1996 semiannual report
IDS
Selective
Fund
(icon of) skyline
The goals of IDS Selective Fund, Inc. are current income and the preservation of
capital by investing in investment grade bonds.
Distributed by American Express Financial Advisors Inc.
(icon of) skyline
A quest for quality
Not all bonds are created equal. A bond's quality depends on the ability of its
issuers to make the interest and principal payments owed to the bondholders. The
quality is determined by independent rating agencies, which assign a credit
rating (in the form of a letter grade) to each bond.
Since its establishment in 1945, Selective Fund has concentrated its investments
in the four highest investment grades. Along the way, investors have enjoyed a
steady stream of interest income with minimum risk to their principal.
Contents
From the president 3
From the portfolio manager 3
Ten largest holdings 5
Financial statements (Fund) 6
Notes to financial statements (Fund) 9
Financial statements (Portfolio) 16
Notes to financial statements (Portfolio) 19
Investments in securities 28
Board members and officers 35
IDS mutual funds 36
<PAGE>
To our shareholders
(picture of) William Pearce
William R. Pearce
President of the Fund
(picture of) Ray Goodner
Ray Goodner
Portfolio manager
From the president
If you're an experienced investor, you know that the past two years have been
unusually strong ones in many worldwide financial markets. Perhaps just as
important, you also know that history shows that bull markets don't last
forever. Though they're often unpredictable, declines -- whether they're brief
or long-lasting, moderate or substantial -- are always a possibility. That fact
reinforces the need for investors to periodically review their long-term goals
and examine whether their investment program remains on track to achieving them.
Your quarterly investment statements are one part of that monitoring process.
The other is a meeting with your American Express financial advisor. That
becomes even more important if there's a major change in your financial
situation or in the financial markets. On June 10, 1996 the Fund began investing
its assets in Quality Income Portfolio instead of directly in securities of
individual companies. Following the Portfolio Manager's letter are the financial
statements of both the Fund and Portfolio. The notes to the financials and
prospectus go into more detail of how the new structure works.
William R. Pearce
From the portfolio manager
IDS Selective Fund was well-positioned to benefit from a rally in the bond
market last fall, and ultimately generated a total return (net asset value
change and dividends) of 7.6% for investors in Class A shares during the first
half of its fiscal period - June through November 1996. The past six months
provided a far-better investment environment than did the first several months
of 1996, when worries about a potential rise in the inflation rate spawned a
sustained downturn in the bond market. During the summer, a somewhat calmer mood
developed in the market, resulting in less dramatic swings in bond prices.
Optimism returns to the market By fall, investors' attitudes began to turn
optimistic, thanks to reports of moderating economic growth, little change in
the low inflation rate and the Federal Reserve's decision not to raise
short-term interest rates. The positive tone in the market continued through
November, fostering a sharp rise in bond prices and a concurrent decline in
long-term interest rates. In anticipation of an improving market, I lengthened
the average maturity of the portfolio - a strategy that makes it more sensitive
to changes in interest rates. Because bond prices move in the opposite direction
of rates, the Fund's net asset value enjoyed an especially good boost during the
rate drop. After rates had come down a fair amount, I began emphasizing more
income-oriented securities such as mortgage-backed bonds, callable corporate
bonds and asset-backed bonds. A well-rounded portfolio As for the portfolio's
asset mix, the largest investment remained in long- and intermediate-term U.S.
government bonds, followed by roughly equal amounts of U.S. corporate bonds,
foreign government bonds (issued by Italy, Korea and China but denominated in
U.S. dollars) and mortgage-backed bonds. While all groups provided positive
performance, the foreign bonds registered the greatest gains. Looking to the
rest of the fiscal year, given the market's recent rally, I think income will
play a greater role in the Fund's return than potential capital appreciation.
Therefore, with the help of this company's extensive research staff, I intend to
seek out issues with attractive yields from a broad range of investment sectors.
Most important for fixed-income investors, though, it appears that the key
secular trends of generally tame inflation worldwide and a declining budget
deficit here at home remain in place. Therefore, barring any sustained reversal
in those factors, I think bonds should continue to prove rewarding for some time
to come.
Ray Goodner
Class A
6-month performance
(All figures per share)
Net asset value (NAV)
- ---------------------------------------------
Nov. 30, 1996 $ 9.37
- ---------------------------------------------
May 31, 1996 $ 9.00
- ---------------------------------------------
Increase $ 0.37
- ---------------------------------------------
Distributions
June 1, 1996 - Nov. 30, 1996
From income $ 0.29
- ---------------------------------------------
From capital gains $ --
- ---------------------------------------------
Total distributions $ 0.29
- ---------------------------------------------
Total return* +7.6**
- ---------------------------------------------
Class B
6-month performance
(All figures per share)
Net asset value (NAV)
- ---------------------------------------------
Nov. 30, 1996 $ 9.37
- ---------------------------------------------
May 31, 1996 $ 9.00
- ---------------------------------------------
Increase $ 0.37
- ---------------------------------------------
Distributions
June 1, 1996 - Nov. 30, 1996
From income $ 0.26
- ---------------------------------------------
From capital gains $ --
- ---------------------------------------------
Total distributions $ 0.26
- ---------------------------------------------
Total return* +7.1**
- ---------------------------------------------
Class Y
6-month performance
(All figures per share)
Net asset value (NAV)
- ---------------------------------------------
Nov. 30, 1996 $ 9.37
- ---------------------------------------------
May 31, 1996 $ 9.00
- ---------------------------------------------
Increase $ 0.37
- ---------------------------------------------
Distributions
June 1, 1996 - Nov. 30, 1996
From income $ 0.30
- ---------------------------------------------
From capital gains $ --
- ---------------------------------------------
Total distributions $ 0.30
- ---------------------------------------------
Total return* +7.7**
- ---------------------------------------------
* The prospectus discusses the effect of sales charges, if any, on the various
classes.
** The total return is a hypothetical investment in the Fund with all
distributions reinvested.
<PAGE>
Quality Income Portfolio
The Portfolio's ten largest holdings
(Pie chart)
The ten holdings listed here make up 10.56% of the Portfolio's net assets
Percent Value
(of Portfolio's net assets) (as of Nov. 30, 1996)
Japan Finance 1.58% $27,416,694
9.25% 1998
Republic of Italy 1.31 22,792,840
6.875% 2023
Southern California Edison 1.26 21,875,910
8.875% 2023
Dayton Hudson 1.08 18,673,187
7.875% 2023
PDV America .95 16,458,420
7.875% 2003
Pacific Bell .95 16,442,250
8.50% 2031
Texas Utilities Electric .88 15,202,590
9.75% 2021
Schering-Plough .86 15,000,000
7.31% Zero Coupon 1996
Daimler-Benz North America .85 14,791,420
7.375% Medium-term Nts 2006
General Motors Acceptance .84 14,646,203
7.00% 2000
Excludes U.S. Treasury and government agencies holdings that total 46% of the
Portfolio's net assets.
