AXP(SM) Diversified
Equity Income
Fund
2000 SEMIANNUAL REPORT
AMERICAN
EXPRESS(R)
FUNDS
AXP Diversified Equity Income Fund
seeks to provide shareholders with a
high level of current income and, as a
secondary goal, steady growth of capital.
(icon of) magnifying glass
AMERICAN
EXPRESS
(R)
<PAGE>
Dual-purpose Stocks
Some of the most successful investments over the years have been stocks that
reward investors in two ways -- through growth in the value of the share price
as well as through payment of regular dividend income. AXPDiversified Equity
Income sets its sights on stocks that can provide this double-barreled benefit.
The Fund takes advantage of opportunities across various industries, among
different types of securities and in markets throughout the world to find
investments that meet its combination growth-and-dividend requirements.
CONTENTS
From the Chairman 3
From the Portfolio Manager 3
Fund Facts 5
The 10 Largest Holdings 6
Financial Statements (Fund) 7
Notes to Financial Statements (Fund) 10
Financial Statements (Portfolio) 16
Notes to Financial Statements (Portfolio) 19
Investments in Securities 23
<PAGE>
(picture of) Arne H. Carlson
Arne Carlson
Chairman of the board
From the Chairman
The financial markets have always had their ups and downs, but in recent months
volatility has become more frequent and intense. While no one can say with
certainty what the markets will do, American Express Financial Corporation, the
Fund's investment manager, expects economic growth to continue this year,
accompanied by a modest rise in long-term interest rates. But no matter what
transpires, this is a great time to take a close look at your goals and
investments. We encourage you to:
o Consult a professional investment advisor who can help you cut through
mountains of data.
o Set financial goals that extend beyond those achievable through retirement
plans of your employer.
o Learn as much as you can about your current investments.
The portfolio manager's letter that follows provides a review of the Fund's
investment strategies and performance. The annual report contains other
valuable information as well. The Fund's prospectus describes its investment
objectives and how it intends to achieve those objectives. As experienced
investors know, information is vital to making good investment decisions.
So, take a moment and decide again whether the Fund's investment objectives and
management style fit with your other investments to help you reach your
financial goals. And make it a practice on a regular basis to assess your
investment options.
Sincerely,
Arne H. Carlson
<PAGE>
(picture of) Kurt Winters
Kurt Winters
Portfolio Manager
From the Portfolio Manager
Despite a generally poor environment for value stocks, AXP Diversified Equity
Income finished the first half of the fiscal year in strong fashion to generate
positive results for the period as a whole. For the six months -- October 1999
through March 2000 -- the total return for the Fund's Class A shares was 5.60%
(excluding the sales charge).
Arne H. Carlson Chairman of the boardKurt Winters Portfolio managerSEMIANNUAL
REPORT -- 2000The period got off to a good start, as reports of still-tame
inflation and generally good corporate profits buoyed the stock market from
October through the early days of January. While the Fund's value-stocks
orientation took a back seat to the performance of high-flying,
technology-related growth stocks, the Fund did register three straight months of
gains.
The mood of the market changed dramatically in mid-January, though, as renewed
fear of potentially higher interest rates and higher inflation began to take a
toll. Widespread selling ensued, dragging down the market through February. The
interest-rate concern worked against the Fund, as it held a number of financial
services (largely banking and insurance) and utility stocks, both of which are
sensitive to rising interest rates.
SPRING SNAPBACK
But, in another display of the remarkable resilience that has been its hallmark
in recent years, the stock market came charging back in March. Thanks to a
pickup in non-technology stocks, especially financial services issues, the Fund
rebounded sharply with a gain of more than 11% for the month to close the period
on an up note. As for other major areas of investment, the Fund's industrial
holdings generated mixed results for the period as a whole.
Changes to the portfolio were minor during the period. Most notable was a
reduction in financial services and industrial stocks, which I made in light of
the market's concern about potentially higher interest rates.
Looking back over the six months, while it was a frustrating period overall, the
Fund's strong finish offers some encouragement as the second half of the fiscal
year begins. Only time will tell, of course, but this could be an early
indication that the stock market is starting to "broaden out" -- that is, a
greater variety of stocks may participate more fully in potential market
upturns. If so, the Fund is well positioned for such a shift, as it continues to
hold a widely diversified group of stocks that have been relatively ignored in
the momentum-driven, technology-centered market of recent years.
