-----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, BREmvnCEcFIIKvk5oqthNR29LV2iTi605J76LMDhsvfgOhbe8aQYVOEuPyjQphXL pW9kEIeU6U67m0DbbDTnIA== 0000820027-97-000572.txt : 19970730 0000820027-97-000572.hdr.sgml : 19970730 ACCESSION NUMBER: 0000820027-97-000572 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970729 EFFECTIVENESS DATE: 19970729 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS SELECTIVE FUND INC CENTRAL INDEX KEY: 0000052407 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-10700 FILM NUMBER: 97646563 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00499 FILM NUMBER: 97646564 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 485BPOS 1 IDS SELECTIVE FUND, INC. PAGE 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 85 (File No. 2-10700) X ------ --- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 33 (File No. 811-499) X ------ --- IDS SELECTIVE FUND IDS Tower 10, Minneapolis, MN 55440 Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 (612) 330-9283 Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective (check appropriate box) immediately upon filing pursuant to paragraph (b) X on July 30, 1997 pursuant to paragraph (b) 60 days after filing pursuant to paragraph (a)(1) on (date) pursuant to paragraph (a)(1) 75 days after filing pursuant to paragraph (a)(2) on (date) pursuant to paragraph (a)(2) of rule 485. If appropriate, check the following box: this post-effective amendment designates a new effective date for a previously filed post-effective amendment. The Registrant has registered an indefinite number or amount of securities under the Securities Act of 1933 pursuant to Section 24(f) of the Investment Company Act of 1940. Registrant's Rule 24f-2 Notice for its most recent fiscal year will be filed on or about July 30, 1997. IDS Selective Fund, a series of the Registrant, has adopted a master/feeder operating structure. This Post-Effective Amendment includes a signature page for Income Trust, the master fund. PAGE 2 Cross reference sheet showing the location in its prospectus and the Statement of Additional Information of the information called for by the items enumerated in Parts A and B of Form N-1A. Negative answers omitted from prospectus are so indicated.
PART A PART B Section Section in Item No. in Prospectus Item No. Statement of Additional Information 1 Cover page of prospectus 10 Cover page of SAI 2(a) Sales charge and Fund expenses 11 Table of Contents (b) The Fund in brief (c) The Fund in brief 12 NA 3(a) Financial highlights 13(a) Additional Investment Policies; all (b) NA appendices except Dollar-Cost Averaging (c) Performance (b) Additional Investment Policies (d) Financial highlights (c) Additional Investment Policies (d) Security Transactions 4(a) The Fund in brief; Investment policies and risks; How the Fund is organized 14(a) Board members and officers of the Fund;** (b) Investment policies and risks Board members and officers (c) Investment policies and risks (b) Board members and Officers (c) Board members and Officers 5(a) Board members and officers; Board members and officers of the Fund (listing) 15(a) NA (b)(i) Investment manager; (b) NA About American Express Financial (c) Board members and Officers Corporation -- General Information (b)(ii) Investment manager 16(a)(i) How the Fund is organized; About American (b)(iii) Investment manager Express Financial Corporation** (c) Portfolio manager (a)(ii) Agreements: Investment Management Services (d) Administrator and transfer agent Agreement, Plan and Agreement of Distribution (e) Administrator and transfer agent (f) Distributor (a)(iii) Agreements: Investment Management Services Agreement (g) Investment manager; (b) Agreements: Investment Management Services Agreement About American Express Financial (c) NA Corporation -- General Information (d) Agreements: Administrative Services Agreement, Shareholder Service Agreement 5A(a) * (e) NA (b) * (f) Agreements: Distribution Agreement (g) NA 6(a) Shares; Voting rights (h) Custodian; Independent Auditors (b) NA (i) Agreements: Transfer Agency Agreement; Custodian (c) NA (d) Voting rights 17(a) Security Transactions (e) Cover page; Special shareholder services (b) Brokerage Commissions Paid to Brokers Affiliated (f) Dividends and capital gain distributions; with American Express Financial Corporation Reinvestments (c) Security Transactions (g) Taxes (d) Security Transactions (h) Alternative sales arrangements; Special (e) Security Transactions considerations regarding master/feeder structure 18(a) Shares; Voting rights** (b) NA 7(a) Distributor (b) Valuing Fund shares 19(a) Investing in the Fund (c) How to purchase, exchange or redeem shares (b) Valuing Fund Shares; Investing in the Fund (d) How to purchase shares (c) NA (e) NA (f) Distributor 20 Taxes 8(a) How to redeem shares 21(a) Agreements: Distribution Agreement (b) NA (b) Agreements: Distribution Agreement (c) How to purchase shares: Three ways to invest (c) NA (d) How to purchase, exchange or redeem shares: Redemption policies -- "Important..." 22(a) Performance Information (for money market funds only) 9 None (b) Performance Information (for all funds except money market funds) 23 Financial Statements
*Designates information is located in annual report. **Designates location in prospectus. PAGE 3 IDS Selective Fund Prospectus July 30, 1997 The goals of IDS Selective Fund, Inc. are current income and the preservation of capital by investing in investment-grade bonds. The Fund seeks to achieve its goals by investing all of its assets in Quality Income Portfolio of Income Trust. The Portfolio is managed by American Express Financial Corporation and has the same goals as the Fund. This arrangement is commonly known as a master/feeder structure. This prospectus contains facts that can help you decide if the Fund is the right investment for you. Read it before you invest and keep it for future reference. Additional facts about the Fund are in a Statement of Additional Information (SAI), filed with the Securities and Exchange Commission (SEC) and available for reference, along with other related materials, on the SEC Internet web site (http://www.sec.gov). The SAI is incorporated herein by reference. For a free copy, contact American Express Shareholder Service. Like all mutual fund shares, these securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission, nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Please note that the Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o is not guaranteed to achieve its goals American Express Shareholder Service P.O. Box 534 Minneapolis, MN 55440-0534 800-862-7919 TTY: 800-846-4852 Web site address: http://www.americanexpress.com/advisors PAGE 4 Table of contents The Fund in brief Goals Investment policies and risks Structure of the Fund Manager and distributor Portfolio manager Alternative purchase arrangements Sales charge and Fund expenses Performance Financial highlights Total returns Yield Investment policies and risks Facts about investments and their risks Valuing Fund shares How to purchase, exchange or redeem shares Alternative purchase arrangements How to purchase shares How to exchange shares How to redeem shares Reductions and waivers of the sales charge Special shareholder services Services Quick telephone reference Distributions and taxes Dividend and capital gain distributions Reinvestments Taxes How to determine the correct TIN How the Fund and Portfolio are organized Shares Voting rights Shareholder meetings Special considerations regarding master/feeder structure Board members and officers Investment manager Administrator and transfer agent Distributor About American Express Financial Corporation General information Appendices Description of investment-grade corporate bond ratings Descriptions of derivative instruments PAGE 5 The Fund in brief Goals IDS Selective Fund (the Fund) seeks to provide shareholders with current income and preservation of capital by investing in investment-grade bonds. It does so by investing all of its assets in Quality Income Portfolio (the Portfolio) of Income Trust (the Trust) rather than by directly investing in and managing its own portfolio of securities. Both the Fund and the Portfolio are diversified investment companies that have the same goals. Because any investment involves risk, achieving these goals cannot be guaranteed. The goals can be changed only by holders of a majority of outstanding securities. The Fund may withdraw its assets from the Portfolio at any time if the board determines that it is in the best interests of the Fund to do so. In that event, the Fund would consider what action should be taken, including whether to retain an investment advisor to manage the Fund's assets directly or to reinvest all of the Fund's assets in another pooled investment entity. Investment policies and risks Both the Fund and the Portfolio have the same investment policies. Accordingly, the Portfolio invests at least 90% of its net assets in the four highest investment grades of corporate debt securities, certain unrated debt securities the portfolio manager believes have the same investment qualities, government securities, derivative instruments and money market securities. Other investments may include common and preferred stocks and convertible securities. The investments are both U.S. and foreign. Some of the Portfolio's investments may be considered speculative and involve additional investment risks. For further information, refer to the later section in the prospectus titled "Investment policies and risks." Structure of the Fund This Fund uses what is commonly known as a master/feeder structure. This means that the Fund (the feeder fund) invests all of its assets in the Portfolio (the master fund). The Portfolio invests in and manages the securities and has the same goals and investment policies as the Fund. This structure is described in more detail in the section captioned "Special considerations regarding master/feeder structure." Here is an illustration of the structure: Investors buy shares in the Fund The Fund invests in the Portfolio The Portfolio invests in securities, such as stocks or bonds PAGE 6 Manager and distributor The Portfolio is managed by American Express Financial Corporation (AEFC), a provider of financial services since 1894. AEFC currently manages more than $63 billion in assets for the IDS MUTUAL FUND GROUP. Shares of the Fund are sold through American Express Financial Advisors Inc., a wholly-owned subsidiary of AEFC. Portfolio manager Ray Goodner joined AEFC in 1977 and serves as vice president and senior portfolio manager. He has managed the assets of the Fund since 1985 and serves as portfolio manager of the Portfolio. He also serves as portfolio manager of IDS Global Balanced Fund, World Income Portfolio and IDS Life Global Yield Fund. Alternative purchase arrangements The Fund offers its shares in three classes. Class A shares are subject to a sales charge at the time of purchase. Class B shares are subject to a contingent deferred sales charge (CDSC) on redemptions made within six years of purchase and an annual distribution (12b-1) fee. Class Y shares are sold without a sales charge to qualifying institutional investors. Sales charge and Fund expenses Shareholder transaction expenses are incurred directly by an investor on the purchase or redemption of Fund shares. Fund operating expenses are paid out of Fund assets for each class of shares and include expenses charged by both the Fund and the Portfolio. Operating expenses are reflected in the Fund's daily share price and dividends, and are not charged directly to shareholder accounts. Shareholder transaction expenses Class A Class B Class Y Maximum sales charge on purchases* (as a percentage of offering price).......5% 0% 0% Maximum deferred sales charge imposed on redemptions (as a percentage of original purchase price)....0% 5% 0% Annual Fund and allocated Portfolio operating expenses (as a percentage of average daily net assets): Class A Class B Class Y Management fee** 0.51% 0.51% 0.51% 12b-1 fee 0.00% 0.75% 0.00% Other expenses*** 0.37% 0.38% 0.30% Total**** 0.88% 1.64% 0.81% *This charge may be reduced depending on your total investments in IDS funds. See "Reductions of the sales charge." **The management fee is paid by the Trust on behalf of the Portfolio. PAGE 7 ***Other expenses include an administrative services fee, a shareholder services fee, a transfer agency fee and other nonadvisory expenses. ****The Fund changed to a master/feeder structure on June 10, 1996. The board considered whether the aggregate expenses of the Fund and the Portfolio would be more or less than if the Fund invested directly in the type of securities being held by the Portfolio. AEFC has agreed to pay the small additional costs required to use a master/feeder structure to manage the investment portfolio during the first year of its operation and half of such costs in the second year, approximately $14,300 in year one and $7,100 in year two. These additional costs may be more than offset in subsequent years if the assets being managed increase. Example: Suppose for each year for the next 10 years, Fund expenses are as above and annual return is 5%. If you sold your shares at the end of the following years, for each $1,000 invested, you would pay total expenses of: 1 year 3 years 5 years 10 years Class A $59 $77 $ 96 $153 Class B $67 $92 $109 $174** Class B* $17 $52 $ 89 $174** Class Y $ 8 $26 $ 45 $101 *Assuming Class B shares are not redeemed at the end of the period. **Based on conversion of Class B shares to Class A shares after eight years. This example does not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. Because Class B pays annual distribution (12b-1) fees, long-term shareholders of Class B may indirectly pay an equivalent of more than a 6.25% sales charge, the maximum permitted by the National Association of Securities Dealers. Performance Financial highlights PAGE 8 IDS Selective Fund, Inc. Fiscal period ended May 31, Per share income and capital changes(a)
Class A 1997 1996(b) 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 year Income from investment operations: Net investment .59 .33 .59 .60 .63 .66 .69 .70 .72 .74 .77 income Net gains (losses) .12 (.52) 1.08 (1.05) .69 .27 .52 (.30) .27 .17 (.71) (both realized and unrealized) Total from .71 (.19) 1.67 (.45) 1.32 .93 1.21 .40 .99 .91 .06 investment operations Less distributions: Dividends from net (.58) (.31) (.58) (.60) (.64) (.66) (.69) (.68) (.74) (.74) (.77) investment income Distributions (.13) (.03) (.13) (.15) (.11) -- -- -- -- -- (.05) from realized gains Total (.71) (.34) (.71) (.75) (.75) (.66) (.69) (.68) (.74) (.74) (.82) distributions Net asset value, $9.00 $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 $8.27 end of period Ratios/supplemental data: Class A 1997 1996(b) 1995 1994 1993 1992 1991 1990 1989 1988 1987 Net assets, end of $1,286 $1,408 $1,490 $1,402 $1,737 $1,541 $1,403 $1,196 $1,167 $1,081 $1,101 period (in millions) Ratio of expenses .88% .89%(c) .85% .72% .72% .74% .77% .76% .77% .74% .75% to average daily net assets Ratio of net 6.36% 6.27%(c) 6.59% 6.53% 6.57% 7.32% 7.94% 8.58% 8.42% 8.67% 8.80% income to average daily net assets Portfolio 31% 18% 26% 30% 30% 62% 59% 54% 79% 86% 74% turnover rate (excluding short-term securities) Total return(d) 8.1% (2.0%) 20.3% (4.7%) 14.8% 10.8% 15.0% 4.8% 12.3% 11.3% 0.6% (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. (c) Adjusted to an annual basis. (d) Total return does not reflect payment of a sales charge.
PAGE 9 IDS Selective Fund, Inc. Fiscal period ended May 31, Per share income and capital changes(a) Class B Class Y 1997 1996(e) 1995(b) 1997 1996(e) 1995(b) Net asset value, $9.00 $9.53 $8.78 $9.00 $9.53 $8.78 beginning of year Income from investment operations: Net investment .52 .30 .40 .60 .34 .46 income Net gains (losses) .12 (.52) .75 .12 (.52) .75 (both realized and unrealized) Total from .64 (.22) 1.15 .72 (.18) 1.21 investment operations Less distributions: Dividends from net (.51) (.28) (.40) (.59) (.32) (.46) investment income Distributions (.13) (.03) -- (.13) (.03) -- from realized gains Total (.64) (.31) (.40) (.72) (.35) (.46) distributions Net asset value, $9.00 $9.00 $9.53 $9.00 $9.00 $9.53 end of period Ratios/supplemental data: Class B Class Y 1997 1996(e) 1995(b) 1997 1996(e) 1995(b) Net assets, end of $126 $108 $72 $202 $212 $142 period (in millions) Ratio of expenses 1.64% 1.63%(d) 1.67%(d) .72% .70%(d) .73%(d) to average daily net assets Ratio of net 6.40% 5.56%(d) 5.68%(d) 7.02% 6.51%(d) 6.64%(d) income to average daily net assets Portfolio 31% 18% 26% 31% 18% 26% turnover rate (excluding short-term securities) Total return(c) 7.3% (2.4%) 13.1% 8.3% (2.0%) 13.8% (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was March 20, 1995. (c) Total return does not reflect payment of a sales charge. (d) Adjusted to an annual basis. (e) The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. The information in these tables has been audited by KPMG Peat Marwick LLP, independent auditors. The independent auditors' report and additional information about the performance of the Fund are contained in the Fund's annual report which, if not included with this prospectus, may be obtained without charge. PAGE 10 Total returns Total return is the sum of all of your returns for a given period, assuming you reinvest all distributions. It is calculated by taking the total value of shares you own at the end of the period (including shares acquired by reinvestment), less the price of shares you purchased at the beginning of the period. Average annual total return is the annually compounded rate of return over a given time period (usually two or more years). It is the total return for the period converted to an equivalent annual figure. Average annual total returns as of May 31, 1997 Purchase 1 year Since 5 years 10 years made ago inception* ago ago IDS Selective: Class A +2.68% --% +6.84% +8.31% Class B +3.27% +6.43% --% --% Class Y +8.27% +9.09% --% --% Lehman Aggregate Bond Index +8.32% +8.39%** +7.16% +8.84% *Inception date was March 20, 1995. **Measurement period started April 1, 1995. Cumulative total returns as of May 31, 1997 Purchase 1 year Since 5 years 10 years made ago inception* ago ago IDS Selective: Class A +2.68% --% +39.29% +122.48% Class B +3.27% +14.68% --% --% Class Y +8.27% +21.10% --% --% Lehman Aggregate Bond Index +8.32% +19.08%** +41.28% +133.25% *Inception date was March 20, 1995. **Measurement period started April 1, 1995. These examples show total returns from hypothetical investments in Class A, Class B and Class Y shares of the Fund. These returns are compared to those of a popular index for the same periods. The performance of Class B and Class Y will vary from the performance of Class A based on differences in sales charges and fees. March 20, 1995 was the inception date for Class B and Class Y. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges although not for other differences in expenses. PAGE 11 For purposes of calculation, information about the Fund assumes: o a sales charge of 5% for Class A shares o redemption at the end of the period and deduction of the applicable contingent deferred sales charge for Class B shares o no sales charge for Class Y shares o no adjustments for taxes an investor may have paid on the reinvested income and capital gains o a period of widely fluctuating securities prices. Returns shown should not be considered a representation of the Fund's future performance. Lehman Aggregate Bond Index is an unmanaged index made up of a representative list of government and corporate bonds as well as asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. However, the securities used to create the index may not be representative of the bonds held in the Fund. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. Yield Yield is the net investment income earned per share for a specified time period, divided by the offering price at the end of the period. The Fund's annualized yield for the 30-day period ended May 31, 1997, was 6.07% for Class A, 5.63 for Class B and 6.49% for Class Y. The Fund calculates this 30-day annualized yield by dividing: o net investment income per share deemed earned during a 30-day period by o the public offering price per share on the last day of the period, and o converting the result to a yearly equivalent figure This yield calculation does not include any contingent deferred sales charge, ranging from 5% to 0% on Class B shares, which would reduce the yield quoted. The Fund's yield varies from day to day, mainly because share values and offering prices (which are calculated daily) vary in response to changes in interest rates. Net investment income normally changes much less in the short run. Thus, when interest rates rise and share values fall, yield tends to rise. When interest rates fall, yield tends to follow. Past yields should not be considered an indicator of future yields. Investment policies and risks The policies described below apply both to the Fund and the Portfolio. The Portfolio invests in the four highest investment grades of marketable corporate debt securities, certain unrated debt securities the portfolio manager believes have the same investment qualities, government securities, derivative instruments and money market instruments. The investments are both U.S. and PAGE 12 foreign. Under normal market conditions, at least 90% of the Portfolio's net assets will be in these investments. The remaining 10% of the Portfolio's net assets may be invested in common and preferred stocks and convertible securities. The various types of investments the portfolio manager uses to achieve investment performance are described in more detail in the next section and in the SAI. Facts about investments and their risks Debt securities: The price of bonds generally falls as interest rates increase, and rises as interest rates decrease. The price of bonds also fluctuates if the credit rating is upgraded or downgraded. The Portfolio does not invest in securities considered by the investment manager to have investment qualities lower than investment grade. Securities that are subsequently downgraded in quality may continue to be held by the Portfolio and will be sold only when the investment manager believes it is advantageous to do so. For a description of investment-grade corporate bonds ratings, please see the Appendix to this prospectus. Common stocks: Stock prices are subject to market fluctuations. Stocks of larger, established companies that pay dividends may be less volatile than the stock market as a whole. Preferred stocks: If a company earns a profit, it generally must pay its preferred stockholders a dividend at a pre-established rate. Convertible securities: These securities generally are preferred stocks or bonds that can be exchanged for other securities, usually common stock, at prestated prices. When the trading price of the common stock makes the exchange likely, convertible securities trade more like common stock. Foreign investments: Securities of foreign companies and governments may be traded in the United States, but often they are traded only on foreign markets. Frequently, there is less information about foreign companies and less government supervision of foreign markets. Foreign investments are subject to political and economic risks of the countries in which the investments are made, including the possibility of seizure or nationalization of companies, imposition of withholding taxes on income, establishment of exchange controls or adoption of other restrictions that might affect an investment adversely. If an investment is made in a foreign market, the local currency may be purchased using a forward contract in which the price of the foreign currency in U.S. dollars is established on the date the trade is made, but delivery of the currency is not made until the securities are received. As long as the Portfolio holds foreign currencies or securities valued in foreign currencies, the value of those assets will be affected by changes in the value of the currencies relative to the U.S. dollar. Because of the limited trading volume in some foreign markets, efforts to buy or sell a security may change the price of the security, and it may be difficult to complete the transaction. The Portfolio may invest up to 25% of its total assets in foreign investments. PAGE 13 Derivative instruments: The portfolio manager may use derivative instruments in addition to securities to achieve investment performance. Derivative instruments include futures, options and forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment and a daily change in price based on or derived from a security, a currency, a group of securities or currencies, or an index. A number of strategies or combination of instruments can be used to achieve the desired investment performance characteristics. A small change in the value of the underlying security, currency or index will cause a sizable gain or loss in the price of the derivative instrument. Derivative instruments allow the portfolio manager to change the investment performance characteristics very quickly and at lower costs. Risks include losses of premiums, rapid changes in prices, defaults by other parties and inability to close such instruments. The Portfolio will use derivative instruments only to achieve the same investment performance characteristics it could achieve by directly holding those securities and currencies permitted under the investment policies. The Portfolio will designate cash or appropriate liquid assets to cover its portfolio obligations. No more than 5% of the Portfolio's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. This does not, however, limit the portion of the Portfolio's assets at risk to 5%. The Portfolio is not limited as to the percentage of its assets that may be invested in permissible investments, including derivatives, except as otherwise explicitly provided in this prospectus or the SAI. For descriptions of these and other types of derivative instruments, see the Appendix to this prospectus and the SAI. Securities and other instruments that are illiquid: A security or other instrument is illiquid if it cannot be sold quickly in the normal course of business. Some investments cannot be resold to the U.S. public because of their terms or government regulations. Securities and instruments, however, can be sold in private sales, and many may be sold to other institutions and qualified buyers or on foreign markets. The portfolio manager will follow guidelines established by the board and consider relevant factors such as the nature of the security and the number of likely buyers when determining whether a security is illiquid. No more than 10% of the Portfolio's net assets will be held in securities and other instruments that are illiquid. Money market instruments: Short-term debt securities rated in the top two grades or the equivalent are used to meet daily cash needs and at various times to hold assets until better investment opportunities arise. Generally, less than 25% of the Portfolio's total assets are in these money market instruments. However, for temporary defensive purposes these investments could exceed that amount for a limited period of time. The investment policies described above may be changed by the boards. PAGE 14 Lending portfolio securities: The Portfolio may lend its securities to earn income so long as borrowers provide collateral equal to the market value of the loans. The risks are that borrowers will not provide collateral when required or return securities when due. Unless a majority of the outstanding voting securities approve otherwise, loans may not exceed 30% of the Portfolio's net assets. Valuing Fund shares The public offering price is the net asset value (NAV) adjusted for the sales charge for Class A. It is the NAV for Class B and Class Y. The NAV is the value of a single Fund share. The NAV usually changes daily, and is calculated at the close of business, normally 3 p.m. Central time, each business day (any day the New York Stock Exchange is open). NAV generally declines as interest rates increase and rises as interest rates decline. To establish the net assets, all securities held by the Portfolio are valued as of the close of each business day. In valuing assets: o Securities (except bonds) and assets with available market values are valued on that basis o Securities maturing in 60 days or less are valued at amortized cost o Bonds and assets without readily available market values are valued according to methods selected in good faith by the board How to purchase, exchange or redeem shares Alternative purchase arrangements The Fund offers three different classes of shares - Class A, Class B and Class Y. The primary differences among the classes are in the sales charge structures and in their ongoing expenses. These differences are summarized in the table below. You may choose the class that best suits your circumstances and objectives. Sales charge and distribution (12b-1) fee Service fee Other information
Class A Maximum initial 0.175% of average Initial sales charge sales charge of daily net assets waived or reduced 5%; no 12b-1 fee for certain purchases
PAGE 15
Class B No initial sales 0.175% of average Shares convert to charge; maximum CDSC daily net assets Class A after eight of 5% declines to 0% years; CDSC waived in after six years; 12b-1 certain circumstances fee of 0.75% of average daily net assets Class Y None 0.10% of average Available only to daily net assets certain qualifying institutional investors
Conversion of Class B shares to Class A shares - During the ninth calendar year of owning your Class B shares, Class B shares will convert to Class A shares and will no longer be subject to a distribution fee. Class B shares that convert to Class A shares are not subject to a sales charge or distribution fee. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. This means more of your money will be put to work for you. Considerations in determining whether to purchase Class A or Class B shares - You should consider the information below in determining whether to purchase Class A or Class B shares. The distribution fee (included in "Ongoing expenses") and sales charges are structured so that you will have approximately the same total return at the end of eight years regardless of which class you chose. Sales charges on purchase or redemption If you purchase Class A If you purchase Class B shares shares o You will not have all o All of your money is of your purchase price invested in shares of invested. Part of your stock. However, you will purchase price will go pay a sales charge if you to pay the sales charge. redeem your shares within You will not pay a sales six years of purchase. charge when you redeem your shares. o You will be able to o No reductions of the take advantage of sales charge are reductions in the sales available for large charge. purchases. If your investments in IDS funds that are subject to a sales charge total $250,000 or more, you are better off paying the reduced sales charge in Class A than paying the higher fees in Class B. If you qualify for a waiver of the sales charge, you should purchase Class A shares. PAGE 16 Ongoing expenses If you purchase Class A If you purchase Class B shares shares o Your shares will have o The distribution and a lower expense ratio transfer agency fees for than Class B shares Class B will cause your because Class A does not shares to have a higher pay a distribution fee expense ratio and to pay and the transfer agency lower dividends than fee for Class A is lower Class A shares. After than the fee for Class B. eight years, Class B As a result, Class A shares shares will convert to will pay higher dividends Class A shares and you than Class B shares. will no longer be subject to higher fees. You should consider how long you plan to hold your shares and whether the accumulated higher fees and CDSC on Class B shares prior to conversion would be less than the initial sales charge on Class A shares. Also consider to what extent the difference would be offset by the lower expenses on Class A shares. To help you in this analysis, the example in the "Sales charge and Fund expenses" section of the prospectus illustrates the charges applicable to each class of shares. Class Y shares - Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to a distribution fee. The following investors are eligible to purchase Class Y shares: o Qualified employee benefit plans* if the plan: - uses a daily transfer recordkeeping service offering participants daily access to IDS funds and has - at least $10 million in plan assets or - 500 or more participants; or - does not use daily transfer recordkeeping and has - at least $3 million invested in funds of the IDS MUTUAL FUND GROUP or - 500 or more participants. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These must have at least $10 million invested in funds of the IDS MUTUAL FUND GROUP. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. * Eligibility must be determined in advance by American Express Financial Advisors. To do so, contact your financial advisor. PAGE 17 How to purchase shares If you are investing in this Fund for the first time, you'll need to set up an account. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. Important: When opening an account, you must provide AEFC with your correct Taxpayer Identification Number (Social Security or Employer Identification number). See "Distributions and taxes." When you purchase shares for a new or existing account, the price you pay per share is determined at the close of business on the day your investment is received and accepted at the Minneapolis headquarters. Purchase policies: o Investments must be received and accepted in the Minneapolis headquarters on a business day before 3 p.m. Central time to be included in your account that day and to receive that day's share price. Otherwise, your purchase will be processed the next business day and you will pay the next day's share price. o The minimums allowed for investment may change from time to time. o Wire orders can be accepted only on days when your bank, AEFC, the Fund and Norwest Bank Minneapolis are open for business. o Wire purchases are completed when wired payment is received and the Fund accepts the purchase. o AEFC and the Fund are not responsible for any delays that occur in wiring funds, including delays in processing by the bank. o You must pay any fee the bank charges for wiring. o The Fund reserves the right to reject any application for any reason. o If your application does not specify which class of shares you are purchasing, it will be assumed that you are investing in Class A shares. Three ways to invest
1 By regular account Send your check and application Minimum amounts (or your name and account number Initial investment: $2,000 if you have an established account) Additional to: investments: $ 100 American Express Financial Advisors Inc. Account balances: $ 300* P.O. Box 74 Qualified retirement Minneapolis, MN 55440-0074 accounts: none Your financial advisor will help you with this process.
