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)
50606 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: 11/30
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AXP(R)
Short Duration
U.S. Government
Fund
Semiannual Report
for the Period Ended
Nov. 30, 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(R)
Funds
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Table of Contents
Fund Snapshot 3
Questions & Answers
with Portfolio Management 4
Investments in Securities 7
Financial Statements (Portfolio) 12
Notes to Financial Statements (Portfolio) 15
Financial Statements (Fund) 19
Notes to Financial Statements (Fund) 22
Proxy Voting 28
(Dalbar logo)
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 SEMIANNUAL REPORT
Fund Snapshot
AS OF NOV. 30, 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 $2.875 billion
Number of holdings 200
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT LONG
X HIGH
MEDIUM QUALITY
LOW
SECTOR COMPOSITION
Percentage of portfolio assets
(pie chart)
Mortgage-backed securities 45.4%
U.S. government obligations & agencies 41.1%
Short-term securities 10.0%
Financials 3.3%
Consumer discretionary 0.2%
CREDIT QUALITY SUMMARY
Percentage of portfolio assets excluding cash equivalents
AAA bonds 100%
Individual security ratings are based on information from Standard & Poor's
Corp. and Moody's Investors Service. If a rating is unavailable, the rating is
determined through an internal analysis, if appropriate.
For further detail about these holdings, please refer to the section entitled
"Investments in Securities."
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 SEMIANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, Portfolio Manager Scott Kirby details AXP Short Duration U.S. Government
Fund's positioning and results for the six months ended Nov. 30, 2003.
Q: How did AXP Short Duration U.S. Government Fund perform for the six months
ended Nov. 30, 2003?
A: AXP Short Duration U.S. Government Fund's Class A shares (excluding sales
charge) fell 0.39% for the six months ended Nov. 30, 2003. The Fund
underperformed the Lipper Short U.S. Government Funds Index, representing
the Fund's peer group, which fell 0.18% over the same period.
The Fund's benchmark, the Lehman Brothers 1-3 Year Government Index, rose
0.13% for the period.
Q: What factors most significantly affected Fund performance?
A: During the first four months of the period we saw significant and severe
volatility. Since the Fund was positioned to do well in a low volatility
environment, it struggled during the volatile months of May through
September.
The fixed income market rallied in June fueled by the belief that interest
rates would remain low until the economy showed sustained signs of a
recovery. Then, on June 25, 2003, the Federal Reserve Board moderated their
stance on deflation and cut the targeted federal funds rate by only 0.25%
(a quarter of a
(bar graph)
PERFORMANCE COMPARISON
For the six-month period ended Nov. 30, 2003
0.50%
0.25% (bar 2)
0.00% +0.13% (bar 3)
- -0.25% (bar 1) -0.18%
- -0.50% -0.39%
(bar 1) AXP Short Duration U.S. Government Fund Class A (excluding sales charge)
(bar 2) Lehman Brothers 1-3 Year Government Index(1) (unmanaged)
(bar 3) Lipper Short U.S. Government Funds Index(2)
(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) 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.
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 SEMIANNUAL REPORT
Questions & Answers
(begin callout quote)> We have seen the fixed-income market settle into a
trading range environment where mortgage-backed securities, which make up almost
half of the Fund, have done well. (end callout quote)
percentage point) to 1.00%, to "add further support for an economy which it
expects to improve over time." The Federal Reserve Board's conservative
move led to a market sell-off, and U.S. Treasury yields rose dramatically
by July. July was also the worst month for mortgage securities in history
based on duration-adjusted excess returns over U.S. Treasuries. Therefore,
we adjusted
AVERAGE ANNUAL TOTAL RETURNS
Class A Class B Class C Class Y
(Inception dates) (8/19/85) (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)
as of Nov. 30, 2003
6 month* -0.39% -5.12% -0.77% -5.70% -0.77% -1.76% -0.31% -0.31%
1 year +1.57% -3.24% +0.81% -3.16% +0.81% +0.81% +1.75% +1.75%
5 years +4.15% +3.14% +3.37% +3.20% N/A N/A +4.31% +4.31%
10 years +5.31% +4.80% N/A N/A N/A N/A N/A N/A
Since inception N/A N/A +4.89% +4.89% +4.74% +4.74% +5.85% +5.85%
as of Dec. 31, 2003
6 months* +0.17% -4.59% -0.21% -5.16% -0.22% -1.21% +0.25% +0.25%
1 year +1.03% -3.76% +0.27% -3.68% +0.27% +0.27% +1.20% +1.20%
5 years +4.12% +3.11% +3.34% +3.17% N/A N/A +4.28 +4.28%
10 years +5.28% +4.77% N/A N/A N/A N/A N/A N/A
Since inception N/A N/A +4.90% +4.90% +4.76% +4.76% +5.85% +5.85%
* Not annualized.
(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/funds for current information.
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5 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Questions & Answers
the Fund's duration to a neutral position. Compounding matters was news of
a stabilizing U.S. economy. After peaking in mid-August, U.S. Treasury
yields declined somewhat by the end of the period. Mortgage securities also
recovered. During September we saw a significant sell-off, but the market
began to see an end to high volatility in October and November. In the
latter part of the period we have seen the fixed-income market settle into
a trading range environment where mortgage-backed securities, which make up
almost half of the Fund, have done well.
The Fund is currently positioned slightly shorter in duration than its
benchmark because we believe that will benefit the Fund during the economic
recovery.
The Fund underperformed its competitors due to its positioning for lower
volatility. The Fund underperformed its benchmark and peer group due its
allocation to mortgages. Within the mortgage sector, we were able to add
relative value by focusing on pools that historically have had
lower-than-average prepayment risks. To help manage risk, the Fund also
used a significant number of futures this period, resulting in a gain. For
much of the period, we maintained a portfolio asset allocation to
mortgage-backed securities near our 50% target. The remaining portion of
the Fund is invested in Treasury and Agency securities with a small
position in cash.
Q: What changes did you make to the Fund and how is it currently positioned?
A: Aside from shifting 10% of the Fund's weighting from Treasuries to agency
securities, we did not make changes to the Fund's mix of securities.
Overall, we have reduced exposure to volatility. We continue to hold the
same allocation to mortgage-backed securities, however we hold more
conservative positions.
Q: How do you intend to manage the Fund in the coming months?
A: As the economy continues to recover, we expect rates to move higher and the
yield curve could steepen slightly futher. Going forward, we believe there
will be good buying opportunities in Treasuries and agency securities as
spreads widen. We will hold a rather defensive position in mortgage-backed
securities as these changes occur because we anticipate a short time period
in which mortgages may struggle. However, after we pass that period, we
anticipate a positive environment for mortgages because there will be less
call risk in the market. We believe volatility may be reduced as well going
forward. However, we intend to keep the Fund's duration shorter than its
benchmark. We may seek opportunities to reduce duration even further over
the coming months. Quality issues and security selection will remain a
priority.
