-----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, TeHnDa0gxSKxpvy0tbeDnryPnqxIRbJ7byyoc9s1ONBMJEProgZbhIiuzd8ICsfb FnVRfZPl0fJ6mXaFL4x8kQ== 0000820027-97-000050.txt : 19970129 0000820027-97-000050.hdr.sgml : 19970129 ACCESSION NUMBER: 0000820027-97-000050 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970128 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS SELECTIVE FUND INC CENTRAL INDEX KEY: 0000052407 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00499 FILM NUMBER: 97512022 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 1996 semiannual report IDS Selective Fund (icon of) skyline The goals of IDS Selective Fund, Inc. are current income and the preservation of capital by investing in investment grade bonds. Distributed by American Express Financial Advisors Inc. (icon of) skyline 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, 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 president 3 From the portfolio manager 3 Ten largest holdings 5 Financial statements (Fund) 6 Notes to financial statements (Fund) 9 Financial statements (Portfolio) 16 Notes to financial statements (Portfolio) 19 Investments in securities 28 Board members and officers 35 IDS mutual funds 36 To our shareholders (picture of) William Pearce William R. Pearce President of the Fund (picture of) Ray Goodner Ray Goodner Portfolio manager From the president If you're an experienced investor, you know that the past two years have been unusually strong ones in many worldwide financial markets. Perhaps just as important, you also know that history shows that bull markets don't last forever. Though they're often unpredictable, declines -- whether they're brief or long-lasting, moderate or substantial -- are always a possibility. That fact reinforces the need for investors to periodically review their long-term goals and examine whether their investment program remains on track to achieving them. Your quarterly investment statements are one part of that monitoring process. The other is a meeting with your American Express financial advisor. That becomes even more important if there's a major change in your financial situation or in the financial markets. On June 10, 1996 the Fund began investing its assets in Quality Income Portfolio instead of directly in securities of individual companies. Following the Portfolio Manager's letter are the financial statements of both the Fund and Portfolio. The notes to the financials and prospectus go into more detail of how the new structure works. William R. Pearce From the portfolio manager IDS Selective Fund was well-positioned to benefit from a rally in the bond market last fall, and ultimately generated a total return (net asset value change and dividends) of 7.6% for investors in Class A shares during the first half of its fiscal period - June through November 1996. The past six months provided a far-better investment environment than did the first several months of 1996, when worries about a potential rise in the inflation rate spawned a sustained downturn in the bond market. During the summer, a somewhat calmer mood developed in the market, resulting in less dramatic swings in bond prices. Optimism returns to the market By fall, investors' attitudes began to turn optimistic, thanks to reports of moderating economic growth, little change in the low inflation rate and the Federal Reserve's decision not to raise short-term interest rates. The positive tone in the market continued through November, fostering a sharp rise in bond prices and a concurrent decline in long-term interest rates. In anticipation of an improving market, I lengthened the average maturity of the portfolio - a strategy that makes it more sensitive to changes in interest rates. Because bond prices move in the opposite direction of rates, the Fund's net asset value enjoyed an especially good boost during the rate drop. After rates had come down a fair amount, I began emphasizing more income-oriented securities such as mortgage-backed bonds, callable corporate bonds and asset-backed bonds. A well-rounded portfolio As for the portfolio's asset mix, the largest investment remained in long- and intermediate-term U.S. government bonds, followed by roughly equal amounts of U.S. corporate bonds, foreign government bonds (issued by Italy, Korea and China but denominated in U.S. dollars) and mortgage-backed bonds. While all groups provided positive performance, the foreign bonds registered the greatest gains. Looking to the rest of the fiscal year, given the market's recent rally, I think income will play a greater role in the Fund's return than potential capital appreciation. Therefore, with the help of this company's extensive research staff, I intend to seek out issues with attractive yields from a broad range of investment sectors. Most important for fixed-income investors, though, it appears that the key secular trends of generally tame inflation worldwide and a declining budget deficit here at home remain in place. Therefore, barring any sustained reversal in those factors, I think bonds should continue to prove rewarding for some time to come. Ray Goodner Class A 6-month performance (All figures per share) Net asset value (NAV) - --------------------------------------------- Nov. 30, 1996 $ 9.37 - --------------------------------------------- May 31, 1996 $ 9.00 - --------------------------------------------- Increase $ 0.37 - --------------------------------------------- Distributions June 1, 1996 - Nov. 30, 1996 From income $ 0.29 - --------------------------------------------- From capital gains $ -- - --------------------------------------------- Total distributions $ 0.29 - --------------------------------------------- Total return* +7.6** - --------------------------------------------- Class B 6-month performance (All figures per share) Net asset value (NAV) - --------------------------------------------- Nov. 30, 1996 $ 9.37 - --------------------------------------------- May 31, 1996 $ 9.00 - --------------------------------------------- Increase $ 0.37 - --------------------------------------------- Distributions June 1, 1996 - Nov. 30, 1996 From income $ 0.26 - --------------------------------------------- From capital gains $ -- - --------------------------------------------- Total distributions $ 0.26 - --------------------------------------------- Total return* +7.1** - --------------------------------------------- Class Y 6-month performance (All figures per share) Net