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By scheduled Contact your financial advisor Minimum amounts investment plan to set up one of the following Initial investment: $100 scheduled plans: Additional investments: $100/each payment o automatic payroll deduction Account balances: none (on active plans of o bank authorization monthly payments) o direct deposit of If account balance is below $2000.00, Social Security check frequency of payment must be at least monthly. o other plan approved by the Fund 3 By wire If you have an established account, If this information is not you may wire money to: included, the order may be rejected and all money Norwest Bank Minneapolis received by the Fund, less Routing No. 091000019 any costs the Fund or AEFC Minneapolis, MN incurs, will be returned Attn: Domestic Wire Dept. promptly. Give these instructions: Minimum amounts Credit IDS Account #00-30-015 Each wire investment: $1,000 for personal account # (your account number) for (your name).
*If your account balance falls below $300, you will be asked in writing to bring it up to $300 or establish a scheduled investment plan. If you don't do so within 30 days, your shares can be redeemed and the proceeds mailed to you. How to exchange shares You can exchange your shares of the Fund at no charge for shares of the same class of any other publicly offered fund in the IDS MUTUAL FUND GROUP available in your state. Exchanges into IDS Tax-Free Money Fund must be made from Class A shares. For complete information on any other fund, including fees and expenses, read that fund's prospectus carefully. If your exchange request arrives at the Minneapolis headquarters before the close of business, your shares will be redeemed at the net asset value set for that day. The proceeds will be used to purchase new fund shares the same day. Otherwise, your exchange will take place the next business day at that day's net asset value. For tax purposes, an exchange represents a redemption and purchase and may result in a gain or loss. However, you cannot use the sales charge imposed on the purchase of Class A shares to create or increase a tax loss (or reduce a taxable gain) by exchanging from the Fund within 91 days of your purchase. For further explanation, see the SAI. How to redeem shares You can redeem your shares at any time. American Express Shareholder Service will mail payment within seven days after receiving your request. PAGE 19 When you redeem shares, the amount you receive may be more or less than the amount you invested. Your shares will be redeemed at net asset value, minus any applicable sales charge, at the close of business on the day your request is accepted at the Minneapolis headquarters. If your request arrives after the close of business, the price per share will be the net asset value, minus any applicable sales charge, at the close of business on the next business day. A redemption is a taxable transaction. If your proceeds from your redemption are more or less than the cost of your shares, you will have a gain or loss, which can affect your tax liability. Redeeming shares held in an IRA or qualified retirement account may subject you to certain federal taxes, penalties and reporting requirements. Consult your tax advisor. Two ways to request an exchange or redemption of shares 1 By letter Include in your letter: o the name of the fund(s) o the class of shares to be exchanged or redeemed o your account number(s) (for exchanges, both funds must be registered in the same ownership) o your Taxpayer Identification Number (TIN) o the dollar amount or number of shares you want to exchange or redeem o signature of all registered account owners o for redemptions, indicate how you want your money delivered to you o any paper certificates of shares you hold Regular mail: American Express Shareholder Service Attn: Redemptions P.O. Box 534 Minneapolis, MN 55440-0534 Express mail: American Express Shareholder Service Attn: Redemptions 733 Marquette Ave. Minneapolis, MN 55402 2 By phone American Express Financial Advisors Telephone Transaction Service: 800-437-3133 or 612-671-3800 o The Fund and AEFC will honor any telephone exchange or redemption request believed to be authentic and will use reasonable procedures to confirm that they are. This includes or asking identifying questions and tape recording calls. If reasonable procedures are not followed, the Fund or AEFC will be liable for any loss resulting from fraudulent requests. o Phone exchange and redemption privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts unless you request these privileges NOT apply by writing American Express Shareholder Service. Each registered owner must sign the request. o AEFC answers phone requests promptly, but you may experience delays when call volume is high. If you are unable to get through, use mail procedure as an alternative. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Phone privileges may be modified or discontinued at any time. Minimum amount Redemption: $100 Maximum amount Redemption: $50,000 PAGE 20 Exchange policies: o You may make up to three exchanges within any 30-day period, with each limited to $300,000. These limits do not apply to scheduled exchange programs and certain employee benefit plans or other arrangements through which one shareholder represents the interests of several. Exceptions may be allowed with pre-approval of the Fund. o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until written approval is obtained from the secured party. o AEFC and the Fund reserve the right to reject any exchange, limit the amount, or modify or discontinue the exchange privilege, to prevent abuse or adverse effects on the Fund and its shareholders. For example, if exchanges are too numerous or too large, they may disrupt the Fund's investment strategies or increase its costs. Redemption policies: o A "change of mind" option allows you to change your mind after requesting a redemption and to use all or part of the proceeds to purchase new shares in the same account from which you redeemed. If you reinvest in Class A, you will purchase the new shares at net asset value rather than the offering price on the date of a new purchase. If you reinvest in Class B, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 30 days of the date your redemption request was received. Include your account number and mention this option. This privilege may be limited or withdrawn at any time, and it may have tax consequences. o A telephone redemption request will not be allowed within 30 days of a phoned-in address change. Important: If you request a redemption of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before a check is mailed to you. (A check may be mailed earlier if your bank provides evidence satisfactory to the Fund and AEFC that your check has cleared.) PAGE 21 Three ways to receive payment when you redeem shares 1
By regular or express mail o Mailed to the address on record o Payable to names listed on the account NOTE: You will be charged a fee if you request express mail delivery. 2 By wire o Minimum wire redemption: $1,000 o Request that money be wired to your bank o Bank account must be in the same ownership as the IDS fund account NOTE: Pre-authorization required. For instructions, contact your financial advisor or American Express Shareholder Service. 3 By scheduled payout plan o Minimum payment: $50 o Contact your financial advisor or American Express Shareholder Service to set up regular payments to you on a monthly, bimonthly, quarterly, semiannual or annual basis o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges
Reductions and waivers of the sales charge Class A - initial sales charge alternative On purchases of Class A shares, you pay a 5% sales charge on the first $50,000 of your total investment and less on investments after the first $50,000: Total investment Sales charge as a percent of:* Public Net offering amount price invested Up to $50,000 5.0% 5.26% Next $50,000 4.5 4.71 Next $400,000 3.8 3.95 Next $500,000 2.0 2.04 $1,000,000 or more 0.0 0.00 * To calculate the actual sales charge on an investment greater than $50,000 and less than $1,000,000, amounts for each applicable increment must be totaled. See the SAI. Reductions of the sales charge on Class A shares Your sales charge may be reduced, depending on the totals of: o the amount you are investing in this Fund now, o the amount of your existing investment in this Fund, if any, and PAGE 22 o the amount you and your primary household group are investing or have in other funds in the IDS MUTUAL FUND GROUP that carry a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. Domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) Other policies that affect your sales charge: o IDS Tax-Free Money Fund and Class A shares of IDS Cash Management Fund do not carry sales charges. However, you may count investments in these funds if you acquired shares in them by exchanging shares from IDS funds that carry sales charges. o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar entity, may be added together to reduce sales charges for all shares purchased through that plan. o If you intend to invest $1 million over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. For more details, see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o Current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses and unmarried children under 21. o Current or retired American Express financial advisors, their spouses and unmarried children under 21. o Investors who have a business relationship with a newly associated financial advisor who joined AEFA from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with AEFA, (2) the purchase is made with proceeds of a redemption of shares that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds must be the result of a redemption of an equal or greater value where a sales load was previously assessed. o Qualified employee benefit plans* using a daily transfer recordkeeping system offering participants daily access to IDS funds. (Participants in certain qualified plans for which the initial sales charge is waived may be subject to a deferred sales charge of up to 4% on certain redemptions. For more information, see the SAI.) PAGE 23 o Shareholders who have at least $1 million invested in funds of the IDS MUTUAL FUND GROUP. If the investment is redeemed in the first year after purchase, a CDSC of 1% will be charged on the redemption. The CDSC will be waived only in the circumstances described for waivers for Class B shares. o Purchases made within 30 days after a redemption of shares (up to the amount redeemed): - of a product distributed by American Express Financial Advisors in a qualified plan subject to a deferred sales charge or - in a qualified plan where American Express Trust Company has a recordkeeping, trustee, investment management or investment servicing relationship. Send the Fund a written request along with your payment, indicating the amount of the redemption and the date on which it occurred. o Purchases made with dividend or capital gain distributions from the same class of another fund in the IDS MUTUAL FUND GROUP that has a sales charge. o Purchases made through or under a "wrap fee" product sponsored by American Express Financial Advisors Inc. (total amount of all investments must be $50,000); the University of Texas System ORP; or a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company. o Purchases made with the proceeds from IDS Life Real Estate Variable Annuity surrenders through December 31, 1997. *Eligibility must be determined in advance by American Express Financial Advisors. To do so, contact your financial advisor. Class B - contingent deferred sales charge alternative Where a CDSC is imposed on a redemption, it is based on the amount of the redemption and the number of calendar years, including the year of purchase, between purchase and redemption. The following table shows the declining scale of percentages that apply to redemptions during each year after a purchase: If a redemption is The percentage rate made during the for the CDSC is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% If the amount you are redeeming reduces the current net asset value of your investment in Class B shares below the total dollar amount of all your purchase payments during the last six years (including the year in which your redemption is made), the CDSC is based on the lower of the redeemed purchase payments or market value. PAGE 24 The following example illustrates how the CDSC is applied. Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 15 months, including reinvested dividend and capital gain distributions. You could redeem any amount up to $2,000 without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you redeemed $2,500, the CDSC would apply only to the $500 that represented part of your original purchase price. The CDSC rate would be 4% because a redemption after 15 months would take place during the second year after purchase. Because the CDSC is imposed only on redemptions that reduce the total of your purchase payments, you never have to pay a CDSC on any amount you redeem that represents appreciation in the value of your shares, income earned by your shares or capital gains. In addition, when determining the rate of any CDSC, your redemption will be made from the oldest purchase payment you made. Of course, once a purchase payment is considered to have been redeemed, the next amount redeemed is the next oldest purchase payment. By redeeming the oldest purchase payments first, lower CDSCs are imposed than would otherwise be the case. Waivers of the contingent deferred sales charge The CDSC on Class B shares will be waived on redemptions of shares: o In the event of the shareholder's death, o Purchased by any board member, officer or employee of a fund o AEFC or its subsidiaries, o Held in a trusteed employee benefit plan, o Held in IRAs or certain qualified plans for which American Express Trust Company acts as custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: - at least 59-1/2 years old, and - taking a retirement distribution (if the redemption is part of a transfer to an IRA or qualified plan in a product distributed by American Express Financial Advisors, or a custodian-to-custodian transfer to a product not distributed by American Express Financial Advisors, the CDSC will not be waived), or - redeeming under an approved substantially equal periodic payment arrangement. For investors in Class A shares who have over $1 million invested in one year, the 1% CDSC on redemption of those shares will be waived in the same circumstances described for Class B. Special shareholder services Services To help you track and evaluate the performance of your investments, AEFC provides these services: Quarterly statements listing all of your holdings and transactions during the previous three months. PAGE 25 Yearly tax statements featuring average-cost-basis reporting of capital gains or losses if you redeem your shares along with distribution information which simplifies tax calculations. A personalized mutual fund progress report detailing returns on your initial investment and cash-flow activity in your account. It calculates a total return to reflect your individual history in owning Fund shares. This report is available from your financial advisor. Quick telephone reference American Express Financial Advisors Telephone Transaction Service Redemptions and exchanges, dividend payments or reinvestments and automatic payment arrangements National/Minnesota: 800-437-3133 Mpls./St. Paul area: 671-3800 TTY Service For the hearing impaired 800-846-4852 American Express Financial Advisors Easy Access Line Automated account information (TouchToneR phones only), including current Fund prices and performance, account values and recent account transactions 800-862-7919 Distributions and taxes As a shareholder you are entitled to your share of the Fund's net income and any net gains realized on its investments. The Fund distributes dividends and capital gain distributions to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. Dividend and capital gain distributions will have tax consequences you should know about. Dividend and capital gain distributions The Portfolio allocates investment income from dividends and interest and net realized capital gains or losses, if any, to the Fund. The Fund deducts direct and allocated expenses from the investment income. The Fund's net investment income is distributed to you monthly as dividends. Short-term capital gains are distributed at the end of the calendar year and are included in net investment income. Long-term capital gains are realized whenever a security held for more than one year is sold for a higher price than was paid for it. The Fund will offset any net realized capital gains by any available capital loss carryovers. Net realized long-term capital gains, if any, are distributed at the end of the calendar year as capital gain distributions. Before they are distributed, net long-term capital gains are included in the value of each share. After they are distributed, the value of each share drops by the per-share amount of the distribution. (If your distributions are reinvested, the total value of your holdings will not change.) PAGE 26 Dividends for each class will be calculated at the same time, in the same manner and will be the same amount prior to deduction of expenses. Expenses attributable solely to a class of shares will be paid exclusively by that class. Reinvestments Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request the Fund in writing or by phone to pay distributions to you in cash, or o you direct the Fund to invest your distributions in the same class of another publicly available IDS fund for which you've previously opened an account. The reinvestment price is the net asset value at close of business on the day the distribution is paid. (Your quarterly statement will confirm the amount invested and the number of shares purchased.) If you choose cash distributions, you will receive only those declared after your request has been processed. If the U.S. Postal Service cannot deliver the checks for the cash distributions, we will reinvest the checks into your account at the then-current net asset value and make future distributions in the form of additional shares. Taxes The Fund has received a Private Letter Ruling from the Internal Revenue Service stating that, for purposes of the Internal Revenue Code, the Fund will be regarded as directly holding its allocable share of the income and gain realized by the Portfolio. Distributions are subject to federal income tax and also may be subject to state and local taxes. Distributions are taxable in the year the Fund declares them regardless of whether you take them in cash or reinvest them. Each January, you will receive a tax statement showing the kinds and total amount of all distributions you received during the previous year. You must report distributions on your tax returns, even if they are reinvested in additional shares. Buying a dividend creates a tax liability. This means buying shares shortly before a capital gain distribution. You pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which is taxable. Redemptions and exchanges subject you to a tax on any capital gain. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be either short term (for shares held for one year or less) or long term (for shares held for more than one year). PAGE 27 Your Taxpayer Identification Number (TIN) is important. As with any financial account you open, you must list your current and correct Taxpayer Identification Number (TIN) -- either your Social Security or Employer Identification number. The TIN must be certified under penalties of perjury on your application when you open an account at AEFC. If you don't provide the TIN, or the TIN you report is incorrect, you could be subject to backup withholding of 31% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN o a civil penalty of $500 if you make a false statement that results in no backup withholding o criminal penalties for falsifying information You also could be subject to backup withholding because you failed to report interest or dividends on your tax return as required.
How to determine the correct TIN Use the Social Security or For this type of account: Employer Identification number of: Individual or joint account The individual or individuals listed on the account Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) A living trust The grantor-trustee (the person who puts the money into the trust) An irrevocable trust, pension The legal entity (not the trust or estate personal representative or trustee, unless no legal entity is designated in the account title) Sole proprietorship The owner Partnership The partnership Corporate The corporation Association, club or The organization tax-exempt organization
For details on TIN requirements, ask your financial advisor or local American Express Financial Advisors office for federal Form W-9, "Request for Taxpayer Identification Number and Certification." PAGE 28 Important: This information is a brief and selective summary of certain federal tax rules that apply to this Fund. Tax matters are highly individual and complex, and you should consult a qualified tax advisor about your personal situation. How the Fund and Portfolio are organized Shares The Fund is owned by its shareholders. The Fund issues shares in three classes - Class A, Class B and Class Y. Each class has different sales arrangements and bears different expenses. Each class represents interests in the assets of the Fund. Par value is one cent per share. Both full and fractional shares can be issued. The Fund no longer issues stock certificates. Voting rights As a shareholder, you have voting rights over the Fund's management and fundamental policies. You are entitled to one vote for each share you own. Shares of the Fund have cumulative voting rights. Each class has exclusive voting rights with respect to the provisions of the Fund's distribution plan that pertain to a particular class and other matters for which separate class voting is appropriate under applicable law. Shareholder meetings The Fund does not hold annual shareholder meetings. However, the board members may call meetings at their discretion, or on demand by holders of 10% or more of the outstanding shares, to elect or remove board members. Special considerations regarding master/feeder structure The Fund pursues its goal by investing its assets in a master fund called the Portfolio. This means that the Fund does not invest directly in securities; rather the Portfolio invests in and manages its portfolio of securities. The Portfolio is a separate investment company, but it has the same goal and investment policies as the Fund. The goal and investment policies of the Portfolio are described under the captions "Investment policies and risks" and "Facts about investments and their risks." Additional information on investment policies may be found in the SAI. Board considerations: The board considered the advantages and disadvantages of investing the Fund's assets in the Portfolio. The board believes that the master/feeder structure can be in the best interest of the Fund and its shareholders since it offers the opportunity for economies of scale. The Fund may redeem all of its assets from the Portfolio at any time. Should the board determine that it is in the best interest of the Fund and its shareholders to terminate its investment in the Portfolio, it would consider hiring an investment advisor to manage the Fund's assets, or other PAGE 29 appropriate options. The Fund would terminate its investments if the Portfolio changed its goals, investment policies or restrictions without the same change being approved by the Fund. Other feeders: The Portfolio sells securities to other affiliated mutual funds and may sell securities to non-affiliated investment companies and institutional accounts (known as feeders). These feeders buy the Portfolio's securities on the same terms and conditions as the Fund and pay their proportionate share of the Portfolio's expenses. However, their operating costs and sales charges are different from those of the Fund. Therefore, the investment returns for other feeders are different from the returns of the Fund. Information about other feeders may be obtained by calling American Express Financial Advisors at 1-800-AXP-SERV. Each feeder that invests in the Portfolio is different and activities of its investors may adversely affect all other feeders, including the Fund. For example, if one feeder decides to terminate its investment in the Portfolio, the Portfolio may elect to redeem in cash or in kind. If cash is used, the Portfolio will incur brokerage, taxes and other costs in selling securities to raise the cash. This may result in less investment diversification if entire investment positions are sold, and it also may result in less liquidity among the remaining assets. If in-kind distribution is made, a smaller pool of assets remains that may affect brokerage rates and investment options. In both cases, expenses may rise since there are fewer assets to cover the costs of managing those assets. Shareholder meetings: Whenever the Portfolio proposes to change a fundamental investment policy or to take any other action requiring approval of its security holders, the Fund will hold a shareholder meeting. The Fund will vote for or against the Portfolio's proposals in proportion to the vote it receives for or against the same proposals from its shareholders. Board members and officers Shareholders elect a board that oversees the operations of the Fund and chooses its officers. Its officers are responsible for day-to-day business decisions based on policies set by the board. The board has named an executive committee that has authority to act on its behalf between meetings. Board members and officers serve 47 IDS and IDS Life funds and 15 Master Trust portfolios, except for William H. Dudley, who does not serve the nine IDS Life funds. The board members also serve as members of the board of the Trust which manages the investments of the Fund and other accounts. Should any conflict of interest arise between the interests of the shareholders of the Fund and those of the other accounts, the board will follow written procedures to address the conflict. PAGE 30 Board members and officers of the Fund President and interested board member William R. Pearce Chairman of the board, Board Services Corporation (provides administrative services to boards including the boards of the IDS and IDS Life funds and Master Trust portfolios). 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 Reader's Digest Association, Inc. Alan K. Simpson Former United States senator for Wyoming. 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 Senior advisor to the chief executive officer, AEFC. David R. Hubers President and chief executive officer, AEFC. John R. Thomas Senior vice president, AEFC. PAGE 31 Officers who also are officers and/or employees of AEFC Peter J. Anderson Senior vice president, AEFC. Vice president - Investments for the Fund. Melinda S. Urion Senior vice president and chief financial officer, AEFC. Treasurer for the Fund. Other officer Leslie L. Ogg President, treasurer and corporate secretary of Board Services Corporation. Vice president, general counsel and secretary for the Fund. Refer to the SAI for the board members' and officers' biographies. Investment manager The Portfolio pays AEFC for managing its assets. The Fund pays its proportionate share of the fee. Under the Investment Management Services Agreement, AEFC is paid a fee for these services based on the average daily net assets of the Portfolio, as follows: Assets Annual rate (billions) at each asset level First $1.0 0.520% Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 For the fiscal year ended May 31, 1997, the Portfolio paid AEFC a total investment management fee of 0.51% of its average daily net assets. Under the Agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory expenses. Administrator and transfer agent The Fund pays AEFC for shareholder accounting and transfer agent services under two agreements. The first agreement, the Administrative Services Agreement, has a declining annual rate beginning at 0.05% and decreasing to 0.025% as assets increase. The second agreement, the Transfer Agency Agreement, has an annual fee per shareholder account as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 PAGE 32 Distributor The Fund has an exclusive distribution agreement with American Express Financial Advisors, a wholly-owned subsidiary of AEFC. Financial advisors representing American Express Financial Advisors provide information to investors about individual investment programs, the Fund and its operations, new account applications, and exchange and redemption requests. The cost of these services is paid partially by the Fund's sales charges. Persons who buy Class A shares pay a sales charge at the time of purchase. Persons who buy Class B shares are subject to a contingent deferred sales charge on a redemption in the first six years and pay an asset-based sales charge (also known as a 12b-1 fee) of 0.75% of the Fund's average daily net assets. Class Y shares are sold without a sales charge and without an asset-based sales charge. Financial advisors may receive different compensation for selling Class A, Class B and Class Y shares. Portions of the sales charge also may be paid to securities dealers who have sold the Fund's shares or to banks and other financial institutions. The amounts of those payments range from 0.8% to 4% of the Fund's offering price depending on the monthly sales volume. Under a Shareholder Service Agreement, the Fund also pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of average daily net assets for Class A and Class B and 0.10% for Class Y. Total expenses paid by the Fund's Class A shares for the fiscal year ended May 31, 1997, were 0.88% of its average daily net assets. Expenses for Class B and Class Y were 1.64% and 0.72%, respectively. About American Express Financial Corporation General information The AEFC family of companies offers not only mutual funds but also insurance, annuities, investment certificates and a broad range of financial management services. Besides managing investments for all funds in the IDS MUTUAL FUND GROUP, AEFC also manages investments for itself and its subsidiaries, IDS Certificate Company and IDS Life Insurance Company. Total assets under management on May 31, 1997 were more than $158 billion. American Express Financial Advisors serves individuals and businesses through its nationwide network of more than 178 offices and more than 8,599 advisors. Other AEFC subsidiaries provide investment management and related services for pension, profit sharing, employee savings and endowment funds of businesses and institutions. PAGE 33 AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a wholly-owned subsidiary of American Express Company (American Express), a financial services company with headquarters at American Express Tower, World Financial Center, New York, NY 10285. The Portfolio may pay brokerage commissions to broker-dealer affiliates of AEFC. PAGE 34 Appendix A Description of investment-grade corporate bond ratings Bond ratings concern the quality of the issuing corporation. They are not an opinion of the market value of the security. Such ratings are opinions on whether the principal and interest will be repaid when due. A security's rating may change, which could affect its price. Ratings by Moody's Investors Service, Inc. are Aaa, Aa, A and Baa. Ratings by Standard & Poor's Corporation are AAA, AA, A and BBB. The following is a compilation of the two agencies' rating descriptions. For further information, see the SAI. Aaa/AAA - Judged to be of the best quality and carry the smallest degree of investment risk. Interest and principal are secure. Aa/AA - Judged to be high-grade although margins of protection for interest and principal may not be quite as good as Aaa or AAA rated securities. A - Considered upper-medium grade. Protection for interest and principal is deemed adequate but may be susceptible to future impairment. Baa/BBB - Considered medium-grade obligations. Protection for interest and principal is adequate over the short-term; however, these obligations may have certain speculative characteristics. Non-rated securities will be considered for investment when they possess a risk comparable to that of rated securities consistent with the Portfolio's objectives and policies. When assessing the risk involved in each non-rated security, the Portfolio will consider the financial condition of the issuer or the protection afforded by the terms of the security. Definitions of zero-coupon and pay-in-kind securities A zero-coupon security is a security that is sold at a deep discount from its face value and makes no periodic interest payments. The buyer of such a security receives a rate of return by gradual appreciation of the security, which is redeemed at face value on the maturity date. A pay-in-kind security is a security in which the issuer has the option to make interest payments in cash or in additional securities. The securities issued as interest usually have the same terms, including maturity date, as the pay-in-kind securities. PAGE 35 Appendix B Descriptions of derivative instruments What follows are brief descriptions of derivative instruments the Portfolio may use. At various times the Portfolio may use some or all of these instruments and is not limited to these instruments. It may use other similar types of instruments if they are consistent with the Portfolio's investment goal and policies. For more information on these instruments, see the SAI. Options and futures contracts. An option is an agreement to buy or sell an instrument at a set price during a certain period of time. A futures contract is an agreement to buy or sell an instrument for a set price on a future date. The Portfolio may buy and sell options and futures contracts to manage its exposure to changing interest rates, security prices and currency exchange rates. Options and futures may be used to hedge the Portfolio's investments against price fluctuations or to increase market exposure. Asset-backed and mortgage-backed securities. Asset-backed securities include interests in pools of assets such as motor vehicle installment sale contracts, installment loan contracts, leases on various types of real and personal property, receivables from revolving credit (credit card) agreements or other categories of receivables. Mortgage-backed securities include collateralized mortgage obligations and stripped mortgage-backed securities. Interest and principal payments depend on payment of the underlying loans or mortgages. The value of these securities may also be affected by changes in interest rates, the market's perception of the issuers and the creditworthiness of the parties involved. The non-mortgage related asset-backed securities do not have the benefit of a security interest in the related collateral. Stripped mortgage-backed securities include interest only (IO) and principal only (PO) securities. Cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments on the underlying mortgage loans or mortgage-backed securities. Indexed securities. The value of indexed securities is linked to currencies, interest rates, commodities, indexes or other financial indicators. Most indexed securities are short- to intermediate- term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself. Inverse floaters. Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. PAGE 36 Structured products. Structured products are over-the-counter financial instruments created specifically to meet the needs of one or a small number of investors. The instrument may consist of a warrant, an option or a forward contract embedded in a note or any of a wide variety of debt, equity and/or currency combinations. Risks of structured products include the inability to close such instruments, rapid changes in the market and defaults by other parties. PAGE 37 STATEMENT OF ADDITIONAL INFORMATION FOR IDS SELECTIVE FUND July 30, 1997 This Statement of Additional Information (SAI) is not a prospectus. It should be read together with the prospectus and the financial statements contained in the Annual Report which may be obtained from your American Express financial advisor or by writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534. This SAI is dated July 30, 1997, and it is to be used with the prospectus dated July 30, 1997, and the Annual Report for the fiscal year ended May 31, 1997. PAGE 38 TABLE OF CONTENTS Goals and Investment Policies.......................See Prospectus Additional Investment Policies...............................p. 3 Security Transactions........................................p. 6 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation.......................p. 9 Performance Information......................................p. 9 Valuing Fund Shares..........................................p. 11 Investing in the Fund........................................p. 13 Redeeming Shares.............................................p. 17 Pay-out Plans................................................p. 17 Taxes........................................................p. 19 Agreements...................................................p. 20 Organizational Information...................................p. 23 Board Members and Officers...................................p. 23 Compensation for Board Members...............................p. 27 Independent Auditors.........................................p. 28 Financial Statements.............................See Annual Report Prospectus...................................................p. 28 Appendix A: Foreign Currency Transactions...................p. 29 Appendix B: Options and Interest Rate Futures Contracts.....p. 34 Appendix C: Mortgage-Backed Securities......................p. 40 Appendix D: Dollar-Cost Averaging...........................p. 41 PAGE 39 ADDITIONAL INVESTMENT POLICIES The Fund pursues its goals by investing all of its assets in Quality Income Portfolio (the "Portfolio") of Income Trust (the "Trust"), a separate investment company, rather than by directly investing in and managing its own portfolio of securities. The Portfolio has the same investment objectives, policies and restrictions as the Fund. Fundamental investment policies adopted by the Fund or Portfolio cannot be changed without the approval of a majority of the outstanding voting securities of the Fund or Portfolio, respectively, as defined in the Investment Company Act of 1940 (the 1940 Act). Whenever the Fund is requested to vote on a change in the investment policies of the corresponding Portfolio, the Fund will hold a meeting of Fund shareholders and will cast the Fund's vote as instructed by the shareholders. Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. These are investment policies in addition to those presented in the prospectus. The policies below are fundamental policies that apply to both the Fund and the Portfolio and may be changed only with shareholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund and Portfolio will not: 'Act as an underwriter (sell securities for others). However, under the securities laws, the Portfolio may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. 'Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Portfolio has not borrowed in the past and has no present intention to borrow. 'Make cash loans if the total commitment amount exceeds 5% of the Portfolio's total assets. 'Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means no more than 25% of the Portfolio's total assets, based on current market value at time of purchase, can be invested in any one industry. 'Purchase more than 10% of the outstanding voting securities of an issuer. PAGE 40 'Invest more than 5% of its total assets in securities of any one company, government or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies or instrumentalities, and except that up to 25% of the Portfolio's total assets may be invested without regard to this 5% limitation. 'Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Portfolio from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. 'Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Portfolio from buying or selling financial instruments (such as options and futures contracts) or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. 