Kurt Winters
<PAGE>
AXP DIVERSIFIED EQUITY INCOME FUNDFund Facts
Class A -- 6-month performance
(All figures per share)
Net asset value (NAV)
March 31, 2000 $9.01
Sept. 30, 1999 $9.40
Decrease $0.39
Distributions -- Oct. 1, 1999 - March 31, 2000
From income $0.14
From capital gains $0.76
Total distributions $0.90
Total return* +5.60%**
Class B -- 6-month performance
(All figures per share)
Net asset value (NAV)
March 31, 2000 $9.00
Sept. 30, 1999 $9.40
Decrease $0.40
Distributions -- Oct. 1, 1999 - March 31, 2000
From income $0.11
From capital gains $0.76
Total distributions $0.87
Total return* +5.14%**
Class Y -- 6-month performance
(All figures per share)
Net asset value (NAV)
March 31, 2000 $9.01
Sept. 30, 1999 $9.40
Decrease $0.39
Distributions -- Oct. 1, 1999 - March 31, 2000
From income $0.15
From capital gains $0.76
Total distributions $0.91
Total return* +5.67%**
*Returns do not include sales load. 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.
<PAGE>
<TABLE>
<CAPTION>
The 10 Largest Holdings
Percent Value
(of net assets) (as of March 31, 2000)
<S> <C> <C>
Citigroup 4.69% $119,289,299
American Intl Group 3.23 82,119,525
Exxon Mobil 2.95 74,950,089
Chevron 2.79 70,992,000
AT&T 2.60 66,149,999
Circuit City Stores-Circuit City Group 2.55 64,874,488
CBS 2.43 61,794,863
Target 2.19 55,614,000
Bank of America 2.01 51,095,100
Morgan Stanley, Dean Witter, Discover & Co 1.99 50,568,750
For further detail about these holdings, please refer to the section entitled
"Investments in Securities."
The 10 holdings listed here make up 27.43% of net assets
(icon of) pie chart
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<CAPTION>
Financial Statements
Statement of assets and liabilities
AXP Diversified Equity Income Fund
March 31, 2000 (Unaudited)
Assets
<S> <C> <C>
Investment in Equity Income Portfolio (Note 1) $2,541,690,478
Liabilities
Dividends payable to shareholders 316,744
Accrued distribution fee 30,024
Accrued service fee 58
Accrued transfer agency fee 10,085
Accrued administrative services fee 2,204
Other accrued expenses 375,262
-------
Total liabilities 734,377
-------
Net assets applicable to outstanding capital stock $2,540,956,101
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 2,821,479
Additional paid-in capital 2,340,094,802
Undistributed net investment income 330,964
Accumulated net realized gain (loss) (44,491,539)
Unrealized appreciation (depreciation) on investments and on translation
of assets and liabilities in foreign currencies 242,200,395
-----------
Total -- representing net assets applicable to outstanding capital stock $2,540,956,101
==============
Net assets applicable to outstanding shares: Class A $1,885,489,131
Class B $ 634,032,767
Class Y $ 21,434,203
Net asset value per share of outstanding capital stock: Class A shares 209,352,882 $ 9.01
Class B shares 70,415,279 $ 9.00
Class Y shares 2,379,764 $ 9.01
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Statement of operations
AXP Diversified Equity Income Fund
Six months ended March 31, 2000 (Unaudited)
Investment income
Income:
<S> <C>
Dividends $ 29,146,515
Interest 3,047,386
---------
Total income 32,193,901
----------
Expenses (Note 2):
Expenses allocated from Equity Income Portfolio 6,609,059
Distribution fee
Class A 2,461,969
Class B 3,240,107
Transfer agency fee 1,732,273
Incremental transfer agency fee
Class A 139,874
Class B 89,729
Service fee-- Class Y 10,664
Administrative services fees and expenses 421,465
Compensation of board members 5,224
Printing and postage 66,507
Registration fees 55,528
Audit fees 4,000
Other 1,750
-----
Total expenses 14,838,149
Earnings credits on cash balances (Note 2) (74,504)
-------
Total net expenses 14,763,645
----------
Investment income (loss) -- net 17,430,256
----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (25,538,370)
Foreign currency transactions 27,866
------
Net realized gain (loss) on investments (25,510,504)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 141,189,353
-----------
Net gain (loss) on investments and foreign currencies 115,678,849
-----------
Net increase (decrease) in net assets resulting from operations $133,109,105
============
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Statements of changes in net assets AXP
Diversified Equity Income Fund
March 31, 2000 Sept. 30, 1999
Six months ended Year ended
(Unaudited)
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 17,430,256 $ 33,575,667
Net realized gain (loss) on investments (25,510,504) 211,284,556
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 141,189,353 161,033,636