asset value (NAV) - --------------------------------------------- Nov. 30, 1996 $ 9.37 - --------------------------------------------- May 31, 1996 $ 9.00 - --------------------------------------------- Increase $ 0.37 - --------------------------------------------- Distributions June 1, 1996 - Nov. 30, 1996 From income $ 0.30 - --------------------------------------------- From capital gains $ -- - --------------------------------------------- Total distributions $ 0.30 - --------------------------------------------- Total return* +7.7** - --------------------------------------------- * 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. Quality Income Portfolio The Portfolio's ten largest holdings (Pie chart) The ten holdings listed here make up 10.56% of the Portfolio's net assets Percent Value (of Portfolio's net assets) (as of Nov. 30, 1996) Japan Finance 1.58% $27,416,694 9.25% 1998 Republic of Italy 1.31 22,792,840 6.875% 2023 Southern California Edison 1.26 21,875,910 8.875% 2023 Dayton Hudson 1.08 18,673,187 7.875% 2023 PDV America .95 16,458,420 7.875% 2003 Pacific Bell .95 16,442,250 8.50% 2031 Texas Utilities Electric .88 15,202,590 9.75% 2021 Schering-Plough .86 15,000,000 7.31% Zero Coupon 1996 Daimler-Benz North America .85 14,791,420 7.375% Medium-term Nts 2006 General Motors Acceptance .84 14,646,203 7.00% 2000 Excludes U.S. Treasury and government agencies holdings that total 46% of the Portfolio's net assets. Financial statements Statement of assets and liabilities IDS Selective Fund, Inc. Nov. 30, 1996 Assets (Unaudited) Investment in Quality Income Portfolio (Note 1) $1,736,697,083 Total assets 1,736,697,083 Liabilities Dividends payable to shareholders 848,821 Accrued distribution fee 5,115 Accrued service fee 14,627 Accrued transfer agency fee 22,352 Accrued administrative services fee 4,531 Other accrued expenses 114,392 Total liabilities 1,009,838 Net assets applicable to outstanding capital stock $1,735,687,245 Represented by Capital stock -- authorized 10,000,000,000 shares of $.01 par value (Note 1) $ 1,852,165 Additional paid-in-capital 1,625,928,521 Accumulated net realized gain (Note 1) 18,727,255 Unrealized appreciation of investments and on translation of assets and liabilities in foreign currencies 89,179,304 Total -- representing net assets applicable to outstanding capital stock $1,735,687,245 Net assets applicable to outstanding shares: Class A $1,409,635,552 Class B $ 125,401,266 Class Y $ 200,650,427 Net asset value per share of outstanding capital stock: Class A shares 150,423,889 $ 9.37 Class B shares 13,382,079 $ 9.37 Class Y shares 21,410,510 $ 9.37 See accompanying notes to financial statements. Statement of operations IDS Selective Fund, Inc. Six months ended Nov. 30, 1996 (Unaudited) Investment Income
June 1, 1996 to June 10, 1996 to Total June 9, 1996 Nov. 30, 1996 (Notes 1 and 4) Income: Dividends $ -- $ 195,083 $ 195,083 Interest 2,465,563 58,608,359 61,073,922 Total Income 2,465,563 58,803,442 61,269,005 Expenses (Note 2): Investment management services fee 168,661 -- 168,661 Distribution fee -- Class B 15,568 416,301 431,869 Transfer agency fee 35,375 879,276 914,651 Incremental transfer agency fee -- Class B 162 4,337 4,499 Service fee Class A 47,116 1,136,290 1,183,406 Class B 3,633 96,626 100,259 Administrative services fee 15,854 391,678 407,532 Compensation of board members 4 1,975 1,979 Compensation of officers -- 5,379 5,379 Custodian fees 1,400 -- 1,400 Postage 690 34,094 34,784 Registration fees 1,427 45,287 46,714 Reports to shareholders -- 2,367 2,367 Audit fees 26 4,974 5,000 Administrative 9 2,796 2,805 Other -- 611 611 Total expenses 289,925 3,021,991 3,311,916 Earnings credits on cash balances (Note 4) (84) -- (84) 289,841 3,021,991 3,311,832 Expenses, including investment management services fee, allocated from Quality Income Portfolio -- 4,226,147 4,226,147 Total net expenses 289,841 7,248,138 7,537,979 Investment income -- net 2,175,722 51,555,304 53,731,026 Realized and unrealized gain (loss) -- net Net realized gain (loss) on security and foreign currency transactions (1,140,606)* 6,701,934 5,561,328 Net realized loss on financial futures contracts -- (11,402,400) (11,402,400) Net realized gain on option contracts written -- 1,165,788 1,165,788 Net realized loss on investments and foreign currencies (1,140,606) (3,534,678) (4,675,284) Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies (5,677,421) 81,147,830 75,470,409 Net gain (loss) on investments and foreign currencies (6,818,027) 77,613,152 70,795,125 Net increase (decrease) in net assets resulting from operations $(4,642,305) $129,168,456 $124,526,151 *Includes gain of $115,748 from foreign currency transactions. See accompanying notes to financial statements.
Financial statements Statements of changes in net assets IDS Selective Fund, Inc.
Operations and distributions Nov. 30, 1996 May 31, 1996 Six months ended Six months (Unaudited) ended Investment income -- net $ 53,731,026 $ 54,403,714 Net realized gain (loss) on investments and foreign currencies (4,675,284) 23,062,764 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies 75,470,409 (113,687,462) Net increase (decrease) in net assets resulting from operations 124,526,151 (36,220,984) Distributions to shareholders from: Net investment income Class A (44,436,983) (48,380,959) Class B (3,261,103) (2,717,675) Class Y (6,562,918) (5,835,989) Net realized gain Class A (345,701) (4,513,331) Class B (25,370) (242,090) Class Y (51,057) (433,179) Excess distribution of realized gain (Note 1) Class A -- (763,230) Class B -- (93,149) Class Y -- (193,212) Total distributions (54,683,132) (63,172,814) Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 58,218,992 111,507,134 Class B shares 31,499,710 58,275,961 Class Y shares 28,538,339 111,069,550 Reinvestment of distributions at net asset value Class A shares 33,236,804 40,178,831 Class B shares 2,989,606 2,823,107 Class Y shares 6,613,975 6,425,412 Payments for redemptions Class A shares (147,047,761) (150,106,899) Class B shares (Note 2) (22,079,901) (18,994,240) Class Y shares (54,776,652) (36,979,985) Increase (decrease) in net assets from capital share transactions (62,806,888) 124,198,871 Total increase in net assets 7,036,131 24,805,073 Net assets at beginning of period 1,728,651,114 1,703,846,041 Net assets at end of period (including undistributed net investment income of $0 and $529,978) $1,735,687,245 $1,728,651,114 See accompanying notes to financial statements.
