N-30D 1 s6385.txt AXP SELECTIVE FUND AXP(R) Selective Fund 2000 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, AXP Selective 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 3 Fund Facts 5 The 10 Largest Holdings 6 Financial Statements (Fund) 7 Notes to Financial Statements (Fund) 10 Financial Statements (Portfolio) 17 Notes to Financial Statements (Portfolio) 20 Investments in Securities 23 (picture of) Arne H. Carlson Arne H. Carlson Chairman of the board From the Chairman The financial markets have always had their ups and downs, but in recent months volatility has become more frequent and intense. While no one can say with certainty what the markets will do, American Express Financial Corporation, the Fund's investment manager, expects economic growth to continue, accompanied by a modest rise in long-term interest rates. But no matter what transpires, this is a great time to take a close look at your goals and investments. We encourage you to: o Consult a professional investment advisor 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 semiannual 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. On behalf of the Board, Arne H. Carlson (picture of) Ray Goodner Ray Goodner Portfolio Manager From the Portfolio Manager Falling interest rates and a well-positioned portfolio resulted in a very productive six months for AXP Selective Fund. Over the first half of the fiscal year -- June through November 2000 -- the total return for the Fund's Class A shares was 7.01% (excluding the sales charge). Setting the stage for what would be a positive period for most types of bonds was a moderation in economic growth. After roaring ahead in the first six months of 2000 and consequently giving rise to concerns about a potential run-up in inflation, the economy began slowing down in third quarter. After being soothed by that development, bond investors' confidence got a boost from the Federal Reserve (Fed), which decided not to raise short-term interest rates during the six months. (Usually, the Fed raises rates when it believes that there is a risk of substantially higher inflation.) In fact, as the period progressed, some observers began saying that the Fed might actually need to reduce interest rates early in 2001 to keep the economy from stalling out and possibly slipping into recession. BUYERS RETURN As the inflation concern dissipated, bonds enjoyed increased buying, which in turn drove yields down and prices up in most sectors of the market. Attracting especially strong buying were high-quality mortgage-backed bonds sponsored by federal agencies and, to a lesser degree, U.S. Treasury issues. Consequently, they experienced particularly good price appreciation. That worked to the Fund's advantage, given that "mortgages" and "Treasurys" made up the bulk of the portfolio. The other major area of investment was high-quality corporate bonds, which, while they provided positive performance, couldn't keep up with the gains generated by the other two sectors. I also maintained a small investment in high-quality foreign government bonds denominated in dollars. Like U.S. Treasurys, they were strong performers. Looking at portfolio changes, because Treasury prices had risen substantially prior to the start of the period, I decided to reduce holdings in that sector and add to those in the mortgage and corporate areas. That strategy yielded mixed results for the Fund, as mortgages performed especially well while corporates lagged behind. At period-end, corporates comprised about 40% of the portfolio, followed by mortgages at 35% and U.S. Treasury and foreign government bonds at 25%. As for the rest of the fiscal year, I think interest rates are likely to stay in a stable-to-slightly-higher range. Therefore, I plan to maintain a somewhat defensive portfolio structure with an emphasis on corporate and mortgage-backed bonds. Ray Goodner Note to shareholders: In January 2001, management of AXP Selective Fund was changed to a portfolio management team headed by Brad Stone. Fund Facts Class A -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 2000 $8.63 May 31, 2000 $8.32 Increase $0.31 Distributions -- June 1, 2000 - Nov. 30, 2000 From income $0.26 From capital gains $ -- Total distributions $0.26 Total return** +7.01% Class B -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 2000 $8.63 May 31, 2000 $8.32 Increase $0.31 Distributions -- June 1, 2000 - Nov. 30, 2000 From income $0.23 From capital gains $ -- Total distributions $0.23 Total return** +6.61% Class C -- June 26, 2000* - Nov. 30, 2000 (All figures per share) Net