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6 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Investments in Securities
Government Income Portfolio
Nov. 30, 2003 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (100.9%)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligations & agencies (46.1%)
Federal Home Loan Bank
11-25-05 2.00% $14,700,000 $14,589,371
09-15-06 2.88 17,400,000 17,461,770
Federal Home Loan Mtge Corp
04-15-06 2.38 133,000,000 132,686,918
06-16-06 1.52 54,000,000 53,990,172
08-15-06 2.75 47,750,000 47,841,632
02-15-16 5.00 19,511,488 20,384,770
Federal Natl Mtge Assn
05-15-06 2.25 20,000,000 19,904,100
07-15-07 4.25 46,228,000 47,937,049
12-15-16 4.00 12,351,720 12,267,065
Student Loan Mtge Assn
03-15-06 5.25 13,200,000 14,009,252
12-15-22 2.99 15,000,000 14,974,215
12-15-32 2.25 15,775,000 15,716,948
03-15-33 2.16 14,800,000 14,804,632
U.S. Treasury
12-31-04 1.75 72,000,000(l) 72,227,808
02-15-05 7.50 92,500,000(c) 99,094,233
05-15-05 6.75 65,650,000(c,l) 70,424,987
05-31-05 1.25 38,500,000(c,l) 38,247,440
08-15-05 10.75 85,590,000 98,338,203
08-31-05 2.00 30,000,000 30,064,440
11-15-05 5.75 76,400,000(c) 81,882,311
02-15-06 5.63 85,500,000(c) 91,952,600
11-15-06 2.63 112,379,000(c,l) 112,664,330
11-15-06 3.50 147,700,000(c,l) 151,807,832
11-15-09 10.38 48,000,000(l) 51,991,872
Total 1,325,263,950
Mortgage-backed securities (50.9%)(f)
Federal Home Loan Mtge Corp
08-25-06 3.13 42,000,000 42,229,963
10-27-06 3.00 15,000,000 15,026,748
09-01-09 6.50 547,081 575,838
10-01-10 7.00 1,938,357 2,059,547
03-01-12 7.50 7,367,731 7,850,675
07-01-12 5.50 839,318 867,645
09-27-12 3.61 13,979,000 13,975,005
02-01-13 5.00 5,049,803 5,177,626
04-01-13 4.50 3,134,189 3,165,898
04-01-13 5.00 4,322,290 4,431,698
05-01-13 4.50 28,328,444 28,615,567
06-01-15 7.50 14,151,672 15,080,148
04-01-17 6.50 40,712,338 43,116,375
07-01-17 6.50 24,134,801 25,400,475
11-01-17 5.50 12,640,374 13,034,842
02-15-20 4.50 15,450,000 15,377,709
07-01-24 8.00 831,984(l) 905,461
07-01-24 8.00 304,629 331,532
01-01-25 9.00 1,237,090 1,374,749
06-01-25 8.00 1,201,815 1,306,174
08-01-25 8.00 326,380 354,720
05-01-26 9.00 2,202,749 2,449,986
Collateralized Mtge Obligation
12-15-08 2.00 15,403,498 15,337,261
12-15-08 6.00 14,770,711 15,527,691
03-15-12 5.00 20,354,433 20,697,092
04-15-12 5.00 23,418,464 24,051,465
03-15-15 5.50 40,888,673 42,029,201
10-15-15 5.00 29,046,000 30,073,938
01-15-16 5.00 9,125,000 9,536,021
02-15-16 5.00 9,125,000 9,536,194
06-15-16 7.00 16,185,942 17,365,408
07-15-16 4.00 11,000,000 10,903,278
08-15-16 4.00 14,617,385 14,561,380
10-15-16 4.00 9,705,546 9,645,911
01-17-21 6.00 5,638,663 5,714,678
04-15-22 5.50 15,828,024 16,319,042
Interest Only
12-15-12 27.33 18,576,480(i) 1,509,450
02-15-14 10.21 14,466,347(i) 1,475,567
01-01-20 4.71 28,625(i) 6,572
Interest Only/Inverse Floater
06-15-18 4.84 12,910,737(i,j) 859,478
03-15-32 6.83 7,621,638(i,j) 693,456
See accompanying notes to investments in securities.
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7 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn
09-01-07 8.50% $325,183 $340,098
10-01-07 7.50 953,159 1,018,839
12-01-08 7.50 1,578,448 1,679,279
01-01-09 5.74 3,280,843 3,500,358
05-01-09 7.50 3,245,411 3,469,043
10-01-09 7.11 4,339,670 4,962,316
01-01-10 5.00 1,322,059 1,347,361
07-01-11 7.50 1,391,347 1,487,425
11-01-12 5.00 944,855 968,772
12-01-12 5.00 1,690,934 1,734,634
04-01-13 5.50 20,777,768 21,479,018
05-01-13 5.00 24,929,430 25,560,456
05-01-13 5.50 6,491,082 6,754,101
05-01-13 6.00 1,486,786 1,556,235
06-01-13 5.00 4,153,713 4,258,854
08-01-13 4.50 11,449,483 11,565,320
10-01-13 6.00 4,447,282 4,655,019
12-01-13 4.50 46,600,000(b) 47,004,112
12-01-13 5.50 2,021,685 2,093,758
12-25-13 4.50 21,428,571 22,047,991
01-01-14 5.50 1,243,872 1,288,216
01-01-14 6.00 811,368 849,268
03-01-14 6.00 1,468,585 1,537,184
06-01-14 6.50 15,104,573 15,951,622
08-01-14 6.50 941,906 994,484
05-01-17 7.00 1,732,628 1,845,727
06-01-17 6.00 21,971,852 22,952,503
06-01-17 6.50 5,705,679 6,020,284
06-01-17 7.00 1,364,019 1,453,057
07-01-17 6.00 43,201,315 45,361,038
08-01-17 5.50 29,405,464 30,431,912
08-01-17 6.00 19,225,956 20,123,204
08-01-17 7.00 2,352,742 2,506,321
09-01-17 6.00 633,584 661,862
11-01-17 5.50 28,907,641 29,878,569
11-01-17 6.00 2,432,243 2,567,630
01-01-18 5.50 2,588,674 2,678,381
02-01-18 5.50 18,417,850 19,027,183
03-01-18 5.50 2,086,779 2,150,966
04-01-18 5.50 15,810,862 16,297,187
05-01-18 5.50 5,313,755 5,480,873
06-01-18 5.50 1,122,719 1,157,252
08-25-18 4.50 14,521,523 14,548,687
11-01-21 8.00 432,377 472,391
03-01-23 9.00 261,158 290,855
11-01-23 6.00 2,893,366 2,989,565
11-25-23 4.50 14,800,000 14,763,456
06-01-24 9.00 990,709 1,102,449
02-01-26 6.00 148,670 153,334
02-01-26 8.00 362,267 394,292
05-01-26 7.50 1,967,582 2,109,322
12-01-28 7.00 4,510,349 4,770,599
04-01-31 6.50 7,777,027 8,163,807
09-01-31 7.50 4,511,933 4,823,709
11-01-31 6.50 3,365,775 3,509,908
09-01-32 6.00 8,261,511 8,495,155
09-01-32 6.50 3,758,910 3,919,732
09-01-32 7.00 1,762,822 1,861,166
10-01-32 7.00 3,070,050 3,241,323
11-01-32 7.00 2,418,924 2,553,871
01-01-33 4.87 4,621,696 4,727,666
01-01-33 7.00 948,429 1,001,340
02-01-33 4.75 8,752,411(g) 8,933,500
02-01-33 4.87 24,695,650 25,189,208
03-01-33 4.93 8,185,117(g) 8,411,830
04-01-33 4.38 17,269,607(g) 17,421,925
04-01-33 4.59 12,575,198 12,818,199
04-01-33 4.87 14,348,616(g) 14,743,325
05-01-33 4.60 9,920,600(g) 10,112,304
06-01-33 3.75 4,890,993(g) 4,894,218
07-01-33 4.43 6,275,743(g) 6,382,880
07-01-33 4.46 14,635,541 14,682,898
07-01-33 4.97 7,631,179(g) 7,785,750
08-01-33 3.08 1,891,604(g) 1,866,812
08-01-33 3.63 4,908,471(g) 4,856,957
08-01-33 4.12 4,121,746(g) 4,082,346
09-01-33 4.20 4,191,818(g) 4,159,708
Collateralized Mtge Obligation
03-25-13 4.50 8,690,330 8,824,960
10-25-13 5.00 24,793,451 25,648,282
07-25-16 4.00 11,000,000 10,884,176
08-30-18 4.00 22,832,247 22,855,438
08-25-22 5.00 44,000,000 45,525,260
07-25-23 5.50 21,000,000 22,042,896
01-25-29 2.91 13,202,000 13,045,226
06-25-33 5.35 8,522,896(g) 8,718,543
05-25-42 5.30 11,500,000 11,934,901
07-25-42 5.50 31,500,000 32,440,697
08-25-42 4.70 16,000,000 16,235,011
09-25-42 5.00 17,857,544 18,268,580
10-25-42 7.50 7,773,108 8,458,113
See accompanying notes to investments in securities.
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8 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
Interest Only
05-25-12 116.36% $4,813,140(i) $78,468
12-25-12 25.80 14,700,000(i) 1,114,445
11-25-13 7.14 10,950,000(i) 1,567,518
08-01-18 9.01 14,150(i) 2,873
01-15-20 9.36 580,152(i) 145,379
07-25-22 14.16 1,976,093(i) 389,515
Interest Only/Inverse Floater
02-25-32 6.68 13,432,029(i,j) 1,300,985
Principal Only
06-25-21 3.13 87,298(h) 79,049
Govt Natl Mtge Assn
08-15-13 6.00 2,199,828 2,312,308
09-15-14 6.00 14,668,093 15,418,688
10-16-17 2.21 14,510,400 14,031,536
08-20-19 11.00 33,604 37,947
09-16-21 3.23 14,000,000(b) 13,930,000
03-15-33 7.00 6,440,609 6,851,124
06-15-33 7.00 6,125,733 6,529,409
Collateralized Mtge Obligation
11-20-13 5.50 8,428,563 8,647,335
10-16-20 2.93 14,728,940 14,562,377
06-16-21 2.75 14,412,874 14,265,864
Interest Only
03-20-29 5.60 6,900,000(i) 976,595
Total 1,464,607,161
Banks and savings & loans (0.5%)
Washington Mutual
Series 2002-AR15 Cl A5
12-25-32 4.38 14,905,000 14,984,274
Financial services (2.8%)
Centex Home Equity
Series 2001-A Cl A4
07-25-29 6.47 10,000,000 10,447,762
First Franklin Mtge Loan
Series 2002-FF4 Cl 2A2
02-25-33 2.80 11,600,000(k) 11,762,205
LB-UBS Commercial Mtge Trust
Series 2003-C3 Cl A1
05-15-27 2.60 8,566,615 8,401,548
Series 2002 C2 Cl A2
06-15-26 4.90 9,600,000 10,044,217
Residential Asset Securities
Series 2002-KS1 Cl AI4
11-25-29 5.86 23,400,000 24,140,142
Series 2003-QS17
09-25-33 5.50 7,778,343 7,927,441
Series 2003-KS9 Cl A13
01-25-29 3.25 9,000,000 8,983,125
Total 81,706,440
Insurance (0.3%)
Conseco Finance
Series 2000-D Cl A4
12-15-25 8.17 8,561,140 8,846,789
Leisure time & entertainment (0.3%)
KSL Resorts
Series 2003-1A Cl A
05-15-13 1.71 7,400,000(d) 7,399,822
Total bonds
(Cost: $2,905,902,764) $2,902,808,436
See accompanying notes to investments in securities.
