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1998 ANNUAL REPORT
IDS
Utilities
Income
Fund
(prospectus enclosed)
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The primary goal of IDS Utilities Income Fund, Inc. is a high level of
current income. Secondary goals are growth of income and capital. The Fund
invests primarily in securities of public utility companies.
(This annual report includes a prospectus that describes in detail the
Fund's objective, investment policies, risks, sales charges, fees and
other matters of interest. Please read the prospectus carefully before you
invest or send money.)
American Express Financial Advisors
Distributed by American Express Financial Advisors Inc.
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(icon of) light bulb
Dependable
dividends
Making money in the stock market isn't limited to trying to find stocks
with rising prices. Many investors prefer to focus on the steady income
stream provided by securities that pay substantial dividends. And perhaps
no segment of the market has a more consistent record of paying dividends
than the utilities industry -- the companies that provide basics such as
electricity, water and telephone service.
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Contents
The purpose of this annual report is to tell investors how the Fund
performed.
(icon of) One open book inside of another.
The prospectus, which is bound into the middle of this annual report,
describes the Fund in detail.
1998 annual report
From the chairman 4
From the portfolio manager 4
The Fund's ten largest holdings 6
Making the most of the Fund 7
The Fund's long-term performance 8
Independent auditors' report 9
Financial statements 10
Notes to financial statements 13
Investments in securities 22
IDS mutual funds 25
Federal income tax information 29
1998 prospectus
The Fund in brief 3p
Goals 3p
Investment policies and risks 3p
Manager and distributor 3p
Portfolio manager 3p
Alternative purchase arrangements 3p
Sales charge and Fund expenses 4p
Performance 6p
Financial highlights 6p
Total returns 8p
Investment policies and risks 10p
Facts about investments and their risks 10p
Alternative investment option 15p
Valuing Fund shares 15p
How to purchase, exchange or redeem shares 16p
Alternative purchase arrangements 16p
How to purchase shares 18p
How to exchange shares 21p
How to redeem shares 21p
Reductions and waivers of the sales charge 25p
Special shareholder services 29p
Services 29p
Quick telephone reference 29p
Distributions and taxes 30p
Dividend and capital gain distributions 30p
Reinvestments 30p
Taxes 31p
How to determine the correct TIN 33p
How the Fund is organized 34p
Shares 34p
Voting rights 34p
Shareholder meetings 34p
Board members and officers 34p
Investment manager 36p
Administrator and transfer agent 36p
Distributor 37p
About American Express Financial Corporation 38p
General information 38p
Year 2000 38p
Appendix 39p
Description of derivative instruments 39p
(This annual report is not part of the prospectus.)
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To our shareholders
From the chairman
If you're an experienced investor, you know that the past few years have
been unusually strong in most financial markets. Perhaps just as
important, history shows that bull markets don't last forever. Though
they're often unpredictable, market declines -- whether they're brief or
long-lasting, moderate or substantial -- are always a possibility. We saw
evidence of that last October, when declines in certain Asian markets
spawned a sharp drop in several financial markets worldwide, including the
U.S.
The potential for such volatility reinforces the need for investors to
review periodically their long-term goals and examine whether their
investment program remains on track to achieving them. Your quarterly
investment statements are one part of that monitoring process. The other
is a meeting with your American Express financial advisor. That becomes
even more important if there's a major change in your financial situation
or in the financial markets.
William R. Pearce
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
From the portfolio manager
Utility stocks performed extremely well during the past 12 months, leading
to an exceptionally strong gain by IDS Utilities Income Fund. During the
Fund's fiscal year -- July 1997 through June 1998 -- its Class A shares
generated a total return of 28.4%, which nearly matched that of the broad
stock market. (A portion of the Fund's return came in the form of a
capital gain, which was paid to shareholders last December and reduced the
Fund's net asset value by a like amount at that time.)
The period began with the stock market continuing to enjoy the positive
effects of steady economic growth, low inflation, declining long-term
interest rates and generally healthy corporate profits. Despite a few
moderate downturns stemming from temporary run-ups in interest rates and
the financial crisis in Asia, the market followed a generally positive
course.
For utility stocks, the overall decline in interest rates was an
especially powerful factor. (As with bonds, the prices of utility stocks
usually rise when rates fall because the stocks attract more buying from
income-seeking investors.) In addition, utilities garnered increasing
(This annual report is not part of the prospectus.)
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interest from concerned investors who were looking for what they perceived
to be a "safe haven" investment in the wake of last fall's upheaval in
many smaller financial markets.
