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: 5/31
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AXP(R)
Short Duration
U.S. Government
Fund
Annual Report
for the Period Ended
May 31, 2004
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.
(logo) (logo)
American AMERICAN
Express(R) EXPRESS
Funds (R)
Table of Contents
Fund Snapshot 3
Questions & Answers
with Portfolio Management 4
The Fund's Long-term Performance 9
Investments in Securities 10
Financial Statements (Portfolio) 15
Notes to Financial Statements (Portfolio) 18
Report of Independent Registered
Public Accounting Firm (Portfolio) 22
Financial Statements (Fund) 23
Notes to Financial Statements (Fund) 26
Report of Independent Registered
Public Accounting Firm (Fund) 36
Federal Income Tax Information 37
Board Members and Officers 39
Proxy Voting 41
(logo) Dalbar
American Express(R) Funds' reports to shareholders have been awarded the
Communications Seal from Dalbar Inc., an independent financial services research
firm. The Seal recognizes communications demonstrating a level of excellence in
the industry.
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2 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Fund Snapshot
AS OF MAY 31, 2004
PORTFOLIO MANAGER
Portfolio manager Scott Kirby*
Since 6/01
Years in industry 25
* 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 $2.308 billion
Number of holdings 173
Average weighted life** 2.3 years
Effective duration*** 1.3 years
Weighted average bond rating AAA
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 graph)
U.S. government obligations & agencies 45.3%
Mortgage-backed securities 44.6%
Short-term securities* 7.2%
CMBS/ABS** 2.1%
Corporate bonds*** 0.8%
* 6.8% of the securities in this category is due to security lending
activity. 0.4% of the short-term securities is the Fund's cash equivalent
position.
** Commercial mortgage-backed securities/Asset-backed securities.
*** Includes 0.5% Banks & brokers and 0.3% Other financial.
CREDIT QUALITY SUMMARY
Percentage of portfolio assets excluding cash equivalents
AAA bonds 100.0%
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."
** Average weighted life is the average number of years that each dollar of
unpaid principal due on a security remains outstanding.
*** Effective duration measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels
of interest rates from two years to 30 years). Positive duration means that
as rates rise, the price decreases, and negative duration means that as
rates rise, the price increases.
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 --- 2004 ANNUAL 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 12 months ended May 31, 2004.
Q: How did AXP Short Duration U.S. Government Fund perform for the 12 months
ended May 31, 2004?
A: AXP Short Duration U.S. Government Fund's Class A shares (excluding sales
charge) fell 0.24% for the 12 months ended May 31, 2004. The Fund's
benchmark, the Lehman Brothers 1-3 Year Government Index, rose 0.66% for the
period. The Fund also underperformed the Lipper Short U.S. Government Funds
Index, the Fund's peer group, which rose 0.07% over the same time frame.
To help keep the Fund competitive with its peers, we implemented a new
expense cap effective June 1, 2004, reducing the maximum level of expenses
borne by Class A shareholders from 0.97% of net assets per fiscal year to a
maximum 0.93% of net assets per year.
Q: What factors most significantly affected Fund performance?
A: The fiscal period was marked by substantial volatility. Uncertainty
regarding the scope of U.S. economic recovery, the potential for rising
interest rates, geopolitical events and the continued threat of terrorism
influenced the fixed income market throughout the 12 months ended May 31,
2004.
The Fund was positioned to do well in a low volatility environment, so it
struggled through some turbulent periods during this past fiscal year. The
Fund's allocation to mortgages also contributed to its underperformance of
the benchmark and peer group for the period. Our security selection within
the mortgage sector of buying pools that historically have had
lower-than-average prepayment risk worked well, however, not well enough to
offset the impact of
(bar graph)
PERFORMANCE COMPARISON
For the year ended May 31, 2004
0.75% (bar 2)
0.50% +0.66%
0.25% (bar 3)
0.00% (bar 1) +0.07%
- -0.25% -0.24%
- -0.50%
(bar 1) AXP Short Duration U.S. Government Fund Class A (excluding sales charge)
(bar 2) Lehman Brothers 1-3 Year Government Index (unmanaged)
(bar 3) Lipper Short U.S. Government Funds Index
(see "The Fund's Long-term Performance" for Index descriptions)
Past performance is no guarantee of future results. The 4.75% sales charge
applicable to Class A shares of the Fund is not reflected in the bar chart; if
reflected, returns would be lower than those shown. The performance of Class B,
Class C and Class Y may vary from that shown above because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
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4 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Questions & Answers
(begin callout quote)> The period was marked by significant volatility as the
market tried to determine what action the Federal Reserve Board (the Fed) would
take with interest rates. (end callout quote)
the volatile environment. The volatility experienced was primarily due to
the market trying to determine what action the Federal Reserve Board (the
Fed) would take with interest rates.
Shortly before the start of the new fiscal year, a Federal Reserve Board
meeting took place in which the Fed introduced the idea
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 May 31, 2004
1 year -0.24% -4.97% -0.99% -4.89% -0.99% -0.99% -0.08% -0.08%
3 years +3.44% +1.78% +2.67% +1.71% +2.67% +2.67% +3.61% +3.61%
5 years +4.05% +3.04% +3.27% +3.09% N/A N/A +4.21% +4.21%
10 years +5.45% +4.94% N/A N/A N/A N/A N/A N/A
Since inception N/A N/A +4.60% +4.60% +4.07% +4.07% +5.55% +5.55%
as of June 30, 2004
1 year -0.20% -4.94% -0.95% -4.85% -0.95% -0.95% -0.04% -0.04%
3 years +3.38% +1.72% +2.60% +1.64% +2.60% +2.60% +3.55% +3.55%
5 years +4.09% +3.08% +3.30% +3.13% N/A N/A +4.25% +4.25%
10 years +5.43% +4.92% N/A N/A N/A N/A N/A N/A
Since inception N/A N/A +4.55% +4.55% +3.97% +3.97% +5.50% +5.50%
The performance information shown represents the past performance and is not a
guarantee of future results. The investment return and principal value of your
investment and returns will fluctuate so that your shares, when redeemed, may be
worth more or less than their original cost. Current performance may be lower or
higher than the performance information shown. You may obtain performance
information current to the most recent month-end by calling (888) 723-8476 or
visiting www.americanexpress.com/funds. You should consider the investment
objectives, risks, and charges and expenses of the Fund carefully before
investing.
(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.
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5 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Questions & Answers
that the probability of deflation exceeded that of inflation over the next
few calendar quarters. The fixed income market rallied, fueled by the belief
that interest rates would remain low and that the Fed would do whatever was
necessary to fight deflation. Two-year U.S. Treasury yields rallied slightly
at the start of fiscal year in June 2003. Then, on June 25, 2003, the Fed
disappointed the market by cutting the targeted federal funds rate by only
0.25% to 1.00%. The Fed's move led to a market sell-off, and U.S. Treasury
yields rose dramatically. The market perceived that deflation was not as big
of a threat as the Fed had led it to believe.
Given the Fed's conservative action, coupled with signs that the economy may
start to recover, the two-year U.S. Treasury yield rose from 1.08% in June
to over 2% by the end of August. During this period, mortgage securities
underperformed dramatically. The performance of the mortgage securities held
in the Fund hurt overall performance. The duration of the Fund during the
back up in rates was not short enough to offset the mortgage impact. From
September 2003 until the beginning of March 2004, two-year U.S. Treasury
yields generally stayed in a relatively tight range of 1.60% to 1.90%
breaking out briefly both higher and lower in rates. Mortgages performed
well during this period. During this period we also set the Fund's duration
slightly short of its benchmark due to the uncertainty of how and when the
economy would recover. This strategy was designed to produce principal
preservation, but it did slightly detract from performance.
Early in 2004, U.S. fixed income markets (as measured by the Lehman Brothers
Aggregate Bond Index) outperformed most stock market indices. Geopolitical
tensions, global terrorist attacks and problems in the war with Iraq shook
investors' confidence in the stock market and increased investors' interest
in the fixed income market. Disappointing employment reports continued,
which caused investors to question whether the U.S. economic recovery was
really back on track. Although signs of an economic recovery were evident,
it began to appear as if the jobs necessary to sustain the recovery were not
developing. Fixed income investors grew concerned as weak employment reports
continued in February (published in March), even though other data suggested
that the jobs would eventually come through. During this period, the Fund
performed well as the mortage securities in the Fund outperformed Treasury
bonds. During this period, we reduced the duration as we expected the
recovery may develop slower than expected.
A long-awaited strong employment report came through in early April to show
that
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6 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Questions & Answers
non-farm payrolls increased by 308,000 in March. Also, the previous two
months payroll numbers were revised upward. Another strong employment
report in April (published in early May) was further evidence that the
recovery picture was in sharper focus.
As the economic recovery developed, we reduced the Fund's duration and
reduced its exposure to mortgage backed securities. To add income, we
increased the weighting in short-term agency securities. We continue to hold
a defensive position as the economic recovery gains strength. Throughout the
period, the Fund participated in the use of derivative instruments. The use
of derivative instruments, such as listed futures, is primarily for hedging
either duration or the yield curve. The Fund will also use listed contracts,
such as eurodollar and swap contracts, to manage spread product exposure in
the portfolio.
Q: What changes did you make to the Fund and how is it currently positioned?
A: Over the fiscal year, we improved the structure of the Fund in an effort to
reduce the effects of market volatility on Fund performance. We continued to
balance the Fund's weightings in U.S. government Treasury, agency and
mortgage-backed securities to provide adequate income within a lower-risk
framework. Mortgage-backed securities comprise approximately half of the
Fund's portfolio. The mortgage securities we held at the beginning of the
fiscal year had characteristics that helped protect these securities from
prepayments. As we approached the end of the fiscal year, the environment
shifted from prepayment risk to duration extension risk. We changed the
mortgage strategy to focus on higher coupons and more seasoned bonds, which
we expect to outperform when the Fed increases rates. We also reduced the
Fund's allocation to U.S. government agencies from overweight to neutral as
agency spreads widened. We have recently added back exposure to agencies to
capture some of the recent spread widening. Throughout the year we continued
to position the Fund with securities that roll down the yield curve. As we
got closer to a rate increase by the Fed, we have started to move the Fund
toward a barbell strategy. In a barbell strategy, the Fund owns positions at
the short and longer end of the yield curve. We favor this strategy when we
believe the yield curve will flatten. We also used a mortgage forward
purchase or roll strategy, which contributed to a portfolio turnover rate of
125% for the period. We have reduced the use of this strategy over the
course of the year.
Through this reporting period, we believed signs were leading toward a
pickup in the economic recovery.
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7 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Questions & Answers
Therefore, our outlook called for the Federal Reserve Board to raise the
target federal funds rate sooner than the view that was priced into the
market. Based on this outlook, we shortened the duration of the Fund and
improved the structure in its mortgage holdings. When job creation did not
materialize as quickly as we expected, the Fund gave up some performance
versus its broad-based benchmark due to its shorter duration. We took
defensive measures to reduce the Fund's exposure to volatility whenever
possible. For example, we maintained approximately the same allocation in
mortgage-backed securities, but improved the characteristics of these
securities to reduce their exposure to volatility. Toward the end of the
period, we started to reduce the Fund's overall exposure to mortage-backed
securities due to valuations.
Q: How do you intend to manage the Fund in the coming months?
A: Looking ahead, we believe the Fed will raise interest rates some time this
summer. The key question is by how much? The fixed income futures market was
already pricing in a total of 100 basis points (1%) in a series of interest
rate increases by the end of December 2004. We have positioned the Fund for
ongoing economic recovery and a moderately higher interest rate environment.
Our continued strategy is to provide added portfolio value with a moderate
amount of risk. We like the balance of risk and performance of the
securities we currently hold. We intend to keep the Fund's duration shorter
than the benchmark until we believe the market has finished pricing in any
Fed increases. We also intend to maintain a defensive, lower allocation to
mortgage-backed securities until their valuations become more attractive.
Finally, we intend to favor a barbell strategy, owning positions at the
short and longer ends of the curve, for the near term, given our view that
the yield curve will flatten once the Fed begins to raise interest rates
over the coming months. As always, we continue to seek attractive buying
opportunities. Quality issues and security selection remain a priority.
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8 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
The Fund's Long-term Performance
This chart illustrates the total value of an assumed $10,000 investment in AXP
Short Duration U.S. Government Fund Class A shares (from 6/1/94 to 5/31/04) as
compared to the performance of two widely cited performance indices, the Lehman
Brothers 1-3 Year Government Index and the Lipper Short U.S. Government Funds
Index. In comparing the Fund's Class A shares to these indices, you should take
into account the fact that the Fund's performance reflects the maximum sales
charge of 4.75%, while such charges are not reflected in the performance of the
indices. Returns for the Fund include the reinvestment of any distribution paid
during each period.