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9 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Short-term securities (11.2%)(m)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (7.8%)
Federal Home Loan Bank Disc Nt
01-02-04 1.08% $50,000,000 $49,952,179
Federal Home Loan Mtge Corp Disc Nts
12-05-03 1.06 4,900,000 4,899,035
01-08-04 1.08 8,400,000 8,390,379
01-15-04 1.05 2,200,000 2,197,050
02-04-04 1.06 11,000,000 10,979,144
Federal Natl Mtge Assn Disc Nts
12-03-03 1.07 20,900,000 20,897,158
12-24-03 1.00 17,100,000 17,087,909
12-24-03 1.03 9,100,000 9,093,566
01-28-04 1.07 50,000,000 49,916,200
02-04-04 1.07 25,000,000 24,952,600
02-04-04 1.08 25,000,000 24,952,600
Total 223,317,820
Commercial paper (3.4%)
CRC Funding LLC
12-16-03 1.05 15,000,000(e) 14,992,125
Greyhawk Funding
12-09-03 1.04 30,000,000(e) 29,990,467
Lehman Brothers Holdings
12-01-03 1.05 12,900,000 12,898,871
Morgan Stanley
12-16-03 1.04 20,000,000 19,989,600
Park Avenue Receivables
12-01-03 1.05 21,000,000(e) 20,998,164
Total 98,869,227
Total short-term securities
(Cost: $322,175,412) $322,187,047
Total investments in securities
(Cost: $3,228,078,176)(n) $3,224,995,483
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At Nov. 30, 2003, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$61,316,375.
(c) Security is partially or fully on loan. See Note 5 to the financial
statements.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the board.
(e) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors." This security has been determined to be liquid
under guidelines established by the board.
(f) Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
Collateralized Mortgage Obligations. These securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, or by private
issuers, generally originators and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. The maturity dates shown represent
the original maturity of the underlying obligation. Actual maturity may
vary based upon prepayment activity on these obligations. Unless otherwise
noted, the coupon rates presented are fixed rates.
(g) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Nov. 30, 2003.
(h) 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 Nov. 30, 2003.
- --------------------------------------------------------------------------------
10 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Notes to investments in securities (continued)
(i) 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 Nov. 30, 2003.
(j) 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 market short-term rates. Interest rate disclosed is
the rate in effect on Nov. 30, 2003.
(k) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on Nov. 30,
2003.
(l) 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
Eurodollar, Sept 2004, 90-day $ 3,000,000
Eurodollar, Dec. 2004, 90-day 81,250,000
Eurodollar, March 2005, 90-day 81,250,000
Eurodollar, June 2005, 90-day 81,250,000
Eurodollar, Sept 2005, 90-day 84,500,000
Eurodollar, Dec. 2005, 90-day 67,500,000
Eurodollar, March 2006, 90-day 6,250,000
Eurodollar, June 2006, 90-day 6,250,000
U.S. Treasury Bonds, March 2004, 30-year 36,900,000
U.S. Treasury Notes, March 2004, 2-year 279,200,000
Sale contracts
U.S. Treasury Notes, Dec. 2003, 5-year 412,700,000
U.S. Treasury Notes, Dec. 2003, 10-year 44,700,000
U.S. Treasury Notes, March 2004, 5-year 35,800,000
U.S. Treasury Notes, March 2004, 10-year 19,200,000
(m) At Nov. 30, 2003, cash or short-term securities were designated to cover
open call options written as follows (see Note 6 to the financial
statements):
Issuer Notional Exercise Expiration Value(a)
amount price date
U.S. Treasury Notes March 2004, 10 year $37,500,000 $112 Feb. 2004 $515,625
(n) At Nov. 30, 2003, the cost of securities for federal income tax purposes
was approximately $3,228,078,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 15,450,000
Unrealized depreciation (18,533,000)
-----------
Net unrealized depreciation $ (3,083,000)
------------
- --------------------------------------------------------------------------------
11 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
Nov. 30, 2003 (Unaudited)
Assets
Investments in securities, at value (Note 1)*
(identified cost $3,228,078,176) $3,224,995,483
Accrued interest receivable 16,316,036
Receivable for investment securities sold 2,553,874
U.S. government securities held as collateral (Note 5) 152,210,495
-----------
Total assets 3,396,075,888
-------------
Liabilities
Disbursements in excess of cash on demand deposit 1,670,135
Payable for investment securities purchased 76,852,343
Payable upon return of securities loaned (Note 5) 439,939,495
Accrued investment management services fee 78,483
Other accrued expenses 71,044
Options contracts written, at value (premiums received $763,736) (Note 6) 515,625
-------
Total liabilities 519,127,125
-----------
Net assets $2,876,948,763
==============
*Including securities on loan, at value (Note 5) $ 428,275,456
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
12 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Statement of operations
Government Income Portfolio
Six months ended Nov. 30, 2003 (Unaudited)
Investment income
Income:
Interest $ 49,210,423
Fee income from securities lending (Note 5) 569,005
-------
Total income 49,779,428
----------
Expenses (Note 2):
Investment management services fee 7,890,111
Compensation of board members 9,250
Custodian fees 148,649
Audit fees 18,563
Other 42,227
------
Total expenses 8,108,800
---------
Investment income (loss) -- net 41,670,628
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (4,334,174)
Futures contracts 9,002,127
Options contracts written (Note 6) 174,382
-------
Net realized gain (loss) on investments 4,842,335
Net change in unrealized appreciation (depreciation) on investments (55,725,921)
-----------
Net gain (loss) on investments (50,883,586)
-----------
Net increase (decrease) in net assets resulting from operations $ (9,212,958)
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Statements of changes in net assets
Government Income Portfolio
Nov. 30, 2003 May 31, 2003
Six months ended Year ended
(Unaudited)
Operations
Investment income (loss) -- net $ 41,670,628 $ 108,160,481
Net realized gain (loss) on investments 4,842,335 44,169,376
Net change in unrealized appreciation (depreciation) on investments (55,725,921) 9,722,424
----------- ---------
Net increase (decrease) in net assets resulting from operations (9,212,958) 162,052,281
---------- -----------
Proceeds from contributions 3,052,822 1,115,892,070
Fair value of withdrawals (645,323,807) (257,074,099)
------------ ------------
Net contributions (withdrawals) from partners (642,270,985) 858,817,971
------------ -----------
Total increase (decrease) in net assets (651,483,943) 1,020,870,252
Net assets at beginning of period 3,528,432,706 2,507,562,454
------------- -------------
Net assets at end of period $2,876,948,763 $3,528,432,706
============== ==============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Notes to Financial Statements
Government Income Portfolio
(Unaudited as to Nov. 30, 2003)
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.
- --------------------------------------------------------------------------------
15 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL 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 Nov. 30, 2003, the Portfolio has entered into
outstanding when-issued securities of $61,316,375.
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.
- --------------------------------------------------------------------------------
16 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL 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, market discount and
original issue 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.
Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer
receipt of their compensation. Deferred amounts are treated as though equivalent
dollar amounts had been invested in shares of the underlying Fund or other
American Express mutual funds. The Portfolio's liability for these amounts is
adjusted for market value changes and remains in the Portfolio until distributed
in accordance with the Plan.
The Portfolio 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 $2,453,323,061 and $3,008,285,236, respectively, for the
six months ended Nov. 30, 2003. Realized gains and losses are determined on an
identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS
As of Nov. 30, 2003, investments in securities included securities valued at
$11,188,170 that were pledged as collateral to cover initial margin deposits on
3,410 open purchase contracts and 5,142 open sale contracts. The notional market
value of the open purchase contracts as of Nov. 30, 2003 was $734,370,858 with a
net unrealized loss of $1,139,046. The notional market value of the open sale
contracts as of Nov. 30, 2003 was $571,856,188 with a net unrealized loss of
$8,730,857. See "Summary of significant accounting policies" and "Notes to
investments in securities."
