-----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, JFocRwJoXU6+W92bsFL+L2Sa33JpfSOiZg4TlWJN0rKfkicBzFjYDGy6KVSy5r4q PZBBSYTcSQlwHb6qgBOcWg== 0000820027-98-000491.txt : 19980803 0000820027-98-000491.hdr.sgml : 19980803 ACCESSION NUMBER: 0000820027-98-000491 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980729 EFFECTIVENESS DATE: 19980729 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS SELECTIVE FUND INC CENTRAL INDEX KEY: 0000052407 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 002-10700 FILM NUMBER: 98672971 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-00499 FILM NUMBER: 98672972 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 485BPOS 1 IDS SELECTIVE FUND, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 86 (File No. 2-10700) X ------ - and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 34 (File No. 811-499) X ------ - IDS SELECTIVE FUND IDS Tower 10 Minneapolis, MN 55440 Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 (612) 330-9283 Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) [x] on July 30, 1997 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of rule 485. If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. IDS Selective Fund, a series of the Registrant, has adopted a master/feeder operating structure. This Post-Effective Amendment includes a signature page for Income Trust, the master fund. Cross reference sheet showing the location in the prospectus and Statement of Additional Information of the information called for by items enumerated in Parts A and B of Form N-1A. Negative answers omitted are so indicated. PART A Item No. Section in Prospectus 1 Cover page of prospectus 2 (a) Sales charge and Fund expenses (b) The Fund in brief (c) The Fund in brief 3 (a) Financial highlights (b) NA (c) Performance (d) Financial highlights 4 (a) The Fund in brief; Investment policies and risks; How the Fund and Portfolio are organized (b) Investment policies and risks (c) Investment policies and risks 5 (a) Board members and officers (b)(i) Investment manager; About American Express Financial Corporation - General information (b)(ii) Investment manager (b)(iii) Investment manager (c) Portfolio manager (d) Administrator and transfer agent (e) Administrator and transfer agent (f) Distributor (g) Investment manager; About American Express Financial Corporation - General information 5A(a) * (b) * 6 (a) Shares; Voting rights (b) NA (c) NA (d) Voting rights (e) Cover page; Special shareholder services (f) Dividend and capital gain distributions; Reinvestments (g) Taxes (h) Alternative purchase arrangements; Special considerations regarding master/feeder structure 7 (a) Distributor (b) Valuing Fund shares (c) How to purchase, exchange or redeem shares (d) How to purchase shares (e) NA (f) Distributor (g) Alternative purchase arrangements; Reductions and waivers of the sales charge 8 (a) How to redeem shares (b) NA (c) How to purchase shares: Three ways to invest (d) How to purchase, exchange or redeem shares: Redemption policies - "Important..." 9 None PART B Item No. Section in Statement of Additional Information 10 Cover page of SAI 11 Table of Contents 12 NA 13 (a) Additional Investment Policies; all appendices except Dollar-Cost Averaging (b) Additional Investment Policies (c) Additional Investment Policies (d) Security Transactions 14 (a) Board members and officers**; Board Members and Officers (b) Board Members and Officers (c) Board Members and Officers 15 (a) NA (b) Principal Holders of Securities, if applicable (c) Board Members and Officers 16 (a)(i) How the Fund and Portfolio are organized; About American Express Financial Corporation** (a)(ii) Agreements: Investment Management Services Agreement, Plan and Agreement of Distribution (a)(iii) Agreements: Investment Management Services Agreement (b) Agreements: Investment Management Services Agreement (c) NA (d) Agreements: Administrative Services Agreement, Shareholder Service Agreement (e) NA (f) Agreements: Distribution Agreement (g) NA (h) Custodian Agreement; Independent Auditors (i) Agreements: Transfer Agency Agreement; Custodian Agreement 17 (a) Security Transactions (b) Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation (c) Security Transactions (d) Security Transactions (e) Security Transactions 18 (a) Shares; Voting rights** (b) NA 19(a) Investing in the Fund (b) Valuing Fund Shares; Investing in the Fund (c) Redeeming Shares 20 Taxes 21 (a) Agreements: Distribution Agreement (b) NA (c) NA 22 (a) Performance Information (for money market funds only) (b) Performance Information (for all funds except money market funds) 23 Financial Statements * Designates information is located in annual report. ** Designates location in prospectus. IDS Selective Fund Prospectus July 30, 1998 The goals of IDS Selective Fund, Inc. are current income and the preservation of capital by investing in investment-grade bonds. The Fund seeks to achieve its goals by investing all of its assets in Quality Income Portfolio of Income Trust. The Portfolio is managed by American Express Financial Corporation and has the same goals as the Fund. This arrangement is commonly known as a master/feeder structure. 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 (SEC) and available for reference, along with other related materials, on the SEC Internet web site (http://www.sec.gov). The SAI is incorporated by reference. For a free copy, contact American Express Shareholder Service. Like all mutual fund shares, 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. Please note that the Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o is not guaranteed to achieve its goals American Express Shareholder Service P.O. Box 534 Minneapolis, MN 55440-0534 800-862-7919 TTY: 800-846-4852 Web site address: http://www.americanexpress.com/advisors Table of contents The Fund in brief Goals Investment policies and risks Structure of the Fund Manager and distributor Portfolio manager Alternative purchase arrangements Sales charge and Fund expenses Performance Financial highlights Total returns Yield Investment policies and risks Facts about investments and their risks Valuing Fund shares How to purchase, exchange or redeem shares Alternative purchase arrangements How to purchase shares How to exchange shares How to redeem shares Reductions and waivers of the sales charge Special shareholder services Services Quick telephone reference Distributions and taxes Dividend and capital gain distributions Reinvestments Taxes How to determine the correct TIN How the Fund and Portfolio are organized Shares Voting rights Shareholder meetings Special considerations regarding master/feeder structure Board members and officers Investment manager Administrator and transfer agent Distributor About American Express Financial Corporation General information Year 2000 Appendices Description of investment-grade corporate bond ratings Descriptions of derivative instruments The Fund in brief Goals IDS Selective Fund (the Fund) seeks to provide shareholders with current income and preservation of capital by investing in investment-grade bonds. It does so by investing all of its assets in Quality Income Portfolio (the Portfolio) of Income Trust (the Trust) rather than by directly investing in and managing its own portfolio of securities. Both the Fund and the Portfolio are diversified investment companies that have the same goals. Because any investment involves risk, achieving these goals cannot be guaranteed. The goals can be changed only by holders of a majority of outstanding securities. The Fund may withdraw its assets from the Portfolio at any time if the board determines that it is in the best interests of the Fund to do so. In that event, the Fund would consider what action should be taken, including whether to retain an investment advisor to manage the Fund's assets directly or to reinvest all of the Fund's assets in another pooled investment entity. Investment policies and risks Both the Fund and the Portfolio have the same investment policies. Accordingly, the Portfolio invests at least 90% of its net assets in the four highest investment grades of corporate debt securities, certain unrated debt securities the investment manager believes have the same investment qualities, government securities, derivative instruments and money market securities. Other investments may include common and preferred stocks and convertible securities. The investments are both U.S. and foreign. Some of the Portfolio's investments may be considered speculative and involve additional investment risks. For further information, refer to the later section in the prospectus titled "Investment policies and risks." Structure of the Fund This Fund uses what is commonly known as a master/feeder structure. This means that the Fund (the feeder fund) invests all of its assets in the Portfolio (the master fund). The Portfolio invests in and manages the securities and has the same goals and investment policies as the Fund. This structure is described in more detail in the section captioned "Special considerations regarding master/feeder structure." Here is an illustration of the structure: Investors buy shares in the Fund The Fund invests in the Portfolio The Portfolio invests in securities, such as stocks or bonds Manager and distributor The Portfolio is managed by American Express Financial Corporation (AEFC), a provider of financial services since 1894. AEFC currently manages more than $78 billion in assets for the IDS MUTUAL FUND GROUP. Shares of the Fund are sold through American Express Financial Advisors Inc. (AEFA), a wholly-owned subsidiary of AEFC. Portfolio manager Ray Goodner joined AEFC in 1977 and serves as vice president and senior portfolio manager. He has managed the assets of the Fund since 1985 and serves as portfolio manager of the Portfolio. He also serves as portfolio manager of IDS Global Balanced Fund, World Income Portfolio and IDS Life Global Yield Fund. 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. Operating expenses are reflected in the Fund's daily share price and dividends, and are not charged directly to shareholder accounts. Shareholder transaction expenses
Class A Class B Class Y Maximum sales charge on purchases* (as a percentage of offering price) 5% 0% 0% Maximum deferred sales charge imposed on redemptions (as a percentage of original purchase price) 0% 5% 0% Annual Fund and allocated Portfolio operating expenses (as a percentage of average daily net assets): Class A Class B Class Y Management fee** 0.51% 0.51% 0.51% 12b-1 fee 0.00% 0.75% 0.00% Other expenses*** 0.35% 0.36% 0.28% Total 0.86% 1.62% 0.79%
*This charge may be reduced depending on your total investments in IDS funds. See "Reductions of the sales charge." **The management fee is paid by the Trust on behalf of the Portfolio. ***Other expenses include an administrative services fee, a shareholder services fee, a transfer agency fee and other nonadvisory expenses. Example: Suppose for each year for the next 10 years, Fund expenses are as above and annual return is 5%. If you sold your shares at the end of the following years, for each $1,000 invested, you would pay total expenses of:
1 year 3 years 5 years 10 years Class A $58 $76 $ 95 $151 Class B $66 $91 $108 $172 ** Class B* $16 $51 $ 88 $172 ** Class Y $ 8 $25 $ 44 $ 98
*Assuming Class B shares are not redeemed at the end of the period. **Based on conversion of Class B shares to Class A shares in the ninth year. 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 Financial highlights
IDS Selective Fund, Inc. Performance Fiscal period ended May 31, Per share income and capital changes(a) Class A 1998 1997 1996b 1995 1994 1993 1992 1991 1990 1989 1988 Net asset value, $9.00 $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 $8.27 beginning of period Income from investment operations: Net investment income .57 .59 .33 .59 .60 .63 .66 .69 .70 .72 .74 (loss) Net gains (losses) (both .31 .12 (.52) 1.08 (1.05) .69 .27 .52 (.30) .27 .17 realized and unrealized) Total from investment .88 .71 (.19) 1.67 (.45) 1.32 .93 1.21 .40 .99 .91 operations Less distributions: Dividends from net (.58) (.58) (.31) (.58) (.60) (.64) (.66) (.69) (.68) (.74) (.74) investment income Distributions from (.07) (.13) (.03) (.13) (.15) (.11) -- -- -- -- -- realized gains Total distributions (.65) (.71) (.34) (.71) (.75) (.75) (.66) (.69) (.68) (.74) (.74) Net asset value, $9.23 $9.00 $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 end of period Ratios/supplemental data: Class A 1998 1997 1996b 1995 1994 1993 1992 1991 1990 1989 1988 Net assets, end of $1,231 $1,286 $1,408 $1,490 $1,402 $1,737 $1,541 $1,403 $1,196 $1,167 $1,081 period (in millions) Ratio of expenses to .86% .88% .89%d .85% .72% .72% .74% .77% .76% .77% .74% average daily net assets(c) Ratio of net income (loss) 6.20% 6.36% 6.27%d 6.59% 6.53% 6.57% 7.32% 7.94% 8.58% 8.42% 8.67% to average daily net assets Portfolio turnover rate 20% 31% 18% 26% 30% 30% 62% 59% 54% 79% 86% (excluding short-term securities) Total return(e) 10.2% 8.1% (2.0%) 20.3% (4.7%) 14.8% 10.8% 15.0% 4.8% 12.3% 11.3% a For a share outstanding throughout the period. Rounded to the nearest cent. b The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. c Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earning credits on cash balances. d Adjusted to an annual basis. e Total return does not reflect payment of a sales charge.
Performance Fiscal period ended May 31, Per share income and capital changes(a) Class B Class Y 1998 1997 1996(e) 1995(b) 1998 1997 1996(e) 1995(b) Net asset value, $9.00 $9.00 $9.53 $8.78 $9.00 $9.00 $9.53 $8.78 beginning of period Income from investment operations: Net investment income .50 .52 .30 .40 .58 .60 .34 .46 (loss) Net gains (losses) (both .31 .12 (.52) .75 .31 .12 (.52) .75 realized and unrealized) Total from investment .81 .64 (.22) 1.15 .89 .72 (.18) 1.21 operations Less distributions: Dividends from net (.51) (.51) (.28) (.40) (.59) (.59) (.32) (.46) investment income (.07) (.13) (.03) -- (.07) (.13) (.03) -- Distributions from realized gains (.58) (.64) (.31) (.40) (.66) (.72) (.35) (.46) Total distributions Net asset value, $9.23 $9.00 $9.00 $9.53 $9.23 $9.00 $9.00 $9.53 end of period Ratios/supplemental data: Class B Class Y 1998 1997 1996e 1995b 1998 1997 1996e 1995b Net assets, end of $153 $126 $108 $72 $221 $202 $212 $142 period (in millions) Ratio of expenses to 1.62% 1.64% 1.63%d 1.67%d .79% .72% .70%d .73%d average daily net assets(c) Ratio of net income (loss) 5.44% 6.40% 5.56%d 5.68%d 6.27% 7.02% 6.51%d 6.64%d to average daily net assets Portfolio turnover rate 20% 31% 18% 26% 20% 31% 18% 26% (excluding short-term securities) Total return(f) 9.3% 7.3% (2.4%) 13.1% 10.2% 8.3% (2.0%) 13.8%
a For a share outstanding throughout the period. Rounded to the nearest cent. b Inception date was March 20, 1995. c Effective fiscal year 1996, expense ratio is based on total expenses on the Fund before reduction of earning credits on cash balances. d Adjusted to an annual basis. e The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. f Total return does not reflect payment of a sales charge. The information in these tables has been audited by KPMG Peat Marwick LLP, independent auditors. The independent auditors' report and additional information about the performance of the Fund are contained in the Fund's annual report which, if not included with this prospectus, may be obtained without charge. 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.
Average annual total returns as of May 31, 1998 Purchase 1 year Since 5 years 10 years made ago inception ago ago - ------------------------------------------ ---------------- --------------- ---------------- --------------- (fund name): Class A + 4.64% --% +6.08% +8.72% Class B + 5.32% +7.69%* --% --% Class Y +10.22% +9.44%* --% --% Lehman Aggregate Bond Index +10.92% +9.06%** +7.02% +9.20% *Inception date was March 20, 1995. **Measurement period started April 1, 1995. Cumulative total returns as of May 31, 1998 Purchase 1 year Since 5 years 10 years made ago inception ago ago - ------------------------------------------ ---------------- --------------- ---------------- --------------- (fund name): Class A + 4.64% --% +34.35% +130.81% Class B + 5.32% +26.75%* --% --% Class Y +10.22% +33.47%* --% --% Lehman Aggregate Bond Index +10.92% +31.70%** +40.38% +141.09%
*Inception date was March 20, 1995. **Measurement period started April 1, 1995. These examples show total returns from hypothetical investments in Class A, Class B and Class Y shares of the Fund. These returns are compared to those of a popular index for the same periods. The performance of Class B and Class Y will vary from the performance of Class A based on differences in sales charges and fees. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges although not for other differences in expenses. For purposes of calculation, information about the Fund assumes: o a sales charge of 5% for Class A shares o redemption at the end of the period and deduction of the applicable contingent deferred sales charge for Class B shares o no sales charge for Class Y shares o no adjustments for taxes an investor may have paid on the reinvested income and capital gains o a period of widely fluctuating securities prices. Returns shown should not be considered a representation of the Fund's future performance. Lehman Aggregate Bond Index is an unmanaged index made up of a representative list of government and corporate bonds as well as asset-backed 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 the Fund. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. Yield Yield is the net investment income earned per share for a specified time period, divided by the offering price at the end of the period. The Fund's annualized yield for the 30-day period ended May 29, 1998, was 5.39% for Class A, 4.92% for Class B and 5.75% for Class Y. The Fund calculates this 30-day annualized yield by dividing: o net investment income per share deemed earned during a 30-day period by o the public offering price per share on the last day of the period, and o converting the result to a yearly equivalent figure This yield calculation does not include any contingent deferred sales charge, ranging from 5% to 0% on Class B shares, which would reduce the yield quoted. The Fund's yield varies from day to day, mainly because share values and offering prices (which are calculated daily) vary in response to changes in interest rates. Net investment income normally changes much less in the short run. Thus, when interest rates rise and share values fall, yield tends to rise. When interest rates fall, yield tends to follow. Past yields should not be considered an indicator of future yields. Investment policies and risks The policies described below apply both to the Fund and the Portfolio. The Portfolio invests in the four highest investment grades of marketable corporate debt securities, certain unrated debt securities the investment manager believes have the same investment qualities, government securities, derivative instruments and money market instruments. The investments are both U.S. and foreign. Under normal market conditions, at least 90% of the Portfolio's net assets will be in these investments. The remaining 10% of the Portfolio's net assets may be invested in common and preferred stocks and convertible securities. The various types of investments the investment 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 Debt securities: The price of bonds generally falls as interest rates increase, and rises as interest rates decrease. The price of bonds also fluctuates if the credit rating is upgraded or downgraded. The Portfolio does not invest in securities considered by the investment manager to have investment qualities lower than investment grade. Securities that are subsequently downgraded in quality may continue to be held by the Portfolio and will be sold only when the investment manager believes it is advantageous to do so. For a description of investment-grade corporate bonds ratings, please see the Appendix to this prospectus. Common stocks: Stock prices are subject to market fluctuations. Stocks of larger, established companies that pay dividends may be less volatile than the stock market as a whole. Preferred stocks: If a company earns a profit, it generally must pay its preferred stockholders a dividend at a pre-established rate. Convertible securities: These securities generally are preferred stocks or bonds that can be exchanged for other securities, usually common stock, at prestated prices. When the trading price of the common stock makes the exchange likely, convertible securities trade more like common stock. Foreign investments: Securities of foreign companies and governments may be traded in the United States, but often they are traded only on foreign markets. Frequently, there is less information about foreign companies and less government supervision of foreign markets. There are risks when investing in securities of foreign companies and governments in addition to those assumed when investing in domestic securities. These risks are classified as country risk, currency risk, and custody risk. Each can adversely affect the value of an investment. Country risk includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight, the possibility of government-imposed restrictions, even the nationalization of assets. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Portfolio holds securities valued in local currency or holds the currency, changes in the exchange rate add or subtract from the asset value of the Portfolio. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. The risks of foreign investments are managed carefully but the Portfolio cannot guarantee against losses that might result from them. The Portfolio may invest up to 25% of its total assets in foreign investments. Derivative instruments: The investment 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 investment 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. 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 investment 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. 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 may be changed by the boards. 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. Valuing Fund shares The public offering price is the net asset value (NAV) adjusted for 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). NAV generally declines as interest rates increase and rises as interest rates decline. To establish the net assets, all securities held by the Portfolio are valued as of the close of each business day. In valuing assets: o Securities and assets with available market values are valued on that basis o Securities maturing in 60 days or less are valued at amortized cost o Assets without readily available market values are valued according to methods selected in good faith by the board How to purchase, exchange or redeem shares 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. You may choose the class that best suits your circumstances and objectives.