Notes to financial statements IDS Selective Fund, Inc. (Unaudited as to Nov. 30, 1996) _______________________________________________________________________ 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 offers Class A, Class B and Class Y shares. Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent deferred sales charge and such shares automatically convert to Class A after eight years. Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend, liquidation and other rights, and the same terms and conditions, except that the level of distribution fee, transfer agency fee and service fee (class specific expenses) differs among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Quality Income Portfolio Effective June 10, 1996, the Fund began investing all of its assets in the Quality Income Portfolio (the Portfolio), a series of Income Trust, an open-end investment company that has the same objectives as the Fund. This was accomplished by transferring the Fund's assets to the Portfolio in return for a proportionate ownership interest in the Portfolio. The Portfolio invests primarily in investment-grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at value that is equal to the Fund's proportionate ownership interest in the net assets of the Portfolio. The percentage of the Portfolio owned by the Fund at Nov. 30, 1996 was 99.97%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements," which are included elsewhere in this report. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Federal taxes Since the Fund's policy is to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders, no provision for income or excise taxes is required. Net investment income (loss) and net realized gains (losses) allocated from the Portfolio may differ for financial statement and tax purposes primarily because of the deferral of losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. _______________________________________________________________________ 2.Expenses and sales charges In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: Effective March 20, 1995, the Fund entered into agreements with American Express Financial Corporation (AEFC) for providing administrative services and serving as transfer agent. Under its Administrative Services Agreement, the Fund pays AEFC 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. Under this agreement, the Fund also pays taxes; audit and certain legal fees; registration fees for shares; office expenses; consultant's fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; and any other expenses properly payable by the Fund approved by the board. Under a separate Transfer Agency Agreement, AEFC maintains shareholder accounts and records. The Fund pays AEFC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 Also effective March 20, 1995, the Fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder servicing-related services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares for distribution-related services. Under a Shareholder Service Agreement, the Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of the Fund's average daily net assets attributable to Class A and Class B shares. Sales charges received by American Express Financial Advisors, Inc. for distributing Fund shares were $1,326,755 for Class A and $49,882 for Class B for the period ended Nov. 30, 1996. Prior to April 30, 1996, the Fund had a retirement plan for its independent board members. The plan was terminated April 30, 1996. The total liability for the plan is $51,528, which will be paid out at some future date. _______________________________________________________________________ 3. Capital share transactions Transactions in shares of capital stock for the periods indicated are as follows: Six months ended Nov. 30, 1996 Class A Class B Class Y _______________________________________________________________________ Sold 6,405,439 3,468,287 3,147,317 Issued for reinvested 3,656,724 328,859 728,481 distributions Redeemed (16,181,572) (2,431,701) (6,046,475) _______________________________________________________________________ Net increase (decrease) (6,119,409) 1,365,445 (2,170,677) - ----------------------------------------------------------------------- Six months ended May 31, 1996 Class A Class B Class Y _______________________________________________________________________ Sold 11,921,387 6,232,510 12,031,481 Issued for reinvested 4,313,212 303,969 692,487 distributions Redeemed (16,151,779) (2,050,373) (4,007,375) _______________________________________________________________________ Net increase 82,820 4,486,106 8,716,593 _______________________________________________________________________ 4. Pre-conversion to Master Prior to transferring its securities to Quality Income Portfolio on June 10, 1996, various transactions took place as stated below. Expenses and sales charges Prior to the conversion on June 10, 1996, the Fund paid an investment management fee to AEFC. Subsequent to the conversion, the investment management fee is assessed at the Portfolio level. (See the notes to the Portfolio financial statements for the terms of the investment management agreement, which remain unchanged.) During the period from June 1, 1996 to June 9, 1996, the Fund's custodian and transfer agency fees were reduced by $84 as a result of earnings credits from overnight cash balances. Securities transactions Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $36,192,318 and $21,571,908, respectively, for the period from June 1, 1996 to June 9, 1996. Realized gains and losses were determined on an identified cost basis. Income from securities lending amounted to $3,898 for the period from June 1, 1996 to June 9, 1996. - ----------------------------------------------------------------------- 5. Financial highlights The tables below show certain important financial information for evaluating the Fund's results. IDS Selective Fund, Inc. Fiscal period ended May 31, Per share income and capital changes*
Class A 1996*** 1996** 1995 1994 1993 1992 1991 1990 1989 1988 1987 Net asset value, $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 $8.27 $9.03 beginning of period Income from investment operations: Net investment income .29 .33 .59 .60 .63 .66 .69 .70 .72 .74 .77 Net gains (losses) .37 (.52) 1.08 (1.05) .69 .27 .52 (.30) .27 .17 (.71) (both realized and unrealized) Total from investment .66 (.19) 1.67 (.45) 1.32 .93 1.21 .40 .99 .91 .06 operations Less distributions: Dividends from net (.29) (.31) (.58) (.60) (.64) (.66) (.69) (.68) (.74) (.74) (.77) investment income Distributions from -- (.03) (.13) (.15) (.11) -- -- -- -- -- (.05) realized gains Total distributions (.29) (.34) (.71) (.75) (.75) (.66) (.69) (.68) (.74) (.74) (.82) Net asset value, $9.37 $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 $8.27 end of period Ratios/supplemental data Class A 1996*** 1996** 1995 1994 1993 1992 1991 1990 1989 1988 1987 Net assets, end of period $1,410 $1,408 $1,490 $1,402 $1,737 $1,541 $1,403 $1,196 $1,167$1,081 $1,101 (in millions) Ratio of expenses to .85% + .89%+ .85% .72% .72% .74% .77% .76% .77% .74% .75% average daily net assets++ Ratio of net income 6.33% + 6.27%+ 6.59% 6.53% 6.57% 7.32% 7.94% 8.58% 8.42% 8.67% 8.80% to average daily net assets Portfolio turnover rate 14% 18% 26% 30% 30% 62% 59% 54% 79% 86% 74% (excluding short-term securities) for the underlying Portfolio Total return+++ 7.6% (2.0%) 20.3% (4.7%) 14.8% 10.8% 15.0% 4.8% 12.3% 11.3% 0.6% *For a share outstanding throughout the period. Rounded to the nearest cent. **The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. ***Six months ended Nov. 30, 1996 (Unaudited). +Adjusted to an annual basis. ++Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. +++Total return does not reflect payment of a sales charge.
IDS Selective Fund, Inc. Fiscal period ended May 31, Per share income and capital changes*
Class B Class Y 1996++ 1996+ 1995** 1996++ 1996+ 1995** Net asset value, $9.00 $9.53 $8.78 $9.00 $9.53 $8.78 beginning of period Income from investment operations: Net investment income .25 .30 .40 .30 .34 .46 Net gains (losses) both .38 (.52) .75 .37 (.52) .75 realized and unrealized) Total from investment .63 (.22) 1.15 .67 (.18) 1.21 operations Less distributions: Dividends from net (.26) (.28) (.40) (.30) (.32) (.46) investment income Distributions from -- (.03) -- -- (.03) -- realized gains Total distributions (.26) (.31) (.40) (.30) (.35) (.46) Net asset value, $9.37 $9.00 $9.53 $9.37 $9.00 $9.53 end of period Ratios/supplemental data Class B Class Y 1996++ 1996+ 1995** 1996+++ 1996+ 1995** Net assets, end of period $125 $108 $72 $201 $212 $142 (in millions) Ratio of expenses to 1.61%# 1.63# 1.67%# .68%# .70%# .73%# average daily net assets+++ Ratio of net income 5.58%# 5.56%# 5.68%# 6.50%# 6.51%# 6.64%# to average daily net assets Portfolio turnover rate 14% 18% 26% 14% 18% 26% (excluding short-term securities) for the underlying Portfolio Total return*** 7.1% (2.4%) 13.1% 7.7% (2.0%) 13.8% *For a share outstanding throughout the period. Rounded to the nearest cent. **Inception date was March 20, 1995 for Class B and Class Y. ***Total return does not reflect payment of a sales charge. #Adjusted to an annual basis. +The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. ++Six months ended Nov. 30, 1996 (Unaudited). +++Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances.