'Make a loan of any part of its assets to American Express Financial Corporation (AEFC), to the board members and officers of AEFC or to its own board members and officers. 'Purchase securities of an issuer if the board members and officers of the Fund, the Portfolio and AEFC hold more than a certain percentage of the issuer's outstanding securities. If the holdings of all board members and officers of the Fund, the Portfolio and of AEFC who own more than 0.5% of an issuer's securities are added together, and if in total they own more than 5%, the Portfolio will not purchase securities of that issuer. 'Lend Portfolio securities in excess of 30% of its net assets. The current policy of the Portfolio's board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the Portfolio receives the market price in cash, U.S. government securities, letters of credit or such other collateral as may be permitted by regulatory agencies and approved by the board. If the market price of the loaned securities goes up, the Portfolio will get additional collateral on a daily basis. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the Portfolio receives cash payments equivalent to all interest or other distributions paid on the loaned securities. A loan will not be made unless the investment manager believes the opportunity for additional income outweighs the risks. 'Issue senior securities, except this restriction shall not be deemed to prohibit the Portfolio from borrowing from banks, using options or futures contracts, lending its securities or entering into repurchase agreements. PAGE 41 Unless changed by the board, the Fund and Portfolio will not: 'Buy on margin or sell short, except the Portfolio may enter into interest rate futures contracts. 'Pledge or mortgage its assets beyond 15% of total assets. If the Portfolio were ever to do so, valuation of the pledged or mortgaged assets would be based on market values. For purposes of this policy, collateral arrangements for margin deposits on futures contracts are not deemed to be a pledge of assets. 'Invest more than 5% of its total assets in securities of companies, including any predecessors, that have a record of less than three years continuous operations. 'Invest more than 10% of its total assets in securities of investment companies. 'Invest in a company to control or manage it. 'Invest in exploration or development programs, such as oil, gas or mineral leases. 'Invest more than 5% of its net assets in warrants. 'Invest more than 10% of its net assets in securities and other instruments that are illiquid. For purposes of this policy illiquid securities include some privately placed securities, public securities and Rule 144A securities that for one reason or another may no longer have a readily available market, repurchase agreements with maturities greater than seven days, non-negotiable fixed-time deposits, and over-the-counter options. In determining the liquidity of Rule 144A securities, which are unregistered securities offered to qualified institutional buyers, and interest-only and principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S. government or its agencies and instrumentalities, the investment manager, under guidelines established by the board, will consider any relevant factors including the frequency of trades, the number of dealers willing to purchase or sell the security and the nature of marketplace trades. In determining the liquidity of commercial paper issued in transactions not involving a public offering under Section 4(2) of the Securities Act of 1933, the investment manager, under guidelines established by the board, will evaluate relevant factors, such as the issuer and the size and nature of its commercial paper programs, the willingness and ability of the issuer or dealer to repurchase the paper, and the nature of the clearance and settlement procedures for the paper. The Portfolio may make contracts to purchase securities for a fixed price at a future date beyond normal settlement time (when-issued securities or forward commitments). Under normal market conditions, the Portfolio does not intend to commit more than 5% of PAGE 42 its total assets to these practices. The Portfolio does not pay for the securities or receive dividends or interest on them until the contractual settlement date. The Portfolio will designate cash or liquid high-grade debt securities at least equal in value to its commitments to purchase the securities. When-issued securities or forward commitments are subject to market fluctuations and they may affect the Portfolio's total assets the same as owned securities. The Portfolio may maintain a portion of its assets in cash and cash-equivalent investments. The cash-equivalent investments the Portfolio may use are short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances and letters of credit of banks or savings and loan associations having capital, surplus and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. Any cash-equivalent investments in foreign securities will be subject to the limitations on foreign investments described in the prospectus. The Portfolio also may purchase short-term corporate notes and obligations rated in the top two classifications by Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Corporation (S&P) or the equivalent and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. A risk of a repurchase agreement is that if the seller seeks the protection of the bankruptcy laws, the Portfolio's ability to liquidate the security involved could be impaired. The Portfolio may invest in foreign securities that are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the U.S. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary Receipts also involve the risks of other investments in foreign securities. For a discussion about foreign currency transactions, see Appendix A. For a discussion on options and interest rate futures contracts, see Appendix B. For a discussion on mortgage-backed securities, see Appendix C. SECURITY TRANSACTIONS Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's and Portfolio's investment goal and policies, which securities will be purchased, held or sold. In determining where the buy and sell orders are to be PAGE 43 placed, AEFC has been directed to use its best efforts to obtain the best available price and most favorable execution except where otherwise authorized by the board. AEFC has a strict Code of Ethics that prohibits its affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for any fund or trust for which it acts as investment manager. AEFC carefully monitors compliance with its Code of Ethics. Normally, the Portfolio's securities are traded on a principal rather than an agency basis. In other words, AEFC will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. AEFC does not pay the dealer commissions. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The board has adopted a policy authorizing AEFC to do so to the extent authorized by law, if AEFC determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or AEFC's overall responsibilities to the funds in the IDS MUTUAL FUND GROUP and other accounts for which it acts as investment advisor. Research provided by brokers supplements AEFC's own research activities. Such services include economic data on, and analysis of, U.S. and foreign economies; information on specific industries; information about specific companies, including earnings estimates; purchase recommendations for stocks and bonds; portfolio strategy services; political, economic, business and industry trend assessments; historical statistical information; market data services providing information on specific issues and prices; and technical analysis of various aspects of the securities markets, including technical charts. Research services may take the form of written reports, computer software or personal contact by telephone or at seminars or other meetings. AEFC has obtained, and in the future may obtain, computer hardware from brokers, including but not limited to personal computers that will be used exclusively for investment decision-making purposes, which include the research, portfolio management and trading functions and other services to the extent permitted under an interpretation by the SEC. When paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge, AEFC must follow procedures authorized by the board. To date, three procedures have been authorized. One procedure permits AEFC to direct an order to buy or sell a security traded on a national securities exchange to a specific broker for research services it has provided. The second procedure permits AEFC, in order to PAGE 44 obtain research, to direct an order on an agency basis to buy or sell a security traded in the over-the-counter market to a firm that does not make a market in that security. The commission paid generally includes compensation for research services. The third procedure permits AEFC, in order to obtain research and brokerage services, to cause the Portfolio to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Portfolio it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services as the handling of large orders, the willingness of a broker to risk its own money by taking a position in a security, and the specialized handling of a particular group of securities that only certain brokers may be able to offer. As a result of this arrangement, some portfolio transactions may not be effected at the lowest commission, but AEFC believes it may obtain better overall execution. AEFC has assured the Fund that under all three procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services performed or research provided. All other transactions shall be placed on the basis of obtaining the best available price and the most favorable execution. In so doing, if in the professional opinion of the person responsible for selecting the broker or dealer, several firms can execute the transaction on the same basis, consideration will be given by such person to those firms offering research services. Such services may be used by AEFC in providing advice to all the funds in the IDS MUTUAL FUND GROUP even though it is not possible to relate the benefits to any particular fund or account. Each investment decision made for the Portfolio is made independently from any decision made for another portfolio, fund or other account advised by AEFC or any of its subsidiaries. When the Portfolio buys or sells the same security as another portfolio, fund or account, AEFC carries out the purchase or sale in a way the Portfolio agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Portfolio, the Portfolio hopes to gain an overall advantage in execution. AEFC has assured the Fund it will continue to seek ways to reduce brokerage costs. On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency and research services. The Portfolio paid total brokerage commissions of $75,832 for the fiscal year ended May 31, 1997, $6,800 for fiscal period ended May 31, 1996 and $8,745 for fiscal year ended Nov. 30, 1995. Substantially all firms through whom transactions were executed provide research services. No transactions were directed to brokers because of research services they provided to the Portfolio. As of the fiscal year ended May 31, 1997, the Portfolio held securities of its regular brokers or dealers or of the parent of PAGE 45 those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below: Value of Securities Owned at End of Name of Issuer Fiscal Year Bank of America $27,933,462 First Chicago 16,446,728 JP Morgan 9,034,437 Salomon Brothers 14,108,050 The portfolio turnover rate was 31% in the fiscal year ended May 31, 1997, and 18% in fiscal period 1996. BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL CORPORATION Affiliates of American Express Company (American Express) (of which AEFC is a wholly-owned subsidiary) may engage in brokerage and other securities transactions on behalf of the Portfolio according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. AEFC will use an American Express affiliate only if (i) AEFC determines that the Portfolio will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Portfolio and (ii) the affiliate charges the Portfolio commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. AEFC may direct brokerage to compensate an affiliate. AEFC will receive research on South Africa from New Africa Advisors, a wholly-owned subsidiary of Sloan Financial Group. AEFC owns 100% of IDS Capital Holdings Inc. which in turn owns 40% of Sloan Financial Group. New Africa Advisors will send research to AEFC and in turn AEFC will direct trades to a particular broker. The broker will have an agreement to pay New Africa Advisors. All transactions will be on a best execution basis. Compensation received will be reasonable for the services rendered. No brokerage commissions were paid to brokers affiliated with AEFC for the three most recent fiscal years. PERFORMANCE INFORMATION The Fund may quote various performance figures to illustrate past performance. Average annual total return and current yield quotations used by the Fund are based on standardized methods of computing performance as required by the SEC. An explanation of the methods used by the Fund to compute performance follows below. Average annual total return The Fund may calculate average annual total return for a class for certain periods by finding the average annual compounded rates of PAGE 46 return over the period that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1+T)n = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) Aggregate total return The Fund may calculate aggregate total return for a class for certain periods representing the cumulative change in the value of an investment in the Fund over a specified period of time according to the following formula: ERV - P P where: P = a hypothetical initial payment of $1,000 ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) Annualized yield The Fund may calculate an annualized yield for a class by dividing the net investment income per share deemed earned during a period by the net asset value per share on the last day of the period and annualizing the results. Yield is calculated according to the following formula: Yield = 2[(a-b + 1) 6 - 1] cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period The Fund's annualized yield was 6.07% for Class A, 5.63% for Class B and 6.49% for Class Y for the 30-day period ended May 31, 1997. The Fund's yield, calculated as described above according to the formula prescribed by the SEC, is a hypothetical return based on market value yield to maturity for the Portfolio's securities. It is not necessarily indicative of the amount which was or may be PAGE 47 paid to the Fund's shareholders. Actual amounts paid to Fund shareholders are reflected in the distribution yield. Distribution yield Distribution yield is calculated according to the following formula: D divided by POP F equals DY 30 30 where: D = sum of dividends for 30-day period POP = sum of public offering price for 30-day period F = annualizing factor DY = distribution yield The Fund's distribution yield was 6.19% for Class A, 5.74% for Class B and 6.61% for Class Y for the 30-day period ended May 31, 1997. In its sales material and other communications, the Fund may quote, compare or refer to rankings, yields or returns as published by independent statistical services or publishers and publications such as The Bank Rate Monitor National Index, Barron's, Business Week, Donoghue's Money Market Fund Report, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, Institutional Investor, Investor's Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor, Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal and Wiesenberger Investment Companies Service. VALUING FUND SHARES The value of an individual share for each class is determined by using the net asset value before shareholder transactions for the day. On June 2, 1997, the first business day following the end of the fiscal year, the computation looked like this:
Net assets before Shares outstanding Net asset value shareholder transactions at end of previous day of one share Class A $1,286,162,649 divided by 142,906,961 equals $9.00 Class B 126,495,765 14,055,085 9.00 Class Y 201,837,060 22,426,340 9.00
In determining net assets before shareholder transactions, the Portfolio's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): 'Securities, except bonds other than convertibles, traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. 'Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the PAGE 48 closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. 'Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. 'Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. 'Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. 'Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current rate of exchange. Occasionally, events affecting the value of such securities may occur between such times and the close of the Exchange that will not be reflected in the computation of the Portfolio's net asset value. If events materially affecting the value of such securities occur during such period, these securities will be valued at their fair value according to procedures decided upon in good faith by the board. 'Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short- term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. 'Securities without a readily available market price, bonds other than convertibles and other assets are valued at fair value as determined in good faith by the board. The board is responsible for selecting methods it believes provide fair value. When possible, bonds are valued by a pricing service independent from the Portfolio. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. The Exchange, AEFC and the Fund will be closed on the following holidays: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. PAGE 49 INVESTING IN THE FUND Sales Charge Shares of the Fund are sold at the public offering price determined at the close of business on the day an application is accepted. The public offering price is the net asset value of one share plus a sales charge, if applicable. For Class B and Class Y, there is no initial sales charge so the public offering price is the same as the net asset value. For Class A, the public offering price for an investment of less than $50,000, made June 2, 1997, was determined by dividing the net asset value of one share, $9.00, by 0.95 (1.00- 0.05 for a maximum 5% sales charge) for a public offering price of $9.47. The sales charge is paid to American Express Financial Advisors by the person buying the shares. Class A - Calculation of the Sales Charge Sales charges are determined as follows: Within each increment, sales charge as a percentage of: Public Net Amount of Investment Offering Price Amount Invested First $ 50,000 5.0% 5.26% Next 50,000 4.5 4.71 Next 400,000 3.8 3.95 Next 500,000 2.0 2.04 $1,000,000 or more 0.0 0.00 Sales charges on an investment greater than $50,000 and less than $1,000,000 are calculated for each increment separately and then totaled. The resulting total sales charge, expressed as a percentage of the public offering price and of the net amount invested, will vary depending on the proportion of the investment at different sales charge levels. For example, compare an investment of $60,000 with an investment of $85,000. The $60,000 investment is composed of $50,000 that incurs a sales charge of $2,500 (5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x $10,000). The total sales charge of $2,950 is 4.92% of the public offering price and 5.17% of the net amount invested. In the case of the $85,000 investment, the first $50,000 also incurs a sales charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575 (4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public offering price and 5.04% of the net amount invested. The following table shows the range of sales charges as a percentage of the public offering price and of the net amount invested on total investments at each applicable level. PAGE 50 On total investment, sales charge as a percentage of Public Net Offering Price Amount Invested Amount of Investment ranges from: First $ 50,000 5.00% 5.26% More than 50,000 to 100,000 5.00-4.50 5.26-4.71 More than 100,000 to 500,000 4.50-3.80 4.71-3.95 More than 500,000 to 999,999 3.80-2.00 3.95-2.04 $1,000,000 or more 0.00 0.00 The initial sales charge is waived for certain qualified plans that meet the requirements described in the prospectus. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The deferred sales charge on certain redemptions will be waived if the redemption is a result of a participant's death, disability, retirement, attaining age 59 1/2, loans or hardship withdrawals. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of Participants Total Plan Assets 1-99 100 or more Less than $1 million 4% 0% $1 million or more 0% 0% - --------------------------------------------------------- Class A - Reducing the Sales Charge Sales charges are based on the total amount of your investments in the Fund. The amount of all prior investments plus any new purchase is referred to as your "total amount invested." For example, suppose you have made an investment of $20,000 and later decide to invest $40,000 more. Your total amount invested would be $60,000. As a result, $10,000 of your $40,000 investment qualifies for the lower 4.5% sales charge that applies to investments of more than $50,000 and up to $100,000. The total amount invested includes any shares held in the Fund in the name of a member of your primary household group. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. Domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) For instance, if your spouse already has invested $20,000 and you want to invest $40,000, your total amount invested will be $60,000 and therefore you will pay the lower charge of 4.5% on $10,000 of the $40,000. PAGE 51 Until a spouse remarries, the sales charge is waived for spouses and unmarried children under 21 of deceased board members, officers or employees of the Fund or AEFC or its subsidiaries and deceased advisors. The total amount invested also includes any investment you or your immediate family already have in the other publicly offered funds in the IDS MUTUAL FUND GROUP where the investment is subject to a sales charge. For example, suppose you already have an investment of $30,000 in another IDS fund. If you invest $40,000 more in this Fund, your total amount invested in the funds will be $70,000 and therefore $20,000 of your $40,000 investment will incur a 4.5% sales charge. Finally, Individual Retirement Account (IRA) purchases, or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar entity, may be added together to reduce sales charges for shares purchased through that plan. Class A - Letter of Intent (LOI) If you intend to invest $1 million over a period of 13 months, you can reduce the sales charges in Class A by filing a LOI. The agreement can start at any time and will remain in effect for 13 months. Your investment will be charged normal sales charges until you have invested $1 million. At that time, your account will be credited with the sales charges previously paid. Class A investments made prior to signing an LOI may be used to reach the $1 million total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will not adjust for sales charges on investments made prior to the signing of the LOI. If you do not invest $1 million by the end of 13 months, there is no penalty, you'll just miss out on the sales charge adjustment. A LOI is not an option (absolute right) to buy shares. Here's an example. You file a LOI to invest $1 million and make an investment of $100,000 at that time. You pay the normal 5% sales charge on the first $50,000 and 4.5% sales charge on the next $50,000 of this investment. Let's say you make a second investment of $900,000 (bringing the total up to $1 million) one month before the 13-month period is up. On the date that you bring your total to $1 million, AEFC makes an adjustment to your account. The adjustment is made by crediting your account with additional shares, in an amount equivalent to the sales charge previously paid. Systematic Investment Programs After you make your initial investment of $2,000 or more, you can arrange to make additional payments of $100 or more on a regular basis. These minimums do not apply to all systematic investment programs. You decide how often to make payments - monthly, quarterly, or semiannually. You are not obligated to make any payments. You can omit payments or discontinue the investment PAGE 52 program altogether. The Fund also can change the program or end it at any time. If there is no obligation, why do it? Putting money aside is an important part of financial planning. With a systematic investment program, you have a goal to work for. How does this work? Your regular investment amount will purchase more shares when the net asset value per share decreases, and fewer shares when the net asset value per share increases. Each purchase is a separate transaction. After each purchase your new shares will be added to your account. Shares bought through these programs are exactly the same as any other fund shares. They can be bought and sold at any time. A systematic investment program is not an option or an absolute right to buy shares. The systematic investment program itself cannot ensure a profit, nor can it protect against a loss in a declining market. If you decide to discontinue the program and redeem your shares when their net asset value is less than what you paid for them, you will incur a loss. For a discussion on dollar-cost averaging, see Appendix D. Automatic Directed Dividends Dividends, including capital gain distributions, paid by another fund in the IDS MUTUAL FUND GROUP subject to a sales charge, may be used to automatically purchase shares in the same class of this Fund without paying a sales charge. Dividends may be directed to existing accounts only. Dividends declared by a fund are exchanged to this Fund the following day. Dividends can be exchanged into the same class of another fund in the IDS MUTUAL FUND GROUP but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: Between a non-custodial account and an IRA, or 401(k) plan account or other qualified retirement account of which American Express Trust Company acts as custodian; Between two American Express Trust Company custodial accounts with different owners (for example, you may not exchange dividends from your IRA to the IRA of your spouse); Between different kinds of custodial accounts with the same ownership (for example, you may not exchange dividends from your IRA to your 401(k) plan account, although you may exchange dividends from one IRA to another IRA). Dividends may be directed from accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA or UTMA accounts with identical ownership. The Fund's investment goals are described in its prospectus along with other information, including fees and expense ratios. Before PAGE 53 exchanging dividends into another fund, you should read that fund's prospectus. You will receive a confirmation that the automatic directed dividend service has been set up for your account. REDEEMING SHARES You have a right to redeem your shares at any time. For an explanation of redemption procedures, please see the prospectus. During an emergency, the board can suspend the computation of net asset value, stop accepting payments for purchase of shares or suspend the duty of the Fund to redeem shares for more than seven days. Such emergency situations would occur if: 'The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or 'Disposal of the Portfolio's securities is not reasonably practicable or it is not reasonably practicable for the Portfolio to determine the fair value of its net assets, or 'The SEC, under the provisions of the 1940 Act, as amended, declares a period of emergency to exist. Should the Fund stop selling shares, the board may make a deduction from the value of the assets held by the Fund to cover the cost of future liquidations of the assets so as to distribute fairly these costs among all shareholders. The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the Fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the Fund as determined by the board. In these circumstances, the securities distributed would be valued as set forth in the prospectus. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. PAY-OUT PLANS You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem Class B shares you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you are redeeming a tax-qualified plan account for which American Express Trust Company acts as custodian, you can elect to PAGE 54 receive your dividends and other distributions in cash when permitted by law. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of the Fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please write American Express Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial Advisors Telephone Transaction Service at 800-437-3133(National/Minnesota) or 612-671-3800 (Mpls./St. Paul). Your authorization must be received in the Minneapolis headquarters at least five days before the date you want your payments to begin. The initial payment must be at least $50. Payments will be made on a monthly, bimonthly, quarterly, semiannual or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way AEFC can handle efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you'll have to send in a separate redemption request for each pay-out. The Fund reserves the right to change or stop any pay-out plan and to stop making such plans available. Plan #1: Pay-out for a fixed period of time If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Plan #2: Redemption of a fixed number of shares If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. Plan #3: Redemption of a fixed dollar amount If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. Plan #4: Redemption of a percentage of net asset value Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each PAGE 55 payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $50 if the value of your account is $10,000 on the payment date. TAXES If you buy shares in the Fund and then exchange into another fund, it is considered a sale and subsequent purchase of shares. Under the tax laws, if this exchange is done within 91 days, any sales charge waived on Class A shares on a subsequent purchase of shares applies to the new shares acquired in the exchange. Therefore, you cannot create a tax loss or reduce a tax gain attributable to the sales charge when exchanging shares within 91 days. Retirement Accounts If you have a nonqualified investment in the Fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the Fund, you can do so without paying a sales charge. However, this type of exchange is considered a sale of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged plus the amount of the initial sales charge applied to the amount exchanged exceeds annual contribution limitations. For example: If you were to exchange $2,000 in Class A shares from a nonqualified account to an IRA without considering the 5% ($100) initial sales charge applicable to that $2,000, you may be deemed to have exceeded current IRA annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of the Fund's dividend that is attributable to dividends the Fund received from domestic (U.S.) securities. For the fiscal year ended May 31, 1997, 0.51% of the Fund's net investment income dividends qualified for the corporate deduction. Capital gain distributions received by individual and corporate shareholders, if any, should be treated as long-term capital gains regardless of how long they owned their shares. Short-term capital gains earned by the Fund are paid to shareholders as part of their ordinary income dividend and are taxable. Under federal tax law and an election made by the Fund under federal tax regulations, by the end of a calendar year the Fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Nov. 30 of that calendar year. The Fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. The Fund intends to comply with federal tax law and avoid any excise tax. PAGE 56 The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or if 50% or more of the average value of its assets consists of assets that produce or could produce passive income. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state and local income tax laws to Fund distributions. AGREEMENTS Investment Management Services Agreement The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with AEFC. For its services, AEFC is paid a fee based on the following schedule: Assets Annual rate at (billions) each asset level First $1.0 0.520% Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 On May 31, 1997, the daily rate applied to the Portfolio's net assets was equal to 0.510% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of business two business days prior to the day for which the calculation is made. The management fee is paid monthly. Under the agreement, the total amount paid was $8,563,732 for the fiscal year ended May 31, 1997, $4,416,446 for fiscal period May 31, 1996, and $7,840,014 for fiscal year Nov. 30, 1995. Under the agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; office expenses; consultants' fees; compensation of board members, Portfolio officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities of the Portfolio; and expenses properly payable by the Portfolio, approved by the board. Under the agreement, the nonadvisory expenses paid by the Fund and Portfolio were $610,404 for the fiscal year ended May 31, 1997, $437,197 for fiscal year 1996, and $731,046 for fiscal year 1995. In this section, prior to June 10, 1996, the fees and expenses described were paid directly by the Fund. After that date, the management fees were paid by the Portfolio. PAGE 57 Administrative Services Agreement The Fund has an Administrative Services Agreement with AEFC. Under this agreement, the Fund pays AEFC for providing administration and accounting services. The fee is calculated as follows: Assets Annual rate (billions) each asset level First $1.0 0.050% Next 1.0 0.045 Next 1.0 0.040 Next 3.0 0.035 Next 3.0 0.030 Over 9.0 0.025 On May 31, 1997, the daily rate applied to the Fund's net assets was equal to 0.048% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of business two business days prior to the day for which the calculation is made. Under the agreement, the Fund paid fees of $804,841 for the fiscal year ended May 31, 1997. Transfer Agency Agreement The Fund has a Transfer Agency Agreement with AEFC. This agreement governs AEFC's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the Fund's shares. Under the agreement, AEFC will earn a fee from the Fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and dividing by the number of days in the year. The rate for Class A and Class Y is $15.50 per year and for Class B is $16.50 per year. The fees paid to AEFC may be changed from time to time upon agreement of the parties without shareholder approval. Under the agreement, the Fund paid fees of $1,842,492 for the fiscal year ended May 31, 1997. Distribution Agreement Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to American Express Financial Advisors daily. These charges amounted to $2,491,568 for the fiscal year ended May 31, 1997. After paying commissions to personal financial advisors, and other expenses, the amount retained was $84,633. The amounts were $2,280,804 and $(355,603) for fiscal period May 31, 1996, and $3,880,191, and $776,038 for fiscal year Nov. 30, 1995. PAGE 58 Additional information about commissions and compensation for the fiscal year ended May 31, 1997, is contained in the following table: (1) (2) (3) (4) (5) Net Compensation Name of Underwriting on Redemption Principal Discounts and and Brokerage Other Underwriter Commissions Repurchases Commissions Compensation AEFC None None None $900,588* American Express Financial Advisors $2,491,568 None None None *Distribution fees paid pursuant to the Plan and Agreement of Distribution. Shareholder Service Agreement The Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of average daily net assets for Class A and Class B shares and 0.10% for Class Y. Plan and Agreement of Distribution For Class B shares, to help American Express Financial Advisors defray the cost of distribution and servicing, not covered by the sales charges received under the Distribution Agreement, the Fund and American Express Financial Advisors entered into a Plan and Agreement of Distribution (Plan). These costs cover almost all aspects of distributing the Fund's shares except compensation to the sales force. A substantial portion of the costs are not specifically identified to any one fund in the IDS MUTUAL FUND GROUP. Under the Plan, American Express Financial Advisors is paid a fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares. The Plan must be approved annually by the board, including a majority of the disinterested board members, if it is to continue for more than a year. At least quarterly, the board must review written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of board members who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the Fund's Class B shares or by American Express Financial Advisors. The Plan (or any agreement related to it) will terminate in the event of its assignment, as that term is defined in the 1940 Act, as amended. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all PAGE 59 material amendments to the Plan must be approved by a majority of the board members, including a majority of the board members who are not interested persons of the Fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No board member who is not an interested person, has any direct or indirect financial interest in the operation of the Plan or any related agreement. For the fiscal year ended May 31, 1997, under the agreement, the Fund paid fees of $900,588. Custodian Agreement The Trust's securities and cash are held by First Bank National Association, 180 E. Fifth St., St. Paul, MN 55101-1631, through a custodian agreement. The Fund also retains the custodian pursuant to a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Portfolio pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. Total fees and expenses The Fund paid total fees and nonadvisory expenses of $15,258,561 for the fiscal year ended May 31, 1997. ORGANIZATIONAL INFORMATION The Fund is a diversified, open-end management investment company, as defined in the Investment Company Act of 1940. Originally incorporated on Feb. 10, 1945 in Nevada, the Fund changed its state of incorporation on June 13, 1986 by merging into a Minnesota corporation incorporated on April 7, 1986. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402- 3268. BOARD MEMBERS AND OFFICERS The following is a list of the Fund's board members. They serve 15 Master Trust portfolios and 47 IDS and IDS Life funds (except for William H. Dudley, who does not serve on the nine IDS Life fund boards.) All shares have cumulative voting rights with respect to the election of board members. H. Brewster Atwater, Jr. Born in 1931 4900 IDS Tower Minneapolis, MN Former chairman and chief executive officer, General Mills, Inc. Director, Merck & Co., Inc. and Darden Restaurants, Inc. PAGE 60 Lynne V. Cheney' Born in 1941 American Enterprise Institute for Public Policy Research (AEI) 1150 17th St., N.W. Washington, D.C. Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities. Director, The Reader's Digest Association Inc., Lockheed-Martin, Union Pacific Resources, and FPL Group, Inc. (holding company for Florida Power and Light). William H. Dudley** Born in 1932 2900 IDS Tower Minneapolis, MN Senior advisor to the chief exectutive officer, AEFC. Robert F. Froehlke+ Born in 1922 1201 Yale Place Minneapolis, MN Former president of all funds in the IDS MUTUAL FUND GROUP. Director, the ICI Mutual Insurance Co., Institute for Defense Analyses, Marshall Erdman and Associates, Inc. (architectural engineering) and Public Oversight Board of the American Institute of Certified Public Accountants. David R. Hubers+** Born in 1943 2900 IDS Tower Minneapolis, MN President, chief executive officer and director of AEFC. Previously, senior vice president, finance and chief financial officer of AEFC. Heinz F. Hutter+' Born in 1929 P.O. Box 2187 Minneapolis, MN Former president and chief operating officer, Cargill, Incorporated (commodity merchants and processors). Anne P. Jones Born in 1935 5716 Bent Branch Rd. Bethesda, MD Attorney and telecommunications consultant. Former partner, law firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and C-Cor Electronics, Inc. PAGE 61 Melvin R. Laird Born in 1922 Reader's Digest Association, Inc. 1730 Rhode Island Ave., N.W. Washington, D.C. Senior counsellor for national and international affairs, The Reader's Digest Association, Inc. Former nine-term U.S. Congressman, U.S. Secretary of Defense and Presidential Counsellor. Director, Metropolitan Life Insurance Co., The Reader's Digest Association, Inc., Science Applications International Corp., Wallace Reader's Digest Funds and Public Oversight Board (SEC Practice Section, American Institute of Certified Public Accountants). William R. Pearce+* Born in 1927 901 S. Marquette Ave. Minneapolis, MN Chairman of the board, Board Services Corporation (provides administrative services to boards). Director, trustee and officer of registered investment companies whose boards are served by the company. Former vice chairman of the board, Cargill, Incorporated (commodity merchants and processors). Alan K. Simpson Born in 1931 1201 Sunshine Ave. Cody, WY Former three-term United States Senator for Wyoming. Former Assistant Republican Leader, U.S. Senate. Director, PacifiCorp (electric power). Edson W. Spencer+ Born in 1926 4900 IDS Center 80 S. 8th St. Minneapolis, MN President, Spencer Associates Inc. (consulting). Former chairman of the board and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation (forest products). Member of International Advisory Council of NEC (Japan). John R. Thomas** Born in 1937 2900 IDS Tower Minneapolis, MN Senior vice president and director of AEFC. PAGE 62 Wheelock Whitney+ Born in 1926 1900 Foshay Tower 821 Marquette Ave. Minneapolis, MN Chairman, Whitney Management Company (manages family assets). C. Angus Wurtele' Born in 1934 Valspar Corporation Suite 1700 Foshay Tower Minneapolis, MN Chairman of the board and retired chief executive officer, The Valspar Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company (air cleaners & mufflers) and General Mills, Inc. (consumer foods). + Member of executive committee. ' Member of joint audit committee. * Interested person by reason of being an officer and employee of the Fund. **Interested person by reason of being an officer, board member, employee and/or shareholder of AEFC or American Express. The board also has appointed officers who are responsible for day-to-day business decisions based on policies it has established. In addition to Mr. Pearce, who is president, the Fund's other officers are: Leslie L. Ogg Born in 1938 901 S. Marquette Ave. Minneapolis, MN President, treasurer and corporate secretary of Board Services Corporation. Vice president, general counsel and secretary for the Fund. Officers who also are officers and/or employees of AEFC Peter J. Anderson Born in 1942 IDS Tower 10 Minneapolis, MN Director and senior vice president-investments of AEFC. Vice president-investments for the Fund. PAGE 63 Melinda S. Urion Born in 1953 IDS Tower 10 Minneapolis, MN Director, senior vice president and chief financial officer of AEFC. Director, executive vice president and controller of IDS Life Insurance Company. Treasurer for the Fund. COMPENSATION FOR FUND BOARD MEMBERS Members of the board who are not officers of the Fund or AEFC receive an annual fee of $300, and the chair of the Contracts Committee receives an additional $86. Board members receive a $50 per day attendance fee for board meetings. The attendance fee for meetings of the Contracts and Investment Review Committees is $50; for meetings of the Audit Committee and Personnel Committee $25 and for traveling from out-of-state $3. Expenses for attending meetings are reimbursed. During the fiscal year ended May 31, 1997, the members of the board, for attending up to 31 meetings, received the following compensation: Compensation Table
