UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4260
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AXP GOVERNMENT INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
200 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 330-9283
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Date of fiscal year end: 5/31
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Date of reporting period: 5/31
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Item 1. Reports to Shareholders.
AXP(R)
Short Duration
U.S. Government
Fund
Annual Report
for the Period Ended
May 31, 2003
AXP Short Duration U.S. Government Fund seeks to provide shareholders with a
high level of current income and safety of principal consistent with investment
in U.S. government and government agency securities.
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(logo) (logo)
American AMERICAN
Express(R) EXPRESS
Funds (R)
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Table of Contents
Fund Snapshot 3
Questions & Answers
with Portfolio Management 4
The Fund's Long-term Performance 9
Investments in Securities 10
Financial Statements (Portfolio) 14
Notes to Financial Statements (Portfolio) 17
Independent Auditors' Report (Portfolio) 21
Financial Statements (Fund) 22
Notes to Financial Statements (Fund) 25
Independent Auditors' Report (Fund) 33
Federal Income Tax Information 34
Board Members and Officers 36
(logo) Dalbar
American Express(R) Funds' reports to shareholders have been awarded the
Communications Seal from Dalbar Inc., an independent financial services research
firm. The Seal recognizes communications demonstrating a level of excellence in
the industry.
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2 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Fund Snapshot
AS OF MAY 31, 2003
PORTFOLIO MANAGER
Portfolio manager Scott Kirby*
Since 6/01
Years in industry 24
* The Fund is managed by a team of portfolio managers led by Scott Kirby.
FUND OBJECTIVE
For investors seeking a high level of current income and safety of principal
consistent with investment in U.S. government and government agency securities.
Inception dates
A: 8/19/85 B: 3/20/95 C: 6/26/00 Y: 3/20/95
Ticker symbols
A: IFINX B: ISHOX C: AXFCX Y: IDFYX
Total net assets $3.527 billion
Number of holdings approximately 200
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT. LONG
X HIGH
MEDIUM
LOW
SECTOR COMPOSITION
Percentage of portfolio assets
(pie chart)
Government obligations & agencies 47.4%
Mortgage-backed securities 41.0%
Cash & equivalents 8.3%
Financials 3.3%
CREDIT QUALITY SUMMARY
Percentage of portfolio assets
AAA bonds 91.7%
Shares of the Fund are not insured or guaranteed by the U.S. government.
Fund holdings are subject to change.
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3 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Recently, the Fund changed its name to AXP Short Duration U.S. Government Fund.
The Fund was formerly known as AXP Federal Income Fund. This change does not
affect the value of your investment or the way the Fund is managed.
Q: How did AXP Short Duration U.S. Government Fund perform for fiscal
year 2003?
A: AXP Short Duration U.S. Government Fund's Class A shares (excluding
sales charge) gained 4.90% for the 12 months ended May 31, 2003. During
the fiscal year, the Fund changed its benchmark to the unmanaged Lehman
Brothers 1-3 Year Government Index, from the Lehman Brothers Aggregate
Bond Index and the Merrill Lynch 1-3 Year U.S. Government Index.
However, for the 12 months ended May 31, 2003 we continued to manage
the Fund in comparison to the Merrill Lynch 1-3 Year U.S. Government
Index. Going forward, we feel the Lehman Brothers 1-3 Year Government
Index, which rose 5.65% for the period, will be more representative of
the Fund's objective than either of the two other indices, which
respectively rose 11.58% and 5.36%. Also, this benchmark change will
provide consistency throughout our fixed income funds, which all use
Lehman Brothers indices as a primary comparative benchmark.
Generally speaking, fiscal 2003 was a good environment for bonds.
Government bonds and mortgage-backed securities did well as interest rates
declined. We are pleased to report the Fund outperformed the Lipper Short
U.S. Government Funds Index, representing the Fund's peer group, which rose
4.60% for the 12 months ended May 31, 2003.
(bar graph)
PERFORMANCE COMPARISON
For the year ended May 31, 2003
12% (bar 4)
+11.58%
10%
8%
(bar 2) (bar 5)
6% (bar 1) +5.65% (bar 3) +5.36%
+4.90% +4.60%
4%
2%
0%
(bar 1) AXP Short Duration U.S. Government Fund Class A (excluding sales charge)
(bar 2) Lehman Brothers 1-3 Year Government Index (unmanaged)
(bar 3) Lipper Short U.S. Government Funds Index
(bar 4) Lehman Brothers Aggregate Bond Index (unmanaged)
(bar 5) Merrill Lynch 1-3 Year U.S. Government Index (unmanaged)
(see "The Fund's Long-term Performance" for Index descriptions)
Past performance is no guarantee of future results. The 4.75% sales charge
applicable to Class A shares of the Fund is not reflected in the bar chart; if
reflected, returns would be lower than those shown. The performance of Class B,
Class C and Class Y may vary from that shown above because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
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4 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Questions & Answers
(begin callout quote) > Fund performance benefited most from its weighting
to and security selection within the mortgage-backed sector. (end callout
quote)
Q: What factors most significantly impacted performance during the annual
period?
A: During the annual period, the U.S. fixed income markets continued their
strong returns of recent years. U.S. Treasuries rallied dramatically, and
yields fell sharply. As investors continued to be attracted to short-term
Treasuries, two-year Treasury note yields declined from 3.19% at the start
of the period to 1.30% on May 31, 2003, and five-year Treasury yields fell
from 4.35% to 2.30% over the 12 months.
From the start of the fiscal year through mid-October, the Federal Reserve
Board believed that the economy was likely to be weak. This, together with
problems regarding corporate governance, a declining stock market, and the
threat
AVERAGE ANNUAL TOTAL RETURNS
as of May 31, 2003
Class A Class B Class C Class Y
(Inception dates) (8/19/95) (3/20/95) (6/26/00) (3/20/95)
NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5)
1 year +4.90% -0.09% +4.11% +0.11% +4.11% +4.11% +5.07% +5.07%
5 years +4.93% +3.92% +4.15% +3.98% N/A N/A +5.09% +5.09%
10 years +5.54% +5.03% N/A N/A N/A N/A N/A N/A
Since inception N/A N/A +5.30% +5.30% +5.85% +5.85% +6.26% +6.26%
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 4.75%.
(3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as
follows: first year 5%; second and third year 4%; fourth year 3%; fifth
year 2%; sixth year 1%; no sales charge thereafter.
(4) 1% CDSC applies to redemptions made within the first year of purchase.
(5) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, so that your shares, when redeemed, may be worth
more or less than the original cost. The performance shown for each class of
shares will vary due to differences in sales charges and fees. Short term
performance may be higher or lower than the figures shown. Visit
americanexpress.com for current information.
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5 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Questions & Answers
of war with Iraq, prompted investors to seek less risky investments. U.S.
Treasuries, led by the shorter end of the curve, rallied. Beginning
mid-October 2002, investors became less risk-averse as stock prices rose,
corporations seemed to be on more solid footing and statistical data
indicated a slow but steadier course for economic recovery. Yields on U.S.
Treasuries remained relatively range-bound through early May. As investors
then sought yield elsewhere, mortgage-backed securities benefited.
On May 6, 2003, the Federal Reserve Board kept the targeted federal funds
rate unchanged at 1.25%, but made it clear that it would maintain its
accommodative monetary policy. It believed the risk of deflation
exceeds that of a pickup in inflation over the next few quarters. The
long-term end of the U.S. Treasury curve rallied in response.
The Fund held a defensive duration posture maintaining a short to neutral
duration versus its benchmark through early May as interest rates declined.
Immediately after May 6th, 2003 we began to shift the Fund's duration to a
longer-than-average position.
For the 2003 fiscal year, Fund performance benefited most from its
weighting to and security selection within the mortgage-backed sector. We
were able to capture for the Fund the extra income boost that
mortgage-backed securities provided over comparable Treasuries, especially
during the period from October through May. Within the mortgage sector, we
were able to add relative value by focusing on pools that historically have
had lower-than-average prepayment risks. These included low-balance
mortgages, mortgages in states with less refinancing activity, newer
mortgages that would likely not be seeking to refinance too quickly, and
servicing organizations that have historically been less aggressive in
getting customers to refinance. For much of the annual period, we
maintained a portfolio asset allocation to mortgage-backed securities near
the 50% target. To help manage risk, we also participated in the U.S.
Treasury futures market.
Q: What changes did you make to the portfolio and how is it currently
positioned?
A: Besides integrating the pooling strategy for mortgage-backed securities
within the last few months of the period, we also reduced the Fund's
allocation to U.S. government agencies and increased its allocation to
U.S. Treasuries. Though agency securities outperformed Treasuries
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6 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Questions & Answers
(column chart)
U.S Treasury Yields
6%
(X) 5.62%
5% (X) 5.04%
(X) 4.35% (Y) 4.38%
4%
(X) 3.68%
(X) 3.19% (Y) 3.37%
3%
(Y) 2.29%
2%
(X) 1.72% (X) 1.88% (Y) 1.57%
(Y) 1.32%
(Y) 1.10% (Y) 1.08%
1%
3 month 6 month 2 year 3 year 5 year 10 year 30 year
Maturity
(X) May 31, 2002
(Y) May 31, 2003
Sources: Bloomberg
This illustration is not intended to represent the current or historical yield
of any mutual fund offered by American Express Funds. U.S. Treasuries are
guaranteed with respect to payment of interest and repayment of principal.
Mutual fund shares are not.
This chart compares yields on U.S. Treasuries on May 31, 2003 with a year
earlier. Rates have dropped the most in the past year on Treasury notes maturing
between three- and five-years. Overall, the income potential of Treasuries is
now at its lowest level since the early 1950s.
during the period, at a certain point we believed agency valuations were
more expensive than Treasuries. The Fund's move to Treasuries was
profitable. For example, at the start of the annual period, the Fund had
approximately 20% of its assets in government agency securities. Then in
September, we began reducing that position, so that by February we were
down to about 2% in agencies. We redeployed those assets primarily into
U.S. Treasuries. After May 6, we modestly reduced the Fund's position in
mortgage-backed securities and increased its position in U.S. Treasuries
even further. During the second half of the fiscal year, we reduced the
Fund's exposure to non-U.S. debt from 5% at the end of November to
approximately 1% at the end of May. At May 31, 2003, the Fund's asset
weightings were primarily in U.S. Treasuries and mortgage-backed
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7 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Questions & Answers
securities. The balance of assets were in asset-backed securities and in
U.S. government agencies.
The Fund also benefited from its positioning of assets along the yield
curve. The Fund was overweighted in intermediate-term bonds during the
early months of the period, when these securities outperformed. When the
yield curve flattened in September, we captured profits from these
intermediate-term bonds and shifted to a more neutral to the benchmark
positioning, investing in securities at both the long and short ends of the
1 to 3 year curve.
The use of our "dollar roll" strategy also contributed to the Fund. This
strategy involved selling a pool of securities that would have delivered in
the current month and simultaneously agreeing to purchase a similar pool of
securities at a future date. The dealer, in effect, offers a discount,
providing an incentive to buy the bonds forward. The use of this strategy
contributed to the Fund's 218% portfolio turnover rate.
Q: What is your view of the bond market for the coming months?
A: We do not believe the Federal Reserve Board will raise interest rates
any time soon. The real question is: Will they cut interest rates yet
again? The fixed income market had already priced in a 0.25% interest rate
cut prior to the Federal Reserve Board's June 25th meeting. Given
this view, we believe the yield curve will flatten even further. Such a
scenario would be less beneficial to the mortgage-backed sector of the
market, however, we feel the lower callability of the mortgage
securities in the Fund's portfolio positions it well for such an
environment. We also believe the current stance of the Federal Reserve
Board may enable us to extend the Fund's duration while integrating
what is known as a "barbell strategy," whereby we own positions at the
short and longer ends of the curve.
Whatever the markets may bring, the Fund will continue to seek current
income as its foremost goal and, as its secondary goal, preservation of
capital, by investing primarily in securities issued by U.S. government
mortgage agencies.
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8 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
The Fund's Long-term Performance
This chart illustrates the total value of an assumed $10,000 investment in AXP
Short Duration U.S. Government Fund Class A shares (from 6/1/93 to 5/31/03) as
compared to the performance of four widely cited performance indices, the Lehman
Brothers 1-3 Year Government Index, the Lehman Brothers Aggregate Bond Index,
the Lipper Short U.S. Government Funds Index and the Merrill Lynch 1-3 Year U.S.
Government Index. Recently, the Fund's investment manager recommended to the
Fund that the Fund change its comparative index from the Lehman Brothers
Aggregate Bond Index to the Lehman Brothers 1-3 Year Government Index. The
investment manager made this recommendation because the new index more closely
represents the Fund's holdings. We will include both indices in this transition
year. In the future, however, only the Lehman Brothers 1-3 Year Government Index
will be included. In comparing the Fund's Class A shares to these indices, 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 indices. Returns for the Fund include the reinvestment of any
distribution paid during each period.