The performance information shown represents the past performance and is not a
guarantee of future results. The value of your investment and returns will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Returns do not reflect taxes payable on distributions and
redemptions. Current performance may be lower or higher than the performance
information shown. You may obtain performance information current to the most
recent month-end by calling (888) 723-8476 or visiting
www.americanexpress.com/funds. Also see "Past Performance" in the Fund's current
prospectus. You should consider the investment objectives, risks, and charges
and expenses of the Fund carefully before investing.
(line graph)
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN AXP SHORT TERM U.S. GOVERNMENT FUND
AXP Short Duration U.S.
Government Fund Class A $ 9,525 $10,348 $10,952 $11,799 $12,761 $13,282 $13,281 $14,634 $15,479 $16,237 $16,198
Lehman Brothers 1-3 Year
Government Index(1) $10,000 $10,736 $11,303 $12,050 $12,890 $13,570 $14,117 $15,538 $16,532 $17,466 $17,581
Lipper Short U.S.
Government Funds Index(2) $10,000 $10,711 $11,219 $11,948 $12,741 $13,354 $13,847 $15,202 $15,999 $16,735 $16,747
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04
(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 and objectives.
Average Annual Total Returns
Class A with Sales Charge as of May 31, 2004
1 year -4.97%
5 years +3.04%
10 years +4.94%
Results for other share classes can be found on page 5.
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9 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Investments in Securities
Government Income Portfolio
May 31, 2004
(Percentages represent value of investments compared to net assets)
Bonds (98.9%)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligations & agencies (48.3%)
Federal Farm Credit Bank
07-17-06 2.13% $15,100,000 $14,853,870
10-02-06 2.38 14,600,000 14,367,130
Federal Home Loan Bank
09-15-06 2.88 17,400,000 17,336,316
Federal Home Loan Mtge Corp
01-15-06 5.25 43,500,000 45,373,197
08-15-06 2.75 92,650,000 92,262,445
08-25-06 3.13 42,000,000 41,855,071
10-27-06 3.00 15,000,000 14,939,214
02-15-07 2.38 43,625,000 42,583,715
09-15-08 3.63 11,543,000 11,362,583
Federal Natl Mtge Assn
02-28-06 2.25 6,770,000 6,726,279
02-15-07 2.38 36,985,000 36,107,420
05-15-08 6.00 17,850,000 19,223,433
Student Loan Mtge Assn
03-15-06 5.25 13,200,000 13,780,510
12-15-32 2.25 16,325,000 16,296,921
03-15-33 2.16 14,800,000 14,785,644
U.S. Treasury
02-15-05 7.50 27,500,000(j) 28,631,158
08-15-05 10.75 85,590,000 94,459,948
11-15-05 5.75 154,125,000 161,951,621
12-31-05 1.88 142,920,000 141,993,307
01-31-06 1.88 46,320,000 45,965,374
11-15-06 3.50 147,700,000(j) 149,996,291
08-15-07 3.25 40,250,000(j) 40,347,486
11-15-09 10.38 48,000,000(j) 49,936,896
Total 1,115,135,829
Commercial mortgage-backed/
Asset-backed securities (2.3%)(f)
Centex Home Equity
Series 2001-A Cl A4
07-25-29 6.47 7,516,421 7,741,269
Conseco Finance
Series 2000-D Cl A4
12-15-25 8.17 3,838,962 3,927,061
KSL Resorts
Series 2003-1A Cl A
05-15-13 1.65 7,400,000(h) 7,403,278
LB-UBS Commercial Mtge Trust
Series 2002 C2 Cl A2
06-15-26 4.90 9,600,000 9,887,829
Residential Asset Securities
Series 2002-KS1 Cl AI4
11-25-29 5.86 23,400,000 23,841,792
Total 52,801,229
Mortgage-backed securities (47.5%)(f,g)
Federal Home Loan Mtge Corp
09-01-09 6.50 496,207 528,658
10-01-10 7.00 1,539,392 1,637,598
03-01-12 7.50 5,900,700 6,336,073
07-01-12 5.50 650,377 669,812
02-01-13 5.00 4,387,044 4,455,420
04-01-13 4.50 2,985,581 2,992,812
04-01-13 5.00 3,945,587 4,007,082
05-01-13 4.50 25,773,152 25,835,991
01-01-14 4.00 13,542,059 13,304,853
05-01-14 4.00 10,065,000 9,644,496
06-01-15 7.50 11,780,508 12,708,135
04-01-17 6.50 34,091,854 36,286,610
07-01-17 6.50 18,661,292 19,721,616
11-01-17 5.50 11,168,015 11,413,923
07-01-24 8.00 888,651 967,673
01-01-25 9.00 1,077,426 1,202,853
06-01-25 8.00 965,816 1,052,595
08-01-25 8.00 247,314 269,535
05-01-26 9.00 1,813,483 2,026,727
See accompanying notes to investments in securities.
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10 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Home Loan Mtge Corp (cont.)
Collateralized Mtge Obligation
12-15-08 6.00% $11,749,234 $12,248,921
03-15-12 5.00 18,880,507 19,319,730
04-15-12 5.00 21,862,191 22,483,733
03-15-15 5.50 40,888,673 41,963,155
10-15-15 5.00 29,046,000 29,835,113
01-15-16 5.00 9,125,000 9,394,964
02-15-16 5.00 28,636,488 29,478,627
06-15-16 7.00 14,961,944 15,918,029
08-15-16 4.00 13,754,798 13,526,240
02-15-20 4.50 15,450,000 15,264,538
Interest Only
12-15-12 12.70 17,890,997(b) 1,408,916
02-15-14 7.40 13,987,282(b) 1,240,112
06-15-18 7.59 11,175,360(b) 702,735
01-01-20 0.00 20,793(b) 3,925
Interest Only/Inverse Floater
03-15-32 0.00 5,359,289(b,e) 505,920
Federal Natl Mtge Assn
09-01-07 8.50 226,651 233,007
10-01-07 7.50 727,283 776,894
12-01-08 7.50 1,176,831 1,249,987
01-01-09 5.74 3,254,080 3,438,083
05-01-09 7.50 2,541,680 2,715,058
10-01-09 7.11 4,315,659 4,797,616
01-01-10 5.00 1,312,175 1,335,051
07-01-11 7.50 1,134,315 1,211,553
11-01-12 5.00 899,512 913,532
12-01-12 5.00 1,420,641 1,446,719
04-01-13 5.50 17,919,691 18,455,181
05-01-13 5.00 22,073,449 22,417,484
05-01-13 5.50 5,566,955 5,728,397
05-01-13 6.00 1,277,018 1,330,271
06-01-13 5.00 3,725,591 3,783,658
08-01-13 4.50 10,430,332 10,455,593
10-01-13 6.00 3,626,135 3,777,352
12-01-13 5.50 1,812,771 1,862,487
01-01-14 5.50 1,080,553 1,110,188
01-01-14 6.00 638,963 665,609
03-01-14 6.00 1,297,022 1,351,110
06-01-14 6.50 11,915,144 12,604,570
08-01-14 6.50 705,240 745,445
08-01-15 5.50 24,300,972 24,967,434
05-01-17 7.00 1,196,253 1,272,963
06-01-17 6.00 18,298,700 19,130,714
06-01-17 6.50 4,644,583 4,904,610
06-01-17 7.00 1,090,010 1,159,906
07-01-17 6.00 37,901,340 39,615,591
08-01-17 5.50 26,166,387 26,854,405
08-01-17 6.00 16,196,902 16,865,515
08-01-17 7.00 1,808,604 1,924,581
09-01-17 6.00 618,876 643,072
11-01-17 5.50 25,587,084 26,220,783
11-01-17 6.00 2,375,460 2,492,313
01-01-18 5.50 2,327,245 2,390,896
02-01-18 5.50 16,712,298 17,166,728
03-01-18 5.50 1,802,041 1,841,407
04-01-18 5.50 14,767,429 15,171,452
05-01-18 5.50 4,683,967 4,791,574
06-01-18 5.50 1,094,106 1,121,972
11-01-21 8.00 352,622 384,977
11-01-23 6.00 2,389,378 2,444,586
06-01-24 9.00 814,178 905,799
02-01-26 6.00 130,704 133,501
05-01-26 7.50 1,428,993 1,532,274
12-01-28 7.00 3,392,232 3,584,642
04-01-31 6.50 5,706,526 5,963,227
09-01-31 7.50 3,749,923 4,014,637
11-01-31 6.50 2,502,279 2,614,808
09-01-32 6.50 3,039,672 3,149,527
10-01-32 7.00 1,893,342 1,990,853
11-01-32 7.00 1,670,609 1,756,649
01-01-33 4.85 3,814,532(i) 3,855,455
02-01-33 4.87 20,518,894(i) 20,783,848
04-01-33 4.37 15,085,012(i) 15,092,403
04-01-33 4.60 11,465,843(i) 11,421,894
04-01-33 4.88 12,410,571(i) 12,859,054
05-01-33 4.60 9,348,516(i) 9,606,474
07-01-33 4.45 5,759,366(i) 5,785,393
07-01-33 4.46 13,972,841(i) 13,912,720
07-01-33 4.97 7,573,289(i) 7,490,106
08-01-33 3.06 1,361,102(i) 1,329,976
08-01-33 4.12 3,764,661(i) 3,708,848
09-01-33 4.20 3,560,857(i) 3,504,697
Collateralized Mtge Obligation
03-25-13 4.50 8,134,093 8,258,551
10-25-13 5.00 23,148,264 23,679,299
12-25-13 4.50 21,428,571 21,842,245
05-25-16 4.00 11,160,000 10,956,191
07-25-16 4.00 11,000,000 10,733,723
10-25-19 4.50 14,800,000 14,723,616
07-25-23 5.50 21,000,000 21,770,750
12-25-26 8.00 5,421,821 5,801,932
06-25-33 5.32 7,120,488(i) 7,225,903
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
11 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
Collateralized Mtge Obligation (cont.)
11-25-33 2.91% $13,202,000 $12,987,468
05-25-34 3.75 10,100,000 10,057,391
06-25-34 5.00 12,750,000 12,895,179
05-25-42 5.30 11,500,000 11,833,900
07-25-42 5.50 28,960,774 29,430,938
10-25-42 7.50 6,432,793 6,870,923
Interest Only
05-25-12 0.00 1,566,840(b) 10,880
12-25-12 13.29 13,483,827(b) 1,022,769
11-25-13 10.08 10,950,000(b) 1,314,963
08-01-18 0.00 11,638(b) 2,128
01-15-20 0.00 479,593(b) 94,920
07-25-22 0.00 1,615,881(b) 273,136
03-25-23 7.94 3,576,566(b) 760,814
Interest Only/Inverse Floater
02-25-32 0.00 9,635,053(b,e) 995,738
Principal Only
06-25-21 2.00 72,884(c) 67,573
Govt Natl Mtge Assn
08-15-13 6.00 1,979,348 2,068,275
09-15-14 6.00 12,338,701 12,895,450
06-15-33 7.00 5,138,588 5,451,721
Collateralized Mtge Obligation
11-20-13 5.50 8,104,540 8,170,702
03-16-19 2.95 11,300,000 10,882,648
07-16-21 3.41 13,500,000 13,238,438
09-16-21 3.23 14,000,000 13,643,756
Interest Only
03-20-29 7.17 6,900,000(b) 834,560
Total 1,097,920,709
Banks and savings & loans (0.5%)
Washington Mutual
Series 2002-AR15 Cl A5
12-25-32 4.38 11,723,375 11,761,142
Financial services (0.3%)
Residential Accredit Loans
Series 2003-QS17 Cl CB7
09-25-33 5.50 6,494,742 6,594,185
Total bonds
(Cost: $2,300,763,328) $2,284,213,094
Option purchased (--%)
Issuer Notional Exercise Expiration Value(a)
amount price date
Put
Sept. U.S. Treasury Nts Futures
10-year $53,800,000 $107 Aug. 2004 $622,063
Total option purchased
(Cost: $1,001,278) $622,063
Short-term securities (7.7%)(k,l)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (4.8%)
Federal Home Loan Mtge Corp Disc Nts
07-27-04 1.04% $20,000,000 $19,965,239
08-10-04 1.13 29,400,000 29,338,260
08-16-04 1.06 4,900,000 4,888,828
Federal Natl Mtge Assn Disc Nts
06-09-04 0.99 3,500,000 3,498,891
07-01-04 1.01 21,000,000 20,981,015
07-21-04 1.03 20,000,000 19,970,327
08-11-04 1.13 11,200,000 11,176,144
Total 109,818,704
Commercial paper (3.0%)
Barton Capital
06-03-04 1.02 1,700,000(d) 1,699,711
Fairway Finance
06-01-04 1.03 10,900,000(d) 10,898,753
HBOS Treasury Services
07-23-04 1.08 6,200,000 6,189,315
Variable Funding Capital
06-01-04 1.03 49,600,000(d) 49,594,323
Total 68,382,102
Total short-term securities
(Cost: $178,194,933) $178,200,806
Total investments in securities
(Cost: $2,479,959,539)(m) $2,463,035,963
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) 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 May 31, 2004.
