-----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, DLC4bRz36c3HvmkRw9XjwH4cSyvdrn4FWIFSrQhGYp93YuzAn/lW68x9e01RD1mI +5AmMdqzIS5pFTqWFd5LpQ== 0000820027-98-000036.txt : 19980129 0000820027-98-000036.hdr.sgml : 19980129 ACCESSION NUMBER: 0000820027-98-000036 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980128 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS SELECTIVE FUND INC CENTRAL INDEX KEY: 0000052407 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-00499 FILM NUMBER: 98514942 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 N-30D 1 1997 SEMIANNUAL REPORT IDS Selective Fund (icon of) skyline The goals of IDS Selective Fund, Inc. are current income and the preservation of capital by investing in investment grade bonds. American Express Financial Advisors Distributed by American Express Financial Advisors Inc. (icon of) skyline A quest for quality Not all bonds are created equal. A bond's quality depends on the ability of its issuers to make the interest and principal payments owed to the bondholders. The quality is determined by independent rating agencies, which assign a credit rating (in the form of a letter grade) to each bond. Since its establishment in 1945, Selective Fund has concentrated its investments in the four highest investment grades. Along the way, investors have enjoyed a steady stream of interest income with minimum risk to their principal. Contents From the chairman 3 From the portfolio manager 3 The Portfolio's ten largest holdings 5 Financial statements (Fund) 6 Notes to financial statements (Fund) 9 Financial statements (Portfolio) 16 Notes to financial statements (Portfolio) 19 Investments in securities 28 Board members and officers 35 IDS mutual funds 36 To our shareholders From the chairman If you're an experienced investor, you know that the past few years have been unusually strong in many financial markets. Perhaps just as important, history shows that bull markets don't last forever. Though they're often unpredictable, declines -- whether they're brief or long lasting, moderate or substantial -- are always a possibility. We saw evidence of that in late October, when declines in certain Asian markets spawned a sharp drop in several financial markets worldwide, including the U.S. That fact reinforces the need for investors to periodically review their long term goals and examine whether their investment program remains on track to achieving them. Your quarterly investment statements are one part of that monitoring process. The other is a meeting with your American Express financial advisor. That becomes even more important if there's a major change in your financial situation or in the financial markets. William R. Pearce (picture of) William R. Pearce William R. Pearce Chairman of the board From the portfolio manager The first half of the fiscal year was a rewarding period for IDS Selective Fund, as a favorable investment environment resulted in a strong rally by the U.S. bond market. For the six months -- June through November 1997 -- the Fund's Class A shares generated a total return, which includes net asset value change and dividends, of 6.3%. Despite a continuation of solid economic growth and declining unemployment, two factors that often put upward pressure on consumer prices, inflation remained quite tame throughout the period. That fact, combined with appreciation in the dollar's value versus major foreign currencies and an ongoing decline in the federal deficit, persuaded the Federal Reserve to hold off on raising short term interest rates. Rates down, bonds up Against that positive backdrop, long term interest rates declined, driving up U.S. bond values through July. Fear of potentially higher inflation temporarily resurfaced in August, causing rates to rise and bonds to retreat. But additional low inflation reports soon calmed investors' nerves and led to lower rates and a healthy rebound by the market during the fall months. The Fund's two largest areas of investment -- U.S. government and corporate bonds -- performed well during the six months. This was especially true of its long term Treasury bonds, whose values are highly sensitive to interest rate fluctuations. Holdings among mortgage backed bonds also performed positively, but contributed more to the Fund's dividend than its net asset value gain. Longer duration As for changes to the portfolio, to take advantage of the interest rate decline, I lengthened its duration. (A function of the average maturity of the bonds in the portfolio, duration determines how sensitive the Fund's net asset value is to interest rate changes. The longer the duration, the greater the sensitivity.) Therefore, when rates came down, the Fund responded quite positively. I also reduced the portfolio's cash reserves, putting the proceeds into bonds, which provided a far better return. At this writing (mid December), I think the investment outlook is still quite favorable, based on these expectations: Last fall's financial crisis in Asia will detract slightly from U.S. economic growth; the U.S. dollar will remain strong; and the federal deficit will continue to decline. Assuming they play out as I anticipate, those factors should help keep a lid on inflation and, thus, long term interest rates. Ultimately, that would bode well for bonds. Ray Goodner (picture of) Ray Goodner Ray Goodner Portfolio Manager To our shareholders Class A 6 month performance (All figures per share) Net asset value (NAV) Nov. 30, 1997 $ 9.27 May 31, 1997 $ 9.00 Increase $ 0.27 Distributions June 1, 1997 Nov. 30, 1997 From income $ 0.28 From capital gains $ -- Total distributions $ 0.28 Total return* +6.3%** Class B 6 month performance (All figures per share) Net asset value (NAV) Nov. 30, 1997 $ 9.27 May 31, 1997 $ 9.00 Increase $ 0.27 Distributions June 1, 1997 Nov. 30, 1997 From income $ 0.25 From capital gains $ -- Total distributions $ 0.25 Total return* +5.9%** Class Y 6 month performance (All figures per share) Net asset value (NAV) Nov. 30, 1997 $ 9.27 May 31, 1997 $ 9.00 Increase $ 0.27 Distributions June 1, 1997 Nov. 30, 1997 From income $ 0.29 From capital gains $ -- Total distributions $ 0.29 Total return* +6.3%** *The prospectus discusses the effect of sales charges, if any, on the various classes. **The total return is a hypothetical investment in the Fund with all distributions reinvested. The Portfolio's ten largest holdings Percent Value (of Portfolio's net assets) (as of Nov 30, 1997) Japan Finance 1.64% $26,646,239 9.25% 1998 Republic of Italy 1.47 23,807,840 6.875% 2023 Dayton Hudson 1.22 19,758,193 7.875% 2023 PDV America 1.05 17,061,165 7.875% 2003 Pacific Bell 1.01 16,320,750 8.50% 2031 New York Telephone .99 16,013,200 9.375% 2031 SAFECO Capital Trust I .96 15,590,400 8.07% 2037 Texas Utilities Electric .92 14,886,170 9.75% 2021 Daimler Benz North America .92 14,884,940 7.375% 2006 General Motors Acceptance .90 14,540,240 7.00% 2000 Excludes U.S. Treasury and government agencies holdings. (icon of) pie chart The ten holdings listed here make up 11.08% of the Portfolio's net assets
Financial statements Statement of assets and liabilities IDS Selective Fund, Inc. Nov. 30, 1997 Assets (Unaudited) Investments in Quality Income Portfolio (Note 1) $ 1,619,633,138 -------------- Total assets 1,619,633,138 ------------- Liabilities Dividends payable to shareholders 797,795 Accrued distribution fee 5,620 Accrued service fee 14,658 Accrued transfer agency fee 2,217 Accrued administrative services fee 4,266 Other accrued expenses 223,078 ------- Total liabilities 1,047,634 --------- Net assets applicable to outstanding capital stock $ 1,618,585,504 ============== Represented by Capital stock-- $.01 par value (Note 1) $ 1,746,018 Additional paid in capital 1,529,357,625 Undistributed net investment income 1,694,177 Accumulated net realized gain (loss) 286,993 Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 85,500,691 ---------- Total-- representing net assets applicable to outstanding capital stock $ 1,618,585,504 ============== Net assets applicable to outstanding shares: Class A $ 1,271,925,745 Class B $ 136,855,030 Class Y $ 209,804,729 Net asset value per share of outstanding capital stock: Class A shares 137,207,039 $ 9.27 Class B shares 14,763,388 $ 9.27 Class Y shares 22,631,419 $ 9.27 See accompanying notes to financial statements.
Statement of operations IDS Selective Fund, Inc. Six months ended Nov. 30, 1997 Investment income (Unaudited) Income: Dividends $ 403,599 Interest 56,540,250 ---------- Total income 56,943,849 ---------- Expenses (Note 2): Expenses allocated from Quality Income Portfolio 4,232,472 Distribution fee -- Class B 492,611 Transfer agency fee 881,481 Incremental transfer agency fee-- Class B 4,970 Service fee Class A 1,095,898 Class B 113,874 Class Y 102,992 Administrative services fees and expenses 392,762 Compensation of board members 5,102 Postage43,173 Registration fees 18,124 Audit fees 5,000 ----- Total expenses 7,388,459 Earnings credits on cash balances (Note 2) (167,767) -------- Total net expenses 7,220,692 --------- Investment income (loss)-- net 49,723,157 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 2,060,505 Financial futures contracts (10,396,601) ----------- Net realized gain (loss) on investments (8,336,096) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 57,044,387 ---------- Net gain (loss) on investments and foreign currencies 48,708,291 ---------- Net increase (decrease) in net assets resulting from operations $98,431,448 =========== See accompanying notes to financial statements.
Financial statements Statements of changes in net assets IDS Selective Fund, Inc. Operations and distributions Nov. 30, 1997 May 31, 1997 Six months ended Year ended (Unaudited) Investment income (loss)-- net $ 49,723,157 $108,022,381 Net realized gain (loss) on investments (8,336,096) 8,252,506 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 57,044,387 14,747,409 ---------- ---------- Net increase (decrease) in net assets resulting from operations 98,431,448 131,022,296 ---------- ----------- Distributions to shareholders from: Net investment income Class A (40,018,374) (86,883,047) Class B (3,607,084) (6,790,893) Class Y (6,519,090) (13,088,145) Net realized gain Class A -- (18,740,975) Class B -- (1,704,126) Class Y -- (2,683,689) ---------- Total distributions (50,144,548) (129,890,875) ----------- ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 47,218,017 109,563,336 Class B shares 22,755,374 56,179,031 Class Y shares 33,589,811 62,930,942 Reinvestment of distributions at net asset value Class A shares 29,372,760 80,162,783 Class B shares 3,240,958 7,801,079 Class Y shares 6,489,685 15,771,834 Payments for redemptions Class A shares (128,918,452) (313,351,499) Class B shares (Note 2) (19,495,722) (45,413,567) Class Y shares (38,156,384) (89,223,917) ----------- ----------- Increase (decrease) in net assets from capital share transactions (43,903,953) (115,579,978) ----------- ------------ Total increase (decrease) in net assets 4,382,947 (114,448,557) Net assets at beginning of period 1,614,202,557 1,728,651,114 ------------- ------------- Net assets at end of period $1,618,585,504 $1,614,202,557 ============== ============== Undistributed net investment income $ 1,694,177 $ 2,115,568 ----------------- ----------------- See accompanying notes to financial statements.