- --------------------------------------------------------------------------------
17 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
5. LENDING OF PORTFOLIO SECURITIES
As of Nov. 30, 2003, securities valued at $428,275,456 were on loan to brokers.
For collateral, the Portfolio received $287,729,000 in cash and U.S. government
securities valued at $152,210,495. Income from securities lending amounted to
$569,005 for the six months ended Nov. 30, 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:
Six months ended Nov. 30, 2003
Puts Calls
Contracts Premiums Contracts Premiums
Balance May 31, 2003 -- $ -- -- $ --
Opened 3,127 2,447,175 5,897 4,922,065
Closed (2,138) (1,927,050) (5,522) (4,158,329)
Exercised (188) (66,811) -- --
Expired (801) (453,314) -- --
------ ---------- ------ ----------
Balance Nov. 30, 2003 -- $ -- 375 $ 763,736
------ ---------- ------ ----------
See "Summary of significant accounting policies."
7. FINANCIAL HIGHLIGHTS
The table below shows certain important financial information for evaluating the
Portfolio's results.
Ratios/supplemental data
Fiscal period ended May 31, 2003(e) 2003 2002 2001 2000
Ratio of expenses to average daily net assets(a) .51%(c) .50% .52% .54% .51%
Ratio of net investment income (loss) to average daily net assets 2.60%(c) 3.35% 4.43% 6.13% 6.11%
Portfolio turnover rate (excluding short-term securities) 77% 218% 267% 366% 674%
Total return(b) (.27%)(d) 5.48% 6.27% 10.56% .50%
Notes to financial highlights
(a) Expense ratio is based on total expenses of the Portfolio before reduction
of earnings credits on cash balances. The ratio does not include feeder
fund expenses.
(b) Total return is based on a calculated Portfolio NAV and does not reflect
payment of a sales charge.
(c) Adjusted to an annual basis.
(d) Not annualized.
(e) Six months ended Nov. 30, 2003 (Unaudited).
- --------------------------------------------------------------------------------
18 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP Short Duration U.S. Government Fund
Nov. 30, 2003 (Unaudited)
Assets
Investment in Portfolio (Note 1) $2,876,827,782
Capital shares receivable 1,341,659
---------
Total assets 2,878,169,441
-------------
Liabilities
Dividends payable to shareholders 1,077,488
Capital shares payable 1,116,136
Accrued distribution fee 90,154
Accrued service fee 851
Accrued transfer agency fee 18,785
Accrued administrative services fee 7,145
Other accrued expenses 514,994
-------
Total liabilities 2,825,553
---------
Net assets applicable to outstanding capital stock $2,875,343,888
==============
Represented by
Capital stock -- $.01 par value (Note 1) $ 5,906,164
Additional paid-in capital 3,047,790,610
Undistributed net investment income 927,312
Accumulated net realized gain (loss) (Note 5) (166,576,229)
Unrealized appreciation (depreciation) on investments (12,703,969)
-----------
Total -- representing net assets applicable to outstanding capital stock $2,875,343,888
==============
Net assets applicable to outstanding shares: Class A $1,441,138,756
Class B $1,230,583,354
Class C $ 48,807,443
Class Y $ 154,814,335
Net asset value per share of outstanding capital stock: Class A shares 296,048,950 $ 4.87
Class B shares 252,744,178 $ 4.87
Class C shares 10,025,869 $ 4.87
Class Y shares 31,797,450 $ 4.87
---------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
19 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Statement of operations
AXP Short Duration U.S. Government Fund
Six months ended Nov. 30, 2003 (Unaudited)
Investment income
Income:
Interest $ 49,207,372
Fee income from securities lending 568,981
-------
Total income 49,776,353
----------
Expenses (Note 2):
Expenses allocated from Portfolio 8,108,495
Distribution fee
Class A 2,004,269
Class B 6,921,087
Class C 271,281
Transfer agency fee 2,076,813
Incremental transfer agency fee
Class A 96,508
Class B 130,967
Class C 7,017
Service fee -- Class Y 82,326
Administrative services fees and expenses 724,106
Compensation of board members 6,508
Printing and postage 311,838
Registration fees 27,884
Audit fees 6,188
Other 21,631
------
Total expenses 20,796,918
Earnings credits on cash balances (Note 2) (27,483)
-------
Total net expenses 20,769,435
----------
Investment income (loss) -- net 29,006,918
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (4,334,417)
Futures contracts 9,002,127
Options contracts written 174,382
-------
Net realized gain (loss) on investments 4,842,092
Net change in unrealized appreciation (depreciation) on investments (55,723,812)
-----------
Net gain (loss) on investments (50,881,720)
-----------
Net increase (decrease) in net assets resulting from operations $(21,874,802)
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
20 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Statements of changes in net assets
AXP Short Duration U.S. Government Fund
Nov. 30, 2003 May 31, 2003
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss) -- net $ 29,006,918 $ 82,662,013
Net realized gain (loss) on investments 4,842,092 44,167,207
Net change in unrealized appreciation (depreciation) on investments (55,723,812) 9,722,377
----------- ---------
Net increase (decrease) in net assets resulting from operations (21,874,802) 136,551,597
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (16,553,146) (45,444,253)
Class B (9,021,599) (30,935,951)
Class C (353,047) (946,842)
Class Y (1,837,390) (5,490,847)
---------- ----------
Total distributions (27,765,182) (82,817,893)
----------- -----------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 278,988,025 1,178,062,138
Class B shares 136,818,687 998,456,600
Class C shares 11,110,042 46,085,175
Class Y shares 34,575,655 92,327,556
Reinvestment of distributions at net asset value
Class A shares 15,028,138 40,761,864
Class B shares 8,492,565 29,157,324
Class C shares 318,646 844,242
Class Y shares 1,503,709 4,979,945
Payments for redemptions
Class A shares (555,517,354) (701,715,252)
Class B shares (Note 2) (471,267,850) (577,985,093)
Class C shares (Note 2) (19,880,892) (18,398,418)
Class Y shares (42,445,259) (125,038,635)
----------- ------------
Increase (decrease) in net assets from capital share transactions (602,275,888) 967,537,446
------------ -----------
Total increase (decrease) in net assets (651,915,872) 1,021,271,150
Net assets at beginning of period 3,527,259,760 2,505,988,610
------------- -------------
Net assets at end of period $2,875,343,888 $3,527,259,760
============== ==============
Undistributed (excess of distributions over) net investment income $ 927,312 $ (314,424)
-------------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
21 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Notes to Financial Statements
AXP Short Duration U.S. Government Fund
(Unaudited as to Nov. 30, 2003)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Government Income Series, 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 Nov. 30, 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.
- --------------------------------------------------------------------------------
22 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL 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.
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.
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 Deferred Compensation Plan (the Plan), non-interested board members may
defer receipt of their compensation. Deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of the Fund or other
American Express mutual funds. The Fund's liability for these amounts is
adjusted for market value changes and remains in the Fund until distributed in
accordance with the Plan.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
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23 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
In addition, AECSC is entitled to charge an annual closed-account fee of $5 per
inactive account, charged on a pro rata basis from the date the account becomes
inactive until the date the account is purged from the transfer agent system
generally within one year. However, the closed account fee is currently not
effective.
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
$3,569,350 for Class A, $1,314,864 for Class B and $21,565 for Class C for the
six months ended Nov. 30, 2003.
During the six months ended Nov. 30, 2003, the Fund's transfer agency fees were
reduced by $27,483 as a result of earnings credits from overnight cash balances.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Nov. 30, 2003
Class A Class B Class C Class Y
Sold 56,829,711 27,896,942 2,265,686 7,047,843
Issued for reinvested distributions 3,069,704 1,734,651 65,096 307,177
Redeemed (113,405,925) (96,104,234) (4,061,663) (8,674,099)
------------ ----------- ---------- ----------
Net increase (decrease) (53,506,510) (66,472,641) (1,730,881) (1,319,079)
----------- ----------- ---------- ----------
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)
----------- ---------- --------- ----------
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24 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
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 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. The Fund had no borrowings
outstanding during the six months ended Nov. 30, 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.
