-----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, IR8+QTR9VAJNA1RVD20ArFSx2LU7wUQSNhJVdJaEh1/DOR1oBYeDu795CrWbnu2/ IBZLLSJr6K/oJMNZiijqLA== 0000820027-00-000034.txt : 20000202 0000820027-00-000034.hdr.sgml : 20000202 ACCESSION NUMBER: 0000820027-00-000034 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000121 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: N-30D SEC ACT: SEC FILE NUMBER: 811-00499 FILM NUMBER: 510765 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 N-30D 1 AXP (SM) Selective Fund 1999 SEMIANNUAL REPORT American Express(R) Funds (icon of) clock AXP Selective Fund seeks to provide shareholders with current income and preservation of capital by investing in investment-grade bonds. A Quest for Quality Not all bonds are created equal. A bond's quality depends on the ability of its issuers to make the interest and principal payments owed to the bondholders. The quality is determined by independent rating agencies, which assign a credit rating (in the form of a letter grade) to each bond. Since its establishment in 1945, AXPSelective Fund has concentrated its investments in the four highest investment grades. Along the way, investors have enjoyed a steady stream of interest income with minimum risk to their principal. Contents From the Chairman 3 From the Portfolio Manager 4 Fund Facts 5 The 10 Largest Holdings 6 Financial Statements (Fund) 7 Notes to Financial Statements (Fund) 10 Financial Statements (Portfolio) 16 Notes to Financial Statements (Portfolio)19 Investments in Securities 24 (picture of) Arne H. Carlson Arne H. Carlson Chairman of the board From the Chariman We are in an extraordinary period for investing in financial assets, with many stocks at their all-time highs. Looking at year 2000, American Express Financial Corporation, the Fund's investment manager, expects the economy to continue to grow and long-term interest rates to rise only slightly. This is a great time to take a close look at your goals and investments. We encourage you to: o Consult a professional investment adviser who can help you cut through mountains of data. o Set financial goals that extend beyond those achievable through retirement plans of your employer. o Learn as much as you can about your current investments. The portfolio manager's letter that follows provides a review of the Fund's investment strategies and performance. The annual report contains other valuable information as well. The Fund's prospectus describes its investment objectives and how it intends to achieve those objectives. As experienced investors know, information is vital to making good investment decisions. So, take a moment and decide again whether the Fund's investment objectives and management style fit with your other investments to help you reach your financial goals. And make it a practice on a regular basis to assess your investment options. Sincerely, Arne H. Carlson (picture of) Ray Goodner Ray Goodner Portfolio manager From the Portfolio Manager The U.S. bond market struggled for much of the past six months, as concern about potentially higher inflation led to a rise in interest rates. AXP Selective Fund did manage to finish in positive territory, however; its Class A shares produced a total return (excluding the sales charge) of 0.13% for the first half of the fiscal year -- June through November 1999. With the economy continuing to grow at a rapid rate, unemployment at a low level and the price of oil more than doubling in a matter of months, the unwelcome specter of higher inflation made bond investors uneasy throughout most of the period. Evidently, the Federal Reserve Board (the Fed) saw some threat to the still-tame inflation environment, too, as it raised short-term interest rates three times over the six months -- in June, August and November -- in an effort to cool off the economy and, ultimately, relieve whatever upward pressure might have been building under consumer prices. RATES UP, BONDS DOWN The end result was that interest rates across the maturity range crept higher, pushing down bond prices in the process. Compounding the situation was a heavy supply of corporate bonds, which further eroded the foundation under prices. Fortunately, during the autumn interest rates leveled off, creating a better tone in the market and enabling prices to generally hold their ground. Given the