<PAGE>
Financial statements
Statement of assets and liabilities
IDS Selective Fund, Inc.
Nov. 30, 1996
Assets
(Unaudited)
Investment in Quality Income Portfolio (Note 1) $1,736,697,083
Total assets 1,736,697,083
Liabilities
Dividends payable to shareholders 848,821
Accrued distribution fee 5,115
Accrued service fee 14,627
Accrued transfer agency fee 22,352
Accrued administrative services fee 4,531
Other accrued expenses 114,392
Total liabilities 1,009,838
Net assets applicable to outstanding capital stock $1,735,687,245
Represented by
Capital stock -- authorized 10,000,000,000 shares of
$.01 par value (Note 1) $ 1,852,165
Additional paid-in-capital 1,625,928,521
Accumulated net realized gain (Note 1) 18,727,255
Unrealized appreciation of investments and on
translation of assets and liabilities in foreign currencies 89,179,304
Total -- representing net assets applicable to outstanding
capital stock $1,735,687,245
Net assets applicable to outstanding shares:
Class A $1,409,635,552
Class B $ 125,401,266
Class Y $ 200,650,427
Net asset value per share of outstanding capital stock:
Class A shares 150,423,889 $ 9.37
Class B shares 13,382,079 $ 9.37
Class Y shares 21,410,510 $ 9.37
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Statement of operations
IDS Selective Fund, Inc.
Six months ended Nov. 30, 1996 (Unaudited)
Investment Income
<CAPTION>
June 1, 1996 to June 10, 1996 to Total
June 9, 1996 Nov. 30, 1996
(Notes 1 and 4)
Income:
<S> <C> <C> <C>
Dividends $ -- $ 195,083 $ 195,083
Interest 2,465,563 58,608,359 61,073,922
Total Income 2,465,563 58,803,442 61,269,005
Expenses (Note 2):
Investment management services fee 168,661 -- 168,661
Distribution fee -- Class B 15,568 416,301 431,869
Transfer agency fee 35,375 879,276 914,651
Incremental transfer agency fee -- Class B 162 4,337 4,499
Service fee
Class A 47,116 1,136,290 1,183,406
Class B 3,633 96,626 100,259
Administrative services fee 15,854 391,678 407,532
Compensation of board members 4 1,975 1,979
Compensation of officers -- 5,379 5,379
Custodian fees 1,400 -- 1,400
Postage 690 34,094 34,784
Registration fees 1,427 45,287 46,714
Reports to shareholders -- 2,367 2,367
Audit fees 26 4,974 5,000
Administrative 9 2,796 2,805
Other -- 611 611
Total expenses 289,925 3,021,991 3,311,916
Earnings credits on cash balances (Note 4) (84) -- (84)
289,841 3,021,991 3,311,832
Expenses, including investment management services fee,
allocated from Quality Income Portfolio -- 4,226,147 4,226,147
Total net expenses 289,841 7,248,138 7,537,979
Investment income -- net 2,175,722 51,555,304 53,731,026
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on security and foreign
currency transactions (1,140,606)* 6,701,934 5,561,328
Net realized loss on financial futures contracts -- (11,402,400) (11,402,400)
Net realized gain on option contracts written -- 1,165,788 1,165,788
Net realized loss on investments and foreign
currencies (1,140,606) (3,534,678) (4,675,284)
Net change in unrealized appreciation or
depreciation of investments and on translation
of assets and liabilities in foreign currencies (5,677,421) 81,147,830 75,470,409
Net gain (loss) on investments and foreign currencies (6,818,027) 77,613,152 70,795,125
Net increase (decrease) in net assets
resulting from operations $(4,642,305) $129,168,456 $124,526,151
*Includes gain of $115,748 from foreign currency transactions.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Financial statements
Statements of changes in net assets
IDS Selective Fund, Inc.
<CAPTION>
Operations and distributions Nov. 30, 1996 May 31, 1996
Six months ended Six months
(Unaudited) ended
<S> <C> <C>
Investment income -- net $ 53,731,026 $ 54,403,714
Net realized gain (loss) on investments and foreign currencies (4,675,284) 23,062,764
Net change in unrealized appreciation or
depreciation of investments and on translation
of assets and liabilities in foreign currencies 75,470,409 (113,687,462)
Net increase (decrease) in net assets resulting from operations 124,526,151 (36,220,984)
Distributions to shareholders from:
Net investment income
Class A (44,436,983) (48,380,959)
Class B (3,261,103) (2,717,675)
Class Y (6,562,918) (5,835,989)
Net realized gain
Class A (345,701) (4,513,331)
Class B (25,370) (242,090)
Class Y (51,057) (433,179)
Excess distribution of realized gain (Note 1)
Class A -- (763,230)
Class B -- (93,149)
Class Y -- (193,212)
Total distributions (54,683,132) (63,172,814)
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 58,218,992 111,507,134
Class B shares 31,499,710 58,275,961
Class Y shares 28,538,339 111,069,550
Reinvestment of distributions at net asset value
Class A shares 33,236,804 40,178,831
Class B shares 2,989,606 2,823,107
Class Y shares 6,613,975 6,425,412
Payments for redemptions
Class A shares (147,047,761) (150,106,899)
Class B shares (Note 2) (22,079,901) (18,994,240)
Class Y shares (54,776,652) (36,979,985)
Increase (decrease) in net assets from capital share transactions (62,806,888) 124,198,871
Total increase in net assets 7,036,131 24,805,073
Net assets at beginning of period 1,728,651,114 1,703,846,041
Net assets at end of period
(including undistributed net investment
income of $0 and $529,978) $1,735,687,245 $1,728,651,114
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to financial statements
IDS Selective Fund, Inc.
(Unaudited as to Nov. 30, 1996)
_______________________________________________________________________
1. Summary of significant accounting policies
The Fund is registered under the Investment Company Act of 1940 (as amended) as
a diversified, open-end management investment company. The Fund offers Class A,
Class B and Class Y shares. Class A shares are sold with a front-end sales
charge. Class B shares may be subject to a contingent deferred sales charge and
such shares automatically convert to Class A after eight years. Class Y shares
have no sales charge and are offered only to qualifying institutional investors.