Statement of assets and liabilities Quality Income Portfolio Nov. 30, 1996 Assets (Unaudited) Investments in securities, at value (Note 1) (identified cost $1,644,334,576) $1,734,414,397 Cash in bank on demand deposit 470,275 Dividends and accrued interest receivable 24,485,658 Receivable for investment securities sold 1,790,583 U.S. government securities held as collateral (Note 4) 48,125,347 --------------------- Total assets 1,809,286,260 --------------------- Liabilities Payable for investment securities purchased 21,861,510 Payable upon return of securities loaned (Note 4) 50,075,347 --------------------- Accrued investment management services fee 48,239 Other accrued expenses 46,869 --------------------- Total liabilities 72,031,965 --------------------- ===================== Net assets $1,737,254,295 ===================== See accompany notes to financial statements. Statement of operations Quality Income Portfolio For the period from June 10, 1996 (commencement of operations ) to Nov. 30, 1996 Investment income (Unaudited) Income: Interest $ 58,623,259 Dividends 195,143 --------------------- Total income 58,818,402 --------------------- Expenses (Note 2): Investment management services fee 4,177,373 Compensation of board members 7,121 Custodian fees 27,779 Audit fees 14,750 Administrative 2,104 --------------------- Total expenses 4,229,127 Earnings credits on cash balances (Note 2) (1,894) Total net expenses 4,227,233 --------------------- Investment income -- net 54,591,169 --------------------- Realized and unrealized gain (loss) -- net Net realized gain on security and foreign curency transactions (including gain of $965,427 from foreign currency transactions) (Note 3) 6,704,004 Net realized loss on financial futures (11,406,331) Net realized gain on option contracts written (Note 6) 1,166,158 --------------------- Net realized loss on investments and foreign currencies (3,536,169) Net change in unrealized appreciation or depreciation of investments and on translation of assets 81,176,272 --------------------- and liabilities in foreign currencies Net gain on investments and foreign currencies 77,640,103 ===================== Net increase in net assets resulting from operations $132,231,272 ===================== See accompanying notes to financial statements. Statement of changes in net assets Quality Income Portfolio For the period from June 10, 1996 (commencement of operations) to Nov. 30, 1996 Operations and distributions (Unaudited) Investment income - net $ 54,591,169 Net realized loss on investments and foreign currencies (3,536,169) Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies 81,176,272 -------------------- Net increase in net assets resulting from operations 132,231,272 Net contributions 1,604,993,023 -------------------- Total increase in net assets 1,737,224,295 Net assets at beginning of period (Note 1) 30,000 ==================== Net assets at end of period $1,737,254,295 ==================== See accompanying notes to financial statements. Notes to financial statements Quality Income Portfolio (Unaudited as to Nov. 30, 1996) ______________________________________________________________________ 1. Summary of significant accounting policies The Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. Quality Income Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. On April 15, 1996, AEFC contributed $30,000 to the Portfolio. Operations did not formally commence until June 10, 1996, at which time, an existing fund transferred its assets to the Portfolio in return for an ownership percentage of the Portfolio. Significant accounting polices followed by the Portfolio are summarized below: Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price; securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Determination of fair value involves, among other things, reference to market indexes, matrixes and data from independent brokers. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions In order to produce incremental earnings, protect gains and facilitate buying and selling of securities for investment purposes, the Portfolio may buy or write options traded on any U.S. or foreign exchange or in the over-the-counter market where the completion of the obligation is dependent upon the credit standing of the other party. The Portfolio also may buy or sell put and call options and write covered call options on portfolio securities and may write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity of profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions In order to gain exposure to or protect itself from changes in the market, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy or write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars at the closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement dates on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Accordingly, as a "pass-through" entity, the Portfolio does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar denominated bonds, interest income includes level-yield amortization of premium and discount. For foreign bonds, except for original issue discount, the Portfolio does not amortize premium and discount. Interest income, including level-yield amortization of premium and discount, is accrued daily. _______________________________________________________________________ 2. Fees and expenses The Trust, on behalf of the Portfolio, has entered into an Investment Management Services Agreement with American Express Financial Corporation (AEFC) for managing its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes and nonadvisory expenses, which include custodian fees to be paid to an affiliate of AEFC; 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, approved by the board. For the period from June 10, 1996 to Nov. 30, 1996, the Portfolio's custodian fees were reduced by $1,894 as a result of earnings credits from overnight cash balances. Pursuant to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the units of the Trust. - ----------------------------------------------------------------------- 3. Securities transactions Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $186,687,329 and $218,562,152, respectively, for the period from June 10, 1996 to Nov. 30, 1996. For the same period, the portfolio turnover rate was 14%. Realized gains and losses are determined on an identified cost basis. - ----------------------------------------------------------------------- 4. Lending of portfolio securities At Nov. 30, 1996, securities valued at $47,471,135 were on loan to brokers. For collateral, the Portfolio received $1,950,000 in cash and U.S. government securities valued at $48,125,347. Income from securities lending amounted to $55,666 for the period from June 10, 1996 to Nov. 30, 1996. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. - ----------------------------------------------------------------------- 5. Illiquid securities Investments in securities include issues that are illiquid. The Portfolio currently limits investments in illiquid securities to 10% of the net assets, at market value, at the time of purchase. The aggregate value of such securities at Nov. 30, 1996 was $6,268,389 representing 0.4% of the net assets. Pursuant to guidelines adopted by the board, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. - ----------------------------------------------------------------------- 6. Option contracts written The number of contracts and premium amounts associated with covered call option contracts written (see Summary of significant accounting policies) is as follows: Period ended Nov. 30, 1996 Call Puts ------------------------------------------------- Contracts Premium Contracts Premium ------------------------------------------------- Balance May 31, 1996 -- $ -- -- $ -- Opened 500 876,408 400 451,126 Closed -- -- (400) (451,126) Exercised (311) (655,867) -- -- Expired (189) (220,541) -- -- -------------------------------------------------------------------------- Balance Nov. 30, 1996 -- $ -- -- $ -- - ----------------------------------------------------------------------- 7. Interest rate futures contracts At Nov. 30, 1996, investments in securities included securities valued at $7,156,030 that were pledged as collateral to cover initial margin deposits on 1,300 open sales contracts. The market value of the open contracts at Nov. 30, 1996, was $150,637,500 with a net unrealized gain of $1,066,281. See Summary of significant accounting policies. Investments in securities Quality Income Portfolio (Percentages represent value of Nov. 30, 1996 (Unaudited) investments compared to net assets) - ----------------------------------------------------------------------------------------------------------------------- Bonds (92.6%) - ------------------------------------------------------------------------------------------------------------------------
Issuer Coupon Maturity Principal Value (a) rate year amount - ------------------------------------------------------------------------------------------------------------------------ U.S. government obligations (34.0%) U.S. Treasury 5.875% 2004 $ 8,000,000 $ 7,959,760 6.875 1999 60,000,000 61,758,000 7.25 1996-2004 70,000,000 73,049,500 7.50 2001-2016 217,100,000 (b) 238,147,504 8.00 2021 15,000,000 17,780,100 8.625 1997 50,745,000 (l) 51,876,106 Resolution Funding Corp Zero Coupon 7.61 2017 39,000,000 (c) 9,910,290 7.89 2016 35,900,000 (b,c) 9,977,687 7.98 2016 47,000,000 (b,c) 12,798,100 8.19 2014 48,000,000 (c) 15,481,920 8.27 2014 10,000,000 (c) 3,120,500 8.35 2006 48,000,000 (b,c) 26,819,040 8.94 2006 25,000,000 (c) 14,199,500 8.95 2006 68,000,000 (b,c) 36,831,520 Overseas Private Investment 6.99 2009 10,000,000 (i) 10,187,500 Total 589,897,027 - ------------------------------------------------------------------------------------------------------------------------ Mortgage-backed securities (12.6%) Federal Home Loan Mtge Corp 7.50 2024 17,363,605 17,668,509 8.00 2016-2025 11,227,867 11,594,910 8.50 2017-2022 10,316,945 10,815,711 9.00 2020-2021 5,922,344 6,280,166 Collateralized Mtge Obligation 8.50 2019 2,971,133 2,987,652 Federal Housing Admin 7.43 2024 9,169,652 9,029,814 Federal Natl Mtge Assn 6.50 2023 12,419,180 12,147,448 8.00 2026 14,850,000 15,153,961 10.00 2002 133 139 Collateralized Mtge Obligation 8.00 2021 13,787,402 14,047,843 8.50 2019 1,448,659 1,597,713 Principal Only 9.50 2018 1,318,240 (e) 1,042,017 9.89 2020 2,441,223 (e) 2,085,223 Trust Series Z 6.00 2024 20,041,441 (d) 16,171,238 Govt Natl Mtge Assn 7.50 2026 20,500,000 20,816,725 8.00 2022-2026 43,265,072 44,753,215 8.50 2026 20,167,411 21,091,885 9.00 2024-2025 6,944,347 7,394,077 Collateralized Mtge Obligation Trust 7.75 2012 1,371,196 1,386,255 Prudential Bache Collateralized Mtge Obligation 7.965 2019 3,599,707 3,729,022 Total 219,793,523 - ------------------------------------------------------------------------------------------------------------------------ Financial (9.2%) Banks and savings & loans (3.6%) BankAmerica Sub Nts 7.50 2002 8,810,000 9,338,336 BankBoston Capital Trust 8.25 2026 5,000,000 (g) 5,158,600 Boatmen's Bancshares Sub Nts 9.25 2001 8,950,000 10,087,097 First Bank System 6.875 2007 8,550,000 8,662,347 First Chicago Sr Nts 9.00 1999 7,900,000 8,458,056 NCNB Sub Nts 9.125 2001 10,000,000 11,170,800 Standard Credit Card 8.625 2002 10,000,000 10,033,400 Total 62,908,636 - ------------------------------------------------------------------------------------------------------------------------ Financial services (2.4%) Aristar Sr Deb 8.875 1998 10,520,000 10,971,729 BankAmerica 7.70 2026 5,000,000 (g) 4,965,000 Beneficial 9.125 1998 10,000,000 10,388,300 Greyhound Financial Medium-term Nts 7.95 1999 9,600,000 10,026,240 Salomon 7.75 2000 5,000,000 5,199,300 Total 41,550,569 - ------------------------------------------------------------------------------------------------------------------------ Insurance (3.2%) American United Life Insurance 7.75 2026 4,800,000 (j) 4,755,264 Arkwright Trust 9.625 2026 4,000,000 (g) 4,531,720 Berkley (WR) 8.70 2022 10,000,000 11,272,300 Conseco Finance Trust II 8.70 2026 6,600,000 6,837,270 Equitable Life Assurance 7.70 2015 5,000,000 (g) 5,146,450 Nationwide Trust 9.875 2025 11,500,000 (g) 13,016,390 SunAmerica 9.95 2012 8,000,000 9,714,480 Total 55,273,874 - ------------------------------------------------------------------------------------------------------------------------ Industrial (14.3%) Automotive & related (2.6%) Daimler-Benz North America Medium-term Nts 7.375 2006 14,000,000 14,791,420 General Motors 8.875 2003 7,050,000 7,995,335 General Motors Acceptance 7.00 2000 14,300,000 14,646,203 Medium-term Nts 5.95 1998 8,000,000 8,012,720 Total 45,445,678 - ------------------------------------------------------------------------------------------------------------------------ Building materials & construction (0.6%) Georgia-Pacific Credit Sensitive Nt 9.85 1997 10,000,000 10,217,700 - ------------------------------------------------------------------------------------------------------------------------ Chemicals (0.7%) Dow Chemical 8.85 2021 10,000,000 11,520,100 - ------------------------------------------------------------------------------------------------------------------------ Electronics (0.3%) Harris 10.375 2018 3,900,000 4,361,604 - ------------------------------------------------------------------------------------------------------------------------ Energy (2.3%) PDV America 7.875 2003 16,500,000 16,458,420 Texaco Capital Gtd Deb 7.50 2043 12,000,000 12,445,800 USX 9.375 2022 9,200,000 10,884,520 Total 39,788,740 - ------------------------------------------------------------------------------------------------------------------------ Energy