----------- -----------
Net increase (decrease) in net assets resulting from operations 133,109,105 405,893,859
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (15,810,177) (27,095,529)
Class B (3,028,222) (3,285,043)
Class Y (185,646) (714,058)
Net realized gain
Class A (172,754,684) (188,382,739)
Class B (56,896,604) (53,833,250)
Class Y (1,851,504) (8,013,205)
---------- ----------
Total distributions (250,526,837) (281,323,824)
------------ ------------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 105,384,624 239,708,503
Class B shares 75,500,376 159,748,121
Class Y shares 3,894,321 16,112,811
Reinvestment of distributions at net asset value
Class A shares 180,420,479 206,091,979
Class B shares 59,051,296 56,396,492
Class Y shares 2,037,282 8,736,974
Payments for redemptions
Class A shares (297,732,652) (386,789,771)
Class B shares (Note 2) (103,795,268) (111,644,354)
Class Y shares (4,817,376) (83,588,946)
---------- -----------
Increase (decrease) in net assets from capital share transactions 19,943,082 104,771,809
---------- -----------
Total increase (decrease) in net assets (97,474,650) 229,341,844
Net assets at beginning of period 2,638,430,751 2,409,088,907
------------- -------------
Net assets at end of period $2,540,956,101 $2,638,430,751
============== ==============
Undistributed net investment income $ 330,964 $ 1,924,753
-------------- --------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
AXP Diversified Equity Income Fund
(Unaudited as to March 31, 2000)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Investment Series, Inc. and is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Investment Series, Inc. has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the board.
The Fund offers Class A, Class B and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year of
ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differ among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.
Investment in Equity Income Portfolio
The Fund invests all of its assets in Equity Income Portfolio (the Portfolio), a
series of Growth and Income Trust (the Trust), an open-end investment company
that has the same objectives as the Fund. The Portfolio seeks to provide
shareholders with a high level of current income and, as a secondary goal,
steady growth of capital by investing primarily in dividend-paying stocks.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at the value that is equal
to the Fund's proportionate ownership interest in the Portfolio's net assets.
The percentage of the Portfolio owned by the Fund as of March 31, 2000 was
99.96%. Valuation of securities held by the Portfolio is discussed in Note 1 of
the Portfolio's "Notes to financial statements" (included elsewhere in this
report).
Use of estimates
Preparing financial statements that conform to accounting principles generally
accepted in the United States of America requires management to make estimates
(e.g., on assets and liabilities) that could differ from actual results.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to the shareholders. No provision for income or excise
taxes is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes, and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
Dividends to shareholders
Dividends from net investment income, declared daily and paid each calendar
quarter, are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
2. EXPENSES AND SALES CHARGES
In addition to the expenses allocated from the Portfolio, the Fund accrues its
own expenses as follows:
The Fund has an agreement with American Express Financial Corporation (AEFC) to
provide administrative services. Under an Administrative Services Agreement, the
Fund pays AEFC a fee for administration and accounting services at a percentage
of the Fund's average daily net assets in reducing percentages from 0.04% to
0.02% annually. A minor portion of additional administrative service expenses
paid by the Fund are consultants' fees and fund office expenses. Under this
agreement, the Fund also pays taxes, audit and certain legal fees, registration
fees for shares, compensation of board members, corporate filing fees and any
other expenses properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19
o Class B $20
o Class Y $17
The Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution, the Fund pays a distribution fee at an annual rate up
to 0.25% of the Fund's average daily net assets attributable to Class A shares
and up to 1.00% for Class B shares.
