UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4260
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AXP GOVERNMENT INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 330-9283
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Date of fiscal year end: 5/31
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Date of reporting period: 11/30
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AXP(R)
Short Duration
U.S. Government
Fund
Semiannual Report
for the Period Ended
Nov. 30, 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
Performance Summary 4
Questions & Answers with Portfolio Management 6
Investments in Securities 10
Financial Statements (Portfolio) 15
Notes to Financial Statements (Portfolio) 18
Financial Statements (Fund) 23
Notes to Financial Statements (Fund) 26
Fund Expenses Example 35
Proxy Voting 37
(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 SEMIANNUAL REPORT
Fund Snapshot
AT NOV. 30, 2004
PORTFOLIO MANAGER
Portfolio manager Since Years in industry
Scott Kirby* 6/01 26
* 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 by class
A: 8/19/85 B: 3/20/95 C: 6/26/00 Y: 3/20/95
Ticker symbols by class
A: IFINX B: ISHOX C: AXFCX Y: IDFYX
Total net assets $2.004 billion
Number of holdings 189
Weighted average life(1) 2.1 years
Effective duration(2) 1.4 years
Weighted average bond rating(3) AAA
(1) Weighted average life measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) 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.
(3) Weighted average bond rating represents the average credit quality of the
underlying bonds in the portfolio.
SECTOR COMPOSITION
Percentage of portfolio assets
(pie chart)
Mortgage-backed securities 51.6%
U.S. government obligations & agencies 42.1%
CMBS/ABS** 3.6%
Short-term securities* 2.7%
* Of the 2.7%, 1.5% is due to security lending activity and 1.2% is the
Portfolio's cash equivalent position.
** 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.
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 SEMIANNUAL REPORT
Performance Summary
(bar chart)
PERFORMANCE COMPARISON
For the six-month period ended Nov. 30, 2004
(bar 1) (bar 2) (bar 3)
+0.86% +0.91% +0.99%
(bar 1) AXP Short Duration U.S. Government Fund Class A (excluding sales charge)
(bar 2) Lehman Brothers 1-3 Year Government Index(1) (unmanaged)
(bar 3) Lipper Short U.S. Government Funds Index(2)
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment 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 (800) 862-7919 or visiting
www.americanexpress.com/funds. You should consider the investment objectives,
risks, and charges and expenses of the Fund carefully before investing.
(1) The 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 includes the 30 largest short
U.S. government funds tracked by Lipper Inc. The index's returns include
net reinvested dividends.
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 other classes may vary from that shown because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
AXP Short Duration U.S. Government Fund
SEC YIELDS
Class A Class B Class C Class Y
At Nov. 30, 2004 2.35% 1.72% 1.72% 2.63%
At Dec. 31, 2004 2.66% 2.05% 2.05% 2.96%
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public offering
price (POP) per share on the last day of the period, and converting the results
to yearly figures. See Average Annual Total Returns on page 5 for additional
performance information.
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT. LONG
X HIGH
MEDIUM QUALITY
LOW
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4 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Performance Summary
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)
at Nov. 30, 2004
6 months* +0.86% -3.93% +0.48% -4.50% +0.48% -0.52% +0.95% +0.95%
1 year +1.01% -3.79% +0.25% -3.69% +0.25% +0.25% +1.18% +1.18%
3 years +2.37% +0.73% +1.60% +0.64% +1.60% +1.60% +2.54% +2.54%
5 years +3.98% +2.98% +3.20% +3.03% N/A N/A +4.15% +4.15%
10 years +5.38% +4.87% N/A N/A N/A N/A N/A N/A
Since inception +6.55% +6.29% +4.41% +4.41% +3.71% +3.71% +5.36% +5.36%
at Dec. 31, 2004
6 months* +1.19% -3.62% +0.81% -4.18% +0.81% -0.19% +1.28% +1.28%
1 year +0.82% -3.96% +0.07% -3.87% +0.07% +0.07% +0.99% +0.99%
3 years +2.57% +0.92% +1.80% +0.83% +1.80% +1.80% +2.74% +2.74%
5 years +4.06% +3.05% +3.28% +3.10% N/A N/A +4.23% +4.23%
10 years +5.40% +4.89% N/A N/A N/A N/A N/A N/A
Since inception +6.54% +6.28% +4.40% +4.40% +3.70% +3.70% +5.35% +5.35%
* Not annualized.
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 4.75%.
(3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as
follows: first year 5%; second and third year 4%; fourth year 3%; fifth
year 2%; sixth year 1%; no sales charge thereafter.
(4) 1% CDSC applies to redemptions made within the first year of purchase.
(5) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
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5 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, Portfolio Manager Scott Kirby discusses the Fund's positioning and
results for the six months ended Nov. 30, 2004.
Q: How did AXP Short Duration U.S. Government Fund perform for the first half
of the fiscal year?
A: AXP Short Duration U.S. Government Fund's Class A shares (excluding sales
charge) rose 0.86% for the six months ended Nov. 30, 2004. This was slightly
less than the Lehman Brothers 1-3 Year Government Index (Lehman Index),
which gained 0.91% for the period. The Lipper Short U.S. Government Funds
Index, representing the Fund's peer group, rose 0.99% over the same time
frame.
To help keep the Fund competitive with its peers, American Express Financial
Corporation implemented a new expense cap on 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 0.925% of net assets per year.
Q: What factors most significantly affected Fund performance?
A: We believed the Federal Reserve Board's (the Fed's) efforts to raise short
term interest rates would create dislocation in the bond market, widening
the difference in interest rates between U.S. Treasuries and mortgages
(yield spreads). Instead yield spreads were tight. The Fund's allocation to
the spread sectors -- agencies, asset-backed securities and mortgage-backed
securities supported the Fund's absolute performance, as these spread
sectors outperformed U.S. Treasuries for the six months.
The Fund's yield curve positioning was a positive contributor to relative
results. We believed the yield curve would flatten somewhat as the Fed
raised short-term interest rates to 2.00% by the end of the period. The
Fund's duration positioning also boosted Fund returns.
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6 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
[line chart]
U.S. TREASURY YIELDS (Nov. 30, 2004 compared to June 1, 2004)
Yield
[solid line] 2.223% 2.432% 2.997% 3.251% 3.691% 4.349% 5.002%
[dotted line] 1.111% 1.398% 2.589% 3.119% 3.836% 4.7% 5.396%
3 mos. 6 mos. 2 yrs. 3 yrs. 5 yrs. 10 yrs. 30 yrs.
Maturity
Treasury yields as of: [solid line] 11/30/04
[dotted line] 6/1/04
Source: Bloomberg
This chart compares the income potential of U.S. Treasury bills, notes and
bonds as of Nov. 30, 2004 compared to six months earlier. This is known as
the yield curve.
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7 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
(begin callout quote)> We believed the yield curve would
flatten somewhat as the Fed raised short-term interest rates
to 2.00% by the end of the period. (end callout quote)
(begin callout quote)> We intend to continue to position the
Fund for ongoing economic recovery and a higher interest
rate environment. (end callout quote)
From a general market perspective, the hallmark of this six-month period was
the dramatic flattening of the yield curve, with rates on the two-year U.S.
Treasury notes rising 0.42% while rates on the 10-year U.S. Treasury
actually fell 0.35% from June 1 through Nov. 30, 2004. Contributing to the
flattening of the yield curve was the widely-anticipated tightening of
monetary policy. The Fed increased the targeted federal funds rate at a
measured pace of 25 basis points (0.25%) each four times during the
semiannual period. At the same time, concerns over a soft labor market,
persistently high oil prices and what Fed Chairman Alan Greenspan called an
economic "soft patch" gave support to a rally at the longer end of the yield
curve. Many investors underestimated the strength of the long-term bond
rally. As economic data improved in the last month or so of the period, the
fixed income market across the yield curve sold off significantly.
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8 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
Q: What changes did you make to the portfolio and how is it currently
positioned?
A: Over the semiannual period, we significantly decreased the Fund's allocation
to U.S. Treasuries. We redeployed those assets primarily into government
agency securities, asset-backed securities, commercial mortgage-backed
securities and non-agency mortgages. This proved to be a prudent strategy.
As yield spreads tightened, we began to shift assets back into U.S.
Treasuries toward the end of the semiannual period. We also began to move
into shorter-term government agency securities.
Within the mortgage sector, we continued to focus on higher coupons and more
seasoned bonds, which we expect to outperform in a rising interest rate
environment. We were also able to add value within the mortgage sector by
focusing on pools that historically have had lower-than-average prepayment
risks. We also invested in collateralized mortgage obligations, which are
attractively structured mortgage-backed securities in that they separate
mortgage pools into short-, medium- and long-term cash flow. Throughout, we
adjusted both yield curve positioning and portfolio duration as market
conditions changed.
Q: How do you intend to manage the Fund in the coming months?
A: While job creation and inflation numbers remain key indicators to monitor in
the coming months, we intend to continue to position the Fund for ongoing
economic recovery and a higher interest rate environment. We believe that
the Fed will continue to raise interest rates at a measured pace well into
the new year. Thus, we intend to keep the Fund's duration shorter than the
Lehman Index. We also intend to position the Fund according to our view that
valuations of mortgage-backed securities are currently stretched. As always,
our strategy is to provide added portfolio value with a moderate amount of
risk. Quality issues and security selection remain a priority as we continue
to seek attractive buying opportunities.