asset value (NAV) Nov. 30, 2000 $8.63 June 26, 2000* $8.40 Increase $0.23 Distributions -- June 26, 2000* - Nov. 30, 2000 From income $0.19 From capital gains $ -- Total distributions $0.19 Total return** +5.23% Class Y--6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 2000 $8.63 May 31, 2000 $8.32 Increase $0.31 Distributions -- June 1, 2000 - Nov. 30, 2000 From income $0.27 From capital gains $ -- Total distributions $0.27 Total return** +7.10% * Inception date. ** The total return is a hypothetical investment in the Fund with all distributions reinvested. Returns do not include sales load. The prospectus discusses the effect of sales charges, if any, on the various classes. The 10 Largest Holdings Percent Value (of net assets) (as of Nov. 30, 2000) PSA 7.13% 2005 1.40% $18,656,793 Daimler-Benz North America 7.38% 2006 1.40 18,599,163 Dayton Hudson 7.88% 2023 1.32 17,634,175 PDV America 7.88% 2003 1.20 15,937,829 New York Telephone 9.38% 2031 1.14 15,190,420 General Electric Capital 6.70% 2002 1.10 14,648,034 ARAMARK Services 6.75% 2004 1.08 14,369,115 Bayerische Landesbank 5.63% 2001 1.03 13,710,674 SunAmerica 9.95% 2008 .96 12,783,804 Railcar Leasing 7.13% 2013 .93 12,380,000 Excludes U.S. Treasury and government agencies holdings. For further detail about these holdings, please refer to the section entitled "Investments in Securities." (icon of) pie chart The 10 holdings listed here make up 11.56% of net assets Financial Statements Statement of assets and liabilities AXP Selective Fund, Inc. Nov. 30, 2000 (Unaudited) Assets Investment in Quality Income Portfolio (Note 1) $1,331,811,297 -------------- Liabilities Dividends payable to shareholders 1,978,121 Accrued distribution fee 12,037 Accrued service fee 489 Accrued transfer agency fee 4,731 Accrued administrative services fee 1,766 Other accrued expenses 102,695 ------- Total liabilities 2,099,839 --------- Net assets applicable to outstanding capital stock $1,329,711,458 ============== Represented by Capital stock-- $.01 par value (Note 1) $ 1,541,006 Additional paid-in capital 1,354,866,618 Undistributed net investment income 166,435 Accumulated net realized gain (loss) (Note 5) (30,165,731) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 3,303,130 --------- Total -- representing net assets applicable to outstanding capital stock $1,329,711,458 ============== Net assets applicable to outstanding shares: Class A $ 945,026,957 Class B $ 205,932,633 Class C $ 906,764 Class Y $ 177,845,104 Net asset value per share of outstanding capital stock: Class A shares 109,521,293 $ 8.63 Class B shares 23,866,655 $ 8.63 Class C shares 105,106 $ 8.63 Class Y shares 20,607,576 $ 8.63 See accompanying notes to financial statements. Statement of operations AXP Selective Fund, Inc. Six months ended Nov. 30, 2000 (Unaudited) Investment income Income: Dividends $ 403,618 Interest 47,035,276 ---------- Total income 47,438,894 ---------- Expenses (Note 2): Expenses allocated from Quality Income Portfolio 3,436,103 Distribution fee Class A 1,181,534 Class B 973,126 Class C 2,086 Transfer agency fee 806,914 Incremental transfer agency fee Class A 51,070 Class B 18,375 Class C 30 Service fee-- Class Y 85,961 Administrative services fees and expenses 321,354 Compensation of board members 3,986 Printing and postage 27,316 Registration fees 32,213 Audit fees 5,250 Other 23,116 ------ Total expenses 6,968,434 Earnings credits on cash balances (Note 2) (55,313) ------- Total net expenses 6,913,121 --------- Investment income (loss)-- net 40,525,773 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (8,179,410) Foreign currency transactions (157,434) Futures contracts (2,597,907) ---------- Net realized gain (loss) on investments (10,934,751) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,318,581 ---------- Net gain (loss) on investments and foreign currencies 48,383,830 Net increase (decrease) in net assets resulting from operations $ 88,909,603 ============== See accompanying notes to financial statements. Statements of changes in net assets AXP Selective Fund, Inc. Nov. 30, 2000 May 31, 2000 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss)-- net $ 40,525,773 $ 87,700,873 Net realized gain (loss) on investments (10,934,751) (12,934,749) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,318,581 (65,462,165) ---------- ----------- Net increase (decrease) in net assets resulting from operations 88,909,603 9,303,959 ---------- --------- Distributions to shareholders from: Net investment income Class A (29,642,954) (66,760,760) Class B (5,372,732) (11,028,617) Class C (11,935) -- Class Y (5,536,359) (10,960,196) Net realized gain Class A -- (20,690,756) Class B -- (3,916,530) Class Y -- (2,953,080) ---------- ---------- Total distributions (40,563,980) (116,309,939) ----------- ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Notes 2 and 6) 53,993,760 103,800,236 Class B shares 41,409,739 70,590,408 Class C shares 925,047 -- Class Y shares 24,914,041 74,872,917 Reinvestment of distributions at net asset value Class A shares 21,808,924 65,226,463 Class B shares 4,631,343 13,239,420 Class C shares 9,637 -- Class Y shares 5,461,338 13,735,844 Payments for redemptions Class A shares (114,218,089) (311,498,945) Class B shares (Note 2) (33,862,051) (92,600,002) Class C shares (Note 2) (41,055) -- Class Y shares (25,960,774) (104,662,927) ----------- ------------ Increase (decrease) in net assets from capital share transactions (20,928,140) (167,296,586) ----------- ------------ Total increase (decrease) in net assets 27,417,483 (274,302,566) Net assets at beginning of period 1,302,293,975 1,576,596,541 ------------- ------------- Net assets at end of period $1,329,711,458 $1,302,293,975 ============== ============== Undistributed net investment income $ 166,435 $ 204,476 -------------- -------------- See accompanying notes to financial statements. Notes to Financial Statements AXP Selective Fund, Inc. (Unaudited as to Nov. 30, 2000) 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. Class C shares of the Fund were offered to the public on June 26, 2000. Prior to this date, American Express Financial Corporation (AEFC) purchased 238 shares of capital stock at $8.41 per share, which represented the initial capital in Class C. The Fund offers Class A, Class B, Class C 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 (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. 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) differ 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, 2000 was 99.99%. 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 accounting principles generally accepted in the United States of America 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 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 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 C $20.00 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 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 and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor 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. Sales charges received by the Distributor for distributing Fund shares were $588,567 for Class A and $80,170 for Class B for the six months ended Nov. 30, 2000. During the six months ended Nov. 30, 2000, the Fund's transfer agency fees were reduced by $55,313 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, 2000 Class A Class B Class C* Class Y Sold 6,349,027 4,868,127 108,784 2,930,811 Issued for reinvested distributions 2,561,852 543,994 1,128 641,513 Redeemed (13,445,821) (3,984,908) (4,806) (3,055,187) ----------- ---------- ------ ---------- Net increase (decrease) (4,534,942) 1,427,213 105,106 517,137 ---------- --------- ------- ------- * Inception date was June 26, 2000. Year ended May 31, 2000 Class A Class B Class C Class Y Sold 12,019,328 8,162,545 N/A 8,744,743 Issued for reinvested distributions 7,608,344 1,545,461 N/A 1,601,656 Redeemed (36,214,650) (10,747,197) N/A (12,107,793) ----------- ----------- ----------- Net increase (decrease) (16,586,978) (1,039,191) N/A (1,761,394) ----------- ---------- ---------- 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 to $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, 2000. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has capital loss carry-over of $15,816,625 as of May 31, 2000, that if not offset by subsequent capital gains, will expire in 2008 through 2009. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 6. FUND MERGER As of close of business on July 14, 2000, AXP Selective Fund acquired the assets and assumed the identified liabilities of Strategist Quality Income Fund. The aggregate net assets of AXP Selective Fund immediately before the acquisition were $1,308,361,652. The merger was accomplished by a tax-free exchange of 87,827 shares of Strategist Quality Income Fund valued at $759,710. In exchange for the Strategist Quality Income Fund shares and net assets, AXP Selective Fund issued the following number of shares: Shares Net assets Class A 89,906 $759,710 Strategist Quality Income Fund's net assets at that date consisted of capital stock of $775,363 and unrealized depreciation of $15,653.