(c) Principal only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal only is sensitive to the rate of principal payments on the
underlying mortgage assets. A slow (rapid) rate of principal repayments may
have an adverse (positive) effect on yield to maturity. Interest rate
disclosed represents yield based upon the estimated timing of future cash
flows as of May 31, 2004.
(d) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors." This security has been determined to be liquid
under guidelines established by the board. These securities may be resold
in transactions exempt from registration, normally to qualified
institutional buyers. As of May 31, 2004, the value of these securities
amounted to $62,192,787 or 2.7% of net assets.
(e) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on May 31, 2004.
(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) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments as of May 31, 2004:
Security Principal Settlement Proceeds Value
amount date receivable
Federal Natl Mtge Assn
06-01-19 5.50% $75,000,000 6-17-04 $76,022,813 $76,476,600
06-01-19 6.00 26,000,000 6-17-04 26,820,625 26,966,888
(h) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31,
2004.
(i) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on May 31, 2004.
- --------------------------------------------------------------------------------
13 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Notes to investments in securities (continued)
(j) 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 43,750,000
Eurodollar, March 2005, 90-day 43,750,000
Eurodollar, June 2005, 90-day 43,750,000
Eurodollar, Sept. 2005, 90-day 43,750,000
Eurodollar, Dec. 2005, 90-day 43,750,000
U.S. Long Bonds, Sept. 2004, 20-year 16,800,000
U.S. Treasury Notes, Sept. 2004, 2-year 88,800,000
U.S. Treasury Notes, Sept. 2004, 10-year 3,500,000
Sale contracts
U.S. Treasury Notes, June 2004, 5-year 152,700,000
U.S. Treasury Notes, Sept. 2004, 5-year 134,300,000
(k) At May 31, 2004, cash or short-term securities were designated to cover
open put options on futures written as follows (see Note 6 to the financial
statements):
Issuer Notional Exercise Expiration Value(a)
amount price date
U.S. Treasury Notes Sept. 2004, 10 year $53,800,000 $105 Aug. 2004 $319,438
(l) Cash collateral received from security lending activity is invested in
short-term securities and represents 7.2% of this category (see Note 5 to
the financial statements). 0.5% of the short-term securities is the Fund's
cash equivalent position.
(m) At May 31, 2004, the cost of securities for federal income tax purposes was
$2,479,967,726 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 10,615,544
Unrealized depreciation (27,547,307)
-----------
Net unrealized depreciation $(16,931,763)
------------
- --------------------------------------------------------------------------------
14 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
May 31, 2004
Assets
Investments in securities, at value (Note 1)*
(identified cost $2,479,959,539) $2,463,035,963
Accrued interest receivable 13,519,113
Receivable for investment securities sold 104,079,793
U.S. government securities held as collateral (Note 5) 27,785,055
----------
Total assets 2,608,419,924
-------------
Liabilities
Disbursements in excess of cash on demand deposit 354,809
Payable for investment securities purchased 588,984
Payable upon return of securities loaned (Note 5) 194,495,930
Accrued investment management services fee 31,817
Other accrued expenses 76,693
Options contracts written, at value (premiums received $579,598) (Note 6) 319,438
Forward sale commitments, at value (proceeds receivable $102,843,438) (Note 1) 103,443,488
-----------
Total liabilities 299,311,159
-----------
Net assets $2,309,108,765
==============
* Including securities on loan, at value (Note 5) $ 189,616,043
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
15 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Statement of operations
Government Income Portfolio
Year ended May 31, 2004
Investment income
Income:
Interest $ 90,569,238
Fee income from securities lending (Note 5) 791,841
-------
Total income 91,361,079
----------
Expenses (Note 2):
Investment management services fee 14,303,395
Compensation of board members 18,225
Custodian fees 271,153
Audit fees 37,125
Other 77,690
------
Total expenses 14,707,588
----------
Investment income (loss) -- net 76,653,491
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (3,751,368)
Futures contracts (11,185,027)
Options contracts written (Note 6) 992,519
-------
Net realized gain (loss) on investments (13,943,876)
Net change in unrealized appreciation (depreciation) on investments (56,711,856)
-----------
Net gain (loss) on investments (70,655,732)
-----------
Net increase (decrease) in net assets resulting from operations $ 5,997,759
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
16 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Statements of changes in net assets
Government Income Portfolio
Year ended May 31, 2004 2003
Operations
Investment income (loss) -- net $ 76,653,491 $ 108,160,481
Net realized gain (loss) on investments (13,943,876) 44,169,376
Net change in unrealized appreciation (depreciation) on investments (56,711,856) 9,722,424
----------- ---------
Net increase (decrease) in net assets resulting from operations 5,997,759 162,052,281
--------- -----------
Proceeds from contributions 7,986,457 1,115,892,070
Fair value of withdrawals (1,233,308,157) (257,074,099)
-------------- ------------
Net contributions (withdrawals) from partners (1,225,321,700) 858,817,971
-------------- -----------
Total increase (decrease) in net assets (1,219,323,941) 1,020,870,252
Net assets at beginning of year 3,528,432,706 2,507,562,454
------------- -------------
Net assets at end of year $ 2,309,108,765 $3,528,432,706
=============== ==============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
17 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Notes to Financial Statements
Government Income Portfolio
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Government Income Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment company. The Portfolio seeks to
provide a high level of current income and safety of principal consistent with
investment in U.S. government and government agency securities. The Declaration
of Trust permits the Trustees to issue non-transferable interests in the
Portfolio.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to accounting principles generally
accepted in the United States of America requires management to make estimates
(e.g., on assets, liabilities and contingent assets and liabilities) that could
differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and sell put and call
options and write put and call options. This may include purchasing
mortgage-backed security (MBS) put spread options and writing covered MBS call
spread options. MBS spread options are based upon the changes in the price
spread between a specified mortgage-backed security and a like-duration Treasury
security. The risk in writing a call option is that the Portfolio gives up the
opportunity for profit if the market price of the security increases. The risk
in writing a put option is that the Portfolio may incur a loss if the market
price of the security decreases and the option is exercised. The risk in buying
an option is that the Portfolio pays a premium whether or not the option is
exercised. The Portfolio also has the additional risk of being unable to enter
into a closing transaction if a liquid secondary market does not exist. The
Portfolio also may write over-the-counter options where completing the
obligation depends upon the credit standing of the other party.
- --------------------------------------------------------------------------------
18 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts. Risks of entering into futures contracts
and related options include the possibility of an illiquid market and that a
change in the value of the contract or option may not correlate with changes in
the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Short sales
The Portfolio may engage in short sales. In these transactions, the Portfolio
sells a security that it does not own. The Portfolio is obligated to replace the
security that was short by purchasing it at the market price at the time of
replacement or entering into an offsetting transaction with the broker. The
price at such time may be more or less than the price at which the Portfolio
sold the security.
Forward sale commitments
The Portfolio may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are used
to satisfy the commitment.
Unsettled forward sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Valuation of securities" above. The forward sale commitment is
"marked-to-market" daily and the change in market value is recorded by the
Portfolio as an unrealized gain or loss. If the forward sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss. If the Portfolio delivers securities under
the commitment, the Portfolio realizes a gain or a loss from the sale of the
securities based upon the market price established at the date the commitment
was entered into. Forward sale commitments outstanding at period end are listed
in the "Notes to investments in securities."
- --------------------------------------------------------------------------------
19 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore
does not pay any income dividends or capital gain distributions.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including amortization of premium, 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 $3,547,255,294 and $4,809,571,356, respectively, for the
year ended May 31, 2004. Realized gains and losses are determined on an
identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS
As of May 31, 2004, investments in securities included securities valued at
$4,335,700 that were pledged as collateral to cover initial margin deposits on
1,534 open purchase contracts and 2,870 open sale contracts. The notional market
value of the open purchase contracts as of May 31, 2004 was $329,539,938 with a
net unrealized loss of $118,430. The notional market value of the open sale
contracts as of May 31, 2004 was $312,576,772 with a net unrealized gain of
$3,691,475. See "Summary of significant accounting policies" and "Notes to
investments in securities."
- --------------------------------------------------------------------------------
20 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
5. LENDING OF PORTFOLIO SECURITIES
As of May 31, 2004, securities valued at $189,616,043 were on loan to brokers.
For collateral, the Portfolio received $166,710,875 in cash and U.S. government
securities valued at $27,785,055. Cash collateral received is invested in
short-term securities, which are included in the short-term section of the
"Investments in securities." Income from securities lending amounted to $791,841
for the year ended May 31, 2004. The risks to the Portfolio of securities
lending are that the borrower may not provide additional collateral when
required or return the securities when due.
6. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written are as follows:
Year ended May 31, 2004
Puts Calls
Contracts Premiums Contracts Premiums
Balance May 31, 2003 -- $ -- -- $ --
Opened 4,415 3,415,181 7,787 7,020,991
Closed (2,488) (2,220,963) (7,387) (6,960,091)
Exercised (188) (66,811) -- --
Expired (1,201) (547,809) (400) (60,900)
------- ----------- ------ -----------
Balance May 31, 2004 538 $ 579,598 -- $ --
------- ----------- ------ -----------
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, 2004 2003 2002 2001 2000
Ratio of expenses to average daily net assets(a) .51% .50% .52% .54% .51%
Ratio of net investment income (loss) to average daily net assets 2.65% 3.35% 4.43% 6.13% 6.11%
Portfolio turnover rate (excluding short-term securities) 125% 218% 267% 366% 674%
Total return(b) .13% 5.48% 6.27% 10.56% .50%
(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.
- --------------------------------------------------------------------------------
21 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
THE BOARD OF TRUSTEES AND UNITHOLDERS
INCOME TRUST
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of Government Income Portfolio (a
series of Income Trust) as of May 31, 2004, the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period ended May 31, 2004, and the financial highlights
for each of the years in the five-year period ended May 31, 2004. These
financial statements and financial highlights are the responsibility of
portfolio management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 2004, by correspondence with the custodian and
brokers or by other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Government Income Portfolio as of May 31, 2004, and the results of its
operations, changes in its net assets and the financial highlights for each of
the periods stated in the first paragraph above, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
July 20, 2004
- --------------------------------------------------------------------------------
22 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP Short Duration U.S. Government Fund
May 31, 2004
Assets
Investment in Portfolio (Note 1) $2,308,987,264
Capital shares receivable 857,044
-------
Total assets 2,309,844,308
-------------
Liabilities
Dividends payable to shareholders 263,852
Capital shares payable 656,391
Accrued distribution fee 35,607
Accrued service fee 314
Accrued transfer agency fee 9,354
Accrued administrative services fee 2,940
Other accrued expenses 607,064
-------
Total liabilities 1,575,522
---------
Net assets applicable to outstanding capital stock $2,308,268,786
==============
Represented by
Capital stock -- $.01 par value (Note 1) $ 4,788,324
Additional paid-in capital 2,503,316,833
Excess of distributions over net investment income (154,011)
Accumulated net realized gain (loss) (Note 5) (185,992,649)
Unrealized appreciation (depreciation) on investments (13,689,711)
-----------
Total -- representing net assets applicable to outstanding capital stock $2,308,268,786
==============
Net assets applicable to outstanding shares: Class A $1,187,755,557
Class B $ 963,349,248
Class C $ 37,978,432
Class I $ 4,080,900
Class Y $ 115,104,649
Net asset value per share of outstanding capital stock: Class A shares 246,410,623 $ 4.82
Class B shares 199,820,074 $ 4.82
Class C shares 7,878,416 $ 4.82
Class I shares 845,632 $ 4.83
Class Y shares 23,877,655 $ 4.82
---------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
23 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Statement of operations
AXP Short Duration U.S. Government Fund
Year ended May 31, 2004
Investment income
Income:
Interest $ 90,563,413
Fee income from securities lending 791,799
-------
Total income 91,355,212
----------
Expenses (Note 2):
Expenses allocated from Portfolio 14,706,970
Distribution fee
Class A 3,630,705
Class B 12,364,597
Class C 486,007
Transfer agency fee 3,618,082
Incremental transfer agency fee
Class A 170,456
Class B 215,639
Class C 10,296
Service fee -- Class Y 148,878
Administrative services fees and expenses 1,317,413
Compensation of board members 13,125
Printing and postage 656,838
Registration fees 103,534
Audit fees 12,375
Other 32,318
------
Total expenses 37,487,233
Earnings credits on cash balances (Note 2) (50,378)
-------
Total net expenses 37,436,855
----------
Investment income (loss) -- net 53,918,357
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (3,751,220)
Futures contracts (11,184,415)
Options contracts written 992,462
-------
Net realized gain (loss) on investments (13,943,173)
Net change in unrealized appreciation (depreciation) on investments (56,709,554)
-----------
Net gain (loss) on investments (70,652,727)
-----------
Net increase (decrease) in net assets resulting from operations $(16,734,370)
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
24 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Statements of changes in net assets
AXP Short Duration U.S. Government Fund
Year ended May 31, 2004 2003
Operations and distributions
Investment income (loss) -- net $ 53,918,357 $ 82,662,013
Net realized gain (loss) on investments (13,943,173) 44,167,207
Net change in unrealized appreciation (depreciation) on investments (56,709,554) 9,722,377
----------- ---------
Net increase (decrease) in net assets resulting from operations (16,734,370) 136,551,597
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (32,141,993) (45,444,253)
Class B (17,983,822) (30,935,951)
Class C (706,906) (946,842)
Class I (10,055) --
Class Y (3,546,323) (5,490,847)
---------- ----------
Total distributions (54,389,099) (82,817,893)
----------- -----------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 429,411,653 1,178,062,138
Class B shares 218,218,185 998,456,600
Class C shares 15,463,649 46,085,175
Class I shares 4,117,088 --
Class Y shares 58,935,229 92,327,556
Reinvestment of distributions at net asset value
Class A shares 29,532,472 40,761,864
Class B shares 17,136,580 29,157,324
Class C shares 654,048 844,242
Class I shares 9,402 --
Class Y shares 2,825,788 4,979,945
Payments for redemptions
Class A shares (962,651,760) (701,715,252)
Class B shares (Note 2) (819,584,452) (577,985,093)
Class C shares (Note 2) (35,046,321) (18,398,418)
Class I shares (15,452) --
Class Y shares (106,873,614) (125,038,635)
------------ ------------
Increase (decrease) in net assets from capital share transactions (1,147,867,505) 967,537,446
-------------- -----------
Total increase (decrease) in net assets (1,218,990,974) 1,021,271,150
Net assets at beginning of year 3,527,259,760 2,505,988,610
------------- -------------
Net assets at end of year $ 2,308,268,786 $3,527,259,760
=============== ==============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
25 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Notes to Financial Statements
AXP Short Duration U.S. Government Fund
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.