Notes to financial statements IDS Selective Fund, Inc. (Unaudited as to Nov. 30, 1997) 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 shares during the ninth calendar year of ownership. Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend, liquidation and other rights, and the same terms and conditions, except that the level of distribution fee, transfer agency fee and service fee (class specific expenses) differs among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Quality Income Portfolio Effective June 10, 1996, the Fund began investing all of its assets in the Quality Income Portfolio (the Portfolio), a series of Income Trust, an open end investment company that has the same objectives as the Fund. This was accomplished by transferring the Fund's assets to the Portfolio in return for a proportionate ownership interest in the Portfolio. Quality Income Portfolio invests primarily in investment grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the net assets of the Portfolio. The percentage of the Portfolio owned by the Fund at Nov. 30, 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. 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, organizational expenses and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 Also effective March 20, 1995, the Fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder servicing related services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares for distribution related services. Under a Shareholder Service Agreement, the Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of the Fund's average daily net assets attributable to Class A and Class B shares and commencing on May 9, 1997 the fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by American Express Financial Advisors Inc. for distributing Fund shares were $953,356 for Class A and $77,193 for Class B for the six months ended Nov. 30, 1997. During the six months ended Nov. 30, 1997, the Fund's transfer agency fees were reduced by $167,767 as a result of earnings credits from overnight cash balances. 3 Capital share transactions Transactions in shares of capital stock for the periods indicated are as follows: Six months ended Nov. 30, 1997 Class A Class B Class Y Sold 5,141,530 2,480,732 3,657,557 Issued for reinvested 3,200,706 353,125 707,066 distributions Redeemed (14,042,158) (2,125,554) (4,159,544) ----------- ---------- ---------- Net increase (decrease) (5,699,922) 708,303 205,079 ---------- ------- ------- Year ended May 31, 1997 Class A Class B Class Y Sold 12,079,376 6,192,646 6,955,369 Issued for reinvested 8,846,036 861,304 1,745,311 distributions Redeemed (34,561,749) (5,015,499) (9,855,527) ----------- ---------- ---------- Net increase (decrease) (13,636,337) 2,038,451 (1,154,847) ----------- --------- ----------
4. Financial highlights The tables below show certain important financial information for evaluatiing the Fund's results. Fiscal period ended May 31, Per share income and capital changes(a) Class A 1997(c) 1997 1996(b) 1995 1994 1993 1992 1991 1990 1989 1988 Net asset value, $9.00 $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 $8.27 beginning of period Income from investment operations: Net investment income (loss) .28 .59 .33 .59 .60 .63 .66 .69 .70 .72 .74 Net gains (losses) .27 .12 (.52) 1.08 (1.05) .69 .27 .52 (.30) .27 .17 (both realized and unrealized) Total from investment .55 .71 (.19) 1.67 (.45) 1.32 .93 1.21 .40 .99 .91 operations Less distributions: Dividends from net (.28) (.58) (.31) (.58) (.60) (.64) (.66) (.69) (.68) (.74) (.74) investment income Distributions from -- (.13) (.03) (.13) (.15) (.11) -- -- -- -- -- realized gains Total distributions (.28) (.71) (.34) (.71) (.75) (.75) (.66) (.69) (.68) (.74) (.74) Net asset value, $9.27 $9.00 $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 end of period Ratios/supplemental data Class A 1997(c) 1997 1996(b) 1995 1994 1993 1992 1991 1990 1989 1988 Net assets, end of period $1,272 $1,286 1,408 $1,490 $1,402 $1,737 $1,541 $1,403 $1,196 $1,167 $1,081 (in millions) Ratio of expenses to .86%(e) .88% .89%(e) .85% .72% .72% .74% .77% .76% .77% .74% average daily net assetsd Ratio of net income (loss) 6.20%(e) 6.36% 6.27%(e) 6.59% 6.53% 6.57% 7.32% 7.94% 8.58% 8.42% 8.67% to average daily net assets Portfolio turnover rate 9% 31% 18% 26% 30% 30% 62% 59% 54% 79% 86% (excluding short-term securities) Total return(f) 6.3% 8.1% (2.0%) 20.3% (4.7%) 14.8% 10.8% 15.0% 4.8% 12.3% 11.3% (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. (c) Six months ended Nov. 30, 1997 (Unaudited). (d) Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balabces. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge.
Financial highlights Fiscal period ended May 31, Per share income and capital changes(a) Class B Class Y 1997(c) 1997 1996(b) 1995(e) 1997(c) 1997 1996(b) 1995(e) Net asset value, $9.00 $9.00 $9.53 $8.78 $9.00 $9.00 $9.53 $8.78 beginning of period Income from investment operations: Net investment income .25 .52 .30 .40 .29 .60 .34 .46 (loss) Net gains (losses) both .27 .12 (.52) .75 .27 .12 (.52) .75 realized and unrealized) Total from investment .52 .64 (.22) 1.15 .56 .72 (.18) 1.21 operations Less distributions: Dividends from net (.25) (.51) (.28) (.40) (.29) (.59) (.32) (.46) investment income Distributions from -- (.13) (.03) -- -- (.13) (.03) -- realized gains Total distributions (.25) (.64) (.31) (.40) (.29) (.72) (.35) (.46) Net asset value, $9.27 $9.00 $9.00 $9.53 $9.27 $9.00 $9.00 $9.53 end of period Ratios/supplemental data 1997(c) 1997 1996(b) 1995(e) 1997(c) 1997 1996(b) 1995(e) Class B Class Y Net assets, end of $137 $126 $108 $72 $210 $202 $212 $142 period (in millions) Ratio of expenses to 1.62%(f) 1.64% 1.63%(f)1.67%(f) .79%(f) .72% .70%(f) .73%(f) average daily net assets(d) Ratio of net income 5.45%(f) 6.40% 5.56%(f)5.68%(f) 6.28%(f) 7.02% 6.51%(f) 6.64%(f) (loss) to average daily net assets Portfolio turnover rate 9% 31% 18% 26% 9% 31% 18% 26% (excluding short-term securities) Total return(g) 5.9% 7.3% (2.4%) 13.1% 6.3% 8.3% (2.0%) 13.8% (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) Six months ended Nov. 30, 1997 (Unaudited). (d) Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) Inception date was March 20, 1995. f Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge.
