AXP (SM)
Selective
Fund
1999 SEMIANNUAL REPORT
American Express(R) Funds
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AXP Selective Fund seeks to provide shareholders with current income and
preservation of capital by investing in investment-grade bonds.
<PAGE>
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, AXPSelective Fund has concentrated its
investments in the four highest investment grades. Along the way, investors have
enjoyed a steady stream of interest income with minimum risk to their principal.
Contents
From the Chairman 3
From the Portfolio Manager 4
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 24
<PAGE>
(picture of) Arne H. Carlson
Arne H. Carlson
Chairman of the board
From the Chariman
We are in an extraordinary period for investing in financial assets, with many
stocks at their all-time highs. Looking at year 2000, American Express Financial
Corporation, the Fund's investment manager, expects the economy to continue to
grow and long-term interest rates to rise only slightly. This is a great time to
take a close look at your goals and investments. We encourage you to:
o Consult a professional investment adviser 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) Ray Goodner
Ray Goodner
Portfolio manager
From the Portfolio Manager
The U.S. bond market struggled for much of the past six months, as concern about
potentially higher inflation led to a rise in interest rates. AXP Selective Fund
did manage to finish in positive territory, however; its Class A shares produced
a total return (excluding the sales charge) of 0.13% for the first half of the
fiscal year -- June through November 1999.
With the economy continuing to grow at a rapid rate, unemployment at a low level
and the price of oil more than doubling in a matter of months, the unwelcome
specter of higher inflation made bond investors uneasy throughout most of the
period. Evidently, the Federal Reserve Board (the Fed) saw some threat to the
still-tame inflation environment, too, as it raised short-term interest rates
three times over the six months -- in June, August and November -- in an effort
to cool off the economy and, ultimately, relieve whatever upward pressure might
have been building under consumer prices.
RATES UP, BONDS DOWN
The end result was that interest rates across the maturity range crept higher,
pushing down bond prices in the process. Compounding the situation was a heavy
supply of corporate bonds, which further eroded the foundation under prices.
Fortunately, during the autumn interest rates leveled off, creating a better
tone in the market and enabling prices to generally hold their ground.
Given the difficult environment, I maintained a defensive structure in the
portfolio. This centered on reducing the duration to provide some protection
against rising interest rates. (Duration, a function of the average maturity of
the securities in the portfolio, influences the Fund's sensitivity to
interest-rate changes. In general, the longer the duration, the greater the
sensitivity.) In addition, I held a higher-than-normal level of cash reserves.
Looking at bond sectors, the biggest area of investment was high-grade corporate
bonds, followed by U.S. Treasury and mortgage-backed securities. Among that
group, on a relative basis corporates and mortgages provided the best
performance for the Fund. I also held some foreign bonds denominated in U.S.
dollars. While they amounted to a modest portion of the portfolio, their strong
price gains did have a noticeably positive effect on performance.
Although the first half of the fiscal year was disappointing on an absolute
basis, I'm encouraged that the bond market held up as well as it did given the
conditions and that inflation has yet to show clear signs of heading higher.
Looking ahead, while the Fed could raise short-term interest rates somewhat
higher over the near term, I think longer-term rates may be relatively stable
and perhaps even decline before the fiscal year is over. If so, the bond market
and, ultimately, the Fund are likely to experience improving performance.
