-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PxybtGnnYTFr2sPP8VJWtFjbWOgT6a45yr6Foaywq+kFTYWkabKoqY+RNxyo7AI3 xRro8cWu9oV6syyuDHnSgw== 0000820027-02-000517.txt : 20020730 0000820027-02-000517.hdr.sgml : 20020730 20020730153557 ACCESSION NUMBER: 0000820027-02-000517 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020531 FILED AS OF DATE: 20020730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP SELECTIVE FUND INC /MN/ CENTRAL INDEX KEY: 0000052407 IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00499 FILM NUMBER: 02714720 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 MAIL ADDRESS: STREET 1: 80 S. 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 FORMER COMPANY: FORMER CONFORMED NAME: IDS SELECTIVE FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 s6376.txt AXP SELECTIVE FUND, INC. AXP(R) Selective Fund 2002 ANNUAL REPORT (PROSPECTUS ENCLOSED) American Express(R) Funds (icon of) clock AXP Selective Fund seeks to provide shareholders with current income and preservation of capital. (This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money.) 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. Table of Contents 2002 ANNUAL REPORT The purpose of this annual report is to tell investors how the Fund performed. From the Chairman 3 Portfolio Manager Q & A 3 Fund Facts 6 The 10 Largest Holdings 7 Making the Most of the Fund 8 The Fund's Long-term Performance 9 Board Members and Officers 10 Independent Auditors' Report (Fund) 13 Financial Statements (Fund) 14 Notes to Financial Statements (Fund) 17 Independent Auditors' Report (Portfolio) 23 Financial Statements (Portfolio) 24 Notes to Financial Statements (Portfolio) 26 Investments in Securities 30 Federal Income Tax Information 35 - -------------------------------------------------------------------------------- 2 AXP SELECTIVE FUND -- ANNUAL REPORT (picture of) Arne H. Carlson Arne H. Carlson Chairman of the board From the Chairman Although we see reason for optimism as the U.S. economy slowly improves, various factors continue to create uncertainty in the financial markets. Warnings about terrorist activities, doubts about the reliability of companies' financial information and growing unrest around the world have contributed to a volatile environment in 2002. While this short-term volatility is unsettling, we encourage you to keep a long-term perspective when it comes to your investments. At times like these, it is important for you to assess your own financial needs, set short- and long-term goals and develop a plan to obtain these goals. Your personal financial advisor can be an important asset in helping you meet your goals. American Express Financial Corporation has set its own goals to assist you in meeting yours. It has taken steps toward improving the competitive ranking and investment performance of the American Express Funds and expanding the range of investment options. The members of the Board, the majority of whom are independent from American Express Financial Corporation, oversee these efforts and believe the steps that have been taken show promise for meeting the goals. This Fund will join the other American Express Funds in holding shareholder meetings in November. We believe it is important for your voice as a Fund shareholder to be heard. When you receive your proxy statement, please take the time to consider the proposals and vote. The Board's recommendation on each proposal will be outlined in the proxy statement. On behalf of the Board, Arne H. Carlson (picture of) Brad Stone Brad Stone Portfolio manager Portfolio Manager Q & A Q: How did AXP Selective Fund perform for the 12-month period ended May 31, 2002? A: In a period that was marked by economic struggles and the tragic events of September 11, 2001, AXP Selective Fund generated a return of 4.85% (Class A shares, not including sales charges). By comparison, the Lehman Brothers Aggregate Bond Index returned 8.10% while the Lipper Corporate Debt - A rated Funds Index generated a return of 6.89% over the same timeframe. - -------------------------------------------------------------------------------- 3 AXP SELECTIVE FUND -- ANNUAL REPORT Q: What factors affected the Fund's performance during the period? A: The Fund was able to generate a solid return for the year, despite the fact that the bond market endured periods of significant volatility. The year began with efforts already underway to stimulate a sagging U.S. economy. The Federal Reserve was reducing short-term interest rates, a practice it had begun early in 2001. In addition, new tax cuts had been put into effect. Still, in the early months of the period, the U.S. economy continued to slow. The situation worsened in the wake of September 11. The terrorist attacks increased investor pessimism about the economy, and predictably, fixed-income securities in general performed well in the immediate aftermath, as investors looked to a perceived safe haven for their assets. However, confidence was soon restored, and as expectations of an economic recovery took hold, short-term interest rates moved higher. That general trend continued from late 2001 through the end of the 12-month period in May 2002. Despite volatile short-term rates, the change in interest rates over the past year has been minimal for longer-term bonds. The Fund benefited in particular during this period from solid performance in the mortgage-backed sector. These securities enjoyed investors' favor as they offered both relative safety vis-a-vis the equity markets, plus attractive comparable yield levels. Investment-grade corporate bonds provided modest returns during the year, and came under pressure as investors became increasingly concerned about accounting concerns tied to the Enron scandal. In addition, weakness among bonds in the struggling telecommunications sector also detracted from the Fund's performance. However, the overall sense of risk-aversion generally worked to the advantage of the bond market and the Fund, as inflows into the fixed-income market remained robust. Q: What changes did you make to the Fund's portfolio? A: We began the year positioning the Fund in expectation of an economic recovery. This included reducing our exposure to U.S. Treasury securities and adding mortgage-backed and corporate debt issues. While the events of September 11 delayed the recovery, that event resulted in an opportunity to put more money to work in some beaten-down segments of the market, particularly corporate bonds. As some corporate issues -- notably those of high-quality banking firms - -- bounced back, we sold some of our holdings and used the proceeds to invest in select undervalued segments of the corporate bond market. As expectations of an economic recovery grew, we shifted into slightly lower-rated (but still investment-grade) corporate bonds that offered relatively higher yields, as well as favorable total return potential. In addition, we placed greater emphasis on mortgage-backed securities, which grew to become the most significant sector in