-----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, KwM8HI2yGaS7+25ho6kxXJCRDNloeYrJMBLMv1qEaerSzjFQ64oKB6/bLHr1yud6 qbJ+85PB3RCWBVArDMHCnw== 0000820027-96-000442.txt : 19960805 0000820027-96-000442.hdr.sgml : 19960805 ACCESSION NUMBER: 0000820027-96-000442 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960802 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS SELECTIVE FUND INC CENTRAL INDEX KEY: 0000052407 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] 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: 96603072 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 N-30D 1 IDS SELECTIVE FUND, INC. PAGE 1 1996 ANNUAL REPORT IDS Selective Fund (prospectus enclosed) (icon of) city skyline The goals of IDS Selective Fund, Inc. are current income and the preservation of capital by investing in investment-grade bonds. (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. PAGE 2 (icon of) city skyline A quest for quality Not all bonds are created equal. A bond's quality depends on the ability of its issuer to make the interest and principal payments owed to the bondholders. The quality is determined by independent rating agencies, which assign a credit rating (in the form of a letter grade) to each bond. Since its establishment in 1945, Selective Fund has concentrated its investments in the four highest investment grades. Along the way, investors have enjoyed a steady stream of interest income with minimal risk to their principal. PAGE 3 Contents (Icon of) One open book inside of another. The purpose of this annual report is to tell investors how the Fund performed. The prospectus, which is bound into the middle of this annual report, describes the Fund in detail. 1996 annual report From the president 4 From the portfolio manager 4 Ten largest holdings 6 Making the most of your Fund 7 Long-term performance 8 Independent auditors' report 9 Financial statements 10 Notes to financial statements 13 Investments in securities 26 IDS mutual funds 34 Federal income tax information 37 1996 prospectus The Fund in brief 3p Goals 3p Investment policies and risks 3p Structure of the Fund 4p Manager and distributor 4p Portfolio manager 4p Alternative purchase arrangements 4p Sales charge and Fund expenses 5p Performance 7p Financial highlights 7p Total returns 9p Yield 11p Investment policies and risks 12p Facts about investments and their risks 12p Valuing Fund shares 16p How to purchase, exchange or redeem shares 17p Alternative purchase arrangements 17p How to purchase shares 19p How to exchange shares 22p How to redeem shares 22p Reductions and waivers of the sales charge 27p Special shareholder services 31p Services 31p Quick telephone reference 31p PAGE 4 Distributions and taxes 32p Dividend and capital gain distributions 32p Reinvestments 33p Taxes 34p How to determine the correct TIN 36p How the Fund is organized 37p Shares 37p Voting rights 37p Shareholder meetings 37p Special considerations regarding master/feeder structure 37p Board members and officers 39p Investment manager 41p Administrator and Transfer Agent 41p Distributor 42p About American Express Financial Corporation 43p General information 43p Appendices 44p Description of investment-grade corporate bond ratings 44p Descriptions of derivative instruments 46p PAGE 5 To our shareholders (photo of) William R. Pearce President of the Fund (photo of) Ray Goodner Portfolio manager From the president If you're an experienced investor, you know that the 1990s have contained some unusually strong periods for the U.S. financial markets. Perhaps just as important, you also know that history shows that bull markets don't last forever. Though they're often unpredictable, declines -- whether they're brief or long-lasting, moderate or substantial -- are always a possibility. That fact reinforces the need for investors to review periodically their long-term goals and assess 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 important if there's a major change in your financial situation or in the financial markets. William R. Pearce From the portfolio manager The bond market displayed a split personality during the past 12 months, as it rallied strongly during the final half of 1995, only to backtrack dramatically in 1996. IDS Selective Fund's performance reflected the up-and-down trend, gaining considerable ground last year, then giving back profits in the ensuing months. Ultimately, investors experienced a negative total return (net change plus interest income) for the Dec. 1995 through May 1996 fiscal period. What had disturbed bonds in 1994 -- a fear that a rapidly growing economy would soon lead to an increase in the inflation rate and, consequently, higher interest rates -- was largely forgotten during 1995 as the economy slowed down and inflation reports remained unthreatening. In that light, the interest income provided by longer-term bonds looked increasingly attractive to investors, and as they rushed back into the market, long term interest rates continued to fall. Except for a relatively brief downturn in July 1995, the market enjoyed strong and consistent momentum, and finished the year on a positive note. As always, bond prices rose in concert with the rate decline, benefitting funds such as this one. Bonds retreat on inflation fear The market's mercurial nature started to emerge, however, not long after the new year began. What initially spooked the market were indications that economic growth might be more robust than expected. That in turn spawned fears of imminent higher inflation, although clear signs of it were nowhere in sight. Already edgy, PAGE 6 the market then had to come to grips with the likelihood that an agreement to balance the federal budget wouldn't be reached anytime soon, if ever. At that point, the news evidently was more than the market could bear, and it beat a steady retreat until mid-April, sending longer-term interest rates sharply higher along the way. Our key strategy during the early months of the fiscal period was to maintain a long average maturity of bonds in the portfolio to capture the capital appreciation generated by rising bond prices. (The longer the maturity, the greater a bond's price-sensitivity to a change in interest rates.) In addition, I reduced cash reserves, whose returns were meager compared with what could be realized from bonds. Beyond that, I maintained an exposure to dollar-denominated foreign bonds, especially in Asia, which also proved to be productive. But if a longer-than-average maturity helps during rate declines, it hurts when rates go up. Therefore, during the riding-rate trend in 1996, I reduced the portfolio's maturity level, primarily by selling 30-year Treasury bonds -- the sector most sensitive to a rate rise. Along with my concurrent decision to increase the cash reserves in the portfolio, this helped cushion the Fund's net asset value in the face on the market downturn. Still, some of the gains realized earlier in the fiscal year were ultimately eroded. Market settles down as data improves Thanks to some relatively unthreatening news regarding employment growth and commodity prices, bonds found more solid ground during the last several weeks of the period, even rallying a bit at times. While I don't expect a rapid comeback, I do think at this point (mid-June) that the worst is over for the market. My reasoning is based on three factors: elected officials seem to have some resolve about curbing the federal deficit; any consumer price inflation in the U.S is likely to be modest given the service-led nature of the economy; and sluggish economic growth in most foreign countries should preclude inflation being "imported" to this