Past performance is no guarantee of future results. Your investment and return
values fluctuate so that your shares, when redeemed, may be worth more or less
than the original cost. Returns do not reflect taxes payable on distributions
and redemptions. Also see "Past Performance" in the Fund's current prospectus.
(line graph)
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN AXP SHORT DURATION U.S. GOVERNMENT FUND
$25,000
(line 3) Lipper Short U.S. Government Funds Index(2)
$20,000 (line 2) Lehman Brothers 1-3 Year Government Index(1)
(line 5) Merrill Lynch 1-3 Year U.S. Government Index(4)
(line 4) Lehman Brothers Aggregate Bond Index(3)
(line 1) AXP Short Duration U.S. Government Fund Class A
$15,000
$10,000
$5,000
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03
(line 1) AXP Short Duration U.S. Government Fund Class A $16,338
(line 2) Lehman Brothers 1-3 Year Government Index(1) $17,819
(line 3) Lipper Short U.S. Government Funds Index(2) $20,468
(line 4) Lehman Brothers Aggregate Bond Index(3) $17,073
(line 5) Merrill Lynch 1-3 Year U.S. Government Index(4) $17,725
(1) Lehman Brothers 1-3 Year Government Index, an unmanaged index, is made up
of all publicly issued, non-convertible domestic debt of the U.S.
government, or agency thereof, or any quasi-federal corporation. The index
also includes corporate debt guaranteed by the U.S. government. Only notes
and bonds with a minimum maturity of one year up to a maximum maturity of
2.9 years are included.
(2) 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.
(3) The Lipper Short U.S. Government 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.
(4) Merrill Lynch 1-3 Year U.S. Government Index, an unmanaged index, is made
up of a representative list of government bonds. The index is frequently
used as a general measure of government bond performance. However, the
securities used to create index may not be representative of the bonds held
in the Fund.
Average Annual Total Returns
Class A with Sales Charge as of May 31, 2003
1 year -0.09%
5 years +3.92%
10 years +5.03%
Results for other share classes can be found on page 5.
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9 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Investments in Securities
Government Income Portfolio
May 31, 2003
(Percentages represent value of investments compared to net assets)
Bonds (99.5%)
Issuer Coupon Principal Value(a)
rate amount
Government obligations & agencies (51.4%)
Federal Home Loan Bank
02-15-05 4.38% $46,000,000 $48,319,688
11-25-05 2.00 14,700,000 14,707,585
Student Loan Mtge Assn
12-15-32 2.25 15,775,000 15,938,271
03-15-33 2.16 14,800,000 14,941,063
U.S. Treasury
11-15-04 5.88 88,000,000 93,909,024
11-15-04 7.88 185,600,000(g) 203,369,715
12-31-04 1.75 177,000,000(g) 178,493,526
02-15-05 7.50 92,500,000 102,273,920
05-15-05 6.75 125,000,000 138,125,000
05-31-05 1.25 39,800,000(b) 39,737,832
08-15-05 10.75 85,590,000 102,998,835
11-15-05 5.75 95,000,000 104,882,185
02-15-06 5.63 31,000,000 34,401,537
05-15-06 2.00 268,988,000 272,350,350
05-15-06 6.88 59,500,000(g) 68,529,601
11-15-06 3.50 106,800,000 113,032,741
08-15-07 3.25 21,245,000(g) 22,290,658
11-15-07 3.00 60,000,000 62,252,340
05-15-08 2.63 126,812,000 128,872,695
11-15-09 10.38 48,000,000(g) 54,223,104
Total 1,813,649,670
Mortgage-backed securities (44.5%)
Federal Home Loan Mtge Corp
09-01-09 6.50 1,372,364 1,438,207
10-01-10 7.00 2,849,727 3,038,605
03-01-12 7.50 10,480,574 11,236,936
07-01-12 5.50 1,066,951 1,111,196
01-01-13 6.00 3,699,076 3,849,213
04-01-13 4.50 3,311,887(b) 3,441,249
04-01-13 5.00 894,289(b) 934,621
05-01-13 4.50 59,335,180(b) 61,286,836
07-01-14 6.50 1,693,650 1,772,454
06-01-15 7.50 19,009,060 20,374,512
04-01-17 6.50 51,909,524 54,928,367
07-01-17 6.50 34,568,295 36,156,910
12-01-17 5.50 16,286,291 16,866,088
11-01-23 8.00 2,493,976 2,723,607
05-01-24 7.50 1,238,262 1,325,547
07-01-24 8.00 353,755 384,513
07-01-24 8.00 1,268,883(g) 1,379,208
01-01-25 9.00 1,523,445 1,695,098
06-01-25 8.00 1,935,225 2,101,311
08-01-25 8.00 449,399 487,967
05-01-26 9.00 2,867,272 3,203,005
Collateralized Mtge Obligation
12-15-08 6.00 18,378,778 19,549,379
03-15-12 5.00 21,777,143 22,530,536
04-15-12 5.00 24,868,186 26,320,240
02-15-14 5.50 29,386,000 30,175,331
03-15-15 5.50 40,388,673 41,960,806
01-17-21 6.00 9,838,602 10,013,773
04-15-22 5.50 15,500,000 16,223,036
02-25-42 6.00 34,000,000 36,362,888
Interest Only
12-15-12 0.85 18,576,480(d) 1,716,937
02-15-14 3.83 14,466,347(d) 1,702,689
01-01-20 0.00 38,399(d) 8,580
11-15-25 0.00 2,899,542(d) 29,943
Interest Only/Inverse Floater
03-15-32 6.64 13,199,562(d,f) 907,426
Principal Only
09-15-03 0.38 542,184(e) 542,295
05-15-08 0.86 166,772(e) 166,647
05-15-08 1.97 123,587(e) 123,487
Federal Natl Mtge Assn
09-01-07 8.50 471,879 496,684
10-01-07 7.50 1,312,026(b) 1,407,037
12-01-08 7.50 2,258,317(b) 2,403,140
05-01-09 7.50 4,629,681(b) 4,964,940
10-01-09 7.11 4,360,960 4,992,370
01-01-10 5.00 1,331,676 1,379,293
03-31-10 4.47 10,000,000(b) 10,100,000
03-31-10 4.50 5,200,000(b) 5,260,125
11-01-10 7.11 5,000,000 5,966,575
07-01-11 7.50 1,966,535(b) 2,110,056
See accompanying notes to investments in securities.
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10 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
09-01-12 6.74% $4,675,122 $5,664,309
11-01-12 5.00 1,125,863(b) 1,178,408
01-01-13 5.00 37,236,472 38,878,017
03-31-13 5.00 8,000,000(b) 8,256,250
04-01-13 5.50 24,969,083 26,155,271
05-01-13 5.00 18,878,102 19,759,143
05-01-13 5.50 7,885,452 8,267,423
05-01-13 6.00 2,263,112 2,363,286
06-01-13 4.50 34,500,000(b) 35,847,570
09-01-13 6.00 37,861 39,537
10-01-13 6.00 6,806,330 7,107,603
10-01-13 7.50 1,105,352(b) 1,185,396
11-01-13 6.00 1,118,392 1,167,896
12-01-13 5.50 2,292,048 2,392,185
01-01-14 5.50 3,452,855 3,603,704
01-01-14 6.00 1,244,456 1,299,540
03-01-14 6.00 1,981,498 2,069,206
06-01-14 6.50 22,855,837 24,023,485
08-01-14 6.50 1,475,963 1,551,051
05-01-17 7.00 1,857,648 1,978,433
06-01-17 6.50 8,727,188 9,166,027
06-01-17 7.00 1,915,777 2,040,342
07-01-17 6.00 47,384,879 49,838,936
08-01-17 5.50 36,076,487 37,687,987
08-01-17 6.00 24,971,550 26,092,615
08-01-17 7.00 3,092,005 3,293,048
09-01-17 6.00 1,008,161 1,050,401
11-01-17 5.50 34,804,441 36,345,648
11-01-17 6.00 2,699,547 2,812,625
01-01-18 5.50 2,895,030 3,006,883
02-01-18 5.50 3,534,300(b) 3,670,852
03-01-18 5.50 2,490,748 2,586,996
03-01-18 5.50 1,985,019(b) 2,061,713
04-01-18 5.50 9,311,195 9,671,001
07-01-18 4.50 14,500,000(b) 14,803,630
08-01-18 4.50 87,825,000(b) 89,334,711
11-01-21 8.00 578,325 632,215
03-01-23 9.00 374,998 418,644
11-01-23 6.00 4,571,574 4,771,405
06-01-24 9.00 1,299,788 1,447,893
02-01-26 6.00 255,323 265,944
02-01-26 8.00 515,211 561,276
05-01-26 7.50 3,036,528 3,246,107
12-01-28 7.00 7,703,868 8,138,032
08-01-29 7.00 3,653,594 3,856,231
04-01-31 6.50 12,267,145 12,784,917
09-01-31 7.50 5,383,258 5,736,347
11-01-31 6.50 4,175,214 4,387,831
09-01-32 6.00 9,379,162 9,746,543
09-01-32 6.50 4,933,954 5,142,120
09-01-32 7.00 2,303,481(b) 2,427,293
10-01-32 7.00 8,727,215(b) 9,196,303
11-01-32 7.00 4,368,520(b) 4,603,328
01-01-33 7.00 1,296,586(b) 1,366,278
02-01-33 4.75 9,750,397 10,011,256
02-01-33 4.87 27,895,371 28,958,628
03-01-33 4.94 9,831,093 10,221,527
04-01-33 4.38 18,977,877 19,298,224
04-01-33 4.59 13,105,889 13,596,720
04-01-33 4.87 14,982,040 15,572,045
05-01-33 4.60 9,993,303 10,367,565
08-01-33 5.00 30,825,000(b) 31,345,326
Collateralized Mtge Obligation
11-25-08 5.50 305,856 307,896
05-25-09 2.92 16,200,000 16,386,680
01-25-12 5.50 29,020,000 29,638,294
03-25-13 4.50 9,227,144 9,586,827
10-25-13 5.00 25,665,445 27,060,302
08-25-22 5.00 44,000,000 46,096,442
11-25-32 5.00 30,916,257 32,048,825
05-25-42 5.30 11,500,000 12,030,840
07-25-42 5.50 31,500,000 32,879,275
08-25-42 4.70 16,000,000 16,687,040
09-25-42 5.00 17,857,544 18,928,997
10-25-42 7.50 8,915,426 9,854,336
12-25-42 2.57 20,000,000 20,093,750
12-25-42 4.75 20,000,000 21,025,000
Interest Only
05-25-12 0.00 14,278,034(d) 556,214
12-25-12 0.40 14,700,000(d) 1,350,787
08-01-18 0.00 18,104(d) 3,862
01-15-20 1.10 768,467(d) 169,796
02-25-22 2.46 113,389(d) 23,534
07-25-22 2.02 2,598,631(d) 518,197
Interest Only/Inverse Floater
02-25-32 6.48 25,169,664(d,f) 1,826,625
Inverse Floater
11-25-23 22.60 423,448(f) 433,798
Principal Only
06-25-21 1.96 103,402(e) 97,251
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
11 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Govt Natl Mtge Assn
05-30-13 2.21% $14,800,000(b) $14,726,000
09-15-14 6.00 19,343,498 20,330,254
08-20-19 11.00 52,828 61,906
05-30-30 7.00 6,887,159(b) 7,500,547
Collateralized Mtge Obligation
11-20-13 5.50 8,743,816 9,260,412
07-16-18 2.58 18,612,946 18,772,770
10-16-20 2.93 14,961,910 15,153,610
06-16-21 2.75 4,478,379 4,540,382
Total 1,569,451,238
Banks and savings & loans (1.8%)
Intl Bank for Reconstruction & Development
(U.S. Dollar)
11-04-05 5.00 45,000,000(c) 48,598,650
Washington Mutual
Collateralized Mtge Obligation
Series 2002-AR15 Cl A5
12-25-32 4.38 14,905,000 15,276,442
Total 63,875,092
Financial services (1.8%)
Centex Home Equity
Series 2001-A Cl A4
07-25-29 6.47 10,000,000 10,525,696
Citibank Credit Card Issuance Trust
Series 2003-A5 Cl A5
04-07-08 2.50 18,000,000 18,263,879
Conseco Finance
Series 2000-D Cl A4
12-15-25 8.17 12,000,000 12,718,774
First Franklin Mtge Loan
Series 2002-F4 Cl 2A2
02-25-33 2.80 11,600,000(h) 11,800,522
LB-UBS Commercial Mtge Trust
Collateralized Mtge Obligation
Series 2003-C3 Cl A1
06-15-36 2.60 9,000,000(b) 9,126,563
Total 62,435,434
Total bonds
(Cost: $3,465,568,628) $3,509,411,434
Options purchased (--%)
Issuer Notional Exercise Expiration Value(a)
amount price date
Put
June Euro
Dollar Futures 212,500,000 $98 June 2003 $5,312
Total options purchased
(Cost: $99,025) $5,312
Short-term securities (9.0%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (7.7%)
Federal Home Loan Mtge Corp Disc Nts
06-05-03 1.21% $9,500,000 $9,498,254
06-19-03 1.19 30,000,000 29,981,301
06-24-03 1.16 25,000,000 24,979,947
06-30-03 1.18 5,400,000 5,394,536
07-08-03 1.17 10,000,000 9,987,325
Federal Natl Mtge Assn Disc Nts
06-04-03 1.16 22,300,000 22,296,642
06-11-03 1.18 6,000,000 5,997,794
06-12-03 1.16 50,000,000 49,979,055
06-13-03 1.16 50,000,000 49,977,443
06-27-03 1.15 5,000,000 4,995,528
07-02-03 1.18 10,300,000 10,289,764
07-31-03 1.17 50,000,000 49,905,750
Total 273,283,339
Commercial paper (1.3%)
Barton Capital
06-02-03 1.36 14,200,000(i) 14,198,391
Rabobank Nederland
06-02-03 1.35 31,600,000 31,596,445
Total 45,794,836
Total short-term securities
(Cost: $319,079,697) $319,078,175
Total investments in securities
(Cost: $3,784,747,350)(j) $3,828,494,921
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 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, 2003, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$368,521,337.