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9 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Investments in Securities
Government Income Portfolio
Nov. 30, 2004 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (98.6%)
Issuer Coupon Principal Value(a)
rate amount
U.S. government obligations & agencies (42.7%)
Federal Farm Credit Bank
07-17-06 2.13% $15,100,000 $14,865,195
10-02-06 2.38 14,600,000 14,393,060
Federal Home Loan Bank
03-13-06 2.50 64,785,000 64,390,264
05-15-06 3.00 25,570,000 25,553,763
05-22-06 2.88 90,080,000 89,852,187
12-17-07 3.25 22,660,000 22,469,883
Federal Home Loan Mtge Corp
01-15-06 5.25 43,500,000 44,575,451
07-15-06 5.50 60,000,000 62,267,460
01-30-07 3.00 10,950,000 10,857,604
02-15-07 2.38 43,625,000 42,803,192
02-23-07 2.85 21,675,000 21,432,847
09-15-07 3.50 24,275,000(b) 24,338,479
Federal Natl Mtge Assn
02-15-06 5.50 15,500,000 15,961,869
02-28-06 2.25 6,770,000 6,709,781
04-13-06 2.15 4,500,000 4,447,436
03-02-07 3.00 16,000,000 15,896,048
12-15-07 3.13 21,640,000(b) 21,394,754
05-15-08 6.00 17,850,000 19,201,995
Student Loan Mtge Assn
12-15-32 2.25 16,325,000(d) 16,141,017
03-15-33 2.16 14,800,000(d) 14,642,528
U.S. Treasury
11-15-05 5.75 50,710,000 52,165,935
12-31-05 1.88 95,920,000 95,076,958
01-31-06 1.88 20,820,000 20,615,048
03-31-06 1.50 41,400,000 40,706,219
11-15-06 3.50 45,210,000(b,l) 45,633,844
05-15-07 3.13 255,000 254,880
08-15-07 2.75 18,450,000 18,231,626
08-15-07 3.25 31,150,000 31,187,723
Total 856,067,046
Commercial mortgage-backed(e)/
Asset-backed securities (3.7%)
AmeriCredit Automobile Receivables Trust
Series 2004-CA Cl A3
03-06-09 3.00 12,000,000 11,898,756
Centex Home Equity
Series 2001-A Cl A4
07-25-29 6.47 4,495,890 4,568,448
Conseco Finance
Series 2000-D Cl A4
12-15-25 8.17 828,102 848,217
LB-UBS Commercial Mtge Trust
Series 2002-C2 Cl A2
06-15-26 4.90 9,600,000 9,894,834
Series 2004-C6 Cl A2
08-15-29 4.19 6,165,000 6,142,436
Morgan Stanley Capital I
Series 2004-IQ8 Cl A2
06-15-40 3.96 12,170,000 12,174,382
Providian Gateway Master Trust
Series 2004-DA Cl A
09-15-11 3.35 10,500,000(d) 10,383,513
Residential Asset Securities
Series 2002-KS1 Cl AI4
11-25-29 5.86 17,491,205 17,606,648
Total 73,517,234
Mortgage-backed securities (52.3%)(e,g)
Federal Home Loan Mtge Corp
09-01-09 6.50 402,685 428,715
10-01-10 7.00 1,253,485 1,329,707
03-01-12 7.50 4,963,025 5,305,394
07-01-12 5.50 573,511 594,838
02-01-13 5.00 3,794,663 3,881,525
04-01-13 4.50 2,763,058 2,784,321
04-01-13 5.00 3,587,438 3,669,557
05-01-13 4.50 23,168,372 23,347,037
01-01-14 4.00 12,254,876 12,181,991
06-01-15 7.50 9,705,719 10,421,672
04-01-17 6.50 29,317,850 31,161,697
07-01-17 6.50 15,170,164 16,055,294
See accompanying notes to investments in securities.
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10 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Home Loan Mtge Corp (cont.)
11-01-17 5.00% $5,724,857 $5,808,321
11-01-17 5.50 10,136,971 10,466,453
09-01-19 5.50 4,608,097 4,755,803
07-01-24 8.00 639,838 696,360
01-01-25 9.00 889,614 998,035
06-01-25 8.00 736,406 802,649
08-01-25 8.00 189,470 206,513
05-01-26 9.00 1,383,052 1,553,278
08-01-34 5.20 6,264,266(k) 6,300,777
10-01-34 5.01 8,125,258(k) 8,240,799
Collateralized Mtge Obligation
12-15-08 6.00 9,226,855 9,513,264
03-15-12 5.00 14,471,288 14,645,898
04-15-12 5.00 20,188,292 20,665,078
10-15-15 5.00 29,046,000 29,818,665
01-15-16 5.00 9,125,000 9,369,482
02-15-16 5.00 28,636,488 29,360,746
06-15-16 7.00 13,657,036 14,691,969
08-15-16 4.00 12,565,455 12,453,945
04-15-19 4.50 1,079,293 1,079,491
02-15-20 4.50 15,450,000 15,514,570
01-15-33 5.00 2,725,656 2,723,895
Interest Only
12-15-12 12.70 14,480,312(i) 798,272
02-15-14 7.40 12,411,430(i) 952,577
11-15-19 19.12 11,000,000(h,i) 1,390,469
01-01-20 0.00 16,807(i) 3,022
03-15-25 8.94 12,557,736(i) 1,182,892
03-15-32 0.00 3,978,680(h,i) 368,037
Federal Natl Mtge Assn
09-01-07 8.50 154,968 157,632
10-01-07 7.50 549,172 570,661
12-01-08 7.50 871,020 905,103
01-01-09 5.74 3,226,451 3,397,627
05-01-09 7.50 1,894,146 1,968,262
10-01-09 7.11 4,292,561 4,791,142
01-01-10 5.00 1,204,787 1,230,218
07-01-11 7.50 920,512 978,211
11-01-12 5.00 852,919 872,442
12-01-12 5.00 1,347,683 1,389,041
04-01-13 5.50 15,554,324 16,132,750
05-01-13 5.00 19,490,829 19,936,985
05-01-13 5.50 4,764,735 4,981,149
05-01-13 6.00 1,038,762 1,091,195
06-01-13 5.00 3,507,758 3,588,053
08-01-13 4.50 9,436,093 9,508,707
10-01-13 6.00 3,053,195 3,207,308
12-01-13 5.50 1,646,345 1,703,967
01-01-14 5.50 938,009 970,840
01-01-14 6.00 565,699 594,253
03-01-14 6.00 1,167,253 1,226,171
06-01-14 6.50 9,712,993 10,313,160
08-01-14 6.50 455,342 483,247
09-01-14 6.00 1,988,282 2,095,450
08-01-15 5.50 20,457,457 21,173,466
06-01-17 6.00 15,812,924 16,642,947
06-01-17 6.50 3,748,141 3,974,358
06-01-17 7.00 861,841 914,355
07-01-17 6.00 33,492,226 35,246,679
08-01-17 5.50 22,955,358 23,775,693
08-01-17 6.00 13,879,278 14,568,899
08-01-17 7.00 1,632,839 1,732,332
09-01-17 6.00 510,293 534,811
11-01-17 5.50 15,913,521 16,476,553
11-01-17 6.00 2,048,233 2,167,163
01-01-18 5.50 2,160,973 2,237,732
02-01-18 5.50 15,101,690 15,641,989
04-01-18 5.50 13,429,470 13,916,757
05-01-18 5.50 1,551,918 1,606,018
06-01-18 5.50 992,694 1,027,557
11-01-21 8.00 274,427 299,271
11-01-23 6.00 1,968,981 2,041,806
06-01-24 9.00 671,615 745,857
02-01-26 6.00 129,181 133,706
05-01-26 7.50 1,093,696 1,176,129
12-01-28 7.00 2,695,293 2,869,306
04-01-31 6.50 4,613,271 4,860,248
09-01-31 7.50 3,336,433 3,581,739
11-01-31 6.50 1,847,911 1,940,406
09-01-32 6.50 2,666,258 2,799,644
11-01-32 7.00 312,842 331,812
01-01-33 4.74 3,125,933(k) 3,159,834
02-01-33 4.84 17,596,712(k) 17,943,325
04-01-33 4.38 13,371,714(k) 13,441,648
04-01-33 4.59 10,626,706(k) 10,737,084
05-01-33 4.59 8,736,845(k) 8,828,736
07-01-33 4.42 4,636,124(k) 4,655,018
07-01-33 4.45 12,823,608(k) 12,834,388
07-01-33 4.97 7,299,264(k) 7,256,754
08-01-33 3.19 1,134,333(k) 1,142,014
08-01-33 4.11 3,524,094(k) 3,499,117
See accompanying notes to investments in securities.
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11 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
09-01-33 4.19% $3,293,854(k) $3,275,845
11-25-33 2.91 13,202,000 13,183,438
08-01-34 4.53 5,204,362(k) 5,195,306
09-01-34 4.87 6,935,744(k) 7,023,928
10-01-34 5.10 7,925,140(k) 8,056,301
11-01-34 5.07 7,215,016(k) 7,312,419
Collateralized Mtge Obligation
03-25-13 4.50 7,553,536 7,662,872
10-25-13 5.00 21,468,333 21,974,300
12-25-13 4.50 21,428,571 21,808,429
05-25-16 4.00 11,160,000 11,155,290
07-25-16 4.00 11,000,000 10,891,090
10-25-19 4.50 14,410,588 14,461,894
07-25-23 5.50 21,000,000 21,601,005
12-25-26 4.50 6,531,106 6,548,378
12-25-26 8.00 4,709,374 5,058,461
06-25-33 6.91 5,331,684(k) 5,407,083
04-25-34 5.50 4,917,208 5,057,127
05-25-34 3.75 10,100,000 9,971,986
06-25-34 5.00 12,750,000 12,896,320
05-25-42 5.30 10,174,190 10,270,907
07-25-42 5.50 9,883,598 9,895,654
10-25-42 7.50 5,249,384 5,633,704
08-25-43 4.61 7,825,000 7,857,552
06-25-44 7.50 5,749,056 6,166,150
Interest Only
12-25-12 13.29 11,818,740(i) 669,863
11-25-13 10.08 10,950,000(i) 1,094,754
08-01-18 0.00 10,359(i) 2,326
01-15-20 0.00 404,232(i) 75,778
07-25-22 0.00 1,323,693(i) 206,249
03-25-23 7.94 3,180,104(i) 569,022
12-25-31 1.19 3,842,568(i) 790,317
02-25-32 0.00 7,389,952(h,i) 700,197
Principal Only
06-25-21 2.44 60,710(j) 56,285
First Horizon Alternative Mtge Securities
10-25-34 5.46 5,401,310 5,499,182
GMAC Mtge Corp Loan Trust
Series 2004-AR2 Cl 3A
08-19-34 4.45 7,806,463(k) 7,747,576
Govt Natl Mtge Assn
08-15-13 6.00 1,842,635 1,944,426
09-15-14 6.00 10,263,088 10,830,097
06-15-33 7.00 3,992,150 4,261,308
Collateralized Mtge Obligation
11-20-13 5.50 7,771,504 7,925,188
03-16-20 4.59 9,934,475 10,068,131
07-16-21 3.41 13,500,000 13,221,267
09-16-21 3.23 14,000,000 13,660,560
Interest Only
03-20-29 7.17 6,898,919(i) 664,690
GSR Mtge Loan Trust
Series 2004-10F Cl 1A1
08-25-19 4.50 3,861,648 3,885,664
Harborview Mtge Loan Trust
Series 2004-4 Cl 3A
06-19-34 2.98 10,768,179(k) 10,643,433
Series 2004-10 Cl 3A
06-19-32 5.19 5,825,000(f) 5,906,459
Morgan Stanley Mtge Loan Trust
Series 2004-10AR Cl 2A1
11-25-34 5.15 3,766,729(k) 3,802,890
Residential Accredit Loans
Series 2003-QS17 Cl CB7
09-25-33 5.50 5,062,484 5,115,615
Structured Asset Securities
Series 2004-12H Cl 2A
04-25-34 5.60 8,993,399(k) 9,160,855
Washington Mutual
Series 2002-AR15 Cl A5
12-25-32 4.38 8,767,001(k) 8,808,393
Total 1,049,207,697
Total bonds
(Cost: $1,988,589,562) $1,978,791,977
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Short-term securities (2.8%)(c)
Issuer Effective Amount Value(a)
yield payable at
maturity
U.S. government agencies (2.5%)
Federal Home Loan Mtge Corp Disc Nt
12-02-04 1.85% $50,000,000 $49,994,862
Federal Natl Mtge Assn Disc Nt
12-15-04 1.77 800,000 799,410
Total 50,794,272
Commercial paper (0.2%)
Variable Funding Capital
12-01-04 2.07% $4,400,000 $4,399,747
Total short-term securities
(Cost: $55,196,849) $55,194,019
Total investments in securities
(Cost: $2,043,786,411)(m) $2,033,985,996
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At Nov. 30, 2004, security was partially or fully on loan. See Note 5 to
the financial statements.