Effective March 4, 2004, the Fund offers an additional class of shares, Class I,
exclusively to certain institutional investors. Class I shares have no sales
charge and are made available through a separate prospectus supplement provided
to investors eligible to purchase the shares. As of May 31, 2004, AEFC and the
AXP Portfolio Builder Funds owned 100% of Class I shares, which represents 0.18%
of the Fund's net assets.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differ among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.
Investment in Government Income Portfolio
The Fund invests all of its assets in Government Income Portfolio (the
Portfolio), a series of Income Trust (the Trust), an open-end investment company
that has the same objectives as the Fund. The Portfolio invests primarily in
U.S. government and government agency securities.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at the value that is equal to
the Fund's proportionate ownership interest in the Portfolio's net assets. The
percentage of the Portfolio owned by the Fund as of May 31, 2004 was 99.99%.
- --------------------------------------------------------------------------------
26 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
All securities held by the Portfolio 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.
Use of estimates
Preparing financial statements that conform to accounting principles generally
accepted in the United States of America requires management to make estimates
(e.g., on assets, liabilities and contingent assets and liabilities) that could
differ from actual results.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to the shareholders. No provision for income or excise
taxes is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $631,155
and accumulated net realized loss has been increased by $631,155.
- --------------------------------------------------------------------------------
27 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
The tax character of distributions paid for the years indicated is as follows:
Year ended May 31, 2004 2003
Class A
Distributions paid from:
Ordinary income $32,141,993 $45,444,253
Long-term capital gain -- --
Class B
Distributions paid from:
Ordinary income 17,983,822 30,935,951
Long-term capital gain -- --
Class C
Distributions paid from:
Ordinary income 706,906 946,842
Long-term capital gain -- --
Class I*
Distributions paid from:
Ordinary income 10,055 N/A
Long-term capital gain -- N/A
Class Y
Distributions paid from:
Ordinary income 3,546,323 5,490,847
Long-term capital gain -- --
* Inception date was March 4, 2004.
As of May 31, 2004, the components of distributable earnings on a tax basis are
as follows:
Undistributed ordinary income $ 983,792
Accumulated long-term gain (loss) $(274,375,673)
Unrealized appreciation (depreciation) $ 73,819,362
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.
- --------------------------------------------------------------------------------
28 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
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.
Class I pays a transfer agency fee at an annual rate per shareholder account of
$1. This amount is included in the transfer agency fee on the statement of
operations.
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
$5,744,897 for Class A, $2,275,430 for Class B and $34,803 for Class C for the
year ended May 31, 2004.
Beginning June 1, 2004, AEFC and its affiliates have agreed to waive certain
fees and expenses until May 31, 2005. Under this agreement, net expenses will
not exceed 0.93% for Class A, 1.68% for Class B, 1.68% for Class C, 0.74% for
Class I and 0.76% for Class Y of the Fund's average daily net assets.
During the year ended May 31, 2004, the Fund's transfer agency fees were reduced
by $50,378 as a result of earnings credits from overnight cash balances.
- --------------------------------------------------------------------------------
29 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2004
Class A Class B Class C Class I* Class Y
Sold 87,696,692 44,598,088 3,158,063 846,839 12,038,535
Issued for reinvested distributions 6,044,611 3,507,313 133,878 1,941 578,270
Redeemed (196,886,140) (167,502,146) (7,170,275) (3,148) (21,855,679)
------------ ------------ ---------- ------- ----------
Net increase (decrease) (103,144,837) (119,396,745) (3,878,334) 845,632 (9,238,874)
------------ ------------ ---------- ------- ----------
*Inception date was March 4, 2004.
Year ended May 31, 2003
Class A Class B Class C Class I Class Y
Sold 239,714,272 203,191,315 9,371,202 N/A 18,774,998
Issued for reinvested distributions 8,291,730 5,931,794 171,739 N/A 1,013,609
Redeemed (142,692,553) (117,558,389) (3,737,168) N/A (25,473,839)
------------ ------------ ---------- ------- ----------
Net increase (decrease) 105,313,449 91,564,720 5,805,773 N/A (5,685,232)
------------ ------------ ---------- ------- ----------
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 year ended May 31, 2004.
5. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund has a capital loss carry-over of
$274,375,673 as of May 31, 2004 that will expire in 2007 through 2012 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.
- --------------------------------------------------------------------------------
30 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
6. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Class A
Per share income and capital changes(a)
Fiscal period ended May 31, 2004 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) .11 .15 .19 .27 .27
Net gains (losses) (both realized and unrealized) (.12) .09 .08 .19 (.27)
Total from investment operations (.01) .24 .27 .46 --
Less distributions:
Dividends from net investment income (.11) (.15) (.20) (.27) (.28)
Distributions from realized gains -- -- -- -- (.07)
Total distributions (.11) (.15) (.20) (.27) (.35)
Net asset value, end of period $4.82 $4.94 $4.85 $4.78 $4.59
Ratios/supplemental data
Net assets, end of period (in millions) $1,188 $1,728 $1,185 $1,047 $1,139
Ratio of expenses to average daily net assets(b) .97% .95% .95% .98% .92%
Ratio of net investment income (loss) to average daily net assets 2.19% 2.90% 4.01% 5.72% 5.71%
Portfolio turnover rate (excluding short-term securities) 125% 218% 267% 366% 674%
Total return(c) (.24%) 4.90% 5.77% 10.19% (.01%)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
31 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2004 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) .07 .11 .16 .24 .24
Net gains (losses) (both realized and unrealized) (.12) .09 .08 .18 (.28)
Total from investment operations (.05) .20 .24 .42 (.04)
Less distributions:
Dividends from net investment income (.07) (.11) (.17) (.23) (.24)
Distributions from realized gains -- -- -- -- (.07)
Total distributions (.07) (.11) (.17) (.23) (.31)
Net asset value, end of period $4.82 $4.94 $4.85 $4.78 $4.59
Ratios/supplemental data
Net assets, end of period (in millions) $963 $1,578 $1,104 $912 $981
Ratio of expenses to average daily net assets(b) 1.72% 1.71% 1.71% 1.73% 1.68%
Ratio of net investment income (loss) to average daily net assets 1.44% 2.15% 3.25% 4.96% 4.95%
Portfolio turnover rate (excluding short-term securities) 125% 218% 267% 366% 674%
Total return(c) (.99%) 4.11% 4.98% 9.36% (.77%)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
32 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2004 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) .07 .11 .16 .22
Net gains (losses) (both realized and unrealized) (.12) .09 .08 .14
Total from investment operations (.05) .20 .24 .36
Less distributions:
Dividends from net investment income (.07) (.11) (.17) (.21)
Net asset value, end of period $4.82 $4.94 $4.85 $4.78
Ratios/supplemental data
Net assets, end of period (in millions) $38 $58 $29 $7
Ratio of expenses to average daily net assets(c) 1.73% 1.72% 1.72% 1.73%(d)
Ratio of net investment income (loss) to average daily net assets 1.44% 2.10% 3.09% 4.93%(d)
Portfolio turnover rate (excluding short-term securities) 125% 218% 267% 366%
Total return(e) (.99%) 4.11% 4.98% 8.08%(f)
(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.
- --------------------------------------------------------------------------------
33 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(b)
Net asset value, beginning of period $4.90
Income from investment operations:
Net investment income (loss) .03
Net gains (losses) (both realized and unrealized) (.07)
Total from investment operations (.04)
Less distributions:
Dividends from net investment income (.03)
Net asset value, end of period $4.83
Ratios/supplemental data
Net assets, end of period (in millions) $4
Ratio of expenses to average daily net assets(c) .63%(d)
Ratio of net investment income (loss) to average daily net assets 2.74%(d)
Portfolio turnover rate (excluding short-term securities) 125%
Total return(e) (.87%)(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was March 4, 2004.
(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.
- --------------------------------------------------------------------------------
34 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2004 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) .12 .15 .20 .28 .28
Net gains (losses) (both realized and unrealized) (.12) .09 .08 .19 (.28)
Total from investment operations -- .24 .28 .47 --
Less distributions:
Dividends from net investment income (.12) (.15) (.21) (.28) (.28)
Distributions from realized gains -- -- -- -- (.07)
Total distributions (.12) (.15) (.21) (.28) (.35)
Net asset value, end of period $4.82 $4.94 $4.85 $4.78 $4.59
Ratios/supplemental data
Net assets, end of period (in millions) $115 $164 $188 $161 $175
Ratio of expenses to average daily net assets(b) .81% .79% .79% .82% .78%
Ratio of net investment income (loss) to average daily net assets 2.35% 3.12% 4.17% 5.89% 5.92%
Portfolio turnover rate (excluding short-term securities) 125% 218% 267% 366% 674%
Total return(c) (.08%) 5.07% 5.93% 10.36% .15%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
35 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
The board and shareholders
AXP GOVERNMENT Income SERIES, Inc.
We have audited the accompanying statement of assets and liabilities of AXP
Short Duration U.S. Government Fund (a series of AXP Government Income Series,
Inc.) as of May 31, 2004, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period ended May 31, 2004, and the financial highlights for each of the
years in the five-year period ended May 31, 2004. These financial statements and
the financial highlights are the responsibility of fund management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of AXP
Short Duration U.S. Government Fund as of May 31, 2004, and the results of its
operations, changes in its net assets and the financial highlights for each of
the periods stated in the first paragraph above, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
July 20, 2004
- --------------------------------------------------------------------------------
36 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Federal Income Tax Information
(UNAUDITED)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
AXP Short Duration U.S. Government Fund
Fiscal year ended May 31, 2004
Class A
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.00850
July 24, 2003 0.00805
Aug. 22, 2003 0.00800
Sept. 22, 2003 0.00800
Oct. 23, 2003 0.00887
Nov. 21, 2003 0.00900
Dec. 22, 2003 0.01535
Jan. 26, 2004 0.00920
Feb. 25, 2004 0.00883
March 26, 2004 0.00900
April 26, 2004 0.00850
May 26, 2004 0.00838
Total distributions $0.10968
Class B
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.00530
July 24, 2003 0.00488
Aug. 22, 2003 0.00506
Sept. 22, 2003 0.00486
Oct. 23, 2003 0.00572
Nov. 21, 2003 0.00606
Dec. 22, 2003 0.01221
Jan. 26, 2004 0.00565
Feb. 25, 2004 0.00586
March 26, 2004 0.00595
April 26, 2004 0.00537
May 26, 2004 0.00538
Total distributions $0.07230
- --------------------------------------------------------------------------------
37 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Class C
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.00529
July 24, 2003 0.00486
Aug. 22, 2003 0.00503
Sept. 22, 2003 0.00482
Oct. 23, 2003 0.00570
Nov. 21, 2003 0.00604
Dec. 22, 2003 0.01218
Jan. 26, 2004 0.00563
Feb. 25, 2004 0.00598
March 26, 2004 0.00593
April 26, 2004 0.00535
May 26, 2004 0.00535
Total distributions $0.07216
Class I
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
March 26, 2004 0.01165
April 26, 2004 0.00960
May 26, 2004 0.00943
Total distributions $0.03068
Class Y
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.00918
July 24, 2003 0.00873
Aug. 22, 2003 0.00863
Sept. 22, 2003 0.00868
Oct. 23, 2003 0.00955
Nov. 21, 2003 0.00963
Dec. 22, 2003 0.01603
Jan. 26, 2004 0.00996
Feb. 25, 2004 0.00945
March 26, 2004 0.00965
April 26, 2004 0.00918
May 26, 2004 0.00902
Total distributions $0.11769
- --------------------------------------------------------------------------------
38 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Board Members and Officers
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. Each member oversees 15
Master Trust portfolios and 86 American Express mutual funds. Board members
serve until the next regular shareholders' meeting or until he or she reaches
the mandatory retirement age established by the board.