(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,
2003, the value of foreign securities represented 1.4% of net assets.
(d) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest-only is extremely sensitive to the rate of principal payments on
the underlying mortgage assets. A rapid (slow) rate of principal repayments
may have an adverse (positive) effect on yield to maturity. The principal
amount shown is the notional amount of the underlying mortgages. Interest
rate disclosed represents yield based upon the estimated timing of future
cash flows as of May 31, 2003.
(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 yield based upon the estimated timing of future cash
flows as of May 31, 2003.
(f) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on May 31, 2003.
(g) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 4 to the financial statements):
Type of security Notional amount
Purchase contracts
U.S. Treasury Bonds, Sept. 2003, 20-year $ 82,100,000
U.S. Treasury Notes, Sept. 2003, 2-year 238,400,000
U.S. Treasury Notes, Sept. 2003, 10-year 92,300,000
Sale contracts
U.S. Treasury Notes, Sept. 2003, 5-year 546,700,000
(h) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31,
2003.
(i) 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.
(j) At May 31, 2003, the cost of securities for federal income tax purposes was
$3,784,088,502 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $46,488,239
Unrealized depreciation (2,081,820)
----------
Net unrealized appreciation $44,406,419
-----------
- --------------------------------------------------------------------------------
13 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
May 31, 2003
Assets
Investments in securities, at value (Note 1)*
(identified cost $3,784,747,350) $3,828,494,921
Accrued interest receivable 17,878,143
Receivable for investment securities sold 371,648,262
U.S. government securities held as collateral (Note 5) 158,205,038
-----------
Total assets 4,376,226,364
-------------
Liabilities
Disbursements in excess of cash on demand deposit 678,406
Payable for investment securities purchased 343,980,618
Payable for securities purchased on a when-issued basis (Note 1) 220,876,045
Payable upon return of securities loaned (Note 5) 282,136,288
Accrued investment management services fee 47,231
Other accrued expenses 75,070
------
Total liabilities 847,793,658
-----------
Net assets $3,528,432,706
==============
*Including securities on loan, at value (Note 5) $ 276,499,570
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Statement of operations
Government Income Portfolio
Year ended May 31, 2003
Investment income
Income:
Interest $124,117,647
Fee income from securities lending (Note 5) 198,547
-------
Total income 124,316,194
-----------
Expenses (Note 2):
Investment management services fee 15,837,132
Compensation of board members 20,388
Custodian fees 203,825
Audit fees 36,000
Other 59,278
------
Total expenses 16,156,623
Earnings credits on cash balances (Note 2) (910)
----
Total net expenses 16,155,713
----------
Investment income (loss) -- net 108,160,481
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 71,691,440
Futures contracts (25,878,862)
Options contracts written (Note 6) (1,643,202)
----------
Net realized gain (loss) on investments 44,169,376
Net change in unrealized appreciation (depreciation) on investments 9,722,424
---------
Net gain (loss) on investments 53,891,800
----------
Net increase (decrease) in net assets resulting from operations $162,052,281
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
15 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Statements of changes in net assets
Government Income Portfolio
Year ended May 31, 2003 2002
Operations
Investment income (loss) -- net $ 108,160,481 $ 105,493,519
Net realized gain (loss) on investments 44,169,376 26,857,517
Net change in unrealized appreciation (depreciation) on investments 9,722,424 7,407,629
--------- ---------
Net increase (decrease) in net assets resulting from operations 162,052,281 139,758,665
----------- -----------
Proceeds from contributions 1,115,892,070 442,781,541
Fair value of withdrawals (257,074,099) (202,909,108)
------------ ------------
Net contributions (withdrawals) from partners 858,817,971 239,872,433
----------- -----------
Total increase (decrease) in net assets 1,020,870,252 379,631,098
Net assets at beginning of year 2,507,562,454 2,127,931,356
------------- -------------
Net assets at end of year $3,528,432,706 $2,507,562,454
============== ==============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
16 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Notes to Financial Statements
Government Income Portfolio
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Government 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 seeks to
provide a high level of current income and safety of principal consistent with
investment in U.S. government and government agency securities. 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 sell put and call
options and write put and call options. This may include purchasing
mortgage-backed security (MBS) put spread options and writing covered MBS call
spread options. MBS spread options are based upon the changes in the price
spread between a specified mortgage-backed security and a like-duration Treasury
security. 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. The
Portfolio also may write over-the-counter options where completing the
obligation depends upon the credit standing of the other party.
- --------------------------------------------------------------------------------
17 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts. 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.
Short sales
The Portfolio may engage in short sales. In these transactions, the Portfolio
sells a security that it does not own. The Portfolio is obligated to replace the
security that was short by purchasing it at the market price at the time of
replacement or entering into an offsetting transaction with the broker. The
price at such time may be more or less than the price at which the Portfolio
sold the security.
Securities purchased on a forward-commitment basis
Delivery and payment for securities that have been purchased by the Portfolio on
a forward-commitment basis, including when-issued securities and other
forward-commitments, 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, 2003, the Portfolio has entered into
outstanding when-issued securities of $220,876,045 and other forward-commitments
of $147,645,292.
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.
- --------------------------------------------------------------------------------
18 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
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. Interest income, including amortization of premium and discount using the
effective interest method, is accrued daily.
2. FEES AND EXPENSES
The Trust, on behalf of the Portfolio, has an Investment Management Services
Agreement with American Express Financial Corporation (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, 2003, the Portfolio's custodian fees were reduced
by $910 as a result of earnings credits from overnight cash balances. The
Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $7,899,209,261 and $6,976,828,006, respectively, for the
year ended May 31, 2003. For the same period, the portfolio turnover rate was
218%. Realized gains and losses are determined on an identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS
As of May 31, 2003, investments in securities included securities valued at
$2,054,214 that were pledged as collateral to cover initial margin deposits on
2,936 open purchase contracts and 5,467 open sale contracts. The notional market
value of the open purchase contracts as of May 31, 2003 was $464,929,168 with a
net unrealized gain of $1,724,098. The notional market value of the open sale
contracts as of May 31, 2003 was $632,463,563 with a net unrealized loss of
$2,450,234. See "Summary of significant accounting policies."
- --------------------------------------------------------------------------------
19 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
5. LENDING OF PORTFOLIO SECURITIES
As of May 31, 2003, securities valued at $276,499,570 were on loan to brokers.
For collateral, the Portfolio received $123,931,250 in cash and U.S. government
securities valued at $158,205,038. Income from securities lending amounted to
$198,547 for the year ended May 31, 2003. 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.
6. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written are as follows:
Year ended May 31, 2003
Puts Calls
Contracts Premiums Contracts Premiums
Balance May 31, 2002 -- $ -- 2,632 $ 1,119,785
Opened 3,425 986,992 9,194 7,783,066
Closed (2,527) (906,397) (10,110) (7,277,993)
Exercised -- -- (1,544) (1,440,108)
Expired (898) (80,595) (172) (184,750)
------ -------- ------- ----------
Balance May 31, 2003 -- $ -- -- $ --
------ --------- ------- -----------
See "Summary of significant accounting policies."
- --------------------------------------------------------------------------------
20 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 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 Government Income Portfolio (a
series of Income Trust) as of May 31, 2003, 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, 2003. 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, 2003, 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 Government Income Portfolio as
of May 31, 2003, 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 11, 2003
- --------------------------------------------------------------------------------
21 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP Short Duration U.S. Government Fund
May 31, 2003
Assets
Investment in Portfolio (Note 1) $3,528,311,428
Capital shares receivable 2,253,794
---------
Total assets 3,530,565,222
-------------
Liabilities
Dividends payable to shareholders 1,137,354
Capital shares payable 1,492,881
Accrued distribution fee 56,751
Accrued service fee 449
Accrued transfer agency fee 6,777
Accrued administrative services fee 4,211
Other accrued expenses 607,039
-------
Total liabilities 3,305,462
---------
Net assets applicable to outstanding capital stock $3,527,259,760
==============
Represented by
Capital stock -- $.01 par value (Note 1) $ 7,136,456
Additional paid-in capital 3,648,836,206
Excess of distributions over net investment income (314,424)
Accumulated net realized gain (loss) (Note 5) (171,418,321)
Unrealized appreciation (depreciation) on investments 43,019,843
----------
Total -- representing net assets applicable to outstanding capital stock $3,527,259,760
==============
Net assets applicable to outstanding shares: Class A $1,727,578,112
Class B $1,577,888,336
Class C $ 58,108,216
Class Y $ 163,685,096
Net asset value per share of outstanding capital stock: Class A shares 349,555,460 $ 4.94
Class B shares 319,216,819 $ 4.94
Class C shares 11,756,750 $ 4.94
Class Y shares 33,116,529 $ 4.94
---------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
22 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Statement of operations
AXP Short Duration U.S. Government Fund
Year ended May 31, 2003
Investment income
Income:
Interest $124,128,441
Fee income from securities lending 198,540
-------
Total income 124,326,981
Expenses (Note 2):
Expenses allocated from Portfolio 16,155,121
Distribution fee
Class A 3,908,849
Class B 14,409,657
Class C 457,887
Transfer agency fee 3,541,666
Incremental transfer agency fee
Class A 160,816
Class B 228,992
Class C 9,667
Service fee -- Class Y 172,531
Administrative services fees and expenses 1,421,675
Compensation of board members 14,805
Printing and postage 766,917
Registration fees 408,052
Audit fees 12,000
Other 58,701
------
Total expenses 41,727,336
Earnings credits on cash balances (Note 2) (62,368)
-------
Total net expenses 41,664,968
----------
Investment income (loss) -- net 82,662,013
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions 71,688,458
Futures contracts (25,878,132)
Options contracts written (1,643,119)
----------
Net realized gain (loss) on investments 44,167,207
Net change in unrealized appreciation (depreciation) on investments 9,722,377
---------
Net gain (loss) on investments 53,889,584
----------
Net increase (decrease) in net assets resulting from operations $136,551,597
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
23 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Statements of changes in net assets
AXP Short Duration U.S. Government Fund
Year ended May 31, 2003 2002
Operations and distributions
Investment income (loss) -- net $ 82,662,013 $ 87,596,745
Net realized gain (loss) on investments 44,167,207 26,855,921
Net change in unrealized appreciation (depreciation) on investments 9,722,377 7,407,446
--------- ---------
Net increase (decrease) in net assets resulting from operations 136,551,597 121,860,112
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (45,444,253) (47,915,014)
Class B (30,935,951) (34,663,888)
Class C (946,842) (508,158)
Class Y (5,490,847) (7,572,107)
---------- ----------
Total distributions (82,817,893) (90,659,167)
----------- -----------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 1,178,062,138 657,601,521
Class B shares 998,456,600 705,152,428
Class C shares 46,085,175 31,377,389
Class Y shares 92,327,556 67,870,113
Reinvestment of distributions at net asset value
Class A shares 40,761,864 41,925,856
Class B shares 29,157,324 32,558,359
Class C shares 844,242 466,925
Class Y shares 4,979,945 7,409,925
Payments for redemptions
Class A shares (701,715,252) (576,657,354)
Class B shares (Note 2) (577,985,093) (558,439,712)
Class C shares (Note 2) (18,398,418) (10,096,220)
Class Y shares (125,038,635) (50,063,214)
------------ -----------
Increase (decrease) in net assets from capital share transactions 967,537,446 349,106,016
----------- -----------
Total increase (decrease) in net assets 1,021,271,150 380,306,961
Net assets at beginning of year 2,505,988,610 2,125,681,649
------------- -------------
Net assets at end of year $3,527,259,760 $2,505,988,610
============== ==============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
24 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Notes to Financial Statements
AXP Short Duration U.S. Government Fund (formerly AXP Federal Income Fund)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Government Income Series, Inc, (formerly AXP Federal
Income Fund, Inc.) and is registered under the Investment Company Act of 1940
(as amended) as a diversified, open-end management investment company. AXP
Government Income Series, Inc. has 10 billion authorized shares of capital stock
that can be allocated among the separate series as designated by the board.