the Fund's portfolio. Among Treasury bonds, our approach in recent months was to own a combination of shorter-term and longer-term securities, typically known as a "barbell" approach to structuring the portfolio. We were convinced that both ends of the Treasury yield curve would be most capable of weathering the pressure of rising interest rates. - -------------------------------------------------------------------------------- 4 AXP SELECTIVE FUND -- ANNUAL REPORT During the year, we also increased our use of a strategy called mortgage dollar rolls, which led to a high portfolio turnover level for AXP Selective Fund. With dollar rolls, we sell a pool of mortgage-backed securities that would have delivered in the current month and we simultaneously agree to purchase a similar pool of securities at a future date. In certain market environments like the one we are experiencing, we believe this strategy adds to the return potential of the Fund without significantly increasing its risk profile. Q: What is your outlook for the year ahead? A: The bond market continues to benefit from a general desire among investors to avoid significant risks. This situation may continue for some time. We anticipate that as the U.S. economy continues to show signs of strength, the Federal Reserve will begin to raise short-term interest rates, but at a rather modest pace. While we believe the level of economic growth will not trigger a dramatic jump in interest rates, a general trend of higher rates is likely. While this could limit the return potential of the Fund in the near term, we continue to actively manage the portfolio with a long-term perspective. Q: How are you positioning the Fund in light of your outlook? A: We plan to maintain a cautious position in terms of the Fund's interest rate sensitivity, given our expectation that interest rates are headed higher in the short term. We also are reducing our holdings among short- and intermediate-term securities, which tend to lag the market in periods when the Federal Reserve increases short-term interest rates. Finally, we continue to seek bonds that can hold up well in the current environment while generating an attractive yield to help bolster the Fund's total return. We believe the Fund is well positioned given the challenging environment that appears to lie ahead. Brad Stone - -------------------------------------------------------------------------------- 5 AXP SELECTIVE FUND -- ANNUAL REPORT Fund Facts Class A -- 12-month performance (All figures per share) Net asset value (NAV) May 31, 2002 $8.74 May 31, 2001 $8.74 Increase $ -- Distributions -- June 1, 2001 - May 31, 2002 From income $0.40 From long-term capital gains $0.02 Total distributions $0.42 Total return* +4.85% Class B -- 12-month performance (All figures per share) Net asset value (NAV) May 31, 2002 $8.74 May 31, 2001 $8.74 Increase $ -- Distributions -- June 1, 2001 - May 31, 2002 From income $0.33 From long-term capital gains $0.02 Total distributions $0.35 Total return* +4.06% Class C -- 12-month performance (All figures per share) Net asset value (NAV) May 31, 2002 $8.74 May 31, 2001 $8.74 Increase $ -- Distributions -- June 1, 2001 - May 31, 2002 From income $0.33 From long-term capital gains $0.02 Total distributions $0.35 Total return* +4.06% Class Y -- 12-month performance (All figures per share) Net asset value (NAV) May 31, 2002 $8.74 May 31, 2001 $8.74 Increase $ -- Distributions -- June 1, 2001 - May 31, 2002 From income $0.42 From long-term capital gains $0.02 Total distributions $0.44 Total return* +5.02% * The total return is a hypothetical investment in the Fund with all distributions reinvested. Returns do not include sales load. The prospectus discusses the effect of sales charges, if any, on the various classes. - -------------------------------------------------------------------------------- 6 AXP SELECTIVE FUND -- ANNUAL REPORT The 10 Largest Holdings Percent Value (of net assets) (as of May 31, 2002) Ford Motor Credit 7.25% 2011 1.2% $18,385,848 Abitibi-Consolidated 8.55% 2010 1.1 16,816,608 United Airlines 7.03% 2010 1.0 15,738,426 MBNA 5.75% 2008 1.0 15,628,957 France Telecom 8.25% 2011 1.0 15,490,320 AT&T Wireless Services 8.75% 2031 0.9 13,836,182 Household Finance 6.38% 2011 0.9 13,695,119 Bowater Canada Finance 7.95% 2011 0.8 12,923,575 Railcar Leasing 7.13% 2013 0.8 12,810,474 WorldCom 7.50% 2011 0.8 11,980,500 Excludes U.S. Treasury and government agencies holdings. For further detail about these holdings, please refer to the section entitled "Investments in Securities." (icon of) pie chart The 10 holdings listed here make up 9.5% of net assets - -------------------------------------------------------------------------------- 7 AXP SELECTIVE FUND -- ANNUAL REPORT 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. The chart below shows how dollar-cost averaging works. In these three hypothetical scenarios, you will see six months of share price fluctuations. This strategy does not ensure a profit or avoid a loss if the market declines. But, if you can continue to invest regularly through changing market conditions even when the price of your shares falls or the market declines, it can be an effective way to accumulate shares to meet your long-term goals. How dollar-cost averaging works Jan Feb Mar Apr May Jun $15 $16 $18 $20 $10 $10 $12 $14 $ 5 Accumulated shares* Average market Your average price per share cost per share 42.25 $15 $14.20 - ------------------------------------------------------------------------------- Jan Feb Mar Apr May Jun $15 $10 $10 $10 $ 5 $8 $5 $5 $8 Accumulated shares* Average market Your average price per share cost per share 85.0 $7.66 $7.05 - ------------------------------------------------------------------------------- Jan Feb Mar Apr May Jun $15 $10 $10 $ 5 $8 $6 $4 $4 $7 Accumulated shares* Average market Your average price per share cost per share 103.5 $6.50 $5.80 - ------------------------------------------------------------------------------- $100 invested per month. Total invested: $600. * Shares purchased is determined by dividing the amount invested per month by the current share price. 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 dividends, interest and other income exceed its expenses. All three make up your total return. 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. - -------------------------------------------------------------------------------- 8 AXP SELECTIVE FUND -- ANNUAL REPORT The Fund's Long-term Performance Value of your $10,000 in AXP Selective Fund (line chart) $30,000 Lehman Brothers Aggregate Bond Index Lipper Corporate Debt - A rated Funds Index $20,000 $18,806 AXP Selective Fund Class A $9,525 `92 `93 `94 `95 `96 `97 `98 `99 `00 `01 `02 Average Annual Total Returns (as of May 31, 2002) 1 year 5 years 10 years Since inception Class A -0.13% +5.10% +6.52% N/A Class B +0.06% +5.18% N/A +6.17%* Class C +4.06% N/A N/A +6.89%** Class Y +5.02% +6.26% N/A +7.12%* * Inception date was March 20, 1995. ** Inception date was June 26, 2000. Assumes: Holding period from 6/1/92 to 5/31/02. Returns do not reflect taxes payable on distributions. Reinvestment of all income and capital gain distributions for the Fund has a value of $10,112. Also see "Past Performance" in the Fund's current prospectus. On the graph above you can see how the Fund's total return compared to two widely cited unmanaged performance indexes, the Lehman Brothers Aggregate Bond Index and the Lipper Corporate Debt - A rated Funds Index. In comparing AXP Selective Fund (Class A) to these indexes, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, 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 maximum applicable sales charge. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. The Lipper Corporate Debt - A rated Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. - -------------------------------------------------------------------------------- 9 AXP SELECTIVE FUND -- ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 78 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, Position held Principal occupations Other directorships address, with Registrant during past five years age and length of service - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- H. Brewster Atwater, Board member Retired chair and chief executive Jr. 4900 IDS Tower since 1996 officer, General Mills, Inc. (consumer Minneapolis, MN 55402 foods) Born in 1931 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Arne H. Carlson Chair of the Chair, Board Services Corporation 901 S. Marquette Ave. Board since 1999 (provides administrative services to Minneapolis, MN 55402 boards), former Governor of Minnesota Born in 1934 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Lynne V. Cheney Board member Distinguished Fellow, AEI The Reader's Digest Association Inc. American Enterprise Institute since 1994 for Public Policy Research (AEI) 1150 17th St., N.W. Washington, D.C. 20036 Born in 1941 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Livio D. DeSimone Board member Retired chair of the board and chief Cargill, Incorporated (commodity 30 Seventh Street East since 2001 executive officer, Minnesota Mining merchants and processors), Target Suite 3050 and Manufacturing (3M) Corporation (department stores), St. Paul, MN 55101-4901 General Mills, Inc. (consumer foods), Born in 1936 Vulcan Materials Company (construction materials/chemicals) and Milliken & Company (textiles and chemicals) - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Ira D. Hall Board member Private investor; formerly with Texaco Imagistics International, Inc. (office Texaco, Inc. since 2001 Inc., treasurer, 1999-2001 and general equipment), Reynolds & Reynolds 2000 Westchester Avenue manager, alliance management Company (information services), TECO White Plains, NY 10650 operations, 1998-1999. Prior to that, Energy, Inc. (energy holding company), Born in 1944 director, International Operations IBM The Williams Companies, Inc. (energy Corp. distribution company) - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Heinz F. Hutter Board member Retired president and chief operating P.O. Box 2187 since 1994 officer, Cargill, Incorporated Minneapolis, MN 55402 (commodity merchants and processors) Born in 1929 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Anne P. Jones Board member Attorney and consultant Motorola, Inc. (electronics) 5716 Bent Branch Rd. since 1985 Bethesda, MD 20816 Born in 1935 - ------------------------------- ----------------- ---------------------------------------- ----------------------------------------
- -------------------------------------------------------------------------------- 10 AXP SELECTIVE FUND -- ANNUAL REPORT
Independent Board Members (continued) Name, Position held Principal occupations Other directorships address, with Registrant during past five years age and length of service - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Stephen R. Lewis, Jr. Board member President and professor of economics, Carleton College since 2002 Carleton College One North College Street Northfield, MN 55057 Born in 1939 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- William R. Pearce Board member RII Weyerhaeuser World Timberfund, 2050 One Financial Plaza since 1980 L.P. (develops timber resources) - Minneapolis, MN 55402 management committee; former chair, Born in 1927 American Express Funds - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Alan G. Quasha Board member President, Quadrant Management, Inc. 720 Fifth Avenue since 2002 (management of private equities) New York, NY 10019 Born in 1949 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Alan K. Simpson Board member Former three-term United States Biogen, Inc. (bio-pharmaceuticals) 1201 Sunshine Ave. since 1997 Senator for Wyoming Cody, WY 82414 Born in 1931 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- C. Angus Wurtele Board member Retired chair of the board and chief Bemis Corporation (packaging) 4900 IDS Tower since 1994 executive officer, The Valspar Minneapolis, MN 55402 Corporation Born in 1934 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Board Members Affiliated with American Express Financial Corporation (AEFC) Name, Position held Principal occupations Other directorships address, with Registrant during past five years age and length of service - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- David R. Hubers Board member Retired chief executive officer and Chronimed Inc. (specialty 50643 AXP Financial Center since 1993 director of AEFC pharmaceutical distribution), RTW Inc. Minneapolis, MN 55474 (manages worker's compensation Born in 1943 programs), Lawson Software, Inc. (technology based business applications) - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- John R. Thomas Board member Senior vice president - information 50652 AXP Financial Center since 1987, and technology of AEFC Minneapolis, MN 55474 president since Born in 1937 1997 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- William F. Truscott Board member Senior vice president - chief 53600 AXP Financial Center since 2001, investment officer of AEFC; former Minneapolis, MN 55474 vice president chief investment officer and managing Born in 1960 since 2002 director, Zurich Scudder Investments - ------------------------------- ----------------- ---------------------------------------- ----------------------------------------