(c) Cash collateral received from security lending activity is invested in
short-term securities and represents 1.5% of net assets. See Note 5 to the
financial statements. 1.3% of net assets is the Portfolio's cash equivalent
position.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the board.
These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At Nov. 30, 2004, the value of
these securities amounted to $41,167,058 or 2.1% of net assets.
(e) 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.
(f) At Nov. 30, 2004, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$5,924,104.
(g) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments at Nov. 30, 2004:
Security Principal Settlement Proceeds Value
amount date receivable
Federal Natl Mtge Assn
12-01-19 5.50% $45,750,000 12-16-04 $47,198,906 $47,165,505
12-01-19 6.00 18,000,000 12-16-04 18,843,750 18,843,840
(h) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on Nov. 30, 2004. At Nov. 30,
2004, the value of inverse floaters represented 0.1% of net assets.
(i) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest only is extremely sensitive to the rate of principal payments on
the underlying mortgage assets. A rapid (slow) rate of principal repayments
may have an adverse (positive) effect on yield to maturity. The principal
amount shown is the notional amount of the underlying mortgages. Interest
rate disclosed represents yield based upon the estimated timing and amount
of future cash flows at Nov. 30, 2004.
- --------------------------------------------------------------------------------
13 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Notes to investments in securities (continued)
(j) 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 at Nov. 30, 2004.
(k) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Nov. 30, 2004.
(l) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 4 to the financial statements.):
Type of security Notional amount
Purchase contracts
U.S. Long Bond, March 2005, 20-year $ 9,900,000
U.S. Treasury Note, March 2005, 2-year 31,900,000
Sale contracts
U.S. Treasury Note, Dec. 2004, 5-year 99,700,000
U.S. Treasury Note, Dec. 2004, 10-year 1,000,000
U.S. Treasury Note, March 2005, 5-year 2,600,000
U.S. Treasury Note, March 2005, 10-year 7,000,000
(m) At Nov. 30, 2004, the cost of securities for federal income tax purposes
was approximately $2,043,786,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 8,090,000
Unrealized depreciation (17,890,000)
-----------
Net unrealized depreciation $ (9,800,000)
------------
How to find information about the Fund's portfolio holdings
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 1-800-SEC-0330); and
(iv) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form N-Q,
can be found at www.americanexpress.com/funds.
- --------------------------------------------------------------------------------
14 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
Nov. 30, 2004 (Unaudited)
Assets
Investments in securities, at value (Note 1)*
(identified cost $2,043,786,411) $2,033,985,996
Accrued interest receivable 10,666,428
Receivable for investment securities sold 82,762,457
----------
Total assets 2,127,414,881
-------------
Liabilities
Disbursements in excess of cash on demand deposit 571,251
Payable for investment securities purchased 24,274,331
Payable upon return of securities loaned (Note 5) 30,385,000
Accrued investment management services fee 27,854
Other accrued expenses 99,284
Forward sale commitments, at value (proceeds receivable $66,042,656) (Note 1) 66,009,345
----------
Total liabilities 121,367,065
-----------
Net assets $2,006,047,816
==============
* Including securities on loan, at value (Note 5) $ 29,656,395
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
15 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Statement of operations
Government Income Portfolio
Six months ended Nov. 30, 2004 (Unaudited)
Investment income
Income:
Interest $ 35,894,543
Fee income from securities lending (Note 5) 105,624
-------
Total income 36,000,167
----------
Expenses (Note 2):
Investment management services fee 5,553,951
Compensation of board members 7,207
Custodian fees 77,298
Audit fees 18,563
Other 42,699
------
Total expenses 5,699,718
---------
Investment income (loss) -- net 30,300,449
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) (7,621,300)
Futures contracts (3,811,679)
Options contracts written (Note 6) 880,071
-------
Net realized gain (loss) on investments (10,552,908)
Net change in unrealized appreciation (depreciation) on investments 4,714,151
---------
Net gain (loss) on investments (5,838,757)
----------
Net increase (decrease) in net assets resulting from operations $ 24,461,692
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
16 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Statements of changes in net assets
Government Income Portfolio
Nov. 30, 2004 May 30, 2004
six months ended Year ended
(Unaudited)
Operations
Investment income (loss) -- net $ 30,300,449 $ 76,653,491
Net realized gain (loss) on investments (10,552,908) (13,943,876)
Net change in unrealized appreciation (depreciation) on investments 4,714,151 (56,711,856)
--------- -----------
Net increase (decrease) in net assets resulting from operations 24,461,692 5,997,759
---------- ---------
Proceeds from contributions 1,624,151 7,986,457
Fair value of withdrawals (329,146,792) (1,233,308,157)
------------ --------------
Net contributions (withdrawals) from partners (327,522,641) (1,225,321,700)
------------ --------------
Total increase (decrease) in net assets (303,060,949) (1,219,323,941)
Net assets at beginning of period 2,309,108,765 3,528,432,706
------------- -------------
Net assets at end of period $2,006,047,816 $ 2,309,108,765
============== ===============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
17 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Notes to Financial Statements
Government Income Portfolio
(Unaudited as to Nov. 30, 2004)
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 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.
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 SEMIANNUAL REPORT
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts. Risks of entering into futures contracts
and related options include the possibility of an illiquid market and that a
change in the value of the contract or option may not correlate with changes in
the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Short sales
The Portfolio may engage in short sales. In these transactions, the Portfolio
sells a security that it does not own. The Portfolio is obligated to replace the
security that was short by purchasing it at the market price at the time of
replacement or entering into an offsetting transaction with the broker. The
price at such time may be more or less than the price at which the Portfolio
sold the security.
Securities purchased on a forward-commitment basis
Delivery and payment for securities that have been purchased by the Portfolio on
a forward-commitment basis, including when-issued securities and other
forward-commitments, can take place one month or more after the transaction
date. During this period, such securities are subject to market fluctuations,
and they may affect the Portfolio's net assets the same as owned securities. The
Portfolio designates cash or liquid securities at least equal to the amount of
its forward-commitments. At Nov. 30, 2004, the Portfolio has entered into
outstanding when-issued securities of $5,924,104.
The Portfolio also enters into transactions to sell purchase commitments to
third parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the
Portfolio to "roll over" its purchase commitments, the Portfolio receives
negotiated amounts in the form of reductions of the purchase price of the
commitment.
- --------------------------------------------------------------------------------
19 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
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."
Guarantees and indemnifications
Under the Portfolio's organizational documents, its officers and trustees are
indemnified against certain liabilities arising out of the performance of their
duties to the Portfolio. In addition, certain of the Portfolio's contracts with
its service providers contain general indemnification clauses. The Portfolio's
maximum exposure under these arrangements is unknown since the amount of any
future claims that may be made against the Portfolio cannot be determined and
the Portfolio has no historical basis for predicting the likelihood of any such
claims.
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.
- --------------------------------------------------------------------------------
20 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
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 that declines from 0.52% to 0.395% annually as the
Portfolio's assets increase.
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 $1,203,281,781 and $1,472,668,841, respectively, for the
six months ended Nov. 30, 2004. Realized gains and losses are determined on an
identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS
At Nov. 30, 2004, investments in securities included securities valued at
$1,806,647 that were pledged as collateral to cover initial margin deposits on
418 open purchase contracts and 1,103 open sale contracts. The notional market
value of the open purchase contracts at Nov. 30, 2004 was $77,712,938 with a net
unrealized loss of $278,908. The notional market value of the open sale
contracts at Nov. 30, 2004 was $121,086,156 with a net unrealized gain of
$1,069,742. See "Summary of significant accounting policies" and "Notes to
investments in securities."
5. LENDING OF PORTFOLIO SECURITIES
At Nov. 30, 2004, securities valued at $29,656,395 were on loan to brokers. For
collateral, the Portfolio received $30,385,000 in cash. 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 $105,624 for the six months ended Nov. 30, 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.
- --------------------------------------------------------------------------------
21 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
6. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written are as follows:
Six months ended Nov. 30, 2004
Puts
Contracts Premiums
Balance May 31, 2004 538 $ 579,598
Opened 717 386,461
Closed (179) (85,988)
Expired (1,076) (880,071)
------ ---------
Balance Nov. 30, 2004 -- $ --
------ ---------
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(e) 2004 2003 2002 2001
Ratio of expenses to average daily net assets(a) .52%(b) .51% .50% .52% .54%
Ratio of net investment income (loss) to average daily net assets 2.75%(b) 2.65% 3.35% 4.43% 6.13%
Portfolio turnover rate (excluding short-term securities) 58% 125% 218% 267% 366%
Total return(c) 1.20%(d) .13% 5.48% 6.27% 10.56%
(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) Adjusted to an annual basis.
(c) Total return is based on a calculated Portfolio NAV and does not reflect
payment of a sales charge.
(d) Not annualized.