Under a Shareholder Service Agreement, the Fund's Class Y shares pay a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares.
Sales charges received by the Distributor for distributing Fund shares were
$1,876,844 for Class A and $417,236 for Class B for the six months ended March
31, 2000.
During the six months ended March 31, 2000, the Fund's transfer agency fees were
reduced by $74,504 as a result of earnings credits from overnight cash balances.
<PAGE>
<TABLE>
<CAPTION>
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended March 31, 2000
Class A Class B Class Y
<S> <C> <C> <C>
Sold 11,588,632 8,273,381 430,259
Issued for reinvested distributions 20,169,517 6,603,815 227,867
Redeemed (33,547,566) (11,746,433) (538,963)
----------- ----------- --------
Net increase (decrease) (1,789,417) 3,130,763 119,163
Year ended Sept. 30, 1999
Class A Class B Class Y
Sold 24,510,779 16,309,409 1,685,598
Issued for reinvested distributions 22,400,615 6,145,593 952,278
Redeemed (39,784,254) (11,498,308) (8,845,686)
----------- ----------- ----------
Net increase (decrease) 7,127,140 10,956,694 (6,207,810)
</TABLE>
<PAGE>
4. BANK BORROWINGS
The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund
is permitted to have bank borrowings for temporary or emergency purposes to fund
shareholder redemptions. The Fund must have asset coverage for borrowings not to
exceed the aggregate of 333% of advances equal to or less than five business
days plus 367% of advances over five business days. The agreement, which enables
the Fund to participate with other American Express mutual funds, permits
borrowings up to $200 million, collectively. Interest is charged to each Fund
based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or
the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to
90 days after such loan is executed. The Fund also pays a commitment fee equal
to its pro rata share of the amount of the credit facility at a rate of 0.05%
per annum. The Fund had no borrowings outstanding during the six months ended
March 31, 2000.
<TABLE>
<CAPTION>
5. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Fiscal period ended Sept. 30,
Per share income and capital changesa
Class A
2000b 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.40 $8.96 $10.39 $8.96 $7.89
Income from investment operations:
Net investment income (loss) .07 .14 .23 .34 .27
Net gains (losses) (both realized and unrealized) .44 1.37 (.43) 2.04 1.06
Total from investment operations .51 1.51 (.20) 2.38 1.33
Less distributions:
Dividends from net investment income (.07) (.13) (.23) (.33) (.26)
Distributions from realized gains (.83) (.94) (1.00) (.62) --
Total distributions (.90) (1.07) (1.23) (.95) (.26)
Net asset value, end of period $9.01 $9.40 $8.96 $10.39 $8.96
Ratios/supplemental data
Net assets, end of period (in millions) $1,885 $1,985 $1,828 $1,789 $1,292
Ratio of expenses to average daily net assetsc .94%e .89% .86% .88% .93%
Ratio of net investment income (loss)
to average daily net assets 1.51%e 1.41% 2.27% 3.62% 3.18%
Portfolio turnover rate
(excluding short-term securities) 10% 84% 97% 81% 84%
Total returnd 5.60% 17.18% (2.17%) 28.11% 17.00%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Six months ended March 31, 2000 (Unaudited).
c Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
d Total return does not reflect payment of a sales charge.