7. FINANCIAL 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 changes(a) Class A 2000b 2000 1999 1998 1997 Net asset value, beginning of period $8.32 $8.96 $9.23 $9.00 $9.00 Income from investment operations: Net investment income (loss) .26 .52 .54 .57 .59 Net gains (losses) (both realized and unrealized) .31 (.46) (.20) .31 .12 Total from investment operations .57 .06 .34 .88 .71 Less distributions: Dividends from net investment income (.26) (.53) (.54) (.58) (.58) Distributions from realized gains -- (.17) (.07) (.07) (.13) Total distributions (.26) (.70) (.61) (.65) (.71) Net asset value, end of period $8.63 $8.32 $8.96 $9.23 $9.00 Ratios/supplemental data Net assets, end of period (in millions) $945 $949 $1,170 $1,231 $1,286 Ratio of expenses to average daily net assets(c) .97%d .97% .89% .86% .88% Ratio of net investment income (loss) to average daily net assets 6.25%d 6.17% 5.85% 6.20% 6.36% Portfolio turnover rate (excluding short-term securities) 32% 62% 30% 20% 31% Total return(e) 7.01% .83% 3.68% 10.15% 8.08% a For a share outstanding throughout the period. Rounded to the nearest cent. b Six months ended Nov. 30, 2000 (Unaudited). c Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. d Adjusted to an annual basis. e Total return does not reflect payment of a sales charge.
Fiscal period ended May 31, Per share income and capital changes(a) Class B 2000b 2000 1999 1998 1997 Net asset value, beginning of period $8.32 $8.96 $9.23 $9.00 $9.00 Income from investment operations: Net investment income (loss) .23 .46 .47 .50 .52 Net gains (losses) (both realized and unrealized) .31 (.47) (.20) .31 .12 Total from investment operations .54 (.01) .27 .81 .64 Less distributions: Dividends from net investment income (.23) (.46) (.47) (.51) (.51) Distributions from realized gains -- (.17) (.07) (.07) (.13) Total distributions (.23) (.63) (.54) (.58) (.64) Net asset value, end of period $8.63 $8.32 $8.96 $9.23 $9.00 Ratios/supplemental data Net assets, end of period (in millions) $206 $187 $210 $153 $126 Ratio of expenses to average daily net assets(c) 1.72%d 1.73% 1.65% 1.62% 1.64% Ratio of net investment income (loss) to average daily net assets 5.50%d 5.41% 5.10% 5.44% 6.40% Portfolio turnover rate (excluding short-term securities) 32% 62% 30% 20% 31% Total return(e) 6.61% .06% 2.89% 9.32% 7.26% a For a share outstanding throughout the period. Rounded to the nearest cent. b Six months ended Nov. 30, 2000 (Unaudited). c Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. d Adjusted to an annual basis. e Total return does not reflect payment of a sales charge.
Fiscal period ended May 31, Per share income and capital changes(a) Class C 2000b Net asset value, beginning of period $8.40 Income from investment operations: Net investment income (loss) .19 Net gains (losses) (both realized and unrealized) .23 Total from investment operations .42 Less distributions: Dividends from net investment income (.19) Distributions from realized gains -- Total distributions (.19) Net asset value, end of period $8.63 Ratios/supplemental data Net assets, end of period (in millions) $1 Ratio of expenses to average daily net assets(C) 1.72%d Ratio of net investment income (loss) to average daily net assets 5.73%d Portfolio turnover rate (excluding short-term securities) 32% Total return(e) 5.23% a For a share outstanding throughout the period. Rounded to the nearest cent. b Inception date was June 26, 2000 (Unaudited). c Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. d Adjusted to an annual basis. e Total return does not reflect payment of a sales charge.