Sales charge and distribution (12b-1) fee Service fee Other information Class A Maximum initial sales 0.175% of average daily net Initial sales charge waived charge of 5%; no 12b-1 fee assets or reduced for certain purchases Class B No initial sales charge; 0.175% of average daily net Shares convert to Class A maximum CDSC of 5% assets in the ninth year of declines to 0% after six ownership; CDSC waived in years; 12b-1 fee of 0.75% certain circumstances of average daily net assets Class Y None 0.10% of average daily net Available only to certain assets qualifying institutional investors
Conversion of Class B shares to Class A shares - During the ninth calendar year of owning your Class B shares, Class B shares will convert to Class A shares and will no longer be subject to a distribution fee. Class B shares that convert to Class A shares are not subject to a sales charge. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. This means more of your money will be put to work for you. Considerations in determining whether to purchase Class A or Class B shares - You should consider the information below in determining whether to purchase Class A or Class B shares. The distribution fee (included in "Ongoing expenses") and sales charges are structured so that you will have approximately the same total return at the end of eight years regardless of which class you chose. Sales charges on purchase or redemption If you purchase Class A shares o You will not have all of your purchase price invested. Part of your purchase price will go to pay the sales charge. You will not pay a sales charge when you redeem your shares. o You will be able to take advantage of reductions in the sales charge. If you purchase Class B shares o All of your money is invested in shares of stock. However, you will pay a sales charge if you redeem your shares within six years of purchase. o No reductions of the sales charge are 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 o Your shares will have a lower expense ratio than Class B shares because Class A does not pay a distribution fee and the transfer agency fee for Class A is lower than the fee for Class B. As a result, Class A shares will pay higher dividends than Class B shares. If you purchase Class B shares o The distribution and transfer agency fees for Class B will cause your shares to have a higher expense ratio and to pay lower dividends than Class A shares. In the ninth year of ownership, Class B shares will convert to Class A shares and you will no longer be subject to higher fees. 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 a distribution fee. The following investors are eligible to purchase Class Y shares: o 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. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These organizations must have at least $10 million invested in funds of the IDS MUTUAL FUND GROUP. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. * Eligibility must be determined in advance by AEFA. To do so, contact your financial advisor. How to purchase shares If you are investing in this Fund for the first time, you will 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 your correct Taxpayer Identification Number (Social Security or Employer Identification number). See "Distributions and taxes." When you purchase shares for a new or existing account, the price you pay per share is determined at the close of business on the day your investment is received and accepted at the Minneapolis headquarters. o 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. Three ways to invest 1 By regular account Send your check and application (or your name and account number if you have an established account) to: American Express Financial Advisors Inc. P.O. Box 74 Minneapolis, MN 55440-0074 Your financial advisor will help you with this process. Minimum amounts Initial investment: $ 2,000 Additional investments: $ 100 Account balances: $ 300* Qualified retirement accounts: none 2 By scheduled investment plan Contact your financial advisor to set up one of the following scheduled plans: o automatic payroll deduction o bank authorization o direct deposit of Social Security check o other plan approved by the Fund Minimum amounts Initial investment: $ 100 Additional investments: $ 100/per each payment for non qualified accounts 50/per each payment for qualified accounts Account balances: none (on active plans of monthly payments) If account balance is below $2,000, frequency of payments must be at least monthly. 3 By wire If you have an established account, you may wire money to: Norwest Bank Minneapolis Routing No. 091000019 Minneapolis, MN Attn: Domestic Wire Dept. Give these instructions: Credit IDS Account #00-30-015 for personal account # (your account number) for (your name). If this information is not included, the order may be rejected and all money received by the Fund, less any costs the Fund or AECSC incurs, will be returned promptly. Minimum amounts Each wire investment: $ 1,000 *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 do not do so within 30 days, your shares can be redeemed and the proceeds mailed to you. If you are in a "wrap-fee" program sponsored by AEFA and your wrap program balance falls below the required program minimum or is terminated, your shares will be redeemed and the proceeds mailed to you. 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 on any other fund, including fees and expenses, read that fund's prospectus carefully. 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 the proceeds from your redemption are more or less than the cost of your shares, you will have a gain or loss, which can affect your tax liability. Redeeming shares held in an IRA or qualified retirement account may subject you to certain federal taxes, penalties and reporting requirements. Consult your tax advisor. Two ways to request an exchange or redemption of shares 1 By letter Include in your letter: o the name of the fund (s) o the class of shares to be exchanged or redeemed o your account number(s) (for exchanges, both funds must be registered in the same ownership) o your Taxpayer Identification Number (TIN) o the dollar amount or number of shares you want to exchange or redeem o signature of all registered account owners o for redemptions, indicate how you want your money delivered to you o any paper certificates of shares you hold Regular mail: American Express Shareholder Service Attn: Redemptions P.O. Box 534 Minneapolis, MN 55440-0534 Express mail: American Express Shareholder Service Attn: Redemptions 733 Marquette Ave. Minneapolis, MN 55402 2 By phone American Express Financial Advisors Telephone Transaction Service: 800-437-3133 or 612-671-3800 o The Fund and AECSC will honor any telephone exchange or redemption request believed to be authentic and will use reasonable procedures to confirm that they are. This includes asking identifying questions and tape recording calls. If reasonable procedures are followed, the Fund or AECSC will not be liable for any loss resulting from fraudulent requests. o Phone exchange and redemption privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts unless you request these privileges NOT apply by writing American Express Shareholder Service. Each registered owner must sign the request. o AECSC answers phone requests promptly, but you may experience delays when call volume is high. If you are unable to get through, use mail procedure as an alternative. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Phone privileges may be modified or discontinued at any time. Minimum amount Redemption: $100 Maximum amount Redemption: $50,000 Exchange policies: o 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. o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until written approval is obtained from the secured party. o AECSC 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: o 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 purchase new shares in the same account 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. o 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 AECSC that your check has cleared.) Three ways to receive payment when you redeem shares 1 By regular or express mail o Mailed to the address on record o Payable to names listed on the account NOTE: You will be charged a fee if you request express mail delivery. 2 By wire o Minimum wire redemption: $1,000 o Request that money be wired to your bank o 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 By scheduled payout plan o Minimum payment: $50 o 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 o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges 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 percentage of:* Public Net offering amount price 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: o the amount you are investing in this Fund now; o the amount of your existing investment in this Fund, if any; and o 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: o 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. o 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. o If you intend to invest $1 million over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. For more details, see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o Current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses and unmarried children under 21. o Current or retired American Express financial advisors, their spouses and unmarried children under 21. o Investors who have a business relationship with a newly associated financial advisor who joined AEFA from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with AEFA, (2) the purchase is made with proceeds of a redemption of shares that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds must be the result of a redemption of an equal or greater value where a sales load was previously assessed. o Qualified employee benefit plans* using a daily transfer recordkeeping system offering participants daily access to IDS funds. (Participants in certain qualified plans for which the initial sales charge is waived may be subject to a deferred sales charge of up to 4% on certain redemptions. For more information, see the SAI.) o Shareholders who have at least $1 million invested in funds of the IDS MUTUAL FUND GROUP. If the investment is redeemed in the first year after purchase, a CDSC of 1% will be charged on the redemption. The CDSC will be waived only in the circumstances described for waivers for Class B shares. o Purchases made within 30 days after a redemption of shares (up to the amount redeemed): - of a product distributed by AEFA 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. o Purchases made with dividend or capital gain distributions from the same class of another fund in the IDS MUTUAL FUND GROUP that has a sales charge. o Purchases made through or under a "wrap fee" product sponsored by AEFA (total amount of all investments must be $50,000); the University of Massachusetts After-Tax Savings Program; the University of Texas System ORP; or a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company. o Purchases made with the proceeds from IDS Life Real Estate Variable Annuity surrenders. * Eligibility must be determined in advance by AEFA. To do so, contact your financial advisor. Class B - contingent deferred sales charge alternative Where a CDSC is imposed on a redemption, it is based on the amount of the redemption and the number of calendar years, including the year of purchase, between purchase and redemption. The following table shows the declining scale of percentages that apply to redemptions during each year after a purchase: If a redemption is The percentage rate made during the for the CDSC is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% If the amount you are redeeming reduces the current net asset value of your investment in Class B shares below the total dollar amount of all your purchase payments during the last six years (including the year in which your redemption is made), the CDSC is based on the lower of the redeemed purchase payments or market value. The following example illustrates how the CDSC is applied. Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 15 months, including reinvested dividend and capital gain distributions. You could redeem any amount up to $2,000 without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you redeemed $2,500, the CDSC would apply only to the $500 that represented part of your original purchase price. The CDSC rate would be 4% because a redemption after 15 months would take place during the second year after purchase. Because the CDSC is imposed only on redemptions that reduce the total of your purchase payments, you never have to pay a CDSC on any amount you redeem that represents appreciation in the value of your shares, income earned by your shares or capital gains. In addition, when determining the rate of any CDSC, your redemption will be made from the oldest purchase payment you made. Of course, once a purchase payment is considered to have been redeemed, the next amount redeemed is the next oldest purchase payment. By redeeming the oldest purchase payments first, lower CDSCs are imposed than would otherwise be the case. Waivers of the contingent deferred sales charge The CDSC on Class B shares will be waived on redemptions of shares: o In the event of the shareholder's death, o Purchased by any board member, officer or employee of a fund or AEFC or its subsidiaries, o Held in a trusteed employee benefit plan, o Held in IRAs or certain qualified plans for which American Express Trust Company acts as 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 AEFA, or a custodian-to-custodian transfer to a product not distributed by AEFA, 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, AECSC provides these services: Quarterly statements featuring: (1) a list of all your holdings and transactions during the previous three months and (2) personalized mutual fund performance information about your specific account. Yearly tax statements featuring average-cost-basis reporting of capital gains or losses if you redeem your shares along with distribution information which simplifies tax calculations. A personalized mutual fund progress report detailing returns on your initial investment and cash-flow activity in your account. It calculates a total return to reflect your individual history in owning Fund shares. This report is available from your financial advisor. Quick telephone reference American Express Financial Advisors Telephone Transaction Service Redemptions and exchanges, dividend payments or reinvestments and automatic payment arrangements National/Minnesota: 800-437-3133 Mpls./St. Paul area: 671-3800 TTY Service For the hearing impaired 800-846-4852 American Express Financial Advisors Easy Access Line Automated account information (TouchTone(R) phones only), including current Fund prices and performance, account values and recent account transactions 800-862-7919 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 Portfolio allocates investment income from dividends and interest and net realized capital gains or losses, if any, to the Fund. The Fund deducts direct and allocated expenses from the investment income. The Fund's net investment income is distributed to you monthly as dividends. Capital gains are realized when a security is sold for a higher price than was paid for it. Short-term capital gains are distributed at the end of the calendar year and are included in net investment income. Long-term capital gains are realized when a security is held for more than one year. The Fund will offset any net realized capital gains by any available capital loss carryovers. Net realized long-term capital gains, if any, are distributed at the end of the calendar year as capital gain distributions. These long-term capital gains will be subject to differing tax rates depending on the holding period of the underlying investments. Before they are distributed, net long-term capital gains are included in the value of each share. After they are distributed, the value of each share drops by the per-share amount of the distribution. (If your distributions are reinvested, the total value of your holdings will not change.) Dividends for each class will be calculated at the same time, in the same manner and will be the same amount prior to deduction of expenses. Expenses attributable solely to a class of shares will be paid exclusively by that class. Reinvestments Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request the Fund in writing or by phone to pay distributions to you in cash, or o you direct the Fund to invest your distributions in the same class of another publicly available IDS fund for which you have previously opened an account. 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 cash only for distributions 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. Prior to reinvestment, no interest will accrue on amounts represented by uncashed distribution or redemption checks. Taxes The Fund has received a Private Letter Ruling from the Internal Revenue Service stating that, for purposes of the Internal Revenue Code, the Fund will be regarded as directly holding its allocable share of the income and gain realized by the Portfolio. 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 declares 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 capital gain distribution. You pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which is taxable. Redemptions and exchanges subject you to a tax on any capital gain. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). Long-term capital gains will be taxed at rates that vary depending upon the holding period. Long-term capital gains are divided into two holding periods: (1) shares held more than one year but not more than 18 months and (2) shares held more than 18 months. 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. If you do not 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 certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN o a civil penalty of $500 if you make a false statement that results in no backup withholding o 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 Use the Social Security or For this type of account: Employer Identification number of: Individual or joint account The individual or individuals listed on the account Custodian account of a minor (Uniform The minor Gifts/Transfers to Minors Act) A living trust The grantor-trustee (the person who puts the money into the trust) An irrevocable trust, The legal entity (not the personal representative pension trust or estate 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 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 this Fund. Tax matters are highly individual and complex, and you should consult a qualified tax advisor about your personal situation. How the Fund and Portfolio are organized Shares The Fund is owned by its shareholders. The 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 the Fund. Par value is one cent per share. Both full and fractional shares can be issued. The Fund no longer issues stock certificates. 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. Special considerations regarding master/feeder structure The Fund pursues its goal by investing its assets in a master fund called the Portfolio. This means that the Fund does not invest directly in securities; rather the Portfolio invests in and manages its portfolio of securities. The Portfolio is a separate investment company, but it has the same goal and investment policies as the Fund. The goal and investment policies of the Portfolio are described under the captions "Investment policies and risks" and "Facts about investments and their risks." Additional information on investment policies may be found in the SAI. Board considerations: The board considered the advantages and disadvantages of investing the Fund's assets in the Portfolio. The board believes that the master/feeder structure can be in the best interest of the Fund and its shareholders since it offers the opportunity for economies of scale. The Fund may redeem all of its assets from the Portfolio at any time. Should the board determine that it is in the best interest of the Fund and its shareholders to terminate its investment in the Portfolio, it would consider hiring an investment advisor to manage the Fund's assets, or other appropriate options. The Fund would terminate its investment if the Portfolio changed its goal, investment policies or restrictions without the same change being approved by the Fund. Other feeders: The Portfolio sells securities to other affiliated mutual funds and may sell securities to non-affiliated investment companies and institutional accounts (known as feeders). These feeders buy the Portfolio's securities on the same terms and conditions as the Fund and pay their proportionate share of the Portfolio's expenses. However, their operating costs and sales charges are different from those of the Fund. Therefore, the investment returns for other feeders are different from the returns of the Fund. Information about other feeders may be obtained by calling American Express Financial Advisors at 1-800-AXP-SERV. Each feeder that invests in the Portfolio is different and activities of its investors may adversely affect all other feeders, including the Fund. For example, if one feeder decides to terminate its investment in the Portfolio, the Portfolio may elect to redeem in cash or in kind. If cash is used, the Portfolio will incur brokerage, taxes and other costs in selling securities to raise the cash. This may result in less investment diversification if entire investment positions are sold, and it also may result in less liquidity among the remaining assets. If in-kind distribution is made, a smaller pool of assets remains that may affect brokerage rates and investment options. In both cases, expenses may rise since there are fewer assets to cover the costs of managing those assets. Shareholder meetings: Whenever the Portfolio proposes to change a fundamental investment policy or to take any other action requiring approval of its security holders, the Fund will hold a shareholder meeting. The Fund will vote for or against the Portfolio's proposals in proportion to the vote it receives for or against the same proposals from its shareholders. 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. Board members and officers serve 47 IDS and IDS Life funds and 15 Master Trust portfolios, except for William H. Dudley, who does not serve the nine IDS Life funds. The board members 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. Independent board members and officers Chairman of the board William R. Pearce* Chairman of the board, Board Services Corporation (provides administrative services to boards including the boards of the IDS and IDS Life funds and Master Trust portfolios). H. Brewster Atwater, Jr. Retired chairman and chief executive officer, General Mills, Inc. Lynne V. Cheney Distinguished fellow, American Enterprise Institute for Public Policy Research. Heinz F. Hutter Retired president and chief operating officer, Cargill, Inc. Anne P. Jones Attorney and telecommunications consultant. Alan K. Simpson Former United States senator for Wyoming. Edson W. Spencer Retired chairman and chief executive officer, Honeywell, Inc. Wheelock Whitney Chairman, Whitney Management Company. C. Angus Wurtele Chairman of the board, The Valspar Corporation. Officer Vice president, general counsel and secretary Leslie L. Ogg* President of Board Services Corporation. Board members and officers associated with AEFC President John R. Thomas* Senior vice president, AEFC. William H. Dudley* Senior advisor to the chief executive officer, AEFC. David R. Hubers* President and chief executive officer, AEFC. Officers associated with AEFC Vice president Peter J. Anderson* Senior vice president, AEFC. Vice president Frederick C. Quirsfeld* Vice president, AEFC. Treasurer Matthew N. Karstetter* Vice president, AEFC. Refer to the SAI for the board members' and officers' biographies. * Interested person as defined by the Investment Company Act of 1940. Investment manager The Portfolio pays AEFC for managing its assets. The Fund pays its proportionate share of the fee. Under the Investment Management Services Agreement, AEFC is paid a fee for these services based on the average daily net assets of the Portfolio, as follows: Assets Annual rate (billions) at each asset level First $1.0 0.520% Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 For the fiscal year ended May 31, 1998, the Portfolio paid AEFC a total investment management fee of 0.51% of its average daily net assets. Under the Agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory expenses. Administrator and transfer agent Under an Administrative Services Agreement, the Fund pays AEFC for administration and accounting services at an annual rate of 0.05% decreasing in gradual percentages to 0.025% as assets increase. Under a separate Transfer Agency Agreement, AECSC maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 Distributor The Fund has an exclusive distribution agreement with AEFA. Financial advisors representing AEFA 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 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. Financial advisors may receive different compensation for selling Class A, Class B and Class Y shares. Portions of the sales charge also may be paid to securities dealers who have sold the Fund's shares or to banks and other financial institutions. The amounts of those payments range from 0.8% to 4% of the Fund's offering price depending on the monthly sales volume. Under a Shareholder Service Agreement, the Fund also pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of average daily net assets for Class A and Class B shares and 0.10% for Class Y shares. Total expenses paid by the Fund's Class A shares for the fiscal year ended May 31, 1998, were 0.86% of its average daily net assets. Expenses for Class B and Class Y were 1.62% and 0.79%, respectively. 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 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, 1998 were more than $195 billion. AEFA serves individuals and businesses through its nationwide network of more than 180 offices and more than 8,700 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 Portfolio may pay brokerage commissions to broker-dealer affiliates of AEFC. Year 2000 The Year 2000 issue is the result of computer programs having been written using two digits rather than four to define a year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in the failure of major systems or miscalculations, which would have a material impact on the operations of the Fund. The Fund has no computer systems of its own but is dependent upon the systems maintained by AEFC and certain other third parties. A comprehensive review of AEFC's computer systems and business processes has been conducted to identify the major systems that could be affected by the Year 2000 issue. Steps are being taken to resolve any potential problems including modification of existing software and the purchase of new software. These measures are scheduled to be completed and tested on a timely basis. AEFC's goal is to complete internal remediation and testing of each of its critical systems by the end of 1998 and to continue compliance efforts through 1999. The Year 2000 readiness of other third parties whose system failures could have an impact on the Fund's operations currently is being evaluated. The companies or governments in which the Fund invests also may be adversely affected by Year 2000 issues. This may affect the value of the Fund's investments. The potential materiality of any impact is not known at this time. Appendix A Description of investment-grade corporate bond ratings Bond 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 and Baa. Ratings by Standard & Poor's Corporation are AAA, AA, A and BBB. The following is a compilation of the two agencies' rating descriptions. For further information, see the SAI. Aaa/AAA - Judged to be of the best quality and carry the smallest degree of investment risk. Interest and principal are secure. Aa/AA - Judged to be high-grade although margins of protection for interest and principal may not be quite as good as Aaa or AAA rated securities. A - Considered upper-medium grade. Protection for interest and principal is deemed adequate but may be susceptible to future impairment. Baa/BBB - Considered medium-grade obligations. Protection for interest and principal is adequate over the short-term; however, these obligations may have certain speculative characteristics. 