- -------------------------------------------------------------------------------- 11 AXP SELECTIVE FUND -- ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Thomas, who is president, and Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, Position held Principal occupations Other directorships address, with Registrant during past five years age and length of service - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Leslie L. Ogg Vice president, President of Board Services Corporation 901 S. Marquette Ave. general counsel Minneapolis, MN 55402 and secretary Born in 1938 since 1978 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Paul D. Pearson Acting Vice president - managed 222 AXP Financial Center treasurer since assets/investment accounting, AEFC, Minneapolis, MN 55474 2002 1998 to present; vice president-mutual Born in 1956 fund administrative services, Piper Capital Management, 1994-1998 - ------------------------------- ----------------- ---------------------------------------- ---------------------------------------- Stephen W. Roszell Vice president Senior vice president - institutional 50239 AXP Financial Center since 2002 group of AEFC Minneapolis, MN 55474 Born in 1949 - ------------------------------- ----------------- ---------------------------------------- ----------------------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. - -------------------------------------------------------------------------------- 12 AXP SELECTIVE FUND -- ANNUAL REPORT Independent Auditors' Report THE BOARD AND SHAREHOLDERS AXP SELECTIVE FUND, INC. We have audited the accompanying statement of assets and liabilities of AXP Selective Fund, Inc. as of May 31, 2002, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2002, and the financial highlights for the each of the years in the five-year period ended May 31, 2002. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AXP Selective Fund, Inc. as of May 31, 2002, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 5, 2002 - -------------------------------------------------------------------------------- 13 AXP SELECTIVE FUND -- ANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP Selective Fund, Inc. May 31, 2002 Assets Investment in Portfolio (Note 1) $1,583,574,623 Capital shares receivable 268,544 ------- Total assets 1,583,843,167 ------------- Liabilities Dividends payable to shareholders 1,293,836 Capital shares payable 126,962 Accrued distribution fee 16,787 Accrued service fee 515 Accrued transfer agency fee 1,724 Accrued administrative services fee 2,088 Other accrued expenses 149,487 ------- Total liabilities 1,591,399 --------- Net assets applicable to outstanding capital stock $1,582,251,768 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 1,809,494 Additional paid-in capital 1,592,774,928 Undistributed net investment income 230,395 Accumulated net realized gain (loss) (3,244,190) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (9,318,859) ---------- Total -- representing net assets applicable to outstanding capital stock $1,582,251,768 ============== Net assets applicable to outstanding shares: Class A $1,042,396,474 Class B $ 342,481,586 Class C $ 9,418,714 Class Y $ 187,954,994 Net asset value per share of outstanding capital stock: Class A shares 119,210,472 $ 8.74 Class B shares 39,167,399 $ 8.74 Class C shares 1,077,157 $ 8.74 Class Y shares 21,494,341 $ 8.74 ---------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 14 AXP SELECTIVE FUND -- ANNUAL REPORT
Statement of operations AXP Selective Fund, Inc. Year ended May 31, 2002 Investment income Income: Dividends $ 201,860 Interest 86,567,483 ---------- Total income 86,769,343 ---------- Expenses (Note 2): Expenses allocated from Portfolio 8,410,501 Distribution fee Class A 2,646,424 Class B 3,155,600 Class C 68,200 Transfer agency fee 1,938,533 Incremental transfer agency fee Class A 109,623 Class B 56,762 Class C 1,487 Service fee -- Class Y 220,860 Administrative services fees and expenses 778,168 Compensation of board members 10,960 Printing and postage 198,554 Registration fees 100,206 Audit fees 10,750 Other 6,349 ----- Total expenses 17,712,977 Earnings credits on cash balances (Note 2) (35,367) ------- Total net expenses 17,677,610 ---------- Investment income (loss) -- net 69,091,733 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 31,053,548 Futures contracts (6,458,049) Options contracts written 1,614,573 --------- Net realized gain (loss) on investments 26,210,072 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (22,812,371) ----------- Net gain (loss) on investments and foreign currencies 3,397,701 --------- Net increase (decrease) in net assets resulting from operations $ 72,489,434 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 15 AXP SELECTIVE FUND -- ANNUAL REPORT
Statements of changes in net assets AXP Selective Fund, Inc. Year ended May 31, 2002 2001 Operations and distributions Investment income (loss) -- net $ 69,091,733 $ 80,820,067 Net realized gain (loss) on investments 26,210,072 (5,721,951) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (22,812,371) 69,508,963 ----------- ---------- Net increase (decrease) in net assets resulting from operations 72,489,434 144,607,079 ---------- ----------- Distributions to shareholders from: Net investment income Class A (47,043,251) (57,805,147) Class B (11,539,596) (11,220,115) Class C (244,581) (68,694) Class Y (10,201,699) (11,461,005) Net realized gain Class A (3,121,437) -- Class B (955,224) -- Class C (21,274) -- Class Y (705,355) -- -------- ----- Total distributions (73,832,417) (80,554,961) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 217,863,403 174,749,533 Class B shares 163,154,275 123,918,483 Class C shares 7,922,122 4,162,840 Class Y shares 96,619,335 106,067,010 Reinvestment of distributions at net asset value Class A shares 39,469,070 43,475,836 Class B shares 11,261,219 9,823,481 Class C shares 241,633 61,067 Class Y shares 10,975,199 11,422,265 Payments for redemptions Class A shares (218,862,352) (208,981,146) Class B shares (Note 2) (94,748,640) (65,880,375) Class C shares (Note 2) (2,556,903) (342,918) Class Y shares (137,754,814) (74,810,965) ------------ ----------- Increase (decrease) in net assets from capital share transactions 93,583,547 123,665,111 ---------- ----------- Total increase (decrease) in net assets 92,240,564 187,717,229 Net assets at beginning of year 1,490,011,204 1,302,293,975 ------------- ------------- Net assets at end of year $1,582,251,768 $1,490,011,204 ============== ============== Undistributed net investment income $ 230,395 $ 167,789 -------------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 16 AXP SELECTIVE FUND -- ANNUAL REPORT Notes to Financial Statements AXP Selective Fund, Inc. 