difficult environment, I maintained a defensive structure in the portfolio. This centered on reducing the duration to provide some protection against rising interest rates. (Duration, a function of the average maturity of the securities in the portfolio, influences the Fund's sensitivity to interest-rate changes. In general, the longer the duration, the greater the sensitivity.) In addition, I held a higher-than-normal level of cash reserves. Looking at bond sectors, the biggest area of investment was high-grade corporate bonds, followed by U.S. Treasury and mortgage-backed securities. Among that group, on a relative basis corporates and mortgages provided the best performance for the Fund. I also held some foreign bonds denominated in U.S. dollars. While they amounted to a modest portion of the portfolio, their strong price gains did have a noticeably positive effect on performance. Although the first half of the fiscal year was disappointing on an absolute basis, I'm encouraged that the bond market held up as well as it did given the conditions and that inflation has yet to show clear signs of heading higher. Looking ahead, while the Fed could raise short-term interest rates somewhat higher over the near term, I think longer-term rates may be relatively stable and perhaps even decline before the fiscal year is over. If so, the bond market and, ultimately, the Fund are likely to experience improving performance. Ray Goodner Fund Facts Class A -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1999 $ 8.70 May 31, 1999 $ 8.96 Decrease $ 0.26 Distributions -- June 1, 1999 - Nov. 30, 1999 From income $ 0.26 From capital gains $ -- Total distributions $ 0.26 Total return* +0.13%** Class B -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1999 $ 8.70 May 31, 1999 $ 8.96 Decrease $ 0.26 Distributions -- June 1, 1999 - Nov. 30, 1999 From income $ 0.23 From capital gains $ -- Total distributions $ 0.23 Total return* -0.26%** Class Y -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1999 $ 8.70 May 31, 1999 $ 8.96 Decrease $ 0.26 Distributions -- June 1, 1999 - Nov. 30, 1999 From income $ 0.27 From capital g $ -- Total distribu $ 0.27 Total return* +0.19%** *The prospectus discusses the effect of sales charges, if any, on the various classes. **The total return is a hypothetical investment in the Fund with all distributions reinvested. The 10 Largest Holdings Percent Value (of net assets) (as of Nov. 30, 1999) Daimler-Benz North America 7.38% 2006 1.29% $18,995,702 Dayton Hudson 7.88% 2023 1.21 17,840,827 New York Telephone 9.38% 2031 1.01 14,852,142 PDV America 7.88% 2003 1.01 14,766,831 Greenpoint Bank 6.70% 2002 1.00 14,727,000 ARAMARK Services 6.75% 2004 .98 14,444,925 AT&T 8.63% 2031 .98 14,427,283 GMAC 7.00% 2000 .97 14,333,915 Bayerische Landesbank 5.63% 2001 .92 13,586,092 AETNA Services 6.38% 2003 .90 13,243,507 Excludes U.S. Treasury and government agencies holdings. For further detail about these holdings, please refer to the section entitled "Investments in Securities." The 10 holdings listed here make up 10.27% of net assets (icon of) pie chart
Financial Statements Statement of assets and liabilities AXP Selective Fund, Inc. Nov. 30, 1999 (Unaudited) Assets Investments in Quality Income Portfolio (Note 1) $1,467,934,442 -------------- Liabilities Dividends payable to shareholders 1,948,374 Accrued distribution fee 13,116 Accrued service fee 479 Accrued transfer agency fee 6,870 Accrued administrative services fee 1,951 Other accrued expenses 197,991 ------- Total liabilities 2,168,781 --------- Net assets applicable to outstanding capital stock $1,465,765,661 ============== Represented by Capital stock-- $.01 par value (Note 1) $ 1,683,944 Additional paid-in capital 1,476,244,862 Undistributed net investment income 256,730 Accumulated net realized gain (loss) 18,820,641 Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (31,240,516) ----------- Total -- representing net assets applicable to outstanding capital stock $1,465,765,661 ============== Net assets applicable to outstanding shares: Class A $1,085,897,135 Class B $ 205,762,175 Class Y $ 174,106,351 Net asset value per share of outstanding capital stock: Class A shares 124,745,004 $ 8.70 Class B shares 23,638,433 $ 8.70 Class Y shares 20,011,012 $ 8.70 ---------- -------------- See accompanying notes to financial statements.