Pension or Estimated Total cash compensation Aggregate Retirement annual from the IDS MUTUAL FUND compensation benefits accrued benefit upon GROUP and the Preferred Board member from the Fund as Fund expenses retirement Master Trust Group H. Brewster Atwater, Jr. $ 728 $0 $0 $ 61,900 (part of year) Lynne V. Cheney 1,143 0 0 92,800 Robert F. Froehlke 1,293 0 0 100,600 Heinz F. Hutter 1,246 0 0 97,800 Anne P. Jones 1,399 0 0 108,500 Melvin R. Laird 1,171 0 0 94,600 Alan K. Simpson 462 0 0 42,100 (part of year) Edson W. Spencer 1,650 0 0 121,400 Wheelock Whitney 1,388 0 0 106,000 C. Angus Wurtele 1,331 0 0 102,700
On May 31, 1997, the Fund's board members and officers as a group owned less than 1% of the outstanding shares. During the fiscal year ended May 31, 1997, no board member or officer earned more than $60,000 from this Fund. All board members and officers as a group earned $17,313 from this Fund. COMPENSATION FOR PORTFOLIO BOARD MEMBERS Members of the board who are not officers of the Portfolio or of the Advisor receive an annual fee of $900 for Quality Income Portfolio. They also receive attendance and other fees. These fees include for each day in attendance at meetings of the board, $50; for meetings of the Contracts and Investment Review Committees, $50; meetings of the Audit and Personnel Committee, $25; for traveling from out-of-state, $9; and as chair of Contracts Committee, $86. Expenses for attending meetings are reimbursed. PAGE 64 During the fiscal year ended May 31, 1997 the members of the board, for attending up to 31 meetings, received the following compensation: Compensation Table for Quality Income Portfolio
Pension or Total cash Retirement Estimated compensation from Aggregate benefits annual from the PREFERRED compensation accrued as benefit MASTER TRUST GROUP from the Portfolio upon and IDS MUTUAL Board member Portfolio expenses retirement FUND GROUP H. Brewster Atwater, Jr. $1,084 $0 $0 $ 61,900 (part of year) Lynne V. Cheney 1,567 0 0 92,800 Robert F. Froehlke 1,699 0 0 100,600 Heinz F. Hutter 1,652 0 0 97,800 Anne P. Jones 1,835 0 0 108,500 Melvin R. Laird 1,595 0 0 94,600 Alan K. Simpson 736 0 0 42,100 (part of year) Edson W. Spencer 2,055 0 0 121,400 Wheelock Whitney 1,794 0 0 106,000 C. Angus Wurtele 1,737 0 0 102,700
During the fiscal year ended May 31, 1997 no board member or officer earned more than $60,000 from the Quality Income Portfolio. All board members and officers as a group earned $18,503 from Quality Income Portfolio. INDEPENDENT AUDITORS The Fund's and corresponding Portfolio's financial statements contained in the Annual Report to shareholders for the fiscal year ended May 31, 1997, were audited by independent auditors, KPMG Peat Marwick LLP, 4200 Norwest Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also provide other accounting and tax-related services as requested by the Fund. FINANCIAL STATEMENTS The Independent Auditors' Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities, contained in the Annual Report to shareholders for the fiscal year ended May 31, 1997 pursuant to Section 30(d) of the Investment Company Act of 1940, as amended, are hereby incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. PROSPECTUS The prospectus for IDS Selective Fund, dated July 30, 1997, is hereby incorporated in this SAI by reference. PAGE 65 APPENDIX A FOREIGN CURRENCY TRANSACTIONS Since investments in foreign countries usually involve currencies of foreign countries, and since the Portfolio may hold cash and cash-equivalent investments in foreign currencies, the value of the Portfolio's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, the Portfolio may incur costs in connection with conversions between various currencies. Spot Rates and Forward Contracts. The Portfolio conducts its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts) as a hedge against fluctuations in future foreign exchange rates. A forward contract involves an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the contract date, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirements. No commissions are charged at any stage for trades. The Portfolio may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment in dollars. By entering into a forward contract, the Portfolio will be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. The Portfolio also may enter into forward contracts when management of the Portfolio believes the currency of a particular foreign country may suffer a substantial decline against another currency. It may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of such securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. The Portfolio will not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate the Portfolio to deliver PAGE 66 an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. The Portfolio will designate cash or securities in an amount equal to the value of the Portfolio's total assets committed to consummating forward contracts entered into under the second circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the Portfolio's commitments on such contracts. At maturity of a forward contract, the Portfolio may either sell the security and make delivery of the foreign currency or retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract with the same currency trader obligating it to buy, on the same maturity date, the same amount of foreign currency. If the Portfolio retains the security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline between the date the Portfolio enters into a forward contract for selling foreign currency and the date it enters into an offsetting contract for purchasing the foreign currency, the Portfolio will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. Should forward prices increase, the Portfolio will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell. It is impossible to forecast what the market value of securities will be at the expiration of a contract. Accordingly, it may be necessary for the Portfolio to buy additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received on the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. The Portfolio's dealing in forward contracts will be limited to the transactions described above. This method of protecting the value of the Portfolio's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although such forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. PAGE 67 Although the Portfolio values its assets each business day in terms of U.S. dollars, it does not intend to convert its foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. Options on Foreign Currencies. The Portfolio may buy put and write covered call options on foreign currencies for hedging purposes. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of securities, the Portfolio may buy put options on the foreign currency. If the value of the currency does decline, the Portfolio will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted. As in the case of other types of options, however, the benefit to the Portfolio derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Portfolio could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates. The Portfolio may write options on foreign currencies for the same types of hedging purposes. For example, when the Portfolio anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised and the diminution in value of securities will be fully or partially offset by the amount of the premium received. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Portfolio would be required to buy or sell the underlying currency at a loss which may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Portfolio also may be required to forego all or a portion of the benefits which might otherwise have been obtained from favorable movements on exchange rates. PAGE 68 All options written on foreign currencies will be covered. An option written on foreign currencies is covered if the Portfolio holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Portfolio to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for the purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. Foreign Currency Futures and Related Options. The Portfolio may enter into currency futures contracts to sell currencies. It also may buy put options and write covered call options on currency PAGE 69 futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. The Portfolio may use currency futures for the same purposes as currency forward contracts, subject to Commodity Futures Trading Commission (CFTC) limitations. All futures contracts are aggregated for purposes of the percentage limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the values of the Portfolio's investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect the Portfolio against price decline if the issuer's creditworthiness deteriorates. Because the value of the Portfolio's investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of the Portfolio's investments denominated in that currency over time. The Portfolio will hold securities or other options or futures positions whose values are expected to offset its obligations. The Portfolio will not enter into an option or futures position that exposes the Portfolio to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. PAGE 70 APPENDIX B OPTIONS AND INTEREST RATE FUTURES CONTRACTS The Portfolio may buy or write options traded on any U.S. or foreign exchange or in the over-the-counter market. The Portfolio may enter into interest rate futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy or write put and call options on these futures. Options in the over-the-counter market will be purchased only when the investment manager believes a liquid secondary market exists for the options and only from dealers and institutions the investment manager believes present a minimal credit risk. Some options are exercisable only on a specific date. In that case, or if a liquid secondary market does not exist, the Portfolio could be required to buy or sell securities at disadvantageous prices, thereby incurring losses. OPTIONS. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition the buyer generally pays a broker a commission. The writer receives a premium, less a commission, at the time the option is written. The cash received is retained by the writer whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. Options can be used to produce incremental earnings, protect gains and facilitate buying and selling securities for investment purposes. The use of options and futures contracts may benefit the Portfolio and its shareholders by improving the Portfolio's liquidity and by helping to stabilize the value of its net assets. Buying options. Put and call options may be used as a trading technique to facilitate buying and selling securities for investment reasons. Options are used as a trading technique to take advantage of any disparity between the price of the underlying security in the securities market and its price on the options market. It is anticipated the trading technique will be utilized only to effect a transaction when the price of the security plus PAGE 71 the option price will be as good or better than the price at which the security could be bought or sold directly. When the option is purchased, the Portfolio pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record-keeping and tax purposes, the price obtained on the purchase of the underlying security will be the combination of the exercise price, the premium and both commissions. When using options as a trading technique, commissions on the option will be set as if only the underlying securities were traded. Put and call options also may be held by the Portfolio for investment purposes. Options permit the Portfolio to experience the change in the value of a security with a relatively small initial cash investment. The risk the Portfolio assumes when it buys an option is the loss of the premium. To be beneficial to the Portfolio, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and subsequent sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Writing covered options. The Portfolio will write covered options when it feels it is appropriate and will follow these guidelines: 'Underlying securities will continue to be bought or sold solely on the basis of investment considerations consistent with the Portfolio's goal. 'All options written by the Portfolio will be covered. For covered call options if a decision is made to sell the security, the Portfolio will attempt to terminate the option contract through a closing purchase transaction. Net premiums on call options closed or premiums on expired call options are treated as short-term capital gains. Since the Portfolio is taxed as a regulated investment company under the Internal Revenue Code, any gains on options and other securities held less than three months must be limited to less than 30% of its annual gross income. If a covered call option is exercised, the security is sold by the Portfolio. The Portfolio will recognize a capital gain or loss based upon the difference between the proceeds and the security's basis. Options on many securities are listed on options exchanges. If the Portfolio writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, Chicago Board Options Exchange (CBOE) or NASDAQ will be valued at the last- PAGE 72 quoted sales price or, if such a price is not readily available, at the mean of the last bid and asked prices. FUTURES CONTRACTS. A futures contract is an agreement between two parties to buy and sell a security for a set price on a future date. They have been established by boards of trade which have been designated contracts markets by the Commodity Futures Trading Commission (CFTC). Futures contracts trade on these markets in a manner similar to the way a stock trades on a stock exchange, and the boards of trade, through their clearing corporations, guarantee performance of the contracts. Currently, there are futures contracts based on such debt securities as long-term U.S. Treasury bonds, Treasury notes, GNMA modified pass-through mortgage-backed securities, three-month U.S. Treasury bills and bank certificates of deposit. While futures contracts based on debt securities do provide for the delivery and acceptance of securities, such deliveries and acceptances are very seldom made. Generally, the futures contract is terminated by entering into an offsetting transaction. An offsetting transaction for a futures contract sale is effected by the Portfolio entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Portfolio immediately is paid the difference and realizes a gain. If the offsetting purchase price exceeds the sale price, the Portfolio pays the difference and realizes a loss. Similarly, closing out a futures contract purchase is effected by the Portfolio entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Portfolio realizes a gain, and if the offsetting sale price is less than the purchase price, the Portfolio realizes a loss. At the time a futures contract is made, a good-faith deposit called initial margin is set up within a segregated account at the Portfolio's custodian bank. The initial margin deposit is approximately 1.5% of a contract's face value. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day the Portfolio would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash markets. The purpose of a futures contract, in the case of a portfolio holding long-term debt securities, is to gain the benefit of changes in interest rates without actually buying or selling long-term debt securities. For example, if the Portfolio owned long-term bonds and interest rates were expected to increase, it might enter into futures contracts to sell securities which would have much the same effect as selling some of the long-term bonds it owned. Futures contracts are based on types of debt securities referred to above, which have historically reacted to an increase or decline in interest rates in a fashion similar to the debt securities the PAGE 73 Portfolio owns. If interest rates did increase, the value of the debt securities in the portfolio would decline, but the value of the Portfolio's futures contracts would increase at approximately the same rate, thereby keeping the net asset value of the Portfolio from declining as much as it otherwise would have. If, on the other hand, the Portfolio held cash reserves and interest rates were expected to decline, the Portfolio might enter into interest rate futures contracts for the purchase of securities. If short-term rates were higher than long-term rates, the ability to continue holding these cash reserves would have a very beneficial impact on the Portfolio's earnings. Even if short-term rates were not higher, the Portfolio would still benefit from the income earned by holding these short-term investments. At the same time, by entering into futures contracts for the purchase of securities, the Portfolio could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Portfolio's cash reserves could then be used to buy long-term bonds on the cash market. The Portfolio could accomplish similar results by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase or by buying bonds with long maturities and selling bonds with short maturities when interest rates are expected to decline. But by using futures contracts as an investment tool, given the greater liquidity in the futures market than in the cash market, it might be possible to accomplish the same result more easily and more quickly. Successful use of futures contracts depends on the investment manager's ability to predict the future direction of interest rates. If the investment manager's prediction is incorrect, the Portfolio would have been better off had it not entered into futures contracts. OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date, an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into such a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Furthermore, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily and that change is reflected in the net asset value of the Portfolio. RISKS. There are risks in engaging in each of the management tools described above. The risk the Portfolio assumes when it buys an option is the loss of the premium paid for the option. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. PAGE 74 The risk involved in writing options on futures contracts the Portfolio owns, or on securities held in its portfolio, is that there could be an increase in the market value of such contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. The Portfolio could enter into a closing transaction by purchasing an option with the same terms as the one it had previously sold. The cost to close the option and terminate the Portfolio's obligation, however, might be more or less than the premium received when it originally wrote the option. Furthermore, the Portfolio might not be able to close the option because of insufficient activity in the options market. A risk in employing futures contracts to protect against the price volatility of portfolio securities is that the prices of securities subject to futures contracts may not correlate perfectly with the behavior of the cash prices of the Portfolio's securities. The correlation may be distorted because the futures market is dominated by short-term traders seeking to profit from the difference between a contract or security price and their cost of borrowed funds. Such distortions are generally minor and would diminish as the contract approached maturity. Another risk is that the Portfolio's investment manager could be incorrect in anticipating as to the direction or extent of various interest rate movements or the time span within which the movements take place. For example, if the Portfolio sold futures contracts for the sale of securities in anticipation of an increase in interest rates, and interest rates declined instead, the Portfolio would lose money on the sale. TAX TREATMENT. As permitted under federal income tax laws, the Portfolio intends to identify futures contracts as mixed straddles and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. Such an election may result in the Portfolio being required to defer recognizing losses incurred by entering into futures contracts and losses on underlying securities identified as being hedged against. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether such option is a section 1256 contract . If the option is a non-equity option, the Portfolio will either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. Certain provisions of the Internal Revenue Code may also limit the Portfolio's ability to engage in futures contracts and related options transactions. For example, at the close of each quarter of the Portfolio's taxable year, at least 50% of the value of its assets must consist of cash, government PAGE 75 securities and other securities, subject to certain diversification requirements. Less than 30% of its gross income must be derived from sales of securities held less than three months. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. In order to avoid realizing a gain within the three-month period, the Portfolio may be required to defer closing out a contract beyond the time when it might otherwise be advantageous to do so. The Portfolio also may be restricted in purchasing put options for the purpose of hedging underlying securities because of applying the short sale holding period rules with respect to such underlying securities. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (the Portfolio's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. PAGE 76 APPENDIX C MORTGAGE-BACKED SECURITIES A mortgage pass-through certificate is one that represents an interest in a pool, or group, of mortgage loans assembled by the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) or non-governmental entities. In pass-through certificates, both principal and interest payments, including prepayments, are passed through to the holder of the certificate. Prepayments on underlying mortgages result in a loss of anticipated interest, and the actual yield (or total return) to the Portfolio, which is influenced by both stated interest rates and market conditions, may be different than the quoted yield on certificates. Some U.S. government securities may be purchased on a when-issued basis, which means that it may take as long as 45 days after the purchase before the securities are delivered to the Portfolio. Stripped Mortgage-Backed Securities. The Portfolio may invest in stripped mortgage-backed securities. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. On an IO, if prepayments of principal are greater than anticipated, an investor may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. Mortgage-Backed Security Spread Options. The Portfolio may purchase mortgage-backed security (MBS) put spread options and write covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. MBS spread options are traded in the OTC market and are of short duration, typically one to two months. The Portfolio would buy or sell covered MBS call spread options in situations where mortgage-backed securities are expected to underperform like-duration Treasury securities. PAGE 77 APPENDIX D DOLLAR-COST AVERAGING A technique that works well for many investors is one that eliminates random buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost averaging involves building a portfolio through the investment of fixed amounts of money on a regular basis regardless of the price or market condition. This may enable an investor to smooth out the effects of the volatility of the financial markets. By using this strategy, more shares will be purchased when the price is low and less when the price is high. As the accompanying chart illustrates, dollar-cost averaging tends to keep the average price paid for the shares lower than the average market price of shares purchased, although there is no guarantee. While this technique does not ensure a profit and does not protect against a loss if the market declines, it is an effective way for many shareholders who can continue investing on a regular basis through changing market conditions, including times when the price of their shares falls or the market declines, to accumulate shares in a fund to meet long-term goals. Dollar-cost averaging - ------------------------------------------------------------------- Regular Market Price Shares Investment of a Share Acquired $100 $6.00 16.7 100 4.00 25.0 100 4.00 25.0 100 6.00 16.7 100 5.00 20.0 ---- ----- ----- $500 $25.00 103.4 Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5). The average price you paid for each share: $4.84 ($500 divided by 103.4). Independent auditors' report The board and shareholders IDS Selective Fund, Inc.: We have audited the accompanying statement of assets and liabilities of IDS Selective Fund, Inc. as of May 31, 1997, and the related statement of operations for the year then ended and the statements of changes in net assets for the year ended May 31, 1997 and the six months ended May 31, 1996, and the financial highlights for the year ended May 31, 1997, the six months ended May 31, 1996 and each of the years in the nine-year period ended Nov. 30, 1995. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDS Selective Fund, Inc. at May 31, 1997, and the results of its operations, changes in its net assets and the financial highlights for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota July 3, 1997
Financial statements Statement of assets and liabilities IDS Selective Fund, Inc. May 31, 1997 Assets Investment in Quality Income Portfolio (Note 1) $1,615,061,028 -------------- Total assets 1,615,061,028 ------------- Liabilities Dividends payable to shareholders 599,570 Accrued distribution fee 2,589 Accrued service fee 7,282 Accrued transfer agency fee 4,940 Accrued administrative services fee 2,118 Other accrued expenses 241,972 ------- Total liabilities 858,471 ------- Net assets applicable to outstanding capital stock $1,614,202,557 ============== Represented by Capital stock-- authorized 10,000,000,000 shares of $.01 par value $ 1,793,884 Additional paid-in capital 1,573,213,712 Undistributed net investment income 2,115,568 Accumulated net realized gain (Note 1) 8,623,089 Unrealized appreciation of investments 28,456,304 ---------- Total-- representing net assets applicable to outstanding capital stock $1,614,202,557 ============== Net assets applicable to outstanding shares: Class A $1,285,926,129 Class B $ 126,468,734 Class Y $ 201,807,694 Net asset value per share of outstanding capital stock: Class A shares 142,906,961 $ 9.00 Class B shares 14,055,085 $ 9.00 Class Y shares 22,426,340 $ 9.00 See accompanying notes to financial statements. Statement of operations IDS Selective Fund, Inc. Year ended May 31, 1997 Investment income June 1, 1996 June 10, 1996 Total to June 9, 1996 to May 31, 1997 (Notes 1 and 4) Income: Dividends $ -- $ 598,700 $ 598,700 Interest 2,463,528 120,218,714 122,682,242 --------- ----------- ----------- Total income 2,463,528 120,817,414 123,280,942 --------- ----------- ----------- Expenses (Note 2): Investment management services fee 168,661 -- 168,661 Distribution fee-- Class B 15,568 885,020 900,588 Transfer agency fee 35,375 1,797,807 1,833,182 Incremental transfer agency fee -- Class B 162 9,148 9,310 Service fee Class A 47,116 2,271,060 2,318,176 Class B 3,633 205,162 208,795 Class Y -- 12,098 12,098 Administrative services fees and expenses 15,854 788,987 804,841 Compensation of board members 4 10,354 10,358 Compensation of officers -- 6,955 6,955 Custodian fees 1,400 -- 1,400 Postage 690 196,697 197,387 Registration fees 1,427 155,877 157,304 Reports to shareholders -- 81,601 81,601 Audit fees 26 9,974 10,000 Other 9 26,208 26,217 - ------ ------ Total expenses 289,925 6,456,948 6,746,873 Earnings credits on cash balances (Notes 2 and 4) (84) (81,162) (81,246) --- ------- ------- 289,841 6,375,786 6,665,627 Expenses, including investment management services fee, allocated from Quality Income Portfolio -- 8,592,934 8,592,934 ----- --------- --------- Total net expenses 289,841 14,968,720 15,258,561 ------- ---------- ---------- Investment income-- net 2,173,687 105,848,694 108,022,381 --------- ----------- ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on security and foreign currency transactions (1,140,606)* 13,633,059 12,492,453 Net realized loss on financial futures contracts -- (6,337,814) (6,337,814) Net realized gain on option contracts written -- 2,097,867 2,097,867 ---------- --------- --------- Net realized gain (loss) on investments and foreign currencies (1,140,606) 9,393,112 8,252,506 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies (5,677,421) 20,424,830 14,747,409 ---------- ---------- ---------- Net gain (loss) on investments and foreign currencies (6,818,027) 29,817,942 22,999,915 ---------- ---------- ---------- Net increase (decrease) in net assets resulting from operations $(4,644,340) $135,666,636 $131,022,296 =========== ============ ============ *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 May 31, 1997 May 31, 1996 Year ended Six months ended Investment income-- net $108,022,381 $ 54,403,714 Net realized gain on investments and foreign currencies 8,252,506 23,062,764 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies 14,747,409 (113,687,462) ---------- ------------ Net increase (decrease) in net assets resulting from operations 131,022,296 (36,220,984) ----------- ----------- Distributions to shareholders from: Net investment income Class A (86,883,047) (48,380,959) Class B (6,790,893) (2,717,675) Class Y (13,088,145) (5,835,989) Net realized gain Class A (18,740,975) (4,513,331) Class B (1,704,126) (242,090) Class Y (2,683,689) (433,179) Excess distribution of realized gain Class A -- (763,230) Class B -- (93,149) Class Y -- (193,212) ------------ ----------- Total distributions (129,890,875) (63,172,814) ------------ ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 109,563,336 111,507,134 Class B shares 56,179,031 58,275,961 Class Y shares 62,930,942 111,069,550 Reinvestment of distributions at net asset value Class A shares 80,162,783 40,178,831 Class B shares 7,801,079 2,823,107 Class Y shares 15,771,834 6,425,412 Payments for redemptions Class A shares (313,351,499) (150,106,899) Class B shares (Note 2) (45,413,567) (18,994,240) Class Y shares (89,223,917) (36,979,985) ----------- ----------- Increase (decrease) in net assets from capital share transactions (115,579,978) 124,198,871 ------------ ----------- Total increase (decrease) in net assets (114,448,557) 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 $2,115,568 and $529,978) $1,614,202,557 $1,728,651,114 ============== ============== See accompanying notes to financial statements
Notes to financial statements IDS Selective Fund, Inc. 1 Summary of significant accounting policies The Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Fund 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 May 31, 1997 was 99.96%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements," which are included elsewhere in this report. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Federal taxes Since the Fund's policy is to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders, no provision for income or excise taxes is required. Net investment income (loss) and net realized gains (losses) allocated from the Portfolio may differ for financial statement and tax purposes primarily because of the deferral of losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net income has been increased by $325,294 and accumulated net realized gain has been decreased by $325,294. 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 a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. Additional administrative service expenses paid by the Fund are office expenses, consultants' fees and compensation of officers and employees. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees, and any other expenses properly payable by the Fund and 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 and 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by American Express Financial Advisors Inc. for distributing Fund shares were $2,382,416 for Class A and $109,152 for Class B for the fiscal period ended May 31, 1997. During the period from June 10, 1996 to May 31, 1997 the Fund's transfer agency fees were reduced by $81,162 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: Year ended May 31, 1997 Class A Class B Class Y Sold 12,079,376 6,192,646 6,955,369 Issued for reinvested 8,846,036 861,304 1,745,311 distributions Redeemed (34,561,749) (5,015,499) (9,855,527) - -------------------------------------------------------------------------------- Net increase (decrease) (13,636,337) 2,038,451 (1,154,847) - -------------------------------------------------------------------------------- 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 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 Change of Fund's fiscal year The By-laws of the Fund were amended on Jan. 10, 1996, changing its fiscal year-end from Nov. 30 to May 31, effective 1996. 6 Financial highlights "Financial highlights" showing per share data and selected information is presented on pages 7 and 8 of the prospectus. Independent auditors' report The board of trustees and unitholders Income Trust: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Quality Income Portfolio (a series of Income Trust) as of May 31, 1997, and the related statements of operations and changes in net assets for the period from June 10, 1996 (commencement of operations) to May 31, 1997. These financial statements are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Investment securities held in custody are confirmed to us by the custodian. As to securities purchased and sold but not received or delivered, and securities on loan, we request confirmations from brokers, and where replies are not received, we carry out other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quality Income Portfolio at May 31, 1997, and the results of its operations and the changes in its net assets for the period from June 10, 1996 (commencement of operations) to May 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota July 3, 1997
Financial statements Statement of assets and liabilities Quality Income Portfolio May 31, 1997 Assets Investments in securities, at value (Note 1) (identified cost $1,688,560,923) $1,718,321,998 Dividends and accrued interest receivable 21,866,316 Receivable for investment securities sold 5,712,652 U.S. government securities held as collateral (Note 4) 39,006,077 ---------- Total assets 1,784,907,043 ------------- Liabilities Disbursements in excess of cash on demand deposit 1,082,909 Payable for investment securities purchased 41,408,277 Payable upon return of securities loaned (Note 4) 126,654,827 Accrued investment management services fee 22,494 Other accrued expenses 84,467 ------ Total liabilities 169,252,974 ----------- Net assets $1,615,654,069 ============== See accompany notes to financial statements. Financial statements Statement of operations Quality Income Portfolio For the period from June 10, 1996 (commencement of operations) to May 31, 1997 Investment income Income: Dividends $ 598,893 Interest 120,249,224 ----------- Total income 120,848,117 ----------- Expenses (Note 2): Investment management services fee 8,395,071 Compensation of board members 7,450 Compensation of officers 11,053 Custodian fees 138,497 Audit fees 29,500 Other 13,928 ------ Total expenses 8,595,499 --------- Investment income -- net 112,252,618 ----------- Realized and unrealized gain (loss) -- net Net realized gain on security and foreign currency transactions (including gain of $1,093,741 from foreign currency transactions) (Note 3) 13,637,267 Net realized loss on financial futures contracts (6,340,145) Net realized gain on option contracts written (Note 5) 2,098,502 --------- Net realized gain on investments and foreign currencies 9,395,624 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies 20,434,131 ---------- Net gain on investments and foreign currencies 29,829,755 ---------- Net increase in net assets resulting from operations $142,082,373 ============ 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 May 31, 1997 Operations Investment income-- net $ 112,252,618 Net realized gain on investments and foreign currencies 9,395,624 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies 20,434,131 ---------- Net increase in net assets resulting from operations 142,082,373 Net contributions 1,473,541,696 ------------- Total increase in net assets 1,615,624,069 Net assets at beginning of period (Note 1) 30,000 ------ Net assets at end of period $1,615,654,069 ============== See accompanying notes to financial statements.