Fiscal period ended May 31, Per share income and capital changes(a) Class Y 2000b 2000 1999 1998 1997 Net asset value, beginning of period $8.32 $8.96 $9.23 $9.00 $9.00 Income from investment operations: Net investment income (loss) .27 .54 .55 .58 .60 Net gains (losses) (both realized and unrealized) .31 (.47) (.20) .31 .12 Total from investment operations .58 .07 .35 .89 .72 Less distributions: Dividends from net investment income (.27) (.54) (.55) (.59) (.59) Distributions from realized gains -- (.17) (.07) (.07) (.13) Total distributions (.27) (.71) (.62) (.66) (.72) Net asset value, end of period $8.63 $8.32 $8.96 $9.23 $9.00 Ratios/supplemental data Net assets, end of period (in millions) $178 $167 $196 $221 $202 Ratio of expenses to average daily net assets(C) .81%d .81% .81% .79% .72% Ratio of net investment income (loss) to average daily net assets 6.42%d 6.33% 5.93% 6.27% 7.02% Portfolio turnover rate (excluding short-term securities) 32% 62% 30% 20% 31% Total return(e) 7.10% .97% 3.77% 10.21% 8.27% a For a share outstanding throughout the period. Rounded to the nearest cent. b Six months ended Nov. 30, 2000 (Unaudited). c Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. d Adjusted to an annual basis. e Total return does not reflect payment of a sales charge.
Financial Statements Statement of assets and liabilities Quality Income Portfolio Nov. 30, 2000 (Unaudited) Assets Investments in securities, at value (Note 1) (identified cost $1,351,411,466) $1,352,956,095 Cash in bank on demand deposit 530 Dividends and accrued interest receivable 17,371,558 Receivable for investment securities sold 3,347 ----- Total assets 1,370,331,530 ------------- Liabilities Payable for investment securities purchased 38,368,880 Accrued investment management services fee 18,636 Other accrued expenses 28,289 ------ Total liabilities 38,415,805 ---------- Net assets $1,331,915,725 ============== See accompanying notes to financial statements. Statement of operations Quality Income Portfolio Six months ended Nov. 30, 2000 (Unaudited) Investment income Income: Dividends $ 403,750 Interest 47,043,030 ---------- Total income 47,446,780 ---------- Expenses (Note 2): Investment management services fee 3,382,874 Compensation of board members 4,311 Custodian fees 22,500 Audit fees 15,750 Other 15,571 ------ Total expenses 3,441,006 Earnings credits on cash balances (Note 2) (4,225) ------ Total net expenses 3,436,781 --------- Investment income (loss)-- net 44,009,999 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) (8,179,405) Foreign currency transactions (157,471) Future contracts (2,599,043) ---------- Net realized gain (loss) on investments (10,935,919) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,333,340 ---------- Net gain (loss) on investments and foreign currencies 48,397,421 ---------- Net increase (decrease) in net assets resulting from operations $ 92,407,420 ============= See accompanying notes to financial statements. Statements of changes in net assets Quality Income Portfolio Nov. 30, 2000 May 31, 2000 Six months ended Year ended (Unaudited) Operations Investment income (loss)-- net $ 44,009,999 $ 95,271,140 Net realized gain (loss) on investments (10,935,919) (12,944,533) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 59,333,340 (65,492,632) ---------- ----------- Net increase (decrease) in net assets resulting from operations 92,407,420 16,833,975 Net contributions (withdrawals) from partners (65,252,130) (289,912,100) ----------- ------------ Total increase (decrease) in net assets 27,155,290 (273,078,125) Net assets at beginning of period 1,304,760,435 1,577,838,560 ------------- ------------- Net assets at end of period $1,331,915,725 $1,304,760,435 ============== ============== See accompanying notes to financial statements. Notes to Financial Statements Quality Income Portfolio (Unaudited as to Nov. 30, 2000) 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. The 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 accounting principles generally accepted in the United States of America 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 Portfolio designates cash or liquid securities at least equal to the amount of its commitment. As of Nov. 30, 2000, the Portfolio had entered into outstanding when-issued or forward-commitments of $38,406,380. The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. 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 or upon receipt of ex-dividend notification in the case of certain foreign securities. 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, 2000, the Portfolio's custodian fees were reduced by $4,225 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 $410,894,371 and $439,803,572, respectively, for the six months ended Nov. 30, 2000. For the same period, the portfolio turnover rate was 32%. Realized gains and losses are determined on an identified cost basis. Income from securities lending amounted to $2,494 for the six months ended Nov. 30, 2000.