Financial statements Statement of assets and liabilities Quality Income Portfolio Nov. 30, 1997 Assets (Unaudited) Investments in securities, at value (Note 1) (identified cost $ 1,530,823,220) $1,616,509,179 Cash in bank on demand deposit 82,529 Accrued interest receivable 22,470,641 U.S. government securities held as collateral (Note 4) 69,880,900 ---------- Total assets 1,708,943,249 ------------- Liabilities Payable for investment securities purchased 47,500 Payable upon return of securities loaned (Note 4) 88,558,400 Accrued investment management services fee 45,323 Other accrued expenses 28,416 ------ Total liabilities 88,679,639 ---------- Net assets applicable to outstanding capital stock $1,620,263,610 ============== See accompanying notes to financial statements.
Statement of operations Quality Income Portfolio Six months ended Nov. 30, 1997 Investment income (Unaudited) Income: Dividends $ 403,750 Interest 56,571,543 ---------- Total income 56,975,293 ---------- Expenses (Note 2): Investment management services fee 4,138,691 Compensation of board members 8,105 Custodian fees 63,161 Audit fees 14,750 Other 11,868 ------ Total expenses 4,236,575 Earnings credits on cash balances (Note 2) (2,504) ------ Total net expenses 4,234,071 --------- Investment income (loss) -- net 52,741,222 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 2,061,188 Financial futures contracts (10,400,542) ----------- Net realized gain (loss) on investments (8,339,354) Net change in unrealized appreciation (depreciation) on investments 57,065,978 ---------- Net gain (loss) on investments 48,726,624 ---------- Net increase (decrease) in net assets resulting from operations $101,467,846 ============ See accompanying notes to financial statements.
Financial statements Statements of changes in net assets Quality Income Portfolio Operations Six months ended For the period from Nov. 30, 1997 June 10, 1996* to (Unaudited) May 31, 1997 Investment income (loss)-- net $ 52,741,222 $ 112,252,618 Net realized gain (loss) on investments (8,339,354) 9,395,624 Net change in unrealized appreciation (depreciation) on investments 57,065,978 20,434,131 ---------- ---------- Net increase (decrease) in net assets resulting from operations 101,467,846 142,082,373 Net contributions (withdrawals) from partners (96,858,305) 1,473,541,696 ----------- ------------- Total increase (decrease) in net assets 4,609,541 1,615,624,069 Net assets at beginning of period (Note 1) 1,615,654,069 30,000 Net assets end of period $1,620,263,610 $1,615,654,069 ============== ============== *Commencement of operations See accompanying notes to financial statements.
Notes to financial statements Quality Income Portfolio (Unaudited as to Nov. 30, 1997) 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, 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. Debt securities are generally traded in the over the counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions In order to produce incremental earnings, protect gains and facilitate buying and selling of securities for investment purposes, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over the counter market where the completion of the obligation is dependent upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities and may write cash secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity of profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss upon expiration or closing of the option transaction. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions In order to gain exposure to or protect itself from changes in the market, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars at the closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement dates on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. Illiquid securities At Nov. 30, 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 Nov. 30, 1997 was $4,882,464 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. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. Accordingly, as a "pass through" entity, the Portfolio does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex dividend date. For U.S. dollar denominated bonds, interest income includes level yield amortization of premium and discount. For foreign bonds, except for original issue discount, the Portfolio does not amortize premium and discount. Interest income, including level yield amortization of premium and discount, is accrued daily. 2 Fees and expenses The Trust, on behalf of the Portfolio, has entered into an Investment Management Services Agreement with AEFC for managing its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio, and any other expenses properly payable by the Trust or Portfolio and approved by the board. During the six months ended Nov. 30, 1997, the Portfolio's custodian fees were reduced by $2,504 as a result of earnings credit from overnight cash balances. Pursuant to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the units of the Trust. 3 Securities transactions Cost of purchases and proceeds from sales of securities (other than short term obligations) aggregated $155,509,631 and $137,805,238, respectively, for the six months ended Nov. 30, 1997. For the same period, the portfolio turnover rate was 9%. Realized gains and losses are determined on an identified cost basis. 4 Lending of portfolio securities At Nov. 30, 1997, securities valued at $86,496,200 were on loan to brokers. For collateral, the Portfolio received $18,677,500 in cash and U.S. government securities valued at $69,880,900. Income from securities lending amounted to $52,529 for the six months ended Nov. 30, 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 Interest rate futures contracts At Nov. 30, 1997, investments in securities included securities valued at $12,317,300 that were pledged as collateral to cover initial margin deposits on 380 open sales contracts. The market value of the open contracts at Nov. 30, 1997, was $45,231,875 with a net unrealized loss of $154,375. See "Summary of significant accounting policies."