country. Ultimately, I think those factors will prevent a meaningful rise in domestic rates during the rest of 1996, which should restore bond investors' confidence and lead to a more productive market. Ray Goodner Class A 6-month performance (All figures per share) Net asset value (NAV) __________________________ May 31, 1996 $ 9.00 __________________________ Nov. 30, 1995 $ 9.53 __________________________ Decrease $ 0.53 __________________________ PAGE 7 Distributions Nov. 30, 1995-May 31, 1996 __________________________ From income $ 0.34 __________________________ From capital gains $ -- __________________________ Total distributions $ 0.34 __________________________ Total return* -2.0%** __________________________ Class B 6-month performance (All figures per share) Net asset value (NAV) __________________________ May 31, 1996 $ 9.00 __________________________ Nov. 30, 1995 $ 9.53 __________________________ Decrease $ 0.53 __________________________ Distributions Nov. 30, 1995-May 31, 1996 __________________________ From income $ 0.31 __________________________ From capital gains $ -- __________________________ Total distributions $ 0.31 __________________________ Total return* -2.4%** __________________________ Class Y 6-month performance (All figures per share) Net asset value (NAV) __________________________ May 31, 1996 $ 9.00 __________________________ Nov. 30, 1995 $ 9.53 __________________________ Decrease $ 0.53 __________________________ Distributions Nov. 30, 1995-May 31, 1996 __________________________ From income $ 0.35 __________________________ From capital gains $ -- __________________________ Total distributions $ 0.35 __________________________ Total return* -2.0%** __________________________ *The prospectus discusses the effect of the sales charges, PAGE 8 if any, on the various classes. **The total return is a hypothetical investment in the Fund with all distributions reinvested. PAGE 9
IDS Selective Fund, Inc. The Fund's ten largest holdings (Pie chart) The ten holdings listed here make up 11.06% of the Fund's net assets Percent Value (of Fund's net assets) (as of May 31, 1996) Japan Finance 1.58% $27,381,661 9.25% 1998 Bundes Republic 1.39 23,946,674 7.50% 2004 Southern California Edison 1.26 21,697,620 8.875% 1st Mortgage 2023 Republic of Italy 1.19 20,572,368 6.875% 2023 Tokyo Electric Power Euro 1.17 20,166,140 6.125% 2003 Dayton Hudson 1.01 17,497,135 7.875% 2023 PDV America .90 15,632,265 7.875% 2003 Pacific Bell .89 15,337,650 8.50% 2031 Schering-Plough .84 14,570,850 7.31% Zero Coupon 1996 Texas Utilities Electric .83 14,321,710 9.75% 1st Mortgage 2021 Excludes U.S. Treasury and government agencies holdings that total 41% of the Fund's net assets.
PAGE 10 Making the most of the Fund Average annual total return (as of May 31, 1996) 1 year 5 years 10 years or since inception Class A -0.90% +7.79% +8.24% Class B* -0.60% -- % +3.95% Class Y* +4.48% -- % +9.47% * Inception date was March 20, 1995. The performance of Class B and Class Y will vary from the performance of Class A based on differences in sales charges and fees. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Figures for Class A and Class B reflect the effect of the maximum 5% sales charge. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. 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. This 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, it 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. PAGE 11 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. PAGE 12 The Fund's long-term performance 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. How your $10,000 has grown in IDS Selective Fund x $22,087 Selective Fund $20,000 Class A x Lehman Aggregate Bond Index x $9,500 (line graph showing the return of Selective Fund tracking slightly below the Lehman Aggregate Bond Index) '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 Average annual total return (as of May 31, 1996) 1 year 5 years 10 years or since inception Class A -0.90% +7.79% +8.24% Class B* -0.60% -- % +3.95% Class Y* +4.48% -- % +9.47% * Inception date was March 20, 1995. (the following two paragraphs appear in the margin to the left of the graph above:) Assumes: -Holding period from 6/1/86 to 5/31/96. -Returns do not reflect taxes payable on distributions. -Reinvestment of all income and capital gain distributions for the Fund, with a value of $12,349. Also see "Performance" in the Fund's current prospectus. The Lehman Aggregate bond Index is made up of a representative list of government and corporate bonds as well as asset-backed securities and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. However, the securities used to create the index may not be representative of PAGE 13 the bonds held in Selective Fund. On the graph above you can see how the Fund's total return compared to a widely cited performance measure, the Lehman Aggregate Bond Index. In comparing Selective Fund 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. If you were actually to buy either individual bonds or bond mutual funds, any sales charges that you pay would reduce your total return as well. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. PAGE 14 Independent auditors' report ___________________________________________________________________ The board and shareholders IDS Selective Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of IDS Selective Fund, Inc. as of May 31, 1996, and the related statements of operations and changes in net assets, and the financial highlights for the six months then ended and the statement of changes in net assets for the year ended November 30, 1995, and the financial highlights for each of the years in the nine-year period ended November 30, 1995. 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 generally accepted auditing standards. 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. Investment securities held in custody are confirmed to us by the custodian. As to securities purchased and sold but not received or delivered and securities on loan, we request confirmations from brokers, and where replies are not received, we carry out 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 IDS Selective Fund, Inc. at May 31, 1996, and the results of its operations and changes in its net assets for the six months then ended and the changes in its net assets for the year ended November 30, 1995, and the financial highlights for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota July 5, 1996 PAGE 15
Statement of assets and liabilities Financial Statements IDS Selective Fund, Inc. May 31, 1996 ______________________________________________________________________________________________________________ Assets ______________________________________________________________________________________________________________ Investments in securities, at value (Note 1) (identified cost $1,688,840,430) $1,701,491,531 Dividends and accrued interest receivable 28,654,566 Receivable for Investment Securities Sold 11,617,805 Unrealized appreciation on foreign currency contracts held, at value (Notes 1 and 7) 490,142 U.S. government securities held as collateral (Note 5) 92,884,309 _____________________________________________________________________________________________________________ Total assets 1,835,138,353 _____________________________________________________________________________________________________________ Liabilities ____________________________________________________________________________________________________________ Disbursements in excess of cash on demand deposit 1,627,857 Dividends payable to shareholders 854,967 Payable for investment