Notes to financial statements Quality Income Portfolio 1 Summary of significant accounting policies Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. Quality Income Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. On April 15, 1996, American Express Financial Corporation (AEFC) contributed $30,000 to the Portfolio. Operations did not formally commence until June 10, 1996, at which time an existing fund transferred its assets to the Portfolio in return for an ownership percentage of the Portfolio. Significant accounting 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, including illiquid securities, 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 and write options traded on any U.S. or foreign exchange or in the over-the-counter market where the completion of the obligation is dependent upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities and may write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity of profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss upon expiration or closing of the option transaction. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions In order to gain exposure to or protect itself from changes in the market, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars at the closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement dates on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. Illiquid securities At May 31, 1997, investments in securities included 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 May 31, 1997 was $4,481,904 representing 0.3% 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. 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 assets the same as owned securities. The Portfolio designates cash or liquid high-grade short-term debt securities at least equal to the amount of its commitment. As of May 31, 1997, the Portfolio had entered into outstanding when-issued or forward-commitments of $19,850,000. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Accordingly, as a "pass-through" entity, the Portfolio does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar denominated bonds, interest income includes level-yield amortization of premium and discount. For foreign bonds, except for original issue discount, the Portfolio does not amortize premium and discount. Interest income, including level-yield amortization of premium and discount, is accrued daily. 2 Fees and expenses The Trust, on behalf of the Portfolio, has entered into an Investment Management Services Agreement with AEFC for managing its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio, and any other expenses properly payable by the Trust or Portfolio and approved by the board. 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 $433,654,306 and $524,514,884, respectively, for the period from June 10, 1996 to May 31, 1997. For the same period, the portfolio turnover rate was 31%. Realized gains and losses are determined on an identified cost basis. 4 Lending of portfolio securities At May 31, 1997, securities valued at $122,850,988 were on loan to brokers. For collateral, the Portfolio received $87,648,750 in cash and U.S. government securities valued at $39,006,077. Income from securities lending amounted to $99,979 for the period from June 10, 1996 to May 31, 1997. 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 Option contracts written The number of contracts and premium amounts associated with option contracts written (see Summary of significant accounting policies) is as follows: Period ended May 31, 1997 Calls Puts - -------------------------------------------------------------------------------- Contracts Premium Contracts Premium - -------------------------------------------------------------------------------- Balance June 10, 1996 -- $ -- -- $ -- Opened 1,250 2,207,036 400 451,126 Closed (750) (1,330,628) (400) (451,126) Exercised (311) (655,867) -- -- Expired (189) (220,541) -- -- - -------------------------------------------------------------------------------- Balance May 31, 1997 -- $ -- -- $ -- - -------------------------------------------------------------------------------- 6 Interest rate futures contracts At May 31, 1997, investments in securities included securities valued at $11,149,700 that were pledged as collateral to cover initial margin deposits on 1,200 open sales contracts. The market value of the open contracts at May 31, 1997, was $131,941,625 with a net unrealized loss of $1,295,469. See Summary of significant accounting policies.
Investments in securities Quality Income Portfolio May 31, 1997 (Percentages represent value of investments compared to net assets) Bonds (92.7%) Issuer Coupon Maturity Principal Value(a) rate year amount U.S. government obligations (31.0%) U.S. Treasury 5.875% 2000-04 $33,000,000(b) $ 32,415,780 6.875 1999 60,000,000 60,765,000 7.25 2004 51,800,000 53,687,658 7.50 2001 99,000,000 102,808,530 7.50 2016 80,000,000(b) 84,386,400 8.00 2021 15,000,000(k) 16,724,550 8.625 1997 50,745,000(b) 51,099,708 Resolution Funding Corp Zero Coupon 7.61 2017 39,000,000(c) 9,329,190 7.98 2016 47,000,000(b,c) 12,104,380 8.19 2014 48,000,000(c) 14,767,200 8.27 2014 10,000,000(c) 2,969,300 8.94 2006 25,000,000(c) 13,978,000 8.95 2006 68,000,000(c) 36,112,080 Overseas Private Investment 6.99 2009 10,000,000 9,812,500 Total 500,960,276 Mortgage-backed securities (15.6%) Federal Home Loan Mtge Corp 7.50 2024 16,648,575 16,677,044 8.00 2016-25 10,569,627 10,795,089 8.50 2017-26 23,155,242 24,061,366 9.00 2020-21 5,553,606 5,881,578 Collateralized Mtge Obligation 8.50 2019 390,904 390,806 Federal Housing Admin 7.43 2024 9,089,707 8,550,279 Federal Natl Mtge Assn 6.50 2023 12,044,089 11,510,295 7.50 2025 20,000,000(l) 19,900,000 7.50 2027 14,920,921 14,869,593 8.00 2026 14,236,093 14,487,360 10.00 2002 124 130 Principal Only 9.50 2018 1,170,264(e) 895,938 Collateralized Mtge Obligation 8.00 2021 11,794,373 11,958,394 8.50 2019 1,448,659 1,562,344 Principal Only 9.89 2020 2,194,500(e) 1,935,487 Trust Series Z 6.00 2024 20,650,251(d) 15,209,529 Govt Natl Mtge Assn 7.50 2026 20,282,237 20,254,451 Collateralized Mtge Obligation Trust 7.75 2012 870,282 879,327 8.00 2022-26 41,512,792 42,451,220 8.50 2026 18,999,763 19,704,464 9.00 2024-25 5,942,163 6,304,255 Prudential Bache Collateralized Mtge Obligation 7.965 2019 3,510,938 3,570,408 Total 251,849,357 Automotive & related (2.8%) Daimler-Benz North America Medium-term Nts 7.375 2006 14,000,000 14,189,840 General Motors 8.875 2003 7,050,000 7,690,704 General Motors Acceptance Medium-term Nts 5.95 1998 8,000,000 8,002,720 7.00 2000 14,300,000 14,432,132 Total 44,315,396 Banks and savings & loans (4.4%) BankAmerica Sub Nts 7.70 2026 5,000,000(g) 4,776,150 BankBoston Capital Trust 8.25 2026 5,000,000 5,016,300 Boatmen's Bancshares Sub Nts 9.25 2001 8,950,000 9,722,653 First Bank System 6.875 2007 8,550,000 8,289,054 First Chicago Sr Nts 9.00 1999 7,900,000 8,268,219 Firstar Capital Trust 8.32 2026 10,000,000 10,021,400 Morgan (JP) 6.50 2012 9,350,000(i) 9,034,437 NCNB Sub Nts 9.125 2001 10,000,000 10,805,200 Washington Mutual Capital 8.375 2027 5,800,000(g) 5,789,328 Total 71,722,741 Building materials & construction (0.6%) Georgia-Pacific Credit Sensitive Nt 9.85 1997 10,000,000 10,010,600 Chemicals (0.7%) Dow Chemical 8.85 2021 10,000,000 11,264,900 Communications equipment & services (1.3%) AT&T 8.35 2025 5,000,000 5,204,350 BellSouth Telecommunications 7.00 2095 10,000,000 9,346,100 GTE 10.25 2020 6,050,00 6,809,941 Total 21,360,391 Electronics (0.3%) Harris 10.375 2018 3,900,000 4,267,185 Energy (2.4%) PDV America 7.875 2003 16,500,000 16,493,235 Texaco Capital Gtd Deb 7.50 2043 12,000,000 11,622,600 USX 9.375 2022 9,200,000 10,491,128 Total 38,606,963 Energy equipment & services (0.4%) Foster Wheeler 6.75 2005 5,850,000 5,613,894 Financial services (2.2%) Aristar Sr Deb 8.875 1998 10,520,000 10,836,968 Beneficial 9.125 1998 10,000,000 10,222,400 Greyhound Financial Medium-term Nts 7.95 1999 9,600,000 9,861,888 Salomon 7.75 2000 5,000,000 5,119,300 Total 36,040,556 Health care (0.8%) Lilly (Eli) 6.77 2036 13,300,000 12,034,106 Industrial equipment & services (1.2%) Browning-Ferris Inds 9.25 2021 7,000,000 8,133,930 Deere & Co 8.95 2019 10,000,000 11,053,800 Total 19,187,730 Insurance (3.3%) American United Life 7.75 2026 4,800,000(g, m) 4,481,904 Arkwright Trust 9.625 2026 4,000,000(g) 4,375,240 Berkley (WR) 8.70 2022 10,000,000 10,634,300 Conseco Financing Trust 8.70 2026 6,600,000 6,634,386 Equitable Life Assurance 7.70 2015 5,000,000(g) 4,951,400 Nationwide Trust 9.875 2025 11,500,000(g) 12,504,870 SunAmerica 9.95 2012 8,000,000 9,643,120 Total 53,225,220 Media (0.7%) Time Warner Entertainment 8.375 2033 12,000,000 11,991,360 Retail (1.8%) Dayton Hudson 7.875 2023 18,850,000 17,866,218 Wal-Mart Stores 7.00 2006 11,653,588(g) 11,642,401 Total 29,508,619 Transportation (1.3%) Burlington Northern Santa Fe 7.00 2025 10,000,000 8,974,900 Railcar Leasing 7.125 2013 12,150,000(g) 12,048,548 Total 21,023,448 Utilities -- electric (6.8%) Arizona Public Service 1st Mtge Sale Lease-Backed Obligation 8.00 2015 9,000,000 9,158,940 Cajun Electric Power Cooperation Mtge Trust 8.92 2019 4,960,000 5,372,722 Commonwealth Edison 6.50 2000 9,000,000 8,945,910 Long Island Lighting 8.625 2004 3,000,000 3,106,650 9.625 2024 7,000,000 7,337,400 RGS Funding Sale Lease-Backed Obligation 9.82 2022 9,939,219 11,771,117 Salton Sea Cl C 7.84 2010 10,000,000(g) 10,032,100 San Diego Gas & Electric 9.625 2020 9,950,000 11,038,629 1st Mtge Southern California Edison 8.875 2023 21,000,000 21,816,690 1st Mtge Texas Utilities Electric 9.75 2021 13,000,000 14,692,210 1st Mtge Wisconsin Electric Power 6.875 2095 8,000,000 7,265,920 Total 110,538,288 Utilities -- telephone (1.4%) New York Telephone 9.375 2031 7,000,000 7,711,060 Pacific Bell 8.50 2031 15,000,000 15,353,250 Total 23,064,310 Foreign (13.7%)(h) ABN Amro Bank (U.S. Dollar) 7.75 2023 12,000,000 11,971,200 Alcan Aluminum (U.S. Dollar) 8.875 2022 9,600,000 10,240,992 BAA PLC (British Pound) 9.363 2006 1,500,000 2,613,582 Bank of China (U.S. Dollar) 8.25 2014 7,100,000 7,084,451 Bayerische Landesbank (U.S. Dollar) 5.625 2001 13,750,000 13,293,637 Dao Heng Bank (U.S. Dollar) 7.75 2007 7,000,000(g) 6,915,090 Deutsche Bank Finance (U.S. Dollar) Zero Coupon 4.50 2017 6,510,000(c,g) 2,880,675 Guangdong Enterprises (U.S. Dollar) 8.875 2007 5,800,000(g) 5,843,384 Hyundai Semiconductor (U.S. Dollar) 8.625 2007 10,800,000(g) 10,767,060 Israel Electric (U.S. Dollar) 7.875 2026 9,000,000(g) 8,865,000 Japan Finance (U.S. Dollar) 9.25 1998 25,950,000 26,973,468 KFW Intl Finance (U.S. Dollar) Medium-term Nts 8.50 1999 10,000,000 10,487,600 Korea Electric Power (U.S. Dollar) 8.00 2002 9,000,000 9,320,040 Korea Electric Power (U.S. Dollar) Zero Coupon 10.07 2016 35,000,000(f) 6,303,850 People's Republic of China (U.S. Dollar) 9.00 2096 10,000,000 10,711,100 Petronas (U.S. Dollar) 7.75 2015 10,000,000(g) 10,134,900 Ras Laffan Gas (U.S. Dollar) 8.294 2014 10,000,000 10,341,900 Republic of Austria Euro (U.S. Dollar) 10.00 1998 5,000,000 5,187,500 Republic of Italy (U.S. Dollar) 6.875 2023 23,200,000 21,541,664 Rodamco NV (U.S. Dollar) 7.30 2005 10,000,000 10,107,200 State of Israel (U.S. Dollar) 6.375 2005 10,800,000 10,179,324 Telekom Malaysia (U.S. Dollar) 7.875 2025 10,000,000(g) 10,151,000 Total 221,914,617 Total bonds (Cost: $1,469,226,517) $1,498,499,957 Preferred stock (0.6%) Issuer Shares Value(a) Salomon Income Financing Trust 9.50% 340,000 $8,988,750 Total preferred stock (Cost: $8,500,000) $8,988,750 Short-term securities (13.0%) Issuer Annualized Amount Value(a) yield on payable at date of maturity purchase U.S. government agencies (2.9%) Federal Home Loan Bank Disc Nt 06-12-97 5.43% $45,500,000 $45,417,948 Federal Home Loan Mtge Corp Disc Nt 06-09-97 5.44 1,100,000 1,098,509 Total 46,516,457 Bankers acceptance (0.5%) First Bank Minneapolis 06-05-97 5.54 8,000,000 7,993,867 Commercial paper (8.2%) Ameritech Capital Funding 06-11-97 5.54 6,000,000 5,989,898 07-18-97 5.58 2,300,000(j) 2,283,041 AT&T 06-02-97 5.54 10,000,000 9,996,944 Bell Atlantic 06-06-97 5.54 5,200,000 5,195,216 BOC Group 06-05-97 5.53 4,600,000(j) 4,596,480 Ciesco LP 06-11-97 5.56 7,700,000 7,686,966 06-19-97 5.55 4,500,000 4,486,890 06-25-97 5.52 9,600,000 9,563,333 Clorox 06-10-97 5.54 5,600,000 5,591,413 First Chicago NBD 06-17-97 5.57 8,200,000 8,178,509 Fleet Funding 06-11-97 5.55 10,000,000(j) 9,983,103 Harris Trust & Savings 06-27-97 5.55 7,500,000 7,500,000 Lincoln Natl 06-18-97 5.56 4,000,000(j) 3,988,940 Mobil Australia Funding (Delaware) 06-20-97 5.59 12,000,000(j) 11,963,000 07-28-97 5.58 7,500,000(j) 7,432,065 Novartis Finance 06-16-97 5.57 13,300,000 13,267,193 Paccar Financial 07-01-97 5.54 1,000,000 995,247 SBC Communications Capital 06-13-97 5.55 8,500,000(j) 8,483,057 06-17-97 5.56 6,000,000(j) 5,984,360 Total 133,165,655 Letter of credit (1.4%) Bank of America- AES Barbers Point 06-12-97 5.52 23,200,000 23,157,312 Total short-term securities (Cost: $210,834,406) $ 210,833,291 Total investment in securities (Cost: $1,688,560,923)(n) $1,718,321,998 See accompanying notes to investments in securities.