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. Definitions of zero-coupon and pay-in-kind securities A zero-coupon security is a security that is sold at a deep discount from its face value and makes no periodic interest payments. The buyer of such a security receives a rate of return by gradual appreciation of the security, which is redeemed at face value on the maturity date. A pay-in-kind security is a security in which the issuer has the option to make interest payments in cash or in additional securities. The securities issued as interest usually have the same terms, including maturity date, as the pay-in-kind securities. Appendix B Descriptions of derivative instruments What follows are brief descriptions of derivative instruments the Portfolio may use. At various times the Portfolio may use some or all of these instruments and is not limited to these instruments. It may use other similar types of instruments if they are consistent with the Portfolio's investment goal and policies. For more information on these instruments, see the SAI. Options and futures contracts - An option is an agreement to buy or sell an instrument at a set price during a certain period of time. A futures contract is an agreement to buy or sell an instrument for a set price on a future date. The Portfolio may buy and sell options and futures contracts to manage its exposure to changing interest rates, security prices and currency exchange rates. Options and futures may be used to hedge the Portfolio's investments against price fluctuations or to increase market exposure. Asset-backed and mortgage-backed securities - Asset-backed securities include interests in pools of assets such as motor vehicle installment sale contracts, installment loan contracts, leases on various types of real and personal property, receivables from revolving credit (credit card) agreements or other categories of receivables. Mortgage-backed securities include collateralized mortgage obligations and stripped mortgage-backed securities. Interest and principal payments depend on payment of the underlying loans or mortgages. The value of these securities may also be affected by changes in interest rates, the market's perception of the issuers and the creditworthiness of the parties involved. The non-mortgage related asset-backed securities do not have the benefit of a security interest in the related collateral. Stripped mortgage-backed securities include interest only (IO) and principal only (PO) securities. Cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments on the underlying mortgage loans or mortgage-backed securities. Indexed securities - The value of indexed securities is linked to currencies, interest rates, commodities, indexes or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself. Inverse floaters - Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. Structured products - Structured products are over-the-counter financial instruments created specifically to meet the needs of one or a small number of investors. The instrument may consist of a warrant, an option or a forward contract embedded in a note or any of a wide variety of debt, equity and/or currency combinations. Risks of structured products include the inability to close such instruments, rapid changes in the market and defaults by other parties. STATEMENT OF ADDITIONAL INFORMATION FOR IDS SELECTIVE FUND July 30, 1998 This Statement of Additional Information (SAI) is not a prospectus. It should be read together with the prospectus and the financial statements contained in the Annual Report 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 July 30, 1998, and it is to be used with the prospectus dated July 30, 1998, and the Annual Report for the fiscal year ended May 31, 1998. IDS Selective Fund TABLE OF CONTENTS Goals and Investment Policies.................................See Prospectus Additional Investment Policies...........................................p.4 Security Transactions....................................................p.8 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation..................................p.10 Performance Information.................................................p.11 Valuing Fund Shares.....................................................p.13 Investing in the Fund...................................................p.15 Redeeming Shares........................................................p.19 Pay-out Plans...........................................................p.20 Taxes...................................................................p.22 Agreements..............................................................p.23 Organizational Information..............................................p.26 Board Members and Officers..............................................p.26 Compensation for Fund and Portfolio Board Members.......................p.30 Independent Auditors....................................................p.31 Financial Statements.......................................See Annual Report Prospectus..............................................................p.31 Appendix A: Foreign Currency Transactions...............................p.32 Appendix B: Investing in Foreign Securities.............................p.37 Appendix C: Options and Interest Rate Futures Contracts.................p.38 Appendix D: Mortgage-Backed Securities..................................p.44 Appendix E: Dollar-Cost Averaging.......................................p.45 ADDITIONAL INVESTMENT POLICIES IDS Selective Fund, Inc. (the Fund) pursues its goals by investing all of its assets in Quality Income Portfolio (the "Portfolio") of Income Trust (the Trust), a separate investment company, rather than by directly investing in and managing its own portfolio of securities. The Portfolio has the same investment objectives, policies and restrictions as the Fund. 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, respectively, as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Whenever the Fund is requested to vote on a change in the investment policies of the corresponding Portfolio, the Fund 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. These are investment policies in addition to those presented in the prospectus. The policies below are fundamental policies that apply to both the Fund and the Portfolio and may be changed only with shareholder/unitholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund and 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 and Fund have not borrowed in the past and have no present intention to borrow. `Make cash loans if the total commitment amount exceeds 5% of the Portfolio's total assets. `Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means no more than 25% of the Portfolio's total assets, based on current market value at time of purchase, can be invested in any one industry. `Purchase more than 10% of the outstanding voting securities of an issuer. `Invest more than 5% of its total assets in securities of any one company, government or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies or instrumentalities, and except that up to 25% of the 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 options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. `Make a loan of any part of its assets to American Express Financial Corporation (AEFC), to the board members and officers of AEFC or to its own board members and officers. `Purchase securities of an issuer if the board members and officers of the Fund, 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 Fund, the Portfolio and of AEFC who own more than 0.5% of an issuer's securities are added together, and if in total they own more than 5%, the Portfolio will not purchase securities of that issuer. `Lend Portfolio securities in excess of 30% of its net assets. The current policy of the Portfolio's board is to make these loans, either long- or short-term, to broker-dealers. 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 the investment manager believes the opportunity for additional income outweighs the risks. `Issue senior securities, except this restriction shall not be deemed to prohibit the Portfolio from borrowing from banks, using options or futures contracts, lending its securities or entering into repurchase agreements. Unless changed by the board, the Fund and Portfolio will not: `Buy on margin or sell short, except the Portfolio may enter into interest rate futures contracts. `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 current 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. `Invest more than 5% of its net assets in warrants. `Invest more than 10% of the Portfolio's net assets in securities and derivative instruments that are illiquid. For purposes of this policy illiquid securities include some privately placed securities, public securities and Rule 144A securities that for one reason or another may no longer have a readily available market, repurchase agreements with maturities greater than seven days, non-negotiable fixed-time deposits, and over-the-counter options. 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 the 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 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 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. 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 investments 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 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. The Portfolio may invest in foreign securities that are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the U.S. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary Receipts also involve the risks of other investments in foreign securities. For a discussion about foreign currency transactions, see Appendix A. For a discussion on investing in foreign securities, see Appendix B. For a discussion on options and interest rate futures contracts, see Appendix C. For a discussion on mortgage-backed securities, see Appendix D. SECURITY TRANSACTIONS Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's and 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 most favorable execution except where otherwise authorized by the board. 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 or trust for which it acts as investment manager. AEFC carefully monitors compliance with its Code of Ethics. Normally, the Portfolio's securities are traded on a principal rather than an agency basis. In other words, AEFC will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. AEFC does not pay the dealer commissions. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. 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 with respect to the Fund and other funds and trusts in the IDS MUTUAL FUND GROUP for which it acts as investment advisor. Research provided by brokers supplements AEFC's own research activities. Such services include economic data on, and analysis of, U.S. and foreign economies; information on specific industries; information about specific companies, including earnings estimates; purchase recommendations for stocks and bonds; portfolio strategy services; political, economic, business and industry trend assessments; historical statistical information; market data services providing information on specific issues and prices; and technical analysis of various aspects of the securities markets, including technical charts. Research services may take the form of written reports, computer software or personal contact by telephone or at seminars or other meetings. AEFC has obtained, and in the future may obtain, computer hardware from brokers, including but not limited to personal computers that will be used exclusively for investment decision-making purposes, which include the research, portfolio management and trading functions and other services to the extent permitted under an interpretation by the SEC. When paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge, AEFC must follow procedures authorized by the board. To date, three procedures have been authorized. One procedure permits AEFC to direct an order to buy or sell a security traded on a national securities exchange to a specific broker for research services it has provided. The second procedure permits AEFC, in order to obtain research, to direct an order on an agency basis to buy or sell a security traded in the over-the-counter market to a firm that does not make a market in that security. The commission paid generally includes compensation for research services. The third procedure permits AEFC, in order to obtain research and brokerage services, to cause the Portfolio to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Portfolio it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services 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 represented 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 other transactions 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 Portfolio is made independently from any decision made for another portfolio, fund or other account advised by AEFC or any of its subsidiaries. When the Portfolio buys or sells the same security as another portfolio, fund or account, AEFC carries out the purchase or sale in a way the Portfolio agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Portfolio, the Portfolio hopes to gain an overall advantage in execution. AEFC has assured the Fund it will continue to seek ways to reduce brokerage costs. On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency and research services. The Portfolio paid total brokerage commissions of $61,088 for the fiscal year ended May 31, 1998, $75,832 for fiscal year ended May 31, 1997 and $6,800 for fiscal period ended May 31, 1996. Substantially all firms through whom transactions were executed provide research services. No transactions were directed to brokers because of research services they provided to the Portfolio. As of the fiscal year ended May 31, 1998, the Portfolio held securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below:
Value of Securities owned at Name of Issuer End of Fiscal Year -------------- ------------------ Bank of America $5,219,650 Equitable Securities Corp. 5,456,300 First Chicago Capital Markets, Inc. 8,131,312 Morgan (J.P.) Securities Inc 8,698,305 Nations Bank 9,785,483 Salomon Brothers Inc. 14,453,100
The portfolio turnover rate was 20% in the fiscal year ended May 31, 1998, and 31% in fiscal year 1997. 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. No brokerage commissions were paid to brokers affiliated with AEFC for the three most recent fiscal years. PERFORMANCE INFORMATION The Fund may quote various performance figures to illustrate past performance. Average annual total return and current yield quotations used by the Fund are based on standardized methods of computing performance as required by the SEC. An explanation of the 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(1+T)n = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) 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 Annualized yield The Fund may calculate an annualized yield for a class by dividing the net investment income per share deemed earned during a period by the net asset value per share on the last day of the period and annualizing the results. Yield is calculated according to the following formula: Yield = 2[(a-b + 1)6 - 1] cd where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period The Fund's annualized yield was 5.39% for Class A, 4.92% for Class B and 5.75% for Class Y for the 30-day period ended May 29, 1998. The Fund's yield, calculated as described above according to the formula prescribed by the SEC, is a hypothetical return based on market value yield to maturity for the Portfolio's securities. It is not necessarily indicative of the amount which was or may be paid to the Fund's shareholders. Actual amounts paid to Fund shareholders are reflected in the distribution yield. Distribution yield Distribution yield is calculated according to the following formula: D divided by POP F equals DY 30 30 where: D = sum of dividends for 30-day period POP = sum of public offering price for 30-day period F = annualizing factor DY = distribution yield The Fund's distribution yield was 6.35% for Class A, 5.92% for Class B and 6.76% for Class Y for the 30-day period ended May 29, 1998. 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, Morningstar, 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. On June 1, 1998, the first business day following the end of the fiscal year, the computation looked like this:
Net assets Shares before outstanding at Net asset value shareholder the end of of one share transactions previous day ----------------- ----------------- ----------------- ----------------- ----------------- Class A $1,233,116,238 divided by 133,367,536 equals $9.246 Class B 153,319,742 16,582,278 9.246 Class Y 221,517,091 23,955,563 9.247
In determining net assets before shareholder transactions, the Portfolio's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): `Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. `Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. `Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. `Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. `Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. `Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current rate of exchange. Occasionally, events affecting the value of such securities may occur between such times and the close of the Exchange that will not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities occur during such period, these securities will be valued at their fair value according to procedures decided upon in good faith by the 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 and other assets are valued at fair value as determined in good faith by the board. The board is responsible for selecting methods it believes provide fair value. When possible, bonds are valued by a pricing service independent from the Portfolio. 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, 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 adjusted for the sales charge for Class A. 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, made June 1, 1998, was determined by dividing the net asset value of one share, $9.246, by 0.95 (1.00-0.05 for a maximum 5% sales charge) for a public offering price of $9.73. The sales charge is paid to American Express Financial Advisors Inc. (AEFA) 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 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 Offering Price Amount Invested Amount of investment ranges from: - -------------------------------------------- First $ 50,000 5.00% 5.26% Next 50,000 to 100,000 5.00-4.50 5.26-4.71 Next 100,000 to 500,000 4.50-3.80 4.71-3.95 Next 500,000 to 999,999 3.80-2.00 3.95-2.04 $1,000,000 or more 0.00 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 varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of Participants Total Plan Assets 1-99 100 or more - ----------------- ---- ----------- Less than $1 million 4% 0% $1 million or more 0% 0% - -------------------------------------------------------------------------------- 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 primary household group. (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.) 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 board members, officers or employees of the Fund or AEFC or its subsidiaries and deceased advisors. The total amount invested also includes any investment you or your immediate family already have in the other publicly offered funds in the IDS MUTUAL FUND GROUP where the investment is subject to a sales charge. For example, suppose you already have an investment of $30,000 in another IDS fund. If you invest $40,000 more in this Fund, your total amount invested in the funds will be $70,000 and therefore $20,000 of your $40,000 investment will incur a 4.5% sales charge. Finally, Individual Retirement Account (IRA) purchases, or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar entity, may be added together to reduce sales charges for shares purchased through that plan. Class A - Letter of Intent (LOI) If you intend to invest $1 million over a period of 13 months, you can reduce the sales charges in Class A by filing a LOI. The agreement can start at any time and will remain in effect for 13 months. Your investment will be charged normal sales charges until you have invested $1 million. At that time, your account will be credited with the sales charges previously paid. Class A investments made prior to signing a LOI may be used to reach the $1 million total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will not adjust for sales charges on investments made prior to the signing of the LOI. If you do not invest $1 million by the end of 13 months, there is no penalty, you'll just miss out on the sales charge adjustment. A LOI is not an option (absolute right) to buy shares. 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 $100 or more, you must make additional payments of $100 or more on at least a monthly basis until your balance reaches $2,000. 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 E. 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 the same class of another fund in the IDS MUTUAL FUND GROUP but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: 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 dividends 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 dividends from your IRA to your 401(k) plan account, although you may exchange dividends 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 expense ratios. Before exchanging dividends into another fund, you should read that fund's 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 Portfolio's securities is not reasonably practicable or it is not reasonably practicable for the Portfolio 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. The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to 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 American Express Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial Advisors Telephone Transaction Service at 800-437-3133 (National/Minnesota) or 612-671-3800 (Mpls./St. Paul). 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 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 redemption 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 redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged plus the amount of the initial sales charge applied to the amount exchanged exceeds annual contribution limitations. For example: If you were to exchange $2,000 in Class A shares from a 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. For the fiscal year ended May 31, 1998, 0.81% of the Fund's net investment income dividends qualified for the corporate deduction. Capital gain distributions, if any, received by corporate shareholders should be treated as long-term capital gains regardless of how long they owned their shares. Capital gain distributions, if any, received by individuals should be treated as long-term if held for more than one year; however, recent tax laws have divided long-term capital gains into two holding periods: (1) shares held more than one year but not more than 18 months and (2) shares held more than 18 months. 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. Each class of the Fund pays its proportionate share of the fee. Assets Annual rate at (billions) each asset level - --------- ---------------- First $1.0 0.520% Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 On May 31, 1998, the daily rate applied to the Portfolio's net assets was equal to 0.511% on an annual basis. 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 total amount paid was $8,256,904 for the fiscal year ended May 31, 1998, $8,563,732 for fiscal year 1997, and $4,416,446 for fiscal period 1996. 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 shares; office expenses; consultants' fees; compensation of board members, Portfolio officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities of the Portfolio; and expenses properly payable by the Portfolio, approved by the board. Under the agreement, the nonadvisory expenses paid by the Fund and Portfolio were $(12,203) for the fiscal year ended May 31, 1998, $610,404 for fiscal year 1997, and $437,197 for fiscal period 1996. In this section, prior to June 10, 1996, the fees and expenses described were paid directly by the Fund. After that date, the management fees were paid by the Portfolio. Administrative Services Agreement The Fund has an Administrative Services Agreement with AEFC. Under this agreement, the Fund pays AEFC for providing administration and accounting services. The fee is calculated as follows: Assets Annual rate (billions) each asset level - --------- ---------------- First $1.0 0.050% Next 1.0 0.045 Next 1.0 0.040 Next 3.0 0.035 Next 3.0 0.030 Over 9.0 0.025 On May 31, 1998, the daily rate applied to the Fund's net assets was equal to 0.048% on an annual basis. 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. Under the agreement, the Fund paid fees of $788,467 for the fiscal year ended May 31, 1998. Transfer Agency Agreement The Fund has a Transfer Agency Agreement with American Express Client Service Corporation (AECSC). This agreement governs AECSC'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, AECSC 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 $15.50 per year and for Class B is $16.50 per year. The fees paid to AECSC may be changed from time to time upon agreement of the parties without shareholder approval. Under the agreement, the Fund paid fees of $1,753,991 for the fiscal year ended May 31, 1998. Distribution Agreement Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to AEFA daily. These charges amounted to $2,121,085 for the fiscal year ended May 31, 1998. After paying commissions to personal financial advisors, and other expenses, the amount retained was $1,826. The amounts were $2,491,568 and $84,633 for fiscal year 1997, and $2,280,804 and $(355,603) for fiscal period 1996. Shareholder Service Agreement The Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of average daily net assets for Class A and Class B and 0.10% for Class Y. Plan and Agreement of Distribution For Class B shares, to help AEFA defray the cost of distribution and servicing, not covered by the sales charges received under the Distribution Agreement, the Fund and AEFA 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, AEFA is paid a fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares. The Plan must be approved annually by the board, including a majority of the disinterested board members, if it is to continue for more than a year. At least quarterly, the board must review written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of board members who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the Fund's Class B shares or by AEFA. 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 Fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No 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. For the fiscal year ended May 31, 1998, under the agreement, the Fund paid fees of $1,034,355. Custodian Agreement The Trust's securities and cash are held by U.S. Bank National Association, 180 E. Fifth St., St. Paul, MN 55101-1631, through a custodian agreement. The Fund also retains the custodian pursuant to a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Portfolio pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. Total fees and expenses The Fund paid total fees and nonadvisory expenses, net of earnings credits, of $14,430,298 for the fiscal year ended May 31, 1998. ORGANIZATIONAL INFORMATION The Fund is a diversified, open-end management investment company, as defined in the 1940 Act. Originally incorporated on Feb. 10, 1945 in Nevada, the Fund changed its state of incorporation on June 13, 1986 by merging into a Minnesota corporation incorporated on April 7, 1986. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. BOARD MEMBERS AND OFFICERS The following is a list of the Fund's board members. They serve 15 Master Trust portfolios and 47 IDS and IDS Life funds (except for William H. Dudley, who does not serve on the nine IDS Life fund boards). All shares have cumulative voting rights with respect to the election of board members. H. Brewster Atwater, Jr. Born in 1931 4900 IDS Tower Minneapolis, MN Retired chairman and chief executive officer, General Mills, Inc. Director, Merck & Co., Inc. and Darden Restaurants, Inc. 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 and Union Pacific Resources. William H. Dudley** Born in 1932 2900 IDS Tower Minneapolis, MN Senior advisor to the chief executive officer of AEFC. David R. Hubers+** Born in 1943 2900 IDS Tower Minneapolis, MN President, chief executive officer, and director of AEFC. Heinz F. Hutter+' Born in 1929 P.O. Box 2187 Minneapolis, MN Retired 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. (electronics), C-Cor Electronics, Inc., and Amnex, Inc. (communications). William R. Pearce+* Born in 1927 901 S. Marquette Ave. Minneapolis, MN Chairman of the board, Board Services Corporation (provides administrative services to boards). Director, trustee and officer of registered investment companies whose boards are served by the company. Retired vice chairman of the board, Cargill, Incorporated (commodity merchants and processors). Alan K. Simpson' Born in 1931 1201 Sunshine Ave. Cody, WY Former three-term United States Senator for Wyoming. Former Assistant Republican Leader, U.S. Senate. Director, PacifiCorp (electric power) and Biogen (pharmaceuticals). Edson W. Spencer+ Born in 1926 4900 IDS Center 80 S. 8th St. Minneapolis, MN President, Spencer Associates Inc. (consulting). Retired 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 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 Foshay Tower Minneapolis, MN Chairman of the board and retired chief executive officer, The Valspar Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company (air cleaners & mufflers) and General Mills, Inc. (consumer foods). + Member of executive committee. ` Member of joint audit committee. * Interested person by reason of being an officer and employee of the Fund. **Interested person by reason of being an officer, board member, employee and/or shareholder of AEFC or American Express. The board also has appointed officers who are responsible for day-to-day business decisions based on policies it has established. In addition to Mr. Pearce, who is chairman of the board and Mr. Thomas, who is president, the Fund's other officers are: Leslie L. Ogg Born in 1938 901 S. Marquette Ave. Minneapolis, MN President of Board Services Corporation. Vice president, general counsel and secretary for the Fund. Officers who also are officers and/or employees of AEFC Peter J. Anderson Born in 1942 IDS Tower 10 Minneapolis, MN Director and senior vice president-investments of AEFC. Vice president-investments for the Fund. Frederick C. Quirsfeld Born in 1947 IDS Tower 10 Minneapolis, MN Vice president - taxable mutual fund investments of AEFC. Vice president - fixed income investments for the Fund. Matthew N. Karstetter Born in 1961 IDS Tower 10 Minneapolis, MN Vice president of Investment Accounting for AEFC since 1996. Prior to joining AEFC, he served as vice president of State Street Bank's mutual fund service operation from 1991 to 1996. Treasurer for the Fund. COMPENSATION FOR FUND AND PORTFOLIO BOARD MEMBERS Members of the Fund board who are not officers of the Fund or of AEFC receive an annual fee of $300, and the chair of the Contracts Committee receives an additional fee of $86. Board members receive a $50 per day attendance fee for board meetings. The attendance fee for meetings of the Contracts and Investment Review Committees is $50; for meetings of the Audit Committee and Personnel Committee $25 and for traveling from out-of-state $3. Expenses for attending meetings are reimbursed. Members of the Portfolio board who are not officers of the Portfolio or of AEFC receive an annual fee of $600 and the chair of the Contracts Committee receives an additional $86. Board members receive a $50 per day attendance fee for board meetings. The attendance fee for meetings of the Contracts and Investment Review Committee is $50; for meetings of the Audit and Personnel Committee $25 and for traveling from out-of-state $6. Expenses for attending meeting are reimbursed. During the fiscal year ended May 31, 1998, the independent members of the Fund and Portfolio boards, for attending up to 27 meetings, received the following compensation:
Compensation Table Total cash Pension or compensation Retirement from the IDS benefits MUTUAL FUND Aggregate Aggregate accrued as Estimated GROUP and compensation compensation Fund or annual benefit Preferred Board member from the Fund from the Portfolio upon retirement Master Trust Portfolio expenses Group - ---------------------- ---------------- ----------------- ---------------- ---------------- ---------------- H. Brewster Atwater, $1,150 $1,625 $0 $0 $101,100 Jr. Lynne V. Cheney 968 1,470 0 0 92,200 Robert F. Froehlke 550 850 0 0 49,000 Heinz F. Hutter 1,150 1,625 0 0 101,100 Anne P. Jones 1,018 1,517 0 0 95,200 Melvin R. Laird 381 643 0 0 36,800 Alan K. Simpson 840 1,336 0 0 84,200 Edson W. Spencer 1,375 1,850 0 0 114,600 Wheelock Whitney 1,175 1,650 0 0 102,700 C. Angus Wurtele 1,300 1,775 0 0 110,100
On May 31, 1998, the Fund's board members and officers as a group owned less than 1% of the outstanding shares of any class. INDEPENDENT AUDITORS The Fund's and corresponding Portfolio's financial statements contained in the Annual Report to shareholders for the fiscal year ended May 31, 1998 were audited by independent auditors, 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. FINANCIAL STATEMENTS The Independent Auditors' Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities, contained in the Annual Report to shareholders for the fiscal year ended May 31, 1998 pursuant to Section 30(d) of the 1940 Act, are hereby incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. PROSPECTUS The prospectus for IDS Selective Fund, dated July 30, 1998, is hereby incorporated in this SAI by reference. APPENDIX A FOREIGN CURRENCY TRANSACTIONS Since investments in foreign countries usually involve currencies of foreign countries, and since the Portfolio may hold cash and cash-equivalent investments in foreign currencies, the value of the Portfolio's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, the Portfolio may incur costs in connection with conversions between various currencies. Spot Rates and Forward Contracts. The Portfolio conducts its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts) as a hedge against fluctuations in future foreign exchange rates. A forward contract involves an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the contract date, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirements. No commissions are charged at any stage for trades. The Portfolio may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment in dollars. By entering into a forward contract, the Portfolio will be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. The Portfolio also may enter into forward contracts when management of the Portfolio believes the currency of a particular foreign country may suffer a substantial decline against another currency. It may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of such securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. The Portfolio will not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. The Portfolio will designate cash or securities in an amount equal to the value of the Portfolio's total assets committed to consummating forward contracts entered into under the second circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the Portfolio's commitments on such contracts. At maturity of a forward contract, the Portfolio may either sell the security and make delivery of the foreign currency or retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract with the same currency trader obligating it to buy, on the same maturity date, the same amount of foreign currency. If the Portfolio retains the security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline between the date the Portfolio enters into a forward contract for selling foreign currency and the date it enters into an offsetting contract for purchasing the foreign currency, the Portfolio will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. Should forward prices increase, the Portfolio will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell. It is impossible to forecast what the market value of securities will be at the expiration of a contract. Accordingly, it may be necessary for the Portfolio to buy additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received on the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. The Portfolio's dealing in forward contracts will be limited to the transactions described above. This method of protecting the value of the Portfolio's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although such forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. Although the Portfolio values its assets each business day in terms of U.S. dollars, it does not intend to convert its foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. Options on Foreign Currencies. The Portfolio may buy put and write covered call options on foreign currencies for hedging purposes. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of securities, the Portfolio may buy put options on the foreign currency. If the value of the currency does decline, the Portfolio will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted. As in the case of other types of options, however, the benefit to the Portfolio derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Portfolio could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates. The Portfolio may write options on foreign currencies for the same types of hedging purposes. For example, when the Portfolio anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised and the diminution in value of securities will be fully or partially offset by the amount of the premium received. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Portfolio would be required to buy or sell the underlying currency at a loss which may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Portfolio also may be required to forego all or a portion of the benefits which might otherwise have been obtained from favorable movements on exchange rates. All options written on foreign currencies will be covered. An option written on foreign currencies is covered if the Portfolio holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Portfolio to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for the purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. Foreign Currency Futures and Related Options. The Portfolio may enter into currency futures contracts to sell currencies. It also may buy put options and write covered call options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. The Portfolio may use currency futures for the same purposes as currency forward contracts, subject to Commodity Futures Trading Commission (CFTC) limitations. All futures contracts are aggregated for purposes of the percentage limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the values of the Portfolio's investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect the Portfolio against price decline if the issuer's creditworthiness deteriorates. Because the value of the Portfolio's investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of the Portfolio's investments denominated in that currency over time. The Portfolio will hold securities or other options or futures positions whose values are expected to offset its obligations. The Portfolio will not enter into an option or futures position that exposes the Portfolio to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. APPENDIX B INVESTING IN FOREIGN SECURITIES Investors should recognize that investing in foreign securities involves certain special considerations, including those set forth below and those described in the prospectus, which are not typically associated with investing in United States securities. Foreign companies are not generally subject to uniform accounting and auditing and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the United States and at times, volatility of price can be greater than in the United States. Further, foreign markets have different clearance, settlement, registration and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets of the Portfolio are uninvested and no return is earned thereon. The inability of the Portfolio is to make intended security purchases due to such problems could cause the Portfolio to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., the Portfolio does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Portfolio will endeavor to achieve the most favorable net results on their portfolio transactions. Further, the Portfolio may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers and listed companies than in the United States. It may be more difficult for the Portfolios' agents to keep currently informed about corporate actions such as stock dividends or other matters which may affect the prices of portfolio securities. Communications between the United States and foreign countries may be less reliable than within the United States, thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments which could affect United States investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). Investments in foreign securities may also entail certain risks, such as possible currency blockages or transfer restrictions, and the difficulty of enforcing rights in other countries. APPENDIX C OPTIONS AND INTEREST RATE 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 Portfolio may enter into interest rate futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy or write put and call options on these futures. 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 Portfolio 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 (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 a 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. Options can be used to produce incremental earnings, protect gains and facilitate buying and selling securities for investment purposes. The use of options and futures contracts may benefit the Portfolio and its shareholders 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. Options are used as a trading technique to take advantage of any disparity between the price of the underlying security in the securities market and its price on the options market. It is anticipated the trading technique will be utilized only to effect a 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 record-keeping 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 subsequent 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: `Underlying securities will continue to be bought or sold solely on the basis of investment considerations consistent with the Fund's goal. `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. Net premiums on call options closed or premiums on expired call options are treated as short-term capital gains. If a covered call option is exercised, the security is sold by the Portfolio. The Portfolio will recognize a capital gain or loss based upon the difference between the proceeds and the security's basis. Options on many securities are listed on options exchanges. If the Portfolio writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, Chicago Board Options 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. FUTURES CONTRACTS. A futures contract is an agreement between two parties to buy and sell a security for a set price on a future date. They have been established by boards of trade which have been designated contracts markets by the Commodity Futures Trading Commission (CFTC). Futures contracts trade on these markets in a manner similar to the way a stock trades on a stock exchange, and the boards of trade, through their clearing corporations, guarantee performance of the contracts. Currently, there are futures contracts based on such debt securities as long-term U.S. Treasury bonds, Treasury notes, GNMA modified pass-through mortgage-backed securities, three-month U.S. Treasury bills and bank certificates of deposit. While futures contracts based on debt securities do provide for the delivery and acceptance of securities, such deliveries and acceptances are very seldom made. Generally, the futures contract is terminated by entering into an offsetting transaction. An offsetting transaction for a futures contract sale is effected by the Portfolio entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Portfolio immediately is paid the difference and realizes a gain. If the offsetting purchase price exceeds the sale price, the Portfolio pays the difference and realizes a loss. Similarly, closing out a futures contract purchase is effected by the Portfolio entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Portfolio realizes a gain, and if the offsetting sale price is less than the purchase price, the Portfolio realizes a loss. At the time a futures contract is made, a good-faith deposit called initial margin is set up within a segregated account at the Portfolio's custodian bank. The initial margin deposit is approximately 1.5% of a contract's face value. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day the Portfolio would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash markets. The purpose of a futures contract, in the case of a portfolio holding long-term debt securities, is to gain the benefit of changes in interest rates without actually buying or selling long-term debt securities. For example, if the Portfolio owned long-term bonds and interest rates were expected to increase, it might enter into futures contracts to sell securities which would have much the same effect as selling some of the long-term bonds it owned. Futures contracts are based on types of debt securities referred to above, which have historically reacted to an increase or decline in interest rates in a fashion similar to the debt securities the Portfolio owns. If interest rates did increase, the value of the debt securities in the portfolio would decline, but the value of the Portfolio's futures contracts would increase at approximately the same rate, thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. If, on the other hand, the Portfolio held cash reserves and interest rates were expected to decline, the Portfolio might enter into interest rate futures contracts for the purchase of securities. If short-term rates were higher than long-term rates, the ability to continue holding these cash reserves would have a very beneficial impact on the Portfolio's earnings. Even if short-term rates were not higher, the Portfolio would still benefit from the income earned by holding these short-term investments. At the same time, by entering into futures contracts for the purchase of securities, the Portfolio could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Portfolio's cash reserves could then be used to buy long-term bonds on the cash market. The Portfolio could accomplish similar results by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase or by buying bonds with long maturities and selling bonds with short maturities when interest rates are expected to decline. But by using futures contracts as an investment tool, given the greater liquidity in the futures market than in the cash market, it might be possible to accomplish the same result more easily and more quickly. Successful use of futures contracts depends on the investment manager's ability to predict the future direction of interest rates. If the investment manager's prediction is incorrect, the Portfolio would have been better off had it not entered into futures contracts. OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date, an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into such a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Furthermore, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily and that change is reflected in the net asset value of the Fund. RISKS. There are risks in engaging in each of the management tools described above. The risk the Portfolio assumes when it buys an option is the loss of the premium paid for the option. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. The risk involved in writing options on futures contracts the Portfolio owns, or on securities held in its portfolio, is that there could be an increase in the market value of such contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. The Portfolio could enter into a closing transaction by purchasing an option with the same terms as the one it had previously sold. The cost to close the option and terminate the Portfolio's obligation, however, might be more or less than the premium received when it originally wrote the option. Furthermore, the Portfolio might not be able to close the option because of insufficient activity in the options market. A risk in employing futures contracts to protect against the price volatility of portfolio securities is that the prices of securities subject to futures contracts may not correlate perfectly with the behavior of the cash prices of the Portfolio's securities. The correlation may be distorted because the futures market is dominated by short-term traders seeking to profit from the difference between a contract or security price and their cost of borrowed funds. Such distortions are generally minor and would diminish as the contract approached maturity. Another risk is that the Portfolio's investment manager could be incorrect in anticipating as to the direction or extent of various interest rate movements or the time span within which the movements take place. For example, if the Portfolio sold futures contracts for the sale of securities in anticipation of an increase in interest rates, and interest rates declined instead, the Portfolio would lose money on the sale. 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 non-equity 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 Fund's taxable year, at least 50% of the value of its assets must consist of cash, government securities and other securities, subject to certain diversification requirements. 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. 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 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. APPENDIX D MORTGAGE-BACKED SECURITIES A mortgage pass-through certificate is one that represents an interest in a pool, or group, of mortgage loans assembled by the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) or non-governmental entities. In pass-through certificates, both principal and interest payments, including prepayments, are passed through to the holder of the certificate. Prepayments on underlying mortgages result in a loss of anticipated interest, and the actual yield (or total return) to the Portfolio, which is influenced by both stated interest rates and market conditions, may be different than the quoted yield on certificates. Some U.S. government securities may be purchased on a when-issued basis, which means that it may take as long as 45 days after the purchase before the securities are delivered to the Portfolio. Stripped Mortgage-Backed Securities. The Portfolio may invest in stripped mortgage-backed securities. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. On an IO, if prepayments of principal are greater than anticipated, an investor may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. Mortgage-Backed Security Spread Options. The Portfolio may purchase mortgage-backed security (MBS) put spread options and write covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. MBS spread options are traded in the OTC market and are of short duration, typically one to two months. The Portfolio would buy or sell covered MBS call spread options in situations where mortgage-backed securities are expected to underperform like-duration Treasury securities. APPENDIX E 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 technique 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 on a regular basis through changing market conditions, including times when the price of their shares falls or the market declines, 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). The average price you paid for each share: $4.84 ($500 divided by 103.4). Independent auditors' report The board and shareholders IDS Selective Fund, Inc.: We have audited the accompanying statement of assets and liabilities of IDS Selective Fund, Inc. as of May 31, 1998, and the related statement of operations for the year then ended and the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for the two-year period ended May 31, 1998, the six months ended May 31, 1996 and each of the years in the eight-year period ended Nov. 30, 1995. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDS Selective Fund, Inc. at May 31, 1998, and the results of its operations, changes in its net assets and the financial highlights for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota July 2, 1998
Financial statements Statement of assets and liabilities IDS Selective Fund, Inc. May 31, 1998 Assets Investments in Quality Income Portfolio (Note 1) $1,606,236,561 Other receivables 5 ------------- Total assets 1,606,236,566 ------------- Liabilities Dividends payable to shareholders 554,067 Accrued distribution fee 3,149 Accrued service fee 7,249 Accrued transfer agency fee 4,706 Accrued administrative services fee 2,118 ----- Total liabilities 571,289 ------- Net assets applicable to outstanding capital stock $1,605,665,277 ============== Represented by Capital stock-- $.01 par value (Note 1) $ 1,739,054 Additional paid-in capital 1,522,797,576 Undistributed net investment income 437,407 Accumulated net realized gain (loss) (6,909,688) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 87,600,928 ---------- Total-- representing net assets applicable to outstanding capital stock $1,605,665,277 ============== Net assets applicable to outstanding shares: Class A $1,231,376,451 Class B $ 153,099,252 Class Y $ 221,189,574 Net asset value per share of outstanding capital stock: Class A shares 133,367,536 $ 9.23 Class B shares 16,582,278 $ 9.23 Class Y shares 23,955,563 $ 9.23 See accompanying notes to financial statements.
Statement of operations IDS Selective Fund, Inc. Year ended May 31, 1998 Investment income Income: Dividends $ 807,190 Interest 112,664,228 ----------- Total income 113,471,418 ----------- Expenses (Note 2): Expenses allocated from Quality Income Portfolio 8,436,231 Distribution fee -- Class B 1,034,355 Transfer agency fee 1,743,793 Incremental transfer agency fee-- Class B 10,198 Service fee Class A 2,166,433 Class B 239,051 Class Y 210,985 Administrative services fees and expenses 784,062 Compensation of board members 9,907 Postage 45,873 Registration fees 17,891 Audit fees 10,000 ------ Total expenses 14,708,779 Earnings credits on cash balances (Note 2) (278,481) -------- Total net expenses 14,430,298 ---------- Investment income (loss)-- net 99,041,120 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 7,988,692 Financial futures contracts (10,627,517) Foreign currency transactions 43,612 Options contracts written 60,993 ------ Net realized gain (loss) on investments (2,534,220) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,144,624 ---------- Net gain (loss) on investments and foreign currencies 56,610,404 ---------- Net increase (decrease) in net assets resulting from operations $155,651,524 ============ See accompanying notes to financial statements.
Financial statements Statements of changes in net assets IDS Selective Fund, Inc. Year ended May 31, Operations and distributions 1998 1997 Investment income (loss)-- net $ 99,041,120 $ 108,022,381 Net realized gain (loss) on investments (2,534,220) 8,252,506 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,144,624 14,747,409 ---------- ---------- Net increase (decrease) in net assets resulting from operations 155,651,524 131,022,296 ----------- ----------- Distributions to shareholders from: Net investment income Class A (79,639,635) (86,883,047) Class B (7,660,457) (6,790,893) Class Y (13,462,696) (13,088,145) Net realized gain Class A (10,132,709) (18,740,975) Class B (1,113,787) (1,704,126) Class Y (1,708,554) (2,683,689) ---------- ---------- Total distributions (113,717,838) (129,890,875) ------------ ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 98,775,364 109,563,336 Class B shares 53,704,727 56,179,031 Class Y shares 79,764,560 62,930,942 Reinvestment of distributions at net asset value Class A shares 67,101,318 80,162,783 Class B shares 7,945,814 7,801,079 Class Y shares 15,171,250 15,771,834 Payments for redemptions Class A shares (253,795,109) (313,351,499) Class B shares (Note 2) (38,380,085) (45,413,567) Class Y shares (80,758,805) (89,223,917) ----------- ----------- Increase (decrease) in net assets from capital share transactions (50,470,966) (115,579,978) ----------- ------------ Total increase (decrease) in net assets (8,537,280) (114,448,557) Net assets at beginning of year 1,614,202,557 1,728,651,114 ------------- ------------- Net assets at end of year $1,605,665,277 $1,614,202,557 ============== ============== Undistributed net investment income $ 437,407 $ 2,115,568 -------------- -------------- See accompanying notes to financial statements.
Notes to financial statements IDS Selective Fund, Inc. 1 Summary of significant accounting policies The Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Fund has 10 billion authorized shares of capital stock. The Fund offers Class A, Class B and Class Y shares. Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent deferred sales charge and such shares automatically convert to Class A shares during the ninth calendar year of ownership. Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend, liquidation and other rights, and the same terms and conditions, except that the level of distribution fee, transfer agency fee and service fee (class specific expenses) differs among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Quality Income Portfolio Effective June 10, 1996, the Fund began investing all of its assets in the Quality Income Portfolio (the Portfolio), a series of Income Trust, an open-end investment company that has the same objectives as the Fund. This was accomplished by transferring the Fund's assets to the Portfolio in return for a proportionate ownership interest in the Portfolio. The Portfolio invests primarily in investment- grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the net assets of the Portfolio. The percentage of the Portfolio owned by the Fund at May 31, 1998 was 99.96%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements," which are included elsewhere in this report. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Federal taxes Since the Fund's policy is to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders, no provision for income or excise taxes is required. Net investment income (loss) and net realized gains (losses) allocated from the Portfolio may differ for financial statement and tax purposes primarily because of the deferral of losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $43,507 and accumulated net realized loss has been increased by $43,507. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2 Expenses and sales charges In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: Effective March 20, 1995, the Fund entered into an agreement with American Express Financial Corporation (AEFC) for providing administrative services. Under its Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. Additional administrative service expenses paid by the Fund are office expenses, consultants' fees and compensation of officers and employees. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees, organizational expenses and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 Also effective March 20, 1995, the Fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder servicing-related services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares for distribution-related services. Under a Shareholder Service Agreement, the Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of the Fund's average daily net assets attributable to Class A and Class B shares and 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by American Express Financial Advisors Inc. for distributing Fund shares were $1,974,258 for Class A and $146,827 for Class B for the year ended May 31, 1998. During the year ended May 31, 1998, the Fund's transfer agency fees were reduced by $278,481 as a result of earnings credits from overnight cash balances. 3 Capital share transactions Transactions in shares of capital stock for the years indicated are as follows: Year ended May 31, 1998 Class A Class B Class Y Sold 10,726,249 5,833,712 8,657,520 Issued for reinvested 7,309,134 865,445 1,651,867 distributions Redeemed (27,574,808) (4,171,964) (8,780,164) Net increase (decrease) (9,539,425) 2,527,193 1,529,223 Year ended May 31, 1997 Class A Class B Class Y Sold 12,079,376 6,192,646 6,955,369 Issued for reinvested 8,846,036 861,304 1,745,311 distributions Redeemed (34,561,749) (5,015,499) (9,855,527) Net increase (decrease) (13,636,337) 2,038,451 (1,154,847) 4 Financial highlights "Financial highlights" showing per share data and selected information is presented on pages 7 and 8 of the prospectus. Independent auditors' report The board of trustees and unitholders Income Trust: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Quality Income Portfolio (a series of Income Trust) as of May 31, 1998, and the related statement of operations for the year then ended and the statements of changes in net assets for the year ended May 31, 1998 and for the period from June 10, 1996 (commencement of operations) to May 31, 1997. These financial statements are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Investment securities held in custody are confirmed to us by the custodian. As to securities on loan, we request confirmations from brokers, and where replies are not received, we carry out other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quality Income Portfolio at May 31, 1998, and the results of its operations and the changes in its net assets for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota July 2, 1998
Financial statements Statement of assets and liabilities Quality Income Portfolio May 31, 1998 Assets Investments in securities, at value (Note 1) (identified cost $1,495,915,577) $1,583,548,708 Cash in bank on demand deposit 186,666 Dividends and accrued interest receivable 23,256,430 U.S. government securities held as collateral (Note 4) 69,084,112 ---------- Total assets 1,676,075,916 ------------- Liabilities Payable upon return of securities loaned (Note 4) 69,084,112 Accrued investment management services fee 22,499 Other accrued expenses 52,865 ------ Total liabilities 69,159,476 ---------- Net assets $1,606,916,440 ============== See accompanying notes to financial statements.