(e) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
22 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP Short Duration U.S. Government Fund
Nov. 30, 2004 (Unaudited)
Assets
Investment in Portfolio (Note 1) $2,005,924,956
Capital shares receivable 523,317
-------
Total assets 2,006,448,273
-------------
Liabilities
Dividends payable to shareholders 711,726
Capital shares payable 793,269
Accrued distribution fee 29,071
Accrued service fee 320
Accrued transfer agency fee 3,184
Accrued administrative services fee 2,603
Other accrued expenses 595,066
-------
Total liabilities 2,135,239
---------
Net assets applicable to outstanding capital stock $2,004,313,034
==============
Represented by
Capital stock -- $.01 par value (Note 1) $ 4,172,953
Additional paid-in capital 2,207,456,248
Excess of distributions over net investment income (1,795,403)
Accumulated net realized gain (loss) (Note 5) (196,545,031)
Unrealized appreciation (depreciation) on investments (8,975,733)
----------
Total -- representing net assets applicable to outstanding capital stock $2,004,313,034
==============
Net assets applicable to outstanding shares: Class A $1,086,973,208
Class B $ 759,325,315
Class C $ 31,234,189
Class I $ 9,542,277
Class Y $ 117,238,045
Net asset value per share of outstanding capital stock: Class A shares 226,314,535 $ 4.80
Class B shares 158,085,926 $ 4.80
Class C shares 6,502,910 $ 4.80
Class I shares 1,983,243 $ 4.81
Class Y shares 24,408,665 $ 4.80
---------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
23 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Statement of operations
AXP Short Duration U.S. Government Fund
Six months ended Nov. 30, 2004 (Unaudited)
Investment income
Income:
Interest $ 35,879,965
Fee income from securities lending 105,618
-------
Total income 35,985,583
----------
Expenses (Note 2):
Expenses allocated from Portfolio 5,699,397
Distribution fee
Class A 1,464,197
Class B 4,317,787
Class C 176,417
Transfer agency fee 1,621,173
Incremental transfer agency fee
Class A 78,166
Class B 92,585
Class C 4,818
Service fee -- Class Y 59,367
Administrative services fees and expenses 525,612
Compensation of board members 5,540
Printing and postage 376,340
Registration fees 8,576
Audit fees 6,188
Other 14,964
------
Total expenses 14,451,127
Expenses waived/reimbursed by AEFC (Note 2) (975,969)
--------
13,475,158
Earnings credits on cash balances (Note 2) (29,260)
-------
Total net expenses 13,445,898
----------
Investment income (loss) -- net 22,539,685
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (7,620,744)
Futures contracts (3,811,709)
Options contracts written 880,071
-------
Net realized gain (loss) on investments (10,552,382)
Net change in unrealized appreciation (depreciation) on investments 4,713,978
---------
Net gain (loss) on investments (5,838,404)
----------
Net increase (decrease) in net assets resulting from operations $ 16,701,281
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
24 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Statements of changes in net assets
AXP Short Duration U.S. Government Fund
Nov. 30, 2004 May 31, 2004
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss) -- net $ 22,539,685 $ 53,918,357
Net realized gain (loss) on investments (10,552,382) (13,943,173)
Net change in unrealized appreciation (depreciation) on investments 4,713,978 (56,709,554)
--------- -----------
Net increase (decrease) in net assets resulting from operations 16,701,281 (16,734,370)
---------- -----------
Distributions to shareholders from:
Net investment income
Class A (14,647,990) (32,141,993)
Class B (7,511,153) (17,983,822)
Class C (308,294) (706,906)
Class I (126,639) (10,055)
Class Y (1,587,001) (3,546,323)
---------- ----------
Total distributions (24,181,077) (54,389,099)
----------- -----------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 164,070,389 429,411,653
Class B shares 57,553,634 218,218,185
Class C shares 3,959,816 15,463,649
Class I shares 10,541,516 4,117,088
Class Y shares 12,729,858 58,935,229
Reinvestment of distributions at net asset value
Class A shares 12,974,727 29,532,472
Class B shares 6,929,336 17,136,580
Class C shares 283,610 654,048
Class I shares 123,159 9,402
Class Y shares 1,069,381 2,825,788
Payments for redemptions
Class A shares (273,864,641) (962,651,760)
Class B shares (Note 2) (265,570,638) (819,584,452)
Class C shares (Note 2) (10,870,103) (35,046,321)
Class I shares (5,167,950) (15,452)
Class Y shares (11,238,050) (106,873,614)
----------- ------------
Increase (decrease) in net assets from capital share transactions (296,475,956) (1,147,867,505)
------------ --------------
Total increase (decrease) in net assets (303,955,752) (1,218,990,974)
Net assets at beginning of period 2,308,268,786 3,527,259,760
------------- -------------
Net assets at end of period $2,004,313,034 $ 2,308,268,786
============== ===============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
25 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Notes to Financial Statements
AXP Short Duration U.S. Government Fund
(Unaudited as to Nov. 30, 2004)
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.
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. At Nov. 30, 2004, American Express Financial
Corporation (AEFC) and the AXP Portfolio Builder Series funds owned 100% of
Class I shares, which represents 0.48% 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 at Nov. 30, 2004 was 99.99%.
- --------------------------------------------------------------------------------
26 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL 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.
Guarantees and indemnifications
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to the shareholders. No provision for income or excise
taxes is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Fund.
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, when
available, are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
- --------------------------------------------------------------------------------
27 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
2. EXPENSES AND SALES CHARGES
In addition to the expenses allocated from the Portfolio, the Fund accrues its
own expenses as follows:
The Fund has an agreement with AEFC to provide administrative services. Under an
Administrative Services Agreement, the Fund pays AEFC a fee for administration
and accounting services at a percentage of the Fund's average daily net assets
that declines from 0.05% to 0.025% annually as the Fund's assets increase. 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
$1,411,429 for Class A, $740,057 for Class B and $6,385 for Class C for the six
months ended Nov. 30, 2004.
- --------------------------------------------------------------------------------
28 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
For the six months ended Nov. 30, 2004, AEFC and its affiliates waived certain
fees and expenses to 0.93% for Class A, 1.68% for Class B, 1.68% for Class C and
0.76% for Class Y. Of these waived fees and expenses, the class specific
transfer agency fees waived for Class A, Class B, Class C and Class Y were
$505,024, $397,549, $17,500 and $55,896, respectively, which represent 0.08%,
0.09%, 0.09% and 0.09%, respectively, of the Fund's average daily net assets.
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 six months ended Nov. 30, 2004, the Fund's transfer agency fees were
reduced by $29,260 as a result of earnings credits from overnight cash balances.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Nov. 30, 2004
Class A Class B Class C Class I Class Y
Sold 34,044,284 11,941,373 821,782 2,184,288 2,640,693
Issued for reinvested distributions 2,693,303 1,438,372 58,870 25,510 221,991
Redeemed (56,833,675) (55,113,893) (2,256,158) (1,072,187) (2,331,674)
----------- ----------- ---------- ---------- ----------
Net increase (decrease) (20,096,088) (41,734,148) (1,375,506) 1,137,611 531,010
----------- ----------- ---------- --------- -------
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.
4. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
The Bank of New York, whereby the Fund may borrow for the temporary funding of
shareholder redemptions or for other temporary or emergency purposes. The
agreement went into effect Sept. 21, 2004. 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 higher of the Federal Funds Effective
Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days
after such loan is executed. The Fund also pays a commitment fee equal to its
pro rata share of the amount of the credit facility at a rate of 0.09% per
annum. Prior to this agreement, the Fund had a revolving credit agreement that
permitted borrowings up to $500 million with Deutsche Bank. The Fund had no
borrowings outstanding during the six months ended Nov. 30, 2004.
- --------------------------------------------------------------------------------
29 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
5. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$274,375,673 at May 31, 2004, that if not offset by capital gains will expire as
follows:
2007 2008 2009 2012
$15,230 $35,158,847 $117,356,906 $121,844,690
It is unlikely the board will authorize a distribution of any net realized
capital gains until the available capital loss carry-over has been offset or
expires.
6. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Class A
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(g) 2004 2003 2002 2001
Net asset value, beginning of period $4.82 $4.94 $4.85 $4.78 $4.59
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .06 .11 .15 .19 .27
Net gains (losses) (both realized and unrealized) (.02) (.12) .09 .08 .19
----- ----- ----- ----- -----
Total from investment operations .04 (.01) .24 .27 .46
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.06) (.11) (.15) (.20) (.27)
----- ----- ----- ----- -----
Net asset value, end of period $4.80 $4.82 $4.94 $4.85 $4.78
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $1,087 $1,188 $1,728 $1,185 $1,047
Ratio of expenses to average daily net assets(b) .93%(c),(d) .97% .95% .95% .98%
Ratio of net investment income (loss) to average daily net assets 2.34%(c) 2.19% 2.90% 4.01% 5.72%
Portfolio turnover rate (excluding short-term securities) 58% 125% 218% 267% 366%
Total return(e) .86%(f) (.24%) 4.90% 5.77% 10.19%
(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) Adjusted to an annual basis.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class A would have been 1.01% for the six
months ended Nov. 30, 2004.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
30 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(g) 2004 2003 2002 2001
Net asset value, beginning of period $4.82 $4.94 $4.85 $4.78 $4.59
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .04 .07 .11 .16 .24
Net gains (losses) (both realized and unrealized) (.02) (.12) .09 .08 .18
----- ----- ----- ----- -----
Total from investment operations .02 (.05) .20 .24 .42
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.04) (.07) (.11) (.17) (.23)
----- ----- ----- ----- -----
Net asset value, end of period $4.80 $4.82 $4.94 $4.85 $4.78
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $759 $963 $1,578 $1,104 $912
Ratio of expenses to average daily net assets(b) 1.68%(c),(d) 1.72% 1.71% 1.71% 1.73%
Ratio of net investment income (loss) to average daily net assets 1.59%(c) 1.44% 2.15% 3.25% 4.96%
Portfolio turnover rate (excluding short-term securities) 58% 125% 218% 267% 366%
Total return(e) .48%(f) (.99%) 4.11% 4.98% 9.36%
(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) Adjusted to an annual basis.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class B would have been 1.77% for the six
months ended Nov. 30, 2004.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
31 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(h) 2004 2003 2002 2001(b)
Net asset value, beginning of period $4.82 $4.94 $4.85 $4.78 $4.63
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .04 .07 .11 .16 .22
Net gains (losses) (both realized and unrealized) (.02) (.12) .09 .08 .14
----- ----- ----- ----- -----
Total from investment operations .02 (.05) .20 .24 .36
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.04) (.07) (.11) (.17) (.21)
----- ----- ----- ----- -----
Net asset value, end of period $4.80 $4.82 $4.94 $4.85 $4.78
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $31 $38 $58 $29 $7
Ratio of expenses to average daily net assets(c) 1.68%(d),(e) 1.73% 1.72% 1.72% 1.73%(d)
Ratio of net investment income (loss) to average daily net assets 1.60%(d) 1.44% 2.10% 3.09% 4.93%(d)
Portfolio turnover rate (excluding short-term securities) 58% 125% 218% 267% 366%
Total return(f) .48%(g) (.99%) 4.11% 4.98% 8.08%(g)
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class C would have been 1.77% for the six
months ended Nov. 30, 2004.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
32 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(g) 2004(b)
Net asset value, beginning of period $4.83 $4.90
----- -----
Income from investment operations:
Net investment income (loss) .06 .03
Net gains (losses) (both realized and unrealized) (.01) (.07)
----- -----
Total from investment operations .05 (.04)
----- -----
Less distributions:
Dividends from net investment income (.07) (.03)
----- -----
Net asset value, end of period $4.81 $4.83
----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $10 $4
Ratio of expenses to average daily net assets(c) .61%(d) .63%(d)
Ratio of net investment income (loss) to average daily net assets 2.67%(d) 2.74%(d)
Portfolio turnover rate (excluding short-term securities) 58% 125%
Total return(e) 1.02%(f) (.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.