All classes of shares have identical voting, dividend, liquidation and other
rights, and the same terms and conditions, except that the level of distribution
fee, transfer agency fee and service fee (class specific expenses) differs among
classes. Income, expenses (other than class specific expenses) and realized and
unrealized gains or losses on investments are allocated to each class of shares
based upon its relative net assets.
Investment in Quality Income Portfolio
Effective June 10, 1996, the Fund began investing all of its assets in the
Quality Income Portfolio (the Portfolio), a series of Income Trust, an open-end
investment company that has the same objectives as the Fund. This was
accomplished by transferring the Fund's assets to the Portfolio in return for a
proportionate ownership interest in the Portfolio. The Portfolio invests
primarily in investment-grade bonds.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at value that is equal to the
Fund's proportionate ownership interest in the net assets of the Portfolio. The
percentage of the Portfolio owned by the Fund at Nov. 30, 1996 was 99.97%.
Valuation of securities held by the Portfolio is discussed in Note 1 of the
Portfolio's "Notes to financial statements," which are included elsewhere in
this report.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
<PAGE>
Federal taxes
Since the Fund's policy is to comply with all sections of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to the shareholders, no provision for income or excise taxes is
required.
Net investment income (loss) and net realized gains (losses) allocated from the
Portfolio may differ for financial statement and tax purposes primarily because
of the deferral of losses on certain futures contracts, the recognition of
certain foreign currency gains (losses) as ordinary income (loss) for tax
purposes, and losses deferred due to "wash sale" transactions. The character of
distributions made during the year from net investment income or net realized
gains may differ from their ultimate characterization for federal income tax
purposes. Also, due to the timing of dividend distributions, the fiscal year in
which amounts are distributed may differ from the year that the income or
realized gains (losses) were recorded by the Fund.
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, are
reinvested in additional shares of the Fund at net asset value or payable in
cash. Capital gains, when available, are distributed along with the last income
dividend of the calendar year.
_______________________________________________________________________
2.Expenses and sales charges
In addition to the expenses allocated from the Portfolio, the Fund accrues its
own expenses as follows:
Effective March 20, 1995, the Fund entered into agreements with American Express
Financial Corporation (AEFC) for providing administrative services and serving
as transfer agent. Under its Administrative Services Agreement, the Fund pays
AEFC for administration and accounting services at a percentage of the Fund's
average daily net assets in reducing percentages from 0.05% to 0.025% annually.
Under this agreement, the Fund also pays taxes; audit and certain legal fees;
registration fees for shares; office expenses; consultant's fees; compensation
of board members, officers and employees; corporate filing fees; organizational
expenses; and any other expenses properly payable by the Fund approved by the
board.
Under a separate Transfer Agency Agreement, AEFC maintains shareholder accounts
and records. The Fund pays AEFC an annual fee per shareholder account for this
service as follows:
o Class A $15.50
o Class B $16.50
o Class Y $15.50
<PAGE>
Also effective March 20, 1995, the Fund entered into agreements with American
Express Financial Advisors Inc. for distribution and shareholder
servicing-related services. Under a Plan and Agreement of Distribution, the Fund
pays a distribution fee at an annual rate of 0.75% of the Fund's average daily
net assets attributable to Class B shares for distribution-related services.
Under a Shareholder Service Agreement, the Fund pays a fee for service provided
to shareholders by financial advisors and other servicing agents. The fee is
calculated at a rate of 0.175% of the Fund's average daily net assets
attributable to Class A and Class B shares.
Sales charges received by American Express Financial Advisors, Inc. for
distributing Fund shares were $1,326,755 for Class A and $49,882 for Class B for
the period ended Nov. 30, 1996.
Prior to April 30, 1996, the Fund had a retirement plan for its independent
board members. The plan was terminated April 30, 1996. The total liability for
the plan is $51,528, which will be paid out at some future date.
_______________________________________________________________________
3. Capital share transactions
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Nov. 30, 1996
Class A Class B Class Y
_______________________________________________________________________
Sold 6,405,439 3,468,287 3,147,317
Issued for reinvested 3,656,724 328,859 728,481
distributions
Redeemed (16,181,572) (2,431,701) (6,046,475)
_______________________________________________________________________
Net increase (decrease) (6,119,409) 1,365,445 (2,170,677)
- -----------------------------------------------------------------------
Six months ended May 31, 1996
Class A Class B Class Y
_______________________________________________________________________
Sold 11,921,387 6,232,510 12,031,481
Issued for reinvested 4,313,212 303,969 692,487
distributions
Redeemed (16,151,779) (2,050,373) (4,007,375)
_______________________________________________________________________
Net increase 82,820 4,486,106 8,716,593
_______________________________________________________________________
4. Pre-conversion to Master
Prior to transferring its securities to Quality Income Portfolio on June 10,
1996, various transactions took place as stated below.
Expenses and sales charges
Prior to the conversion on June 10, 1996, the Fund paid an investment management
fee to AEFC. Subsequent to the conversion, the investment management fee is
assessed at the Portfolio level. (See the notes to the Portfolio financial
statements for the terms of the investment management agreement, which remain
unchanged.)
During the period from June 1, 1996 to June 9, 1996, the Fund's custodian and
transfer agency fees were reduced by $84 as a result of earnings credits from
overnight cash balances.
Securities transactions
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $36,192,318 and $21,571,908, respectively, for the
period from June 1, 1996 to June 9, 1996. Realized gains and losses were
determined on an identified cost basis.
Income from securities lending amounted to $3,898 for the period from June 1,
1996 to June 9, 1996.
<PAGE>
<TABLE>
- -----------------------------------------------------------------------
5. Financial highlights
The tables below show certain important financial information for evaluating the
Fund's results.
IDS Selective Fund, Inc.