Ray Goodner
<PAGE>
Fund Facts
Class A -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1999 $ 8.70
May 31, 1999 $ 8.96
Decrease $ 0.26
Distributions -- June 1, 1999 - Nov. 30, 1999
From income $ 0.26
From capital gains $ --
Total distributions $ 0.26
Total return* +0.13%**
Class B -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1999 $ 8.70
May 31, 1999 $ 8.96
Decrease $ 0.26
Distributions -- June 1, 1999 - Nov. 30, 1999
From income $ 0.23
From capital gains $ --
Total distributions $ 0.23
Total return* -0.26%**
Class Y -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1999 $ 8.70
May 31, 1999 $ 8.96
Decrease $ 0.26
Distributions -- June 1, 1999 - Nov. 30, 1999
From income $ 0.27
From capital g $ --
Total distribu $ 0.27
Total return* +0.19%**
*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>
The 10 Largest Holdings
Percent Value
(of net assets) (as of Nov. 30, 1999)
Daimler-Benz North America
7.38% 2006 1.29% $18,995,702
Dayton Hudson
7.88% 2023 1.21 17,840,827
New York Telephone
9.38% 2031 1.01 14,852,142
PDV America
7.88% 2003 1.01 14,766,831
Greenpoint Bank
6.70% 2002 1.00 14,727,000
ARAMARK Services
6.75% 2004 .98 14,444,925
AT&T
8.63% 2031 .98 14,427,283
GMAC
7.00% 2000 .97 14,333,915
Bayerische Landesbank
5.63% 2001 .92 13,586,092
AETNA Services
6.38% 2003 .90 13,243,507
Excludes U.S. Treasury and government agencies holdings.
For further detail about these holdings, please refer to the section
entitled "Investments in Securities."
The 10 holdings listed here
make up 10.27% of net assets
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<CAPTION>
Financial Statements
Statement of assets and liabilities
AXP Selective Fund, Inc.
Nov. 30, 1999 (Unaudited)
Assets
<S> <C> <C>
Investments in Quality Income Portfolio (Note 1) $1,467,934,442
--------------
Liabilities
Dividends payable to shareholders 1,948,374
Accrued distribution fee 13,116
Accrued service fee 479
Accrued transfer agency fee 6,870
Accrued administrative services fee 1,951
Other accrued expenses 197,991
-------
Total liabilities 2,168,781
---------
Net assets applicable to outstanding capital stock $1,465,765,661
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 1,683,944
Additional paid-in capital 1,476,244,862
Undistributed net investment income 256,730
Accumulated net realized gain (loss) 18,820,641
Unrealized appreciation (depreciation) on investments and on
translation of assets and liabilities in foreign currencies (31,240,516)
-----------
Total -- representing net assets applicable to outstanding capital stock $1,465,765,661
==============
Net assets applicable to outstanding shares: Class A $1,085,897,135
Class B $ 205,762,175
Class Y $ 174,106,351
Net asset value per share of outstanding capital stock:
Class A shares 124,745,004 $ 8.70
Class B shares 23,638,433 $ 8.70
Class Y shares 20,011,012 $ 8.70
---------- --------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
AXP Selective Fund, Inc.
Six months ended Nov. 30, 1999 (Unaudited)
Investment income
Income:
<S> <C>
Dividends $ 403,551
Interest 52,815,799
Less foreign taxes withheld (16,190)
-------
Total income 53,203,160
----------
Expenses (Note 2):
Expenses allocated from Quality Income Portfolio 4,013,282
Distribution fee
Class A 1,171,573
Class B 1,015,758
Transfer agency fee 920,522
Incremental transfer agency fee
Class A 62,470
Class B 20,729
Service fee
Class A 169,670
Class B 31,818
Class Y 94,785
Administrative services fees and expenses 377,345
Compensation of board members 4,445
Printing and postage 60,243
Registration fees 50,333
Audit fees 5,125
Other 2,992
-----
Total expenses 8,001,090
Earnings credits on cash balances (Note 2) (28,452)
-------
Total net expenses 7,972,638
---------
Investment income (loss) -- net 45,230,522
----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (7,667,137)
Financial futures contracts 4,799,422
Foreign currency transactions (49,325)
-------
Net realized gain (loss) on investments (2,917,040)
Net change in unrealized appreciation (depreciation) on investments and on
translation of assets and liabilities in foreign currencies (40,702,883)
-----------
Net gain (loss) on investments and foreign currencies (43,619,923)
-----------
Net increase (decrease) in net assets resulting from operations $ 1,610,599
=============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
AXP Selective Fund, Inc.