(g) Six months ended Nov. 30, 2003 (Unaudited).
- --------------------------------------------------------------------------------
33 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(g) 2004 2003 2002 2001
Net asset value, beginning of period $4.82 $4.94 $4.85 $4.78 $4.59
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .06 .12 .15 .20 .28
Net gains (losses) (both realized and unrealized) (.02) (.12) .09 .08 .19
----- ----- ----- ----- -----
Total from investment operations .04 -- .24 .28 .47
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.06) (.12) (.15) (.21) (.28)
----- ----- ----- ----- -----
Net asset value, end of period $4.80 $4.82 $4.94 $4.85 $4.78
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $117 $115 $164 $188 $161
Ratio of expenses to average daily net assets(b) .76%(c),(d) .81% .79% .79% .82%
Ratio of net investment income (loss) to average daily net assets 2.51%(c) 2.35% 3.12% 4.17% 5.89%
Portfolio turnover rate (excluding short-term securities) 58% 125% 218% 267% 366%
Total return(e) .95%(f) (.08%) 5.07% 5.93% 10.36%
(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) Adjusted to an annual basis.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class Y would have been 0.85% for the six
months ended Nov. 30, 2004.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
34 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Fund Expenses Example
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, including management fees; distribution and service (12b-1) fees; and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six months ended Nov. 30, 2004.
Actual Expenses
The first line of the table provides information about actual account values and
actual expenses. You may use the information in this line, together with the
amount you invested, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading titled "Expenses paid during the period" to estimate the
expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
35 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Beginning Ending Expenses paid
account value account value during the period
June 1, 2004 Nov. 30, 2004 June 1, 2004-Nov. 30, 2004
Class A
Actual(a) $1,000 $1,008.60 $4.76(b)
Hypothetical (5% return before expenses) $1,000 $1,020.74 $4.79(b)
Class B
Actual(a) $1,000 $1,004.80 $8.58(c)
Hypothetical (5% return before expenses) $1,000 $1,016.92 $8.63(c)
Class C
Actual(a) $1,000 $1,004.80 $8.58(d)
Hypothetical (5% return before expenses) $1,000 $1,016.92 $8.63(d)
Class I
Actual(a) $1,000 $1,010.20 $3.12(e)
Hypothetical (5% return before expenses) $1,000 $1,022.37 $3.14(e)
Class Y
Actual(a) $1,000 $1,009.50 $3.89(f)
Hypothetical (5% return before expenses) $1,000 $1,021.61 $3.91(f)
(a) Based on the actual return for the six months ended Nov. 30, 2004: +0.86%
for Class A, +0.48% for Class B, +0.48% for Class C, +1.02% for Class I and
+0.95% for Class Y.
(b) Expenses are equal to the Fund's Class A annualized expense ratio of 0.93%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(c) Expenses are equal to the Fund's Class B annualized expense ratio of 1.68%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(d) Expenses are equal to the Fund's Class C annualized expense ratio of 1.68%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(e) Expenses are equal to the Fund's Class I annualized expense ratio of 0.61%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(f) Expenses are equal to the Fund's Class Y annualized expense ratio of 0.76%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
- --------------------------------------------------------------------------------
36 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
Proxy Voting
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the website americanexpress.com/funds; or by
searching the website 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, information
regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 is available at http://www.sec.gov.
- --------------------------------------------------------------------------------
37 -- AXP SHORT DURATION U.S. GOVERNMENT FUND -- 2004 SEMIANNUAL REPORT
(logo)
AMERICAN
EXPRESS
(R)
American Express Funds
70100 AXP Financial Center
Minneapolis, MN 55474
This report must be accompanied or preceded by the Fund's current prospectus.
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and
is not a broker-dealer.
AXP(R)
U.S. Government
Mortgage
Fund
Semiannual Report
for the Period Ended
Nov. 30, 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
Performance Summary 4
Questions & Answers
with Portfolio Management 5
Investments in Securities 9
Financial Statements 13
Notes to Financial Statements 17
Fund Expenses Example 28
Proxy Voting 30
[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 SEMIANNUAL REPORT
Fund Snapshot
AT NOV. 30, 2004
PORTFOLIO MANAGER
Portfolio manager Since Years in industry
Scott Kirby* 2/02 26
* 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 by class
A: 2/14/02 B: 2/14/02 C: 2/14/02 Y: 2/14/02
Ticker symbols by class
A: AUGAX B: AUGBX C: AUGCX Y: --
Total net assets $294.1 million
Number of holdings 168
Weighted average life(1) 3.8 years
Effective duration(2) 2.9 years
Weighted average bond rating(3) AAA
(1) Weighted average life measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) 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.
(3) Weighted average bond rating represents the average credit quality of the
underlying bonds in the portfolio.
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 94.0%
Short-term securities* 6.0%
* Of the 6.0%, 5.8% is due to forward TBA mortgage securities.
CREDIT QUALITY SUMMARY
Percentage of portfolio assets excluding cash equivalents
AAA bonds 99.6%
AA bonds 0.4%
Individual security ratings are based on information from Standard & Poor's
Corp. and Moody's Investors Service. If a rating is unavailable, the rating is
determined through an internal analysis, if appropriate.
Individual securities owned by the Fund, but not shares of the Fund, are
guaranteed by the U.S. government, its agencies or instrumentalities as to
timely payments of principal and interest. The Fund's yield and share price are
not guaranteed, and may vary with market conditions.
Fund holdings are subject to change.
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3 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Performance Summary
[bar chart]
PERFORMANCE COMPARISON
For the six-month period ended Nov. 30, 2004
[bar 1] [bar 2] [bar 3]
+3.56% +4.09% +3.06%
[bar 1] AXP U.S. Government Mortgage Fund Class A (exchanging sales charge)
[bar 2] Lehman Brothers Mortgage-Backed Securities Index(1) (unmanaged)
[bar 3] Lipper U.S. Mortgage Funds Index(2)
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment 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 (800) 862-7919 or visiting
www.americanexpress.com/funds. You should consider the investment objectives,
risks, and charges and expenses of the Fund carefully before investing.
(1) The Lehman Brothers Mortgage-Backed Securities Index, an unmanaged index,
includes 15- and 30-year fixed-rate securities backed by mortgage pools of
the Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), and Federal National Mortgage Association
(FNMA).
(2) The Lipper U.S. Mortgage Funds Index includes the 10 largest U.S. mortgage
funds tracked by Lipper Inc. The index's returns include net reinvested
dividends.
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 other classes may vary from that shown because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
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)
at Nov. 30, 2004
6 months* +3.56% -1.37% +2.96% -2.04% +2.96% +1.96% +3.65% +3.65%
1 year +4.45% -0.50% +3.67% -0.31% +3.67% +3.67% +4.63% +4.63%
Since inception +4.84% +3.03% +4.07% +2.72% +4.06% +4.06% +5.02% +5.02%
at Dec. 31, 2004
6 months* +3.45% -1.47% +2.86% -2.14% +2.86% +1.86% +3.54% +3.54%
1 year +4.05% -0.89% +3.29% -0.71% +3.29% +3.29% +4.23% +4.23%
Since inception +4.91% +3.14% +4.13% +2.83% +4.12% +4.12% +5.09% +5.09%
* Not annualized.
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 4.75%.
(3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as
follows: first year 5%; second and third year 4%; fourth year 3%; fifth
year 2%; sixth year 1%; no sales charge thereafter.
(4) 1% CDSC applies to redemptions made within the first year of purchase.
(5) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
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4 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, Portfolio Manager Scott Kirby discusses the Fund's positioning and
results for the six months ended Nov. 30, 2004.
Q: How did AXP U.S. Government Mortgage Fund perform for the first half of the
fiscal year?
A: AXP U.S. Government Mortgage Fund's Class A shares (excluding sales charge)
rose 3.56% for the six months ended Nov. 30, 2004. In comparison, the
Lehman Brothers Mortgage-Backed Securities Index (Lehman Index) advanced
4.09%. The Fund outperformed the Lipper U.S. Mortgage Funds Index,
representing the Fund's peer group, which gained 3.06% over the same time
frame.
To help keep the Fund competitive with its peers, American Express
Financial Corporation and its affiliates revised the Fund's expense cap on
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%
of net assets per year.
Q: What factors most significantly affected the Fund's performance during the
semiannual period?
A: The Fund's yield curve positioning was a positive contributor to our
results. We believed the yield curve would flatten somewhat as the Federal
Reserve Board (the Fed) raised short-term interest rates to 2.00% by the
end of the period. The Fund's duration positioning also boosted Fund
returns.
Mortgages in general did not perform well versus U.S. Treasuries during the
early part of the semiannual period. During what Fed Chairman Alan
Greenspan called an economic "soft patch" over the summer and the
flattening of the yield curve, many anticipated that rates would fall
enough to reignite prepayment concerns. However, as the period progressed,
rates remained in a narrow range, so mortgage securities for the six months
overall, outperformed U.S. Treasuries.
Detracting from Fund performance relative to the Lehman Index was the
Fund's focus within the mortgage sector on higher coupon bonds during a
period when lower coupon bonds outperformed. We believed interest rates
would move more rapidly than they did and sought to reduce the Fund's
exposure to volatility when possible.
AXP U.S. Government Mortgage Fund
SEC YIELDS
Class A Class B Class C Class Y
At Nov. 30, 2004 3.44% 2.87% 2.87% 3.80%
At Dec. 31, 2004 3.20% 2.61% 2.62% 3.59%
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public offering
price (POP) per share on the last day of the period, and converting the results
to yearly figures. See Average Annual Total Returns on page 4 for additional
performance information.
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5 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
[line chart]
U.S. TREASURY YIELDS
(Nov. 30, 2004 compared to June 1, 2004)
Yield
[solid line] 2.223% 2.432% 2.997% 3.251% 3.691% 4.349% 5.002%
[dotted line] 1.111% 1.398% 2.589% 3.119% 3.836% 4.7% 5.396%
3 mos. 6 mos. 2 yrs. 3 yrs. 5 yrs. 10 yrs. 30 yrs.
Maturity
Treasury yields as of: [solid line] 11/30/04
[dotted line] 6/1/04
Source: Bloomberg
This chart compares the income potential of U.S. Treasury bills, notes and bonds
as of Nov. 30, 2004 compared to six months earlier. This is known as the yield
curve.
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6 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
(begin callout quote)> The Fund's yield curve positioning
was a positive contributor to our results. (end callout
quote)
(begin callout quote)> We intend to keep the Fund's duration
shorter than the Lehman Index. We also intend to position
the Fund according to our view that valuations of
mortgage-backed securities are currently stretched. (end
callout quote)
From a general market perspective, the hallmark of this six-month period
was the dramatic flattening of the yield curve, with rates on two-year U.S.