Fiscal period ended May 31,
Per share income and capital changes*
<CAPTION>
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996*** 1996** 1995 1994 1993 1992 1991 1990 1989 1988 1987
Net asset value, $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 $8.27 $9.03
beginning of period
Income from investment operations:
Net investment income .29 .33 .59 .60 .63 .66 .69 .70 .72 .74 .77
Net gains (losses) .37 (.52) 1.08 (1.05) .69 .27 .52 (.30) .27 .17 (.71)
(both realized and
unrealized)
Total from investment .66 (.19) 1.67 (.45) 1.32 .93 1.21 .40 .99 .91 .06
operations
Less distributions:
Dividends from net (.29) (.31) (.58) (.60) (.64) (.66) (.69) (.68) (.74) (.74) (.77)
investment income
Distributions from -- (.03) (.13) (.15) (.11) -- -- -- -- -- (.05)
realized gains
Total distributions (.29) (.34) (.71) (.75) (.75) (.66) (.69) (.68) (.74) (.74) (.82)
Net asset value, $9.37 $9.00 $9.53 $8.57 $9.77 $9.20 $8.93 $8.41 $8.69 $8.44 $8.27
end of period
Ratios/supplemental data
Class A
1996*** 1996** 1995 1994 1993 1992 1991 1990 1989 1988 1987
Net assets,
end of period $1,410 $1,408 $1,490 $1,402 $1,737 $1,541 $1,403 $1,196 $1,167$1,081 $1,101
(in millions)
Ratio of expenses to .85% + .89%+ .85% .72% .72% .74% .77% .76% .77% .74% .75%
average daily net assets++
Ratio of net income 6.33% + 6.27%+ 6.59% 6.53% 6.57% 7.32% 7.94% 8.58% 8.42% 8.67% 8.80%
to average daily net assets
Portfolio turnover rate 14% 18% 26% 30% 30% 62% 59% 54% 79% 86% 74%
(excluding short-term
securities) for the
underlying Portfolio
Total return+++ 7.6% (2.0%) 20.3% (4.7%) 14.8% 10.8% 15.0% 4.8% 12.3% 11.3% 0.6%
*For a share outstanding throughout the period. Rounded
to the nearest cent.
**The Fund's fiscal year-end was changed from Nov. 30 to
May 31, effective 1996.
***Six months ended Nov. 30, 1996 (Unaudited).
+Adjusted to an annual basis.
++Effective fiscal year 1996, expense ratio is based on
total expenses of the Fund before reduction of
earnings credits on cash balances.
+++Total return does not reflect payment of a sales
charge.
</TABLE>
<PAGE>
<TABLE>
IDS Selective Fund, Inc.
Fiscal period ended May 31,
Per share income and capital changes*
<CAPTION>
Class B Class Y
<S> <C> <C> <C> <C> <C> <C>
1996++ 1996+ 1995** 1996++ 1996+ 1995**
Net asset value, $9.00 $9.53 $8.78 $9.00 $9.53 $8.78
beginning of period
Income from investment operations:
Net investment income .25 .30 .40 .30 .34 .46
Net gains (losses) both .38 (.52) .75 .37 (.52) .75
realized and unrealized)
Total from investment .63 (.22) 1.15 .67 (.18) 1.21
operations
Less distributions:
Dividends from net (.26) (.28) (.40) (.30) (.32) (.46)
investment income
Distributions from -- (.03) -- -- (.03) --
realized gains
Total distributions (.26) (.31) (.40) (.30) (.35) (.46)
Net asset value, $9.37 $9.00 $9.53 $9.37 $9.00 $9.53
end of period
Ratios/supplemental data
Class B Class Y
1996++ 1996+ 1995** 1996+++ 1996+ 1995**
Net assets, end of period $125 $108 $72 $201 $212 $142
(in millions)
Ratio of expenses to 1.61%# 1.63# 1.67%# .68%# .70%# .73%#
average daily net assets+++
Ratio of net income 5.58%# 5.56%# 5.68%# 6.50%# 6.51%# 6.64%#
to average daily net assets
Portfolio turnover rate 14% 18% 26% 14% 18% 26%
(excluding short-term
securities) for the
underlying Portfolio
Total return*** 7.1% (2.4%) 13.1% 7.7% (2.0%) 13.8%
*For a share outstanding throughout the period.
Rounded to the nearest cent.
**Inception date was March 20, 1995 for Class B and
Class Y.
***Total return does not reflect payment of a sales
charge.
#Adjusted to an annual basis.
+The Fund's fiscal year-end was changed from Nov. 30
to May 31, effective 1996.
++Six months ended Nov. 30, 1996 (Unaudited).
+++Effective fiscal year 1996, expense ratio is based
on total expenses of the Fund before reduction of
earnings credits on cash balances.
</TABLE>
<PAGE>
Statement of assets and liabilities
Quality Income Portfolio
Nov. 30, 1996
Assets
(Unaudited)
Investments in securities, at value (Note 1)
(identified cost $1,644,334,576) $1,734,414,397
Cash in bank on demand deposit 470,275
Dividends and accrued interest receivable 24,485,658
Receivable for investment securities sold 1,790,583
U.S. government securities held as collateral (Note 4) 48,125,347
---------------------
Total assets 1,809,286,260
---------------------
Liabilities
Payable for investment securities purchased 21,861,510
Payable upon return of securities loaned (Note 4) 50,075,347
---------------------
Accrued investment management services fee 48,239
Other accrued expenses 46,869
---------------------
Total liabilities 72,031,965
---------------------
=====================
Net assets $1,737,254,295
=====================
See accompany notes to financial statements.
<PAGE>
Statement of operations
Quality Income Portfolio
For the period from June 10, 1996
(commencement of operations ) to Nov. 30, 1996
Investment income
(Unaudited)
Income:
Interest $ 58,623,259
Dividends 195,143
---------------------
Total income 58,818,402
---------------------
Expenses (Note 2):
Investment management services fee 4,177,373
Compensation of board members 7,121
Custodian fees 27,779
Audit fees 14,750
Administrative 2,104
---------------------
Total expenses 4,229,127
Earnings credits on cash balances (Note 2) (1,894)
Total net expenses 4,227,233
---------------------
Investment income -- net 54,591,169
---------------------
Realized and unrealized gain (loss) -- net
Net realized gain on security and foreign curency
transactions (including gain of $965,427 from foreign currency
transactions) (Note 3) 6,704,004
Net realized loss on financial futures (11,406,331)
Net realized gain on option contracts written (Note 6) 1,166,158
---------------------
Net realized loss on investments and foreign currencies (3,536,169)
Net change in unrealized appreciation or
depreciation of investments and on translation of assets 81,176,272
---------------------
and liabilities in foreign currencies
Net gain on investments and foreign currencies 77,640,103
=====================
Net increase in net assets resulting from operations $132,231,272
=====================
See accompanying notes to financial statements.
<PAGE>
Statement of changes in net assets
Quality Income Portfolio
For the period from June 10, 1996
(commencement of operations) to Nov. 30, 1996
Operations and distributions
(Unaudited)
Investment income - net $ 54,591,169
Net realized loss on investments and foreign currencies (3,536,169)
Net change in unrealized appreciation or depreciation of
investments and on translation of assets and liabilities
in foreign currencies 81,176,272
--------------------
Net increase in net assets resulting from operations 132,231,272
Net contributions 1,604,993,023
--------------------
Total increase in net assets 1,737,224,295
Net assets at beginning of period (Note 1) 30,000
====================
Net assets at end of period $1,737,254,295
====================
See accompanying notes to financial statements.