e Adjusted to an annual basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal period ended Sept. 30,
Per share income and capital changesa
Class B Class Y
2000b 1999 1998 1997 1996 2000b 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.40 $8.96 $10.39 $8.96 $7.89 $9.40 $8.96 $10.40 $8.96 $7.89
Income from investment operations:
Net investment income (loss) .04 .06 .15 .27 .20 .07 .15 .24 .35 .28
Net gains (losses)
both realized and unrealized) .43 1.38 (.42) 2.04 1.06 .45 1.37 (.44) 2.05 1.06
Total from investment operations .47 1.44 (.27) 2.31 1.26 .52 1.52 (.20) 2.40 1.34
Less distributions:
Dividends from net investment income (.04) (.06) (.16) (.26) (.19) (.08) (.14) (.24) (.34) (.27)
Distributions from realized gains (.83) (.94) (1.00) (.62) -- (.83) (.94) (1.00) (.62) --
Total distributions (.87) (1.00) (1.16) (.88) (.19) (.91) (1.08) (1.24) (.96) (.27)
Net asset value, end of period $9.00 $9.40 $8.96 $10.39 $8.96 $9.01 $9.40 $8.96 $10.40 $8.96
Ratios/supplemental data
Net assets, end of period (in millions) $634 $633 $505 $350 $125 $21 $21 $76 $79 $37
Ratio of expenses to
average daily
net assetsc 1.70%e 1.66% 1.62% 1.65% 1.69% .77%e .78% .78% .76% .76%
Ratio of net investment
income (loss) to average
daily net assets .74%e .63% 1.48% 2.97% 2.56% 1.66%e 1.58% 2.34% 3.85% 3.38%
Portfolio turnover rate
(excluding short-term securities) 10% 84% 97% 81% 84% 10% 84% 97% 81% 84%
Total returnd 5.14% 16.30% (2.91%) 27.16% 16.21% 5.67% 17.30% (2.11%) 28.29% 17.27%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Six months ended March 31, 2000 (Unaudited).
c Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
d Total return does not reflect payment of a sales charge.
e Adjusted to an annual basis.
</TABLE>
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<TABLE>
<CAPTION>
Financial Statements
Statement of assets and liabilities
Equity Income Portfolio
March 31, 2000 (Unaudited)
Assets
Investments in securities, at value (Note 1)
<S> <C> <C>
(identified cost $2,260,983,399) $2,503,281,204
Cash in bank on demand deposit 89,604
Dividends and accrued interest receivable 2,898,464
Receivable for investment securities sold 43,238,906
----------
Total assets 2,549,508,178
Liabilities
Payable for investment securities purchased 963,962
Payable upon return of securities loaned (Note 4) 5,625,000
Accrued investment management services fee 33,837
Other accrued expenses 157,433
-------
Total liabilities 6,780,232
---------
Net assets applicable to outstanding capital stock $2,542,727,946
==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
Equity Income Portfolio
Six months ended March 31, 2000 (Unaudited)
Investment income
Income:
<S> <C>
Dividends $ 29,157,811
Interest 3,027,267
---------
Total income 32,185,078
Expenses (Note 2):
Investment management services fee 6,480,583
Compensation of board members 6,648
Custodian fees 85,269
Audit fees 12,000
Other 29,781
------
Total expenses 6,614,281
Earnings credits on cash balances (Note 2) (2,656)
------
Total net expenses 6,611,625
---------
Investment income (loss) -- net 25,573,453
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (25,550,866)
Foreign currency transactions 27,875
------
Net realized gain (loss) on investments (25,522,991)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 141,249,651
-----------
Net gain (loss) on investments and foreign currencies 115,726,660
-----------
Net increase (decrease) in net assets resulting from operations $141,300,113
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Equity Income Portfolio
March 31, 2000 Sept. 30, 1999
Six months ended Year ended
(Undaudited)
Operations
<S> <C> <C>
Investment income (loss)-- net $ 25,573,453 $ 48,741,010
Net realized gain (loss) on investments (25,522,991) 211,365,708
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 141,249,651 161,093,888
----------- -----------
Net increase (decrease) in net assets resulting from operations 141,300,113 421,200,606
Net contributions (withdrawals) from partners (238,751,522) (191,699,690)
------------ ------------
Total increase (decrease) in net assets (97,451,409) 229,500,916
Net assets at beginning of period 2,640,179,355 2,410,678,439
------------- -------------
Net assets at end of period $2,542,727,946 $2,640,179,355
============== ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
Equity Income Portfolio
(Unaudited as to March 31, 2000)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Equity Income Portfolio (the Portfolio) is a series of Growth and Income Trust
(the Trust) and is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. Equity Income
Portfolio seeks to provide a high level of current income and, as a secondary
goal, steady growth of capital by investing primarily in dividend-paying stocks.