Treasury notes rising 0.42% while rates on 10-year U.S. Treasury notes
actually fell 0.35% from June 1 through Nov. 30, 2004. Contributing to the
flattening of the yield curve was the widely-anticipated tightening of
monetary policy. The Federal Reserve Board increased the targeted federal
funds rate at a measured pace of 25 basis points (0.25%) each four times
during the semiannual period. At the same time, concerns over a soft labor
market, somewhat elevated inflation, persistently high oil prices and
headlines about the economic "soft patch" gave support to the rally at the
longer end of the yield curve. What was less-than-expected by many
investors was the strength of the long-term bond rally. Interestingly, as
economic data improved in the last month or so of the period, the fixed
income market across the yield curve sold off significantly.
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7 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Questions & Answers
Q: What changes did you make to the Fund and how is it currently positioned?
A: We continued to emphasize those securities issued by government mortgage
agencies, including Ginnie Mae, Fannie Mae and Freddie Mac. During the
period, we also added to the Fund's holdings in hybrid adjustable rate
mortgages (ARMs), non-agency mortgage-backed securities and collateralized
mortgage obligations, which we anticipate may outperform in a rising
interest rate environment. Collateralized mortgage obligations are
attractively structured mortgage-backed securities in that they separate
mortgage pools into short-, medium- and long-term cash flows. We continued
to focus on higher coupon bonds and emphasized investments in more seasoned
pools of mortgages, which we also expect to outperform in a rising interest
rate environment. Throughout, securities were carefully selected to reduce
the risk of prepayments if higher interest rates do not materialize.
We adjusted both yield curve positioning and portfolio duration as market
conditions changed during the semiannual period.
Q: How do you intend to manage the Fund in the coming months?
A: While job creation and inflation numbers remain key indicators to monitor
in the coming months, we intend to position the Fund for ongoing economic
recovery and a higher interest rate environment. We believe that the Fed
will continue to raise interest rates at a measured pace well into the new
year. Thus, we intend to keep the Fund's duration shorter than the Lehman
Index. We also intend to position the Fund according to our view that
valuations of mortgage-backed securities are currently stretched. As
always, our strategy is to provide added portfolio value with a moderate
amount of risk. Quality issues and security selection remain a priority as
we continue to seek attractive buying opportunities.
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8 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Investments in Securities
AXP U.S. Government Mortgage Fund
Nov. 30, 2004 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (99.2%)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (e,f)
Adjustable Rate Mtge Trust
Series 2004-2 Cl 6A1
02-25-35 5.29% $673,022(d) $679,131
Bank of America Alternative Loan Trust
Series 2003-11 Cl 1A1
01-25-34 6.00 949,028 972,127
Bank of America Mtge Securities
Series 2004-F Cl B1
07-25-34 4.16 548,050(d) 526,204
Countrywide Home Loans
Series 2004-12 Cl 1M
08-25-34 4.67 374,813(d) 369,955
CS First Boston Mtge Securities
Series 2004-AR5 Cl CB1
06-25-34 4.45 373,723(d) 367,108
Federal Home Loan Mtge Corp
01-01-09 7.00 288,247 303,424
03-01-10 8.00 495,294 522,781
06-01-15 7.50 1,921,785 2,063,548
12-01-16 6.50 539,057 573,528
02-01-17 6.50 2,215,185 2,358,160
04-01-17 7.00 1,272,347 1,356,880
10-01-17 8.00 647,347 701,366
11-01-17 5.00 2,902,212 2,944,524
01-01-18 5.50 1,632,046 1,685,092
02-01-18 5.50 963,251 994,560
05-01-18 5.00 2,430,885 2,469,999
08-01-18 5.00 2,674,480 2,719,289
10-01-18 5.00 3,312,694 3,360,412
03-01-22 6.50 657,810 691,927
04-01-22 6.50 985,007 1,043,170
01-01-30 5.50 2,609,413 2,651,316
03-01-30 7.50 410,867 440,822
12-01-30 5.50 1,749,498 1,777,280
06-01-31 8.00 452,829 491,122
07-01-32 7.00 343,428 364,231
08-01-32 6.50 3,441,172 3,609,872
04-01-33 6.00 3,125,131 3,248,277
06-01-33 5.50 2,531,608 2,566,218
07-01-33 6.00 1,059,158 1,100,028
08-01-33 5.00 1,787,469 1,770,556
09-01-33 4.56 1,342,346(d) 1,333,889
09-01-33 5.00 2,740,640 2,714,707
10-01-33 6.00 1,534,878 1,585,042
04-01-34 6.50 847,968 889,515
08-01-34 5.20 493,249(d) 496,124
08-01-34 6.50 915,645 960,508
Collateralized Mtge Obligation
02-15-27 5.00 3,200,000 3,262,193
10-15-27 5.00 2,225,000 2,256,409
06-15-28 5.00 2,200,000 2,232,973
11-15-28 4.50 1,604,653 1,607,862
01-15-33 5.00 381,309 381,063
02-15-33 5.50 3,525,792 3,624,821
Interest Only
02-15-14 7.40 1,544,313(g) 118,526
11-15-19 19.12 1,650,000(c,g) 208,570
10-15-22 14.56 1,613,026(g) 132,958
03-15-32 0.00 765,093(c,g) 70,773
Federal Natl Mtge Assn
05-01-08 7.75 334,760 354,797
10-01-09 8.50 155,319 160,701
08-01-10 7.50 749,834 796,916
04-01-11 6.50 216,897 230,451
12-01-11 5.10 940,732 967,462
01-01-13 4.92 24,438 24,846
02-01-13 4.87 24,447 24,772
10-01-13 5.11 24,671 25,205
12-01-13 5.01 544,406 553,432
03-01-14 4.60 495,756 488,959
08-01-16 6.50 341,219 363,973
03-01-17 6.00 1,024,280 1,076,948
03-01-17 6.50 913,341 973,949
03-01-17 7.00 48,063 50,974
04-01-17 7.50 93,458 99,096
05-01-17 6.00 412,840 433,727
See accompanying notes to investments in securities.
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9 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
07-01-17 6.00% $5,472,819 $5,760,043
08-01-17 5.50 2,832,821 2,934,055
09-01-17 6.50 2,536,608 2,704,850
10-01-17 5.50 827,709 856,977
11-01-17 5.50 2,842,258 2,942,801
12-01-17 5.50 2,408,935 2,494,257
02-01-18 5.50 3,063,840 3,174,860
04-01-18 5.50 3,853,050 3,992,720
05-01-18 5.00 1,869,121 1,896,678
05-01-18 6.00 1,527,779 1,602,616
06-01-18 4.50 2,470,673 2,460,676
06-01-18 5.00 1,850,885 1,881,538
07-01-18 4.50 418,599 417,386
08-01-18 4.50 6,817,449 6,789,209
10-01-18 5.00 2,690,624 2,730,293
12-01-18 5.00 1,893,361 1,923,812
02-01-19 5.00 1,619,927 1,643,810
12-01-19 5.00 1,900,000(b) 1,924,339
09-01-22 6.50 820,258 863,514
11-01-22 6.00 908,356 941,663
03-01-23 5.50 2,038,634 2,092,883
07-01-23 5.00 1,050,089 1,052,360
08-01-23 5.50 3,996,230 4,077,281
09-01-23 5.50 3,266,126 3,331,831
10-01-23 5.50 1,829,914 1,866,881
04-01-25 8.00 1,280,762 1,409,970
07-01-28 5.50 1,665,088 1,691,256
08-01-28 5.50 1,351,524 1,372,764
09-01-28 7.50 1,565,770 1,688,802
12-01-28 7.00 1,603,882 1,723,760
01-01-29 6.00 1,266,961 1,310,356
03-01-29 6.50 3,191,187 3,373,505
04-01-29 5.00 1,948,600 1,929,083
05-01-29 6.00 952,815 985,450
06-01-29 6.00 4,826,015 5,021,731
06-01-31 7.00 2,898,322 3,085,161
09-01-31 7.00 2,715,530 2,912,156
09-01-31 7.50 2,590,237 2,780,680
10-01-31 9.50 147,055 163,617
11-01-31 6.50 1,208,239 1,270,513
01-01-32 6.00 1,443,857 1,493,101
01-01-32 6.50 938,905 992,379
03-01-32 7.00 1,125,456 1,205,135
04-01-32 6.50 2,704,413 2,853,808
04-01-32 7.00 1,026,363 1,093,490
05-01-32 6.50 4,235,654 4,470,912
05-01-32 7.00 3,300,247 3,511,677
06-01-32 6.50 1,168,185 1,235,525
08-01-32 6.50 1,514,793 1,598,393
09-01-32 6.00 2,206,329 2,278,476
09-01-32 6.50 2,496,514 2,621,408
10-01-32 5.50 869,519 881,756
11-01-32 6.00 4,136,138 4,295,974
12-01-32 6.00 1,864,961 1,925,945
12-01-32 7.50 124,830 133,924
01-01-33 5.50 1,165,194 1,181,593
01-01-33 6.00 2,708,645 2,797,217
01-01-33 7.00 1,279,038 1,363,204
02-01-33 5.50 2,497,572 2,533,305
03-01-33 5.50 3,184,422 3,237,516
03-01-33 6.50 511,505 538,854
04-01-33 5.50 12,482,173 12,685,863
05-01-33 5.50 6,331,546 6,424,469
05-01-33 6.00 2,051,456 2,122,613
07-01-33 4.85 752,503(d) 755,716
07-01-33 5.00 1,558,808 1,541,943
07-01-33 5.50 3,502,570(h) 3,548,802
07-01-33 5.50 945,367 957,845
08-01-33 5.50 1,373,776 1,391,909
11-01-33 5.50 3,076,306 3,116,912
01-01-34 6.50 906,836 958,477
03-01-34 5.00 4,868,582 4,815,909
04-01-34 5.00 3,254,048 3,217,928
09-01-34 4.85 1,975,764(b,d) 2,000,278
12-01-34 6.00 5,000,000(b) 5,157,800
12-01-34 6.50 4,600,000(b) 4,822,824
01-01-35 6.00 5,900,000(b) 6,108,328
Collateralized Mtge Obligation
05-25-16 4.00 2,000,000 1,999,156
12-25-26 8.00 672,768 722,637
06-25-44 7.50 858,068 920,321
Interest Only
12-25-12 13.29 1,447,193(g) 82,024
12-25-31 1.19 853,904(g) 175,626
12-25-33 6.09 681,062(g) 179,748
First Horizon Alternative Mtge Securities
Series 2004-AA4 Cl A1
10-25-34 5.46 778,567 792,675
Series 2004-FA1 Cl 1A1
10-25-34 6.25 1,778,870 1,834,500
See accompanying notes to investments in securities.