Statement of operations AXP Selective Fund, Inc. Six months ended Nov. 30, 1999 (Unaudited) Investment income Income: Dividends $ 403,551 Interest 52,815,799 Less foreign taxes withheld (16,190) ------- Total income 53,203,160 ---------- Expenses (Note 2): Expenses allocated from Quality Income Portfolio 4,013,282 Distribution fee Class A 1,171,573 Class B 1,015,758 Transfer agency fee 920,522 Incremental transfer agency fee Class A 62,470 Class B 20,729 Service fee Class A 169,670 Class B 31,818 Class Y 94,785 Administrative services fees and expenses 377,345 Compensation of board members 4,445 Printing and postage 60,243 Registration fees 50,333 Audit fees 5,125 Other 2,992 ----- Total expenses 8,001,090 Earnings credits on cash balances (Note 2) (28,452) ------- Total net expenses 7,972,638 --------- Investment income (loss) -- net 45,230,522 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (7,667,137) Financial futures contracts 4,799,422 Foreign currency transactions (49,325) ------- Net realized gain (loss) on investments (2,917,040) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (40,702,883) ----------- Net gain (loss) on investments and foreign currencies (43,619,923) ----------- Net increase (decrease) in net assets resulting from operations $ 1,610,599 ============= See accompanying notes to financial statements.
Statements of changes in net assets AXP Selective Fund, Inc. Nov. 30, 1999 May 31, 1999 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss)-- net $ 45,230,522 $ 93,661,839 Net realized gain (loss) on investments (2,917,040) 41,649,023 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (40,702,883) (78,138,561) ----------- ----------- Net increase (decrease) in net assets resulting from operations 1,610,599 57,172,301 --------- ---------- Distributions to shareholders from: Net investment income Class A (34,381,212) (70,803,729) Class B (5,568,298) (9,096,813) Class Y (5,815,930) (13,407,056) Net realized gain Class A -- (9,639,607) Class B -- (1,455,785) Class Y -- (1,906,262) ----------- ------------- Total distributions (45,765,440) (106,309,252) ----------- ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 54,444,592 164,324,490 Class B shares 39,156,864 106,562,827 Class Y shares 22,493,630 103,567,821 Reinvestment of distributions at net asset value Class A shares 24,283,867 60,263,276 Class B shares 4,748,897 9,546,709 Class Y shares 5,606,450 15,313,318 Payments for redemptions Class A shares (130,578,432) (249,392,529) Class B shares (Note 2) (42,467,577) (52,552,712) Class Y shares (44,364,330) (137,564,985) ----------- ------------ Increase (decrease) in net assets from capital share transactions (66,676,039) 20,068,215 ----------- ---------- Total increase (decrease) in net assets (110,830,880) (29,068,736) Net assets at beginning of period 1,576,596,541 1,605,665,277 ------------- ------------- Net assets at end of period $1,465,765,661 $1,576,596,541 ============== ============== Undistributed net investment income $ 256,730 $ 791,648 -------------- -------------- See accompanying notes to financial statements.
Notes to Financial Statements AXP Selective Fund, Inc. (Unaudited as to Nov. 30, 1999) 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. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge and automatically convert to Class A shares during the ninth calendar year of ownership. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental 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 The Fund invests all of its assets in Quality Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. 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 Portfolio's net assets. The percentage of the Portfolio owned by the Fund as of Nov. 30, 1999 was 99.95%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to generally accepted accounting principles requires management to make estimates (e.g., on assets and liabilities) that could differ from actual results. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred 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. Dividends to shareholders Annual 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: The Fund has an agreement with American Express Financial Corporation (AEFC) to provide administrative services. Under an 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. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees 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 $19.50 o Class B $20.50 o Class Y $17.50 The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution (the Plan), the Fund pays a distribution fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B shares. The Plan went into effect July 1, 1999. Under terms of a prior Plan and Agreement of Distribution (the Prior Plan) that ended June 30, 1999, the Fund paid a distibution fee for Class B shares at an annual rate up to 0.75% of average daily net assets. The Prior Plan was not effective with respect to Class A shares. Under a Shareholder Service Agreement, the Fund's Class Y shares pay a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Under terms of a prior agreement that ended June 30, 1999, the Fund paid a shareholder service fee for Class A and Class B shares at a rate of 0.175% of average daily net assets. Effective July 1, 1999, the agreement for Class A and Class B shares was converted to the Plan and Agreement of Distribution discussed above. Sales charges received by the Distributor for distributing Fund shares were $984,931 for Class A and $136,360 for Class B for the six months ended Nov. 30, 1999. During the six months ended Nov. 30, 1999, the Fund's transfer agency fees were reduced by $28,452 as a result of earnings credits from overnight cash balances. 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows: Six months ended Nov. 30, 1999 Class A Class B Class Y Sold 6,194,114 4,447,921 2,556,735 Issued for reinvested distributions 2,764,911 540,829 638,869 Redeemed (14,857,234) (4,828,950) (5,036,425) ----------- ---------- ---------- Net increase (decrease) (5,898,209) 159,800 (1,840,821) Year ended May 31, 1999 Class A Class B Class Y Sold 17,815,988 11,571,189 11,212,661 Issued for reinvested distributions 6,549,613 1,038,289 1,668,598 Redeemed (27,089,924) (5,713,123) (14,984,989) ----------- ---------- ----------- Net increase (decrease) (2,724,323) 6,896,355 (2,103,730) 4. BANK BORROWINGS The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than five business days plus 367% of advances over five business days. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.05% per annum. The Fund had no borrowings outstanding during the six months ended Nov. 30, 1999.
5. FIANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. Fiscal period ended May 31, Per share income and capital changesa Class A 1999b 1999 1998 1997 1996c Net asset value, beginning of period $8.96 $9.23 $9.00 $9.00 $9.53 Income from investment operations: Net investment income (loss) .26 .54 .57 .59 .33 Net gains (losses) (both realized and unrealized) (.26) (.20) .31 .12 (.52) Total from investment operations -- .34 .88 .71 (.19) Less distributions: Dividends from net investment income (.26) (.54) (.58) (.58) (.31) Distributions from realized gains -- (.07) (.07) (.13) (.03) Total distributions (.26) (.61) (.65) (.71) (.34) Net asset value, end of period $8.70 $8.96 $9.23 $9.00 $9.00 Ratios/supplemental data Net assets, end of period (in millions) $1,086 $1,170 $1,231 $1,286 $1,408 Ratio of expenses to average daily net assetsd .95%e .89% .86% .88% .89%e Ratio of net investment income (loss) to average daily net assets 5.93%e 5.85% 6.20% 6.36% 6.27%e Portfolio turnover rate (excluding short-term securities) 28% 30% 20% 31% 18% Total returnf .13% 3.68% 10.15% 8.08% (2.03%) a For a share outstanding throughout the period. Rounded to the nearest cent. b Six months ended Nov. 30, 1999 (Unaudited). c The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. d Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. e Adjusted to an annual basis. f Total return does not reflect payment of a sales charge.
Fiscal period ended May 31, Per share income and capital changesa Class B Class Y 1999b 1999 1998 1997 1996c 1999b 1999 1998 1997 1996c Net asset value, beginning of period $8.96 $9.23 $9.00 $9.00 $9.53 $8.96 $9.23 $9.00 $9.00 $9.53 Income from investment operations: Net investment income (loss) .22 .47 .50 .52 .30 .26 .55 .58 .60 .34 Net gains (losses) (both realized and unrealized) (.25) (.20) .31 .12 (.52) (.25) (.20) .31 .12 (.52) Total from investment operations (.03) .27 .81 .64 (.22) .01 .35 .89 .72 (.18) Less distributions: Dividends from net investment income (.23) (.47) (.51) (.51) (.28) (.27) (.55) (.59) (.59) (.32) Distributions from realized gains -- (.07) (.07) (.13) (.03) -- (.07) (.07) (.13) (.03) Total distributions (.23) (.54) (.58) (.64) (.31) (.27) (.62) (.66) (.72) (.35) Net asset value, end of period $8.70 $8.96 $9.23 $9.00 $9.00 $8.70 $8.96 $9.23 $9.00 $9.00 Ratios/supplemental data Net assets, end of period (in millions) $206 $210 $153 $126 $108 $174 $196 $221 $202 $212 Ratio of expenses to average daily net assetsd 1.71%e 1.65% 1.62% 1.64% 1.63%e .80%e .81% .79% .72% .70%e Ratio of net investment income (loss) to average daily net assets 5.18%e 5.10% 5.44% 6.40% 5.56%e 6.07%e 5.93% 6.27% 7.02% 6.51%e Portfolio turnover rate (excluding short-term securities) 28% 30% 20% 31% 18% 28% 30% 20% 31% 18% Total returnf (.26%) 2.89% 9.32% 7.26% (2.04%) .19% 3.77% 10.21% 8.27% (1.96%) a For a share outstanding throughout the period. Rounded to the nearest cent. b Six months ended Nov. 30, 1999 (Unaudited). c The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. d Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. e Adjusted to an annual basis. f Total return does not reflect payment of a sales charge.