Investments in securities Quality Income Portfolio Nov. 30, 1997 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (97.2%) Issuer Coupon Maturity Principal Value(a) rate year amount U.S. government obligations (30.1%) U.S. Treasury 5.875% 2000-04 $33,000,000(b) $ 33,063,430 6.00 2000 11,400,000(b) 11,457,912 6.875 1999 60,000,000 61,032,600 7.25 2004 51,800,000(b) 55,682,372 7.50 2001-16 179,000,000(b) 196,971,130 8.00 2021 15,000,000(k) 18,475,950 Tips 3.375 2007 8,050,000(m) 8,080,986 Resolution Funding Corp Zero Coupon 7.98 2016 47,000,000(c) 14,798,420 8.19 2014 48,000,000(c) 17,629,920 8.27 2014 10,000,000(c) 3,560,500 8.94 2006 25,000,000(c) 15,503,500 8.95 2006 68,000,000(c) 40,314,480 Overseas Private Investment 6.99 2009 10,000,000 10,325,000 Total 486,896,200 Mortgage backed securities (16.2%) Collateralized Mtge Obligation Trust 7.75 2012 340,130 341,963 Federal Home Loan Mtge Corp 7.50 2024 15,781,816 16,189,145 8.00 2016-25 9,775,755 10,134,533 8.50 2017-26 21,269,325 22,246,591 9.00 2020-21 4,915,825 5,259,480 Federal Housing Admin 7.43 2024 9,005,027 9,266,736 Federal Natl Mtge Assn 6.50 2023 11,359,139 11,221,239 7.50 2027 39,141,016 39,940,658 8.00 2026-27 27,705,829 28,682,889 10.00 2002 116 121 Collateralized Mtge Obligation 8.00 2021 9,595,822 9,697,884 8.50 2019 1,448,659 1,607,724 Principal Only 9.50 2018 1,007,211(e) 792,691 9.89 2020 1,835,820(e) 1,668,465 Trust Series Z 6.00 2024 21,277,554(d) 18,359,550 Govt Natl Mtge Assn 7.50 2026 19,815,015 20,247,378 8.00 2022-26 39,031,411 40,521,772 8.50 2026 16,878,989 17,702,684 9.00 2024-25 5,282,405 5,671,666 Prudential Bache Collateralized Mtge Obligation 7.965 2019 3,349,400 3,466,389 Total 263,019,558 Automotive & related (1.4%) Daimler Benz North America Medium term Nts 7.375 2006 14,000,000 14,884,940 General Motors 8.875 2003 7,050,000 7,845,240 Total 22,730,180 Banks and savings & loans (5.4%) BankAmerica Series B 7.70 2026 5,000,000(g) 5,057,750 BankBoston Capital Trust Company Guaranty Series B 8.25 2026 5,000,000 5,311,000 First Bank System 6.875 2007 8,550,000 8,691,673 First Chicago Sr Nts 9.00 1999 7,900,000 8,216,158 Firstar Capital Trust 8.32 2026 10,000,000 10,838,200 Morgan (JP) Medium term Nts 4.00 2012 9,350,000(i) 9,042,103 NationsBank 9.25 2001 8,950,000 9,816,181 NCNB Sub Nts 9.125 2001 10,000,000 10,969,100 Swiss Bank Sub Deb 7.75 2026 11,369,000 12,534,664 Washington Mutual Capital I Company Guaranty 8.375 2027 5,800,000(g) 6,218,006 Total 86,694,835 Chemicals (1.5%) Dow Chemical 8.85 2021 10,000,000 12,234,100 USA Waste Services Sr Nts 7.125 2007 11,900,000 12,249,622 Total 24,483,722 Communications equipment & services (0.6%) BellSouth Telecommunications 7.00 2095 10,000,000 10,248,400 Computers & office equipment (0.3%) Hewlett Packard Zero Coupon 3.125 2017 10,000,000(c,g) 5,187,500 Electronics (0.3%) Harris 10.375 2018 3,900,000 4,241,718 Energy (2.5%) PDV America 7.875 2003 16,500,000 17,061,165 Texaco Capital Gtd Deb 7.50 2043 12,000,000 12,834,480 USX 9.375 2022 9,200,000 11,423,088 Total 41,318,733 Energy equipment & services (0.4%) Foster Wheeler 6.75 2005 5,850,000 5,899,725 Financial services (4.4%) Aristar Sr Deb 8.875 1998 10,520,000 10,705,994 Beneficial 9.125 1998 10,000,000 10,063,800 General Motors Acceptance Medium Term Nts 5.95 1998 8,000,000 8,011,360 General Motors Acceptance 7.00 2000 14,300,000 14,540,240 Greyhound Financial Medium Term Nts 7.95 1999 9,600,000 9,861,504 Railcar Leasing Sr Nts 7.125 2000 12,150,000(g) 12,643,776 Salomon 7.75 2000 5,000,000 5,165,400 Total 70,992,074 Health care (0.8%) Lilly (Eli) 6.77 2036 13,300,000 13,463,457 Industrial equipment & services (1.3%) Browning Ferris Inds 9.25 2021 7,000,000 8,761,620 Deere & Co 8.95 2019 10,000,000 11,875,300 Total 20,636,920 Insurance (4.5%) American United Life 7.75 2026 4,800,000(l) 4,882,464 Arkwright Trust 9.625 2026 4,000,000(g) 4,767,520 Berkley (WR) 8.70 2022 10,000,000 11,728,600 Conseco Financing Trust II Company Guaranty 8.70 2026 6,600,000 7,204,890 Equitable Life Assurance 7.70 2015 5,000,000(g) 5,333,700 Nationwide Trust 9.875 2025 11,500,000(g) 13,511,120 SAFECO Capital Trust I Company Guaranty 8.07 2037 15,000,000(g) 15,590,400 SunAmerica 9.95 2012 8,000,000 10,224,080 Total 73,242,774 Media (0.8%) Time Warner Entertainment 8.375 2033 12,000,000 13,460,520 Retail (2.6%) Dayton Hudson 7.875 2023 18,850,000 19,758,193 Rite Aid 5.25 2002 9,000,000 10,125,000 Wal Mart CRAVE Trust 7.00 2006 11,211,435(g) 11,457,862 Total 41,341,055 Transportation (0.6%) Burlington Northern Santa Fe 7.00 2025 10,000,000 10,024,000 Utilities -- electric (5.0%) Arizona Public Service Sale Lease Backed Obligation 8.00 2015 9,000,000 9,697,500 Cajun Electric Power Mtge Trust 8.92 2019 4,960,000 5,390,974 Commonwealth Edison 1st Mtge Series 90 6.50 2000 9,000,000 9,051,750 Long Island Lighting 9.625 2024 7,000,000 7,227,500 Long Island Lighting 8.625 2004 3,000,000 3,197,520 RGS Funding Sale Lease Backed Obligation 9.82 2022 4,969,237 6,371,357 RGS Funding I & M Sale Lease Back Obligation 9.82 2022 4,969,232 6,371,351 Salton Sea Cl C 7.84 2010 10,000,000 10,648,800 Texas Utilities Electric 1st Mtge 9.75 2021 13,000,000 14,886,170 Wisconsin Electric Power 6.875 1995 8,000,000 7,994,080 Total 80,837,002 Utilities -- telephone (2.8%) AT&T 8.35 2025 5,000,000 5,451,900 GTE 10.25 2020 6,050,000 6,817,080 New