Independent Board Members
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Arne H. Carlson Board member Chair, Board Services Corporation
901 S. Marquette Ave. since 1999 (provides administrative services to
Minneapolis, MN 55402 boards). Former Governor of Minnesota
Age 69
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan
901 S. Marquette Ave. since 2002 Corporation (engineering and Materials Company, Inc.
Minneapolis, MN 55402 construction) since 1998 (construction
Age 66 materials/chemicals)
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Livio D. DeSimone Board member Retired Chair of the Board and Chief Cargill, Incorporated
30 Seventh Street East since 2001 Executive Officer, Minnesota Mining and (commodity merchants and
Suite 3050 Manufacturing (3M) processors), General Mills,
St. Paul, MN 55101-4901 Inc. (consumer foods),
Age 70 Vulcan Materials Company
(construction materials/
chemicals), Milliken &
Company (textiles and
chemicals), and Nexia
Biotechnologies, Inc.
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 69
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Stephen R. Lewis, Jr.* Board member Retired President and Professor of Valmont Industries, Inc.
901 S. Marquette Ave. since 2002 Economics, Carleton College (manufactures irrigation
Minneapolis, MN 55402 systems)
Age 65
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
* Interested person of AXP Partners International Aggressive Growth Fund by
reason of being a security holder of FleetBoston Financial Corporation,
parent company of Columbia Wanger Asset Management, L.P., one of the fund's
subadvisers.
- --------------------------------------------------------------------------------
39 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
Independent Board Members (continued)
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Alan K. Simpson Board member Former three-term United States Senator
1201 Sunshine Ave. since 1997 for Wyoming
Cody, WY 82414
Age 72
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Alison Taunton-Rigby Board member since Founder and Chief Executive Officer,
901 S. Marquette Ave. 2002 RiboNovix, Inc. since 2004; President,
Minneapolis, MN 55402 Forester Biotech since 2000; prior to
Age 60 that, President and CEO, Aquila
Biopharmaceuticals, Inc.
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Board Member Affiliated with AEFC**
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
William F. Truscott Board member Senior Vice President - Chief
53600 AXP Financial Center since 2001, Vice Investment Officer of AEFC since 2001.
Minneapolis, MN 55474 President since Former Chief Investment Officer and
Age 43 2002 Managing Director, Zurich Scudder
Investments
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
** Interested person by reason of being an officer, director and/or employee of
AEFC.
- --------------------------------------------------------------------------------
40 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL REPORT
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the board. In addition to Mr. Truscott, who is vice president, the
Fund's other officers are:
Other Officers
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Jeffrey P. Fox Treasurer since Vice President - Investment Accounting,
50005 AXP Financial Center 2002 AEFC, since 2002; Vice President -
Minneapolis, MN 55474 Finance, American Express Company,
Age 49 2000-2002; Vice President - Corporate
Controller, AEFC, 1996-2000
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Paula R. Meyer President since Senior Vice President and General
596 AXP Financial Center 2002 Manager - Mutual Funds, AEFC, since
Minneapolis, MN 55474 2002; Vice President and Managing
Age 50 Director - American Express Funds,
AEFC, 2000-2002; Vice President, AEFC,
1998-2000
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General Counsel,
Minneapolis, MN 55402 and Secretary
Age 65 since 1978
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling (800) 862-7919.
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 August
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.
- --------------------------------------------------------------------------------
41 --- AXP SHORT DURATION U.S. GOVERNMENT FUND --- 2004 ANNUAL 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.This report must be accompanied or preceded by the
Fund's current prospectus. Distributed by American Express Financial Advisors
Inc. Member NASD. American Express Company is separate from American Express
Financial Advisors Inc. and is not a broker-dealer.
AXP(R)
U.S. Government
Mortgage
Fund
Annual Report
for the Period Ended
May 31, 2004
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
Funds (R)
Table of Contents
Fund Snapshot 3
Questions & Answers
with Portfolio Management 4
The Fund's Long-term Performance 9
Investments in Securities 10
Financial Statements 14
Notes to Financial Statements 17
Report of Independent Registered
Public Accounting Firm 29
Federal Income Tax Information 30
Board Members and Officers 33
Proxy Voting 35
(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 -- 2004 ANNUAL REPORT
Fund Snapshot
AS OF MAY31, 2004
PORTFOLIO MANAGER
Portfolio manager Scott Kirby*
Since 2/02
Years in industry 25
* 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 $320.6 million
Number of holdings 152
Average weighted life** 4.8 years
Effective duration*** 3.4 years
Weighted average bond rating AAA
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 88.0%
Short-term securities 5.6%
U.S. government obligations & agencies 5.1%
CMBS/ABS* 1.3%
* Commercial mortgage-backed securities/Asset-backed securities
Credit Quality Summary
Percentage of portfolio assets excluding cash equivalents
AAA bonds 100.0%
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."
** Average weighted life is the average number of years that each dollar of
unpaid principal due on a security remains outstanding.
*** Effective duration measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels
of interest rates from two years out to 30 years). Positive duration means
that as rates rise, the price decreases, and negative duration means that
as rates rise, the price increases.
Individual securities owned by the Fund, but not shares of the Fund, are
guaranteed by the U.S. government, its agencies or instrumentalities as to
timely payments of principal and interest. The Fund's yield and share price are
not guaranteed, and may vary with market conditions.
Fund holdings are subject to change.
- --------------------------------------------------------------------------------
3 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, Portfolio Manager Scott Kirby discusses the Fund's positioning and
results for the 12 months ended May 31, 2004.
Q: How did the AXP U.S. Government Mortgage Fund perform for the current fiscal
year?
A: AXP U.S. Government Mortgage Fund's Class A shares (excluding sales charge)
rose 1.27% for the 12-month period ended May 31, 2004. In comparison, the
Lehman Brothers Mortgage-Backed Securities Index advanced 1.50%. The Fund's
performance was slightly less than that of its peer group, represented by
the Lipper U.S. Mortgage Funds Index, which rose 1.33% over the same time
frame.
To help keep the Fund competitive with its peers, we revised the Fund's
expense cap effective June 1, 2004, reducing the maximum level of expenses
borne by Class A shareholders from 0.99% of net assets per fiscal year to a
maximum 0.945% per year.
Q: What factors most affected Fund performance during the period?
A: The hallmark of this fiscal year was volatility. Significant and severe
volatility cast a shadow over the fixed income market, which tends to hurt
the performance of mortgage-backed securities. The Fund, however, was well
positioned through its security selection to offset much of the impact of
the environment. The fixed income market rallied in June fueled by the
expectation that interest rates would remain low -- and move even lower --
until the economy showed sustained signs of a recovery. Then on June 25,
2003, at the Federal Open Market Committee meeting, the Federal Reserve
Board (the Fed) modified its stance on deflation and cut the targeted
federal funds rate by only 0.25% (one-quarter of a percentage point) to
1.00%. The market's expectation was
(bar chart)
PERFORMANCE COMPARISON
For the year ended May 31, 2004
(bar 2)
1.5% (bar 1) +1.50% (bar 3)
+1.27% +1.33%
1.2%
0.9%
0.6%
0.3%
0.0%
(bar 1) AXP U.S. Government Mortgage Fund A (excluding sales charge)
(bar 2) Lehman Brothers Mortgage-Backed Securities Index (unmanaged)
(bar 3) Lipper U.S. Mortgage Funds Index
(see "The Fund's Long-term Performance" for Index descriptions)
Past performance is no guarantee of future results. The 4.75% sales charge
applicable to Class A shares of the Fund is not reflected in the bar chart; if
reflected, returns would be lower than those shown. The performance of Class B,
Class C and Class Y may vary from that shown above because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
- --------------------------------------------------------------------------------
4 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Questions & Answers
(begin callout quote)> We have positioned the Fund for an ongoing U.S.
economic recovery and a higher interest rate environment. (end callout quote)
for a deeper cut, and the market's perception was now that deflation was not
as big a threat as the Fed had led us to believe. This led to a market
sell-off. Given the Fed's conservative action, together with signs that the
economy may start to recover, 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. The fourth
calendar quarter of 2003 was a period of relative stability in the fixed
income markets. During periods like this, mortgages tend to do well as was
the case during this 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 May 31, 2004
1 year +1.27% -3.54% +0.52% -3.35% +0.52% +0.52% +1.45% +1.45%
Since inception +4.32% +2.13% +3.65% +1.96% +3.64% +3.64% +4.50% +4.50%
as of June 30, 2004
1 year +1.70% -3.14% +1.14% -2.76% +1.14% +1.14% +1.88% +1.88%
Since inception +4.47% +2.35% +3.79% +2.17% +3.78% +3.78% +4.65% +4.65%
The performance information shown represents the past performance and is not a
guarantee of future results. The investment return and principal value of your
investment and returns will fluctuate so that your shares, when redeemed, may be
worth more or less than their original cost. Current performance may be lower or
higher than the performance information shown. You may obtain performance
information current to the most recent month-end by calling (888) 723-8476 or
visiting www.americanexpress.com/funds. You should consider the investment
objectives, risks, and charges and expenses of the Fund carefully before
investing.
(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.
- --------------------------------------------------------------------------------
5 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Questions & Answers
We adjusted the Fund's duration to a neutral position in June, as mortgage
securities began to underperform, and maintained that strategy through July.
By the end of August, the Fund was slightly shorter in duration than its
benchmark. We believed that the shorter duration, a somewhat defensive
positioning, would benefit performance during the economic recovery, and we
held on to the Fund's shorter duration and conservative positioning going
into January. We continued to believe signs were leading toward a pickup in
the economic recovery. Therefore, our outlook called for the Fed to raise
the target federal funds rate sooner than the view that was priced into the
market. Based on this outlook, we shortened the duration of the Fund and
improved the structure in its mortgage holdings. When job creation did not
materialize as quickly as we expected, the Fund gave up some performance
versus the broad-based benchmarks due to its shorter duration.
Early in 2004, the U.S. fixed income markets (as measured by the Lehman
Brothers Aggregate Bond Index) outperformed most stock market indices.
Geopolitical tensions, global terrorist attacks and problems in the war with
Iraq shook investors' confidence in the stock market and increased
investors' interest in the fixed income market. Disappointing employment
reports continued in the early months of 2004, which caused investors to
question whether the U.S. economic recovery was really back on track.
Although signs of an economic recovery were evident, it began to appear as
if the jobs necessary to sustain the recovery were not developing. Fixed
income investors grew concerned as weak employment reports continued in
February (published in March), even though other data suggested that the
jobs would eventually come through. A long-awaited strong employment report
came through in March (published in early April) to show that non-farm
payrolls increased by 308,000. Also, the previous two months payroll numbers
were revised upward. Another strong employment report in April (published in
early May)
- --------------------------------------------------------------------------------
6 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Questions & Answers
was further evidence that the recovery picture was now in sharper focus.
This, along with an unexpectedly high reading on the Consumer Price Index
(CPI), contributed to bond yields rising sharply at the end of the reporting
period.
Throughout the period, the Fund focused on higher coupon mortgage-backed
securities that would outperform if there were an increase in interest
rates. However, the securities were carefully selected to also reduce the
risk of prepayments if the increase in interest rates did not materialize.
The Fund also participated in the use of derivative instruments this period.
The use of derivative instruments, such as listed futures, is primarily for
hedging either duration or the yield curve. The Fund will also use listed
contracts, such as eurodollar and swap contracts, to manage spread product
exposure in the portfolio.
Q: What changes have you made to the Fund?
A: Early in the period, 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. We
continued to emphasize those securities issued by government mortgage
agencies, including Ginnie Mae, Fannie Mae and Freddie Mac. However, the
Fund has a lower-than-index position in Ginnie Mae securities because we
believe other sectors within the mortgage-backed sucurities market offer
better relative value.
Throughout the year, we positioned the Fund to use both specified securities
as well as forward purchases also known as mortgage rolls. Our effective use
of this roll strategy contributed to a portfolio turnover rate of 163% for
the fiscal period.
We reduced the duration of the Fund early in 2004 and continued to hold its
duration short of the index. There have been no major shifts in asset
allocation. We continue to remain slightly defensive by reducing the Fund's
exposure to volatility, when possible.