Nov. 30, 1999 May 31, 1999
Six months ended Year ended
(Unaudited)
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 45,230,522 $ 93,661,839
Net realized gain (loss) on investments (2,917,040) 41,649,023
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (40,702,883) (78,138,561)
----------- -----------
Net increase (decrease) in net assets resulting from operations 1,610,599 57,172,301
--------- ----------
Distributions to shareholders from:
Net investment income
Class A (34,381,212) (70,803,729)
Class B (5,568,298) (9,096,813)
Class Y (5,815,930) (13,407,056)
Net realized gain
Class A -- (9,639,607)
Class B -- (1,455,785)
Class Y -- (1,906,262)
----------- -------------
Total distributions (45,765,440) (106,309,252)
----------- ------------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 54,444,592 164,324,490
Class B shares 39,156,864 106,562,827
Class Y shares 22,493,630 103,567,821
Reinvestment of distributions at net asset value
Class A shares 24,283,867 60,263,276
Class B shares 4,748,897 9,546,709
Class Y shares 5,606,450 15,313,318
Payments for redemptions
Class A shares (130,578,432) (249,392,529)
Class B shares (Note 2) (42,467,577) (52,552,712)
Class Y shares (44,364,330) (137,564,985)
----------- ------------
Increase (decrease) in net assets from capital share transactions (66,676,039) 20,068,215
----------- ----------
Total increase (decrease) in net assets (110,830,880) (29,068,736)
Net assets at beginning of period 1,576,596,541 1,605,665,277
------------- -------------
Net assets at end of period $1,465,765,661 $1,576,596,541
============== ==============
Undistributed net investment income $ 256,730 $ 791,648
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See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
AXP Selective Fund, Inc.
(Unaudited as to Nov. 30, 1999)
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 has 10 billion
authorized shares of capital stock.
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) 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
The Fund invests all of its assets in Quality Income Portfolio (the Portfolio),
a series of Income Trust (the Trust), an open-end investment company that has
the same objectives as the Fund. 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 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 Nov. 30, 1999 was 99.95%.
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 generally accepted accounting
principles 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
Annual 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:
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 0.05% to
0.025% 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 $19.50
o Class B $20.50
o Class Y $17.50
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 Plan), 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. The Plan went into effect
July 1, 1999. Under terms of a prior Plan and Agreement of Distribution (the
Prior Plan) that ended June 30, 1999, the Fund paid a distibution fee for Class
B shares at an annual rate up to 0.75% of average daily net assets. The Prior
Plan was not effective with respect to Class A 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. Under terms of a prior agreement that
ended June 30, 1999, the Fund paid a shareholder service fee for Class A and
Class B shares at a rate of 0.175% of average daily net assets. Effective July
1, 1999, the agreement for Class A and Class B shares was converted to the Plan
and Agreement of Distribution discussed above.
Sales charges received by the Distributor for distributing Fund shares were
$984,931 for Class A and $136,360 for Class B for the six months ended Nov. 30,
1999.
During the six months ended Nov. 30, 1999, the Fund's transfer agency fees were
reduced by $28,452 as a result of earnings credits from overnight cash balances.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Nov. 30, 1999
Class A Class B Class Y
Sold 6,194,114 4,447,921 2,556,735
Issued for reinvested distributions 2,764,911 540,829 638,869
Redeemed (14,857,234) (4,828,950) (5,036,425)
----------- ---------- ----------
Net increase (decrease) (5,898,209) 159,800 (1,840,821)
Year ended May 31, 1999
Class A Class B Class Y
Sold 17,815,988 11,571,189 11,212,661
Issued for reinvested distributions 6,549,613 1,038,289 1,668,598
Redeemed (27,089,924) (5,713,123) (14,984,989)
----------- ---------- -----------
Net increase (decrease) (2,724,323) 6,896,355 (2,103,730)
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 $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 Nov.
30, 1999.