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 Government Income Portfolio
The Fund invests all of its assets in Government 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
U.S. government and government agency securities.
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, 2003 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.
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25 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
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 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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by
$1,605,940 and accumulated net realized loss has been increased by $1,853,665
resulting in a net reclassification adjustment to increase paid-in capital by
$247,725.
The tax character of distributions paid for the years indicated is as follows:
Year ended May 31, 2003 2002
Class A
Distributions paid from:
Ordinary income $45,444,253 $47,915,014
Long-term capital gain -- --
Class B
Distributions paid from:
Ordinary income 30,935,951 34,663,888
Long-term capital gain -- --
Class C
Distributions paid from:
Ordinary income 946,842 508,158
Long-term capital gain -- --
Class Y
Distributions paid from:
Ordinary income 5,490,847 7,572,107
Long-term capital gain -- --
As of May 31, 2003, the components of distributable earnings on a tax basis are
as follows:
Undistributed ordinary income $ 1,719,584
Accumulated gain (loss) $(156,987,506)
Unrealized appreciation (depreciation) $ 27,692,374
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, when
available, 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.
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26 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
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.
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 $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
Under terms of a prior agreement that ended April 30, 2003, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $19.50 for
Class A, $20.50 for Class B, $20 for Class C and $17.50 for Class Y.
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 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
$9,668,197 for Class A, $1,852,988 for Class B and $40,593 for Class C for the
year ended May 31, 2003.
During the year ended May 31, 2003, the Fund's transfer agency fees were reduced
by $62,368 as a result of earnings credits from overnight cash balances.
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27 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2003
Class A Class B Class C Class Y
Sold 239,714,272 203,191,315 9,371,202 18,774,998
Issued for reinvested distributions 8,291,730 5,931,794 171,739 1,013,609
Redeemed (142,692,553) (117,558,389) (3,737,168) (25,473,839)
------------ ------------ ---------- -----------
Net increase (decrease) 105,313,449 91,564,720 5,805,773 (5,685,232)
----------- ---------- --------- ----------
Year ended May 31, 2002
Class A Class B Class C Class Y
Sold 135,903,504 145,765,262 6,484,859 14,030,804
Issued for reinvested distributions 8,677,586 6,738,998 96,601 1,533,797
Redeemed (119,296,103) (115,594,195) (2,088,331) (10,364,442)
------------ ------------ ---------- -----------
Net increase (decrease) 25,284,987 36,910,065 4,493,129 5,200,159
---------- ---------- --------- ---------
4. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
Deutsche Bank, whereby the Fund is permitted to have bank borrowings for
temporary or emergency purposes to fund shareholder redemptions. The agreement
went into effect Sept. 24, 2002. The Fund must maintain asset coverage for
borrowings of at least 300%. The agreement, which enables the Fund to
participate with other American Express mutual funds, permits borrowings up to
$500 million, collectively. Interest is charged to each Fund based on its
borrowings at a rate equal to either the LIBOR plus 0.50%, the IBOR plus 0.50%
or the higher of the Federal Funds Rate plus 0.25% and the Prime Lending Rate.
Borrowings are payable within 60 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 0.09% per annum. Prior to this agreement, the Fund had a
revolving credit agreement that permitted borrowings up to $200 million with
U.S. Bank, N.A. The Fund had no borrowings outstanding during the year ended May
31, 2003.
5. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund has a capital loss carry-over of
$156,987,506 as of May 31, 2003 that will expire in 2007 through 2009 if not
offset by capital gains. It is unlikely the board will authorize a distribution
of any net realized capital gains until the available capital loss carry-over
has been offset or expires.
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28 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
6. 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, 2003 2002 2001 2000 1999
Net asset value, beginning of period $4.85 $4.78 $4.59 $4.94 $5.08
Income from investment operations:
Net investment income (loss) .15 .19 .27 .27 .27
Net gains (losses) (both realized and unrealized) .09 .08 .19 (.27) (.07)
Total from investment operations .24 .27 .46 -- .20
Less distributions:
Dividends from net investment income (.15) (.20) (.27) (.28) (.27)
Distributions from realized gains -- -- -- (.07) (.07)
Total distributions (.15) (.20) (.27) (.35) (.34)
Net asset value, end of period $4.94 $4.85 $4.78 $4.59 $4.94
Ratios/supplemental data
Net assets, end of period (in millions) $1,728 $1,185 $1,047 $1,139 $1,723
Ratio of expenses to average daily net assets(c) .95% .95% .98% .92% .88%
Ratio of net investment income (loss) to average daily net assets 2.90% 4.01% 5.72% 5.71% 5.36%
Portfolio turnover rate (excluding short-term securities) 218% 267% 366% 674% 278%
Total return(e) 4.90% 5.77% 10.19% (.01%) 4.07%
See accompanying notes to financial highlights.
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29 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2003 2002 2001 2000 1999
Net asset value, beginning of period $4.85 $4.78 $4.59 $4.94 $5.08
Income from investment operations:
Net investment income (loss) .11 .16 .24 .24 .23
Net gains (losses) (both realized and unrealized) .09 .08 .18 (.28) (.07)
Total from investment operations .20 .24 .42 (.04) .16
Less distributions:
Dividends from net investment income (.11) (.17) (.23) (.24) (.23)
Distributions from realized gains -- -- -- (.07) (.07)
Total distributions (.11) (.17) (.23) (.31) (.30)
Net asset value, end of period $4.94 $4.85 $4.78 $4.59 $4.94
Ratios/supplemental data
Net assets, end of period (in millions) $1,578 $1,104 $912 $981 $1,498
Ratio of expenses to average daily net assets(c) 1.71% 1.71% 1.73% 1.68% 1.63%
Ratio of net investment income (loss) to average daily net assets 2.15% 3.25% 4.96% 4.95% 4.61%
Portfolio turnover rate (excluding short-term securities) 218% 267% 366% 674% 278%
Total return(e) 4.11% 4.98% 9.36% (.77%) 3.31%
See accompanying notes to financial highlights.
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30 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2003 2002 2001(b)
Net asset value, beginning of period $4.85 $4.78 $4.63
Income from investment operations:
Net investment income (loss) .11 .16 .22
Net gains (losses) (both realized and unrealized) .09 .08 .14
Total from investment operations .20 .24 .36
Less distributions:
Dividends from net investment income (.11) (.17) (.21)
Net asset value, end of period $4.94 $4.85 $4.78
Ratios/supplemental data
Net assets, end of period (in millions) $58 $29 $7
Ratio of expenses to average daily net assets(c) 1.72% 1.72% 1.73%(d)
Ratio of net investment income (loss) to average daily net assets 2.10% 3.09% 4.93%(d)
Portfolio turnover rate (excluding short-term securities) 218% 267% 366%
Total return(e) 4.11% 4.98% 8.08%(f)
See accompanying notes to financial highlights.
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31 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2003 2002 2001 2000 1999
Net asset value, beginning of period $4.85 $4.78 $4.59 $4.94 $5.08
Income from investment operations:
Net investment income (loss) .15 .20 .28 .28 .28
Net gains (losses) (both realized and unrealized) .09 .08 .19 (.28) (.07)
Total from investment operations .24 .28 .47 -- .21
Less distributions:
Dividends from net investment income (.15) (.21) (.28) (.28) (.28)
Distributions from realized gains -- -- -- (.07) (.07)
Total distributions (.15) (.21) (.28) (.35) (.35)
Net asset value, end of period $4.94 $4.85 $4.78 $4.59 $4.94
Ratios/supplemental data
Net assets, end of period (in millions) $164 $188 $161 $175 $191
Ratio of expenses to average daily net assets(c) .79% .79% .82% .78% .80%
Ratio of net investment income (loss) to average daily net assets 3.12% 4.17% 5.89% 5.92% 5.44%
Portfolio turnover rate (excluding short-term securities) 218% 267% 366% 674% 278%
Total return(e) 5.07% 5.93% 10.36% .15% 4.15%
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.
(f) Not annualized.
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32 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
AXP GOVERNMENT INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities of AXP
Short Duration U.S. Government Fund (formerly AXP Federal Income Fund) (a series
of AXP Government Income Series, Inc.) as of May 31, 2003, 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, 2003, and the
financial highlights for each of the years in the five-year period ended May 31,
2003. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of AXP
Short Duration U.S. Government Fund as of May 31, 2003, 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 acccounting
principles generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
July 11, 2003
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33 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 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 Short Duration U.S. Government Fund
Fiscal year ended May 31, 2003
Class A
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 $0.01579
July 26, 2002 0.01434
Aug. 26, 2002 0.01534
Sept. 26, 2002 0.01525
Oct. 25, 2002 0.01516
Nov. 25, 2002 0.01343
Dec. 20, 2002 0.01115
Jan. 22, 2003 0.01004
Feb. 21, 2003 0.00990
March 24, 2003 0.00870
April 24, 2003 0.00850
May 23, 2003 0.00848
Total distributions $0.14608
Class B
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 $0.01247
July 26, 2002 0.01131
Aug. 26, 2002 0.01219
Sept. 26, 2002 0.01209
Oct. 25, 2002 0.01221
Nov. 25, 2002 0.01026
Dec. 20, 2002 0.00861
Jan. 22, 2003 0.00667
Feb. 21, 2003 0.00684
March 24, 2003 0.00553
April 24, 2003 0.00533
May 23, 2003 0.00551
Total distributions $0.10902
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34 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Class C
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 $0.01248
July 26, 2002 0.01130
Aug. 26, 2002 0.01218
Sept. 26, 2002 0.01207
Oct. 25, 2002 0.01219
Nov. 25, 2002 0.01024
Dec. 20, 2002 0.00859
Jan. 22, 2003 0.00664
Feb. 21, 2003 0.00683
March 24, 2003 0.00550
April 24, 2003 0.00530
May 23, 2003 0.00549
Total distributions $0.10881
Class Y
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 $0.01649
July 26, 2002 0.01497
Aug. 26, 2002 0.01600
Sept. 26, 2002 0.01591
Oct. 25, 2002 0.01578
Nov. 25, 2002 0.01410
Dec. 20, 2002 0.01169
Jan. 22, 2003 0.01075
Feb. 21, 2003 0.01056
March 24, 2003 0.00937
April 24, 2003 0.00918
May 23, 2003 0.00912
Total distributions $0.15392
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35 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 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 83 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, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Arne H. Carlson Board member since Chair, Board Services Corporation
901 S. Marquette Ave. 1999 (provides administrative services to
Minneapolis, MN 55402 boards). Former Governor of Minnesota
Age 68
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Philip J. Carroll, Jr. Board member since Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan
901 S. Marquette Ave. 2002 Corporation (engineering and Materials Company, Inc.
Minneapolis, MN 55402 construction) since 1998 (construction
Age 65 materials/chemicals)
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Livio D. DeSimone Board member since Retired Chair of the Board and Chief Cargill, Incorporated
30 Seventh Street East 2001 Executive Officer, Minnesota Mining and (commodity merchants and
Suite 3050 Manufacturing (3M) processors), General Mills,
St. Paul, MN 55101-4901 Inc. (consumer foods), Vulcan
Age 69 Materials Company
(construction materials/
chemicals), Milliken & Company
(textiles and chemicals), and
Nexia Biotechnologies, Inc.
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Heinz F. Hutter* Board member since Retired President and Chief Operating
P.O. Box 2187 1994 Officer, Cargill, Incorporated (commodity
Minneapolis, MN 55402 merchants and processors)
Age 74
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Anne P. Jones Board member since Attorney and Consultant
5716 Bent Branch Rd. 1985
Bethesda, MD 20816
Age 68
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Stephen R. Lewis, Jr.** Board member since Retired President and Professor of Valmont Industries, Inc.
222 South 9th Street #440 2002 Economics, Carleton College (manufactures irrigation
Minneapolis, MN 55402 systems)
Age 64
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
* Interested person of AXP Partners International Aggressive Growth Fund and
AXP Partners Aggressive Growth Fund by reason of being a security holder of
J P Morgan Chase & Co., which has a 45% interest in American Century
Companies, Inc., the parent company of the subadviser of two of the AXP
Partners Funds, American Century Investment Management, Inc.
** Interested person of AXP Partners International Aggressive Growth Fund by
reason of being a security holder of FleetBoston Financial Corporation,
parent company of Liberty Wanger Asset Management, L.P., one of the fund's
subadvisers.
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36 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
Independent Board Members (continued)
Name, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Alan G. Quasha Board member since President, Quadrant Management, Inc. Compagnie Financiere
720 Fifth Avenue 2002 (management of private equities) Richemont AG (luxury goods),
New York, NY 10019 Harken Energy Corporation
Age 53 (oil and gas exploration) and
SIRIT Inc. (radio frequency
identification technology)
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Alan K. Simpson Board member since Former three-term United States Senator Biogen, Inc.