- --------------------------------------------------------------------------------
7 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Questions & Answers
Q: How do you intend to manage the Fund in the coming months?
A: Looking ahead, we believe the Fed will raise interest rates some time this
summer. The key question is: by how much? The fixed income futures market
was already pricing in a total of 100 basis points (1%) in a series of
interest rate increases by the end of December 2004. We have positioned
the Fund for an ongoing U.S. economic recovery and a higher interest rate
environment.
We intend to keep the Fund's duration shorter than its benchmark until we
believe the market has finished pricing in any Fed increases. As always, we
continue to seek attractive buying opportunities, quality issues and
security selection remain a priority.
- --------------------------------------------------------------------------------
8 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
The Fund's Long-term Performance
This chart illustrates the total value of an assumed $10,000 investment in AXP
U.S. Government Mortgage Fund Class A shares (from 3/1/02 to 5/31/04) as
compared to the performance of two widely cited performance indices, Lehman
Brothers Mortgage-Backed Securities Index and the Lipper U.S. Mortgage Funds
Index. In comparing the Fund's Class A shares to these indices, you should take
into account the fact that the Fund's performance reflects the maximum sales
charge of 4.75%, while such charges are not reflected in the performance of the
indices. Returns for the Fund include the reinvestment of any distribution paid
during each period.
The performance information shown represents the past performance and is not a
guarantee of future results. The value of your investment and returns will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Returns do not reflect taxes payable on distributions and
redemptions. Current performance may be lower or higher than the performance
information shown. You may obtain performance information current to the most
recent month-end by calling (888) 723-8476 or visiting
www.americanexpress.com/funds. Also see "Past Performance" in the Fund's current
prospectus. You should consider the investment objectives, risks, and charges
and expenses of the Fund carefully before investing.
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN AXP U.S. GOVERNMENT MORTGAGE FUND
AXP U.S. Government Mortgage
Fund Class A $ 9,525 $ 9,692 $10,363 $10,495
Lehman Brothers Mortgage-
Backed Securities Index(1) $10,000 $10,169 $10,822 $10,984
Lipper U.S. Mortgage Funds
Index $10,000 $10,128 $10,744 $10,887
3/1/02 5/31/02 5/31/03 5/31/04
(1) Lehman Brothers Mortgage-Backed Securities Index, an unmanaged index,
includes 15- and 30-year fixed-rate securities backed by mortgage pools of
the Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), and Federal National Mortgage Association
(FNMA).
(2) The Lipper U.S. Mortgage Funds Index, published by Lipper Inc., includes
the 10 largest funds that are generally similar to the Fund, although some
funds in the index may have somewhat different invesmtent policies or
objectives.
Average Annual Total Returns
Class A with Sales Charge as of May 31, 2004
1 year -3.54%
Since inception (2/14/02) +2.13
Results for other share classes can be found on page 5.
- --------------------------------------------------------------------------------
9 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Investments in Securities
AXP U.S. Government Mortgage Fund
May 31, 2004
(Percentages represent value of investments compared to net assets)
Bonds (99.9%)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligations & agencies (5.4%)
Federal Home Loan Mtge Corp
06-01-19 4.50% $10,400,000(b) $10,153,000
Federal Natl Mtge Assn
06-01-19 4.50 1,000,000(b) 976,250
U.S. Treasury
05-15-09 3.88 4,000,000 4,014,360
05-15-14 4.75 2,075,000 2,090,563
Total 17,234,173
Commercial mortgage-backed/Asset-backed
securities (1.4%)(f)
Bank of America Alternative Loan Trust
Series 2003-11 Cl 1A1
01-25-34 6.00 1,044,677 1,052,439
CS First Boston Mtge Securities
Series 2003-8 Cl 5A1
04-25-33 6.50 1,184,436(h) 1,207,532
Structured Asset Securities
Series 2003-33H Cl 1A1
10-25-33 5.50 2,419,876 2,373,896
Total 4,633,867
Mortgage-backed securities (93.1%)(f)
Federal Home Loan Mtge Corp
01-01-09 7.00 369,606 393,632
03-01-10 8.00 634,646 683,024
06-01-15 7.50 2,332,605 2,516,280
12-01-16 6.50 624,301 663,255
02-01-17 6.50 2,503,351 2,664,630
04-01-17 7.00 1,306,734 1,401,670
10-01-17 8.00 833,887 906,082
01-01-18 5.50 1,709,252 1,746,887
02-01-18 5.50 1,050,535 1,073,667
05-01-18 5.00 2,642,345 2,661,438
08-01-18 5.00 2,750,292 2,763,340
10-01-18 5.00 3,471,176 3,477,298
06-01-19 5.00 3,000,000(b) 2,995,314
03-01-22 6.50 812,921 846,267
04-01-22 6.50 1,286,200 1,349,111
03-01-30 7.50 496,196 533,324
12-01-30 5.50 2,074,593 2,066,948
06-01-31 8.00 826,614 892,821
03-01-32 7.00 328,649 349,054
07-01-32 7.00 589,593 619,393
08-01-32 6.50 4,192,497 4,343,409
09-01-32 6.50 1,769,491 1,833,185
04-01-33 6.00 3,443,398 3,523,968
06-01-33 5.50 2,710,902 2,691,350
07-01-33 6.00 1,272,442 1,302,518
08-01-33 5.00 1,870,601 1,799,850
09-01-33 4.56 1,428,993(e) 1,423,805
09-01-33 5.00 2,893,578 2,784,134
Collateralized Mtge Obligation
10-15-18 5.00 2,700,000 2,727,859
11-15-18 5.00 5,200,000 5,253,400
11-15-21 5.00 1,000,000 1,021,885
02-15-27 5.00 3,200,000 3,217,724
11-15-28 4.50 1,663,442 1,655,647
02-15-33 5.50 3,665,785 3,778,068
Interest Only
02-15-14 7.40 1,740,392(g) 154,303
06-15-18 7.59 1,273,142(g) 80,058
10-15-22 14.56 1,733,193(g) 192,800
Interest Only/Inverse Floater
03-15-32 0.00 1,030,582(d,g) 97,288
Federal Natl Mtge Assn
05-01-08 7.75 453,317 486,293
10-01-09 8.50 211,517 221,962
08-01-10 7.50 909,398 971,972
04-01-11 6.50 263,441 278,832
08-01-16 6.50 384,163 408,630
11-01-16 7.00 953,757 1,023,928
02-01-17 7.00 1,306,203 1,402,348
03-01-17 6.00 1,264,591 1,321,839
03-01-17 6.50 982,512 1,045,074
03-01-17 7.00 49,249 52,438
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
10 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
04-01-17 7.50% $107,624 $114,691
05-01-17 6.00 426,161 443,923
07-01-17 6.00 6,195,655 6,475,676
08-01-17 5.50 3,229,080 3,313,985
09-01-17 6.50 2,907,001 3,090,471
10-01-17 5.50 849,724 871,731
11-01-17 5.50 3,134,516 3,215,770
12-01-17 5.50 2,525,073 2,590,778
12-01-17 6.00 3,137,635 3,260,304
02-01-18 5.50 3,449,156 3,541,456
04-01-18 5.50 4,092,543 4,201,765
05-01-18 5.00 2,034,349 2,036,468
06-01-18 5.00 1,970,040 1,981,887
07-01-18 4.50 435,169 426,294
08-01-18 4.50 6,327,011(h) 6,196,517
08-01-18 4.50 992,215 972,050
10-01-18 5.00 2,846,759 2,849,723
12-01-18 5.00 2,105,754 2,113,178
02-01-19 5.00 1,685,394 1,687,149
09-01-22 6.50 917,202 954,968
11-01-22 6.00 1,060,287 1,089,385
03-01-23 5.50 2,070,199 2,100,812
07-01-23 5.00 1,128,770 1,109,704
08-01-23 5.50 4,291,964 4,327,383
09-01-23 5.50 3,582,582 3,609,914
10-01-23 5.50 1,912,302 1,927,570
04-01-25 8.00 1,342,578 1,484,001
07-01-28 5.50 1,950,926 1,943,346
08-01-28 5.50 1,365,676 1,360,370
09-01-28 7.50 1,802,880 1,934,322
12-01-28 7.00 1,672,709 1,784,387
01-01-29 6.00 1,495,165 1,523,635
03-01-29 6.50 3,961,641 4,129,593
04-01-29 5.00 1,996,805 1,926,575
05-01-29 6.00 1,149,421(b) 1,171,308
06-01-29 6.00 5,526,957 5,667,975
06-01-29 7.50 1,461,580 1,562,842
06-01-31 7.00 3,560,705 3,783,474
09-01-31 7.00 2,878,950 3,064,070
09-01-31 7.50 2,911,249 3,116,760
10-01-31 9.50 206,689 229,274
11-01-31 6.50 1,562,479 1,632,612
01-01-32 6.00 1,705,086 1,743,530
01-01-32 6.50 1,060,940 1,112,234
03-01-32 7.00 2,050,396 2,180,304
04-01-32 6.50 3,019,728 3,165,698
04-01-32 7.00 2,506,359 2,661,340
05-01-32 6.50 4,732,438 4,951,045
05-01-32 7.00 3,657,441 3,873,764
06-01-32 6.50 1,442,396 1,505,382
07-01-32 6.50 569,885 590,481
08-01-32 6.50 1,836,333 1,915,947
09-01-32 6.00 2,533,394 2,577,471
09-01-32 6.50 2,846,155 2,949,017
10-01-32 5.50 957,976 951,027
11-01-32 6.00 4,723,887 4,832,851
12-01-32 6.00 1,996,252 2,030,983
12-01-32 6.50 2,940,930 3,047,217
12-01-32 7.50 484,770 517,543
01-01-33 6.00 2,887,872 2,938,115
01-01-33 7.00 1,604,840 1,701,092
02-01-33 5.50 2,708,962 2,695,021
03-01-33 5.50 1,009,477(b) 1,003,770
03-01-33 5.50 2,734,160 2,721,713
03-01-33 6.00 5,430,134 5,537,171
03-01-33 6.50 653,430 679,286
04-01-33 5.50 13,564,721 13,504,211
04-01-33 6.00 5,010,879 5,100,003
05-01-33 5.50 10,386,926 10,313,201
05-01-33 6.00 2,243,816 2,289,242
07-01-33 5.50 6,767,266 6,716,680
07-01-33 6.00 1,499,224 1,531,510
08-01-33 5.50 1,454,055 1,442,633
08-01-33 6.00 4,179,190 4,250,904
01-01-34 6.50 972,895 1,016,565
04-01-34 5.00 3,487,616 3,361,434
06-01-34 5.50 3,700,000(b) 3,661,846
Collateralized Mtge Obligation
05-25-16 4.00 2,000,000 1,963,475
12-25-26 8.00 774,546 828,847
02-25-44 7.00 2,000,000 2,115,938
Interest Only
10-25-09 0.00 2,714,817(g) 15,983
12-25-12 13.29 1,651,081(g) 125,237
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
11 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Govt Natl Mtge Assn
04-15-29 6.50% $511,968 $532,842
02-15-30 7.00 466,902 494,135
03-15-30 7.00 551,620 583,795
12-15-31 6.50 801,965 834,370
02-15-32 6.50 952,957 991,414
12-15-32 6.00 798,133 814,111
05-15-33 6.00 1,101,734 1,123,493
03-20-34 6.50 451,862 466,415
Total 298,476,384
Total bonds
(Cost: $322,571,363) $320,344,424
Option purchased (--%)
Issuer Notional Exercise Expiration Value(a)
amount price date
Call
Sept. U.S. Treasury
Nt Futures
5-year $10,000,000 $110.50 June 2004 $4,688
Total option purchased
(Cost: $30,088) $4,688
Short-term securities (5.9%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (3.3%)
Federal Home Loan Mtge Corp Disc Nt
08-17-04 1.14% $10,000,000 $9,976,900
Federal Natl Mtge Assn Disc Nt
07-14-04 1.04 700,000 699,114
Total 10,676,014
Commercial paper (2.6%)
Park Avenue Receivables
06-01-04 1.03 4,300,000(c) 4,299,508
Variable Funding Capital
06-14-04 1.03 3,900,000(c) 3,898,103
Total 8,197,611
Total short-term securities
(Cost: $18,871,693) $18,873,625
Total investments in securities
(Cost: $341,473,144)(i) $339,222,737
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At May 31, 2004, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$19,854,310.
(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. These securities may be resold
in transactions exempt from registration, normally to qualified
institutional buyers. As of May 31, 2004, the value of these securities
amounted to $8,197,611 or 2.6% of net assets.
(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 May 31, 2004.
(e) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on May 31, 2004.
(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) 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 May 31, 2004.