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(g) 2003 2002 2001 2000
Net asset value, beginning of period $4.94 $4.85 $4.78 $4.59 $4.94
Income from investment operations:
Net investment income (loss) .05 .15 .19 .27 .27
Net gains (losses) (both realized and unrealized) (.07) .09 .08 .19 (.27)
Total from investment operations (.02) .24 .27 .46 --
Less distributions:
Dividends from net investment income (.05) (.15) (.20) (.27) (.28)
Distributions from realized gains -- -- -- -- (.07)
Total distributions (.05) (.15) (.20) (.27) (.35)
Net asset value, end of period $4.87 $4.94 $4.85 $4.78 $4.59
Ratios/supplemental data
Net assets, end of period (in millions) $1,441 $1,728 $1,185 $1,047 $1,139
Ratio of expenses to average daily net assets(c) .97%(d) .95% .95% .98% .92%
Ratio of net investment income (loss) to average daily net assets 2.14%(d) 2.90% 4.01% 5.72% 5.71%
Portfolio turnover rate (excluding short-term securities) 77% 218% 267% 366% 674%
Total return(e) (.39%)(f) 4.90% 5.77% 10.19% (.01%)
See accompanying notes to financial highlights.
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25 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2003(g) 2003 2002 2001 2000
Net asset value, beginning of period $4.94 $4.85 $4.78 $4.59 $4.94
Income from investment operations:
Net investment income (loss) .03 .11 .16 .24 .24
Net gains (losses) (both realized and unrealized) (.07) .09 .08 .18 (.28)
Total from investment operations (.04) .20 .24 .42 (.04)
Less distributions:
Dividends from net investment income (.03) (.11) (.17) (.23) (.24)
Distributions from realized gains -- -- -- -- (.07)
Total distributions (.03) (.11) (.17) (.23) (.31)
Net asset value, end of period $4.87 $4.94 $4.85 $4.78 $4.59
Ratios/supplemental data
Net assets, end of period (in millions) $1,231 $1,578 $1,104 $912 $981
Ratio of expenses to average daily net assets(c) 1.72%(d) 1.71% 1.71% 1.73% 1.68%
Ratio of net investment income (loss) to average daily net assets 1.38%(d) 2.15% 3.25% 4.96% 4.95%
Portfolio turnover rate (excluding short-term securities) 77% 218% 267% 366% 674%
Total return(e) (.77%)(f) 4.11% 4.98% 9.36% (.77%)
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2003(g) 2003 2002 2001(b)
Net asset value, beginning of period $4.94 $4.85 $4.78 $4.63
Income from investment operations:
Net investment income (loss) .03 .11 .16 .22
Net gains (losses) (both realized and unrealized) (.07) .09 .08 .14
Total from investment operations (.04) .20 .24 .36
Less distributions:
Dividends from net investment income (.03) (.11) (.17) (.21)
Net asset value, end of period $4.87 $4.94 $4.85 $4.78
Ratios/supplemental data
Net assets, end of period (in millions) $49 $58 $29 $7
Ratio of expenses to average daily net assets(c) 1.73%(d) 1.72% 1.72% 1.73%(d)
Ratio of net investment income (loss) to average daily net assets 1.38%(d) 2.10% 3.09% 4.93%(d)
Portfolio turnover rate (excluding short-term securities) 77% 218% 267% 366%
Total return(e) (.77%)(f) 4.11% 4.98% 8.08%(f)
See accompanying notes to financial highlights.
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26 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2003(g) 2003 2002 2001 2000
Net asset value, beginning of period $4.94 $4.85 $4.78 $4.59 $4.94
Income from investment operations:
Net investment income (loss) .05 .15 .20 .28 .28
Net gains (losses) (both realized and unrealized) (.07) .09 .08 .19 (.28)
Total from investment operations (.02) .24 .28 .47 --
Less distributions:
Dividends from net investment income (.05) (.15) (.21) (.28) (.28)
Distributions from realized gains -- -- -- -- (.07)
Total distributions (.05) (.15) (.21) (.28) (.35)
Net asset value, end of period $4.87 $4.94 $4.85 $4.78 $4.59
Ratios/supplemental data
Net assets, end of period (in millions) $155 $164 $188 $161 $175
Ratio of expenses to average daily net assets(c) .81%(d) .79% .79% .82% .78%
Ratio of net investment income (loss) to average daily net assets 2.31%(d) 3.12% 4.17% 5.89% 5.92%
Portfolio turnover rate (excluding short-term securities) 77% 218% 267% 366% 674%
Total return(e) (.31%)(f) 5.07% 5.93% 10.36% .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.
(g) Six months ended Nov. 30, 2003 (Unaudited).
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27 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
Proxy Voting
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the Web site americanexpress.com/funds; or by
searching the Web site of the Securities and Exchange Commission
http://www.sec.gov. You may view the Fund's voting record for all portfolio
companies whose shareholders meetings were completed the previous quarter on
americanexpress.com/funds or obtain a copy by calling the Fund's administrator,
Board Services Corporation, collect at (612) 330-9283. In addition, after Aug.
1, 2004, information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available at http://www.sec.gov.
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28 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2003 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
(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
Semiannual Report
for the Period Ended
Nov. 30, 2003
AXP U.S. Government Mortgage Fund seeks to provide shareholders with current
income as its primary goal and, as its secondary goal, preservation of capital.
- --------------------------------------------------------------------------------
(logo) (logo)
American AMERICAN
Express(R) EXPRESS(R)
Funds
- --------------------------------------------------------------------------------
Table of Contents
Fund Snapshot 3
Questions & Answers
with Portfolio Management 4
Investments in Securities 8
Financial Statements 12
Notes to Financial Statements 15
Proxy Voting 23
(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.
- --------------------------------------------------------------------------------
2 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Fund Snapshot
AS OF NOV. 30, 2003
PORTFOLIO MANAGER
Portfolio manager Scott Kirby*
Since 2/02
Years in industry 24
* The Fund is managed by a team of portfolio managers led by Scott Kirby.
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 $390.5 million
Number of holdings 147
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT LONG
X HIGH
MEDIUM QUALITY
LOW
SECTOR COMPOSITION
Percentage of portfolio assets
(pie chart)
Mortgage-backed securities 92.3%
Short-term securities 5.9%
U.S. government obligation & agency 1.2%
Financials 0.6%
CREDIT QUALITY SUMMARY
Percentage of portfolio assets excluding cash equivalents
AAA bonds 100%
Individual security ratings are based on information from Standard & Poor's
Corp. and Moody's Investors Service. If a rating is unavailable, the rating is
determined through an internal analysis, if appropriate.
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.
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3 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, Portfolio Manager Scott Kirby discusses the Fund's positioning and
results for the six months ended Nov. 30, 2003.
Q: How did the AXP U.S. Government Mortgage Fund perform for the first half of
the current fiscal year?
A: AXP U.S. Government Mortgage Fund's Class A shares (excluding sales charge)
rose 0.40% for the six month period ended Nov. 30, 2003. Its benchmark, the
Lehman Brothers Mortgage-Backed Securities Index, and its peer group, as
represented by the Lipper U.S. Mortgage Funds Index both rose 0.53%.
Q: What factors most affected Fund performance during the period?
A: During the first four months of the period we saw significant and severe
volatility, therefore mortgage-backed securities struggled during this
time. In the latter part of the period we have seen the fixed income market
settle into a trading range environment where mortgage-backed securities
have done well.
The fixed income market rallied in June fueled by the belief that interest
rates would remain low until the economy showed sustained signs of a
recovery. Then, on June 25, 2003, the Federal Reserve Board moderated their
stance on deflation and cut the targeted federal funds rate by only 0.25%
(one-quarter of a percentage point) to 1.00%, to "add further support for
an economy which it
(bar graph)
PERFORMANCE COMPARISON
For the six-month period ended Nov. 30, 2003
1.00%
0.75%
(bar 2) (bar 2)
0.50% (bar 1) +0.53% +0.53%
+0.40%
0.25%
0.00%
(bar 1) AXP U.S. Government Mortgage Fund Class A (excluding sales charge)
(bar 2) Lehman Brothers Mortgage-Backed Securities Index(1) (unmanaged)
(bar 3) Lipper U.S. Mortgage Funds Index(2)
(1) The 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.
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 U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Questions & Answers
(begin callout quote)> In the latter part of the period we have seen the fixed
income market settle into a trading range environment where mortgage-backed
securities have done well.(end callout quote)
expects to improve over time." The Federal Reserve Board's conservative move led
to a market sell-off, and U.S. Treasury yields rose dramatically by July. July
was also the worst month for mortgage securities in history based on
duration-adjusted excess returns over U.S. Treasuries. Compounding matters was
news of a stabilizing U.S. economy. After peaking in mid-August, U.S. Treasury
yields declined somewhat by the end of the period.
AVERAGE ANNUAL TOTAL RETURNS
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)
as of Nov. 30, 2003
6 month* +0.40% -4.37% -0.17% -5.11% -0.17% -1.16% +0.50% +0.50%
1 year +3.23% -1.68% +2.45% -1.55% +2.45% +2.45% +3.41% +3.41%
Since inception +5.05% +2.24% +4.29% +2.11% +4.27% +4.27% +5.23% +5.23%
as of Dec. 31, 2003
6 months* +1.11% -3.70% +0.72% -4.20% +0.72% -0.26% +1.21% +1.21%
1 year +3.04% -1.86% +2.25% -1.70% +2.25% +2.25% +3.22% +3.22%
Since inception +5.36% +2.66% +4.59% +2.52% +4.57% +4.57% +5.54% +5.54%
* Not annualized.