securities purchased 10,718,762 Unrealized depreciation on foreign currency contracts held, at value (Notes 1 and 7) 3,697 Payable upon return of securities loaned (Note 5) 92,884,309 Accrued investment management services fee 24,167 Accrued distribution fee 2,224 Accrued service fee 7,277 Accrued transfer agency fee 5,064 Accrued administrative services fee 2,271 Other accrued expenses 356,644 _____________________________________________________________________________________________________________ Total liabilities 106,487,239 _____________________________________________________________________________________________________________ Net assets applicable to outstanding capital stock $1,728,651,114 _____________________________________________________________________________________________________________ Represented by _____________________________________________________________________________________________________________ Capital stock -- authorized 10,000,000,000 shares of $.01 par value $ 1,921,411 Additional paid-in capital 1,688,666,163 Undistributed net investment income 529,978 Accumulated net realized gain (Note 1) 23,824,667 Unrealized appreciation of investments and on translation of assets and liabilities in foreign currencies (Note 7) 13,708,895 _____________________________________________________________________________________________________________ Total -- representing net assets applicable to outstanding capital stock $1,728,651,114 _____________________________________________________________________________________________________________ Net assets applicable to outstanding shares: Class A $1,408,373,750 Class B $ 108,109,795 Class Y $ 212,167,569 Net asset value per share of outstanding capital stock: Class A shares 156,543,298 $ 9.00 Class B shares 12,016,634 $ 9.00 Class Y shares 23,581,187 $ 9.00 See accompanying notes to financial statements. PAGE 16 Financial statements Statement of operations IDS Selective Fund, Inc. Six months ended May 31, 1996 _____________________________________________________________________________________________________________ Investment income _____________________________________________________________________________________________________________ Income: Interest (net of foreign taxes withheld of $4,077) $62,295,370 _____________________________________________________________________________________________________________ Expenses (Note 2): Investment management services fee 4,416,446 Distribution fee -- Class B 350,902 Transfer agency fee 932,533 Incremental transfer agency fee - Class B 3,579 Service fee Class A 1,254,108 Class B 81,753 Administrative services fee 415,138 Compensation of board members 17,995 Compensation of officers 7,995 Custodian fees 58,042 Postage 137,298 Registration fees 99,752 Reports to shareholders 76,154 Audit fees 35,000 Administrative 3,864 Other 3,992 _____________________________________________________________________________________________________________ Total expenses 7,894,551 Earnings credit on cash balances (Note 2) (2,895) _____________________________________________________________________________________________________________ Total net expenses 7,891,656 _____________________________________________________________________________________________________________ Investment income -- net 54,403,714 _____________________________________________________________________________________________________________ Realized and unrealized gain (loss) -- net _____________________________________________________________________________________________________________ Net realized gain on security and foreign currency transactions (including gain of $1,034,306 from foreign currency transactions) (Note 3) 22,625,628 Net realized gain on closed interest rate futures contracts 388,606 Net realized gain on closed option contracts written (Note 8) 48,530 _____________________________________________________________________________________________________________ Net realized gain on investments and foreign currency 23,062,764 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies (Note 7) (113,687,462) _____________________________________________________________________________________________________________ Net loss on investments and foreign currency (90,624,698) _____________________________________________________________________________________________________________ Net decrease in net assets resulting from operations $(36,220,984) _____________________________________________________________________________________________________________ See accompanying notes to financial statements.
PAGE 17
Financial statements Statements of changes in net assets IDS Selective Fund, Inc. _____________________________________________________________________________________________________________ Operations and distributions May 31, 1996 Nov. 30, 1995 _____________________________________________________________________________________________________________ Six months ended Year ended Investment income -- net $ 54,403,714 $ 99,914,474 Net realized gains on investments and foreign currency 23,062,764 7,644,942 Net change in unrealized appreciation or depreciation of investments and on translation of assets and liabilities in foreign currencies (113,687,462) 173,013,840 _____________________________________________________________________________________________________________ Net increase (decrease) in net assets resulting from operations (36,220,984) 280,573,256 _____________________________________________________________________________________________________________ Distributions to shareholders from: Net investment income Class A (48,380,959) (91,687,959) Class B (2,717,675) (1,325,265) Class Y (5,835,989) (5,767,587) Net realized gain Class A (4,513,331) (20,000,191) Class B (242,090) -- Class Y (433,179) -- Excess distribution of realized gain (Note 1) Class A (763,230) -- Class B (93,149) -- Class Y (193,212) -- _____________________________________________________________________________________________________________ Total distributions (63,172,814) (118,781,002) _____________________________________________________________________________________________________________ Capital share transactions (Note 4) _____________________________________________________________________________________________________________ Proceeds from sales Class A shares (Note 2) 111,507,134 207,511,368 Class B shares 58,275,961 74,256,461 Class Y shares 111,069,550 146,334,859 Reinvestment of distributions at net asset value Class A shares 40,178,831 83,864,001 Class B shares 2,823,107 1,205,720 Class Y shares 6,425,412 5,694,035 Payments for redemptions Class A shares (150,106,899) (352,508,286) Class B shares (Note 2) (18,994,240) (6,231,036) Class Y shares (36,979,985) (20,194,720) _____________________________________________________________________________________________________________ Increase in net assets from capital share transactions 124,198,871 139,932,402 _____________________________________________________________________________________________________________ Total increase in net assets 24,805,073 301,724,656 Net assets at beginning of period 1,703,846,041 1,402,121,385 _____________________________________________________________________________________________________________ Net assets at end of period (including undistributed net investment income of $529,978 and $2,530,909) $1,728,651,114 $1,703,846,041 _____________________________________________________________________________________________________________ See accompanying notes to financial statements.