(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. Long Bond, Sept. 2004, 20-year $10,700,000
Sale contracts
U.S. Treasury Notes, June 2004, 5-year 2,500,000
U.S. Treasury Notes, Sept. 2004, 2-year 20,000,000
U.S. Treasury Notes, Sept. 2004, 5-year 2,200,000
(i) At May 31, 2004, the cost of securities for federal income tax purposes was
$341,495,787 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 1,850,708
Unrealized depreciation (4,123,758)
----------
Net unrealized depreciation $(2,273,050)
-----------
- --------------------------------------------------------------------------------
13 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP U.S. Government Mortgage Fund
May 31, 2004
Assets
Investments in securities, at value (Note 1)
(identified cost $341,473,144) $339,222,737
Cash in bank on demand deposit 23,242
Capital shares receivable 108,011
Accrued interest receivable 1,377,077
Receivable for investment securities sold 1,123,996
---------
Total assets 341,855,063
-----------
Liabilities
Dividends payable to shareholders 54,994
Capital shares payable 177,644
Payable for investment securities purchased 1,053,330
Payable for securities purchased on a forward-commitment basis (Note 1) 19,854,310
Accrued investment management services fee 4,575
Accrued distribution fee 5,152
Accrued transfer agency fee 1,563
Accrued administrative services fee 440
Other accrued expenses 58,382
------
Total liabilities 21,210,390
----------
Net assets applicable to outstanding capital stock $320,644,673
============
Represented by
Capital stock -- $.01 par value (Note 1) $ 636,828
Additional paid-in capital 324,497,854
Excess of distributions over net investment income (169,582)
Accumulated net realized gain (loss) (2,137,388)
Unrealized appreciation (depreciation) on investments (2,183,039)
----------
Total -- representing net assets applicable to outstanding capital stock $320,644,673
============
Net assets applicable to outstanding shares: Class A $177,289,900
Class B $128,608,354
Class C $ 14,724,034
Class I $ 9,767
Class Y $ 12,618
Net asset value per share of outstanding capital stock: Class A shares 35,218,317 $ 5.03
Class B shares 25,536,915 $ 5.04
Class C shares 2,923,120 $ 5.04
Class I shares 1,942 $ 5.03
Class Y shares 2,507 $ 5.03
----- ------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Statement of operations
AXP U.S. Government Mortgage Fund
Year ended May 31, 2004
Investment income
Income:
Interest $16,242,923
-----------
Expenses (Note 2):
Investment management services fee 2,063,726
Distribution fee
Class A 540,930
Class B 1,621,705
Class C 183,111
Transfer agency fee 564,542
Incremental transfer agency fee
Class A 31,990
Class B 38,589
Class C 3,954
Service fee -- Class Y 12
Administrative services fees and expenses 204,741
Compensation of board members 9,925
Custodian fees 76,690
Printing and postage 82,731
Registration fees 103,609
Audit fees 19,000
Other 727
---
Total expenses 5,545,982
Expenses waived/reimbursed by AEFC (Note 2) (268,608)
--------
5,277,374
Earnings credits on cash balances (Note 2) (5,775)
------
Total net expenses 5,271,599
---------
Investment income (loss) -- net 10,971,324
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (1,934,596)
Futures contracts (79,025)
Options contracts written (Note 6) 252,128
-------
Net realized gain (loss) on investments (1,761,493)
Net change in unrealized appreciation (depreciation) on investments (5,682,907)
----------
Net gain (loss) on investments (7,444,400)
----------
Net increase (decrease) in net assets resulting from operations $ 3,526,924
===========
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
15 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Statements of changes in net assets
AXP U.S. Government Mortgage Fund
Year ended May 31, 2004 2003
Operations and distributions
Investment income (loss) -- net $ 10,971,324 $ 9,686,929
Net realized gain (loss) on investments (1,761,493) 5,763,024
Net change in unrealized appreciation (depreciation) on investments (5,682,907) 2,819,705
---------- ---------
Net increase (decrease) in net assets resulting from operations 3,526,924 18,269,658
--------- ----------
Distributions to shareholders from:
Net investment income
Class A (6,673,492) (6,365,488)
Class B (3,833,418) (3,718,149)
Class C (435,554) (383,803)
Class I (167) --
Class Y (414) (475)
Tax return of capital
Class A (379,306) --
Class B (217,882) --
Class C (24,756) --
Class I (9) --
Class Y (24) --
Net realized gain
Class A (2,276,411) (878,837)
Class B (1,733,487) (703,993)
Class C (199,554) (67,316)
Class Y (142) (57)
----------- -----------
Total distributions (15,774,616) (12,118,118)
----------- -----------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 80,517,965 277,134,067
Class B shares 42,305,093 210,911,273
Class C shares 5,501,269 19,636,847
Class I shares 44,454 --
Class Y shares 500 502
Reinvestment of distributions at net asset value
Class A shares 8,808,051 6,382,377
Class B shares 5,526,710 4,108,191
Class C shares 615,962 404,490
Class I shares 66 --
Class Y shares 111 85
Payments for redemptions
Class A shares (156,430,470) (93,565,033)
Class B shares (Note 2) (114,195,539) (45,757,524)
Class C shares (Note 2) (12,356,331) (3,415,045)
Class I shares (34,542) --
Class Y shares -- (132)
----------- -----------
Increase (decrease) in net assets from capital share transactions (139,696,701) 375,840,098
------------ -----------
Total increase (decrease) in net assets (151,944,393) 381,991,638
Net assets at beginning of year 472,589,066 90,597,428
----------- ----------
Net assets at end of year $ 320,644,673 $472,589,066
============= ============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
16 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Notes to Financial Statements
AXP U.S. Government Mortgage Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Government Income Series, Inc. 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.
Effective March 4, 2004, the Fund offers an additional class of shares, Class I,
exclusively to certain institutional investors. Class I shares have no sales
charge and are made available through a separate prospectus supplement provided
to investors eligible to purchase the shares. As of May 31, 2004, American
Express Financial Corporation (AEFC) and the AXP Portfolio Builder Funds owned
100% of Class I shares.
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.
- --------------------------------------------------------------------------------
17 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
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 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.
- --------------------------------------------------------------------------------
18 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
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 May 31, 2004, the Fund has entered into outstanding
when-issued securities of $17,685,018 and other forward-commitments of
$2,169,292.
The Fund also enters into transactions to sell purchase commitments to third
parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the Fund
to "roll over" its purchase commitments, the Fund receives negotiated amounts in
the form of reductions of the purchase price of the commitment.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $38,038
and accumulated net realized loss has been increased by $37,418 resulting in a
net reclassification adjustment to decrease paid-in capital by $620.
- --------------------------------------------------------------------------------
19 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
The tax character of distributions paid for the years indicated is as follows:
Year ended May 31, 2004 2003
Class A
Distributions paid from:
Ordinary income $8,814,309 $7,244,325
Long-term capital gain 135,594 --
Tax return of capital 379,306 --
Class B
Distributions paid from:
Ordinary income 5,463,649 4,422,142
Long-term capital gain 103,256 --
Tax return of capital 217,882 --
Class C
Distributions paid from:
Ordinary income 623,221 451,119
Long-term capital gain 11,887 --
Tax return of capital 24,756 --
Class I*
Distributions paid from:
Ordinary income 167 N/A
Long-term capital gain -- N/A
Tax return of capital 9 --
Class Y
Distributions paid from:
Ordinary income 548 532
Long-term capital gain 8 --
Tax return of capital 24 --
* Inception date was March 4, 2004.
As of May 31, 2004, the components of distributable earnings on a tax basis are
as follows:
Undistributed ordinary income $ --
Accumulated long-term gain (loss) $(1,882,303)
Unrealized appreciation (depreciation) $(2,552,712)
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.
- --------------------------------------------------------------------------------
20 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
2. EXPENSES AND SALES CHARGES
The Fund has agreements with 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.
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.
Class I pays a transfer agency fee at an annual rate per shareholder account of
$1. This amount is included in the transfer agency fee on the statement of
operations.
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
$1,117,521 for Class A, $279,925 for Class B and $16,963 for Class C for the
year ended May 31, 2004.
- --------------------------------------------------------------------------------
21 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
For the year ended May 31, 2004, 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, 0.64% for
Class I and 0.81% for Class Y. Beginning June 1, 2004, AEFC and its affiliates
have agreed to waive certain fees and expenses until May 31, 2005. Under this
agreement, net expenses will not exceed 0.945% for Class A, 1.695% for Class B,
1.695% for Class C, 0.645% for Class I and 0.765% for Class Y of the Fund's
average daily net assets.
During the year ended May 31, 2004, the Fund's custodian and transfer agency
fees were reduced by $5,775 as a result of earnings credits from overnight cash
balances. The Fund also pays custodian fees to American Express Trust Company,
an affiliate of AEFC.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $642,311,752 and $773,253,852, respectively, for the
year ended May 31, 2004. Realized gains and losses are determined on an
identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2004
Class A Class B Class C Class I* Class Y
Sold 15,645,306 8,226,489 1,069,281 8,629 97
Issued for reinvested distributions 1,719,729 1,078,130 120,137 13 22
Redeemed (30,490,915) (22,241,050) (2,408,909) (6,700) --
----------- ----------- ---------- ------ ---
Net increase (decrease) (13,125,880) (12,936,431) (1,219,491) 1,942 119
----------- ----------- ---------- ----- ---
* Inception date was March 4, 2004.
Year ended May 31, 2003
Class A Class B Class C Class I Class Y
Sold 53,840,581 40,951,953 3,809,031 N/A 98
Issued for reinvested distributions 1,236,256 795,646 78,342 N/A 16
Redeemed (18,129,387) (8,851,021) (659,979) N/A (25)
----------- ----------- ---------- ----- ---
Net increase (decrease) 36,947,450 32,896,578 3,227,394 N/A 89
----------- ----------- ---------- ----- ---
5. INTEREST RATE FUTURES CONTRACTS
As of May 31, 2004, investments in securities included securities valued at
$601,669 that were pledged as collateral to cover initial margin deposits on 107
open purchase contracts and 147 open sale contracts. The notional market value
of the open purchase contracts as of May 31, 2004 was $11,258,406 with a net
unrealized loss of $48,592. The notional market value of the open sale contracts
as of May 31, 2004 was $26,173,531 with a net unrealized gain of $115,960. See
"Summary of significant accounting policies" and "Notes to investments in
securities."
- --------------------------------------------------------------------------------
22 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
6. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written are as follows:
Year ended May 31, 2004
Puts Calls
Contracts Premiums Contracts Premiums
Balance May 31, 2003 -- $ -- -- $ --
Opened 211 152,923 1,474 1,743,950
Closed (211) (152,923) (1,474) (1,743,950)
---- -------- ------ ----------
Balance May 31, 2004 -- $ -- -- $ --
---- --------- ------ -----------
See "Summary of significant accounting policies."
7. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
Deutsche Bank, whereby the Fund is permitted to have bank borrowings for
temporary or emergency purposes to fund shareholder redemptions. The 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 year ended May 31, 2004.
8. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund has a capital loss carry-over of
$1,882,303 as of May 31, 2004 that will expire in 2012 and 2013 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.
- --------------------------------------------------------------------------------
23 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
9. 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, 2004 2003 2002(b)
Net asset value, beginning of period $5.19 $5.06 $5.01
Income from investment operations:
Net investment income (loss) .16 .19 .04
Net gains (losses) (both realized and unrealized) (.09) .16 .04
Total from investment operations .07 .35 .08
Less distributions:
Dividends from net investment income (.16) (.20) (.03)
Tax return of capital (.01) -- --
Distributions from realized gains (.06) (.02) --
Total distributions (.23) (.22) (.03)
Net asset value, end of period $5.03 $5.19 $5.06
Ratios/supplemental data
Net assets, end of period (in millions) $177 $251 $58
Ratio of expenses to average daily net assets(c),(e) .98% .99% .95%(d)
Ratio of net investment income (loss) to average daily net assets 3.11% 3.31% 2.98%(d)
Portfolio turnover rate (excluding short-term securities) 163% 227% 200%
Total return(f) 1.27% 6.93% 1.75%(g)
(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 1.05%, 1.06% and
1.58% for the periods ended May 31, 2004, 2003 and 2002, respectively.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
24 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2004 2003 2002(b)
Net asset value, beginning of period $5.20 $5.07 $5.01
Income from investment operations:
Net investment income (loss) .12 .15 .03
Net gains (losses) (both realized and unrealized) (.09) .16 .05
Total from investment operations .03 .31 .08
Less distributions:
Dividends from net investment income (.12) (.16) (.02)
Tax return of capital (.01) -- --
Distributions from realized gains (.06) (.02) --
Total distributions (.19) (.18) (.02)
Net asset value, end of period $5.04 $5.20 $5.07
Ratios/supplemental data
Net assets, end of period (in millions) $129 $200 $28
Ratio of expenses to average daily net assets(c),(e) 1.74% 1.75% 1.74%(d)
Ratio of net investment income (loss) to average daily net assets 2.35% 2.49% 2.68%(d)
Portfolio turnover rate (excluding short-term securities) 163% 227% 200%
Total return(f) .52% 6.12% 1.76%(g)
(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 B would have been 1.80%, 1.82% and
2.34% for the periods ended May 31, 2004, 2003 and 2002, respectively.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
25 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2004 2003 2002(b)
Net asset value, beginning of period $5.20 $5.07 $5.01
Income from investment operations:
Net investment income (loss) .12 .15 .03
Net gains (losses) (both realized and unrealized) (.09) .16 .05
Total from investment operations .03 .31 .08
Less distributions:
Dividends from net investment income (.12) (.16) (.02)
Tax return of capital (.01) -- --
Distributions from realized gains (.06) (.02) --
Total distributions (.19) (.18) (.02)
Net asset value, end of period $5.04 $5.20 $5.07
Ratios/supplemental data
Net assets, end of period (in millions) $15 $22 $5
Ratio of expenses to average daily net assets(c),(e) 1.74% 1.75% 1.73%(d)
Ratio of net investment income (loss) to average daily net assets 2.36% 2.50% 2.60%(d)
Portfolio turnover rate (excluding short-term securities) 163% 227% 200%
Total return(f) .52% 6.12% 1.74%(g)
(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 C would have been 1.80%, 1.82% and
2.34% for the periods ended May 31, 2004, 2003 and 2002, respectively.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
26 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(b)
Net asset value, beginning of period $5.15
Income from investment operations:
Net investment income (loss) .05
Net gains (losses) (both realized and unrealized) (.11)
Total from investment operations (.06)
Less distributions:
Dividends from net investment income (.06)
Net asset value, end of period $5.03
Ratios/supplemental data
Net assets, end of period (in millions) $--
Ratio of expenses to average daily net assets(c) .64%(d)
Ratio of net investment income (loss) to average daily net assets 3.39%(d)
Portfolio turnover rate (excluding short-term securities) 163%
Total return(e) (1.38%)(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was March 4, 2004.