The Declaration of Trust permits the Trustees to issue non-transferable
interests in the Portfolio.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to accounting principles generally
accepted in the United States of America requires management to make estimates
(e.g., on assets and liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and write options traded on
any U.S. or foreign exchange or in the over-the-counter market where completing
the obligation depends upon the credit standing of the other party. The
Portfolio also may buy and sell put and call options and write covered call
options on portfolio securities as well as write cash-secured put options. The
risk in writing a call option is that the Portfolio gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Portfolio may incur a loss if the market price of the
security decreases and the option is exercised. The risk in buying an option is
that the Portfolio pays a premium whether or not the option is exercised. The
Portfolio also has the additional risk of being unable to enter into a closing
transaction if a liquid secondary market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
an option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of premium received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts traded on any U.S. or foreign exchange. The
Portfolio also may buy and write put and call options on these futures
contracts. Risks of entering into futures contracts and related options include
the possibility of an illiquid market and that a change in the value of the
contract or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Foreign currency translations and foreign currency contracts
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars. Foreign currency amounts related to the
purchase or sale of securities and income and expenses are translated at the
exchange rate on the transaction date. The effect of changes in foreign exchange
rates on realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net realized
gains or losses from foreign currency transactions, if any, may arise from sales
of foreign currency, closed forward contracts, exchange gains or losses realized
between the trade date and settlement date on securities transactions, and other
translation gains or losses on dividends, interest income and foreign
withholding taxes.
The Portfolio may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Portfolio and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Portfolio is subject to the credit risk that
the other party will not complete its contract obligations.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore
does not pay any income dividends or capital gain distributions.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date and interest income,
including level-yield amortization of premium and discount, is accrued daily.
2. FEES AND EXPENSES
The Trust, on behalf of the Portfolio, has an Investment Management Services
Agreement with AEFC to manage its portfolio. Under this agreement, AEFC
determines which securities will be purchased, held or sold. The management fee
is a percentage of the Portfolio's average daily net assets in reducing
percentages from 0.53% to 0.4% annually. The fee may be adjusted upward or
downward by a performance incentive adjustment based on a comparison of the
performance of Class A shares of AXP Diversified Equity Income Fund to the
Lipper Equity Income Fund Index. The maximum adjustment is 0.08% of the Fund's
average daily net assets after deducting 1% from the performance difference. If
the performance difference is less than 1%, the adjustment will be zero. The
adjustment increased the fee by $11,250 for the period.
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 March 31, 2000, the Portfolio's custodian fees were
reduced by $2,656 as a result of earnings credits from overnight cash balances.
The Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
According to a Placement Agency Agreement, American Express Financial
Advisors Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $562,762,480 and $799,827,837, respectively, for the six
months ended March 31, 2000. For the same period, the portfolio turnover rate
was 10%. Realized gains and losses are determined on an identified cost basis.
Brokerage commissions paid to brokers affiliated with AEFC were $27,552 for the
six months ended March 31, 2000.
4. LENDING OF PORTFOLIO SECURITIES
As of March 31, 2000, securities valued at $5,596,875 were on loan to brokers.
For collateral, the Portfolio received $5,625,000 in cash. Income from
securities lending amounted to $34,469 for the six months ended March 31, 2000.
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.