PAGE 18 Notes to financial statements IDS 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 invests primarily in investment-grade bonds. The Fund offers Class A, Class B and Class Y shares. Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent deferred sales charge and such shares automatically convert to Class A after eight years. Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend, liquidation and other rights, and the same terms and conditions, except that the level of distribution fee, transfer agency fee and service fee (class specific expenses) differs among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Significant accounting policies followed by the Fund are summarized below: Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price; securities for which market quotations are not readily available, including illiquid securities, are valued at fair value according to methods selected in good faith by the board. Determination of fair value involves, among other things, reference to market indexes, matrixes and data from independent brokers. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions In order to produce incremental earnings, protect gains, and facilitate buying and selling of securities for investment purposes, the Fund may buy or write options traded on any U.S. or PAGE 19 foreign exchange or in the over-the-counter market where the completion of the obligation is dependent upon the credit standing of the other party. The Fund also may buy and sell put and call options and write covered call options on portfolio securities and may write cash-secured put options. The risk in writing a call option is that the Fund gives up the opportunity of profit if the market price of the security increases. The risk in writing a put option is that the Fund 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 Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss upon expiration or closing of the option transaction. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions In order to gain exposure to or protect itself from changes in the market, the Fund may buy and sell futures contracts traded on any U.S. or foreign exchange. The Fund also may buy or write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Fund 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 Fund 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 Fund recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars at the closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement dates on securities transactions, and PAGE 20 other translation gains or losses on dividends, interest income and foreign withholding taxes. The Fund 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 Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete the obligations of the contract. Federal taxes Since the Fund's policy is to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders, no provision for income or excise taxes is required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferral of losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. The effect on dividend distributions of certain book-to- tax differences is presented as "excess distributions" in the statement of changes in net assets. 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. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $529,978 and accumulated net realized gain has been decreased by $529,978. 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. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar denominated bonds, interest income includes level-yield amortization of premium and discount. For foreign bonds, except for original issue discount, the Fund does not amortize premium and discount. Interest income, including level- yield amortization of premium and discount, is accrued daily. PAGE 21 ___________________________________________________________________ 2. Expenses and sales charges Effective March 20, 1995, the Fund entered into agreements with American Express Financial Corporation (AEFC) for managing its portfolio, providing administrative services and serving as transfer agent as follows: Under its Investment Management Services Agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under an Administrative Services Agreement, the Fund pays AEFC for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. Under a separate Transfer Agency Agreement, AEFC maintains shareholder accounts and records. The Fund pays AEFC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 Also effective March 20, 1995, the Fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder servicing-related services as follows: Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares for distribution-related services. Under a Shareholder Service Agreement, the Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of the Fund's average daily net assets attributable to Class A and Class B shares. AEFC will assume and pay any expenses (except taxes and brokerage commissions) that exceed the most restrictive applicable state expense limitation. Sales charges received by American Express Financial Advisors Inc. for distributing Fund shares were $2,251,978 for Class A and $28,826 for Class B for the fiscal period ended May 31, 1996. During the fiscal period ended May 31, 1996, the Fund's custodian fees were reduced by $2,895 as a result of earnings credits from overnight cash balances. Prior to April 30, 1996, the Fund had a retirement plan for its independent board members. The plan was terminated April 30, 1996. The retirement plan expense amounted to $7,719 for the fiscal period. The total liability for the plan is $88,613, which will be paid out at some future date. PAGE 22 ___________________________________________________________________ 3. Securities transactions Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $315,096,352 and $283,469,123, respectively, for the fiscal period ended May 31, 1996. Realized gains and losses are determined on an identified cost basis. ___________________________________________________________________ 4. Capital share transactions Transactions in shares of capital stock for the periods indicated are as follows: Six months ended May 31, 1996 Class A Class B Class Y ___________________________________________________________________ Sold 11,921,387 6,232,510 12,031,481 Issued for reinvested 4,313,212 303,969 692,487 distributions Redeemed (16,151,779) (2,050,373) (4,007,375) ___________________________________________________________________ Net increase 82,820 4,486,106 8,716,593 ___________________________________________________________________ Year ended Nov. 30, 1995 Class A Class B* Class Y* ___________________________________________________________________ Sold 23,080,473 8,072,716 16,445,854 Issued for reinvested 9,414,149 129,691 618,114 distributions Redeemed (39,632,200) (671,879) (2,199,374) ___________________________________________________________________ Net increase (decrease) (7,137,578) 7,530,528 14,864,594 ___________________________________________________________________ *Inception date was March 20, 1995. ___________________________________________________________________ 5. Lending of portfolio securities At May 31, 1996, securities valued at $90,143,020 were on loan to brokers. For collateral, the Fund received $86,063,000 in U.S. government securities valued at $92,884,309. Income from securities lending amounted to $57,952 for the fiscal period ended May 31, 1996. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. ___________________________________________________________________ 6. Illiquid Securities At May 31, 1996, investments in securities included issues that are illiquid. The Fund currently limits investments in illiquid securities to 10% of the net assets, at market value, at the time of purchase. The aggregate value of such securities at May 31, 1996, was $8,000,758 representing 0.5% of the net assets. Pursuant to guidelines adopted by the Fund's board, certain unregistered PAGE 23 securities are determined to be liquid and are not included within the 10% limitation specified above. ___________________________________________________________________ 7. Foreign currency contracts At May 31, 1996, the Fund had entered into five foreign currency exchange contracts that obligate the Fund to deliver currencies at specified future dates. The unrealized appreciation and/or depreciation on these contracts are included in the accompanying financial statements. The terms of the open contracts are as follows:
Exchange date Currency to be Currency to be Unrealized Unrealized delivered received appreciation deprecication ______________________________________________________________________________________________ June 4, 1996 216,751 172,480 $ -- $ 519 Australian Dollar U.S. Dollar June 17, 1996 12,650,000 10,132,650 43,516 -- Australian Dollar U.S. Dollar June 26, 1996 15,350,000 10,442,177 373,830 -- Deutsche Mark U.S. Dollar July 9, 1996 22,567,000 14,885,884 72,796 -- Deutsche Mark U.S. Dollar July 9, 1996 9,460,000 6,206,412 -- 3,178 Deutsche Mark U.S. Dollar _________ _______ $490,142 $3,697
___________________________________________________________________ 8. Option contracts written The number of contracts and premium amounts associated with covered call option contracts written is as follows: Period ended May 31, 1996 _____________________________ Contracts Premium ___________________________________________ Balance Nov. 30, 1995 -- $ -- Opened 250 108,125 Closed (250) (108,125) ___________________________________________ Balance May 31, 1996 -- $ -- ___________________________________________________________________ 9. Interest rate futures contracts At May, 31, 1996, investments in securities included securities valued at $2,061,000 that were pledged as collateral to cover initial margin deposits on 750 open sales contracts. The market value of the open contracts at May 31, 1996, was $81,046,875 with a net unrealized gain of $568,594. PAGE 24 ___________________________________________________________________ 10. Change of Fund's fiscal year The By-Laws of the Fund were amended on Jan. 10-11, 1996, changing its fiscal year-end from Nov. 30 to May 31, effective 1996. ___________________________________________________________________ 11. Subsequent event The Fund invested its assets in a master portfolio, called the Quality Income Portfolio, on June 10, 1996. The Portfolio is a separate investment company, but has the same goals and investment policies of the Fund. Additional information on investment policies may be found in the prospectus and Statement of Additional Information (SAI). ___________________________________________________________________ 12. Financial highlights "Financial highlights" showing per share data and selected information is presented on pages 7 and 8 of the prospectus. PAGE 25
Investments in securities IDS Selective Fund, Inc. (Percentages represent value of May 31, 1996 investments compared to net assets) _____________________________________________________________________________________________________________________________ Bonds (90.0%) _____________________________________________________________________________________________________________________________ Issuer Coupon Maturity Principal Value(a) rate year amount _____________________________________________________________________________________________________________________________ U.S. government obligations (31.5%) U.S. Treasury 6.875% 1999 $ 60,000,000 $ 60,626,400 7.25 1996-04 70,000,000 (b) 71,265,700 7.50 2001-16 200,300,000 (b) 207,700,231 8.00 2021 35,000,000 (b) 38,330,950 8.625 1997 50,745,000 (j) 52,292,722 Resolution Funding Corp Zero Coupon 7.61 2017 39,000,000 (c) 8,391,240 7.89 2016 35,900,000 (b,c) 8,533,071 7.98 2016 47,000,000 (c) 10,905,880 8.19 2014 48,000,000 (c) 13,344,480 8.27 2014 10,000,000 (c) 2,680,900 8.35 2006 48,000,000 (c) 23,976,960 8.94 2006 25,000,000 (c) 12,709,500 8.95 2006 68,000,000 (c) 32,793,000 _____________ Total 543,551,034 _____________________________________________________________________________________________________________________________ Mortgage-backed securities (9.2%) Federal Home Loan Mtge Corp 7.50 2024 18,241,958 17,905,576 8.00 2016-25 11,953,022 11,986,629 8.50 2017-22 11,255,425 11,547,045 9.00 2020-21 6,626,738 6,907,292 Collateralized Mtge Obligation 8.50 2019 6,608,944 6,646,020 Federal Housing Admin 7.43 2024 9,251,785 8,959,859 Federal Natl Mtge Assn 6.50 2023 13,394,813 12,436,280 10.00 2002 140 148 Collateralized Mtge Obligation 8.00 2021 13,756,661 13,964,247 8.50 2019 3,233,904 3,332,441 Principal Only 9.50 2018 1,484,201 (e) 1,099,243 9.89 2020 2,629,671 (e) 2,213,368 Trust Series Z 6.00 2024 19,450,581 (d) 13,922,337 See accompanying notes to investments in securities. PAGE 26 Govt Natl Mtge Assn 8.00 1922-24 34,664,111 34,848,178 9.00 1924-25 7,861,832 8,223,004 Collateralized Mtge Obligation Trust 7.75 2012 1,927,113 1,952,801 Prudential Bache Collateralized Mtge Obligation 7.965 2019 3,827,924 3,762,735 ______________ Total 159,707,203 _____________________________________________________________________________________________________________________________ Financial (9.5%) Banks and savings & loans (3.3%) BankAmerica Sub Nts 7.50 2002 8,810,000 8,910,522 Boatmen's Bancshares Sub Nts 9.25 2001 8,950,000 9,836,050 First Bank System 6.875 2007 8,550,000 8,121,816 First Chicago Sr Nts 9.00 1999 7,900,000 8,359,306 NCNB Sub Nts 9.125 2001 10,000,000 10,888,400 Standard Credit Card 8.625 2002 10,000,000 10,152,100 ______________ Total 56,268,194 _____________________________________________________________________________________________________________________________ Financial services (4.4%) Aristar Sr Deb 8.875 1998 10,520,000 10,921,338 Beneficial 9.125 1998 10,000,000 10,400,000 General Motors Acceptance Medium Term Nts 5.95 1998 8,000,000 7,896,720 7.00 2000 14,300,000 14,321,021 Greyhound Financial Medium Term Nts 7.95 1999 9,600,000 9,876,864 Salomon 7.75 2000 5,000,000 5,082,400 Medium Term Nts 8.91 1998 8,400,000 8,687,616 SunAmerica 9.95 2012 8,000,000 9,257,680 ______________ Total 76,443,639 _____________________________________________________________________________________________________________________________ Insurance (1.8%) American United Life 7.75 2026 4,800,000 (g) 4,396,512 Arkwright 9.625 2026 4,000,000 (g) 4,080,560 Berkley (WR) 8.70 2022 10,000,000 10,597,400 Equitable Life 7.70 2015 5,000,000 (g) 4,838,700 Nationwide Trust Credit Sensitive Nt 9.875 2025 6,500,000 (g) 7,086,885 _____________ Total 31,000,057 _____________________________________________________________________________________________________________________________ Industrial (11.9%) Aerospace & defense (0.7%) United Technologies 8.875 2019 10,000,000 11,325,000 _____________________________________________________________________________________________________________________________ Automotive & related (1.0%) Ford Capital 9.00 1996 9,700,000 9,700,873 General Motors 8.875 2003 7,050,000 7,586,505 ____________ Total 17,287,378 Beverages & tobacco (0.6%) PAGE 27 Philip Morris 8.10 1996 10,000,000 10,043,200 _____________________________________________________________________________________________________________________________ Chemicals (0.6%) Dow Chemical 8.85 2021 10,000,000 10,776,600 _____________________________________________________________________________________________________________________________ Ecological services & equipment (0.5%) Browning-Ferris Inds 9.25 2021 7,000,000 8,115,380 ____________________________________________________________________________________________________________________________ Electronics (0.3%) Harris 10.375 2018 3,900,000 4,254,315 _____________________________________________________________________________________________________________________________ Energy (2.1%) PDV America 7.875 2003 16,500,000 15,632,265 Texaco Capital Gtd Deb 7.50 2043 12,000,000 11,520,360 USX 9.375 2022 9,200,000 9,965,256 ______________ Total 37,117,881 _____________________________________________________________________________________________________________________________ Energy Equipment and Services (0.4%) Foster Wheeler 6.75 2005 8,000,000 7,547,040 _____________________________________________________________________________________________________________________________ Health care (1.5%) Lilly (Eli) 6.77 2036 13,300,000 11,892,195 Schering-Plough Zero Coupon 7.31 1996 15,000,000 (c,g) 14,570,850 _____________ Total 26,463,045 _____________________________________________________________________________________________________________________________ Industrial equipment & services (1.2%) Case 7.25 2005 10,000,000 9,764,200 Deere 8.95 2019 10,000,000 11,025,800 _____________ Total 20,790,000 _____________________________________________________________________________________________________________________________ Media (1.4%) Tele-communications Sr Deb 7.875 2013 8,300,000 7,496,726 9.875 2022 5,000,000 5,341,600 Time Warner Entertainment 8.375 2033 12,000,000 11,684,880 _____________ Total 24,523,206 _____________________________________________________________________________________________________________________________ Paper & packaging (0.6%) Georgia-Pacific Credit Sensitive Nt 9.85 1997 10,000,000 10,307,400 _____________________________________________________________________________________________________________________________ Retail (1.0%) Dayton Hudson 7.875 2023 18,850,000 17,497,135 _____________________________________________________________________________________________________________________________ Transportation (0.5%) Burlington Northern 7.00 2025 10,000,000 8,913,900 _____________________________________________________________________________________________________________________________ Utilities (9.1%) Electric (7.1%) Arizona Public Service 1st Mtge 8.75 2024 5,000,000 5,236,000 Sale Lease-Backed Obligation 8.00 2015 9,000,000 8,731,800 Cajun Electric Power Cooperative Mtge Trust 8.92 2019 4,960,000 5,444,195 Commonwealth Edison 6.50 2000 9,000,000 8,766,270 PAGE 28 8.375 2023 10,000,000 9,733,300 Long Island Lighting 9.625 2024 10,000,000 10,110,600 RGS Funding Sale Lease-Backed Obligation 9.82 2022 9,940,610 11,658,745 Salton Sea Funding 7.84 2010 10,000,000 9,496,900 San Diego Gas & Electric 1st Mtge 9.625 2020 9,950,000 10,930,572 Southern California Edison 1st Mtge 8.875 2023 21,000,000 21,697,620 Texas Utilities Electric 1st Mtge 9.75 2021 13,000,000 14,321,710 Wisconsin Electric Power 6.875 2095 8,000,000 6,948,240 _______________ Total 123,075,952 _____________________________________________________________________________________________________________________________ Telephone (2.0%) BellSouth Telecommunications 7.00 2095 10,000,000 9,091,200 GTE 10.25 2020 2,000,000 2,287,640 New York Telephone 9.375 2031 7,000,000 7,539,070 Pacific Bell 8.50 2031 15,000,000 15,337,650 ______________ Total 34,255,560 _____________________________________________________________________________________________________________________________ Foreign (18.3%)(h) ABN Amro Bank (U.S. Dollar) 7.75 2023 12,000,000 11,931,960 Alcan Aluminum (U.S. Dollar) 8.875 2022 9,600,000 9,981,984 Austria Republic Euro (U.S. Dollar) 10.00 1998 5,000,000 5,324,055 Bank of China (U.S. Dollar) 8.25 2014 7,100,000 6,427,559 British Airport Authority Euro (British Pound) 5.75 2006 1,500,000 2,546,647 Bundes Republic (Deutsche Mark) 6.00 2016 10,000,000 5,798,421 (Deutsche Mark) 7.50 2004 34,000,000 23,946,674 City of Helsinki Sr Nts (U.S. Dollar) 8.00 2006 2,000,000 (i) 1,917,500 8.65 2006 1,500,000 (i) 1,461,150 8.75 2006 1,500,000 (i) 1,483,050 9.00 2007 1,650,000 (i) 1,640,183 9.15 2006 1,500,000 (i) 1,498,875 Euratom Euro (U.S. Dollar) 7.75 1997 6,100,000 6,172,438 Govt of Australia (Australian Dollar) 9.00 2004 13,100,000 10,586,828 Govt of Canada (Canadian Dollar) 8.00 2023 10,000,000 7,204,876 (Canadian Dollar) 10.50 2001 10,000,000 8,286,844 Govt of Poland Discount Euro (U.S. Dollar) 6.81 2024 9,300,000 8,579,250 Guang Dong Enterprise (U.S. Dollar) 8.75 2003 15,000,000 (g) 13,512,600 Intl Bank Reconstruction & Development (U.S. Dollar) 12.375 2002 6,000,000 7,631,700 Intl Finance Euro (U.S. Dollar) 8.25 1996 8,000,000 8,024,960 Japan Finance (U.S. Dollar) 9.25 1998 25,950,000 27,381,661 PAGE 29 KFW Intl Finance (U.S. Dollar) 8.50 1999 10,000,000 10,566,500 Kingdom of Denmark Euro (U.S. Dollar) 7.25 1996 8,000,000 8,035,000 Korea Electric Power (U.S. Dollar) 7.75 2013 14,000,000 13,651,680 8.00 2002 9,000,000 9,277,200 Zero Coupon 9.27 2016 35,000,000 (f) 4,598,650 Peoples Republic China (U.S. Dollar) 9.00 2096 10,000,000 9,163,100 Petronas (U.S. Dollar) 7.75 2015 10,000,000 (g) 9,860,900 Republic of Columbia (U.S. Dollar) 7.25 2004 13,400,000 12,349,842 Republic of Italy (U.S. Dollar) 6.875 2023 23,200,000 20,572,368 Rodamco (U.S. Dollar) 7.30 2005 10,000,000 9,896,200 State of Isreal (U.S. Dollar) 6.375 2005 7,300,000 6,747,682 Telekom Malaysia (U.S. Dollar) 7.875 2025 10,000,000 (g) 9,835,800 Tokyo Electric Power Euro (U.S. Dollar) 6.125 2003 21,500,000 20,166,140 ______________ Total 316,060,277 _____________________________________________________________________________________________________________________________ Total bonds (Cost: $1,542,671,708) $1,555,323,396