Financial statements Statement of operations Quality Income Portfolio Year ended May 31, 1998 Investment income Income: Dividends $ 807,500 Interest 112,711,954 ----------- Total income 113,519,454 ----------- Expenses (Note 2): Investment management services fee 8,256,904 Compensation of board members 14,340 Custodian fees 120,916 Audit fees 29,500 Other 25,008 ------ Total expenses 8,446,668 Earnings credits on cash balances (Note 2) (7,157) ------ Total net expenses 8,439,511 --------- Investment income (loss) -- net 105,079,943 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 7,991,478 Financial futures contracts (10,631,544) Foreign currency transactions 43,619 Option contacts written 61,015 ------ Net realized gain (loss) on investments (2,535,432) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,167,525 ---------- Net gain (loss) on investments and foreign currencies 56,632,093 ---------- Net increase (decrease) in net assets resulting from operations $161,712,036 ============ See accompanying notes to financial statements.
Statements of changes in net assets Quality Income Portfolio Operations May 31, 1998 For the period from Year ended June 10, 1996* to May 31, 1997 Investment income (loss)-- net $ 105,079,943 $ 112,252,618 Net realized gain (loss) on investments (2,535,432) 9,395,624 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,167,525 20,434,131 ---------- ---------- Net increase (decrease) in net assets resulting from operations 161,712,036 142,082,373 Net contributions (withdrawals) from partners (170,449,665) 1,473,541,696 ------------ ------------- Total increase (decrease) in net assets (8,737,629) 1,615,624,069 Net assets at beginning of period (Note 1) 1,615,654,069 30,000 ------------- ------ Net assets at end of period $1,606,916,440 $1,615,654,069 ============== ============== *Commencement of operations See accompanying notes to financial statements. (This annual report is not part of the prospectus.)
Notes to financial statements Quality Income Portfolio 1 Summary of significant accounting policies Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. Quality Income Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. On April 15, 1996, American Express Financial Corporation (AEFC) contributed $30,000 to the Portfolio. Operations did not formally commence until June 10, 1996, at which time an existing fund transferred its assets to the Portfolio in return for an ownership percentage of the Portfolio. Significant accounting policies followed by the Portfolio are summarized below: Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions In order to produce incremental earnings, protect gains and facilitate buying and selling of securities for investment purposes, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where the completion of the obligation is dependent upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities and may write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity of profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss upon expiration or closing of the option transaction. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions In order to gain exposure to or protect itself from changes in the market, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars at the closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement dates on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. Illiquid securities At May 31, 1998, investments in securities included issues that are illiquid. The Portfolio currently limits investments in illiquid securities to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities at May 31, 1998 was $5,019,504 representing 0.31% of net assets. Pursuant to guidelines adopted by the board, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Accordingly, as a "pass-through" entity, the Portfolio does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar denominated bonds, interest income includes level-yield amortization of premium and discount. For foreign bonds, except for original issue discount, the Portfolio does not amortize premium and discount. Interest income, including level-yield amortization of premium and discount, is accrued daily. 2 Fees and expenses The Trust, on behalf of the Portfolio, has entered into an Investment Management Services Agreement with AEFC for managing its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. During the year ended May 31, 1998, the Portfolio's custodian fees were reduced by $7,157 as a result of earnings credit from overnight cash balances. Pursuant to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the units of the Trust. 3 Securities transactions Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $309,613,276 and $328,105,980, respectively, for the year ended May 31, 1998. For the same period, the portfolio turnover rate was 20%. Realized gains and losses are determined on an identified cost basis. 4 Lending of portfolio securities At May 31, 1998, securities valued at $68,199,205 were on loan to brokers. For collateral, the Portfolio received in U.S. government securities valued at $69,084,112. Income from securities lending amounted to $80,491 for the year ended May 31, 1998. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due.
Investments in securities Quality Income Portfolio May 31, 1998 (Percentages represent value of investments compared to net assets) Bonds (96.2%) Issuer Coupon Principal Value(a) rate amount U.S. government obligations (31.8%) Overseas Private Investment U.S. Govt Guaranty Series 1996A 01-15-09 6.99% $10,000,000 $10,399,300 Resolution Funding Corp Zero Coupon 01-15-06 8.94 25,000,000(g) 16,228,500 10-15-06 8.95 68,000,000(g) 42,235,480 01-15-14 8.21 48,000,000(g) 18,802,560 07-15-14 8.27 10,000,000(g) 3,801,400 04-15-16 8.05 47,000,000(g) 15,974,830 U.S. Treasury 07-31-99 6.875 60,000,000 60,879,600 02-15-00 5.875 25,000,000 25,132,000 08-15-00 6.00 11,400,000 11,506,248 11-15-01 7.50 99,000,000(d) 104,862,780 02-15-04 5.875 8,000,000 8,117,040 05-15-04 7.25 25,000,000 27,063,500 08-15-04 7.25 26,800,000 29,087,916 11-15-16 7.50 92,545,000(d) 109,288,241 11-15-21 8.00 15,000,000 18,973,200 TIPS 01-15-07 3.375 8,050,000(i) 7,990,049 Total 510,342,644 Mortgage-backed securities (13.4%) Federal Home Loan Mtge Corp 07-01-16 8.00 444 462 01-01-17 8.00 6,325 6,588 03-01-17 8.50 169,420 177,626 06-01-17 8.50 129,722 135,924 04-01-20 9.00 2,806,470 2,978,366 04-01-21 9.00 1,490,329 1,596,977 03-01-22 8.50 3,609,957 3,797,891 08-01-22 8.50 3,261,490 3,428,218 06-01-24 7.50 13,590,795 14,041,873 02-01-25 8.00 7,277,207 7,576,009 Collateralized Mtge Obligation 09-01-19 8.50 210,526 220,130 Federal Housing Admin 01-01-24 7.43 8,917,296 9,106,789 Federal Natl Mtge Assn 11-01-02 10.00 106 111 10-01-23 6.50 10,692,695 10,693,337 11-01-26 8.00 10,840,285 11,265,766 04-01-27 7.50 12,516,195 12,872,156 06-01-27 7.50 16,376,755 16,858,886 07-01-27 8.00 11,711,885 12,156,703 08-01-27 7.50 4,747,545 4,887,313 Collateralized Mtge Obligation 10-25-19 8.50 1,448,659 1,596,710 01-25-21 8.00 4,980,113 5,015,671 Principal Only 01-25-20 9.89 1,255,556(j) 1,179,215 09-01-18 9.50 857,123(j) 692,398 Trust Series Z 02-25-24 6.00 21,923,913(e) 19,532,453 Govt Natl Mtge Assn 01-15-22 8.00 1,503,673 1,567,429 02-15-23 8.00 2,699,205 2,813,651 07-15-24 8.00 11,339,976 11,817,162 08-15-24 8.00 9,894,672 10,311,040 10-15-24 9.00 4,083,307 4,387,840 02-15-25 9.00 508,373 545,972 05-15-26 7.50 18,272,918 18,847,784 09-15-26 8.50 13,037,833 13,769,907 10-15-26 8.00 7,748,720 8,060,296 Prudential Bache Collateralized Mtge Obligation 04-01-19 7.97 3,021,754 3,128,096 Total 215,066,749 Automotive & related (1.4%) Daimler-Benz North America Company Guaranty Medium-term Nts Series A 09-15-06 7.375 14,000,000 15,088,780 General Motors 05-15-03 8.875 7,050,000 7,855,603 Total 22,944,383 Banks and savings & loans (6.1%) BankAmerica Sub Nts Series B 12-31-26 7.70 5,000,000(f) 5,219,650 BankBoston Capital Company Guaranty Series B 12-15-26 8.25 5,000,000 5,546,850 Cullen/Frost Capital Series A 02-01-27 8.42 10,000,000 10,752,810 US Bancorp Sub Nts 09-15-07 6.875 8,550,000 8,890,461 First Chicago Sr Sub Nts 06-15-99 9.00 7,900,000 8,131,312 Firstar Capital Company Guaranty Series B 12-15-26 8.32 10,000,000 11,086,400 Morgan (JP) Medium-term Sr Sub Nts Series A 02-15-12 4.00 9,350,000(k) 8,698,305 NationsBank Sub Nts 11-01-01 9.25 8,950,000 9,785,483 NCNB Sub Nts 10-15-01 9.125 10,000,000 10,932,200 Swiss Bank Sub Deb 09-01-26 7.75 11,369,000 12,871,868 Washington Mutual Capital Company Guaranty 06-01-27 8.375 5,800,000(f) 6,441,132 Total 98,356,471 Chemicals (1.5%) Dow Chemical 09-15-21 8.85 10,000,000 12,377,400 USA Waste Services Sr Nts 10-01-07 7.125 11,900,000 12,480,363 Total 24,857,763 Communications equipment & services (0.7%) BellSouth Telecommunications 12-01-95 7.00 10,000,000 10,685,600 Computers & office equipment (0.3%) Hewlett-Packard Zero Coupon Cv Sub Nts 10-15-17 3.125 10,000,000(f,g) 5,325,000 Electronics (0.3%) Harris 12-01-18 10.375 3,900,000 4,176,549 Energy (3.1%) PDV America Sr Nts 08-01-03 7.875 16,500,000 16,931,970 Phillips Petroleum 03-15-28 7.125 8,700,000 8,812,143 Texaco Capital Gtd Deb 03-01-43 7.50 12,000,000 13,263,000 USX-Marathon Group 05-15-22 9.375 9,200,000 11,580,132 Total 50,587,245 Energy equipment & services (0.4%) Foster Wheeler 11-15-05 6.75 5,850,000 5,993,852 Financial services (3.8%) GMAC 03-01-00 7.00 14,300,000 14,541,098 Medium-term Nts 07-16-98 5.95 8,000,000 8,001,920 Greyhound Financial Medium-term Nts Series A 07-02-99 7.95 9,600,000 9,788,256 Railcar Leasing Sr Nts 01-15-13 7.125 12,150,000(f) 12,825,419 Salomon Sr Nts 05-15-00 7.75 5,000,000 5,166,850 Washington Mutual Sr Sub Nts 08-15-98 8.875 10,520,000 10,571,863 Total 60,895,406 Foreign (12.0%)(b) ABN-Amro Bank (U.S. Dollar) Sub Nts Series B 05-15-23 7.75 12,000,000 13,375,200 Alcan Aluminum (U.S. Dollar) 01-15-22 8.875 9,600,000 10,498,464 Banco General (U.S. Dollar) 08-01-02 7.70 6,400,000(f) 6,316,608 Bank of China (U.S. Dollar) 03-15-14 8.25 7,100,000 6,809,965 Bayerische Landesbank (U.S. Dollar) Deposit Nts 02-26-01 5.625 13,750,000 13,677,950 Dao Heng Bank (U.S. Dollar) Sub Nts 01-24-07 7.75 7,000,000(f) 6,195,000 Gruma (U.S. Dollar) Sr Nts 10-15-07 7.625 2,000,000 1,959,900 Hutchison Whampo Finance (U.S. Dollar) Company Guaranty 08-01-27 7.50 14,025,000(f) 12,100,630 Hyundai Semiconductor (U.S. Dollar) Sr Nts 05-15-07 8.625 10,800,000(f) 8,791,524 Israel Electric (U.S. Dollar) Sr Nts 12-15-26 7.875 9,000,000(f) 9,388,890 Japan Finance (U.S. Dollar) 09-21-98 9.25 25,950,000 26,217,544 Jasmine Submarine Telecom (U.S. Dollar) Sr Nts 05-30-11 8.48 3,086,055(f) 2,597,625 KFW Intl Finance (U.S. Dollar) Medium-term Nts 12-15-99 8.50 10,000,000 10,382,900 Korea Development Bank (U.S. Dollar) 05-15-06 7.25 4,600,000 3,852,638 Korea Electric Power (U.S. Dollar) 07-01-02 8.00 9,000,000 8,156,700 (U.S. Dollar) Zero Coupon 04-01-16 10.07 35,000,000(h) 3,578,750 People's Republic of China (U.S. Dollar) 01-15-96 9.00 10,000,000 11,424,800 Perez Companc (U.S. Dollar) 07-15-07 8.125 5,000,000(f) 4,673,300 Petronas (U.S. Dollar) 08-15-15 7.75 10,000,000(f) 9,041,000 Republic of Austria Euro (U.S. Dollar) 07-01-98 10.00 3,150,000 3,161,875 Telecom Corp of New Zealand (New Zealand Dollar) 02-10-03 6.25 13,000,000(f) 12,936,157 Telekom Malaysia (U.S. Dollar) 08-01-25 7.875 10,000,000(f) 8,002,900 Total 193,140,320 Health care (1.6%) Baxter Intl 02-15-28 6.625 12,000,000 11,944,320 Lilly (Eli) 01-01-36 6.77 13,300,000 13,917,519 Total 25,861,839 Health care services (1.0%) Service Corp Intl 03-15-08 6.50 15,350,000 15,402,958 Industrial equipment & services (1.3%) Browning-Ferris Inds 05-01-21 9.25 7,000,000 8,879,360 Deere & Co 06-15-19 8.95 10,000,000 12,155,200 Total 21,034,560 Insurance (4.7%) American United Life Insurance 03-30-26 7.75 4,800,000(c) 5,019,504 Arkwright CSN Trust 08-15-26 9.625 4,000,000(f) 4,891,160 Berkley (WR) 01-01-22 8.70 10,000,000 12,027,300 Conseco Financing Trust Company Guaranty 11-15-26 8.70 6,600,000 7,457,208 Equitable Life Assurance 12-01-15 7.70 5,000,000(f) 5,456,300 Nationwide CSN Trust 02-15-25 9.875 11,500,000(f) 13,964,220 SAFECO Capital Company Guaranty 07-15-37 8.07 15,000,000 16,037,700 SunAmerica 02-01-12 9.95 8,000,000 10,395,280 Total 75,248,672 Media (0.9%) Time Warner Entertainment Sr Nts 07-15-33 8.375 12,000,000 14,181,120 Retail (2.3%) Dayton Hudson 06-15-23 7.875 18,850,000 20,177,983 Rite Aid Cv Sub Nts 09-15-02 5.25 5,000,000(f) 6,000,000 Wal-Mart CRAVE Trust 07-17-06 7.00 10,753,807(f) 11,045,772 Total 37,223,755 Transportation (1.3%) Burlington Northern Santa Fe 12-15-25 7.00 10,000,000 10,361,600 Enterprise Rent-A-Car USA Finance 02-15-08 6.80 10,000,000(f) 10,041,000 Total 20,402,600 Utilities -- electric (4.0%) AEP Generating Sale Lease-backed Obligation Series F 12-07-22 9.82 4,968,844 5,860,901 Arizona Public Service 1st Mtge Sale Lease-backed Obligation 12-30-15 8.00 9,000,000 9,974,520 Cajun Electric Power Mtge Trust Series A9 03-15-19 8.92 4,960,000 5,313,549 Commonwealth Edison 1st Mtge Series 90 04-15-00 6.50 9,000,000 9,079,020 Indiana & Michigan Power Sale Lease-backed Obligation Series F 12-07-22 9.82 4,968,839 5,860,894 Long Island Lighting Gen Ref Mtge 04-15-04 8.625 3,000,000 3,000,000 07-01-24 9.625 7,000,000 7,037,660 Salton Sea Funding Series C 05-30-10 7.84 10,000,000 10,675,700 Wisconsin Electric Power 12-01-95 6.875 8,000,000 8,245,360 Total 65,047,604 Utilities -- telephone (4.3%) AT&T 01-15-25 8.35 5,000,000 5,573,650 12-01-31 8.625 10,000,000 11,105,500 Bell Atlantic 07-15-31 9.375 14,000,000 16,133,180 GTE 11-01-20 10.25 6,050,000 6,767,348 GTE Florida 02-01-28 6.86 12,450,000 12,785,030 SBC Communications 08-15-31 8.50 15,000,000 16,823,550 Total 69,188,258 Total bonds (Cost: $1,459,116,467) $1,545,963,348 Preferred stock (0.6%) Issuer Shares Value(a) Salomon Income Financing Trust 2.375% 2026 340,000 $9,286,250 Total preferred stock (Cost: $8,500,000) $9,286,250 Short-term securities (1.8%) Issuer Annualized Amount Value(a) yield on payable at date of maturity purchase U.S. government agency (0.5%) Federal Home Loan Mtge Corp Disc Nts 06-05-98 5.44% $2,100,000 $2,098,105 06-16-98 5.42 5,000,000 4,987,250 06-16-98 5.45 1,300,000 1,296,666 Total 8,382,021 Commercial paper (1.3%) Bell Atlantic Finance 06-05-98 5.54 1,000,000 999,080 Fleet Funding 07-08-98 5.56 7,400,000(l) 7,355,748 Glaxo Wellcome 06-26-98 5.54 1,600,000(l) 1,593,388 Paccar Financial 06-09-98 5.54 3,500,000 3,494,624 Toyota Motor Credit 06-25-98 5.56 5,300,000 5,278,832 Xerox 06-24-98 5.52 1,200,000 1,195,417 Total 19,917,089 Total short-term securities (Cost: $28,299,110) $28,299,110 Total investments in securities (Cost: $1,495,915,577)(m) $1,583,548,708 See accompanying notes to investments in securities.