equipment & services (0.3%) Foster Wheeler 6.75 2005 5,850,000 5,834,147 - ------------------------------------------------------------------------------------------------------------------------ Health care (1.6%) Lilly (Eli) 6.77 2036 13,300,000 12,823,062 Schering-Plough Zero Coupon 7.31 1996 15,000,000 (c,g) 15,000,000 Total 27,823,062 - ------------------------------------------------------------------------------------------------------------------------ Industrial equipment & services (1.8%) Browning-Ferris Inds 9.25 2021 7,000,000 8,628,200 Case 7.25 2005 10,000,000 10,289,500 Deere & Co 8.95 2019 10,000,000 11,698,900 Total 30,616,600 - ------------------------------------------------------------------------------------------------------------------------ Media (1.7%) Tele-communications 7.875 2013 13,300,000 12,221,636 Sr Deb 9.875 2022 5,000,000 5,381,600 Time Warner Entertainment 8.375 2033 12,000,000 (g) 12,470,280 Total 30,073,516 - ------------------------------------------------------------------------------------------------------------------------ Retail (2.4%) American Stores 8.00 2026 10,000,000 10,615,300 Dayton Hudson 7.875 2023 18,850,000 18,673,187 Home Depot Cv 3.25 2001 1,000,000 998,750 Wal-Mart Stores 7.00 2006 12,000,000 (g) 12,345,480 Total 42,632,717 - ------------------------------------------------------------------------------------------------------------------------ Transportation (0.6%) Burlington Northern 7.00 2025 10,000,000 9,559,000 - ------------------------------------------------------------------------------------------------------------------------ Utilities (9.2%) Electric (6.8%) Arizona Public Service 1st Mtge 8.75 2024 5,000,000 5,611,800 Sale Lease-Backed Obligation 8.00 2015 9,000,000 9,525,330 Cajun Electric Power Cooperation Mtge Trust 8.92 2019 4,960,000 5,481,742 Commonwealth Edison 6.50 2000 9,000,000 9,055,530 Long Island Lighting 9.625 2024 10,000,000 10,594,500 RGS Funding Sale Lease-Backed Obligation 9.82 2022 9,939,934 12,412,592 Salton Sea Sr Nts 7.84 2010 10,000,000 (g) 10,423,400 San Diego Gas & Electric 1st Mtge 9.625 2020 9,950,000 11,105,295 Southern California Edison 1st Mtge 8.875 2023 21,000,000 21,875,910 Texas Utilities Electric 1st Mtge 9.75 2021 13,000,000 15,202,590 Wisconsin Electric Power 6.875 2095 8,000,000 7,555,200 Total 118,843,889 - ------------------------------------------------------------------------------------------------------------------------ Telephone (2.4%) BellSouth Telecommunications 7.00 2095 10,000,000 9,985,600 GTE 10.25 2020 6,050,000 6,993,135 New York Telephone 9.375 2031 7,000,000 8,030,120 Pacific Bell 8.50 2031 15,000,000 16,442,250 Total 41,451,105 - ------------------------------------------------------------------------------------------------------------------------ Foreign (12.7%)(h) ABN Amro Bank (U.S. Dollar) 7.75 2023 12,000,000 12,939,360 Alcan Aluminum (U.S. Dollar) 8.875 2022 9,600,000 10,493,184 Bank of China (U.S. Dollar) 8.25 2014 7,100,000 7,419,713 British Airport Authority Euro (British Pound) 5.75 2006 1,500,000 2,588,132 Bundes Republic (Deutsche Mark) 6.00 2016 10,000,000 6,208,130 (Deutsche Mark) 7.50 2004 14,000,000 10,213,853 City of Helsinki (U.S. Dollar) Sr Nts 9.15 2006 1,500,000 (j) 1,513,125 Euratom Euro (U.S. Dollar) 7.75 1997 6,100,000 6,115,250 Financiera Ener Nacional (U.S. Dollar) 9.375 2006 11,800,000 (g) 12,463,750 Japan Finance (U.S. Dollar) 9.25 1998 25,950,000 27,416,694 KFW Intl Finance (U.S. Dollar) Medium-term Nts 8.50 1999 10,000,000 10,745,900 Korea Electric Power (U.S. Dollar) 7.75 2013 14,000,000 14,633,920 (U.S. Dollar) 8.00 2002 9,000,000 9,635,220 (U.S. Dollar) Zero Coupon 9.27 2016 35,000,000 (f) 6,858,250 Peoples Republic of China (U.S. Dollar) 9.00 2096 10,000,000 11,081,700 Petronas (U.S. Dollar) 7.75 2015 10,000,000 (g) 10,526,900 Republic of Austria Euro (U.S. Dollar) 10.00 1998 5,000,000 5,306,250 Republic of Italy (U.S. Dollar) 6.875 2023 23,200,000 22,792,840 Rodamco NV (U.S. Dollar) 7.30 2005 10,000,000 10,407,800 State of Israel (U.S. Dollar) 6.375 2005 10,800,000 10,472,436 Telekom Malaysia (U.S. Dollar) 7.875 2025 10,000,000 (g) 10,511,000 Total 220,343,407 - ----------------------------------------------------------------------------------------------------------------------- Total bonds (Cost: $1,518,343,525) 1,607,934,894
- -------------------------------------------------------------------------------- Preferred stocks (0.7%) - -------------------------------------------------------------------------------- Issuer Shares Value (a) - -------------------------------------------------------------------------------- Salomon 2.375% 340,000 8,903,750 Sakura Bank ADR .075% Cv 174,000 (g) 3,258,953 - -------------------------------------------------------------------------------- Total preferred stocks (Cost: $11,671,710) 12,162,703 - -------------------------------------------------------------------------------- Short-term securities (6.5%) - -------------------------------------------------------------------------------- Issuer Annualized Amount Value (a) yield on payable at date of maturity purchase - -------------------------------------------------------------------------------- U.S government agencies (0.2%) Federal Home Loan Mtge Disc Nt 12-20-96 5.23% $1,100,000 $1,096,816 Federal Natl Mtge Assn Disc Nt 12-09-96 5.24 2,900,000 2,896,208 Total 3,993,024 - -------------------------------------------------------------------------------- Commercial paper (6.2%) Ameritech Capital 12-18-96 5.29 5,000,000 (k) 4,986,825 Aon 12-06-96 5.28 1,200,000 1,198,948 BBV Finance 12-02-96 5.26 7,300,000 7,297,875 CAFCO 12-18-96 5.28 . 4,700,000 (k) 4,687,686 Cargill 12-13-96 5.27 5,800,000 5,789,004 Dean Witter 01-07-97 5.35 7,900,000 7,855,637 Gannett 12-17-96 5.32 6,900,000 (k) 6,882,731 General Electric 12-17-96 5.28 3,500,000 3,491,306 Kellogg 01-10-97 5.35 7,900,000 7,852,135 Metlife Funding 01-28-97 5.35 2,571,000 2,547,373 Mobil Australia Finance 12-05-96 5.27 2,400,000 (k) 2,398,250 Pfizer 12-05-96 5.27 600,000 (k) 599,563 Pitney Bowes Credit 12-19-96 5.27 6,700,000 6,681,435 Reed Elsevier 12-23-96 5.27 3,500,000 (k) 3,488,260 Southwestern Bell Capital 12-04-96 5.27 2,200,000 (k) 2,198,717 Sandoz 12-18-96 5.29 7,800,000 7,779,525 01-27-97 5.37 700,000 (k) 693,671 Smithkline Beecham 12-03-96 5.29 5,500,000 5,497,594 12-23-96 5.30 8,000,000 7,973,013 01-21-97 5.32 7,300,000 7,243,397 Sysco 12-10-96 5.28 5,400,000 (k) 5,392,125 Wal-mart 12-05-96 5.40 5,300,000 5,296,025 Total 107,831,095 - -------------------------------------------------------------------------------- Letter of credit (0.1%) Bank of America - AES Barbers Point 12-20-96 5.29 2,500,000 2,492,681 - -------------------------------------------------------------------------------- Total short-term securities (Cost: $114,319,341) $114,316,800 - -------------------------------------------------------------------------------- Total investments in securities (Cost: $1,644,334,576)(m) $1,734,414,397 (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Security is partially or fully on loan. See Note 4 to the financial statements. (c) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (d) This security is a collateralized mortgage obligation that pays no interest of principal during its initial accrual period until payment of previous series within the trust have been paid off. Interest is accrued at an effective yield; similar to a zero coupon bond. (e) 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. (f) 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 rate reset date disclosed. (g) 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. (h) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 1996. (j) Identifies issues considered to be illiquid, (see Note 5 to the financial statements). Information concerning such security holdings at Nov. 30, 1996, is as follows: Security Acquisition Cost date American United Life Insurance* 7.75% 2026 02-13-96 $4,800,000 City of Helsinki 9.15% Sr Nts 2006 02-07-95 $1,497,956 *Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. (k) 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, an 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. (l) Partially pledged as initial margin deposit on the following open interest rate futures contracts (see Note 7 to the financial statements): Type of security Notional amount Sales contracts U.S Treasury Bonds March 1997 $130,000,000 (m) At Nov. 30, 1996, the cost of securities for federal income tax purposes was approximately $1,644,334,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $92,252,000 Unrealized depreciation (2,172,000) Net unrealized appreciation $90,080,000 Board members and officers Board members and officers of the Fund - ----------------------------------------------------------------- President and interested board member William R. Pearce President of all funds in the IDS MUTUAL FUND GROUP. - ----------------------------------------------------------------- Independent board members H. Brewster Atwater Jr. Former chairman and chief executive officer, General Mills, Inc. Lynne V. Cheney Distinguished fellow, American Enterprise Institute for Public Policy Research. Robert F. Froehlke Former president of all funds in the IDS MUTUAL FUND GROUP. Heinz F. Hutter Former president and chief operating officer, Cargill, Inc. Anne P. Jones Attorney and telecommunications consultant. Melvin R. Laird Senior counsellor for national and international affairs, The Readers's Digest Association, Inc. Edson W. Spencer Former chairman and chief executive officer, Honeywell, Inc. Wheelock Whitney Chairman, Whitney Management Company. C. Angus Wurtele Chairman of the board, The Valspar Corporation. - ----------------------------------------------------------------- Interested board members who are officers and/or employees of AEFC William H. Dudley Executive vice president, AEFC. David R. Hubers President and chief executive officer, AEFC. John R. Thomas Senior vice president, AEFC. - ----------------------------------------------------------------- Officers who also are officers and/or employees of AEFC Peter J. Anderson Vice President of all funds in the IDS MUTUAL FUND GROUP. Melinda S. Urion Treasurer of all funds in the IDS MUTUAL FUND GROUP. - ------------------------------------------------------------------- Other officer Leslie L. Ogg Vice president, general counsel and secretary of all funds in the IDS MUTUAL FUND GROUP. PAGE IDS mutual funds Global/International funds Funds in this group seek capital growth and/or income by investing primarily in foreign securities. Foreign investments may be subject to currency fluctuations and political and economic risks of the countries in which the investments are made. They are high risk mutual funds with a potential for high reward. IDS Emerging Markets Fund Invests in a Portfolio comprised primarily of stocks of companies in developing countries throughout the world that are believed to offer growth potential. Seeks to provide long-term growth of capital. (icon of) world globe IDS Global Growth Fund Invests in a Portfolio comprised primarily of stocks of companies throughout the world that are positioned to meet market needs in a changing world economy. These companies offer above-average potential for long-term growth. (icon of) world IDS International Fund Invests primarily in common stocks of foreign companies that offer potential for superior growth. The Fund may invest up to 20% of its assets in the U.S. market. (icon of) three flags IDS Global Balanced Fund Invests in stocks-and bonds in, for the most part, major markets throughout the world, including the U.S. Seeks to provide a balance of growth of capital and current income. (icon of) scale of globes IDS Global Bond Fund Invests in a Portfolio comprised primarily of debt securities of U.S. and foreign issuers to seek high total return through income and growth of capital. (icon of) globe Growth funds Funds in this group seek capital growth, primarily from common stocks. They are high risk mutual funds with a potential for high reward. IDS Precious Metals Fund Invests primarily in the securities of foreign or domestic companies that explore for, mine and process or distribute gold and other precious metals. A highly aggressive and speculative fund that seeks long-term growth of capital. (icon of) cart of precious gems IDS Discovery Fund Invests in small- and medium-size, growth-oriented companies emphasizing technological innovation and productivity enhancement. Buys and holds larger growth-oriented stocks. (icon of) ship IDS Small Company Index Fund Invests in all or a representative group of the equity securities comprising the S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation. (icon of) building IDS Strategy Aggressive Fund Invests primarily in common stocks of companies that are selected for their potential for above-average growth. Above-average means that their growth potential is better, in the opinion of the portfolio's investment manager, than the Standard & Poor's Corporation (S&P) 500 Stock Index. (icon of) chess piece IDS Research Opportunities Fund Invests in a Portfolio comprised primarily of equity securities of companies included in the S&P 500 Index that are believed to have strong growth potential. The Portfolio is managed using a research methodology by the Research Department of AEFC. Goal is long-term appreciation. (icon of) magnifying glass IDS Growth Fund Invests in a Portfolio comprised primarily of companies that have above-average potential for long-term growth as a result of new management, marketing opportunities or technological superiority. (icon of) flower IDS New