1201 Sunshine Ave. 1997 for Wyoming (biopharmaceuticals)
Cody, WY 82414
Age 71
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Alison Taunton-Rigby Board member since President, Forester Biotech since 2000.
901 S. Marquette Ave. 2002 Former President and CEO, Aquila
Minneapolis, MN 55402 Biopharmaceuticals, Inc.
Age 59
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Board Members Affiliated with AEFC***
Name, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- -------------------------------------------
Barbara H. Fraser Board member since Executive Vice President - AEFA Products
1546 AXP Financial Center 2002 and Corporate Marketing of AEFC since
Minneapolis, MN 55474 2002. President - Travelers Check Group,
Age 53 American Express Company, 2001-2002.
Management Consultant, Reuters,
2000-2001. Managing Director -
International Investments, Citibank
Global, 1999-2000. Chairman and CEO,
Citicorp Investment Services and
Citigroup Insurance Group, U.S., 1998-1999
- -------------------------------- -------------------- -------------------------------------------
Stephen W. Roszell Board member since Senior Vice President - Institutional
50238 AXP Financial Center 2002, Vice Group of AEFC
Minneapolis, MN 55474 President since
Age 54 2002
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
William F. Truscott Board member since Senior Vice President - Chief Investment
53600 AXP Financial Center 2001, Vice Officer of AEFC since 2001. Former Chief
Minneapolis, MN 55474 President since Investment Officer and Managing Director,
Age 42 2002 Zurich Scudder Investments
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
*** Interested person by reason of being an officer, director and/or employee
of AEFC.
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37 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 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. Roszell, who is vice president, and
Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers
Name, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Jeffrey P. Fox Treasurer since Vice President - Investment Accounting,
50005 AXP Financial Center 2002 AEFC, since 2002; Vice President -
Minneapolis, MN 55474 Finance, American Express Company,
Age 48 2000-2002; Vice President - Corporate
Controller, AEFC, 1996-2000
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Paula R. Meyer President since Senior Vice President and General Manager
596 AXP Financial Center 2002 - Mutual Funds, AEFC, since 2002; Vice
Minneapolis, MN 55474 President and Managing Director -
Age 49 American Express Funds, AEFC, 2000-2002;
Vice President, AEFC, 1998-2000
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General Counsel,
Minneapolis, MN 55402 and Secretary
Age 64 since 1978
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling (800) 862-7919.
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38 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 ANNUAL REPORT
The policies and procedures that the Fund uses to determine how to vote proxies
relating to portfolio securities can be found in the Fund's Statement of
Additional Information (SAI) which is available (i) without charge, upon
request, by calling toll-free (800) 862-7919; (ii) on the American Express
Company Web site at americanexpress.com; and on the Securities and Exchange
Commission Web site at http://www.sec.gov.
- --------------------------------------------------------------------------------
(logo)
AMERICAN
EXPRESS(R)
- --------------------------------------------------------------------------------
American Express Funds
70100 AXP Financial Center
Minneapolis, MN 55474
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.
AXP(R)
U.S. Government
Mortgage
Fund
Annual Report
for the Period Ended May 31, 2003
AXP U.S. Government Mortgage Fund seeks to provide shareholders with current
income as its primary goal and, its secondary goal, 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.)
- --------------------------------------------------------------------------------
(logo) (logo)
American AMERICAN
Express(R) EXPRESS
Funds (R)
- --------------------------------------------------------------------------------
Table of Contents
Fund Snapshot 3
Questions & Answers
with Portfolio Management 4
The Fund's Long-term Performance 8
Investments in Securities 9
Financial Statements 12
Notes to Financial Statements 15
Independent Auditors' Report 25
Federal Income Tax Information 26
Board Members and Officers 29
(logo) Dalbar
American Express(R) Funds' reports to shareholders have been awarded the
Communications Seal from Dalbar Inc., an independent financial services research
firm. The Seal recognizes communications demonstrating a level of excellence in
the industry.
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2 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Fund Snapshot
AS OF MAY 31, 2003
PORTFOLIO MANAGER
Portfolio manager Team led by Scott Kirby
Since 2/02
Years in industry 24
FUND OBJECTIVE
The Fund seeks to provide shareholders with current income as its primary goal
and, as its secondary goal, preservation of capital.
Inception dates
A: 2/14/02 B: 2/14/02 C: 2/14/02 Y: 2/14/02
Ticker symbols
A: AUGAX B: AUGBX C: AUGCX Y: --
Total net assets $472.6 million
Number of holdings approximately 190
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT. LONG
X HIGH
MEDIUM
LOW
SECTOR COMPOSITION
Percentage of portfolio assets
(pie chart)
Mortgage-backed securities 98.1%
Government obligations & agencies 1.9%
CREDIT QUALITY SUMMARY
Percentage of portfolio assets
AAA bonds 100%
For further details about these holdings, please refer to the section entitled
"Investments in Securities."
Individual securities owned by the Fund, but not shares of the Fund, are
guaranteed by the U.S. government, its agencies or instrumentalities as to
timely payments of principal and interest. The Fund's yield and share price are
not guaranteed, and may vary with market conditions.
Fund holdings are subject to change.
- --------------------------------------------------------------------------------
3 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Q: How did AXP U.S. Government Mortgage Fund perform for fiscal year 2003?
A: AXP U.S. Government Mortgage Fund's Class A shares (excluding sales charge)
gained 6.93% for the 12-month period ended May 31, 2003. In comparison, the
Lehman Brothers Mortgage-Backed Securities Index increased 6.42%. The Fund
also outperformed the Lipper U.S. Mortgage Funds Index, representing the
Fund's peer group, which rose 6.08% over the same time frame.
Q: What factors most significantly impacted performance during the annual
period?
A: During the annual period, the U.S. fixed income markets provided strong
returns for the third consecutive year. U.S. Treasuries rallied
dramatically, and yields fell sharply. Mortgage-backed securities within
the Lehman Brothers Aggregate Bond Index outperformed comparable duration
U.S. Treasury securities for the annual period. However, mortgage
securities did underperform corporate bonds as measured by the Lehman
U.S. Credit Index for the 12 months ended May 31, 2003.
From the start of the fiscal year through mid-October, the Federal Reserve
Board believed that the economy was likely to be weak. This, together with
problems regarding corporate governance, a declining stock market and the
threat of war with Iraq, prompted investors to seek less risky investments.
U.S. Treasuries, led by the shorter end of the curve, rallied. Beginning
mid-October 2002, investors became less risk-averse as stock prices rose,
corporations seemed to be on more solid footing and statistical data
indicated a slow but steadier course for economic recovery. Yields on U.S.
Treasuries remained relatively range-bound through early May. As investors
then sought yield elsewhere, mortgage-backed securities benefited.
On May 6, 2003, the Federal Reserve Board kept the targeted federal funds
rate unchanged at 1.25%, but made it clear that it would maintain its
accommodative
(bar graph)
PERFORMANCE COMPARISON
For the year ended May 31, 2003
8%
7% (bar 1) (bar 2) (bar 3)
6% +6.93% +6.42% +6.08%
5%
4%
3%
2%
1%
0%
(bar 1) AXP U.S. Government Mortgage Fund Class A (excluding sales charge)
(bar 2) Lehman Brothers Mortgage-Backed Securities Index (unmanaged)
(bar 3) Lipper U.S. Mortgage Funds Index
(see "The Fund's Long-term Performance" for Index descriptions)
Past performance is no guarantee of future results. The 4.75% sales charge
applicable to Class A shares of the Fund is not reflected in the bar chart; if
reflected, returns would be lower than those shown. The performance of Class B,
Class C and Class Y may vary from that shown above because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
- --------------------------------------------------------------------------------
4 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Questions & Answers
(begin callout quote) > We were able to capture for the Fund the extra income
boost that mortgage-backed securities provided over comparable Treasuries,
especially during the period from October through May. (end callout quote)
monetary policy. It believed the probability of deflation exceeds that of a
pickup in inflation over the next few quarters. The long-term end of the
U.S. Treasury curve rallied in response.
Fund performance benefited most from its security selection. With interest
rates at 45-year lows, a refinancing blitz caused extra call risk within
the mortgage-backed sector. That is, when refinancing occurs, existing
mortgage bonds with higher yields are refunded; their principal is paid and
new bonds are issued with lower yields. This environment made security
selection key, as we sought as much coupon income as possible. Indeed, we
were able to capture for the Fund the extra income boost that
mortgage-backed securities provided over comparable Treasuries, especially
during the period from October through May.
AVERAGE ANNUAL TOTAL RETURNS
as of May 31, 2003
Class A Class B Class C Class Y
(Inception dates) (2/14/02) (2/14/02) (2/14/02) (2/14/02)
NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5)
1 year +6.93% +1.86% +6.12% +2.12% +6.12% +6.12% +7.10% +7.10%
Since inception +6.75% +2.80% +6.14% +3.08% +6.12% +6.12% +6.93% +6.93%
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 4.75%.
(3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as
follows: first year 5%; second and third year 4%; fourth year 3%; fifth
year 2%; sixth year 1%; no sales charge thereafter.
(4) 1% CDSC applies to redemptions made within the first year of purchase.
(5) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, so that your shares, when redeemed, may be worth
more or less than the original cost. The performance shown for each class of
shares will vary due to differences in sales charges and fees. Short term
performance may be higher or lower than the figures shown. Visit
americanexpress.com for current information.
- --------------------------------------------------------------------------------
5 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Questions & Answers
Q: What changes did you make to the portfolio and how is it currently
positioned?
A: We integrated two primary strategies within the Fund to add relative value.
One is called a specified pool strategy. We focused on pools of mortgages
that historically have had lower-than-average prepayment risks, such as
low-balance mortgages, mortgages in states with less refinancing activity,
newer mortgages that would likely not be seeking to refinance too quickly
and servicing organizations that have historically been less aggressive in
getting customers to refinance.
The other driving force of the Fund's strong performance was what we call
our "dollar roll" strategy. The dollar roll strategy involved selling a
pool of mortgage-backed securities that would have delivered in the current
month and simultaneously agreeing to purchase a
(column chart)
U.S Treasury Yields
6%
(X) 5.62%
5% (X) 5.04%
(X) 4.35% (Y) 4.38%
4%
(X) 3.68%
(X) 3.19% (Y) 3.37%
3%
(Y) 2.29%
2%
(X) 1.72% (X) 1.88% (Y) 1.57%
(Y) 1.32%
(Y) 1.10% (Y) 1.08%
1%
3 month 6 month 2 year 3 year 5 year 10 year 30 year
Maturity
(X) May 31, 2002
(Y) May 31, 2003
Source: Bloomberg
This illustration is not intended to represent the current or historical yield
of any mutual fund offered by American Express Funds. U.S. Treasuries are
guaranteed with respect to payment of interest and repayment of principal.
Mutual fund shares are not.
This chart compares yields on U.S. Treasuries on May 31, 2003 with a year
earlier. Rates have dropped the most in the past year on Treasury notes maturing
between three and five-years. Overall, the income potential of Treasuries is now
at its lowest level since the early 1950s.
- --------------------------------------------------------------------------------
6 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Questions & Answers
similar pool of securities at a future date. The dealer, in effect, offers
a discount, providing an incentive to buy the bonds forward. This strategy
added to the Fund's return during the period without notably increasing its
risk profile.
For much of the period, the Fund also benefited from investment in a number
of well-structured 15-year collateralized mortgage obligations (CMOs) that
were less affected by the refinancing boom as well as from a focus on
intermediate-term mortgage bonds. After the Federal Reserve Board statement
on May 6, we repositioned the Fund, reducing its 15-year holdings and
shifting to a more neutral to the benchmark position by increasing its
holdings in 30-year mortgage-backed securities.
At May 31, 2003, approximately 98% of the Fund's assets were invested in
mortgage-backed securities. We continued to emphasize those securities
issued by government mortgage agencies, including the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporate (FHLMC). The remaining
assets were invested in bonds and notes issued by the U.S. Treasury. Our
focus was on generating a competitive level of current income while
maintaining an extremely high level of credit quality. We maintained a
neutral duration through most of the fiscal year.
Q: What is your outlook for the coming months?
A: We do not believe the Federal Reserve Board will raise interest rates any
time soon. The real question is: Will they cut interest rates yet again?
The fixed income market had already priced in an interest rate cut prior
to the Federal Reserve Board's June 25th 0.25% cut in the federal funds
rate. Given this view, we believe the yield curve will flatten even
further. Such a scenario would be less beneficial to the mortgage-backed
sector of the market, however, we feel the lower callability of the
mortgage securities in the Fund's portfolio positions it well for such an
environment. We also believe the current stance of the Federal Reserve
Board may enable us to extend the Fund's duration while integrating what
is known as a "barbell strategy," whereby we own positions at the short
and longer ends of the curve.
Whatever the markets may bring, the Fund will continue to seek current
income as its foremost goal and, as its secondary goal, preservation of
capital, by investing primarily in securities issued by U.S. government
mortgage agencies.