<PAGE>
<TABLE>
<CAPTION>
5. FIANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Fiscal period ended May 31,
Per share income and capital changesa
Class A
1999b 1999 1998 1997 1996c
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.96 $9.23 $9.00 $9.00 $9.53
Income from investment operations:
Net investment income (loss) .26 .54 .57 .59 .33
Net gains (losses) (both realized and unrealized) (.26) (.20) .31 .12 (.52)
Total from investment operations -- .34 .88 .71 (.19)
Less distributions:
Dividends from net investment income (.26) (.54) (.58) (.58) (.31)
Distributions from realized gains -- (.07) (.07) (.13) (.03)
Total distributions (.26) (.61) (.65) (.71) (.34)
Net asset value, end of period $8.70 $8.96 $9.23 $9.00 $9.00
Ratios/supplemental data
Net assets, end of period (in millions) $1,086 $1,170 $1,231 $1,286 $1,408
Ratio of expenses to average daily net assetsd .95%e .89% .86% .88% .89%e
Ratio of net investment income (loss)
to average daily net assets 5.93%e 5.85% 6.20% 6.36% 6.27%e
Portfolio turnover rate
(excluding short-term securities) 28% 30% 20% 31% 18%
Total returnf .13% 3.68% 10.15% 8.08% (2.03%)
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Six months ended Nov. 30, 1999 (Unaudited).
c The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Adjusted to an annual basis.
f Total return does not reflect payment of a sales charge.
</TABLE>
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<TABLE>
<CAPTION>
Fiscal period ended May 31,
Per share income and capital changesa
Class B Class Y
1999b 1999 1998 1997 1996c 1999b 1999 1998 1997 1996c
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.96 $9.23 $9.00 $9.00 $9.53 $8.96 $9.23 $9.00 $9.00 $9.53
Income from investment operations:
Net investment income (loss) .22 .47 .50 .52 .30 .26 .55 .58 .60 .34
Net gains (losses)
(both realized and unrealized) (.25) (.20) .31 .12 (.52) (.25) (.20) .31 .12 (.52)
Total from investment operations (.03) .27 .81 .64 (.22) .01 .35 .89 .72 (.18)
Less distributions:
Dividends from net investment income (.23) (.47) (.51) (.51) (.28) (.27) (.55) (.59) (.59) (.32)
Distributions from realized gains -- (.07) (.07) (.13) (.03) -- (.07) (.07) (.13) (.03)
Total distributions (.23) (.54) (.58) (.64) (.31) (.27) (.62) (.66) (.72) (.35)
Net asset value, end of period $8.70 $8.96 $9.23 $9.00 $9.00 $8.70 $8.96 $9.23 $9.00 $9.00
Ratios/supplemental data
Net assets, end of period
(in millions) $206 $210 $153 $126 $108 $174 $196 $221 $202 $212
Ratio of expenses to average daily
net assetsd 1.71%e 1.65% 1.62% 1.64% 1.63%e .80%e .81% .79% .72% .70%e
Ratio of net investment
income (loss) to average
daily net assets 5.18%e 5.10% 5.44% 6.40% 5.56%e 6.07%e 5.93% 6.27% 7.02% 6.51%e
Portfolio turnover rate
(excluding short-term securities) 28% 30% 20% 31% 18% 28% 30% 20% 31% 18%
Total returnf (.26%) 2.89% 9.32% 7.26% (2.04%) .19% 3.77% 10.21% 8.27% (1.96%)
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Six months ended Nov. 30, 1999 (Unaudited).
c The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996.
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Adjusted to an annual basis.
f Total return does not reflect payment of a sales charge.