(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/funds for current information.
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5 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Questions & Answers
Mortgage securities also gained back a portion of their underperformance.
During September we saw a significant sell-off, but the market began to see
an end to high volatility in October and November.
In June, as mortgage securities began to underperform, we adjusted duration
to a neutral position, maintaining that strategy through July. By the end
of August, the Fund was slightly shorter in duration than its benchmark and
is currently positioned in this fashion because we believe that will
benefit the Fund during the economic recovery.
Q: What changes have you made to the Fund?
A: We repositioned the Fund by adding 30-year mortgages and selling securities
with 15-year maturities. We felt there was better value in 30-year
mortgages in anticipation of a flattening yield curve. The Fund continued
to focus on high-quality agency mortgages such as Ginnie Mae, Freddie Mac
and Fannie Mae, with a focus on those offering call protection from early
repayment. However, the Fund has a lower-than-index position in Ginnie Mae
securities because these securities tend to underperform in an economic
recovery.
We also integrated two strategies within the Fund to add relative value.
One is what we call 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. We believe many of the pools
we purchased will add value during a period of rising interest rates and
declining refinancing.
The other driving force of the Fund's performance was what we call our
"dollar roll" strategy. This strategy involved selling a pool of
mortgage-backed 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. This strategy added to the Fund's
return during the period without notably increasing its risk profile.
However, we have recently removed several of these positions to shift the
Fund's stance to more conservative mortgage products.
We continued to emphasize those securities issued by government mortgage
agencies, including Ginnie Mae, Fannie Mae and Freddie Mac. Remaining
assets were invested in bonds and notes issued
- --------------------------------------------------------------------------------
6 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Questions & Answers
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.
Q: How do you intend to manage the Fund in the coming months?
A: As economic growth accelerates, we expect rates to move higher. We will
hold a rather defensive position in mortgage-backed securities as these
changes occur because we anticipate a short time period in which mortgages
may struggle. However, after we pass that period, we anticipate a very
positive environment for mortgages because there will be less call risk in
the market. We believe volatility will be reduced as well going forward. We
intend to keep the Fund's duration shorter than the benchmark and to seek
opportunities to reduce duration further over the coming months. We believe
that mortgages continue to offer good relative value and good risk-adjusted
returns over longer periods of time. Quality issues and security selection
will remain a priority.
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7 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Investments in Securities
AXP U.S. Government Mortgage Fund
Nov. 30, 2003 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (100.1%)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligation & agency (1.3%)
Federal Natl Mtge Assn
11-17-08 3.88% $5,000,000 $4,980,900
Mortgage-backed securities (98.1%)(f)
Federal Home Loan Mtge Corp
01-01-09 7.00 475,764 506,122
03-01-10 8.00 873,109 945,421
06-01-15 7.50 2,802,108 2,985,951
12-01-16 6.50 737,128 779,929
02-01-17 6.50 3,058,661 3,239,343
04-01-17 7.00 1,730,921 1,852,839
10-01-17 8.00 1,125,402 1,223,479
01-01-18 5.50 1,797,511 1,853,606
02-01-18 5.50 1,127,185 1,162,361
05-01-18 5.00 2,827,352 2,877,396
08-01-18 5.00 2,955,161 3,002,301
10-01-18 5.00 691,787 700,836
12-01-18 5.00 3,000,000(b) 3,037,500
03-01-22 6.50 1,368,676 1,431,004
04-01-22 6.50 1,548,143 1,627,939
03-01-30 7.50 594,667 636,391
12-01-30 5.50 2,426,933 2,452,021
06-01-31 8.00 950,010 1,023,073
03-01-32 7.00 414,045 440,868
07-01-32 7.00 820,828 866,094
08-01-32 6.50 5,578,240 5,821,934
09-01-32 6.50 2,315,287 2,416,433
04-01-33 6.00 3,735,102 3,858,839
06-01-33 5.50 2,897,124 2,915,198
07-01-33 6.00 1,475,022 1,516,490
09-01-33 4.56 1,478,584(g) 1,473,853
12-01-33 5.00 11,573,000(b) 11,334,308
Collateralized Mtge Obligation
07-15-16 4.00 2,700,000 2,676,259
09-15-18 4.00 3,500,000 3,188,348
10-15-18 5.00 2,700,000 2,779,627
11-15-18 5.00 5,200,000 5,358,338
02-15-27 5.00 3,200,000 3,266,343
02-15-33 5.50 3,802,067 3,970,689
02-25-42 6.50 4,730,118 5,015,405
Interest Only
02-15-14 10.21 1,800,000(e) 183,600
Interest Only/Inverse Floater
03-15-32 6.83 1,465,627(d,e) 133,350
06-15-18 4.84 1,470,844(d,e) 97,915
Federal Natl Mtge Assn
05-01-08 7.75 585,622 631,997
10-01-09 8.50 294,436 312,985
08-01-10 7.50 1,133,688 1,212,905
04-01-11 6.50 294,386 311,591
11-01-12 4.79 325,000 325,467
08-01-13 4.37 3,990,548 3,847,629
10-01-13 5.11 999,091 1,024,380
08-01-16 6.50 425,930 452,231
11-01-16 7.00 1,059,974 1,138,077
02-01-17 7.00 1,336,067 1,434,714
03-01-17 6.00 1,449,440 1,522,552
03-01-17 6.50 1,035,011 1,098,881
03-01-17 7.00 50,393 53,826
04-01-17 7.50 132,243 141,364
05-01-17 6.00 512,593 535,472
06-01-17 6.50 2,515,484 2,654,185
07-01-17 6.00 7,077,985 7,435,501
07-01-17 7.50 853,867 912,704
08-01-17 5.50 3,628,801 3,755,470
09-01-17 6.50 3,150,507 3,345,759
10-01-17 5.50 938,125 970,793
11-01-17 5.50 3,430,710 3,550,230
12-01-17 5.50 2,715,798 2,810,367
12-01-17 6.00 3,829,478 4,000,396
02-01-18 5.50 3,857,021 3,990,442
04-01-18 5.50 4,583,211(h) 4,741,713
05-01-18 5.00 2,156,935 2,186,496
07-01-18 4.50 454,812 451,645
08-01-18 4.50 7,719,668 7,677,011
10-15-18 4.00 5,000,000 4,432,100
12-01-18 5.00 2,200,000 2,230,152
12-01-18 5.00 11,700,000(b) 11,849,878
09-01-22 6.50 940,384 982,363
See accompanying notes to investments in securities.