Investments in Securities Quality Income Portfolio Nov. 30, 2000 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (95.8%) Issuer Coupon Principal Value(a) rate amount Government obligations & agencies (20.8%) Federal Republic of Germany (European Monetary Unit) 11-11-04 7.50% 16,000,000(c) $15,204,697 Govt of Canada (U.S. Dollar) 11-05-08 5.25 27,000,000(c) 25,107,516 Overseas Private Investment U.S. Govt Guaranty Series 1996A 01-15-09 6.99 8,888,857 9,047,790 People's Republic of China (U.S. Dollar) 01-15-96 9.00 10,000,000(c) 9,392,830 Resolution Funding Corp Zero Coupon 01-15-11 6.40 20,000,000(i) 11,042,600 04-15-16 8.04 47,000,000(i) 18,647,720 U.S. Treasury 11-15-01 7.50 49,050,000 49,670,973 05-15-04 7.25 25,000,000 26,300,750 08-15-04 7.25 36,800,000 38,875,888 11-15-16 7.50 54,695,000 64,728,251 TIPS 01-15-07 3.38 8,050,000(g) 8,617,038 Total 276,636,053 Mortgage-backed securities (37.9%) Federal Home Loan Mtge Corp 11-01-14 7.50 9,224,067 9,378,266 04-01-15 7.50 20,704,777 21,050,900 07-01-16 8.00 280 286 01-01-17 8.00 2,966 3,034 03-01-17 8.50 75,801 77,673 06-01-17 8.50 44,065 45,442 04-01-20 9.00 768,953 796,343 04-01-21 9.00 657,249 680,253 03-01-22 8.50 1,533,396 1,583,231 08-01-22 8.50 1,499,182 1,547,441 06-01-24 7.50 6,894,133 6,971,692 02-01-25 8.00 2,707,320 2,771,619 Collateralized Mtge Obligation 09-01-19 8.50 81,462 83,931 Federal Housing Admin 01-01-24 7.43 5,713,911 5,463,928 Federal Natl Mtge Assn 05-01-02 6.00 25,000,000(b) 24,328,124 11-01-02 10.00 52 54 10-01-03 7.00 6,994,123 6,927,187 06-15-09 6.38 60,000,000 59,711,999 01-01-14 6.00 14,872,606 14,490,191 04-01-14 5.50 2,548,010 2,432,447 04-01-14 6.00 14,849,243 14,467,428 04-01-14 6.50 15,705,756 15,537,261 08-01-14 6.50 14,584,916 14,419,017 12-01-14 5.50 9,571,146 9,137,052 10-01-23 6.50 7,049,986 6,906,519 12-01-26 8.00 4,663,004 4,762,093 04-01-27 7.50 6,174,254 6,234,083 06-01-27 7.50 6,623,416 6,687,597 08-01-27 8.00 5,267,941 5,377,073 01-01-28 6.50 2,521,080 2,456,489 05-01-28 6.50 15,695,679 15,278,802 09-01-28 6.00 15,000,000(b) 14,240,625 12-01-28 6.50 17,044,853 16,565,552 02-01-29 6.50 17,125,978 16,644,395 03-01-29 6.00 3,661,700 3,478,615 03-01-29 6.50 13,428,163 13,054,807 05-01-29 6.00 948,685 901,250 06-01-29 7.00 18,927,482 18,753,743 07-01-29 6.00 14,108,768 13,403,330 09-01-29 7.00 19,496,899 19,317,933 12-01-29 7.00 19,104,312 18,919,191 12-01-29 7.50 19,233,381 19,380,286 01-01-30 8.00 5,566,436 5,678,509 03-01-30 8.00 18,648,555 19,024,021 06-01-30 7.00 7,992,558 7,916,066 07-01-30 8.00 12,052,294 12,293,575 09-01-30 7.00 9,982,129 9,886,597 Collateralized Mtge Obligation 10-25-19 8.50 1,448,659 1,513,477 Principal Only 09-01-18 9.50 348,435(f) 277,755 Trust Series Z 02-25-24 6.00 25,462,435(h) 22,471,616 Govt Natl Mtge Assn 05-15-26 7.50 9,025,699 9,141,318 Prudential Bache Collateralized Mtge Obligation 04-01-19 7.97 1,948,299 1,983,579 Total 504,453,695 Airlines (0.9%) Delta Air Lines 12-15-09 7.90 7,500,000 7,128,150 United Air Lines 07-01-10 7.73 