<PAGE>
Notes to financial statements
Quality Income Portfolio
(Unaudited as to Nov. 30, 1996)
______________________________________________________________________
1. Summary of significant accounting policies
The Quality Income Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment company. Quality Income
Portfolio invests primarily in investment-grade bonds. The Declaration of Trust
permits the Trustees to issue non-transferable interests in the Portfolio. On
April 15, 1996, AEFC contributed $30,000 to the Portfolio. Operations did not
formally commence until June 10, 1996, at which time, an existing fund
transferred its assets to the Portfolio in return for an ownership percentage of
the Portfolio.
Significant accounting polices followed by the Portfolio are summarized below:
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price; securities for which market quotations
are not readily available are valued at fair value according to methods selected
in good faith by the board. Determination of fair value involves, among other
things, reference to market indexes, matrixes and data from independent brokers.
Short-term securities maturing in more than 60 days from the valuation date are
valued at the market price or approximate market value based on current interest
rates; those maturing in 60 days or less are valued at amortized cost.
<PAGE>
Option transactions
In order to produce incremental earnings, protect gains and facilitate buying
and selling of securities for investment purposes, the Portfolio may buy or
write options traded on any U.S. or foreign exchange or in the over-the-counter
market where the completion of the obligation is dependent upon the credit
standing of the other party. The Portfolio also may buy or sell put and call
options and write covered call options on portfolio securities and may write
cash-secured put options. The risk in writing a call option is that the
Portfolio gives up the opportunity of profit if the market price of the security
increases. The risk in writing a put option is that the Portfolio may incur a
loss if the market price of the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio pays a premium whether or not
the option is exercised. The Portfolio also has the additional risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss upon expiration or closing of the option
transaction. When an option is exercised, the proceeds on sales for a written
call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the market, the
Portfolio may buy and sell financial futures contracts traded on any U.S. or
foreign exchange. The Portfolio also may buy or write put and call options on
these futures contracts. Risks of entering into futures contracts and related
options include the possibility that there may be an illiquid market and that a
change in the value of the contract or option may not correlate with changes in
the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Foreign currency translations
and foreign currency contracts
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars at the closing rate of exchange. Foreign
currency amounts related to the purchase or sale of securities and income and
expenses are translated at the exchange rate on the transaction date. The effect
of changes in foreign exchange rates on realized and unrealized security gains
or losses is reflected as a component of such gains or losses. In the statement
of operations, net realized gains or losses from foreign currency transactions
may arise from sales of foreign currency, closed forward contracts, exchange
gains or losses realized between the trade date and settlement dates on
securities transactions, and other translation gains or losses on dividends,
interest income and foreign withholding taxes.
The Portfolio may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Portfolio and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Portfolio is subject to the credit risk that
the other party will not complete the obligations of the contract.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. Accordingly, as a "pass-through" entity, the Portfolio
does not pay any income dividends or capital gain distributions.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar
denominated bonds, interest income includes level-yield amortization of premium
and discount. For foreign bonds, except for original issue discount, the
Portfolio does not amortize premium and discount. Interest income, including
level-yield amortization of premium and discount, is accrued daily.
_______________________________________________________________________
2. Fees and expenses
The Trust, on behalf of the Portfolio, has entered into an Investment Management
Services Agreement with American Express Financial Corporation (AEFC) for
managing its portfolio. Under this agreement, AEFC determines which securities
will be purchased, held or sold. The management fee is a percentage of the
Portfolio's average daily net assets in reducing percentages from 0.52% to
0.395% annually.
Under the agreement, the Trust also pays taxes and nonadvisory expenses, which
include custodian fees to be paid to an affiliate of AEFC; audit and certain
legal fees; fidelity bond premiums; registration fees for units; office
expenses; consultants' fees; compensation of trustees; corporate filing fees;
expenses incurred in connection with lending securities of the Portfolio: and
any other expenses properly payable by the Trust or Portfolio, approved by the
board.
For the period from June 10, 1996 to Nov. 30, 1996, the Portfolio's custodian
fees were reduced by $1,894 as a result of earnings credits from overnight cash
balances.
Pursuant to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the units of the Trust.
- -----------------------------------------------------------------------
3. Securities transactions
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $186,687,329 and $218,562,152, respectively, for the
period from June 10, 1996 to Nov. 30, 1996. For the same period, the portfolio
turnover rate was 14%. Realized gains and losses are determined on an identified
cost basis.
- -----------------------------------------------------------------------
4. Lending of portfolio securities
At Nov. 30, 1996, securities valued at $47,471,135 were on loan to brokers. For
collateral, the Portfolio received $1,950,000 in cash and U.S. government
securities valued at $48,125,347. Income from securities lending amounted to
$55,666 for the period from June 10, 1996 to Nov. 30, 1996. The risks to the
Portfolio of securities lending are that the borrower may not provide additional
collateral when required or return the securities when due.
- -----------------------------------------------------------------------
5. Illiquid securities
Investments in securities include issues that are illiquid. The Portfolio
currently limits investments in illiquid securities to 10% of the net assets, at
market value, at the time of purchase. The aggregate value of such securities at
Nov. 30, 1996 was $6,268,389 representing 0.4% of the net assets. Pursuant to
guidelines adopted by the board, certain unregistered securities are determined
to be liquid and are not included within the 10% limitation specified above.
- -----------------------------------------------------------------------
6. Option contracts written
The number of contracts and premium amounts associated with covered call option
contracts written (see Summary of significant accounting policies) is as
follows:
Period ended Nov. 30, 1996
Call Puts
-------------------------------------------------
Contracts Premium Contracts Premium
-------------------------------------------------
Balance May 31, 1996 -- $ -- -- $ --
Opened 500 876,408 400 451,126
Closed -- -- (400) (451,126)
Exercised (311) (655,867) -- --
Expired (189) (220,541) -- --
--------------------------------------------------------------------------
Balance Nov. 30, 1996 -- $ -- -- $ --
- -----------------------------------------------------------------------
7. Interest rate futures contracts
At Nov. 30, 1996, investments in securities included securities valued at
$7,156,030 that were pledged as collateral to cover initial margin deposits on
1,300 open sales contracts. The market value of the open contracts at Nov. 30,
1996, was $150,637,500 with a net unrealized gain of $1,066,281.
See Summary of significant accounting policies.