</TABLE>
<PAGE>
Financial Statements
Statement of assets and liabilities
Quality Income Portfolio
Nov. 30, 1999 (Unaudited)
Assets
Investments in securities, at value (Note 1)
(identified cost $1,517,888,430) $1,483,658,035
Dividends and accrued interest receivable 20,649,069
Receivable for investment securities sold 12,979
------
Total assets 1,504,320,083
Liabilities
Disbursements in excess of cash on demand deposit 43,646
Payable for investment securities purchased 35,572,815
Accrued investment management services fee 20,669
Other accrued expenses 2,568
-----
Total liabilities 35,639,698
----------
Net assets $1,468,680,385
==============
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of operations
Quality Income Portfolio
Six months ended Nov. 30, 1999 (Unaudited)
Investment income
Income:
<S> <C>
Dividends $ 403,750
Interest 52,852,579
Less foreign taxes withheld (16,198)
-------
Total income 53,240,131
----------
Expenses (Note 2):
Investment management services fee 3,972,412
Compensation of board members 5,578
Custodian fees 32,698
Audit fees 15,375
Other 39
--
Total expenses 4,026,102
Earnings credits on cash balances (Note 2) (10,828)
- -------
Total net expenses 4,015,274
---------
Investment income (loss) -- net 49,224,857
----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) (7,674,206)
Financial future contracts 4,801,845
Foreign currency transactions (49,365)
-------
Net realized gain (loss) on investments (2,921,726)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (40,719,315)
-----------
Net gain (loss) on investments and foreign currencies (43,641,041)
-----------
Net increase (decrease) in net assets resulting from operations $ 5,583,816
=============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of changes in net assets
Quality Income Portfolio
Nov. 30, 1999 May 31, 1999
Six months ended Year ended
(Unaudited)
Operations
<S> <C> <C>
Investment income (loss)-- net $ 49,224,857 $ 100,906,199
Net realized gain (loss) on investments (2,921,726) 41,663,256
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies
(40,719,315) (78,170,119)
----------- -----------
Net increase (decrease) in net assets resulting from operations 5,583,816 64,399,336
Net contributions (withdrawals) from partners (114,741,991) (93,477,216)
------------ -----------
Total increase (decrease) in net assets (109,158,175) (29,077,880)
Net assets at beginning of period 1,577,838,560 1,606,916,440
------------- -------------
Net assets at end of period $1,468,680,385 $1,577,838,560
============== ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
Quality Income Portfolio (Unaudited as to Nov. 30, 1999)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust)
and is registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. Quality Income Portfolio
invests primarily in investment-grade bonds. The Declaration of Trust permits
the Trustees to issue non-transferable interests in the Portfolio.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles 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
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
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.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the Portfolio on
a forward-commitment or when-issued basis can take place one month or more after
the transaction date. During this period, such securities are subject to market
fluctuations, and they may affect the Portfolio's gross net assets the same as
owned securities. The Porfolio designates cash or liquid high-grade short-term
debt securities at least equal to the amount of its commitment. As of Nov. 30,
1999, the Porfolio had entered into outstanding when-issued or
forward-commitments of $35,194,690.
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. 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 0.52% to 0.395% annually. Under the agreement, the Trust also
pays taxes, brokerage commissions and nonadvisory expenses, which include
custodian fees, audit and certain legal fees, fidelity bond premiums,
registration fees for units, office expenses, consultants' fees, compensation of
trustees, corporate filing fees, expenses incurred in connection with lending
securities of the Portfolio and any other expenses properly payable by the Trust
or Portfolio and approved by the board.
During the six months ended Nov. 30, 1999, the Portfolio's custodian fees were
reduced by $10,828 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 $400,663,415 and $449,777,855, respectively, for the six
months ended Nov. 30, 1999. For the same period, the portfolio turnover rate was
28%. Realized gains and losses are determined on an identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS As of Nov. 30, 1999, investment is securities
included securities valued at $13,078,753 that were pledged as collateral to
cover initial margin deposit on 1,100 open sales contracts. The market value of
the open sales contracts as of Nov. 30, 1999, was $102,368,750 with a net
unrealized loss of $579,994. See "Summary of significant accounting policies."