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10 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Govt Natl Mtge Assn
02-15-30 7.00% $267,239 $284,351
03-15-30 7.00 546,320 581,302
12-15-31 6.50 681,002 718,166
02-15-32 6.50 831,441 876,802
12-15-32 6.00 640,744 663,363
05-15-33 6.00 882,660 913,997
07-15-33 5.00 989,426 986,449
10-15-33 5.00 1,644,764 1,639,301
03-20-34 6.50 362,533 382,361
GSR Mtge Loan Trust
Series 2004-6F Cl 2A2
05-25-34 5.50 579,584 591,972
Master Alternative Loans Trust
Series 2004-7 Cl 8A1
08-25-19 5.00 597,837 601,322
Series 2004-8 Cl 7A1
09-25-19 5.00 839,907 845,274
Structured Adjustable Rate Mtge Loan
Series 2004-5 Cl B1
05-25-34 4.63 424,402(d) 419,123
Structured Asset Securities
Series 2003-33H Cl 1A1
10-25-33 5.50 2,137,445 2,141,778
Washington Mutual
Series 2004-CB2 Cl 6A
07-25-19 4.50 959,283 949,191
Series 2004-CB4 Cl 22A
12-25-19 6.00 2,559,234 2,673,600
Wells Fargo Mtge Backed Securities
Series 2006-16 Cl2A1
12-25-18 4.50 1,813,903 1,794,984
Total bonds
(Cost: $290,498,621) $291,942,416
Short-term securities (6.4%)
Issuer Effective Amount Value(a)
yield payable at
maturity
U.S. government agencies (2.1%)
Federal Home Loan Bank Disc Nt
12-06-04 1.78% $4,200,000 $4,198,754
Federal Natl Mtge Assn Disc Nt
12-09-04 1.85 2,100,000 2,099,029
Total 6,297,783
Commercial paper (4.3%)
CHARTA LLC
12-01-04 2.07 7,400,000 7,399,574
Citigroup Global Markets Holdings
12-13-04 2.02 5,000,000 4,996,353
Total 12,395,927
Total short-term securities
(Cost: $18,694,732) $18,693,710
Total investments in securities
(Cost: $309,193,353)(i) $310,636,126
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At Nov. 30, 2004, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$20,046,869.
(c) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on Nov. 30, 2004. At Nov. 30,
2004 the value of inverse floaters represented 0.1% of net assets.
(d) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Nov. 30, 2004.
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11 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Notes to investments in securities (continued)
(e) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments at Nov. 30, 2004:
Security Principal Settlement Proceeds Value
amount date receivable
Federal Natl Mtge Assn
12-01-34 5.50% $375,000 12-13-04 $379,746 $378,983
(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 at Nov. 30, 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, March 2005, 20-year $12,800,000
U.S. Treasury Notes, March 2005, 10-year 100,000
Sale contracts
U.S. Treasury Notes, Dec. 2004, 5-year 4,400,000
U.S. Treasury Notes, March 2005, 2-year 18,000,000
U.S. Treasury Notes, March 2005, 5-year 100,000
(i) At Nov. 30, 2004, the cost of securities for federal income tax purposes
was approximately $309,193,000 and the approximate aggregate gross
unrealized appreciation and depreciation based on that cost was:
Unrealized appreciation $ 2,540,000
Unrealized depreciation (1,097,000)
----------
Net unrealized appreciation $ 1,443,000
-----------
How to find information about the Fund's portfolio holdings
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 1-800-SEC-0330); and
(iv) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form N-Q,
can be found at www.americanexpress.com/funds.
- --------------------------------------------------------------------------------
12 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP U.S. Government Mortgage Fund
Nov. 30, 2004 (Unaudited)
Assets
Investments in securities, at value (Note 1)
(identified cost $309,193,353) $310,636,126
Cash in bank on demand deposit 44,220
Capital shares receivable 215,285
Accrued interest receivable 1,343,564
Receivable for investment securities sold 10,453,225
----------
Total assets 322,692,420
-----------
Liabilities
Dividends payable to shareholders 194,225
Capital shares payable 122,969
Payable for investment securities purchased 27,755,916
Accrued investment management services fee 4,180
Accrued distribution fee 4,509
Accrued transfer agency fee 788
Accrued administrative services fee 402
Other accrued expenses 81,088
Forward sale commitments, at value (proceeds receivable $379,746) (Note 1) 378,983
-------
Total liabilities 28,543,060
----------
Net assets applicable to outstanding capital stock $294,149,360
============
Represented by
Capital stock -- $.01 par value (Note 1) $ 574,568
Additional paid-in capital 292,923,040
Undistributed net investment income 16,404
Accumulated net realized gain (loss) (Note 7) (612,789)
Unrealized appreciation (depreciation) on investments 1,248,137
---------
Total -- representing net assets applicable to outstanding capital stock $294,149,360
============
Net assets applicable to outstanding shares: Class A $172,161,702
Class B $109,537,080
Class C $ 12,427,771
Class I $ 9,931
Class Y $ 12,876
Net asset value per share of outstanding capital stock: Class A shares 33,635,138 $ 5.12
Class B shares 21,390,638 $ 5.12
Class C shares 2,426,578 $ 5.12
Class I shares 1,942 $ 5.11
Class Y shares 2,516 $ 5.12
----- ------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Statement of operations
AXP U.S. Government Mortgage Fund
Six months ended Nov. 30, 2004 (Unaudited)
Investment income
Income:
Interest $6,916,635
----------
Expenses (Note 2):
Investment management services fee 808,005
Distribution fee
Class A 222,743
Class B 594,512
Class C 68,259
Transfer agency fee 253,811
Incremental transfer agency fee
Class A 14,647
Class B 16,952
Class C 1,859
Service fee -- Class Y 7
Administrative services fees and expenses 81,602
Compensation of board members 4,482
Custodian fees 35,320
Printing and postage 30,690
Registration fees 32,040
Audit fees 10,500
Other 9,500
-----
Total expenses 2,184,929
Expenses waived/reimbursed by AEFC (Note 2) (219,485)
--------
1,965,444
Earnings credits on cash balances (Note 2) (3,587)
------
Total net expenses 1,961,857
---------
Investment income (loss) -- net 4,954,778
---------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 485,764
Futures contracts 1,038,835
---------
Net realized gain (loss) on investments 1,524,599
Net change in unrealized appreciation (depreciation) on investments 3,431,176
---------
Net gain (loss) on investments 4,955,775
---------
Net increase (decrease) in net assets resulting from operations $9,910,553
==========
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Statements of changes in net assets
AXP U.S. Government Mortgage Fund
Nov. 30, 2004 May 31, 2004
Six months ended Year ended
(Unaudited)
Operations and distributions
Investment income (loss) -- net $ 4,954,778 $ 10,971,324
Net realized gain (loss) on investments 1,524,599 (1,761,493)
Net change in unrealized appreciation (depreciation) on investments 3,431,176 (5,682,907)
--------- ----------
Net increase (decrease) in net assets resulting from operations 9,910,553 3,526,924
--------- ---------
Distributions to shareholders from:
Net investment income
Class A (3,027,681) (6,673,492)
Class B (1,560,401) (3,833,418)
Class C (180,289) (435,554)
Class I (188) (167)
Class Y (233) (414)
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)
Class B -- (1,733,487)
Class C -- (199,554)
Class Y -- (142)
---------- -----------
Total distributions (4,768,792) (15,774,616)
---------- -----------
- --------------------------------------------------------------------------------
15 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Statements of changes in net assets (continued)
AXP U.S. Government Mortgage Fund
Nov. 30, 2004 May 31, 2004
Six months ended Year ended
(Unaudited)
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) $ 28,402,723 $ 80,517,965
Class B shares 8,581,295 42,305,093
Class C shares 1,041,959 5,501,269
Class I shares -- 44,454
Class Y shares -- 500
Reinvestment of distributions at net asset value
Class A shares 2,670,119 8,808,051
Class B shares 1,423,944 5,526,710
Class C shares 158,526 615,962
Class I shares -- 66
Class Y shares 46 111
Payments for redemptions
Class A shares (39,107,543) (156,430,470)
Class B shares (Note 2) (31,081,327) (114,195,539)
Class C shares (Note 2) (3,726,816) (12,356,331)
Class I shares -- (34,542)
----------- ------------
Increase (decrease) in net assets from capital share transactions (31,637,074) (139,696,701)
----------- ------------
Total increase (decrease) in net assets (26,495,313) (151,944,393)
Net assets at beginning of period 320,644,673 472,589,066
----------- ------------
Net assets at end of period $294,149,360 $ 320,644,673
============ =============
Undistributed (excess of distributions over) net investment income $ 16,404 $ (169,582)
------------ -------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
16 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Notes to Financial Statements
AXP U.S. Government Mortgage Fund
(Unaudited as to Nov. 30, 2004)
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.
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. At Nov. 30, 2004, American Express Financial
Corporation (AEFC) 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 SEMIANNUAL 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 SEMIANNUAL 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. At Nov. 30, 2004, the Fund has entered into outstanding
when-issued securities of $18,037,237 and other forward-commitments of
$2,009,632.
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.
Forward sale commitments
The Fund 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 Fund
as an unrealized gain or loss. If the forward sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Fund realizes a gain
or loss. If the Fund delivers securities under the commitment, the Fund 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."
Guarantees and indemnifications
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
- --------------------------------------------------------------------------------
19 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Fund.
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, when
available, are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including amortization of premium, market discount and
original issue discount using the effective interest method, is accrued daily.
2. EXPENSES AND SALES CHARGES
The Fund has agreements with 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 that declines from 0.52%
to 0.395% annually as the Fund's assets increase.
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 that declines from 0.05% to 0.025% annually as the Fund's
assets increase. 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.
- --------------------------------------------------------------------------------
20 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
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
$240,089 for Class A, $99,906 for Class B and $2,135 for Class C for the six
months ended Nov. 30, 2004.
For the six months ended Nov. 30, 2004, AEFC and its affiliates waived certain
fees and expenses to 0.94% for Class A, 1.69% for Class B, 1.69% for Class C,
0.61% for Class I and 0.76% for Class Y. Of these waived fees and expenses, the
class specific transfer agency fees waived for Class A, Class B, Class C and
Class Y were $88,896, $66,514, $7,549 and $8, respectively, which represent
0.11%, 0.12%, 0.12% and 0.13%, respectively, of the Fund's average daily net
assets. In addition, 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 six months ended Nov. 30, 2004, the Fund's custodian and transfer
agency fees were reduced by $3,587 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 $243,138,771 and $275,585,430, respectively, for the six
months ended Nov. 30, 2004. Realized gains and losses are determined on an
identified cost basis.