Financial Statements Statement of assets and liabilities Quality Income Portfolio Nov. 30, 1999 (Unaudited) Assets Investments in securities, at value (Note 1) (identified cost $1,517,888,430) $1,483,658,035 Dividends and accrued interest receivable 20,649,069 Receivable for investment securities sold 12,979 ------ Total assets 1,504,320,083 Liabilities Disbursements in excess of cash on demand deposit 43,646 Payable for investment securities purchased 35,572,815 Accrued investment management services fee 20,669 Other accrued expenses 2,568 ----- Total liabilities 35,639,698 ---------- Net assets $1,468,680,385 ============== See accompanying notes to financial statements.
Statement of operations Quality Income Portfolio Six months ended Nov. 30, 1999 (Unaudited) Investment income Income: Dividends $ 403,750 Interest 52,852,579 Less foreign taxes withheld (16,198) ------- Total income 53,240,131 ---------- Expenses (Note 2): Investment management services fee 3,972,412 Compensation of board members 5,578 Custodian fees 32,698 Audit fees 15,375 Other 39 -- Total expenses 4,026,102 Earnings credits on cash balances (Note 2) (10,828) - ------- Total net expenses 4,015,274 --------- Investment income (loss) -- net 49,224,857 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) (7,674,206) Financial future contracts 4,801,845 Foreign currency transactions (49,365) ------- Net realized gain (loss) on investments (2,921,726) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (40,719,315) ----------- Net gain (loss) on investments and foreign currencies (43,641,041) ----------- Net increase (decrease) in net assets resulting from operations $ 5,583,816 ============= See accompanying notes to financial statements.
Statements of changes in net assets Quality Income Portfolio Nov. 30, 1999 May 31, 1999 Six months ended Year ended (Unaudited) Operations Investment income (loss)-- net $ 49,224,857 $ 100,906,199 Net realized gain (loss) on investments (2,921,726) 41,663,256 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (40,719,315) (78,170,119) ----------- ----------- Net increase (decrease) in net assets resulting from operations 5,583,816 64,399,336 Net contributions (withdrawals) from partners (114,741,991) (93,477,216) ------------ ----------- Total increase (decrease) in net assets (109,158,175) (29,077,880) Net assets at beginning of period 1,577,838,560 1,606,916,440 ------------- ------------- Net assets at end of period $1,468,680,385 $1,577,838,560 ============== ============== See accompanying notes to financial statements.
Notes to Financial Statements Quality Income Portfolio (Unaudited as to Nov. 30, 1999) 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. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to generally accepted accounting principles requires management to make estimates (e.g., on assets and liabilities) that could differ from actual results. 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 that reflects fair value as quoted by dealers 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 To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends 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 as well as write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity for 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 being unable 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 when the option transaction expires or closes. 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 To gain exposure to or protect itself from market changes, 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 of 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. 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, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date 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 its contract obligations. Securities purchased on a when-issued basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment or when-issued basis can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's gross net assets the same as owned securities. The Porfolio designates cash or liquid high-grade short-term debt securities at least equal to the amount of its commitment. As of Nov. 30, 1999, the Porfolio had entered into outstanding when-issued or forward-commitments of $35,194,690. 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. As a "pass-through" entity, the Portfolio therefore 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. 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 an Investment Management Services Agreement with AEFC to manage 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 six months ended Nov. 30, 1999, the Portfolio's custodian fees were reduced by $10,828 as a result of earnings credits from overnight cash balances. The Portfolio also pays custodian fees to American Express Trust Company, an affiliate of AEFC. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $400,663,415 and $449,777,855, respectively, for the six months ended Nov. 30, 1999. For the same period, the portfolio turnover rate was 28%. Realized gains and losses are determined on an identified cost basis. 4. INTEREST RATE FUTURES CONTRACTS As of Nov. 30, 1999, investment is securities included securities valued at $13,078,753 that were pledged as collateral to cover initial margin deposit on 1,100 open sales contracts. The market value of the open sales contracts as of Nov. 30, 1999, was $102,368,750 with a net unrealized loss of $579,994. See "Summary of significant accounting policies."