Notes to investments in securities (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 or 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 May 31, 1997. (j) 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. (k) Partially pledged as initial margin deposit on the following open interest rate futures contracts (see Note 6 to the financial statements): Type of security Notional amount Sales contracts U.S Treasury Bonds June 97 $96,400,000 U.S Treasury Bonds Sept. 97 $23,600,000 (l) At May 31, 1997, the cost of securities purchased on a when-issued basis was $19,850,000. (m) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at May 31, 1997, is as follows: Security Aquisition Cost date American United Life* 7.75% 2026 02-13-96 $4,800,000 *Represents a security sold under Rule 144A, which is exempt from registration under the securities Act of 1933, as amended. (n) At May 31, 1997, the cost of securities for federal income tax purposes was $1,688,560,923 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation........................................$ 45,542,614 Unrealized depreciation.........................................(15,781,539) - -------------------------------------------------------------------------------- Net unrealized appreciation....................................$ 29,761,075 - -------------------------------------------------------------------------------- PAGE 78 PART C. OTHER INFORMATION Item 24. Financial Statements and Exhibits. (a) FINANCIAL STATEMENTS: List of financial statements filed as part of this Post- Effective Amendment to the Registration Statement: For IDS Selective Fund o Independent auditors' report dated July 3, 1997 o Statement of assets and liabilities, May 31, 1997 o Statement of operations, year ended May 31, 1997 o Statement of changes in net assets, for the year ended May 31, 1997 and period ended May 31, 1996 o Notes to financial statements o Investments in securities, May 31, 1997 o Notes to investments in securities For Quality Income Portfolio o Independent auditors' report dated, July 3, 1997 o Statement of assets and liabilities, May 31, 1997 o Statement of operations, for the period from June 10, 1996 (commencement of operations) to May 31, 1997 o Statement of changes in net assets, for the period from June 10, 1996 (commencement of operations) to May 31, 1997 o Notes to the financial statements o Investments in securities, May 31, 1997 o Notes to investments in securities (b) EXHIBITS: 1. Articles of Incorporation, as amended October 17, 1988, filed electronically as Exhibit 1 to Registrant's Post-Effective Amendment No. 69 to Registration Statement No. 2-10700, is incorporated herein by reference. 2. By-laws, as amended January 10, 1996, filed electronically as Exhibit 2 to Registrant's Post-Effective Amendment No. 84 to Registration Statement No. 2-10700, is incorporated herein by reference. 3. Not Applicable. 4. Stock certificate, filed as Exhibit 3 to Registrant's Form N- 1Q for the calendar quarter ended September 30, 1979, is incorporated herein by reference. 5. Copy of Investment Management Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, is filed electronically herewith. The agreement was assumed by the Portfolio when the Fund adopted the master/feeder structure. 6. Copy of Distribution Agreement between Registrant and American Express Financial Advisors Inc., dated March 20, 1995, is filed electronically herewith. PAGE 79 7. All employees are eligible to participate in a profit sharing plan. Entry into the plan is Jan. 1 or July 1. The Registrant contributes each year an amount up to 15 percent of their annual salaries, the maximum deductible amount permitted under Section 404(a) of the Internal Revenue Code. 8(a). Copy of Custodian Agreement between Registrant and First National Bank of Minneapolis, dated July 23, 1986, is filed electronically herewith. 8(b). Copy of Addendum to the Custodian Agreement between IDS Selective Fund, Inc., First Bank National Association and American Express Financial Corporation dated June 10, 1996, filed electronically as Exhibit 8(b) to Registrant's Post-Effective Amendment No. 84 to Registration Statement No. 2-10700 is incorporated herein by reference. 9(a). Plan and Agreement of Merger dated April 10, 1986, filed as Exhibit 9 to Registrant's Post-Effective Amendment No. 62 to Registration Statement No. 2-10700, is incorporated herein by reference. 9(b). Copy of Transfer Agency Agreement between the Registrant and American Express Financial Corporation, dated March 20, 1995 is filed electronically herewith. 9(c). Copy of License Agreement, dated January 25, 1988, between IDS Financial Corporation and Registrant, filed electronically as Exhibit 9(c) to Registrant's Post Effective Amendment No. 69 to Registration Statement No. 2-10700, is incorporated herein by reference. 9(d). Copy of Shareholder Service Agreement between Registrant and American Express Financial Advisors Inc., dated March 20, 1995, is filed electronically herewith. 9(e). Copy of Administrative Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995 is filed electronically herewith. 9(f). Copy of Agreement and Declaration of Unitholders between IDS Selective Fund, Inc. and Strategist Income Fund, Inc. dated June 10, 1996, filed electronically as Exhibit 9(f) to Registrant's Post-Effective Amendment No. 84 to Registration Statement No. 2-10700 is incorporated herein by reference. 9(g) Copy of Class Y Shareholder Service Agreement between IDS Precious Metals Fund, Inc. and American Express Financial Advisors Inc., dated May 9, 1997 filed electronically on or about May 27, as Exhibit 9(e) to IDS Precious Metals Fund, Inc.'s Amendment No. 30 to Registration Statement No. 2-93745, is incorporated herein by reference. Registrant's Class Y shareholder Service Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. PAGE 80 10. Opinion and consent of counsel as to the legality of the securities being registered is filed with Registrant's most recent 24f-2 Notice. 11. Independent Auditors' Consent is filed electronically herewith. 12. None. 13. Not Applicable. 14. Forms of Keogh, IRA and other retirement plans, filed as Exhibits 14(a) through 14(n) to IDS Growth Fund, Inc., Post Effective Amendment No. 34 to Registration Statement No. 2- 38355, are incorporated herein by reference. 15. Copy of Plan and Agreement of Distribution between Registrant and American Express Financial Advisors Inc., dated March 20, 1995 is filed electronically herewith. 16. Copy of Schedule for computation of each performance quotation provided in the Registration Statement in response to Item 22(b), filed as Exhibit 16 to Post-Effective Amendment No. 75 to Registrant's Registration Statement No. 2-10700, is incorporated herein by reference. 17. Financial Data Schedule is filed electronically herewith. 18. Copy of Plan pursuant to Rule 18f-3 under the 1940 Act, filed electronically as Exhibit 18 to Registrant's Post-Effective Amendment No. 82 to Registration Statement No. 2-10700, is incorporated herein by reference. 19(a). Directors' Power of Attorney to sign Amendments to this Registration Statement, dated January 8, 1997 is filed electronically herewith. 19(b). Officers' Power of Attorney to sign Amendments to this Registration Statement, dated November 1, 1995, filed electronically as Exhibit 19(b) to Registrant's Post- Effective Amendment No. 83, is incorporated herein by reference. 19(c). Trustees Power of Attorney dated January 8, 1997 is filed electronically herewith. 19(d). Officers' Power of Attorney dated April 11, 1996 is filed electronically herewith. Item 25. Persons Controlled by or Under Common Control with Registrant None. PAGE 81 Item 26. Number of Holders of Securities (1) (2) Number of Record Holders as of Title of Class July 14, 1997 Class A 72,592 Class B 9,842 Class Y 32,630 Item 27. Indemnification The Articles of Incorporation of the registrant provide that the Fund shall indemnify any person who was or is a party or is threatened to be made a party, by reason of the fact that she or he is or was a director, officer, employee or agent of the Fund, or is or was serving at the request of the Fund as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, to any threatened, pending or completed action, suit or proceeding, wherever brought, and the Fund may purchase liability insurance and advance legal expenses, all to the fullest extent permitted by the laws of the State of Minnesota, as now existing or hereafter amended. The By-laws of the registrant provide that present or former directors or officers of the Fund made or threatened to be made a party to or involved (including as a witness) in an actual or threatened action, suit or proceeding shall be indemnified by the Fund to the full extent authorized by the Minnesota Business Corporation Act, all as more fully set forth in the By-laws filed as an exhibit to this registration statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Any indemnification hereunder shall not be exclusive of any other rights of indemnification to which the directors, officers, employees or agents might otherwise be entitled. No indemnification shall be made in violation of the Investment Company Act of 1940. PAGE 1 Item 29(c). Not applicable. Item 30. Location of Accounts and Records American Express Financial Corporation IDS Tower 10 Minneapolis, MN 55440 Item 31. Management Services Not Applicable. Item 32. Undertakings (a) Not Applicable. (b) Not Applicable. (c) The Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. PAGE 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, IDS Selective Fund, Inc. certifies that it meets the requirements for the effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and State of Minnesota on the 28th day of July, 1997. IDS SELECTIVE FUND by /s/William R. Pearce** William R. Pearce, President by /s/Melinda S. Urion Melinda S. Urion, Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 28th day of July, 1997. Signatures Capacity /s/ William R. Pearce** President, Principal William R. Pearce Executive Officer and Director /s/ H. Brewster Atwater, Jr.* Director H. Brewster Atwater, Jr. /s/ Lynne V. Cheney* Lynne V. Cheney Director /s/ William H. Dudley* Director William H. Dudley /s/ Robert F. Froehlke* Director Robert F. Froehlke /s/ David R. Hubers* Director David R. Hubers /s/ Heinz F. Hutter* Director Heinz F. Hutter /s/ Anne P. Jones* Director Anne P. Jones PAGE 83 Signatures Capacity /s/ Melvin R. Laird* Director Melvin R. Laird /s/ Alan K. Simpson* Director Alan K. Simpson /s/ Edson W. Spencer* Director Edson W. Spencer /s/ John R. Thomas* Director John R. Thomas /s/ Wheelock Whitney* Director Wheelock Whitney /s/ C. Angus Wurtele* C. Angus Wurtele Director *Signed pursuant to Directors' Power of Attorney dated January 8, 1997 is filed electronically herewith. Leslie L. Ogg **Signed pursuant to Officers' Power of Attorney dated November 1, 1995, filed electronically as Exhibit 19(b) to Registrant's Post- Effective Amendment No. 83 to Registration Statement No. 2-10700 by: Leslie L. Ogg PAGE 84 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, INCOME TRUST consents to the filing of this Amendment to the Registration Statement of IDS Selective Fund, Inc. signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and State of Minnesota on the 28th day of July, 1997. INCOME TRUST By /s/ William R. Pearce** William R. Pearce President By /s/ Melinda S. Urion Melinda S. Urion Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 28th day of July, 1997. Signatures Capacity /s/ William R. Pearce** Trustee William R. Pearce /s/ H. Brewster Atwater, Jr.* Trustee H. Brewster Atwater, Jr. /s/ Lynne V. Cheney* Trustee Lynne V. Cheney /s/ William H. Dudley* Trustee William H. Dudley /s/ Robert F. Froehlke* Trustee Robert F. Froehlke /s/ David R. Hubers* Trustee David R. Hubers /s/ Heinz F. Hutter* Trustee Heinz F. Hutter /s/ Anne P. Jones* Trustee Anne P. Jones PAGE 85 Signatures Capacity /s/ Melvin R. Laird* Trustee Melvin R. Laird /s/ Edson W. Spencer Trustee Edson W. Spencer /s/ Alan K. Simpson Trustee Alan K. Simpson /s/ John R. Thomas* Trustee John R. Thomas /s/ Trustee Wheelock Whitney /s/ C. Angus Wurtele* Trustee C. Angus Wurtele * Signed pursuant to Trustees Power of Attorney dated January 8, 1997, filed electronically as Exhibit 19(c) by: Leslie L. Ogg ** Signed pursuant to Officers' Power of Attorney dated January 8, 1997, filed herewith as Exhibit 19(d) to Registrant's Post- Effective Amendment No. 8 by: Leslie L. Ogg PAGE 86 CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 85 TO REGISTRATION STATEMENT NO. 2-10700 This Post-Effective Amendment comprises the following papers and documents: The facing sheet. The cross-reference page. Part A. The prospectus. Part B. Statement of Additional Information. Financial Statements. Part C. Other information. Exhibits. The signatures. EX-99. 2 EXHIBIT INDEX PAGE 1 IDS Selective Fund, Inc. File No. 2-10700/811-499 EXHIBIT INDEX Exhibit 5: Copy of Investment Management Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995. Exhibit 6: Copy of Distribution Agreement between Registrant and American Express Financial Advisors Inc., dated March 20, 1995. Exhibit 8(a): Copy of Custodian Agreement between Registrant and First National Bank of Minneapolis, dated July 23, 1986. Exhibit 9(b): Copy of Transfer Agency Agreement between the Registrant and American Express Financial Corporation, dated March 20, 1995. Exhibit 9(d): Copy of Shareholder Service Agreement between the Registrant and American Express Financial Advisors Inc., dated March 20, 1995. Exhibit 9(e): Copy of Administrative Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995. Exhibit 11: Independent Auditors' Consent Exhibit 15: Copy of Plan and Agreement of Distribution between Registrant and American Express Financial Advisors Inc., dated March 20, 1995. Exhibit 17: Fiancial Data Schedule Exhibit 19(a): Directors' Power of Attorney, dated January 8, 1997. Exhibit 19(c): Trustees' Power of Attorney, dated January 8, 1997. Exhibit 19(d): Officers' Power of Attorney, dated April 11, 1996. EX-99.5-AGREEMENT 3 5 INVESTMENT MANAGEMENT SERVICES AGREE. PAGE 1 INVESTMENT MANAGEMENT SERVICES AGREEMENT AGREEMENT made the 20th day of March, 1995, by and between IDS Selective Fund, Inc. (the "Fund"), a Minnesota corporation, and American Express Financial Corporation, a Delaware corporation. Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES (1) The Fund hereby retains American Express Financial Corporation, and American Express Financial Corporation hereby agrees, for the period of this Agreement and under the terms and conditions hereinafter set forth, to furnish the Fund continuously with suggested investment planning; to determine, consistent with the Fund's investment objectives and policies, which securities in American Express Financial Corporation's discretion shall be purchased, held or sold and to execute or cause the execution of purchase or sell orders; to prepare and make available to the Fund all necessary research and statistical data in connection therewith; to furnish all services of whatever nature required in connection with the management of the Fund as provided under this Agreement; and to pay such expenses as may be provided for in Part Three; subject always to the direction and control of the Board of Directors (the "Board"), the Executive Committee and the authorized officers of the Fund. American Express Financial Corporation agrees to maintain an adequate organization of competent persons to provide the services and to perform the functions herein mentioned. American Express Financial Corporation agrees to meet with any persons at such times as the Board deems appropriate for the purpose of reviewing American Express Financial Corporation's performance under this Agreement. (2) American Express Financial Corporation agrees that the investment planning and investment decisions will be in accordance with general investment policies of the Fund as disclosed to American Express Financial Corporation from time to time by the Fund and as set forth in its prospectuses and registration statements filed with the United States Securities and Exchange Commission (the "SEC"). (3) American Express Financial Corporation agrees that it will maintain all required records, memoranda, instructions or authorizations relating to the acquisition or disposition of securities for the Fund. (4) The Fund agrees that it will furnish to American Express Financial Corporation any information that the latter may reasonably request with respect to the services performed or to be performed by American Express Financial Corporation under this Agreement. (5) American Express Financial Corporation is authorized to select the brokers or dealers that will execute the purchases and sales of portfolio securities for the Fund and is directed to use its best efforts to obtain the best available price and most favorable execution, except as prescribed herein. Subject to prior authorization by the Fund's Board of appropriate policies and procedures, and subject to termination at any time by the Board, PAGE 2 American Express Financial Corporation may also be authorized to effect individual securities transactions at commission rates in excess of the minimum commission rates available, to the extent authorized by law, if American Express Financial Corporation determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or American Express Financial Corporation's overall responsibilities with respect to the Fund and other funds for which it acts as investment adviser. (6) It is understood and agreed that in furnishing the Fund with the services as herein provided, neither American Express Financial Corporation, nor any officer, director or agent thereof shall be held liable to the Fund or its creditors or shareholders for errors of judgment or for anything except willful misfeasance, bad faith, or gross negligence in the performance of its duties, or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that American Express Financial Corporation may rely upon information furnished to it reasonably believed to be accurate and reliable. Part Two: COMPENSATION TO INVESTMENT MANAGER (1) The Fund agrees to pay to American Express Financial Corporation, and American Express Financial Corporation covenants and agrees to accept from the Fund in full payment for the services furnished, a fee for each calendar day of each year equal to the total of 1/365th (1/366th in each leap year) of the amount computed as shown below. The computation shall be made for each day on the basis of net assets as of the close of business of the full business day two (2) business days prior to the day for which the computation is being made. In the case of the suspension of the computation of net asset value, the asset charge for each day during such suspension shall be computed as of the close of business on the last full business day on which the net assets were computed. Net assets as of the close of a full business day shall include all transactions in shares of the Fund recorded on the books of the Fund for that day. The asset charge shall be based on the net assets of the Fund as set forth in the following table. Asset Charge Assets Annual Rate at (Billions) Each Asset Level First $1 0.520% Next $1 0.495 Next $1 0.470 Next $3 0.445 Next $3 0.420 Over $9 0.395 PAGE 3 (2) The fee shall be paid on a monthly basis and, in the event of the termination of this Agreement, the fee accrued shall be prorated on the basis of the number of days that this Agreement is in effect during the month with respect to which such payment is made. (3) The fee provided for hereunder shall be paid in cash by the Fund to American Express Financial Corporation within five business days after the last day of each month. Part Three: ALLOCATION OF EXPENSES (1) The Fund agrees to pay: (a) Fees payable to American Express Financial Corporation for its services under the terms of this Agreement. (b) Taxes. (c) Brokerage commissions and charges in connection with the purchase and sale of assets. (d) Custodian fees and charges. (e) Fees and charges of its independent certified public accountants for services the Fund requests. (f) Premium on the bond required by Rule 17g-1 under the Investment Company Act of 1940. (g) Fees and expenses of attorneys (i) it employs in matters not involving the assertion of a claim by a third party against the Fund, its directors and officers, (ii) it employs in conjunction with a claim asserted by the Board against American Express Financial Corporation, except that American Express Financial Corporation shall reimburse the Fund for such fees and expenses if it is ultimately determined by a court of competent jurisdiction, or American Express Financial Corporation agrees, that it is liable in whole or in part to the Fund, and (iii) it employs to assert a claim against a third party. (h) Fees paid for the qualification and registration for public sale of the securities of the Fund under the laws of the United States and of the several states in which such securities shall be offered for sale. (i) Fees of consultants employed by the Fund. (j) Directors, officers and employees expenses which shall include fees, salaries, memberships, dues, travel, seminars, pension, profit sharing, and all other benefits paid to or provided for directors, officers and employees, directors and officers liability insurance, errors and omissions liability insurance, worker's compensation insurance and other expenses applicable to the directors, officers and employees, except the Fund will not pay any fees or expenses of any person who is an officer or employee of American Express Financial Corporation or its affiliates. PAGE 4 (k) Filing fees and charges incurred by the Fund in connection with filing any amendment to its articles of incorporation, or incurred in filing any other document with the State of Minnesota or its political subdivisions. (l) Organizational expenses of the Fund. (m) Expenses incurred in connection with lending portfolio securities of the Fund. (n) Expenses properly payable by the Fund, approved by the Board. (2) American Express Financial Corporation agrees to pay all expenses associated with the services it provides under the terms of this Agreement. Further, American Express Financial Corporation agrees that if, at the end of any month, the expenses of the Fund under this Agreement and any other agreement between the Fund and American Express Financial Corporation, but excluding those expenses set forth in (1)(b) and (1)(c) of this Part Three, exceed the most restrictive applicable state expenses limitation, the Fund shall not pay those expenses set forth in (1)(a) and (d) through (n) of this Part Three to the extent necessary to keep the Fund's expenses from exceeding the limitation, it being understood that American Express Financial Corporation will assume all unpaid expenses and bill the Fund for them in subsequent months but in no event can the accumulation of unpaid expenses or billing be carried past the end of the Fund's fiscal year. Part Four: MISCELLANEOUS (1) American Express Financial Corporation shall be deemed to be an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Fund. (2) A "full business day" shall be as defined in the By-laws. (3) The Fund recognizes that American Express Financial Corporation now renders and may continue to render investment advice and other services to other investment companies and persons which may or may not have investment policies and investments similar to those of the Fund and that American Express Financial Corporation manages its own investments and/or those of its subsidiaries. American Express Financial Corporation shall be free to render such investment advice and other services and the Fund hereby consents thereto. (4) Neither this Agreement nor any transaction had pursuant hereto shall be invalidated or in any way affected by the fact that directors, officers, agents and/or shareholders of the Fund are or may be interested in American Express Financial Corporation or any successor or assignee thereof, as directors, officers, stockholders or otherwise; that directors, officers, stockholders or agents of American Express Financial Corporation are or may be interested in the Fund as directors, officers, shareholders, or otherwise; or PAGE 5 that American Express Financial Corporation or any successor or assignee, is or may be interested in the Fund as shareholder or otherwise, provided, however, that neither American Express Financial Corporation, nor any officer, director or employee thereof or of the Fund, shall sell to or buy from the Fund any property or security other than shares issued by the Fund, except in accordance with applicable regulations or orders of the SEC. (5) Any notice under this Agreement shall be given in writing, addressed, and delivered, or mailed postpaid, to the party to this Agreement entitled to receive such, at such party's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) American Express Financial Corporation agrees that no officer, director or employee of American Express Financial Corporation will deal for or on behalf of the Fund with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit: (a) Officers, directors or employees of American Express Financial Corporation from having a financial interest in the Fund or in American Express Financial Corporation. (b) The purchase of securities for the Fund, or the sale of securities owned by the Fund, through a security broker or dealer, one or more of whose partners, officers, directors or employees is an officer, director or employee of American Express Financial Corporation, provided such transactions are handled in the capacity of broker only and provided commissions charged do not exceed customary brokerage charges for such services. (c) Transactions with the Fund by a broker-dealer affiliate of American Express Financial Corporation as may be allowed by rule or order of the SEC, and if made pursuant to procedures adopted by the Fund's Board. (7) American Express Financial Corporation agrees that, except as herein otherwise expressly provided or as may be permitted consistent with the use of a broker-dealer affiliate of American Express Financial Corporation under applicable provisions of the federal securities laws, neither it nor any of its officers, directors or employees shall at any time during the period of this Agreement, make, accept or receive, directly or indirectly, any fees, profits or emoluments of any character in connection with the purchase or sale of securities (except shares issued by the Fund) or other assets by or for the Fund. Part Five: RENEWAL AND TERMINATION (1) This Agreement shall continue in effect until March 19, 1997, or until a new agreement is approved by a vote of the majority of the outstanding shares of the Fund and by vote of the Fund's Board, including the vote required by (b) of this paragraph, and if no new agreement is so approved, this Agreement shall PAGE PAGE 6 continue from year to year thereafter unless and until terminated by either party as hereinafter provided, except that such continuance shall be specifically approved at least annually (a) by the Board of the Fund or by a vote of the majority of the outstanding shares of the Fund and (b) by the vote of a majority of the directors who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. As used in this paragraph, the term "interested person" shall have the same meaning as set forth in the Investment Company Act of 1940, as amended (the "1940 Act"). (2) This Agreement may be terminated by either the Fund or American Express Financial Corporation at any time by giving the other party 60 days' written notice of such intention to terminate, provided that any termination shall be made without the payment of any penalty, and provided further that termination may be effected either by the Board of the Fund or by a vote of the majority of the outstanding voting shares of the Fund. The vote of the majority of the outstanding voting shares of the Fund for the purpose of this Part Five shall be the vote at a shareholders' regular meeting, or a special meeting duly called for the purpose, of 67% or more of the Fund's shares present at such meeting if the holders of more than 50% of the outstanding voting shares are present or represented by proxy, or more than 50% of the outstanding voting shares of the Fund, whichever is less. (3) This Agreement shall terminate in the event of its assignment, the term "assignment" for this purpose having the same meaning as set forth in the 1940 Act. IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement as of the day and year first above written. IDS SELECTIVE FUND, INC. By /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL CORPORATION By /s/ Janis E. Miller Janie E. Miller Vice President EX-99.6-AGREEMENT 4 DISTRIBUTION AGREEMENT PAGE 1 DISTRIBUTION AGREEMENT Agreement made as of the 20th day of March, 1995, by and between IDS Selective Fund, Inc. (the "Fund"), a Minnesota corporation, for and on behalf of each class of the Fund and American Express Financial Advisors Inc., a Delaware corporation. Part One: DISTRIBUTION OF SECURITIES (1) The Fund covenants and agrees that, during the term of this agreement and any renewal or extension, American Express Financial Advisors shall have the exclusive right to act as principal underwriter for the Fund and to offer for sale and to distribute either directly or through any affiliate any and all shares of each class of capital stock issued or to be issued by the Fund. (2) American Express Financial Advisors hereby covenants and agrees to act as the principal underwriter of each class of capital shares issued and to be issued by the Fund during the period of this agreement and agrees during such period to offer for sale such shares as long as such shares remain available for sale, unless American Express Financial Advisors is unable or unwilling to make such offer for sale or sales or solicitations therefor legally because of any federal, state, provincial or governmental law, rule or agency or for any financial reason. (3) With respect to the offering for sale and sale of shares of each class to be issued by the Fund, it is mutually understood and agreed that such shares are to be sold on the following terms: (a) All sales shall be made by means of an application, and every application shall be subject to acceptance or rejection by the Fund at its principal place of business. Shares are to be sold for cash, payable at the time the application and payment for such shares are received at the principal place of business of the Fund. (b) No shares shall be sold at less than the asset value (computed in the manner provided by the currently effective prospectus or Statement of Additional Information and the Investment Company Act of 1940, and rules thereunder). The number of shares or fractional shares to be acquired by each applicant shall be determined by dividing the amount of each accepted application by the public offering price of one share of the capital stock of the appropriate class as of the close of business on the day when the application, together with payment, is received by the Fund at its principal place of business. The computation as to the number of shares and fractional shares shall be carried to three decimal points of one share with the computation being carried to the nearest 1/lOOOth of a share. If the day of receipt of the application and payment is not a full business day, then the asset value of the share for use in such computation shall be determined as of the close of business on the next succeeding full business day. In the event of a period of emergency, the computation of the asset value for the purpose of determining the number of shares or fractional shares to be acquired by the applicant may be deferred until the close of business on the first full business day following the termination of the period of PAGE 2 emergency. A period of emergency shall have the definition given thereto in the Investment Company Act of 1940, and rules thereunder. (4) The Fund agrees to make prompt and reasonable effort to do any and all things necessary, in the opinion of American Express Financial Advisors, to have and to keep the Fund and the shares properly registered or qualified in all appropriate jurisdictions and, as to shares, in such amounts as American Express Financial Advisors may from time to time designate in order that the Fund's shares may be offered or sold in such jurisdictions. (5) The Fund agrees that it will furnish American Express Financial Advisors with information with respect to the affairs and accounts of the Fund, and in such form, as American Express Financial Advisors may from time to time reasonably require and further agrees that American Express Financial Advisors, at all reasonable times, shall be permitted to inspect the books and records of the Fund. (6) American Express Financial Advisors or its agents may prepare or cause to be prepared from time to time circulars, sales literature, broadcast material, publicity data and other advertising material to be used in the sales of shares issued by the Fund, including material which may be deemed to be a prospectus under rules promulgated by the Securities and Exchange Commission (each separate promotional piece is referred to as an "Item of Soliciting Material"). At its option, American Express Financial Advisors may submit any Item of Soliciting Material to the Fund for its prior approval. Unless a particular Item of Soliciting Material is approved in writing by the Fund prior to its use, American Express Financial Advisors agrees to indemnify the Fund and its directors and officers against any and all claims, demands, liabilities and expenses which the Fund or such persons may incur arising out of or based upon the use of any Item of Soliciting Material. The term "expenses" includes amounts paid in satisfaction of judgments or in settlements. The foregoing right of indemnification shall be in addition to any other rights to which the Fund or any director or officer may be entitled as a matter of law. Notwithstanding the foregoing, such indemnification shall not be deemed to abrogate or diminish in any way any right or claim American Express Financial Advisors may have against the Fund or its officers or directors in connection with the Fund's registration statement, prospectus, Statement of Additional Information or other information furnished by or caused to be furnished by the Fund. (7) American Express Financial Advisors agrees to submit to the Fund each application for shares immediately after the receipt of such application and payment therefor by American Express Financial Advisors at its principal place or business. (8) American Express Financial Advisors agrees to cause to be delivered to each person submitting an application a prospectus or circular to be furnished by the Fund in the form required by the applicable federal laws or by the acts or statutes of any applicable state, province or country. PAGE 3 (9) The Fund shall have the right to extend to shareholders of each class the right to use the proceeds of any cash dividend paid by the Fund to that shareholder to purchase shares of the same class at the net asset value at the close of business upon the day of purchase, to the extent set forth in the currently effective prospectus or Statement of Additional Information. (10) Shares of each class issued by the Fund may be offered and sold at their asset value to the shareholders of the same class of other funds in the IDS MUTUAL FUND GROUP who wish to exchange their investments in shares of the other funds in the IDS MUTUAL FUND GROUP to investments in shares of the Fund, to the extent set forth in the currently effective prospectus or Statement of Additional Information, such asset value to be computed as of the close of business on the day of sale of such shares of the Fund. (11) American Express Financial Advisors and the Fund agree to use their best efforts to conform with all applicable state and federal laws and regulations relating to any rights or obligations under the term of this agreement. Part Two: ALLOCATION OF EXPENSES Except as provided by any other agreements between the parties, American Express Financial Advisors covenants and agrees that during the period of this agreement it will pay or cause or be paid all expenses incurred by American Express Financial Advisors, or any of its affiliates, in the offering for sale or sale of each class of the Fund's shares. Part Three: COMPENSATION (1) It is covenanted and agreed that American Express Financial Advisors shall be paid: (i) for a class of shares imposing a front-end sales charge, by the purchasers of Fund shares in an amount equal to the difference between the total amount received upon each sale of shares issued by the Fund and the asset value of such shares at the time of such sale; and (ii) for a class of shares imposing a deferred sales charge, by owners of Fund shares at the time the sales charge is imposed in an amount equal to any deferred sales charge, as described in the Fund's prospectus. Such sums as are received by the Fund shall be received as Agent for American Express Financial Advisors and shall be remitted to American Express Financial Advisors daily as soon as practicable after receipt. (2) The asset value of any share of each class of the Fund shall be determined in the manner provided by the classes currently effective prospectus and Statement of Additional Information and the Investment Company Act of 1940, and rules thereunder. PAGE 4 Part Four: MISCELLANEOUS (1) American Express Financial Advisors shall be deemed to be an independent contractor and, except as expressly provided or authorized in this agreement, shall have no authority to act for or represent the Fund. (2) American Express Financial Advisors shall be free to render to others services similar to those rendered under this agreement. (3) Neither this agreement nor any transaction had pursuant hereto shall be invalidated or in any way affected by the fact that directors, officers, agents and/or shareholders of the Fund are or may be interested in American Express Financial Advisors as directors, officers, shareholders or otherwise; that directors, officers, shareholders or agents of American Express Financial Advisors are or may be interested in the Fund as directors, officers, shareholders or otherwise; or that American Express Financial Advisors is or may be interested in the Fund as shareholder or otherwise, provided, however, that neither American Express Financial Advisors nor any officer or director of American Express Financial Advisors or any officers or directors of the Fund shall sell to or buy from the Fund any property or security other than a security issued by the Fund, except in accordance with a rule, regulation or order of the federal Securities and Exchange Commission. (4) For the purposes of this agreement, a "business day" shall have the same meaning as is given to the term in the By-laws of the Fund. (5) Any notice under this agreement shall be given