4,270,000 4,455,916 Total 11,584,066 Automotive & related (2.0%) Daimler-Benz North America Company Guaranty Medium-term Nts Series A 09-15-06 7.38 18,745,000 18,599,163 General Motors 05-15-03 8.88 7,050,000 7,396,226 Total 25,995,389 Banks and savings & loans (5.8%) Bank of America Sub Nts 11-01-01 9.25 8,950,000 9,143,410 Bayerische Landesbank (U.S. Dollar) Deposit Nts 02-26-01 5.63 13,750,000(c) 13,710,674 (U.S. Dollar) Sub Nts 12-01-08 5.88 9,000,000(c) 8,373,420 Cullen/Frost Capital Series A 02-01-27 8.42 10,000,000 8,744,100 First Union Sub Nts 08-18-10 7.80 10,100,000 9,961,024 Morgan (JP) Sr Sub Medium-term Nts Series A 02-15-12 4.00 9,350,000(k) 8,212,947 NCNB Sub Nts 10-15-01 9.13 10,000,000 10,197,200 Wachovia Sr Nts 07-15-05 7.45 9,100,000 9,260,524 Total 77,603,299 Chemicals (0.9%) Dow Chemical 01-15-09 5.97 12,755,000 11,953,310 Communications equipment & services (0.7%) Telekom Malaysia (U.S. Dollar) 08-01-25 7.88 10,000,000(c,d) 8,830,000 Electronics (0.5%) Hyundai Semiconductor (U.S. Dollar) Sr Nts 05-15-07 8.63 8,660,000(c,d) 6,860,236 Energy (3.6%) Alberta Energy (U.S. Dollar) 09-15-30 8.13 11,500,000(c) 11,845,115 PDV America Sr Nts 08-01-03 7.88 16,500,000 15,937,829 Petroliam Nasional (U.S. Dollar) 08-15-15 7.75 10,000,000(c,d) 9,100,800 Phillips Petroleum 03-15-28 7.13 12,000,000 10,514,364 Total 47,398,108 Financial services (2.3%) Citigroup Sub Nts 10-01-10 7.25 10,000,000 9,960,200 Marlin Water Trust Sr Nts 12-15-01 7.09 8,300,000(d) 8,279,698 Railcar Leasing 01-15-13 7.13 12,150,000(d) 12,380,000 Total 30,619,898 Health care services (0.4%) Service Corp Intl 03-15-08 6.50 9,550,000 5,061,500 Industrial equipment & services (1.1%) ARAMARK Services 08-01-04 6.75 15,000,000 14,369,115 Insurance (2.7%) Nationwide CSN Trust 02-15-25 9.88 11,500,000(d) 11,516,756 SAFECO Capital Trust Company Guaranty 07-15-37 8.07 15,000,000 12,001,290 SunAmerica 08-01-08 9.95 11,000,000 12,783,804 Total 36,301,850 Metals (0.7%) Alcan Aluminum (U.S. Dollar) 01-15-22 8.88 9,600,000(c) 9,974,496 Miscellaneous (1.5%) Jasmine Submarine Telecom (U.S. Dollar) Sr Nts 05-30-11 8.48 1,372,928(c,d) 1,311,159 PSA (U.S. Dollar) 08-01-05 7.13 18,250,000(c,d) 18,656,793 Total 19,967,952 Multi-industry conglomerates (1.1%) General Electric Capital Series A 10-01-02 6.70 14,600,000 14,648,034 Paper & packaging (0.7%) Intl Paper 07-08-05 8.13 9,050,000(d) 9,324,215 Retail (1.9%) Dayton Hudson 06-15-23 7.88 18,850,000 17,634,175 Wal-Mart CRAVE Trust 07-17-06 7.00 8,213,899(d) 8,170,201 Total 25,804,376 Transportation (1.4%) Burlington Northern Santa Fe 12-15-25 7.00 10,000,000 9,055,590 Enterprise Rent-A-Car USA Finance 02-15-08 6.80 10,000,000(d) 9,323,900 Total 18,379,490 Utilities -- electric (4.0%) Arizona Public Service 1st Mtge Sale Lease-backed Obligation 12-30-15 8.00 4,500,000 4,482,855 Edison Mission Energy Sr Nts 06-15-09 7.73 8,600,000 8,407,042 Israel Electric (U.S. Dollar) Sr Nts 12-15-26 7.88 9,000,000(c,d) 8,151,390 Korea Electric Power (U.S. Dollar) Zero Coupon 