Investments in Securities Quality Income Portfolio Nov. 30, 1999 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (92.1%) Issuer Coupon Principal Value(a) rate amount Government obligations (29.8%) Federal Republic of Germany (European Monetary Unit) 07-04-27 6.50% 10,000,000(b) $10,975,022 Overseas Private Investment U.S. Govt Guaranty Series 1996A 01-15-09 6.99 10,000,000 9,980,100 People's Republic of China (U.S. Dollar) 01-15-96 9.00 10,000,000(b) 9,501,890 Resolution Funding Corp Zero Coupon 04-15-16 8.05 47,000,000(c) 15,454,987 U.S. Treasury 02-15-00 5.88 25,000,000 25,023,658 08-15-00 6.00 11,400,000 11,421,410 11-15-01 7.50 109,000,000 111,950,706 02-15-04 5.88 8,000,000 7,947,834 05-15-04 7.25 25,000,000 26,046,823 08-15-04 7.25 26,800,000 27,963,278 05-15-06 6.88 31,150,000 32,170,047 11-15-16 7.50 128,370,000(i) 139,909,962 TIPS 01-15-07 3.38 8,050,000(h) 8,135,047 Total 436,480,764 Mortgage-backed securities (20.8%) Federal Home Loan Mtge Corp 07-01-16 8.00 418 425 01-01-17 8.00 3,390 3,460 03-01-17 8.50 83,317 86,051 06-01-17 8.50 52,758 54,687 04-01-20 9.00 1,001,484 1,049,675 04-01-21 9.00 825,123 868,442 03-01-22 8.50 1,819,174 1,883,409 08-01-22 8.50 1,800,670 1,863,135 06-01-24 7.50 7,717,037 7,721,822 02-01-25 8.00 3,148,607 3,199,771 Collateralized Mtge Obligation 09-01-19 8.50 83,091 85,973 Federal Housing Admin 01-01-24 7.43 8,634,693 8,453,904 Federal Natl Mtge Assn 11-01-02 10.00 76 78 06-15-09 6.38 33,000,000 32,017,589 04-01-14 6.50 17,803,989 17,420,898 12-01-14 6.50 15,000,000(j) 14,657,813 10-01-23 6.50 7,815,623 7,522,537 11-01-26 8.00 5,442,542 5,519,064 04-01-27 7.50 6,963,339 6,943,772 06-01-27 7.50 7,591,929 7,570,596 07-01-27 8.00 6,081,754 6,165,980 01-01-28 6.50 2,842,712 2,713,028 05-01-28 6.50 17,344,667 16,553,403 12-01-28 6.50 18,502,372 17,658,294 02-01-29 6.50 19,057,401 18,188,003 03-01-29 6.00 4,000,001 3,707,521 03-01-29 6.50 14,528,809 13,853,407 05-01-29 6.00 1,000,001 926,881 06-01-29 7.00 20,864,049 20,407,647 07-01-29 6.00 15,000,001 13,903,201 11-01-29 7.00 20,000,000 19,537,600 12-01-29 7.00 20,800,000(j) 20,293,000 Collateralized Mtge Obligation 10-25-19 8.50 1,448,659 1,509,657 Principal Only 01-25-20 9.89 83,141(f) 82,490 09-01-18 9.50 431,103(f) 356,028 Trust Series Z 02-25-24 6.00 23,863,884(g) 20,141,595 Govt Natl Mtge Assn 05-15-26 7.50 10,664,986 10,638,324 Prudential Bache Collateralized Mtge Obligation 04-01-19 7.97 1,985,282 2,016,376 Total 305,575,536 Automotive & related (2.8%) Daimler-Benz North America Company Guaranty Medium-term Nts Series A 09-15-06 7.38 18,745,000 18,995,702 General Motors 05-15-03 8.88 7,050,000 7,430,943 GMAC Medium-term Nts 03-01-00 7.00 14,300,000 14,333,915 Total 40,760,560 Banks and savings & loans (6.9%) ABN-Amro Bank (U.S. Dollar) Sub Nts Series B 05-15-23 7.75 12,000,000(b) 11,833,547 Banco General (U.S. Dollar) 08-01-02 7.70 6,400,000(b,d) 6,029,583 Bayerische Landesbank (U.S. Dollar) Deposit Nts 02-26-01 5.63 13,750,000(b) 13,586,092 Cullen/Frost Capital Series A 02-01-27 8.42 10,000,000 9,583,050 Firstar Capital Company Guaranty Series B 12-15-26 8.32 5,900,000 5,580,334 Greenpoint Bank Sr Nts 07-15-02 6.70 15,000,000 14,727,000 Morgan (JP) Sr Sub Medium-term Nts