in writing, addressed and delivered, or mailed postpaid, to the parties to this agreement at each company's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) American Express Financial Advisors agrees that no officer, director or employee of American Express Financial Advisors will deal for or on behalf of the Fund with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit: (a) Officers, directors and employees of American Express Financial Advisors from having a financial interest in the Fund or in American Express Financial Advisors. (b) The purchase of securities for the Fund, or the sale of securities owned by the Fund, through a security broker or dealer, one or more of whose partners, officers, directors or employees is an officer, director or employee of American Express Financial Advisors, provided such transactions are handled in the capacity of broker only and provided commissions charged do not exceed customary brokerage charges for such services. PAGE 5 (c) Transactions with the Fund by a broker-dealer affiliate of American Express Financial Advisors if allowed by rule or order of the Securities and Exchange Commission and if made pursuant to procedures adopted by the Fund's Board of Directors. (7) American Express Financial Advisors agrees that, except as otherwise provided in this agreement, or as may be permitted consistent with the use of a broker-dealer affiliate of American Express Financial Advisors under applicable provisions of the federal securities laws, neither it nor any of its officers, directors or employees shall at any time during the period of this agreement make, accept or receive, directly or indirectly, any fees, profits or emoluments of any character in connection with the purchase or sale of securities (except securities issued by the Fund) or other assets by or for the Fund. Part Five: TERMINATION (1) This agreement shall continue from year to year unless and until terminated by American Express Financial Advisors or the Fund, except that such continuance shall be specifically approved at least annually by a vote of a majority of the Board of Directors who are not parties to this agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval, and by a majority of the Board of Directors or by vote of a majority of the outstanding voting securities of the Fund. As used in this paragraph, the term "interested person" shall have the meaning as set forth in the Investment Company Act of 1940, as amended. (2) This agreement may be terminated by American Express Financial Advisors or the Fund at any time by giving the other party sixty (60) days written notice of such intention to terminate. (3) This agreement shall terminate in the event of its assignment, the term "assignment" for this purpose having the same meaning as set forth in the Investment Company Act of 1940, as amended. IN WITNESS WHEREOF, The parties hereto have executed the foregoing agreement on the date and year first above written. IDS SELECTIVE FUND, INC. By /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL ADVISORS INC. By /s/ Janis E. Miller Janis E. Miller Vice President EX-99.8(A)-AGREEMENT 5 CUSTODIAN AGREEMENT PAGE 1 CUSTODIAN AGREEMENT THIS CUSTODIAN AGREEMENT dated July 23, 1986, between IDS Selective Fund, Inc., a Minnesota Corporation (hereinafter also called the "Corporation") and First National Bank of Minneapolis, a corporation organized under the laws of the United States of America with its principal place of business at Minneapolis, Minnesota (hereinafter also called the "Custodian"). WHEREAS, the Corporation desires that its securities and cash be hereafter held and administered by Custodian pursuant to the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual agreements herein made, the Corporation and the Custodian agree as follows: Section l. Definitions The word "securities" as used herein shall be construed to include, without being limited to, shares, stocks, treasury stocks, including any stocks of this Corporation, notes, bonds, debentures, evidences of indebtedness, options to buy or sell stocks or stock indexes, certificates of interest or participation in any profit-sharing agreements, collateral trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, fractional or undivided interests in oil, gas or other mineral rights, or any certificates of interest or participation in, temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing, acceptances and other obligations and any evidence of any right or interest in or to any cash, property or assets and any interest or instrument commonly known as a security. In addition, for the purpose of this Agreement, the word "securities" also shall include other instruments in which the Corporation may invest including currency forward contracts and commodities such as interest rate or index futures contracts, margin deposits on such contracts or options on such contracts. The words "custodian order" shall mean a request or direction, including a computer printout, directed to the Custodian and signed in the name of the Corporation by any two individuals designated in the current certified list referred to in Section 2. The word "facsimile" shall mean an exact copy or likeness which is electronically transmitted for instant reproduction. Section 2. Names, Titles and Signatures of Authorized Persons The Corporation will certify to the Custodian the names and signatures of its present officers and other designated persons authorized on behalf of the Corporation to direct the Custodian by custodian order as hereinbefore defined. The Corporation agrees that whenever any change occurs in this list it will file with the Custodian a copy of a resolution certified by the Secretary or an PAGE 2 Assistant Secretary of the Corporation as having been duly adopted by the Board of Directors or the Executive Committee of the Board of Directors of the Corporation designating those persons currently authorized on behalf of the Corporation to direct the Custodian by custodian order, as hereinbefore defined, and upon such filing (to be accompanied by the filing of specimen signatures of the designated persons) the persons so designated in said resolution shall constitute the current certified list. The Custodian is authorized to rely and act upon the names and signatures of the individuals as they appear in the most recent certified list from the Corporation which has been delivered to the Custodian as hereinabove provided. Section 3. Use of Subcustodians The Custodian may make arrangements, where appropriate, with other banks having not less than two million dollars aggregate capital, surplus and undivided profits for the custody of securities and cash. The Custodian also may enter into arrangements for the custody of "Foreign Securities" and cash entrusted to its care through "Eligible Foreign Custodian," as those terms are defined by Rule 17f-5 under the Investment Company Act of 1940 (the "Act"), or such other entity as permitted by the Securities and Exchange Commission (the "SEC") (such Eligible Foreign Custodians, collectively, "Foreign Custodial Agents") provided, if required by the SEC, that the Board has given its prior approval to the use of, and Custodian's contract with, each Foreign Custodial Agent by resolution, and a certified copy of such resolution has been provided to the Custodian. To the extent the provisions of this Agreement are consistent with the requirements of the Act, rules, orders or no-action letters of the SEC, they shall apply to all such foreign custodianships. To the extent such provisions are inconsistent with or additional requirements are established by the Act or such rules, orders or no-action letters, the requirements of the Act or such rules, orders or no-action letters will prevail and the parties will adhere to such requirements; provided, however, in the absence of notification from the Corporation of any changes or additions to such requirements, the Custodian shall have no duty or responsibility to inquire as to any such changes or additions. All subcustodians of the Custodian (such subcustodians, collectively, the "Subcustodians"), including all Foreign Custodial Agents, shall be subject to the instructions of the Custodian and not to those of the Corporation and shall act solely as agent of the Custodian. Section 4. Receipt and Disbursement of Money (1) The Custodian shall open and maintain a separate account or accounts in the name of the Corporation and cause any Subcustodians to open and maintain such account or accounts, subject only to checks, drafts or directives by the Custodian or such Subcustodian pursuant to the terms of this Agreement. The Custodian or such Subcustodian shall hold in such account or accounts, subject to the PAGE 3 provisions hereof, all cash received by it from or for the account of the Corporation. The Custodian or such Subcustodian shall make payments of cash to or for the account of the Corporation from such cash only: (a) for the purchase of securities for the portfolio of the Corporation upon the receipt of such securities by the Custodian or such Subcustodian; (b) for the purchase or redemption of shares of capital stock of the Corporation; (c) for the payment of interest, dividends, taxes, management fees, or operating expenses (including, without limitation thereto, fees for legal, accounting and auditing services); (d) for payment of distribution fees, commissions, or redemption fees, if any; (e) for payments in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Corporation held by or to be delivered to the Custodian; (f) for payments in connection with the return of securities loaned by the Corporation upon receipt of such securities or the reduction of collateral upon receipt of proper notice; (g) for payments for other proper corporate purposes; or (h) upon the termination of this Agreement. Before making any such payment for the purposes permitted under the terms of items (a), (b), (c), (d), (e), (f) or (g) of paragraph (1) of this section, the Custodian shall receive and may rely upon a custodian order directing such payment and stating that the payment is for such a purpose permitted under these items (a), (b), (c), (d), (e), (f) or (g) and that in respect to item (g), a copy of a resolution of the Board of Directors or of the Executive Committee of the Board of Directors of the Corporation signed by an officer of the Corporation and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose to be a proper corporate purpose, and naming the person or persons to whom such payment is made. Notwithstanding the above, for the purposes permitted under items (a) or (f) of paragraph (1) of this section, the Custodian may rely upon a facsimile order. (2) The Custodian is hereby appointed the attorney-in-fact of the Corporation to endorse and collect all checks, drafts or other orders for the payment of money received by the Custodian for the account of the Corporation and drawn on or to the order of the Corporation and to deposit same to the account of the Corporation pursuant to this Agreement. PAGE 4 (3) Subject to the prior authorization provisions of Section 3 of this Agreement, the Corporation authorizes the Custodian to establish and maintain in each country or other jurisdiction in which the principal trading market for any Foreign Securities is located, or in which any Foreign Securities are to be presented for payment, an account or accounts which may include nostro accounts with Custodian branches and omnibus accounts of Custodian at Foreign Custodial Agents for receipt of cash in such currencies as directed by custodian order. For purposes of this Agreement, cash so held in any such account shall be evidenced by separate book entries maintained by Custodian and shall be deemed to be cash held by Custodian. Cash received or credited by Custodian or any Custodian branch or any Foreign Custodial Agent in a currency other than United States dollars shall be maintained in such currency and shall not be converted or remitted except in accordance with the custodian order, except as permitted by Section 7. Section 5. Receipt of Securities Except as permitted by the second paragraph of this section, the Custodian shall, and shall cause any Subcustodians to, hold in a separate account or accounts, and physically segregated at all times from those of any other persons, firms or corporations, pursuant to the provisions hereof, all securities and cash received for the account of the Corporation. The Custodian shall, and shall cause any Subcustodians to, record and maintain a record of all certificate numbers. Securities so received shall be held in the name of the Corporation, in the name of an exclusive nominee duly appointed by the Custodian or such Subcustodian, or in bearer form, as appropriate. Subject to such rules, regulations or guidelines as the SEC may adopt, the Custodian may deposit all or any part of the securities owned by the Corporation in a securities depository which includes any system for the central handling of securities established by a national securities exchange or a national securities association registered with the SEC under the Securities Exchange Act of 1934, or such other person as may be permitted by the SEC, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities. All securities are to be held or disposed of by the Custodian for, and subject at all times to the instructions of, the Corporation pursuant to the terms of this Agreement. The Custodian shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities, except pursuant to the directive of the Corporation and only for the account of the Corporation as set forth in Section 6 of this Agreement. PAGE 5 Section 6. Transfer Exchange, Delivery, etc. of Securities The Custodian shall have sole power to release or deliver any securities of the Corporation held by it pursuant to this Agreement. The Custodian agrees to transfer, exchange or deliver securities held by it or any Subcustodian only: (a) for sales of such securities for the account of the Corporation, upon receipt of payment therefor; (b) when such securities are called, redeemed, retired or otherwise become payable; (c) for examination upon the sale of any such securities in accordance with "street delivery" custom which would include delivery against interim receipts or other proper delivery receipts; (d) in exchange for or upon conversion into other securities alone or other securities and cash whether pursuant to any plan of merger, consolidation, reorganization, recapitalization or readjustment, or otherwise; (e) for the purpose of exchanging interim receipts or temporary certificates for permanent certificates; (f) upon conversion of such securities pursuant to their terms into other securities; (g) upon exercise of subscription, purchase or other similar rights represented by such securities; (h) for loans of such securities by the Corporation upon receipt of collateral; or (i) for other proper corporate purposes. As to any deliveries made by the Custodian pursuant to items (a), (b), (c), (d), (e), (f), (g) and (h), securities or cash received in exchange therefore shall be delivered to the Custodian, a Subcustodian, or to a securities depository. Before making any such transfer, exchange or delivery, the Custodian shall receive a custodian order or a facsimile from the Corporation requesting such transfer, exchange or delivery and stating that it is for a purpose permitted under this section (whenever a facsimile is utilized, the Corporation will also deliver an original signed custodian order) and, in respect to item (i), a copy of a resolution of the Board of Directors or of the Executive Committee of the Board of Directors of the Corporation signed by an officer of the Corporation and certified by its Secretary or an Assistant Secretary, specifying the securities, setting forth the purpose for which such payment, transfer, exchange or delivery is to be made, declaring such PAGE 6 purpose to be a proper corporate purpose, and naming the person or persons to whom such transfer, exchange or delivery of such securities shall be made. Section 7. Custodian's Acts Without Instructions Unless and until the Custodian receives a contrary custodian order from the Corporation, the Custodian shall or shall cause a Subcustodian to: (a) present for payment all coupons and other income items held by the Custodian or such Subcustodian for the account of the Corporation which call for payment upon presentation and hold all cash received by it upon such payment for the account of the Corporation; (b) present for payment all securities held by it or such Subcustodian which mature or when called, redeemed, retired or otherwise become payable; (c) ascertain all stock dividends, rights and similar securities to be issued with respect to any securities other than Foreign Securities; (d) collect and hold for the account of the Corporation all stock dividends, rights and similar securities issued with respect to any securities; (e) ascertain all interest and cash dividends to be paid to security holders with respect to any securities other than Foreign Securities; (f) collect and hold all interest and cash dividends for the account of the Corporation; (g) present for exchange securities converted pursuant to their terms into other securities; (h) exchange interim receipts or temporary securities for definitive securities; (i) execute in the name of the Corporation such ownership and other certificates as may be required to obtain payments in respect thereto, provided that the Corporation shall have furnished to the Custodian or such Subcustodian any information necessary in connection with such certificates; and (j) convert interest and dividends received with respect to Foreign Securities into United States dollars whenever it is practicable to do so through customary banking channels, including the Custodian's own banking facilities. PAGE 7 Section 8. Settlement Procedures Settlement procedures for transactions in Foreign Securities, including receipts and payments of cash held in any nostro account or omnibus account, shall be carried out in accordance with instructions in the operational manual provided by the Custodian (the "Operational Manual"). It is understood that such settlement procedures may vary, as provided in the Operational Manual, from securities market to securities market, to reflect particular settlement practices in such markets. With respect to any transaction involving Foreign Securities, the Custodian or any Subcustodian in its discretion may cause the Corporation to be credited on the contractual settlement date with proceeds of any sale or exchange of Foreign Securities and to be debited on the contractual settlement date for the cost of Foreign Securities purchased or acquired. The Custodian may reverse any such credit or debit if the transaction with respect to which such credit or debit was made fails to settle within a reasonable period, determined by the Custodian in its discretion, after the contractual settlement date except that if any Foreign Securities delivered pursuant to this section are returned by the recipient thereof, the Custodian may cause any such credits and debits to be reversed at any time. With respect to any transactions as to which the Custodian does not determine so to credit or debit the Corporation, the proceeds from the sale or exchange of Foreign Securities will be credited and the cost of such Foreign Securities purchased or acquired will be debited on the date such proceeds or Foreign Securities are received by the Custodian. Notwithstanding the preceding paragraph, settlement, payment and delivery for Foreign Securities may be effected in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering Foreign Securities to the purchaser thereof or to a dealer therefor against a receipt with the exception of receiving later payment for such Foreign Securities from such purchaser or dealer. Section 9. Records The Custodian hereby agrees that it shall create, maintain, and retain all records relating to its activities and obligations under this Agreement in such manner as will meet their obligations under this Agreement and the obligations of the Corporation under the Act, particularly Section 31 thereof and Rules 31a-1 and 31a-2 thereunder and Section 17(f) thereof and the rules thereunder, and applicable federal, state and foreign tax laws and other laws or administrative rules or procedures, in each case as currently in effect, which may be applicable to the Corporation. All records so maintained in connection with the performance of its duties under this Agreement shall remain the property of the Corporation and, in PAGE 8 the event of termination of this Agreement, shall be delivered in accordance with the provisions of this Agreement. (a) With respect to securities and cash held by the Custodian's branches, such securities and cash may be placed in an omnibus account for the customers of the Custodian, and the Custodian shall maintain separate book entry records for each such omnibus account. (b) With respect to securities and cash deposited by the Custodian with a Foreign Custodial Agent, the Custodian shall indemnify on its books as belonging to the Corporation the securities and cash shown on the Custodian's account on the books of such Foreign Custodial Agent. (c) With respect to securities and cash deposited with a securities depository or clearing agency, incorporated or organized under the laws of a country other than the United States, which operates the central system for handling of securities or equivalent book-entries in that country or which operates a transnational system for the central handling or securities or equivalent book-entries (on "Eligible Foreign Securities Depository"), the Custodian shall cause the securities and cash shown on the account on the books of the Eligible Foreign Securities Depository to be identified as belonging to the Custodian as agent for the Corporation. The Custodian hereby agrees that the books and records of the Custodian (including any Custodian branch) pertaining to its actions under this Agreement shall be open to the physical, on- premises inspection and audit by the independent accountant (the "Accountant") employed by, or other representatives of, the Corporation, and, upon the request of the Accountant, confirmation of the contents of those records shall be provided by the Custodian. The Custodian shall use its best efforts to cause any Foreign Custodial Agent to afford access to the Accountant to the books and records of such Foreign Custodial Agent with respect to securities and cash held by such Foreign Custodial Agent for the Corporation. the Custodian also agrees to furnish the Accountant with such reports of the Custodian's (including any Custodian branches') auditors as they relate to the services provided under this Agreement and as are necessary for the Accountant to conduct its examination of the books and records pertaining to affairs of the Corporation, and the Custodian shall use its best efforts to obtain and furnish similar reports of any Foreign Custodial Agent holding securities and cash for the Corporation. Section 10. Registration of Securities Securities which are ordinarily held in registered form may be registered in the name of the Custodian's nominee or, as to any securities in the physical possession of an entity other than the Custodian, in the name of such entity's nominee. The Corporation PAGE 9 agrees to hold any such nominee harmless from any liability as a holder of record of such securities. The Custodian may without notice to the Corporation cause any such securities to cease to be registered in the name of any such nominee and to be registered in the name of the Corporation. In the event that any security registered in the name of the Custodian's nominee or held by any Subcustodians and registered in the name of such Subcustodian's nominee is called for partial redemption by the issuer of such security, the Custodian may allot, or cause to be allotted, the called portion to the respective beneficial holders of such class of security in any manner the Custodian deems to be fair and equitable. Section 11. Transfer Taxes The Corporation shall pay or reimburse the Custodian and any Subcustodian for any transfer taxes payable upon transfers of securities made hereunder, including transfers resulting from the termination of this Agreement. The Custodian shall, and shall use its best efforts to cause any Subcustodian to, execute such certificates in connection with securities delivered to it under this Agreement as may be required, under any applicable law or regulation, to exempt from taxation any transfers and/or deliveries of any such securities which may be entitled to such exemption. Section 12. Voting and Other Action Neither the Custodian or any Subcustodian nor any nominee of the Custodian or such Subcustodian shall vote any of the securities held hereunder by or for the account of the Corporation. The Custodian shall, and shall use its best efforts to cause any Subcustodian to, promptly deliver to the Corporation all notices, proxies and proxy soliciting materials with relation to such securities, such proxies to be executed by the registered holder of such securities (if registered otherwise than in the name of the Corporation), but without indicating the manner in which such proxies are to be voted. The Custodian shall, and shall use its best efforts to cause any Subcustodian to, transmit promptly to the Corporation all written information (including, without limitation, pendency of calls and maturities of securities and expirations of rights in connection therewith) received by the Custodian or such Subcustodian from issuers of the securities being held for the Corporation. With respect to tender or exchange offers, the Custodian shall, and shall use its best efforts to cause any Subcustodian to, transmit promptly to the Corporation all written information received by the Custodian or such Subcustodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. PAGE 10 Section 13. Custodian's Reports The Custodian shall furnish the Corporation as of the close of business each day a statement showing all transactions and entries for the account of the Corporation. The books and records of the Custodian pertaining to its actions as Custodian under this Agreement and securities held hereunder by the Custodian shall be open to inspection and audit by officers of the Corporation, internal auditors employed by the Corporation's investment adviser, and independent auditors employed by the Corporation. The Custodian shall furnish the Corporation in such form as may reasonably be requested by the Corporation a report, including a list of the securities held by it in custody for the account of the Corporation, identification of any subcustodian, and identification of such securities held by such subcustodian, as of the close of business of the last business day of each month, which shall be certified by a duly authorized officer of the Custodian. It is further understood that additional reports may from time to time be requested by the Corporation. Should any report ever be filed with any governmental authority pertaining to lost or stolen securities, the Custodian will concurrently provide the Corporation with a copy of that report. The Custodian also shall furnish such reports on its systems of internal accounting control as the Corporation may reasonably request from time to time. Section 14. Security Interest, Liens and Transfers of Beneficial Ownership The securities and cash held by the Custodian hereunder shall not be subject to any right, change, security interest, lien or claim of any kind in favor of the Custodian or its creditors, except a claim of payment for their safe custody or administration, and beneficial ownership of such securities and cash shall be freely transferable without the payment of money or value other than for safe custody or administration. Any agreement the Custodian shall enter into with any Subcustodian, including any Foreign Custodial Agent, shall contain a provision which is substantially identical to the foregoing. In the event that there shall be asserted any attachment or lien on or against any securities or cash held in any omnibus account or nostro account referred to in this Agreement which results from any claim against the Custodian (including any branch) or any such account, which is not directly related to transactions in securities or cash for the Corporation, the Custodian will use its best efforts promptly to discharge such attachment or lien. If the Custodian shall not have discharged such attachment or lien within five business days, it shall notify the Corporation of the existence of the attachment or lien. If the attachment or lien is not discharged on the date required for delivery or payment with respect to any securities or cash in accordance with the provisions of the Operation Manual: PAGE 11 (a) in the case of such securities, at the option of the Corporation, the Custodian shall either immediately transfer to the Corporation a like amount of such securities (provided the same shall be reasonably available) or immediately transfer an amount in United States dollars equal to the market value of such securities, valued in accordance with such procedures as may be mutually agreed to by the parties thereto; (b) in the case of cash, the Custodian shall immediately transfer to the Corporation an equal amount of cash in United States dollars. Section 15. Compensation For its services hereunder the Custodian shall be paid such compensation and out-of-pocket or incidental expenses at such times as may from time to time be agreed on in writing by the parties hereto in a Custodian Fee Agreement. Section 16. Standard of Care The Custodian shall not be liable for any action taken in good faith upon any custodian order or facsimile herein described or certified copy of any resolution of the Board of Directors or of the Executive Committee of the Board of Directors of the Corporation, and may rely on the genuineness of any such document which it may in good faith believe to have been validly executed. The Corporation agrees to indemnify and hold harmless the Custodian, any Subcustodian, or any nominee thereof from all taxes, charges, expenses, assessments, claims and liabilities (including counsel fees) incurred or assessed against any such entity in connection with the performance of this Agreement, except such as may arise from such entity's own negligent action, negligent failure to act or willful misconduct. The Custodian is authorized to charge any account of the Corporation for such items. In the event of any advance of cash for any purpose made by the Custodian resulting from orders or instructions of the Corporation, or in the event that the Custodian or any nominee thereof shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from such entity's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Corporation shall be security therefor. The Custodian shall maintain a standard of care equivalent to that which would be required of a bailee for hire and shall not be liable for any loss or damage to the Corporation resulting from participation in a securities depository unless such loss or damage arises by reason of any negligence, misfeasance, or willful misconduct of officers or employees of the Custodian, or from its PAGE 12 failure to enforce effectively such rights as it may have against any securities depository or from use of a Subcustodian, unless such loss or damage arises by reason of any negligence, mis- feasance, or willful misconduct of officers or employees of the Custodian, or from its failure to enforce effectively such rights as it may have against such Subcustodian. Anything in the foregoing to the contrary notwithstanding, the Custodian shall exercise, in the performance of its obligations undertaken or reasonably assumed with respect to this Agreement, including the recommendation to the Board of Foreign Custodial Agents, reasonable care, for which the Custodian shall be responsible to the same extent as if it were performing such duties directly and holding such securities and cash in Minnesota, United States of America. The Custodian shall be indemnified and held harmless by the Corporation from and against any loss or liability for any action taken or omitted to be taken hereunder in good faith upon custodian order and may rely on the genuineness of all such orders and documents as it in good faith believes to have been validly executed. The Custodian shall be responsible for the securities and cash held by or deposited with any Subcustodian to the same extent as if such securities and cash were directly held by or deposited with the Custodian. The Custodian hereby agrees that it shall indemnify and hold the Corporation harmless from and against any loss which shall occur as a result of the failure of a foreign Custodial Agent holding the securities and cash to exercise reasonable care with respect to the safekeeping of such securities and cash to the extent that the Custodian would be required to indemnify and hold the Corporation harmless if the Custodian were itself holding such securities and cash in Minnesota. It is also understood that the Custodian shall not have liability for loss except by reason of the Custodian's negligence, fraud or willful misconduct, or by reason of negligence, fraud or willful misconduct of any Subcustodian holding such securities or cash for the Corporation. The Custodian warrants that the established procedures to be followed by any Subcustodian, in the opinion of the Custodian after due inquiry, afford protection for such securities and cash at least equal to that afforded by the Custodian's established procedures with respect to similar securities and cash held by the Custodian (including its securities depositories) in Minnesota. However, the Custodian shall have no liability for any loss or liability occasioned by delay in the actual receipt by it or any Subcustodian of notice of any payment, redemption, or other transaction regarding securities unless such delay is a result of its own negligence, fraud, or willful misconduct. The Custodian shall not be responsible for any loss of the Corporation, or to take any action with respect to any attachment or lien on any omnibus account or nostro account, except as provided in Section 14 of this Agreement, in such loss, attachment or lien arises by reason of any cause or circumstances beyond the control of the Custodian, including acts of civil or military PAGE 13 authority, expropriation, national emergency, acts of God, insurrection, war, riots, or failure of transportation, communication or power supply, or the failure of any person, firm or corporation (other than the Custodian or any Subcustodian acting on behalf of the Custodian) to perform any obligation if such failure results in any such loss. Section 17. Insurance The Custodian represents and warrants that it presently maintains and shall maintain for the duration of this Agreement a bankers' blanket bond (the "Bond") which provides standard fidelity and non- negligent loss coverage with respect to securities and cash which may be held by the Custodian and securities and cash which may be held by any Subcustodian which may be utilized by the Custodian pursuant to this Agreement. The Custodian agrees that, if at any time the Custodian for any reason discontinues such coverage, it shall immediately notify the Corporation in writing. The Custodian represents that only the named insured on the Bond, which includes the Custodian but not any of its customers, is directly protected against loss. The Custodian represents that while it might resist a claim of one of its customers to recover for a loss not covered by the Bond, as a practical matter, where a claim is brought and a loss is possibly covered by the Bond, the Custodian would give notice of the claim to its insurer, and the insurer would normally determine whether to defend the claim against the Custodian or to pay the claim on behalf of the Custodian. The Custodian also represents that it does not intend to obtain any insurance for the benefit of the Corporation which protects against the imposition of the proceeds of sale of any securities or against confiscation, expropriation or nationalization of any securities or the assets of the issuer of such securities by a government or any foreign country in which the issuer of such securities is organized or in which securities are held for safekeeping either by the Custodian or any Subcustodian in such country. The Custodian represents that it has discussed the availability of expropriation insurance with the Corporation. The Custodian also represents that it has advised the Corporation as to its understanding of the position of the Staff of the SEC that any investment company investing in securities of foreign issuers has the responsibility for reviewing the possibility of the imposition of exchange control restrictions which would affect the liquidity of such investment company's assets and the possibility of exposure to political risk, including the appropriateness of insuring against such risk. The Custodian represents that the Corporation has acknowledged that it has the responsibility to review the possibility of such risks and what, if any, action should be taken. PAGE 14 Section 18. Termination and Amendment of Agreement The Corporation and the Custodian mutually may agree from time to time in writing to amend, to add to, or to delete from any provision of this Agreement. The Custodian may terminate this Agreement by giving the Corporation ninety days' written notice of such termination by registered mail addressed to the Corporation at its principal place of business. The Corporation may terminate this Agreement at any time by written notice thereof delivered, together with a copy of the resolution of the Board of Directors authorizing such termination and certified by the Secretary of the Corporation, by registered mail to the Custodian. Upon such termination of this Agreement, assets of the Corporation held by the Custodian shall be delivered by the Custodian to a successor custodian, if one has been appointed by the Corporation, upon receipt by the Custodian of a copy of the resolution of the Board of Directors of the Corporation certified by the Secretary, showing appointment of the successor custodian, and provided that such successor custodian is a bank or trust company, organized under the laws of the United States or of any State of the United States, having not less than two million dollars aggregate capital, surplus and undivided profits. Upon the termination of this Agreement as a part of the transfer of assets, either to a successor custodian or otherwise, the Custodian will deliver securities held by it hereunder, when so authorized and directed by resolution of the Board of Directors of the Corporation, to a duly appointed agent of the successor custodian or to the appropriate transfer agents for transfer of registration and delivery as directed. Delivery of assets on termination of this Agreement shall be effected in a reasonable, expeditious and orderly manner; and in order to accomplish an orderly transition from the Custodian to the successor custodian, the Custodian shall continue to act as such under this Agreement as to assets in its possession or control. Termination as to each security shall become effective upon delivery to the successor custodian, its agent, or to a transfer agent for a specific security for the account of the successor custodian, and such delivery shall constitute effective delivery by the Custodian to the successor under this Agreement. In addition to the means of termination hereinbefore authorized, this Agreement may be terminated at any time by the vote of a majority of the outstanding shares of the Corporation and after written notice of such action to the Custodian. Section 19. General Nothing expressed or mentioned in or to be implied from any provision of this Agreement is intended to, or shall be construed to give any person or corporation other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement, or any covenant, condition or provision herein contained, this Agreement and all of the covenants, conditions and PAGE 15 provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective successors and assigns. This Agreement shall be governed by the laws of the State of Minnesota. Attest: IDS SELECTIVE FUND, INC. By /s/ William C. Herber By /s/ Leslie L. Ogg William C. Herber Leslie L. Ogg Secretary Vice President FIRST NATIONAL BANK OF MINNEAPOLIS By /s/ Robert Spies Robert Spies By ________________________________ EX-99.9(B)-AGREEMENT 6 TRANSFER AGENCY AGREEMENT PAGE 1 TRANSFER AGENCY AGREEMENT AGREEMENT dated as of March 20, 1995, between IDS Selective Fund, Inc. (the "Fund"), a Minnesota corporation, and American Express Financial Corporation (the "Transfer Agent"), a Delaware corporation. In consideration of the mutual promises set forth below, the Fund and the Transfer Agent agree as follows: 1. Appointment of the Transfer Agent. The Fund hereby appoints the Transfer Agent, as transfer agent for its shares and as shareholder servicing agent for the Fund, and the Transfer Agent accepts such appointment and agrees to perform the duties set forth below. 