Dimensions Fund Invests in a Portfolio comprised primarily of companies with significant growth potential due to superiority in technology, marketing or management. The Fund frequently changes its industry mix. (icon of) dimension IDS Progressive Fund Invests primarily in undervalued common stocks. The Fund holds stocks for the long term with the goal of capital growth. (icon of) shooting star Growth and income funds These funds focus on securities of medium to large, well-established companies that offer long-term growth of capital and reasonable income from dividends and interest. IDS Equity Select Fund Invests primarily in a combination of moderate growth stocks, higher-yielding equities and bonds. Seeks growth of capital and income. (icon of) three pine trees IDS Blue Chip Advantage Fund Invests in selected stocks from a major market index. Securities purchased are those recommended by our research analysts as the best from each industry represented on the index. Offers potential for long-term growth as well as dividend income. (icon of) ribbon IDS Managed Allocation Fund Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and foreign debt securities, foreign equity securities and money market instruments. The Fund provides diversification among these major investment categories and has a target mix that represents the way the Fund's investments will be allocated over the long term. Seeks maximum total return. (icon of) spinning toy IDS Stock Fund Invests in a Portfolio comprised primarily of common stocks of companies representing many sectors of the economy. Seeks current income and growth of capital. (icon of) building with columns IDS Equity Value Fund Invests primarily in undervalued common stocks that offer potential for growth of capital and income. (icon of) three growing flowers IDS Utilities Income Fund Invests primarily in the stocks of public utility companies to seek high current income and growth of income and capital with reduced volatility. (icon of) light bulb IDS Diversified Equity Income Fund Invests in a Portfolio comprised primarily in high-yielding common stocks to seek high current income and, secondarily, to benefit from the growth potential offered by stock investments. (icon of) two puzzle pieces IDS Mutual Invests in a Portfolio which seeks to balance between common stocks and senior securities (preferred stocks and bonds). Seeks a balance of growth of capital and current income. (icon of) scale of justice Income funds The funds in this group invest their assets primarily in corporate bonds or government securities to seek interest income. Secondary objective is capital growth. Risk varies by bond quality. IDS Extra Income Fund Invests in a Portfolio comprised mainly in long-term, high-yielding corporate fixed-income securities in the lower rated, higher risk bond categories to seek high current income. Secondary objective is capital growth. (icon of) two coins IDS Bond Fund Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk bond categories, or the equivalent, and in government bonds. (icon of) Greek column IDS Selective Fund Invests in a Portfolio comprised primarily of high-quality corporate bonds and other highly rated debt instruments including government securities and short-term investments. Seeks current income and preservation of capital. (icon of) skyline IDS Federal Income Fund Invests in a Portfolio comprised primarily of securities issued or guaranteed as to the timely payment of principal and interest by the U.S. government, its agencies and instrumentalities. Seeks a high level of current income and safety of principal consistent with its type of investments. (icon of) shield with eagle head Tax-exempt income funds These funds provide tax-free income by investing in municipal bonds. The income is generally free from federal income tax, but a portion of the income may be subject to state and local taxes. Risk varies by bond quality. IDS Tax-Exempt Bond Fund Invests mainly in bonds and notes of state or local government units, with at least 75% in the four highest rated, lowest risk bond categories. (icon of) shield with Greek column IDS Insured Tax-Exempt Fund Invests primarily in municipal securities that are insured as to the timely payment of principal and interest. The insurance feature minimizes credit risk of the Fund but does not guarantee the market value of the Fund's shares. (icon of) shield with star IDS State Tax-Exempt Funds (CA, MA, MI, MN, NY, OH) Invests primarily in high- and medium-grade municipal securities to provide income to residents of each respective state that is exempt from federal, state and local income taxes. (New York is the only state that is exempt at the local level.) (icon of) shield with U.S. enclosed IDS High Yield Tax-Exempt Fund Invests in a Portfolio comprised primarily of medium- and lower-quality municipal bonds and notes. Lower-quality securities generally involve greater risk of principal and income. (icon of) shield with basket of apples enclosed IDS Intermediate Tax-Exempt Fund Invests in mainly investment-grade bonds and other debt securities with intermediate-term maturities issued by state and local government units. Goal is to seek a high level of current income exempt from federal taxes. (icon of) shield with tree enclosed Money market funds These money market funds have three main goals: conservation of capital, constant liquidity and the highest possible current income consistent with these objectives. An investment in these funds is neither insured nor guaranteed by the U.S. government, and there can be no assurance that these funds will be able to maintain a stable net asset value of $1.00 per share. Very limited risk. IDS Cash Management Fund Invests in such money market securities as high quality commercial paper, bankers' acceptances, certificates of deposit (CDs) and other bank securities. (icon of) piggy bank IDS Tax-Free Money Fund Invests primarily in short-term bonds and notes issued by state and local governments to seek high current income exempt from federal income taxes. (icon of) shield with piggy bank enclosed PAGE Quick telephone reference American Express Telephone Transaction Service Redemptions and exchanges, dividend payments or reinvestments and automatic payment arrangements National/Minnesota: 800-437-3133 Mpls./St. Paul area: 671-3800 American Express Shareholder Service Fund performance, objectives and account inquiries 612-671-3733 TTY Service For the hearing impaired 800-846-4852 American Express Infoline Automated account information (TouchTone(R) phones only), including current fund prices and performance, account values and recent account transactions National/Minnesota: 800-272-4445 Mpls./St. Paul area: 671-1630 PAGE AMERICAN EXPRESS FINANCIAL ADVISORS IDS Selective Fund IDS Tower 10 Minneapolis, MN 55440-0010 -----END PRIVACY-ENHANCED MESSAGE-----