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. Class C shares of the Fund were offered to the public on June 26, 2000. Prior to this date, American Express Financial Corporation (AEFC) purchased 238 shares of capital stock at $8.41 per share, which represented the initial capital in Class C. The Fund offers Class A, Class B, Class C 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 (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in 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 May 31, 2002 was 99.99%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent 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 - -------------------------------------------------------------------------------- 17 AXP SELECTIVE FUND -- ANNUAL REPORT 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. The tax character of distributions paid for the years indicated is as follows: Year ended May 31, 2002 2001 Class A Distributions paid from: Ordinary income $47,611,117 $57,805,147 Long-term capital gain 2,553,571 -- Class B Distributions paid from: Ordinary income 11,713,375 11,220,115 Long-term capital gain 781,445 -- Class C Distributions paid from: Ordinary income 248,451 68,694 Long-term capital gain 17,404 -- Class Y Distributions paid from: Ordinary income 10,330,020 11,461,005 Long-term capital gain 577,034 -- As of May 31, 2002, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 3,187,553 Accumulated gain (loss) $ 4,505,231 Unrealized appreciation (depreciation) $(18,731,601) 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: The Fund has an agreement with 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. - -------------------------------------------------------------------------------- 18 AXP SELECTIVE FUND -- ANNUAL REPORT Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. 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 C $20.00 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 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 and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $2,100,255 for Class A, $300,235 for Class B, and $3,633 for Class C for the year ended May 31, 2002. During the year ended May 31, 2002, the Fund's transfer agency fees were reduced by $35,367 as a result of earnings credits from overnight cash balances. 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2002 Class A Class B Class C Class Y Sold 24,549,245 18,395,624 893,392 10,879,769 Issued for reinvested distributions 4,462,460 1,273,680 27,348 1,240,318 Redeemed (24,742,938) (10,713,888) (289,398) (15,570,378) ----------- ----------- -------- ----------- Net increase (decrease) 4,268,767 8,955,416 631,342 (3,450,291) --------- --------- ------- ---------- Year ended May 31, 2001 Class A Class B Class C* Class Y Sold 20,114,774 14,273,778 478,028 12,164,023 Issued for reinvested distributions 5,035,406 1,136,801 7,001 1,322,093 Redeemed (24,264,710) (7,638,038) (39,214) (8,631,923) ----------- ---------- ------- ---------- Net increase (decrease) 885,470 7,772,541 445,815 4,854,193 ------- --------- ------- ---------
* Inception date was June 26, 2000. - -------------------------------------------------------------------------------- 19 AXP SELECTIVE FUND -- ANNUAL REPORT 4. BANK BORROWINGS The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than five business days plus 367% of advances over five business days. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.05% per annum. The Fund had no borrowings outstanding during the year ended May 31, 2002. - -------------------------------------------------------------------------------- 20 AXP SELECTIVE FUND -- ANNUAL REPORT 5. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2002 2001 2000 1999 1998 Net asset value, beginning of period $8.74 $8.32 $8.96 $9.23 $9.00 Income from investment operations: Net investment income (loss) .40 .52 .52 .54 .57 Net gains (losses) (both realized and unrealized) .02 .42 (.46) (.20) .31 Total from investment operations .42 .94 .06 .34 .88 Less distributions: Dividends from net investment income (.40) (.52) (.53) (.54) (.58) Distributions from realized gains (.02) -- (.17) (.07) (.07) Total distributions (.42) (.52) (.70) (.61) (.65) Net asset value, end of period $8.74 $8.74 $8.32 $8.96 $9.23 Ratios/supplemental data Net assets, end of period (in millions) $1,042 $1,004 $949 $1,170 $1,231 Ratio of expenses to average daily net assets(c) .98% .97% .97% .89% .86% Ratio of net investment income (loss) to average daily net assets 4.45% 6.01% 6.17% 5.85% 6.20% Portfolio turnover rate (excluding short-term securities) 389% 150% 62% 30% 20% Total return(e) 4.85% 11.52% .83% 3.68% 10.15% Class B Per share income and capital changes(a) Fiscal period ended May 31, 2002 2001 2000 1999 1998 Net asset value, beginning of period $8.74 $8.32 $8.96 $9.23 $9.00 Income from investment operations: Net investment income (loss) .33 .45 .46 .47 .50 Net gains (losses) (both realized and unrealized) .02 .42 (.47) (.20) .31 Total from investment operations .35 .87 (.01) .27 .81 Less distributions: Dividends from net investment income (.33) (.45) (.46) (.47) (.51) Distributions from realized gains (.02) -- (.17) (.07) (.07) Total distributions (.35) (.45) (.63) (.54) (.58) Net asset value, end of period $8.74 $8.74 $8.32 $8.96 $9.23 Ratios/supplemental data Net assets, end of period (in millions) $342 $264 $187 $210 $153 Ratio of expenses to average daily net assets(c) 1.73% 1.73% 1.73% 1.65% 1.62% Ratio of net investment income (loss) to average daily net assets 3.67% 5.25% 5.41% 5.10% 5.44% Portfolio turnover rate (excluding short-term securities) 389% 150% 62% 30% 20% Total return(e) 4.06% 10.69% .06% 2.89% 9.32%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 21 AXP SELECTIVE FUND -- ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2002 2001(b) Net asset value, beginning of period $8.74 $8.40 Income from investment operations: Net investment income (loss) .33 .42 Net gains (losses) (both realized and unrealized) .02 .34 Total from investment operations .35 .76 Less distributions: Dividends from net investment income (.33) (.42) Distributions from realized gains (.02) -- Total distributions (.35) (.42) Net asset value, end of period $8.74 $8.74 Ratios/supplemental data Net assets, end of period (in millions) $9 $4 Ratio of expenses to average daily net assets(c) 1.74% 1.73%(d) Ratio of net investment income (loss) to average daily net assets 3.64% 5.16%(d) Portfolio turnover rate (excluding short-term securities) 389% 150% Total return(e) 4.06% 9.27%
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2002 2001 000 1999 1998 Net asset value, beginning of period $8.74 $8.32 $8.96 $9.23 $9.00 Income from investment operations: Net investment income (loss) .42 .53 .54 .55 .58 Net gains (losses) (both realized and unrealized) .02 .42 (.47) (.20) .31 Total from investment operations .44 .95 .07 .35 .89 Less distributions: Dividends from net investment income (.42) (.53) (.54) (.55) (.59) Distributions from realized gains (.02) -- (.17) (.07) (.07) Total distributions (.44) (.53) (.71) (.62) (.66) Net asset value, end of period $8.74 $8.74 $8.32 $8.96 $9.23 Ratios/supplemental data Net assets, end of period (in millions) $188 $218 $167 $196 $221 Ratio of expenses to average daily net assets(c) .81% .82% .81% .81% .79% Ratio of net investment income (loss) to average daily net assets 4.61% 6.16% 6.33% 5.93% 6.27% Portfolio turnover rate (excluding short-term securities) 389% 150% 62% 30% 20% Total return(e) 5.02% 11.70% .97% 3.77% 10.21%
Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 22 AXP SELECTIVE FUND -- ANNUAL REPORT Independent Auditors' Report THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Quality Income Portfolio (a series of Income Trust) as of May 31, 2002, the related statement of operations for the year then ended and the statements of changes in net assets for each of the years in the two-year period ended May 31, 2002. These financial statements are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2002, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quality Income Portfolio as of May 31, 2002, and the results of its operations and the changes in its net assets for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 5, 2002 - -------------------------------------------------------------------------------- 23 AXP SELECTIVE FUND -- ANNUAL REPORT Financial Statements
Statement of assets and liabilities Quality Income Portfolio May 31, 2002 Assets Investments in securities, at value (Note 1)* (identified cost $1,991,495,379) $1,982,496,407 Dividends and accrued interest receivable 14,175,449 Receivable for investment securities sold 34,986,390 ---------- Total assets 2,031,658,246 ------------- Liabilities Disbursements in excess of cash on demand deposit 991,148 Payable for investment securities purchased 89,709,354 Payable for securities purchased on a when-issued basis (Note 1) 295,626,873 Payable upon return of securities loaned (Note 4) 61,535,000 Accrued investment management services fee 22,173 Other accrued expenses 84,130 ------ Total liabilities 447,968,678 ----------- Net assets $1,583,689,568 ============== *Including securities on loan, at value (Note 4) $ 60,179,334 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 24 AXP SELECTIVE FUND -- ANNUAL REPORT
Statement of operations Quality Income Portfolio Year ended May 31, 2002 Investment income Income: Dividends $ 201,875 Interest 86,565,622 ---------- Total income 86,767,497 ---------- Expenses (Note 2): Investment management services fee 8,196,469 Compensation of board members 13,760 Custodian fees 149,431 Audit fees 32,500 Other 21,982 ------ Total expenses 8,414,142 Earnings credits on cash balances (Note 2) (3,045) ------ Total net expenses 8,411,097 --------- Investment income (loss) -- net 78,356,400 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 31,056,012 Futures contracts (6,458,403) Options contracts written (Note 5) 1,614,697 --------- Net realized gain (loss) on investments 26,212,306 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (22,814,230) ----------- Net gain (loss) on investments and foreign currencies 3,398,076 --------- Net increase (decrease) in net assets resulting from operations $ 81,754,476 ============
Statements of changes in net assets Quality Income Portfolio Year ended May 31, 2002 2001 Operations Investment income (loss) -- net $ 78,356,400 $ 88,221,481 Net realized gain (loss) on investments 26,212,306 (5,722,347) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (22,814,230) 69,524,334 ----------- ---------- Net increase (decrease) in net assets resulting from operations 81,754,476 152,023,468 ---------- ----------- Proceeds from contributions 162,938,975 135,461,684 Fair value of withdrawals (152,745,069) (100,504,401) ------------ ------------ Net contributions (withdrawals) from partners 10,193,906 34,957,283 ---------- ---------- Total increase (decrease) in net assets 91,948,382 186,980,751 Net assets at beginning of year 1,491,741,186 1,304,760,435 ------------- ------------- Net assets at end of year $1,583,689,568 $1,491,741,186 ============== ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 25 AXP SELECTIVE FUND -- ANNUAL REPORT Notes to Financial Statements Quality Income Portfolio 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. The 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 accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent 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. - -------------------------------------------------------------------------------- 26 AXP SELECTIVE FUND -- ANNUAL REPORT 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. Illiquid securities As of May 31, 2002, investments in securities included issues that are illiquid which the Portfolio currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities as of May 31, 2002 was $3,177,232 representing 0.20% of net assets. These securities are valued at fair value according to methods selected in good faith by the board. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment 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 net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. As of May 31, 2002, the Portfolio has entered into outstanding forward-commitments of $63,347,141 and outstanding when-issued securities of $295,626,873. - -------------------------------------------------------------------------------- 27 AXP SELECTIVE FUND -- ANNUAL REPORT The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. 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 or upon receipt of ex-dividend notification in the case of certain foreign securities. 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 year ended May 31, 2002, the Portfolio's custodian fees were reduced by $3,045 as a result of earnings credits from overnight cash balances. 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 $5,973,497,003 and $5,854,187,825, respectively, for the year ended May 31, 2002. For the same period, the portfolio turnover rate was 389%. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES As of May 31, 2002, securities valued at $60,179,334 were on loan to brokers. For collateral, the Portfolio received $61,535,000 in cash. Income from securities lending amounted to $67,211 for the year ended May 31, 2002. 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. - -------------------------------------------------------------------------------- 28 AXP SELECTIVE FUND -- ANNUAL REPORT 5. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written are as follows: Year ended May 31, 2002 Puts Calls Contracts Premiums Contracts Premiums Balance May 31, 2001 675 $ 415,426 675 $ 355,896 Opened 5,250 3,122,275 18,481 2,699,321 Closed (5,925) (3,537,701) (19,156) (3,055,217) ------ ---------- ------- ---------- Balance May 31, 2002 -- $ -- -- $ -- ------ ---------- ------- ---------- See "Summary of significant accounting policies." 