fiscal year, given stocks' spectacular gain in the previous period, it's difficult to imagine a repeat performance. Still, the investment environment continues to be reasonably good for both stocks and bonds, so, at this time (mid-September) we see no reason to substantially change the investment mix. Alfred Henderson (picture of) Alfred Henderson Alfred Henderson Portfolio manager Deborah L. Pederson (picture of) Deborah L. Pederson Deborah L. Pederson Porfolio manager (This annual report is not part of the prospectus.)
The Fund's ten largest holdings Managed Fund (icon of) pie chart The ten holdings listed here make up 16.19% of the Fund's net assets Percent Value (of Fund's net assets) (as of Aug. 31, 1997) Intel 2.57% $114,235,000 Compaq Computer 2.51 111,677,500 General Electric 1.69 75,000,000 Merck 1.65 73,450,000 Travelers Group 1.46 65,087,500 Morgan Stanley, Dean Witter & Discover 1.41 62,562,500 Boeing 1.39 61,786,562 Northern Telecom 1.25 55,510,000 Washington Mutual 1.14 50,893,750 Microsoft 1.12 49,570,313 Excludes U.S. Treasury and government agency holdings. (This annual report is not part of the prospectus.)
The Fund's long-term performance Managed Fund How $10,000 has grown in Managed Fund Managed Fund $30,861 S&P 500 $10,000 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 Average annual total returns (as of August 31, 1997) 1 year 5 years 10 years +28.54 +13.51% +11.93% On the graph above you can see how the Fund's total return compared to a widely cited performance index, Standard & Poor's 500 Stock Index (S&P 500). The S&P 500, an unmanaged list of common stocks, is frequently used as a general measure of the market performance. However, the S&P 500 companies are generally larger than those in which the Fund invests. Your investment and return values fluctuate so that your accumulation units, when redeemed, may be worth more or less than their original cost. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. The above graph does not reflect expenses that apply to the variable accounts or the annuity contracts. (This annual report is not part of the prospectus.) To our contract owners Moneyshare Fund From the portfolio manager Moneyshare Fund's yield was little changed during the past fiscal year (September 1996 through August 1997), reflecting largely stable short-term interest rates over the period. For the seven-day period ended August 31, 1997, the Fund's compound annualized yield was 5.24%, and the simple annualized yield was 5.11%. In keeping with its objective, the Fund maintained a $1 per share price throughout the 12 months. (Although the Fund seeks to maintain a stable $1 per share price, there is no assurance that it will be able to do so. An investment in the fund is neither insured nor guaranteed by the U.S. government.) With inflation remaining subdued and the economy showing no signs of either overheating or falling into recession, the Federal Reserve Board (the Fed) elected to leave short-term interest rates unchanged through last fall and winter. By late March, though, the Fed evidently believed that inflationary pressures had reached the point that a rate increase was necessary, so it raised the federal funds rate -- the interest rate banks pay on overnight loans -- by a quarter percent. The increase marked the first rate adjustment by the Fed since 1994 and, as it turned out, the only one in the past 12 months. Because I was expecting the Fed to raise rates, I kept the average maturity of the Fund's investments somewhat shorter than normal -- mostly between 35 and 40 days. This strategy is based on the fact that the longer the Fund's average maturity, the longer it takes the Fund's yield to respond to a change in interest rates. Therefore, when rates rise, a shorter maturity allows me to more quickly add new, higher-yielding investments, which modestly increases the income paid to shareholders. On the other hand, should rates decline, a shorter maturity results in slightly less income. As always, the entire portfolio remained invested in first-rated commercial paper, bank letters of credit and certificates of deposit. Looking to the current fiscal year, I think the odds continue to favor somewhat higher interest rates. At this writing (mid-September), the economy is still showing positive momentum, and, with unemployment at an uncommonly low level, I think it's likely that upward pressure on wages will ultimately push inflation up a bit. If that forecast is reasonably accurate, the Fed will probably deem it necessary to raise short-term rates again, in which case the Fund's yield would rise as well. Terry Fettig (picture of) Terry Fettig Terry Fettig Portfolio manager (This annual report is not part of the prospectus.) To our contract owners International Equity Fund From the portfolio manager Foreign stock markets experienced highly mixed results