<PAGE>
Investments in securities
<TABLE>
Quality Income Portfolio (Percentages represent value of
Nov. 30, 1996 (Unaudited) investments compared to net assets)
- -----------------------------------------------------------------------------------------------------------------------
Bonds (92.6%)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Issuer Coupon Maturity Principal Value (a)
rate year amount
- ------------------------------------------------------------------------------------------------------------------------
U.S. government obligations (34.0%)
<S> <C> <C> <C> <C>
U.S. Treasury 5.875% 2004 $ 8,000,000 $ 7,959,760
6.875 1999 60,000,000 61,758,000
7.25 1996-2004 70,000,000 73,049,500
7.50 2001-2016 217,100,000 (b) 238,147,504
8.00 2021 15,000,000 17,780,100
8.625 1997 50,745,000 (l) 51,876,106
Resolution Funding Corp
Zero Coupon 7.61 2017 39,000,000 (c) 9,910,290
7.89 2016 35,900,000 (b,c) 9,977,687
7.98 2016 47,000,000 (b,c) 12,798,100
8.19 2014 48,000,000 (c) 15,481,920
8.27 2014 10,000,000 (c) 3,120,500
8.35 2006 48,000,000 (b,c) 26,819,040
8.94 2006 25,000,000 (c) 14,199,500
8.95 2006 68,000,000 (b,c) 36,831,520
Overseas Private Investment 6.99 2009 10,000,000 (i) 10,187,500
Total 589,897,027
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities (12.6%)
Federal Home Loan Mtge Corp 7.50 2024 17,363,605 17,668,509
8.00 2016-2025 11,227,867 11,594,910
8.50 2017-2022 10,316,945 10,815,711
9.00 2020-2021 5,922,344 6,280,166
Collateralized Mtge Obligation 8.50 2019 2,971,133 2,987,652
Federal Housing Admin 7.43 2024 9,169,652 9,029,814
Federal Natl Mtge Assn 6.50 2023 12,419,180 12,147,448
8.00 2026 14,850,000 15,153,961
10.00 2002 133 139
Collateralized Mtge Obligation 8.00 2021 13,787,402 14,047,843
8.50 2019 1,448,659 1,597,713
Principal Only 9.50 2018 1,318,240 (e) 1,042,017
9.89 2020 2,441,223 (e) 2,085,223
Trust Series Z 6.00 2024 20,041,441 (d) 16,171,238
Govt Natl Mtge Assn 7.50 2026 20,500,000 20,816,725
8.00 2022-2026 43,265,072 44,753,215
8.50 2026 20,167,411 21,091,885
9.00 2024-2025 6,944,347 7,394,077
Collateralized Mtge Obligation Trust 7.75 2012 1,371,196 1,386,255
Prudential Bache
Collateralized Mtge Obligation 7.965 2019 3,599,707 3,729,022
Total 219,793,523
- ------------------------------------------------------------------------------------------------------------------------
Financial (9.2%)
Banks and savings & loans (3.6%)
BankAmerica
Sub Nts 7.50 2002 8,810,000 9,338,336
BankBoston Capital Trust 8.25 2026 5,000,000 (g) 5,158,600
Boatmen's Bancshares
Sub Nts 9.25 2001 8,950,000 10,087,097
First Bank System 6.875 2007 8,550,000 8,662,347
First Chicago
Sr Nts 9.00 1999 7,900,000 8,458,056
NCNB
Sub Nts 9.125 2001 10,000,000 11,170,800
Standard Credit Card 8.625 2002 10,000,000 10,033,400
Total 62,908,636
- ------------------------------------------------------------------------------------------------------------------------
Financial services (2.4%)
Aristar
Sr Deb 8.875 1998 10,520,000 10,971,729
BankAmerica 7.70 2026 5,000,000 (g) 4,965,000
Beneficial 9.125 1998 10,000,000 10,388,300
Greyhound Financial
Medium-term Nts 7.95 1999 9,600,000 10,026,240
Salomon 7.75 2000 5,000,000 5,199,300
Total 41,550,569
- ------------------------------------------------------------------------------------------------------------------------
Insurance (3.2%)
American United Life Insurance 7.75 2026 4,800,000 (j) 4,755,264
Arkwright Trust 9.625 2026 4,000,000 (g) 4,531,720
Berkley (WR) 8.70 2022 10,000,000 11,272,300
Conseco Finance Trust II 8.70 2026 6,600,000 6,837,270
Equitable Life Assurance 7.70 2015 5,000,000 (g) 5,146,450
Nationwide Trust 9.875 2025 11,500,000 (g) 13,016,390
SunAmerica 9.95 2012 8,000,000 9,714,480
Total 55,273,874
- ------------------------------------------------------------------------------------------------------------------------
Industrial (14.3%)
Automotive & related (2.6%)
Daimler-Benz North America
Medium-term Nts 7.375 2006 14,000,000 14,791,420
General Motors 8.875 2003 7,050,000 7,995,335
General Motors Acceptance 7.00 2000 14,300,000 14,646,203
Medium-term Nts 5.95 1998 8,000,000 8,012,720
Total 45,445,678
- ------------------------------------------------------------------------------------------------------------------------
Building materials & construction (0.6%)
Georgia-Pacific
Credit Sensitive Nt 9.85 1997 10,000,000 10,217,700
- ------------------------------------------------------------------------------------------------------------------------
Chemicals (0.7%)
Dow Chemical 8.85 2021 10,000,000 11,520,100
- ------------------------------------------------------------------------------------------------------------------------
Electronics (0.3%)
Harris 10.375 2018 3,900,000 4,361,604
- ------------------------------------------------------------------------------------------------------------------------
Energy (2.3%)
PDV America 7.875 2003 16,500,000 16,458,420
Texaco Capital
Gtd Deb 7.50 2043 12,000,000 12,445,800
USX 9.375 2022 9,200,000 10,884,520
Total 39,788,740
- ------------------------------------------------------------------------------------------------------------------------
Energy equipment & services (0.3%)
Foster Wheeler 6.75 2005 5,850,000 5,834,147
- ------------------------------------------------------------------------------------------------------------------------
Health care (1.6%)
Lilly (Eli) 6.77 2036 13,300,000 12,823,062
Schering-Plough
Zero Coupon 7.31 1996 15,000,000 (c,g) 15,000,000
Total 27,823,062
- ------------------------------------------------------------------------------------------------------------------------
Industrial equipment & services (1.8%)
Browning-Ferris Inds 9.25 2021 7,000,000 8,628,200
Case 7.25 2005 10,000,000 10,289,500
Deere & Co 8.95 2019 10,000,000 11,698,900
Total 30,616,600
- ------------------------------------------------------------------------------------------------------------------------
Media (1.7%)
Tele-communications 7.875 2013 13,300,000 12,221,636
Sr Deb 9.875 2022 5,000,000 5,381,600
Time Warner Entertainment 8.375 2033 12,000,000 (g) 12,470,280
Total 30,073,516