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
Quality Income Portfolio
Nov. 30, 1999 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (92.1%)
Issuer Coupon Principal Value(a)
rate amount
Government obligations (29.8%)
Federal Republic of Germany
(European Monetary Unit)
<S> <C> <C> <C> <C> <C>
07-04-27 6.50% 10,000,000(b) $10,975,022
Overseas Private Investment
U.S. Govt Guaranty Series 1996A
01-15-09 6.99 10,000,000 9,980,100
People's Republic of China
(U.S. Dollar)
01-15-96 9.00 10,000,000(b) 9,501,890
Resolution Funding Corp
Zero Coupon
04-15-16 8.05 47,000,000(c) 15,454,987
U.S. Treasury
02-15-00 5.88 25,000,000 25,023,658
08-15-00 6.00 11,400,000 11,421,410
11-15-01 7.50 109,000,000 111,950,706
02-15-04 5.88 8,000,000 7,947,834
05-15-04 7.25 25,000,000 26,046,823
08-15-04 7.25 26,800,000 27,963,278
05-15-06 6.88 31,150,000 32,170,047
11-15-16 7.50 128,370,000(i) 139,909,962
TIPS
01-15-07 3.38 8,050,000(h) 8,135,047
Total 436,480,764
Mortgage-backed securities (20.8%)
Federal Home Loan Mtge Corp
07-01-16 8.00 418 425
01-01-17 8.00 3,390 3,460
03-01-17 8.50 83,317 86,051
06-01-17 8.50 52,758 54,687
04-01-20 9.00 1,001,484 1,049,675
04-01-21 9.00 825,123 868,442
03-01-22 8.50 1,819,174 1,883,409
08-01-22 8.50 1,800,670 1,863,135
06-01-24 7.50 7,717,037 7,721,822
02-01-25 8.00 3,148,607 3,199,771
Collateralized Mtge Obligation
09-01-19 8.50 83,091 85,973
Federal Housing Admin
01-01-24 7.43 8,634,693 8,453,904
Federal Natl Mtge Assn
11-01-02 10.00 76 78
06-15-09 6.38 33,000,000 32,017,589
04-01-14 6.50 17,803,989 17,420,898
12-01-14 6.50 15,000,000(j) 14,657,813
10-01-23 6.50 7,815,623 7,522,537
11-01-26 8.00 5,442,542 5,519,064
04-01-27 7.50 6,963,339 6,943,772
06-01-27 7.50 7,591,929 7,570,596
07-01-27 8.00 6,081,754 6,165,980
01-01-28 6.50 2,842,712 2,713,028
05-01-28 6.50 17,344,667 16,553,403
12-01-28 6.50 18,502,372 17,658,294
02-01-29 6.50 19,057,401 18,188,003
03-01-29 6.00 4,000,001 3,707,521
03-01-29 6.50 14,528,809 13,853,407
05-01-29 6.00 1,000,001 926,881
06-01-29 7.00 20,864,049 20,407,647
07-01-29 6.00 15,000,001 13,903,201
11-01-29 7.00 20,000,000 19,537,600
12-01-29 7.00 20,800,000(j) 20,293,000
Collateralized Mtge Obligation
10-25-19 8.50 1,448,659 1,509,657
Principal Only
01-25-20 9.89 83,141(f) 82,490
09-01-18 9.50 431,103(f) 356,028
Trust Series Z
02-25-24 6.00 23,863,884(g) 20,141,595
Govt Natl Mtge Assn
05-15-26 7.50 10,664,986 10,638,324
Prudential Bache
Collateralized Mtge Obligation
04-01-19 7.97 1,985,282 2,016,376
Total 305,575,536
Automotive & related (2.8%)
Daimler-Benz North America
Company Guaranty Medium-term Nts Series A
09-15-06 7.38 18,745,000 18,995,702
General Motors
05-15-03 8.88 7,050,000 7,430,943
GMAC
Medium-term Nts
03-01-00 7.00 14,300,000 14,333,915
Total 40,760,560
Banks and savings & loans (6.9%)
ABN-Amro Bank
(U.S. Dollar) Sub Nts Series B
05-15-23 7.75 12,000,000(b) 11,833,547
Banco General
(U.S. Dollar)
08-01-02 7.70 6,400,000(b,d) 6,029,583
Bayerische Landesbank
(U.S. Dollar) Deposit Nts
02-26-01 5.63 13,750,000(b) 13,586,092
Cullen/Frost Capital
Series A
02-01-27 8.42 10,000,000 9,583,050
Firstar Capital
Company Guaranty Series B
12-15-26 8.32 5,900,000 5,580,334
Greenpoint Bank
Sr Nts
07-15-02 6.70 15,000,000 14,727,000
Morgan (JP)
Sr Sub Medium-term Nts Series A