Investments in securities Quality Income Portfolio Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. (c) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at May 31, 1998, is as follows: Security Acquisition Cost date American United Life Insurance* 7.75% 2026 02-13-96 $4,800,000 *Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. (d) Security is partially or fully on loan. See Note 4 to the financial statements. (e) This security is a collateralized mortgage obligation that pays no interest or principal during its initial accrual period until payment of a previous series within the trust have been paid off. Interest is accrued at an effective yield; similar to a zero coupon bond. (f) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (g) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (h) For those zero coupon bonds that become coupon paying at a future date, the interest rate disclosed represents the annualized effective yield from the date of acquisition to interest reset date disclosed. (i) U.S. Treasury inflation-protection securities (TIPS) are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (j) Principal-only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal-only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents current yield based upon the current cost basis and estimated timing of future cash flows. (k) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 1998. (l) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (m) At May 31, 1998, the cost of securities for federal income tax purposes was $1,495,915,577 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation.........................................$100,101,139 Unrealized depreciation..........................................(12,468,008) Net unrealized appreciation......................................$87,633,131 PART C. OTHER INFORMATION Item 24. Financial Statements and Exhibits. (a) FINANCIAL STATEMENTS: List of financial statements filed as part of this Post- Effective Amendment to the Registration Statement: For IDS Selective Fund o Independent auditors' report dated July 2, 1998 o Statement of assets and liabilities, May 31, 1998 o Statement of operations, year ended May 31, 1998 o Statement of changes in net assets, for the year ended May 31, 1998 and year ended May 31, 1997 o Notes to financial statements o Investments in securities, May 31, 1998 o Notes to investments in securities For Quality Income Portfolio o Independent auditors' report dated, July 2, 1998 o Statement of assets and liabilities, May 31, 1998 o Statement of operations, for the year ended May 31, 1998 o Statement of changes in net assets, for the year ended May 31, 1998 and for the period from June 10, 1996 (commencement of operations) to May 31, 1997 o Notes to the financial statements o Investments in securities, May 31, 1998 o Notes to investments in securities (b) EXHIBITS: 1. Articles of Incorporation, as amended October 17, 1988, filed electronically as Exhibit 1 to Registrant's Post-Effective Amendment No. 69 to Registration Statement No. 2-10700, is incorporated herein by reference. 2. By-laws, as amended January 10, 1996, filed electronically as Exhibit 2 to Registrant's Post-Effective Amendment No. 84 to Registration Statement No. 2-10700, is incorporated herein by reference. 3. Not Applicable. 4. Stock certificate, filed as Exhibit 3 to Registrant's Form N-1Q for the calendar quarter ended September 30, 1979, is incorporated herein by reference. 5. Copy of Investment Management Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, is filed electronically herewith. The agreement was assumed by the Portfolio when the Fund adopted the master/feeder structure. 6. Copy of Distribution Agreement between Registrant and American Express Financial Advisors Inc., dated March 20, 1995, filed electronically as Exhibit 6 to Registrant's Post-Effective Amendment No. 85 to Registration Statement No. 2-10700 is incorporated herein by reference. 7. All employees are eligible to participate in a profit sharing plan. Entry into the plan is Jan. 1 or July 1. The Registrant contributes each year an amount up to 15 percent of their annual salaries, the maximum deductible amount permitted under Section 404(a) of the Internal Revenue Code. 8(a). Copy of Custodian Agreement between Registrant and First National Bank of Minneapolis, dated July 23, 1986, filed electronically as Exhibit 8(a) to Registrant's Post-Effective Amendment No. 85 to Registration Statement No. 2-10700 is incorporated herein by reference. 8(b). Copy of Addendum to the Custodian Agreement between IDS Selective Fund, Inc., First Bank National Association and American Express Financial Corporation dated June 10, 1996, filed electronically as Exhibit 8(b) to Registrant's Post-Effective Amendment No. 84 to Registration Statement No. 2-10700 is incorporated herein by reference. 9(a). Plan and Agreement of Merger dated April 10, 1986, filed as Exhibit 9 to Registrant's Post-Effective Amendment No. 62 to Registration Statement No. 2-10700, is incorporated herein by reference. 9(b). Copy of Transfer Agency Agreement between the Registrant and American Express Client Service Corporation, dated January 1, 1998, is filed electronically herewith. 9(c). Copy of License Agreement, dated January 25, 1988, between IDS Financial Corporation and Registrant, filed electronically as Exhibit 9(c) to Registrant's Post Effective Amendment No. 69 to Registration Statement No. 2-10700, is incorporated herein by reference. 9(d). Copy of Shareholder Service Agreement between Registrant and American Express Financial Advisors Inc., dated March 20, 1995, filed electronically as Exhibit 9(d) to Registrant's Post-Effective Amendment No. 85 to Registration Statement No. 2-10700 is incorporated herein by reference. 9(e). Copy of Administrative Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995 filed electronically as Exhibit 9(e) to Registrant's Post-Effective Amendment No. 85 to Registration Statement No. 2-10700 is incorporated herein by reference. 9(f). Copy of Agreement and Declaration of Unitholders between IDS Selective Fund, Inc. and Strategist Income Fund, Inc. dated June 10, 1996, filed electronically as Exhibit 9(f) to Registrant's Post-Effective Amendment No. 84 to Registration Statement No. 2-10700 is incorporated herein by reference. 9(g) Copy of Class Y Shareholder Service Agreement between IDS Precious Metals Fund, Inc. and American Express Financial Advisors Inc., dated May 9, 1997 filed electronically on or about May 27, as Exhibit 9(e) to IDS Precious Metals Fund, Inc.'s Amendment No. 30 to Registration Statement No. 2-93745, is incorporated herein by reference. Registrant's Class Y shareholder Service Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. 10. Opinion and consent of counsel as to the legality of the securities being registered is filed electronically herewith. 11. Independent Auditors' Consent is filed electronically herewith. 12. None. 13. Not Applicable. 14. Forms of Keogh, IRA and other retirement plans, filed as Exhibits 14(a) through 14(n) to IDS Growth Fund, Inc., Post Effective Amendment No. 34 to Registration Statement No. 2-38355, are incorporated herein by reference. 15. Copy of Plan and Agreement of Distribution between Registrant and American Express Financial Advisors Inc., dated March 20, 1995 filed electronically as Exhibit 15 to Registrant's Post-Effective Amendment No. 85 to Registration Statement No. 2-10700 is incorporated herein by reference. 16. Copy of Schedule for computation of each performance quotation provided in the Registration Statement in response to Item 22(b), filed as Exhibit 16 to Post-Effective Amendment No. 75 to Registrant's Registration Statement No. 2-10700, is incorporated herein by reference. 17. Financial Data Schedule is filed electronically herewith. 18. Copy of 18f-3 Plan, dated May 9, 1997, filed electronically on or about January 27, 1998 as Exhibit 18 to IDS Equity Select Fund, Inc.'s Post-Effective Amendment No. 86 to Registration Statement No. 2-13188, is incorporated herein by reference. 19(a). Directors' Power of Attorney to sign Amendments to this Registration Statement, dated January 7, 1998 is filed electronically herewith. 19(b). Officers' Power of Attorney to sign Amendments to this Registration Statement, dated November 1, 1995, filed electronically as Exhibit 19(b) to Registrant's Post-Effective Amendment No. 83, is incorporated herein by reference. 19(c). Trustees Power of Attorney dated January 7, 1998 is filed electronically herewith. 19(d). Officers' Power of Attorney dated April 11, 1996 filed electronically as Exhibit 19(d) to Registrant's Post-Effective Amendment No. 85 to Registration Statement No. 2-10700 is incorporated herein by reference. Item 25. Persons Controlled by or Under Common Control with Registrant None. Item 26. Number of Holders of Securities (1) (2) Number of Record Holders as of Title of Class July 16, 1998 Class A 65,617 Class B 10,888 Class Y 32,515 Item 27. Indemnification The Articles of Incorporation of the registrant provide that the Fund shall indemnify any person who was or is a party or is threatened to be made a party, by reason of the fact that she or he is or was a director, officer, employee or agent of the Fund, or is or was serving at the request of the Fund as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, to any threatened, pending or completed action, suit or proceeding, wherever brought, and the Fund may purchase liability insurance and advance legal expenses, all to the fullest extent permitted by the laws of the State of Minnesota, as now existing or hereafter amended. The By-laws of the registrant provide that present or former directors or officers of the Fund made or threatened to be made a party to or involved (including as a witness) in an actual or threatened action, suit or proceeding shall be indemnified by the Fund to the full extent authorized by the Minnesota Business Corporation Act, all as more fully set forth in the By-laws filed as an exhibit to this registration statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Any indemnification hereunder shall not be exclusive of any other rights of indemnification to which the directors, officers, employees or agents might otherwise be entitled. No indemnification shall be made in violation of the Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser (American Express Financial Corporation) Directors and officers of American Express Financial Corporation who are directors and/or officers of one or more other companies: - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Name and Title Other company(s) Address Title within other company(s) - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Ronald G. Abrahamson, American Express Client IDS Tower 10 Director and Vice President Vice President Service Corporation Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. North Dakota Public Director and Vice President Employee Payment Company - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President Senior Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Peter J. Anderson, Advisory Capital Strategies IDS Tower 10 Director Director and Senior Vice Group Inc. Minneapolis, MN 55440 President American Express Asset Director and Chairman of Management Group Inc. the Board American Express Asset Director, Chairman of the Management International, Board and Executive Vice Inc. President American Express Financial Senior Vice President Advisors Inc. IDS Capital Holdings Inc. Director and President IDS Futures Corporation Director NCM Capital Management 2 Mutual Plaza Director Group, Inc. 501 Willard Street Durham, NC 27701 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Ward D. Armstrong, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Service Vice President Corporation American Express Trust Director and Chairman of Company the Board - ----------------------------- ----------------------------- ---------------------------- ---------------------------- John M. Baker, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Trust Senior Vice President Company - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Joseph M. Barsky III, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Timothy V. Bechtold, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- John C. Boeder, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Box 5144 Director of New York Albany, NY 12205 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas W. Brewers, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Karl J. Breyer, American Express Financial IDS Tower 10 Senior Vice President Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 President American Express Minnesota Director Foundation - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Daniel J. Candura, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Cynthia M. Carlson, American Enterprise IDS Tower 10 Director, President and Vice President Investment Services Inc. Minneapolis, MN 55440 Chief Executive Officer American Express Financial Vice President Advisors Inc. American Express Service Vice President Corporation - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and Senior Vice President and Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer Chief Marketing Officer IDS Life Insurance Company Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James E. Choat, American Enterprise Life IDS Tower 10 Director, President and Senior Vice President Insurance Company Minneapolis, MN 55440 Chief Executive Officer American Express Financial Senior Vice President Advisors Inc. American Express Insurance Vice President Agency of Idaho Inc. American Express Insurance Vice President Agency of Nevada Inc. American Express Insurance Vice President Agency of Oregon Inc. American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Vice President Alabama Inc. IDS Insurance Agency of Vice President Arkansas Inc. IDS Insurance Agency of Vice President Massachusetts Inc. IDS Insurance Agency of New Vice President Mexico Inc. IDS Insurance Agency of Vice President North Carolina Inc. IDS Insurance Agency of Vice President Ohio Inc. IDS Insurance Agency of Vice President Wyoming Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Kenneth J. Ciak, AMEX Assurance Company IDS Tower 10 Director and President Vice President and General Minneapolis, MN 55440 Manager American Express Financial Vice President and General Advisors Inc. Manager IDS Property Casualty 1 WEG Blvd. Director and President Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Paul A. Connolly, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Colleen Curran, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant General Counsel American Express Service Vice President and Chief Corporation Legal Counsel - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Regenia David, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Luz Maria Davis American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Gordon L. Eid, American Express Financial IDS Tower 10 Senior Vice President, Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Counsel and Chief President, Deputy General Compliance Officer Counsel and Chief Compliance Officer American Express Insurance Director and Vice President Agency of Arizona Inc. American Express Insurance Director and Vice President Agency of Idaho Inc. American Express Insurance Director and Vice President Agency of Nevada Inc. American Express Insurance Director and Vice President Agency of Oregon Inc. American Express Property Director and Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Director and Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Director and Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Director and Vice President Alabama Inc. IDS Insurance Agency of Director and Vice President Arkansas Inc. IDS Insurance Agency of Director and Vice President Massachusetts Inc. IDS Insurance Agency of New Director and Vice President Mexico Inc. IDS Insurance Agency of Director and Vice President North Carolina Inc. IDS Insurance Agency of Director and Vice President Ohio Inc. IDS Insurance Agency of Director and Vice President Wyoming Inc. IDS Real Estate Services, Vice President Inc. Investors Syndicate Director Development Corp. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Robert M. Elconin, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Gordon M. Fines, American Express Asset IDS Tower 10 Executive Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas L. Forsberg, American Centurion Life IDS Tower 10 Director Vice President Assurance Company Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and Vice President and Insurance Company Minneapolis, MN 55440 Controller Corporate Controller American Express Financial Vice President and Advisors Inc. Corporate Controller - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Harvey Golub, American Express Company American Express Tower Chairman and Chief Director World Financial Center Executive Officer New York, NY 10285 American Express Travel Chairman and Chief Related Services Company, Executive Officer Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- David A. Hammer, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Marketing Controller Marketing Controller IDS Plan Services of Director and Vice President California, Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President Vice President Minneapolis, MN 55440 American Enterprise Life Vice President Insurance Company American Express Financial Vice President Advisors Inc. American Partners Life Director and Vice Insurance Company President IDS Certificate Company Vice President IDS Life Insurance Company Vice President IDS Life Series Fund, Inc. Vice President IDS Life Variable Annuity Vice President Funds A and B Investors Syndicate Director and Vice Development Corp. President IDS Life Insurance Company P.O. Box 5144 Investment Officer of New York Albany, NY 12205 IDS Property Casualty 1 WEG Blvd. Vice President Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Scott A. Hawkinson, American Centurion Life IDS Tower 10 Chief Actuary Vice President Assurance Company Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Janis K. Heaney, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James G. Hirsh, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant General Counsel - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Darryl G. Horsman, American Express Trust IDS Tower 10 Director and President Vice President Company Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer Vice President and Minneapolis, MN 55440 and Assistant Secretary Corporate Treasurer American Centurion Life Vice President and Assurance Company Treasurer American Enterprise Vice President and Investment Services Inc. Treasurer American Enterprise Life Vice President and Insurance Company Treasurer American Express Asset Vice President and Management Group Inc. Treasurer American Express Asset Vice President and Management International Treasurer Inc. American Express Client Vice President and Service Corporation Treasurer American Express Corporation Vice President and Treasurer American Express Financial Vice President and Advisors Inc. Treasurer American Express Insurance Vice President and Agency of Arizona Inc. Treasurer American Express Insurance Vice President and Agency of Idaho Inc. Treasurer American Express Insurance Vice President and Agency of Nevada Inc. Treasurer American Express Minnesota Vice President and Foundation Treasurer American Express Property Vice President and Casualty Insurance Agency Treasurer of Kentucky Inc. American Express Property Vice President and Casualty Insurance Agency Treasurer of Maryland Inc. American Express Property Vice President and Casualty Insurance Agency Treasurer of Pennsylvania Inc. American Express Partners Vice President and Life Insurance Company Treasurer IDS Cable Corporation Director, Vice President and Treasurer IDS Cable II Corporation Director, Vice President and Treasurer IDS Capital Holdings Inc. Vice President, Treasurer and Assistant Secretary IDS Certificate Company Vice President and Treasurer IDS Insurance Agency of Vice President and Alabama Inc. Treasurer IDS Insurance Agency of Vice President and Arkansas Inc. Treasurer IDS Insurance Agency of Vice President and Massachusetts Inc. Treasurer IDS Insurance Agency of New Vice President and Mexico Inc. Treasurer IDS Insurance Agency of Vice President and North Carolina Inc. Treasurer IDS Insurance Agency of Vice President and Ohio Inc. Treasurer IDS Insurance Agency of Vice President and Wyoming Inc. Treasurer IDS Life Insurance Company Vice President, Treasurer and Assistant Secretary IDS Life Series Fund Inc. Vice President and Treasurer IDS Life Variable Annuity Vice President and Funds A & B Treasurer IDS Management Corporation Director, Vice President and Treasurer IDS Partnership Services Vice President and Corporation Treasurer IDS Plan Services of Vice President and California, Inc. Treasurer IDS Real Estate Services, Vice President and Inc. Treasurer IDS Realty Corporation Vice President and Treasurer IDS Sales Support Inc. Vice President and Treasurer IDS Securities Corporation Vice President and Treasurer Investors Syndicate Vice President and Development Corp. Treasurer IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer Insurance Company DePere, WI 54115 and Assistant Secretary North Dakota Public Vice President and Employee Payment Company Treasurer - ----------------------------- ----------------------------- ---------------------------- ---------------------------- David R. Hubers, AMEX Assurance Company IDS Tower 10 Director Director, President and Minneapolis, MN 55440 Chief Executive Officer American Express Financial Chairman, President and Advisors Inc. Chief Executive Officer American Express Service Director and President Corporation IDS Certificate Company Director IDS Life Insurance Company Director IDS Plan Services of Director and President California, Inc. IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Martin G. Hurwitz, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James M. Jensen, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Marietta L. Johns, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Nancy E. Jones, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Service Vice President Corporation - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James E. Kaarre, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Matthew N. Karstetter, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Linda B. Keene, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- G. Michael Kennedy, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Susan D. Kinder, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President IDS Securities Corporation Director - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Brian C. Kleinberg, American Enterprise IDS Tower 10 Senior Vice President Executive Vice President Investment Services Inc. Minneapolis, MN 55440 American Express Financial Executive Vice President Advisors Inc. American Express Service Director Corporation AMEX Assurance Company Director and Chairman of the Board American Partners Life Executive Vice President Insurance Company IDS Property Casualty 1 WEG Blvd. Director and Chairman of Insurance Company DePere, WI 54115 the Board - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director Director and Senior Vice Minneapolis, MN 55440 President American Centurion Life Director Assurance Company American Enterprise Life Director and Chairman of Insurance Company the Board American Express Corporation Director and President American Express Financial Senior Vice President Advisors Inc. American Express Insurance Director and President Agency of Arizona Inc. American Express Insurance Director and President Agency of Idaho Inc. American Express Insurance Director and President Agency of Nevada Inc. American Express Insurance Director and President Agency of Oregon Inc. American Express Property Director and President Casualty Insurance Agency of Kentucky Inc. American Express Property Director and President Casualty Insurance Agency of Maryland Inc. American Express Property Director and President Casualty Insurance Agency of Pennsylvania Inc. American Express Service Vice President Corporation American Partners Life Director and Chairman of Insurance Company the Board IDS Certificate Company Director and Chairman of the Board IDS Insurance Agency of Director and President Alabama Inc. IDS Insurance Agency of Director and President Arkansas Inc. IDS Insurance Agency of Director and President Massachusetts Inc. IDS Insurance Agency of New Director and President Mexico Inc. IDS Insurance Agency of Director and President North Carolina Inc. IDS Insurance Agency of Director and President Ohio Inc. IDS Insurance Agency of Director and President Wyoming Inc. IDS Life Insurance Company Director and President IDS Life Series Fund, Inc. Director