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
Equity Income Portfolio
March 31, 2000 (Unaudited)
(Percentages represent value of investments compared to net assets)
Common stocks (89.6%)
Issuer Shares Value(a)
Aerospace & defense (1.9%)
<S> <C> <C>
Goodrich (BF) 614,400 $17,625,600
Honeywell Intl 124,800 6,575,400
Rockwell Intl 577,900 24,163,444
Total 48,364,444
Automotive & related (1.9%)
Ford Motor 566,400 26,019,000
General Motors 278,400 23,055,000
Total 49,074,000
Banks and savings & loans (9.6%)
Allied Capital 936,000 16,321,500
Bank of America 974,400 51,095,100
Bank of New York 715,200 29,725,500
Chase Manhattan 226,000 19,704,375
First Union 598,100 22,279,225
FleetBoston Financial 988,730 36,088,645
Mellon Financial 772,800 22,797,600
SLM Holding 321,600 10,713,300
Wells Fargo 868,800 35,566,500
Total 244,291,745
Building materials & construction (1.9%)
Fluor 630,000 19,530,000
Martin Marietta Materials 623,800 29,630,500
Total 49,160,500
Chemicals (1.8%)
Dow Chemical 96,000 10,944,000
Du Pont (EI) de Nemours 432,000 22,842,000
Lyondell Petrochemical 892,800 13,168,800
Total 46,954,800
Communications equipment & services (1.6%)
Motorola 292,800 41,687,400
Computers & office equipment (5.6%)
BMC Software 240,000(b) 11,850,000
Compaq Computer 475,000 12,646,875
Electronic Data Systems 177,600 11,399,700
EQUANT 168,100(b,c) 14,299,006
First Data 264,000 11,682,000
Hewlett-Packard 91,200 12,089,700
NOVA 880,900(b) 25,656,213
Solectron 614,400(b) 24,614,400
Unisys 730,000(b) 18,615,000
Total 142,852,894
Energy (10.9%)
Chevron 768,000 70,992,000
Conoco Cl A 1,248,000 30,732,000
Conoco Cl B 360,000 9,225,000
ENI 4,950,000(b,c) 24,777,881
Exxon Mobil 963,214 74,950,089
Sunoco 883,200 24,177,600
Texaco 801,600 42,985,800
Total 277,840,370
Energy equipment & services (0.6%)
Halliburton 374,400 15,350,400
Financial services (13.0%)
Alliance Capital Management Holding LP 964,800 $39,978,900
Citigroup 2,011,200 119,289,299
Kansas City Southern Inds 432,000(b) 37,125,000
MBNA 1,660,800 42,350,400
Morgan Stanley, Dean Witter, Discover & Co 620,000 50,568,750
Providian Financial 456,000 39,501,000
Total 328,813,349
Food (1.9%)
Bestfoods 384,000 17,976,000
General Mills 460,800 16,675,200
Sara Lee 763,200 13,737,600
Total 48,388,800
Health care (4.2%)
American Home Products 446,400 23,938,200
Baxter Intl 319,000 19,020,375
Mylan Laboratories 750,000 20,625,000
Pharmacia & Upjohn 345,600 20,476,800
Warner-Lambert 240,000 23,400,000
Total 107,460,375
Household products (1.3%)
Colgate-Palmolive 576,000 32,472,000
Industrial equipment & services (2.4%)
Caterpillar 192,000 7,572,000
Illinois Tool Works 432,000 23,868,000
Parker-Hannifin 720,000 29,745,000
Total 61,185,000
Insurance (4.8%)
American Intl Group 749,950 82,119,525
Aon 134,800 4,347,300
Marsh & McLennan 331,200 36,535,500
Total 123,002,325
Media (3.7%)
Adelphia Communications Cl A 168,000(b) $8,232,000
CBS 1,091,300(b) 61,794,863
MediaOne Group 288,000(b) 23,328,000
Total 93,354,863
Paper & packaging (2.3%)
American Natl Can Group 1,344,000 17,640,000
Intl Paper 945,600 40,424,400
Total 58,064,400
Retail (5.9%)
Circuit City Stores-Circuit City Group 1,065,700 64,874,488
CVS 772,800 29,028,300
Target 744,000 55,614,000
Total 149,516,788
Utilities -- electric (1.8%)
CMS Energy 30,600 554,625
Dominion Resources 275,000 10,570,313
Duke Energy 240,000 12,600,000
Edison Intl 120,000 1,987,500
FPL Group 300,000 13,818,750
New Century Energies 90,000 2,705,625
NiSource 165,000 2,784,375
Total 45,021,188
Utilities -- gas (1.1%)
Coastal 250,000 11,500,000
El Paso Energy 150,000 6,056,250
Williams Companies 250,000 10,984,375
Total 28,540,625
Utilities -- telephone (11.4%)
ALLTEL 96,000 $6,054,000
AT&T 1,176,000 66,149,999
Bell Atlantic 696,000 42,542,999
BellSouth 724,800 34,065,600