02-15-12 4.00 9,350,000(k) 8,226,691
NationsBank
Sub Nts
11-01-01 9.25 8,950,000 9,321,231
NCNB
Sub Nts
10-15-01 9.13 10,000,000 10,385,563
Sanwa Finance Aruba
(U.S. Dollar)
07-15-09 8.35 12,000,000(b) 12,260,196
Total 101,533,287
Building materials & construction (0.3%)
Foster Wheeler
11-15-05 6.75 5,850,000 4,830,795
Chemicals (1.5%)
Dow Chemical
01-15-09 5.97 12,755,000 11,672,113
USA Waste Services
Sr Nts
10-01-07 7.13 11,900,000 9,945,463
Total 21,617,576
Communications equipment & services (0.6%)
Telekom Malaysia
(U.S. Dollar)
08-01-25 7.88 10,000,000(b,d) 9,081,038
Electronics (0.6%)
Hyundai Semiconductor
(U.S. Dollar) Sr Nts
05-15-07 8.63 10,800,000(b,d) 8,669,430
Energy (3.2%)
PDV America
Sr Nts
08-01-03 7.88 16,500,000 14,766,831
Phillips Petroleum
03-15-28 7.13 12,000,000 10,646,288
Texaco Capital
Gtd Deb
03-01-43 7.50 12,000,000 11,245,688
USX-Marathon Group
05-15-22 9.38 9,200,000 9,732,054
Total 46,390,861
Financial services (2.4%)
KFW Intl Finance
(U.S. Dollar) Medium-term Nts
12-15-99 8.50 10,000,000(b) 10,010,526
Marlin Water Trust
Sr Nts
12-15-01 7.09 8,300,000 8,171,051
Railcar Leasing
(U.S. Dollar)
01-15-13 7.13 12,150,000(b,d) 12,189,832
Salomon
Sr Nts
05-15-00 7.75 5,000,000 5,041,600
Total 35,413,009
Health care (0.8%)
Lilly (Eli)
01-01-36 6.77 13,300,000 12,095,255
Health care services (2.3%)
AETNA Services
08-15-03 6.38 13,650,000 13,243,507
HEALTHSOUTH
Sr Nts
06-15-08 7.00 15,000,000 12,505,245
Service Corp Intl
03-15-08 6.50 11,550,000 8,704,738
Total 34,453,490
Industrial equipment & services (1.7%)
ARAMARK Services
08-01-04 6.75 15,000,000 14,444,925
Deere & Co
06-15-19 8.95 10,000,000 10,562,649
Total 25,007,574
Insurance (4.4%)
Arkwright CSN Trust
08-15-26 9.63 11,000,000(d) 11,347,576
Conseco
Medium-term Nts Series B
06-21-01 7.60 10,000,000 9,919,298
Conseco Financing Trust
Company Guaranty
11-15-26 8.70 6,600,000 5,886,558
Nationwide CSN Trust
02-15-25 9.88 11,500,000(d) 12,229,619
SAFECO Capital
Company Guaranty
07-15-37 8.07 15,000,000 12,945,266
SunAmerica
08-01-08 9.95 11,000,000 12,977,359
Total 65,305,676
Media (0.8%)
Cox Enterprises
06-14-02 6.63 12,000,000(d) 11,839,822
Metals (0.7%)
Alcan Aluminum
(U.S. Dollar)
01-15-22 8.88 9,600,000(b) 10,152,640
Miscellaneous (0.1%)
Jasmine Submarine Telecom
(U.S. Dollar) Sr Nts
05-30-11 8.48 1,443,645(b,d) 1,313,307
Paper & packaging (0.8%)
Caraustar Inds
06-01-09 7.38 11,775,000 11,216,884
Retail (1.8%)
Dayton Hudson
06-15-23 7.88 18,850,000 17,840,827
Wal-Mart CRAVE Trust
07-17-06 7.00 9,282,557(d) 9,111,016
Total
26,951,843
Transportation (1.4%)
Burlington Northern Santa Fe
12-15-25 7.00 10,000,000 9,072,859
Enterprise Rent-A-Car USA Finance
02-15-08 6.80 10,000,000(d) 9,349,000
Zhuhai Highway
(U.S. Dollar) Sr Nts
07-01-06 9.13 2,850,000(b,d) 1,781,250
Total 20,203,109
Utilities -- electric (3.9%)
Arizona Public Service
1st Mtge Sale Lease-backed Obligation
12-30-15 8.00 9,000,000 8,983,747
Commonwealth Edison
1st Mtge Series 90
04-15-00 6.50 9,000,000 8,995,910
Edison Mission Energy
Sr Nts
06-15-09 7.73 8,600,000(d) 8,575,086
Israel Electric
(U.S. Dollar) Sr Nts
12-15-26 7.88 9,000,000(b,d) 8,229,600
Korea Electric Power
(U.S. Dollar) Zero Coupon
04-01-16 10.07 35,000,000(b,e) 5,296,127
Salton Sea Funding
Series C
05-30-10 7.84 10,000,000 9,887,697
Wisconsin Electric Power