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8 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
11-01-22 6.00% $1,181,824 $1,218,962
03-01-23 5.50 2,193,439 2,244,904
07-01-23 5.00 1,178,210 1,173,045
08-01-23 5.50 4,463,981 4,528,771
09-01-23 5.50 3,910,904 3,967,667
10-01-23 5.50 1,955,768 1,984,154
04-01-25 8.00 1,508,766 1,668,757
07-01-28 5.50 2,343,791 2,372,507
08-01-28 5.50 1,379,050 1,395,946
09-01-28 7.50 2,014,313 2,159,385
12-01-28 7.00 2,014,528 2,151,139
01-01-29 6.00 1,798,713 1,851,930
03-01-29 6.50 5,067,674 5,355,350
06-01-29 6.00 6,208,684 6,427,994
06-01-29 7.50 1,832,559 1,955,922
06-25-30 7.50 558,203 607,395
06-01-31 7.00 4,350,458 4,623,320
09-01-31 7.00 3,190,326 3,406,431
09-01-31 7.50 3,502,835 3,744,883
10-01-31 9.50 257,786 286,357
11-01-31 6.50 2,026,979 2,119,098
01-01-32 6.00 2,034,153 2,095,993
01-01-32 6.50 1,220,809 1,282,151
03-01-32 7.00 2,526,030 2,686,770
04-01-32 6.50 3,683,039 3,868,079
04-01-32 7.00 2,950,972 3,131,697
05-01-32 6.50 4,207,410(h) 4,418,912
05-01-32 6.50 1,052,719 1,097,758
05-01-32 7.00 4,220,945 4,478,013
06-01-32 6.50 1,453,321 1,523,403
07-01-32 6.50 681,350 710,501
08-01-32 6.50 2,126,538 2,230,109
09-01-32 6.00 7,007,789 7,204,263
09-01-32 6.50 3,519,604 3,670,187
11-01-32 6.00 5,132,369 5,300,136
12-01-32 6.00 2,510,839 2,580,352
12-01-32 6.50 3,595,656 3,749,493
12-01-32 7.00 810,159 855,356
12-01-32 7.50 974,559 1,039,806
01-01-33 6.00 6,259,401 6,432,692
01-01-33 7.00 1,779,477 1,892,060
02-01-33 4.74 1,750,482(g) 1,786,700
02-01-33 5.50 2,932,031 2,955,229
03-01-33 5.50 2,900,538 2,925,934
03-01-33 6.00 5,847,456(h) 6,023,931
03-01-33 6.50 705,250 735,423
04-01-33 5.50 18,076,437 18,207,725
04-01-33 6.00 6,132,488 6,304,822
05-01-33 5.50 11,206,903 11,290,300
05-01-33 6.00 2,435,199 2,507,839
06-01-33 6.00 2,262,129 2,324,742
07-01-33 5.50 8,678,920 8,740,928
07-01-33 6.00 1,508,239 1,549,985
08-01-33 5.50 1,494,895 1,505,156
08-01-33 6.00 4,649,596 4,778,290
08-30-33 4.82 2,000,000 2,020,000
12-01-33 5.50 4,000,000(b) 4,025,000
Collateralized Mtge Obligation
07-25-16 4.00 2,700,000 2,671,570
08-25-41 7.50 2,663,857 2,898,609
10-25-42 7.50 2,534,709 2,758,080
Interest Only
10-25-09 5.00 9,357,793(e) 138,926
12-25-12 25.80 1,800,000(e) 136,463
Govt Natl Mtge Assn
04-15-29 6.50 577,330 607,420
02-15-30 7.00 550,840 586,111
03-15-30 7.00 633,315 673,866
12-15-31 6.50 863,000 907,783
02-15-32 6.50 1,046,377 1,100,099
12-15-32 6.00 888,078 919,614
05-15-33 6.00 1,334,315 1,381,476
10-15-33 5.50 4,683,855 4,738,164
Total 383,364,512
Banks and savings & loans (0.4%)
Washington Mutual
Series 2003-AR10 Cl A6
10-25-33 4.11 1,500,000 1,493,734
Financial services (0.3%)
Residential Asset Securities
Series 2002-KS1 Cl AI4
11-25-29 5.86 1,000,000 1,031,630
Total bonds
(Cost: $391,046,447) $390,870,776
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
9 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Short-term securities (6.2%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (3.8%)
Federal Home Loan Bank Disc Nt
01-02-04 1.08% $10,000,000 $9,990,435
Federal Natl Mtge Assn Disc Nt
01-14-04 1.07 4,900,000 4,893,673
Total 14,884,108
Commercial paper (2.4%)
Park Avenue Receivables
12-01-03 1.05% $5,000,000(c) $4,999,563
Sigma Finance
12-01-03 1.05 4,400,000(c) 4,399,615
Total 9,399,178
Total short-term securities
(Cost: $24,282,584) $24,283,286
Total investments in securities
(Cost: $415,329,031)(i,j) $415,154,062
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At Nov. 30, 2003, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$30,241,849.
(c) 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.
(d) 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 Nov. 30, 2003.
(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 and amount
of future cash flows as of Nov. 30, 2003.
(f) Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
Collateralized Mortgage Obligations. These securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, or by private
issuers, generally originators and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. The maturity dates shown represent
the original maturity of the underlying obligation. Actual maturity may
vary based upon prepayment activity on these obligations. Unless otherwise
noted, the coupon rates presented are fixed rates.
(g) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Nov. 30, 2003.
(h) 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 Bonds, March 2003, 30-year $ 6,000,000
U.S. Treasury Notes, March 2004, 10-year 7,000,000
Sale contracts
U.S. Treasury Notes, Dec. 2003, 2-year 26,400,000
- --------------------------------------------------------------------------------
10 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Notes to investments in securities (continued)
(i) At Nov. 30, 2003, cash or short-term securities were designated to cover
open call options written as follows (see Note 6 to the financial
statements):
Issuer Notional Exercise Expiration Value(a)
amount price date
U.S. Treasury Notes March 2004, 10-year $10,600,000 $112 Feb. 2004 $145,750
(j) At Nov. 30, 2003, the cost of securities for federal income tax purposes
was approximately $415,329,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 2,716,000
Unrealized depreciation (2,891,000)
----------
Net unrealized depreciation $ (175,000)
-----------
- --------------------------------------------------------------------------------
11 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP U.S. Government Mortgage Fund
Nov. 30, 2003 (Unaudited)
Assets
Investments in securities, at value (Note 1)
(identified cost $415,329,031) $415,154,062
Cash in bank on demand deposit 16,087
Capital shares receivable 476,989
Accrued interest receivable 1,732,915
Receivable for investment securities sold 4,084,053
---------
Total assets 421,464,106
-----------
Liabilities
Dividends payable to shareholders 177,106
Capital shares payable 244,942
Payable for investment securities purchased 111,718
Payable for securities purchased on a forward-commitment basis (Note 1) 30,241,849
Accrued investment management services fee 11,155
Accrued distribution fee 12,741
Accrued transfer agency fee 3,427
Accrued administrative services fee 1,073
Other accrued expenses 52,077
Options contracts written, at value (premiums received $218,201) (Note 6) 145,750
-------
Total liabilities 31,001,838
----------
Net assets applicable to outstanding capital stock $390,462,268
============
Represented by
Capital stock -- $.01 par value (Note 1) $ 759,552
Additional paid-in capital 387,759,922
Undistributed net investment income 242,604
Accumulated net realized gain (loss) 2,075,958
Unrealized appreciation (depreciation) on investments (375,768)
--------
Total -- representing net assets applicable to outstanding capital stock $390,462,268
============
Net assets applicable to outstanding shares: Class A $211,681,732
Class B $160,342,636
Class C $ 18,425,098
Class Y $ 12,802
Net asset value per share of outstanding capital stock: Class A shares 41,185,392 $ 5.14
Class B shares 31,184,547 $ 5.14
Class C shares 3,582,743 $ 5.14
Class Y shares 2,491 $ 5.14
----- ------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
12 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Statement of operations
AXP U.S. Government Mortgage Fund
Six months ended Nov. 30, 2003 (Unaudited)
Investment income
Income:
Interest $ 8,655,976
-----------
Expenses (Note 2):
Investment management services fee 1,136,819
Distribution fee
Class A 297,307
Class B 897,894
Class C 99,006
Transfer agency fee 343,005
Incremental transfer agency fee
Class A 18,606
Class B 24,356
Class C 2,793
Service fee -- Class Y 6
Administrative services fees and expenses 114,078
Compensation of board members 4,875
Custodian fees 42,360
Printing and postage 40,639
Registration fees 52,397
Audit fees 9,500
Other 1,663
-----
Total expenses 3,085,304
Expenses waived/reimbursed by AEFC (Note 2) (180,500)
--------
2,904,804
Earnings credits on cash balances (Note 2) (2,976)
------
Total net expenses 2,901,828
---------
Investment income (loss) -- net 5,754,148
---------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (1,974,643)
Futures contracts 83,811
Options contracts written (Note 6) 95,673
------
Net realized gain (loss) on investments (1,795,159)
Net change in unrealized appreciation (depreciation) on investments (3,875,636)
----------
Net gain (loss) on investments (5,670,795)
----------
Net increase (decrease) in net assets resulting from operations $ 83,353
===========
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Statements of changes in net assets
AXP U.S. Government Mortgage Fund
Nov. 30, 2003 May 31, 2003
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss) -- net $ 5,754,148 $ 9,686,929
Net realized gain (loss) on investments (1,795,159) 5,763,024
Net change in unrealized appreciation (depreciation) on investments (3,875,636) 2,819,705
---------- ---------
Net increase (decrease) in net assets resulting from operations 83,353 18,269,658
------ ----------
Distributions to shareholders from:
Net investment income
Class A (3,283,845) (6,365,488)
Class B (1,793,644) (3,718,149)
Class C (197,974) (383,803)
Class Y (182) (475)
Net realized gain
Class A -- (878,837)
Class B -- (703,993)
Class C -- (67,316)
Class Y -- (57)
---------- -----------
Total distributions (5,275,645) (12,118,118)
---------- -----------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 51,807,908 277,134,067
Class B shares 27,793,520 210,911,273
Class C shares 3,887,364 19,636,847
Class Y shares 500 502
Reinvestment of distributions at net asset value
Class A shares 3,101,754 6,382,377
Class B shares 1,717,336 4,108,191
Class C shares 183,209 404,490
Class Y shares 31 85
Payments for redemptions
Class A shares (91,503,473) (93,565,033)
Class B shares (Note 2) (66,981,644) (45,757,524)
Class C shares (Note 2) (6,941,011) (3,415,045)
Class Y shares -- (132)
---------- -----------
Increase (decrease) in net assets from capital share transactions (76,934,506) 375,840,098
----------- -----------
Total increase (decrease) in net assets (82,126,798) 381,991,638
Net assets at beginning of period 472,589,066 90,597,428
----------- ----------
Net assets at end of period $390,462,268 $472,589,066
============ ============
Undistributed (excess of distributions over) net investment income $ 242,604 $ (235,899)
------------ ------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Notes to Financial Statements
AXP U.S. Government Mortgage Fund
(Unaudited as to Nov. 30, 2003)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Government Income Series, 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 debt
obligations guaranteed as to principal and interest by the U.S. government, its
agencies or instrumentalities. Although the Fund may invest in any U.S.
government securities, it is anticipated that U.S. government securities
representing part ownership in pools of mortgage loans (mortgage-backed
securities) will comprise a large percentage of the Fund's investments.