04-01-96 10.07 35,000,000(c,j) 7,469,875 NRG Energy Sr Nts 09-15-10 8.25 8,000,000 8,239,520 Salton Sea Funding Series C 05-30-10 7.84 10,000,000 10,138,800 Wisconsin Electric Power 12-01-95 6.88 8,000,000 6,826,880 Total 53,716,362 Utilities -- gas (0.6%) El Paso Energy Sr Nts Series B 07-15-01 6.63 8,675,000 8,624,598 Utilities -- telephone (4.3%) GTE Florida 02-01-28 6.86 12,450,000 11,458,233 New England Telephone & Telegraph 10-01-23 6.88 7,800,000 6,988,878 New York Telephone 07-15-31 9.38 14,000,000 15,190,420 Qwest 11-10-26 7.20 6,800,000 6,166,716 Qwest Communications Intl Sr Nts Series B 11-01-08 7.50 5,000,000 5,035,650 U S WEST Capital Funding Company Guaranty 08-15-01 6.88 12,000,000 11,985,720 Total 56,825,617 Total bonds (Cost: $1,273,492,477) $1,274,931,659
Preferred stock (0.6%) Issuer Shares Value(a) Salomon Income Financing Trust 9.50% 340,000 $8,627,500 Total preferred stock (Cost: $8,500,000) $8,627,500
Short-term securities (5.2%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (4.4%) Federal Home Loan Bank Disc Nt 12-06-00 6.40% $8,000,000 $7,991,253 Federal Home Loan Mtge Corp Disc Nts 12-29-00 6.42 19,600,000 19,499,188 01-16-01 6.49 13,000,000 12,890,698 Federal Natl Mtge Assn Disc Nts 01-25-01 6.50 $18,400,000 18,206,542 Total 58,587,681 Commercial paper (0.8%) Falcon Asset 01-16-01 6.65 2,700,000(e) 2,676,770 SBC Communications 01-26-01 6.60 6,500,000(e) 6,432,795 UBS Finance (Delaware) 12-01-00 6.57 1,700,000 1,699,690 Total 10,809,255 Total short-term securities (Cost: $69,418,989) $69,396,936 Total investments in securities (Cost: $1,351,411,466)(l) $1,352,956,095
Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At Nov. 30, 2000, the cost of securities purchased, including interest purchased, on a when-issued basis was $38,406,380. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Nov. 30, 2000, the value of foreign securities represented 11.56% of net assets. (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) 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. (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 original yield based upon the estimated timing of future cash flows. (g) 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. (h) 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. (i) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (j) 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. (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, 2000. (l) At Nov. 30, 2000, the cost of securities for federal income tax purposes was approximately $1,351,411,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 28,373,000 Unrealized depreciation (26,828,000) ----------- Net unrealized appreciation $ 1,545,000 ------------ American Express(R) Funds AXP Selective Fund 70100 AXP Financial Center Minneapolis, MN 55474 TICKER SYMBOL Class A:INSEX Class B:ISEBX Class C:N/A Class Y:IDEYX PRSRT STD AUTO U.S. POSTAGE PAID AMERICAN EXPRESS S-6385 P (1/01) 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.