6. INTEREST RATE FUTURES CONTRACTS As of May 31, 2002, investments in securities included securities valued at $6,683,018 that were pledged as collateral to cover initial margin deposits on 1,495 open sale contracts. The notional market value of the open sale contracts as of May 31, 2002, was $156,492,611 with a net unrealized loss of $320,543. See "Summary of significant accounting policies." - -------------------------------------------------------------------------------- 29 AXP SELECTIVE FUND -- ANNUAL REPORT Investments in Securities Quality Income Portfolio May 31, 2002 (Percentages represent value of investments compared to net assets) Bonds (98.1%) Issuer Coupon Principal Value(a) rate amount Government obligations (21.2%) Overseas Private Investment U.S. Govt Guaranty Series 1996A 01-15-09 6.99% $7,222,222 $7,702,428 U.S. Treasury 03-31-03 4.25 30,000,000 30,517,800 12-31-03 3.25 92,000,000 92,528,263 05-15-04 7.25 5,000,000(g) 5,383,550 08-15-04 7.25 6,800,000(g) 7,363,652 08-15-05 6.50 15,300,000 16,550,775 08-15-11 5.00 12,000,000 11,976,480 02-15-12 4.88 12,100,000 11,944,975 11-15-16 7.50 20,700,000 24,572,349 02-15-26 6.00 15,925,000 16,354,179 08-15-29 6.13 8,000,000 8,396,560 05-15-30 6.25 11,450,000 12,255,508 02-15-31 5.38 55,300,000 53,415,928 Principal Only 08-15-21 6.11 50,000,000(f) 15,735,500 TIPS 01-15-07 3.38 20,309,940(j) 21,138,205 Total 335,836,152 Mortgage-backed securities (48.4%) Federal Home Loan Mtge Corp 11-01-14 7.50 5,266,113 5,570,112 04-01-15 7.50 9,707,273 10,267,649 01-01-16 7.00 15,019,788 15,757,296 07-01-16 8.00 253 273 01-01-17 8.00 2,308 2,494 02-01-17 5.50 27,374,824 27,348,580 03-01-17 8.50 43,452 47,375 06-01-17 8.50 16,425 17,901 09-01-19 8.50 78,606 85,628 04-01-20 9.00 447,217 490,913 04-01-21 9.00 432,201 477,510 03-01-22 8.50 886,458 961,943 04-01-22 6.50 28,440,449 29,146,029 08-01-22 8.50 852,666 923,630 06-01-24 7.50 4,025,804 4,244,516 02-01-25 8.00 1,483,451 1,592,882 04-01-32 7.00 5,125,000 5,296,781 Collateralized Mtge Obligation 05-15-17 5.50 18,258,555 18,743,393 Federal Housing Admin 01-01-24 7.43 3,969,119 3,929,428 Federal Natl Mtge Assn 11-01-02 10.00 10 10 02-15-05 7.13 8,000,000 8,679,424 05-15-08 6.00 21,450,000 22,531,509 05-15-11 6.00 8,900,000 9,195,720 03-15-12 6.13 5,600,000 5,823,546 03-22-12 6.25 13,700,000 14,049,624 01-01-14 6.00 10,298,607 10,569,775 04-01-14 6.00 11,203,363 11,498,353 04-01-14 6.50 10,697,987 11,116,005 05-01-14 6.00 7,801,421 7,998,101 08-01-14 6.50 10,443,012 10,824,893 06-01-15 6.50 43,000,000(b) 44,397,500 05-01-16 6.50 17,165,786 17,752,070 10-01-16 6.50 529,242 547,318 10-01-23 6.50 5,310,820 5,441,275 12-01-26 8.00 2,295,682 2,460,932 04-01-27 7.50 3,142,940 3,309,145 08-01-27 8.00 2,451,510 2,624,801 01-01-28 6.50 1,689,507 1,725,841 05-01-28 6.50 9,764,021 9,961,330 12-01-28 6.50 13,424,647 13,695,930 02-01-29 6.50 11,774,492 12,012,429 03-01-29 6.00 2,920,091 2,908,228 03-01-29 6.50 10,867,100 11,077,196 05-01-29 6.00 25,493,618 25,451,476 06-01-29 7.00 12,618,724 13,046,301 07-01-29 6.00 11,595,891 11,548,782 07-01-29 7.00 56,275,000(b) 57,998,421 12-01-29 7.50 8,244,561 8,636,817 01-01-30 8.00 2,290,172 2,439,488 03-01-30 8.00 6,680,774 7,116,349 05-01-30 6.00 15,000,000(b) 14,868,750 06-01-30 7.00 82,900,000(b) 85,594,249 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 30 AXP SELECTIVE FUND -- ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 06-01-30 8.00% $17,500,000(b) $18,560,938 07-01-30 6.00 8,000,000 7,885,000 07-01-30 6.50 66,100,000(b) 66,802,312 06-01-31 6.50 9,820,810 9,983,117 05-01-32 7.50 4,300,000 4,499,048 Collateralized Mtge Obligation 10-25-19 8.50 1,448,659 1,612,072 Principal Only 09-01-18 5.73 197,794(f) 170,058 Freddie Mac 05-25-12 6.00 13,700,000 13,742,744 Collateralized Mtge Obligation 06-15-17 5.50 14,200,000 14,432,969 Govt Natl Mtge Assn 05-15-26 7.50 4,462,741 4,721,522 10-15-31 6.50 5,621,884 5,722,506 11-15-31 6.50 28,376,126 28,884,009 Total 768,822,216 Airlines (2.8%) American Airlines 10-01-06 7.80 5,600,000(d) 5,549,096 05-23-11 6.82 7,000,000 6,907,320 Continental Airlines 02-02-19 6.54 6,022,974 5,760,968 Series D 12-01-06 7.57 3,000,000 2,733,806 Delta Air Lines 09-18-11 7.11 7,300,000 7,615,587 United Air Lines 10-01-10 7.03 16,030,502 15,738,426 Total 44,305,203 Automotive & related (1.6%) Ford Motor 07-16-31 7.45 7,400,000 7,182,951 Ford Motor Credit 10-25-11 7.25 18,000,000 18,385,848 Total 25,568,799 Building materials & construction (0.5%) Tyco Intl Group (U.S. Dollar) Company Guaranty 02-15-11 6.75 9,000,000(c) 7,891,956 Communications equipment & services (1.3%) AT&T Wireless Services Sr Nts 03-01-11 7.88 7,000,000 6,743,765 03-01-31 8.75 14,400,000 13,836,182 Total 20,579,947 Energy (1.4%) FirstEnergy Series B 11-15-11 6.45 10,600,000 10,098,196 Phillips Petroleum 03-15-28 7.13 12,000,000 11,895,924 Total 21,994,120 Financial services (6.5%) CIT Group 05-17-04 5.63 8,600,000 8,305,269 Citibank Credit Card Insurance Trust Series 2001-8 Cl A 12-07-06 4.10 10,000,000 10,042,341 Countrywide Home Company Guaranty Series H 04-15-09 6.25 5,000,000 5,041,435 GMAC 09-15-11 6.88 11,500,000 11,677,790 Household Finance 10-15-11 6.38 14,100,000 13,695,119 MBNA 10-15-08 5.75 15,000,000 15,628,957 Sr Nts 03-15-12 7.50 6,700,000 7,026,612 Morgan Stanley, Dean Witter & Co 04-01-12 6.60 7,000,000 7,127,190 Pemex Master Trust 02-01-09 7.88 9,500,000(d) 9,666,250 Prudential Bache Collateralized Mtge Obligation 04-01-19 7.97 1,616,536 1,648,495 Railcar Leasing 01-15-13 7.13 12,150,000(d) 12,810,474 Total 102,669,932 Food (1.0%) Delhaize America 04-15-31 9.00 7,700,000 8,850,750 Company Guaranty 04-15-11 8.13 6,000,000 6,511,302 Total 15,362,052 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 31 AXP SELECTIVE FUND -- ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Health care (0.5%) American Home Products 03-15-04 5.88% $7,000,000 $7,258,867 Leisure time & entertainment (0.6%) AOL Time Warner 05-01-32 7.70 10,100,000 9,860,024 Media (2.0%) Clear Channel Communications 11-01-06 6.00 6,400,000 6,323,507 Comcast Cable Communications 05-01-27 8.50 8,400,000 9,035,620 Sr Nts 01-30-11 6.75 4,000,000 3,860,284 06-15-13 7.13 7,000,000 6,858,159 Time Warner Entertainment 03-15-23 8.38 5,000,000 5,185,425 Total 31,262,995 Multi-industry conglomerates (0.7%) General Electric Capital 06-15-12 6.00 11,700,000 11,641,500 Paper & packaging (1.9%) Abitibi-Consolidated (U.S. Dollar) 08-01-10 8.55 16,000,000(c) 16,816,608 Bowater Canada Finance (U.S. Dollar) Company Guaranty 11-15-11 7.95 12,500,000(c) 12,923,575 Total 29,740,183 Retail (0.6%) Target 06-15-23 7.88 8,850,000 9,350,698 Utilities -- electric (1.9%) IPALCO Enterprises 11-14-08 7.38 10,000,000 9,567,740 11-14-11 7.63 6,000,000(d) 5,647,428 NRG Energy 04-01-31 8.63 3,515,000 3,000,826 Tiers-Mirant 06-15-04 7.20 13,000,000(d) 11,243,011 Total 29,459,005 Utilities -- gas (0.2%) Williams 03-15-12 8.13 3,400,000(h) 3,177,232 Utilities -- telephone (5.0%) AT&T - Liberty Media 02-01-30 8.25 5,860,000 5,694,719 Citizens Communications Sr Nts 08-15-08 7.63 11,000,000 10,890,638 08-15-31 9.00 4,500,000 4,469,090 France Telecom (U.S. Dollar) 03-01-11 8.25 15,900,000(c,i) 15,490,320 Qwest Capital Funding Company Guaranty 07-15-28 6.88 6,400,000 4,130,080 Sprint Capital 03-15-12 8.38 6,000,000(d) 5,922,330 Company Guaranty 05-01-04 5.88 11,500,000 10,989,055 11-15-08 6.13 3,500,000 3,138,107 WorldCom 05-15-11 7.50 24,450,000 11,980,500 05-15-31 8.25 15,000,000 6,450,000 Total 79,154,839 Total bonds (Cost: $1,562,910,904) $1,553,935,720 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 32 AXP SELECTIVE FUND -- ANNUAL REPORT Short-term securities (27.1%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (12.5%) Federal Home Loan Bank Disc Nts 06-26-02 1.69% $50,000,000 $49,943,014 06-28-02 1.73 30,900,000 30,858,423 07-03-02 1.73 50,000,000 49,920,709 Federal Home Loan Mtge Corp Disc Nts 06-21-02 1.71 5,700,000 5,694,539 08-09-02 1.84 12,400,000 12,360,766 Federal Natl Mtge Assn Disc Nts 06-21-02 1.70 25,000,000 