Series A 02-15-12 4.00 9,350,000(k) 8,226,691 NationsBank Sub Nts 11-01-01 9.25 8,950,000 9,321,231 NCNB Sub Nts 10-15-01 9.13 10,000,000 10,385,563 Sanwa Finance Aruba (U.S. Dollar) 07-15-09 8.35 12,000,000(b) 12,260,196 Total 101,533,287 Building materials & construction (0.3%) Foster Wheeler 11-15-05 6.75 5,850,000 4,830,795 Chemicals (1.5%) Dow Chemical 01-15-09 5.97 12,755,000 11,672,113 USA Waste Services Sr Nts 10-01-07 7.13 11,900,000 9,945,463 Total 21,617,576 Communications equipment & services (0.6%) Telekom Malaysia (U.S. Dollar) 08-01-25 7.88 10,000,000(b,d) 9,081,038 Electronics (0.6%) Hyundai Semiconductor (U.S. Dollar) Sr Nts 05-15-07 8.63 10,800,000(b,d) 8,669,430 Energy (3.2%) PDV America Sr Nts 08-01-03 7.88 16,500,000 14,766,831 Phillips Petroleum 03-15-28 7.13 12,000,000 10,646,288 Texaco Capital Gtd Deb 03-01-43 7.50 12,000,000 11,245,688 USX-Marathon Group 05-15-22 9.38 9,200,000 9,732,054 Total 46,390,861 Financial services (2.4%) KFW Intl Finance (U.S. Dollar) Medium-term Nts 12-15-99 8.50 10,000,000(b) 10,010,526 Marlin Water Trust Sr Nts 12-15-01 7.09 8,300,000 8,171,051 Railcar Leasing (U.S. Dollar) 01-15-13 7.13 12,150,000(b,d) 12,189,832 Salomon Sr Nts 05-15-00 7.75 5,000,000 5,041,600 Total 35,413,009 Health care (0.8%) Lilly (Eli) 01-01-36 6.77 13,300,000 12,095,255 Health care services (2.3%) AETNA Services 08-15-03 6.38 13,650,000 13,243,507 HEALTHSOUTH Sr Nts 06-15-08 7.00 15,000,000 12,505,245 Service Corp Intl 03-15-08 6.50 11,550,000 8,704,738 Total 34,453,490 Industrial equipment & services (1.7%) ARAMARK Services 08-01-04 6.75 15,000,000 14,444,925 Deere & Co 06-15-19 8.95 10,000,000 10,562,649 Total 25,007,574 Insurance (4.4%) Arkwright CSN Trust 08-15-26 9.63 11,000,000(d) 11,347,576 Conseco Medium-term Nts Series B 06-21-01 7.60 10,000,000 9,919,298 Conseco Financing Trust Company Guaranty 11-15-26 8.70 6,600,000 5,886,558 Nationwide CSN Trust 02-15-25 9.88 11,500,000(d) 12,229,619 SAFECO Capital Company Guaranty 07-15-37 8.07 15,000,000 12,945,266 SunAmerica 08-01-08 9.95 11,000,000 12,977,359 Total 65,305,676 Media (0.8%) Cox Enterprises 06-14-02 6.63 12,000,000(d) 11,839,822 Metals (0.7%) Alcan Aluminum (U.S. Dollar) 01-15-22 8.88 9,600,000(b) 10,152,640 Miscellaneous (0.1%) Jasmine Submarine Telecom (U.S. Dollar) Sr Nts 05-30-11 8.48 1,443,645(b,d) 1,313,307 Paper & packaging (0.8%) Caraustar Inds 06-01-09 7.38 11,775,000 11,216,884 Retail (1.8%) Dayton Hudson 06-15-23 7.88 18,850,000 17,840,827 Wal-Mart CRAVE Trust 07-17-06 7.00 9,282,557(d) 9,111,016 Total 26,951,843 Transportation (1.4%) Burlington Northern Santa Fe 12-15-25 7.00 10,000,000 9,072,859 Enterprise Rent-A-Car USA Finance 02-15-08 6.80 10,000,000(d) 9,349,000 Zhuhai Highway (U.S. Dollar) Sr Nts 07-01-06 9.13 2,850,000(b,d) 1,781,250 Total 20,203,109 Utilities -- electric (3.9%) Arizona Public Service 1st Mtge Sale Lease-backed Obligation 12-30-15 8.00 9,000,000 8,983,747 Commonwealth Edison 1st Mtge Series 90 04-15-00 6.50 9,000,000 8,995,910 Edison Mission Energy Sr Nts 06-15-09 7.73 8,600,000(d) 8,575,086 Israel Electric (U.S. Dollar) Sr Nts 12-15-26 7.88 9,000,000(b,d) 8,229,600 Korea Electric Power (U.S. Dollar) Zero Coupon 04-01-16 10.07 35,000,000(b,e) 