_____________________________________________________________________________________________________________________________ Short-term securities (8.4%) _____________________________________________________________________________________________________________________________ Issuer Annualized Amount Value(a) yield on payable at date of maturity purchase _____________________________________________________________________________________________________________________________ U.S. government agency (0.3%) Federal Home Loan Mtge Disc Nt 06-12-96 5.21% $5,800,000 $5,790,784 _____________________________________________________________________________________________________________________________ Commercial paper (7.8%) AIG Funding 06-05-96 5.30 4,700,000 4,697,248 Albertson's 06-03-96 5.30 3,200,000 3,199,061 American General Finance 06-21-96 5.30 6,000,000 5,982,400 BellSouth Telephone 06-04-96 5.30 3,100,000 3,098,636 Cargill 06-11-96 5.31 8,000,000 7,988,244 Colgate Palmolive 06-06-96 5.31 6,500,000 (k) 6,495,224 Dean Witter 06-24-96 5.30 4,600,000 4,584,483 PAGE 30 Fleet Funding 06-10-96 5.33 6,146,000 (k) 6,137,857 06-17-96 5.32 6,300,000 (k) 6,285,160 Gannett 06-07-96 5.31 5,300,000 (k) 5,295,327 06-18-96 5.31 6,800,000 (k) 6,783,013 Kredietbank North America Finance 07-03-96 5.31 4,800,000 4,777,429 Metlife Funding 06-11-96 5.31 5,000,000 4,992,667 Michigan Consolidated Gas 06-17-96 5.31 14,000,000 13,967,084 Mobil Australia Finance 06-12-96 5.32 5,500,000 (k) 5,491,093 Pacific Mutual 06-03-96 5.32 4,300,000 4,298,734 06-12-96 5.31 6,000,000 5,990,302 Reed Elsevier 06-21-96 5.30 8,000,000 (k) 7,976,533 St. Paul Companies 06-18-96 5.31 6,600,000 (k) 6,583,513 Sandoz 06-19-96 5.32 5,500,000 (k) 5,484,895 07-09-96 5.30 1,400,000 1,392,212 Southern California Gas 06-03-96 5.30 5,000,000 (k) 4,998,533 Toyota Motor 06-05-96 5.32 2,500,000 2,498,528 U S WEST Communications 06-13-96 5.32 6,600,000 6,588,362 _____________ Total 135,586,538 ______________________________________________________________________________________________________________________________ Letter of credit (0.3%) Bank of America- AES Barbers Point 06-14-96 5.32 4,800,000 4,790,813 _____________________________________________________________________________________________________________________________ Total short-term securities (Cost: $146,168,722) $ 146,168,135 _____________________________________________________________________________________________________________________________ Total investments in securities (Cost: $1,688,840,430(l) $1,701,491,531 _____________________________________________________________________________________________________________________________ Notes to investments in securities _____________________________________________________________________________________________________________________________ (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Security is partially or fully on loan. See Note 5 to the financial statements. (c) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (d) This security is a collateralized mortgage obligation that pays no interest or principal during its initial accrual period until payment of previous series within the trust have been paid off. Interest is accrued at an effective yield; similar to a zero coupon bond. (e) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents current yield based upon the current cost basis and estimated timing of future cash flows. (f) For those zero coupon bonds that become coupon paying at a future date, the interest rate disclosed repesents the annualized effective yield from the date of acquisition to interest rate reset date disclosed. (g) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. PAGE 31 (h) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. (i) Identifies issues considered to be illiquid, (see Note 6 to the financial statements). Information concerning such security holdings at May 31, 1996, is as follows: Security Acquisition Cost date City of Helsinki 02-07-95 $1,859,160 City of Helsinki 02-07-95 1,462,155 City of Helsinki 02-07-95 1,472,805 City of Helsinki 02-07-95 1,638,450 City of Helsinki 02-07-95 1,497,750 (j) Partially pledged as initial margin deposit on the following open interest rate futures contracts (see Note 9 to the financial statements): Type of security Notional amount _________________________________________________________________ Sales Contracts U.S. Treasury Bonds June 1996 $75,000,000 (k) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, 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. (l) At May 31, 1996, the cost of securities for federal income tax purposes was $1,686,181,898 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $46,289,329 Unrealized depreciation (30,979,696) ____________________________________________________________________________________________ Net unrealized appreciation $15,309,633 ____________________________________________________________________________________________
PAGE 32 IDS mutual funds Cash equivalent investments These money market funds have three main goals: conservation of capital, constant liquidity and the highest possible current income consistent with these objectives. Very limited risk. IDS Cash Management Fund Invests in such money market securities as high quality commercial paper, bankers' acceptances, certificates of deposits (CDs) and other bank securities. (icon of) piggy bank 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 Income investments 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 Global Bond Fund Invests primarily in debt securities of U.S. and foreign issuers to seek high total return through income and growth of capital. (icon of) globe IDS Extra Income Fund Invests mainly in long-term, high-yielding corporate