and President IDS Life Variable Annuity Manager, Chairman of the Funds A and B Board and President IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 IDS Life Insurance Company P.O. Box 5144 Director, Chairman of the of New York Albany, NY 12205 Board and President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Director and Executive Vice President IDS Life Series Fund, Inc. Vice President and Chief Actuary IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Claire Kolmodin, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Steve C. Kumagai, American Express Financial IDS Tower 10 Director and Senior Vice Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Edward Labenski, Jr., American Express Asset IDS Tower 10 Senior Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Kurt A Larson, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lori J. Larson, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Futures Corporation Director - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief Vice President and Chief Advisors Inc. Minneapolis, MN 55440 U.S. Economist U.S. Economist - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Peter A. Lefferts, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President American Express Trust Director Company IDS Plan Services of Director California, Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas A. Lennick, American Express Financial IDS Tower 10 Director and Executive Director and Executive Vice Advisors Inc. Minneapolis, MN 55440 Vice President President IDS Securities Corporation Director, President and Chief Executive Officer - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Mary J. Malevich, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Fred A. Mandell, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Thomas W. Medcalf, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President Vice President Insurance Company Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. American Partners Life Director and President Insurance Company IDS Certificate Company Director and President IDS Life Insurance Company Director and Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James A. Mitchell, AMEX Assurance Company IDS Tower 10 Director Director and Executive Vice Minneapolis, MN 55440 President American Enterprise Director Investment Services Inc. American Express Financial Executive Vice President Advisors Inc. American Express Service Director and Senior Vice Corporation President American Express Tax and Director Business Services Inc. IDS Certificate Company Director IDS Life Insurance Company Director, Chairman of the Board and Chief Executive Officer IDS Plan Services of Director California, Inc. IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- William P. Miller, Advisory Capital Strategies IDS Tower 10 Vice President Vice President and Senior Group Inc. Minneapolis, MN 55440 Portfolio Manager American Express Asset Senior Vice President Management Group Inc. American Express Financial Vice President and Senior Advisors Inc. Portfolio Manager - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Pamela J. Moret, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Trust Vice President Company IDS Life Insurance Company Executive Vice President IDS Life Insurance Company P.O. Box 5144 Vice President of New York Albany, NY 12205 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Barry J. Murphy, American Express Client IDS Tower 10 Director and President Director and Senior Vice Service Corporation Minneapolis, MN 55440 President American Express Financial Senior Vice President Advisors Inc. IDS Life Insurance Company Director and Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Mary Owens Neal, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Michael J. O'Keefe, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James R. Palmer, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Carla P. Pavone, American Express Client IDS Tower 10 Director and Vice President Vice President Service Corporation Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. North Dakota Public Director and President Employee Payment Company - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President Senior Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Susan B. Plimpton, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Ronald W. Powell, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant General Counsel IDS Cable Corporation Vice President and Assistant Secretary IDS Cable II Corporation Vice President and Assistant Secretary IDS Management Corporation Vice President and Assistant Secretary IDS Partnership Services Vice President and Corporation Assistant Secretary IDS Plan Services of Vice President and California, Inc. Assistant Secretary IDS Realty Corporation Vice President and Assistant Secretary - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James M. Punch, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Vice President Senior Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Senior Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- - ----------------------------- ----------------------------- ---------------------------- ---------------------------- ReBecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President Senior Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Stephen W. Roszell, Advisory Capital Strategies IDS Tower 10 Director Senior Vice President Group Inc. Minneapolis, MN 55440 American Express Asset Director, President and Management Group Inc. Chief Executive Officer American Express Asset Director Management International, Inc. American Express Asset Director Management Ltd. American Express Financial Senior Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- John P. Ryan, American Express Financial IDS Tower 10 Vice President and General Vice President and General Advisors Inc. Minneapolis, MN 55440 Auditor Auditor - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Erven A. Samsel, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President American Express Insurance Vice President Agency of Idaho Inc. American Express Insurance Vice President Agency of Nevada Inc. American Express Insurance Vice President Agency of Oregon Inc. American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Vice President Alabama Inc. IDS Insurance Agency of Vice President Arkansas Inc. IDS Insurance Agency of Vice President Massachusetts Inc. IDS Insurance Agency of New Vice President Mexico Inc. IDS Insurance Agency of Vice President North Carolina Inc. IDS Insurance Agency of Vice President Ohio Inc. IDS Insurance Agency of Vice President Wyoming Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Stuart A. Sedlacek, American Centurion Life IDS Tower 10 Director, Chairman and Senior Vice President and Assurance Company Minneapolis, MN 55440 President Chief Financial Officer American Enterprise Life Executive Vice President Insurance Company American Express Financial Senior Vice President and Advisors Inc. Chief Financial Officer American Express Trust Director Company American Partners Life Director and Vice President Insurance Agency IDS Certificate Company Director and President IDS Life Insurance Company Executive Vice President and Controller - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Donald K. Shanks, AMEX Assurance Company IDS Tower 10 Senior Vice President Vice President Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. IDS Property Casualty 1 WEG Blvd. Senior Vice President Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- F. Dale Simmons, AMEX Assurance Company IDS Tower 10 Vice President Vice President Minneapolis, MN 55440 American Enterprise Life Vice President Insurance American Express Financial Vice President Advisors Inc. American Partners Life Vice President Insurance Company IDS Certificate Company Vice President IDS Life Insurance Company Vice President IDS Partnership Services Director and Vice President Corporation IDS Real Estate Services Director and Vice President Inc. IDS Realty Corporation Director and Vice President IDS Life Insurance Company Box 5144 Vice President and of New York Albany, NY 12205 Assistant Treasurer - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- William A. Smith, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Controller Controller - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Bridget Sperl, American Express Client IDS Tower 10 Vice President Vice President Service Corporation Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lisa A. Steffes, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President, Vice President and Insurance Company Minneapolis, MN 55440 General Counsel and Assistant General Counsel Secretary American Express Corporation Director, Vice President and Secretary American Express Financial Vice President and Advisors Inc. Assistant General Counsel American Partners Life Director, Vice President, Insurance Company General Counsel and Secretary IDS Life Insurance Company Vice President, General Counsel and Secretary IDS Life Series Fund Inc. General Counsel and Assistant Secretary IDS Life Variable Annuity General Counsel and Funds A & B Assistant Secretary - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James J. Strauss, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey J. Stremcha, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Barbara Stroup Stewart, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Wesley W. Wadman, American Express Asset IDS Tower 10 Executive Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Asset Director and Senior Vice Management International, President Inc. American Express Asset Director and Vice Chairman Management Ltd. American Express Financial Vice President Advisors Inc. IDS Fund Management Limited Director and Vice Chairman - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Norman Weaver Jr., American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President American Express Insurance Vice President Agency of Arizona Inc. American Express Insurance Vice President Agency of Idaho Inc. American Express Insurance Vice President Agency of Nevada Inc. American Express Insurance Vice President Agency of Oregon Inc. American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Vice President Alabama Inc. IDS Insurance Agency of Vice President Arkansas Inc. IDS Insurance Agency of Vice President Massachusetts Inc. IDS Insurance Agency of New Vice President Mexico Inc. IDS Insurance Agency of Vice President North Carolina Inc. IDS Insurance Agency of Vice President Ohio Inc. IDS Insurance Agency of Vice President Wyoming Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Michael L. Weiner, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Capital Holdings Inc. Vice President IDS Futures Brokerage Group Vice President IDS Futures Corporation Vice President, Treasurer and Secretary IDS Sales Support Inc. Director, Vice President and Assistant Treasurer - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lawrence J. Welte, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey F. Welter, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Edwin M. Wistrand, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant General Counsel - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Michael R. Woodward, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President American Express Insurance Vice President Agency of Idaho Inc. American Express Insurance Vice President Agency of Nevada Inc. American Express Insurance Vice President Agency of Oregon Inc. American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Vice President Alabama Inc. IDS Insurance Agency of Vice President Arkansas Inc. IDS Insurance Agency of Vice President Massachusetts Inc. IDS Insurance Agency of New Vice President Mexico Inc. IDS Insurance Agency of Vice President North Carolina Inc. IDS Insurance Agency of Vice President Ohio Inc. IDS Insurance Agency of Vice President Wyoming Inc. IDS Life Insurance Company Box 5144 Director of New York Albany, NY 12205 - ----------------------------- ----------------------------- ---------------------------- ----------------------------
Item 29. Principal Underwriters. (a) American Express Financial Advisors acts as principal underwriter for the following investment companies: IDS Bond Fund, Inc.; IDS California Tax-Exempt Trust; IDS Discovery Fund, Inc.; IDS Equity Select Fund, Inc.; IDS Extra Income Fund, Inc.; IDS Federal Income Fund, Inc.; IDS Global Series, Inc.; IDS Growth Fund, Inc.; IDS High Yield Tax-Exempt Fund, Inc.; IDS International Fund, Inc.; IDS Investment Series, Inc.; IDS Managed Retirement Fund, Inc.; IDS Market Advantage Series, Inc.; IDS Money Market Series, Inc.; IDS New Dimensions Fund, Inc.; IDS Precious Metals Fund, Inc.; IDS Progressive Fund, Inc.; IDS Selective Fund, Inc.; IDS Special Tax-Exempt Series Trust; IDS Stock Fund, Inc.; IDS Strategy Fund, Inc.; IDS Tax-Exempt Bond Fund, Inc.; IDS Tax-Free Money Fund, Inc.; IDS Utilities Income Fund, Inc., Growth Trust; Growth and Income Trust; Income Trust, Tax-Free Income Trust, World Trust and IDS Certificate Company. (b) As to each director, officer or partner of the principal underwriter: Name and Principal Business Address Position and Offices with Offices with Registrant Underwriter - --------------------------------------------- --------------------------------- -------------------------- Ronald G. Abrahamson Vice President-Service Quality None IDS Tower 10 and Reengineering Minneapolis, MN 55440 Douglas A. Alger Senior Vice President-Human None IDS Tower 10 Resources Minneapolis, MN 55440 Peter J. Anderson Senior Vice Vice President IDS Tower 10 President-Investment Operations Minneapolis, MN 55440 Ward D. Armstrong Vice President-American None IDS Tower 10 Express, Institutional Services Minneapolis, MN 55440 John M. Baker Vice President-Plan Sponsor None IDS Tower 10 Services Minneapolis, MN 55440 Joseph M. Barsky III Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Timothy V. Bechtold Vice President-Risk Management None IDS Tower 10 Products Minneapolis, MN 55440 John D. Begley Group Vice None Suite 100 President-Ohio/Indiana 7760 Olentangy River Rd. Columbus, OH 43235 Brent L. Bisson Group Vice President-Los None Suite 900, E. Westside Twr Angeles Metro 11835 West Olympic Blvd. Los Angeles, CA 90064 John C. Boeder Vice President-Mature Market None IDS Tower 10 Group Minneapolis, MN 55440 Walter K. Booker Group Vice President-New Jersey None Suite 200, 3500 Market Street Camp Hill, NJ 17011 Bruce J. Bordelon Group Vice President-Gulf States None Galleria One Suite 1900 Galleria Blvd. Metairie, LA 70001 Charles R. Branch Group Vice President-Northwest None Suite 200 West 111 North River Dr. Spokane, WA 99201 Douglas W. Brewers Vice President-Sales Support None IDS Tower 10 Minneapolis, MN 55440 Karl J. Breyer Senior Vice President-Law and None IDS Tower 10 Corporate Minneapolis, MN 55440 Affairs Daniel J. Candura Vice President-Marketing Support None IDS Tower 10 Minneapolis, MN 55440 Cynthia M. Carlson Vice President-American Express None IDS Tower 10 Securities Services Minneapolis, MN 55440 Mark W. Carter Senior Vice President and Chief None IDS Tower 10 Marketing Officer Minneapolis, MN 55440 James E. Choat Senior Vice None IDS Tower 10 President-Institutional Minneapolis, MN 55440 Products Group Kenneth J. Ciak Vice President and General None IDS Property Casualty Manager-IDS Property Casualty 1400 Lombardi Avenue Green Bay, WI 54304 Paul A. Connolly Vice President - Advisor None IDS Tower 10 Staffing, Training and Support Minneapolis, MN 55440 Roger C. Corea Group Vice President-Upstate None 290 Woodcliff Drive New York Fairport, NY 14450 Henry J. Cormier Group Vice President-Connecticut None Commerce Center One 333 East River Drive East Hartford, CT 06108 John M. Crawford Group Vice President-Arkansas / None Suite 200 Springfield / Memphis 10800 Financial Ctr Pkwy Little Rock, AR 72211 Kevin F. Crowe Group Vice None Suite 312 President-Carolinas/Eastern 7300 Carmel Executive Pk Georgia Charlotte, NC 28226 Colleen Curran Vice President and assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Reginia David Vice President-Systems Services None IDS Tower 10 Minneapolis, MN 55440 Luz Maria Davis Vice President-Communications None IDS Tower 10 Minneapolis, MN 55440 Scott M. DiGiammarino Group Vice None Suite 500, 8045 Leesburg Pike President-Washington/Baltimore Vienna, VA 22182 Bradford L. Drew Group Vice President-Eastern None Two Datran Center Florida Penthouse One B 9130 S. Dadeland Blvd. Miami, FL 33156 James P. Egge Group Vice President - Western None 4305 South Louise, Suite 202 Iowa, Nebraska, Dakotas Sioux Falls, SD 57103 Gordon L. Eid Senior Vice President, General None IDS Tower 10 Counsel and Chief Compliance Minneapolis, MN 55440 Officer Robert M. Elconin Vice President-Government None IDS Tower 10 Relations Minneapolis, MN 55440 Louise P. Evenson Group Vice President-San None Suite 200 Francisco Bay Area 1333 N. California Blvd. Walnut Creek, CA 94596 Phillip W. Evans, Group Vice President - Rocky None Suite 600 Mountain 6985 Union Park Center Midvale, UT 84047-4177 Gordon M. Fines Vice President-Mutual Fund None IDS Tower 10 Equity Investments Minneapolis, MN 55440 Douglas L. Forsberg Vice President-Institutional None IDS Tower 10 Products Group Minneapolis, MN 55440 Jeffrey P. Fox Vice President and Corporate None IDS Tower 10 Controller Minneapolis, MN 55440 William P. Fritz Group Vice President-Gateway None Suite 160 12855 Flushing Meadows Dr St. Louis, MO 63131 Carl W. Gans Group Vice President-Twin City None 8500 Tower Suite 1770 Metro 8500 Normandale Lake Blvd. Bloomington, MN 55437 David A. Hammer Vice President and Marketing None IDS Tower 10 Controller Minneapolis, MN 55440 Teresa A. Hanratty Group Vice President-Northern None Suites 6&7 New England 169 South River Road Bedford, NH 03110 Robert L. Harden Group Vice President-Boston None Two Constitution Plaza Metro Boston, MA 02129 Lorraine R. Hart Vice President-Insurance None IDS Tower 10 Investments Minneapolis, MN 55440 Scott A. Hawkinson Vice President-Assured Assets None IDS Tower 10 Product Development and Minneapolis, MN 55440 Management Brian M. Heath Group Vice President-North Texas None Suite 150 801 E. Campbell Road Richardson, TX 75081 Janis K. Heaney Vice President - Incentive None IDS Tower 10 Management Minneapolis, MN 55440 James G. Hirsh Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Jon E. Hjelm Group Vice President-Rhode None 319 Southbridge Street Island/Central-Western Auburn, MA 01501 Massachusetts David J. Hockenberry Group Vice President-Eastern None 30 Burton Hills Blvd. Tennessee Suite 175 Nashville, TN 37215 Jeffrey S. Horton Vice President and Treasurer None IDS Tower 10 Minneapolis, MN 55440 David R. Hubers Chairman, President and Chief Board member IDS Tower 10 Executive Officer Minneapolis, MN 55440 Martin G. Hurwitz Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 James M. Jensen Vice President-Insurance None IDS Tower 10 Product Development and Minneapolis, MN 55440 Management Marietta L. Johns Senior Vice President-Field None IDS Tower 10 Management Minneapolis, MN 55440 Nancy E. Jones Vice President - Business None IDS Tower 10 Development Minneapolis, MN 55440 James E. Kaarre Vice President-Marketing None IDS Tower 10 Promotions Minneapolis, MN 55440 Matthew N. Karstetter Vice President-Investment None IDS Tower 10 Accounting Minneapolis, MN 55440 Linda B. Keene Vice President-Market None IDS Tower 10 Development Minneapolis, MN 55440 G. Michael Kennedy Vice President-Investment None IDS Tower 10 Services and Investment Research Minneapolis, MN 55440 Susan D. Kinder Senior Vice None IDS Tower 10 President-Distribution Services Minneapolis, MN 55440 Brian Kleinberg Executive Vice None IDS Tower 10 President-Financial Direct Minneapolis, MN 55440 Richard W. Kling Senior Vice President-Products None IDS Tower 10 Minneapolis, MN 55440 Paul F. Kolkman Vice President-Actuarial Finance None IDS Tower 10 Minneapolis, MN 55440 Claire Kolmodin Vice President-Service Quality None IDS Tower 10 Minneapolis, MN 55440 David S. Kreager Group Vice President-Greater None Suite 108 Michigan Trestle Bridge V 5136 Lovers Lane Kalamazoo, MI 49002 Steven C. Kumagai Director and Senior Vice None IDS Tower 10 President-Field Management and Minneapolis, MN 55440 Business Systems Mitre Kutanovski Group Vice President-Chicago None Suite 680 Metro 8585 Broadway Merrillville, IN 48410 Edward Labenski Jr. Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Kurt A. Larson Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Lori J. Larson Vice President - Brokerage and None IDS Tower 10 Direct Services Minneapolis, MN 55440 Daniel E. Laufenberg Vice President and Chief U.S. None IDS Tower 10 Economist Minneapolis, MN 55440 Peter A. Lefferts Senior Vice President-Corporate None IDS Tower 10 Strategy and Development Minneapolis, MN 55440 Douglas A. Lennick Director and Executive Vice None IDS Tower 10 President-Private Client Group Minneapolis, MN 55440 Mary J. Malevich Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Fred A. Mandell Vice President-Field Marketing None IDS Tower 10 Readiness Minneapolis, MN 55440 Daniel E. Martin Group Vice President-Pittsburgh None Suite 650 Metro 5700 Corporate Drive Pittsburgh, PA 15237 Thomas W. Medcalf Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Paula R. Meyer Vice President - Assured Assets None IDS Tower 10 Minneapolis, MN 55440 William P. Miller Vice President and Senior None IDS Tower 10 Portfolio Manager Minneapolis, MN 55440 James A. Mitchell Executive Vice None IDS Tower 10 President-Marketing and Products Minneapolis, MN 55440 Pamela J. Moret Vice President-Variable Assets None IDS Tower 10 Minneapolis, MN 55440 Alan D. Morgenstern Group Vice President-Central None Suite 200 California/Western Nevada 3500 Market Street Camp Hill, NJ 17011 Barry J. Murphy Senior Vice President-Client None IDS Tower 10 Service Minneapolis, MN 55440 Mary Owens Neal Vice President-Mature Market None IDS Tower 10 Segment Minneapolis, MN 55440 Thomas V. Nicolosi Group Vice President-New York None Suite 220 Metro Area 500 Mamaroneck Avenue Harrison, NY 10528 Michael J. O'Keefe Vice President - Advisory None IDS Tower 10 Business Systems Minneapolis, MN 55440 James R. Palmer Vice President-Taxes None IDS Tower 10 Minneapolis, MN 55440 Marc A. Parker Group Vice President - None 10200 SW Greenburg Road Portland/Eugene Suite 110 Portland OR 97223 Carla P. Pavone Vice President-Compensation and None IDS Tower 10 Field Administration Minneapolis, MN 55440 Thomas P. Perrine Senior Vice President - Group IDS Tower 10 Relationship Leader/AXP Minneapolis, MN 55440 Technologies Financial Services Susan B. Plimpton Vice President-Marketing None IDS Tower 10 Services Minneapolis, MN 55440 Larry M. Post Group Vice None One Tower Bridge President-Philadelphia Metro 100 Front Street 8th Fl West Conshohocken, PA 19428 Ronald W. Powell Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Diana R. Prost Group Vice President - None 3030 N.W. Expressway Kansas/Oklahoma Suite 900 Oklahoma City, OK 73112 James M. Punch Vice President-Special Projects None IDS Tower 10 Minneapolis, MN 55440 Frederick C. Quirsfeld Senior Vice President - Fixed None IDS Tower 10 Income Minneapolis, MN 55440 R. Daniel Richardson Group Vice President-Southern None Suite 800 Texas Arboretum Plaza One 9442 Capital of Texas Hwy N. Austin, TX 78759 ReBecca K. Roloff Senior Vice President-Field None IDS Tower 10 Management and Financial Minneapolis, MN 55440 Advisory Service Stephen W. Roszell Senior Vice None IDS Tower 10 President-Institutional Minneapolis, MN 55440 Max G. Roth Group Vice None Suite 201 S IDS Ctr President-Wisconsin/Upper 1400 Lombardi Avenue Michigan Green Bay, WI 54304 John P. Ryan Vice President and General None IDS Tower 10 Auditor Minneapolis, MN 55440 Erven A. Samsel Senior Vice President-Field None 45 Braintree Hill Park Management Suite 402 Braintree, MA 02184 Russell L. Scalfano Group Vice None Suite 201 President-Illinois/Indiana/Kentucky 101 Plaza East Blvd. Evansville, IN 47715 William G. Scholz Group Vice None Suite 205 President-Arizona/Las Vegas 7333 E Doubletree Ranch Rd Scottsdale, AZ 85258 Stuart A. Sedlacek Senior Vice President and Chief None IDS Tower 10 Financial Officer Minneapolis, MN 55440 Donald K. Shanks Vice President-Property Casualty None IDS Tower 10 Minneapolis, MN 55440 F. Dale Simmons Vice President-Senior Portfolio None IDS Tower 10 Manager, Insurance Investments Minneapolis, MN 55440 Judy P. Skoglund Vice President -Quality and None IDS Tower 10 Service Support Minneapolis, MN 55440 William A. Smith Vice President and None IDS Tower 10 Controller-Private Client Group Minneapolis, MN 55440 James B. Solberg Group Vice President-Eastern None 466 Westdale Mall Iowa Area Cedar Rapids, IA 52404 Bridget Sperl Vice President-Geographic None IDS Tower 10 Service Teams Minneapolis, MN 55440 Paul J. Stanislaw Group Vice President-Southern None Suite 1100 California Two Park Plaza Irvine, CA 92714 Lisa A. Steffes Vice President - Cardmember None IDS Tower 10 Initiatives Minneapolis, MN 55440 Lois A. Stilwell Group Vice President-Outstate None Suite 433 Minnesota Area/ North 9900 East Bren Road Dakota/Western Wisconsin Minnetonka, MN 55343 William A. Stoltzmann Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 James J. Strauss Vice President and General None IDS Tower 10 Auditor Minneapolis, MN 55440 Jeffrey J. Stremcha Vice President-Information None IDS Tower 10 Resource Management/ISD Minneapolis, MN 55440 Barbara Stroup Stewart Vice President - Channel None IDS Tower 10 Development Minneapolis, MN 55440 Craig P. Taucher Group Vice None Suite 150 President-Orlando/Jacksonville 4190 Belfort Road Jacksonville, FL 32216 Neil G. Taylor Group Vice None Suite 425 President-Seattle/Tacoma 101 Elliott Avenue West Seattle, WA 98119 Peter S. Velardi Group Vice None Suite 180 President-Atlanta/Birmingham 1200 Ashwood Parkway Atlanta, GA 30338 Charles F. Wachendorfer Group Vice President - Detroit None 8115 East Jefferson Avenue Metro Detroit, MI 48214 Wesley W. Wadman Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Donald F. Weaver Group Vice President - Greater None 3500 Market Street, Suite 200 Pennsylvania Camp Hill, PA 17011 Norman Weaver Jr. Senior Vice President-Field None 1010 Main St. Suite 2B Management Huntington Beach, CA 92648 Michael L. Weiner Vice President-Tax Research and None IDS Tower 10 Audit Minneapolis, MN 55440 Lawrence J. Welte Vice President-Investment None IDS Tower 10 Administration Minneapolis, MN 55440 Jeffry M. Welter Vice President-Equity and Fixed None IDS Tower 10 Income Trading Minneapolis, MN 55440 Thomas L. White Group Vice President-Cleveland None Suite 200 Metro 28601 Chagrin Blvd. Woodmere, OH 44122 Eric S. Williams Group Vice President-Virginia None Suite 250 3951 Westerre Parkway Richmond, VA 23233 William J. Williams Group Vice President-Western None Two North Tamiami Trail Florida Suite 702 Sarasota, FL 34236 Edwin M. Wistrand Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Michael D. Wolf Vice President- Senior None IDS Tower 10 Portfolio Manager Minneapolis, MN 55440 Michael R. Woodward Senior Vice President-Field None 32 Ellicott St Management Suite 100 Batavia, NY 14020