5,296,127 Salton Sea Funding Series C 05-30-10 7.84 10,000,000 9,887,697 Wisconsin Electric Power 12-01-95 6.88 8,000,000 7,006,924 Total 56,975,091 Utilities -- gas (0.6%) El Paso Energy Sr Nts Series B 07-15-01 6.63 8,675,000 8,596,752 Utilities -- telephone (3.9%) AT&T 01-15-25 8.35 5,000,000 5,088,100 12-01-31 8.63 14,000,000 14,427,283 GTE Florida 02-01-28 6.86 12,450,000 11,384,380 New York Telephone 07-15-31 9.38 14,000,000 14,852,142 U S West Capital Funding Company Guaranty 08-15-01 6.88 12,000,000(d) 11,980,320 Total 57,732,225 Total bonds (Cost: $1,386,741,745) $1,352,196,524 Preferred stock (0.6%) Issuer Shares Values (a) Salomon Income Financing Trust 2.38% 340,000 $8,861,420 Total preferred stock (Cost: $8,500,000) $8,861,420 Short-term securities (8.2%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (7.4%) Federal Home Loan Mtge Corp Disc Nts 12-16-99 5.26% $10,500,000 $10,474,244 01-10-00 5.60 2,200,000 2,185,092 01-12-00 5.52 14,100,000 14,007,707 02-11-00 5.63 900,000 889,014 Federal Natl Mtge Assn Disc Nts 12-02-99 5.24 24,700,000 24,692,439 12-15-99 5.26 22,200,000 22,149,770 12-17-99 5.26 10,900,000 10,871,134 02-04-00 5.60 23,900,000 23,636,224 Total 108,905,624 Commercial paper (0.9%) Ford Motor Credit 12-14-99 5.31% $1,000,000 $997,939 Merrill Lynch 01-26-00 5.99 5,600,000 5,547,066 Northern States Power 12-07-99 5.32 1,100,000 1,098,864 Petrofina (Delaware) 01-18-00 6.03 6,100,000 6,050,598 Total 13,694,467 Total short-term securities (Cost: $122,646,685) $122,600,091 Total investments in securities (Cost: $1,517,888,430)(l) $1,483,658,035
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. As of Nov. 30, 1999, the value of foreign securities represented 8.91% of net assets. (c) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (d) 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. (e) 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. (f) 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. (g) This security is a collateralized mortgage obligation that pays no interest or principal during its initial accrual period until previous series within the trust have been paid off. Interest is accrued at an effective yield; similar to a zero coupon bond. (h) 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. (i) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 4 to the financial statements): Type of security Notional amount Sale contracts U.S. Treasury Bonds, March 2000 $110,000,000 (j) At Nov. 30, 1999, the cost of securities purchased, including interest purchased, on a when-issued basis was $35,194,690. (k) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 1999. (l) At Nov. 30, 1999, the cost of securities for federal income tax purposes was approximately $1,517,888,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $13,197,000 Unrealized depreciation (47,427,000) ----------- Net unrealized depreciation $(34,230,000) American Express Funds AXP Selective Fund IDS Tower 10 Minneapolis, MN 55440-0010 Ticker Symbol Class A INSEX Class B ISEBX Class Y IDEYX PRSRT STD AUTO U.S. POSTAGE PAID SPENCER, IA PERMIT NO. 85 S-6385 N (1/00) Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. -----END PRIVACY-ENHANCED MESSAGE-----