- --------------------------------------------------------------------------------
7 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
The Fund's Long-term Performance
This chart illustrates the total value of an assumed $10,000 investment in AXP
U.S. Government Mortgage Fund Class A shares (from 3/1/02 to 5/31/03) as
compared to the performance of two widely cited performance indices, Lehman
Brothers Mortgage-Backed Securities Index and Lipper U.S. Mortgage Funds Index.
In comparing the Fund's Class A shares to these indices, 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
indices. Returns for the Fund include the reinvestment of any distribution paid
during each period.
Past performance is no guarantee of future results. Your investment and return
values fluctuate so that your shares, when redeemed, may be worth more or less
than the original cost. Returns do not reflect taxes payable on distributions
and redemptions. Also see "Past Performance" in the Fund's current prospectus.
(line graph)
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN AXP U.S. GOVERNMENT MORTGAGE FUND
$12,000
$9,000 (solid line) AXP U.S. Government Mortgage Fund Class A
$6,000 (dotted line) Lehman Brothers Mortgage-Backed Securities Index(1)
$3,000 (dashed line) Lipper U.S. Mortgage Funds Index(2)
3/1/02 5/31/02 8/31/02 11/30/02 2/28/03 5/31/03
(solid line) AXP U.S. Government Mortgage Fund Class A $10,364
(dotted line) Lehman Brothers Mortgage-Backed Securities Index(1) $10,876
(dashed line) Lipper U.S. Mortgage Funds Index(2) $10,744
(1) Lehman Brothers Mortgage-Backed Securities Index, an unmanaged index,
includes 15- and 30-year fixed-rate securities backed by mortgage pools of
the Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), and Federal National Mortgage Association
(FNMA).
(2) The Lipper U.S. Mortgage Funds Index, published by Lipper Inc., includes
the 10 largest funds that are generally similar to the Fund, although some
funds in the index may have somewhat different investment policies or
objectives.
Average Annual Total Returns
Class A with Sales Charge as of May 31, 2003
1 year +1.86%
Since inception (2/14/02) +2.80%
Results for other share classes can be found on page 5.
- --------------------------------------------------------------------------------
8 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Investments in Securities
AXP U.S. Government Mortgage Fund
May 31, 2003
(Percentages represent value of investments compared to net assets)
Bonds (97.1%)
Issuer Coupon Principal Value(a)
rate amount
Government obligations & agencies (1.8%)
U.S. Treasury
05-15-08 2.63% $3,000,000 $3,048,750
11-15-16 7.50 4,000,000 5,521,248
Total 8,569,998
Mortgage-backed securities (95.3%)
Federal Home Loan Mtge Corp
01-01-09 7.00 692,794 738,871
03-01-10 8.00 1,106,703 1,170,710
11-01-10 7.00 622,717 663,991
03-01-12 7.50 1,985,178 2,128,445
06-01-15 7.50 3,763,897 4,034,264
12-01-16 6.50 839,934 888,687
02-01-17 6.50 3,972,297 4,202,332
04-01-17 7.00 1,960,049 2,106,797
06-01-17 6.50 1,652,629 1,728,577
10-01-17 8.00 1,549,104 1,679,817
12-01-17 5.50 1,373,334 1,422,225
01-01-18 5.50 1,962,791 2,032,667
05-01-18 5.00 2,979,023(b) 3,084,825
06-01-18 5.00 3,000,000(b) 3,101,250
03-01-22 6.50 1,575,477 1,642,609
04-01-22 6.50 3,611,147 3,764,209
03-01-30 7.50 615,375 654,927
12-01-30 5.50 2,848,101 2,957,350
06-01-31 8.00 1,219,660 1,310,631
03-01-32 7.00 666,640 705,115
04-01-32 7.00 1,704,818 1,788,415
06-01-32 7.00 3,795,032 3,981,123
07-01-32 7.00 944,554 990,871
08-01-32 6.50 10,588,177 11,015,329
09-01-32 6.50 3,005,008 3,126,237
04-01-33 6.00 3,973,668 4,119,722
06-01-33 5.50 3,000,000 3,110,156
Collateralized Mtge Obligation
02-25-42 6.00 1,000,000 1,069,497
02-25-42 6.50 4,823,010 5,357,447
Interest Only
02-15-14 12.29 1,800,000(e) 211,860
11-15-25 0.00 981,863(e) 10,139
Interest Only/Inverse Floater
03-15-32 6.64 2,538,252(e,f) 174,496
Federal Natl Mtge Assn
05-01-08 7.75 760,283 807,870
07-01-09 7.50 5,001,503(b) 5,366,346
10-01-09 8.50 413,051 438,027
08-01-10 7.50 1,486,433 1,594,943
04-01-11 6.50 335,748 353,914
09-01-12 6.74 1,870,049 2,265,723
08-01-16 6.50 631,201 662,897
11-01-16 7.00 1,406,885 1,518,487
01-01-17 6.00 1,744,035 1,817,041
02-01-17 7.00 2,140,213 2,300,250
03-01-17 6.00 1,872,359 1,969,113
03-01-17 6.50 2,051,158 2,163,430
03-01-17 7.00 187,156 199,848
04-01-17 6.50 841,778(c) 894,444
04-01-17 7.50 142,205 152,559
05-01-17 6.00 1,407,325 1,466,289
06-01-17 6.50 10,522,568 11,051,686
06-01-17 7.00 2,708,829 2,877,518
07-01-17 6.00 8,514,940 8,955,928
07-01-17 7.50 1,024,703 1,098,907
07-22-17 5.00 13,400,000(b) 13,789,403
08-01-17 5.50 4,452,043 4,650,911
09-01-17 6.00 1,807,703 1,883,375
09-01-17 6.50 3,426,274 3,598,561
10-01-17 5.50 1,029,629 1,069,410
11-01-17 5.50 3,898,673 4,073,652
12-01-17 5.50 3,017,910 3,134,511
12-01-17 6.00 4,666,163 4,861,664
02-01-18 5.50 4,149,658 4,309,171
03-01-18 5.50 2,299,152 2,387,997
04-01-18 5.50 4,914,837 5,147,501
06-01-18 5.00 4,200,000(b) 4,335,198
07-01-18 4.50 5,000,000(b) 5,104,700
08-01-18 4.50 9,200,000(b) 9,358,147
08-01-22 6.50 2,583,226 2,702,906
09-01-22 6.50 1,197,608 1,253,092
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
9 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
11-01-22 6.00% $1,197,258 $1,245,834
03-01-23 5.50 2,225,670 2,312,837
04-01-25 8.00 1,695,884 1,855,902
09-01-28 7.50 2,720,389 2,912,285
12-01-28 7.00 2,456,086 2,619,575
01-01-29 6.00 2,511,287 2,612,023
03-01-29 6.50 7,565,453 7,990,239
06-01-29 6.00 8,563,578 8,907,090
06-01-29 7.50 2,560,486 2,723,460
06-25-30 7.50 681,913 753,727
06-01-31 7.00 6,007,859 6,387,748
09-01-31 7.00 3,712,183 3,946,161
09-01-31 7.50 4,179,288 4,453,408
10-01-31 9.50 316,973 352,995
11-01-31 6.50 2,631,410 2,756,007
01-01-32 6.00 2,617,521 2,720,131
01-01-32 6.50 1,532,136 1,610,166
03-01-32 6.50 3,446,792 3,622,242
03-01-32 7.00 3,004,024 3,192,500
04-01-32 6.50 8,876,722 9,328,592
04-01-32 7.00 3,928,994 4,169,122
05-01-32 6.50 6,633,283 6,966,685
05-01-32 7.00 3,754,708 3,992,857
06-01-32 6.50 4,165,805 4,359,144
06-01-32 7.00 1,482,680 1,562,522
07-01-32 6.50 11,519,767 12,083,882
07-01-32 6.50 826,201(b) 861,059
08-01-32 6.50 9,682,168 10,090,663
08-01-32 7.00 3,667,033 3,862,284
09-01-32 6.00 8,383,123 8,711,459
09-01-32 6.50 6,405,120 6,675,355
10-01-32 6.50 1,557,140 1,622,836
11-01-32 6.00 5,621,269 5,841,408
11-01-32 6.50 456,187 475,434
12-01-32 6.00 2,933,553 3,048,436
12-01-32 6.50 4,316,064 4,498,160
12-01-32 7.00 1,095,020 1,153,877
01-01-33 6.00 7,230,924 7,514,100
02-01-33 4.75 1,950,079 2,002,251
02-01-33 5.50 3,209,553 3,333,135
03-01-33 5.50 2,988,104 3,103,249
03-01-33 6.00 5,880,752 6,110,976
03-01-33 6.50 862,168 898,540
03-31-33 5.50 3,000,000 3,127,500
04-01-33 5.50 18,919,368 19,648,417
04-01-33 6.00 5,496,840 5,712,068
04-01-33 6.00 1,136,832(b) 1,181,353
05-01-33 5.50 4,000,000 4,154,138
05-01-33 6.00 2,118,114 2,201,035
06-01-33 5.50 4,000,000 4,154,138
07-01-33 5.00 7,000,000(b) 7,146,580
Collateralized Mtge Obligation
12-25-42 4.75 2,000,000 2,102,500
08-25-41 7.50 3,259,621 3,602,902
08-25-42 5.00 2,000,000 2,078,260
10-25-42 7.50 2,907,204 3,213,371
12-25-43 2.57 1,000,000 1,004,688
Interest Only
10-25-09 4.97 17,427,096(e) 733,862
12-25-12 1.29 1,800,000(e) 165,403
07-25-21 0.00 8,694,105(e) 407,454
Gov't Natl Mtge Assn
09-15-14 6.00 3,995,225 4,199,030
04-15-29 6.50 792,455 831,826
02-15-30 7.00 645,919 680,786
03-15-30 7.00 698,058 735,739
12-15-31 6.50 911,533 955,782
02-15-32 6.50 1,117,076 1,171,181
12-15-32 6.00 975,879 1,022,616
08-01-33 5.50 8,000,000(b) 8,287,520
Residential Funding Mtge
Collateralized Mtge Obligation
10-25-17 5.50 1,953,470 2,033,499
Total 450,381,014
Total bonds
(Cost: $455,462,334) $458,951,012
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
10 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Short-term securities (16.3%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (15.3%)
Federal Home Loan Mtge Corp Disc Nts
06-05-03 1.21% $2,200,000 $2,199,596
06-19-03 1.19 15,400,000 15,390,401
06-30-03 1.18 19,500,000 19,480,834
Federal Natl Mtge Assn Disc Nts
06-02-03 1.18 800,000 799,921
06-04-03 1.16 11,200,000 11,198,314
06-11-03 1.18 2,400,000 2,399,118
06-18-03 1.17 1,400,000 1,399,185
06-26-03 1.15 6,100,000 6,094,739
06-27-03 1.16 3,400,000 3,396,932
07-31-03 1.17 10,000,000 9,981,150
Total 72,340,190
Short-term securities (continued)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
Commercial paper (1.0%)
Alpine Securitization
06-02-03 1.36% $4,800,000(d) $4,799,456
Total short-term securities
(Cost: $77,139,409) $77,139,646
Total investments in securities
(Cost: $532,601,743)(g) $536,090,658
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At May 31, 2003, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$61,446,826.
(c) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
Type of security Notional amount
Purchase contracts
U.S. Treasury Notes, Sept. 2003, 10-year $ 300,000
U.S. Long Bond, Sept. 2003, 20-year 5,000,000
Sale contracts
U.S. Treasury Notes, Sept. 2003, 2-year 19,800,000
(d) 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.
(e) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest-only is extremely sensitive to the rate of principal payments on
the underlying mortgage assets. A rapid (slow) rate of principal repayments
may have an adverse (positive) effect on yield to maturity. The principal
amount shown is the notional amount of the underlying mortgages. Interest
rate disclosed represents yield based upon the estimated timing of future
cash flows as of May 31, 2003.
(f) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on May 31, 2003.