- ------------------------------------------------------------------------------------------------------------------------
Retail (2.4%)
American Stores 8.00 2026 10,000,000 10,615,300
Dayton Hudson 7.875 2023 18,850,000 18,673,187
Home Depot
Cv 3.25 2001 1,000,000 998,750
Wal-Mart Stores 7.00 2006 12,000,000 (g) 12,345,480
Total 42,632,717
- ------------------------------------------------------------------------------------------------------------------------
Transportation (0.6%)
Burlington Northern 7.00 2025 10,000,000 9,559,000
- ------------------------------------------------------------------------------------------------------------------------
Utilities (9.2%)
Electric (6.8%)
Arizona Public Service
1st Mtge 8.75 2024 5,000,000 5,611,800
Sale Lease-Backed Obligation 8.00 2015 9,000,000 9,525,330
Cajun Electric Power Cooperation
Mtge Trust 8.92 2019 4,960,000 5,481,742
Commonwealth Edison 6.50 2000 9,000,000 9,055,530
Long Island Lighting 9.625 2024 10,000,000 10,594,500
RGS Funding
Sale Lease-Backed Obligation 9.82 2022 9,939,934 12,412,592
Salton Sea
Sr Nts 7.84 2010 10,000,000 (g) 10,423,400
San Diego Gas & Electric
1st Mtge 9.625 2020 9,950,000 11,105,295
Southern California Edison
1st Mtge 8.875 2023 21,000,000 21,875,910
Texas Utilities Electric
1st Mtge 9.75 2021 13,000,000 15,202,590
Wisconsin Electric Power 6.875 2095 8,000,000 7,555,200
Total 118,843,889
- ------------------------------------------------------------------------------------------------------------------------
Telephone (2.4%)
BellSouth Telecommunications 7.00 2095 10,000,000 9,985,600
GTE 10.25 2020 6,050,000 6,993,135
New York Telephone 9.375 2031 7,000,000 8,030,120
Pacific Bell 8.50 2031 15,000,000 16,442,250
Total 41,451,105
- ------------------------------------------------------------------------------------------------------------------------
Foreign (12.7%)(h)
ABN Amro Bank
(U.S. Dollar) 7.75 2023 12,000,000 12,939,360
Alcan Aluminum
(U.S. Dollar) 8.875 2022 9,600,000 10,493,184
Bank of China
(U.S. Dollar) 8.25 2014 7,100,000 7,419,713
British Airport Authority Euro
(British Pound) 5.75 2006 1,500,000 2,588,132
Bundes Republic
(Deutsche Mark) 6.00 2016 10,000,000 6,208,130
(Deutsche Mark) 7.50 2004 14,000,000 10,213,853
City of Helsinki
(U.S. Dollar) Sr Nts 9.15 2006 1,500,000 (j) 1,513,125
Euratom Euro
(U.S. Dollar) 7.75 1997 6,100,000 6,115,250
Financiera Ener Nacional
(U.S. Dollar) 9.375 2006 11,800,000 (g) 12,463,750
Japan Finance
(U.S. Dollar) 9.25 1998 25,950,000 27,416,694
KFW Intl Finance
(U.S. Dollar)
Medium-term Nts 8.50 1999 10,000,000 10,745,900
Korea Electric Power
(U.S. Dollar) 7.75 2013 14,000,000 14,633,920
(U.S. Dollar) 8.00 2002 9,000,000 9,635,220
(U.S. Dollar) Zero Coupon 9.27 2016 35,000,000 (f) 6,858,250
Peoples Republic of China
(U.S. Dollar) 9.00 2096 10,000,000 11,081,700
Petronas
(U.S. Dollar) 7.75 2015 10,000,000 (g) 10,526,900
Republic of Austria Euro
(U.S. Dollar) 10.00 1998 5,000,000 5,306,250
Republic of Italy
(U.S. Dollar) 6.875 2023 23,200,000 22,792,840
Rodamco NV
(U.S. Dollar) 7.30 2005 10,000,000 10,407,800
State of Israel
(U.S. Dollar) 6.375 2005 10,800,000 10,472,436
Telekom Malaysia
(U.S. Dollar) 7.875 2025 10,000,000 (g) 10,511,000
Total 220,343,407
- -----------------------------------------------------------------------------------------------------------------------
Total bonds
(Cost: $1,518,343,525) 1,607,934,894
</TABLE>
- --------------------------------------------------------------------------------
Preferred stocks (0.7%)
- --------------------------------------------------------------------------------
Issuer Shares Value (a)
- --------------------------------------------------------------------------------
Salomon
2.375% 340,000 8,903,750
Sakura Bank ADR
.075% Cv 174,000 (g) 3,258,953
- --------------------------------------------------------------------------------
Total preferred stocks
(Cost: $11,671,710) 12,162,703
- --------------------------------------------------------------------------------
Short-term securities (6.5%)
- --------------------------------------------------------------------------------
Issuer Annualized Amount Value (a)
yield on payable at
date of maturity
purchase
- --------------------------------------------------------------------------------
U.S government agencies (0.2%)
Federal Home Loan Mtge Disc Nt
12-20-96 5.23% $1,100,000 $1,096,816
Federal Natl Mtge Assn Disc Nt
12-09-96 5.24 2,900,000 2,896,208
Total 3,993,024
- --------------------------------------------------------------------------------
Commercial paper (6.2%)
Ameritech Capital
12-18-96 5.29 5,000,000 (k) 4,986,825
Aon
12-06-96 5.28 1,200,000 1,198,948
BBV Finance
12-02-96 5.26 7,300,000 7,297,875
CAFCO
12-18-96 5.28 . 4,700,000 (k) 4,687,686
Cargill
12-13-96 5.27 5,800,000 5,789,004
Dean Witter
01-07-97 5.35 7,900,000 7,855,637
Gannett
12-17-96 5.32 6,900,000 (k) 6,882,731
General Electric
12-17-96 5.28 3,500,000 3,491,306
Kellogg
01-10-97 5.35 7,900,000 7,852,135
Metlife Funding
01-28-97 5.35 2,571,000 2,547,373
Mobil Australia Finance
12-05-96 5.27 2,400,000 (k) 2,398,250
Pfizer
12-05-96 5.27 600,000 (k) 599,563
Pitney Bowes Credit
12-19-96 5.27 6,700,000 6,681,435
Reed Elsevier
12-23-96 5.27 3,500,000 (k) 3,488,260
Southwestern Bell Capital
12-04-96 5.27 2,200,000 (k) 2,198,717
Sandoz
12-18-96 5.29 7,800,000 7,779,525
01-27-97 5.37 700,000 (k) 693,671
Smithkline Beecham
12-03-96 5.29 5,500,000 5,497,594
12-23-96 5.30 8,000,000 7,973,013
01-21-97 5.32 7,300,000 7,243,397
Sysco
12-10-96 5.28 5,400,000 (k) 5,392,125
Wal-mart
12-05-96 5.40 5,300,000 5,296,025
Total 107,831,095
- --------------------------------------------------------------------------------
Letter of credit (0.1%)
Bank of America -
AES Barbers Point
12-20-96 5.29 2,500,000 2,492,681
- --------------------------------------------------------------------------------
Total short-term securities
(Cost: $114,319,341) $114,316,800
- --------------------------------------------------------------------------------
Total investments in securities
(Cost: $1,644,334,576)(m) $1,734,414,397
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Security is partially or fully on loan. See Note 4 to the financial
statements.