Cable & Wireless 290,000(c) 5,438,934
Deutsche Telekom 88,000(c) 7,091,728
GTE 335,600 23,827,600
MCI WorldCom 771,800(b) 34,972,187
SBC Communications 775,900 32,587,800
Sprint 87,400 5,506,200
Sprint PCS 71,000(b) 4,637,188
Telefonica de Espana ADR 79,700(b,c,e) 5,947,613
U S WEST Communications Group 254,400 18,475,800
Total 287,297,648
Total common stocks
(Cost: $2,026,229,879) $2,278,693,914
Preferred stocks (5.4%)
Issuer Shares Value(a)
Cox Communications
7.00% Cm Cv PRIDES 300,000(g) $19,050,000
CNF Trust
5.00% Cv Series A 500,000 21,250,000
Global Crossing
6.38% Cv 23,000(c,d) 2,478,250
Global TeleSystems Group
7.25% Cm Cv 143,000 5,791,500
Ingersoll-Rand
6.75% Cv PRIDES 1,000,000(g) 23,500,000
Intermedia Communications
7.00% Cm Cv Series F 259,000(b) 8,579,375
Sovereign Bancorp
7.50% Cv 492,000(b) 23,985,000
Union Pacific Capital
6.25% Cv 541,000 $21,166,625
6.25% Cm Cv 270,500 10,583,313
Total preferred stocks
(Cost: $146,432,693) $136,384,063
Bond (0.1%)
Issuer Coupon Principal Value(a)
rate amount
NTL
Cv Sub Nts
12-15-09 5.75% $2,600,000(d) $2,661,750
Total bond
(Cost: $2,753,179) $2,661,750
Short-term securities (3.4%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (1.8%)
Federal Home Loan Bank Disc Nts
05-03-00 5.83% $31,400,000 $31,228,736
05-12-00 5.84 6,300,000 6,255,057
05-26-00 5.88 900,000 891,137
Federal Home Loan Mtge Corp Disc Nt
05-12-00 6.02 3,300,000 3,276,996
Federal Natl Mtge Assn Disc Nt
06-01-00 6.01 2,400,000 2,374,291
Total 44,026,217
Commercial paper (1.6%)
Fleet Funding
05-31-00 6.09 1,000,000(f) 989,461
Heinz (HJ)
05-04-00 6.06 1,200,000 1,193,166
Short-term securities (continued)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
Pacific Gas & Electric
04-03-00 6.03% $5,100,000 $5,097,437
Procter & Gamble
05-01-00 5.88 10,900,000 10,845,091
05-03-00 6.05 6,600,000 6,563,579
Sheffield Receivables
06-16-00 6.16 3,600,000(f) 3,552,106
USAA Capital
05-24-00 6.09 2,400,000 2,377,931
Windmill Funding
05-25-00 6.12 11,000,000(f) 10,896,489
Total 41,515,260
Total short-term securities
(Cost: $85,567,648) $85,541,477
Total investments in securities
(Cost: $2,260,983,399)(h) $2,503,281,204
See accompanying notes to investments in securities.
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing.
(c) Foreign security values are stated in U.S. dollars. As of March 31, 2000,
the value of foreign securities represented 2.36% of net assets.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security has
been determined to be liquid under guidelines established by the board.
(e) Security is partially or fully on loan. See Note 4 to the financial
statements.
(f) 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.
(g) PRIDES (Preferred Redeemable Increased Dividend Equity Securities) are
structured as convertible preferred securities. Investors receive an enhanced
yield but based upon a specific formula, potential appreciation is limited.
PRIDES pay dividends, have voting rights, are noncallable for three years and
upon maturity, convert into shares of common stock.
(h) At March 31, 2000, the cost of securities for federal income tax purposes
was approximately $2,261,118,000 and the approximate aggregate gross unrealized
appreciation and depreciation based on that cost was:
Unrealized appreciation $382,892,000
Unrealized depreciation (140,729,000)
------------
Net unrealized appreciation $242,163,000
<PAGE>
American
Express
Funds
AXP DIVERSIFIED EQUITY INCOME FUND
200 AXP Financial Center
Minneapolis, MN 55474
TICKER SYMBOL
Class A: INDZX Class B: IDEBX Class Y: IDQYX PRSRT STD AUTO
U.S. POSTAGE
PAID
AMERICAN
EXPRESSS
AMERICAN
EXPRESS
(R)
S-6476 L 5/00)
Distributed by American Express Financial Advisors Inc. Member NASD.
American Express Company is seperate from American Express Financial Advisors
Inc. and is not a broker-dealer.