fixed-income securities in the lower rated, higher risk bond categories to seek high current income. Secondary objective is capital growth. (icon of) coins 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. (icon of) greek column PAGE 33 IDS Selective Fund Invests in high-quality corporate bonds and other highly rated debt instruments including government securities and short-term investments. Seeks current income and preservation of capital. (icon of) skyline IDS Federal Income Fund Invests primarily in 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. (icon of) shield with eagle head enclosed Tax-exempt income investments These funds provide tax-free income by investing in municipal bonds. The income is generally free from federal income tax. Risk varies by bond quality. IDS High Yield Tax-Exempt Fund Invests primarily in medium- and lower-quality municipal bonds and notes. Lower-quality securities generally involve greater risk of principal and income. (icon of) shield with basket of apples enclosed 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.) (icon of) shield with U.S. enclosed 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. (icon of) shield with Greek column enclosed 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. (icon of) shield with star enclosed PAGE 34 Growth and income investments 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. Moderate risk. 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. (icon of) three flags IDS Managed Retirement Fund Invests in 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. (icon of) bird in a nest IDS Equity Select Fund Invests primarily in a combination of moderate growth stocks, higher-yielding equities and bonds. Seeks growth of capital and income. (icon of) three pine trees 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. (icon of) ribbon IDS Stock Fund Invests in common stock of companies representing many sectors of the economy. Seeks current income and growth of capital. (icon of) building with columns IDS Equity Value Fund Invests primarily in undervalued common stocks that offer potential for growth of capital and income. (icon of) three growing flowers PAGE 35 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. (icon of) light bulb IDS Diversified Equity Income Fund Invests primarily in high-yielding common stocks to seek high current income and, secondarily, to benefit from the growth potential offered by stock investments. (icon of) two puzzle pieces IDS Mutual Invests in a balance between common stocks and senior securities (preferred stocks and bonds). Seeks a balance of growth of capital and current income. (icon of) scale of justice Growth investments Funds in this group seek capital growth, primarily from common stocks. They are high risk mutual funds with a potential for high reward. 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. (icon of) ship IDS Strategy Aggressive Fund Invests primarily in common stocks of companies that are selected for their potential for above-average growth. Above-average means that their growth potential is better, in the opinion of the portfolio's investment manager, than the Standard & Poor's Corporation (S&P) 500 Stock Index. (icon of) chess piece IDS Growth Fund Invests primarily in companies that have above-average potential for long-term growth as a result of new management, marketing opportunities or technological superiority. (icon of) trees PAGE 36 IDS Global Growth Fund Invests in stocks of companies throughout the world that are positioned to meet market needs in a changing world economy. These companies offer above-average potential for long-term growth. (icon of) world IDS New Dimensions Fund Invests primarily in companies with significant growth potential due to superiority in technology, marketing or management. The fund frequently changes its industry mix. (icon of) dimension IDS Progressive Fund Invests primarily in undervalued common stocks. The fund holds stocks for the long term with the goal of capital growth. (icon of) shooting star Specialty growth investment This fund aggressively seeks capital growth as a hedge against inflation. 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. This is the most aggressive and most speculative IDS mutual fund. (icon of) cart of precious gems 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. PAGE 37 Federal income tax information IDS Selective 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 Selective Fund, Inc. Fiscal period ended May 31, 1996 Class A Income distributions taxable as dividend income, none qualifying for deduction by corporations. Payable date Per share Dec. 27, 1995 $0.08720 Jan. 25, 1996 0.04576 Feb. 26, 1996 0.04727 March 27, 1996 0.04381 April 26, 1996 0.04532 May 28, 1996 0.07265 Total $0.34201 The distribution of $0.08720 per share, payable Dec. 27, 1995, consisted of $0.05830 derived from net investment income and $0.02890 from net short-term capital gains. Class B Income distributions taxable as dividend income, none qualifying for deduction by corporations. Dec. 27, 1995 $0.08131 Jan. 25, 1996 0.04000 Feb. 26, 1996 0.04100 March 27, 1996 0.03801 April 26, 1996 0.03964 May 28, 1996 0.06662 Total distributions $0.30658 The distribution of $0.08131 per share, payable Dec. 27, 1995, consisted of $0.05241 derived from net investment income and $0.02890 from net short-term capital gains. PAGE 38 Class Y Income distributions taxable as dividend income, none qualifying for deduction by corporations. Dec. 27, 1995 $0.08857 Jan. 25, 1996 0.04704 Feb. 26, 1996 0.04873 March 27, 1996 0.04507 April 26, 1996 0.04660 May 28, 1996 0.07399 Total distributions $0.35000 The distribution of $0.08857 per share, payable Dec. 27, 1995, consisted of $0.05967 derived from net investment income and $0.02890 from net short-term capital gains. PAGE 39 Quick telephone reference American Express Telephone Transaction Service Redemptions and exchanges, dividend payments or reinvestments and automatic payment arrangements National/Minnesota: 800-437-3133 Mpls./St. Paul area: 671-3800 American Express Shareholder Service Fund performance, objectives and account inquiries 612-671-3733 TTY Service For the hearing impaired 800-846-4852 American Express Infoline Automated account information (TouchToneR phones only), including current fund prices and performance, account values and recent account transactions National/Minnesota: 800-272-4445 Mpls./St. Paul area: 671-1630 AMERICAN EXPRESS Financial Advisors IDS Selective Fund IDS Tower 10 Minneapolis, MN 55440-0010 PAGE 40 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 and prospectus 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 and prospectus. 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. -----END PRIVACY-ENHANCED MESSAGE-----