Item 29(c). Not applicable. Item 30. Location of Accounts and Records American Express Financial Corporation IDS Tower 10 Minneapolis, MN 55440 Item 31. Management Services Not Applicable. Item 32. Undertakings (a) Not Applicable. (b) Not Applicable. (c) The Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, IDS Selective Fund, Inc. certifies that it meets the requirements for the effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and State of Minnesota on the 28th day of July, 1998 IDS SELECTIVE FUND, INC. by /s/ William R. Pearce** William R. Pearce, Chief Executive Officer by /s/ Mathew N. Karstetter, Treasurer Mathew N. Karstetter, Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 28th day of July, 1998 Signatures Capacity /s/ William R. Pearce* Chairman of the Board William R. Pearce /s/ H. Brewster Atwater, Jr.* Director H. Brewster Atwater, Jr. /s/ Lynne V. Cheney* Director Lynne V. Cheney /s/ William H. Dudley* Director William H. Dudley /s/ David R. Hubers* Director David R. Hubers /s/ Heinz F. Hutter* Director Heinz F. Hutter /s/ Anne P. Jones* Director Anne P. Jones Signatures Capacity /s/ Alan K. Simpson* Director Alan K. Simpson /s/ Edson W. Spencer* Director Edson W. Spencer /s/ John R. Thomas* Director John R. Thomas /s/ Wheelock Whitney* Director Wheelock Whitney /s/ C. Angus Wurtele* Director C. Angus Wurtele *Signed pursuant to Directors' Power of Attorney dated January 7, 1998 is filed electronically as Exhibit 19(a) to Registrant's Post-Effective Amendment No. 86 by: /s/Leslie L. Ogg Leslie L. Ogg **Signed pursuant to Officers' Power of Attorney dated November 1, 1995, filed electronically as Exhibit 19(b) to Registrant's Post-Effective Amendment No. 83 to Registration Statement No. 2-10700 by: /s/Leslie L. Ogg Leslie L. Ogg SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, INCOME TRUST consents to the filing of this Amendment to the Registration Statement of IDS Selective Fund, Inc. signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and State of Minnesota on the 28th day of July, 1998. INCOME TRUST By /s/ William R. Pearce* William R. Pearce Chief Executive Officer By /s/ Mathew N. Karstetter Mathew N. Karstetter Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 28th day of July, 1998. Signatures Capacity /s/ William R. Pearce* Chairman of the Board William R. Pearce /s/ H. Brewster Atwater, Jr.* Trustee H. Brewster Atwater, Jr. /s/ Lynne V. Cheney* Trustee Lynne V. Cheney /s/ William H. Dudley* Trustee William H. Dudley /s/ David R. Hubers* Trustee David R. Hubers /s/ Heinz F. Hutter* Trustee Heinz F. Hutter /s/ Anne P. Jones* Trustee Anne P. Jones Signatures Capacity /s/ Edson W. Spencer Trustee Edson W. Spencer /s/ Alan K. Simpson Trustee Alan K. Simpson /s/ John R. Thomas* Trustee John R. Thomas /s/ Wheelock Whitney* Trustee Wheelock Whitney /s/ C. Angus Wurtele* Trustee C. Angus Wurtele * Signed pursuant to Trustees Power of Attorney dated January 8, 1997, filed electronically herewith as Exhibit 19(a) to Registrant's Post-Effective Amendment No. 86 by: /s/ Leslie L. Ogg Leslie L. Ogg ** Signed pursuant to Officers' Power of Attorney dated April 11, 1996, filed electronically as Exhibit 19(d) to Registrant's Post-Effective Amendment No. 85 to Registration Statement No. 2-10700 by: /s/Leslie L. Ogg Leslie L. Ogg CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 86 TO REGISTRATION STATEMENT NO. 2-10700 This Post-Effective Amendment comprises the following papers and documents: The facing sheet. The cross-reference page. Part A. The prospectus. Part B. Statement of Additional Information. Financial Statements. Part C. Other information. Exhibits. The signatures. EX-99 2 EXHIBIT INDEX IDS Selective Fund, Inc. File No. 2-10700/811-499 EXHIBIT INDEX Exhibit 9b: Transfer Agency Agreement dated January 1, 1998 Exhibit 10: Opinion and Consent of Counsel Exhibit 11: Consent of Independent Auditors Exhibit 17: Financial Data Schedules Exhibit 19a: Directors/Trustees Power of Attorney dated January 7, 1998 Exhibit 19c: Trustees Power of Attorney dated January 7, 1998 EX-99.9B-TRANS 3 TRANSAGMT TRANSFER AGENCY AGREEMENT AGREEMENT dated as of January 1, 1998, between IDS Selective Fund, Inc., a Minnesota corporation, (the "Company" or "Fund"), and American Express Client Service Corporation (the "Transfer Agent"), a Minnesota corporation. In consideration of the mutual promises set forth below, the Company and the Transfer Agent agree as follows: 1. Appointment of the Transfer Agent. The Company hereby appoints the Transfer Agent, as transfer agent for its shares and as shareholder servicing agent for the Company, and the Transfer Agent accepts such appointment and agrees to perform the duties set forth below. 2. Compensation. The Company will compensate the Transfer Agent for the performance of its obligations as set forth in Schedule A. Schedule A does not include out-of-pocket disbursements of the Transfer Agent for which the Transfer Agent shall be entitled to bill the Company separately. The Transfer Agent will bill the Company monthly. The fee provided for hereunder shall be paid in cash by the Company to the Transfer Agent within five (5) business days after the last day of each month. Out-of-pocket disbursements shall include, but shall not be limited to, the items specified in Schedule B. Reimbursement by the Company for expenses incurred by the Transfer Agent in any month shall be made as soon as practicable after the receipt of an itemized bill from the Transfer Agent. Any compensation jointly agreed to hereunder may be adjusted from time to time by attaching to this Agreement a revised Schedule A, dated and signed by an officer of each party. 3. Documents. The Company will furnish from time to time such certificates, documents or opinions as the Transfer Agent deems to be appropriate or necessary for the proper performance of its duties. 4. Representations of the Company and the Transfer Agent. (a) The Company represents to the Transfer Agent that all outstanding shares are validly issued, fully paid and non-assessable by the Company. When shares are hereafter issued in accordance with the terms of the Company's Articles of Incorporation and its By-laws, such shares shall be validly issued, fully paid and non-assessable by the Company. (b) The Transfer Agent represents that it is registered under Section 17A(c) of the Securities Exchange Act of 1934. The Transfer Agent agrees to maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this agreement and to comply with all applicable laws. 5. Duties of the Transfer Agent. The Transfer Agent shall be responsible, separately and through its subsidiaries or affiliates, for the following functions: (a) Sale of Fund Shares. (1) On receipt of an application and payment, wired instructions and payment, or payment identified as being for the account of a shareholder, the Transfer Agent will deposit the payment, prepare and present the necessary report to the Custodian and record the purchase of shares in a timely fashion in accordance with the terms of the Fund's prospectus. All shares shall be held in book entry form and no certificate shall be issued unless the Fund is permitted to do so by its prospectus and the purchaser so requests. (2) On receipt of notice that payment was dishonored, the Transfer Agent shall stop redemptions of all shares owned by the purchaser related to that payment, place a stop payment on any checks that have been issued to redeem shares of the purchaser and take such other action as it deems appropriate. (b) Redemption of Fund Shares. On receipt of instructions to redeem shares in accordance with the terms of the Fund's prospectus, the Transfer Agent will record the redemption of shares of the Fund, prepare and present the necessary report to the Custodian and pay the proceeds of the redemption to the shareholder, an authorized agent or legal representative upon the receipt of the monies from the Custodian. (c) Transfer or Other Change Pertaining to Fund Shares. On receipt of instructions or forms acceptable to the Transfer Agent to transfer the shares to the name of a new owner, change the name or address of the present owner or take other legal action, the Transfer Agent will take such action as is requested. (d) Exchange of Fund Shares. On receipt of instructions to exchange the shares of the Fund for the shares of another fund in the IDS MUTUAL FUND GROUP or other American Express Financial Corporation product in accordance with the terms of the prospectus, the Transfer Agent will process the exchange in the same manner as a redemption and sale of shares. (e) Right to Seek Assurance. The Transfer Agent may refuse to transfer, exchange or redeem shares of the Fund or take any action requested by a shareholder until it is satisfied that the requested transaction or action is legally authorized or until it is satisfied there is no basis for any claims adverse to the transaction or action. It may rely on the provisions of the Uniform Act for the Simplification of Fiduciary Security Transfers or the Uniform Commercial Code. The Company shall indemnify the Transfer Agent for any act done or omitted to be done in reliance on such laws or for refusing to transfer, exchange or redeem shares or taking any requested action if it acts on a good faith belief that the transaction or action is illegal or unauthorized. (f) Shareholder Records, Reports and Services. (1) The Transfer Agent shall maintain all shareholder accounts, which shall contain all required tax, legally imposed and regulatory information; shall provide shareholders, and file with federal and state agencies, all required tax and other reports pertaining to shareholder accounts; shall prepare shareholder mailing lists; shall cause to be printed and mailed all required prospectuses, annual reports, semiannual reports, statements of additional information (upon request), proxies and other mailings to shareholders; and shall cause proxies to be tabulated. (2) The Transfer Agent shall respond to all valid inquiries related to its duties under this Agreement. (3) The Transfer Agent shall create and maintain all records in accordance with all applicable laws, rules and regulations, including, but not limited to, the records required by Section 31(a) of the Investment Company Act of 1940. (g) Dividends and Distributions. The Transfer Agent shall prepare and present the necessary report to the Custodian and shall cause to be prepared and transmitted the payment of income dividends and capital gains distributions or cause to be recorded the investment of such dividends and distributions in additional shares of the Fund or as directed by instructions or forms acceptable to the Transfer Agent. (h) Confirmations and Statements. The Transfer Agent shall confirm each transaction either at the time of the transaction or through periodic reports as may be legally permitted. (i) Lost or Stolen Checks. The Transfer Agent will replace lost or stolen checks issued to shareholders upon receipt of proper notification and will maintain any stop payment orders against the lost or stolen checks as it is economically desirable to do. (j) Reports to Company. The Transfer Agent will provide reports pertaining to the services provided under this Agreement as the Company may request to ascertain the quality and level of services being provided or as required by law. (k) Other Duties. The Transfer Agent may perform other duties for additional compensation if agreed to in writing by the parties to this Agreement. 6. Ownership and Confidentiality of Records. The Transfer Agent agrees that all records prepared or maintained by it relating to the services to be performed by it under the terms of this Agreement are the property of the Company and may be inspected by the Company or any person retained by the Company at reasonable times. The Company and Transfer Agent agree to protect the confidentiality of those records. 7. Action by Board and Opinion of Counsel. The Transfer Agent may rely on resolutions of the Board of Directors (the "Board") or the Executive Committee of the Board and on opinion of counsel for the Company. 8. Duty of Care. It is understood and agreed that, in furnishing the Company with the services as herein provided, neither the Transfer Agent, nor any officer, director or agent thereof shall be held liable for any loss arising out of or in connection with their actions under this Agreement so long as they act in good faith and with due diligence, and are not negligent or guilty of any willful misconduct. It is further understood and agreed that the Transfer Agent may rely upon information furnished to it reasonably believed to be accurate and reliable. In the event the Transfer Agent is unable to perform its obligations under the terms of this Agreement because of an act of God, strike or equipment or transmission failure reasonably beyond its control, the Transfer Agent shall not be liable for any damages resulting from such failure. 9. Term and Termination. This Agreement shall become effective on the date first set forth above (the "Effective Date") and shall continue in effect from year to year thereafter as the parties may mutually agree; provided that either party may terminate this Agreement by giving the other party notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. In the event such notice is given by the Company, it shall be accompanied by a vote of the Board, certified by the Secretary, electing to terminate this Agreement and designating a successor transfer agent or transfer agents. Upon such termination and at the expense of the Company, the Transfer Agent will deliver to such successor a certified list of shareholders of the Fund (with name, address and taxpayer identification or Social Security number), a historical record of the account of each shareholder and the status thereof, and all other relevant books, records, correspondence, and other data established or maintained by the Transfer Agent under this Agreement in the form reasonably acceptable to the Company, and will cooperate in the transfer of such duties and responsibilities, including provisions for assistance from the Transfer Agent's personnel in the establishment of books, records and other data by such successor or successors. 10. Amendment. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. 11. Subcontracting. The Company agrees that the Transfer Agent may subcontract for certain of the services described under this Agreement with the understanding that there shall be no diminution in the quality or level of the services and that the Transfer Agent remains fully responsible for the services. Except for out-of-pocket expenses identified in Schedule B, the Transfer Agent shall bear the cost of subcontracting such services, unless otherwise agreed by the parties. 12. Miscellaneous. (a) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other party. (b) This Agreement shall be governed by the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers as of the day and year written above. IDS SELECTIVE FUND, INC. By: /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS CLIENT SERVICE CORPORATION By: /s/ Barry J. Murphy Barry J. Murphy President Schedule A IDS SELECTIVE FUND, INC. FEE The annual per account fee for services under this agreement, accrued daily and payable monthly, is as follows: Class A Class B Class Y $15.50 $16.50 $15.50 Schedule B OUT-OF-POCKET EXPENSES The Company shall reimburse the Transfer Agent monthly for the following out-of-pocket expenses: o typesetting, printing, paper, envelopes, postage and return postage for proxy soliciting material, and proxy tabulation costs o printing, paper, envelopes and postage for dividend notices, dividend checks, records of account, purchase confirmations, exchange confirmations and exchange prospectuses, redemption confirmations, redemption checks, confirmations on changes of address and any other communication required to be sent to shareholders o typesetting, printing, paper, envelopes and postage for prospectuses, annual and semiannual reports, statements of additional information, supplements for prospectuses and statements of additional information and other required mailings to shareholders o stop orders o outgoing wire charges o other expenses incurred at the request or with the consent of the Company EX-99.10-OPINCOUN 4 OPINION AND CONSENT OF COUNSEL July 28, 1998 IDS Selective Income Fund, Inc. IDS Tower 10 Minneapolis, Minnesota 55440-0010 Gentlemen: I have examined the Articles of Incorporation and the By-Laws of the Company and all necessary certificates, permits, minute books, documents and records of the Company, and the applicable statutes of the State of Minnesota, and it is my opinion: (a) That the Company is a corporation duly organized and existing under the laws of the State of Minnesota with an authorized capital stock of 10,000,000,000 shares, all of $.01 par value, and that such shares may be issued as full or fractional shares; (b) That all such authorized shares are, under the laws of the State of Minnesota, redeemable as provided in the Articles of Incorporation of the Company and upon redemption shall have the status of authorized and unissued shares; (c) That the Company registered on June 13, 1978 an indefinite number of shares pursuant to Rule 24f-2; (d) That shares which were sold at not less than their par value and in accordance with applicable federal and state securities laws were legally issued, fully paid and nonassessable. I hereby consent that the foregoing opinion may be used in connection with this Post-Effective Amendment. Very truly yours, /s/Leslie L. Ogg Leslie L. Ogg Attorney at Law 901 S. Marquette Ave., Suite 2810 Minneapolis, Minnesota 55402-3268 EX-99.11-AUDCONS 5 CONSENT OF INDEPENDENT AUDITORS Independent auditors' consent The board and shareholders IDS Selective Fund, Inc.: The board of trustees and unitholders Income Trust: Quality Income Portfolio We consent to the use of our reports incorporated herein by reference and to the references to our Firm under the headings "Financial highlights" in Part A and "INDEPENDENT AUDITORS" in Part B of the Registration Statement. KPMG Peat Marwick LLP Minneapolis, Minnesota July 28, 1998 EX-27 6 FINANCIAL DATA SCHEDULES
6 1 IDS SELECTIVE FUND CLASS A YEAR MAY-31-1998 MAY-31-1998 0 0 0 1606236566 0 1606236566 0 0 571289 571289 0 1524536630 133367536 142906961 437407 0 0 6909688 87600928 1231376451 807190 112664228 0 14430298 99041120 (2534220) 59144624 155651524 0 79639635 10132709 0 10726249 27574808 7309134 (8537280) 2115568 8623089 0 0 6469702 0 14708779 1267281945 9.00 .57 .31 .58 .07 0 9.23 .86 0 0
EX-27 7 FINANCIAL DATA SCHEDULE
6 2 IDS SELECTIVE FUND CLASS B YEAR MAY-31-1998 MAY-31-1998 0 0 0 1606236566 0 1606236566 0 0 571289 571289 0 1524536630 16582278 14055085 437407 0 0 6909688 87600928 153099252 807190 112664228 0 14430298 99041120 (2534220) 59144624 155651524 0 7660457 1113787 0 5833712 4171964 865445 (8537280) 2115568 8623089 0 0 804389 0 14708779 138288344 9.00 .50 .31 .51 .07 0 9.23 1.62 0 0
EX-27 8 FINANCIAL DATA SCHEDULE
6 3 IDS SELECTIVE FUND CLASS Y YEAR MAY-31-1998 MAY-31-1998 0 0 0 1606236566 0 1606236566 0 0 571289 571289 0 1524536630 23955503 22426340 437407 0 0 6909688 87600928 221189574 807190 112664228 0 14430298 99041120 (2534220) 59144624 155651524 0 13462696 1708554 0 8657520 8780164 1651867 (8537280) 2115568 8623089 0 0 1162139 0 14708779 211557723 9.00 .58 .31 .59 .07 0 9.23 .79 0 0
EX-27 9 FINANCIAL DATA SCHEDULES
6 4 QUALITY INCOME PORTFOLIO YEAR MAY-31-1998 MAY-31-1998 1495915577 1583548708 23256430 69270778 0 1676075916 0 0 69159476 69159476 0 0 0 0 0 0 0 0 0 1606916440 807500 112711954 0 8439511 105079943 (2535432) 59167525 161712036 0 0 0 0 0 0 0 (8737629) 0 0 0 0 8256904 0 8446668 0 0 0 0 0 0 0 0 0 0 0
EX-99.19A-DIRPOA 10 DIRECTORS DIRECTORS/TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as directors and trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 with the Securities and Exchange Commission:
1933 Act 1940 Act Reg. Number Reg. Number IDS Bond Fund, Inc. 2-51586 811-2503 IDS California Tax-Exempt Trust 33-5103 811-4646 IDS Discovery Fund, Inc. 2-72174 811-3178 IDS Equity Select Fund, Inc. 2-13188 811-772 IDS Extra Income Fund, Inc. 2-86637 811-3848 IDS Federal Income Fund, Inc. 2-96512 811-4260 IDS Global Series, Inc. 33-25824 811-5696 IDS Growth Fund, Inc. 2-38355 811-2111 IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901 IDS International Fund, Inc. 2-92309 811-4075 IDS Investment Series, Inc. 2-11328 811-54 IDS Managed Retirement Fund, Inc. 2-93801 811-4133 IDS Market Advantage Series, Inc. 33-30770 811-5897 IDS Money Market Series, Inc. 2-54516 811-2591 IDS New Dimensions Fund, Inc. 2-28529 811-1629 IDS Precious Metals Fund, Inc. 2-93745 811-4132 IDS Progressive Fund, Inc. 2-30059 811-1714 IDS Selective Fund, Inc. 2-10700 811-499 IDS Special Tax-Exempt Series Trust 33-5102 811-4647 IDS Stock Fund, Inc. 2-11358 811-498 IDS Strategy Fund, Inc. 2-89288 811-3956 IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686 IDS Tax-Free Money Fund, Inc. 2-66868 811-3003 IDS Utilities Income Fund, Inc. 33-20872 811-5522
hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Acts and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 7th day of January, 1998. /s/ H. Brewster Atwater, Jr. /s/ William R. Pearce H. Brewster Atwater, Jr. William R. Pearce /s/ Lynne V. Cheney /s/ Alan K. Simpson Lynne V. Cheney Alan K. Simpson /s/ William H. Dudley /s/ Edson W. Spencer William H. Dudley Edson W. Spencer /s/ David R. Hubers /s/ John R. Thomas David R. Hubers John R. Thomas /s/ Heinz F. Hutter /s/ Wheelock Whitney Heinz F. Hutter Wheelock Whitney /s/ Anne P. Jones /s/ C. Angus Wurtele Anne P. Jones C. Angus Wurtele EX-99.19C-TRUSPOA 11 TRUSTEES TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Investment Company Act of 1940 with the Securities and Exchange Commission: 1940 Act Reg. Number Growth Trust 811-07395 Growth and Income Trust 811-07393 Income Trust 811-07307 Tax-Free Income Trust 811-07397 World Trust 811-07399 hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Act and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 7th day of January, 1998. /s/ H. Brewster Atwater, Jr. /s/ William R. Pearce H. Brewster Atwater, Jr. William R. Pearce /s/ Lynne V. Cheney /s/ Alan K. Simpson Lynne V. Cheney Alan K. Simpson /s/ William H. Dudley /s/ Edson W. Spencer William H. Dudley Edson W. Spencer /s/ David R. Hubers /s/ John R. Thomas David R. Hubers John R. Thomas /s/ Heinz F. Hutter /s/ Wheelock Whitney Heinz F. Hutter Wheelock Whitney /s/ Anne P. Jones /s/ C. Angus Wurtele Anne P. Jones C. Angus Wurtele -----END PRIVACY-ENHANCED MESSAGE-----