York Telephone 9.375 2031 14,000,000 16,013,200 Pacific Bell 8.50 2031 15,000,000 16,320,750 Total 44,602,930 Foreign (15.7%)(h) ABN Amro Bank (U.S. Dollar) 7.75 2023 12,000,000 12,867,240 Alcan Aluminum (U.S. Dollar) 8.875 2022 9,600,000 10,471,392 BAA PLC (British Pound) 9.36 2006 1,500,000 2,691,306 Banco General (U.S. Dollar) 7.70 2002 6,400,000(g) 6,305,728 Bank of China (U.S. Dollar) 8.25 2014 7,100,000 7,187,543 Bayerische Landesbank (U.S. Dollar) Deposit Nts 5.625 2001 13,750,000 13,582,938 Dao Heng Bank (U.S. Dollar) Sub Nts 7.75 2007 7,000,000(g) 6,518,820 Deutsche Bank (U.S. Dollar) Zero Coupon 4.50 2017 6,510,000(c,g) 2,905,087 Gruma (U.S. Dollar) 7.625 2007 2,000,000(g) 1,940,000 Guangdong Enterprises (U.S. Dollar) Sr Nts 8.875 2007 5,800,000(g) 5,507,506 Hutchinson Whampoa (U.S. Dollar) 7.50 2027 14,025,000(g) 13,261,900 Hyundai Semiconductor (U.S. Dollar) Sr Nts 8.625 2007 10,800,000(g) 10,123,272 Israel Electric (U.S. Dollar) 7.875 2026 9,000,000(g) 9,305,730 Japan Finance (U.S. Dollar) 9.25 1998 25,950,000 26,646,239 Jasmine Submarine Telecom (U.S. Dollar) 8.48 2011 5,000,000(g) 4,312,050 KFW Intl Finance (U.S. Dollar) Medium Term Nts 8.50 1999 10,000,000 10,457,300 Korea Development Bank (U.S. Dollar) 7.25 2006 4,600,000 4,214,014 Korea Electric Power (U.S. Dollar) 8.00 2002 9,000,000 8,628,120 Korea Electric Power (U.S. Dollar) Zero Coupon 9.27 2016 35,000,000(f) 4,783,100 People's Republic of China (U.S. Dollar) 9.00 2096 10,000,000 10,611,300 Perez (U.S. Dollar) 8.125 2007 5,000,000(g) 4,800,000 Petronas (U.S. Dollar) 7.75 2015 10,000,000 9,554,800 Ras Laffan Gas (U.S. Dollar) 8.29 2014 10,000,000(g) 10,618,900 Republic of Austria Euro (U.S. Dollar) 10.00 1998 3,150,000 3,218,906 Republic of Italy (U.S. Dollar) 6.875 2023 23,200,000 23,807,840 Rodamco NV (U.S. Dollar) 7.30 2005 10,000,000 10,544,300 State of Israel (U.S. Dollar) 6.375 2005 10,800,000 10,687,572 Telekom Malaysia (U.S. Dollar) 7.875 2025 10,000,000(g) 9,457,800 Total 255,010,703 Total bonds (Cost: $1,489,411,047) $1,574,332,006 Preferred stock (0.6%) Issuer Shares Value(a) Salomon Income Financing Trust 9.50% 340,000 $9,265,000 Total preferred stock (Cost: $8,500,000) $9,265,000 Short term securities (2.0%) Issuer Annualized Amount Value(a) yield on payable at date of maturity purchase U.S. government agencies (0.8%) Federal Home Loan Bank Disc Nt 12 17 97 5.47% $ 2,500,000 $ 2,493,200 Federal Home Loan Mtge Corp Disc Nt 12 22 97 5.52 9,800,000 9,765,564 Federal Natl Mtge Assn Disc Nt 12 11 97 5.45 1,400,000 1,397,466 Total 13,656,230 Commercial paper (1.2%) A.I. Credit 12 03 97 5.53 2,500,000 2,498,469 CAFCO 12 17 97 5.60 2,600,000(j) 2,592,746 Consolidated Natural Gas 12 18 97 5.58 1,500,000 1,495,590 May Dept Stores 12 09 97 5.56 500,000 499,231 PACCAR Financial 12 04 97 5.55 1,900,000 1,898,541 USAA Capital 12 17 97 5.58 10,300,000 10,271,366 Total 19,255,943 Total short term securities (Cost: $32,912,173) $ 32,912,173 Total investment in securities (Cost: $1,530,823,220)(n) $1,616,509,179 ============== 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 aquisition. (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 yeild; 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 aquisition to interest reset date disclosed. (g) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (h) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 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 5 to the financial statements): Type of security Notional amount Sales contracts U.S Treasury Bonds $380,000,000 (l) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Nov. 30, 1997, is as follows: Security Acquisition Cost date American United Life* 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. (m) U.S. Treasury inflation protection securities (TIPS) are securities in which the principal amount is adjusted for inflation and the semi annual interest payments equal a fixed percentage of the inflation adjusted principal amount. (n) At Nov. 30, 1997, the cost of securities for federal income tax purposes was approximately $1,530,769,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation.........................................$91,265,000 Unrealized depreciation..........................................(5,525,000) Net unrealized appreciation.....................................$85,740,000
Board members and officers Independent board members and officers Chairman William R. Pearce* of the board Chairman of the board, Board Services Corporation (provides administrative services to boards including the boards of the IDS and IDSLife funds and Master Trust portfolios). 