(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.
- --------------------------------------------------------------------------------
27 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2004 2003 2002(b)
Net asset value, beginning of period $5.19 $5.06 $5.01
Income from investment operations:
Net investment income (loss) .17 .19 .04
Net gains (losses) (both realized and unrealized) (.09) .16 .04
Total from investment operations .08 .35 .08
Less distributions:
Dividends from net investment income (.17) (.20) (.03)
Tax return of capital (.01) -- --
Distributions from realized gains (.06) (.02) --
Total distributions (.24) (.22) (.03)
Net asset value, end of period $5.03 $5.19 $5.06
Ratios/supplemental data
Net assets, end of period (in millions) $-- $-- $--
Ratio of expenses to average daily net assets(c),(e) .81% .80% .78%(d)
Ratio of net investment income (loss) to average daily net assets 3.29% 3.68% 2.95%(d)
Portfolio turnover rate (excluding short-term securities) 163% 227% 200%
Total return(f) 1.45% 7.10% 1.80%(g)
(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 Y would have been 0.87%, 0.88% and
1.40% for the periods ended May 31, 2004, 2003 and 2002, respectively.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
28 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
THE BOARD AND SHAREHOLDERS
AXP GOVERNMENT INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP U.S. Government Mortgage Fund
(a series of AXP Government Income Series, Inc.) as of May 31, 2004, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period ended May 31, 2004, and
the financial highlights for each of the years in the two-year period ended May
31, 2004 and for the period from Feb. 14, 2002 (when shares became publicly
available) to May 31, 2002. These financial statements and the financial
highlights are the responsibility of fund management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 2004, by correspondence with the custodian and
brokers or by other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of AXP
U.S. Government Mortgage Fund as of May 31, 2004, and the results of its
operations, changes in its net assets and the financial highlights for each of
the periods stated in the first paragraph above, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
July 20, 2004
- --------------------------------------------------------------------------------
29 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Federal Income Tax Information
(UNAUDITED)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
AXP U.S. Government Mortgage Fund
Fiscal year ended May 31, 2004
Class A
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.01413
July 24, 2003 0.01310
Aug. 22, 2003 0.01107
Sept. 22, 2003 0.01100
Oct. 23, 2003 0.01100
Nov. 21, 2003 0.01100
Dec. 22, 2003 0.07590
Jan. 26, 2004 0.01380
Feb. 25, 2004 0.01600
March 26, 2004 0.01750
April 26, 2004 0.01666
May 26, 2004 0.01402
Total $0.22518
Capital gain distributions -- taxable as long-term capital gain.
Payable date Per share
Dec. 22, 2003 $0.00340
Total distributions* $0.22858
- --------------------------------------------------------------------------------
30 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Class B
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.01076
July 24, 2003 0.00975
Aug. 22, 2003 0.00798
Sept. 22, 2003 0.00768
Oct. 23, 2003 0.00767
Nov. 21, 2003 0.00788
Dec. 22, 2003 0.07255
Jan. 26, 2004 0.01006
Feb. 25, 2004 0.01292
March 26, 2004 0.01428
April 26, 2004 0.01337
May 26, 2004 0.01088
Total $0.18578
Capital gain distribution -- taxable as long-term capital gain.
Payable date Per share
Dec. 22, 2003 $0.00340
Total distributions* $0.18918
Class C
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.01078
July 24, 2003 0.00976
Aug. 22, 2003 0.00797
Sept. 22, 2003 0.00771
Oct. 23, 2003 0.00767
Nov. 21, 2003 0.00789
Dec. 22, 2003 0.07256
Jan. 26, 2004 0.01008
Feb. 25, 2004 0.01305
March 26, 2004 0.01429
April 26, 2004 0.01338
May 26, 2004 0.01088
Total $0.18602
Capital gain distribution -- taxable as long-term capital gain.
Payable date Per share
Dec. 22, 2003 $0.00340
Total distributions* $0.18942
- --------------------------------------------------------------------------------
31 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Class I
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
March 26, 2004 $0.02217
April 26, 2004 0.01851
May 26, 2004 0.01578
Total distributions $0.05646
Class Y
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
June 23, 2003 $0.01489
July 24, 2003 0.01384
Aug. 22, 2003 0.01178
Sept. 22, 2003 0.01218
Oct. 23, 2003 0.01177
Nov. 21, 2003 0.01168
Dec. 22, 2003 0.07660
Jan. 26, 2004 0.01460
Feb. 25, 2004 0.01664
March 26, 2004 0.01808
April 26, 2004 0.01777
May 26, 2004 0.01469
Total $0.23452
Capital gain distribution -- taxable as long-term capital gain.
Payable date Per share
Dec. 22, 2003 $0.00340
Total distributions* $0.23792
* $0.01 per share represents a tax return of capital.
- --------------------------------------------------------------------------------
32 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Board Members and Officers
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. Each member oversees 15
Master Trust portfolios and 86 American Express mutual funds. Board members
serve until the next regular shareholders' meeting or until he or she reaches
the mandatory retirement age established by the board.
Independent Board Members
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Arne H. Carlson Board member Chair, Board Services Corporation
901 S. Marquette Ave. since 1999 (provides administrative services to
Minneapolis, MN 55402 boards). Former Governor of Minnesota
Age 69
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan
901 S. Marquette Ave. since 2002 Corporation (engineering and Materials Company, Inc.
Minneapolis, MN 55402 construction) since 1998 (construction
Age 66 materials/chemicals)
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Livio D. DeSimone Board member Retired Chair of the Board and Chief Cargill, Incorporated
30 Seventh Street East since 2001 Executive Officer, Minnesota Mining and (commodity merchants and
Suite 3050 Manufacturing (3M) processors), General Mills,
St. Paul, MN 55101-4901 Inc. (consumer foods),
Age 70 Vulcan Materials Company
(construction materials/
chemicals), Milliken &
Company (textiles and
chemicals), and Nexia
Biotechnologies, Inc.
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 69
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
Stephen R. Lewis, Jr.* Board member Retired President and Professor of Valmont Industries, Inc.
901 S. Marquette Ave. since 2002 Economics, Carleton College (manufactures irrigation
Minneapolis, MN 55402 systems)
Age 65
- ---------------------------------- ------------------- ----------------------------------------- -----------------------------
* Interested person of AXP Partners International Aggressive Growth Fund by
reason of being a security holder of FleetBoston Financial Corporation,
parent company of Columbia Wanger Asset Management, L.P., one of the fund's
subadvisers.
- --------------------------------------------------------------------------------
33 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
Independent Board Members (continued)
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Alan K. Simpson Board member Former three-term United States Senator
1201 Sunshine Ave. since 1997 for Wyoming
Cody, WY 82414
Age 72
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Alison Taunton-Rigby Board member since Founder and Chief Executive Officer,
901 S. Marquette Ave. 2002 RiboNovix, Inc. since 2004; President,
Minneapolis, MN 55402 Forester Biotech since 2000; prior to
Age 60 that, President and CEO, Aquila
Biopharmaceuticals, Inc.
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Board Member Affiliated with AEFC**
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
William F. Truscott Board member Senior Vice President - Chief
53600 AXP Financial Center since 2001, Vice Investment Officer of AEFC since 2001.
Minneapolis, MN 55474 President since Former Chief Investment Officer and
Age 43 2002 Managing Director, Zurich Scudder
Investments
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
** Interested person by reason of being an officer, director and/or employee of
AEFC.
- --------------------------------------------------------------------------------
34 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL REPORT
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the board. In addition to Mr. Truscott, who is vice president, the
Fund's other officers are:
Other Officers
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of service
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Jeffrey P. Fox Treasurer since Vice President - Investment Accounting,
50005 AXP Financial Center 2002 AEFC, since 2002; Vice President -
Minneapolis, MN 55474 Finance, American Express Company,
Age 49 2000-2002; Vice President - Corporate
Controller, AEFC, 1996-2000
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Paula R. Meyer President since Senior Vice President and General
596 AXP Financial Center 2002 Manager - Mutual Funds, AEFC, since
Minneapolis, MN 55474 2002; Vice President and Managing
Age 50 Director - American Express Funds,
AEFC, 2000-2002; Vice President, AEFC,
1998-2000
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General Counsel,
Minneapolis, MN 55402 and Secretary
Age 65 since 1978
- --------------------------------- -------------------- ----------------------------------------- -----------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling (800) 862-7919.
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 August
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.
- --------------------------------------------------------------------------------
35 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 ANNUAL 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.
Item 2. (a) The Registrant has adopted a code of ethics that applies to the
Registrant's principal executive officer and principal financial
officer. A copy of the code of ethics is filed as an exhibit to this
form N-CSR.
(b) During the period covered by this report, there were not any
amendments to the provisions of the code of ethics adopted in 2(a)
above.
(c) During the period covered by this report, there were not any
implicit or explicit waivers to the provisions of the code of ethics
adopted in 2(a).
Item 3. The Registrant's board of directors has determined that independent
directors Livio D. DeSimone, Anne P. Jones, and Alan G. Quasha, each
qualify as audit committee financial experts.
Item 4. Principal Accountant Fees and Services
Fund - Related Fees
(a) Audit Fees. The fees paid for the years ended May 31, to KPMG LLP for
professional services rendered for the audits of the annual financial
statements for AXP Government Income Series, Inc. were as follows:
2003 - $28,773; 2002 - $30,588
(b) Audit - Related Fees. The fees paid for the years ended May 31, to KPMG
LLP for additional professional services rendered in connection with
the registrant's security count pursuant to Rule 17f-2 for AXP
Government Income Series, Inc. were as follows:
2003 - $579; 2002 - $771
(c) Tax Fees. The fees paid for the years ended May 31, to KPMG LLP for tax
compliance related services for AXP Government Income Series, Inc. were
as follows:
2003 - $5,450; 2002 - $5,150
(d) All Other Fees. The fees paid for the years ended May 31, to KPMG LLP
for additional professional services rendered in connection to proxy
filing for AXP Government Income Series, Inc. were as follows:
2003 - None; 2002 - $45
(e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley
pre-approval requirements, all services to be performed by KPMG LLP for
the registrant and to the registrant's investment adviser and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
must be pre-approved by the audit committee.
(e) (2) 100% of the services performed for items (b) through (d) above
during 2003 and 2002 were pre-approved by the audit committee with
the exception of the 2002 tax fees.
(f) Not applicable.
(g) Non-Audit Fees. The fees paid for the years ended May 31, by the
registrant for non-audit services to KPMG LLP were as follows:
2003 - None; 2002 - None
The fees paid for the years ended May 31, to KPMG LLP by the
registrant's investment adviser, and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing
services to the registrant were as follows:
2003 - $71,000; 2002 - $164,000
(h) For the fees disclosed in item (g) above, 100% and 97% of the fees for
services performed during 2003 and 2002, respectively, were
pre-approved by the audit committee. The exception was a 2002 tax
research request by the adviser on defaulted securities for $5,000. The
amounts not pre-approved are compatible with maintaining KPMG LLP's
independence.
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.
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) Code of ethics as applies to the Registrant's principal
executive officer and principal financial officer, as required to be
disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH.
(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 August 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 August 3, 2004
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date August 3, 2004