12-01-95 6.88 8,000,000 7,006,924
Total 56,975,091
Utilities -- gas (0.6%)
El Paso Energy
Sr Nts Series B
07-15-01 6.63 8,675,000 8,596,752
Utilities -- telephone (3.9%)
AT&T
01-15-25 8.35 5,000,000 5,088,100
12-01-31 8.63 14,000,000 14,427,283
GTE Florida
02-01-28 6.86 12,450,000 11,384,380
New York Telephone
07-15-31 9.38 14,000,000 14,852,142
U S West Capital Funding
Company Guaranty
08-15-01 6.88 12,000,000(d) 11,980,320
Total 57,732,225
Total bonds
(Cost: $1,386,741,745) $1,352,196,524
Preferred stock (0.6%)
Issuer Shares Values (a)
Salomon Income Financing Trust
2.38% 340,000 $8,861,420
Total preferred stock
(Cost: $8,500,000) $8,861,420
Short-term securities (8.2%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (7.4%)
Federal Home Loan Mtge Corp Disc Nts
12-16-99 5.26% $10,500,000 $10,474,244
01-10-00 5.60 2,200,000 2,185,092
01-12-00 5.52 14,100,000 14,007,707
02-11-00 5.63 900,000 889,014
Federal Natl Mtge Assn Disc Nts
12-02-99 5.24 24,700,000 24,692,439
12-15-99 5.26 22,200,000 22,149,770
12-17-99 5.26 10,900,000 10,871,134
02-04-00 5.60 23,900,000 23,636,224
Total 108,905,624
Commercial paper (0.9%)
Ford Motor Credit
12-14-99 5.31% $1,000,000 $997,939
Merrill Lynch
01-26-00 5.99 5,600,000 5,547,066
Northern States Power
12-07-99 5.32 1,100,000 1,098,864
Petrofina (Delaware)
01-18-00 6.03 6,100,000 6,050,598
Total 13,694,467
Total short-term securities
(Cost: $122,646,685) $122,600,091
Total investments in securities
(Cost: $1,517,888,430)(l) $1,483,658,035
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. As of Nov. 30,
1999, the value of foreign securities represented 8.91% of net assets.
(c) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(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) 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 reset date disclosed.
(f) 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.
(g) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until previous series within the
trust have been paid off. Interest is accrued at an effective yield; similar to
a zero coupon bond.
(h) U.S. Treasury inflation-protection securities (TIPS) are securities in which
the principal amount is adjusted for inflation and the semiannual interest
payments equal a fixed percentage of the inflation-adjusted principal amount.
(i) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 4 to the financial statements):
Type of security Notional amount
Sale contracts U.S. Treasury Bonds, March 2000 $110,000,000
(j) At Nov. 30, 1999, the cost of securities purchased, including interest
purchased, on a when-issued basis was $35,194,690.
(k) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on Nov. 30, 1999.
(l) At Nov. 30, 1999, the cost of securities for federal income tax purposes was
approximately $1,517,888,000 and the approximate aggregate gross unrealized
appreciation and depreciation based on that cost was:
Unrealized appreciation $13,197,000
Unrealized depreciation (47,427,000)
-----------
Net unrealized depreciation $(34,230,000)
<PAGE>
American
Express
Funds
AXP Selective Fund
IDS Tower 10
Minneapolis, MN 55440-0010
Ticker Symbol
Class A INSEX Class B ISEBX Class Y IDEYX
PRSRT STD AUTO
U.S. POSTAGE
PAID
SPENCER, IA
PERMIT NO. 85
S-6385 N (1/00)
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