- --------------------------------------------------------------------------------
21 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Nov. 30, 2004
Class A Class B Class C Class I Class Y
Sold 5,568,065 1,678,944 204,084 -- --
Issued for reinvested distributions 522,227 278,301 30,980 -- 9
Redeemed (7,673,471) (6,103,522) (731,606) -- --
----------- ----------- ---------- ------ ---
Net increase (decrease) (1,583,179) (4,146,277) (496,542) -- 9
----------- ----------- ---------- ------ ---
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.
5. INTEREST RATE FUTURES CONTRACTS
At Nov. 30, 2004, investments in securities included securities valued at
$354,620 that were pledged as collateral to cover initial margin deposits on 129
open purchase contracts and 135 open sale contracts. The notional market value
of the open purchase contracts at Nov. 30, 2004 was $14,206,750 with a net
unrealized loss of $236,750. The notional market value of the open sale
contracts at Nov. 30, 2004 was $23,785,828 with a net unrealized gain of
$41,351. See "Summary of significant accounting policies" and "Notes to
investments in securities."
6. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
The Bank of New York, whereby the Fund may borrow for the temporary funding of
shareholder redemptions or for other temporary or emergency purposes. The
agreement went into effect Sept. 21, 2004. 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 higher of the Federal Funds Effective
Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days
after such loan is executed. The Fund also pays a commitment fee equal to its
pro rata share of the amount of the credit facility at a rate of 0.09% per
annum. Prior to this agreement, the Fund had a revolving credit agreement that
permitted borrowings up to $500 million with Deutsche Bank. The Fund had no
borrowings outstanding during the six months ended Nov. 30, 2004.
- --------------------------------------------------------------------------------
22 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
7. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$1,882,303 at May 31, 2004, that if not offset by capital gains will expire as
follows:
2012 2013
$819,277 $1,063,026
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.
8. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Class A
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(h) 2004 2003 2002(b)
Net asset value, beginning of period $5.03 $5.19 $5.06 $5.01
----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .09 .16 .19 .04
Net gains (losses) (both realized and unrealized) .09 (.09) .16 .04
----- ----- ----- -----
Total from investment operations .18 .07 .35 .08
----- ----- ----- -----
Less distributions:
Dividends from net investment income (.09) (.16) (.20) (.03)
Tax return of capital -- (.01) -- --
Distributions from realized gains -- (.06) (.02) --
----- ----- ----- -----
Total distributions (.09) (.23) (.22) (.03)
----- ----- ----- -----
Net asset value, end of period $5.12 $5.03 $5.19 $5.06
----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $172 $177 $251 $58
Ratio of expenses to average daily net assets(c),(d) .94%(e) .98% .99% .95%(e)
Ratio of net investment income (loss) to average daily net assets 3.51%(e) 3.11% 3.31% 2.98%(e)
Portfolio turnover rate (excluding short-term securities) 80% 163% 227% 200%
Total return(f) 3.56%(g) 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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class A would have been 1.08% for the six
months ended Nov. 30, 2004 and 1.05%, 1.06% and 1.58% for the periods ended
May 31, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
23 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(h) 2004 2003 2002(b)
Net asset value, beginning of period $5.04 $5.20 $5.07 $5.01
----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .07 .12 .15 .03
Net gains (losses) (both realized and unrealized) .08 (.09) .16 .05
----- ----- ----- -----
Total from investment operations .15 .03 .31 .08
----- ----- ----- -----
Less distributions:
Dividends from net investment income (.07) (.12) (.16) (.02)
Tax return of capital -- (.01) -- --
Distributions from realized gains -- (.06) (.02) --
----- ----- ----- -----
Total distributions (.07) (.19) (.18) (.02)
----- ----- ----- -----
Net asset value, end of period $5.12 $5.04 $5.20 $5.07
----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $110 $129 $200 $28
Ratio of expenses to average daily net assets(c),(d) 1.69%(e) 1.74% 1.75% 1.74%(e)
Ratio of net investment income (loss) to average daily net assets 2.74%(e) 2.35% 2.49% 2.68%(e)
Portfolio turnover rate (excluding short-term securities) 80% 163% 227% 200%
Total return(f) 2.96%(g) .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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class B would have been 1.84% for the six
months ended Nov. 30, 2004 and 1.80%, 1.82% and 2.34% for the periods ended
May 31, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
24 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(h) 2004 2003 2002(b)
Net asset value, beginning of period $5.04 $5.20 $5.07 $5.01
----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .07 .12 .15 .03
Net gains (losses) (both realized and unrealized) .08 (.09) .16 .05
----- ----- ----- -----
Total from investment operations .15 .03 .31 .08
----- ----- ----- -----
Less distributions:
Dividends from net investment income (.07) (.12) (.16) (.02)
Tax return of capital -- (.01) -- --
Distributions from realized gains -- (.06) (.02) --
----- ----- ----- -----
Total distributions (.07) (.19) (.18) (.02)
----- ----- ----- -----
Net asset value, end of period $5.12 $5.04 $5.20 $5.07
----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $12 $15 $22 $5
Ratio of expenses to average daily net assets(c),(d) 1.69%(e) 1.74% 1.75% 1.73%(e)
Ratio of net investment income (loss) to average daily net assets 2.75%(e) 2.36% 2.50% 2.60%(e)
Portfolio turnover rate (excluding short-term securities) 80% 163% 227% 200%
Total return(f) 2.96%(g) .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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class C would have been 1.84% for the six
months ended Nov. 30, 2004 and 1.80%, 1.82% and 2.34% for the periods ended
May 31, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
25 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(h) 2004(b)
Net asset value, beginning of period $5.03 $5.15
----- -----
Income from investment operations:
Net investment income (loss) .09 .05
Net gains (losses) (both realized and unrealized) .08 (.11)
----- -----
Total from investment operations .17 (.06)
----- -----
Less distributions:
Dividends from net investment income (.09) (.06)
----- -----
Net asset value, end of period $5.11 $5.03
----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $-- $--
Ratio of expenses to average daily net assets(c) .61%(d),(e) .64%(e)
Ratio of net investment income (loss) to average daily net assets 3.84%(e) 3.39%(e)
Portfolio turnover rate (excluding short-term securities) 80% 163%
Total return(f) 3.53%(g) (1.38%)(g)
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class I would have been 0.64% for the six
months ended Nov. 30, 2004.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
26 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended May 31, 2004(h) 2004 2003 2002(b)
Net asset value, beginning of period $5.03 $5.19 $5.06 $5.01
----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .09 .17 .19 .04
Net gains (losses) (both realized and unrealized) .09 (.09) .16 .04
----- ----- ----- -----
Total from investment operations .18 .08 .35 .08
----- ----- ----- -----
Less distributions:
Dividends from net investment income (.09) (.17) (.20) (.03)
Tax return of capital -- (.01) -- --
Distributions from realized gains -- (.06) (.02) --
----- ----- ----- -----
Total distributions (.09) (.24) (.22) (.03)
----- ----- ----- -----
Net asset value, end of period $5.12 $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),(d) .76%(e) .81% .80% .78%(e)
Ratio of net investment income (loss) to average daily net assets 3.69%(e) 3.29% 3.68% 2.95%(e)
Portfolio turnover rate (excluding short-term securities) 80% 163% 227% 200%
Total return(f) 3.65%(g) 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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratios of expenses for Class Y would have been 0.92% for the six
months ended Nov. 30, 2004 and 0.87%, 0.88% and 1.40% for the periods ended
May 31, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
(h) Six months ended Nov. 30, 2004 (Unaudited).
- --------------------------------------------------------------------------------
27 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Fund Expenses Example
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, including management fees; distribution and service (12b-1) fees; and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six months ended Nov. 30, 2004.
Actual Expenses
The first line of the table provides information about actual account values and
actual expenses. You may use the information in this line, together with the
amount you invested, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading titled "Expenses paid during the period" to estimate the
expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
28 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Beginning Ending Expenses paid
account value account value during the period
June 1, 2004 Nov. 30, 2004 June 1, 2004-Nov. 30, 2004
Class A
Actual(a) $1,000 $1,035.60 $4.88(b)
Hypothetical (5% return before expenses) $1,000 $1,020.69 $4.84(b)
Class B
Actual(a) $1,000 $1,029.60 $8.74(c)
Hypothetical (5% return before expenses) $1,000 $1,016.87 $8.68(c)
Class C
Actual(a) $1,000 $1,029.60 $8.74(d)
Hypothetical (5% return before expenses) $1,000 $1,016.87 $8.68(d)
Class I
Actual(a) $1,000 $1,035.30 $3.16(e)
Hypothetical (5% return before expenses) $1,000 $1,022.37 $3.14(e)
Class Y
Actual(a) $1,000 $1,036.50 $3.94(f)
Hypothetical (5% return before expenses) $1,000 $1,021.61 $3.91(f)
(a) Based on the actual return for the six months ended Nov. 30, 2004: +3.56%
for Class A, +2.96% for Class B, +2.96% for Class C, +3.53% for Class I and
+3.65% for Class Y.
(b) Expenses are equal to the Fund's Class A annualized expense ratio of 0.94%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(c) Expenses are equal to the Fund's Class B annualized expense ratio of 1.69%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(d) Expenses are equal to the Fund's Class C annualized expense ratio of 1.69%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(e) Expenses are equal to the Fund's Class I annualized expense ratio of 0.61%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
(f) Expenses are equal to the Fund's Class Y annualized expense ratio of 0.76%,
multiplied by the average account value over the period, multiplied by
186/365 (to reflect the one-half year period).
- --------------------------------------------------------------------------------
29 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
Proxy Voting
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the website americanexpress.com/funds; or by
searching the website 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, information
regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 is available at http://www.sec.gov.
- --------------------------------------------------------------------------------
30 -- AXP U.S. GOVERNMENT MORTGAGE FUND -- 2004 SEMIANNUAL REPORT
(logo)
AMERICAN
EXPRESS
(R)
American Express Funds
70100 AXP Financial Center
Minneapolis, MN 55474
This report must be accompanied or preceded by the Fund's current prospectus.
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
Item 2. Code of Ethics. Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert. Not applicable for semi-annual
reports.
Item 4. Principal Accountant Fees and Services. Not applicable for
semi-annual reports.
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. The complete schedule of investments is included in Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of matters to a vote of security holders. Not applicable.
Item 11. Controls and Procedures.
(a) Based upon their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing
date of this Form N-CSR, the registrant's Principal Financial
Officer and Principal Executive Officer have concluded that those
disclosure controls and procedures provide reasonable assurance
that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Not applicable for semi-annual reports.
(a)(2) Separate certification for the Registrant's principal
executive officer and principal financial officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a)
under the Investment Company Act of 1940, are attached as
EX.99.CERT.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) AXP Government Income Series, Inc.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date January 28, 2005
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 January 28, 2005
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date January 28, 2005