24,983,234 08-08-02 1.85 25,000,000 24,922,075 Total 198,682,760 Commercial paper (14.6%) BOC Group 06-07-02 1.80 3,200,000 3,198,880 Corporate Receivables 06-18-02 1.93 3,400,000(e) 3,396,753 CXC 07-15-02 1.86 10,000,000(e) 9,976,000 07-30-02 1.81 5,200,000(e) 5,183,360 Dexia Bank (Delaware) 06-10-02 1.80 11,000,000 10,994,500 07-26-02 1.81 11,100,000 11,060,258 Edison Asset Securitization 06-20-02 1.95 11,400,000(e) 11,382,792 Gannett 07-09-02 1.77 4,400,000(e) 4,390,896 07-25-02 1.78 10,500,000(e) 10,471,445 Intl Lease Finance 07-09-02 1.76 12,500,000 12,475,385 Johnson & Johnson 07-08-02 1.75 6,200,000(e) 6,187,434 Marsh & McLennan 06-05-02 1.77 3,400,000(e) 3,399,164 May Dept Stores 07-12-02 1.78 5,000,000 4,989,617 Pfizer 06-20-02 1.92 10,000,000(e) 9,984,962 Salomon Smith Barney 06-07-02 1.76 12,000,000 11,995,894 06-17-02 1.77 15,300,000 15,287,211 07-01-02 1.77 600,000 599,086 07-16-02 1.79 14,500,000 14,466,334 SBC Communications 07-19-02 1.77 7,800,000(e) 7,779,058 SBC Intl 07-15-02 1.79 5,300,000(e) 5,288,141 08-01-02 1.79 21,600,000(e) 21,528,576 Sheffield Receivables 06-03-02 1.81 13,800,000(e) 13,797,918 06-27-02 1.80 4,500,000(e) 4,493,925 Southern Co Funding 06-19-02 1.93 7,600,000(e) 7,592,339 07-12-02 1.80 20,000,000(e) 19,957,999 Total 229,877,927 Total short-term securities (Cost: $428,584,475) $428,560,687 Total investments in securities (Cost: $1,991,495,379)(k) $1,982,496,407 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 33 AXP SELECTIVE FUND -- ANNUAL REPORT Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2002, the cost of securities purchased, including interest purchased, on a when-issued or forward commitment basis was $358,974,014. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of May 31, 2002, the value of foreign securities represented 3.4% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (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 yield based upon the estimated timing of future cash flows as of May 31, 2002. (g) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 6 to the financial statements): Type of security Notional amount Sale contracts Swap Futures, Sept. 2002, 10-year $ 6,000,000 U.S. Treasury Bonds, Sept. 2002, 10-year 25,700,000 U.S. Treasury Bonds, Sept. 2002, 20-year 8,600,000 U.S. Treasury Notes, Sept. 2002, 5-year 107,400,000 U.S. Treasury Notes, Sept. 2002, 10-year 1,800,000 (h) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at May 31, 2002, is as follows: Security Acquisition dates Cost Williams* 8.13% 2012 05-03-02 thru 05-28-02 $3,477,112 * Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2002. (j) 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. (k) At May 31, 2002, the cost of securities for federal income tax purposes was $1,992,541,724 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 24,687,385 Unrealized depreciation (34,732,702) ----------- Net unrealized depreciation $(10,045,317) ------------ - -------------------------------------------------------------------------------- 34 AXP SELECTIVE FUND -- ANNUAL REPORT Federal Income Tax Information (Unaudited) 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. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Selective Fund, Inc. Fiscal year ended May 31, 2002 Class A Income distributions taxable as dividend income, 0.30% qualifying for deduction by corporations. Payable date Per share June 26, 2001 $0.04342 July 26, 2001 0.03912 Aug. 27, 2001 0.04134 Sept. 26, 2001 0.03308 Oct. 26, 2001 0.02943 Nov. 26, 2001 0.02913 Dec. 20, 2001 0.03708 Jan. 25, 2002 0.03421 Feb. 26, 2002 0.03053 March 26, 2002 0.02379 April 26, 2002 0.02692 May 24, 2002 0.03261 Total $0.40066 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2001 $0.02100 Total distributions $0.42166 The distribution of $0.05808 per share, payable Dec. 20, 2001, consisted of $0.03241 derived from net investment income, $0.00467 from net short-term capital gains (a total of $0.03708 taxable as dividend income) and $0.02100 from net long-term capital gains. - -------------------------------------------------------------------------------- 35 AXP SELECTIVE FUND -- ANNUAL REPORT Class B Income distributions taxable as dividend income, 0.30% qualifying for deduction by corporations. Payable date Per share June 26, 2001 $0.03743 July 26, 2001 0.03365 Aug. 27, 2001 0.03546 Sept. 26, 2001 0.02758 Oct. 26, 2001 0.02387 Nov. 26, 2001 0.02334 Dec. 20, 2001 0.03265 Jan. 25, 2002 0.02759 Feb. 26, 2002 0.02464 March 26, 2002 0.01868 April 26, 2002 0.02127 May 24, 2002 0.02755 Total $0.33371 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2001 $0.02100 Total distributions $0.35471 The distribution of $0.05365 per share, payable Dec. 20, 2001, consisted of $0.02798 derived from net investment income, $0.00467 from net short-term capital gains (a total of $0.03265 taxable as dividend income) and $0.02100 from net long-term capital gains. Class C Income distributions taxable as dividend income, 0.30% qualifying for deduction by corporations. Payable date Per share June 26, 2001 $0.03741 July 26, 2001 0.03365 Aug. 27, 2001 0.03553 Sept. 26, 2001 0.02763 Oct. 26, 2001 0.02389 Nov. 26, 2001 0.02329 Dec. 20, 2001 0.03265 Jan. 25, 2002 0.02758 Feb. 26, 2002 0.02464 March 26, 2002 0.01865 April 26, 2002 0.02124 May 24, 2002 0.02749 Total $0.33365 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2001 $0.02100 Total distributions $0.35465 The distribution of $0.05365 per share, payable Dec. 20, 2001, consisted of $0.02798 derived from net investment income, $0.00467 from net short-term capital gains (a total of $0.03265 taxable as dividend income) and $0.02100 from net long-term capital gains. - -------------------------------------------------------------------------------- 36 AXP SELECTIVE FUND -- ANNUAL REPORT Class Y Income distributions taxable as dividend income, 0.30% qualifying for deduction by corporations. Payable date Per share June 26, 2001 $0.04469 July 26, 2001 0.04028 Aug. 27, 2001 0.04259 Sept. 26, 2001 0.03426 Oct. 26, 2001 0.03061 Nov. 26, 2001 0.03036 Dec. 20, 2001 0.03802 Jan. 25, 2002 0.03560 Feb. 26, 2002 0.03177 March 26, 2002 0.02487 April 26, 2002 0.02812 May 24, 2002 0.03369 Total $0.41486 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2001 $0.02100 Total distributions $0.43586 The distribution of $0.05902 per share, payable Dec. 20, 2001, consisted of $0.03335 derived from net investment income, $0.00467 from net short-term capital gains (a total of $0.03802 taxable as dividend income) and $0.02100 from net long-term capital gains. - -------------------------------------------------------------------------------- 37 AXP SELECTIVE FUND -- ANNUAL REPORT AXP Selective Fund 70100 AXP Financial Center Minneapolis, MN 55474 americanexpress.com Ticker Symbol Class A: INSEX Class B:ISEBX Class C: N/A Class Y:IDEYX This report must be accompanied or preceded by the Fund's current prospectus. 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. (logo) AMERICAN EXPRESS S-6376 W (7/02) -----END PRIVACY-ENHANCED MESSAGE-----