Telephone stocks lead performance
Leading the way for the Fund were its holdings among telephone utilities,
which comprised about a third of the portfolio and racked up the most
impressive gains. Working in phones' favor were predictable earnings
growth and strong cash flow, as well as a less-worrisome regulatory
environment. Although they couldn't keep up with the phones' powerful
performance, stocks of electric utilities also made a sizable
contribution. Natural gas stocks, on the other hand, were relatively weak
performers, as excess supply and mild weather restrained their prices.
I kept cash reserves low (less than 5% of assets) during the 12 months, a
beneficial strategy given the modest return cash generated compared with
utility stocks. As for changes to the portfolio, I reduced investments in
stocks of foreign utilities and put more money to work in domestic issues.
Also, last summer I added a bit to the telephone exposure while
eliminating the Fund's holdings among real estate investment trusts.
Lastly, to counter the ongoing regulatory uncertainty that surrounds
electric and telephone companies, I continued to concentrate investments
in those companies that appear best able to withstand possible regulatory
changes.
Looking to the current fiscal year, telephone and natural gas utilities
appear to be in the best position as they have the potential to deliver
good earnings results, which most likely would provide a boost to their
prices. Electric utility stocks, while their earnings growth will likely
be slower, remain attractively priced and, therefore, offer opportunity
for gain. I think the biggest potential hurdle for utilities is a rise in
long-term interest rates, which could come about if economic growth
continues at a robust pace.
Bernhard Fleming
(picture of) Bernhard Fleming
Bernhard Fleming
Portfolio Manager
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Class A
12-month performance
(All figures per share)
Net asset value (NAV)
June 30, 1998 $8.98
June 30, 1997 $8.04
Increase $0.94
Distributions
July 1, 1997 - June 30, 1998
From income $0.50
From capital gains $0.73
Total distributions $1.23
Total return* +28.4%**
Class B
12-month performance
(All figures per share)
Net asset value (NAV)
June 30, 1998 $8.98
June 30, 1997 $8.04
Increase $0.94
Distributions
July 1, 1997 - June 30, 1998
From income $0.44
From capital gains $0.73
Total distributions $1.17
Total return* +27.5%**
Class Y
12-month performance
(All figures per share)
Net asset value (NAV)
June 30, 1998 $8.98
June 30, 1997 $8.04
Increase $0.94
Distributions
July 1, 1997 - June 30, 1998
From income $0.51
From capital gains $0.73
Total distributions $1.24
Total return* +28.4%**
* 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.
(This annual report is not part of the prospectus.)
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The Fund's ten largest holdings
Percent Value
(of Fund's net assets) (as of June 30, 1998)
BellSouth 4.00% $46,987,500
Ameritech 3.44 40,387,500
US West Communications Group 3.40 39,950,000
GTE 3.20 37,546,875
WorldCom 3.05 35,805,339
Century Telephone Enterprises 2.64 30,965,625
BCE 2.54 29,881,250
Enron 2.19 25,679,687
FPL Group 2.15 25,200,000
Duke Energy 2.02 23,700,000
For further detail about these holdings, please refer to the section
entitled "Investments in securities" herein.
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The ten holdings listed here make up 28.63% of the Fund's net assets
(This annual report is not part of the prospectus.)
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Making the most of the Fund
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost averaging --
a time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly.
You'll automatically buy more shares when the Fund's share price is low,
fewer shares when it is high.
Using this strategy does not ensure a profit or avoid a loss if the market
declines, and requires that you be able to keep on investing on a regular
basis, even when the price of your shares falls or the market declines.
Investing in this manner can be an effective way to accumulate shares to
meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
(footnotes to table) By investing an equal number of dollars each month...
(arrow in table pointing to April) you automatically buy more shares when the
per share market price is low...
(arrow in table pointing to September) and fewer shares when the per share
market price is high.
You have paid an average price of only $17.91 per share over the 10
months, while the average market price actually was $18.10.
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's
investments do well
o you receive capital gains when the gains on
investments sold by the Fund exceed losses
o you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and
capital gain distributions to buy additional shares of the Fund or another
fund.
(This annual report is not part of the prospectus.)
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The Fund's long-term performance
Assumes: oHolding period from 8/1/88 to 6/30/98. oReturns do not reflect
taxes payable on distributions. oReinvestment of all income and capital
gain distributions for the Fund, with a value of $19,890. Also see
"Performance" in the Fund's current prospectus.
Standard & Poor's 500 Stock Index (S&P 500), an unmanaged list of common
stocks, is frequently used as a general measure of market performance.
However, the S&P 500 companies are generally larger than those in which
the Fund invests.