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. Heinz F. Hutter Former president and chief operating officer, Cargill, Inc. Anne P. Jones Attorney and telecommunications consultant. Alan K. Simpson Former United States senator for Wyoming. Edson W. Spencer Former chairman and chief executive officer, Honeywell, Inc. Wheelock Whitney Chairman, Whitney Management Company. C. Angus Wurtele Chairman of the board, The Valspar Corporation. Officer Vice president, Leslie L. Ogg* general counsel President, treasurer and corporate secretary of Board Services and secretary Corporation. Board members and officers associated with AEFC President John R. Thomas* Senior vice president, AEFC. William H. Dudley* Senior advisor to the chief executive officer, AEFC. David R. Hubers* President and chief executive officer, AEFC. Officers associated with AEFC Vice president Peter J. Anderson* Senior vice president, AEFC Treasurer Matthew N. Karstetter* Vice president, AEFC * Interested person as defined by the Investment Company Act of 1940. IDS mutual funds Global/International funds Funds in this group seek capital growth and/or income by investing primarily in foreign securities. Foreign investments may be subject to currency fluctuations and political and economic risks of the countries in which the investments are made. They are high risk mutual funds with a potential for high reward. IDS Emerging Markets Fund Invests in a Portfolio comprised primarily of stocks of companies in developing countries throughout the world that are believed to offer growth potential. Seeks to provide long-term growth of capital. (icon of) world with countries IDS Global Growth Fund Invests in a Portfolio comprised primarily of stocks of companies throughout the world that are positioned to meet market needs in a changing world economy. These companies offer above-average potential for long-term growth. (icon of) world IDS International Fund Invests primarily in common stocks of foreign companies that offer potential for superior growth. The Fund may invest up to 20% of its assets in the U.S. market. (icon of) three flags IDS Global Balanced Fund Invests in stocks and bonds in, for the most part, major markets throughout the world, including the U.S. Seeks to provide a balance of growth of capital and current income. (icon of) scale of globes IDS Global Bond Fund Invests in a Portfolio comprised primarily of debt securities of U.S. and foreign issuers to seek high total return through income and growth of capital. (icon of) globe Growth funds Funds in this group seek capital growth, primarily from common stocks. They are high risk mutual funds with a potential for high reward. IDS Precious Metals Fund Invests primarily in the securities of foreign or domestic companies that explore for, mine and process or distribute gold and other precious metals. A highly aggressive and speculative fund that seeks long-term growth of capital. (icon of) cart of precious gems IDS Discovery Fund Invests in small- and medium-size, growth-oriented companies emphasizing technological innovation and productivity enhancement. Buys and holds larger growth-oriented stocks. (icon of) ship IDS Small Company Index Fund Invests in all or a representative group of the equity securities comprising the S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation. (icon of) building IDS Strategy Aggressive Fund Invests primarily in common stocks of companies that are selected for their potential for above-average growth. Above-average means that their growth potential is better, in the opinion of the portfolio's investment manager, than the Standard & Poor's Corporation (S&P) 500 Stock Index. (icon of) chess piece IDS Research Opportunities Fund Invests in a Portfolio comprised primarily of equity securities of companies included in the S&P 500 Index that are believed to have strong growth potential. The Portfolio is managed using a research methodology by the Research Department of AEFC. Goal is long-term appreciation. (icon of) magnifying glass IDS Growth Fund Invests in a Portfolio comprised primarily of companies that have above-average potential for long-term growth as a result of new management, marketing opportunities or technological superiority. (icon of) trees IDS New Dimensions Fund Invests in a Portfolio comprised primarily of companies with significant growth potential due to superiority in technology, marketing or management. The Fund frequently changes its industry mix. (icon of) dimension IDS Progressive Fund Invests primarily in undervalued common stocks. The Fund holds stocks for the long term with the goal of capital growth. (icon of) shooting star Growth & income funds These funds focus on securities of medium to large, well-established companies that offer long-term growth of capital and reasonable income from dividends and interest. Foreign investments may be subject to currency fluctuations and political and economic risks of the countries in which the investments are made. IDS Equity Select Fund Invests primarily in a combination of moderate growth stocks, higher-yielding equities and bonds. Seeks growth of capital and income. (icon of) three pine trees IDS Blue Chip Advantage Fund Invests in selected stocks from a major market index. Securities purchased are those recommended by our research analysts as the best from each industry represented on the index. Offers potential for long-term growth as well as dividend income. (icon of) ribbon IDS Managed Allocation Fund Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and foreign debt securities, foreign equity securities and money market instruments. The Fund provides diversification among these major investment categories and has a target mix that represents the way the Fund's investments will be allocated over the long term. Seeks maximum total return. (icon of) gyroscope IDS Stock Fund Invests in a Portfolio comprised primarily of common stock of companies representing many sectors of the economy. Seeks current income and growth of capital. (icon of) building with columns IDS Equity Value