(g) At May 31, 2003, the cost of securities for federal income tax purposes was
$532,634,965 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 5,117,376
Unrealized depreciation (1,661,683)
----------
Net unrealized appreciation $ 3,455,693
-----------
- --------------------------------------------------------------------------------
11 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP U.S. Government Mortgage Fund
May 31, 2003
Assets
Investments in securities, at value (Note 1)
(identified cost $532,601,743) $536,090,658
Cash in bank on demand deposit 128,322
Capital shares receivable 418,598
Accrued interest receivable 2,190,213
Receivable for investment securities sold 65,092,803
----------
Total assets 603,920,594
-----------
Liabilities
Dividends payable to shareholders 266,298
Capital shares payable 487,241
Payable for investment securities purchased 79,614,211
Payable for securities purchased on a when-issued basis (Note 1) 50,896,412
Accrued investment management services fee 6,728
Accrued distribution fee 7,777
Accrued transfer agency fee 1,659
Accrued administrative services fee 647
Other accrued expenses 50,555
------
Total liabilities 131,331,528
-----------
Net assets applicable to outstanding capital stock $472,589,066
============
Represented by
Capital stock -- $.01 par value (Note 1) $ 909,625
Additional paid-in capital 464,544,355
Excess of distributions over net investment income (235,899)
Accumulated net realized gain (loss) 3,871,117
Unrealized appreciation (depreciation) on investments (Note 5) 3,499,868
---------
Total -- representing net assets applicable to outstanding capital stock $472,589,066
============
Net assets applicable to outstanding shares: Class A $251,114,423
Class B $199,931,709
Class C $ 21,530,532
Class Y $ 12,402
Net asset value per share of outstanding capital stock: Class A shares 48,344,197 $ 5.19
Class B shares 38,473,346 $ 5.20
Class C shares 4,142,611 $ 5.20
Class Y shares 2,388 $ 5.19
----- ------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
12 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Statement of operations
AXP U.S. Government Mortgage Fund
Year ended May 31, 2003
Investment income
Income:
Interest $14,086,355
-----------
Expenses (Note 2):
Investment management services fee 1,714,820
Distribution fee
Class A 448,097
Class B 1,364,483
Class C 140,738
Transfer agency fee 406,037
Incremental transfer agency fee
Class A 22,741
Class B 30,828
Class C 3,465
Service fee -- Class Y 12
Administrative services fees and expenses 166,561
Compensation of board members 10,547
Custodian fees 56,130
Printing and postage 70,007
Registration fees 163,068
Audit fees 17,500
Other 21,889
------
Total expenses 4,636,923
Expenses waived/reimbursed by AEFC (Note 2) (233,538)
--------
4,403,385
Earnings credits on cash balances (Note 2) (3,959)
------
Total net expenses 4,399,426
---------
Investment income (loss) -- net 9,686,929
---------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 5,906,969
Futures contracts (300,658)
Options contracts written (Note 6) 156,713
-------
Net realized gain (loss) on investments 5,763,024
Net change in unrealized appreciation (depreciation) on investments 2,819,705
---------
Net gain (loss) on investments 8,582,729
---------
Net increase (decrease) in net assets resulting from operations $18,269,658
===========
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Statements of changes in net assets
AXP U.S. Government Mortgage Fund
May 31, 2003 For the period from
Year ended Feb. 14, 2002* to
May 31, 2002
Operations and distributions
Investment income (loss) -- net $ 9,686,929 $ 448,697
Net realized gain (loss) on investments 5,763,024 188,897
Net change in unrealized appreciation (depreciation) on investments 2,819,705 651,272
--------- -------
Net increase (decrease) in net assets resulting from operations 18,269,658 1,288,866
---------- ---------
Distributions to shareholders from:
Net investment income
Class A (6,365,488) (297,178)
Class B (3,718,149) (75,981)
Class C (383,803) (12,617)
Class Y (475) (80)
Net realized gain
Class A (878,837) --
Class B (703,993) --
Class C (67,316) --
Class Y (57) --
----------- --------
Total distributions (12,118,118) (385,856)
----------- --------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 277,134,067 32,847,519
Class B shares 210,911,273 28,841,488
Class C shares 19,636,847 4,695,391
Class Y shares 502 1,500
Reinvestment of distributions at net asset value
Class A shares 6,382,377 80,237
Class B shares 4,108,191 51,011
Class C shares 404,490 8,025
Class Y shares 85 2
Payments for redemptions
Class A shares (93,565,033) (811,270)
Class B shares (Note 2) (45,757,524) (927,337)
Class C shares (Note 2) (3,415,045) (123,023)
Class Y shares (132) --
----------- ----------
Increase (decrease) in net assets from capital share transactions 375,840,098 64,663,543
----------- ----------
Total increase (decrease) in net assets 381,991,638 65,566,553
Net assets at beginning of period (Note 1) 90,597,428 25,030,875**
---------- ----------
Net assets at end of period $472,589,066 $90,597,428
============ ===========
Undistributed (excess of distributions over) net investment income $ (235,899) $ 112,861
------------ -----------
* When shares became publicly available
** Initial capital of $25,000,000 was contributed on Feb. 7, 2002. The Fund
had an increase in net assets resulting from operations of $30,875 during
the period from Feb. 7, 2002 to Feb. 14, 2002 (when shares became publicly
available).
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Notes to Financial Statements
AXP U.S. Government Mortgage Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Government Income Series, Inc. (formerly AXP
Federal Income Fund, Inc.) and is registered under the Investment Company Act
of 1940 (as amended) as a diversified, open-end management investment company.
AXP Government Income Series, Inc. has 10 billion authorized shares of capital
stock that can be allocated among the separate series as designated by the
board. The Fund invests primarily in mortgage-backed securities. On Feb. 7,
2002, IDS Life Insurance Company invested $25,000,000 in the Fund which
represented 4,994,000 shares for Class A, 2,000 shares for Class B, Class C
and Class Y, respectively, which represented the initial capital for each
class at $5 per share. Shares of the Fund were first offered to the public on
Feb. 14, 2002.
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.
The Fund'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.
- --------------------------------------------------------------------------------
15 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Fund may buy and sell put and call options
and write put and call options. This may include purchasing mortgage-backed
security (MBS) put spread options and writing covered MBS call spread options.
MBS spread options are based upon the changes in the price spread between a
specified mortgage-backed security and a like-duration Treasury security. The
risk in writing a call option is that the Fund gives up the opportunity for
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 being unable to enter into a closing transaction if a
liquid secondary market does not exist. The Fund also may write over-the-counter
options where completing the obligation depends upon the credit standing of the
other party.
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 when the option transaction expires or closes. 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
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial 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 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.
Short sales
The Fund may engage in short sales. In these transactions, the Fund sells a
security that it does not own. The Fund is obligated to replace the security
that was short by purchasing it at the market price at the time of replacement
or entering into an offsetting transaction with the broker. The price at such
time may be more or less than the price at which the Fund sold the security.
- --------------------------------------------------------------------------------
16 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Securities purchased on a forward-commitment basis
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other
forward-commitments, 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 Fund's net assets the same as owned securities. The Fund
designates cash or liquid securities at least equal to the amount of its
forward-commitments. As of May 31, 2003, the Fund has entered into outstanding
when-issued securities of $50,896,412 and forward-commitments of $10,550,414.
The Fund 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 Fund
to "roll over" its purchase commitments, the Fund receives negotiated amounts in
the form of reductions of the purchase price of the commitment.
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 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 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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $432,226
and accumulated net realized gain has been decreased by $432,226.
- --------------------------------------------------------------------------------
17 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
The tax character of distributions paid for the periods indicated is as follows:
For the period from
May 31, 2003 Feb. 14, 2002* to
Year ended May 31, 2002
Class A
Distributions paid from:
Ordinary income $7,244,325 $297,178
Long-term capital gain -- --
Class B
Distributions paid from:
Ordinary income 4,422,142 75,981
Long-term capital gain -- --
Class C
Distributions paid from:
Ordinary income 451,119 12,617
Long-term capital gain -- --
Class Y
Distributions paid from:
Ordinary income 532 80
Long-term capital gain -- --
* When shares became publicly available.
As of May 31, 2003, the components of distributable earnings on a tax basis are
as follows:
Undistributed ordinary income $4,089,622
Accumulated gain (loss) $ 250,180
Unrealized appreciation (depreciation) $3,061,582
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, when
available, 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. Interest income, including amortization of premium and discount using the
effective interest method, is accrued daily.
- --------------------------------------------------------------------------------
18 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
2. EXPENSES AND SALES CHARGES
The Fund has agreements with American Express Financial Corporation (AEFC) to
manage its portfolio and provide administrative services. Under an 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 a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor
portion of additional administrative service expenses paid by the Fund are
consultants' fees and fund office expenses. Under this agreement, the Fund also
pays taxes, audit and certain legal fees, registration fees for shares,
compensation of board members, corporate filing fees and any other expenses
properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The 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 $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
Under terms of a prior agreement that ended April 30, 2003, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $19.50 for
Class A, $20.50 for Class B, $20 for Class C and $17.50 for Class Y.
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 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
$2,054,585 for Class A, $151,479 for Class B and $12,482 for Class C for the
year ended May 31, 2003.
For the year ended May 31, 2003, AEFC and American Express Financial Advisors
Inc. waived certain fees and expenses to 0.99% for Class A, 1.75% for Class B,
1.75% for Class C and 0.80% for Class Y. In addition, AEFC and American Express
Financial Advisors Inc. have agreed to waive certain fees and expenses until May
31, 2004. Under this agreement, total expenses will not exceed 0.99% for Class
A, 1.75% for Class B, 1.75% for Class C and 0.81% for Class Y of the Fund's
average daily net assets.
- --------------------------------------------------------------------------------
19 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
During the year ended May 31, 2003, the Fund's custodian and transfer agency
fees were reduced by $3,959 as a result of earnings credits from overnight cash
balances. The Fund also pays custodian fees to American Express Trust Company,
an affiliate of AEFC.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $1,094,526,154 and $733,842,146, respectively, for the
year ended May 31, 2003. Realized gains and losses are determined on an
identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods are as follows:
Year ended May 31, 2003
Class A Class B Class C Class Y
Sold 53,840,581 40,951,953 3,809,031 98
Issued for reinvested distributions 1,236,256 795,646 78,342 16
Redeemed (18,129,387) (8,851,021) (659,979) (25)
----------- ---------- -------- ---
Net increase (decrease) 36,947,450 32,896,578 3,227,394 89
---------- ---------- --------- --
Feb. 14, 2002* to May 31, 2002
Class A Class B Class C Class Y
Sold 6,548,408 5,749,357 936,279 299
Issued for reinvested distributions 15,930 10,111 1,590 --
Redeemed (161,591) (184,700) (24,652) --
--------- --------- ------- ---
Net increase (decrease) 6,402,747 5,574,768 913,217 299
--------- --------- ------- ---
* When shares became publicly available.
5. INTEREST RATE FUTURES CONTRACTS
As of May 31, 2003, investments in securities included securities valued at
$447,222 that were pledged as collateral to cover initial margin deposits on 53
open purchase contracts and 99 open sale contracts. The notional market value of
the open purchase contracts as of May 31, 2003 was $6,316,250 with a net
unrealized gain of $37,881. The notional market value of the open sale contracts
as of May 31, 2003 was $21,405,657 with a net unrealized loss of $26,928. See
"Summary of significant accounting policies."
- --------------------------------------------------------------------------------
20 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
6. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written are as follows:
Year ended May 31, 2003
Puts Calls
Contracts Premiums Contracts Premiums
Balance May 31, 2002 -- $ -- -- $ --
Opened 599 131,584 631 177,106
Closed (370) (103,577) (319) (158,803)
Expired (229) (28,007) (312) (18,303)
---- ------- ---- -------
Balance May 31, 2003 -- $ -- -- $ --
---- ------- ---- -------
See "Summary of significant accounting policies."
7. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
Deutsche Bank, whereby the Fund is permitted to have bank borrowings for
temporary or emergency purposes to fund shareholder redemptions. The agreement
went into effect Sept. 24, 2002. The Fund must maintain asset coverage for
borrowings of at least 300%. The agreement, which enables the Fund to
participate with other American Express mutual funds, permits borrowings up to
$500 million, collectively. Interest is charged to each Fund based on its
borrowings at a rate equal to either the LIBOR plus 0.50%, the IBOR plus 0.50%
or the higher of the Federal Funds Rate plus 0.25% and the Prime Lending Rate.
Borrowings are payable within 60 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 0.09% per annum. Prior to this agreement, the Fund had a
revolving credit agreement that permitted borrowings up to $200 million with
U.S. Bank, N.A. The Fund had no borrowings outstanding during the year ended May
31, 2003.
- --------------------------------------------------------------------------------
21 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
8. 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, 2003 2002(b)
Net asset value, beginning of period $5.06 $5.01
Income from investment operations:
Net investment income (loss) .19 .04
Net gains (losses) (both realized and unrealized) .16 .04
Total from investment operations .35 .08
Less distributions:
Dividends from net investment income (.20) (.03)
Distributions from realized gains (.02) --
Total distributions (.22) (.03)
Net asset value, end of period $5.19 $5.06
Ratios/supplemental data
Net assets, end of period (in millions) $251 $58
Ratio of expenses to average daily net assets(c,e) .99% .95%(d)
Ratio of net investment income (loss)
to average daily net assets 3.31% 2.98%(d)
Portfolio turnover rate (excluding short-term securities) 227% 200%
Total return(i) 6.93% 1.75%(j)
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2003 2002(b)
Net asset value, beginning of period $5.07 $5.01
Income from investment operations:
Net investment income (loss) .15 .03
Net gains (losses) (both realized and unrealized) .16 .05
Total from investment operations .31 .08
Less distributions:
Dividends from net investment income (.16) (.02)
Distributions from realized gains (.02) --
Total distributions (.18) (.02)
Net asset value, end of period $5.20 $5.07
Ratios/supplemental data
Net assets, end of period (in millions) $200 $28
Ratio of expenses to average daily net assets(c,f) 1.75% 1.74%(d)
Ratio of net investment income (loss)
to average daily net assets 2.49% 2.68%(d)
Portfolio turnover rate (excluding short-term securities) 227% 200%
Total return(i) 6.12% 1.76%(j)
See accompanying notes to financial highlights.