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 SEMIANNUAL 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.
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 Nov. 30, 2003, the Fund has entered into outstanding
when-issued securities of $30,241,849.
- --------------------------------------------------------------------------------
16 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
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.
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, market discount and
original issue discount using the effective interest method, is accrued daily.
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 Deferred Compensation Plan (the Plan), non-interested board members may
defer receipt of their compensation. Deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of the Fund or other
American Express mutual funds. The Fund's liability for these amounts is
adjusted for market value changes and remains in the Fund until distributed in
accordance with the Plan.
- --------------------------------------------------------------------------------
17 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
In addition, AECSC is entitled to charge an annual closed-account fee of $5 per
inactive account, charged on a pro rata basis from the date the account becomes
inactive until the date the account is purged from the transfer agent system
generally within one year. However, the closed account fee is currently not
effective.
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
$659,224 for Class A, $163,620 for Class B and $13,974 for Class C for the six
months ended Nov. 30, 2003.
For the six months ended Nov. 30, 2003, AEFC and its affiliates waived certain
fees and expenses to 0.98% for Class A, 1.74% for Class B, 1.74% for Class C and
0.80% for Class Y. In addition, AEFC and its affiliates 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.
During the six months ended Nov. 30, 2003, the Fund's custodian and transfer
agency fees were reduced by $2,976 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.
- --------------------------------------------------------------------------------
18 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $368,266,116 and $430,639,471, respectively, for the six
months ended Nov. 30, 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:
Six months ended Nov. 30, 2003
Class A Class B Class C Class Y
Sold 10,047,000 5,395,154 754,895 97
Issued for reinvested distributions 603,134 333,725 35,588 6
Redeemed (17,808,939) (13,017,678) (1,350,351) --
----------- ----------- ---------- ---
Net increase (decrease) (7,158,805) (7,288,799) (559,868) 103
---------- ---------- -------- ---
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
---------- ---------- --------- ----
5. INTEREST RATE FUTURES CONTRACTS
As of Nov. 30, 2003, investments in securities included securities valued at
$525,995 that were pledged as collateral to cover initial margin deposits on 130
open purchase contracts and 132 open sale contracts. The notional market value
of the open purchase contracts as of Nov. 30, 2003 was $14,232,969 with a net
unrealized loss of $227,348. The notional market value of the open sale
contracts as of Nov. 30, 2003 was $28,274,813 with a net unrealized loss of
$45,902. See "Summary of significant accounting policies."
6. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written are as follows:
Six months ended Nov. 30, 2003
Puts Calls
Contracts Premiums Contracts Premiums
Balance May 31, 2003 -- $ -- -- $ --
Opened 211 152,923 1,262 1,247,923
Closed (211) (152,923) (1,156) (1,029,722)
---- -------- ------ ----------
Balance Nov. 30, 2003 -- $ -- 106 $ 218,201
---- --------- ------ -----------
See "Summary of significant accounting policies."
- --------------------------------------------------------------------------------
19 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
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 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. The Fund had no borrowings
outstanding during the six months ended Nov. 30, 2003.
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(k) 2003 2002(b)
Net asset value, beginning of period $5.19 $5.06 $5.01
Income from investment operations:
Net investment income (loss) .08 .19 .04
Net gains (losses) (both realized and unrealized) (.06) .16 .04
Total from investment operations .02 .35 .08
Less distributions:
Dividends from net investment income (.07) (.20) (.03)
Distributions from realized gains -- (.02) --
Total distributions (.07) (.22) (.03)
Net asset value, end of period $5.14 $5.19 $5.06
Ratios/supplemental data
Net assets, end of period (in millions) $212 $251 $58
Ratio of expenses to average daily net assets(c),(e) .98%(d) .99% .95%(d)
Ratio of net investment income (loss) to average daily net assets 2.98%(d) 3.31% 2.98%(d)
Portfolio turnover rate (excluding short-term securities) 85% 227% 200%
Total return(i) .40%(j) 6.93% 1.75%(j)
See accompanying notes to financial highlights.
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20 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2003(k) 2003 2002(b)
Net asset value, beginning of period $5.20 $5.07 $5.01
Income from investment operations:
Net investment income (loss) .06 .15 .03
Net gains (losses) (both realized and unrealized) (.07) .16 .05
Total from investment operations (.01) .31 .08
Less distributions:
Dividends from net investment income (.05) (.16) (.02)
Distributions from realized gains -- (.02) --
Total distributions (.05) (.18) (.02)
Net asset value, end of period $5.14 $5.20 $5.07
Ratios/supplemental data
Net assets, end of period (in millions) $160 $200 $28
Ratio of expenses to average daily net assets(c),(f) 1.74%(d) 1.75% 1.74%(d)
Ratio of net investment income (loss) to average daily net assets 2.21%(d) 2.49% 2.68%(d)
Portfolio turnover rate (excluding short-term securities) 85% 227% 200%
Total return(i) (.17%)(j) 6.12% 1.76%(j)
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2003(k) 2003 2002(b)
Net asset value, beginning of period $5.20 $5.07 $5.01
Income from investment operations:
Net investment income (loss) .06 .15 .03
Net gains (losses) (both realized and unrealized) (.07) .16 .05
Total from investment operations (.01) .31 .08
Less distributions:
Dividends from net investment income (.05) (.16) (.02)
Distributions from realized gains -- (.02) --
Total distributions (.05) (.18) (.02)
Net asset value, end of period $5.14 $5.20 $5.07
Ratios/supplemental data
Net assets, end of period (in millions) $18 $22 $5
Ratio of expenses to average daily net assets(c),(g) 1.74%(d) 1.75% 1.73%(d)
Ratio of net investment income (loss) to average daily net assets 2.23%(d) 2.50% 2.60%(d)
Portfolio turnover rate (excluding short-term securities) 85% 227% 200%
Total return(i) (.17%)(j) 6.12% 1.74%(j)
See accompanying notes to financial highlights.
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21 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2003(k) 2003 2002(b)
Net asset value, beginning of period $5.19 $5.06 $5.01
Income from investment operations:
Net investment income (loss) .09 .19 .04
Net gains (losses) (both realized and unrealized) (.06) .16 .04
Total from investment operations .03 .35 .08
Less distributions:
Dividends from net investment income (.08) (.20) (.03)
Distributions from realized gains -- (.02) --
Total distributions (.08) (.22) (.03)
Net asset value, end of period $5.14 $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%(d) .80% .78%(d)
Ratio of net investment income (loss) to average daily net assets 3.19%(d) 3.68% 2.95%(d)
Portfolio turnover rate (excluding short-term securities) 85% 227% 200%
Total return(i) .50%(j) 7.10% 1.80%(j)
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% for the six
months ended Nov. 30, 2003 and 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% for the six
months ended Nov. 30, 2003 and 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 1.83% for the six
months ended Nov. 30, 2003 and 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 0.90% for the six
months ended Nov. 30, 2003, and 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.
(k) Six months ended Nov. 30, 2003 (Unaudited).
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22 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
Proxy Voting
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the Web site americanexpress.com/funds; or by
searching the Web site of the Securities and Exchange Commission
http://www.sec.gov. You may view the Fund's voting record for all portfolio
companies whose shareholders meetings were completed the previous quarter on
americanexpress.com/funds or obtain a copy by calling the Fund's administrator,
Board Services Corporation, collect at (612) 330-9283. In addition, after Aug.
1, 2004, information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available at http://www.sec.gov.
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23 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2003 SEMIANNUAL REPORT
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(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 for semi-annual reports.
Item 3. Audit Committee Financial Expert. Not applicable for semi-annual
reports.
Item 4. Principal Accountant Fees and Services. Not applicable at this time.
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 9. Submission of matters to a vote of security holders. Not applicable
at this time.
Item 10. 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 11. Exhibits.
(a)(1) Not applicable for semi-annual reports.
(a)(2) 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.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 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 February 3, 2004
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 February 3, 2004
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date February 3, 2004