Fund Invests primarily in undervalued common stocks that offer potential for growth of capital and income. (icon of) three growing flowers IDS Utilities Income Fund Invests primarily in the stocks of public utility companies to seek high current income and growth of income and capital with reduced volatility. (icon of) light bulb IDS Diversified Equity Income Fund Invests in a Portfolio comprised primarily in high-yielding common stocks to seek high current income and, secondarily, to benefit from the growth potential offered by stock investments. (icon of) two puzzle pieces IDS Mutual Invests in a Portfolio which seeks to balance between common stocks and senior securities (preferred stocks and bonds). Seeks a balance of growth of capital and current income. (icon of) scale of justice Income funds The funds in this group invest their assets primarily in corporate bonds or government securities to seek interest income. Secondary objective is capital growth. Risk varies by bond quality. IDS Extra Income Fund Invests in a Portfolio comprised mainly of long-term, high-yielding corporate fixed-income securities in the lower rated, higher risk bond categories to seek high current income. Secondary objective is capital growth. (icon of) two coins IDS Bond Fund Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk bond categories, or the equivalent, and in government bonds. (icon of) Greek column IDS Selective Fund Invests in a Portfolio comprised primarily of high-quality corporate bonds and other highly rated debt instruments including government securities and short-term investments. Seeks current income and preservation of capital. (icon of) skyline IDS Federal Income Fund Invests in a Portfolio comprised primarily of securities issued or guaranteed as to the timely payment of principal and interest by the U.S. government, its agencies and instrumentalities. Seeks a high level of current income and safety of principal consistent with its type of investments. (icon of) shield with eagle head Tax-exempt income funds These funds provide tax-free income by investing in municipal bonds. The income is generally free from federal income tax, but a portion of the income may be subject to state and local taxes. Risk varies by bond quality. IDS Tax-Exempt Bond Fund Invests mainly in bonds and notes of state or local government units, with at least 75% in the four highest rated, lowest risk bond categories. (icon of) shield with Greek column IDS Insured Tax-Exempt Fund Invests primarily in municipal securities that are insured as to the timely payment of principal and interest. The insurance feature minimizes credit risk of the Fund but does not guarantee the market value of the Fund's shares. (icon of) shield with star IDS State Tax-Exempt Funds (CA, MA, MI, MN, NY, OH) Invests primarily in high- and medium-grade municipal securities to provide income to residents of each respective state that is exempt from federal, state and local income taxes. (New York is the only state that is exempt at the local level.) (icon of) shield with U.S. enclosed IDS High Yield Tax-Exempt Fund Invests in a Portfolio comprised primarily of medium- and lower-quality municipal bonds and notes. Lower-quality securities generally involve greater risk of principal and income. (icon of) shield with basket of apples enclosed IDS Intermediate Tax-Exempt Fund Invests in mainly investment-grade bonds and other debt securities with intermediate-term maturities issued by state and local government units. Goal is to seek a high level of current income exempt from federal taxes. (icon of) shield with tree enclosed Money market funds These money market funds have three main goals: conservation of capital, constant liquidity and the highest possible current income consistent with these objectives. An investment in these funds is neither insured nor guaranteed by the U.S. government, and there can be no assurance that these funds will be able to maintain a stable net asset value of $1.00 per share. Very limited risk. IDS Cash Management Fund Invests in such money market securities as high quality commercial paper, bankers' acceptances, certificates of deposit (CDs) and other bank securities. (icon of) piggy bank IDS Tax-Free Money Fund Invests primarily in short-term bonds and notes issued by state and local governments to seek high current income exempt from federal income taxes. (icon of) shield with piggy bank enclosed For more complete information about any of these funds, including charges and expenses, you can obtain a prospectus by contacting your financial advisor or writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534. Read it carefully before you invest or send money. Quick telephone reference American Express Redemptions and exchanges, National/Minnesota Financial Advisors dividend payments or 800-437-3133 Telephone Transaction reinvestments and automatic Service payment arrangements Mpls./St. Paul area: 671-3800 TTY Service For the hearing impaired 800-846-4852 American Express Automated account information 800-862-7919 Financial Advisors (TouchTone(R) phones only), Easy Access Line including current fund prices and performance, account values and recent account transactions AMERICAN EXPRESS Financial Advisors IDS Selective Fund IDS Tower 10 Minneapolis, MN 55440-0010 -----END PRIVACY-ENHANCED MESSAGE-----