2. Compensation. The Fund will compensate the Transfer Agent for the performance of its obligations as set forth in Schedule A. Schedule A does not include out-of-pocket disbursements of the Transfer Agent for which the Transfer Agent shall be entitled to bill the Fund separately. The Transfer Agent will bill the Fund monthly. The fee provided for hereunder shall be paid in cash by the Fund to American Express Financial Corporation within five (5) business days after the last day of each month. Out-of-pocket disbursements shall include, but shall not be limited to, the items specified in Schedule B. Reimbursement by the Fund for expenses incurred by the Transfer Agent in any month shall be made as soon as practicable after the receipt of an itemized bill from the Transfer Agent. Any compensation jointly agreed to hereunder may be adjusted from time to time by attaching to this Agreement a revised Schedule A, dated and signed by an officer of each party. 3. Documents. The Fund will furnish from time to time such certificates, documents or opinions as the Transfer Agent deems to be appropriate or necessary for the proper performance of its duties. 4. Representations of the Fund and the Transfer Agent. (a) The Fund represents to the Transfer Agent that all outstanding shares are validly issued, fully paid and non-assessable by the Fund. When shares are hereafter issued in accordance with the terms of the Fund's Articles of Incorporation and its prospectus, such shares shall be validly issued, fully paid and non-assessable by the Fund. (b) The Transfer Agent represents that it is registered under Section 17A(c) of the Securities Exchange Act of 1934. The Transfer Agent agrees to maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this agreement and to comply with all applicable laws. PAGE 2 5. Duties of the Transfer Agent. The Transfer Agent shall be responsible, separately and through its subsidiaries or affiliates, for the following functions: (a) Sale of Fund Shares. (1) On receipt of an application and payment, wired instructions and payment, or payment identified as being for the account of a shareholder, the Transfer Agent will deposit the payment, prepare and present the necessary report to the Custodian and record the purchase of shares in a timely fashion in accordance with the terms of the prospectus. All shares shall be held in book entry form and no certificate shall be issued unless the Fund is permitted to do so by the prospectus and the purchaser so requests. (2) On receipt of notice that payment was dishonored, the Transfer Agent shall stop redemptions of all shares owned by the purchaser related to that payment, place a stop payment on any checks that have been issued to redeem shares of the purchaser and take such other action as it deems appropriate. (b) Redemption of Fund Shares. On receipt of instructions to redeem shares in accordance with the terms of the Fund's prospectus, the Transfer Agent will record the redemption of shares of the Fund, prepare and present the necessary report to the Custodian and pay the proceeds of the redemption to the shareholder, an authorized agent or legal representative upon the receipt of the monies from the Custodian. (c) Transfer or Other Change Pertaining to Fund Shares. On receipt of instructions or forms acceptable to the Transfer Agent to transfer the shares to the name of a new owner, change the name or address of the present owner or take other legal action, the Transfer Agent will take such action as is requested. (d) Exchange of Fund Shares. On receipt of instructions to exchange the shares of the Fund for the shares of another fund in the IDS MUTUAL FUND GROUP or other American Express Financial Corporation product in accordance with the terms of the prospectus, the Transfer Agent will process the exchange in the same manner as a redemption and sale of shares. (e) Right to Seek Assurance. The Transfer Agent may refuse to transfer, exchange or redeem shares of the Fund or take any action requested by a shareholder until it is satisfied that the requested transaction or action is legally authorized or until it is satisfied there is no basis for any claims adverse to the transaction or action. It may rely on the provisions of the Uniform Act for the Simplification of Fiduciary Security Transfers or the Uniform Commercial Code. The Fund shall indemnify the Transfer Agent for any act done or omitted to be done in reliance on such laws or for refusing to transfer, exchange or redeem shares or taking any requested action if it acts on a good faith belief that the transaction or action is illegal or unauthorized. (f) Shareholder Records, Reports and Services. PAGE 3 (1) The Transfer Agent shall maintain all shareholder accounts, which shall contain all required tax, legally imposed and regulatory information; shall provide shareholders, and file with federal and state agencies, all required tax and other reports pertaining to shareholder accounts; shall prepare shareholder mailing lists; shall cause to be printed and mailed all required prospectuses, annual reports, semiannual reports, statements of additional information (upon request), proxies and other mailings to shareholders; and shall cause proxies to be tabulated. (2) The Transfer Agent shall respond to all valid inquiries related to its duties under this Agreement. (3) The Transfer Agent shall create and maintain all records in accordance with all applicable laws, rules and regulations, including, but not limited to, the records required by Section 31(a) of the Investment Company Act of 1940. (g) Dividends and Distributions. The Transfer Agent shall prepare and present the necessary report to the Custodian and shall cause to be prepared and transmitted the payment of income dividends and capital gains distributions or cause to be recorded the investment of such dividends and distributions in additional shares of the Fund or as directed by instructions or forms acceptable to the Transfer Agent. (h) Confirmations and Statements. The Transfer Agent shall confirm each transaction either at the time of the transaction or through periodic reports as may be legally permitted. (i) Lost or Stolen Checks. The Transfer Agent will replace lost or stolen checks issued to shareholders upon receipt of proper notification and will maintain any stop payment orders against the lost or stolen checks as it is economically desirable to do. (j) Reports to Fund. The Transfer Agent will provide reports pertaining to the services provided under this Agreement as the Fund may request to ascertain the quality and level of services being provided or as required by law. (k) Other Duties. The Transfer Agent may perform other duties for additional compensation if agreed to in writing by the parties to this Agreement. 6. Ownership and Confidentiality of Records. The Transfer Agent agrees that all records prepared or maintained by it relating to the services to be performed by it under the terms of this Agreement are the property of the Fund and may be inspected by the Fund or any person retained by the Fund at reasonable times. The Fund and Transfer Agent agree to protect the confidentiality of those records. 7. Action by Board and Opinion of Fund's Counsel. The Transfer Agent may rely on resolutions of the Board of Directors or the Executive Committee of the Board of Directors and on opinion of counsel for the Fund. PAGE 4 8. Duty of Care. It is understood and agreed that, in furnishing the Fund with the services as herein provided, neither the Transfer Agent, nor any officer, director or agent thereof shall be held liable for any loss arising out of or in connection with their actions under this Agreement so long as they act in good faith and with due diligence, and are not negligent or guilty of any willful misconduct. It is further understood and agreed that the Transfer Agent may rely upon information furnished to it reasonably believed to be accurate and reliable. In the event the Transfer Agent is unable to perform its obligations under the terms of this Agreement because of an act of God, strike or equipment or transmission failure reasonably beyond its control, the Transfer Agent shall not be liable for any damages resulting from such failure. 9. Term and Termination. This Agreement shall become effective on the date first set forth above (the "Effective Date") and shall continue in effect from year to year thereafter as the parties may mutually agree; provided that either party may terminate this Agreement by giving the other party notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. In the event such notice is given by the Fund, it shall be accompanied by a vote of the Board of Directors, certified by the Secretary, electing to terminate this Agreement and designating a successor transfer agent or transfer agents. Upon such termination and at the expense of the Fund, the Transfer Agent will deliver to such successor a certified list of shareholders of the Fund (with name, address and taxpayer identification or Social Security number), a historical record of the account of each shareholder and the status thereof, and all other relevant books, records, correspondence, and other data established or maintained by the Transfer Agent under this Agreement in the form reasonably acceptable to the Fund, and will cooperate in the transfer of such duties and responsibilities, including provisions for assistance from the Transfer Agent's personnel in the establishment of books, records and other data by such successor or successors. 10. Amendment. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. 11. Subcontracting. The Fund agrees that the Transfer Agent may subcontract for certain of the services described under this Agreement with the understanding that there shall be no diminution in the quality or level of the services and that the Transfer Agent remains fully responsible for the services. Except for out-of-pocket expenses identified in Schedule B, the Transfer Agent shall bear the cost of subcontracting such services, unless otherwise agreed by the parties. 12. Miscellaneous. (a) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other party. PAGE 5 (b) This Agreement shall be governed by the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers as of the day and year written above. IDS SELECTIVE FUND, INC. By: /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL CORPORATION By: /s/ Janis E. Miller Janis E. Miller Vice President PAGE 6 Schedule A IDS SELECTIVE FUND, INC. TRANSFER AGENT FEE Effective the 20th day of March, 1995, the Annual Per Account Fee accrued daily and payable monthly is revised as follows: CLASS FEE A $ 15.50 B 16.50 Y 15.50 PAGE 7 Schedule B OUT-OF-POCKET EXPENSES The Fund shall reimburse the Transfer Agent monthly for the following out-of-pocket expenses: o typesetting, printing, paper, envelopes, postage and return postage for proxy soliciting material, and proxy tabulation costs o printing, paper, envelopes and postage for dividend notices, dividend checks, records of account, purchase confirmations, exchange confirmations and exchange prospectuses, redemption confirmations, redemption checks, confirmations on changes of address and any other communication required to be sent to shareholders o typesetting, printing, paper, envelopes and postage for prospectuses, annual and semiannual reports, statements of additional information, supplements for prospectuses and statements of additional information and other required mailings to shareholders o stop orders o outgoing wire charges o other expenses incurred at the request or with the consent of the Fund EX-99.9(D)-AGREEMENT 7 SHAREHOLDER SERVICE AGREEMENT PAGE 1 Shareholder Service Agreement This agreement is between IDS Selective Fund, Inc. (the "Fund") and American Express Financial Advisors Inc., the principal underwriter of the Fund, for services to be provided to shareholders by personal financial advisors and other servicing agents. It is effective on the first day the Fund offers multiple classes of shares. American Express Financial Advisors represents that shareholders consider their financial advisor or servicing agent a significant factor in their satisfaction with their investment and, to help retain financial advisors or servicing agents, it is necessary for the Fund to pay annual servicing fees to financial advisors and other servicing agents. American Express Financial Advisors represents that fees paid to financial advisors will be used by financial advisors to help shareholders thoughtfully consider their investment goals and objectively monitor how well the goals are being achieved. As principal underwriter, American Express Financial Advisors will use its best efforts to assure that other distributors provide comparable services to shareholders for the servicing fees received. American Express Financial Advisors agrees to monitor the services provided by financial advisors and servicing agents, to measure the level and quality of services provided, to provide training and support to financial advisors and servicing agents and to devise methods for rewarding financial advisors and servicing agents who achieve an exemplary level and quality of services. The Fund agrees to pay American Express financial advisors and other servicing agents 0.15 percent of the net asset value for each shareholder account assigned to a financial advisor or servicing agent that holds either Class A or Class B shares. In addition, the Fund agrees to pay American Express Financial Advisors' costs to monitor, measure, train and support services provided by financial advisors or servicing agents up to 0.025 percent of the net asset value for each shareholder account assigned to a financial advisor or servicing agent that holds either Class A or Class B shares. The Fund agrees to pay American Express Financial Advisors in cash within five (5) business days after the last day of each month. American Express Financial Advisors agrees to provide the Fund, prior to the beginning of the calendar year, a budget covering its expected costs to monitor, measure, train and support services and a quarterly report of its actual expenditures. American Express Financial Advisors agrees to meet with representatives of the Fund at their request to provide information as may be reasonably necessary to evaluate its performance under the terms of this agreement. American Express Financial Advisors agrees that if, at the end of any month, the expenses of the Fund, including fees under this agreement and any other agreement between the Fund and American PAGE 2 Express Financial Advisors or American Express Financial Corporation, but excluding taxes, brokerage commissions and charges in connection with the purchase and sale of assets exceed the most restrictive applicable state expense limitation for the Fund's current fiscal year, the Fund shall not pay fees and expenses under this agreement to the extent necessary to keep the Fund's expenses from exceeding the limitation, it being understood that American Express Financial Advisors will assume all unpaid expenses and bill the Fund for them in subsequent months but in no event can the accumulation of unpaid expenses or billing be carried past the end of the Fund's fiscal year. This agreement shall continue in effect for a period of more than one year so long as it is reapproved at least annually at a meeting called for the purpose of voting on the agreement by a vote, in person, of the members of the Board who are not interested persons of the Fund and have no financial interest in the operation of the agreement, and of all the members of the Board. This agreement may be terminated at any time without payment of any penalty by a vote of a majority of the members of the Board who are not interested persons of the Fund and have no financial interest in the operation of the agreement or by American Express Financial Advisors. The agreement will terminate automatically in the event of its assignment as that term is defined in the Investment Company Act of 1940. This agreement may be amended at any time provided the amendment is approved in the same manner the agreement was initially approved and the amendment is agreed to by American Express Financial Advisors. Approved this 20th day of March, 1995. IDS SELECTIVE FUND, INC. By /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL ADVISORS INC. By /s/ Janis E. Miller Janis E. Miller Vice President EX-99.9(E)-AGREEMENT 8 ADMINISTRATIVE SERVICES AGREEMENT PAGE 1 ADMINISTRATIVE SERVICES AGREEMENT AGREEMENT made the 20th day of March, 1995, by and between IDS Selective Fund, Inc. (the "Fund"), a Minnesota corporation, and American Express Financial Corporation, a Delaware corporation. Part One: SERVICES (1) The Fund hereby retains American Express Financial Corporation, and American Express Financial Corporation hereby agrees, for the period of this Agreement and under the terms and conditions hereinafter set forth, to furnish the Fund continuously with all administrative, accounting, clerical, statistical, correspondence, corporate and all other services of whatever nature required in connection with the administration of the Fund as provided under this Agreement; and to pay such expenses as may be provided for in Part Three hereof; subject always to the direction and control of the Board of Directors, the Executive Committee and the authorized officers of the Fund. American Express Financial Corporation agrees to maintain an adequate organization of competent persons to provide the services and to perform the functions herein mentioned. American Express Financial Corporation agrees to meet with any persons at such times as the Board of Directors deems appropriate for the purpose of reviewing American Express Financial Corporation's performance under this Agreement. (2) The Fund agrees that it will furnish to American Express Financial Corporation any information that the latter may reasonably request with respect to the services performed or to be performed by American Express Financial Corporation under this Agreement. (3) It is understood and agreed that in furnishing the Fund with the services as herein provided, neither American Express Financial Corporation, nor any officer, director or agent thereof shall be held liable to the Fund or its creditors or shareholders for errors of judgment or for anything except willful misfeasance, bad faith, or gross negligence in the performance of its duties, or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that American Express Financial Corporation may rely upon information furnished to it reasonably believed to be accurate and reliable. Part Two: COMPENSATION FOR SERVICES (1) The Fund agrees to pay to American Express Financial Corporation, and American Express Financial Corporation covenants and agrees to accept from the Fund in full payment for the services furnished, based on the net assets of the Fund as set forth in the following table: PAGE 2 Assets Annual Rate At (Billions) Each Asset Level -------------- ---------------- First $1 0.050% Next 1 0.045 Next 1 0.040 Next 3 0.035 Next 3 0.030 Over 9 0.025 The administrative fee for each calendar day of each year shall be equal to 1/365th (1/366th in each leap year) of the total amount computed. The computation shall be made for each such day on the basis of net assets as of the close of business of the full business day two (2) business days prior to the day for which the computation is being made. In the case of the suspension of the computation of net asset value, the administrative fee for each day during such suspension shall be computed as of the close of business on the last full business day on which the net assets were computed. As used herein, "net assets" as of the close of a full business day shall include all transactions in shares of the Fund recorded on the books of the Fund for that day. (2) The administrative fee shall be paid on a monthly basis and, in the event of the termination of this Agreement, the administrative fee accrued shall be prorated on the basis of the number of days that this Agreement is in effect during the month with respect to which such payment is made. (3) The administrative fee provided for hereunder shall be paid in cash by the Fund to American Express Financial Corporation within five (5) business days after the last day of each month. Part Three: ALLOCATION OF EXPENSES (1) The Fund agrees to pay: (a) Administrative fees payable to American Express Financial Corporation for its services under the terms of this Agreement. (b) Taxes. (c) Fees and charges of its independent certified public accountants for services the Fund requests. (d) Fees and expenses of attorneys (i) it employs in matters not involving the assertion of a claim by a third party against the Fund, its directors and officers, (ii) it employs in conjunction with a claim asserted by the Board of Directors against American Express Financial Corporation, except that American Express Financial Corporation shall reimburse the Fund for such fees and expenses if it is ultimately determined by a court of competent jurisdiction, or American Express Financial Corporation agrees, that it is liable in whole or in part to the Fund, and (iii) it employs to assert a claim against a third party. PAGE 3 (e) Fees paid for the qualification and registration for public sale of the securities of the Fund under the laws of the United States and of the several states in which such securities shall be offered for sale. (f) Office expenses which shall include a charge for occupancy, insurance on the premises, furniture and equipment, telephone, telegraph, electronic information services, books, periodicals, published services, and office supplies used by the Fund, equal to the cost of such incurred by American Express Financial Corporation. (g) Fees of consultants employed by the Fund. (h) Directors, officers and employees expenses which shall include fees, salaries, memberships, dues, travel, seminars, pension, profit sharing, and all other benefits paid to or provided for directors, officers and employees, directors and officers liability insurance, errors and omissions liability insurance, worker's compensation insurance and other expenses applicable to the directors, officers and employees, except the Fund will not pay any fees or expenses of any person who is an officer or employee of American Express Financial Corporation or its affiliates. (i) Filing fees and charges incurred by the Fund in connection with filing any amendment to its articles of incorporation, or incurred in filing any other document with the State of Minnesota or its political subdivisions. (j) Organizational expenses of the Fund. (k) One-half of the Investment Company Institute membership dues charged jointly to the IDS MUTUAL FUND GROUP and American Express Financial Corporation. (l) Expenses properly payable by the Fund, approved by the Board of Directors. (2) American Express Financial Corporation agrees to pay all expenses associated with the services it provides under the terms of this Agreement. Further, American Express Financial Corporation agrees that if, at the end of any month, the expenses of the Fund under this Agreement and any other agreement between the Fund and American Express Financial Corporation, but excluding those expenses set forth in (1)(b) of this Part Three, exceed the most restrictive applicable state expenses limitation, the Fund shall not pay those expenses set forth in (1)(a) and (c) through (m) of this Part Three to the extent necessary to keep the Fund's expenses from exceeding the limitation, it being understood that American Express Financial Corporation will assume all unpaid expenses and bill the Fund for them in subsequent months but in no event can the accumulation of unpaid expenses or billing be carried past the end of the Fund's fiscal year. PAGE 4 Part Four: MISCELLANEOUS (1) American Express Financial Corporation shall be deemed to be an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Fund. (2) A "full business day" shall be as defined in the By-laws. (3) The Fund recognizes that American Express Financial Corporation now renders and may continue to render investment advice and other services to other investment companies and persons which may or may not have investment policies and investments similar to those of the Fund and that American Express Financial Corporation manages its own investments and/or those of its subsidiaries. American Express Financial Corporation shall be free to render such investment advice and other services and the Fund hereby consents thereto. (4) Neither this Agreement nor any transaction had pursuant hereto shall be invalidated or in anyway affected by the fact that directors, officers, agents and/or shareholders of the Fund are or may be interested in American Express Financial Corporation or any successor or assignee thereof, as directors, officers, stockholders or otherwise; that directors, officers, stockholders or agents of American Express Financial Corporation are or may be interested in the Fund as directors, officers, shareholders, or otherwise; or that American Express Financial Corporation or any successor or assignee, is or may be interested in the Fund as shareholder or otherwise, provided, however, that neither American Express Financial Corporation, nor any officer, director or employee thereof or of the Fund, shall sell to or buy from the Fund any property or security other than shares issued by the Fund, except in accordance with applicable regulations or orders of the United States Securities and Exchange Commission. (5) Any notice under this Agreement shall be given in writing, addressed, and delivered, or mailed postpaid, to the party to this Agreement entitled to receive such, at such party's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) American Express Financial Corporation agrees that no officer, director or employee of American Express Financial Corporation will deal for or on behalf of the Fund with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit officers, directors or employees of American Express Financial Corporation from having a financial interest in the Fund or in American Express Financial Corporation. (7) The Fund agrees that American Express Financial Corporation may subcontract for certain of the services described under this Agreement with the understanding that there shall be no diminution in the quality or level of the services and that American Express Financial Corporation remains fully responsible for the services. PAGE 5 (8) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other party. This Agreement shall be governed by the laws of the State of Minnesota. Part Five: RENEWAL AND TERMINATION (1) This Agreement shall become effective on the date first set forth above (the "Effective Date") and shall continue in effect from year to year thereafter as the parties may mutually agree; provided that either party may terminate this Agreement by giving the other party notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. (2) This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement as of the day and year first above written. IDS SELECTIVE FUND, INC. By: /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL CORPORATION By: /s/ Janis E. Miller Janis E. Miller Vice President EX-99.11-CONSENT 9 INDEPEND. AUD. CONSENT PAGE 1 Independent auditors' consent - ------------------------------------------------------------------- The board and shareholders IDS Selective Fund, Inc.: We consent to the use of our report incorporated herein by reference and to the reference to our Firm under the headings "Financial highlights" in Part A and "INDEPENDENT AUDITORS" in Part B of the Registration Statement. KPMG Peat Marwick LLP Minneapolis, Minnesota July 28, 1997 EX-99.15-AGREEMENT 10 PLAN AND AGREEMENT OF DISTRIBUTION PAGE 1 Plan and Agreement of Distribution This plan and agreement is between IDS Selective Fund, Inc. (the "Fund") and American Express Financial Advisors Inc., the principal underwriter of the Fund, for distribution services to the Fund. It is effective on the first day the Fund offers multiple classes of shares. The plan and agreement has been approved by members of the Board of Directors (the "Board") of the Fund who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the plan or any related agreement, and all of the members of the Board, in person, at a meeting called for the purpose of voting on the plan and agreement. The plan and agreement provides that: 1. The Fund will reimburse American Express Financial Advisors for all sales and promotional expenses attributable to the sale of Class B shares, including sales commissions, business and employee expenses charged to distribution of Class B shares, and corporate overhead appropriately allocated to the sale of Class B shares. 2. The amount of the reimbursement shall be equal on an annual basis to 0.75% of the average daily net assets of the Fund attributable to Class B shares. The amount so determined shall be paid to American Express Financial Advisors in cash within five (5) business days after the last day of each month. American Express Financial Advisors agrees that if, at the end of any month, the expenses of the Fund, including fees under this agreement and any other agreement between the Fund and American Express Financial Advisors or American Express Financial Corporation, but excluding taxes, brokerage commissions and charges in connection with the purchase and sale of assets exceed the most restrictive applicable state expense limitation for the Fund's current fiscal year, the Fund shall not pay fees and expenses under this agreement to the extent necessary to keep the Fund's expenses from exceeding the limitation, it being understood that American Express Financial Advisors will assume all unpaid expenses and bill the Fund for them in subsequent months, but in no event can the accumulation of unpaid expenses or billing be carried past the end of the Fund's fiscal year. 3. For each purchase of Class B shares, after eight years the Class B shares will be converted to Class A shares and those assets will no longer be included in determining the reimbursement amount. 4. The Fund understands that if a shareholder redeems Class B shares before they are converted to Class A shares, American Express Financial Advisors will impose a sales charge directly on the redemption proceeds to cover those expenses it has previously incurred on the sale of those shares. 5. American Express Financial Advisors agrees to provide at least quarterly an analysis of distribution expenses and to meet with representatives of the Fund as reasonably requested to provide additional information. PAGE 2 6. The plan and agreement shall continue in effect for a period of more than one year provided it is reapproved at least annually in the same manner in which it was initially approved. 7. The plan and agreement may not be amended to increase materially the amount that may be paid by the Fund without the approval of a least a majority of the outstanding shares of Class B. Any other amendment must be approved in the manner in which the plan and agreement was initially approved. 8. This agreement may be terminated at any time without payment of any penalty by a vote of a majority of the members of the Board who are not interested persons of the Fund and have no financial interest in the operation of the plan and agreement, or by vote of a majority of the outstanding Class B shares, or by American Express Financial Advisors. The plan and agreement will terminate automatically in the event of its assignment as that term is defined in the Investment Company Act of 1940. Approved this 20th day of March, 1995. IDS SELECTIVE FUND, INC. By /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL ADVISORS INC. By /s/ Janis E. Miller Janis E. Miller Vice President EX-27 11 FINANCIAL DATA SCHEDULES
6 2 IDS SELECTIVE FUND CLASS B 12-MOS MAY-31-1997 MAY-31-1997 0 0 0 1615061028 0 1615061028 0 0 858471 858471 0 1575007596 14055085 12016634 2115568 0 8623089 0 28456304 126468734 598700 122682242 0 15258561 108022381 8252506 14747409 131022296 0 6790893 1704126 0 6192646 5015499 861304 (114448557) 529978 23824667 0 0 8761595 0 6746873 120597616 9.00 .52 .12 .51 .13 0 9.00 1.64 0 0
EX-27 12 FINANCIAL DATA SCHEDULES
6 3 IDS SELECTIVE FUND CLASS Y 12-MOS MAY-31-1997 MAY-31-1997 0 0 0 1615061028 0 1615061028 0 0 858471 858471 0 1575007596 22426340 23581187 2115568 0 8623089 0 28456304 201807694 598700 122682242 0 15258561 108022381 8252506 14747409 131022296 0 13088145 2683689 0 6955369 9855527 1745311 (114448557) 529978 23824667 0 0 8761595 0 6746873 199809759 9.00 .60 .12 .59 .13 0 9.00 .72 0 0
EX-27 13 FINANCIAL DATA SCHEDULES
6 1 QUALITY INCOME FUND 12-MOS MAY-30-1997 JUN-10-1996 MAY-30-1997 1688560923 1718321998 5712652 39006077 0 1784904043 41408277 0 127844697 169252974 0 0 0 0 0 0 0 0 0 1615654069 598893 120249224 0 8595499 112252618 9395624 20434131 142082373 0 0 0 0 0 0 0 1615624069 0 0 0 0 8395071 0 8595499 1418379346 0 0 0 0 0 0 0 0 0 0
EX-99.19(A)-DIRPOA 14 DIRECTORS' POWER OF ATTORNEY PAGE 1 DIRECTORS/TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as directors and trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 with the Securities and Exchange Commission: 1933 Act 1940 Act Reg. Number Reg. Number IDS Bond Fund, Inc. 2-51586 811-2503 IDS California Tax-Exempt Trust 33-5103 811-4646 IDS Discovery Fund, Inc. 2-72174 811-3178 IDS Equity Select Fund, Inc. 2-13188 811-772 IDS Extra Income Fund, Inc. 2-86637 811-3848 IDS Federal Income Fund, Inc. 2-96512 811-4260 IDS Global Series, Inc. 33-25824 811-5696 IDS Growth Fund, Inc. 2-38355 811-2111 IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901 IDS International Fund, Inc. 2-92309 811-4075 IDS Investment Series, Inc. 2-11328 811-54 IDS Managed Retirement Fund, Inc. 2-93801 811-4133 IDS Market Advantage Series, Inc. 33-30770 811-5897 IDS Money Market Series, Inc. 2-54516 811-2591 IDS New Dimensions Fund, Inc. 2-28529 811-1629 IDS Precious Metals Fund, Inc. 2-93745 811-4132 IDS Progressive Fund, Inc. 2-30059 811-1714 IDS Selective Fund, Inc. 2-10700 811-499 IDS Special Tax-Exempt Series Trust 33-5102 811-4647 IDS Stock Fund, Inc. 2-11358 811-498 IDS Strategy Fund, Inc. 2-89288 811-3956 IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686 IDS Tax-Free Money Fund, Inc. 2-66868 811-3003 IDS Utilities Income Fund, Inc. 33-20872 811-5522 hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Acts and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in PAGE 2 connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 8th day of January, 1997. /s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird H. Brewster Atwater, Jr. Melvin R. Laird /s/ Lynne V. Cheney /s/ William R. Pearce Lynne V. Cheney William R. Pearce /s/ William H. Dudley /s/ Alan K. Simpson William H. Dudley Alan K. Simpson /s/ Robert F. Froehlke /s/ Edson W. Spencer Robert F. Froehlke Edson W. Spencer /s/ David R. Hubers /s/ John R. Thomas David R. Hubers John R. Thomas /s/ Heinz F. Hutter /s/ Wheelock Whitney Heinz F. Hutter Wheelock Whitney /s/ Anne P. Jones /s/ C. Angus Wurtele Anne P. Jones C. Angus Wurtele EX-99.19(C)-TRUSTPOA 15 TRUSTEES' POA PAGE 1 TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Investment Company Act of 1940 with the Securities and Exchange Commission: 1940 Act Reg. Number Growth Trust 811-07395 Growth and Income Trust 811-07393 Income Trust 811-07307 Tax-Free Income Trust 811-07397 World Trust 811-07399 hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Act and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 8th day of January, 1997. /s/ H. Brewster Atwater, Jr. /s/ Melvin R. Laird H. Brewster Atwater, Jr. Melvin R. Laird /s/ Lynne V. Cheney /s/ William R. Pearce Lynne V. Cheney William R. Pearce /s/ William H. Dudley /s/ Alan K. Simpson William H. Dudley Alan K. Simpson /s/ Robert F. Froehlke /s/ Edson W. Spencer Robert F. Froehlke Edson W. Spencer /s/ David R. Hubers /s/ John R. Thomas David R. Hubers John R. Thomas /s/ Heinz F. Hutter /s/ Wheelock Whitney Heinz F. Hutter Wheelock Whitney /s/ Anne P. Jones /s/ C. Angus Wurtele Anne P. Jones C. Angus Wurtele EX-99.19(D)-OFFPOA 16 OFFICERS' POWER OF ATTORNEY PAGE 1 OFFICERS' POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as officers of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Investment Company Act of 1940 with the Securities and Exchange Commission: Growth Trust Growth and Income Trust Income Trust Tax-Free Income Trust World Trust hereby constitutes and appoints William R. Pearce and Leslie L. Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead, as an officer, any and all further amendments to said registration statements filed pursuant to said Act and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 11th day of April, 1996. /s/ William R. Pearce William R. Pearce /s/ Melinda S. Urion Melinda S. Urion -----END PRIVACY-ENHANCED MESSAGE-----