during the past 12 months. Nevertheless, the Fund's value did increase by 9.34% over the fiscal year -- September 1996 through August 1997. (This figure does not reflect expenses that apply to the variable accounts, subaccounts, or the annuity contract.) The major foreign stock markets trailed the striking advance of the U.S. market during the period. Japan, the Fund's largest area of investment, showed occasional signs of a comeback, but returns there were penalized by currency weakness, as the yen continued to lose value versus the U.S. dollar. As the period progressed, I scaled back the Fund's exposure to Japan from about 30% to as low as 15% at times. At this point, the Japanese market has a two-tier structure -- companies that are competitive on a worldwide basis and those that are not. Stocks in the former group recently have been the best performers, and that is where I have been concentrating the Fund's Japanese investments. In the well-established markets of Europe, the United Kingdom provided positive results, thanks in part to a favorable currency situation -- that is, the pound strengthening versus the dollar. The Fund's U.K. exposure ranged between 10% and 20% during the 12 months. In continental Europe, including France, Germany, Italy and the Netherlands each of which comprised up to 10% of assets, stocks gained ground. But like Japan, returns to U.S. investors were, in most cases, eroded by the dollar's rise in value versus the local currencies. Still, there were some notable exceptions to that trend, particularly the so-called "emerging" markets in Latin America, including Argentina, Chile, Mexico and Brazil. While the Fund's investments there were not substantial, their generous returns enhanced Fund performance. On the other hand, the markets of Southeast Asia, including Malaysia and Singapore, experienced huge declines last summer. While the Fund had only small holdings in those markets, the severity of the decline culminated in a marked effect on performance during August. My outlook for foreign markets remains largely positive, especially for several of the emerging markets. As for the larger, more-established markets, including Germany, the U.K. and Japan, I think the bulk of the currency weakness is behind them. If so, that would be a plus for U.S. investors, including this Fund. Assuming their economies show faster growth, which I anticipate, those markets should respond positively. Peter Lamaison (picture of) Peter Lamaison Peter Lamaison Portfolio manager (This annual report is not part of the prospectus.)
The Fund's ten largest holdings International Equity Fund (icon of) pie chart The ten holdings listed here make up 24.31% of the Fund's net assets Percent Value (of Fund's net assets) (as of Aug. 31, 1997) Philips Electronics (Netherlands) 4.61% $97,054,882 Ente Nazionale Idrocarburi (Italy) 2.87 60,474,350 Ericsson (LM) B Free (Sweden) 2.37 49,802,502 Roche Holding (Switzerland) 2.34 49,174,856 Novartis (Switzerland) 2.33 49,037,746 HSBC Holdings (Hong Kong) 2.22 46,679,243 Telecom Italia Risp (Italy) 1.97 41,505,333 Banque Nationale de Paris (France) 1.94 40,834,635 BG (United Kingdom) 1.84 38,807,569 Cheung Kong Holdings (Hong Kong) 1.82 38,346,729 (This annual report is not part of the prospectus.)
The Fund's long-term performance International Equity Fund How $10,000 has grown in International Equity Fund International Equity Fund $16,323 Morgan Stanley Capital International World Index $10,000 1/13/92 '92 '93 '94 '95 '96 '97 Average annual total returns (as of August 31, 1997) Since 1 year 5 years inception* +9.34% +10.22% +9.12% *Inception date was Jan. 13, 1992. On the graph above you can see how the Fund's total return compared to a widely cited performance index, the Morgan Stanley Capital International World Index (World Index). The World Index, compiled from a composite of securities listed on the markets of North America, Europe, Australasia and the Far East is widely recognized by investors as the measurement index for portfolios that invest in the major markets of the world Your investment and return values fluctuate so that your accumulation units, when redeemed, may be worth more or less than their original cost. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. The above graph does not reflect expenses that apply to the variable accounts or the annuity contracts. (This annual report is not part of the prospectus.) To our contract owners Aggressive Growth Fund From the portfolio manager Stocks continued to enjoy a favorable environment during the past 12 months, enabling the Fund to record positive results. For the fiscal year -- September 1996 through August 1997 -- the Fund's value appreciated 18.60%. (This figure does not reflect expenses that apply to the variable accounts, subaccounts, or the annuity contract.) Almost on cue with the beginning of the fiscal year, the stock market began moving forward last fall. Buoyed by ongoing reports of modest economic growth, well-behaved inflation, healthy corporate profits and a subsequent decline in interest rates, stocks soon mounted a powerful rally that, aside from a few, brief setbacks, continued through February. At that point, concern about potentially higher inflation sent the market into a several-week slide. Stocks rebounded strongly over much of the summer, however, to more than make up for the decline. As has been the case in recent years, stocks of large companies generally performed better than those of smaller companies for nearly the entire fiscal year. Because Aggressive Growth's investment focus is on the latter group of stocks, this trend worked to the disadvantage of the Fund. Still, smaller stocks did participate in the rally, and the Fund produced a gain in 11 of the 12 months. I kept the Fund's investments well-diversified during the period, with stocks of technology, health care, energy and financial services companies comprising the areas of greatest emphasis. Although all groups contributed to the Fund's positive performance, thanks to rising oil prices, energy-related stocks were especially rewarding. Technology stocks, the Fund's largest exposure, were quite volatile but, overall, provided positive results. To cushion the Fund against potential market volatility, I maintained a higher-than-normal level of cash reserves. As the fiscal year progressed and the market regained positive momentum, however, I lowered that level by putting more money to work in stocks. In other portfolio changes, I established a new, modest position among selected transportation stocks and added to investments in certain specialty retailers. Lastly, I shifted the emphasis in technology toward semiconductor equipment providers that appear likely to benefit from a major change in the semiconductor manufacturing process. As for the year ahead, it's encouraging to note that small-company stocks showed renewed strength late in the past period, outperforming their bigger brethren. If they are able to maintain their momentum for a sustained period, this Fund should benefit accordingly. Martin G. Hurwitz (picture of) Martin G. Hurwitz Martin G. Hurwitz Portfolio manager (This annual report is not part of the prospectus.) The Fund's ten largest holdings Aggressive Growth Fund (icon of) pie chart The ten holdings listed here make up 11.60% of the Fund's net assets Percent Value (of Fund's net assets) (as of Aug. 31, 1997) HBO & Co 2.15% $52,214,625 Tyco Intl 1.62 39,218,750 KLA-Tencor 1.46 35,437,500 Outdoor Systems .98 23,793,750 Westinghouse Electric .95 23,175,000 Kohl's .92 22,404,687 Costco Cos .89 21,637,500 Cooper Cameron .88 21,408,750 Family Dollar Stores .88 21,250,000 USA Waste Service .87 21,000,000 (This annual report is not part of the prospectus.) The Fund's long-term performance Aggressive Growth Fund How $10,000 has grown in Aggressive Growth Fund Aggressive Growth Fund $19,375 S&P 500 $10,000 1/13/92 '92 '93 '94 '95 '96 '97 Average annual total returns (as of August 31, 1997) Since 1 year 5 years inception* +18.60% +16.51% +12.45% *Inception date was Jan. 13, 1992. On the graph above you can see how the Fund's total return compared to a widely cited performance index, Standard & Poor's 500 Stock Index (S&P 500). The S&P 500, an unmanaged list of common stocks, is frequently used as a general measure of the market performance. However, the S&P 500 companies are generally larger than those in which the Fund invests. Your investment and return values fluctuate so that your accumulation units, when redeemed, may be worth more or less than their original cost. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. The above graph does not reflect expenses that apply to the variable accounts or the annuity contracts. (This annual report is not part of the prospectus.) The financial statements contained in Post-Effective Amendment #35 to Registration Statement No. 2-73115 filed on or about October 30, 1997 are incorporated herein by reference. Privileged Assets Select Annuity Investment Portfolios P.O. Box 59197 Minneapolis, MN 55459-9798 AMERICAN EXPRESS Financial Direct STATEMENT OF DIFFERENCES Difference Description 1) The layout is different 1) Some of the layout in the throughout the annual report. annual report to shareholders is in two columns. 2) Headings. 2) The headings in the annual report are placed in a black strip at the top of the page. 3) There are pictures, icons 3) Each picture, icon and and graphs throughout the graph is described to annual report. the left of the text. 4) Footnotes for charts and 4) The footnotes for each graphs are described at chart or graph are typed the left margin. below the description of the chart or graph. -----END PRIVACY-ENHANCED MESSAGE-----