How your $10,000 has grown in IDS Utilities Income Fund
$50,000
$40,000
$36,952
Utilities
$30,000 Income Fund
Class A
S&P 500
$20,000 Stock Index
$10,000
9,500
88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
Average annual total return
(as of June 30, 1998)
1 year Since 5 years
inception
Class A +21.98% +14.09%* +13.06%
Class B +23.47% +21.41%** --%
Class Y +28.43% +22.97%** --%
*Inception date was Aug. 1, 1988.
**Inception date was March 20, 1995.
On the graph above you can see how the Fund's total return compared to a
widely cited performance index, the S&P 500. In comparing Utilities Income
Fund (Class A) to this index, you should take into account the fact that
the Fund's performance reflects the maximum sales charge of 5%, while such
charges are not reflected in the performance of the index.
Your investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. Average annual
total return figures reflect the impact of the applicable sales charge up
to a maximum of 5%. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
(This annual report is not part of the prospectus.)
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The financial statements contained in Post-Effective Amendment #20 to
Registration Statement No. 33-20872 filed on or about Aug. 27, 1998 are
incorporated by reference.
<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.
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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.
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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
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 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 Stock 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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(This annual report is not part of the prospectus.)
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IDS mutual funds
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 & income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest. Foreign investments may be subject to currency fluctuations and
political and economic risks of the countries in which the investments are made.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks that generaly pay
dividends 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
Invests in a Portfolio comprised primarily of common stock 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 that 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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(This annual report is not part of the prospectus.)
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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 of long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
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IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
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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 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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(This annual report is not part of the prospectus.)
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IDS mutual funds
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.
(icon of) shield with piggy bank enclosed
For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus by contacting your financial advisor or
writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534. Read it carefully before you invest or send money.
(This annual report is not part of the prospectus.)
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Federal income tax information
IDS Utilities Income Fund, Inc.
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its
fiscal year. Some of the dividends listed below were reported to you on a
Form 1099-DIV, Dividends and Distributions, last January. Dividends paid
to you since the end of last year will be reported to you on a tax
statement sent next January. Shareholders should consult a tax advisor on
how to report distributions for state and local purposes.
IDS Utilities Income Fund, Inc.
Fiscal year ended June 30, 1998
Class A
Income distributions
taxable as dividend income, 46.93% qualifying for deduction by
corporations.
Payable date Per share
Sept. 26, 1997 $0.06111
Dec. 26, 1997 0.32906
March 26, 1998 0.05311
June 25, 1998 0.05892
Total $0.50220
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 26, 1997 $0.73184
Total distributions $1.23404
The distribution of $1.06090 per share, payable Dec. 26, 1997, consisted
of $0.06141 derived from net investment income, $0.26765 from net
short-term capital gains (a total of $0.32906 taxable as dividend income)
and $0.73184 from net long-term capital gains.
The long-term gains distribution is divided into two rate categories: 28%
- $0.43237 and 20% - $0.29947.
(This annual report is not part of the prospectus.)
<PAGE>
Federal income tax information
Class B
Income distributions
taxable as dividend income, 46.93% qualifying for deduction by
corporations.
Payable date Per share
Sept. 26, 1997 $0.04574
Dec. 26, 1997 0.31294
March 26, 1998 0.03708
June 25, 1998 0.04197
Total $0.43773
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 26, 1997 $0.73184
Total distributions $1.16957
The distribution of $1.04478 per share, payable Dec. 26, 1997, consisted
of $0.04529 derived from net investment income,$0.26765 from net
short-term capital gains (a total of $0.31294 taxable as dividend income)
and $0.73184 from net long-term capital gains.
The long-term gains distribution is divided into two rate categories: 28%
-$0.43237 and 20% - $0.29947.
(This annual report is not part of the prospectus.)
<PAGE>
Class Y
Income distributions
taxable as dividend income, 46.93% qualifying for deduction by
corporations.
Payable date Per share
Sept. 26, 1997 $0.06244
Dec. 26, 1997 0.33061
March 26, 1998 0.05466
June 25, 1998 0.06054
Total $0.50825
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 26, 1997 $0.73184
Total distributions $1.24009
The distribution of $1.06245 per share, payable Dec. 26, 1997, consisted
of $0.06296 derived from net investment income, $0.26765 from net
short-term capital gains (a total of $0.33061 taxable as dividend income)
and $0.73184 from net long-term capital gains.
The long-term gains distribution is divided into two rate categories: 28%
- $0.43237 and 20% - $0.29947.
(This annual report is not part of the prospectus.)
<PAGE>
Quick telephone reference
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
671-3800
TTY Service For the hearing impaired 800-846-4852
American Express Automated account information 800-862-7919
Financial Advisors (TouchTone(R) phones only),
Easy Access Line including current fund prices
and performance, account values
and recent account transactions
You may experience delays when call volumes are high.
AMERICAN EXPRESS Financial Advisors
IDS Utilities Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