(c) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(d) This security is a collateralized mortgage obligation that pays no
interest of principal during its initial accrual period until payment of
previous series within the trust have been paid off. Interest is accrued at an
effective yield; similar to a zero coupon bond.
(e) Principal only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal only is sensitive to the rate of principal payments on the underlying
mortgage assets. A slow (rapid) rate of principal repayments may have an adverse
(positive) effect on yield to maturity. Interest rate disclosed represents
current yield based upon the current cost basis and estimated timing of future
cash flows.
(f) For those zero coupon bonds that become coupon paying at a future date,
the interest rate disclosed represents the annualized effective yield from
the date of acquisition to interest rate reset date disclosed.
(g) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security has
been determined to be liquid under guidelines established by the board.
(h) Foreign security values are stated in U.S. dollars. For debt
securities, principal amounts are denominated in the currency indicated.
(i) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Nov. 30, 1996.
(j) Identifies issues considered to be illiquid, (see Note 5 to the financial
statements). Information concerning such security holdings at Nov. 30, 1996, is
as follows:
Security Acquisition Cost
date
American United Life Insurance*
7.75% 2026 02-13-96 $4,800,000
City of Helsinki
9.15% Sr Nts 2006 02-07-95 $1,497,956
*Represents a security sold under Rule 144A, which is exempt from registration
under the Securities Act of 1933, as amended.
(k) Commercial paper sold within terms of a private placement memorandum, exempt
from registration under section 4(2) of the Securities Act of 1933, as amended,
an may be sold only to dealers in that program or other "accredited investors."
This security has been determined to be liquid under guidelines established by
the board.
(l) Partially pledged as initial margin deposit on the following open interest
rate futures contracts (see Note 7 to the financial statements):
Type of security Notional amount
Sales contracts
U.S Treasury Bonds March 1997 $130,000,000
(m) At Nov. 30, 1996, the cost of securities for federal income tax purposes was
approximately $1,644,334,000 and the approximate aggregate gross unrealized
appreciation and depreciation based on that cost was:
Unrealized appreciation $92,252,000
Unrealized depreciation (2,172,000)
Net unrealized appreciation $90,080,000
<PAGE>
Board members and officers
Board members and officers of the Fund
- -----------------------------------------------------------------
President and interested board member
William R. Pearce
President of all funds in the IDS MUTUAL FUND GROUP.
- -----------------------------------------------------------------
Independent board members
H. Brewster Atwater Jr.
Former chairman and chief executive officer, General Mills, Inc.
Lynne V. Cheney
Distinguished fellow, American Enterprise Institute for
Public Policy Research.
Robert F. Froehlke
Former president of all funds in the IDS MUTUAL FUND GROUP.
Heinz F. Hutter
Former president and chief operating officer, Cargill, Inc.
Anne P. Jones
Attorney and telecommunications consultant.
Melvin R. Laird
Senior counsellor for national and international affairs, The Readers's Digest
Association, Inc.
Edson W. Spencer
Former chairman and chief executive officer, Honeywell, Inc.
Wheelock Whitney
Chairman, Whitney Management Company.
C. Angus Wurtele
Chairman of the board, The Valspar Corporation.
- -----------------------------------------------------------------
Interested board members who are officers and/or employees of AEFC
William H. Dudley
Executive vice president, AEFC.
David R. Hubers
President and chief executive officer, AEFC.
John R. Thomas
Senior vice president, AEFC.
- -----------------------------------------------------------------
Officers who also are officers and/or employees of AEFC
<PAGE>
Peter J. Anderson
Vice President of all funds in the IDS MUTUAL FUND GROUP.
Melinda S. Urion
Treasurer of all funds in the IDS MUTUAL FUND GROUP.
- -------------------------------------------------------------------
Other officer
Leslie L. Ogg
Vice president, general counsel and secretary of all funds in the IDS MUTUAL
FUND GROUP.
<PAGE>
PAGE
IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
(icon of) world globe
IDS Global Growth Fund
Invests in a Portfolio comprised primarily of stocks of companies throughout the
world that are positioned to meet market needs in a changing world economy.
These companies offer above-average potential for long-term growth.
(icon of) world
IDS International Fund
Invests primarily in common stocks of foreign companies that offer potential for
superior growth. The Fund may invest up to 20% of its assets in the U.S. market.
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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.
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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.
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Growth funds
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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IDS Progressive Fund
Invests primarily in undervalued common stocks. The Fund holds stocks for the
long term with the goal of capital growth.
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Growth and income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks, higher-yielding
equities and bonds. Seeks growth of capital and income.
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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.
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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.
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IDS Stock Fund
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Invests in a Portfolio comprised primarily of common stocks of companies
representing many sectors of the economy. Seeks current income and growth of
capital.
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IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential for growth
of capital and income.
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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.
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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.
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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.
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Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly in long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
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IDS Bond Fund
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Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
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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.
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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.
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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.
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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.
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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
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exempt from federal, state and local income taxes. (New York is the only state
that is exempt at the local level.)
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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.
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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.
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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.
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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.
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Quick telephone reference
American Express Telephone Transaction Service
Redemptions and exchanges, dividend payments or reinvestments and
automatic payment arrangements
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National/Minnesota:
800-437-3133
Mpls./St. Paul area:
671-3800
American Express Shareholder Service
Fund performance, objectives and account inquiries
612-671-3733
TTY Service
For the hearing impaired
800-846-4852
American Express Infoline
Automated account information (TouchTone(R) phones only), including current fund
prices and performance, account values and recent account transactions
National/Minnesota:
800-272-4445
Mpls./St. Paul area:
671-1630
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AMERICAN EXPRESS FINANCIAL ADVISORS
IDS Selective Fund
IDS Tower 10
Minneapolis, MN 55440-0010
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