- --------------------------------------------------------------------------------
22 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2003 2002(b)
Net asset value, beginning of period $5.07 $5.01
Income from investment operations:
Net investment income (loss) .15 .03
Net gains (losses) (both realized and unrealized) .16 .05
Total from investment operations .31 .08
Less distributions:
Dividends from net investment income (.16) (.02)
Distributions from realized gains (.02) --
Total distributions (.18) (.02)
Net asset value, end of period $5.20 $5.07
Ratios/supplemental data
Net assets, end of period (in millions) $22 $5
Ratio of expenses to average daily net assets(c,g) 1.75% 1.73%(d)
Ratio of net investment income (loss)
to average daily net assets 2.50% 2.60%(d)
Portfolio turnover rate (excluding short-term securities) 227% 200%
Total return(i) 6.12% 1.74%(j)
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2003 2002(b)
Net asset value, beginning of period $5.06 $5.01
Income from investment operations:
Net investment income (loss) .19 .04
Net gains (losses) (both realized and unrealized) .16 .04
Total from investment operations .35 .08
Less distributions:
Dividends from net investment income (.20) (.03)
Distributions from realized gains (.02) --
Total distributions (.22) (.03)
Net asset value, end of period $5.19 $5.06
Ratios/supplemental data
Net assets, end of period (in millions) $-- $--
Ratio of expenses to average daily net assets(c,h) .80% .78%(d)
Ratio of net investment income (loss)
to average daily net assets 3.68% 2.95%(d)
Portfolio turnover rate (excluding short-term securities) 227% 200%
Total return(i) 7.10% 1.80%(j)
See accompanying notes to financial highlights.
- --------------------------------------------------------------------------------
23 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Notes to financial highlights
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) For the period from Feb. 14, 2002 (when shares became publicly available)
to May 31, 2002.
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class A would have been 1.06% and 1.58%
for the periods ended May 31, 2003 and 2002, respectively.
(f) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class B would have been 1.82% and 2.34%
for the periods ended May 31, 2003 and 2002, respectively.
(g) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class C would have been 1.82% and 2.34%
for the periods ended May 31, 2003 and 2002, respectively.
(h) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class Y would have been 0.88% and 1.40%
for the periods ended May 31, 2003 and 2002, respectively.
(i) Total return does not reflect payment of a sales charge.
(j) Not annualized.
- --------------------------------------------------------------------------------
24 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Independent Auditors' Report
THE BOARD AND SHAREHOLDERS
AXP GOVERNMENT INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP U.S. Government Mortgage Fund
(a series of AXP Government Income Series, Inc.) as of May 31, 2003, the related
statement of operations for the year then ended and the statements of changes in
net assets and the financial highlights for the year ended May 31, 2003 and for
the period from Feb. 14, 2002 (when shares became publicly available) to 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. Our procedures included confirmation of
securities owned as of May 31, 2003, 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of AXP
U.S. Government Mortgage Fund as of May 31, 2003, 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 11, 2003
- --------------------------------------------------------------------------------
25 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 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 U.S. Government Mortgage Fund
Fiscal period ended May 31, 2003
Class A
Income distributions taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 0.02320
July 26, 2002 0.01915
Aug. 26, 2002 0.01935
Sept. 26, 2002 0.01889
Oct. 25, 2002 0.01650
Nov. 25, 2002 0.01650
Dec. 20, 2002 0.03754
Jan. 22, 2003 0.01300
Feb. 21, 2003 0.01133
March 24, 2003 0.01273
April 24, 2003 0.01300
May 23, 2003 0.01490
Total distributions $0.21609
The distribution of $0.03754 per share, payable Dec. 20, 2002, consisted of
$0.01400 from net investment income and $0.02354 from net short-term capital
gains.
- --------------------------------------------------------------------------------
26 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Class B
Income distributions taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 0.01976
July 26, 2002 0.01604
Aug. 26, 2002 0.01607
Sept. 26, 2002 0.01558
Oct. 25, 2002 0.01342
Nov. 25, 2002 0.01318
Dec. 20, 2002 0.03486
Jan. 22, 2003 0.00946
Feb. 21, 2003 0.00812
March 24, 2003 0.00939
April 24, 2003 0.00966
May 23, 2003 0.01176
Total distributions $0.17730
The distribution of $0.03486 per share, payable Dec. 20, 2002, consisted of
$0.01132 from net investment income and $0.02354 from net short-term capital
gains.
Class C
Income distributions taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 0.01975
July 26, 2002 0.01596
Aug. 26, 2002 0.01604
Sept. 26, 2002 0.01556
Oct. 25, 2002 0.01339
Nov. 25, 2002 0.01316
Dec. 20, 2002 0.03485
Jan. 22, 2003 0.00947
Feb. 21, 2003 0.00810
March 24, 2003 0.00937
April 24, 2003 0.00966
May 23, 2003 0.01176
Total distributions $0.17707
The distribution of $0.03485 per share, payable Dec. 20, 2002, consisted of
$0.01131 from net investment income and $0.02354 from net short-term capital
gains.
- --------------------------------------------------------------------------------
27 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Class Y
Income distributions taxable as dividend income:
Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00%
Dividends Received Deduction for corporations: 0.00%
Payable date Per share
June 26, 2002 0.02391
July 26, 2002 0.01980
Aug. 26, 2002 0.02009
Sept. 26, 2002 0.01962
Oct. 25, 2002 0.01719
Nov. 25, 2002 0.01725
Dec. 20, 2002 0.03817
Jan. 22, 2003 0.01379
Feb. 21, 2003 0.01204
March 24, 2003 0.01347
April 24, 2003 0.01375
May 23, 2003 0.01558
Total distributions $0.22466
The distribution of $0.03817 per share, payable Dec. 20, 2002, consisted of
$0.01463 from net investment income and $0.02354 from net short-term capital
gains.
- --------------------------------------------------------------------------------
28 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 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 83 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, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Arne H. Carlson Board member since Chair, Board Services Corporation
901 S. Marquette Ave. 1999 (provides administrative services to
Minneapolis, MN 55402 boards). Former Governor of Minnesota
Age 68
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Philip J. Carroll, Jr. Board member since Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan
901 S. Marquette Ave. 2002 Corporation (engineering and Materials Company, Inc.
Minneapolis, MN 55402 construction) since 1998 (construction
Age 65 materials/chemicals)
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Livio D. DeSimone Board member since Retired Chair of the Board and Chief Cargill, Incorporated
30 Seventh Street East 2001 Executive Officer, Minnesota Mining and (commodity merchants and
Suite 3050 Manufacturing (3M) processors), General Mills,
St. Paul, MN 55101-4901 Inc. (consumer foods), Vulcan
Age 69 Materials Company
(construction materials/
chemicals), Milliken & Company
(textiles and chemicals), and
Nexia Biotechnologies, Inc.
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Heinz F. Hutter* Board member since Retired President and Chief Operating
P.O. Box 2187 1994 Officer, Cargill, Incorporated (commodity
Minneapolis, MN 55402 merchants and processors)
Age 74
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Anne P. Jones Board member since Attorney and Consultant
5716 Bent Branch Rd. 1985
Bethesda, MD 20816
Age 68
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Stephen R. Lewis, Jr.** Board member since Retired President and Professor of Valmont Industries, Inc.
222 South 9th Street #440 2002 Economics, Carleton College (manufactures irrigation
Minneapolis, MN 55402 systems)
Age 64
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
* Interested person of AXP Partners International Aggressive Growth Fund and
AXP Partners Aggressive Growth Fund by reason of being a security holder of
J P Morgan Chase & Co., which has a 45% interest in American Century
Companies, Inc., the parent company of the subadviser of two of the AXP
Partners Funds, American Century Investment Management, Inc.
** Interested person of AXP Partners International Aggressive Growth Fund by
reason of being a security holder of FleetBoston Financial Corporation,
parent company of Liberty Wanger Asset Management, L.P., one of the fund's
subadvisers.
- --------------------------------------------------------------------------------
29 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
Independent Board Members (continued)
Name, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Alan G. Quasha Board member since President, Quadrant Management, Inc. Compagnie Financiere
720 Fifth Avenue 2002 (management of private equities) Richemont AG (luxury goods),
New York, NY 10019 Harken Energy Corporation
Age 53 (oil and gas exploration) and
SIRIT Inc. (radio frequency
identification technology)
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Alan K. Simpson Board member since Former three-term United States Senator Biogen, Inc.
1201 Sunshine Ave. 1997 for Wyoming (biopharmaceuticals)
Cody, WY 82414
Age 71
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Alison Taunton-Rigby Board member since President, Forester Biotech since 2000.
901 S. Marquette Ave. 2002 Former President and CEO, Aquila
Minneapolis, MN 55402 Biopharmaceuticals, Inc.
Age 59
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Board Members Affiliated with AEFC***
Name, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- -------------------------------------------
Barbara H. Fraser Board member since Executive Vice President - AEFA Products
1546 AXP Financial Center 2002 and Corporate Marketing of AEFC since
Minneapolis, MN 55474 2002. President - Travelers Check Group,
Age 53 American Express Company, 2001-2002.
Management Consultant, Reuters,
2000-2001. Managing Director -
International Investments, Citibank
Global, 1999-2000. Chairman and CEO,
Citicorp Investment Services and
Citigroup Insurance Group, U.S., 1998-1999
- -------------------------------- -------------------- -------------------------------------------
Stephen W. Roszell Board member since Senior Vice President - Institutional
50238 AXP Financial Center 2002, Vice Group of AEFC
Minneapolis, MN 55474 President since
Age 54 2002
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
William F. Truscott Board member since Senior Vice President - Chief Investment
53600 AXP Financial Center 2001, Vice Officer of AEFC since 2001. Former Chief
Minneapolis, MN 55474 President since Investment Officer and Managing Director,
Age 42 2002 Zurich Scudder Investments
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
*** Interested person by reason of being an officer, director and/or employee
of AEFC.
- --------------------------------------------------------------------------------
30 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 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. Roszell, who is vice president, and
Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers
Name, address, age Position held with Principal occupation during past five Other directorships
Fund and length of years
service
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Jeffrey P. Fox Treasurer since Vice President - Investment Accounting,
50005 AXP Financial Center 2002 AEFC, since 2002; Vice President -
Minneapolis, MN 55474 Finance, American Express Company,
Age 48 2000-2002; Vice President - Corporate
Controller, AEFC, 1996-2000
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Paula R. Meyer President since Senior Vice President and General Manager
596 AXP Financial Center 2002 - Mutual Funds, AEFC, since 2002; Vice
Minneapolis, MN 55474 President and Managing Director -
Age 49 American Express Funds, AEFC, 2000-2002;
Vice President, AEFC, 1998-2000
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General Counsel,
Minneapolis, MN 55402 and Secretary
Age 64 since 1978
- -------------------------------- -------------------- ------------------------------------------- -------------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling (800) 862-7919.
- --------------------------------------------------------------------------------
31 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 ANNUAL REPORT
The policies and procedures that the Fund uses to determine how to vote proxies
relating to portfolio securities can be found in the Fund's Statement of
Additional Information (SAI) which is available (i) without charge, upon
request, by calling toll-free (800) 862-7919; (ii) on the American Express
Company Web site at americanexpress.com; and (iii) on the Securities and
Exchange Commission Web site at http://www.sec.gov.
- --------------------------------------------------------------------------------
(logo)
AMERICAN
EXPRESS(R)
- --------------------------------------------------------------------------------
American Express Funds
70100 AXP Financial Center
Minneapolis, MN 55474
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.
Item 2. Code of Ethics. Not applicable pursuant to SEC Release No. IC-25914
(January 27, 2003).
Item 3. Audit Committee Financial Expert. Not applicable pursuant to SEC
Release No. IC-25914 (January 27, 2003).
Item 4. Principal Accountant Fees and Services. Not applicable pursuant to
SEC Release No. IC-25915 (January 28, 2003).
Items 5-6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. [Reserved]
Item 9. Controls and Procedures.
(a) The registrant's Principal Executive Officer and Principal
Financial Officer have evaluated the registrant's disclosure
controls and procedures within 90 days of this filing and have
concluded that the registrant's disclosure controls and
procedures by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) At the date of filing this Form N-CSR, the registrant's Principal
Executive Officer and Principal Financial Officer are aware of no
significant changes in the registrant's internal controls or in
other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10. Exhibits.
(a) Not applicable pursuant to SEC Release No. IC-25914 (January 27,
2003).
(b) Separate certification for the Registrant's principal executive
officer and principal financial officer, as required by Section 302 of
the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment
Company Act of 1940, are attached as EX.99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) AXP Government Income Series, Inc.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date July 31, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date July 31, 2003
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date July 31, 2003